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Sinha's 'excise simplification' claim baffles experts

Aparajita S in Bombay

The proposals relating to central excise duty in the Finance Bill are a mixed bag, informed sources said.

While some proposals, like those which increase the rate of duty, may slow down economic recovery by triggering price-rise and shrinking demand, others will benefit manufacturers, it is learnt.

The pro-producer proposals include procedural simplifications in the Modified Value Added Tax or MODVAT scheme, reduction in paper work, change in the basic assessment to transaction value, etc.

Finance Minister Yashwant Sinha's 'claim' that he has introduced a major simplification in central excise duty rates by introducing a single rate of duty of 16 per cent called CENVAT (central VAT) has come in for scrutiny. He has said CENVAT would replace the three earlier duty rates of 8 per cent, 16 per cent and 24 per cent.

It transpires that all goods that were earlier subjected to 8 per cent and 16 per cent of duty, will now attract duty at the common rate of 16 per cent. However, goods which were earlier subjected to duty rate of 24 per cent and above, will now bear in addition to the 16 per cent CENVAT, special excise duty at rates of 8 per cent or 16 per cent or 24 per cent. (Exceptions to this are medicinal grade oxygen and hydrogen peroxide, anaesthetics, electric bulbs of maximum retail price up to Rs 20, clocks and watches up to Rs 500, tooth powder, sanitary towels, baby napkins, cutlery and knives, household glassware produced by mouth blown process, roasted chicory, special cold chain equipment, surgical gloves and potassium iodate).

The impact of the above measure is that while goods which were attracting 8 per cent duty earlier, will carry a much higher duty burden (16 per cent), those which were attracting more than 16 per cent duty, will continue to have the same or marginally higher duty burden.

Since incidence of excise duty is normally passed on to the consumers, this will result in an increase in prices of items like toothpastes, toilet soaps, television sets (black&white and colour), jams, squashes, sauces, biscuits, cosmetics, etc, say experts. There has also been an increase in central excise duty on cigarettes.

This may result in a drop in the consumption level which could slow down economic recovery. If manufacturers choose to shoulder some of the increase in excise duty, their profit margins, and surplus cash available for investment, would get squeezed. These likely scenarios could further slacken the already sluggish pace of economy.

Another measure that will have an inflationary effect is that the special excise duty has not been made MODVATable. This is so because the manufacturer will not be able to adjust the special excise duty incidence on his inputs towards payment of duty on the final product. Earlier, he could adjust the entire input duty for payment of duty on the final product.

Section 4 on the Central Excise Act 1944, which deals with valuation, would be replaced by a new section with effect from July 1, 2000. As a result, duty will now be paid on the actual transaction value instead of on normal price as was done earlier. This will benefit both manufacturers and consumers as duty will now be paid on the actual price of sale of goods and not on the notional price.

Twenty-four new items have been included in the scheme of MRP-based assessment. The new items include cocoa powder, lubricating preparations, branded edible preparations, betel nut powder (supari), fruit pulp or fruit juice based drinks, insulated ware, room air-conditioners, refrigerators, dishwashing machines, typewriters, pagers, cellular or mobile phones, among others.

Indiscriminate issue of show-cause notices or SCNs to manufacturers demanding duty and proposing imposition of penalty, etc, has been a major form of harassment. Issue of frivolous SCNs has been sought to be checked by raising the level of officers who issue such notices. (Meaning, only senior or top officials will have the power to issue such notices).

In the past, SCNs were issued by officers of the level of superintendents and higher. SCNs involving duty of above Rs 10 million will henceforth be issued only with the approval of the chief commissioner.

SCNs involving duty of less than Rs 10 million will be issued either by a commissioner or by an officer approved by the commissioner.

The MODVAT rules had become very complicated leading to a lot of disputes. From April 1, 2000, the entire rules governing the MODVAT scheme will be done away with, and will be replaced by a small set of simple and transparent rules. However, only time will tell how simple and transparent the rules would be, sources said.

Henceforth, manufacturers do not have to maintain separate records of production, sale, etc, for central excise purposes. The central excise department will now rely on the records maintained by the manufacturer. This will lead to a substantial reduction in paperwork.

The MODVAT scheme has been expanded to include all inputs and capital goods with the exception of petrol and high-speed diesel oil.

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