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

Feb 18 2014, 13:53 IST
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SummarySluggish growth in tax collection reflected in lowering of the tax-GDP ratio for FY14 to 10.2%

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 minister’s 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

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