Yielding to pressure from across the board, Finance Minister Pranab Mukherjee on Tuesday withdrew the proposed 5 per cent service tax on air-conditioned hospitals with more than 25 beds and on diagnostic services. The tax was imposed in the budget proposals for 2011-2012.

Mr. Mukherjee also raised the abatement available for levy of taxes on the retail price of some branded garments and textile made-ups that would bring relief to readymade garment manufacturers.

Moving the Finance Bill for passage in the Lok Sabha amidst a walk-out by the National Democratic Alliance for the government's refusal to take up a short duration discussion on the Prime Minister's response to the WikiLeaks revelations before the last leg of the budgetary procedure was taken up, Mr. Mukherjee said the purpose of the new healthcare tax was not merely to mobilise revenue, but to pave the way for introduction of the Goods and Services Tax.

“However, I have decided to exempt the new levy in its entirety both in respect of services provided by hospitals as well as by way of diagnostic tests until the GST comes into force,” Mr. Mukherjee said.

Both these proposals evoked sharp reaction from the interest groups. During the general discussion on the budget almost all political parties wanted the Finance Minister to withdraw the healthcare service tax proposal, which was dubbed as “misery tax.”

“To address this concern, I propose to enhance the abatement of 40 per cent to 55 per cent on the retail sale price. With this relief a unit will continue to be eligible for small scale industry exemption in 2011-12 even if it had a turnover based on retail sale price of Rs. 8.9 crore in the current year,” the Minister said.

“I would like to emphasise the importance of staying our course on the tax reforms, the enactment of the Direct Taxes Code (DTC) and the Constitutional amendment to facilitate the implementation of the GST from the next fiscal year,” he said.

Half-measures in these reforms, by insisting on concessions and exemptions, will only add to the complexity and distortions of the tax regime, which will compromise the intended benefits from these measures, the Minister explained.

Beginning his speech with reference to the devastating earthquake and tsunami in Japan and the their implications on the global market, the Finance Minister said there was growing political uncertainty in the Middle-East and Libya that had profound implications for the global oil markets and for the fuel-oil costs and inflation in the Indian economy.

“Even as we plan and prepare for the uncertainties in a globalised world, I want to emphasise that there will always be events that one cannot anticipate or plan for,” he said, adding “we need to do more when the going is good.”

Mr. Mukherjee said he opted for a significant fiscal consolidation when he could afford to do so without dislocating the growth momentum as it would also help in strengthening the domestic medium-term macro-economic environment.

Mr. Mukherjee said the government would pursue three more financial sector legislation — Pension Fund Regulatory and Development Authority Bill, the Bill on Factoring and Assignment and the State Bank of India Subsidiary Bank Law Amendment Bill shortly.

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