Several global business heads, including Honda, Vodafone and BP India, have recently spoken about the burdensome nature of tax laws in India that have delayed and discouraged further foreign investment into India. They have referred to poor infrastructure, uncertain tax regime, delay in fixing input prices such as of gas, tax dispute on retrospectivity, slower clearances from government for getting business permit for starting business or setting up of factories, etc.
While all of them do not relate to tax matters, the latter do constitute a substantial portion of the hindrance that they have referred to. If anybody thinks that a lot of reform has taken place in tariff, he should see the existing spread of rates in customs. The sheer complication in the tariff itself is quite daunting for investors. Let us see the Customs tariff at the first instance. The rates of duty in customs still are very large in number, as indicated: 150, 100, 90, 85, 75, 70, 65, 60, 50, 45, 40, 35, 30, 25, 20, 17.5, 15, 10, 7.5, 5, 3, 2.5, free, nil & some specific rates. Then there are 32 Lists covering at least 4,000 items and 99 conditions which apply, though not all at a time. Tariff also requires certificates from any or more of 32 departments if exempted rates are to be allowed, such as director general of foreign trade (DGFT); deputy secretary, ministry of tourism; director of vanaspati, vegetable oil and fat (department of food & public distribution), etc.
So the result is that there is still a "milling crowd" in front of the appraising department of the custom houses, though the system introduced by computer technology does theoretically ensure a green channel. The importers say it is not green enough at all.
Computer cannot make the channel of clearance of goods green unless the tariff is simple, which needs a lot of drastic effort to achieve and a change in the mind set.
What I can suggest for improving the tariff is to introduce the system of "one chapter one tariff" in as many chapters as possible. It may not be possible in chapters like 22, 27, 84, 85, 87 and 90 which got variegated commodities but it can be possible in most chapters.
Even in these chapters many exemptions can be withdrawn. The existing 22 rates can be combined into 150, 100, 50, 30, 10, 5 and nil. There should not be any exemption to the extent of 2.5 per cent. The fundamentals of the economy being strong, a difference of 2.5 per cent can be withstood by industries. They, in fact, will get impetus if so many conditions are abolished and lists are pruned. Declarations should be accepted rather than certificates and bonds. The export related exemptions need to be combined and rationalised because they are the biggest source of controversy.
There is an omnibus exemption covering all goods (apart from many others) which has a condition number 5, which alone occurs 45 times spreading over 13 chapters. If this condition can be reviewed and the spread reduced, it will go a long way in improving the exemption structure. A simple declaration should be sufficient. Any misuse can be found out by post audit or intelligence. Now distinctions are there for very similar things which will invariably raise controversy and lead to delay, like glycerine and medicinal grade of glycerine, windscreen wipers and parts of wipers and so on.
It must be admitted, however, that the government has made a special arrangement for foreign investors for giving them a firm ruling about their tax liability for both direct and indirect taxes by introducing advance ruling authority. Even the scope of this authority has been expanded over a period of time. But this is not enough since most issues are not out of its jurisdiction.
The conclusion is, we must admit that there has been no reform in customs tariff and even procedure. Ask the importers and not the officers. We must reform by adopting simplification as the mantra if foreign investment has to come.
Accepting declaration and depending on the intelligence department to detect violation is a far better system than the present system of bonds and bondages.