With danger signals flashed in the Economic Survey, the Union Budget on Wednesday is likely to contain certain bold decisions to cut fiscal deficit and spendings laced with tax sops for the salaried class.
In the United Progressive Alliance government's maiden Budget, Finance Minister P Chidambaram is likely to take follow his predecessor in presenting one-part Budget that is widely expected to raise Income-Tax exemption limit to Rs 70,000-1,00,000, phasing out exemptions and imposing two per cent cess on direct taxes for funding primary education.
Along with the Budget, Chidambaram would present three documents -- a macro-economic framework statement, a medium term fiscal policy statement and a fiscal policy strategy statement, official sources said.
The medium term fiscal policy statement would contain a 3-year "rolling target" for key fiscal parameters that underpin the government's fiscal correction trajectory.
Sources said the fiscal deficit is likely to be restricted to less than 4.3 per cent of GDP, in line with the stipulation of the Fiscal Responsibility & Budget Management Act of 2003.
The FRBM mandates government to cut fiscal deficit by at least 0.3 per cent of GDP annually and revenue deficit by at least 0.5 per cent of GDP.
The Budget is expected to contain reform measures to sustain 7-8 per cent growth, including higher public investment in infrastructure, agriculture and social sectors, while liberalising FDI regime to boost industrial growth to at least 10 per cent.
Concerned over the possibility of northward movement of interest rates globally and surge in inflation in the last few weeks, the Budget may keep small savings rate intact at 8-8.5 per cent for various instruments, sources said.
On the tax front, sources said there might not be much tinkering of rates in both direct and indirect taxes.
While Income-Tax rates are likely to be kept at 20-30 per cent for different income slabs, the Corporate Tax rate might also be retained at 35 per cent.
Sources said the finance minister may withdraw the 3.0 per cent surcharge but impose a 2.0 per cent cess instead.
With the Economic Survey emphasising the need to bring down customs duty to ASEAN levels, there is a possibility of some tinkering especially on raw materials but peak rates would remain untouched at 20 per cent.
There is also likely to be some tax sops for the textile sector especially when the multi-fibre agreement is set to be phased out from January 2005.
But Cenvat on handlooms and powerlooms might be withdrawn keeping in line with the promise in the Common Minimum Programme to provide relief to the weavers.
Sources said the budget will unveil several innovative measures to tap black money.
Chidambaram is also expected to extend the list of services, which would be coming under the tax net. The target for service tax collection is also expected to be raised significantly to garner additional revenue.
The government is expected to redefine Capital Gains Tax or rationalise it to boost investment in the country.
The exemption from the 12.5 per cent Dividend Distribution Tax on equity mutual funds may be restored.
The Income-Tax deduction limit for pension contribution may also be increased slightly from the present Rs 10,000 to promote long-term savings as provided under Section 80 CCC of the I-T Act.
The finance ministry may cap the rebate provide under Section 88 on investments in insurance policies to Rs 10,000, sources said.
But the tax sops for single premium insurance schemes provided under Section 10(10D) may not be restored.
Chidambaram is unlikely to touch the sensitive issue of taxing farm income.
Instead, he might keep the CMP promise and abide by the announcement made by Prime Minister Manmohan Singh to give a "new deal" to rural India by hiking allocations for agro-based industries, irrigation projects, rural roads and electricity in the Budget.
Chidambaram has already promised steps to make India a "manufacturing hub". The Budget might contain fiscal measures to push up investment both domestic and foreign, in the manufacturing sector.
This could mean reviewing some of the legislations, removing bureaucratic hassles, tax incentives for green-field projects and special economic zones to push up investment and exports from the country, sources said.
Gross budget support for annual plans to states, pegged at Rs 1,35,000 crore (Rs 1350 billion) in the interim Budget may be pushed up slightly to near about Rs 1,50,000 crore (Rs 1500 billion) in the Budget to enable the government to spend more on education, health and drinking water.
On the expenditure side, the finance minister may not have much leeway to curtail subsidies especially in food, fertiliser and some petroleum products like kerosene and LPG, particularly with the CMP promise to provide relief to the poor and weaker sections.
But measures to cut expenditure by at least 10 per cent would come through knocking off some of the unwanted provisions to the various ministries.
There could be some serious efforts to downsize the government on the lines of Expenditure Reforms Commission helping the government to make some savings from staff costs.
Major expenditure control could be in the form of reduction in the interest payments of the Centre through a slew of measures like prepayment of costly foreign loans, debt swap of state loans and buyback of securities from banks and FIs.
The new defined contribution pension system is also likely to reduce the government's salary bill as a proportion to the total expenditure.
More from rediff