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The case for restoring taxes
February, 03rd 2010

As evidence of economic recovery mounts, the Centre should consider rolling back, in stages, the tax cuts it had announced last year. This is imperative for overall macroeconomic stability and to give the RBI room to keep rates steady. Partial restoration of the 6% cut in excise duty will neither pose a grave threat to industry nor dampen consumer sentiment.

There is ample evidence that the economy has come out of the spot it found itself in when the crisis in the global financial sector found its way to the real sector. Manufacturing output has been rising, non-oil imports zoomed 22% in December and the HSBC Markit Purchasing Managers Index climbed to its highest level in one-and-a-half years in January 2010.

The spectacular performance of sectors such as automobiles and cement reinforces the recovery story. Car manufacturers posted record sales, yet again, in January, and two-wheeler manufacturers too reported a strong showing. Equally heartening is the news that exports are expanding once again, after contracting for a year.

While the growth may be on a low base, what cannot be ignored is the improvement in the global economy, including the US.

Other bits of positive news coming out include expansion of staff strength by companies in the manufacturing and services sectors, and more-than-modest salary revisions in the new financial year. That should convince policymakers that the slowdown is behind us.

Industry bodies would oppose an across-the-board increase in indirect taxes. Pending the expected transition to a goods and services tax (GST) regime, whose central rate would be benign, there is scope for restoring taxes at different speeds on different sectors. Crude can bear an import duty and fuels normal levels of excise, as can cars. Lowfloor buses can get concessional duties.

The argument for maintaining status quo on indirect taxes has its merits after all, tinkering around with tax rates affects businesses .

But a lower GST rate depends on expanding the tax base and scrapping exemptions. None of which will happen overnight. In the meantime, the Centre should not squander away the opportunity to get the fisc in shape.

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