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'Income tax should have been spread evenly on all segments including agriculture and services'

BUDGET 2000

Dr B B Bhattacharya

This Budget appears to be a continuation of last year's Budget. It did not turn out to be as hard as one expected from the pronouncements of the prime minister and finance minister.

The Budget gives the impression that everything is fine with the economy. In this respect, it defers from the pre-Budget Economic Survey released yesterday, which highlighted the danger of excessive fiscal deficit. Considering this, there is no attempt to curb government expenditure. The government announced its intention to curb the size of the bureaucracy in future through some technical studies on budgeting. However, such intentions were pronounced a number of times in the past with no result.

The only significant measure is the increase in direct tax -- both personal income and corporate tax. The fiscal deficit stipulated in the Budget at 5.1 per cent of GDP is a matter of serious concern. Let us hope that the actual turns out to be more modest.

In effect, the high income tax would be paid by the salaried group while the others hide their real income for tax purpose. In effect, it is demoralising. But on the positive side it means the finance minister will not increase prices through higher indirect taxes or by printing money.

Yes, it is harsh on industry, except on IT and entertainment. But the finance minister having boldly declared that he is going for a harsh Budget did not have the guts to tax either agriculture or the service sector. So the burden would obviously be on the industry.

It would have been better if the income tax was spread evenly on all segments of the population including agriculture and services. However, it maybe noted that even after the 15 per cent surcharge on income tax above Rs 150,000 income, the effective rate of taxation in India is still one of the lowest in the world.

The Budget is ultimately a political instrument with an aim of retaining power, and no government would like to present a Budget to lose an election. However, the experiences in developed and mature democracies show a cyclical pattern of budgeting: the first Budget after the election is the hardest, followed gradually by softer and softer Budgets, and the last Budget before the election becomes the softest. Unfortunately, in India almost every Budget has become the last Budget before the election. This seems to be no exception.

On the positive side, the software industry would have the benefit of lower import duty on computer and related items. But on the negative side, they will now be subject to tax on profit from exports. Presently, only small companies export software. The large ones generally look for the domestic markets. So in the immediate future the tax on exports of software would not cause a major problem. But it would have a psychologically dampening effect on the share prices of software companies.

The Indian middle class may now be divided into two groups: one, those who have benefited from the ongoing globalisation -- doctors, engineers, corporate managers, IT experts... Their incomes would rise faster than that of others and, thus, in spite of the increasing tax rates their standard of living would not be seriously affected. A corporate manager in India today earns as much as his or her counterpart in Singapore or Hong Kong. And pays effectively less tax. The actual burden of adjustment would therefore be borne by the non-globalised middle class whose income is not indexed to the global standards.

After all the brave pronouncements by the government, the industry expected a downsizing of the government and the bureaucracy. This has not happened. On the contrary, industry would now pay effectively higher taxes, so the disappointment leads to a southward movement of share prizes.

The revenue gains would come mainly from corporate and excise taxes. On the positive side, the bulk of the additional revenue would come from direct taxes. But as an overall revenue measure, this budget has not made any radical change.

The personal income tax structure would remain the same, except that 10 per cent surcharge is now raised to 15 per cent for people earning above Rs 150,000. For senior citizens and working women there is however a special concession of exemption limit, raised from Rs 10,000 to Rs 15,000.

For general category, the marginal rate of taxation of income above Rs 150,000 would be 34 per cent. The personal income tax rate effectively may go up a little because of the rise in corporate tax on dividend income distributed from 10 per cent to 20 per cent. The post tax income would therefore decline for higher income categories after this Budget.

Prices of vehicles as such may not be affected by the budget except for an increase in the import price of diesel and decrease on the imports of machinery.

The problem of infrastructure is not merely lack of funds. In principle the private sector, particularly the foreign capital, is given red carpet treatment for investment infrastructure. But, neither the domestic private industry nor the foreign capital is very excited about it because of procedural delays in implementation in infrastructure projects like land, water, electricity etc.

Further, there is a lot of corruption and theft in these sectors which stops an honest investor from putting his/her money. Unless the govt can tackle these problems with appropriate administrative and judicial reforms, this sector would continue to draw inadequate funds.

The hike in the Defence Budget was very much expected after the Kargil effect. The Defence Budget next year would probably be more than three per cent of GDP. It would have two macro effects -- one, increase the fiscal deficit and two, raise the volume of imports because much of the capital equipment in the Defence Budget is now imported from abroad. But this is a price we will have to pay till the security threat normalises.

Dr B B Bhattacharya is Director, Institute of Economic Growth.

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