This is the last year before elections. Undoubtedly, Finance Minister is under severe pressure from his colleagues to present a budget so that they can go to their constituents with something positive to say to the voters. Past experience have shown that populist budget has not helped the ruling parties The case in point is the budget passed by Jaswant Singh before the elections which was highly populist but still NDA lost the elections. Although successive Finance Ministers know this fact very well but pressure from the party members is hard to ignore. Capital Market seems to have taken these populist measures into account even before the budget is presented and as a result stock index increases a week before budget and then crash.
When P Chidambaram took over as Finance Minister, he promised to make Budget a non issue. In USA, budget is so much on predictable lines that it losses its relevance. That is why budget in USA is presented once in two year and each President gets two budgets to present. P Chidambaram has promised to move in the similar direction despite formidable opposition.
Despite several constrains, Finance Minister seems to have done a good job. Apart from elections year, government is a coalition of parties who don’t seem eye to eye with each other on various economic issues. Six factors which have played key role in preparing Budget – 2008 - 09.
1. Fear of recession
2. Elections
3. Managing fiscal and revenue deficit.
4. Sub prime crisis
5. Excess foreign reserve
6. Worsening agricultural crisis.
There has been rationalization of direct tax. Exemptions limit has been raised to Rs. 1.5 lakhs. This is probably keeping the sixth pay commission recommendations in view which will be released by March. This will generate adequate consumption demand in the economy. Finance Minister had addressed the issue of ‘Dividend Distribution Tax’ which now allows a parent company to set off dividend received from subsidiary companies in holding company. This will help companies undertake financial engineering for better valuation of the company. The 2 to 4 percent cut in excise duties can help the companies in dealing with recession.
Dr. Manmohan Singh, Prime Minister of India has recently stated in Indian Development Council meet that Naxalite unrest will be the number one problem of India in years to come with around 75 percent of the Indian states coming under their influence. Agriculture is growing at a rate of only 2.6 percent and contributing only 18 percent to the GDP when 65 percent of the population lives off it.
Rs. 60, 000 crore loan waiver could be a double edged weapon. How this waiver will be funded is as yet not clear . Its affect on the economy is still to unravel. The benefit of loan waiver is that it will clean up the books of banks and will also reduce the power of moneylenders. The adverse effect will be on fiscal deficit if government decide to finance the deal. Unfortunate part of loan waiver is that it will benefit 5 percent of farmers at the cost of 95 percent of honest farmers who repaid their loans even when their was distress.
Main limitations of the Budget – 2008 – 09 is its inability to fulfill FRBM target. FRBM had set a fiscal deficit target of 3 percent of GDP and a revenue deficit target of zero for 2008 -09. The rationale of these targets is to increase government capital expenditure , especially in infrastructure. Keeping in view the burden of 6th pay commission, budget has set a target of 2.5 and 1 percent for fiscal and revenue deficit respectively. Fear is that government will not be able to achieve even this target , which will increase the problem of inflation. One thing which will go in favor of finance minister is that tax compliance has improved over the years. Over the last two year , tax revenue has increased by 15 percent whereas GDP growth during this period has been only 9.6 percent. If this trend continues, then tax revenues collection may be more than the target of 17.5 percent planned for this budget. Objective of the government to bring the service tax on par with indirect tax seems to be working well. This will help the government in reducing indirect tax without adversely affecting the tax revenue. Finance Minister has be cautious of Communist party opposition and hence has kept projected receipt from disinvestment of Rs. 10165 crore in the budget on the lower side
Two sectors which have been comparatively ignored are infrastructure and financial sector. Beneficiary of the budget are mainly FMCG, Automobiles, Pharmaceuticals and Agro-business.
Major Recommendations of the Budget 2008 -09
Direct Taxes
- Threshold limit of exemption from personal income tax in the case of all assesses increased to Rs.150,000. The slabs and rates of tax are:
Up to Rs.150,000 NIL
Rs.150,001 to Rs.300,000 10 per cent
Rs.300,001 to Rs.500,000 20 per cent
Rs.500,001 and above 30 per cent
- In case of a woman assessee, the threshold limit increased from Rs.145,000 to Rs.180,000; for a senior citizens, the threshold limit increased from Rs.195,000 to
Rs.225,000.
- No change in the corporate income tax rates.
- No change in the rate of surcharge.
- Senior Citizen Saving Scheme 2004 and the Post Office Time Deposit Account added to the basket of saving instruments under Section 80C of the Income Tax Act.
- Additional deduction of Rs.15,000 allowed under Section 80D to an individual0 paying medical insurance premium for his/her parent or parents.
- Income Tax Act to be amended to provide that reverse mortgage would not amount to "transfer"; and the stream of revenue received by the senior citizen would not be"income".
- Tax income arising from saplings or seedlings grown in a nursery exempted.
- Business of production of seeds and manufacture of agricultural implements added to the list of companies allowed weighted deduction of 150 per cent on any expenditure on in-house scientific research.
- Benefit of amortisation of certain preliminary expenses under Section 35D allowed to assessees in the services sector.
- Corporate debt instruments issued in demat form and listed on recognised stock exchanges exempted from TDS.
- Crèche facilities, sponsorship of an employee-sportsperson, organising sports events for employees and guest houses excluded from the purview of FBT.
- Parent company allowed to set off the dividend received from its subsidiary company against dividend distributed by the parent company; provided that the dividend received has suffered DDT and the parent company is not a subsidiary of another company.
- Insert a new sub-section (11C) in Section 80-IB to grant a five year tax holiday to hospitals located in any place outside the urban agglomerations especially in tier- 2 and tier-3 towns; this window will be open for the period April 1, 2008 to March 31, 2013.
- Five year holiday from income tax being granted to two, three or four star hotels established in specified districts having UNESCO-declared 'World Heritage Sites'; the hotel should be constructed and start functioning during the period April 1, 2008 to March 31, 2013.
- Coir Board included in Section 10(29A) and exempted from income tax.
- Rate of tax on short term capital gains under Section 111A & Section 115AD increased to 15 per cent.
- STT paid to be treated like any other deductible expenditure against business income; Levy of STT, in the case of options to be only on premium, where the option is not exercised; liability to be on the seller; where the option is exercised, levy to be on the settlement price and the liability on the buyer; no change in the present rates.
- Commodities Transaction Tax (CTT) to be introduced on the same lines as STT on options and futures.
- Law being amended to exclude entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes from claiming that their purposes also fall under "charitable purpose"; Genuine charitable organisations not to be affected in any way.
- Banking Cash Transaction Tax (BCTT) being withdrawn with effect from April 1, 2009.
Service tax
- Four services brought under service tax net namely, asset management service provided under ULIP, services provided by stock/commodity exchanges and clearing houses; right to use goods, in cases where VAT is not payable; and customized software, to bring it on par with packaged software and other IT services.
- Threshold limit of exemption for small service providers increased from Rs.8 lakhs per year to Rs.10 lakh per year; about 65,000 small service providers go out of the tax net.
Indirect Taxes
Customs duties
- No change in the peak rate of customs duty.
- Customs duty on Project Imports to reduce from 7.5 per cent to 5 per cent; 4 per cent special CVD to be imposed on a few specified projects in the power sector.
- Customs duty being reduced on steel melting scrap and aluminum scrap from 5 per cent to nil.
- Customs duty to be reduced from 10 per cent to 5 per cent on certain specified life saving drugs and on the bulk drugs used for the manufacture of such drugs. They are also being exempted from excise duty or countervailing duty.
- Customs duty is being reduced on vitamin premixes and mineral mixtures from 30 per cent to 20 per cent and on phosphoric acid from 7.5 per cent to 5 per cent to reduce cost of manufacture of dairy and poultry feeds.
- Customs duty being reduced on bactofuges from 7.5 per cent to nil for the benefit of dairy industry and to increase shelf life of milk.
- Specified parts of set top boxes and specified raw materials for use in the IT/ electronic hardware industry to be exempted from customs duty.
- Customs duty on convergence products to be reduced from 10 per cent to 5 per cent to establish parity between devices used in the information/ communication sector and the entertainment sector.
- Customs duty being reduced on specified machinery from 7.5 per cent to 5 per cent to provide fillip to the manufacture of sports goods; duty also being exempted on specified raw materials for sports goods.
- Customs duty to be exempted on rough cubic zirconia and being reduced on polished cubic zirconia from 10 per cent to 5 per cent, in order to encourage value addition and exports by gem and jewellery industry; Customs duty on rough coral being reduced from 10 per cent to 5 per cent.
- Customs duty removed on helicopter simulators to facilitate training of helicopter pilots.
- Customs duty reduced on crude and unrefined sulphur from 5 per cent to 2 per cent, in order to support domestic fertiliser production.
- Customs duty exemption is proposed to be withdrawn on naphtha for use in the manufacture of polymers in order to correct price distortions and revenue losses. Naphtha for use in the manufacture of polymers will be subjected to normal rate of 5 per cent. Naphtha imported for the production of fertilisers will continue to be exempt from import duty. 12
- Export duty on chrome being increased from Rs.2,000 per metric tonne to Rs.3,000 per metric tonne in order to conserve and make it available for value added manufacture in India.
Excise duty
- General CENVAT rate on all goods reduced from 16 per cent to 14 per cent to give a stimulus to the manufacturing sector.
- Excise duty on all goods produced in the pharmaceutical sector reduced from 16 per cent to 8 per cent.
- Excise duty reduced on buses and their chassis from 16 per cent to 12 per cent.
- Excise duty reduced on small cars from 16 per cent to 12 per cent and on hybrid cars from 24 per cent to the general revised rate of 14 per cent.
- Excise duty reduced on two wheelers and three wheelers from 16 per cent to 12 per cent.
- Excise duty to be reduced on paper, paper board and articles made therefrom manufactured out of non-conventional raw materials by units not having an attached bamboo/wood pulp making plant from 12 per cent to 8 per cent with a further reduction on clearances up to 3,500 MT from 8 per cent to nil. Excise duty on certain varieties of writing, printing and packing paper is to be reduced from 12 per cent to 8 per cent.
- Excise duty is to be reduced from 16 per cent to nil on a few mass consumption items including composting machines, wireless data cards, packaged coconut water, tea and coffee mixes, and puffed rice.
- Excise duty reduction from 16 per cent to 8 per cent on a few more items including water purification devices, veneers and flush doors, sterile dressing pads etc,. specified packaging material and breakfast cereals.
- Anti AIDS drug, Atazanavir, as well as bulk drugs for its manufacture are to be exempted from excise duty.
- Excise duty being exempted on end-use basis, on refrigeration equipment (consisting of compressor, condenser units, evaporator, etc) above 2 TR (tonne refrigeration) utilising power of 50 KW and above.
- Excise duty rates on bulk cement and packaged cement brought on par; bulk cement to attract excise duty of Rs.400 per Metric Tonne or 14 per cent ad valorem, whichever is higher; cement clinkers excise duty at Rs.450 per Metric Tonne.
- Excise duty being increased on packaged software from 8 per cent to 12 per cent, bringing at par with customised software attracting a service tax of 12 per cent.
- Excise duty on both filter and non-filter cigarettes brought on par by applying higher rates on non-filter cigarettes.
- Ad valorem part of the excise duty on unbranded petrol and unbranded diesel being abolished and replaced by an equivalent specific duty of Rs.1.35 per litre; there will be only a specific duty of Rs.14.35 per litre on unbranded petrol and Rs.4.60 per litre on unbranded diesel; there will be no impact on retail prices. 13
- NCCD of 1 per cent removed on polyester filament yarn and the levy shifted to cellular mobile phones.
CST and a Roadmap towards GST
- Central Sales Tax rate being reduced from 3 per cent to 2 per cent from April 1, 2008.
- Roadmap for Goods and Service Tax being prepared for introduction of GST from April 1, 2010.
References
Economic Survey of India – 2007 - 2008
Finance Bill of India - 2008 – 09
http://indiabudget.nic.in/ub2008-09/keybudget.htm
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