The Hindu Business Line : A Budget for growth and consolidation

The Budget proposals have created the environment for India to be economically vibrant and socially equitable. It lays the foundation for the country's full integration with the world economy.

The Finance Minister, Mr P. Chidambaram, had the good fortune of framing his third Budget proposals in arising economy. Keeping in mind the deficiencies still plaguing the economy, his proposals are measured, mature, meaningful and material to the need of the day. The proposals should lay the foundation for second generation reforms.

Perhaps, the Finance Bill 2006 is the shortest in the last 50 years, in respect of provisions pertaining to direct taxes. As expected, the focus has turned more towards service tax with 54 per cent of GDP coming from this sector. The increase in the service tax from 10 per cent to 12 per cent and bringing in additional services will ensure collections of almost Rs 20,000 crore in 2006-07.

AIDS CAPITAL FORMATION

The Finance Minister's emphasis on investment, which he stressed in June 2004 when he became the Finance Minister, has paid off handsomely. Internal accruals and investment plans of public sector enterprises in 2006-07 are pegged at a whopping Rs 1,22,757 crore. This, coupled with the foreign direct investment of around $5 billion, will result in capital formation on an unprecedented scale. The savings rate of the Indian people is now more than 30 per cent of GDP. No wonder, the Government is projecting a growth rate of 10 per cent by 2010.

The Finance Minister has gone beyond the traditional approaches by touching upon innovative initiatives. In infrastructure, while paying attention to important sectors of power, ports and transportation, he has charted a new course by announcing themes for urban renewal such as cluster development models and regional development.

For the industrial sector, he has attempted to make corporates globally competitive by bringing down the import duties to 12.5 per cent, quite close to Asean tariff levels.

There is no doubt that investments in infrastructure and in the capital market will continue to flow in abundant measure. By end 2008, FDI will certainly touch the impressive figure of $10 billion.

There is no change in the corporate tax structure. The Minimum Alternate Tax has been increased to 10 per cent and the long-term capital gains on securities, which were exempt under Section 10, will now have to be included in the book profits under Section 115-JB of the Income-Tax Act, 1961.

A welcome feature is the extension of tax holiday provisions under Section 80-IA for power projects and development of industrial parks.

One provision which will affect the business community is the amendment to Section 43B with retrospective effect. If interest paid to financial institutions is converted into loan or borrowing, it will not be allowed as a deduction because the interest will not be deemed to have been paid.

This amendment will take effect from assessment year 1989-90. Likewise, interest payable to scheduled banks converted into loans will not be allowed as a deduction with effect from the assessment year 1997-98.

The continuation of the Fringe Benefit Tax was expected. It has been streamlined as demanded by captains of industry. The greatest benefit is the exemption of contribution to superannuation fund made by companies to the extent of Rs 1 lakh per employee every year.

Therefore, no FBT would be payable by a corporate up to the aforesaid limit. If the employee has also contributed to this fund, he would be able to secure a deduction under Section 80C, alongwith his other eligible investments, subject to a ceiling of Rs 1 lakh.

NO MARKET DAMPENER

Apart from increasing the securities transaction tax by 25 per cent across the board, he has not come up with any measure to dampen the buoyant sentiments prevailing in the capital market.

The increase in limit for foreign institutional investors to purchase Government paper and other securities will give depth and strength to the debt market. Mutual funds are given greater freedom for overseas investments, thereby opening a wider window for Indian investors.

If the economy continues on its current growth trajectory, the need for funds to service both corporate and retail needs is likely to multiply. The onus will fall on the banking system to fulfil the enhanced demand. In order to inject more liquidity in the banking system, the Finance Minister has permitted conversion of non-tradeable special securities issued by banks in lieu of recapitalisation funds, into tradeable SLR Government securities. Further, increase in FII investment limits in government securities to $2 billion and in corporate paper to $1.5 billion, will result in additional liquidity of Rs 6,000 crore being infused.

With the completion of the Golden Quadrilateral by the end of this year, and the completion of the North-South, East-West corridors, modernisation of three major seaports, setting up of four new airports, and the laying of a container goods dedicated rail line, the country is moving towards a 12 per cent rate of growth by the year 2015.

This will reduce the poverty levels by half and the middle-class will grow to a size of 250 million people, which is the population of England and the European Union countries put together.

The Finance Minister has also not forgotten the needs of the middle-class, and qualified bank deposits for Section 80-C deduction, removed the one-by-six scheme, and deferred taxing maturity proceeds of amounts saved from the proposed EET regime. He has not yielded to pressures from the Left to introduce an inheritance tax.

A new provision, Section 139-B, has been introduced to enable certain class of persons to prepare and furnish their tax returns through a Tax Return Preparer who is authorised under the law. This measure will certainly help non-resident Indians who are required to file a return of income. It will also prove a boon to first time tax return filers.

FISCAL RECTITUDE

The main thrust of the Budget proposals is to proceed on the path of fiscal rectitude and build on the foundation of stability and progressive reforms introduced during the last seven years.

That the Minister promises to reduce the fiscal deficit to 3.8 per cent for the next year is a sign of the growing ability of the Government to tackle the most daunting problem of fiscal indiscipline.

The most striking feature of the Plan expenditure is the allocation of Rs 14,000 crore for rural unemployment and the grant of Rs 4,595 crore for the National Urban Renewal Mission.

This will go a long way in addressing the needs of the rural masses and the urban poor. A reduction in the rate of interest for crop loans is perhaps the greatest gift which the Government has given to the sons of the soil who will be able to throw away the burden of high interest loans taken from usurious moneylenders. The Budget proposals have certainly created the environment for India to be economically vibrant and socially equitable.

The foundation has been laid for India's tryst with destiny and for the country to be fully integrated with the world economy.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)