The Hindu Business Line : Towards political expediency and economic compulsions

The Budget has been steered quite adroitly through the narrow channel of political expediency and economic compulsions. An economist should support any move by the Government to tap into the parallel economy, so long as the measure is rational.It is hoped the Finance Minister would accommodate all the well-directed concerns with no impact on the honest tax-payers.

THE Budget proposals for 2005-06 announced by the Finance Minister would seem to have been significantly influenced by the political compulsions of a coalition government which has strong representation from political parties that still believe in outmoded concept of government's role in economic management.

The fact that the Minister's speech was interrupted only once, that too when he outlined the proposal that was possibly understood by most of the members assembled to have a personal impact (the proposal to levy tax on cash withdrawals), indicates that the proposals indeed bridged the political divide well.

With regard to the fiscal measures, on both direct the indirect tax, there appears to have been much unsaid during the speech and the proverbial devil seems to be in the detail.

The approach that the Minister adopted in the previous year to substitute capital gains tax (in the form of income tax) to a transaction-based tax (analogous to sales tax) has been carried further to cover other forms of levy that essentially seek to substitute income-based tax.

The fringe benefit tax, mentioned in passing, appears to be strong fiscal measure to offset certain personal advantages derived by employees that currently escape perquisite tax and has much deeper implications on a careful reading.

The type of expenses (there are many that cannot even be attributed to benefit any employee even indirectly) that have been tainted with the tag of `fringe benefits' extends to travel, sales promotion, fuel expenses and the like, which are incurred more to facilitate the conduct of business than to benefit any employee or a group of employees.

The inclusion of superannuation contribution in this list appals one, so to speak. Certain percentage of the 17 types of expenses mentioned would be subject to the new tax at the rate of 30 per cent+ applicable surcharge. The tax would be payable even if the enterprise is otherwise not liable to corporate income tax. This covers all types of activity including non-profit organisations.

This provision is much more adverse than a provision that existed in the law disallowing certain types of expenses incurred by the business and which was abolished for the reason that such disallowances are against the principles of taxing real income.

The change in the tax structure for companies whereby the tax rate has been brought down by 5 per cent, an increase in surcharge by 7.5 per cent, and an indicated reduction in the rate of depreciation, cumulatively appears a zero-sum game and a clever act in seeking to please the business community without any tangible benefit.

The proposal to restrict tax holiday for units set up in SEZs only to such cases commencing operations before April 1, 2009 would appear to negate one of the significant fiscal benefits that SEZ units were supposed to enjoy on an ongoing bases and may render the setting up of new SEZs unattractive, if business units cannot be set up before that date. The reintroduction of tax credit for MAT paid under section 115JB is a very positive move and eliminates an anomaly in the law that made this form of levy objectionable.

The rate rationalisation of the structure of the personal income-tax would appear to be welcome. The effective reduction in tax rate seems to range from 10 per cent for income at Rs 3 lakhs to 3 per cent for income above Rs 15 lakhs.

The proposal that met boisterous disapproval is the proposed tax on cash withdrawals from bank, as a measure to counter cash transactions. However, any right-thinking economist should support any move by the Government to tap into the parallel economy, so long as the measure is rational.

It is hoped that the Finance Minister would accommodate all the well-directed concerns on the implementation of the move and still place it in the statute in a manner that makes the law workable with no impact on the honest tax-payers.

The approach on the indirect tax front has been on very predictable lines, with Customs duty coming down in general by 5 per cent and goods subject to ITA agreement being exempt from duty, with corresponding benefit for inputs for making such items locally. Other measures to improve the competitiveness of export oriented sectors like leather and textiles would greatly help in improving the external competitiveness of these.

The excise duty structure has not been tinkered with much except that the withdrawal of special duty has not been extended to automobiles. This lacunae misses the ability of this industry to create employment and also promote ancillary business.

The Budget has been steered quite adroitly through the narrow channel of political expediency and economic compulsions. The business community will be enraged by the impact of FBT and representations to tone down its rigour will not be lacking, considering the financial impact this would have on India Inc.

(The author is Partner, Ernst & Young. The views expressed are personal.)

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