The Hindu Business Line : Promise of metrics to measure implementation of outlays

"Mr P. Chidambaram has presented a good Budget. We have for long been neglecting some sectors, such as education, health, and rural development. We really started looking into these sectors last year, but the Finance Minister has buttressed his commitment by actually increasing expenditure on education, water, the rural development plan subsidy and health.

"What is even more significant, is that a committee will be formed under the Planning Commission, to measure the outcome, which means that somebody will actually come up with some kind of indices for measuring the implementation of the budgetary proposals... " A look now at the sector-wise analyses by PwC of the Budget proposals.

Indirect taxes

The indirect tax proposals, taken together, are on expected lines and take forward the clearly laid out agenda of a value-added tax (VAT) or a goods and services tax (GST) at the federal level.

Customs: The reductions in Customs duty rates are on expected lines and continue the progression towards Asean levels. It is expected that the peak Customs duty rates would match the Asean levels by 2006-07. There are significant sectoral packages for the textiles, pharmaceuticals, oil and gas and IT/telecom industries. The Government has also fulfilled its WTO commitments of zero duties on IT/telecom products.

However, the Government has, at the same time, imposed a countervailing duty of 4 per cent on all such goods, to compensate for the sales tax/VAT that would be applicable if such goods were manufactured and sold in India.

The concern with regard to the 4 per cent levy is that it is available as credit only for payment of excise duties on output goods and not with regard to the service tax payable on any output services.

Excise: The rationalisation of excise duties is welcome. Also, the removal of special excise duties on three product categories is on expected lines.

However, the continuance of this duty on motor vehicles and aerated waters would be a disappointment for these sectors.

This, together with the continuation of the several exemptions from excise duties, as also the reductions in duty rates on some goods, means that the progression towards a uniform Cenvat, with extended coverage and removal of exemptions, is still sometime away.

Also, the expected integration of the Cenvat and service tax on the output side has not happened. Therefore, while the proposals in the area of excise are welcome, they do not go far enough towards bringing in an integrated goods and services tax.

Service tax: The maintenance of the rate of tax at 10 per cent would come as welcome relief to the service sector.

This, however, also means that the integration of the goods and services tax, at the present Cenvat rate of 16 per cent, is still a work-in-process.

The extension of the service tax to various new categories of services is on expected lines. There is an important amendment to the basic principle of service taxation which states that even if the services were rendered outside India they would be taxable, as long as the recipient of the services is in India.

Taken together, the indirect tax proposals certainly do further the objectives of increasing the tax-GDP ratio, broadening the coverage and emphasising on compliance.

S. Madhavan,

ED and Head Indirect Tax Practice

Direct tax

The founding principles of taxation remain the corner stone of the direct tax proposals in Budget 2005. The focus is on increasing the tax-GDP ratio, improving tax administration and compliance and widening the taxpayer base.

Higher tax exemption limits coupled with a clean-up and standardisation of exemptions and rebates would ensure a simplified and efficient tax structure for individuals.

The reduction in corporate tax rates, re-introduction of MAT credit, along with lowering of depreciation rates indicates a comprehensive analysis of the tax structure for corporates.

The 10 per cent reduction in withholding tax on royalty/technology payments, extension of weighted deduction for R&D expenses and extension of tax holiday for scientific research organisations indicate the clear focus on a technology-driven economy.

Anti-tax evasion provisions, such as levy of 0.1 per cent tax on large cash withdrawals and reporting of "withholding tax free" deposits by banks, are a clear attempt to widen the tax base and improve the tax-GDP ratio of the country.

N. N. Gupta,

Country Leader, Tax & Regulatory Services

Banking

The Finance Minister has pointed out that key drivers of the banking sector will be competition, consolidation and convergence, and there is a need for Indian banks to follow this path.

While he has not identified the specific measures to be taken for this purpose, such as for encouraging M&A activity in banks, resolving the voting rights restriction issue, clarifying permissible increases in FDI levels, these are likely to be covered in the long promised roadmap for banking sector reform which he mentions that the RBI has prepared and shall unveil.

We hope this signals that a view has emerged which shall soon be announced and shall encourage Indian banking to grow and strengthen.

The removal of statutory upper and lower bands for SLR and CRR, and flexibility to the RBI to prescribe prudential norms, reflects the government having moved away from pre-emption of funds mobilised by the banking sector.

It is expected that such provisions shall be used by the central bank only to ensure the health of the banking sector, thereby taking away a cost element and allowing banks greater flexibility in managing resources.

Ashwani Puri,

Executive Director

Oil and gas

It is feared that the reduction in depreciation rates, introduction of fringe benefit tax and increase in surcharge may wipe away the gains on account of reduction in corporate tax rate.

Scope of construction service has been expanded to include pipelines, repair and restoration of the same. Hitherto long distance pipelines were excluded from the scope of construction services.

Services provided from outside India to person in India would be deemed to be provided in India and would impact the sector since significant services are received from outside.

Supply of ATF to designated Indian Carriers for international flights would be deemed to be export of goods and sales tax would not be payable on such supplies to bring at par with foreign carriers.

The Finance Minister has reiterated that VAT would be introduced from April 1, 2005. But it is clearly some time before the most consumed fuels such as petrol and diesel come under the VAT regime.

N. N. Gupta,

Country Leader, Tax and Regulatory Services

FDI

Though Mr Chidambaram has presented a truly well balanced Budget, there is no specific proposal for FDI. He identified FDI opportunities in the mining, trade and pension sector which essentially means opening up of coal mining, retail sector and pension funds.

A welcome move is corporate tax reduction to 30 per cent from 35 per cent and reduction of withholding tax to 10 per cent on payments overseas for royalties and technical services fee.

However, foreign companies, being taxed in India as branches/PE, will continue to be taxed at 40 per cent plus surcharge.

Non-Resident Indians will continue to enjoy tax-free interest from NRE and FCNR accounts.

Vivek Mehra,

Executive Director

Retail and consumer sectors

No announcement on opening the retail sector for FDI. Trade is, however, among the three sectors which the Government is likely to open in the near term (the other two sectors being mining and pension).

With the strengthening of the infrastructure (including urban infrastructure in seven metros) organised retail will benefit in terms of logistics/supply chain management as well as introduction of big box retail formats.

With the imposition of service tax on certain services connected with management of commercial real estate, occupancy cost will increase for retail outlets at malls.

Consumer sector: Reduction of Customs duty on refrigerated vans and abolition of surcharge will have a positive impact on the food processing industry.

Across the board duty cuts and capital subsidy will see the textile and garment industry grow.

Leather/footwear manufacturers will benefit with reduction of Customs duties on select machinery and reduction of duty on ethyl vinyl acetate (EVA), an input for the footwear industry.

N. V. Sivakumar,

Executive Director

Urban infrastructure

The National Urban Renewal Mission has expanded the earlier coverage of six cities under the Megacities Scheme to other metropolis' in India.

This reflects the Government's realisation that B class cities are also important and need significant doses of investment.

However, the focus continues to be on large infrastructure projects, missing out on prioritising service delivery performance and improved urban governance.

Amrit Pandurangi

Executive Director

Insurance, pension

National Agriculture Insurance Scheme (NAIS) will roll out an improved farmer-friendly crop insurance scheme. Further, NAIS will continue in its present form for kharif and rabi crops during 2005-2006.

This will not only boost the sale of crop insurance but will also significantly mitigate the risk of loss of crops to farmers.

On account of benefits visible in the insurance industry, the Finance Minister has promoted the concept of micro insurance.

It is desired that insurance should reach rural India and the vulnerable sections. The design and delivery of micro insurance are specialised functions.

The Insurance Regulatory and Development Authority (IRDA) has already drafted regulations in respect of micro insurance. Certain NGOs, self-help groups (SHGs), and cooperatives will now have a scope to act as micro insurance agencies. The Central Government will now support IRDA's move to promote micro insurance. This will facilitate insurance coverage to a larger section of individuals.

Anticipated increase in the premium towards life insurance on account of allowing every taxpayer a consolidated limit of Rs 1lakh to be deducted from the income, prior to computation of tax.

Rebate under Section 88 is eliminated and therefore tax benefit can now be availed on premium not exceeding Rs 1 lakh, if such premium is the only component under the aforesaid consolidated limit.

Pension: Pension Fund Regulatory and Development Authority (PFRDA) has already been constituted. India has witnessed improvement in medical sciences and, therefore, an increase in the average life of human beings in comparison to the earlier years.

This necessitates availability of funds in the older age to meet the daily living expenses, which are anticipated to increase on account of inflation. The Government had announced a Defined Contribution Pension Scheme for newly recruited Central Government employees.

This scheme will now be extended to the unorganised sector also. It is proposed to introduce a Bill to replace the ordinance promulgated on December 29, 2004, to set up FRDA.

The new scheme proposes to offer a variety of investments options to the subscribers and to provide a strong regulatory mechanism to ensure that their interests are protected.

This will ensure development of pension fund market in India, savings for senior citizens, boost to the investments in the infrastructure and capital markets.

The proposal to set up a committee of experts to work out the roadmap for moving towards an EET system would imply that tax will not be levied at the time of making contributions and also at the time of annual accretions.

Khushroo B. Panthaky,

Associate Director

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