Hike excise,service tax,cut subsidy: PM panel

Pointer to budget: Need adjustments in diesel price,urea decontrol,says Rangarajan.

Written by Shruti Srivastava | New Delhi | Published:February 22, 2012 10:04 pm

Three weeks ahead of the union budget for 2012-13,the Prime Minister’s Economic Advisory Council (PMEAC) has suggested that excise and service tax rates be brought to pre-crisis levels. This is in view of the government’s deteriorating fiscal health. The move could help the exchequer collect an additional Rs 35,000 crore next year.

Releasing his council’s review of the economy for 2011-12,C Rangarajan,chairman of the PMEAC said: “In indirect tax area,there is a scope (of raising it to pre-crisis level)… it can be done in a phased manner.”

The EAC also made a strong case for curbing subsidies,a major threat to fiscal consolidation. The subsidy bill in the current fiscal is likely to go up by a massive Rs 1 lakh crore on account of higher outlays towards fertiliser,food and oil.

“It will be necessary during 2012-13 to make some adjustments on diesel prices in a phased manner. We have not done this for quite some time and international crude prices have gone up… It is not possible for us to subsidise this sector beyond a level,” Rangarajan said.

“The price of urea too needs to be decontrolled or at least,raised substantially,” the report said.

Rangarajan’s colleague at the council,M Govinda Rao,who is also the director of leading public policy think-tank National Institute of Public Finance and Policy (NIPFP),said excise and service tax rates need to be raised to pre-crisis levels of 12 per cent.

“You need to have a detailed strategy on both revenue and expenditure side. Immediate thing one could think of is going back to pre-crisis level of excise and service tax,which can be rationalised once you bring GST (Goods and Services Tax),” Rao said.

Before the global financial meltdown of 2008,the rates of excise duty and service tax were 14 per cent and 12 per cent respectively. India slashed these rates to 10 per cent as a part of its economic stimulus package.

According to government data,the tax-to-GDP ratio has dropped from 17.7 per cent (in both states and the centre) in 2007-08 to 15.4 per cent in 2010-11,and is likely to remain at the same level in the current fiscal year. Rao said increasing the ratio to at least the 2007-08 level is important to achieve fiscal consolidation.

“The process should be initiated in the forthcoming budget of 2012-13,” he said.

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