Why the government chooses these items (say, packaged coconut water or textile walls) is not clear—even the combined impact of zero duty on them would scarcely cause a ripple in overall government revenues. No amount of squeezing these businesses would cover at least this year’s fiscal deficit. "Don’t look for any big reason why these items are singled out," says Vivek Sharma, associate director, indirect taxes, with consultancy firm Ernst & Young. "These items have very low tax-generation capacity and are probably assisted by the government simply because they are reeling under cheaper imports, or steadily suffering losses for another reason."
Some items, such as talking books or wheelchairs or puffed rice cater to the needs of specific groups or have health benefits, which is why import duties or other tax burdens are steadily reduced. Others, such as imitation jewellery, are understood to cater to poorer sections. To the untrained eye, however, items such as travel baggage and radio sets seem to be selected on mere whim.
Mostly, however, there is a logic to why a particular item, lowly when compared with other multi-crore industries, finds its way into the speeches of finance ministers. As Naresh Banthia, director, Citizen Umbrella Manufacturers Ltd, one of the largest manufacturers of cheap umbrellas priced as low as Rs 30, says, "Umbrella-makers haven’t been paid attention to this year because of the lower than expected monsoon rains."
He has been lucky before, though. In 2005, the customs duty on umbrella parts was cut from 12.5 per cent to 5 per cent, the same year that taxes on mouth fresheners, pet foods, biscuits, food mixes and footwear too were slashed. But this year there has been no change for umbrellas. "That’s a double onslaught for my business if you consider the cheap imports," Banthia complains.
Of course, there’s another big change coming next year—the Goods and Services Tax (GST)—which will combine existing taxes and freeze the rate of taxation at a single rate (or two, including one for states). Once GST kicks in, likely by April 2010, it will deflect the budget’s attention from taxing this or that commodity. In fact, some mass-consumed goods manufacturers are unhappy for this reason. Vanaspati manufacturers, for instance, lobbied for years until last year, when excise duty fell to 4 per cent. With GST, they’ll be taxed at 8 per cent, to achieve the "mean" rate where central and state taxes are expected to converge. "Well, vanaspati didn’t need mention this year—finally—but we’re back to square one if the rate is hiked under GST next year," says Pramod Dugar, who heads the association of vanaspati manufacturers.
Similarly, cigarettes escaped attention this year, but then Delhi and Maharashtra increased the VAT rate to 20 per cent. Some say it will encourage the smuggling of tobacco from bordering states where VAT is still 12.5 per cent. "This is a classic example of bad economic policy when you try to tax more to raise revenues but end up losing what you had before," says E&Y’s Sharma.
It is precisely these changes that irk economists and taxation experts. "Once GST comes into force, you won’t have to think about why one or the other item is being singled out in the budget for specific tax-related proposals," says Shubhashis Gangopadhyay of India Development Foundation, an independent research outfit based in Delhi. So, with GST, some of this discretion will be history—and life will become a little less interesting for many manufacturers.
