The Narendra Modi government might contemplate shortening the list of 300 goods eligible for excise duty exemption in the coming Budget in order to compensate for the additional expenditure resulting out of increase in government employee salaries and defence pensions in 2016-17.
The list of 300 items might be trimmed to 90 goods, which will also be in line with the taxation proposed in the goods and services tax (GST). Currently, biscuits, honey, butter, cheese, tea, coffee and rusk are among the goods exempted from the central excise duty.
"The idea is to do away with or phase out tax exemptions. This will not only broaden the tax base but also clean up the taxation structure. We are examining if some excise exemptions can be done away with in preparation of GST," a government official told Business Standard.
The move to reduce the list may fetch tax revenue of Rs 50,000-60,000 crore to the government. In 2011-2012, the list was pruned to 300 from 470 items.
Chief Economic Advisor Arvind Subramanian recently said that the wide excise duty exemptions accounted for nearly Rs 1.8 lakh crore or 80% of excise duty collections.
"Given the historic opportunity afforded by the GST, the aim should be to clean up the Indian tax system that has effectively become an 'exemptions raj' with serious consequences for revenue and governance," a report prepared by Subramanian stated.
The report called for limiting the exemptions to a "few merit goods" that benefit the poor.
"If the GST is not happening, pruning central excise exemptions will be a prudent revenue-raising option. Reducing the list from 300 to 90 could add Rs 50,000-60,000 crore in tax revenue," said Satya Poddar, senior tax advisor at EY.
"Bringing the list to a bare minimum and aligning it to the GST model will be a great revenue source for the government," said Gautam Khattar of PwC. "Besides, the government could look at demerit items such as tobacco and aerated drinks to hike duty in the Budget," he added.
The government's salary bill is expected to increase significantly due to the implementation of the Seventh Pay Commissions and the One Rank One Pension (OROP) for ex-defence personnel in the next fiscal year.
The Modi government is also looking to raise service tax to 16% to reduce the fiscal burden from higher government salaries.