Stimulus ends in 2010, taxes will go up

New Delhi: The finance ministry has told the Thirteenth Finance Commission that given its expectations of a recovery in January-March 2010, it will withdraw the fiscal stimulus by increasing the tax rates next year.

In its two-page note to the Vijay Kelkar-chaired TFC — set up last November to recommend how Central taxes will be shared with states over the next five years — finance minister Pranab Mukherjee has stuck to his promise of fiscal consolidation as announced in this year's Budget.

According to government officials, India's 'exit strategy' will begin in the right earnest in 2010-11. In its note, the finance ministry has said it expects tax buoyancy to be restored in the fourth quarter of 2009-10. But they added today that advance tax collections in September have revived their hopes of an early recovery, despite drought-like conditions.

Between September 2008 and the presentation of the regular Budget on July 6, 2009, the government has announced three stimulus packages that saw excise rates being reduced to 8 per cent from 14 per cent, cut in service tax rate to 10 per cent from 12 per cent besides generous increase in expenditure on the United Progressive Alliance government's flagship programmes.

Though the finance ministry presented the regular Budget for this fiscal on July 6, it took almost two months to spell out how it planned to effect sharp cuts in fiscal deficits over the next two years. In the statement on FRBM laid before Parliament, the ministry said it would cut the deficit to 5.5 per cent of the GDP in 2010-11 and to 4 per cent in 2011-12 from 6.8 per cent of the GDP estimated in the Budget for this year.

The officials said the two-page note does not elaborate how consolidation can be achieved especially with no clarity on the Goods and Service Tax regime that Mukherjee has promised will be implemented on April 1, 2009. The ministry, they said, has left it to the TFC to make assumptions on GST collections.

The TFC, meanwhile, is likely to be given a three-month extension till December-end for submitting its report to the ministry.

The Cabinet will take up the proposal in its meeting on Thursday. More clarity is expected on the GST rates with today's meeting of the empowered committee of state finance ministers and the TFC's own plan to float a discussion paper on the GST rate structure.

The ministry, the officials said,...