Confederation of Indian Industry - Indirect Taxes: Sector and Industry

Indirect Taxes: Sector and Industry-Specific Analysis

Air- conditioners & Air Conditioning Equipment

* by notification

Status

• With a reduction in the room air-conditioner prices facilitated by a reduction in excise duties, rising incomes and easy availability of consumer financing – air-conditioners have come to be accepted as a utility item rather than a luxury one in many households.
• Window/wall type self contained air-conditioners are included in the list of Early Harvest Scheme of India-Thailand Agreement and customs duty on these was reduced to 12.5% from 1st September 2004. Consequently indigenous manufacturers were allowed to import specified inputs of aluminium at 10% duty and some other inputs including compressors at 15% customs duty by customs notification 27/2004 dated 23.01.2004. In the budget 2006, seven entries related to inputs were deleted probably due to general reduction of customs duty rates on these inputs. However, concessional duty of 10% on import of aluminium tubes continues.
• As per the commitment in India-Thailand Agreement, customs duty was further reduced to 6.25% on 1^st September 2005. In the year 2003-04 and 2005-06, about one third of total imports of window/wall type self contained air-conditioners were from Thailand in value terms as evident from the data given below.

• In the third phase of implementation of India-Thailand FTA, the customs duty has been further reduced to NIL on 1st September 2006. This is likely to boost import of air-conditioners from Thailand. The current customs duty structure on inputs tantamounts to inverted duty structure and discourages local manufacturing since it is cheaper to import the full products. Therefore, reduction in duty on compressors and other inputs for air-conditioners is needed to safeguard the interest of indigenous manufacturers.

• As reduction in customs duty on compressors would adversely affect the indigenous manufacturers of this product, there should be simultaneous reduction of customs duty on parts and other inputs for compressors.

Customs duty on parts and other inputs for manufacture of compressors for window/wall type air-conditioners should also be reduced to 5%.

Alkalies

* by notification

Status

• Caustic soda and soda ash are the two main alkalies manufactured by this industry. The major user industries of caustic soda are pulp & paper, man-made fibers, aluminium and soaps. Caustic soda is manufactured through mercury cells or diaphragm cells or the membrane cells. Most of the caustic soda plants have switched over to membrane cell technology and at present, about 80% of the plants are using this technology.
• Customs duty on mono or bipolar membrane electrolysers and its parts as well as membranes for replacement and parts thereof is 5%. However, spare parts, other than membranes and parts thereof, required for the existing membrane cell plants still attract customs duty of 12.5%. The concessional duty rate of 5% needs to be extended to such spare parts also.
• Electric power and salt are the key inputs required for manufacture of caustic soda and power accounts for almost 60% of the total cost of production. The higher cost of power in India is the main factor, which makes Indian manufacturer uncompetitive in the international market. Many caustic soda manufacturers have set up their own captive power plants and most of these are based on fuel oils like furnace oil, LSHS etc. Reduction in customs duty on fuel oils from 10% to 5% can give some relief to the industry.

Reduce customs duty on fuel oils like furnace oil, LSHS etc. from 10% to 5%. 

Aluminium

*by notification

Status

• In the manufacturing process of aluminium, aluminium ore is converted into alumina calcined (aluminium oxide) and then to aluminium. Thus alumina calcined is an intermediate between aluminium ore and aluminium.
• In order to reduce the transportation cost, calcined alumina is exported instead of aluminium ore (bauxite) for manufacture of aluminium. Only two tons of metallurgical grade alumina is required to produce one ton of aluminium. At present the customs duty on alumina calcined is 7.5%. With the reduction of customs duty on aluminium ore (bauxite) from 5% to 2% in the budget 2006, duty on the intermediate product alumina calcined should not be more than 5%.
• Aluminium alloy manufacturers in India use aluminium scrap for recycling into aluminium alloys and these are mostly sold at a lesser price than the primary aluminium metal. Aluminium alloys so manufactured are used as raw material for manufacture of auto components.

• Manufacturers of aluminium alloys are facing competition from Sri Lanka as these alloys are allowed for import at NIL customs duty under Indo-Sri Lanka Free Trade Agreement as per customs notification 26/2000. Import of aluminium alloys from Sri Lanka has increased from Rs.577 lacs in 2003-04 to Rs.3816 lacs in 2004-05 and to Rs 4731 lacs in 2005-06..
• Aluminium alloys attracted customs duty of 3.75% with effect from 1^st September 2005 when imported from Thailand as these are covered under the Early Harvest Scheme of India-Thailand FTA and the customs duty has been further reduced to NIL from 1^st September 2006. Import of aluminium alloys from Thailand, have tremendously increased from Rs.2.5 lacs in 2003-04 to Rs.2092 lacs in 2004-05 and to Rs 7241 lacs in 2005-06.

• During the year 2005-06, imports of aluminium alloys from Sri Lanka and Thailand at concessional customs duty was 30.8% of total import of this product.
• Due to limited indigenous availability of aluminium scrap, aluminium alloy manufacturers import aluminium scrap from other countries. At present customs duty on aluminium scrap is 7.5% which is at par with the normal duty rate on aluminium alloys but much higher than the NIL duty rate applicable on import of aluminium alloys from Thailand and Sri Lanka. Reduction of customs duty on aluminium scrap from 7.5% to 2% would give some relief to the aluminium alloy manufacturers.

Customs duty on aluminium scrap should be reduced from 7.5% to 2%.

Auto Components

* by notification

Status

• India’s automotive component industry manufactures the entire range of parts required by the domestic automobile industry. To meet international quality requirements and for tapping the global markets, the Indian auto ancillary units have entered into joint ventures with foreign companies.
• India is emerging as a key hub for auto component manufacture in Asia and is well poised to play a significant role in the global automotive supply chain in the near future. As per CII-ASCON survey, during the financial year 2004-05, this sector posted a growth of 30%, which has come down to 20% in 2005-06 because of increase in OEM buying from China. Exports growth during 2005-06 was 35%. This high exports growth rate can be attributed to the improvement in the industry’s export capabilities and the increasing global recognition of this capability.
• One of the key challenges being faced by the Indian auto component industry is the growing number of Free Trade Agreements and Preferential Trade Agreements already signed/being signed by India with countries like Thailand, Singapore, ASEAN countries, etc. Variety of auto components like engine parts, gear boxes, lighting equipment etc. are included in the Early Harvest Scheme (EHS) of the Thailand FTA and the basic customs duty has been reduced to NIL with effect from 1^st September 2006.
• Given the present duty structure on the various raw materials in the country as well as the existing infrastructure and other conditions available in the country, these FTAs are also likely to erode India’s ability to attract investments in manufacturing vis-à-vis the FTA countries. These countries have not only much better overall infrastructure but the import duties on the basic raw materials are also lower. Therefore, in order to successfully compete for future investments with these countries, the import duties on the basic raw materials will need to be reduced to commensurate levels.
• In order to safeguard the interest of indigenous auto component industry from the impact of implementation of first phase of India-Thailand FTA, customs duty on some of the steel inputs for auto components was reduced to 10% vide sl no. 5 to 15 of customs notification 27/2004 dated 23.01.2004. This notification still shows customs duty of 10%, even though general rate of customs duty on these items has been reduced to 5% in case of non-alloy steel and 7.5% for alloy steel. Customs duty on these inputs needs to be reduced to 5%. Similar concession needs to be extended to other inputs falling under different chapters.
• Parts, components and assemblies of automobiles falling under any chapter have been brought under RSP based assessment with effect from 1^st June 2006 with abatement of 33.5%. The abatement percentage is low keeping in view that there is 16% central excise and 12.5% VAT on auto components apart from other post manufacturing expenses and traders margin. The auto component manufacturers have already submitted data for revision of abatement rate and the decision is awaited.

• Kits and their parts required for the conversion of motor spirit or diesel driven vehicles into CNG/LPG driven vehicles are allowed for import at 5% customs duty. But this concession is not available on import of raw materials required for manufacturing conversion kits, which attract customs duty of 7.5-12.5%

Customs duty concession of 5% on CNG kits / parts of kits should be extended to raw material required for manufacture of CNG kits and its parts. 

Automobiles

* by notification

 Status

• Car manufacturing is basically assembly of components procured from ancillaries or auto component manufacturers. The demand for cars is dependent on number of factors such as price of cars, incidence of duties and taxes, introduction of new models, availability and cost of car financing schemes, depreciation norms, fuel cost etc.
• In the budget 2006, excise duty on small cars (upto 4000 mm length and engine size of 1200 cc for petrol/LPG/CNG and 1500 cc for diesel) was reduced from 24% to 16%. Small cars should be defined on the basis of length only and the criteria based on fuel or engine capacity should be removed from the definition.
• Vehicles designed for transport of 7 to 12 persons are commonly known as multi-utility vehicles (MUVs) and provide basic transport for intra / inter city movement of peoples. These MUVs as well as other passenger cars (excluding small cars) attract excise duty of 24% at present and needs to be brought down to 16%.
• Motor vehicles for transport of goods fitted with petrol engine falling under CET 8704 attract excise duty of 24%. Charging higher duty on the basis of fuel should not be the rationale particularly when there are very few vehicles falling under this category.
• Motor vehicles falling under CET 8703 and registered as taxi for transport up to 7 persons including driver either pay excise duty of 16% or get refund of 8% excise duty out of 24% paid at the time of clearance as per C.E. notification 6/2006 – sl. no. 34. The same benefit should be extended to vehicles registered as maxi – cab (taxi) falling under CET 8703 having seating capacity below 10 persons excluding driver.
• The manufacturers of ambulance pay excise duty of 24% and file claim for refund of 8% thereafter, which defeats the very purpose of the excise concessions. In fact, ambulance is a different product and should be allowed to be cleared with the applicable excise duty of 16%.
• Excise duty on the chassis fitted with engine was enhanced from 16% (ad-valorem) to 16% plus Rs. 10,000/- per unit in the Budget 2003-04 to promote integrated bus body building. Over 90% of the vehicles constituted in this category are above the payload of 1.5 MTs capacity and cost of body building ranges between Rs. 75,000/- to Rs. 5 lacs depending on the type of body building.

However, in respect of the vehicles with a smaller payload of less than 1.5 MTs, which is normally used as load carriers for short haulage, the cost of body building would be in the range of Rs. 20,000/-In such cases, if the manufacturer of the vehicle were to give it to a body builder in the organized sector, the amount of Rs. 10,000/- cannot be absorbed under the CENVAT scheme and consequently, the effective duty would far exceed 16%.

• Two wheelers are vehicles for the mobility of people who cannot afford cars and have limited access to public transport facilities. Presently, 2-wheelers attract excise duty of 16% and its reduction to 8% would further encourage its usage.

Recommendation

Reduce excise duty from 24% to 16% on all passenger vehicles including multi-utility vehicles and petrol driven vehicles for transport of goods.

The benefit of 8% excise duty refund should be extended to vehicles under CET 8702 when registered as maxi-cab (taxi).

Allow clearance of ambulance at the applicable concessional excise duty of 16% and the present system of paying full duty and claiming refund should be done away with.

Reduce excise duty from 16% + Rs. 10,000/- to 16% + Rs. 3,000/- on chassis fitted with engine of payload of less than 1.5 MT.

Reduce excise duty from 16% to 8% on 2-wheelers and its components. 

Ball and Roller Bearings

Item	Excise Duty (%)		Customs Duty (%)
	2005-06	2006-07	2005-06	2006-07
Ball and roller bearings (8482)	16	16	15	12.5
Ball bearings from Thailand (8482 10)	16	16	6.25* 85/2004-67	NIL* 85/2004-67
Balls and rollers for bearings (8482 91)	16	16	15	12.5
INVERTED AND ANOMALOUS CUSTOMS DUTY STRUCTURE DUE TO FTA INPUTS
Steel (72)
Cold rolled steel strips (7211) Cold rolled steel strips - copper / phosphate coated (7212 50 90)	16	16	5* 21/2002-190B	5* 21/2002-190B
Alloy steel strips (7226) Bearing quality alloy steel wire rod confirming to SAE 52100 (7227 90 30) Black bars / rounds of alloy steel (7227 90 90) Bright bars conforming to SAE 52100 (7228 10 10) Alloy steel round bars (7228 30 29) Bearing quality alloy steel wires (7229)	16	16	10* 21/2002-207	7.5* 21/2002-207
Articles of Steel (73)
Seamless bearing quality alloy steel tubes confirming to SAE 52100 (7304 51 10) Forged rings (7326 90 99)	16	16	15	12.5
Other Inputs
Grinding wheels and honing stones / blocks (6804 22 90)	16	16	15	12.5
Zytel 6 x 6 (Nylon) (3908 10 90)	16	16	15	12.5

* by notification

Status

• The fortune of this industry is closely related to how well the user industries of automobile and engineering perform. These users sectors are doing well. Ball and roller bearings sector has seen a production growth of 24% in 2005-06 compared to 20.5% in 2004-05 as per CII ASCON survey.
• An alarming feature in recent times has been the increased availability of imported low cost bearings from China and East European countries in the replacement market, which has cut into the share of the domestic industry. There has also been an increase in trading of spurious bearings.

• In the budget 2006, customs duty rate on ball and roller bearings, its components and some of other inputs was reduced from 15% to 12.5% in line with the reduction of peak tariff duty rate. There is no duty differential between bearings and some of its inputs such as articles of steel falling under chapter 73 and grinding wheels as well as honing stones / blocks falling under tariff heading 6804 22 90.
• The Free Trade Agreement (FTA) between India and Thailand has a list of goods covered by the Early Harvest Scheme (EHS) and includes ball bearings. In the second phase of implementation of FTA, customs duty on ball bearings imported from Thailand was reduced to 6.25% with effect from 1^st September 2005. As per the Agreement, duty has been further reduced to NIL from 1^st September 2006 on implementation of third phase of FTA. Consequently, import of ball bearings from Thailand has increased from Rs. 141 lacs in 2002-03 to Rs. 915 lacs in 2005-06.
• In order to safeguard the interest of indigenous industry, customs duty on three specified steel inputs for ball bearings viz. bearing quality alloy steel wire rod conforming to SAE 52100, bright bar conforming to SAE 52100 and alloy steel round bars falling under Chapter 72 was reduced to 10% on 23.01.2004 vide customs notification 27/2004 before implementation of first phase of India-Thailand FTA. This notification still shows customs duty of 10%, even through, general rate of customs duty on these items has been reduced to 7.5% with effect from 1^st March 2006. Customs duty on these inputs needs to be reduced to 5% by amendment to customs notification 27/2004 – sl no. 11, 13 and 15. Also similar concession needs to be extended to few other inputs of ball bearings.
• Parts, components and assemblies of automobiles falling under any heading have been included at sl. no. 97 of central excise notification 2/2006 (NT) with effect from 29^th May 2006 bringing these under RSP based assessment with abatement of 33.5%. Ball and roller bearings falling under HS Code 8482 have wide ranging applications. While, some ball and roller bearings are used in automobiles, the same are also used in other applications and the end user is not known at the time of sale of such bearings to distributors/dealers. Therefore, ball and roller bearings should be excluded from RSP based assessment.

Recommendation

Customs duty on three main inputs of alloy steel for ball bearings figuring in customs notification 27/2004 should be reduced from 10% to 5%.

Reduce Customs duty on seamless bearing quality alloy steel tubes conforming to SAE 52100 and forged rings falling under chapter 73 from 12.5% to 5% when used for manufacture of ball bearings.

Exclude ball and roller bearings from the scope of parts and components of automobiles for the purpose of RSP based assessment.

Capital Goods / Project Imports

Item	Excise Duty (%)		Customs Duty (%)
	2005-06	2006-07	2005-06 (Basic+CVD)	2006-07 (Basic+CVD+Spl. CVD)
Mega Power Projects (9801)	16	16	NIL*+NIL 21/2002-400	NIL+NIL+NIL 21/2002-400
Nuclear Power projects of capacity 440 MW or more (9801)	16	16	NIL*+NIL 21/2002-401	NIL*+NIL+NIL 21/2002-401
Projects financed by World Bank / Asian Development Bank / other International Organisations	NIL* 108/1995 6/2002-301	NIL* 108/1995 6/2006-91	NIL*+NIL 84/1997	NIL+NIL+NIL 84/1997
Specified goods for petroleum exploration under NELP, specified contracts, lease renewal (84 or any other chapter)	16	16	NIL*+NIL 21/2002-214,216,217	NIL*+NIL+NIL 21/2002-214,216,217
LNG facility project of Ratnagiri Gas & Power for power project at Dabhol (9801)	16	16	NIL*+NIL 21/2002-510	NIL*+NIL+NIL 21/2002-510
Drinking water supply projects (9801)	NIL* 6/2002-196A	NIL* 6/2006-07	NIL*+NIL 21/2002-401A	NIL*+NIL+NIL 21/2002-401A
Water supply projects for agricultural and industrial use (9801)	NIL* 3/2004	NIL* 3/2004	NIL*+NIL 14/2004	NIL*+NIL+NIL 14/2004
Specified goods for coal bed methane operations. (84 or any other chapter)	16	16	NIL*+NIL 21/2002-218	NIL*+NIL+NIL 21/2002-218
Capital goods, material handling equipment etc. for repair of ocean-going vessels (84 or any other chapter)	16	16	NIL*+NIL 21/2002-351	NIL*+NIL+NIL 21/2002-351
Power generation project including gas turbine power projects (excluding captive power) (9801)	16	16	5*+16 21/2002-399	5*+16+NIL 21/2002-399
23 specified equipment for high voltage transmission projects (84 or any other chapter)	16	16	5*+16 21/2002-424	5*+16+NIL 21/2002-424
Goods required for initial setting up of a project for power generation using non-conventional materials.	NIL* 33/2005	NIL* 33/2005	5*+NIL 81/2005	5*+NIL+4 81/2005
Barge mounted power plants (9801)	16	16	5*+16 21/2002-399	5*+16+4 21/2002-399
Fertiliser projects (9801)	16	16	5*+16 21/2002-399	5*+16+4 21/2002-399
Coal mining projects (9801)
Refining of crude petroleum (84 or any chapter)	16	16	5*+16 21/2002-228	5*+16+4 21/2002-228
LNG regassification plants projects (9801)	16	16	5*+16 21/2002-433	5*+16+4 21/2002-433
Aerial passenger ropeway projects (9801)	16	16	5*+NIL 21/2002-433	5*+NIL+4 21/2002-433
Power transmission, sub-transmission or distribution projects (9801)	16	16	10*+16 21/2002-399	10*+16+NIL 21/2002-399
Projects with investment of Rs. 5 crore or more in plant and machinery within two years (9801)	16	16	10*+16 21/2002-441	10*+16+4 21/2002-441
14 specified goods for development of ports (84 or any other chapter)	16	16	10*+16 21/2002-231	10*+16+4 21/2002-231
7 specified goods for inland water ways (84 or any other chapter)	16	16	10* +16 21/2002-231A	10*+16+4 21/2002-231A
11 specified goods for development of airports (84 or any other chapter)	16	16	10* +16 21/2002-232	10*+16+4 21/2002-232
8 Specified equipments for use in an inland container depots/container freight stations (84 or any other chapter)	16	16	10*+16 21/2002-502	10*+16+4 21/2002-502
General Machinery not covered by any notification (84, 85)	16	16	15+16	12.5+16+4

* by notification

Status

• India has a strong engineering and capital goods base. The range of machinery produced in India includes heavy electrical machinery, textile machinery, machine tools, earthmoving and construction equipment including mining equipment, road construction equipment, material handling equipment, oil & gas equipment, sugar machinery, food processing and packaging machinery, railway equipment, metallurgical equipment, cement machinery, rubber machinery, process plants & equipment, paper & pulp machinery, printing machinery, dairy machinery, transport equipment, industrial refrigeration, industrial furnaces etc.
• In the budget 2006, levy of 4% special CVD was extended to all imports with certain exceptions, which includes various types of projects and other capital goods specified in the table above. In para 133 of Finance Minister’s budget speech on 28^th February 2006, it was stated that the purpose of imposition of special CVD of 4% on imports is to compensate for state level taxes. The exemption granted to large number of categories vide sl. No. 1, 11 and 12 of customs notification 20/2006 dated 1^st March 2006 goes against the basic principle of this levy. This adversely affects the indigenous capital goods manufacturers as Central Sales Tax (CST)/VAT is applicable on the goods manufactured by them and supplied to such exempted categories. In other words, it amounts to negative protection, which erodes competitiveness of the domestic industry.
• The current duty structure for the capital goods sector has four rates of customs duty — 0%, 5%, 10% and the peak rate of 12.5% for general machinery. This is the only engineering sector where basic customs duty is 0% or 5%. Mega power projects, nuclear power projects, capital goods for water supply projects, capital goods for repair of ocean going vessels, specified goods for coal bed methane operations, specified road construction machinery, goods required for petroleum exploration licences / leases and petroleum operations under specified contracts under NELP attract zero customs duties. LNG facility project of Ratnagiri Gas & Power was added to no charge category of NIL duties from 1^st October 2005.
• Capital goods imports at 5% duty is allowed for fertiliser projects, coal-mining projects, LNG regassification plants, crude petroleum refinery plants, barge mounted power projects, aerial passenger ropeway projects and specified goods required for high voltage power transmission projects. Under Customs Tariff heading 9801, domestic manufacturers are allowed to import their inputs at the same customs duty rate as the capital goods. However, for 23 specified equipments used for high voltage transmission projects, there is no provision of importing inputs even at the same rate of duty.
• In case of aerial passenger ropeway projects, basic customs duty on imported goods is 5% and CVD is NIL as per customs notification 21/2002-sl. no. 433. NIL CVD on imported goods and 16% excise duty on indigenous inputs such as electric motors, electrical control panels, gear boxes, wire ropes, cabins, haulage chains etc. puts the Indian ropeway projects executors in a disadvantageous position compared to the foreign bidders for the project. This anomalous situation needs to be corrected by removal of CVD exemption and imposition of 16% CVD on passenger ropeway projects.

• It is argued that imports at 0% and 5% duty has been allowed with the specific objective of attracting investments in these identified sectors. Whatever the reason, the point is that such duty concessions are an aberration in a tax regime and puts the domestic industry at a cost disadvantage.
• The domestic manufacturers also bear the burden of various local taxes, which importers do not have to pay. In addition, there are other disadvantages in the form of external factors and costs like inadequate and low quality power, infrastructure, high cost of finance and inefficiencies in logistics – warehousing, transportation and distribution. In case of tenders specifying that "Form C" will not be issued, indigenous supplies suffer additional 10% price disadvantage. Owing to these factors, the cost disadvantage suffered by the domestic capital goods industry is to the extent of 14% to 23%.
• On an average, capital goods constitute about 30% - 40% of the cost of a project. Customs duty of 12.5% on capital goods is considered a dis-incentive to investment. The domestic user industry therefore expects the duty rate on capital goods to come down. The same logic, which demands that duty rates on capital goods should be brought down when extended to capital goods manufacturers imply that they should also get their inputs at least at 2.5% lower duty.

Recommendation

Impose 4% special CVD on all types of projects and others which involve import of capital goods by removal of exemption to counter balance internal taxes such as CST/VAT.

Import of capital goods under 0% category for project imports and others should be removed.

Allow import of inputs by indigenous manufacturers at 5% customs duty for manufacture of 23 specified high voltage transmission equipment i.e. at par with the end product.

Impose 16% CVD on aerial passenger ropeway projects.

Allow import of parts and other major inputs at 2.5% lesser rate of duty than the duty rate applicable on capital goods.

Cement

Item	% Abatement on RSP	Excise Duty		Customs Duty (%)
		2005-06	2006-07	2005-06	2006-07
Portland cement (2523 29)		Rs.400 per tonne	Rs.400 per tonne	15	12.5
Portland cement for bagging outside factory (2523 29)		*Rs.382 per tonne 15/1999	*Rs.382 per tonne 15/1999	15	12.5
Cement from mini plants (2523 29)		*Rs.250 per tonne 6/2002-19	*Rs.250 per tonne 4/2006-1	15	12.5
Cement clinkers (2523 10)		Rs.350 per tonne	Rs.350 per tonne	15	12.5
White cement (2523 21 00)	35	16%