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June 4, 1998


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Budget lacks fiscal discipline

The Centre for Monitoring Indian Economy

The Union Budget '98 cannot be given the credit for maintaining fiscal discipline as the gross fiscal deficit is budgeted to reach 5.6 per cent of the gross domestic product in 1998-99.

Given that most Budget proposals are optimistic and the current one does not show any signs of being different, the likelihood of the deficit turning out to be much higher is distinct.

Such high deficits are way above levels that can be considered prudent. The gross fiscal deficit was 6.1 per cent of the GDP in 1997--98 and in the words of the Economic Survey, published by the ministry of finance, this marked a `"major deterioration'' on the fiscal front.

It is quite likely that the international financial community and in particular the international rating agencies would take a negative view of this fiscal profligacy.

However, there is no truth in the fiscal deficit being an absolute evil.

A little fiscal discipline can be sacrificed for growth. Inflation is low and the economy is early on its recovery path. Increased government spending can provide the much-required impetus to the growth process. However, in this respect, the government can best spend the additional amounts on infrastructure development as this can best "kick-start'' the economy.

Capacities in infrastructure would lead to increased down-stream activities. And these being large capital investments of longer gestation, the government is better suited to do this, at least till the environment for private sector participation matures.

The Union Budget does not specifically focus on the problem of investment in infrastructure as a whole.

However, it does show substantially increased outlays for power and coal. The outlay for power has increased 37 per cent from Rs 69.73 billion budgeted in 1997--98 to Rs 95 billion in 1998--99.

Similarly, the outlay for coal has increased 19 per cent from Rs 33.92 billion to Rs 40.53 billion. The coal ministry, however, could not spend 30 per cent of its budgeted outlay in 1997--98.

The outlay for the civil aviation ministry has declined compared to the allocation in the previous year as the ministry could not spend over a third of the budgeted outlay. Outlays for the petroleum and non-conventional energy sectors have increased.

However, the increase for surface transport has been marginal.

There are substantially increased outlays for agriculture. This may have a favourable impact on boosting domestic demand.

The Union government has wisely refrained from raising direct taxes, although there were widespread expectations of an increase in these.

A consistency in the direction of the taxation policy is essential to ensure better compliance to compensate for the decline in the tax rate.

Past statistics do indicate that there is hope of an increase in compliance and an increase in the tax rates would have had an adverse impact on the longer term.

The increase in customs duty is a step in the direction of providing protection to domestic industry.

This runs against the trend of a tax regime which aims at making the Indian industry more competitive. The increase in customs duties is not even stated to be an interim measure.

As such, it would require another round of reforms to reduce these again. The rise in excise duties have been selective and the selections, as usual, do not appeal to any easy reasoning.

An exception to this, is the intelligent spread of service taxes this year. Transport operators and marriage pandal organisers are difficult customers to charge a tax on, but the business services group is a relatively easier proposition.

However, it is hoped that indirect taxes in general are discouraged in the longer run.

Announcements for the capital markets have been far from appeasing. A one-year extension for stock brokers to corporatise, the signaling of the arrival of derivatives, and the further spread of the portfolio of investments permitted for the non-resident Indians and foreign institutional investors - none have moved the markets.

The Sensex lost 168 points reportedly because of the stipulation of Permanent Account Numbers (for income tax assessees) on large transactions.

To sum up the Budget, it is broadly a continuation of the preceding seven budgets but has gone a trifle overboard on the fiscal deficit. Finally, it has apparently completely ignored the impending sanctions the country faces from the West.

Indirect Taxes

Excise Duties

In excise duties, as in most other parts of the Union Budget, Finance Minister Yashwant Sinha has continued on the path of reforms and rationalisation set out since the early 1990s.

Thus, the excise duty regime is guided by the overall need to rationalise the rate-structure so as to reduce the multiplicity of rates and ensure convergence toward a mean rate of 18 per cent ad valorem.

However, the Union Budget continues to indulge in nit-picking at excise duties -- a cut here and a hike there on a heterogenous mix of items selected quite apparently with great precision and purpose.

However, one fails to see the rationale and the purpose in the selection of these items for excise (or for that matter customs) changes.

Particle and other similar boards have been exempted from excise duties. Similarly, jute articles have been exempted. Recorded audio and video cassettes have been exempted. Computer software has been exempted from excise duties.

Besides, excise duties on a small heterogenous mix of items have been reduced. These include effluent treatment plants, diesel engines up to 10 HP, surgical and medical examination gloves, potassium iodate, electronic calculators, pagers, cellophane, PVC compound, nylon filament yarn, alcohol-based toilet preparations, televisions of specific sizes and matches.

The list of items on which excise duties have been increased is much larger and far more heterogenous.

Several items hitherto exempted from excise have been brought under the purview of excise duties. Many of these items are of mass consumption such as packaged tea, branded butter, cheese, ghee, spices, cigarettes, pan masala, meats and other edible preparations. These and others such as spectacles and tractors have been slapped an excise duty of eight per cent.

Similarly, duty on multi-utility vehicles, solid or cushion tyres and marble tiles have been increased.

The Union Budget has imposed a five per cent service tax on a host of business and consulting services. These include architects, interior decorators, management consultants, chartered accountants, cost accountants, company secretaries, private security services, real estate agents and consultants, market research agencies, credit rating agencies, underwriting agencies and slaughter houses.

However, taxes on these is expected to yield only Rs 2.20 billion in a full year.

Custom Duties

In sharp contrast to the trend witnessed since the early 1990s, customs duties have been raised in the Union Budget.

This is expected to fetch an additional amount of Rs 33.04 billion.

The domestic industry has been demanding an increase in the protective barriers against imports. The Budget has obliged and imposed an eight per cent additional non-modvatable levy on imports.

The new levy would not apply to crude oil, newsprint, capital goods sector, goods under a special tariff regime which are subjected to additional duties of excise in lieu of sales tax, gold and silver imported by passengers or other nominated agencies and life-saving drugs that are free from custom duties.

The duty would also not apply to goods which are currently exempt both from basic and additional duties of customs.

Similarly, goods imported for subsequent trading have also been left out of its purview, since they bear the burden of sales tax at the time of first sale. The new levy will also not apply to inputs imported under export-promotion schemes.

Besides, there has been an ad-hoc increase in customs duties on a host of commodities.

Kerosene for parallel marketing has attracted a tariff of 32 per cent. Duties on gold, citric acid, telecom parts, cold-rolled coils of iron and steel, paper and paper board, engines for motor vehicles, copper and photographic chemicals are among the items whose import duty has been raised.

Customs duties have been reduced in respect of several items. Components used in the manufacture of computers in general have seen duties decline in this Budget. Other major items whose customs duties have been reduced include newsprint, button cells, paraxylene, caprolactum, rayon-grade wood pulp, refractory ceramic goods, stainless steel melting scrap and watch movements.

Direct Taxes

Personal Taxes

Dr Manmohan Singh's tax rate cuts in 1993--94 and those of P Chidambaram in 1997--98 -- both of whom cut personal taxes by 10 percentage points each in their respective years of glory -- cannot bematched by any other finance minister.

Sinha was not even expected to cut taxes sharply this year. In fact, the pre-Budget build-up was one of increasing taxes to meet hard times ahead.

The minister presented a pleasant surprise by not making any material change to the personal tax regime. The few changes were favourable for the common man. The exemption limit has been increased from Rs 40,000 to Rs 50,000.

Standard deduction for the salaried income up to Rs 1,00,000 has been increased by Rs 5,000 from the existing Rs 20,000 to Rs 25,000.

However, persons earning between Rs 100,000 to Rs 500,000 would continue to get a standard deduction of Rs 20,000 only and individuals with income of more than Rs 500,000 would no longer enjoy the benefits of standard deduction.

Tax-free medical reimbursement has been enhanced from Rs 10,000 to Rs 15,000 per annum.

Gift Tax has been abolished. However, the recipient of such gifts will have to pay income tax on the same.

The Finance Bill proposes to amend Section 47 of the Income Tax Act. This will provide for a scheme where lending of any securities under an agreement or arrangement -- entered with the borrower of such securities -- shall not be regarded as ``transfer''. Hence exempt from Capital Gains tax.

Henceforth, PAN/GIR number will have to be mentioned in transactions like purchase and sale of houses, purchase of motor vehicles, transactions of shares above Rs 50,000, fixed deposits in banks above Rs 50,000, application for telephone connection and hotel payments exceeding Rs 25,000.

The Union finance ministry intends to introduce the following simplification and rationalisation measures:

  • "Saral'', a one page return form for all non-corporate tax payers will be introduced. A tax payer would be able to fill the same and file returns without the help of a chartered accountant.
  • "Samadhan'', a scheme to provide a quick and voluntary settlement of tax dues outstanding as on 31 March 1998, both in various direct tax enactments as well as indirect tax enactments by offering waiver of a part of the arrear taxes and interest and providing immunity against institution of prosecution and imposition of penalty.
  • "Samman'', a scheme to recognise and offer incentives to honest tax-payers.

Corporate Taxes

The Indian corporate sector has benefited from declining tax rates consistently since the reforms began in 1990--91. In 1990--91, the effective tax rate on corporate profits was 54 per cent.

By 1996--97, this was brought down to about 46 per cent by Dr Manmohan Singh. Chidambaram went further and, in just two years, the effective tax rate on Indian corporates was brought down substantially to 37.6 per cent.

The effective tax incidence, i.e. the tax paid by the corporate sector as a per cent of the profits before tax reported by them in the annual reports, has been much lower than the effective tax rate because of a slew of concessions available.

While the imposition of the Minimum Alternate Tax did raise the tax incidence, this still remains much lower than the tax rates.

Tax incidence of profit-making companies had declined from 26 per cent in 1990--91 to 19.5 per cent in 1995--96.

MAT raised this to 22 per cent in 1996-97.

Unaudited results of 1997-98 indicate that the rate was about 20 per cent in the year.

Fears of sanctions against India following the nuclear tests and also the decline in tax collections in 1997-98 had raised fears that taxes would be raised in 1998-99.

However, there has been no change in corporate tax rates. Some of the proposals are outlined below:

  • Specified business reorganisations to be exempt from capital gains tax and carry forward of loss and unabsorbed depreciation arising out of such reorganisation allowed.
  • Tax holiday on housing schemes. 100 per cent deduction for the first five years and 30 per cent during the subsequent five years for approved housing schemes.
  • The five-year tax holiday applicable to telecom services extended to radio paging and domestic satellite services.
  • Tax holiday to enterprises generating or generating and distributing power and for industrial undertakings set up in industrially backward states and industrially backward districts extended up to 31 March 2003.
  • Seven-year tax holiday granted for oil refineries which commence production on or after 1 October 1998.
  • Businesses with profit of Rs 40,000 or turnover of Rs 120,000 were required to file returns and maintain books of accounts. This is being raised to Rs 400,000 and Rs.1,000,000 respectively.
  • Companies allowed special deduction of 30 per cent of the aggregate wages or salary paid to the new workers in case of a new undertakings -- the number of workers are at least 100 and, in case of an existing undertaking, the number of new employees are at least 10 per cent of the existing number of employees.
  • Payment made for extortion will not be treated as business expense and will not qualify for tax exemption.

Budget does little to aid industrial recovery

Budget '98

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