Addressing expectations on indirect taxes crucial

A key expectation from Budget 2009 on indirect taxes is with regard to rationalisation of duty rates.

A key expectation from Budget 2009 on indirect taxes is with regard to rationalisation of duty rates. The issue can be framed from the government standpoint as one requiring a trade-off between the imperative to address the very large fiscal deficit,with the attendant challenges on revenue mobilisation,and the continued sluggishness of the Indian economy and for the need to consequently address the economic slow down from a fiscal standpoint. However,the issue is also to do with setting the direction in terms of signalling of the likely rates of indirect taxes under the impending Goods and Service Tax (GST).

In relation to customs duties,the poor pace of collections so far and the challenge of the fiscal deficit could mean that the government would possibly not reduce the median rate of customs duty from the present rate of 10 per cent to ASEAN levels as per its stated intent. Indeed,in addition the government could also minimise product based and end use based exemptions. Further,the government might reintroduce the basic customs duty of 5 per cent on crude oil imports. The customs duty on crude oil imports was withdrawn at a time when crude oil prices were at an all time high. Given the significant decrease in crude oil prices since then,the reinstatement of the 5 per cent duty on crude is a distinct possibility. This,of course,leads to the discussion around freeing up retail prices of POL such as petrol and diesel in order to protect the refineries from incurring losses. The government could seriously consider this policy.

With regard to excise duties,the need to continue the stimulus package for manufacturing is a continuing one,given the macro economic indicators. Talk of economic recovery and green shoots could be premature. Therefore,in the aforesaid stated trade-off,the government could leave the excise duty rate of 8 per cent untouched. Also,from a GST standpoint,it is now the common understanding that the aggregate rate of the dual GST on goods comprising the federal GST as well as the state GST would be in the range of 14 per cent to 16 per cent. If this understanding is correct,it would stand to logic that the federal GST rate on goods should be approximately 8 per cent. For this reason as well,it would be logical for the government not to consider an increase in the excise duty rate from the present 8 per cent. There is,of course,very little possibility of any further reduction in the excise duty rate.

Finally,with regard to the service tax,revenue buoyancy in the midst of the economic slowdown has been most noticeable in the area of service tax. It is a moot point therefore as to whether the economic slowdown has impacted the service sector as much as the manufacturing sector. If not,the government could consider an increase in the service tax rate as a measured response to the fiscal deficit problem. Here again,from a GST standpoint,it is logical for the government to consider an increase in the service tax rate. Since,as stated above,the aggregate rate of the dual GST on services and goods is expected to be in the range of 14 per cent to 16 per cent,given that there is presently no State service tax at all,the Central government could increase the service tax rate from the present 10 per cent to the erstwhile 12 per cent,as a signalling measure on the ultimate aggregate incidence of the service tax rate under the GST.