At sharp 11 am (IST) on 8th July, Finance Minister, P.Chidambaram presented the Union Budget for 2004-05. He surely had a tough task at hand, a balancing act of keeping both economic pragmatism and political correctness intact. An one can say that he has managed to perform the act pretty well.
If the previous Govt concentrated more on urban development, this newly elected Govt's main focus area was rural upliftment and agricultural progress. The main objective of the Budget seems to have been fiscal and agricultural consolidation.
There is a lot which Chidambaram has attempted to do in this Budget but with the new Givt coming to power just 2-3 months back, it would have been too much to expect Chidambaram to revamp and redo all that which the previous Govt had done.
The main emphasis in this Budget has been on agriculture and upliftment of the farmer. Major portion of the Budget allocation has gone towards this. The last five years saw macro growth and this Budget aims at changing the emphasis to a more micro level. But the big question is - will the well meant plans get implemented or will they remain merely on paper with most of the funds getting siphoned off by corrupt politicans, as has always been the practice? Though the Finance Minsiter (FM) has given a break-up of the proposed expenses in rural India, there is no clear direction presented in terms of how it is ensured that this earmarked money actually gets spent for the purpose that it has been allocated for. In short, there is no roadmap for implementation.
The Budget can be labelled as ''visionary''. The main aim of the FM , through this Budget seems to be improve rural India which in turn is expected to give impetus to demand for industrial goods. This way, through agricultural growth, the FM aims at increasing the growth in the industrial sector. But will this work is the million dollar question.
Chidambaram forecast the deficit, which the finance ministry has warned poses a challenge to sustained growth, would fall to 4.4 percent of gross domestic product (GDP) from 4.6 percent in 2003/04, but announced no major measures for tackling the issue.
Like the farmer, the FM has tried to keep the lower middle class also happy. He hiked the income tax exemption limit to Rs 1 lakh. But finance being a business of give and take, he also imposed a 2 per cent education cess on all central taxes to raise upto Rs 5,000 crore a year.
This means that the salaried class earning up to Rs 1 lakh will be able to save as much as Rs 9,000 annually. However, those earning above Rs 1 lakh will have to bear an additional tax burden of Rs 380 annually on account of education cess. While persons earning between Rs 1 lakh and Rs 8.5 lakh will have to pay the cess at two per cent, high income groups earning more than Rs 8.5 lakh annually will have to shell out a higher cess at 10 per cent.
The FM has left the subsequent income slabs untouched. This transaltes into a 20 per cent for income up to Rs 1.5 lakh and 30 per cent beyond that.
Service tax rate has also been raised to 10 per cent while bringing in 15 more services into the net. There was clarification on the issue of Gift Tax also. This tax was abolished in 1997. Though that decision remains, the FM has taken steps to plug the loophole to prevent money laundering. Accordingly, purported gifts from unrelated persons (not blood related), above the threshold limit of Rs.25,000, will now be taxed as income. Gifts received from blood relations, lineal ascendants and lineal descendants, and gifts received on certain occasion like marriage will continue to be totally exempt.
Coming to the issue of small savings instruments, no changes were made in the existing rates of interest. Consequently, PPF, GPF and the Special Deposit Scheme will continue to attract 8 per cent interest this year. For senior citizens, a new scheme has been introdced, called the Senior Citizens Savings Scheme offering an interest rate of 9 per cent per annum. The Government Savings bond which will carry an interest rate of 8 per cent per annum will also continue.
He has tinkered with the capital gains tax also which actually caused a lot of heartburn with the Indian stock markets. He abolished the tax on long-term capital gains from securities transactions altogether and following his policy of give and take, a 0.15% tax on transactions in securities was levied. This means a transaction involving securities valued at, say, Rs.100,000 will now bear a small tax of Rs.150, to be borne by the buyer. The short-term capital gains was reduced to a flat rate of 10 per cent.
Chidambaram has made changes in tax on dividends distributed by mutual funds also. Equity-oriented mutual funds will continue to be exempt from tax. While, debt-oriented mutual funds, individuals and HUF unit holders will continue to have the same rate of 12.5%, corporate unit holders will have to pay 20%. Thi was done mainly to close the window of arbitrage opportunity.
For the Non Resident Indians (NRIs) this was not a very good Budget as interest earned from a Non-Resident (External) Account and interest paid by banks to a Non-Resident or to a Not-Ordinarily Resident on deposits in foreign currency will now no longer be exempt from tax. These exemptions will cease prospectively from September 1, 2004.
Apart from all the tax angles, the Budget is expected to be inflationary. The cost of living might certainly go up. Prices of wheat and rice is expected to go up. Cars will cost more as excise on steel has been hiked. This in turn means, cost of almost all infrastructure will go up.
Computers, mobile phones, tractors and gas stoves will become cheaper with the lowering of duties while imitation jewellery, steel, cakes and pastries and scented supari will become costlier. Apart from these, pens and ball point pens, non-alcoholic beverages such as chocolate and malted food drinks, branded and packaged preparations of meat, fish and poultry would also become cheaper with reduction or exemption in excise duties.
However, items such as contact lens, playing cards, candles, prefabricated buildings, laboratory glassware, plastic insulated ware, clocks and watches will become costlier.
For the Indian industry, some sectors were very happy. The automobile industry was given a 150 per cent deduction of expenditure on in-house R&D facilities. The shipping industry was jubiliant as its much awaited demand of tonnage tax was finally met. Shipping companies will now have only an option to pay the tonnage tax or normal corporate tax on profits. The steel industry was unhappy as the excise duty on steel was hiked from 8 per cent to 12 per cent. Duty on refined palm oil was hiked to 75 per cent. Tractors were fully exempt, likewise for dairy machinery and hand mde tools. which attracts an excise duty of 16 per cent will be fully exempt, like wise for dairy machinery and hand made tools.Import duty on platinum was reduced from Rs.550 per 10 grams to Rs.200.
On the contentious issue of Public Sector Undertakings (PSUs), the FM kept the Left parties interest in mind and announced equity support of Rs.14,194 crore and loans of Rs.2,132 crore to Central PSUs (including Railways). Major investments will be made in PSEs falling in the sectors of power, telecommunications, railways, roads, petroleum, coal and civil aviation. The Government intends to piggy-back on the public issue of NTPC and disinvest approximately five per cent of its holding. As against the amibitious target of Rs.16,000 crores estimated to be raised from sale of PSU disinvestment, Chidambaram has been very realistic and set the target this time at a meager Rs.4000 crore.
