A low-voltage Budget

With one eye on the voter and another on the foreign investor, Finance Minister P. Chidambaram presented a “responsible” Budget on Thursday. His watchwords: Prudence, patience and restraint. Later, at a briefing for the press, he said he didn’t have much room for manoeuvre.

Mindful of the hardship caused by unrelenting inflation to the middle-class, he left direct tax rates unchanged. But faced with the need for more revenues to bring down the fiscal deficit, he turned to the 42,800 people considered to be super-rich because they have a taxable income of Rs 1 crore or more. They will now pay a surcharge at the rate of 10 per cent.

Chidambaram’s real innovation, however, was in the form of inflation-indexed bonds. He didn’t give much relief to the middle-class — except to those earning between Rs 2 lakh and 5 lakh. But these bonds will at least protect middle-class savings.

Boost to social sector

The UPA’s flagship social sector schemes got the expected boost in outlays, and a nod to women, in the form of a women-oriented PSU bank and Rs 1,000 crore for the fairer sex’s security. Outlays for rural development were raised 46 per cent, and he even provided Rs 10,000 crore against the yet-to-be-passed Food Security Bill.

But a Budget cannot please everyone and the stock market dipped, unhappy that he had increased the surcharge payable by domestic companies from 5 to 10 per cent and the dividend distribution tax from 5 to 10 per cent. For foreign companies, the surcharge increase is from 2 to 5 per cent.

Chidambaram did, however, try to please the market by lowering the securities transaction tax and bringing non-agro commodities at par with equity by re-introducing the commodities transaction tax, focussing mainly on gold futures.

Aware of the problems that slow export growth and high imports can cause, he has tried to improve the foreign capital flows. FIIs will be allowed to participate in the exchange traded currency derivative segment to the extent of their rupee exposure in India. They will also be permitted to use their investment in corporate bonds and Government securities as collateral to meet their margin requirements.

SEBI will also do its bit. It will simplify the procedures and prescribe uniform registration and other norms for entry of foreign portfolio investors.

But the real change may lie in the reclassification of FII inflows. Foreign investments of 10 per cent or less in a company will be treated as FII and with more than 10 per cent as FDI. He said a committee will be constituted to examine the application of the principle and to work out the details expeditiously.

More FII investment

This is expected to create some more room for FII investment. Currently, various regulators have placed caps on FII holdings in the sectors regulated by them.

Contrary to expectation, there was no change in the basic rate of Customs and excise duties along with service tax. But there are some sectors — such as mobile handset costing more than Rs 2,000 or sports utility vehicles — that will pay higher excise duty.

Similarly, dining in any air-conditioned restaurants, irrespective of serving liquor or not, will become costlier as there will be service tax on 40 per cent of total bill amount.

These changes in direct and indirect tax measures are expected to bring Rs 18,000 crore of additional revenue during 2013-14

Double taxation

One important area on which he was silent was the taxation of indirect transfer of shares, such as the Vodafone case. Observers believe that the Government is keen to settle with Vodafone.

But the Budget did make one thing clear — a valid tax residency certificate from a foreign jurisdiction is a necessary but not a sufficient condition for granting treaty benefits under a double taxation avoidance agreement. This has significant implications for investments flowing into India through jurisdictions such as Mauritius.

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