Yr-end rollback of excise duty cuts likely

NEW DELHI: The finance ministry will explore a partial year-end rollback of the excise duty cuts doled out earlier in a bid to boost collections from this tax, which have been sharply lower in the first six months of the current fiscal, a senior official in the revenue department told ET.

The rate increase looks feasible because of the large unused cenvat credit available with industry. The manufacturing industry can offset the higher excise duty against the available cenvat credit, ensuring that greater excise levy does not cause prices to increase and thereby affect the economic recovery underway.

The government had halved the cenvat rate from 16% to 8% in stages beginning budget 2008-09 as part of the measures to stimulate demand after the global financial crisis caused hiccups in the Indian economy. Cenvat rate is the median rate of excise duty, levied on nearly 90% of manufactured goods.

A final decision would be taken at the highest political level after a review of various economic indicators such as third quarter advance tax collections, GDP numbers and industrial production data.

Prime Minister Manmohan Singh���s Economic Advisory Council said last week that if the economy grows by 6.5% or more this fiscal, then the government could begin withdrawing sector specific incentives from the next fiscal onwards. "If economy grows by 6.5% or more, then sector specific support may not be necessary. What we have to do is to stimulate the economy in general," said C Rangarajan who chairs the panel.

The industry has raised the issue of cenvat credit utilization with the government recently. It has suggested a cash refund of the unused credit, something that the government is unlikely to accept given the funds crunch it faces.
The accumulation of cenvat credit has happened after the rate was halved from 16% to 8%, as industry was unable to set off the higher duty paid on inventory of inputs purchased at high rates because the excise liability on the final product had dropped sharply after the rate cut.

The partial rollback by 2-4 percentage points could yield about Rs 6,000 crore to Rs 10,000 crore to the government. The higher rate would also facilitate the transition to the goods and services tax (GST) (expected to be rolled out later from April 2001), the official said.

With revival signals getting stronger by the day, the government is coming under pressure to return to fiscal consolidation. Excise duty collections in the April-September period declined by 21% from the corresponding period last year to Rs 43,230 crore.

A high fiscal deficit - a measure of excess government expenditure over revenues,that has to be met through borrowing can cause interest rates to harden when the economic recovery gathers pace and demand for funds increases. The government has budgeted a fiscal deficit of 6.8% for the current fiscal.

The central bank has in the monetary policy review unveiled on Tuesday also alluded to a firmer industrial recovery. The monetary policy review said: "The leading indicators of industrial production, both quantitative and qualitative, also point to revival of industrial activity in the months ahead."

Some tightening on the expenditure front has already been initiated by the finance ministry, which unveiled the controversial austerity measures for government departments and ministries.

Even the budget circular for 2010-11 has asked ministries and department to trim wasteful expenditure in their estimates for next year. Finance minister Pranab Mukherjee had earlier told ET that he would review the tax concessions during the formulation of the budget.