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Scrap inverted duty structures, bring in GST to boost manufacturing
September, 23rd 2008

Stressing on the need for rationalisation and simplification of the countrys indirect tax structure, the National Manufacturing Competitiveness Council (NMCC) has called for an early implementation of the goods and services tax, abolition of inverted duty structures and linking fiscal incentives to value addition by industries.

The panel led by V Krishnamurthy in its report Measures For Ensuring Sustained Growth Of The Indian Manufacturing Sectorsubmitted to the Prime Minister on Saturday has said bringing about such changes will help promote domestic manufacturing and industry and help them compete with other countries in the international market.

Earlier this year, the NMCC, in an interim report, had also suggested a slew of tax proposals, which could be incorporated in the Budget. Calling for the reduction of the total tax level in the country, the report notes, A study done in the year 2002 comparing the prices of a range of manufactured products in India and China found that the prices of Indian products were higher, on average, between 28% to 33%, half of which is attributed to the difference in indirect tax levels.

In this regard, it is imperative for the finance ministry to stick to its target of abolishing the central sales tax by 2010 and introducing GST that would subsume service tax and excise duty along with a plethora of state taxes. Bringing in GST at the earliest and rationalising other taxes and duties is essential and should be undertaken on a priority basis, the panel has stressed.

It has also called for the abolition of inverted duty structures and rationalising the custom duties. The government is already working at reducing the peak import duty to the same level as in Asean countries, which would enable Indian industry to be more competitive. The Asean customs duty rate ranges between 5% and 10%.

Experts say that inverted duty structures is a common problem, especially in customs duties, where often inputs attract a higher duty than finished goods, and so giving domestic manufacturers very little incentive for value addition.

The NMCC has recommended that any special fiscal dispensation such as lower rates of excise duty or even through budgetary support should be linked to domestic value addition. This will enable growth of manufacturing. Such a policy is already prevalent in China, it notes and in India it is partially being followed in the automobile industry. This will ensure not only that the manufacturing sector grows but the firms would also acquire necessary technological capabilities, it said.

For this, a standing committee with representatives from the department of revenue, the department of industrial policy and promotion and the NMCC should be set up. It should also consider levying export duties on raw materials and inputs for promoting domestic value addition.

Nagesh Kumar, director general Research and Information System for Developing Countries said, These recommendations are in the right direction as there is a great need for promoting the countrys manufacturing sector. But along with correcting the inverted duty structure, there is a need to incentivise value addition, especially in the R&D sector.

Interestingly, the panel has also noted that one of Indias closest competitorsChinahas been introducing some measures which outwardly are not WTO incompatible but have helped domestic manufacturing.

For example, it has come up with a new mandate called indigenous innovation, which it claims is only to invigorate domestic innovation. But its real purpose appears to be to give indigenous Chinese companies an additional advantage through preferences, tax incentives etc.

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