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Case for easy indirect tax regime
February, 23rd 2010

The month of February is upon us, which amongst other things is the month of the Union budget. Standing on the threshold of this years budget, the aam aadmi has been most adversely affected because of the steep rise in the prices of almost all goods, including essentials items.

While India achieved the distinction of being the second fastest growing economy (about 7 per cent during April-September 2009) amidst global recession, the joy was marred by the decades sharpest rise in food prices, much to the chagrin of the common man. The earlier cut in the excise and service tax rates may have arrested an unstoppable slide and brought in a general euphoria, but these efforts did not stop the steady price rise, with food inflation touching more than a decades high of 20 per cent, driven mainly by the rising prices of pulses, potato and other vegetables. The twin impact of drought and floods badly impacted the farm sector, and agricultural output and allied sector growth rate slipped to below 1 per cent during July-September 2009.

The general forecast for Budget 2010 is that the government will now roll back the excise duty and service tax to its original level, 14 per cent and 12 per cent, respectively. The economists view is that this adjustment will be essential for the UPA government to keep a check on the fiscal deficit, which is expected to soar to 6.8 per cent of GDP during 2009-10 from 6.2 per cent in the previous fiscal on account of the twin impact of tax cut and high public expenditure.

Amidst this bleak prospect, the expectation of the common man would be that the UPA government takes suitable fiscal and stringent administrative measures so that the continuing rise in the price levels of commodities is arrested (refer to the figure). The indications are however not very favourable in as much as there is already a proposal for deregulating petroleum prices, including that of cooking gas, which is bound to result in a hike, which in turn would invariably lead to further pressure on prices.

The stress on prices is bound to further increase if the excise duty and service tax rates are rolled back to their original levels. Although one might argue that the increase of rates in excise duty on industrial inputs is neutralised by the set-off available to the manufacturer, still in the absence of a comprehensive tax format such as the goods and services tax (GST), the cascading effect continues to add to higher cost at the hands of the consumers. The much promised abolishing of central sales tax (CST) and introduction of GST at the earliest would certainly help in minimising the net tax incidence on the aam aadmi. In general, the expectations from the government would be:

a) No hike in petroleum rates

b) No roll back of excise and service tax rates for the time being

c) Reduction of CST to 1 per cent till GST is implemented

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