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Arvind P. Datar

The critical limits of excise duty and other indirect tax levies have been reached. Rather than hike the rates further, Mr Yashwant Sinha must focus on checking evasion, says Arvind P. Datar

A RECENT ordinance has given the Finance Minister, Mr Yashwant Sinha, special powers to hike excise duties. The Central Excise Tariff Act, 1985 prescribes the excise duty rates payable on different commodities. The Central Government can reduce these partially, or even grant complete exemption, with or without conditions. The Centre can increase such duties up to 200 per cent of the prescribed rate. But the current ordinance allows Mr Sinha to increase the rates of excise duty on any commodity without a ceiling.

Soft option

The ostensible reason for granting these powers is to raise revenue for meeting the huge deficit, which is almost a certainty this year too. The easiest way out for any Finance Minister is to raise taxes and duties. Unfortunately though, individual taxpayers and companies in India are, perhaps, the most heavily taxed in the world. A company today pays income-tax, Central excise, Customs duties, sales tax, service tax, and various other cesses and surcharges levied by the Central Government. It also has to pay various taxes levied by States and local authorities such as municipal bodies and panchayats.

Excise duty — the critical limit

Before 2001, there were only one-lakh assessees paying excise duty. The 2001-02 Budget hiked the minimum exemption to Rs 1 crore and, as a result, the number of assessees has fallen to 70,000. Also, in keeping with the WTO obligations, Customs duties on a number of items have been scaled down. Customs duty collections are, therefore, likely to decrease further.

The organised sector is already paying high rates of excise duty. Most companies also pay service tax in one form or the other. The Department continues to burden the organised sector with taxes/duties, thereby making Indian industry increasingly uncompetitive. For example, in 1992, the ex-refinery price of propylene was Rs11,400 a tonne. This was subjected to excise duty, sales tax, Gulf surcharge, Budget surcharge, additional sales tax and other levies/duties, resulting in the customer ultimately paying Rs 24,000 — the post-Customs cost of imported propylene was a mere Rs16,000. Thus, it is indirect taxes, and not the lack of productivity, that has made Indian products more expensive and driven consumers into buying foreign goods.

In several northern States, including Gujarat, there is substantial excise evasion. But no attempt is made to check this. On the other hand, the organised sector is repeatedly harassed with frivolous show-cause notices and directives not to avail itself of Modvat/Cenvat credit. Mr Sinha should realise that the critical limits of excise duty and other indirect tax levies have been reached. Attention must now be on checking the rampant evasion of these duties. The arrest of no less than the Chairman and a member of the Central Board of Excise and Customs is a clear indication of the rot within the Department.

Direct taxes

Of a population of 100 crore, the number of income-tax assessees is a mere 2.5 crores. The much-talked-about one-by-six scheme has basically resulted only in a jump in the number of returns filed, with virtually no increase in revenues. .

Evasion of direct taxes is also rampant. Several professionals simply do not pay income-tax. Under Rule 6F of the I-T Rules, 1962, professionals are required to maintain prescribed books of accounts if the total gross receipts exceeded Rs 1,50,000 per annum. These provisions are observed only in the breach. The same is the case with a number of small businesses. Unfortunately, the Department does not seem to be acting against the evaders.

If Mr Sinha means business, a concerted drive to collect more direct taxes from potential assesses must be made — raids and even prosecution proceedings when the evasion is, say, more than Rs 5 lakh. The focus must, therefore, be on increasing direct tax collections.

Downsizing — empty promises

Two years back, Mr Sinha had announced that steps would be taken to downsize the bureaucracy. The post of one Secretary in the Finance Ministry was surrendered, and little else. Lowering the retirement age of both Central and State government employees back to 58 would have been a major revenue saver. The Fifth Pay Commission recommendation to hike salaries was quickly accepted, but several other recommendations regarding staff reduction, rationalisation of services, and so on, have been ignored completely.

A recent cadre review of both income-tax and Customs/excise officers saw across-the-board promotions being handed out.

Fiscal escapism

. With the Central and State Governments doing precious little to curb profligacy and plug the enormous revenue leakages owing to corruption and misadministration, there is no moral justification in increasing the burden on citizens by enhancing levies.

Mr Sinha has adopted the path of least resistance. Any increase in excise or other taxes now, or in the Budget, would amount to fiscal escapism.

It is time the Centre took the bull by the horns and implemented a clear, time-bound action plan to trim Government expenditure and plug revenue leakages.

Else, the nation will only lurch from one financial crisis to another.

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