By : M.K.Venu
Additional excise duties likely

Finance minister Yashwant Sinha has told the BJP’s economic cell that the government was likely to raise excise duties on many items consumed by the middle class to raise revenue, which has virtually collapsed in 2001-02. This may be done by imposing a special excise duty on items such as white goods, automobiles, cosmetics and tobacco. The industry will not be happy with this move as it is already reeling from a continued demand recession.
Since excise duty is passed on to the consumers, they may end up paying more for these goods. The finance minister’s logic is simple: Year 2001-02 has seen a virtually zero growth in revenue. The overall revenue shortfall is working out in the region of Rs.25,000 crore. The largest chunk of the shortfall comes from excise duty, which was projected to grow from Rs.70,000 crore in 2000-01 to Rs.81,720 crore (Budget Estimate) in 2001-02.
But as things have turned out, excise growth appears to be totally flat and the projected growth of about Rs.12,000 crore will not materialise. This is virtually half of the total revenue shortfall. So Finance Minister Yashwant Sinha is sure to shuffle with the excise duties. At present nearly 85 per cent of the goods are on the CENVAT rate of 16 per cent.
Most other items are placed on the 32 per cent slab. He may shift some items from 16 to 32 per cent slab. The finance minister had tried to simplify the excise rates by keeping just two slabs 16 per cent and 32 per cent. But he has reduced his maneuverability to introduce new excise rates as it will be seen as a reversal of the two-slab reform done last year. So he may end up imposing a special cess on certain items of mass consumption such as cigarettes, upper segment automobiles and so on. He will not disturb the CENVAT rates introduced last year.
He may also increase excise duty by 8 per cent on LPG, kerosene and diesel engines upto 10 HP. At present these three items enjoy a special rate of 8 per cent because they are products of mass consumption.
The finance minister may merge this rate with the CENVAT rate of 16 per cent. So LPG and kerosene prices may go up in this budget, unless this too is absorbed by the oil pool deficit, as was the case recently with petrol.
Without disturbing the CENVAT rates introduced last year, the finance minister will certainly try to mop up more revenue through excise.
This is more likely because revenue from customs has to fall further as peak customs will be brought down further from the present 35 per cent to either 30 per cent or 25 per cent.

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Customs and excise together form over 60 per cent of the total tax revenue.

If customs do not yield higher revenues, the focus will be on excise duties to raise more revenue. The industry, of course, will see this as most ill timed given the demand recession in the economy. Housing and real estate sops
Though the last two budgets had announced a slew of concessions to boost specific industrial sectors, it has not made any significant difference to growth in most of these sectors. This is possibly because the overall lack of demand in the economy put paid to many of these supply side incentives.
But the policy makers have noted a significant response in the housing sector where housing finance has shown a 40 per cent increase in 2001. This is largely a result of tax breaks given in the last two budgets to encourage the middle class to lock into long term housing loans. There is a potential market for 25 million houses in urban areas and small towns which needs to be fully explored.
The finance ministry may give further concessions to this sector, especially in view of the fact that the government has opened up real estate infrastructure to foreign investment.
The finance ministry has also drawn heavily from a McKinsey report submitted to the Prime Minister last year which said the housing and real estate industry, if freed of many legal and procedural rigidities, could contribute upto one per cent to the GDP. It had strongly recommended freeing of the land and real estate market.
The finance ministry’s thinking is to ease up income tax procedures to facilitate smoother sale and purchase of houses. This would also entail levying a low stamp duty to make transactions easier and quicker.
There will be loss of revenue on foregoing stamp duty but that can be recompensed by levying a transparent and moderate property tax, as per McKinsey recommendations. Stamp duty is a state subject and therefore coordination will be required with states on this aspect.
There could be a tax holiday for those who build real estate infrastructure. Thus this sector will finally acquire a more formal industry status. Dividend conundrum
How is that the Central government’s dividend income has been rising phenomenally in the last three years when the profits of Public Sector Units are falling?
Seems illogical isn’t it. The government’s main source of dividend income is from public undertakings. The dividend income grew from Rs.9,300 crore in 1999-2000 to Rs.14,000 crore in 2000-01. In 2001-02 it is budgeted at Rs.16,229.

The phenomenal growth in dividend earnings in 2000-01 came largely from a hefty transfer—over Rs.4000 crore—from the RBI to the Centre.
In 2000, there was heavy purchase of government securities by the RBI at market interest rates. The interest earnings were then transferred back as dividend to the Centre. A simple book adjustment!
However, this year there has not been much RBI purchase of government securities. But the Centre will get over Rs.3000 crores from VSNL alone which paid the government hefty dividends twice in 2001.
This was done to whittle down the cash reserves of VSNL prior to its privatisation. So this time it is VSNL, which will bail out the Centre insofar as dividend earnings are concerned.