Budget: Third time lucky?

Traditionally, a finance minister's third budget is the most reformist. Will Chidambaram's follow this rule?

So far, only six finance ministers of the Union government have managed to present three budgets in a row. Chintamani Deshmukh in the 1950s, Morarji Desai in the 1960s, Y B Chavan in the 1970s, Pranab Mukherjee in the 1980s, Manmohan Singh in the 1990s and Yashwant Sinha in the late 1990s.

By next Tuesday afternoon, you will have to add one more name to this list. Palaniappan Chidambaram will have presented his third budget in a row by then. In his last stint as finance minister in the United Front government, Chidambaram could present only two budgets in a row. The UF government fell before he could prepare for his third one.

The third consecutive budget of a finance minister has traditionally been more significant than his previous efforts, primarily because in parliamentary democracy, the third budget turns out to be the last chance of the finance minister to push through hard decisions.

By the time the fourth budget is to be presented, electoral considerations start weighing heavily on the mind of the finance minister. Even if he may not always agree, his colleagues in the Cabinet manage to persuade him to shun any unpopular decisions to be announced in the budget.

Thus, Deshmukh reserved his decision to announce the setting up of the taxation enquiry commission that undertook the country's first taxation reforms initiative and Desai hiked duties across sectors. Chavan sought to switch over to ad valorem duties to garner more revenue and Mukherjee slashed both direct and indirect taxes.

This trend, however, has seen a change since the initiation of economic reforms in the 1990's. The third budget became significant for the boldest reform measures of a government. Manmohan Singh's third budget introduced full convertibility of the Indian rupee on the current account and slashed duties and taxes across sectors. In sharp contrast, Singh's fourth and fifth budgets had nothing to display by way of his reformist credentials. Sinha too presented in February 2000 what critics argue to be his best budget -- heralding the introduction of a single rate Cenvat rate of 16 per cent for a majority of products.

So, what does one expect from Chidambaram's third budget? From the taxation point of view, Chidambaram has already introduced three new taxes in his last two budgets -- the securities transaction tax in his first budget in 2004, the fringe benefit tax in 2005 and the cash transaction tax in the same year. Will he introduce a fourth tax or make some changes in the three new taxes he has already announced?

As far as the existing taxes are concerned, Chidambaram's third budget looks all set to extend the coverage of the service tax. He faced major hurdles in getting this tax accepted across sectors -- especially among the goods transporters.

The concept of a service tax has now been accepted even by goods transporters, even though the exemption limits have been relaxed substantially to ensure that there is less noise. But there is little doubt that he would bring more sectors under the service tax net and raise the rate so that he moves closer to his goal of bringing the service tax rate on a par with the Cenvat rate of 16 per cent.

On the customs duty front, Chidambaram will in all probability reduce the basic duty rate by five percentage points to 10 per cent. But he may surprise you by also announcing a set of new countervailing duties on imported goods to neutralise the impact of state-level taxes on domestically produced goods.

The big question on the corporation tax front is whether he will remove the surcharges that continue to be levied on it. Tax experts are unanimous that there was no need for these surcharges to continue any longer because the purpose for which they were levied is no longer valid. But few finance ministers in the past have completely done away with a surcharge levied either by him or his predecessors. All that they do is to find justification for replacing an existing surcharge with a new one, albeit with a lower rate.

For those who are historically minded, there is one more point to ponder over. Barring Pranab Mukherjee, all finance ministers who presented three budgets in a row had gone on to present at least two more budgets. Next Tuesday, Chidambaram would have presented only his third budget in a row.