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May 20, 1998


Budget may focus on savings, spare tax structure

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Faced with low economic growth and sagging industrial production and exports, the first Budget of the Bharatiya Janata Party-led coalition government is likely to initiate major measures to restore business confidence and spur the economy.

The poor economic performance is reflected in the low gross domestic product growth rate in 1997-98 -- around five per cent, the lowest in the last five years -- steep shortfall in revenue collection, low industrial production and export growth rate of four per cent and depressed capital market. On top of this is the fallout of the economic sanctions imposed by the United States and other developed countries following India's nuclear testing.

The June 1 Budget is expected to stimulate demand which is the main cause of the industrial slowdown. It is almost certain that capital outlay is to be significantly increased over last year.

According to analysts, it is likely that the Budget may produce a fresh initiative in the housing and construction sector which has great potential for generating demand in a large number of industries like steel and cement and at the same time create large-scale employment. This will mean a number of fiscal incentives including according housing and construction industry infrastructure status and making it eligible for five-year tax holiday and drastic changes in land acquisition and rent laws which have come in the way of housing activity. The urban development ministry has already decided to implement several sweeping changes to give a fillip to the housing sector.

The Budget is expected to provide larger allocation for the infrastructure sector, particularly power, ports and roads. It is well recognised now that private initiative is not enough in this field.

In the area of direct taxes, it is expected that the government may retain the existing rates. There is a view in some quarters that because of the slowdown in direct tax collection a new slab may be introduced for the super rich. Others, however, feel that this is unlikely to happen in the context of the present industrial slowdown.

The BJP-led coalition's national agenda for governance has laid stress on stepping up savings. The Budget is, therefore, likely to provide incentives for savings such as removal of the existing ceilings of Rs 60,000 on public provident fund and other enterprises investment which is eligible for tax rebate.

Industry circles are hopeful that the government will either remove tax on band deposits or levy lower rate of tax on companies which have to restructure as a result of liberalisation or globalisation as capital gains and gift tax is levied on acquisitions, mergers, demergers, splitting, and spin- off. To facilitate the process of reconstruction, the Budget may exempt levy of such taxes, these circles say.

In the area of indirect taxes, no increase in import tariff across the board is expected. The Budget, however, may freeze any further reduction in import tariff. Also it may ask the Tariff Commission to relook at the import tariff of those products where the rates have been brought down below the World Trade Organisation commitments. The paper industry is one such case.

Analysts say the Budget may provide relief to the domestic industry against cheap imports by streamlining countervailing duty levied on the same item when imported so as to include central sales tax and other state levies.

The Budget may also consider reduction of excise duty on select items such as steel as this and some other industries confront a lot of difficulties.

Excise duties, which at present have a large number of slabs, may be reduced to three or four to minimise classification disputes.

As demanded by industry, Modvat may also be extended to more products.

The capital market has been depressed for the last three years. To revive the market, the Budget may initiate a number of measures including liberalising lending norms against shares and non-voting shares and remove ceiling on inter-corporate loans and investments.

Despite public prouncements from time to time about swadeshi, the Budget is unlikely to make any significant departure from the foreign direct investment policy, foreign investment promoting agencies say.

In fact, the clearance of projects may be speeded up and procedures simplified.

Analysts say to promote exports the Budget may extend the benefit of Section 80 HHC to export earnings so that no tax is levied on exports. Also interest on export finance may be further reduced.

The Budget may initiate reforms in the financial sector including opening up of the insurance sector in a limited way to the domestic industry. And for some products and services, foreign companies may be allowed to take limited equity in Indian companies.


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