Friday 2 March 2007

Review - Union Budget 2007-08

The much talked about union budget 07-08 for India was delivered yesterday 28-02-07. As expressed in the Indian Express this budget is just politically correct. Many execs believe that people will easily forget this budget within a few days, as there are very few changes in the overall condition for a common man. Due to many reasons including current levels of inflation, this budget was supposed to remove the fallacies in the economy including taxation reforms, viz. double taxation, removing futile exemptions. So on the front of public and corporate expectation this budget was a failure.

For your own referral here are some of the niceties of the budget, courtesy CNBC-TV-18 and moneycontrol.com.


Direct taxes: -

  • Tax exemption limit extended by Rs. 10000/- reducing tax liability of an individual by Rs. 1000/- irrespective of age or sex. Pittance!
  • Adding education cess of 1% on all sorts of tax liabilities, which will be spent on development of secondary education, making total cess 3%. Taking away the pittance, too!
  • PAN will be compulsory and the sole identification number for capital market transactions. Lesser but compulsory complications!
  • Tax exemption under section 80D is extended to Rs. 15000/- for normal individual and for senior citizen it’s Rs. 20000/-, little relief!
  • Tax concessions under section 80IB for construction are scrapped which were beneficial for the buying of houses of area till 1000 sq. ft. in metros and 1500 sq. ft. in secondary cities. Unaffordable houses for middle class in cities.
  • Cash transaction tax exemption raised from Rs. 25000/- a day to Rs. 50000/-. Still a pain… you know where!
  • Investments in liquid/money market funds are taxed higher under Dividend Distribution Tax. Rose from 20% to 25%. DDT for companies’ declared dividend also rose from 12.5% to 15%. Absolutely uncalled for and baffling!
  • ESOPs are now under FBT, rates fro which are not determined. Wasn’t FM supposed to clarify or even scrap FBT?
  • The 10% surcharge has been removed for Corporates whose taxable income is less than Rs 1 crore. Expected to benefit SMEs!
  • 11.22% MAT is now applicable to IT industry also. Wasn’t IT supposed to enjoy the tax holidays till 2009?


Indirect taxes: -

  • Biggest story is the Excise duty on cement. For the companies that sell cement below Rs. 190/- a bag excise is reduced to Rs. 300/- from current Rs. 400/- a tonne, while for those that sell cement above Rs. 190/- a bag, it will be Rs. 600/- a tonne. Attempt is to bring cement prices below Rs. 190/- but unlikely to be taken by cement companies as welcome change!

Service Tax

  • Service tax exemption for tech business incubators. Little relief!
  • Drug testing clinical trials exempt from service tax. Big boost for research!
  • Service tax on rental of property for commercial use. What’s the idea? Hitting business profit! Adding problem to already overblown real estate bubble!
  • Service tax on works' contract service. Extending service tax net!

Excise

  • Excise duty on pan masala without tobacco cut to 40%. Minor change!
  • Excise duty on pan masala without tobacco cut to 40%. Minor change!
  • Non-electric water filters fully exempt from excise. Save power!
  • Umbrella, footwear excise duty cut to 8% vs. 16%. Get ready for monsoon!
  • Bio diesel, food processing exempted from excise duty. Fuel alternatives and cheaper food products!
  • SSI excise exemption raised to Rs. 15 mn vs. Rs. 10 mn. Benefit for Small Scale Industries!
  • Excise on plywood cut to 8% from 16%. Supply support!
  • Petrol, diesel ad valorem excise duty cut to 6% vs 8%. Expected and delivered!

Customs duty

  • General customs duty on medical equipment 5%. Caring for health at last!
  • Customs duty on animal feed cut to 20% vs. 30%. Be happy if you’re a dog or a cat! Can poor be fed with dog or cat food if the grains and pulses become more expensive?
  • Customs duty on watch dials, umbrella cut to 5% vs. 12.5%. Care for time! Again Monsoon will hurt!
  • Coking coal exempt from customs duty. Not a great solution for fuel alternative!
  • Customs duty on cut, polished gems cut to 3% from 5%. Boost for Gems business!
  • Customs duty on PFY cut to 7.5% from 10%. Little change!
  • Crude, refined edible oils to be exempt from customs duty. Supply support!
  • Customs duty on steel cut to 12% vs. 20%. The Tata effect!
  • Customs duty on drip irrigation cut to 5% vs 7.5%. Caring for Agriculture! Supply support!
  • Customs duty on polyester fibre yarn cut to 7.5% vs. 10%. Boost for textile industry!
  • To cut peak rate for non-farm products to 10% vs. 12.5%. Supply support!

The explanation for such a budget would be that our FM stuck to his promise of making budget a non event. But at what point of time and at what cost? At this point economy is poised between high growth and high inflation. FM says that the inflation can be controlled with 3 points, viz. Money supply (this part is well taken care of by RBI with 4 increases in Repo rate and CRR each), Fiscal policy and Supply crunch. FM proposed few measures on fiscal side but they are all on mid term level, nothing to control inflation in short term! Agricultural sector is offered with many benefits to check on the supply side in course of 1/2 seasons, but it seems inflation would not have mattered after 1/2 seasons anyway. So nothing on offer for controlling the inflation!

On the other hand what seems is that in effect FM might add to the current level of inflation. Cement industry is in no mood of lowering the prices. Construction companies are out of tax haven, so the cost of construction goes up, in effect the prices of houses will increase by 15-20% in opinion of some builders. Interest rates for housing loans are already touching 13%. 4% short of pathetic socialistic rates of 17%. So it’s now impossible for middle class to buy a house. It was costing already Rs. 25 lakh for 500 sq. ft. now it will cost Rs. 30 lakh. Where the sense in the prices is and what calculations did the FM make to come up with these arrangements in budget.

There were many tax reforms expected to clear the regressive methods of double taxation like the DDT, which is over and after a company pays corporate tax. Instead what we get is increase in DDT. Thank god he didn’t decide to take the service tax to 15% i.e. to the level of global GST. He was supposed to bring down the duties to the level of SAFTA which did not happen at all. I believe that might have taken care of supply side in short term. He could have reduced the double taxes which should have been phased out after the introduction of VAT. He could have thrown light on Capital gains tax which still is a huge conundrum for many Corporates also. Thank god he did not tinker with STT. He just banned Wheat and Rice from MCX futures trading. That surely will come back once the inflation comes down. He should have shifted the tax slabs by at least Rs. 50000/- on higher side (optimistically Rs. 100000/-). That would have taken care of the pinch of the prices common man feels. He should have increased the tax rebate for housing loans under section 24 to Rs. 200000/- which went nowhere.

The FM has tried to be Robin Hood but in the end he has just become a marauder who’ll end up taking the money away from each and everyone. The budget is typical congress style which used to be from year 1947 to1991; it means lot of scope for MPs, MLAs and bureaucrats to launder money under many schemes announced by central government. It is all right for advanced polities to make budget a non event but for polity like India when poised at such a delicate manoeuvre which could make or break the backbone of our economy, to make the best opportunity into a non event is the most pathetic decisions ever taken by Mr. P. Chidambaram. This was 10th time he was presenting budget and he too had an opportunity to go into Indian history like our respected PM did in 1991, but he decided otherwise.

There seriously is lapse in the performance of FM in this budget which could have simplified many things that were begging for it. On a scale of expectation FM’s attempt should be rated -3 on a scale of 0 to 10. I know this sounds as ridiculous as this budget itself!