Budget 2012: Tax hikes are practically inevitable

by FP Editors  Mar 6, 2012 09:07 IST

#Budget 2012   #Goods and Services Tax   #Tax   #Tax cut   #Taxation  

Given the ballooning fiscal deficit, it looks almost inevitable that taxes will be raised to boost government revenues in the new financial year. Expect some announcements in that regard in the Union Budget scheduled to be presented on 16 March.

Taxes on several goods look likely to be raised, according to various brokerage reports. The most obvious bet seems to be excise duties. That fact was confirmed by a government advisor recently as well. “One of the possibilities is full rollback of the stimulus — that is almost 1pc of the GDP,” Pronab Sen, principal adviser to India’s Planning Commission, said in this Reuters report.

Taxes on several goods look likely to be raised, according to various brokerage reports. The most obvious bet seems to be excise duties. James Morris/Flickr

India implemented a stimulus package of about Rs 1.86  lakh crore following the 2008 global financial crisis, mainly through tax cuts, which have only been partly rolled back, the report said. “There is space. The space is basically raising excise duties,” Sen said.

However, that runs contrary to what businesses are clamouring for: they want tax cuts – and interest rate cuts – to boost growth in a slumping economic environment.

But few economists are hopeful of large-scale tax cuts. Given the widening gap between between government revenues and government expenditure, which is expected to hit 5.6 percent of GDP in the financial year ending March 2012, there’s little room for the government to oblige businesses with tax/duty cuts.

Among the worst-hit could be the automobile sector, which is already wheezing under sluggish sales. High petrol prices and high borrowing costs kept buyers away from the showrooms in 2011. Now, a proposed tax on diesel cars could choke in growth one of the few segments that had been growing in the sector.

It's also highly likely that a 'negative' service tax list, specifically mentioning only those services that are not subject to tax, will be introduced in the Budget. By default, that will make every other service subject to tax, which will raise the prices of these services as well.

Not surprisingly, Credit Suisse, in a recent report, warned that the Budget might not contain many "market-friendly measures”. Instead, there might be a slew of tightening measures.

Sharekhan, another local brokerage, also said it did not expect any big-bang measures to be announced, especially since the implementation of the Direct Tax Code and the Goods and Services Tax are likely to be postponed.

However, it does expect the government to focus on raising revenues from non-tax avenues as well, such as divestments and spectrum auctions. “The government is expected to announce an aggressive disinvestment target as a few large public-sector undertakings are likely to hit the market in the financial year ending March 2012. The budget may throw some light on the list of the companies in which the government’s stake is likely to be divested," it said in a note.

Tax hikes, however, carry the risk of slowing economic growth even further. At the same time, containing government expenditure will be a daunting task for the Finance Minister Pranab Mukherjee because of high crude oil prices, subsidies and increased allocations towards social-sector schemes.