Indian Budget 2005-06 Run Up

EXPECTATIONS OF VARIOUS GROUPS FROM THE BUDGET 2005-06

Left Parties Demand Taxes on the Rich and Corporate

Left parties have suggested to the Centre that the Union Budget ’05-06 should reflect the objectives of the Common Minimum Programme, increase taxes on the rich and corporate and explore new sources of taxation to augment revenue.

EXPECTATIONS OF VARIOUS GROUPS FROM THE BUDGET 2005-06

Left Parties Demand Taxes on the Rich and Corporate

Left parties have suggested to the Centre that the Union Budget ’05-06 should reflect the objectives of the Common Minimum Programme, increase taxes on the rich and corporate and explore new sources of taxation to augment revenue.

It was demanded that Budget provide for an extra Rs 50,000 crore to meet the commitments of the CMP for the full year (’05-06) The amount was Rs 10,000 crore in the interim budget last year.

Left parties also suggested that tax-GDP ratio be restored to 11%, as it would fetch an additional revenue of Rs 30,000-40,000 crore. In nutshell, the left demands budget to be pro-poor, pro-kisan, pro-agricultural development and pro-employment.

Priority should be given to national employment guarantee, agricultural investment and the present credit amount to farmers be doubled or tripled. Also, it is very necessary that the government should increase allocation for education and health.

It was demanded that Budget provide for an extra Rs 50,000 crore to meet the commitments of the CMP for the full year (’05-06) The amount was Rs 10,000 crore in the interim budget last year.

Left parties also suggested that tax-GDP ratio be restored to 11%, as it would fetch an additional revenue of Rs 30,000-40,000 crore. In nutshell, the left demands budget to be pro-poor, pro-kisan, pro-agricultural development and pro-employment.

Priority should be given to national employment guarantee, agricultural investment and the present credit amount to farmers be doubled or tripled. Also, it is very necessary that the government should increase allocation for education and health.

If certain investments are to be made and expenditure is to be incurred then this can be done by ensuring that the affluent and corporate houses are taxed adequately.

The question of non-performing assets and tax defaulters should also be very carefully and efficiently scrutinised so that they come into government revenues.

Further, the left parties demanded that excise and customs duties reduction should be in our interest and not in interest of foreign MNCs. Certain concessions in excise and customs duties are harmful to small-scale industries and other domestic industries. The budget should take into account such factors.

Left parties had opposed 74% FDI allowed in telecom on security reasons and regarding private banks they have expressed concerns that giving 74% share holding to foreign investors will not be viable option on ownership grounds. Moreover, given the fact that private banks lending is declining, allowing foreign banks to take control of private sector banks would further reduce priority sector lending.

 

 

With respect to interest rates, the main concern is whether the liberal policies initiated in the past will be continued or will they be reversed

In the past, the soft interest rate regime, coupled with liberal policies of the government, gave a tremendous push to the housing sector.. The interest rates on housing loans had come down from around 18 percent to between six and 10 percent (depending on the tenure, purpose, and quantum of loan).

This was supported by the liberal credit policies of the Reserve Bank of India. This in turn ensured adequate availability of credit to the housing sector. And prospective homebuyers could borrow large amounts at cheap rates for long tenures. Also, the continuance of tax incentives under the Income Tax Act acted as an incentive. With few other savings and tax planning avenues available, property is good for investment and tax planning. Tax benefits are available for house properties built by taking housing loans. Repayment of loans and interest on them are eligible for deduction under the Income Tax Act.

The year 2004 saw a reversal of trends, and the interest rates started increasing, with indications that this may continue to do so in the near future. The main reason was the rising inflation – both in India as well as the global rates – fuelled by rising oil prices. However, it has not drastically dampened the demand for housing loans

Expectations from the budget in relation to the housing sector include the trend of the interest rates
Depending on the outlook of the government, and its priorities, the direction of the interest rates will be impacted. Although there may not be any direct measures, the indirect measures may indicate the expected direction of movement of interest rates.

With growth of the industrial sector picking up, there is a competing demand for funds from this sector, which may reduce the quantum of housing loans in the loan portfolio of banks.

In the sphere of Tax and stamp duty, the big question is whether or not the tax concessions will continue
There have been recommendations from many committees to gradually eliminate the concessions and deductions, including the deduction on housing loan interest. The previous government had kept the decision in abeyance. There is an expectation of reduction in stamp duty on property transactions. This will help increase the revenue of the government. By reducing the stamp duty rates on registration and transfer of property, the incentive to under-value the property by the purchasers would decrease and thereby the revenue stream of the government will increase. Simultaneously, it will help reduce generation of black money.

Another expectation from the coming budget is that it will include measures to boost rural housing
New schemes for rural areas and the economically weaker sections are expected. The government may come up with some new funds, proposals, or incentives for promoting housing in rural areas.

Last year, in order to increase the housing loan portfolios amongst the total loan portfolios of banks, the RBI had encouraged banks to provide bigger loans by granting priority sector status to housing loans up to Rs 15 lakhs from Rs 10 lakhs. This is expected to go up further.

India’s military has its own long wish list, which they feel is necessary to modernize country’s armed forces
Indian defense officials have laid out a request for a huge increase in spending on arms to New Delhi, most of which will be used to purchase state-of-the-art weaponry from suppliers around the world. While there is intense lobbying from representatives of various sectors to incorporate their demands, attention has focused on the over 40% hike in defense outlay that has been demanded by the India’s defense forces, which comes in the wake of an unprecedented 22% increase last year.

Last year, the budget set apart the biggest-ever allocation to defense – the equivalent of US$15 billion for 2004-05. This represented 2.5% of India’s gross domestic product.

Some people feel that there is a requirement for such a huge augmentation and modernization of the Indian armed forces. The other school of thought is that India’s defense spending and war preparedness should take into consideration the threat of actual war in the foreseeable future, short, medium and long term, with greater cause for concern being terrorist attacks, as well as internal insurgencies, such as Naxalism, bad governance, caste and feudal wars and communal violence. This, in turn, should lead to India focusing more on getting its intelligence-gathering infrastructure, external and internal intelligence agencies and paramilitary forces right, rather than building on conventional weapons of war. Given the current state of superiority of India’s armed forces over Pakistan, the country from which the threat perception is the highest, there is no requirement for such a massive drive. Further, given the fact that both India and Pakistan are nuclear-weapon states, it is unlikely that a full-scale high-intensity war lasting for weeks will ever happen, making the case for having such a huge cache of arms as well as armed forces redundant.

Notwithstanding the fact that armed forces needs modernisation, it is important to pace the process in a way that there is a definite but sure increment without a disproportionate chunk of government funds being siphoned away from equally important needs – the social sector, which affects the welfare of people the most.

India-Inc hopes the following from the budget 2005-06

• Reduction of Corporate Tax
• Cut import duty on crude oil to boost energy sector
• Targeting subsidies, particularly for LPG and kerosene
• Time-frame for Goods & Services Tax
• Accelerated depreciation allowance for R&D
• Simple procedures and tax concession on M&As
• Time-bound integration of all taxes such as octroi into VAT (Value-Added Tax)
• Dividends received from overseas companies should be exempt
• Widening tax base on Services
• Inverted duty structure should be streamlined
• Exporters should be refunded all the taxes paid by them
• A Life Science policy on the lines of the IT policy
• Infrastructure Development Board with public-private ties
• Removing disincentives in Telecom sector and levy single tax
• Removing mobile phones from 1X6 category
• Link Agriculture sector to world markets by infrastructure facilities like transportation and cold chains
• FDI (Foreign Direct Investment) in real estate and IT hardware sector
• Downsizing of Government on a priority basis
• Need to lower high transaction costs to boost export
• Public private partnerships in Defence production
• Appropriate vehicle retirement policy to reduce pollution
• SSI (Small Scale Industry) with turnover of Rs 2 crore to pay excise duty
• Excise exemption for branded SSI products
• Suitable Service Tax exemptions on Tiny units.

The market is hoping that the government will raise the foreign investment caps in sectors like real estate and retail, which in turn will trigger the demand for stocks of cement, steel and other related sector companies.

“There are also some taxation and structural issues that need to be addressed in the budget for the increased flow of overseas investments as well as domestic retail participation inside the trading ring.”

The key share index has rallied sharply higher in the past few days on the hopes of unveiling a “market-friendly” budget. The stock market barometer 30-share Bombay Stock Exchange sensitive index or Sensex Monday touched an all-time closing high of 6,679.33, bettering its previous record high of 6,679.29 logged Jan 3.

It is expected that the Budget 2005-2006 will be substantially different from the budget 2004-2005, especially in tax arena. The tax structure in India has to be substantially given a face-lift, making it more simple and stable
Bulk of the taxes would have to come from corporate and not the salaried class

Government had committed to widen the tax net to take the tax-GDP ratio from the present nine per cent to 11-12 per cent.

Instead of the ineffective two-pronged strategy of giving deduction and charging high taxes, the government may rationalise this by removing the benefit of deduction /exemption along with reduction in tax simultaneously. This will also lead to the reducing of unnecessary litigations.

Transaction Tax
The government introduced the Securities Transaction Tax (STT) last year. Under this tax, every time a person purchases or sells shares, he has to pay tax, which is insignificant, i.e. 0.15 per cent or 0.075 per cent. In lieu of that, his long-term capital gain on shares is not taxable and his short-term capital gain on shares is taxable at a lower rate of 10 per cent.

The government may apply the STT to all the sectors and sales tax, custom, excise duties and all countervailing duties, etc. may be abolished. Those who undertake more transactions will pay more tax. Those who do not carry out any transactions would have to pay a lower tax since the quantum of transactions done by them would be lower.

Agricultural income and other exempt incomes
Any person, who earns income, including agricultural income, would necessarily be required to file his return of income, together with his profit and loss account, balance sheet and capital account.

A lot of people claim income from agriculture where no agriculture exists, thereby converting ‘black money’ into ‘white’ and show it as agricultural income. Once they file returns, and their returns are scrutinised, only the real agricultural income would then become tax-free.

Tax reform is also expected in residential construction
Currently, there is a total tax exemption given to builders who construct residential houses. This benefit was given to ensure that low cost housing was provided to the community at large. But none of that has happened. The builders who have shown huge profits have usurped the entire profit. This is already under the government’s magnifying glass.

Regarding the issue of Tax Deducted at Source, it has been seen that the provisions of TDS have helped a lot in the collection of tax
E.g. if a small contractor or transporters is paid a sum, such a person would generally never file a return or offer income for taxation. People like the taxi driver or the owner of a paan/beedi shop may earn a lot, but do not pay any taxes, nor do they contribute to the exchequer in any way. –Soon, a system could be put in place, which ensures that the payer deducts tax at source, so that at least some portion gets taxed.

Right now, Service tax is levied on certain specified activities i.e. all other activities are exempted
A lot of litigation has arisen as to whether a certain activity is taxable or not, if taxable on what portion or to what extent. However, the next Budget could change the entire scenario. If there would be a service tax on each and every activity, there would be a lot of income generated for the government.

Tax savings and other small deposits schemes are likely to get a new orientation in this budget
Tax benefits under Section 80 and 88 will see some changes this year. To popularise pension schemes, the limit of deposit, on which section 80-CCC benefit is given, is likely to be increased. The limit is likely to be increased to Rs 20,000, but the industry is demanding this to be increased to Rs 50,000. At present, an investor can get a deduction up to an investment of Rs 10,000 in a pension scheme.

The government has already formed a new Pension Fund Regulatory and Development Authority (PFRDA) for regulating the new pension system. Central government has already discontinued old pension scheme of defined benefits for its employees, who have been recruited after January 1, 2004.

It is learnt that the government is considering doing away with the compartmentalisation of savings for giving the tax benefit. It would be left for the tax payers to select the investment instrument from notified schemes, to invest for tax benefit.

But, the government is also considering reducing the maximum benefits allowed under Section 88 benefit. At present, the benefit is allowed on a maximum amount of Rs 1,00,000. This is likely to be brought down to Rs 80,000. That means, the maximum benefit will come down to Rs 12,000 from the existing Rs 15,000

In the IT Sector, there is a need to unveil a clear roadmap for boosting the creaky infrastructure in the national budget to help the sector achieve sustainable and robust growth in the years ahead
There is a hope that annual fiscal package would also unveil guidelines for enhancing the meagre government investments on technology usages.

A rise in expenditure on the usage of IT and IT-enabled services, including e-governance , in order to give a boost to the growth of the industry is expected.Al the budgets in the past few years have been favourable to the IT industry in terms of taxation structure, the sector representatives hope the budget would not alter the existing tax norms and maintain stable regime in taxation matters.

The stability in the fiscal policies of the government not only boosts the sentiment of domestic companies but also result in sharply higher overseas investments into the country,

The budget should give a clear signal about the reforms drive, foreign direct investments and infrastructure development.

Hardware Sector
The industry leaders hope the budget would introduce a uniform eight percent excise duty on all IT products. Reduction in excise duties on inputs is desirable because it is through reduced prices IT penetration can be improved at the home and education sector.

The trade and industry has already submitted its memoranda giving details of its wish list that included reduction in corporate tax rates from the present 35 per cent to 30 per cent, abolition of minimum alternate tax on zero tax paying companies and continuation of investment-oriented exemptions.

The budget is expected to bring out wide ranging reforms in the agriculture sector
There is an urgent need to push up investment in agriculture to achieve a sustained four per cent growth annually in the farm sector, necessary for higher 7-8 per cent GDP growth.

Agriculturists have demanded for increased investment in irrigation, water harvesting facilities and continuation of minimum support price.

Industrialists are expected to pitch for long awaited labour reforms, but the trade unions are likely to speak against them, particularly when employment opportunities are shrinking in the organised sector
Government is expected to take a balanced view on this controversial issue, with the Left parties being a part of the coalition.

The economists are expressing their concerns on the burgeoning fiscal and revenue deficits
The economists are expressing their concerns on the burgeoning fiscal and revenue deficits that crowd out private investments apart from making available less money for social sectors. They are demanding reforms in this area. How much of these reforms the government is able to accommodate is to be seen, as there are compulsions of coalition politics also.

Further easing in FDI norms are expected
Government has already raised the FDI cap in civil aviation from 40 to 49 per cent and from 49 per cent to 74 per cent in telecom sector.

The government would introduce a bill to raise FDI cap in insurance sector from 26 per cent to 49 per cent in the budget session of Parliament.

The second issue in the insuarce sector would be related to taxation. Some of the key recommendations that the industry has made with regard to Section 88 benefit and 80CCC benefits should be taken into account because this is a young industry and there have to be ongoing incentives for customers to save and self insure.

Particularly in the absence of any kind of meaningful social security programme in India, the government should encourage individuals to self insure and one of the ways this can be done is to provide tax incentives.

Since the issue of the first license to a private insurance player in 2000, the life insurance sector has seen significant changes like product innovations, introduction of riders, new channels of distribution i.e., banks, corporate agents, group insurance business etc. These changes have no doubt attracted the attention of various stakeholders – customers, policy makers, regulators and the shareholders.

According to the private players, these changes are most welcome and will benefit the growth of the industry and the customers. But there are several key issues that need to be addressed immediately namely professionalism, scalability and market conduct and compliance.

The government may launch a Rs 10,000-crore employment guarantee programme for urban areas in the Budget
The urban employment initiative will be aimed at generating market oriented jobs, unlike the National Rural Employment Guarantee scheme.

One-time funding for the urban employment initiative, is expected to support jobs for 1 crore low-skilled workers, for 200 days a year.

The Government is expected to fulfil the promise made in the Common Minimum Programme of adopting a standardized approach towards this end.

The budget is expected to take steps to push savings rate by 2-3 per cent from the present 24 per cent of GDP to mobilise additional resources for pushing up investment
The budget is expected to take steps to push savings rate by 2-3 per cent from the present 24 per cent of GDP to mobilise additional resources for pushing up investment and the Trade unions are demanding rise in the income tax exemption limits and continuing with administered interest rate regime on small savings instruments.

The Indian chemical industry would like investment made to set up power plants to be treated as infrastructure investments
The Indian chemical industry would like investment made to set up power plants to be treated as infrastructure investments. The industry is happy with the gradual reduction in peak custom duties on finished products but wants duties in feedstock to fall. Besides it wants the customs duties on basic building blocks to be 10% lower than the peak duty rate. It also demands an amendment of the cenvat credit rules to extend 100% cenvat credit on capital goods.