The Hindu Business Line : Setting new policy priorities

THE Finance Minister, Mr P. Chidambaram, while proposing a change in the manner on governance and a change in national priorities, has in Budget 2004 wrought much change in policy priorities and significantly altered some tax provisions. Some of the highlights of the Budget are:

Policy announcements

The Finance Minister has proposed various measures that should benefit people below the poverty line, especially provision of primary education with food for children of the poor'; providing basic health care and medicines at fair prices; improving rainwater harvesting and providing drinking water for all. As expected, the focus is on agriculture. He has promised a doubling of agricultural credit in three years, accelerating the completion of irrigation projects and investments in rural infrastructure.

While committing to the Fiscal Responsibility and Budget Management Act and agreeing to wipe off revenue deficit by 2008-09, Mr Chidambaram proposes to contain the revenue deficit in the current year to 2.5 per cent of GDP, which is 0.5 per cent lower than the target set by the FRBM Act. This is certainly commendable.

The Budget makes clear that the focus is to improve infrastructure significantly. Accordingly, almost Rs. 40,000 crore has been made available through an Inter-Institutional group set up specifically for lending at concessional terms for infrastructure projects. To encourage foreign investments, the FDI ceiling has been increased in telecom, civil aviation and insurance.

The Minister has also announced that the Government is committed to developing public sector units and that he would also continue with selective disinvestment/privatisation of PSUs. The estimated revenue for this year from disinvestment/privatisation is estimated at Rs 4,000 crore.

Direct Tax proposals

Income tax rates remain unchanged. An additional levy of 2 per cent in the form of education cess on all taxes is proposed over and above the current surcharge. Further, for individual taxpayers with total income of up to Rs 1 lakh, a rebate of the entire tax payable is proposed.

The Minister proposes to exempt long-term capital gains on sale of securities from taxation and has reduced the rate of tax on short-term capital gains on transfer of securities to 10 per cent. However, he has proposed a levy of transaction tax at the rate of 0.15 per cent of the value of the securities. Such a transaction tax is to be paid on the purchase of all securities. This tax will be collected by brokers and paid to the Government. This is likely to significantly impact the volume of securities traded. Further, the ambit of this tax is very wide, as `security' would include not only shares, scrips, stocks, but also bonds, debentures, marketable securities, derivatives, units, government securities, including any rights or interest in respect thereof and security receipts as defined under the Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002.

Mr Chidambaram has accepted the shipping industry's long-standing demand for the introduction of tonnage tax. The Minister has proposed exhaustive provisions to introduce tonnage tax. Under these provisions, it is proposed to "deem" tonnage income per day based on certified tonnage of the ships. The slab rate for deeming such income per day varies from Rs 46 per 100 tonnes for qualifying ships with net tonnage up to 1000 to Rs 19 per 100 tonnes for qualifying ships with net tonnage exceeding 25,000 tonnes. Such deemed income would be subject to tax at 35 per cent for a corporate entity. A tax-payer opting for this scheme has to continue there under for ten years.

To discourage money laundering, the Minister, while continuing to keep the Gift Tax Act inactive, has proposed that gifts received from persons other than relatives in excess of Rs 25,000 shall be included in recipient's income. He proposes to disallow deduction of certain legitimate business expenses such as interest, commission, brokerage, technical or professional fees and payments to contractors while arriving at taxable income if the taxpayer has either not deducted tax at source while making payment thereof or has deducted but not paid the same into Government Treasury. These provisions previously existed only in respect of payments to non-residents. This is likely to create enormous administrative difficulties for corporates who will now need to closely monitor their withholding tax obligations.

Indirect Tax proposals

Mr Chidambaram proposes to introduce a Value Added Tax system with effect from April 1, 2005 to simplify trade within the country.

The rate of service tax has been increased from 8 per cent to 10 per cent while expanding the service tax net to cover 13 new services. However, the credit for such service tax paid could also be claimed against the excise duty liability of the manufacturer.

Further, the Minister has proposed wide ranging realignment of rates for import duty and excise duties and has announced certain exemptions for the textile sector in particular. Further, the education cess of 2 per cent is also proposed on all indirect taxes.

The Budget is certainly in the right direction with the intention of achieving growth with "a human face". However, as has been the experience, it remains to be seen how effective will be the Government's measures to ensure that there are minimum leakages in implementation of welfare measures as well as increasing the coverage, especially of direct tax.

(The authors are respectively Partner, Bharat S. Raut and Co., and Manager, Tax and Regulatory Services, KPMG, New Delhi.)