Imports may turn costlier

Imports are likely to become costlier from March 1. In a bid to bring down the current account deficit to 3 per cent from the current 3.5 per cent, customs duties are likely to be raised slightly in the forthcoming Budget.

Dr C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council (PMEAC), had told Business Line recently that the current account deficit would be close to 3 per cent rather than the 3.5-3.7 per cent levels.

Crude oil imports

However, the basic customs duty of 5 per cent on crude oil imports is likely to be left untouched. The Petroleum Ministry has been asking for it to be reduced.

Economy watchers say that the current account deficit could well be reined in at 3 per cent of GDP going by the recent superlative export performance and subdued import growth in the last two months.

Customs duty collections have been high this fiscal, with revenue growth in excess of 67 per cent on a year on year basis, reflecting the spurt in imports in the first two quarters.

In recent months, the Government has been concerned about the sustainability of the current account deficit which had almost reached 4 per cent of GDP.

The deficit has been made up by capital inflows. But these could be reversed very quickly if there is an internal or external shock to the system.

Also on the cards are a 2 percentage point hike in excise duty, 2 percentage point increase in service tax rate and some increases in basic customs duty on certain non-oil imports.

The maximum rate applicable to about 80 per cent of non-oil imports is 10 per cent.

There is also a good chance of the Government doing away with special countervailing duty of 4 per cent.

In the aftermath of the global financial turmoil post September 2008, the Centre had come up with three rounds of fiscal stimulus aggregating to 3 per cent of GDP.

The first round of withdrawal happened in Budget 2010-11, with the Centre going in for 2 percentage point increase in excise duty from 8 per cent to 10 per cent. Over 70 per cent of Centre's excise collections come on the 10 per cent tax rate.

Service tax

However, the Centre had, in the last Budget, left the service tax rate unchanged at 10 per cent. As part of the fiscal stimulus package, the Centre had reduced the service tax rate to 10 per cent from the earlier 12 cent .

The trade deficit for 2010-11 is now expected to be lower at $105-110 billion as against the earlier anticipated $135 billion.