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Five pc surcharge on income, corporate taxes likely to offset Kargil cost

George Iype in New Delhi

The Atal Bihari Vajpayee government is likely to levy a five per cent surcharge on income tax and corporate tax to mop up at least Rs 7 billion to partially meet the huge additional expenditure that the conflict in Kargil has imposed.

Although militarily and diplomatically India has won the battle against Pakistan in Kargil, the cost of the unexpected border conflict has upset Finance Minister Yashwant Sinha’s fiscal calculations for the financial year.

Indian government officials said that since Parliament is not in session, K R Narayanan has cleared the caretaker Vajpayee government’s proposal for a one-time special Kargil tax. While the Finance Ministry officials are working out the modalities of the new levy, sources said most probably it could be a five per cent surcharge on income and corporate taxes.

The government is also examining the possibility of mid-year hike in excise and custom duties on a wide range of commodities to increase the revenue collection in the next six months.

In the next few days, Sinha will present the Kargil tax details to the Union Cabinet for approval. Once sanctioned by the Cabinet, the government will submit the proposal to Narayanan who is expected to issue an ordinance. The new government that comes after elections will ratify the ordinance and move a financial amendment in the first session of the next Lok Sabha.

However, officials said since elections are fast approaching, Prime Minister Vajpayee and the Bharatiya Janata Party leadership are of the view that the Kargil tax should not inflict a heavy burden on common people and the middle classes.

Therefore, Sinha has already met with the finance secretary, revenue secretary and expenditure secretary to draw up an ad-hoc fund-raising plan that will not be excessive and painful for the tax-payers and at the same time will help meet the whopping Kargil expenditure.

“We are attempting to ensure that the additional taxes because of the Kargil conflict will not upset the people. Emergency taxes never go down well with the people whatever be the cause,” a Finance Ministry official pointed out.

He said with defence spending shooting up and fiscal deficit widening, the government has been left with no option but to impose a one-time tax to meet the border conflict expenditure.

He said the Ministry is trying its best to reach a delicate balance to make sure that the Kargil tax is minimal for every section of the society, especially the middle classes.

The official said the government has not so far calculated how much the two-month old battle against Pakistan in Kargil has cost the country. But rough estimates suggest that the Kargil cost would not be less than Rs 150 billion. The expenses have primarily been on account of moving troops to the front, compensation for lives and property lost and rehabilitating displaced people.

However, this does not include the series of defence purchases that the government is now scouting for.

The new government is expected to come out with the exact cost of the Kargil operations during the mid-term economic review in November.

The government has been pressed hard to moot the special Kargil tax as the fiscal outlook for the year 1999-2000 is bleak. Adding to the government’s fiscal worries is the failure of the proposed disinvestment of public sector undertakings by which the Finance Ministry hoped to shore up Rs 100 billion.

Moreover, while the government revenue collection in the past four months has been satisfactory, its borrowings overshot expenditure resulting in an unprecedented fiscal pressure.

Interestingly, it would be the second “war time tax” that Sinha has been compelled to impose. Sinha, who was the finance minister during the Gulf War in 1990, had levied a similar mid-year surcharge on income tax and corporate tax. The Gulf War had adversely affected the Balance of Payments virtually wiping out India’s foreign exchange reserves when petroleum prices shot through the roof.

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