Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Economy

Indirect Taxes Up Big Time on Fuel Duties and Gold, Good For Government, Not So Much For Anyone Else

Apparently, the Indirect tax collections (Service Tax, Excise Duty and Customs Duty) are up 37% in May 2015 over May 2014. But is this really something we should be excited about?

Our view: Simple – it’s that massive tax on fuels and the customs duty on gold. The press release says:

These increase were spread across all the three categories- customs, central excise and service tax.

Central Excise collections have increased from Rs. 11,838 crore in May 2014 to Rs. 21,809 crore during May, 2015 registering an increase of 84.2 %.  Central Excise collections during April to May 2015 increased to Rs. 38,535 crore from Rs. 20,493 crore (during April to May 2014) and thus registering an increase of 88.0%.

Fuel Taxes Are More than 80% of the change

Central excise collections are up by around 10,000 cr. in May.

We use around 1000 cr. liters of petrol/diesel per month, and the excise duty has been increased by around Rs. 7.5 to 7.75 per liter extra between November 2014 and January 2015. That alone is Rs. 8000 cr. per month of excise duty increases.

There’s also the car duty increase that has happened in Jan of this year.

I think most of the increase is coming from these sources, rather than from actual increase in production (some of which is also happening, undoubtedly) Our manufacturing revival from the rock bottom that it was in the previous year will help, but the scale is more of the order of 10-12%, not the 37% headline number.

Customs: It’s The Gold! And Only the Gold.

Customs collections have increased from Rs.13,539 crore during May, 2014 to Rs.15,700 crore during May 2015 registering an increase of 16.0%. Customs collections during April to May 2015 increased to Rs. 29,986 crore from Rs. 25,094 crore (during April to May 2014) and thus registering an increase of 19.5%.

Customs duty is up 16% but I attribute most of that to freed gold imports which have been very high in comparison with May 2014.

Last year we did just 35 tonnes in May versus 60 tonnes in the first 15 days of May this year. Assuming 120 tonnes for May 2015, we imported an extra 85 tonnes of gold. Duty on Gold is 10% and the price of Gold is around Rs. 25 lakh per kg. At Rs. 2.5 lakh per kg of customs duty, that’s 25 cr per ton of Gold, which means the excess 85 tons import yielded 2125 cr. of customs duty.

Guess how much customs duty collections were up by? From 13539 cr, to 15700 cr. , which means we saw an increase of about Rs. 2161 cr. in overall customs duty collections for May.

Nearly all of that is the increase in gold collections. Nothing else. Gold doesn’t actually help, so the indication of the increase in duty collections is actually not good if its only gold.

Others

Service tax is up by 13.2%. This is positive; we don’t know yet if it’s because of more business happening, or just more collections due to an increase in the Service Tax net. 

Overall, this sounds like the government’s keeping fit. I’m not sure of large increases in the economy though – as it doesn’t really look like things are changing on the ground just yet. Credit growth yesterday is back down to 9.8%, and the import/export equation is changing with trade growth near its lowest ever.

The increase in tax collections is good for the fiscal deficit. But it’s bad for consumption if it really is happening because of higher taxes or higher imports of a useless commodity; the only thing that will really be good is if we are manufacturing more and if we are consuming more. Next month onwards service tax numbers will anyhow be up another 10% because service tax is up to 14% from June; that is again a negative more than a positive.

 

Subscribe to Capital Mind:

To subscribe to new posts by email, once a day, delivered to your Inbox:

Also, do check out Capital Mind Premium , where we provide high quality analysis on macro, fixed income and stocks. Also see our portfolio which has given stellar returns in our year, trade by trade as we progress. Take a 30-day trial:

  • piyush says:

    You know the most important piece of information hidden in this post. That manufacturing actually grew @ 10-12%. That’s amazing. When was last when manufacturing grew at 10-12%. If actually that is the case, we are getting back to 8-9% growth in a hurry. Even discounting part of service tax, if we are seeing 9-10% growth there then that’s great news as well.

  • If I remember correctly, Jaitley said on TV that excluding the rate hikes, the increase in excise collection in May is around 16%. That, combined with service tax increase of 13.2% still makes for a very decent number. Besides, compliance must have improved given Modi government’s zero tolerance for corruption.

  • Ranga says:

    Big amount indirect taxes: problem.
    Big amount income tax : problem.
    Without these , how will the govt build roads, run hospitals, maintain police, protect borders, give cheap electricity, free food & rations, & everything ?
    Atleast the indirect taxes are levelling the field, unlike the income tax where only a few crore idiots are sucked dry.