Finance ministry may reduce Customs duty

[N.Sukumar]

NEW DELHI: The finance ministry is in no mood to cut duties even as it
rules out the possibility of a cess. Although the oil deficit —
projected at Rs 2,30,000 crore for 2008-09 — is threatening to derail
the fiscal balance, the finance ministry is reluctant to slash duties
given the huge spending ahead, be it the farm loan waiver or the NREG
extension or the Sixth Pay Commission recommendations.

Finance ministry sources say that at best, there is scope for
reduction in Customs duty in the wake of rupee depreciation. The
Customs duty for crude is 5%. A reduction in the duty could give
relief to the refining companies. The oil ministry’s proposal of
imposing a cess, experts point out, will not be able to provide a
cushion as the collection could be just Rs 5,000 crore.

The finance ministry’s reluctance to reduce duties stems from the fact
that the oil sector is among the biggest contributors to revenues. In
2007-08, of the total excise duty collection of Rs 1,17,266 crore
(revised estimates), close to 49% (Rs 57,460 crore) came from
petroleum products.

In the case of Customs, oil contributed 15% (Rs 12,270 crore) to the
total collection of Rs 81,800 crore. Thus, tinkering with the duty
structure has major implications for the finance ministry in the
backdrop of expenses that it has to incur in the fiscal: Rs 25,000
crore towards the farm debt waiver, Rs 26,000 crore (including
arrears) for Sixth Pay Commission implementation (for which no
budgetary provision was made) and Rs 16,000 crore, which could go up
during the year, for NREG.

Moreover, the revenue buoyancy itself in both direct and indirect
taxes could come under pressure with a slide in industrial production
and slowdown in developed economies, they said.

The government had abolished the ad valorem part of the excise duty on
unbranded petrol and unbranded diesel and replaced it with an
equivalent specific duty of Rs 1.35 per litre. At present, the excise
duty is Rs 14.35 per litre on unbranded petrol and Rs 4.60 per litre
on unbranded diesel. Even a small tinkering would hit the excise
revenues from the commodity and impact the fiscal arithmetic.

Political leaders will now take a call on how to sail through the
catch-22 situation which would not go down well with voters, with some
big states going to polls, and trigger inflation that has crossed
8%.

N.Sukumar
Research Analyst