Consumers have been surprised through the last month that the 4% cut in central excise duty on all products have not resulted in similar cuts at the retail prices in the shops. The reason is not the reluctance of companies to price in the cuts.
Retail prices of goods have not come down because along with the cuts, the Central Board of Excise and Customs has also reduced the ?abatement rates? on excise duty on over 100 items, including sugars, biscuits, pan masala, white cement, lubricating oils, consumer durables and auto parts and components by 2% to 3%.
This might seem a technical exercise far removed from the shop stores. But it is not so and in this case has ended up diluting the largest ever fiscal measure taken by the Centre to reduce prices, make people spend more and therefore block the economy?s slide into a lower growth spiral.
Abatement is the amount that is deducted from the retail sale price of goods to arrive at the assessable value on which excise duty will be levied. In other words, even before companies cut the price of a good, the department assumes it in. This creates the problem.
To take an example, if a product costs Rs 100 with an excise duty of 10%, then, if the abatement is say 31.5%, the company will pay an actual duty of Rs 6.85. If nothing else changes, except the abatement rate to say, 30%, the company will pay a higher duty of Rs 7.
In the fiscal package the government has clipped excise duty by 4%, but it has also reduced the abatement rates. This has led to companies not earning a full 4% reduction in their duty payable, which means the consumers see a lower reduction in the retail prices of goods.
The quantum of abatement is notified by taking into account the amount of excise duty, sales tax and other taxes and trade margins. In case of certain taxable services, specified abatements from gross value are prescribed to arrive at the assessable value on which service tax is charged. CBEC officials, however, say this is a standard practice.
?Abatement is not a concession. When the duty incidence comes down, the market price of goods reduces and the abatement also has to be cut proportionately,? said an official.
But industry analysts are not so sure. ?It will mean that companies will pass on less of the duty cut to consumers,? a tax expert said requesting anonymity.
?The reduction in abatement rates has taken place for a second time this fiscal. It dilutes the beneficial impact of the excise duty cut announced last month,? said Vivek Mishra, tax partner with Ernst and Young.
Agreed R Muralidharan, executive director PricewaterhouseCoopers, said, ?To a limited extent, the reduction in the abatement percentage may erode the benefit of the duty reduction. A detailed review will be required in the near future to revise the abatement by taking into consideration the post manufacturing expenses, including taxes and duties.?