Budget 2013-14: FM may expand tax base, hike CENVAT to14% say experts

One of the many important aspects of the Union Budget will include India's indirect tax architecture including the rates for service tax, customs and excise duty. This Budget may see higher taxes on consumption although not everyone would agree with it at this point of time.

In an interview with CNBC-TV18's Siddharth Zarabi, Harishankar Subramanian, partner & national leader-indirect tax, Ernst & Young (E&Y); B Sriram, executive director-tax & regulatory services, PricewaterhouseCoopers -India and Sachin Menon, national head of indirect tax, KPMG India lend their views on the possibility of raising taxes on consumption. Below is the edited transcript of the interview. Q: There is a big broad expectation that a rate hike is coming and that could be a return to the pre-2008 taxation architecture as far as rates go on the indirect tax side. What are your expectations? Subramanian: With the fiscal situation that we have today which is alarming, it is quite natural that the easiest temptation is to raise rates. However, today, we know what the gross domestic product (GDP) numbers are. We want to be at sub-6 percent, maybe closer to 5.4 percent this year. The Finance Minister (FM) in all his rounds abroad has been talking about a growth oriented Budget. So, the first and foremost is that he has got to do a tight-rope balancing between controlling the fiscal deficit and also spurring growth. If that needs to be done, I do not know whether rate increase could be the right solution at this stage. Industry has very strongly advocated the fact of maintaining stability of rates and not tinker rates , still we bring on goods and services tax (GST) which is also looking like at last moving forward. With this scenario, I believe, they would rather look at expanding the tax base because they need revenues, which is a fact of life. So, they will expand the tax base, they would look at excise thresholds, they would look at bringing excise products which are under an exempt situation today or at a lower rate. They will also look at some tweaks in service tax.  Q: What are your expectations as far as this big question of rate hikes on the indirect tax side are concerned? Sriram: The FM has said that this Budget is going to be a very responsible Budget. So, the broad theme seems to be that there is going to be a balance between growth and stability. The other important factor is the roadmap to GST. So, these three broad things will play on the minds of FM while formulating the policies and indirect tax proposals in this Budget. Essentially this means and from whatever I have read from Parthasarathi Shome’s report, I do get the information that this stimulus which was brought in a couple of years back from 2008 onwards, there has been a continuous rollback of the stimulus happening. From CENVAT (Central VAT) point of view, the rate is about 12 percent. So, I would not be surprised that if the FM takes this up and further rolls upto the pre-2008 level – a level of 14 percent CENVAT rate. It is possible and also the additional factor of GST being talked about and the hopes being revived, they could be under the guise of GST being put in place during the course of this financial year i.e. 2013-2014. I can think that there is a reasonable possibility that the rates could grow as far as the CENVAT rate is concerned.