This is an article I wrote a few months back, on the Union Budget 2006-07. Thought I need to let it have some fresh air, after getting suffocated in my Hard Disk a tad too long!
Union Budget 2006: A Case of Missed Bus?
The Finance Minister Mr P Chidambaram presented the Union Budget for the fiscal 2006-07 on February 28, 2006. Reams have already been written on it and it has been dissected and discussed at length on various fora. Almost all are of the opinion that the FM played it safe. However at least a few have expressed the view that the budget left much to be desired.
Today the Indian economy is in a state of flux. All the sectors are doing well with the result that the economy grew at 8.1%, but there are pockets of poverty and there are incidents of farmer suicides. In this context, the general expectation was that the FM would initiate a host of measures to set right the anomalies. Of course, in the present-day market economy, the government does not enjoy the kind of flexibility to influence the economy the way it used to prior to 1990s. In FM’s own words, the days of ‘Big-Bang’ budgets are over. However, there are a few things that the FM left hanging in the air and this article takes a look at a few of them. This is not to gloss over the positives like the efficient fiscal management which has seen the fiscal deficit down to 3.8% of GDP and increased outlay to social sectors.
First of all, though there were no new taxes or levies, the hike in Service Tax to 12% (in effect, 12.24% including education cess) is sure to pinch – to use UPA Government’s pet term – ‘aam aadmi’. This is an increase that will be felt across the board as it is an indirect tax. The minister has failed to give any convincing reason for the hike. Again, the withdrawal of the exemption given to BPO units – they have provided jobs to many an educated youth – from service tax is really surprising. The FM seems to have forgotten that the low cost of BPO services in India is one of its core competencies. If this cost advantage disappears, the day China and Philippines come up to the expectations vis-à-vis quality, the BPO industry in India will go bust, unless of course, it gets a domestic clientele.
Another provision that has caused resentment is the increase in Minimum Alternate Tax (MAT) to 10%. There was no justification for this either, primarily because MAT in itself is a sort of penalty for efficient tax planning. [MAT was introduced to tax zero-tax companies i.e., those which had book profits but no taxable income because they availed of the various deductions and exemptions in the Income Tax Act]. The minister should have given serious consideration to the Kelkar Committee recommendations relating to doing away with all deductions and exemptions in the Income Tax Act. The continuation of Banking Cash Transaction Tax (BCCT) is another sore point because it sort of amounts to double tax.
The global crude prices are galloping and the partial pass through of these high prices has seen the oil companies sinking into the red (notwithstanding the views that some of the loss is notional). It was expected that the budget would provide a roadmap for reforms in petro-products taxation, especially a provision for moving over to quantity-specific duty from the present ad valorem structure. That was not to be. Not only that, even the Rangarajan Committee recommendations (on reforms in petro-pricing) were given a go-by!! Had these recommendations been acted upon, it’d have provided some respite to the ‘aam aadmi’. The reasons for inaction on this front is not far to seek. Successive Finance Ministers and state governments have viewed petro products as their milch-cow, with the result that India probably will be the only country where duties on a product exceed its cost of manufacture. Again, at a time when the Central Sales Tax (CST) is to be phased out (with the introduction of State-level VAT), the FM has sought to use it to control the price of LPG, by making it a ‘declared’ good under the CST. Surprising, to say the least!!
Just a few days before the budget, there was a revolutionary recommendation by an MPs’ Panel (on Widening Tax Base) for bringing agriculture income under the tax net. It will be worthwhile to recall that the Committee on Agricultural Taxation headed by Dr K N Raj suggested back in 1975 that the agricultural income of landholding classes should be taxed. Till date, the formula given by him is used to club agriculture and non-agriculture income under the provisions of the Income-Tax Act, 1961 in order to calculate tax liabilities of a farmer (subject to fulfillment of a few conditions). Surely, it is high time farm income is taxed in its entirety. In the present-day set up, we cannot subsidize one sector (agriculture) at the cost of two other sectors (industry and services). It goes against the principles of equity. But, it is to be seen how the legislation for bringing farm income under the tax net will see the light of the day overcoming the lobbying of rich rural farmers.
Many international and national economists and other commentators have lamented the infrastructure bottlenecks in India. The Jawaharlal Nehru Urban Renewal Mission (why do we always need a long dead Prime Minister’s name for any project?) and Bharat Nirman Project notwithstanding, the FM failed to give a significant push to infrastructure projects underway. On top of it all, he withdrew the exemption u/s 10(23G) of the Income Tax Act, which was available to income of infrastructure capital fund/company. This is a set back to many an infrastructure company because it’ll jack up the cost of funds for them.
To cut a long story short, though the time was apt for the FM to unleash a host of reforms to accelerate the pace of growth, he missed the proverbial bus. However, the stock markets have continued their bull run, prompting many to comment that the absence of any major negatives in the budget is itself a great positive. To what extent stock markets reflect the real state of the economy is in itself a debatable issue. The imminent elections in five states and the constant barking by the Left (which dare not bite, at least till the UPA Government’s completion of two years in office as only then the MPs will be eligible for lifelong pension!) probably played high on the mind of the FM. And, he has done a dexterous balancing act, by including so many ‘feel-good’ measures that the likely-contentious issues got swept under the rug. In fact, the Union Budget 2006-07 is an example for the saying that ‘Good Economics and Good Politics do not go together.’
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