Often indirect taxes are used as a tool by the governments to raise resources for sectors that are instrumental to economic growth. By increasing the rates, the government not only increases its revenue potential but also steers consumer behavior.
In certain circumstances the rate strategy is also played out to stabilise volatility in prices. For instance, the fall in global crude oil prices has triggered a rise in excise duty rates on petroleum products as a result of which the government has not only stabilised the petroleum prices for the ultimate consumer but has also significantly gained in terms of its overall revenue collections.
A gradual increase in rates will serve as a bridge between the existing indirect tax rates and the rates under GST. This process has already been initiated with enhancement of service tax rate last year. Though the rate of GST is yet to be finalised, the same is expected to be higher than the present effective rate on services of 14.5%. There could be a temptation to further increase the effective service tax rate to say 16.5%. If that turns out to be the case, then it is going to pinch every consumer as they will have to pay more for eating out at restaurants, hotel stay, phone bills, broadband connections, air tickets etc.
Table I shows an illustrative example of the impact of an increase in rate of service tax on the ultimate consumer in case of a restaurant bill. Similarly, an expected rise in excise duty rate from 12.5 per cent to say 14 per cent is also going to make goods made in India more expensive. The tax impact would be more severe in case of manufactured goods since the consumer will not only have to bear the burden of additional excise duty but also its cascading effect as VAT is charged on the value of goods inclusive of excise duty element.
The table II illustrates the increase in excise duty and its cascading impact on price.
Presently several items like cheese, biscuit, ready to eat packaged food, ketchup etc. attract excise duty between Nil and 6 per cent. Under GST regime it is aimed to keep the exemptions at the minimum. In a preparation towards the same, government may consider to do away with certain exemptions as a result of which excise duty could go up to 12.5 per cent making such frequently consumed food items costlier and thus leaving a hole in consumers’ pocket.
Indirect tax being a transaction tax is often viewed as a key barometer of the production, consumption and demand in the economy.
There is no doubt that an increase in rate of tax will assist the government in meeting the revenue needs and bridging the fiscal deficit. However, it is essential to ensure that a proper balance is maintained between revenue growth and consumer demand.
(The authors are partner and Deputy Manager Deloitte Haskins & Sells LLP)