The Hindu Business Line : Will Budget hit bull's eye?

With the economy on a roll and the stock and real-estate markets on a high, 8 per cent growth seems more possible now. The Finance Minister's task in the Budget will be to maintain the growth rate without a corresponding increase in the inflation rate. What lies ahead, asks SUDHIR H. KAPADIA.

It is that time of the year again when the Budget is just a few days away and speculation about the proposed measures is reaching its zenith. The Finance Minister has slightly different challenges to face this time and so, the proposed measures are even more eagerly awaited.

The economy is on a roll. The Bombay Stock Exchange Index has touched the magical figure of 10,000 and contrary to fears, has remained at that level without facing resistance; real estate prices are at record highs almost throughout the country as are prices of gold. The last monsoon was good. All these have fuelled expectations of a growth of almost 8 per cent with more to come.

The Finance Minister's task is to maintain the growth rate without a corresponding increase in the inflation rate and also of keeping the fiscal deficit at a manageable level. As usual, no compromise on expenditure on defence is expected and the spiralling oil prices may throw the expenditure budget out of gear.

What is taxing

Coming to every one's favourite subject, taxes: The Left parties have demanded the levy of an additional tax on the so-called `super rich' or the affluent section. Industry has been clamouring for tax holidays for various sectors and the removal of the fringe benefit tax (FBT).

Foreign Direct Investment is being allowed/increased in a number of sectors including retail trade, to a limited extent. The exempt-exempt tax (EET) is expected to be formally introduced. All these and more have whet the appetite of the Indian public eagerly awaiting the next announcement from the Finance Minister. Will his proposals maintain and further boost the good times? This is the question that is foremost in everyone's mind.

Collection of taxes without unduly `taxing' citizens is an art that most governments have traditionally struggled with. India offers potential to do so as the ratio of taxpayers to the total population can be improved significantly. Measures of widening the tax base and imposing taxes in areas hitherto unlevied could the Finance Minister's focus. This may mean bringing more services within the service tax net. This could also involve bringing more sections within the scheme of compulsory filing of income-tax returns or expanding the transactions requiring reporting in the Annual Information Return. Rumours of a tax on withdrawals from savings accounts have been doing the rounds. This levy is avoidable as it may cause a lot of heartburn without significantly augmenting the kitty.

The Finance Minister has in interviews with the media, ruled out the possibility of any increase in the income-tax rate.

This is welcome as stable and certain tax rates not only encourage the `feel good' factor among the general public but also encourage foreign investors to come in with the tax exposure known upfront.

The Fringe Benefit Tax has been the industry's bug bear since its introduction. A circular incorporating 107 Frequently Asked Questions (FAQ) has done its bit to resolve the issues faced by industry on the levy of this tax.

However, industry has voiced concerns that still remain and has requested for the abolition of the tax.

The Finance Minister has ruled out the latter but indicated a willingness to review the provisions.

So, industry can expect some `rationalisation' on this count. Particularly the removal of contribution to superannuation fund from the FBT net will be welcomed by employers and employees alike.

FBT concerns

So also, removal of FBT on expenses such as sales/brand promotion and free samples will go a long way in addressing industry's concern on the `hidden' costs of legitimate marketing expenditure with no employee perquisites being involved.

It is also expected that the provisions of tax deductions available to individuals will be recast to give effect to the EET system of taxation.

The first step towards this was done in last year's Budget where the rebate hitherto available on specified investments was replaced by a deduction from the total income.

The logical culmination of this could be the introduction of provisions providing for the levy of tax on the redemption/transfer/withdrawal of investments.

It remains to be seen if such a provision is introduced in the coming Budget. Corporates expect some clarification, simplification and removal of difficulties.

They expect tax holiday in key infrastructure areas such as the construction and the power industry, availability of carry forward and set off of losses for most mergers and demergers, increase in the depreciation rate for plant and machinery to 25 per cent from 15 per cent, removal of Minimum Alternative Tax (MAT) on companies making infrastructure investments, and a reduction in compliance requirements.

Also expected are sector-specific changes, for example, clarifying the tax issues for outsourcing of business processes by foreign companies to India, clarifying the tax issues relating to reinsurance, introduction of provisions dealing with taxation of securitisation transactions, rationalisation of the tax to be withheld by equity schemes of mutual funds from short-term capital gains of non-resident investors, and abolition of the artificial treatment of loss on purchase and sale of shares by companies as speculation loss.

Focus on tax administration

The Finance Minister has indicated that improvement in tax administration is one of the areas of his focus. It is learnt that his promise to introduce a simpler and smaller Income-Tax Act is taking shape and the work of the drafting the new version is apace. Though we may not see the new version in this Budget, the Bill for the same is expected to be introduced in the near future.

Taxation of services has yielded significant revenues in the past year or so. It is, therefore, expected that more services will be brought under the service tax net and there is a strong rumour that the medical and legal professionals may be asked to pay service tax on the lines of other professionals.

Whether this happens or not, the service tax net is sure to be spread wider to not only gather more revenue but also to integrate service tax and value added tax on goods in the medium term.

Amendments to the Customs and excise duty rates have now become a regular feature of Budgets. The thrust towards moving to a uniform excise duty rate is expected to continue and rates are expected to be further rationalised.

So the expectations are that the coming Budget will maintain the momentum and further spur the process of achieving double-digit economic growth in the long term. Media reports talk of numerologists predicting the coming Budget to be one of the finest.

One only hopes the income and expenditure numbers of the economy are as favourable as the Finance Minister's birth date on which the predictions of the numerologists are based. The challenges are different and an `out-of-the-box' strategy may be needed to keep the Indian juggernaut rolling.

(The author is Partner, BSR & Co.)