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The demonetization exercise has resulted in a massive cash shortage, which is hurting economic growth. Photo: Hemant Mishra/Mint
The demonetization exercise has resulted in a massive cash shortage, which is hurting economic growth. Photo: Hemant Mishra/Mint

Demonetisation hits service tax, excise duty collection

Growth in service tax collection declined to 13% in November as against 68% in October; excise duty collections grew by 32% in November as against 41% the previous month

New Delhi: Excise duty and service tax collection growth slowed in November, reflecting to some extent the impact of demonetization on economic activity in the country.

According to indirect tax data released by the Central Board of Excise and Customs, excise duty collections grew by 32% in November as against 41% in October and 36% in September, reflecting the slowdown in manufacturing activity.

To be sure, since manufacturers with an annual revenue threshold of less than Rs1.5 crore are exempt from levy of excise, the impact of demonetization on very small manufacturers may not be captured by the excise collection data.

Growth in service tax collections decelerated to 13% in November, as against more than 60% in October.

In the case of service tax, the data includes very small businesses as the annual revenue threshold for them is Rs10 lakh.

Total indirect tax collection in November also declined by 13.9% over the previous month’s numbers, said a statement from the finance ministry.

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Last month, Prime Minister Narendra Modi announced the cancellation of the legal tender of Rs500 and Rs1,000 notes with effect from 9 November. The move has resulted in a massive cash shortage across the country that is impacting economic activity.

Many rating agencies, economists and financial institutions have lowered India’s growth forecasts for 2016-17, citing slowdown in demand and investment in the economy.

Recent automobile sales data also reflects the trend of slowing demand. Automobile sales in November declined for the first time in 11 months as the government’s decision to ban high-value bank notes depressed demand for commercial vehicles and two-wheelers.

Total sales fell 5.48% during the month, the steepest decline since March 2013, according to data compiled by lobby group Society of Indian Automobile Manufacturers, or Siam.

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“Excise duty and service tax are very important leading indicators for economic activity in the economy. A sharp fall in these numbers suggest that economic activity has been hit badly during the month of November, especially after demonetization. Their effect will be seen in other tax revenues, like value-added tax (VAT), as well. They will show their effect in the falling GDP number for the month of November," said N.R. Bhanumurthy, professor at National Institute of Public Finance and Policy.

“Scarcity of new currency notes has led to the decline in the overall consumption demand in November. This trend will continue in the coming months as well unless the old currency notes are replaced by new ones in the market," Bhanumurthy added.

States have also seen a sharp fall in their VAT collections especially in sectors like tourism, hotels and small-scale manufacturing, Amit Mitra, finance minister of West Bengal and chairman of the empowered committee of state finance ministers, said recently, adding that demonetization had destabilized state finances.

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