FEBRUARY 26, 2010

Crude Shock

By K Vaitheeswaran Advocate

WHEN the Finance Minister stated that the Budget was being presented with the challenge of maintaining the GDP growth rates and move towards a double digit level; harness inclusive development and address problems in public delivery system, one was looking out for some significant policy initiatives and fiscal consolidation through revenue mobilization.

Even though everyone was looking at an increase in excise duty rates, no one was geared for the crude shock that came in the form of 5% basic customs duty on crude petroleum. Adding fuel to the fire was the increase by 5%, the basic customs duty on petrol, diesel and other other specified petroleum products.

The reaction in the Parliament was instantaneous and there was absolute noise and confusion which is normally associated when there is a big fire. In the midst of this din, the announcement of excise duty increase on petrol and diesel by Re.1 per litre came in.

The impact is going to be significant. A nation which is facing the brunt and harsh impact of inflation may now have to deal with further inflation due to increase in freight and personal transportation costs; possible increase in product prices due to increased transportation costs for the suppliers; increased in product price due to the excise duty increase across the board by 2%.

Service tax has also contributed its mite to the issue in the form of withdrawal of Notification No.33/2009 dated 01.09.2009. In other words the exemption for transportation of goods by the Government Railways stands withdrawn.

It is no doubt true that on the direct tax front, the Finance Minister had been significantly generous in restructuring the tax slabs in order to put more money in the hands of the tax payer. The joy could be shortlived since the money could be just enough to deal with spiraling prices.