Excise duties may go up as economy finds its feet

Automobile, Small-Scale Sector May Be Spared

THE government may only spare select sectors from a proposed increase in excise duty rates in the upcoming Budget, as officials consider plans for a wholesale rollback of recent duty cuts, in a bid to return to fiscal prudence amid slack revenue collections. The Cenvat rate, which covers almost 96% of the goods that attract excise duty, was cut to 10% last December and further to 8% in February under a series of fiscal stimulus measures, launched by the government to shield the economy from the slowdown.
    Government officials now say a lot of these cuts could be reversed in the upcoming Budget on July 6. They said the current thinking was to go in for a lower rollback, for sectors where recovery was not strong, and increase the rate by as much as four percentage points in those sectors expected to turn buoyant soon. Steel and cement could see the excise duty go up to 12%. But sectors still not out of the woods, notably some very small-scale industries and automobile, may be spared an increase in these levies at this stage, said one government functionary, requesting anonymity because of the sensitivities surrounding the Budget-making process.
    Officials said the finance ministry, which is debating a number of revenue-raising proposals, could also look to roll back the service tax rate to 12% from 10% now, in view of a sharp worsening in the government's revenue situation, because of the combined effect of the duty cuts and lower collections in a slowing economy.
    The slew of indirect tax incentives in the various stimulus packages has cost the exchequer around Rs 30,000 crore so far. Excise duties alone account for around 18% of total revenue collections. The government has set a target of Rs 1.11 lakh crore from excise duties for the year to March 2010. For the preceding two years, excise collections totalled Rs 1.22 lakh crore and Rs 1.07 lakh crore.
    One official said, although a final decision on any duty increase would need to be cleared with the Prime Minister's Office, the finance ministry was of the view that excise duty has been cut too rapidly in the past two years — the Cenvat rate had been cut to 14% in last year's Budget — and a rollback had to start now.
RETURN TO DUTY
Lower rollback in sectors where recovery is not strong and increase of up to 4 percentage points in those expected to turn buoyant soon
Sectors such as steel and cement could see excise duty go up to 12% while some SSIs and automobiles may be spared an increase at this stage
Rollback of service tax rate to 12% from 10% is also being considered in view of a sharp deterioration in govt's revenue situation
Rs 30,000 crore Cost of stimulus packages on exchequer so far
Rs 111,000 crore Target for excise collections for 2009-10
Rs 108,000 crore Collections from excise duties in 2008-09 (revised)
Rs 122,000 crore Excise mop-up in FY08 (actual) Signs of recovery give govt the room to raise rates
OR ELSE, the pain would be very sharp when the goods & services tax (GST) regime, which could take levies to as high as 16% in one stroke, kicks in next year.
    Officials said there was also an urgent need to signal a return to a regime of fiscal prudence, with several economic indices clearly showing the slowdown was now past its worst. Recent data on industrial output indicates a recovery and a number of issues like liquidity have been resolved to a large extent, they said. Key sectors such as exports are also expected to recover by the end of this year.
    Fiscal discipline had to be abandoned through the second half of the last financial year, and the government sought to boost spending to maintain the growth momentum in the economy. The combined fiscal deficit of the Centre and states is estimated to have run into double-digits for 2008-09.
    Finance Minister Pranab Mukherjee, in his interim Budget speech last February, had said the government would seek to contain fiscal deficit to 5.5% of GDP during 2009-10. New Fiscal Responsibility and Budget management (FRBM) targets may be set only after the economy picks up, leaving the government enough room to work on fiscal prudence, say officials. For the time being, FRBM would continue to be on hold, and the primary focus will be on the revival of the economy and inclusive growth.

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