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March 6, 2001                                       Feedback  

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Excise duty phase-out to cut car prices further

Santosh Tiwary

The finance ministry is set to phase out the 16 per cent special excise duty (SED) which would reduce the car prices further. The reduction of 24 per cent SED rate applied on cars and other items to 16 per cent in the current Budget has already reduced the car prices by Rs 12,000 to Rs 45,000.

According to a senior finance ministry official, the phasing out of 16 per cent SED is necessary to make 16 per cent Cenvat a single rate value-added tax (VAT).

"The realisation of 16 per cent VAT regime is the ultimate goal and it will have to be achieved within the shortest possible time," he said.

The official, however, added that time-frame for phasing out of the 16 per cent SED would depend on the revenue considerations.

Finance Minister Yashwant Sinha proposed to compress the three rates of SED of 8 per cent, 16 per cent and 24 per cent into one 16 per cent rate in the Budget for 2001-02.

All the items attracting 40 per cent excise duty till February 28, 2001, 24 per cent SED over and above 16 per cent Cenvat, would now be subjected to 32 per cent rate (16 per cent Cenvat+16 per cent SED).

Sources said that as only 17 per cent of the revenue from excise duty would come from the 32 per cent rate, it would not be difficult to phase out the 16 per cent SED rate within two to three years.

The 16 per cent Cenvat has already become the main rate as it is projected to contribute 80 per cent to the excise kitty in 2001-02.

Another major requirement to achieve a VAT regime was assimilation of service tax with the excise structure, said officials.

This would mean that tax net would be extended to all the services in a phased manner simultaneously with the phasing out of SED.

"The 5 per cent rate of service tax would also be increased with this and likely to be doubled to 10 per cent to make it compatible with the 16 per cent CENVAT," said an official.

He added that it was not possible to achieve a real VAT regime without the availability of proper set off for service tax in the excise duty structure.

Sources said though the government had extended the service tax net to select services in the current Budget and has decided to introduce self assessment for payment of service tax, a proper administrative structure for tackling a comprehensive service tax base would be set up within next few years.

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