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Budget 2010-11: Excise duty hike
January, 27th 2010

The government is considering an across-the-board increase in excise duty in Budget 2010-11, as it faces pressure to withdraw fiscal stimulus measures in the wake of a 16-year high fiscal deficit of 6.8% in the current financial year.

One option being considered is an increase in Cenvat rate by 2% while leaving the service tax rate unchanged at 10%, a finance ministry official told ET . Cenvat refers to the median excise duty, tax on manufacture of goods, levied on nearly 90% of the goods made in the country.

More services could be brought under the tax net to allow the government to keep service tax rates unchanged, the official said, requesting anonymity. A hike in service tax rate would be an immediate burden on consumers already battling high food prices. The proposal is at a very early stage and could undergo significant changes by the time the Budget is presented.

An alternative proposal is also under consideration which seeks an increase in excise rates in sectors that are doing well such as automobiles, instead of an across-the-board hike.

The economy is recovering from a downturn induced by a global recession that forced the government to cut taxes and increase spending to boost demand. The Reserve Bank of India is keeping policy rates at record low levels to encourage economic activity.

The countrys GDP grew 6.7% in 2008-09 after recording 9% plus growth rates in the three preceding years. Three stimulus packages announced by the government in December 2008, January 2009 and February 2009 put the economy back on track, and helped it grow by 7.9% in the second quarter of the current financial year. The Cenvat rate was brought down to 10% from 14% in December 2008 and by another 2 percentage points to 8% in the interim Budget in February 2009. The service tax rate was cut to 10% from 12%.

The government is now looking to unwind these measures to contain the fiscal deficit. A two percentage point increase in the Cenvat could help garner an additional Rs 7,000 crore.

A sectoral strategy could, however, find favour with the government following some recent concerns, making the outlook look a mixed one against a bright one a few weeks ago.

The strong GDP growth in the second quarter had raised expectations of an 8% growth in 2009-10. Industrial output that expanded 11.7% in November and a four-month high 6% growth in core sector in December suggest growth could accelerate further. But the third-quarter growth could be in the range of 6-6.5% because of poor farm sector output, suggesting that overall growth could be in the range of 7%.

Globally too, some concerns have emerged over the economic recovery with countries such as China taking steps to counter the possibility of asset bubbles emerging. The head of International Monetary Fund, or the IMF, Dominique Strauss-Kahn had also recently warned against premature withdrawal of the stimulus.

The countrys chief statistician Pronab Sen does not see any urgency for tinkering with rates for a different reason. If we are going to go in for GST (goods and services tax), does it make sense to take up the excise and then realign it later? he said.

Even tax experts argue that the duty rejig should be done keeping in mind GST rates. Given the likely GST rate, the government should either marginally increase the excise duty rate or leave it unchanged while simultaneously reducing the exempted items, said Pratik Jain, executive director KPMG. Mr Jain, however, felt service tax rates could be hiked.

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