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2% cut in excise & service tax, Govt to take Rs 30,000-crore hit

In what appears to be a marriage of sound economics with smart politics, the government on Tuesday announced a fresh stimulus to the slowing economy by cutting excise duty on several products and service tax on 100 services by 2 percentage points. The new tax structure will bring down prices of a host of products including paper, leather products and bottled water, apart from other consumer goods such as refrigerators and microwave ovens. Gaurav Choudhury reports. See graphics
Hindustan Times | By Gaurav Choudhury, New Delhi
UPDATED ON FEB 25, 2009 01:45 AM IST

From phone bills to restaurant outings, a host of services that we use in our everyday lives just got cheaper. So did several goods, including cement, steel, tyres, and TV sets, among others.

In what appears to be a marriage of sound economics with smart politics, the government on Tuesday announced a fresh stimulus to the slowing economy by cutting excise duty on several products and service tax on 100 services by 2 percentage points.

Replying to the debate on the interim budget in the Lok Sabha on Tuesday, finance minister Pranab Mukherjee announced that goods that attract 10 per cent excise duty would now be charged 8 per cent. However, excise rates on items that attract 8 per cent and 4 per cent excise duty will not be changed.

Almost 96 per cent of all excise duty collections come from the category that currently attracts the 10 per cent bracket.
While this will mean about Rs 30,000 crore of tax revenue foregone by the government, the increased spending that the package is expected to stimulate could neutralise this somewhat.

The new tax structure will bring down prices of a host of products including paper, leather products and bottled water, apart from other consumer goods such as refrigerators and microwave ovens.

Tax on about 100 services — such as courier, hotel, entertainment, consulting and telecom services — has been reduced to 10 per cent from the existing 12 per cent.

Besides, excise duty on bulk cement has been reduced to 8 per cent or Rs 230 per tonne, whichever is higher — a move aimed at helping bring down costs of real estate and infrastructure development.

Expectedly, the measures brought cheer among members of India Inc.

Welcoming reductions in tax rates, industrial chamber Confederation of Indian Industries (CII) said it would provide much needed fiscal measures for slowing industry and economy. “Further reductions in excise and service tax by 2 per cent and extension of the earlier 4 per cent cut in excise duty beyond 31 March, 2009, will go a long way in stimulating consumption demand,” said Chandrajit Banerjee, director general, CII.

In some products like tyres, the impact of the tax cut was immediate with companies announcing price cuts. “The new prices will be effective across India with immediate effect,” said Arnab Banerjee, vice-president, Ceat Ltd.

Mukherjee said the first two stimulus packages announced in December and January had started yielding results with latest data indicating that several key sectors, including cement and steel, were showing early signs of recovery.

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