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Govt may tinker with tax rates to boost Indian economy, says P. Chidambaram

P. Chidambaram says his vote-on-account budget to be presented in the Lok Sabha on February 17.

Finance minister P. Chidambaram on Monday hinted at making some changes in the indirect tax regime, and outlining certain policy priorities to be pursued if the UPA is voted back to power, when he presents the vote on account for 2014-15 in Parliament on February 17.

Tax experts see scope for a cut in excise and service tax rates from the current 12%, given the central GST rate of 10% proposed earlier and the notion that lower taxes could give an impetus to consumption. They also expect a five-year extension of the excise duty exemption given to the industry in states such as Himachal Pradesh and J&K that expires in May 2014.

The dismal industrial production scenario ? output contracted 2.1% in November– and a sluggish economic growth of below 5% may prompt the government to experiment with indirect tax cuts in the hope that resultant higher growth could boost revenues.

Indirect tax collection grew just 6.2% in the April-December period of this fiscal ? the collections stood at about Rs 3,55,003 crore during the first nine months of 2013-14 as against Rs 3,34,309 crore in the year-ago period. The government had projected a 20% growth in indirect taxes this fiscal to Rs 5.65 lakh crore.

Chidambaram said although government cannot propose amendments to the Income Tax Act, Customs Act or the Excise Act, it can certainly make any proposal that is short of amending the law. Changes in indirect tax rates don’t require Parliament’s assent (they only require to be notified and placed before Parliament), while those in direct taxes need it.

An aggressive spending cut is already underway. Plan spending may be cut by close to Rs one lakh crore this fiscal, while about Rs 1.2 lakh crore in food, fuel and fertilizer subsidy payments may be rolled over to FY15 as the government does not want to breach the fiscal deficit target of 4.8% this year. The gap between receipts and spending in the April-December period of 2013 stood at Rs 5.16 lakh crore or 95.2% of the full-year target, compared to 78.8% for the same period last year.

The government has averred that the fiscal deficit target of 4.8% of the GDP for this fiscal would be met, but many, including RBI governor Raghuram Rajan, have expressed concern over the quality of expenditure reductions. It is believed that helped by the expenditure cuts and some last-minute success on the disinvestment front, besides higher income from PSUs in the form of special dividends, could allow the finance minister to show a fiscal deficit of 4.8% or even slightly less than that.

?Whatever changes are required to be made to excise or service tax rates without an amendment to the law are being made and will be made,? the minister said. The minister said he could also outline a vision for the future.

R Murlidharan of PwC said: “Assuming that the benefit of excise duty cuts is fully passed on to the consumer and that the products are price-sensitive, lower duty could benefit tax collections through higher consumption.”

?As per Constitution, the government has power to reduce indirect tax rates, but it might prefer to give selective exemption such as extending by another five years the excise duty exemption given in some hill states. That would help in job creation and tax stability, while putting to good use the infrastructure already created in these states,? said Ashok Dhingra, partner, J Sagar Associates.

Referring to last week’s imposition of a 5% export duty on iron pellets and increase in exise duty on pan masala, gutkha and chewing tobacco, Chidambaram said that such changes in indirect taxes only have to be notified and placed before Parliament.

The minister said the vote-on-account budget to be presented in the Lok Sabha on February 17 will be a short one, on which he would prefer a debate.

“In 2004, the then finance minister Jaswant Singh’s speech was in 12-pages while in 2009, Pranab Mukherjee’s speech was contained in 18-pages. I have these two numbers in front of me as reference,” he said.

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First published on: 03-02-2014 at 19:03 IST
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