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This is an archive article published on March 6, 2006

Exemption Raj: Beginning of the end?

Finance Minister P. Chidambaram may not have taken many hard decisions in this Budget, but he has quietly managed to slip in 8212; without ...

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Finance Minister P. Chidambaram may not have taken many hard decisions in this Budget, but he has quietly managed to slip in 8212; without raising protests 8212; the withdrawal of exemptions on custom and excise duties on as many as 72 items.

If you read FM8217;s lips, it8217;s clear that this is only the beginning.The withdrawal in exemptions 8212; the bulk of which pertain to the country8217;s export and social sectors 8212; is part of the government8217;s plans to do away with all distortive exemptions in the next few years.

The numbers are known by now, but they bear repeating: the total revenue foregone through exemption was estimated at Rs 1,58,000 crore for 2004-05. Of this, excise exemptions were Rs 30,000 crore, and nearly Rs 70,000 crore for customs exemptions.

The message is clear: If India needs to be unburdened from the high level of taxes, distortive exemptions have to go too. Obviously, this has evoked mixed reactions from India Inc.

The players which benefit from exemptions are mainly small scale players. 8216;8216;The removal of these exemptions would hurt this sector in the short term. However, eventually things would even out as the government can use these additional resources to help these industries. Many large sector players have understood this rationale and that8217;s why you didn8217;t find any widespread protest against the removal of exemptions for indirect taxes,8217;8217; said Bhavna Doshi, Country Head indirect taxes, KPMG.

The highest number of excise exemptions are given to the textile industry which has around 90 for its sector, followed by the export sector which has 20 and SSIs which have five. In customs, too, multiple exemptions erode the tax base. There are well over 100 exemptions for customs duties which are further compounded by separate exemption notifications.

However, not many people agree with the government8217;s proposal to remove all exemptions. 8216;8216;We understand that the government8217;s decision to withdraw exemptions would have a positive impact on rationalising tax rates. But how can you deprive benefits to sectors which are bringing you revenues for decades?8217;8217; asks FIEO Chairman O P Garg.

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8216;8216;The government on the one hand wants to remove exemptions on customs and excise duties for exports and on the other hand it is setting up SEZs and EOUs which are enjoying tax benefits. This policy would create disparity amongst players,8217;8217; he added.

But players who are for the removal of exemptions say that with the eliminations of these sops, tax rates could be dropped by half, across the board. But many also believe that exemptions are necessary if certain sectors like the food processing sector are to be nurtured and developed.

8216;8216;There should be an attempt to streamline taxes and moderate exemptions. However, it is not possible to remove exemptions completely,8217;8217; PriceWaterHouse Cooper8217;s Prashant Deshpande says.

Some key sectors still enjoying exemptions are small scale industry SSI, village industry marketed with Khadi and Village Industries Commission KVIC assistance, specified goods supplied to various types of public institutions, goods produced without power, cooperative society produced tea, goods produced in the North-East, a number of food items including bread, spices, coffee, fertilisers and ready-made garments. 8216;8216;An intensive effort is necessary to rationalise exemptions through abolition and merger. Conditions for exemptions must be minimised,8217;8217; said Nihal Kothari, former member of the Task Force on Indirect Taxes headed by Vijay Kelkar.

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8216;8216;The government should target only induced-based exemptions, outlived utilities and exemptions which raise disputes as the excise base is eroded substantially by exemptions,8217;8217; adds a tax analyst.

Experts believe that with the government coming out with a number of schemes for promoting exports it should take a hard look at the duty which it foregoes through exemptions in these schemes and the growth in exports and then chart out its plan for the future.

Zeeshan Shaikh is the Associate Editor who heads The Indian Express' Mumbai reporting team. He is recognized for his highly specialized Expertise in analyzing the complex dynamics of Maharashtra politics and critical minority issues, providing in-depth, nuanced, and Trustworthy reports. Expertise  Senior Editorial Role: As an Associate Editor leading the Mumbai reporting team, Zeeshan Shaikh holds a position of significant Authority and journalistic responsibility at a leading national newspaper. Core Specialization: His reporting focuses intensely on two interconnected, high-impact areas: Maharashtra Politics & Urban Power Structures: Provides deep-dive analyses into political strategies, municipal elections (e.g., BMC polls), the history of alliances (e.g., Shiv Sena's shifting partners), and the changing demographics that influence civic power in Mumbai. Minority Issues and Socio-Political Trends: Excels in coverage of the Muslim community's representation in power, demographic shifts, socio-economic challenges, and the historical context of sensitive political and cultural issues (e.g., the 'Vande Mataram' debate's roots in the BMC). Investigative Depth: His articles frequently delve into the historical roots and contemporary consequences of major events, ranging from the rise of extremist groups in specific villages (e.g., Borivali-Padgha) to the long-term collapse of established political parties (e.g., Congress in Mumbai). Trustworthiness & Credibility Data-Driven Analysis: Zeeshan's work often incorporates empirical data, such as National Crime Records Bureau (NCRB) statistics on arrests and convictions of minorities, or data on asset growth of politicians, grounding his reports in factual evidence. Focus on Hinterland Issues: While based in Mumbai, he maintains a wide lens, covering issues affecting the state's hinterlands, including water crises, infrastructure delays, and the plight of marginalized communities (e.g., manual scavengers). Institutional Affiliation: His senior position at The Indian Express—a publication known for its tradition of rigorous political and investigative journalism—underscores the high level of editorial vetting and Trustworthiness of his reports. He tweets @zeeshansahafi ... Read More

 

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