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Custom Duties in India. Term paper (2007) MSE

Custom Duties in India. Term paper (2007) MSE

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  • INDIAN PUBLIC FINANCE TERMPAPER: CUSTOMS DUTIES Ashish Bharadwaj, M.Sc. Economics II, MSE (Nov 2007) The central government has four major taxes: personal income tax, corporation tax, central excise duties and customs duties. In our analysis, we will confine ourselves to customs duties only. The customs duty in India consists of ‘basic’ tariff, the additional duty of customs (AD), and special excise duty (SAD). The additional duty is the counterpart of excise duties paid by domestic manufacturers i.e. countervailing duty (CVD). The special additional duty has been introduced to serve as the counterpart of state sales taxes on domestically produced goods. Since the customs duty is collected under the three sub-heads (basic, AD and SAD), its custom duty collection rate should be obtained by dividing total collections under the three heads by the total value of imports during the year. Some commodities like alcohol have a ‘basic’ rate higher than the ‘peak’ rate. During the reform years, the “peak” rate has come down from 150 % in 1991-92 to 40 % in 1997-98. The “peak” rate was reduced to 35% in 2001-02 and 30% in 2002-03. The reduction in the peak duty rates has continued. The 2005-06 Budget reduced the peak duty rate to 15% for nonagricultural products. The average tariff rate has therefore declined over the 1990s. As a result the customs duty collection rate has declined from about 47% in 1998-99, and to 21% in 2000-01. The average customs tariffs rates still remain among the highest in the world 1 . 1. Revenue Performance of Customs and Excise Duty relative to GDP Excise and Customs revenue as % of GDP 6.00 Revenue (as % GDP) 5.00 4.00 3.00 2.00 1.00 2002-03 2000-01 1998-99 1996-97 1994-95 1992-93 1990-91 1988-89 1986-87 1984-85 1982-83 1980-81 1978-79 1976-77 1974-75 1972-73 1970-71 1968-69 1966-67 1964-65 1962-63 1960-61 1958-59 1956-57 1954-55 1952-53 1950-51 0.00 Year Excise revenue as % of GDP 1 Customs revenue as % of GDP Srivastava, D.K., “Issues in Indian Public Finance”(2005), New Delhi 1
  • The profile of the share of the customs duties shows more of an inverted U-shape, similar to Union excise duties, although these started at a level much higher than excise duties. In 1950-51, the customs duties accounted for nearly 1.6% of GDP, which was the highest among all major central taxes. (Table 1, Appendix A) These were overtaken by excise duties in 1957-58. Following a slightly volatile pattern, these reached a peak of 3.9% in 1986-87, after which they started declining. By 2001-02, these had reached a level, relative to GDP, of 1.8%, which is compared to its level in the mid sixties. Thus, customs duty, which was the highest contributor, is fast becoming the lowest contributor now. 2. Relative Shares of Major Central Taxes in Centre's Gross Tax Revenues 60.0 50.0 Share in % 40.0 30.0 20.0 10.0 2002-03 2000-01 1998-99 1996-97 1994-95 1992-93 1990-91 1988-89 1986-87 1984-85 1982-83 1980-81 1978-79 1976-77 1974-75 1972-73 1970-71 1968-69 1966-67 1964-65 1962-63 1960-61 1958-59 1956-57 1954-55 1952-53 1950-51 0.0 Year Income Tax Corporation Tax Excise Duty Customs Duty The chart highlights the inverted U-shape of the curve representing the share of Union excise duties, which can be contrasted with the more U-shape type of curve of the customs duties until the beginning of the nineties. What is also clearly observable is that the four taxes are tending to come close to each other in terms of their shares in the centre’s gross revenue receipts. (Table 2, Appendix A) 3. Customs Duties: Annual Buoyancy Tax buoyancy is measured as % change in tax revenue over a given period by % change in tax base, which is generally taken to be GDP, over the same period. While the contribution that a tax makes to overall collection of tax revenues is an important consideration, another important feature of the tax sources is their volatility. To examine this, we look at the yearly growth rates. Customs duties are more noticeable for their negative growth in more recent years. (Table 3, Appendix A) 2
  • Annual Customs Duty Buoyancy 15.00 10.00 Buoyancy 5.00 2001-02 1999-00 1997-98 1995-96 1993-94 1991-92 1989-90 1987-88 1985-86 1983-84 1981-82 1979-80 1977-78 1975-76 1973-74 1971-72 1969-70 1967-68 1965-66 1963-64 1961-62 1959-60 1957-58 1955-56 1953-54 1951-52 0.00 -5.00 -10.00 Year Comparison of custom rate among countries 16.8 China 22.2 Bangladesh 20 Sri Lanka 7.1 Malaysia S.Korea 8.7 Taiwan 8.8 10.9 Country Indonesia 17.1 Thailand 20.5 Egypt 13.9 Russia 11 Argentina 10.1 Mexico 10 Chile 8.5 S.Africa 8.2 Turkey 32.2 India 0 5 10 15 20 25 30 35 Custom Tariff Rate 3
  • EMPIRICAL STUDY I Testing for Cointegration between the following a) Customs Revenues and Other Central Tax Revenues such as Personal Income Tax, Corporation Tax and Total Direct Tax Revenues (1970-2006) b) Customs Revenues and Imports of Principal Commodities 2 Dependent Variable: CR = customs revenues {Yt} Possible Independent Variables {Xt} to test for Cointegration with CR ER = excise revenues ITR = income tax revenues CTR = corporation tax revenues DTR = total direct tax revenues IMP = imports Yt = β0 + β1Xt + ut Yt, Xt ~ Cointegration (d,b) if both series are integrated of same order i.e. d=b Testing for Stationary using Augmented Dickey-Fuller Test (ADF Test) Variable First Difference ADF Test Statistics* Second Difference Δ CRt -3.05 (stationary) - ERt ADF Test Statistics* 0.837 (non stationary) 3.818 Δ ERt Δ ERt-1 ITRt 3.710 Δ ITRt CTRt 3.801 Δ CTRt -0.958 (non stationary) 0.038 (non stationary) 0.907 (non stationary) DTRt 4.319 Δ DTRt IMPt 2.344 Δ IMPt CRt 2.734 (non stationary) 3.514 (non stationary) Δ ITRt-1 Δ CTRt-1 Δ DTRt-1 Δ IMPt-1 ADF Test Statistics* - Order of Integration I(1) -6.367 (stationary) -4.256 (stationary) -1.787 (non stationary) -3.104 (stationary) -0.560 (non stationary) I(2) *Compared with (-2.975) Critical Value at 5% level (Table 4, Appendix B and Table 5, Appendix C) Conclusion: We can conclude that any regression model containing CR with any other variable mentioned above would be meaningless and cannot be tested for Cointegration since they are integrated of different orders. 2 Food & live animals, beverages & tobacco, Crude materials, inedible, except fuels, Mineral fuels, lubricants and related materials, Animal and vegetable oils and fats, Chemicals, Manufacture goods classified chiefly by material, Machinery and transport equipment, Miscellaneous manufactured articles 4 I(2) > I(2) I(2) > I(2)
  • EMPIRICAL STUDY II Testing for Causality between Customs Revenue and Effective Customs Duty CR = Customs Revenue ETR = Total Customs Revenue/GDPmp Where ETR is the effective tax rate (customs duty) and GDP has been taken as a proxy for a tax base for customs duty. Ln CRt = β0 + β1 (ln ETRt) + β2 (lnETRt)2 + ut Variable ADF Test First Difference Statistics* Ln CRt -1.712 Δ ln CRt (non stationary) Ln ETRt 2.001 Δ ln ETRt (non stationary) (LnETRt)2 0.075 Δ ln ETR2t (non stationary) *Compared with (-2.975) Critical Value at 5% level ADF Test Statistics* -3.611 (stationary) -3.359 (stationary -3.222 (stationary Order of Integration I(1) I(1) I(1) Ln CRt = 18.53 + 2.81(lnETRt) + 0.14(lnETRt)2 (4.91) (2.28) (14.49) R2 = 0.9673 DW statistic = 0.13 Figures in parentheses are t-values (5% level of significance) (Table 4, Appendix B and Table 5, Appendix C) Testing for stationarity of residuals in the model using ADF test ADF test statistic = -1.342 Interpolated DF 5% critical value = -2.972 MacKinnon approximate p-value = 0.6098 Observations: 1. Errors are non stationary 2. Durbin-Watson statistic value considerably less than 2.0 implies that the errors serially correlated Conclusion: It can be concluded that the above regression is spurious since both X and Y variables are stationary of same order but the error term is non-stationary. However, we can apply OLS to the appropriately differenced series (taking into account the appropriate lag length using either AIC or SC). 5
  • ΔlnCRt = 0.06 - 0.23ΔlnCRt-1 + 0.29ΔlnETRt-1 + 1.36ΔlnETRt + 0.04Δ (lnETRt) 2 + 0.007Δ (lnETRt-1)2 (5.9) (-1.24) (0.97) (8.8) (2.6) (0.38) ΔlnCRt = 0.057 - 0.11ΔlnCRt-1 + 0.09ΔlnETRt-1 + 0.95ΔlnETRt (5.4) (-0.63) (0.59) (25.29) ΔlnCRt = 0.03 + 0.26ΔlnCRt-1 – 0.1Δ (lnETRt) 2 + 0.03Δ (lnETRt-1)2 (2.93) (1.69) (-13.5) (1.92) lnETR and (lnETR)2 Granger cause lnCR EMPIRICAL STUDY III Estimating a Laffer curve for customs duty revenues and effective rate (customs duty) for India (1970-2006) using a log-lin model. lnCRt = 228.8ETRt – 3012.2 (ETRt)2 (14.5) (-7.6) ∂lnCR t = 228.8 − 6024.4 ETRt ∂ETRt ∂lnCR t = 0 => ETRt = 0.0379 or 3.79% FOC: ∂ETRt SOC: R2 = 0.928 ∂ 2 lnCR t = −(6024.4) < 0 ∂ETRt 2 Since the quadratic term is negative and significant, the Laffer curve has a bell shape. Taking the first derivative of lnCR, with respect to ETR, and setting the first derivative to zero, we find that the revenue-maximizing tax rate is 3.79%. This can also be seen from the graph below. We may draw a conclusion that the Federal government is likely to raise more tax revenues by raising the tax rate up to this level. (Table 4, Appendix B and Table 5, Appendix C) 6
  • Appendix A Table 1: Tax revenues as % of GDP (1950-51 to 2002-03) Year Excise customs Year 1950-51 0.68 1.58 1968-69 1951-52 0.81 2.21 1969-70 1952-53 0.80 1.68 1970-71 1953-54 0.48 1.41 1971-72 1954-55 1.01 1.73 1972-73 1955-56 1.34 1.55 1973-74 1956-57 1.47 1.34 1974-75 1957-58 2.05 1.35 1975-76 1958-59 2.10 0.93 1976-77 1959-60 2.30 1.00 1977-78 1960-61 2.43 0.99 1978-79 1961-62 2.69 1.17 1979-80 1980-81 1962-63 3.06 1.26 1981-82 1963-64 3.25 1.49 1982-83 1964-65 3.06 1.52 1983-84 1965-66 3.25 1.95 1984-85 1966-67 3.30 1.87 1985-86 1967-68 3.13 1.40 Source: Indian Public finance statistics, 2006 Excise 3.40 3.57 3.85 4.21 4.31 3.97 4.17 4.02 4.70 4.38 4.87 4.97 4.52 4.40 4.28 4.66 4.54 4.66 customs 1.15 0.99 1.15 1.42 1.59 1.52 1.72 1.71 1.73 1.80 2.20 2.42 2.37 2.55 2.72 2.54 2.87 3.43 Year 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Excise 4.65 4.64 4.47 4.61 4.31 4.30 4.12 3.69 3.69 3.38 3.29 3.15 3.06 3.20 3.28 3.19 3.34 customs 3.69 3.87 3.75 3.71 3.63 3.41 3.18 2.58 2.65 3.01 3.13 2.64 2.34 2.50 2.28 1.77 1.82 Table 2: Relative Share (in %) of Central Taxes in Gross Central Taxes Year 1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 Income 33.0 28.6 27.6 29.1 28.9 27.2 26.5 23.8 24.5 16.9 18.9 15.7 14.5 15.5 14.6 13.2 13.4 Corp.tax 9.7 8.0 9.3 8.9 8.1 7.5 8.8 8.0 7.7 12.1 12.3 14.8 17.2 16.8 17.2 14.8 14.3 Excise 16.7 16.7 18.7 12.9 23.8 29.9 33.4 39.6 44.6 41.1 46.5 46.4 46.6 44.6 44.0 43.6 44.8 Customs 38.8 45.5 39.0 37.8 40.6 34.8 30.4 26.0 19.7 17.8 19.0 20.1 19.1 20.5 21.8 26.2 25.4 Year 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 Income 11.3 11.2 11.2 11.4 9.3 8.9 8.2 8.2 8.8 8.8 8.5 9.6 9.8 9.3 10.0 10.6 12.0 Corp.tax 13.8 11.9 11.6 9.9 12.4 12.3 12.0 10.9 10.0 9.6 9.1 9.9 9.2 9.3 11.7 11.9 13.3 Excise 50.2 51.0 50.2 49.3 46.8 45.5 49.3 47.5 45.2 44.1 43.6 42.4 43.4 42.6 41.7 41.3 41.8 Customs 20.6 23.0 24.4 25.9 27.1 28.9 26.9 30.0 33.2 34.9 36.4 35.5 34.9 35.9 33.0 31.9 29.3 7
  • Contd 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 13.8 15.1 15.9 14.8 13.9 13.9 14.6 13.8 16.0 14.5 13.2 11.9 12.5 11.6 12.2 12.4 11.5 11.2 11.3 11.9 48.8 52.6 54.0 54.9 53.2 51.6 51.3 51.1 44.0 51.1 21.8 17.8 15.0 16.3 18.0 19.0 19.7 21.1 18.7 18.8 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 13.0 14.0 14.1 12.3 14.1 14.9 16.8 17.1 16.6 15.0 14.8 14.3 14.4 17.1 17.9 18.9 19.6 20.8 40.5 36.1 34.7 34.4 37.0 36.0 36.3 38.8 37.1 29.0 32.2 33.0 28.9 28.3 28.2 25.2 21.5 20.2 Source: Indian Public finance statistics, 2006 Table 3: Estimated Annual Buoyancy of Central Taxes Year Income Corp.tax Excise Customs 1951-52 1.52 0.57 4.23 7.58 1952-53 8.59 -1.02 1.65 13.43 1953-54 -0.05 -1.15 1.63 -0.98 1954-55 -1.39 0.15 -2.61 -3.08 1955-56 0.28 -0.77 18.74 -5.38 1956-57 0.76 1.99 0.63 0.21 1957-58 2.89 3.40 14.24 1.27 1958-59 0.39 -0.21 1.25 -2.03 1959-60 -2.50 17.85 2.83 2.39 1960-61 1.40 0.31 1.62 0.94 1961-62 -0.33 7.11 2.92 4.14 1962-63 1.65 5.52 2.96 2.11 1963-64 2.44 1.61 1.47 2.42 1964-65 0.31 0.86 0.59 1.13 1965-66 0.36 -0.53 2.18 6.45 1966-67 1.03 0.60 1.15 0.66 1967-68 0.33 -0.33 0.65 -0.72 1968-69 2.72 -0.58 2.53 -2.20 1969-70 1.83 1.77 1.52 -0.51 1970-71 0.81 0.71 2.24 3.48 1971-72 1.89 3.85 2.41 4.60 1972-73 1.61 1.77 1.25 2.26 1973-74 0.86 0.21 0.55 0.76 1974-75 0.99 1.20 1.34 1.87 1975-76 5.20 2.87 0.47 0.87 1976-77 -0.21 1.83 3.37 1.22 Source: Indian Public finance statistics, 2006 Year 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Income -1.22 2.08 1.42 0.65 -0.12 0.55 0.50 1.14 2.28 1.23 0.79 1.80 1.21 0.35 1.70 1.19 1.05 1.78 1.71 1.12 -0.55 1.28 2.38 3.02 0.09 1.80 Corp.tax 1.82 0.30 1.15 -0.31 2.91 0.93 0.85 0.21 0.91 0.86 0.62 1.50 0.48 0.76 3.18 0.91 0.88 2.09 1.11 0.83 0.69 1.57 2.23 2.07 0.29 3.10 Excise 0.41 2.46 1.23 0.43 0.82 0.74 1.62 0.77 1.22 0.98 0.97 0.78 1.24 0.55 0.99 0.66 0.19 1.00 0.44 0.79 0.58 0.77 1.45 1.36 0.67 1.60 Customs 1.32 3.91 2.13 0.88 1.51 1.63 0.55 2.20 2.67 1.71 1.40 0.81 0.92 0.85 0.53 0.47 -0.45 1.16 1.94 1.31 -0.55 0.08 1.69 -0.23 -1.75 1.35 8
  • Appendix B Table 4: GDP & Import figures along with the calculated ETR (=Revenues/GDP) Year GDP at market prices ( at 1993-94 prices) (in Rs.crore) Imports (in Rs.crore) 1970-71 326925 1634.2 1971-72 332516 1824.5 1972-73 330594 1867.4 1973-74 341050 2955.4 1974-75 345101 4518.8 1975-76 376731 5264.8 1976-77 383163 5073.8 1977-78 410873 6020.2 1978-79 434437 6810.6 1979-80 411663 9142.6 1980-81 439201 12549.2 1981-82 467139 13607.6 1982-83 484217 14292.7 1983-84 518491 15831.5 1984-85 539874 17134.2 1985-86 570267 19657.7 1986-87 597850 20095.8 1987-88 623371 22243.7 1988-89 684832 28235.2 1989-90 728952 35328.4 1990-91 771295 43192.9 1991-92 778289 47850.8 1992-93 819318 63374.5 1993-94 859220 73101.0 1994-95 923349 89970.7 1995-96 993946 122678.1 1996-97 1067444 138919.7 1997-98 1115248 154176.3 1998-99 1182020 178331.9 1999-00 1266283 215236.5 2000-01 1316201 230872.8 2001-02 1383705 245199.7 2002-03 1440632 297205.9 2003-04 1564620 359107.7 2004-05 1612201 501064.5 2005-06 1699056 660408.9 2006-07 1760539 862301.5 Source: CSO and Statistics on Indian Economy, RBI Effective tax rate (customs) etr^2 0.001602814 0.002090125 0.002592304 0.002920393 0.003862637 0.003766613 0.004055715 0.004439328 0.005579635 0.007102897 0.007761822 0.009204969 0.010571706 0.010767786 0.013041932 0.016704456 0.019193778 0.02198049 0.023078653 0.02474237 0.026765375 0.028597346 0.029019257 0.02582924 0.029012865 0.035974791 0.040143558 0.036039518 0.034405509 0.038237108 0.025955762 0.020481244 0.022141671 0.022105048 0.025934111 0.02745348 0.033110315 0.000003 0.000004 0.000007 0.000009 0.000015 0.000014 0.000016 0.000020 0.000031 0.000050 0.000060 0.000085 0.000112 0.000116 0.000170 0.000279 0.000368 0.000483 0.000533 0.000612 0.000716 0.000818 0.000842 0.000667 0.000842 0.001294 0.001612 0.001299 0.001184 0.001462 0.000674 0.000419 0.000490 0.000489 0.000673 0.000754 0.001096 9
  • Appendix C Table 5: Central Government Receipts of major components (Rs.crore) Year Indirect tax (net) 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Source: CSO and RBI 1940 2342 2691 3052 3956 4530 4895 5319 6726 6617 7465 9024 10294 12310 14276 17442 20296 23915 27730 32321 36075 39966 41969 40927 49045 59652 68326 68500 72532 86836 87007 85828 96932 110392 128854 149572 177201 Excise duties (net) 1369 1586 1757 1971 2528 2988 3193 3335 4128 3481 3723 4181 4567 6165 6625 7331 8164 9423 10922 13096 14100 16017 16367 17224 21064 22176 23463 25516 28581 34944 49758 54469 62388 70245 77241 86642 92304 Customs duties 524 695 857 996 1333 1419 1554 1824 2424 2924 3409 4300 5119 5583 7041 9526 11475 13702 15805 18036 20644 22257 23776 22193 26789 35757 42851 40193 40668 48419 34163 28340 31898 34586 41811 46645 58292 Income tax 114 75 137 213 362 480 542 327 471 475 438 459 438 527 697 665 719 603 1492 1088 1250 1627 1831 1355 3468 4318 4715 3589 5760 9131 23766 22106 27779 30765 35443 45238 59667 Corporation tax 371 472 558 583 709 862 984 1221 1256 1392 1311 1970 2185 2493 2556 2865 3160 3433 4407 4729 5335 7853 8899 10060 13822 16487 18567 20016 24529 30692 25177 25133 33893 45706 60289 75187 108880 10