Five proposals were deliberated in the meetings of the monitoring committee constituted for leather sector by the department of commerce and also in the meetings of National Manufacturing Competitive-ness Council (NMCC). These were recommended to the department of revenue for priority consideration, to encourage investments (both domestic and overseas) and capacity building:

• central excise exemption on machinery & equipment falling under C E Tariff 8453.10

• lowering of import duty on parts of machinery, at a par with the 5% concessional import duty for machinery. Also, central excise exemption on spare parts of machinery falling under CE Tariff 8453.90.

• CVD removal on vegetable tanning extracts falling under customs tariff 32.01

• central excise exemption on footwear components manufacturing

• removal of excise duty on footwear under chapter 64

None of these found place in the Union Budget. Instead a few other suggestions were announced, such as inclusion of six more critical inputs under 3% duty-free import scheme, adding seven new machinery for import under 5% concessional duty, lowering import duty on EVA (soling) material etc. These will not make a significant impact on manufacturing competitiveness and achieve the envisaged growth.

There are two main issues in the income tax matter for which the export industry was expecting amendments/clarifications in this Finance Bill. These relate to non-inclusion of DEPB benefit as an export incentive, like DBK etc., under Section 28 (iii a) & (III c) for the purpose of income tax exemptions under Section 80 HHC. Another relates to interpretation while calculating the eligible deduction under Section 80 HHC, in cases where the exclusion of 90% of export incentives results in negative profit.

However, there have been no announcements in these matters, though the Prime Minister assured that he would look into these. In any case, where the finance ministry needs to take a liberal approach, it has chosen to remain silent. This at a time when the finance minister has himself spoken about ambitious export targets.

Further, the proposed levy of Banking Cash Transaction Tax on all cash withdrawals exceeding Rs 10,000 is likely to have an impact on the leather industry, as it is required to make cash payments for procuring raw hides & skins from mandis and also on payment of wages and salaries.

On service tax, a new explanation has been added at the end of Section 65(105) of the Service Tax Act, that in the case of a non-resident rendering services from outside India and the recipient is in India, then tax has to be paid by the resident recipient on behalf of the non-resident. The export industry avails various services from non-residents outside India, such as sale agents, exhibition services, transport services etc., and taxing all such services will increase our cost of exports and render our products uncompetitive. Hence, for such services rendered outside India for the purpose of exports should be exempt from service tax levy.

Another issue concerning service tax relates to production of goods for and on behalf of the client (i.e. outsourcing/job working) if the production activity amounted to manufacture under Section 2(f) of the Central Excise Act, is exempted from levy of service tax. However, there have been debates as to what constitutes manufacture and further whether a product falling under a new excise tariff should emerge after such production etc. for availing this exemption.

Though the activity amounting to manufacture was exempted from the purview of service tax, notification 8/2005 dated March 1, 2005 exempts only those activities not amounting to manufacture under Section 2(f) of the Excise Act. However, this exemption is not applicable to products having ‘Nil’ rate of duty or exempt from excise levy.

In such cases, (a) finished leather being a non-excisable product, the benefit of notification will not be available, (b) all exports are exempt from levy of excise duty (though products are otherwise excisable) and hence benefit of notification will not be available.

Since leather is the main raw material for the industry, the entire processing chain of leather should be exempt from levy of service tax, similar to textile processing and agricultural produce. Further, the export of products, which are otherwise excisable, should be free from levy of service tax at all stages of production.

The writer is chairman, Council for Leather Exports, Chennai & former president, FIEO