The government is in a dilemma over raising excise duty and service tax rates in the Budget, as prescriptions to this effect came from experts and senior advisors.
Officials say the Central Board of Excise and Customs (CBEC) had been pushing for an increase in service tax and excise duty rates by two percentage points to 12 per cent each. The implications of such a move have come as a matter of worry for others in the finance ministry, given that the economic growth was already estimated to fall in the current financial year to levels near to what the country witnessed during the crisis period of 2008-09.
“The dilemma before the government,” according to a key official, “is whether to increase the rates and bridge the ballooning fiscal deficit or maintain a status quo to support industry and economic growth.” It is not just the CBEC; even the prime minister’s senior advisors want the finance ministry to raise excise duty and service tax rates by two percentage points.
| READY RECKONER |
| * Excise duty reduced from 16% to 14% in the Budget in February 2008 |
| * After 2008 meltdown, it was reduced by six percentage points in phases |
| * First to 10 per cent in December, 2008 and further to 8 per cent in February 2009 |
| * Subsequently, it was increased to 10 per cent in the Budget in February 2010 |
| * Service tax rate was cut two percentage points to 10 per cent in February 2009 |
| * It remained at that level since then |
| * In first nine months, fiscal deficit was 93% of Budget Estimates for FY12 |
| * Indirect tax collections estimate in the Budget for 2011-12 likely to be met |
| * There could be shortfall of Rs 15,000-20,000 crore in direct tax collections |
“The government should take such measures as necessary to raise the tax-gross domestic product (GDP) ratio,” according to the Prime Minister’s Economic Advisory Council (PMEAC). An improvement in the tax-GDP ratio, council chairman C Rangarajan said recently, had to come from plugging loopholes in the tax administration and raising excise duty and the service tax rate close to the pre-2008-09 level.
PMEAC member Govinda Rao, a fiscal expert, says based on rough calculation that an extra Rs 35,000 crore could be added to the exchequer if excise duty and service tax rates were raised to 12 per cent.
Similar advice came from some Planning Commission members at a recent meeting with finance ministry officials, even though tax rates do not fall under the domain of the commission.
Consultant PricewaterhouseCoopers indirect tax expert Vivek Mishra says the government could consider raising excise and service tax rates. Reason: “A cut in these rates was a temporary step to give stimulus to industry facing heat from global financial crisis and because of widening fiscal deficit.”
But industry — which will face the pinch of the move — is up in arms over the suggestions.
The Confederation of Indian Industry (CII), Federation of Indian Chambers and Industry and the Assocham have, in their pre-Budget interactions, cautioned the government against any such move. In fact, the chambers are not even considering that the government might raise service tax rate. It is another matter that they are apprehensive of a move to raise excise duty rate.
The finance ministry is trying to find a middle path on another front: introducing a negative list for service tax in cases where goods and services are supplied as composite bundles.
CII notes that there is state value added tax (VAT) of 12.5 per cent to 14.5 per cent at present, in addition to 10 per cent excise duty. “The combined effect of these two taxes is quite high when compared with GST rates in most of the countries,” says chamber Director-general Chandrajit Banerjee.
The manufacturing sector, he adds, is the major contributor to excise revenue; but that is in the downturn now. “Under such a situation, CII is of the view that any increase in excise duty in Budget 2012-13 would adversely affect the growth prospects of industry and result in higher cost to the consumer, in turn leading to inflation,” he warns.
In fact, advance estimates pegged manufacturing growth to fall to 3.9 per cent for this financial year, which is below 7.6 per cent of last financial year’s and also less than 4.3 per cent witnessed during the crisis period of 2008-09. Also, overall growth is estimated to come down to 6.9 per cent of GDP this financial year, which would be close to 6.7 per cent witnessed in 2008-09.
If excise and service duty tax rates lead to fall in the GDP growth rate, it would affect tax collections as well. For example, one per cent real GDP tax rate leads to fall of Rs 15,000-Rs 20,000 crore of direct tax collections.
A PMEAC member explains that the fall in GDP growth rate is not as high as is hyped in the media. If you see it from the point of view of global conditions, Indian economy has been witnessing good growth rate, he said, buttressing the PMEAC argument for a hike in excise duty and service tax rates.
For next financial year, the council expects the economy to grow by 7.5-8 per cent.
The chamber wants the finance ministry to bridge fiscal deficit by announcing measures in the Budget for perking up investment rates in the economy.
