Increased tax on SUVs and Cigarettes in India

India plans to fund its higher-than-expected spending in the fiscal year 2013-14 with increased taxes received from large-scale businesses. On Thursday, India claimed to increase its revenues by taking certain steps which will revive growth amid the country’s worst slowdown in a decade.

India’s total spending is anticipated to increase by a surprisingly high 16 percent to 16.65 trillion rupees, while the fiscal deficit for the current year will fall to 5.2 percent of GDP. Finance Minister P. Chidambaram expects that next year’s deficit will be 4.8 percent of GDP. However, he insists that fiscal consolidation cannot be effective only by slacking expenditure.

“The high gross borrowing and the higher spending is going to be inflationary and RBI would rather think of slowing the pace of monetary easing rather than increasing it,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Although Chidambaram hesitated from increasing general indirect tax rates, he raised customs duty on certain products including imported high value motor bikes, cars, and excise duty on mobiles costing over Rs 2,000 and cigarettes.

“SUVs occupy greater road and parking space and ought to bear a higher tax… However, the increase will not apply to SUVs registered as taxis,” Chidambaram said. Targeting the “affluent class in India that consumes imported luxury goods such as high end motor vehicles, motorcycles, yachts and similar vessels”, he said: “I am sure they will not mind paying a little more.”

Moreover, smokers will also have to pay more for buying their cigarettes as Chidambaram sees them as the means of easy revenue.

“What does a finance minister turn to when he requires resources? The answer is cigarettes. I propose to increase the specific excise duty on cigarettes by about 18 per cent. Similar increases are proposed on cigars, cheroots and cigarillos,” he said.