Peak indirect tax rates may stay

RUN UP TO THE BUDGET 2004-05

More services to be brought in Tax Net.

Finance Minister P Chidambaram's indirect tax package in the forthcoming Budget is unlikely to see any major rate changes. The peak Customs duty and the Cenvat rate are likely to remain at 20 per cent and 16 per cent, respectively.

According to senior government sources, the finance minister is also inclined to postpone an increase in the service tax rate to the next Budget in February 2005.

The ministry is, however, determined to expand the scope of the tax by bringing in more services. Road transport services, which in the very first year 1997-98 netted the exchequer Rs 120 crore, is in the sights of the Central Board of Excise and Customs.

With the Supreme Court ruling in favour of the Centre in the suit between the transporters and the Union government last year, the ministry is keen to tax transport services.

The earlier National Democratic Alliance government had withdrawn the tax in 1998, under pressure from the transporters lobby, which had struck work.

Instead, Chidambaram is expected to put pressure on tax officials to realise the arrears in duties, estimated at almost Rs 20,000 crore.

The sources said that former Finance Minister Jaswant Singh had already cut the peak duty rate to 20 per cent from 25 per cent ahead of his Interim Budget for the current fiscal.

This, along with other specific duty cuts, is estimated to result in a Rs 10,000 crore loss in indirect tax revenues in the current fiscal. But the sources conceded the domestic industry needed some protection.

Moreover, they pointed out that even the Vijay Kelkar task force on indirect taxes had set a 2006-07 deadline to bring tariffs down to the Asean level of 10 per cent. The ministry could cut the Customs duty by 5 per cent each in the next two Budgets, the sources added.

The 16 per cent Cenvat rate had stabilised over the last four years, the sources said, adding that there was no clear logic for reducing it to 14 per cent in 2004-05 as recommended by the Kelkar task force.

Yashwant Sinha had converged the three ad-valorem specific excise duty rates of 8 per cent, 16 per cent and 24 per cent, to a single Cenvat of 16 per cent in his Budget for 2000-01.

After the value-added tax regime is introduced as planned by the new government on April 1, 2005, the ministry would take a fresh look at moving towards a single tax rate regime for both goods and services, with provisions to allow input credit from each other, the sources said. Without any such offsetting measures, a rise in service tax rate at the present juncture would have substantial inflationary impact.

The Govinda Rao committee on service taxation had envisaged that the rate on both goods and services could converge at about 13.5 per cent. It had said while the rate on goods could be reduced to 13.5 per cent from 16 per cent, that on services could be increased to 13.5 per cent in phases.