Keen to give a stimulus to India Inc as it tries to revive the investment cycle, the government is considering a proposal to continue with the current rates of service tax and excise duty of 12 per cent.
“There is a clear need to give some kind of boost, even if it is in terms of improving sentiments, in order to revive industrial activity. Not burdening them with additional or higher taxes could be one solution,” said a person close to the development, adding that a final decision would be taken close to the Budget 2013-14.
Industrial production dipped by 0.1 per cent in November with poor performance by manufacturing, metal and capital goods sector and once again raised hopes for an interest rate cut by the Reserve Bank of India.
The Indian economy is expected to clock a mere six per cent growth this fiscal and the government has been striving to revive the manufacturing sector, which is a key contributor to growth.
The issue was also raised by industry chambers last week at a pre-Budget meeting with finance minister P Chidambaram, where they suggested that indirect tax rates should not be tinkered with as it would impact manufacturing.
The finance ministry was understood to be considering hiking rates of service tax and excise duty by 2 per cent to 14 per cent, to earn additional revenue to plug the fiscal deficit.
But this would mean bringing excise duty rates back to the pre-crisis level of 14 per cent, while the service tax rate would be pushed to an all-time high as well. Additionally, it would make goods and services more expensive and could dampen consumer demand to some extent.
“If the overall objective is to improve revenues, then leaving rates unchanged could also work as it could help companies and in turn improve the tax collection,” the person argued.
The move, if it goes through, would also be in sync with the overall structure of the proposed goods and services tax (GST).
M Govinda Rao, director, NIPFP had also argued against such a move, pointing out that it could necessitate a sudden cut in excise and service tax rates when GST would be introduced. Instead he called for rationalisation of excise duty through measures such as lowering the threshold for the levy to Rs 1 crore and hiking the tax rate to 12 per cent across board .