Budget 2012 to herald changes in line with planned GST

New Delhi: The finance ministry is likely to introduce a slew of measures in the budget to prepare the ground for the proposed goods and services tax that is yet to be approved by the states.

The indirect tax reforms are expected to withdraw some fiscal stimulus measures, raise excise on diesel cars and cigarettes and switch over to a negative service tax list. This would help the government align taxes with a unified GST, the country's most comprehensive indirect tax reform, and also raise additional revenue.

"The idea would be continue with what was initiated in the last budget... a full-fleged GST would be the culmination of the reform process, but that would take time," said afinance ministry official.

The finance ministry may opt for a gradual increase in excise rates because of the current slowdown even though policymakers say that the fiscal stimulus should be fully withdrawn. After the 2008 financial crisis, the government had cut excise duty from 14% to 8% and service tax was brought down to 10% from 12%.

"We should go back to the rates that prevailed before the crisis," C Rangrajan, chairman Prime Minister's Economic Advisory Council had told ET in an interview earlier this month. The North Block, which houses the ministry, is also studying a proposal to raise excise duty on diesel cars and cigarettes.

The steadily widening gap between the price of petrol and diesel has led to a spurt in demand for diesel-run vehicles, increasing the government's subsidy burden. The petroleum ministry and some sections within the finance ministry strongly support a higher excise on diesel cars.

The government earns aboutRs 8,000 crore from duty on diesel cars and Rs 10,000 crore on cigarettes each year. At present, the excise duty on cars is based on length and not fuel. An expert panel headed by former Planning Commission member Kirit Parikh last year has also recommended imposition of additional excise duty on diesel vehicles of up to Rs 80,000.

Finance minister Pranab Mukherjee had brought only 130 items under excise duty out of a list of 370 that enjoyed exemption. These include milk products, yogurt, baby foods, paper products, edible oil and equipment supplies to infrastructure projects.

Tax experts also support this pruning. "The tax base needs to be expanded... a gradual movement is a preferred approach," Pratik Jain, partner, KPMG. The ministry has kicked off a detailed analysis of the sectors in the backdrop of industrial slowdown to ensure that any change in the duty structure does not hurt growth. "Any decision on changes in the duty structure will take into account the growth scenario," the official said.

Economic growth in the current fiscal is now pegged at 7.2% as against the near 9% estimated in the budget 2011-12. The finance ministry also plans to raise its mopup from service tax, which yields just 10% of total taxes despite the sector contributing around 60% to India's GDP. It is working on a negative list approach that will not only help expand the service tax base but also clean up its administration.

The negative list concept, practiced globally, is proposed to be introduced as part of GST. Ministry officials are looking at changes that may be required for the switchover, such as credit rules, export-import norms and place-of-supply rules for services. States, too, are supporting the negative list proposal.