Last week, we covered the Kelkar Committee's recommendations in the area of direct taxes.

In this second and concluding part, we look at the changes suggested by the committee in indirect taxes and the impact of the proposals on the corporate sector.

The task force talks about removing the plethora of exemptions granted on import and excise taxes for a variety of reasons, widening the tax net by expanding the service tax base and improving tax-payers' compliance.

More specifically it has suggested the removal of multiplicity of levies and the retaining of only basic customs duty, countervailing duty and anti-dumping/safeguard duty. The current multiple customs duty structure is to be organised under a simple two-tier structure of 10 per cent for raw materials and 20 per cent for consumer durables by 2004-2005.

Also, it suggests a further reduction as per a transparent road map to five per cent for basic raw materials like core, ores and concentrates; 8 per cent for intermediate goods; 10 per cent for finished goods other than consumer durables and 20 per cent for consumer durables by 2006-2007.

These reductions are to begin with the introduction of state value-added tax which is to be effective from April 2003.

Similarly, the special additional duty should also be removed with the introduction of state value-added tax, suggests the task force.

Again the number of products which are charged a nil rate of customs duty right now are to be brought down.

This is to confine the set only to products of strategic importance and life saving drugs and equipment.

All products attracting a nil rate currently should be charged a duty of 5 per cent.

As a general policy, the downward revision in customs duty is to be achieved through a five per cent reduction every year to provide predictability to investors and industry, says the report.

The committee has recommended sweeping changes in the excise duty structure too.

One is to review all existing levies like special duty of excise, additional duty of excise and cess, and adhering to a single type of levy -- Cenvat. It calls for rationalisation of excise duty rates as well.

One key suggestion of consequence is to extend the concept of MRP-based valuation to more industries. This will simplify a lot of procedural complexities and leave lesser scope for ambiguities, say tax experts.

However, the duty impact of this change cannot be pinpointed with any degree of certainty as there is no mention of abatement rates which are critical to assess the impact.

The abatement rates are to be handled by a separate committee.

Besides, the task force has also suggested some big changes in excise procedures. One significant point here is the removal of the distinction between capital goods and inputs.

Credit for all inputs brought into the factory to be allowed, except for items like office furniture and motor vehicles.

More importantly, full credit of the duty paid is to be allowed on capital goods immediately on receipt, as in case of inputs with effect from April 2004.

In the interim, 75 per cent credit may be provided from April 2003. As of now, there is a graduated scheme of availment over two years.

Apart from this, the task force has recommended that the number of export promotion schemes be pruned in order to minimise misuse.

It also advocates various other measures to enable hassle free trade.

Here is a snapshot of the proposed changes in duty structure sector-wise.

Automobiles: The auto industry as a whole may benefit, because the average duty on inputs is likely to fall more sharply than in case of finished goods.

For domestic car makers again, the threat of second hand car imports is ruled out since the duty rates on second cars are to be left untouched.

Petroleum products: There are quite a few changes recommended for the oil sector.

The customs duty on crude oil is to be brought down from the current 10 per cent to 8 per cent in 2003-2004 and 5 per cent in 2004-2005.

In case of petro products, the same is to be cut from the current 20 per cent to 15 per cent and 10 per cent during the same period.

This means that refining margins should improve. Since the country is a net exporter of petro products, the reduction in petro product import duty may not affect domestic companies much, says an oil company official.

Currently, the Cenvat on petro products ranges anywhere between 16-32 per cent. This is to be brought down to 16 per cent for all.

The task force has also recommended that the excise duty on petroleum products should be fixed at specific rates rather than at the current ad valorem rate.

This will remove procedural complexities and have a marginally positive impact, says an oil company official.

Textiles: Textile companies are likely to benefit from a substantial reduction in excise duty. Currently, the sector attracts excise duty in the range of 16-32 per cent.

As per the task force, a standard rate of 12 per cent should be levied on them up to 2005. The only loser in the textile sector could be cotton yarn manufacturers, because excise duty is to be raised from the current eight per cent to 14 per cent.

Services: The services sector could, however, be a major loser. For one, the industry will be comprehensively covered by the tax net with minimum exceptions.

Plus, the task force has suggested that service tax rates be enhanced to Cenvat rate levels ultimately. Presently, services attract a tax of only 10 per cent.

Telecom: Cellular phones will become cheaper as the basic customs duty and special additional duty is to be removed and only CVD will apply.

This may be a welcome move for the telecom sector though analysts do point out that the major sales in the cellular handsets is only in the grey market.