The Central Board of Excise & Customs? circular asking for a whittling down of area-based excise duty exemptions, such as those in Himachal Pradesh and Uttarakhand, will not please those who want India?s excise structure rationalised. The Board wants to strike off ?peripheral? operations from the list of commercial activities eligible for such concessions within these zones. These would be operations related to preservation, cleaning, packing, labelling, sorting and declaration/alteration of retail sale prices. Such an order may seem like an attempt at simplification, and may even increase excise collections, but is likely to create more problems than it solves. This is because it complicates the provision with details that are open to interpretation by local tax collectors, who will doubtless use their discretionary power to their own advantage. Nor will it free the fisc of the menace of area-based tax exemptions.
If there is any action that needs to be taken, it would be to eliminate such exemptions in toto. One can also ask why there have been no attempts to synchronise the rules for availing this concession across all regions that benefit from them, and why it took four years after the extension of this tax concession to these two hill states for the regulations to be made relatively leakage-proof. The current move seems motivated not by principle but by the growing revenue losses from area-based excise exemptions. The figure for revenues forgone has risen sharply in recent years from Rs 1,400 crore in 2003-04 to Rs 6,200 crore in 2005-06. This is quite a large sum. In fact, it is more than half the excise duty exemptions provided to the entire lot of small-scale industries that account for close to 15% of GDP. And with investment proposals continuing to pour into Himachal Pradesh and Uttarakhand, with the numbers touching almost Rs 18,000 crore last year, the government would have had no option but to plug the breach before the tax losses became too glaring to ignore. Such exemptions spell bad economics. They distort the relative comparative advantages of regions within the country, resulting in the misallocation of resources. Area-based incentives were first introduced in 1999 in the northeast region, before they spread to Kutch, Jammu & Kashmir and Sikkim. Special grants for infrastructure projects would do these regions more good than excise holidays.
