The Hindu Business Line : Chidambaram's focus on stability and growth

The Finance Minister has tried to trigger this growth impulse through increased investment. As he said, big bang Budgets are not necessary to send the message.

The main focus of the Budget has been to ensure stability in the tax regime and keep a low profile on major policy reforms.

The economy is on a high growth trajectory. The Finance Minister, Mr P. Chidambaram, has tried to trigger this growth impulse through increased investment.

India is recognised as an attractive market and investment destination. As the Finance Minister observed, big bang Budgets are not necessary to send the message.

The changes

He has made adjustments in valuation and brought down rates for some sectors in new taxes such as Fringe Benefit Tax (FBT), expanded the scope of the service tax and made investment via the mutual fund route more attractive. Fixed deposits in banks up to Rs 1 lakh will enjoy the status of tax saving instruments (under Section 80C) similar to Public Provident Fund, National Savings Certificate, equity linked savings scheme and insurance plans. This step, in response to bankers' plea to make long-term deposits more attractive, might attract low-risk investors such as senior citizens. For an investor in the 30 per cent tax slab, the difference could be nearly 3 percentage points on pre-tax returns.

Small cars, and a variety of consumer items such as soft drinks and instant food mixes will become cheaper. He has removed excise duty on processed meat, fish and poultry, pasta, etc. Cigarettes and packaged software will cost more. So also items such as umbrellas and walking sticks to enable manufacturers of these items get Modvat benefits.

Debt market

Since the debt market has mainly focused on low-yield treasury bills, corporates have not been able to get the benefit of the debt market to the desired extent. Nor has the investor in debt instruments a choice. The Finance Minister has tried to correct this anomaly by attempting to develop the bond market.

As the Economic Survey points out, both the primary and secondary debt markets have not fared well in recent years with returns on broad portfolio of government bonds being negative, not a low risk, low return option as is usually perceived.

In this scenario, the investing class needs an alternative and what better option than promoting corporate debt instruments through mutual funds?

This might also provide a viable avenue for corporates with a good track record to raise capital without having to use retained earnings or borrowing at high interest rates for short- or medium-term requirements.

Secondly, the Finance Minister has made the definition of equity oriented funds conform to that of SEBI (Securities and Exchange Board of India) norms under which exemption from the dividend distribution tax will be available only to equity-oriented funds with equity exposure of more than 65 per cent.

This might give fillip to equity linked investment schemes.

The limit for contribution to pension schemes has been raised to Rs 1 lakh under Section 80C.

These measures and the fact that there is no rise in personal and corporate tax rates or adjustment of slabs have contributed to the Sensex soaring to new highs.

The one-by-six scheme has been abolished given its failure to significantly add to the number of tax contributing assessees. Most assessees had zero tax liability.

On the FBT, the taxable value of benefit for tour and travel has been reduced from 20 per cent to 5 per cent. The Finance Minister has also reduced the rate on expenditure on hospitality, boarding and lodging in the shipping and aircraft industries from 50 per cent to 5 per cent. Free medical samples or medical equipment to doctors has been exempted from the FBT, so also fees paid by companies to brand ambassadors.

As the Finance Minister explained, the FBT is in the nature of a presumptive tax, as normally expenditure by companies or benefit to employees never got reported in their tax returns.

As the salary structure in the economy has undergone significant change in recent years, fringe benefits particularly for the top salaried class have become a major source of gain. Therefore, the FBT has become necessary with appropriate exemptions.

MAT CRITICISM

The increase in the Minimum Alternate Tax (MAT) from 7.5 per cent to 10 per cent on book profits predictably has drawn some criticism. MAT is actually levied on profit making companies.

However, because of exemptions under the tax laws, such companies are able to show their profits as nil. The principle of every profit-making economic entity having to pay some tax is inviolable. The increase in MAT by 2.5 per cent only reduces the tax exempt part to two-thirds from the present 75 per cent.

The service tax has gone up from 10 per cent to 12.5 per cent and its coverage has also been expanded. This was not entirely unexpected. Consumers will feel the pinch since items such as telephone and electricity bills, and a variety of other expenses will bear higher service tax.

The Securities Transactions Tax has been increased as also the service tax collected on share transfers. This may impact the investing class who trade in shares.

The Budget has not received any sharp criticism on fiscal deficit performance, which stands at 4.1 per cent for FY 2005-06 (revised estimate) and a forecast at 3.8 per cent for 2006-07.

The key for success in this area lies on how best the Government can rein in its expenditure programmes that have remained elusive for various reasons. Infrastructure, hopefully, will continue to remain a priority.

In social sectors, allocation to education has gone up by 32 per cent, health and family welfare by 22 per cent.

Irrigation, rural housing, water supply, electrification and telecom connectivity are other gainers grabbing a higher share of allocation. For obvious reasons the Finance Minister cannot be more specific on privatisation schemes except to indicate that he expects to garner about Rs 6000-8000 crore in 2006-07 through the privatisation of non-navaratna PSUs.

On the whole, the Budget is as good as one can expect given the present political constraints.

(The author is a New Delhi-based management and financial consultant.)