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Govt plans 2% raise in excise duty, service tax
November, 29th 2012

The finance ministry is considering a proposal to raise excise duty and service tax by two per cent to 14 per cent each in the Union Budget for 2013-14. The move is likely to help the ministry collect about Rs 30,000 crore. Certain exemptions may also be rolled back.

It is being debated whether both excise duty and service tax should be increased to 14 per cent. Certain exemptions may be removed and Customs duty on crude oil may be restored. A final decision would be taken close to the Budget, said a finance ministry official, on the condition of anonymity. Peak Customs duty, however, might be retained at 10 per cent.

These steps, proposed in pre-Budget meetings, are aimed at improving the governments tax-to-gross domestic product (GDP) ratio. Though most Budget announcements come into effect from a new financial year, changes in excise and Customs duties have immediate effect. For instance, even if Budget 2013-14 is announced on February 28, the government would avail of the additional two per cent excise duty rise in March.

The ministry official said it was argued even in the Goods & Services Tax (GST) regime, the combined rate for services would be 16 per cent. Though increasing the excise duty to 14 per cent would raise the rate to pre-crisis levels, most in the government feel both service tax and excise duty should be kept at the same level. At this rate, service tax would be at an all-time high.

Once GST is implemented, both the Centre and states may levy service tax at eight per cent each. Currently, states cannot tax services. Goods, however, are likely to be taxed at the peak rate of 20 per cent in the GST regime. At a time when states already levy value-added tax at 12.5 per cent, tax of 14 per cent by the Centre would make goods expensive.

Though crude oil prices (Indian basket) are still at the June 2011 level of about $110 a barrel, the finance ministry wants to restore Customs duty on crude oil, as this has put undue pressure on the exchequer. In 2011-12, it had to forgo revenue of about Rs 58,190 crore, owing to the fall in Customs duty on petroleum products.

Officials said, while taking a decision on taxes, the government would also keep in mind the results of the Assembly elections in Gujarat. It might find it a little difficult to opt for a potentially unpopular move like this in case of an anti-Congress verdict. In fact, a section in the ministry has been advocating a cut in the rates to aid growth and revive sentiment. Though this may be a good move, politically, because the cost is passed on to end consumers, the ministry is worried about its fiscal implications.

An increase in taxes may also affect growth, which had already slipped to 5.5 per cent in the first quarter of this financial year. In 2011-12, too, the ministry had increased excise duty and service tax by two per cent each.

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