Customs duty receipts that took a heavy beating so far this fiscal from a stronger currency, low oil price and reduced imports, looks set to pick up in the months to come. However, the government faces a fresh challenge?aligning import duty with the proposed goods and service tax (GST) so that local manufacturing and jobs do not suffer.
Economists say customs duty collection that was 29% less in the first nine months of this fiscal from what was received the same time a year ago, has begun to gain momentum. In April 2009, the collection was less than half of what was received the same month a year ago. In the following months, collections were between half to one fourth of the previous levels. That gap, however, has narrowed to about 8% in December 2009.
According to Ernst & Young tax partner Harishankar Subramaniam, the sharp fall in the April-December period was not merely because of reduced consumption of imported items and raw materials, but also due to fluctuations in currency and oil prices. For instance, in April 2009 when excise receipt was less than a half of the same month the previous year, the rupee had strengthened 23% in the intervening 12 months, enabling businesses to pay less for imports and on duty. Also, oil prices had fallen by 43% during the same 12 months, reducing the value of oil imports that accounted for about a quarter of the total imports in April 2009.
In June 2009 too the domestic currency, that was stronger by 11%, and 47% cheaper global crude, had suppressed customs duty collection by 35% from the same month a year ago. But currency and oil alone are not the culprits. Industrial activity in the country too had fallen behind the year ago levels between April and August, needing less imported inputs. Besides, when the government slashed excise duty to stimulate the economy, it had also scrapped an equivalent component from the customs duty called the basic customs duty, contributing to lesser collections.
Subramaniam says that customs collections would improve further by February-March. ?As the global economy gets better and better in 2010-11 and India?s economic buoyancy too enhances, customs collection would certainly go up,? said Subramaniam. In tune with the improvement in the global economy, oil prices too may go up, perhaps to $100 a barrel by 2011, he said.
KPMG?s indirect tax head Pratik Jain told FE that customs collections are also a function of prices. Receipts would go up from January 2010 because prices of fuel and other inputs are showing signs of strengthening. Jain also said that if the government withdraws the economic stimulus and rolls back the excise duty cut, then the counter veiling duty component in the customs duty would also go up.
But the government faces a major challenge ahead?rejigging customs duty in such a way that importing finished goods do not become more attractive than producing them here. Importers now take credit on the counter-vailing duty on imported raw materials and use it to pay the excise duty on the finished product. If the GST is less than the CVD, then it would lead to accumulation of credit, making it more attractive to import the finished product itself. Once the GST is in place, the government will have to do the alignment, the official said.