A brief analysis of the latest tax sops from the UPA government - Atasi Das

Introduction
On 24th February 2009, India’s acting finance minister Mr. Pranab Mukherjee announced a fresh round of fiscal measures for the economy, barely a week after the launch of the Interim Budget 2009-10. Rural India was the prime focus of the Interim budget, but there had been little room for cheer for the industry or urban India in general. So in view of the upcoming Lok Sabha elections, the Congress led UPA government has extended the carrot to the beleaguered industry (affected by the global recession) and urban India, including the unorganized sector therein.

The rate cuts: an overview
The centre has announced rate cuts for both excise duties as well as service taxes. Broadly speaking, currently there existed three central excise duty slabs on manufacture; 10%, 8% and 4%, out of which the 10% rate has been slashed to 8%.

Goods attracting excise duty in the range 4-8% will face no changes.

Excise duty on commodities like two wheelers, consumer durables and light commercial vehicles are scheduled to climb down to 8%.

Small cars which already attract excise duty of 8% will not earn any further tax benefits. Medicine prices will remain unchanged.

Bulk cement will now attract an 8% central excise duty (a fall from the erstwhile 10 %) or Rs 230 a tonne from Rs 290 a tonne, whichever is higher.

Countervailing duty on imports has been brought down to 8% from 10%. This has in turn scaled down the effective customs duty.

Service taxes have also been brought down to 10% from the erstwhile 12% rate. This can lead to a marginal fall in telecom call rates. Also, as per the latest announcement, companies having production units at SEZ areas will be entitled to designated tariff benefits irrespective of whether they have production units at domestic tariff areas or not.

Manufacturers of consumer durables, steel and cement have agreed in principle to pass on the benefits of the tax reduction to consumers in the form of falling prices. Some effects of the tax rate deductions are listed as follows:

• Fall in cost for manufacturers
• Immediate fall in price of steel, cement and consumer durables
• Possible availability of cheaper cars in specific segments, if the manufacturers decide to  pass on the cost reductions to the consumers

Prime sectors of the economy benefitting from the said changes are listed below:

• Automobile
• FMCG
• Infrastructure
• Retail
• IT & ITES
• Real estate
• Fertilizers
• Tobacco
• Chemicals
• Rubber and plastic
• Iron and Steel
• Utility bills
• Steel and Cement

This latest fiscal stimulus package will lead to a revenue loss of around Rs 30,000 crore for the government and this is in addition to the December 2008 announced central VAT reduction by 4% (which has received extension beyond 31st March 2009). India’s fiscal deficit is estimated at an astronomical sum of Rs 362,000 crore. This has been a point of concern with global credit rating agencies. In fact, Mr Pranab Mukherjee’s announcement of the fiscal stimulus package coincided with global credit rating agency, Standard & Poor’s downsizing of India’s long-term sovereign credit rating outlook to ‘negative’ from ‘stable’. [Sovereign credit ratings are credit rating agency assigned risk assessments to a government’s financial obligations. Credit ratings are used by governments in connection with raising capital from international markets].

Industry response to tax cuts
Industry mandarins like Mr. Sajjan Jindal, president of Associated Chambers of Commerce and Industry and Mr. Harsh Pati Singhania, president of FICCI have hailed the cuts in excise duty and service taxes. However some like Mr. Chandrajit Banerjee, Director General of the Confederation of Indian Industry have voted in favour of greater investment generating monetary intervention on part of the government.
The government’s stand

Mr Pranab Mukherjee, (after the announcement of the latest tax relief package) has urged the banking sector, including the RBI, to go in for curtailment of interest rates so as to increase liquidity in the economy (availability of funds). He is of the opinion that a properly structured and timed monetary policy would be able to do away with the negative effects of the government’s heightened public spending. Once the economy is back on track, the problem of fiscal deficit will be dealt with on an emergency basis, promised the minister. In the backdrop of the global meltdown, the UPA government intends to boost domestic demand through the new fiscal stimulus package. One primary aim of the announced tax sops has been the protection of jobs via increased consumption (and resultant production). It is hoped that the industries in a bid to survive would pass on the tax benefits to the consumers. The export sector, with its high employment generating potential, is also expected to garner substantial profits from these tax concessions.

A high level of fiscal deficit brings about a high interest payment burden for the country. In fiscal year 2007-08, 31% of the government’s net revenues were spent on interest payments. This figure is likely to climb up to 37% in the current fiscal. Noted economist C Rangarajan has voiced concern over India’s widening fiscal deficit. According to him, though the low levels of demand and global slump justify fiscal deficit as a government policy measure (aimed at hiking the economy’s aggregate demand and consumption), the current level of fiscal deficit is much higher than what should have been a sustainable figure.

Conclusion
For an emerging economy like India, in the backdrop of the global slowdown, fine tuning of fiscal and monetary policies and dedicated political motive to put the rails back on the track of growth and development are urgent needs of the hour.