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Rise in excise & service tax rate will have an inflationary impact: R V Kanoria
March, 26th 2012

Since the excise and service tax rates were raised in the Union Budget for 2012-13, the industry has been warning of inflationary pressures. Federation of Indian Chambers of Commerce and Industry (Ficci) President R V Kanoria tells Shaikh Zoaib Saleem the objections were in the context of their impact on inflation and monetary tightening, which will affect the growth momentum. He, however, finds no problem in raising tax rates to the pre-crisis levels. Edited excerpts:

The biggest setback to the industry in the Budget was the rise in excise and service tax rates. What is your reaction?
In the current scenario, any increase in these taxes will have an inflationary impact. This would result in further tightening of the monetary policy. Hence, interest rates will not come down. So, what we have been saying is this increase at this point in time, will have an impact on growth and investments.

One should also recognise it is a good move towards harmonising tax rates. (Both excise duty rates and service tax rates were aligned to 12 per cent). If we want to move towards goods and service tax (GST), there is a need of convergence of rates as well as of the law.

But the tax rates were higher before the 2008-09 crisis and were slashed only as a stimulus to the industry. So, is this demand for low rates not unjustified?

Not at all. We also have to see the circumstances in which this is being done. If we see the government spending between 2008 and now, it has increased substantially. Therefore, I think there is a need to curtail expenditure. That part has not been addressed at all. Though, per se there is no problem in increasing the rates to pre-2008 level.

The minimum alternate tax on special economic zones (SEZs) has not been touched at all. Will this have any impact on the present or future investments in SEZs?

The bigger issue is that there was an implied promise that SEZs will not attract minimum alternative tax (MAT). That promise has not been kept. There is no doubt any tax holiday attracts more investments. The important point is when the government has a tax holiday for infrastructure for 10 years, why do they have this MAT on a sector, which has a long-gestation period and is incapable of paying it.

In any case, the rates should have been brought down. You cannot have a tight monetary as well as fiscal policy at the same time. Reducing MAT and introducing investment allowance will have minimal impact on the governments revenue, but a major impact on investment sentiments.

There have been indications that due to certain political constraints, GST will not be coming in during this government's tenure.

The states should understand GST will improve revenue. Politics has to be set aside. GST is a very critical enabler of growth, which is probably going to add one-and-a-half per cent to the gross domestic product.

The finance ministry is confident of achieving the targets of containing fiscal deficit and subsidy outgo. Do you agree with its optimism?

My view is this is going to be a formidable task. The intent is there but there is a gap between intent and reality. Despite raising the Budget assumption of average crude oil prices from $90 to $115, the government has reduced the subsidy. This actually suggests the government would increase the prices of petrol or diesel. But I dont think the subsidy target will be sufficient if the food security comes.

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