New Delhi, June 1: The Centre's scheme for tightening the noose around tax evaders in the steel industry has developed loopholes of its own. Union finance minister P Chidambaram had, in his budget speech proposed a dual excise structure for the steel industry in a bid to draw the tax net around the myriad induction furnaces and re-rolling mills, among which excise evasion is known to be rampant.

The small units have been under-reporting production for years to evade the 15 per cent excise that steel producers have to pay on the actual value of their production.

The finance minister had proposed levying excise on the basis of the installed capacity of these units, to prevent them from juggling with production figures. He had said that proposals for ``suitable legislative changes in the excise law'' would be submitted to the House subsequently. The drill began since the department of revenue and the union ministry of steel has not yet yielded a workable system for levying excise on steel-making capacity.

Among the hitches identified in such a system is the wide range of products that even small steel producers are known to make. Excise levied on capacity would deny the revenue department of the fruits of value-addition on differently priced products and different grades of steel. Since profits would differ from product to product, a flat rate on capacity would in effect tantamount to a massive excise relief for the alleged culprits.The 93 electric arc furnaces that reported production of 3.5 million tonne of steel during the first nine months of last year, at a surprisingly low capacity utilisation of 55 per cent, will incidentally, be denied the bonanza for no apparent fault of theirs. The system would create not only two kinds of tax structures among big and small producers, but also differential levies within the secondary steel-makers.

Genuine under-utilisation of capacity because of a recession in the market would, moreover, put steel makers in a fix, if excise was levied on capacity. Sources in government, working on the scheme, said the system of capacity-based excise, involved ``many risks.'' They said the system required many safeguards.

The complications involved have compelled the finance ministry to do a re-think on levying excise on steel-making capacity. A decision on the proposal, sources said, would be taken soon. The secondary steel sector, of which the re-rolling mills and induction furnaces are a part, is incidentally, the fastest growing segment of the industry.

Last year the output of the secondary steel plants soared by more than nine per cent, while giants in the industry like the Steel Authority of India Limited (SAIL), Tata Steel and the Rashtriya Ispat Nigam Limited (RINL) recorded a mere 1.1 per cent increase in steel output.

The 1018 re-rolling mills in the country, that have a total capacity of 21 million tonne, reported an output of 6.2 million tonne of steel during 1995-96. Induction arc furnaces reported 48.7 per cent capacity utilisation during the first nine months of the 1996-97 fiscal, accounting for 2.72 million tonne of steel.

Electric arc furnaces (EAF) reported production of 3.21 million tonne of steel in 1995-96, out of a total installed capacity of 10.44 million tonne per year. The EAF units, which contribute the bulk of the steel output in the secondary sector, did not find a mention in the finance minister's budget speech. The exceptionally small utilisation of capacity was among the many glaring pointers that led the union steel ministry to suspect that small steel producers were not reporting their production figures correctly. The revenue department has now vindicated that suspicion.

The steel ministry was recently informed that excise collections clearly showed that steel production last year was 1.7 million tonne more than had been reported. The total steel output of the country was actually 22.7 million tonne, going by excise receipts, instead of the 21 million tonne that had been reported to the ministry of steel during 1996-97.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.