India cuts excise duty, service tax to spur economy


New Delhi : External Affairs Minister Pranab Mukherjee Tuesday got the Lok Sabha’s nod to cut excise duty and service tax by 2 percent in what is being touted as the third stimulus package to help India Inc tide over the impact of global economic crisis.

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The duty reductions, seen as costing the exchequer Rs.30,000 crore ($6 billion or Rs.300 million), come over and above the 4 percent cut in central value added tax announced in December, which has now been extended beyond March 31, the foreign minister said.

Replying to the debate on the interim budget in the lower house of parliament, Mukherjee said the government had taken steps in the past two months to lift the economy and that such steps, along with the measures announced Tuesday, will bear fruit soon.

He proposed that the excise duty be further cut from 10 percent to 8 percent. He said naphtha that is imported to generate electricity be fully exempted from customs duty, and service tax on taxable services be cut from 12 percent to 10 percent.

In the case of cement, he proposed the excise duty at 8 percent ad valorem or a specific duty of Rs.230 per tonne, whichever was higher, resulting in a gain of Rs.3.50 per bag.

The house later passed by voice vote the interim budget, including the latest measures and the vote-on-account, to help fund government expenditure till the regular budget is presented by the next government after national elections, and passed by parliament.

“I express satisfaction on our overall performance for five years,” Mukherjee said, summing up the achievements of the United Progressive Alliance (UPA) government since it took office under Prime Minister Manmohan Singh May 22, 2004.

The steps invited immediate positive response from leading chambers. Companies like carmaker Maruti Udyog and steel major Jindal group promised to pass on the duty cuts to consumers, while Home Minister P. Chidambaram said the steps were “commendable”.

“He has cut the service tax by 2 percent and excise by 2 percent at the highest slab. The bulk of the tax is from that rate. And if it is passed on to the consumer, and I believe it can be passed on, it will stimulate demand.”

Chidambaram, who held the finance portfolio till December and presented all the five previous budgets of the UPA government said, rural demand was stable and that only urbanites were feeling jittery.

The steps Tuesday came after two stimulus packages announced by the government to pump prime the economy in a bid to help Indian industry tide over the crisis brought by the demand slowdown and the general crisis in the global economy.

During his reply, Mukherjee, who had also tabled the interim budget, as Manmohan Singh, who holds the finance portfolio, is convalescing from a heart surgery, also made some comparisons with the achievements previous National Democratic Alliance (NDA) government.

“Never in the history of this country we can find a period of three consecutive years of sustainable growth of 9 percent,” he said, adding: “And the allegation is we have destroyed the economy!”

He said under the NDA regimes, which lasted six years till 2004, the average growth was 5.8 percent, while under the UPA regime, the overall gross domestic product (GDP) expanded by an average of 8.6 percent.

He said, on every count – fiscal deficit, revenue deficit, tax-to-GDP ratio, or the savings and investment rates – his government had turned out much better performance.

At the same time, the revised budgetary estimates during the past five years had always turned out a much better performance compared with what had been budgeted for, said Mukherjee, who was himself finance minister in the 1980s.

“And you call it dismal performance?”

The veteran politician said all this had been achieved despite the high average cost of crude oil in the past few years, when it even touched $147 per barrel last year, as opposed to $27 per barrel during the NDA government.

“Let us have some self-confidence in ourselves,” he said. “I have expressed deep concern on the impact of the global meltdown. Any responsible finance minister has to express this concern,” he said.

“But I said I have confidence in the resilience of the Indian economy.”

According to the foreign minister, it was because of parliamentary etiquettes that he did not unveil new measures in the interim budget, as he thought it fit for the next government to present a regular budget after elections.