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Buoyant economy helpful

Surge in revenues behind unchanged direct tax rates

A VIBRANT economy has helped the Finance Minister, P. Chidambaram, to formulate his budget proposals from a comfortable position.

Even though the estimates of tax revenues for 2005-06 were optimistically conceived, gross tax revenues at Rs. 3,70,141 crore (revised) have marginally exceeded the target of Rs. 3,70,025 crore (budget) for the first time in recent memory.

The slight improvement in gross tax receipts is due mainly to a surge in collections from import duties and services taxes. In spite of the earlier buoyancy in corporate tax receipts, net revenue under this head is lower, presumably due to heavy refunds.

The target for income tax has been fully met, while excise collections are less than the Budget estimate.

The Finance Minister's calculations that revenue receipts would be higher than the Budget estimate have, of course, turned out correct.

Even with a slight drop in non-tax revenues, the revenue deficit has declined to Rs. 91,821 crore (revised) from Rs. 95,312 crore (budget). This is due to the non-plan expenditure being pruned to Rs. 3,64,914 crore from Rs. 3,70,847 crore (budget), in spite of payments to the States for relief operations in the tsunami and flood affected areas. The Central plan outlay too has dropped to Rs. 2,05,338 crore from Rs. 2,11,253 crore (budget).

The fall in the revenue deficit as a proportion of the Gross Domestic Product (GDP) to 2.6 per cent (revised) from 2.7 per cent (Budget) should be partly ascribed to the growth in GDP by 8.1 per cent in 2005-06. The fiscal deficit also is lower at 4.1 per cent of GDP against 4.3 per cent for the same reason.

In absolute terms too, there has been a drop in the fiscal deficit by Rs. 4,969 crore to Rs. 1,46,175 crore in the revised estimates because of the drawing down of cash balances.

The Finance Minister is naturally happy about carrying forward the process of fiscal consolidation. As it is anticipated that the rise in GDP will again be eight per cent in the next financial year and industrial and the services sectors will remain buoyant, it is felt that the receipts from various levies, even at the present levels, will be rising significantly and it will be possible to avoid an uncomfortable rise in the fiscal deficit in 2006-07.

This calculation has obviously influenced Mr. Chidambaram to leave the rates of direct taxes unchanged, even though he has sought to raise additional revenues by abolishing exemption of anonymous contributions to charitable trusts and increasing the rate of Minimum Alternative Tax (MAT) to 10 per cent from 7.5 per cent.

The Fringe Benefit Tax (FBT) has not been abolished and only its rigours have been minimised by exempting certain categories of expenditure and reducing significantly the percentage rates. However, there are no fresh incentives for saving and investment, as it is probably hoped that there will be heavy inflows on account of FIIs and FDIs.

Import duties have been reduced to bring the various rates to levels prevailing in the ASEAN countries and implement also the assurances given to other member countries under various Free Trade Agreements. In order to avoid unfair competition from imports and as a measure of protection, the import duty on vanaspati has been raised to 80 per cent, while that of steel scrap has been increased to 5 per cent from nil. Excise duties on various products also have been lowered for stimulating consumption. But the duty on cigarettes has been raised by five per cent.

Hike in service tax

The benefit accruing to consumers, however, will be neutralised to a significant extent or completely, as the rate of service tax has been raised to 12 per cent from 10 per cent and the list of services coming under the tax net has also got widened.

The securities transaction tax has, of course, been increased across the board by 25 per cent, obviously for offsetting, to a certain extent, the loss from the abolition of capital gains tax, where the transactions have been put through approved stock exchanges.

Plan revenue expenditure has, therefore, risen sharply by 25.94 per cent to Rs. 1,43,762 crore from Rs. 1,14,153 crore (revised), while non-plan revenue expenditure will be rising by only 5.61 per cent to Rs. 3,44,430 crore from Rs. 3,26,142 crore (revised), even with special emphasis on raising allocations for projects under the National Common Minimum Programme (NCMP).

There will be only a marginal increase in non-tax revenues. Even so, the revenue deficit will be declining to Rs. 84,727 crore from Rs. 91,821 crore (revised) and as a percentage of GDP to 2.1 per cent.

The fiscal deficit also will be lower at 3.8 per cent as a proportion of GDP only because of an eight per cent growth in GDP though, in absolute terms, there will be a marginal rise of Rs. 2,511 crore to Rs. 1,48,686 crore.

Net market borrowing will be higher than in 2005-06 and on a dearer basis, as there has been a distinct hardening of interest rates and scheduled commercial banks particularly have difficulty in extending liberal support to new loans.

Favourable reaction

The reaction to the Budget proposals has been heartening, though there was an initial hesitation in stock market circles. With the successful visit of the U.S. President, George W. Bush, to India and the nuclear energy agreement, stock markets have been buoyant and new peak levels have been touched last week.

As the Budget proposals are out of the way and there may also be a further increase in buying by FIIs and others along with larger FDI, the uptrend in equity values is expected to be sustained, though in some quarters, it is pointed out that the surge in BSE index by as much as 60.41 per cent in a little less than a year has led to an exaggeration in equity values in some directions.

In any case, the growth prospects are viewed with optimism and it is acknowledged in knowledgeable quarters that efficient established enterprises stand to gain to a great extent in the current situation.

The year 2006-07 may, thus, turn out to be a major landmark in the march of India to the status of a developed nation by 2020.

P. A. Seshan

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