Finance Minister Pranab Mukherjee today announced a stimulus package for the economy, the third this financial year, cutting excise duty and service tax two percentage points each, effective midnight, and extending previous excise cuts beyond March 31, 2009.
Service tax has been cut across the board from 12 per cent to 10 per cent and the excise has been reduced by the same margin only for items that currently attract the 10 per cent rate.
Consumers are expected to benefit significantly from this latest cut in indirect tax, since over 90 per cent of excise duty collections come from the 10 per cent slab rate, which is levied on white goods, metals, commercial vehicles, iron and steel and cement. Tyre makers have already responded by announcing a two percentage point cut in prices.
Overall, consumers can expect a more than 2 per cent reduction in retail prices if the excise and service tax cuts are passed on fully. This is because the Value-Added Tax (VAT), which is levied at the state level, is applied over and above the excise duty, said Vivek Mishra, partner, Ernst & Young, an auditing and consulting firm.
Most items attract 4 per cent or 12.5 per cent VAT rates. At 12.5 per cent, a two percentage cut in indirect tax will lead to a 2.3 per cent reduction in retail prices.
In terms of a deficit-financed stimulus, economists said cutting indirect taxes is more effective than government spending. “By cutting taxes, the government has put more money in people’s hands rather than spending on its own,” said D K Joshi, economist with Crisil Ltd, a ratings and advisory firm.
Agreeing that indirect tax cuts are more effective in stimulating demand than direct tax cuts, Abheek Barua, chief economist with HDFC Bank, said, “Cutting income tax rates, for instance, often leads to higher savings instead of increased spending, as precautionary savings increase when people are faced with uncertainty”.
No comments:
Post a Comment