With barely five days to go for the presentation of the Union Budget for 2010-11, there are strong signals that Finance Minister Pranab Mukherjee will start withdrawing the economic stimulus set in place last year to revive the sagging economy, by announcing a two percentage point rise in excise duty on most goods.
Government sources, who did not wish to be identified, indicated a similar across-the-board two-percentage point increase in service tax to 12 per cent. These measures may be simple, effective ones to shore up government finances.
A six percentage point cut in excise duty in most goods from 14 per cent to 8 per cent through 2008 and 2009 have left a gaping hole in public finances, forcing the government to borrow a record Rs 400,000 crore or 6.8 per cent of the Gross Domestic Product to plug its fiscal deficit.
Until December, the government had collected Rs 63,045 crore as central excise duty, and it appears unlikely that the budget estimate of Rs 106,477 crore will be achieved.
The tax cuts, announced in three phases to counter the downturn, has resulted in foregone revenues that total up to Rs 42,000 crore.
The budget will partially reverse the cut in excise duties by increasing them by at least 2 percentage points, said Rajeev Malik of Macquarie Securities.
The government cannot continue with the kind of large revenue and fiscal deficits and will have to initiate fiscal consolidation in the coming fiscal year ( 2010-11), the Prime Ministers Economic Advisory Council, headed by former Reserve Bank of India governor C. Rangarajan, said in its review of the economy on Friday.
The underlying economic recovery offers the scope to fully reverse the two percentage point cut in the service tax, said an official.
This would imply a rise in the cost of the 109 services such as beauty salons, health and fitness clubs and rent-a-car services.
The government is planning to peg service tax collections for 2010-11 at about Rs 75,000 crore up from the Rs 65,000 crore in 2009-10.
The government, however, will have to carefully walk wedge to ensure that higher taxes do not worsen the overall price situation hit by inflation levels of food commodities reaching nearly 18 per cent.
Excise duties and service tax will remain in place until the government rolls out a uniform goods and services tax (GST). The government is targeting to roll out GST from October 1 although contentious issues remain to be ironed out, especially on specific tax rates.