Excise cuts may be selectively withdrawn to boost revenues

The Union finance ministry is considering an increase in the central excise duty for some of the products that had benefited from the two rounds of reductions announced by the government as part of its fiscal stimulus measures last year.

In December 2008, the government had reduced the general rate of central excise duty for all products, except petroleum goods, from 14 to 10 per cent. In February, Finance Minister Pranab Mukherjee cut the general rate of central excise duty further to 8 per cent and the service tax rate from 12 to 10 per cent. The annual impact of the duty cuts on the government’s tax revenues was estimated at over Rs 75,000 crore.

With the government’s revenues in the first two months of this year showing no signs of buoyancy (direct tax collections grew only 5.5 per cent), the finance ministry is now identifying products belonging to those sectors that are doing relatively better than those severely affected by the economic downturn. The objective is to shore up revenues for the current fiscal year by selectively raising the central excise duty on products doing well, instead of an across-the-board increase in the duty.

The ministry is studying the latest trends in the industrial growth figures for different product categories to formulate a list of such goods for which general excise rate can be increased to either 10 per cent, the level that prevailed before the Interim Budget announcement, or 14 per cent, the level before December 2008.

Sectors that are likely to be exempted from any increase in the excise duty under this proposal include commercial vehicles and textiles, said government officials.

On the other hand, the latest infrastructure and industrial output data for April 2009 indicate a pick-up in demand for certain sectors like cement. Eleven out of 17 industry groups, accounting for nearly 60 per cent weight in Index of Industrial Production (IIP) have shown growth on an annual basis in April 2009. Many of the items in these sectors could be considered for an excise duty increase.

The ministry’s proposal stems from the realisation that the Interim Budget had accounted for the revenue loss from the duty cuts only for the first four months of the current fiscal. Thus, if the general rate of excise duty is allowed to remain at the level outlined in the Interim Budget, the government’s fiscal deficit would go up by about a percentage point of GDP in the normal course.

A selective increase in excise duty is also under consideration because the finance ministry is already under pressure to spend more on various social sector schemes. At the same time, it is trying hard to contain the increase in the fiscal deficit for the current financial year, over and above the target of 5.5 per cent of GDP already projected in the Interim Budget.

At the level of deficit projected in the Interim Budget, the Union government will borrow around Rs 3,60,000 crore from the market in the current financial year. A higher fiscal deficit level is likely to crowd out private sector investments, especially at a time when firms resume their investment plans. The fiscal deficit in the year ended March 2009 exceeded the revised estimates by 0.2 percentage points to reach 6.2 per cent of GDP.

The need to increase the general rate of excise duty and mobilise more revenue has also arisen because the ministry realises that the scope for mobilising substantial resources through disinvestment of government equity in public sector undertakings (PSUs) is limited because of the political opposition to the idea from two of the government’s political allies.

Even if disinvestment of a few PSUs is cleared, the earlier estimates of mobilising Rs 25,000 crore from equity sales during the year now appear unrealistic, said government officials. Similarly, the ministry is now of the view that it cannot achieve the earlier target of mobilising Rs 40,000 crore from the auction of 3-G licences for the telecommunications sector. A more realistic estimate of collections from this route has been put at Rs 12,000 crore for the year.

The ministry is also conscious of the fresh challenges a selective increase in excise duty would pose for the government’s plan to introduce a goods and services tax (GST) from April 2010.

But its view is also influenced by the need to raise more resources during the current financial year and the realisation that the plan for the GST regime may need some revision in view of the political opposition to the idea and the unpreparedness of many states to opt for a GST system from the next financial year.