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The first cut

Presenting the first of the rediff.com-Dun & Bradstreet India special Budget Impact series. This article analyses the policy measures as announced by the finance minister.

The Union Budget 2000-01 has projected a fiscal deficit of Rs 1,112.07 billion, representing 5.1 per cent of the GDP. In Dun & Bradstreet's opinion, this target is likely to be overshot when viewed against the backdrop of the current year's deficit of 5.6 per cent of GDP and the burgeoning interest payments that are expected to touch Rs 1,000 billion. In fact, the Economic Analysis Group (UK) of D&B has previously projected the fiscal deficit to touch 5.5 per cent of GDP in 2000-01.

Expenditure control: Measures fall short

The government's move to a phased reduction of fertiliser subsidies is welcome. The reduction of the interest rates by 1 per cent on General Provident Fund is on expected lines and reinforces the government's commitment to move the economy to a lower interest rate regime.

However, it must be stated that these measures, though significant, are too small by themselves to have a major impact on the government's expense bill. The finance minister appears to have refrained from tackling the expenditure issue head on. While the increase in defence expenditure is understandable on the grounds of national security, the finance minister's pronouncements on recapitalisation of weak banks calls into question the government's toughness on fiscal profligacy.

The much-awaited introduction of the Fiscal Responsibility Act did not materialise and the finance minister has deferred this to a subsequent date. Had the Act been introduced at the time of the Budget, it would have unambiguously signalled the government's preparedness to take tough fiscal decisions.

To his credit, the finance minister has clearly stated that Non-Plan Expenditure needs to be curtailed. He has even stated that all ongoing development schemes will be subject to zero-based budgeting and fresh recruitment in government departments would be kept to the minimum and that subsidies would be gradually pruned.

The finance minister has earmarked Rs 10 billion from public sector divestment for retiring government debt, as a first step in this direction. While this marks a good beginning, the government needs to put in place a structured programme for reducing its debt burden. Ad hoc measures will not suffice.

Revenue measures: Good, but not enough

Indirect Taxation

Excise Duty: The finance minister has taken the process of excise duty rationalisation further by moving from 3 rates of excise duty viz -- 8 per cent, 16 per cent and 24 per cent, to a single 16 per cent rate (called central value added tax or CENVAT). However, he has introduced three rates of special excise duty -- 8 per cent, 16 per cent and 24 per cent replacing the earlier two rates of 8% and 16%. This measure is expected to be revenue positive to the extent of Rs 32.5 billion.

In response to a longstanding industry demand, the government has now permitted the payment of excise on a fortnightly basis against the present daily clearance basis. In an equally important procedural simplification, the excise department will rely on the assessee's records from July 1, 2000 and dispense with its own departmental statutory records from this date.

The government has announced the introduction of "transaction-based valuation" in lieu of "normal price" for the levy of excise duty. However, the fine print needs to be read for analysing the implications of this move.

Customs Duty: The government has moved from five rates of customs duty to four rates and the peak rate has been brought down by 5 per cent to 35 per cent. The new rates are as follows: 5 per cent, 15 per cent, 25 per cent and 35 per cent. However, the Special Additional Duty of 4 per cent will continue and will also become applicable on goods imported by traders for resale.

The finance minister has reduced customs duties in the case of several industries. The primary beneficiaries of these reductions are the computer hardware sector, the telecom sector (cellular phone providers) and the entertainment industry.

In a move predicted by D&B in the pre-Budget analysis, the government has reduced customs duty on crude oil from 20 per cent to 15 per cent. The finance minister has also spoken of reducing customs duty on other petroleum products from 30 per cent to 25 per cent. Impact assessment on the refining industry will be possible after viewing specific tariff items.

The overall impact of the proposals pertaining to customs duties is expected to be revenue negative to the tune of Rs 14.28 billion.

Service Tax: The finance minister has chosen not to widen the ambit of service tax coverage, pending a detailed study.

Direct Taxation

Personal Taxation: The government has chosen to leave the basic slabs, rates and exemption limits untouched at this point of time. However, the surcharge on non-corporate assessees with total taxable income exceeding Rs 150,000 has been increased from 10 per cent to 15 per cent. The marginal rate of taxation for the highest slab would therefore stand at 34.5 per cent as against 33 per cent earlier.

Women and senior citizens paying tax have some cause for cheer as the finance minister has announced an additional rebate of Rs 5,000 to them.

The tax deductibility in respect of housing loans for self-occupied property which was allowed till March 31, 2000 has been extended by a further two years. Capital gains benefits have been extended to holders of more than one residential property.

Corporate taxation: In a very important move to bring exporters into the tax net across the board, the finance minister has announced a reduction of tax exemption on export earnings by 20 per cent each year for five years, commencing from 2000-01.

In our pre-Budget analysis, D&B had listed this as the second-most likely step of the finance minister towards raising revenues. It should be noted that this move will automatically bring the software sector within the ambit of taxation. However, the implications of double taxation treaties will need to be factored in before the impact can be quantified, especially in the software sector.

While leaving dividends untaxed in the hands of investors, the finance minister has hiked the dividend tax in the hands of the companies from 10 per cent to 20 per cent. This measure may result in lower dividend payouts and increased profit ploughbacks (albeit involuntary).

Minimum Alternate Tax (MAT) on book profits of companies (computed on the basis of Companies Act, 1956) will now be levied at a uniform rate of 7.5 per cent as against 10.5 per cent prevailing earlier. The finance minister has stated that the method of computation of the MAT would ensure that erstwhile zero-tax companies will be brought into the tax net. This is indeed a welcome move that will ensure equitable taxation.

The objective of the finance minister's corporate taxation measures appears to be to spread the burden of taxation on the collective shoulders of the entire corporate sector rather than increasing the burden on a select group of tax-paying companies.

The overall impact of the direct taxation measures will yield an incremental revenue of Rs 50.8 billion, which is far lower than the amount required by the finance minister to tackle the fiscal deficit problem.

Capital Market

The Finance Minister's announcement of hike in FII investment ceiling from 30 per cent to 40 per cent will have a positive impact on market capitalisation in the months to come.

In a not-so-welcome move, the finance minister has chosen to tax the income distributed by debt-oriented mutual funds at 20 per cent against 10 per cent earlier. UTI's US-64 scheme has however been exempted. This move comes as a surprise, particularly since the Indian debt market is still in a nascent stage.

Venture capital investment will receive a fillip with the new measures announced by the finance minister in the Budget.

Conclusion

While the measures announced by the finance minister to rationalise taxes and simplify procedures are welcome, these seem to have taken the focus away from the two main areas on which the Budget was expected to focus:

1. Controlling the fiscal deficit.

2. Promoting industrial growth by encouraging further investments.

While we still await the fine print, the verdict at the end of the first round is that Budget 2000 is good on intent but short on measures.

ALSO SEE:

What will Yashwant Sinha do?

How will personal taxes change?

Fiscal report card

SECTOR ANALYSIS:

Automobiles | Cement | Cigarettes | Fertilisers | Hotels | Housing
Mutual funds | Paints | Paper | Petrochemicals | Pharmaceuticals
Power | Software | Steel | Tea and coffee

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