Will FM present another 'Dream Budget'?

Written by: By S Sivakumar
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WHEN people talk of 'dream" budgets, I often get confused. Are they talking about budgets which have tax proposals which one would not think of, even in a dream or are they perhaps referring to budgets which really made a big difference…. I don"t know. But, Mr PC"s 1997-98 is still referred to as a 'dream budget" in a positive sense, of course.

In his 'dream budget" of 1997-98, Mr PC brought in several positive changes in the tax regime. It was he who brought down the maximum rate of personal taxes to the 30% level, which has remained at that level over the last 11 years. Mr PC"s 1997 'dream proposals" included abolition of corporate surcharge, abolition of dividend tax at the hands of shareholders, allowing foreign institutional investors and non-resident Indians to invest up to 30 per cent in Indian companies. These proposals were path breaking and represented the mind of a visionary, to say the least. It is another matter that due to the pressure of raising revenues, Mr PC has had to persist with corporate surcharge in his subsequent Budgets.

I personally feel that Mr PC has just not lived up to his potential and his post 1997 Budgets can nowhere be compared to his 1997-98 'dream budget". Of course, they haven"t been nightmare budgets, either, like the one Mr N D Tiwari presented. The 2007-08 Budget presented by Mr PC was declaredly pro-poor and pro-agriculturalist. Mr PC tampered with several tax provisions including raising the dividend distribution tax by 2.5%, imposing FBT on ESOPs, increasing TDS rate to 10% for professionals, levying MAT on the IT sector and significantly increasing the coverage of service tax by imposing tax on transactions which cannot be regarded as 'service".

What then, can we expect from Mr PC? Before that, can we take a very quick run up, in terms of the main factors which would influence the 2008-09 Budget…

1. This has to be an election budget. With elections scheduled for as much as 10 states this year, followed by general elections in 2009, Mr PC will hardly be able to resist demands from his colleagues for significant allocations for 'people friendly" schemes. Look then for more allocations for rural development, poverty alleviation schemes, education, health, social schemes, rural employment, etc. Never mind, most of these schemes might just fail to make any economic sense. So, expect Mr PC to announce massive fund allocations for social sector projects like National Rural Employment Guarantee (NREG), rural health and power sectors and perhaps, a debt-relief package for the farmers. Who cares if the Government"s ambitious National Rural Employment Guarantee Scheme, which has had an annual allocation of a staggering Rs 12,000 crores has not been able to make any great impact on the ground. The UPA desperately wants to have an Aam Aadmi Budget this year, if it has to take on the rejuvenated NDA in the coming elections and especially in the light of the drubbing that it has already got in Gujarat and HP. So, we can safely expect Mr PC to follow on his 2007-08 'Aam Aadmi Budget, while presenting his 7th Budget, as well.

2. There is an increasing realization that the international economy is indeed slowing down, with the US leading the pack. The IMF has already revised downwards its forecast for global economic growth to 4.1% from its earlier forecast of 4.4%. Indian exporters are already feeling the impact of the US and the global slowdown. Aided by an appreciating rupee, the US slowdown could significantly affect India"s exports. We are already seeing the impact in terms of a slowing down manufacturing and services exports including software exports. News of major IT majors cutting down workforce, on whatever pretext including the so called 'appraisal based work force adjustments", is for everybody to see, in the national dailies. The FM has gone on record in January 2008, expressing his concerns on the impact on the Indian economy, arising mainly on account of India"s exports, arising out of a very likely US slowdown. While the US might not go into a full fledged recession, its slowdown will affect Indian exports and consequently, the Indian economy..

3. India"s industrial growth which rose to a record high of 12% in the initial months of 2007 has fallen sharply and is estimated at hovering around the 7% level. Industrial production in November 2007 had declined to 5.3 per cent against 15.8 per cent in the same month in 2006, the lowest since October 2006, when it stood at 4.51 per cent and the lowest in calendar year 2007. During the same month, consumer durables production dipped 4.1 per cent against the 10.1 per cent growth rate recorded a year ago. Consumer non-durables production also declined to 2.1 per cent in November from a growth rate of 14.8 per cent during the same month the previous year. These are clearly indications of the manufacturing sector slowing down considerably. The slowdown is already being felt in the automobile, construction/housing, consumer goods and textile sectors. Dr Rangarajan, Chairman of the PM"s Economic Advisory Council has already called for a moderation in indirect taxes levied on the consumer durables sector, in order to boost the ailing manufacturing sector.

There is also a marked slump in the agricultural sector, as well, demanding Mr PC"s attention.

4. On the direct taxes front, current indications do show a very impressive performance, in the current year. A growth of about 40% in direct tax collections is a great performance, even if you net off the tax growth attributable to the overall economic growth which should be around 8% to 9% adjusted for inflation. A 30% plus net growth is nevertheless very good. Incidentally, personal income tax collections have risen by 50% till now. At this rate, it does look like the Government will indeed surpass its target of Rs 2,67,400 crores for 2007-08 and as per Dr Rangarajan"s guess, it should touch Rs around 3,00,000 crores. Of course, Mr PC deserves a lot of credit for increasing the level of 'voluntary compliance" reflected in the significant increase in the number of tax payers, thanks largely to the steps that he has been taking in terms of PAN based tracking of direct tax related information and filings. Of course, on the indirect taxes front, the excise collections have been lagging behind, confirming the manufacturing sector"s woes. Thanks to an appreciating rupee, custom duty collections are rising, in sync with rising imports. With a record 100+ taxable services, service tax collections are understandably booming and the fall in excise collections will be largely offset by the increase in customs and service tax collections. So, Mr PC should be quite satisfied with his performance on the tax front.

5. On the exports front, of course, things do not look rosy at all, as we discussed earlier. There are already reports of major layoffs in the BPO and software sectors, apart from the labour intensive textiles and garment sectors. Though the long term impact of the US slowdown could be good for India, especially for India"s IT sector, there can be little doubt that the short to medium term impact on the Indian exporters would be quite bad. There are already reports of large scale layoffs in the textile and garments sector.

6. The Sixth Pay Commission, as per reports, has already finalized its recommendations and there are indications that it would recommend a very significant pay rise for the Babus. This would increase the pressure on Mr PC when he presents his Budget.

So, what are we to expect? My guess is as follows...

With a highly impressive performance on the direct taxes collection front, one would feel that this is the ideal time for Mr PC to go ahead and make an across the board reduction in the personal tax rates. A 5% tax rate deduction would perhaps be justified. But, given his other priorities, my guess is that, Mr PC would follow the beaten path and end up announcing cosmetic and inconsequential changes including perhaps, increasing the standard deduction amount to about Rs 130,000- and also marginally increasing the threshold limits for the tax payers. India"s salaries class might still feel disappointed.

And, how about the corporate taxes? No major changes are expected, though one would expect Mr PC to withdraw the surcharge.

With a projected slowdown in the manufacturing and capital goods sector, which we discussed, Mr PC might have to look at the services sector for meeting the revenue targets for 2008-09. So, the area to watch out would be service tax. Please expect more and more taxable services to be added, along with a possible increase in the service tax rate Writing in TIOL earlier, I had opined that the FM could comfortably look at a revenue target of Rs 70,000 crores from service tax during 2008-09.

Any possibility of tinkering with the tax holiday for 100% EOUs and Software Units, which is proposed to be withdrawn effective April 1, 2009? My strong opinion is that, there should be no extension of the tax holiday, given the fact that India"s IT sector has been enjoying the tax holiday for a long time now, ever since Mr Yashwant Sinha extended the tax holiday under Sections 10A and 10B for units to be set up till Assessment Year 2009-10. There are reports that the tax holiday has cost the Government about Rs 12,000 crores in taxes foregone and given the pressures on the FM in 2008-09, I feel it is unlikely that he will oblige the IT sector. On the SEZ front, Mr PC might not make any changes.

- Will Mr PC reduce the excise rates, at least in respect of select commodities, to boost consumption? Looks very likely, especially in the light of the recommendations made by Dr Rangarajan, especially vis-À-vis the consumer goods sector. There could also be sector specific rate cuts.

- Any, how about obnoxious taxes like FBT and BCTT? Ideally, Mr PC should think of withdrawing these taxes. As far as I can see, somebody like Mr PC could have introduced these taxes only to collect revenues. But, going by Mr PC"s 2007-08 Budget in which he actually ended up significantly expanding the FBT coverage, one should feel happy as long as he does not add anything to the FBT list.

- Mr PC could announce specific packages aimed at helping out India"s embattled manufacturing exports sector. He has already announced a Rs 500 package for the textile sector, severely affected by the rising rupee. We can expect Mr PC to take this thinking forward.

- Any possibility of major reduction in the indirect tax rates for petroleum products? Writing in TIOL earlier, I had pointed out that the fuel prices in India are at least 30% costlier that those prevailing in Pakistan. It looks unlikely that Mr PC would go in for a much awaited and highly justified indirect tax rate reduction.

In a nutshell, going by the Budgets that Mr PC had presented over the last four years and especially the one that he presented last year, I would be very surprised if he comes out with a Budget, anywhere comparable to his 'dream budget" presented in 1997. The general expectation is that, given the political compulsion, Mr PC would try to please all and end up pleasing nobody.

I would love to be proved wrong, of course.

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