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Expectations on indirect taxes

The annual budget presentation is often treated as an 'auspicious' event in India, with people glued to their television sets wondering how the Union Budget proposals would impact their household budget. An important part of the budget speech comprises indirect tax proposals, which essentially cover customs duty on imported goods, excise duty on manufacture and service tax on services.

business Updated: Feb 18, 2010 17:21 IST
Pratik Jain

The annual budget presentation is often treated as an 'auspicious' event in India, with people glued to their television sets wondering how the Union Budget proposals would impact their household budget. An important part of the budget speech comprises indirect tax proposals, which essentially cover customs duty on imported goods, excise duty on manufacture and service tax on services.

Today, with visible signals of economic revival coupled with continued pressure on tax collections, the moot question is whether the stimulus extended earlier in the form of lower excise duty and service tax, should be discontinued.

Arguments are on both sides. Surely, increase in taxes would mean additional funds for the government for infrastructure, social security, education, healthcare etc.

After all, the stimulus package was only supposed to be a corrective measure, and by no means a permanent affair.

On the other hand, the industry is urging the government to continue the tax concessions for some more time, as any increase in costs or prices at this stage could derail the recovery process.

The Government would be mindful of the current situation of rising prices (inflation), which is increasingly becoming the most difficult challenge to tackle. For instance, a 2% increase in excise duty would typically have a disproportionate impact on the final price. This is because of increased transposition costs (due to increase in fuel prices), financial costs (due to increase in funds required for purchase of inputs) and higher incidence of sales tax/ VAT, which applies on the price inclusive of excise duty.

While the debate continues, the government may consider adopting a cautious approach, to meet (at least partly) these conflicting objectives. It may retain the current excise duty of 8 per cent, and marginally raise service tax from 10 per cent to say 12 per cent.

Continuing the existing excise duty rate would enable the manufacturing sector to consolidate. Also, it is broadly aligned with the central GST rate, which could be somewhere around 8-9 per cent.

On the other hand, increasing the service tax rate should not severely impact the service sector, which is currently better placed vis-à-vis manufacturing sector, in terms of recovery. This would also help to bridge the current gap between tax on goods and services, which is one of the foundations of GST regime.

In keeping with the above objectives of fiscal consolidation and gradual movement towards GST, the government may also consider withdrawing some of the existing customs/excise/service tax exemptions. However, the challenge here would be to first agree with the states as to which of the goods or services should continue to be given preferential treatment under GST.

Since services are currently not taxed by the State Governments, maybe it would be easier for the Finance Minister to roll back some of the Service tax exemptions, without getting into extensive debates with the States.

To conclude, people would expect that there is not much action on the indirect tax front in the forthcoming Budget. While there could be marginal hike in tax rates, hopefully it would not translate into any substantial burden on household expenditure. This might as well turn out to be the last Budget before GST rollout, which in any case would be a major turning point for both businesses as well as consumers.

So a tax neutral Budget would not be a bad news, after all.