T N Ninan's observations in the column, "The tax puzzle" (November 13) are interesting and call for an explanation. Normally, an increase in excise duty collection is indicative of higher manufacturing activity, which, as the author points out, is not the case in the current financial year. During the period April-October 2015, the excise duty collected was Rs 1,48,000 crore - a rise of 68 per cent from Rs 88,000 crore during the same period the previous year.
The main reason for the increased excise duty collection was the rise in the excise duty on petrol and diesel by Rs 7.75 and Rs 6.50 per litre respectively that came into effect between November 2014 and January 2015 in four tranches. The full impact of this was reflected in the April-October 2015 period. In an attempt to partly mop up the windfall arising from falling crude oil prices, the excise duty has been further increased by Rs 1.60 per litre on petrol and Rs 0.40 per litre on diesel with effect from November 1, 2015.
Although the increase in excise duty collection does not represent an upswing in production or economic activity, it would nevertheless reflect in the gross domestic product (GDP) and subsequently, a higher growth rate. Earlier, GDP was based on factor cost, which did not take into account indirect taxes or subsidies. With GDP now being calculated on the basis of market price, with 2012 as the base year, indirect taxes have been added and subsidies deducted from the factor cost.
For these reasons, in a financial year like 2015-16, when excise duties increased sharply and subsidies were reduced, GDP and the growth rate would be higher than normal. However, these increases could even out in the following years. Changes in customs duties and the service tax rate were not significant enough to distort GDP in the current year.
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The main reason for the increased excise duty collection was the rise in the excise duty on petrol and diesel by Rs 7.75 and Rs 6.50 per litre respectively that came into effect between November 2014 and January 2015 in four tranches. The full impact of this was reflected in the April-October 2015 period. In an attempt to partly mop up the windfall arising from falling crude oil prices, the excise duty has been further increased by Rs 1.60 per litre on petrol and Rs 0.40 per litre on diesel with effect from November 1, 2015.
Although the increase in excise duty collection does not represent an upswing in production or economic activity, it would nevertheless reflect in the gross domestic product (GDP) and subsequently, a higher growth rate. Earlier, GDP was based on factor cost, which did not take into account indirect taxes or subsidies. With GDP now being calculated on the basis of market price, with 2012 as the base year, indirect taxes have been added and subsidies deducted from the factor cost.
For these reasons, in a financial year like 2015-16, when excise duties increased sharply and subsidies were reduced, GDP and the growth rate would be higher than normal. However, these increases could even out in the following years. Changes in customs duties and the service tax rate were not significant enough to distort GDP in the current year.
C S Jacob Mumbai
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number