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Excise duties may go up as economy finds its feet
June, 18th 2009

The government may only spare select sectors from a proposed increase in excise duty rates in the upcoming Budget, as officials consider plans for a wholesale rollback of recent duty cuts, in a bid to return to fiscal prudence amid slack revenue collections.

The Cenvat rate, which covers almost 96% of the goods that attract excise duty, was cut to 10% last December and further to 8% in February under a series of fiscal stimulus measures, launched by the government to shield the economy from the slowdown.

Government officials now say a lot of these cuts could be reversed in the upcoming Budget on July 6. They said the current thinking was to go in for a lower rollback, in case of sectors where recovery was not strong, and increase the rate by as much as four percentage points in those sectors expected to turn buoyant soon. Steel and cement could see the excise duty go up to 12%.

But sectors still not out of the woods, notably some very small-scale industries and automobile, may be spared an increase in these levies at this stage, said one government functionary, requesting not to be identified because of the sensitivities surrounding the Budget-making process.

Officials said the finance ministry, which is debating a number of revenue-raising proposals, could also look to roll back the service tax rate to 12% from 10% now, in view of a sharp worsening in the governments revenue situation, because of the combined effect of the duty cuts and lower collections in a slowing economy.

The slew of indirect tax incentives in the various stimulus packages has cost the exchequer around Rs 30,000 crore so far. Excise duties alone account for around 18% of total government revenue collections. The government has set a target of Rs 1.11 lakh crore from excise duties for the year to March 2010. For the preceding two years, excise collections totalled Rs 1.22 lakh crore and Rs 1.07 lakh crore.

One official said although a final decision on any duty increase would need to be cleared with the Prime Ministers Office, the finance ministry was of the view that excise duty has been cut too rapidly in the past two years the Cenvat rate had been cut to 14% in last years Budget and a rollback had to start now.

Or else, the pain would be very sharp when the goods & services tax (GST) regime, which could take levies to as high as 16% in one stroke, kicks in next year.

Officials said there was also an urgent need to signal a return to a regime of fiscal prudence, with several economic indices clearly showing the slowdown was now past its worst. Recent data on industrial output indicates a recovery and a number of issues like liquidity have been resolved to a large extent, they said. Key sectors such as exports are also expected to recover by the end of this year.

Fiscal discipline had to be abandoned through the second half of the last financial year, and the government sought to boost spending to maintain the growth momentum in the economy. The combined fiscal deficit of the Centre and states is estimated to have run into double-digits for 2008-09.

Finance Minister Pranab Mukherjee, in his interim Budget speech last February, had said the government would seek to contain fiscal deficit to 5.5% of GDP during 2009-10. New Fiscal Responsibility and Budget

management (FRBM) targets may be set only after the economy picks up, leaving the government enough room to work on fiscal prudence, say officials. For the time being, FRBM would continue to be on hold, and the primary focus will be on the revival of the economy and inclusive growth.

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