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End irrational spread on indirect taxes
June, 01st 2013

The finance ministry says a tablet will attract a higher duty than a mobile phone when imported, never mind the pious projections that India will see the world's fastest growth in data traffic over 2012-17. Phones and low-cost tablets are what Indians will use to cross the digital divide.Is there any sense in having separate duty rates for thetwo kinds of products? Tablets and mobile phones,as information technology-related imports, attract zero customs duty.

A countervailing duty (CVD) is charged on imports equivalent to the excise duty— 6%for mobile phones valued over Rs 2,000 and 12% on tablets. An importer cannot claim tax credit on CVD,whereas a domestic manufacturer can set off excise duty on a product against the taxes paid on inputs. A higher CVD on a tablet offers a local producer a higher level of protection than on phones.

There is little basis for such differential duties. Economic sense lies in offering precisely the same, uniform tax treatment to any kind of value addition so that policy does not discriminate against some kinds.The irrational spread in duty rates came about on Pranab Mukherjee's watch and the need now is to narrow the range and eventually converge on a single, lowrate of import duty and domestic goods and services tax. As potentially theworld's largest market for data communications, India has a strong case for developing indigenous manufacturing capability in data products.

To realise this potential, creating a rational, non-distortionary duty structure is more important than assorted subsidies and privileges. This, of course, does not militatea against state activism to create a semi conductor chip-making industry in the country, which many consider an important ingredient of the eco system needed to promote electronics manufacture.

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