Budget may see hike in excise and service tax

Steps aimed at lowering revenue, fiscal deficit

Some tough fiscal measures like reversal in the excise and service tax to the pre-2008 crisis level may be in the offing in the Budget for 2012-13 in order to fight twin problems of lower revenue and ballooning fiscal deficit.

“There is a need for ending the accommodating fiscal policy measures by raising the excise duty and service tax rates to pre-crisis levels. This itself will roughly generate about one per cent additional tax revenue,” a top government official told Deccan Herald.

“In the next year’s Budget, it is something that should be looked at,” he said.
To revive Indian economy, impacted by the global slowdown, the government had provided three fiscal stimulus packages starting from December 2008 which included reduction in excise duties among other sops.

Accordingly, the three major ad valorem excise rates of 14, 12 and 8 per cent applicable on non-petroleum products were slashed by four percentage points each. In subsequent year, following economic recovery, the duty cuts were partially resumed.

Service tax was also increased from 10 per cent to 12 per cent in 2009-10 Budget in order to give relief to the industry reeling under the impact of economic recession, The rate was reduced from 12 per cent to 10 per cent in subsequent year. In the last Budget, however, the government did not go for any roll back as the fiscal deficit had declined sharply to 4.7 per cent from budgeted 5.1 per cent.

The official said that this 1 per cent of additional tax revenue would see much lesser need of tight monetary policy to fight inflation and spur growth.

Government expenditure

Curbing open ended subsidies on oil and fertiliser are some other measures the policymakers have been suggesting in order to cut government expenditure and reduce its extra borrowing needs.

“Open-ended subsidies on energy and fertiliser can be extremely destabilising,” Prime Minister’s Economic Advisory Council Chairman C Rangarajan said recently.
He had also suggested that the country needed to raise the excise rates to the level at which they were prior to the crisis.

Chief Economic Adviser Kaushik Basu  and Planning Commission Deputy Chairman Montek Singh Ahluwalia have in the past voiced concern over rising fuel and fertilizer subsidies.

Basu recently said that India must move to market-based energy prices and subsidies should be directly credited to the account of poor and needy.