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Government plans to impose additional levies on cigarettes and diesel cars
November, 02nd 2011

The finance ministry is exploring plans to impose additional levies on cigarettes and diesel cars, measures that some officials think could help it earn much needed revenues without stoking inflation or hurting growth.

Taxes on services could also be increased under these plans aimed at helping the cash-strapped government cope with lower-than-budgeted revenues in a slowing economy, two finance ministry officials familiar with the proposals told ET.

"Various options, including raising duties on diesel cars and cigarettes, are on the table," said one official, asking not to be identified. The second official said a frantic search was on for all options to boost revenues as the finance ministry was also keen to demonstrate its fiscal prudence at a time of great stress. "All efforts are being made to ensure the fiscal deficit target of 4.6% of GDP is met and there is no slippage."

Finance Minister Pranab Mukherjee is expected to take a final decision on the levies after a review of the indirect tax collection figures for October, which will become available later this week. An increase in excise duty and service tax is said to have figured in the discussions at Prime Minister Manmohan Singh's meeting with economists on October 15.

Excise duty collections fell for the first time in 16 months in September while customs duty collections remained flat, raising fears the government may fail to meet the revised target of Rs 4.40 lakh crore for indirect taxes. On Monday, data showed the government has run up a fiscal deficit of 70% of budget estimates half-way into the financial year despite a near-freeze in expenditure.

The officials said relevant departments had been asked to study the implication of any increase in levies on the two sectors, including calculating the revenues these proposals can fetch. The finance minister is not keen on an across-the-board increase in taxes for fear of hurting already faltering growth, said one of them, who is familiar with the minister's thinking. Economic growth slipped to 7.7% in the fiscal first quarter and there is now near-consensus that this year's GDP growth will be about 7.5% and not the near-9% budgeted at the start of the fiscal.

Cigarettes have long been considered a favourite target for any government facing revenue challenges. Increasing levies on them does not prick ministers' conscience and neither does it impact growth in the sector. The finance ministry feels topping up the excise levy on diesel cars will not make a material dent in demand.

Reluctant to hike diesel price

There exists a waiting period of 2-3 months on most diesel models because of the steady rise in petrol prices. The government has been reluctant to increase prices of diesel for fear of stoking inflation. The finance ministry reasons that since the government is not able to raise diesel prices, it is justified in levying more tax on diesel cars. Officials say raising levies on these items could be politically expedient and administratively simple.

Imposition of duties on these products would also not the hurt common man, a crucial consideration for the government ahead of major assembly elections next year. Duties on diesel cars can be increased though a simple notification although to do the same on cigarettes, it will need to issue an ordinance. The government earns about Rs 8,000 crore from duty on diesel cars and Rs 10,000 crore on cigarettes each year.

Excise duty on cigarettes ranges from Rs 509 to Rs 1948 per thousand sticks, which is the maximum that the government can impose without seeking Parliament's approval. At present the duty on cars is based on the length and not the fuel. Small cars attract an excise duty of 10%, while cars with engine capacity more than 1500 cc attract 22% duty. An expert panel headed by former Planning Commission member Kirit Parikh last year recommended imposition of additional excise duty on diesel vehicles of up to Rs 80,000.

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