Budget taxes will not raise prices of essential goods

The Ministry of Finance says tax changes proposed under Budget 2009, will not increase prices of essential commodities – as they are protected under special legislation. Despite widespread fears of price increases of essential goods, the Ministry of Finance says the prices of 11 commodities, listed as essential commodities, will not change because of tax changes in the budget.

The list of essential items consists of potatoes, Mysore dhal, watana dhal, green gram, chickpeas, chillies, Bombay onions, tinned fish (salmon) sprats, sugar and milk powder. Imports of these 11 items are taxed under a special tax called the Special Commodity Levy introduced in January this year.

“Normally when you import, you have to pay Customs duty, surcharge, PAL(Port and Airport Levy), VAT and Social Responsibility Levy. But now there is only one tax for all essential items. That is the Special Commodity Levy. So the tax is very much lower than before,” Director General of Fiscal Policy at the Ministry of Finance, S. R. Attygalle, told The Sunday Times FT.

Because the 11 essential items are now under the Special Commodity Levy, changes to other taxes like VAT and PAL do not impact them. They are also exempt from the new Nation Building Levy (NBL).
“Essential goods are not affected by changes to other taxes. Even the NBL does not apply to them. So the prices of ‘essential items’ will not change,” said Mr Attygalle.

Only two items under the Special Commodity Levy – milk powder and sugar – will see tax increases. But again, this is not expected to increase retail prices. The Ministry of Finance says the tax increase is very small, and importers can afford to absorb the increase because retail prices of milk and sugar did not come down according to world market price reductions.

For instance, the Special Commodity Levy on milk powder was increased from Rs 5 per kg, to Rs 15 per kg. But world market prices of milk powder have reduced by around Rs 100, while retail prices of milk powder have not reduced proportionately.

So the ministry says importers can afford to pay the Rs 10 tax increase without increasing milk powder prices. “The CIF value for imports of milk powder was Rs 474 per kg. It has now reduced by around Rs 100 because world market prices have come down. Now, the CIF value is about Rs 374 per kg. So even with the cess increase (Rs 10), importers have a margin of Rs 90,” said Mr Attygalle.

The tax on sugar was increased by Rs 2, from Rs 14 per kg to Rs 16 per kg. Again, the Finance Ministry says the price of sugar is coming down in word markets and importers can afford to absorb the marginal tax increase.

Therefore, the Ministry maintains that prices of sugar and milk powder should not increase because of the tax increase. The Ministry says the marginal tax increase on sugar and milk is aimed at encouraging domestic production of both items.