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Stimulus rollback may derail growth

Stimulus rollback may derail growth
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First Published: Tue, Feb 22 2011. 01 15 AM IST
Updated: Tue, Feb 22 2011. 09 33 AM IST
Though the country has shown an impressive recovery from the downturn, a complete rollback of the stimulus package could pose the risk of derailing economic growth. Also, given inflationary pressure, a significant increase in excise duty could further aggravate the situation. Therefore, scenario one, that is, a complete rollback of stimulus, doesn’t appear to be a viable solution in the forthcoming budget.
Also See | How can Budget 2011 Tame Inflation (PDF)
While a partial rollback, that is, scenario two, can be considered, even a 2% increase in the excise duty rate at this stage may turn out to be inflationary, as it would also increase the value-added tax incidence, which is levied on sale price including excise duty.
Also, even from the goods and services tax (GST) perspective, if the central GST rate is likely to be around 10%, as suggested by the finance minister earlier, then he might consider retaining the current rate of excise duty. Instead of increasing the excise duty rate, the service tax rate might be increased to 12%, and the finance minister could look at other avenues that will serve the dual purpose of increasing government revenue and also rationalizing the current tax regime to bring it closer to the likely GST framework. For instance, the existing long list of excise exemptions can be pruned to broaden the tax base and to ensure that manufacturing activities in the not-so-priority sectors are adequately taxed. Some of these exemptions were granted long back and have perhaps outlived their utility.
Similarly, the service tax net may be further widened to include services that are currently not taxed, but are likely to become taxable under GST. The above measures can be supplemented by introducing a suitable mechanism to unleash the large amount of money currently blocked in litigation at various judicial levels. For instance, the finance minister may propose some sort of settlement scheme, which would encourage taxpayers to abandon unwarranted litigation and pay up the tax amount due to the government.
The author is an executive director at consultancy KPMG.
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First Published: Tue, Feb 22 2011. 01 15 AM IST