After doling out Customs duty sops in the run-up to the Interim Budget 2004, Finance Minister Jaswant Singh is likely to announce a 4 percentage point cut in the special excise duty (SED) on February 3.

At present, five products -- motor cars, air conditioners, polyester filament yarn, aerated soft drinks and tyres -- attract an SED of 8 per cent.

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The move will be in line with the finance ministry's plan to eliminate the SED in phases.

In his debut Budget last year, Singh had halved the SED on the five items to 8 per cent from 16 per cent. The task force on indirect taxes headed by Vijay Kelkar, adviser to the finance minister, had recommended that either the SED be done away with in one stroke or be phased out in four years.

The SED contributes about Rs 1,200 crore (Rs 12 billion) to the indirect tax kitty. The finance ministry has throughout this fiscal kept a watch on price movements in the automobile industry to check whether the duty cut had been passed on to consumers.
After a review of the price movements till December 2003, officials said there was reason to believe that the move had not only helped the sector post a 24 per cent growth but had also resulted in higher tax collection.

The government is also planning to get the long- awaited divestment fund going. The fund has been in the works for the past two years.

The ministry is, however, not likely to change the tax structure for the petroleum sector. In the Budget for 2003-04, the government had jettisoned a plan to shift to a specific duty structure from an ad valorem duty on petroleum products.

On the direct tax front, the Interim Budget will present the first schedule of the Finance Bill in Parliament, which will seek permission to levy the unaltered income tax rates for the next fiscal.

The only possible changes are expected in the extension of benefits under Section 88 of the I-Tax Act to contributions to the newly announced pension funds and a possible extension of the sunset clauses in Section 80HHC exempting export profits and Section 80 IB benefits for units in J & K.

The ministry is also continuing with the process of doling out sops to industry through notifications. Over the weekend it has announced exemption from central excise duty for manufacturing units in Jammu and Kashmir if they undertake fresh investments.

Accordingly, units set up before June 14, 2002, but which have made new investments after this date will be eligible for the waiver which till now was only applicable to units that had come up after June 14, 2002.

The only rider is that the investment must show a generation of additional regular employment of not less than 25 per cent over and above the number the unit had employed so far.

Singh is also expected to show an enhanced allocation for several key sectors in the Interim Budget.

He has gone in for a gross budgetary support of Rs 133,000 crore (Rs 1,330 billion) for the annual plan for 2004-05, which is 10 per cent higher than the current fiscal 03, officials said there was reason to believe that the move had not only helped the auto sector post a 24 per cent growth but had also meant higher collections.

The ministry is, however, not likely to change the tax structure for the petroleum sector.

In the Budget for 2003-04, the ministry had jettisoned the plan to shift to a specific duty structure from an ad valorem duty for petroleum products, practically at the eleventh hour.

On the direct tax front, the interim Budget will present the first schedule of the Finance Bill in Parliament, which will seek permission from the House to levy the unaltered income tax rates for the next fiscal.

The only possible changes are expected in terms of extension of the benefits under Section 88 of the I-T Act to contributions in the newly announced pension funds and possible extension of the sunset clauses in Section 80HHC, exempting export profits and Section 80 IB, extending benefits to units in Jammu and Kashmir by four months, when Singh presents a regular Budget.

The ministry is also continuing with the process of doling out sops to industry through notifications. Over the weekend, it announced exemption from central excise duty to manufacturing units in Jammu and Kashmir if they pushed in fresh investments.

Accordingly, units existing before June 14, 2002 but which have made new investments after this date, will be eligible for the waiver, which till now was only applicable to new units which had come up after June 14, 2002.

The only rider is that the investment must show a generation of additional regular employment, of not less than 25 per cent over and above the number it had employed.

Singh is also expected to show an enhanced allocation for several key sectors in the interim Budget.

What to expect

• Sunset clauses in Section 80HHC and Section 80IB may be extended till the regular Budget.
• Halving of the SED will result in Rs 1,200 crore lower excise collections.
• Fresh excise exemption for units in Jammu & Kashmir.
• No change in direct tax rates and duty structure for petroleum goods.