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| PC goes with the flow | | | With the Left as friend, the Prime Minister as philosopher and Sonia Gandhi’s Aam Aadmi slogan as guide, finance minister P Chidambaram had to deliver a multi-faceted budget. The good thing is that the budget does not set the clock backward on reforms even though it does not attempt anything big or bold.
Don’t rock anybody’s boat. That’s the approach he took in his tax proposals. The existing tax regime has given the centre 20% growth in gross tax revenues for three years running. Savings, investment and GDP growth have all been impressive. The tax-GDP ratio is set to go up to 11.2% next fiscal even without any tinkering. So, Chidambaram let that be.
After last year’s overhaul, no change in personal or corporate income-tax was warranted and, therefore, it was left untouched.
The services sector, now accounting for 54% of GDP, has turned out to be the cash cow. Chidambaram, therefore, cast the tax net wider bring in 15 new services and simultaneously raised the tax rate to 12% from 10%. There’s no great risk of the cost of services becoming unaffordable because of the availability of abatement and set-off against input taxes. But the FM could budget a cool Rs 34,500 crore in service tax revenue for 2006-07 against Rs 23,000 crore this fiscal.
In excise and customs, the finance minister did the predictable. He brought down the excise rate for small cars and soft drinks to the Cenvat rate of 16% from 24%. He had promised to consider doing this in his last budget. Also predictably, the peak rate of customs was cut, but not by a full 5 %, but by 2.5 % to 12.5%. It’s a signal to the world that India remains committed to bringing down import duties to the East Asian level.
A plethora of other excise and customs duty adjustments in the budget aim at providing a thrust to the man-made textiles sector, leather products, footwear and food processing. Cigarettes, as is the norm, gets taxed higher to mop up revenue for the government.
There are only a couple of changes in direct taxes that have a business impact. One of those - an increase in minimum alternate tax (MAT) to 10% from 7.5% of book profits - will fetch the government extra revenue from the so called “zero-tax companies”, but will also hit companies in “thrust” areas such as infrastructure despite the provision that they can take credit for MAT over seven years instead of five.
By way of tax reforms, the most significant step is the announcement of a timeframe for the introduction of a combined goods and services tax (GST) by 2010. In the next few years, the excise on goods with a central rate of 16% and the tax rate on services at 12% would have to move closer and arrive at a uniform rate. Infrastructure development is perhaps the single most important step that the budget was required to take to ensure that the economy maintains a high growth rate. Chidambaram did step up allocations for investment both on physical and social infrastructure.
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