FM bets on growth; goes for fiscal prudence
New Delhi: In Budget 2006-07, finance minister,
P Chidambaram achieved his revenue targets and contained the fiscal deficit. He announced a reduction in the peak customs duty and the cenvat rate on a range of industrial and consumer goods.

No big ticket reforms were announced in the Budget speech that went on for an hour and 40 minutes; there were no tax innovations either. The only significant medium — term announcement was the intention to move to an integrated goods and service tax by 2010, as proposed two years ago by the Kelkar committee.

The budgetary picture looked healthy due to strong economic growth — which helped tax revenue grow by more than 20 per cent for the second year in a row, with 19 per cent growth now set as the target for next year (including an ambitious 28 per cent increase in corporation tax revenue). The result will be an increase in the tax-GDP ratio from 9.2 per cent in 2003-04 to 11.2 per cent next year. With a fiscal deficit next year of just 3.8 per cent, the system seems on course to meet the 3 per cent target set for 2008-09 by the fiscal responsibility law.

Additional revenues next year is set to come from an increase in the minimum alternate tax, from 7.5 per cent to 10 per cent, a 25 per cent increase in the rates for the securities transaction tax, and extension of the service tax to 15 new services (including automated teller machines and non-economy class international air travel) as well as a hike in the service tax rate from 10 per cent to 12 per cent. These are balanced by tax cuts for a range of industrial and consumer goods, including small cars and soft drinks, paper and synthetic fibre / yarn, processed foods and plastics. As an exception, cigarettes will attract 5 per cent more tax.

The peak customs rate has been cut from 15 per cent to 12.5 per cent. And this is more than compensated by the extension of a 4 per cent special countervailing duty to all imports.

Keeping his eye on the need to address tightening financial liquidity, and to finance growth, the minister announced that foreign institutional investors can invest much more money in government securities and corporate bonds, while banks can sell previously non-marketable government securities. The mutual fund industry also came in for some attention, including tax benefits for close-ended funds.

Though most commentators welcomed the key elements of the Budget, there was some disappointment on the lack of action on petroleum product prices, and the absence of major reform measures, while tax experts were critical of the continuing proliferation of tax rates and the return to intervention in bank functioning through an interest subsidy for specified loans to farmers — which however received the longest cheer in the Lok Sabha.

Chidambaram also modified the fringe benefit tax to lower the tax rate on travel and hospitality and some other services, but argued that the tax should stay on grounds of vertical and horizontal equity. He also maintained that the banking cash transaction tax had helped track tax evasion.

On the spending side, the finance minister overall budgetary support to the Plan has increased by over 20 per cent — with most of the money going to the government's flagship programmes in education, mid-day meals, rural employment, rural infrastructure and rural health.

The finance minister also announced that computerisation of the tax department would be complete by the end of 2006, and that this would lead to e-filing of returns, use of databases to spread the tax net wider, and business process re-engineering of tax operations. But the minister scrapped the one-by-six scheme for filing tax returns, without explanation.

He also mentioned that after 20 years, the gross fiscal deficit for 2004-05, the latest year for which 'actuals' are available, was less than the gross budgetary support for the plan in that year. "This means that the government is not financing the plan entirely through borrowing," Chidambaram added.
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Steel loses its shine
Alloy and stainless steel manufacturers like Mukand and Jindal Stainless have not benefitted from the Budget while carbon steel manufacturers have been spared the stick. But the industry is not impressed.

The finance minister has cut customs duty on alloy steel and stainless steel from 10 per cent to 7.5 per cent combined with a reduction in customs duty on inputs like refractories from 10 per cent to 7.5 per cent.

Though the finance minister would like India to be promoted as a hub for steel making, he has not announced any concrete steps.

Industry men say the alloy steel industry will face a threat in terms of dumping because of low customs duty at 7.5 per cent.
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Metals stay the course
The finance minister has slashed customs duties on non-ferrous metals such as copper, aluminium, zinc from 10 per cent to 7.5 per cent. He has imposed a 4 per cent countervailing duty on all imports including metals. Customs duty on ores and concentrates has been reduced to 2 per cent from 5 per cent.

An analyst said the impact of the 2.5 per cent reduction in customs duty has been negated because of the 4 per cent countervailing duty.

The margins for copper manufacturers are also however, unlikely to be hit as the customs duty on copper concentrate — which is the basic raw material for manufacturing copper — has also been reduced by 3 percent..

The cost of manufacturing is likely to marginally come down for non-ferrous manufacturers as the customs duty on refractories has been reduced to 7.5 per cent.
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Education gets a leg up
The education sector has got an almost 36 per cent hike in budgetary allocation for elementary and adult education and a 45 per cent hike for secondary and higher education. Elementary education has been given budgetary support of Rs16,892.50 crore.

Though higher education has got the highest increase, 60 per cent it comes after years of neglect. Public expenditure on higher education has been declining continuously. Between 2002-03 and 2004-05, public expenditure fell from 0.39 per cent to
0.33 per cent.
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