Fiscal developments
By Fiscal results in 1999 | 10 Apr 2007
1.44 The 1999-2000 Budget indicated a medium-term fiscal correction target of eliminating the revenue deficit and reducing the fiscal deficit to below 2 per cent of GDP in four years. Given the committed nature of certain Government expenditures it is not easy to reduce them in the short run. An Expenditure Commission is to be set up to review the entire gamut of expenditures from an overall perspective, free of departmental interests. To promote transparency and curb the growth of contingent liabilities, the budget constituted a Guarantee Redemption Fund with an initial corpus of Rs.50 crore. State Governments would also be encouraged to set up similar funds.
1.45 The Budget for 1999-2000, switched over to a new accounting practice from April 1, 1999 whereby States’ share in small savings will be credited to a "National Small Savings Fund" under the Public Account and loans to States made from it. The fiscal deficit under this system will be 4.1 per cent of GDP in 1999-2000 as against 5.4 per cent under the old system. Revenue deficit, which is small savings transactions neutral, is budgeted at 2.8 per cent of GDP.
1.46 The primary deficit (fiscal deficit net of interest payments), a better indicator of the current fiscal stance of the Government, is budgeted to improve from 0.6 per cent of GDP in 1998-99 to -0.4 per cent of GDP in 1999-2000 .
1.47 Revenue receipts (net to Centre) are budgeted to grow by 21.5 per cent in 1999-2000, as a result of a 25.9 per cent growth in the tax revenue. A ten per cent surcharge was imposed on corporate tax and on all other categories of assesses (except non-residents and those residents in 10 per cent slab). Also a ten per cent surcharge was imposed on basic customs duty (excluding certain categories). Long-term capital gains tax for resident Indians on shares and securities was, however, reduced to 10 per cent (from 20 per cent). Individual income from mutual funds was made tax-free subject to a final withholding (or dividend) tax of 10 per cent. The latter was, however, exempted for open-ended equity-oriented schemes with 50 per cent or more investment in equity.
1.48 The intention to curb expenditure growth is reflected in a budgeted growth of 11.3 per cent in total and 9.6 per cent in revenue expenditure (over the provisional un-audited data for 1998-99). This compares with a 1998-99 growth rate of 17.9 and 19.9 per cent in total and revenue expenditures respectively. In contrast, capital expenditure is budgeted to increase by about 21 per cent in 1999-2000.
Fiscal results in 1999
1.49 The fiscal parameters for the nine months of the current fiscal year reveal a worrisome trend. Revenue receipts have increased by 15.4 per cent in April-December, 1999 as compared to growth of 4.7 per cent in same period of last year. Other receipts (mainly dis-investment receipts) were Rs. 1383 crore only against a budgeted target of Rs. 10000 crore. Total expenditure during this period of the current fiscal year has grown by 17.8 per cent. The borrowings and other liabilities have shown a high growth of about 21 per cent over the comparable level achieved in the same period of the last year.
1.50 The data available for gross collections from major direct and indirect taxes for the first nine months (April-December, 1999) of the current year show a recovery in indirect tax collections. Collections from personal income tax and corporation tax increased by 15.3 per cent and from excise & custom duties by 19 per cent during April–December 1999. This compares with an increase of only 1.9 per cent in the latter during April-December 1998.
Tax reform
1.51 The 1999-2000 Budget undertook a major overhaul of indirect taxes by reducing the multiplicity of rates, rationalising the rate structure and drastically curtailing the scope for discretion by abolishing the power to grant ad hoc duty exemptions. Budget also signalled government’s intention to move towards a single rate, full-fledged VAT in the near future and to phase down customs duty to Asian levels in five years. The former was followed up by an agreement among all states to move to a VAT by April 2001. Excise tax reform involved reduction of eleven major ad-valorem duty rates to three, namely, a central rate of 16 per cent, a merit rate of 8 per cent and a demerit rate of 24 per cent. The cap on MODVAT credit of 95 per cent of the admissible amount was lifted and restored to 100 per cent. The excise tax on capital goods was brought to the central rate of 16 per cent (from 13%). An Authority for Advance Rulings for Excise and Customs was set up. This will not only inject greater transparency but also provide binding rules, which will go a long way in helping intending investors about their duty liability in advance.
1.52 Reduction of the peak protective customs duty resumed after a hiatus of two years, with a reduction of the peak tariff from 45 per cent to 40 per cent. The seven major ad-valorem rates of basic customs duty were winnowed to five (5%, 15%, 25%, 35% and 40%). To reduce dispersion a basic duty of 5 per cent was imposed on a number of commodities (including project imports) which earlier enjoyed duty exemption (but were exempted from the 4 per cent special additional duty). This will also provide some minimal protection to these items.
1.53 The pass-through provisions for Venture Capital Funds and Venture Capital Company were improved. Stock options and Sweat equity offered by management to employees of ‘sunrise’ sectors, are to be taxed as perquisite at the time of exercise of option and later as capital gains at the time of sale of security. The existing provisions relating to amalgamation of companies were rationalised by relaxing the existing conditions for carry forward and set off of accumulated losses and unabsorbed depreciation. The new provisions make de-merger of companies tax-neutral. The profits and gains arising from sale of a running business is to be taxed as capital gains. With a view to expand the tax base, "One-by-Six" criteria introduced in the 1998-99 budget for identifying potential tax assessees was extended to 19 more cities (from 35) having population of more than 5 lakh.
1.54 Furthermore major decisions were agreed in November 1999 to harmonize State sales tax system and move towards VAT. In addition, the Central Government supported fiscal reforms by States through a special facility.
