Editorial: Clean up tax sops

As in auto sector, they’re probably not helping either

While automotive firms are bound to be upset with the government for not renewing the excise duty sops given by UPA finance minister P Chidambaram last year in February and later extended by NDA finance minister Arun Jaitley, the fact is the sops were simply not working. Excise duty rates were cut from 12% to 8% for small cars, scooters, motorcycles and commercial vehicles and from 24% to 20% for mid-sized cars. Despite this, however, there was hardly any response from the market in even December, the month when the tax concessions were to come to an end—in the case of Hero MotoCorp, for instance, sales rose just 0.21% over that a year ago. For April to November, sales of passenger vehicles—cars, utility vehicles and vans—were up just 2.7%, and that is when they were down 6% in FY14 and grew just 2% in FY13.  Commercial vehicles contracted 7.3% on top of a 20% contraction in the whole of FY14 and a 2% contraction in the year before. And this is when, on top of the excise duty concessions, auto manufacturers were adding their own sweeteners. In economists’ jargon, this means the demand for cars is more income elastic than it is price elastic—that is, customers buy new cars more in response to a change in their incomes in comparison with a mere change in prices.

Which suggests that the government has probably got it right in deciding that the money gained from the latest round of hiking excise duties on petrol and diesel is to be kept aside for building fresh
expressways. The impact of increased government expenditure on capital creation will probably do more for stimulating demand and economic growth and, in turn, will raise the demand for automobiles.

While the government may have taken the decision not to extend the excise sops on the basis of the R1 lakh crore projected shortfall in tax collections for the year, it needs to do a detailed exercise on the various tax giveaways and to see if these make economic sense—have they resulted in a significant step up in production for the product they have been given for? In the manufacturing sector alone, these added up to R1.96 lakh crore in FY14 while the excise collections in that year were a lower R1.79 lakh crore. For those who argue the political sensitivity of exemptions given to develop areas such as those in the North East and Jammu & Kashmir, it is worth keeping in mind these were a much smaller R18,000 crore in FY14. Customs duty exemptions, similarly, added up to R2.66 lakh crore in FY14 as compared to customs duty collections of a mere R1.75 lakh crore. If R38,000 crore of customs duty exemptions were given to ‘animal and vegetable fats’, was this justified? Ditto for the R78,000 crore given for ‘mineral fuels and mineral oils’. The total revenue foregone in FY14 was R5.73 lakh crore, or 49.4% of the total tax collections of R11.59 lakh crore in that year. Estimating how much of this is really justified should be a big part of FY16’s budget exercise.

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