P. Chidambaram banks on tax cuts to spur demand & revenue

Written by fe Bureau | Updated: Feb 18 2014, 19:23pm hrs
Despite sharply lower tax receipts, which were partly made up by better-than-expected non-tax receipts, finance minister P Chidambaram on Monday announced a limited fiscal stimulus package for the manufacturing sector in his interim budget for Fy15. The sluggish growth in tax collection reflected in the lowering of the tax-GDP ratio for FY14 from a projected 10.9% to 10.2%.

Chidambaram lowered excise duty on a host of consumer goods, including televisions, refrigerators, air-conditioners, washing machines, personal computers, laptops, printers and water heaters, from 12% to 10% till June 30. Excise duty on plant and machinery and other capital goods, too, have come down from 12% to 10%. For the same period, service tax exemption has been given to warehousing and logistics business in rice and to preservation of stem cells by cord blood banks.

Similarly, excise duty on small cars, motor cycles, scooters and commercial vehicles has been lowered from 12% to 8%, while mid-segment cars got duty relief from 24% to 20%. SUVs got duty relief from 30% to 24%.

The rationalisation of excise duty on mobile phones allows producers who were earlier paying a duty of 6% on phones priced above R2,000 with Cenvat credit to now pay a duty of 1% without Cenvat credit. This could make locally produced phones above R2,000 cheaper.

Chidambaram hopes that the revenue loss from excise and service tax relief given to businesses up to June 30 this year could be made up by greater tax receipts arising from higher consumption. What strengthened the ministers hand in announcing tax breaks is the savings the government could make in Plan and non-Plan spending.

Although Chidambaram could contain revenue deficit at 3.3% in FY14, the effective revenue deficit or the difference between revenue deficit and grants for creation of capital assets has gone up from the budgeted 1.8% this fiscal to 2.2%. He, however, said it would be limited again to 1.8% in FY15. Chidambaram said at a press briefing in the afternoon that the calculation of effective revenue deficit is imperfect due to vague definitions of capital spending and revenue spending.

Tax receipts lagged the projected growth rates. The impact of economic slowdown was pretty much visible in corporate tax receipts that grew just 9.7%, at nearly half the budgeted growth rate. Excise duty collections expanded by 4.38%, about a third of the growth rate originally projected. Personal income tax receipts grew at 17.27%, close to the budgeted levels, thanks to strict enforcement of compliance.

The 10% surcharge introduced in Budget for FY14 for a year on persons with a taxable income of over R1 crore a year has not been lifted in the interim budget as Income-Tax Act amendment was not possible in a vote on account. Finance Bill, 2014, has proposed the same rate of income taxes and surcharge introduced in FY14 for FY15 as well. Thus the surcharges continue to exist for the time-being, said Rajiv Chugh, tax partner, EY.

Chidambaram clarified that the super-rich tax provision ought to be revised in the full Budget. The first instalment of advance tax is payable by June 15, 2014. Before that, there will be a government and a regular Budget. So, if you are paying advance tax, then dont worry, he added.

One only hopes that the regular Budget addresses the problems of the manufacturing sector in a much more comprehensive manner, including review of the excise duty rates, said R Muralidharan, executive director, indirect tax, PwC India.

The decision to cut excise duty on automobiles might lead to a revenue loss of R300-400 crore in the remaining 40 days of this fiscal and around R700-800 crore in the April-May period next fiscal, but much of that loss will be made up in terms of greater revenues even if there is a 5% increase in sales of these vehicles, said Chidambaram.

The excise duty cuts are likely to lead to price reductions ranging from R15,000 in small cars like i10 to R4 lakh in high-end SUVs like Audi. The automobile sector has been witnessing a slowdown in sales. With the passing of benefits of excise reductions to customers, the sector may see some improvement in sales, said Saloni Roy, senior director, Deloitte in India.