Chidambaram is one of the most knowledgeable finance
ministers the country has seen and has been rightly
credited for many reform moves, especially in taxation.
But once in a while he has this habit of coming up with
some so called ''innovative ideas'' which are not well
thought out and which do more damage and make the processes
more complex. Erudite and eloquent as he is, he often
succeeds in selling such ideas without much difficulty.
year it was the banking cash transactions tax (BCTT),
which he introduced as a major step to track unaccounted
money. In this year''s budget speech he has claimed that
the BCTT has become an extremely useful tool in tracking
money laundering. If the purpose was to track money
laundering, did he really have to impose a tax on cash
transactions? It should not be difficult to monitor
such transactions even on a daily basis as most major
banks have migrated to sophisticated banking software
year he has come up with the differential excise duty
structure for cement. In the budget speech he stopped
short of directly accusing the cement industry of profiteering.
In one of his industry interactions today, he blamed
the cement industry for not cooperating with the government
in the effort to control inflation. He claims the differential
excise duty structure is designed to reward the good,
socially-committed cement manufacturers and penalise
those who are too greedy.
finance minister has fixed a benchmark retail price
of Rs190 per 50 kg bag of cement, which he says was
the retail price a year ago. Those manufacturers who
are willing to reduce the retail price to this benchmark
price would have to pay an excise duty of only Rs350
per tonne as compared to existing duty of Rs400 per
tonne. Those who are unwilling to drop prices would
have to pay a higher Rs600 per tonne.
any such differential duty structures to derive the
desired results, the potential gains for the duty payer
should be sufficient enough to encourage a downward
price revision. This simple logic has been completely
ignored by the finance minister and his team. In this
case, the net realisation for cement manufacturers would
be more under the higher duty rate. Retail cement prices
before the budget announcement ranged between Rs210
and Rs250 per bag. Even at the lowest price of Rs210
per bag, it is still more beneficial for manufacturers
to pay the higher excise duty.
retail price per bag in Rs (A)
duty per tonne in Rs
duty per bag of 50 kg in Rs (B)
realisation per bag in Rs (A-B)
above calculation is on the assumption that manufacturers
will not be able to pass on the higher duty to consumers.
What if the demand is strong enough to sustain even
higher prices, like the situation currently is for the
cement sector? The manufacturers would simply hike retail
prices to cover the higher duty.
is exactly what domestic cement companies have done.
There are reports that cement prices in the key Mumbai
market have been increased by around Rs12 per bag from
this morning. Retail cement prices in Mumbai today is
around Rs250 per bag!
''innovative'' duty structure designed to fight inflation
is having exactly the opposite effect!
was the finance minister thinking when he designed this
duty structure? He is not naïve enough to believe
that the manufacturers would readily forego a significant
portion of their margins. So, was this all part of a
plan to raise some additional revenue and then blame
the industry for forcing him to do so?