When budget gains are not passed on…
The minister’s intentions may be honourable, but the business of passing on the benefits of indirect tax reductions in customs and excise duties has historically been a murky one, writes Pushpa Girimaji.Updated: Mar 07, 2008 23:16 IST
It’s exactly a week since Finance Minister P Chidambaram enthralled the middle class with a budget bonanza that included both direct tax cuts which would put more cash in the hands of consumers, and indirect tax cuts in excise duties that should bring down prices of some goods, particularly automobiles.
The minister’s intentions may be honourable, but the business of passing on the benefits of indirect tax reductions in customs and excise duties has historically been a murky one.
Before the economic reforms began in 1991, consumers would dread the budget because frequent tax increases would be passed on to consumers. After liberalization began, taxes were cut — but sadly, were not passed on routinely.
Before 1991, often advertisements would say, “Just two days left for the budget” or “Beat the budget blues, buy now before prices go up.”
After that we had other stories that said that purchases were held up in anticipation of a fall in prices after the budget.
It was perhaps in the first half of the 1990s, that the Union ministry of consumer affairs took serious note of consumer complaints about manufacturers not passing on the budget concessions, and even sponsored a study on the issue by the Bureau of Industrial Costs and Prices. The BICP’s report only confirmed what the consumers were saying: as per the BICP report, firms in industries like pharmaceuticals, textiles, cosmetics, had not cut down prices to match the reduction in excise duties.
Following this report, the Consumer Affairs Ministry recommended to the Finance Ministry that duty concessions be withdrawn from industries that failed to pass on the benefits to the end-consumer. The ministry did issue such a threat a couple of times to the industry, but did not carry it through in the next budget. When questioned about it by journalists, the finance ministry said that there was no mechanism nor law to monitor the industry on this score or force them to pass on fully, the duty cuts. Nor could they, under the existing Central Excise Law, withhold excise duty refunds to those industries that had not passed on the concessions to the end user or transfer it to the consumer Welfare Fund as demanded by consumers. The ministry also said that it believed in competition forcing the industry to bring down the prices rather than a complicated system of rules and regulations.
Unwilling to accept defeat, consumer groups held market surveys to monitor price changes in those goods on which duties were slashed. The conclusion was that while some manufacturers did not pass on the duty cuts at all on some pretext or the other, some others did, but only partially. Many of those who claimed to have reduced the prices in commensurate with the duty cuts, were found to have maintained that price only for a brief period, before jacking it up. However, where duties were hiked, manufacturers wasted no time in adjusting the consumer price to incorporate the hike. In fact, it was not uncommon to find retailers charging even higher than the incidence of increased duty on goods that had left the manufacturing unit much before the price revision and had therefore not attracted the revised duty at all.
The Standards of Weights measures (Packaged Commodities ) Rules in fact tries to protect consumers from such short practices. It says that where duties have been hiked, a retailer can charge the revised price only on those consignments on which the new duties have been levied and not on the existing stocks. It also makes it clear that he cannot charge more than the incidence of revised duty. More interestingly, it says, “where the revised prices are lower than the price marked on the package, the retail dealer or other person shall not charge any price in excess of the revised price, irrespective of the month in which the commodity was pre-packed”.
But the benefits of these provisions are limited because basically, the rules are meant to ensure that dealers do not exploit the changes in duties to overcharge consumers. Also, the enforcement agency has no mechanism or the wherewithal to investigate whether the duty cuts are being passed on accurately by the manufacturer. Besides, the provisions apply only to those products that are required under the rules to indicate the month and year of packaging.
Given the lack of transparency in the pricing of goods and a highly complicated tax regime, it is very difficult for consumers to make out whether the reduction in price fully corresponds to the revised duty rates. This is where we need more transparency in the pricing of manufactured goods and a monitoring mechanism to ensure that duty cuts are really passed on. The issue is simple: consumers pay the entire excise duty levied on a product. So it is only fair that when that duty is cut, there is a corresponding cut in the duty collected from the consumer. Failure to do so would amount to the manufacturer enriching himself at the cost of the government (which loses the revenue) and the consumers.
In fact, the apex consumer court too reiterated this point in the case of Tata Engineering Locomotive and Shakti Automobiles vs John Jacob, wherein it said that collecting excise duty (from consumers) not payable by the manufacturer or dealer is illegal and would constitute an unfair trade practice. Here the main issue was whether a manufacturer or a dealer was entitled to recover from the consumer excise duty that is not paid by them. Saying that the obvious answer was that they couldn’t, the apex consumer court had held that acting contrary to this constituted an unfair trade practice.
In the latest budget, the Finance Minister has cut customs duty and excise duty on a number of goods, the most prominent among them being pharmaceuticals and automobiles. Some automobile manufacturers have already announced price cuts. As far as pharmaceuticals are concerned, the National Pharmaceutical Pricing Authority has taken into consideration the reduction in excise duty from 16 per cent to 8 per cent, and also in the rate of abatement on drugs and pharmaceuticals from 42.5 per cent to 35.5 per cent and has revised downwards the prices of scheduled formulation packs and asked all manufacturers to reduce the equivalent Maximum Retail Price (MRP) (inclusive of excise duty & all taxes) by 4.58 per cent. The revised price will take effect immediately, says NPPA. What about non-scheduled drugs or drugs that are not under price-control? What about other products such as consumer durables, water purifiers, paper?
It is only transparency in pricing and government intervention that can help translate into reality, consumer expectations from the budget vis-à-vis duty reductions. If the ministry wants to, it can well put a condition while notifying the revised duty rates that it should be fully passed on to consumers.
Senior journalist, consumer affairs specialist