2 Percent Cut in Excise and Service Tax

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Feb 25 – Doling out incentives to win more votes before the general elections this year the central government cut factory gate duties by two percent to eight percent and service tax to 10 percent, a cut of 2 percent.

While the move is meant to boost sentiments in the most severely affected industries before the elections, it will also put a strain on the fiscal deficit, which is burgeoning to one of the largest in the world.

Economic Affairs Secretary Ashok Chawla said the duty and service tax cuts would result in a revenue loss of 300 billion rupees (US$6 billion) or 0.5 percent of the GDP in the next fiscal year. This follows the announced loss of 400 billion rupees (US$8 billion) already announced by P. Chidambaram. Higher civil servant wages, sops to the agricultural and education sectors, have already helped swell the federal fiscal deficit to 6 percent of gross domestic product in 2008/09.

The measures are intended to uplift sentiments in urban India which is being affected by job losses and hasn’t yet seen any benefits from the recently announced populist interim budget, two stimulus packages or the change in FDI policies. The government also hopes that cut in service taxes and excise duties would be passed onto the end consumer, spurring both domestic consumption and exports.

The government released a people’s budget because the initial thinking was that a majority of the votes come from the rural areas. However after some belated recognition that urban constituencies are not only large but also have a sizeable percentage of the poor, it has decided to entice urban areas as well. Although a small proportion of urban India votes, the majority of urban Indians that do vote are from the middle class, a large segment that the government cannot afford to ignore. It is mostly this urban class that work in factories and turn the wheels of the economy that the government hopes to invigorate through these tax measures.

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