Till the recent State elections, the Budget 2012 was largely expected to be a ‘hard' one, with no significant tax sops and focused on fiscal consolidation. Now, the view seems to be divided and a few analysts believe that it may be ‘softer' than what was expected initially. However, the question really is that in a situation where GDP growth, specifically manufacturing, is slipping, inflation being a constant dampener, fiscal deficit worsening and apparent conflicts between the Central and State Governments on GST-related issues, what can the Government do?

Manufacturing sector

Well, there are some measures that may be considered for achieving many of these seemingly conflicting objectives. The manufacturing sector, which perhaps needs more attention, would expect that excise duty rate continues at the current level of 10 per cent. Hike in excise not only affects growth, but could also fuel inflation given the overall resultant impact due to the corresponding increase in VAT incidence, transportation cost etc. However, products that are currently exempt from duty can be brought within the ambit, like last year, wherein around 130 items were made liable. Further, one might also see the concessional excise duty rates of 1 per cent or 5 per cent moving a notch up. There could be other measures for incentivising manufacturing and the Government might look at providing concessional duty rates for R&D equipment and also correcting the anomalies of inverted duty structure, which is seen as a roadblock for capacity enhancement in many sectors.

Service tax hike

There may be a good case for the Government to increase the service tax rate from 10 per cent to 12 per cent. This would augment Government revenues without dis-incentivising manufacturing sector, and would also bring service tax a step closer towards the likely GST rate of around 16 per cent. Need for fiscal consolidation could also prompt the Government to introduce negative list-based taxation for services, for which the discussion paper has already been issued . While in concept this is fine, one hopes that at least a few months would be given to all stakeholders to absorb the impact of the final rules and regulations. Thus, a policy announcement in the budget speech followed by actual implementation sometime mid-year, could be in the offing.

It has always been argued that a better tax administration can significantly enhance Government exchequer without any corresponding increase in tax rates. Take, for instance, the self assessment mechanism introduced under Customs last year. While it has yet to be made fully operational, if supported by a robust audit mechanism, the level of compliances under Customs should increase significantly, thus, reducing duty evasion.

Similarly, the Government can consider simplifying the litigation/ advance ruling procedures to make them more effective and time-bound. This should free up a substantial amount of taxpayers' money currently blocked at various stages in litigation, part of which would naturally flow to the Government wherever the matter is decided in the latter's favour.

Even if this year's Budget is not a big-bang event, basic rationalisation measures can still come in handy in meeting the multi-fold objectives highlighted earlier. After all, even small can be big, if put in the right context!

(Pratik Jain is Partner-Tax, KPMG and Siddharth Mehta is Director-Tax, KPMG)

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