The Hindu Business Line : Cut in excise, peak customs duty likely

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New Delhi Feb. 21 Buoyant revenue collections on both the direct tax and indirect tax front coupled with mounting inflationary concerns may encourage the Finance Minister, Mr P. Chidambaram, to tinker with the general excise (Cenvat) duty rate and reduce it to 15 per cent from the existing 16 per cent.

The move is expected in the forthcoming Budget along with a cut in the peak rate of customs duty from 12.5 per cent to 10 per cent, officials told Business Line.

Currently a major portion of the Centre's excise duty collections comes from the Cenvat rate of 16 per cent.

Tax convergence

While lowering the Cenvat rate and peak customs duty would support the Centre's ongoing battle against rising inflation, the potential revenues foregone may be made good by an increase in the service tax rate from 12 per cent to 14 per cent besides widening the service tax net.

"This would pave the way for the eventual convergence of the two rates (Cenvat and service tax), to enable an integrated central goods and services tax (GST) regime," they said, while hinting that the convergence could happen within a 14-16 per cent band.

Moreover, certain product-specific excise duty exemptions (and not area-based exemptions) are likely to be removed to bolster revenues.

The Finance Minister is also expected to provide budgetary support to compensate the States for the losses that may arise from the proposed reduction in Central sales tax (CST) from 4 per cent to 3 per cent from April 1.

Collections growth

The customs duty revenues are on a roll, with collections in April-January 2007 growing by about 34 per cent to Rs 70,872 crore compared with Rs 52,768 crore in the same period last year.

At this growth rate, the Government is expected to comfortably exceed the budgeted customs duty collections target of Rs 77,066 crore in 2006-07. The Centre is, however, likely to fall short of its budget estimates of Rs 1,19,000 crore on the excise duty front.

On the direct tax side, the Centre's collections are expected to comfortably cross the budgeted Rs 2,10,000 crore this fiscal.

With the revenue situation buoyant, industry anticipates a reduction in the peak customs duty as well as excise.

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