Implications of Third Stimulus Package.

Implications of Third Stimulus Package

The third stimulus package was announced by the Government on 24.02.09. Following are the implications of the same:

1.) Reduction in general rate of excise duty and service tax:-

The Government has reduced the rate of Excise Duty and Service Tax. The rate of basic excise duty is reduced from 10% to 8% on all articles except petroleum products, specified rated items and tobacco products. The change has been made vide notification no. 4/2009-CE dated 24.2.2009.

The rate of Service Tax has also been reduced from 12% to 10% vide notification no. 8/2009-ST dated 24.2.2009. The new rates are effective from 24.2.2009. Now the following will be the rates of Excise duty and service tax:-

	Excise Duty (%)	Service Tax (%)
Basic Rate	8	10
Education Cess	0.16	0.20
SHE Cess	0.08	0.10
Total effective rate	8.24	10.30

General reduction in Excise Duty rates by 4 per cent, which was brought into effect from December 7, 2008, has now been extended beyond March 31, 2009

2.) Retention of the rate of central excise duty on goods currently attracting ad valorem rates of 8 per cent and 4 per cent, respectively

There has been no change in the rate of excise duty which is levied at the concessional rates of 4% and 8%. Prior to this change, the effective rates of duty on these goods were 4% & 8% by virtue of Exemption Notifications. Now the rate of basic excise duty is reduced to 8% but no change has been made in the goods (like disposable needles and syringes) already attracting duty @ 8% by virtue of exemption notification. The effect is as if the notification has been withdrawn from these goods as now the basic excise duty itself is levied @ 8%.

3.) No change in rate of service tax levied under the Composition Scheme of Works Contract Service:

Under the Works Contract Service, the service provider has an option either to pay service tax at full rate and utilise Cenvat credit or he can opt for payment of service tax @ 4% under the Composition Scheme. At the time, this scheme was implemented the rate of service tax was 12% and the scheme was implemented at a very attractive rate of 2%. Only after one year, the rate under composition scheme was increased to 4%. There is no option to opt out of the composition scheme once it is opted in respect of a particular contract. This increase in rate under composition scheme made the construction companies re-think about their decision of opting under composition scheme but there is no option left with them. Now the situation has become still worse as the basic rate of service tax has been reduced to 10%. Now the service tax under composition scheme which was looking favourable has become bitter as the other options like Construction of Commercial complex or Installation and commissioning services are now more favourable to the construction companies. The effective rate of service tax on these options after abatement comes 3.3% which is lower than service tax under composition scheme which is 4%. Hence, it is a true case of promissory estoppel.

4.) No change in rate of excise duty prescribed for compound levy scheme:

Under the compound levy scheme, the duty is not levied on the clearances of the goods but is levied on the production capacity of the factory. Fixed duty is payable on the number of machines installed. The Patta/Patti units as well as pan masala manufacturing units fall under the purview of this scheme. The rate of excise duty has come down from 16% to 8% in the last 12 months, but there is no change in the rates prescribed under Compounded Levy Scheme.

5.) No change in rate of 10% reversal for excise duty and rate of 8% reversal for service tax under Rule 6 (3) of the Cenvat Credit Rules, 2004:

Rule 6 (3) of the Cenvat Credit Rules, 2004 provides for reversal of 10% of the value of exempted goods in case common inputs are used for manufacturing dutiable as well as exempted goods and separate records are not maintained by the manufacturer. Similarly, a service provider has to reverse 8% of the value of exempted services if he is providing both taxable service and exempted service and opts not to maintain separate records. When this rate of reversing 10% on the value of exempted goods was prescribed, the rate of basic excise duty was 16%. Now the rate of basic excise duty has come down to 8%, but there is no change in the rate of reversal. As such, if the manufacturer pays excise duty on the exempted goods – it will be favourable rather than claiming exemption and reversing the amount under rule 6 of the Cenvat Credit Rules, 2004. Similarly, in case of service provider also, the rate of reversal is 8% which is kept intact but the basic rate of service tax has been reduced from 12% to 10%.

6.) Duty on bulk cement reduced:

The duty on bulk cement was 10% or Rs.290 per tonne, whichever is higher. The duty on bulk cement has been reduced to 8% or Rs. 230 per tonne, which ever is higher. This will definitely give a boost to the real estate sector.

7.) Exemption from Customs duty:

Exemption from basic customs duty on Naptha imported for generation of electric energy is now being extended beyond March 31, 2009.

8.) Key sectors with 2% excise duty cut

Following are the key sectors in which reduction in prices is expected due to duty cuts:

Sector	Expected price reduction
Steel	Rs 500 -600 per tonne
Aluminum	Rs 1,500 -1600 per tonne
Commercial Vehicles	Rs 10,000 - 30,000 per vehicle
Tyres	Rs 200 - Truck tyre; Rs 25 - Car tyre
Cement (only on bulk cement)	Rs 60 - 100 per tonne
Household appliances	21" Flat CTV price to be lower by Rs 150
Organic Chemicals	Caustic soda - Rs 500/tonne; soda ash - Rs 290-320 per tonne
Petrochemicals	Rs 700 - 1,000 per tonne

9.) Key sectors with 2% service tax cut

Following are the key sectors in which reduction in prices is expected due to Service tax cuts:

1. Construction

2. Media & entertainment

3. Telecom Services

4. Hotels

5. Airline Services

6. Healthcare Providers

10.) Key sectors where duties remain unchanged

Following are the key sectors in which the duties remain unchanged:

1. Textiles

2. Paper

3. Petroleum products

4. Cars & two-wheelers

Impact:

The benefits of the above-mentioned measures will be passed on to the consumers resulting in a marginal reduction in cost of services and reduced prices of commercial vehicles, household appliances and commodities such as steel, aluminum and cement.

While the housing segment is expected to marginally benefit due to lower cost of inputs (steel, cement), the end consumer will benefit from lower prices of products and services (including lease rentals).

However, these measures are unlikely to spur demand/consumption, given weak consumer sentiments. Player profitability is expected to remain unaffected in most sectors leading to an overall neutral impact across key sectors.

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Implications of Third Stimulus Package.

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