1. Editorial: Finmin vs Make in India

Editorial: Finmin vs Make in India

Listen to what the chief economic advisor is saying

By: | Published: May 4, 2015 12:25 AM

Putting a 1% additional tax in lieu of central sales tax (CST) as part of the GST regime, as this newspaper has pointed out earlier, is going to hit the Make-in-India programme since it adds to the tax burden at a time when India needs to lower taxes in order to get more competitive. Worse, thanks to poor wording in the GST Bill, the tax is to apply to all ‘supply’ of goods, not ‘sales’—as a result, since intra-firm stock transfers will also be taxed, the additional tax could well end up at 4-5 percentage points. Equally important, allowing GST exemptions for various sectors, such as petroleum and real estate, ensure that the taxes paid on the inputs will never get rebated, and that puts Indian manufacturing at a disadvantage. So, for instance, if a Reliance Industries is to import crude and process it in India, it will get no tax credits for the taxes it pays on various inputs it buys like, say, machinery. If, however, it chooses to do the refining in Bangladesh and exports the petroleum products to India, it will pay no taxes on the machinery it uses—in both cases, when the petrol/diesel is sold to the final consumer, the same consumption tax will be paid. It is unlikely that a Reliance will shift refining operations to a Bangladesh since it already has a set up in India, but the same will not be true of a new firm.

A Business Standard op-ed by chief economic advisor Arvind

Subramanian and Arbind Modi (he heads risk assessment in the income tax department) makes much the same point. The duo sketch three scenarios of excise duty and CVD imposition/exemption and detail their impact. In a situation of no excise/CVD exemption, there is clearly no problem since the same level of taxes are paid in both cases. If, however, there is no excise exemption for locally produced goods while there is a CVD exemption for imported goods, the duo calculate an 11% tax disadvantage for Indian producers. The more subtle case is that where there is an excise exemption for the domestically produced good and there is no CVD exemption on imports—on paper, books look equitable. The imported good has no CVD and, because it is zero-rated in the exporting country, has no taxes on it. But since the local good is exempted from excise—the Reliance example—the input taxes paid on it are not rebated. This, according to Modi/Subramanian, adds up to a disadvantage of over 9%, a killer at a time when India is, in any case, uncompetitive in most areas of manufacturing. At a macro level, since CVD is meant to offset excise, the two should be equal—the duo say that while the effective excise rate is 9% on non-oil goods, the CVD is only around 6%. That’s a very large disadvantage, roughly R40,000 crore, for Indian manufacturing. In which case, the finance ministry needs to start examining such cases immediately—since the power sector has no CVD, for instance, the taxes BHEL pays in the process of manufacturing put it at a disadvantage vis-à-vis Chinese suppliers. The finance ministry has been working on areas where the import duty on components is higher than on finished goods—progress on the inverted-duty structure has also been limited—but this is a far more serious issue. Finance minister Jaitley would do well to get the chief economic advisor to explain this to his tax officers.

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