India´s Union Budget: balancing act

February 18, 2013

The Budget’s indirect tax changes will be designed to boost revenue and promote growth

By: Harishanker Subramaniam, Tax Partner & National Leader – Indirect Tax Services, Ernst & Young, India

Finance Minister Palaniappan Chidambaram and his team will have to strike a delicate balance in this year’s Budget. While there is a need to address concerns around our alarming fiscal and current account deficits, announcing measures that can spur overall economic growth is paramount. Expectations will have to bear this in mind, as there will be a move to shore up revenues across indirect taxes.

Debate around rate increases, especially in excise duty, to pre-2008 days of 14% has commenced, with an equal rate increase in service tax to 14%. Though the temptation to increase rates may sound an easy solution, with current inflation trends and slow economic growth, my sense is this is something that could be best avoided at this stage.

Widening the tax base

However, what should be expected is widening of base by pruning exemptions, especially in excise duty, and to some extent in service tax, which recently underwent widening through the negative list concept.

In excise duty, one area they might examine and tweak are goods, which today are either exempt or at a concessional rate, to increase base as a precursor for GST. In the last two years, the Government has brought several goods that were exempt under excise duty at a very low duty rate of 1%, which was later increased to 2%. This base could be further expanded with a rate increase to 3% this year.

Another contentious area is the threshold level for the levy of excise duty, which today is at INR15m to keep small and medium enterprises outside the net. In connection with the GST rollout, the Central Government has expressed a desire to align this threshold with service tax and state VAT levels. So, Government can consider a gradual reduction in the threshold to increase the base as a preparation for GST.

In respect of service tax, there appears to be less potential to expand the negative list; a few exemptions maybe revisited, though a rate should be avoided.

Custom duty: continuity and change

As regards custom duty, the peak basic rate of 10% will be left untouched, though duty changes on specific products, inverted duty structure etc. will be addressed. Gold importation, second in value only to oil imports, has been one of the reasons for the widening of the current account deficit and has already seen a custom duty increase of 2%.

The restoration of custom duty on crude oil is another proposal being examined. Here, again, exemptions will be closely considered to increase rates and base. Increase in base both through pruning of exemptions and increasing rates selectively would be a better option to shore up revenues and as a precursor for the GST rollout.

GST: a way forward

An increase in the rates of both excise duty and service tax at this stage may be counterproductive to growth. Another hope in this Budget is the GST road map, especially with consensus having evolved between center (the federal government) and state (twenty eight states) on various contentious issues, namely central sales tax compensation, GST design and floor rates.

The consensus reached is historic and paves the way forward for GST. A statement by the Finance Minister on GST and the implementation road map will be most welcome.

The presentation of the Constitution Amendment Bill during the Budget Session of Parliament will be another welcome step in the right direction. The early introduction of GST can be one of the most important milestones for spurring growth and addressing revenue concerns.

The hope is the current Budget, will be a responsible one, which is growth oriented and addresses the concerns around deficits.

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