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In Praise of Small Mercies

Omkar Goswami


In the many pre-Budget TV programmes that were desperately trying to drum up excitement, the sentiment expressed by almost every pundit was that if it ain’t broke, don’t fix it. With the economy set to achieve 8.1 per cent real GDP growth and a benign inflation outlook, the plea was simple: “Animal spirits are alive and well. Don’t spring unpleasant fiscal surprises.”


Barring a couple of worrisome exceptions, Finance Minister P. Chidambaram has obliged. We expected a substantial rise in plan expenditure to finance the big ticket items of this coalition government’s Common Minimum Policy, and the FM did just that. Thanks to massive outlay increases in Bharat Nirman, Sarva Siksha Abhiyan, National Rural Health Mission and the National Rural Employment Guarantee Scheme, plan expenditure for 2006-07 is budgeted at Rs.172,728 crore — more than 20 per cent above the revised estimate for 2005-06.


Most of us believed that the service tax net would be further widened. It happened. However, for the last eight years I have been patiently waiting to see when doctors and lawyers would be included. The FM has again given these two worthy professions the benefit of the slip. And I’ll bet a few rupees that you won’t see them in featuring come 28 February 2007.


We expected the service tax rate to be upped from 10 per cent. The eventual target is 16 per cent, in line with the central CENVAT rate. Most of us thought the first step would be to 12 per cent. That’s what happened.


While everyone assumed that the peak customs duty on non-agricultural products would  be reduced from 15 per cent, there was a debate on whether it could be slashed by five points in one go. The consensus was that revenue compulsions would limit the extent of the cut. It did: it was reduced to 12.5 per cent. Again, par for the course.


In excise, too, industry was expecting the duty on aerated drinks and passenger cars to come down to 16 per cent. It did, with the proviso being that for automobiles, it was restricted to the smaller cars — something that made Maruti’s Jagdish Khattar smile like never before.


In a milieu where the word ‘disinvestment’ makes the Left see red, and where not a paisa of subsidy can be cut, the FM has had to somehow find the extra revenue to meet all these items. He expects to get part of it by leveraging growth. A sizeable chunk will come out of services tax. But there was still a gap, which needed to be filled, given that the FM had to get back to the targets laid out in the Fiscal Responsibility and Budget Management Act — targets that he had ignored last year.


So, he has had to garner taxes one way or another. In the process, there have been two bad proposals. The most retrograde has been the removal of the exemption under Section 10(23G) — a provision that was critical for infrastructure finance. Simply put, from June 1998, income earned as dividends, interest or long-term capital gains by banks, financial institutions and specialised infrastructure capital companies or funds for infrastructure projects was tax exempt. This was a strong incentive for funding infrastructure and played a key role in determining the profitability of many infrastructure financing companies. In one stroke, 10(23G) has been eliminated — at a time of desperate need for massive infrastructure funding. The reasoning: interest rates have fallen, and there is no need to give this relief to facilitate lower interest rates. Seems very strange in a world where the rates are hardening.


The other disagreeable provision is to include income from long term capital gains in computing book profit of companies on whom 10 per cent Minimum Alternate Tax is to be levied. To me, that’s a backdoor method of testing the waters for reintroducing a 10 per cent long term capital gains tax. I bet the view was, “Let’s check it out by trying it on MAT, and then take it from there.”


These two provisions aside, it’s a budget as I expected. Long on expenditure; short on making tall claims; and without too many googlies. Now lets get on with reforms.


Published: Business World, March 2006


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