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Finance ministry may reduce Customs duty
May, 31st 2008

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 ministrys 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 ministrys 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%.

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