In a capitalist economy, there is nothing as absurd as the concept of passing on the benefit of a duty cut or refund to the consumer. It is a chimera. It can never be achieved. Those who try to implement such an idea will hit a dead-end. Why? I will explain this with examples.

The immediate provocation for making this statement is an announcement in the government's mini-import policy of January 28.

This stipulates that single- or two-star hotels and stand-alone restaurants will now be allowed to import items for their trade duty-free -- provided they pass on the duty benefit to consumers.

To implement this the exemption will have to be given with the condition that the ultimate price charged from tourists will have excluded the duty element.

This means that the hotelier can only charge a tourist the average price for, say, a peg of whisky. But what about the hotelier's profit? If he adds his profit, which he obviously will, then there is no way of distinguishing between profit and the value addition owing to the duty element.

Moreover, the hotelier will have to charge tourists a lower price and Indians a higher price. What will he charge when a tourist is accompanied by an Indian?

And a higher price cannot be detected by comparing it with the previous price since no such system existed earlier at all.

If a particular establishment is suspected of not passing on the duty benefit, a show-cause memo will have to be issued under the Customs Act alleging violation of the conditions under Section 111(o), whereby a penalty can be levied for the past offence.

If the imported goods are air-conditioners or spare parts of machines used in the hotel or the restaurant, what accounting jugglery will be needed to show that the duty that has not been paid has not been added can best be left to the imagination.

Theoretically, it may be possible to prove, though not effectively, that what it has paid has not been added, but how does one prove that what one has not paid has not been added?

It is absurd to think that the government can implement such a rigid requirement. To do so will require an administered price mechanism, which contradicts the spirit of liberalisation.

The difficulty in implementing the concept of passing on duty cut benefits to consumers was evident in the early and mid-nineties when Manmohan Singh, then finance minister, used to reduce customs and excise in each Budget.

The most frequently asked parliamentary question in those days was proof that the duty cut had been passed on to the consumer.

To reply to such questions we used to collect price data, sometimes from the Bureau of Cost and Prices, which were often very inconclusive when the price reduction did not match the duty cut.

So we used to prepare our replies saying that there was no direct correlation demanded in any law that the price has to be reduced if the duty is reduced and that ultimately, we have to depend on a competitive market for price reductions.

That is still and always the valid reply to all such questions. I have a suspicion that such questions used to be asked more for their nuisance value than out of genuine concern for consumers.

The other burning example of the non-workability of this concept is that of the law barring unjust enrichment. This has to do with passing on the benefit of duty refunds to the consumer. The law uses the expression "not passing on the burden of higher tax to the consumer".

An example will clarify the issue. If a manufacturer (or importer) pays, say, 40 per cent duty but claims that 25 per cent is the correct rate, he files a refund claim.

In the meantime he may add the 40 per cent duty to his cost which he thereafter recovers from the consumer. After that, suppose he is refunded the 15 per cent duty, which he claimed was excessive. That receipt becomes a windfall gain for him. The Public Accounts Committee called it "unjust enrichment".

To remedy this "unjust enrichment", a law was passed in 1991 amending Section 11B of the Excise Act and Section 27 of the Customs Act. The law was challenged in the Supreme Court on grounds of being "unconstitutional, illegal, invalid, a colourable device to deny refund legitimately due".

The Supreme Court appointed a nine-judge bench, and in a landmark judgment upheld the law as constitutional in the case of Mafatlal Industries versus UOI [1997(89) ELT 247 SC].

Subsequently in the TVS Suzuki case [2000 (156)ELT 161 SC], the Supreme Court held that the bar did not apply to cases of provisional assessment . One more judgment in the Sinkhai case [2002 (143)ELT 17(SC)] said the same thing.

However, in the case of CCE Mumbai versus Allied Photographics India Ltd [reported in 2003 (158) ELT AT74], two judges pointed out that the judgment in Mafatlal's case has not been quoted fully and thereby an incorrect view has been taken by these judgments.

The whole issue has been referred by the two-judge bench in the above case to a larger bench saying that the judgments in the TVS Suzuki and Sinkhai cases were against the Mafatlal judgment.

Until this is decided all refund cases of provisional assessment have been consigned to what is euphemistically called the "call book". This means that nothing is shown as pending but no refund is given. Litigation goes on and industry suffers a cash crunch.

Whatever socialist approach was intended in the law barring unjust enrichment has not worked; it has only become a severe hurdle for the industry.

So when we are trying to implement something that is simply not possible either because there is no law or because the law will lead to gargantuan distortions, we are only hoaxing the public. Why don't we simply allow unconditional exemptions, plain and simple?

The author is retired member, Central Board of Excise and Customs.

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