FEBRUARY 09, 2015

By Sumit Dutt Majumder

THE politico – economic situation of the country and the international economic scenario both play a vital role in formulating the Union Budget. This year, the backdrop is near perfect. This is the first year after the General Elections, and the elections in most of the major State Assemblies are also over. Therefore, there is no political compulsion for a populist budget. Further, the Oil prices have nose dived from 110 US Dollars to 45 US Dollars. That has brought down international prices of most of the commodities related to Oil. The import bill of the country will, therefore, come down substantially, thus making the Foreign Exchange Reserve comfortable and also easing the Current Account Deficit (CAD). On the other hand, the loss of revenue by the oil producing countries will have a negative impact on their economy and this will impact India's export markets directly, in addition to the impact due to fall in export remittances. The third major factor that will have an impact on this year's Budget is the long awaited announcement regarding introduction of goods and services tax (GST) from April 2016. The Union Finance Minister is expected to take advantage of the one year gap between Budget 2015 and the introduction of GST in 2016 by announcing certain fiscal measures leading to a comfortable journey to the GST. Fourthly, the Prime Minister's announcement of the ' Make in India' policy will inspire the Finance Minister to announce certain steps facilitating manufacturing in India. Thus, all these factors are expected to have a bearing in the budget proposal for indirect taxes in 2015.

Keeping the target date of 1 st April 2016 in mind, the Finance Minister has already introduced the GST Constitution Amendment Bill before the Parliament in the last winter session. The broad structure of GST is known. Therefore, the Budget2015 will be an opportunity to align the tax structures in the Central Excise (on manufacture of goods) and Service Taxes (on provision of services) so as to have a seamless transition to the GST regime in 2016. It may be recalled that the GST would subsume Central Excise Duty, Service Tax and Countervailing Duty (Customs) in addition to State VAT and host of other States and Central indirect taxes. The Dual GST structure that is being envisaged is expected to have only two rates–a standard one and a reduced one for goods and services meant for consumption by poorer sections of the society. Some goods and services would also be exempt from GST;but that list would be a very short one.

Therefore, keeping in mind the need for smooth transition to the GST regime around one year ahead, following budget proposals can be expected in Central Excise Duty and Services Tax.

(a) The number of rates of duty may be brought down to only two for Central Excise Duty. At present there are multiple rates of taxes on the Central Excise side. Service Tax may continue to have one rate till the GST is introduced.

(b) Since the goods and services would be aligned in the GST regime, it would be better if a beginning is made in this Budget itself to have an alignment in the rates of Central Excise Duty and Service Tax. A similar step was taken in the 2011 Budget when the Central Excise Duty on a good number of critical items was pegged at 10% percent, the rate which was prevalent for Service Tax.

(c) Since the number exemptions in the GST regime would be kept at minimum, it would be desirable to drastically prune the number of exemptions on the Central Excise side in this Budget itself, so that the trade & industry do not feel the shock when the exemptions would be withdrawn in certain items or sectors during the GST regime.

(d) The present thresholds for Central Excise duty, Service Tax and Stat VAT are Rs. 1.5 Crores, Rs. 10 Lakhs and Rs. 3 to 5 Lakhs respectively.In the GST regime, the common threshold for both goods and services can be expected to be somewhere between Rs. 10 Lakhs to Rs 25 Lakhs. Here again, in order to prepare the Small Business for GST in 2016, the Budget for 2015 may propose to bring down the threshold for Central Excise duty to say Rs. 50 Lakhs from Rs. 1.5 Crore.

As for issues not related to GST preparation, the Finance Minister may consider the following in this year's Budget. First of all, the steep fall in international prices of Oil will give the Finance Minister a unique opportunity to reduce the Budget Deficit by increasing the rate of Central Excise duty on Petroleum and Petroleum products. These items will, in any case, remain outside the ambit of GST for the initial years of introduction of GST. The increase should be such that it evens out the effect of lower price of Oil, but does not add to inflation. This will have to be a balancing act. This step would be necessary since oil price will rise again in future, and one must be cautious on this count keeping the future in mind.

Indian roads are already heavily congested and the pollution out of automobile fuel emission is alarmingly high. It's time not to congest the roads further with SUVs. It would, therefore, be opportune to raise the Excise duty on SUVs while reducing that on the smaller cars.

Given that the infrastructure sector will have to be given a big push, the Excise duties on steel, cement and other important construction materials may have to be brought down.

Having regard to the steep fall in Oil price coupled with the Prime Minister's call for 'Make in India', one would expect higher rates of Customs duty on following imported items.

(i) Petroleum and Petroleum Products other than Crude Oil, so as to encourage refining in India.

(ii) Finished Electronic and Electrical items including Mobile Phones, Lap Top and Desk Top Computers so as to give a fillip to the 'Make in India' program.This is necessary since the price of these import items is quite low and these give a tough competition to their domestic manufacturing.

(iii) Imported Cars including SUVs may attract higher Customs duty, again due to the support needed for 'Make in India' program.

It is, however, expected that the Customs duty on raw materials and components necessary for manufacturing finished products will be brought down to encourage manufacturing.

There is a flip side to the prevailing low Oil price.This will also have a negative impact on India's export market – particularly those in the Oil producing countries. The Indian exporters would need support to make the price of their goods and services competitive. The support may have to be in terms of further tax- relief in respect of goods manufactured for export,since support through other means like subsidies may invite criticism from the competitor countries.

Summing up, sharp fall in Oil prices will provide the Finance Minister the unique opportunity through the 2015 Budget to cut down the budget deficit, do away with certain avoidable subsidies, facilitate manufacturing in India and prepare the tax-payers for ushering in the much awaited GST in 2016. We may, therefore, expect an interesting Budget on the 28th February, 2015.

[The author is former Chairman, Central Board of Excise and Customs & Consulting Editor, TIOL]