"There is one response that would help manufacturing and the 'Make in India' initiative without being as difficult as improving the business environment, and as controversial and expensive as the industrial policy or protectionist response: eliminating the exemptions in the countervailing duties (CVD) and special additional duties (SAD) levied on imports," the document tabled in Parliament said.
In line with international norms, CVD—which is equal to the taxes such as excise duty levied on locally-produced goods—can be levied on all imported goods to neutralize any disadvantage to domestic industry. But the government has over the years exempted certain products, arguing that the move is aimed at benefiting consumers.
"India's current indirect tax system, however, acts sometimes to favour foreign production over domestically produced goods... These exemptions can be quantified. The effective rate of excise on domestically-produced non-oil goods is about 9%. The effective collection rate of CVDs should theoretically be the same but is in actual fact only about 6%. The difference not only represents the fiscal cost to the government of Rs 40,000 crore, it also represents the negative protection in favour of foreign produced goods over domestically produced goods," the Survey said.
The industry department which has been driving the Make in India campaign has argued in favour of a tax regime that favours domestic production through steps such as lower duty on raw materials and higher levies on finished products. Even the Economic Survey spoke in the same tone.
It said that CVD exemptions on inputs to help manufacturers reduce their input costs may be justified. At the same time it pointed out that once goods and services tax (GST) kicks in, there can be refunds or input credit for the CVD paid on inputs. So, CVD exemptions do not provide additional relief.
It also trashed the argument of exemptions on the grounds that there was no competing local production. "This argument is faulty because the absence of competing domestic production may itself be the result of not having the neutrality of incentives that the CVD creates. Domestic producers may have chosen not to enter because the playing field is not level. Indian tax policy is therefore effectively penalizing domestic manufacturing."
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