FICCI URGES GOVT. TO SPEED UP PROGRAMME FOR WITHDRAWAL OF CST & MODALITIES Chamber calls for fiscal boost to key industry sectors NEW DELHI, October 28, 2006. FICCI has urged the Government to come out with a dedicated, time- bound CST withdrawal programme to be completed before 2009, lowering of CST by 100 basis points every six months, a clear direction on the entry tax policy that the States will adopt post CST and how it will merge with VAT, the ceiling with respective upper limits and lower limits rates for various products, documentation that will be required under zero CST and creation of a three-party resource like NSDL which will permit and regulate generation of online forms for inter-state transactions which will be connected to the TIN numbers of assessees. Based on the feedback received from Chief Executive Officers, Chief Financial Officers, Company Secretaries and Chartered Accountants of its member companies across States and industrial sectors, FICCI, in its pre-budget suggestions on Indirect Taxes has pointed out that Since the intention of the government is to put GST in place from 1st April 2010, it is important that Government must bring all items under the ambit of VAT regime. Considering this aspect in mind, it is suggested that petrol and Petroleum products should also be brought under the VAT regime with maximum rate of 12.5% across all States. However, due to revenue constraints, if it is not possible for Government right now to reduce Sales Tax/VAT to this level, then at least the differential amongst States should not exceed 3%-4%. FICCI is of the view that to have National VAT in place, a roadmap should be laid down with total incidence of 20% (Cenvat 12% and State VAT 8%). This will provide the competitive edge to India in the global matrix as well. The Chamber has stated that with the introduction of VAT, the facility of purchase of inputs within the State at a concessional rate of 1% has been withdrawn. This has resulted into unutilized VAT, which will be refundable only at the end of two years and is thereby adversely affecting working capital. It is submitted that inputs for the watch industry are included in the list of Industrial inputs taxed at 4%. The Government should also ensure timely availability of declaration forms so that dealers can submit their forms in time to avoid interest and penalty. Alternatively, Government should allow dealers to use pre- printed stationery subject to Government exercising certain controls to avoid misuse of forms. Further, Form F, says FICCI, should be made mandatory only where finished goods or bought out items are transferred for the ultimate sale of the same in the state in which they are transferred. In other words amendment should be made to make Form F applicable only for the transfers of goods meant for further manufacturing or sale in the transferee states. FICCI strongly believes that there is an urgent need for a massive cut in commodity taxes, especially on demand elastic items to stimulate demand in the economy. Tax cuts would provide the much-needed boost to India’s manufacturing sector. What is needed is that Government should move away from its over-dependence on the manufacturing sector as its major revenue base, and instead, enlarge the service tax net, design the customs duty structure so as to strengthen the domestic sector to develop its competitiveness in exports as well as against imports at home. The Chamber feels it is imperative for the Government to do away with the concept of SED altogether in the forthcoming Budget and the overall incidence of duty and other levies on manufacturers reduced drastically. The Government should reduce the Excise Duty from 16% to 14% in this year’s Budget itself. FICCI has strongly urged to do away with NCCD. Sectorally, FICCI has pointed to the need for giving a fiscal booster to industries that have a strong growth, export and employment generating potential. FOOD PROCESSING: This, according to the Chamber remains an unexplored territory. It has therefore suggested that the government should follow a multi-pronged strategy in the form of direct and indirect tax incentives, availability of finance at concessional rate of interest, speedy clearance of projects etc to ensure that such projects can be set up at the earliest. It is submitted that a tax holiday should be provided to the entire chain of the food processing industry. It notes that while section 80-IC of the Act also provides for a tax holiday to a number of agro-based and food processing industries, the benefit is restricted to only the States of Sikkim, Himachal Pradesh, Uttaranchal and North-Eastern States. Further, a number of activities like preservation, storage, handling and transportation etc., which are an inseparable part of the food processing industry, should be granted the benefit of deduction under section 80-IC. The magnitude of the investment required and the associated benefits that would accrue to the Indian economy justify that comprehensive direct tax incentives in the form of 100% tax holiday in respect of the profits of the undertaking should be made available for a period of atleast 10 years and the assessee should be given the option to claim this tax holiday for any 10 consecutive years out of 15 years beginning with the year in which the undertaking commences business or commercial operations. To encourage more players to come forward and reduce capital cost, Excise Duty should be exempted for Food Processing machinery and refrigerated trucks and other vehicles used by processed food industry and for transport of farm products to processing plant. On the lines of mega power projects, customs duty and countervailing duty should be exempted for import of food processing machinery by mega food processing plant. TEXTILES: FICCI has called for removing the distortionary exemptions from the CENVAT chain to reach a fibre neutral fiscal regime. This will create a level playing field and will induce growth in domestic consumption and investment. Also, there should be progressive convergence between the excise duty regime for competing fibres. Further, FICCI has underlined the need for a progressive duty structure graduating from raw materials to finished goods, while simultaneously moving towards lower peak rates. For example, duty protection is granted to raw material intermediates and not to the fibre/yarn sector in polyester. This inhibits down-stream investments TYRE INDUSTRY: The Chamber notes that production cost-push has resulted in considerable pressure on the tyre industry. Tyre industry is raw material intensive. Fifty five per cent of industry turnover and 70% of production cost are accounted by raw materials. Natural rubber and oil based items are the main raw materials of the tyre industry. The last three years have witnessed steep increase in Natural Rubber price. With increase in oil prices, other major raw materials of tyres had also witnessed price escalation. Tyre is essential for the growth of economy and used in movement of goods and common man. By reducing excise duty on tyres, road transportation becomes more cheaper thereby reducing the cost of commodities. The Excise Duty should be reduced from 16% to 8% and the customs duty on natural rubber (HS Code 4001.21) be reduced from 20% to preferably 7.5% or 10%. The Government may also consider waiving the customs duty on butyl rubber, polyester tyre cord and styrene butadiene rubber (tyre grades: S- 1502 & S-1712). OIL AND GAS: Gas pipelines and associated infrastructure are critical infrastructure required for safe and economic evacuation of Natural Gas and therefore, it is absolutely essential that the increase in production of Natural Gas is matched with the corresponding increase in pipeline capacities to ensure that the gas can be transported to the markets at a reasonable cost. A 10-year tax holiday under Section 80 IA be granted to pipelines, storage terminals and other related facilities for transportation and storage of petroleum products. In other words, these gas pipelines and associated infrastructure should also be granted infrastructure status. Sub-section (9) of Section 80-IB provides deduction to an undertaking, which begins commercial production or refining of mineral oil equal to 100% of the profits for the period of 7 consecutive years including the initial assessment year. It has to be appreciated that in the initial few years there is hardly any profit to take advantage of the tax holiday provisions under this section. The said sub-section does not provide any flexibility to choose the period in which to claim the benefit. Also, during the initial seven years period of tax holiday, companies have large expenditure to set off and hence actual benefit of tax holiday does not flow to them. Undertakings should be given the option of claiming tax holiday in respect of 100 % of its profits for seven consecutive years at any time during the first 15 years after the commencement of commercial production, to make the incentive really meaningful. Weighted deduction of 150% of the actual expenses incurred by the assessee in respect of drilling and exploration activities should be allowed as a deduction to the assessee under section 42 of the Income Tax Act. As a fuel, natural gas has to compete with coal, which enjoys “declared goods” status under Section 14 of the Central Sales Tax Act 1956 thus attracting maximum 4% sales tax. Declared goods status should also be granted in case of Natural Gas as well. Excise duty on petroleum products should be made specific instead of advolerm so as to avoid unproductive litigations and to smoothen the price volatility in the market and its impact on inflation. The Rangarajan Committee has also advocated for specific duty structure in case of MS and HSD. And, the differential in the rates of duty between crude oil and petroleum products should be kept at 10% minimum. CEMENT: To give a fillip to the development of the infrastructure, the Government should consider reducing/eliminating the various taxes on cement. While the specific rate of excise duty should be continued, the same should be reduced drastically. The reduction/elimination of taxes and duties will lower the final cost of cement. This will facilitate much-needed infrastructure development as also the construction activity in the country. With a view to motivate Indian cement industry to produce blended cement, FICCI has suggested that there is need for a change the excise duty structure to include a special classification for blended cements; a differentially lower excise duty and lower VAT rate for blended cements (versus non blended variants) containing a minimum level of 25% of fly ash / 50% of blast furnace slag respectively; and provision of capital subsidy for setting up facilities for manufacturing blended cement and fly- ash classifiers; PHARMACEUTICALS: For the pharma industry, FICCI has underscored the need for extending the benefit of 150% weighted deduction to the investments made in land and building. Similarly, customs duty, excise duty and service tax should also be waived for the capital goods, revenue expenditure, as well as for the services received by R&D units. Further, Indian pharma companies are also aggressively investing in R&D activities so as to obtain the regulatory approvals from the countries belonging to Western Europe and US. This expenditure, at present does not get 150% weighted deduction. It is widely felt that extending the weighted deduction for above expenditure will help the Indian pharma companies investing in R&D to obtain these approvals and increasing the exports to the developed world. While select life saving drugs should be fully exempted from Customs Duty, the same presently attract customs duty ranging from 5% to 12.5%. There is need to reduce excise duty on pharmaceuticals from 16% to 8% to give the desired fillip to pharma industry as well as to make healthcare cheaper for the patients. ELECTRONIC HARDWARE: FICCI has pointed out that the differential duty structure to sustain manufacturing in the Indian context is not possible and the inverted duties due to ITA -1 & FTAs is plaguing hardware manufacturing. Moreover, domestic taxes and levies impose fiscal disabilities, for example, the cascading impact of CST on components detrimental for finished products manufacturing. Also, the high cost of finance and power add to fiscal and physical disabilities. The Chamber has therefore suggested: Excise duty at 8% for entire electronics industry value chain ensuring no Cenvat overflow (Excepting for mobile handset manufacturing); abolish CST on all Electronics Hardware immediately; 4% VAT across the board on entire Hardware value chain; Manufacturers ensuring minimum 30% domestic value addition to be given Income Tax Exemption for 10 years – revive Section 80HHC benefits for DTA units; Inverted duties due to ITA-I and FTAs need to be corrected; No differentiation between IT and non-IT segments – treat at par for domestic taxes / levies to avoid classification conflict; Same classification of electronic goods across all States of India under VAT as per Customs / Excise HS Code to ensure same treatment across the country; Set up a Development Fund to compensate for high interest rates and other infrastructural disabilities – Interest rate at 5% ; and Remove condition of minimum 16% applicable duty on DTA sale by EHTP / EOU units; allow actual 50% applicable duty on DTA sale.