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New taxes likely, 2% surcharge to continue

The budget 2001-2002 to be presented by India's Finance Minister Yashwant Sinha will continue with the recently-imposed 2 per cent surcharge on direct taxes and rationalise indirect taxes -- customs and excise -- to raise higher resources.

As, rehabilitation and rebuilding of infrastructure in quake hit Gujarat will impose additional burden, Sinha will not be inclined to discontinue the surcharge. According to finance ministry sources, more than Rs 13 billion will be raised through the already imposed surcharge.

Further the budget is likely to include many of the recommendations of the economic advisory council of the prime minister, sources said.

Contrary to industry demand, Sinha is likely to extend service tax to more areas and also increase the rate. Industry experts had earlier urged the FM to reduce the existing rates of corporate and income tax and abolish the minimum alternate tax (MAT). Sources added that the finance minister may widen the service tax net to include medical, legal and technical services.

Already termed as a harsh budget, any relief may be only marginal, such as raising of income tax exemption limit from the present level of Rs 50,000 to a higher amount. There is also a popular demand, backed by the industry, for applying the maximum rate of 35.1 per cent, including the surcharges, to income above Rs 150,000.

Experts point out that the ever increasing middle class plays a crucial role in boosting demand through its spending. Hence, it should be left with more money to spend on consumer durables, which will have a multiplier effect and help in combating the current drop in demand, which has contributed to the slowdown of the industry.

Sinha, however, is likely to keep in view the figures of the tax research cell of the finance ministry, which indicates that every increase of Rs 5000 in the income tax exemption limit will lead to a net revenue loss of Rs 1 billion.

The Federation of Indian Chambers of Commerce and Industry (FICCI) has argued that the maximum rate of income tax applicable on income of Rs 150,000 limit in India is much lower than limits prevailing in neighbouring countries.

Sinha has indicated that the government has already put in place a moderate income tax rate structure and surcharges on direct taxes are ''reasonable.''

Sinha will make a serious effort to widen the tax base and he has been advised to plug loopholes of evasion, for example, making it obligatory to give bank account numbers in tax returns.

In view of the decline in savings rate to around 22 per cent, he may give incentives such as raising the present public provident fund (PPF) limit of Rs 60,000, increasing the income tax rebate of Rs 16,000 to Rs 20,000 and raising the exemption of bank interest from Rs 12,000.

The Reserve Bank of India's announcement of cut in bank rate to reduce the prime lending rate (PLR) as demanded by the industry may finally result in reducing the deposit rate which may hurt small investors, salaried class, and senior citizens.

There is a suggestion that there can be differential rate of interest in the case of vulnerable sections of the community, particulary retired persons and senior citizens upto a certain amount. Senior citizens are getting concessions in many sectors such as rail and air fares.

Indian industry has been jolted by the cost, variety and quality of Chinese imports. The budget is likely to take cognisance of the problems faced by industry on account of flooding of imports from China and other countries and removal of quantitative restrictions (QRa) on the remaining 714 items from April one this year.

While the finance minister is disinclined to impose higher tariffs to offset the impact of QRs on all items, he is likely to raise duties permitted by the World Trade Organisation bound rates in case of agricultural commodities and some items reserved for small scale sector.

As far as Chinese imports are concerned he will strengthen the anti-dumping mechanism to ensure that such goods do not sell in the country below the cost price of the exporting country or lower than the price at which it is exported to other countries.

As resources are required, particularly for infrastructure development, Sinha may remove all remaining bottlenecks in the way of foreign direct investment which is only around $2 billion, much less than the targeted level of $10 billion.

He is expected to further simplify the procedures and except for a small negative list, FDI is likely to be opened up to all sectors, including housing which has a large potential for generating employment.

Despite the Gujarat calamity, the thrust of the budget will be on growth through larger public investment by increasing domestic savings, apart from larger inflows of FDI. This may be a difficult task in the present scanario but there is no escape from it. The budget will have to come out with bold and innovative measures to reverse the slowdown in industry.

In view of the coming elections to five state assemblies, the finance minister is unlikely to raise excise duty on items used by the common man such as biscuits, toothpaste, personal products, tea, coffee, soaps, detergents and bread.

He may also provide larger allocation for infrastructure development, including social infrastructure such as education and health.

There are also suggestions that the government should come out with an innovative scheme for tapping unaccounted money in the form of Gujarat relief bonds returnable after a certain period.

The budget is likely to indicate the direction of second generation reforms, including financial sector, labour and judicialry.

There has been lacklustre performance on the divestment front last year and the target of Rs 100 billion by the last budget will certainly not be achieved. In the light of this experience, the budget may come out with a strategy on divestment in PSUs.

The government has brought in the Fiscal Responsibility and Budget Management Bill. This will necessitate zero-based budgeting of schemes. The government has also indicated that it plans to prune a large number of schemes which, it feels, are no longer relevant.

The plethora of anti-poverty schemes could be merged.

Non-plan expenditure is likely to be ruthlessly curbed and many ministries may find their budgets halved. Certain ministries and departments are likely to be either shut down or merged.

The government is also likely to bring in the VRS scheme for its employees, which would help cut down on its salary bill.

Indications are that the government will reform the financial sector by bringing in legislative changes to allow financial institutions to transform themselves into universal banks and encourage banks to take up the mantle of financial institutions.

A package to revive sick banks appears to be also on the cards.

To help banks recover assets locked in bad debts, the government is likely to bring in foreclosure laws which will allow easier winding of companies and distribution of their assets among creditors and labour.

The President has hinted in his address to the joint session of parliament that there will be wide ranging labour reforms. However, a consensus still eludes the government, industry and unions over this issue. Both government and industry want legislative changes, which will allow industry an easy exit policy. But unions are still oppossing this.

An overhauling of the companies act might also be signalled in the budget to help restructure Indian industry which has been suffering from recessionary pressures as well as cost inefficiencies.

One of the major constraints in the development of the industrial sector is the continued depressed capital market. Many experts and businessmen have pleaded that the dividend tax be reduced from the present level of 20 per cent to ten per cent if not altogether abolished.

The stock markets have not yet been able to recover from Harshad Mehta scam and the subsequent loss suffered by ordinary shareholders in the crash that followed.

Sentiment, which is the single biggest factor in the market, also suffered and has not staged a recovery since then. Also, the small investor, the true king of the market, disappeared from the scene after having burnt his fingers on account of the manipulation of dishonest company promoters and greedy merchant bankers.

Experts point out that around the same time after the unwise and hasty scrapping of capital issues control, the Securities and Exchange Board of India, and the merchant bankers created a system where public issues for all practical purposes became private placements. Common investors had no way to bid for shares of companies directly. They had to buy only stocks of mutual funds and some of these also badly let them down.

Experts say the need to seek an answer to the revival of a healthy market is not through the budget so much, but by making possible the return of the small investor to the market and doing away with the present near domination of foreign institutional investors and the domestic government institutions.

They say Sebi has to be instructed to reserve a substantial portion of all issues for public subscription. This combined with energetic divestment by the government will help revival of the market.

The government has so far not taken enough action against dishonest speculators and promoters who defrauded thousands of small investors during 1992-1997 and thereafter did the vanishing trick.

Experts say the finance ministry, RBI, Sebi and stock exchange authorities owe it to the nation to take demonstrative punitive action against culprits. The budget could give some indication.

There are indications that Sinha is likely to hike excise duty rate on high category items of white goods popularly known as luxury items. Such a move may not be politically inconvenient but the finance minister will have to face pressure from major players in the white goods sector, who maintains that performance of this sector has not been upto the mark.

There is much talk of an imminent cut in interest on small savings.

The budget may further liberalise critical sectors such as power, telecom and insurance.

There are other expectations from the budget as outlined by industry experts and financial analysts.

These include tax concessions for private life insurers, tax holiday for infrastructure investments, tourism, civil aviataion and hospitality projects as also tax breaks for agro-processing industries.

Sources feel that the price controls or administered price mechanism (APM) will be dismantled ahead of next year's deadline. However, kerosene will remain under APM.

The market expectation regarding the infotech and telecom sector is a five year tax moratorium on all e-commerce transcations, tax incentives for hardware manufacturing in special econmic zones (SEZs) and a cut in customs duty on hardware sector components.

The market is banking upon a higher import duty on edible oil. Experts point to the possibility of the budget giving amensty to encourage households to deposit gold in banks under the gold bond scheme aimed at bringing privately held gold stocks into circulation.

The auto industry is waiting anxiously for a cut in excise duty on passenger cars and feel that the FM may extend allocation of proceeds of a spcial tax on automobile sales to r and d projects.

The economy in 2000-2001 has been depressing. The current fiscal year is likely to end without achieving growth targets of GDP, industry, agriculture, services sector as well as savings and FDI.

The deteriorating performance of the infrastructure sector, negative growth in capital goods industry, hike in oil prices, rising inflation, pressure on the rupee, continuing gloomy capital market and hardening of interest are areas of concern.

The only bright spot is the export performance with growth rate of over 21 per cent and comfortable balance of payments situation.

The fact remains that in the present political scenario, Sinha has to do a lot of tight rope walking.

No finance minister can ignore the political fallout of the budget proposals and pulls and pressures of coalition partners.

UNI

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