Stimulus 3.0

Pranab Mukherjee may have left consumers disappointed with his interim Budget last week, but he made up for it in style on Tuesday, announcing cuts of 2% in service tax and excise duties on most goods that should help ease the household budget. In all, the sops announced during the standin finance minister’s reply to the discussion on the interim budget are estimated to cost the government over Rs 29,000 crore. While the government was at pains to portray the exercise as a third stimulus package for the economy, pressure on Mukherjee from his own partymen and allies to deliver some sops before the election is likely to have played at least as large a role in inducing him to loosen the purse strings. Announcing that the 4% cut in central excise duties made in December 2008 would continue for the next fiscal, the FM said excise rates at 10% would be cut by a further 2% to bring them down to 8%. Other excise slabs like 4% or 8% or items taxed at more than 10% would be unaffected by the cut. Experts said while only one slab had been slashed, it accounted for almost 96% of all items, which makes the cut almost across-the-board. There are a few exceptions to the excise cuts, broadly items that are considered worthy of having lower than normal tax rates, like lifesaving medicines, or those on which the tax policy deliberately imposes higher levies, like cigarettes or luxury goods. There are also cars, which are taxed at 8% if they are small and 20% if they are big. But most other goods should get cheaper if the producers pass on the benefit of the lower levies to the consumer. A more definite saving will come through the reduction in the service tax rate from 12% to 10%. Since this tax is levied and separately mentioned on bills for various services like credit cards, telephones, travel agents and insurance premia, the cut is bound to be passed on. Mukherjee also announced that the customs duty exemption given for the import of naphtha for power plants would continue in the next fiscal. The chairman of the Central Board for Excise and Customs (CBEC) later revealed that the various sops announced on Tuesday would involve a loss of potential revenue of Rs 29,100 crore—Rs 14,000 cr from service tax, Rs 8,500 cr from excise and Rs 6,600 cr from customs. Mukherjee said he was using the flexibility available within constitutional constraints to provide a further stimulus. He said this was necessary because the full impact of the recession in Europe and Asia, with which India had strong export ties, was still to be felt.