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The Indian Union Budget of 2005-06, presented by Harvard educated Finance Minister, P Chidambaram, on the evening of 28 February 2005, brought some relief to individual tax payers as well as to corporates. On the one hand, he increased the exemption limit for income tax up to an annual income of Rs 1 lakh, while on the other, he reduced the corporate tax rate for domestic companies from 35 percent to 30 percent. Chidambaram’s move may yield higher disposable incomes in the hands of salaried class, for the tax slabs have also been changed to their advantage.
Smiles for tax payers
Now for an annual income ranging from Rs 1-1.5 lakh, there is a tax of 10 percent and for the next income bracket, i.e. incomes ranging between Rs 1.5-2.5 lakh, the taxation is 20 percent. The 30 percent tax slab only starts at an annual income above Rs 2.5 lakh. And what’s more, the exemption limit for women is Rs 1.25 lakh and for senior citizens it is up to Rs 1.5 lakh. The annual income limit for imposition of a surcharge of 10 percent has also been increased from Rs 8.5 to 10 lakh. Yes, there’s more for individual taxpayers–consolidated savings of up to Rs 1 lakh will now be rebated from the income of taxpayers before the calculation of tax. However, despite smiles, the budget also brought about a frown or two. An imposition of 0.1 percent tax on cash withdrawals of Rs 10,000 and above from banks in a single day, created a slight controversy. The Finance Minister has also proposed to remove the standard deductions and a host of tax rebates. The rebates under Section 88 and deductions under Section 80L are being withdrawn and the ambit of service tax coverage has also been increased. At the same time, Chidambaram has reduced the depreciation rate on plant and machinery from 25 percent to 15 percent, which is bad news for corporates. The reduction of customs and excise duties on crude oil and petroleum products, and leaving the subsidies on domestic LPG and kerosene unchanged are other welcome features of the budget, which by and large, can be termed as a ‘people and business friendly’ one.
The VAT regime begins
VAT or value added tax was imposed across the nation, with effect from 1 April 2005. According to the FM’s budget statement, “VAT is a modern, simple and transparent tax system that will replace the existing sales tax and eliminate the cascading effect of sales tax.” He termed this development as “the most important tax reform ever attempted in this country.” His goal in the medium to long term is that the “entire production-distribution chain should be covered by a national VAT, or even better, by a goods and services tax (GST), encompassing both the centre and the states.”
Focus on development
The question remains on how the FM plans to finance a consumer friendly look to his budget. On a macroeconomic perspective, the 2005-06 budget, which has a fiscal deficit of Rs 151,144 crore, as compared to 139,231 crore in the 2004-05 budget, is potentially inflationary. According to Chidambaram, the fiscal deficit for the coming financial year would be 4.3 percent of GDP, which is higher than the originally envisaged 4 percent. Only a huge economic growth can offset this inflationary effect. The Finance Minister is expecting an approximately 21 percent enhancement in gross tax revenues, 30.66 percent growth in income tax, 33.22 percent growth in corporation tax and 20.66 percent growth in excise tax revenues for the 2005-06 budget. The nominal GDP growth for 2005-06 is estimated at 13.6 percent. However, assuming the average inflation rate for the next fiscal is between 5.5-6 percent, the real GDP growth could be around 7.5-8 percent, which is nevertheless a healthy one.
However, growth without development hardly holds any water. As for the developmental schemes introduced in this budget, the ambitious Bharat Nirman schemes deserve special mention. Under this scheme, the FM proposes to connect all villages with a population of 1000 or more (for hilly/tribal areas, villages with a population of 500 or more) with a road. Constructing 60 lakh additional houses for the poor and to bring an additional one crore hectares under assured irrigation are some of the other landmark visions under Bharat Nirman, envisaged in the budget. Bharat Nirman also entails distributing electricity to households in 1.25 lakh villages. For this rural electrification programme, FM has allocated a sum of Rs 1100 crore for this fiscal.
There is a galore of other developmental schemes in the budget, whose proper execution can uplift underprivileged India. One of them is the increase in budget allocation for the mid-day meal scheme for children, from Rs 1675 crore in the 2004-05 fiscal to Rs 3010 crore in the 2005-06 fiscal. The allocation for Sarva Shikhsa Abhiyan programme, which Chidambaram states as “ the cornerstone of the government’s intervention in basic education for all children” has also been proposed to increase to Rs 7156 crore. In the 2004-05 fiscal, Rs 4754 crore was allocated to this programme. “A non-lapsable fund called ‘Parambhik Shiksha Kosh’ has been created for funding this programme,” stated the FM.
In the new budget, 2.5 crore families residing ‘below the poverty line’ will be included in the Antyodaya Anna Yojana (2004-05 fiscal covered 2 crore). Besides that, the budget has also introduced schemes for the development of Scheduled Castes and Tribes. An amount of Rs 6253 crore has been allocated to these programmes.
The National Rural Employment Guarantee Scheme and the National Rural Health Mission are other aces up his sleeve that are geared to address the twin problems of rural employment and rural health comprehensively. To finance the National Rural Health Mission and its associated components, Chidambaram has proposed to increase the budgetary allocation to the Department of Health and the Department of Family Welfare to Rs 10,280 crore in the next fiscal (2004-05’s fiscal allocation was Rs 8420 crore).
Lending support to agriculture
The budget has placed adequate importance on the agricultural sector, and a pointer to this is the National Horticulture Mission. The mission was launched on 1 April 2005 and the budget has proposed Rs 630 crore for the mission. According to Chidambaram’s budget statement, “The Mission will ensure an end-to-end approach, having backward and forward linkages covering research, production, post-harvest management, processing and marketing, under one umbrella, in an integrated manner.” He also assured that with the mission gathering momentum, more funds would be allocated to it.
The budget has also increased its allocation to the Accelerated Irrigation Benefit Programme (AIBP). It has been increased to Rs 4800 crore from Rs 2800 crore. The budget has also proposed to allocate Rs 72 crore for a new scheme titled ‘Development/Strengthening of Agricultural Marketing Infrastructure, Grading and Standardization’. Rs 400 crore has been allocated to promote micro-irrigation, which is the need of the hour in India’s agricultural scenario, characterised by its low water-use efficiency. To foster agricultural research, recently a task force headed by Dr MS Swaminathan has called for the creation of a national fund for strategic agricultural research. In this budget, “an initial provision” of Rs 50 crore has been allotted to operationalise the fund.
An industrious approach
The cutting of excise duty on polyester filament yarn from 24 percent to 16 percent, and halving the existing custom duty on textile machinery are some of the welcome provisions of the budget, which will give a big boost to the textile industry in general. Furthermore, the Finance Minister has also proposed a 10 percent capital subsidy scheme for the textile processing sector and called for enhancing the Rs 25,000 crore Technology Upgradation Fund Scheme (TUFS). The import duty on a wide range of textile products has also been cut from 20 percent to 15 percent. All these will definitely augur well for the textiles industry.
In his budget, Chidambaram has proposed to cover 20 lakh handloom weavers under a life insurance scheme. Presently only 2 lakh weavers are being covered. Similarly he also proposed to cover 2 lakh handloom weavers under the health insurance package, which presently, covers only 25,000 weavers.
Among conventional industries, the tyre industry is expected to receive an impetus with excise duty on tyres, tubes and flaps reduced from 24 percent to 16 percent. This is likely to make the tyres cheaper and in turn boost the automobile industry indirectly, which incidentally, is not too happy with the budget, in the absence of any excise duty relief. Besides this initiative, the Indian tyre industry will gain from the drop in the peak customs duty from 20 percent to 15 percent that has been proposed. However, at the same time it may face competition from increased imports of finished products, as a result of drop in the peak rate of customs duty.
For the telecom sector also there are a range of incentives on offer. Customs duty has been waived for those items that are covered under the Information Technology Agreement (ITA). However, the Minister has imposed a 4 percent countervailing duty (CVD) on the 217 items covered by ITA, which will, in turn, dilute the effect of waiving of customs duty. The customs duty on fibre-optic cable has also been reduced from 20 percent to 10 percent. This step is likely to reduce the price of broadband and high-speed Internet services. And yes, mobile phones have been excluded from the 1/6 scheme of the Income-Tax Act.
However, there is very little for the two sunrise sectors of the Indian economy-pharmaceuticals and biotechnology. Except for getting the extension of 150 percent weighted deduction benefit on in-house R&D, the pharmaceutical industry has nothing to cheer home about.
Emphasis on the core sector
The infrastructure sector, which is the backbone of economy, has been given its due recognition in the budget. The budget proposes a Rs 10,000 crore special purpose vehicle (SPV) for the purpose of extending loans to projects pertaining to roads, ports, airports and tourism. All these projects funded through the SPV will be first appraised by an inter-institutional group of banks and financial institutions, before qualifying for loans. The Finance Minister has also increased the allocation for national highway development from Rs 6514 crore in the budget estimates of 2004-05 to Rs 9320 crore in 2005-06.
The allocation for Indira Awas Yojana- the rural housing scheme for weaker sections of the society, has also been increased from Rs 2500 crore in the previous fiscal to Rs 2750 crore for the current one. Under this scheme, about 15 lakh houses are expected to be constructed during the continuing fiscal. For the 2005-06 fiscal, the Rural Infrastructure Development Fund has also been provided with a corpus of Rs 8000 crore, which is same as that of the previous fiscal.
However, the urban sector is not neglected in Chidambaram’s 2005-06 budget, as is reflected in the National Urban Renewal Mission. According to our FM’s budget statement, “It will cover the seven mega cities, all cities with a population of over one million, and some other towns.” For this mission Rs 5500 crore has been proposed in the budget, which includes a grant component of Rs 1650 crore. Some of the projects to be supported by this mission include the Mumbai Metro Rail Project, the Mumbai Western Expressway Sealink and the Bangalore Metro Rail Project.
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