Partial stimulus rollback likely in Budget

However, direct tax rates are not likely to be tweaked for the time being as the Finance Ministry is unlikely to initiate reforms on the direct taxes code now, which is still being debated at various government levels, sources said.

The direct taxes code, which will replace the archaic Income Tax Act, is unlikely to come in the budget session, that begins from Monday, the sources added.

The Prime Minister's Economic Advisory Council had also pitched for raising of excise duty to the level of service tax and broadening the service tax net. Currently excise duty stands at 8 per cent and service tax at 10 per cent.

After the Central Statistical Organisation estimated economic growth at 7.2 per cent for this fiscal against 6.7 per cent a year ago, Planning Commission Deputy Chairman Montek Sigh Ahluwalia had also said, "we should say stimulus has succeeded and we should begin to phase it now."

Commerce and Industry Minister Anand Sharma had also said those export sectors which moved into a very robust growth level could stand to see stimulus withdrawn.
However, leading industry chambers Ficci, CII, and PHDCCI are strongly opposed to any withdrawal of the stimulus measures as they say economic revival is not broad-based yet.

Ficci president Harshpati Singhania said, "we are afraid that the rollback of the stimulus packages, even partially, could derail the growth process and adversely impact the industrial sector. We would, therefore, expect continuation of the stimulus packages for another year, or at least six months more."

Making a case for continuation of the stimulus packages, CII director general Chandrajit Banerjee said the global economic recovery is likely to be slow with ample of risk of double-dip recession.

However, KPMG executive director Vikas Vasal said, "the economic activities across sectors has shown positive movements compared to last year. Therefore, it is likely that the Government may take some steps to reduce fiscal deficit in a phased manner."
Vasal further said stimulus measures should be viewed as short-term "life support system" which cannot continue forever.

Meanwhile, sources said the direct tax rates may be retained in the Budget and any change will come only through the draft direct tax code.

With just a days left for the Budget, tax consultants and advisors expect a partial withdrawal of the stimulus measures, while the industry demands its continuation till economic recovery gains ground.

Law firm Amarchand & Mangaldas partner Aseem Chawla pointed out, "with the economy recovering from the slowdown, it is expected that the Government may start withdrawing the stimulus in a phased manner so as to contain the rising fiscal deficit."

On the likelihood of changes in the personal income tax in the forthcoming Budget, Ernst & Young tax market leader Sudhir Kapadia said, "there is slim chance of a reduction in the personal income tax, as one reduction has already happened last year."

Mukherjee in Budget 2010 had removed surcharge on income of more than Rs 10 lakh.
As regards corporate tax rate, Chawla said the rates are likely to be kept at the same level of 30 per cent. "Corporates may be required to wait for the next fiscal for the rates come down to 25 per cent as proposed in the direct taxes code bill," he said.

The Government provided Rs 1.86 lakh crore of economic stimulus measures by cutting excise duty by 6 per cent,service tax by 2 per cent and stepped up Plan expenditure massively to perk up the economy which came under the impact of the global financial meltdown which began with the fall of Lehman Brothers in September 2008.

This raised economic growth to spectacular 7.9 per cent in the second quarter of this fiscal from 6.1 per cent in the first quarter, and 5.8 per cent each in the previous two quarters.

However, this also widened fiscal deficit to 6.2 per cent of GDP during 2008-09 from the Budget estimates of just 2.5 per cent. Fiscal deficit is projected to widen to 6.8 per cent during the current fiscal.

The Finance Ministry has set a target to cut fiscal deficit to 5.5 per cent of the GDP next fiscal, for which it would require both expenditure compression and hike in some tax rates.