What are the different fiscal policy tools used in India ? Can Customs and Excise Duties be used as…

Question

What are the different fiscal policy tools used in India ? Can Customs and Excise Duties be used as flexible fiscal policy tools in order to increase revenue and control inflation ? Discuss.

Ghissu Editorial · Accepted Answer

India's fiscal tools are direct taxes, indirect taxes such as GST, customs and excise duties, public expenditure and borrowing. Customs and excise can be flexible tools, as pandemic excise hikes on fuel raised revenue and FY23 edible oil duty cuts eased prices, though frequent changes create uncertainty.

**Introduction**

India’s fiscal policy uses diverse tools to manage economic growth, inflation, and revenue, with Customs and Excise Duties increasingly important for flexibility amid challenges like COVID-19 and global price volatility.

**Fiscal Policy Tools**

1. **Direct and Indirect Taxes**: Direct taxes, including Income and Corporate Tax, contribute over half of tax revenue, showing resilience post-pandemic⟦1⟧; indirect taxes like GST, Customs, and Excise Duties remain crucial, especially for petroleum and alcohol sectors.

2. **Audit Evidence from Andhra Pradesh⟦4⟧⟦3⟧⟦2⟧**: ==Andhra Pradesh CAG Audit Reveals ₹1,806 Crore Revenue Impact in Tax and Land Departments (2021-22)== and ==CFMS Audit: ₹968 Cr Excess Payments, 48% Public Account Share⟦5⟧== expose significant revenue leakages and compliance issues.

**Customs and Excise Duties as Flexible Tools**

3. **Revenue and Inflation Management**: Excise duties were raised on petrol and diesel during the pandemic to boost revenue and later reduced to ease inflation; lowering customs duties on edible oils in FY23 helped control food inflation, benefiting low-income households in ==Andhra Pradesh==.

4. **Challenges and Trade-offs**: Frequent duty changes cause business uncertainty and evasion risks, as seen in ==Andhra Pradesh’s== commercial tax audits revealing ₹2,772 crore outstanding revenue observations (2023).

**Way Forward**

5. **Improve Enforcement and Simplify Duties**: Strengthening compliance and rationalizing duty structures will reduce leakages and litigation.

6. **Strategic Duty Modulation**: Continue flexible adjustments aligned with macroeconomic conditions, integrating duties with broader fiscal reforms including expanding the tax base and enhancing capital expenditure.

**Conclusion**

Customs and Excise Duties remain vital flexible fiscal tools for revenue and inflation control, requiring better administration and strategic use for sustainable growth.

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