The Hindu : Front Page : Substantial income tax relief

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Tuesday, Mar 01, 2005

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Substantial income tax relief

By Ashok Dasgupta

NEW DELHI, FEB. 28. In a well-tailored but politically measured exercise, the Finance Minister, P. Chidambaram, on Monday not only managed to fulfil the `rural India' mission objectives enunciated in the National Common Minimum Programme but also extended the fiscal spurs necessary to drive various sectors such as textiles, sugar, pharmaceuticals and small-medium enterprises to catapult the economy on to a new growth path.

At the same time, Mr. Chidambaram, while presenting the budget for 2005-06 in the Lok Sabha, took care to warm the cockles of the hearts of the salaried class and other income-tax payers by granting them substantial relief, doing away with all the major exemptions in one stroke even while casting his net wider to garner larger resources through higher tax compliance and vigorous collections. He also noted that the States, starting April 1, would implement the Value Added Tax scheme in lieu of sales tax.

Cheque economy

Instead of introducing an amnesty scheme to mop up black money, the Minister sought to make a beginning by imposing a banking transaction tax of Rs. 10 on cash withdrawals of over Rs. 10,000 in a single day. This, he said, was not to mop up revenue but to introduce the system of "cheque economy."

Another ready segment available to Mr. Chidambaram for tapping was the services sector. And considering that services currently account for over 52 per cent of the country's gross domestic product (GDP), he sought to add nine more sectors while extending the scope of service tax on certain existing services already in the list.Among the nine services to be roped in for the new fiscal are piped transport of goods, including gas and water, site formation demolition, membership fees of clubs and associations, packaging and specialised mailing services, survey and map-making services, dredging services in rivers and harbours, cleaning services for commercial buildings and construction of planned residential complexes with more than 12 dwelling units by builders.

Removal of exemptions

Taking the cue from the Kelkar Committee report, Mr. Chidambaram imbibed the suggestion of tax slab rationalisation and removal of exemptions in the direct tax segment while reducing the customs duties to gradually bring them down to Asean levels. On the excise front, while granting selective relief to certain sections, he sought to revamp the duty structure in such a way that most items attract a duty of 16 per cent instead of the current eight or 24 per cent.

While the direct tax proposals are expected to mop up Rs. 6,000 crores in a full year, the rationalisation of indirect taxes is expected to be revenue neutral.

Explaining the change at a press conference later, he said the revenue neutrality in the oil sector would depend on the current level of imports at the current international prices. "If the consumption and the prices in the international market go up, it will turn revenue positive; if they go down, it will be negative," he said. Perhaps, the reason for the duty tinkering is to relieve the oil companies of the burden while the revenue to the Government — either as customs or excise mop-up — currently remains the same.

Securities transaction tax

Mr. Chidambaram has taken care to provide adequate funds for various social sector schemes such as education, health and drinking water as well as the national plan for renewal of urban cities and the `Bharat Nirman' programme. For the health plan, the required funds are sought to be mopped up from the higher impost on cigarettes and other tobacco products. For this, barring the companies engaged in this business, no one is going to shed a tear. He also increased the securities transaction tax on day traders on the bourses from 0.015 per cent to 0.2 per cent to mop up Rs. 130-140 crores a month as compared to the Rs. 100 crores at present.

He, however, did not reduce the subsidy bill for the new fiscal in either food or fertilizers, despite the prescription in the Economic Survey to switch a part of it to funding irrigation. Neither does the budget offer much on foreign direct investment except noting that the issue required a pragmatic view. There is also a deafening silence on the issue of disinvestment, which Mr. Chidambaram explained as owing to the fact that it was not linked to the Budget.

The Budget estimates for 2005-06 put the total expenditure at Rs. 5,14,344 crores while the revenue receipts and revenue expenditure are put at Rs. 3,51,200 crores and Rs. 4.46,512 crores. As a result, the revenue deficit works out to Rs. 95,312 crores or 2.7 per cent of the GDP while the fiscal deficit works out to Rs. 1,51,144 crores or 4.3 per cent of the estimated GDP. Mr. Chidambaram explained the "pause" in lowering fiscal deficit to the fall-out of the 12th Finance Commission recommendations and promised to correct it by 2006-07 and achieve the FRBM Act goals by 2008-09.

Budget speech text on our website: www.thehindu.com

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