Against the backdrop of falling industrial output, sluggish performance by the agriculture sector and slower GDP growth rate of around five per cent, the Government will be faced with twin challenges of increasing tax revenues to reduce the growing fiscal deficit, while simultaneously striving to provide the appropriate environment to spur economic growth.
It also seems quite likely that the Government may miss the indirect tax collection target of Rs 5 lakh crore this year.
Hiking the tax rates is, perhaps, the most obvious method of increasing tax revenues. Admittedly, there seems to be a case to increase the excise duty and service tax rates which are currently levied at 12 per cent.
So, if the indirect rates are unlikely to be hiked, how does the Government increase its indirect tax collections to keep the fiscal deficit in check?
One may note that the negative list-based system of taxation of services, introduced last July, has already widened the base for tax collections by making most of the activities taxable. Only a few activities which are covered in the negative list remain out of the tax net. It is also expected that the full impact of this broadening of the tax base would be realised only in the next financial year. Therefore, it is unlikely that the service tax regime would undergo a major overhaul.
This would mean that we may witness a greater thrust on excise measures in this Budget to increase tax revenues.
This would also positively impact customs duty collections, since excise duty is also levied on imports as countervailing duty.
(The author is Executive Director, Khaitan & Co, New Delhi.)