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| P. Chidambaram: Another tightrope
walk, but expect some populist stance |
These
are the best of times for Finance Minister Paliniappan Chidambaram.
The economy is galloping ahead at 9.2 per cent, the booming stock
market is spreading cheer all around and most projections forecast
more of the same in the months and years ahead. These are also the
worst of times to be in his shoes. The inflation rate has been rising
relentlessly, eating into household budgets; interest rates have
gone up in tandem, making loans-the lifeblood of middle class aspirations-more
expensive, and the economy is showing early signs of overheating.
And as B-day draws closer, he is acutely aware of the economic constraints
that he will have to tide over. "Several steps are being taken
to see that the monetary situation remains under control,"
he says.
On the political side, he will be under pressure
from his Left allies and sections of his own party to go easy
on necessary, though unpopular, reforms. Congress President and
UPA Chairperson Sonia Gandhi has already written to the government
expressing reservations over the proposal to allow foreign retailers
to enter the country and the contentious SEZ policy. But happily,
there are signs that the Left is coming to terms with the limits
on its ability to influence key decisions. "The government
has, by and large, ignored our views on most issues, but we will
still vehemently oppose any move to bring in measures that go
against the interests of the common man," says CPI(M) MP
Nilotpal Basu.
| THE LEFT CHARTER |
| Surprise! The Left hasn't made
too many subversive demands.
|
| Increase Plan allocations to meet NCMP commitments.
LIKELY TO BE ACCEPTED.
Raise resources by increasing tax rates for corporates
and the rich. NOT LIKELY TO BE ACCEPTED.
Increase public investment in agriculture and irrigation.
Expedite completion of ongoing irrigation works. LIKELY
TO BE ACCEPTED.
Reduce interest rate on loans for farmers to 4 per cent.
Provide debt relief to all debt-stressed farmers. MAY
BE PARTIALLY ACCEPTED.
Check price rise in essential commodities. Strengthen
procurement and increase agricultural production. Universalise
the PDS by increasing food subsidy. MAY BE PARTIALLY
ACCEPTED.
Bring down prices of petrol and diesel by restructuring
the duty structure on petroleum products. ALREADY
DONE.
Extend NREGA to 200 more districts. Allocate more funds
for the rural employment and infrastructure development.
LIKELY TO BE ACCEPTED.
Increase expenditure on education from 3.8 per cent to
6 per cent of GDP. Increase education cess to fund expansion
of education at all levels. MAY BE PARTIALLY ACCEPTED.
Allocate funds to initiate social security scheme for
unorganised workers. LIKELY TO BE ACCEPTED.
Reintroduce standard deduction for salaried employees.
MAY BE PARTIALLY ACCEPTED. |
So, what exactly does India Inc. expect from Budget
2007? Prime Minister Manmohan Singh has indicated that the tax
regime will be simplified. "Our tax regime should not have
too many exemptions that make tax administration an unnecessarily
complex exercise vulnerable to misuse," he has said recently.
The apex chambers are comfortable with this idea, provided "the
corporate tax rate is cut from 33.66 per cent to 25 per cent".
This, they feel, will enable them to compete more effectively
in the global marketplace. Multinationals can also expect some
relief. There is a strong possibility that they will be taxed
at the same rate as their Indian counterparts from the coming
financial year. MNCs currently pay an effective corporate tax
of 41.8 per cent.
The Left and several UPA constituents agree that
exemptions should go, but they also advocate raising the tax rate
to 35 per cent. "Profits are rising 40-50 per cent in most
cases. There can, thus, be no rationale for such mollycoddling,"
says CPI(M)'s Basu. The Left parties claim that total exemptions
to the corporate sector add up to Rs 57,000 crore. "This
amount alone can take care of the deficit and fund a number of
welfare schemes," he adds.
Industry, understandably, is less than enthusiastic
about the Left agenda. "Collections are buoyant this year;
so, there is no need to increase tax rates or bring more services
under the tax net. Rather, the corporate tax structure needs to
be rationalised further," says Siddhartha Roy, Chief Economist,
Tata Sons. The consensus is that India Inc. will have to live
with fewer exemptions. Will this be accompanied by lower corporate
tax rates? Opinion is divided on this.
| THE 10 CORPORATE
EXPECTATIONS |
| Thrust on infrastructure: Development of basic
infrastructure in power, roads, ports and airports will receive
a boost.
Lowering of corporate taxes: Even the Prime Minister has
hinted at it. Most corporate leaders feel this is a given.
Rationalisation of tax exemptions: Companies in India
enjoy a range of exemptions like tax holidays for software
technology parks, EoUs, infrastructure service providers
and units set up in backward areas. These are likely to
be phased out.
Rationalisation of indirect taxes: Rationalisation and
lowering of indirect taxes is another demand that is likely
to be accepted, at least partially.
Abolition of surcharges/cess: Surcharges are usually levied
to raise resources for situations caused by natural disasters
or military emergencies. Given the buoyancy in revenues
and the comfortable fiscal situation, industry expects surcharges
to go.
Rationalisation of FBT: The most contentious levy imposed
by the government. The FM may tinker with it and exempt
some legitimate business actitivities, but outright abolition
seems unlikely.
Better and simplified tax administration: This is part
of the government's stated policy; so expect something on
this front.
Thrust on education and health: Given Congress President
Sonia Gandhi's personal interest in this issue, the FM will
have to deliver.
Boost to agriculture: This is the only sector in the economy
that is not on steroids; yet some 65 per cent of the country's
population depends on it. The consensus is that Chidambaram
will definitely allocate a major chunk of resources to agriculture
to bring it up to scratch and touch that magical 10 per
cent growth figure.
Fiscal responsibility & accountability: The government
is mandated by law to cut its coat according to its cloth.
The FM will almost definitely ensure that the government
continues to live within its means. Not doing so can result
in severe long-term damage to the economy. |
Other items on India Inc.'s wish list are: rationalisation
of surcharge, abolition of fringe benefit tax, reduction in duties
in select areas and increased capital expenditure, especially
in the agri sector. Will these wishes be granted? "We believe
the Budget will continue with the FBT while making an attempt
to further exempt genuine business expenditure from the tax net.
We also think that the stock investor may have to shoulder some
additional burden," says a senior Kotak Securities executive.
Finance Ministry officials are tightlipped on what
the Budget holds, but Business Today learns that it is fairly
certain that Chidambaram will announce a Rs 2,200-crore package
for small-scale industries. He is also expected to reduce customs
duty on machinery imports for sectors such as leather, footwear,
textiles & clothing and sports goods.
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| Prakash Karat: Tax the rich
to raise resources |
Then, India Inc. can expect tax relief on reinvested
profits, though short-term capital gains tax on stocks may rise
from 10 per cent to 15 per cent. "We also want the tax on distribution
of dividends to go," says a top executive in a multinational
company. Customs duties is another area that is bothering industry.
At present, sectors such as metals, minerals and heavy machinery,
among others, face an inverted duty structure, i.e., the tax regime
is skewed against domestic manufacturers. "It makes no sense
to pay more for raw materials than finished products as such duties
only make foreign players more competitive," says Tata Sons'
Roy.
Finance Ministry officials say Budget 2007 will
provide a significant amount of support to projects with political
overtones. Among them, the biggest beneficiaries are likely to
be the Jawaharlal Nehru Urban Renewal Mission, the National Rural
Health Mission (NRHM), and the National Rural Employment Guarantee
Scheme. Also on the anvil are massive investments in agriculture
and education.
The Left feels the government can mobilise additional
resources for these welfare measures by reintroducing capital
gains tax, increasing the securities transaction tax from 20 per
cent to a higher level and by raising the wealth tax rate from
1 per cent to 3 per cent. The consensus: Chidambaram is unlikely
to give in on any of these.
Inflation is a huge and legitimate concern. "The
spurt in the Wholesale Price Index from 5.58 per cent to 6.12
per cent is indeed a matter for concern," the fm admitted
recently. It has since risen to 6.73 per cent. The Finance Minister
will need to device a multi-pronged strategy to cage this monster.
The most likely measures: a further rationalisation of duties
on petroleum products and, possibly, the reintroduction of standard
deduction for salaried people.
Will all these grand expectations bear fruit? We'll
find out on February 28.
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