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Deficit issues: Will excise duty be raised?

india Updated: Feb 11, 2013 21:30 IST

In the face of rising deficit and a declining growth rate, the question that arises is whether finance minister P Chidambaram would propose structural changes in taxation or present a budget for the aam aadmi, keeping in view the party's poll prospects in the General Elections next year.

The finance minister has said that he will present a "responsible" budget. But would this be possible? In the last budget (2012-13), former finance minister Pranab Mukherjee raised the standard rate of excise duty on non-petroleum products from 10% to 12% - two percentage points lower than the 14% rate that prevailed before the global financial crisis in 2008-09. Post 2008-09, the government brought it down to 8%.

The question that arises is: As we move towards a nationwide Goods and Services Tax (GST), will the finance minister raise the excise duty rate from 12% to 14%?

The finance minister will have to deal with pressures from various sections of the society, industry and investors, apart from political compulsions. Raising the excise duty and service tax rates is likely to aid fiscal correction.

However, there is likely to be some elbow room for the finance minister in the form of postponement of certain expenses to a new fiscal year, proceeds from disinvestment and new spectrum auction etc. Also the fact that GST is now more closer to reality, the excise duty rate, coupled with the value-added tax rate, should be kept in conformity with the expected revenue neutral rate (RNR), which is likely to be in the range of 16-20%. While the proportionate share of the Central and state governments in the RNR has not been decided, assuming an equal share, the excise duty rates are likely to be more or less in harmony with the RNR (This is, however, considering that excise duty at the rate of 12% is not levied on post manufacturing value additions). Therefore, any further hike, merely for a fiscal correction may not be politically a wise decision at this point in time nor right for a belagured economy.

Reduction in tax rates is in any case ruled out, due to the fiscal situation. A hike in one of the two central levies (i.e. excise duty and service tax) also appears unlikely, in view of the government's intention of bringing a unified code of central indirect taxes, with unified forms, credits, tax payments and rules, as a step towards implementation of the GST.

It appears that the excise duty does not warrant any tinkering of rates. However, increase in taxes in some specific sectors such as high-end products, diesel cars or "sin goods" like cigarettes, tobacco, etc., which do not affect the aam aadmi, cannot be ruled out.

(The writer is senior director, Deloitte Touche Tohmatsu India Pvt Ltd. The views expressed are personal)