TIOL - COB( WEB) - 229
MARCH 03, 2011

By Shailendra Kumar, Editor

THE Union Government Budgets have traditionally been shrouded in layers of secrecy. But, in the recent years after the enactment of RTI Act and the virtue of transparency becoming a popular slogan for agents of governance and reforms, a good number of Budget proposals are nowadays discussed openly at various fora. With the media, the trade houses and others being able to make intelligent guesses, particularly in the light of collapsing tariff walls, this year's Budget was not expected to unfold many surprises for the close watchers. However, credit goes to our septuagenarian Finance Minister, Mr Pranab Mukherjee, who literally sprang many surprises on the budget analysts.

First, contrary to the general perception that having commenced the process of roll back for the fiscal stimulus provided in 2008 after the typhoon of global economic meltdown hit the Indian shores, there was no stopping for the FM to hike the Central Excise duty back to 12%. Such a perception was reinforced by the fact that the Indian economy, after China, has been the second best economy to regain the lost momentum of growth after the global crisis. Our industrial and services sectors have been doing well. Interestingly, the investments done in the past have helped the Agriculture sector to log 5.4% growth this fiscal. Given the goose-pimple generating pressure of huge fiscal deficit, fuelling the demon of inflation, the Finance Minister was expected to roll back if not Central Excise duty, then at least the Service Tax. Why Service Tax? Because, even while accounting for roughly 58% of the GDP, it contributes only ONE per cent to the gross revenue.

Notwithstanding so many valid reasons, the Finance Minister chose not to raise either the Central Excise duty rate or the Service Tax rate. And this is truly an act of fiscal valour and braveheart. No Finance Minister in the past would have done so! But Mr Mukherjee did it, and he did it for several valid reasons. Of course, not hiking duty rates makes poor headlines in the media but he seems to have a method in the 'madness' of putting trust in his taxpayers. By not increasing the indirect taxes rates he has reposed huge faith in his 14 lakh indirect tax payers. In his own words, he wants the industry to translate the large profit margins into doses of investments into the manufacturing and services sectors. In other words, his larger vision is to enable the various sectors of the economy to make larger profits and invest part of them and distribute them partly in the form of dividend. The investments will lead to an enhanced capital formation in the economy, and the dividends in the hands of individual share-holders will lend a boost to the composite demand for goods and services in the economy. This way, it would jack up the growth trajectory to a little beyond 9% in the medium-term and two-digit in the long-run.

Another reason which must be attributed to Mr Mukherjee's decision to maintain status quo is his staunch commitment for the proposed Goods and Services Tax (GST). He probably wanted to display his undiminished faith in the indirect taxes reforms and send an unmistakable signal to the recalcitrant States to join the GST bandwagon at the earliest. Although some of the States do share his vision towards a unified and common Indian market but some others, particularly ruled by the BJP and some of UPA's coalition partners, are yet to graduate to a level where they could rise above the partisan politics and see eye to eye with him. Following the time-tested Gandhian philosophy, Mr Mukherjee has enhanced his level of commitment to the GST and hopes to influence or isolate those States whose views to the proposed reforms have been oscillating like the traditional 'ghanta ghar'!

In fact Mr Mukherjee has further taken his commitment to GST a few notches upward when he proposed certain changes in the Central Excise rate structure to prepare the ground for the transition to GST, beginning with a reduction in the number of exemptions. At present, there are about 100 items that are exempt from Central Excise as well as State VAT. In addition, there are as many as 370 items that avail exemption from Central Excise duty but are chargeable to VAT. Such incongruity calls for streamlining if India is destined to embrace GST. Therefore, the FM has proposed withdrawal of the exemption on 130 of these items that are mainly in the nature of consumer goods. The remaining 240 items would be brought into the tax net when GST is introduced. A nominal Central Excise duty of ONE per cent is being imposed on the 130 items. No Cenvat credit would be available for the manufacture of these items. Basic food and fuel will continue to be exempt. This levy would also not apply to precious metals and stones. In case of jewellery and articles of gold, silver and precious metals, the levy would apply only to goods sold under a brand name.

Secondly, it is common knowledge that despite a general consensus, most States have increased their merit rate of VAT from 4 per cent to 5 per cent. Toeing their line and also for easy consensus on the merit rate when the GST comes into being, the FM has proposed to enhance the lower rate of Central Excise duty from 4 per cent to 5 per cent.

Thirdly, the FM knows that the GST cannot be implemented without a sturdy IT infrastructure. Therefore, without losing time, he had put the IT wizard Nandan Nilekani on the job who recently submitted the TAGUP report on the proposed GST Network (GSTN). This will take care of the key business processes of registration, returns and payments of GST. The National Securities Depository Limited (NSDL) has been selected as technology partner for incubating the National Information Utility that will establish and operate the IT backbone for GST. By June 2011, NSDL will set up a Pilot portal in collaboration with 11 States prior to its roll out across the country.

The Mission Mode Projects for computerization of Commercial Taxes in States, which was announced in the last Budget, will allow States to align with the roll out of GST. Funds have been released for 31 projects received from the States and Union Territories. Most of the States and UTs have already enabled the facility of making electronic payments by the dealers . A number of States have already started accepting Electronic Tax Returns and issuing forms required for inter-state trade. Once the States fully switch over to the electronic mode for practically all procedural purposes, this is going to be a major taxpayers' services in the fiscal history of India.

In simple words, Pranab Da has not succumbed to common temptations to which most FMs in the past have caved in and hiked the tax rates, and has also shown truly extraordinary vision which only fiscal statesmen have shown in the case of a few countries. Without taking his eyes off the pot called double-digit economic growth, he had made a valiant attempt to change the fiscal orbit of the country from run-of-the-mill form of taxation to a more equitable GST which would automatically remedy the cascading effect of tax on tax. Let's wish him good luck for realising his dream by 2012.