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Dual
GST from April 2010; Natural gas gets tax break, bonanza
for RIL; Petrol, Diesel pricing review; New pension
schemes to be tax-free; Direct tax code in next 45 days
Pranab
Mukherjee has presented a borrow-and-spend Budget with a
deficit that may be an all-time high, reflecting
short-term pessimism about economic prospects. The finance
minister reckons on only marginal improvement from last
year’s GDP growth rate of 6.7 per cent, chiefly because
he sees no upturn in international demand. Mukherjee has,
therefore, focused his Budget on boosting domestic demand
as a growth driver.
Compared
to his Interim Budget of February, he has given more money
for the Central Plan, more money to the states, more money
for flagship programmes like the rural employee guarantee
scheme, and more money for both urban and rural
infrastructure. And since the current tax revenue
assessments are lower than the February numbers, the
deficit has ballooned — from 5.5 per cent of GDP in
February to 6.8 per cent now. All Budgets since the
economic reforms began in 1991 have seen lower deficits.
To
finance this, he has resorted to even more market
borrowing, which has quadrupled from the Rs 1,00,571 crore
that P Chidambaram had postulated in his Budget for last
year, to Rs 3,97,957 crore.
This
is Mukherjee’s fourth Budget (the earlier three were in
1982-84), and he knows that he is testing the limits. He
admitted candidly in an interview that this
borrow-and-spend strategy was a response to exceptional
circumstances and could not hold for the medium-term, let
alone for the long-term. The Budget papers contain a
promise that the deficit will be cut to 5.5 per cent next
year, and 4 per cent the year after. Presumably, GDP
growth will have recovered by then to the 9 per cent that
the finance minister hoped to achieve “at the
earliest”, as he said in his Budget speech.
In
other words, this is a Budget for what is seen as an
especially difficult year; so the fiscal stimulus must
continue, and fiscal discipline can wait. Mukherjee
recognises also that the borrowing programme runs the
danger of affecting interest rates and crowding out
private investment; he will take up the issue with the
Reserve Bank at a meeting on Saturday, and look for ways
of “innovatively managing” the government’s massive
borrowing programme.
However,
the bond market in Mumbai reacted to the deficit
announcement with yields climbing for longer-term
maturities. As a flip-side response, bank stocks led the
fall in the stock market as a lot of banks have been
holding long-term maturity government paper. Bankers said
the short-term liquidity situation remained comfortable;
one bank CEO even said he was thinking of dropping his
bank’s prime lending rate.
The
difficult fiscal situation has not prevented the finance
minister from tossing out goodies for tax payers: the
income-tax floor has been raised a bit, and the tax
surcharge on those earning Rs 10 lakh and more has been
abolished. For good measure, he has abolished the fringe
benefit tax (FBT), though some of what the FBT covered
(including employee stock option programmes) will now be
taxed as perquisites.
The
biggest beneficiaries from the package are those in the
upper income reaches. The revenue loss of about Rs 18,000
crore is sought to be recouped through a higher minimum
alternate tax, which goes up from 10 per cent to 15 per
cent. The changes in direct taxes, taken together, were
revenue-neutral, Mukherjee said.
There
are specific tax changes for selected industries, but the
broad structure of indirect taxes has remained unchanged.
A disappointed stock market lost about 6 per cent of its
value during the day, in part because of the level of the
deficit and also because no target was set for revenue
from disinvestment, seen as a bellwether reform issue. In
contrast, most businessmen seemed to recognise that the
finance minister had done a fine balancing act, in the
face of a difficult situation.
The
biggest reform measure in the Budget is the commitment to
the schedule for introducing an integrated Goods and
Services Tax (GST) next April. This involves prior action
in the form of Constitutional amendments and other
legislative changes, apart from a re-alignment of tax
rates. Mukherjee said his confidence on sticking to the
GST schedule flowed from the work done by the committee of
state finance ministers, whose work he praised. He said in
the interview that he expected better tax compliance in
the wake of the GST to make possible a significant
lowering of the nominal tax rates.
Two
other reform measures involve fertiliser and petroleum
products. In the former, the present product-subsidy model
will give way to a nutrient-based model, yielding
eventually to direct subsidy payments to farmers rather
than manufacturers. Mukherjee hoped this would create room
for innovative fertiliser products and fresh investment in
the fertiliser industry, which has seen no investment for
more than a decade.
On
petrol and diesel, the finance minister said an expert
group would advise the government on how to make the
pricing policy for these products “viable and
sustainable”.
Mukherjee’s
tax proposals for the current year include specific
benefits for the tech sector, oil and natural gas
(exploration, production and pipeline-transportation),
textiles and a handful of others (like mobile phones and
set-top boxes). The Commodities Transaction Tax,
introduced last year but never given effect to, has been
scrapped. And in a third reversal of the positions adopted
by his immediate predecessor, Mukherjee has extended the
service tax to cover law firms, arguing that he disagreed
with P Chidambaram’s view (stated in jest) that they did
not provide a service! The new pensions scheme will enjoy
various tax benefits.
The
finance minister said that this is the first Budget to
cross the Rs 10,00,000 crore figure, and recalled that
Independent India’s first Budget was for Rs 193 crore.
Source :
Business Standard - Mumbai, Maharashtra, India,
dated 07/07/2009
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