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Excise & Service Tax to Touch 12% in Stimulus Wind-Down

Constrained by a near absence of revenue buoyancy, the government may opt for the withdrawal of a substantial part of the remaining fiscal stimulus in Budget 2012-13. A source privy to the discussions in the finance ministry told FE that while growth in revenue expenditure will be kept minimal for the next fiscal, both the median excise duty and service tax rates are likely to be hiked from 10% at present to 12%.

The rate increases, the source says, might come along with an announcement to introduce the negative list of services, which would broaden the service tax base significantly and eliminate certain exemptions on the excise side. Around 90% of the items under excise duty are taxed at 10%. As many as 120 services are taxed at present. The negative list means all services except a select 20 or so will be taxed.

Reserve Bank of India governor D Subbarao had said last month after announcing the third-quarter policy review that government should try and address the high fiscal deficit, which has been restraining the central bank from cutting interest rates, adding the coming Budget must begin the fiscal consolidation process in a credible and sustainable way. Slippages in fiscal deficit (which is expected at around 5.5% of the GDP as against the Budget estimate of 4.6%) will add to inflationary pressures and so will constrain the RBI from going for rate cuts, in response to stagnant private consumption and investment spending, the governor had said. “What the RBI governor said is right and we will have to pay heed (to him),” a government official said, requesting anonymity.

The government, in a series of steps since 2008,announced a slew of stimulus measures including excise duty cuts and exemptions to combat the crippling effects of the global financial crisis. In 2008, the finance ministry had brought down excise duty from 14% to 10% to fight the impact of the crisis, which was reduced to 8% the next year. However, it was increased to 10% in 2010. Service tax too was decreased by 2 percentage points to 10% in 2009.

Although industry chambers have unanimously opposed the withdrawal of the remaining fiscal stimulus in the context of the pressure on aggregate demand, the ballooning fiscal deficit is weighing on the government’s mind. Finance minister Pranab Mukherjee said on Thursday that he was “losing sleep” over the skyrocketing subsidy bill, which is expected to overshoot the Budget estimate by a whopping R1 lakh crore.

“The increase in excise and service tax rate will be a good move as government needs revenue for fiscal consolidation. The fiscal deficit is way beyond the target and it needs to be contained. The raising of taxes will have negative impact on domestic demand but reduction in deficit will allow easing of interest rates,” Ernst & Young partner Satya Poddar said.

PwC tax partner R Muralidharan has a slightly different take. “Today’s excise and service tax rate (10%) is in tune with government’s policy of a moderate rate of taxation on a wider base. We have, after years of efforts, converged on this rate for goods and services,” Muralidharan said.

“While the need for increased tax revenue from a fiscal consolidation perspective is well understood, a better policy option may be to keep the rates unchanged and look closely at pruning the present exemptions and increasing the tax base,” said Muralidharan.

During April-January this fiscal, indirect tax collection went up 15.1% to Rs 3.17 lakh crore, which is 80.74% of the Budget estimate. The government has estimated to raise Rs 3.92 lakh crore from indirect taxes in the current financial year. Out of Rs 3.17 lakh crore, collection from customs duty rose 12.7% to Rs 1.24 lakh crore, excise by 6.8% to Rs 1.17 lakh crore and service tax by 36.9% to Rs 75,440 crore.

In Budget 2011-12, the government had estimated to collect Rs 1.64 lakh crore from excise, which is an increase of 20% over the revised target of last year. The service tax revenue was estimated to grow 18% to Rs 82,000 crore.

One problem in hiking excise duty is the fact that it won't be in consonance with the plan for the goods and services tax (GST) which, according to a formula mooted by the Centre itself, will start at 20% and converge at 16% in the third year of introduction. If the excise duty is 12%, the combined Centre-state rate will be 24.5% (going by the higher state VAT rate of 12.5%. This means that an adjustment may be required once GST is implemented. The GST has missed several dates in the past due to lack of consensus between the centre and states on a variety of issues – the threshold where the tax kicks in, the rates, and the list of exemption.

Financial Express, New Delhi, 10-02-2012