Belated stimulus...Govt unveils tax cuts

A week after presenting a disappointing Interim Budget (Vote-on-Account), acting Finance Minister Pranab Mukherjee decided to swing into action by cutting indirect taxes to spur demand in a sluggish economy. He reduced the general rate of Central Excise duty from 10% to 8%. The Centre also retained the rate of central excise duty on goods currently attracting ad valorem rates of 8% and 4%, respectively. It also trimmed the rate of central excise duty on bulk cement from 10% or Rs290 per million ton, whichever is higher to 8% or Rs.230 per million ton, whichever is higher. In addition, the 4% cut in excise duty that announced in December was extended beyond March.

In line with the objective of introducing universal Goods & Services Tax (GST), it decided to reduce the rate of service tax on taxable services from 12% to 10%. To provide relief to the power sector, Naptha imported for generation of electric energy was fully exempted from basic Customs Duty. This exemption which was available up to March 2009, was now being extended beyond that date. "I have tried to make certain changes to provide further stimulus to the economy," said Mukherjee while replying to a debate on an interim budget for 2009-10 that was later approved by the Lok Sabha.

IT companies received a boost from Mukherjee when he accepted that the Section 10 AA that prevented their subsidiaries in SEZs from getting full tax benefits was discriminatory and needed to be removed. However, the software exporters, including TCS, Infosys and Wipro, will have to wait for the new government to bring about the change through an amendment to the Income Tax Act in the new budget.

The Finance Ministry will sacrifice revenues of about Rs300bn with the latest tax concessions. With this, the total indirect tax giveaways in the past few months would amount to Rs700bn this fiscal. This is about 1.5% of GDP. The only worry is on account of the ballooning fiscal deficit. But, given the nature of the current economic situation the government doesn't seem to have too many options at its disposal.