MUMBAI, Feb 28
Budgets nowadays do not create much excitement, and Budget 2011 was no exception. Aided by buoyant tax revenues and non tax receipts like income from 3G spectrum auctions, Finance Minister Pranab Mukherjee was able to give us a budget that did not raises taxes significantly, provides substantial amounts for several crucial sectors – to ensure inclusive growth in the country.
Emphasis on Growth
The Finance Minister described his budget as a process towards simplifying administrative processes in taxation, trade and tariffs, free of discretion and bureaucratic delays.
Last year there was an all-round GDP growth of 8.6 per cent, aided by a rebound in agriculture of 5.4 per cent, 8.1 per cent in industrial production and 9.6 per cent in the service sector. The FM projects a growth of 9 per cent this year, aided by a higher domestic savings rate, significant capital flows and hopefully a bountiful monsoon.
The growth trajectory looks possible – there is an upward trend in most sectors. This has allowed the FM to provide greater spending on many key programmes like Bharat Nirman, Right to Education, and Health Care.
No major new project is envisaged, but several ongoing projects have got fresh funds. Besides the flagship educational program Sarva Shiksha Abhiyan, increased amounts are given for the educational needs of Scheduled Castes and Tribes. The only interesting innovation is the National Innovation Council, to prepare a roadmap for innovation. Increased funding for education and innovation is vital if India has to take its place as a developed nation; we must have quality educational facilities for all sections of society.
Direct Taxes
Pranabdada, with his eyes on coming elections both in West Bengal and Tamil Nadu, has raised the exemption bar for personal Income Tax from Rs 1.60 lakh to Rs1.80 lakh. This will provide uniform tax relief of Rs 2,000 for every taxpayer.
There is good news for senior citizens. The age limit for seniors has been brought down from 65 years to 60 years and the exemption limit raised from Rs 2.40 lakh to Rs 2.50 lakh. ‘Very senior citizens’ over 80 years will pay no tax up to Rs 5 lakh.
This is a wonderful gesture. Senior citizens have no further earning capacity, and with the rising cost of living, the reduction in tax rates will be welcome.
Most of the time of tax officers is spent on issuing refunds and processing returns of small tax payers. An excellent innovation of the budget is that those whose tax is deducted at source by employers will not have to file tax returns. Small and medium taxpayers whose entire tax is deducted at source will no longer have to go through the tedious process of filing tax returns.
Plus, with the reduction of work load, tax officers would be able to pay more attention to the cases of bigger tax payers. The government wants annual returns to be processed electronically, and more funds have been allocated to set up more electronic processing units. But there is a need to ensure that the staff in these units, are sufficiently motivated. Senior officers are not interested in serving in these units, since there is little public contact as most of the work, including the issue of refunds, is automated!
There is also some relief for the corporate sector. Corporate surcharge has been marginally reduced from 7.5 per cent to 5 per cent, while the rate for companies that pay Minimum Alternate Tax (MAT) has been increased from 18 per cent to 18.5 per cent. Now even developers of Special Economic Zones (SEZs) and units in these zones will have to pay MAT. Our export units have matured, and there is no reason why these units should not pay tax.
To raise funds for infrastructure projects, the withholding tax on special vehicles to provide funding for infrastructure debt funds is down to 5 per cent from 20 per cent in the past. Simultaneously, the additional IT deduction of Rs 20,000 under 80CCF for investment in long term infrastructure bonds is extended for another year, to allow Infra sector companies to raise funds. Many were hoping that the current savings deduction of Rs1 lakh would be raised; but the FM did not oblige.
Several Indian residents and companies do not bring home income from foreign dividends and interest received abroad. To encourage these funds back to India, the budget prescribes a lower tax rate of 15 per cent on foreign dividends brought back into the country.
But does the government have information on residents who get foreign income? Not really. Despite claims that it has agreements with various countries to provide information on Indian income stashed abroad, there is little actual information available on which the tax authorities can act. It is now posting tax officers abroad, but most government do not easily provide such information unless a strong case is made that the funds are from fraud or criminal activities. The government has a long way to go before it can tackle Indians who have money abroad.
Many were expecting another amnesty scheme for black money in this budget. It seems they forget that during the last amnesty programme, the government had given an undertaking to the Supreme Court that there would not be any more such schemes.
The focus was on the Direct Tax Code (DTC) to come. This bill is before the Standing Committee of Parliament and the FM promised it would be brought to Parliament during this financial year, to become law by next year.
Indirect Taxes
The FM moved towards aligning indirect tax rates to the forthcoming Goods and Services Tax (GST), to be rolled out next year; that is, if there is consensus with the states. Withdrawing the economic stimulus, the base excise rate has been raised to 10 per cent, probably in anticipation of next year’s GST rate of 12 per cent.
Of 370 items in the exemption category, 130 items (mainly consumer goods) will be taxed this year at 1 per cent, while the remaining 240 items will be brought into the tax net with the introduction of GST. Prices of these goods will increase.
The peak rate of Customs Duty has been kept at 10 per cent, while middle rates of 2, 2.5 and 3 per cent have been unified at 2.5 per cent. To improve cold chain food storage, full exemption is given for air-conditioning and refrigeration equipment for cold chain infrastructure.
Export Duty on iron ore has been raised to 20 per cent of the price. This will seriously impact mining companies – there are several in Goa – but there is a simultaneous exemption for iron ore pellets, to encourage value addition. This will encourage firms to convert ore into pellets.
Most excise duty proposals are to synchronise them with GST, which will hopefully be brought in next year.
Service Tax
With the impending GST, all services will be taxed, and the FM brought several more services into the tax net.
Hotel tariffs over Rs 1,000 per day, air conditioned restaurants with bars, air conditioned hospitals with more than 25 beds, domestic and international air travel (Rs 50 and Rs 250 respectively), investment services by life insurers, and legal services provided by firms and companies.
Hopefully with the growth predicted and buoyancy in tax revenues, the budget proposals will ensure that India’s development keeps pace with the FM’s expectations.
How would one categorise the budget? Well, there were no bold initiatives; in an era of coalition politics, Pranabdada is no conflict creator, but one who finds consensus. This is a budget that Parliament would readily pass!
