Central excise duty rate up to 12%; 17 services on negative list; STT cut 20%, QFIs allowed access to corporate bond market
Finance Minister Pranab Mukherjee on Friday unveiled a range of new taxation measures to mop up net additional revenue of Rs 41,440 crore, the highest by him in any of his Budgets since 2009.
In his Budget for 2012-13, presented to Parliament amid hope of reforms after a year of policy stasis, Mukherjee increased the central excise duty rate by two percentage points to 12 per cent to raise an estimated Rs 16,910 crore from manufacturing firms. He did not spare even the high-profile automobile industry by raising excise duty on large cars.
Simultaneously, he raised the service tax rate from 10 to 12 per cent and widened its coverage to include all services, except a small negative list and an exempted category. His service tax measures are expected to fetch him additional tax revenue of Rs 18,660 crore. And later reacting to the Budget proposals, Prime Minister Manmohan Singh said the task ahead was to put forward an effective programme for adjusting petroleum product prices.
However, in spite of projecting tax revenue growth of 20 per cent and a non-tax revenue rise of 32 per cent, Mukherjee managed to project only a modest fiscal deficit reduction to 5.1 per cent of gross domestic product or GDP in 2012-13. The government's fiscal deficit for 2011-12 is now estimated at 5.9 per cent of GDP, representing a sharp slippage from the earlier estimate of 4.6 per cent.
By way of relief, Mukherjee chose to raise the exemption limit for individual taxpayers from Rs 1.8 lakh of annual income to Rs 2 lakh, in addition to raising the upper limit of the 20 per cent tax slab from Rs 8 lakh to Rs 10 lakh of annual income and allowing deduction of annual bank interest earnings up to Rs 10,000. The total annual revenue loss on account of the tax concessions is estimated at Rs 4,500 crore. He also raised the duty-free baggage allowance by 40 per cent to Rs 35,000 for all Indians returning from an overseas trip.
The stock market was not impressed by the Budget's taxation proposals and fiscal consolidation efforts, even though the finance minister reduced the securities transaction tax by 20 per cent, allowed qualified foreign investors to access the Indian corporate bond market, simplified the process of initial public offers and permitted two-way fungibility in Indian depository receipts to encourage greater foreign participation in the Indian capital market.
The Bombay Stock Exchange benchmark index, Sensex, lost 209 points to end the day at 17,466. Its response was perhaps influenced by a few less explicit taxation proposals in the Finance Bill such as the one seeking to give retrospective amendment to taxation of overseas transactions relating to underlying assets situated in the country (like the Vodafone purchase of Hutch shares that once controlled its telecom business in India and in which the Supreme Court has already given its ruling in favour of the company).
Mukherjee's fiscal consolidation effort appeared modest not just because he hoped to reduce the fiscal deficit merely by Rs 8,390 crore, but also because even this reduction was dependent on the government's ability to raise resources or contain expenditure under several heads. One, he hoped to raise Rs 30,000 crore from disinvestment of its shares in public sector undertakings, though he managed to raise only Rs 13,145 crore this year through this route against a Budget target of Rs 40,000 crore.
Two, he provided for a subsidy allocation for petroleum products at Rs 43,580 crore next year, compared to Rs 68,481 crore this year, and the lower outlay will be inadequate without a steep increase in retail prices of diesel, petrol and liquefied petroleum gas. Three, the finance minister expected to sell telecom spectrum and licences to fetch Rs 58,217 crore next year.
Given the government's poor performance in all these areas in 2011-12 and the political sensitivity associated with each of the initiatives, Mukherjee's fiscal consolidation task may prove to be difficult. On the subsidies front, though, he did announce a grand scheme to use the model proposed by Unique Identification Authority Chairman Nandan Nilekani for direct transfer of fertiliser subsidy in the entire country during 2012. This will effectively reduce the government's subsidy bill.
Mukherjee showed his concern over a deteriorating current account balance and doubled the duty on gold imports to 4 per cent (since gold imports had spurted this year, widening India's trade deficit). At the same time, he allowed several industries to raise external commercial borrowing to meet their funding requirements. He also promised a new white paper on black money and a host of new financial sector laws and other legislative measures for public procurement, narcotics and benami transactions.
On the expenditure side, the finance minister was a little more realistic than in his Budget for 2011-12. Instead of a reduction of about a per cent for non-Plan expenditure for the current year, Mukherjee has now proposed a 9 per cent increase, though much of the increase is on account of a higher defence outlay and one-off items like India's capital contribution to the International Monetary Fund. Indeed subsidies for next year are slated to fall by 12 per cent.
Similarly, instead of a 12 per cent increase for Plan expenditure originally estimated for 2011-12, he has now projected a 22 per cent growth for Plan expenditure next year. It is this growth in expenditure that has contributed to a modest fiscal correction in spite of a 20 per cent rise in tax revenues and 32 per cent rise in non-tax revenues