New Delhi, February 22
The Budget for fiscal 2012-13, to be presented in less than a month’s time, is likely be a tax heavy one if the cues from the Prime Minister’s Economic Advisory Council (PMEAC) are incorporated. The council has strongly recommending deregulating diesel prices in a phased manner and also raising excise and service taxes to the pre-crisis level of 12 percent.

In addition to the above moves to curb fiscal deficit, while releasing the review of the economy for the current fiscal, PMEAC chairman, C Rangarajan also asked for deregulation of urea prices.

Raising diesel prices and increasing service tax and excise duty rates are two issues for the budget that have been flagged in these columns previously. The Reserve Bank of India has also advocated hiking diesel prices but it has not happened due to political opposition. With crude oil prices touching a nine month high of $120 a barrel, under-recoveries of diesel, cooking gas and kerosene have galloped to Rs 465 crore a day which oil companies are suffering. The shortfall on diesel is Rs 12 a litre.

"It’ll be necessary during 2012-13 to make some adjustments on the diesel prices in a phased manner. We have not done this for quite some time and international crude prices have gone up. It is not possible for us to subsidize this sector beyond a level," Rangarajan said.

On improving the tax to GDP ratio, Rangarajan said the excise duty and service tax should be increased to pre-crisis level, a move which will bring in additional Rs 35,000 crore.

Before the economic crisis, service tax and excise duty rates were at 12%, but as a stimulus the government had brought them down to 10 percent in 2008-09. Even now, the industry is pitching for measures to revive growth and has been steadily opposing any hike in excise duties.

The PMEAC in its review has laid a lot of stress on fiscal consolidation and said that the budget should should come out with clear measures to cut the fiscal deficit. Rangarajan said the government needs to improve on the tax administration system to plug evasion, enhance equity flows, increase infrastructure spending.

The council has projected better prospects for next year with a 7.5-8% growth rate, the caveat being that the global scenario remains stable.

Rangarajan said the growth rate in 2011-12 is likely to be 7.1%, marginally higher than 6.9% projected by the Central Statistical Organizaton.

The review noted investment activity has slowed down and as a result the gross fixed capital formation for FY 2011-12 slipped to 29.3%, a decline of almost 4 percentage points over the last four years.