September 08, 2008

Revenue neutral model for excise cut for steel in India

BL reported that there could be an additional burden of over INR 4,600 crore in the form of export duty on iron ore in case Indian government adopts the steel ministry proposed revenue neutral model to bring down steel prices.

The model, proposed by Mr Ram Vilas Paswan India’s steel minister, suggests reduction of excise duty on steel products from 14% to 8% and recovering the shortfall through additional imposts on iron ore exports.

At a meeting held on April 15th 2008 between Mr P Chidambaram finance minister, Mr Ram Vilas Paswan steel minister, Mr Kamal Nath commerce minister and Mr Sis Ram Ola mines minister, Mr Chidambaram is reported to have said that he is open to excise duty cut in steel but insisted that the loss in revenue on account of steel should be compensated by some other means.

According to the latest full year excise collection data available with the government, during fiscal 2006-07, when excise duty on steel was 16%, the top 10 steel producers had paid INR 12,392.03 crore as excise duty. Assuming that the level of production prevalent in 2006-07 is maintained and without factoring in the price rise during last fiscal at 14% duty rate the excise receivable from these companies would have been INR 10,843.03 crore in the current fiscal. According to the steel ministry, If the excise rate is brought down to 8%, the Government would receive INR 6,196 crore, thereby leaving a gap of INR 4,647 crore which could be compensated by a 15% export tax on iron ore.

But, another important point to be notes is that as excise duty is based on the value of steel, which has almost doubled over last year, reduction in excise duty from 14% to 8% would not reduce government revenues anyway, without considering compensation for increase in export duty on iron ore.