Stimulus rollback: Two percentage point excise hike in Budget

A first step towards withdrawing the post-crisis fiscal stimulus may be taken in the Union Budget for 2010-11, with an increase in the Cenvat rate for excise duty by 2 percentage points.

Encouraged by signs of growth revival and desperate to reduce the fiscal deficit Union finance minister Pranab Mukherjee is expected to take this step when he presents his Budget to Parliament on February 26.

The government had reduced the Cenvat rate for excise duty from 14 to 8 per cent -- in two rounds, by four percentage points in December 2008 and two percentage points in February 2009.

The proposal for a partial rollback of these tax cuts has been revived following the advance estimates for gross domestic product pegging the growth rate for 2009-10 at 7.2 per cent, up from 6.7 per cent in 2008-09 (quick estimates).

What has also emboldened the government to consider a rollback of the excise duty cut is the healthy growth in sales of consumer durables and automobiles in recent months.

In January, for instance, the automobile industry's sales went up by 32 per cent over the same month in 2009, while the consumer durables industry is expecting to grow 15 per cent during 2009-10.

The government has now veered round to the view that a two percentage point increase in excise duty for such industries would be moderate enough to be absorbed by them without unduly affecting their medium-term growth prospects. 

Proponents of the partial rollback have argued that such a phase-out would also help the finance ministry effect a calibrated integration of excise duty with the services tax by the end of the next financial year, when the proposal for a goods and services tax is likely to be implemented. 

"Besides the concerns on the fiscal side, the government is thinking of increasing the excise duty in order to bring it in line with the goods and service tax.

There is some play to go back to the earlier rates but it should be done in phases," said Rohan Shah, managing partner, Economic Laws Practice.

The move will also help the government shore up its revenues, which have taken a substantial hit in the wake of the cut in excise duty last year.

According to the latest figures released by the government, indirect tax receipts fell 21 per cent to Rs 1,46,000 crore (Rs 1,460 billion) in the first eight months of the year (April-November), which is only 46 per cent of the Budget estimate of Rs 2,69,477 crore (Rs 2,694.77 billion) for 2009-10.

The government is, therefore, evaluating whether it should increase excise duty for specific sectors which are showing recovery or marginally raise the rate for all sectors to avoid disparity.

One of the major concerns against the rolling back the excise duty cut is the issue of rising inflation. "Inflation could, however, be stoked if the government's fiscal deficit is not controlled," said an expert.

Shah believes that there were some sectors that still needed the stimulus and, therefore, the government may increase tax in phases or for some sectors.

"The government will need to see that the change is not sudden, some sectors that not yet out of the slowdown continue to get stimulus and also there is some kind of harmonious move towards GST," said Shah.

More spending and lower revenues were earlier expected to widen the fiscal deficit to 6.8 per cent of GDP in 2009-10, compared with 6 per cent in 2008-09 when the Fiscal Responsibility and Budget Management Act required the government to bring down the fiscal deficit to 2.5 per cent.

However, a change in the base year for calculating GDP and an increase in the advance estimates for GDP in the current financial year have softened the blow on the fiscal deficit front, with the latest estimates pegging it around 6.1 per cent.

Mukherjee had indicated to Parliament while presenting his last Budget in July 2009 that he would like the fiscal deficit for 2010-11 to be around 5.5 per cent of GDP.

The proposal to raise excise duty by two percentage points is being endorsed also to help the finance ministry raise more revenue and stick to the projected fiscal deficit targegt.

With the mounting pressure on launching crucial social sector schemes that now require more funds, the finance ministry now sees the need to shore up revenues.

The rollback of fiscal stimulus measures is being justified in North Block on these grounds as well.

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