Service tax rate may be raised to 12% in Budget

With the government's fiscal deficit ballooning, there are chances of service tax rate being restored to 12 per cent in the upcoming Budget, official sources said.

The government had last year cut down service tax rate from 12 to 10 per cent as part fiscal stimulus measures to help the economy tide over the then slowdown.

Official sources said service tax rates could be raised to the original level of 12 per cent as the booming sector is something the revenue department banks upon but the 2 per cent duty cut has brought a dip in the service tax revenues.

Together with cut in service tax and excise duty reductions, Plan expenditure was also stepped up, leading to widening of fiscal deficit as the total stimulus amounted to Rs 1,86,000 crore.

The fiscal deficit, which was projected to be 2.5 per cent of GDP at the beginning of 2008-09, crossed 6 per cent by the end of the fiscal. It is projected to further rise to 6.8 per cent this fiscal.

"With rising fiscal deficit to manage and the economy showing some signs of recovery, the government may withdraw the fiscal stimulus, though not completely. Service tax ambit could be widened and the rates may see upswing to the pre-stimulus period," said Ernst and Young Partner and Indirect Tax Leader Vivek Mishra.

During April-December this fiscal, service tax collections were down 6 per cent with the government collecting a little over Rs 36,000 crore, while excise duty collections were down by 13 per cent at close to Rs 70,000 crore.

The huge shortfall calls for reinstatement of indirect tax rates to their original levels, but excise duty might not be touched this time since the industry is yet to fully recover, experts feel.

The government has fixed a target of 2.7 lakh crore from indirect tax collections for the current fiscal which seems difficult to meet and the government also needs to shore up revenues as social sector spending is on its agenda at present.

Against this target, indirect tax collections shrank by over 21 per cent to Rs 1.26 lakh crore in the first seven months of this fiscal, against Rs 1.61 lakh crore a year ago.

In its recent monetary review, RBI also advised the Finance Ministry to partially roll back the stimulus measures.

"For short-term economic management and medium-term fiscal sustainability..., it is imperative, that the Government returns to a path of fiscal consolidation. The consolidation can begin with a phased roll back of the transitory components," RBI Governor D Subbarao said while unveiling the third quarterly review of the monetary policy.

RBI's advise came at a time when Finance Minister Pranab Mukherjee is busy preparing the Budget for 2010-11, to be unveiled on February 26 in the Lok Sabha.