16 Feb 2008

Predictions on the Union Budget 2008-09

I write this post as a follow-up to my previous post on Unravelling of the Budget Making process and also upon the request of a very close friend of mine who inspired me to this idea. The subject and content of this post might not fall within the strict confines of the term law as it is properly understood, yet it is of vital importance to law in the sense that it affects a number of laws and has a specific constitutional importance in the state-of-affairs of the national economy as a whole. Therefore I commence upon this ambitious crusade to comment upon what I expect to be covered in the Budget Statement for 2008-09, to be presented on the coming 29th of February and also on certain issues which I anticipate to be dealt with in the same. However, instead of filling this post with stats and figures, I would only go only to make an analysis of the major issues and that too on a policy perspective.

It is in this line that in the upcoming budget I expect a further reduction in the number of varied exemptions under the Income Tax Act, 1961, as Mr. Chidambaram would go on to follow his agenda of expanding the tax base. These sops, which have always been a hornet's nest (criticized for distorting the system and called for to ensure fairness to those to require to be promoted to bring them to the economic mainframe), are ultimately bound to disappear in a big way as India seeks on its mission to seek dependence on direct taxation and move from indirect taxation, as a mark of a developed nation. However, removal of such exemptions would also mean a corresponding rise in the non-taxable slab (currently Rs. 1,10,000/ for men and Rs. 1,45,000/- for women) upon which a close friend informs the the Ministry if mulling over the possibility of raising it to Rs. 1,50,000/-.

On the corporate tax front, as another friend informs, major changes are being considered by the Ministry. There are chances that (i) Thin Capitalization Rules, (ii) Loan Relationship Rules, and (iii) Controlled Foreign Corporation Rules may as well be introduced in the Budget. [These issues being highly technical, I am expecting myself to find some time to write about them in a separate post]. Given the fact that Indian tax system has closely followed the UK tax systems, the chances of these changes being brought in the Indian tax code are in any case high, though the timing may vary. Further, the Anti-Avoidance Rules are also an area whereon the FM can mull over to avoid revenues escaping tax liability.

In line with its commitment with the WTO, it might not be a surprise if there is a continuation of the trend from last year, and there is a further reduction in customs duties this year as well. This might come as a hard blow to the revenue targets but then I think this would be compensated by the increasing contribution to the service tax front, regarding which I can see more services being brought within the service tax net.

Then on his promised transition of the indirect tax regime from one of state-retail sales tax and central service tax to a consolidated 'Goods and Service Tax' by 2010, I can forthwith see changes (may be even a further reduction in CST tax rate) being introduced in the structural pattern of taxation of goods and services. Though I am aware that this is more so better dealt with as a separate constitutional issue rather than to be provided for in the Union budget but then the preparations would have been done under Budget as well and therefore I would not be surprised to find provisions illuminating the path to this goal.

With hue and cry from the industrial quarters and an archaic piece of legislation on the subject-matter, I think the FM would go on to a bit on the stamp duty front as well. I am sure we all appreciate the role that stamp duties play especially when the amounts run in somewhere between six to ten digits in high value transactions and therefore stamp duty acts a potent barrier to the implementation of commercially viable options based upon their viability alone. In a developing economy, with constant changes in ownership of economic assets, high stamp duties are always indicators of negative vibes and run counter to the growth perspectives.

Then, in principle, I am sure the FM would take stock of the liquidity concerns and rising inflation and would extent a warm hand to the industrial sector. This might need a bit of nourishing by extending sops to the industrial community. But then this would not come in way of the subsidy and promotion programme for agriculture, wherein the trends have always indicated a rising contribution by the union government to the improvement of the productivity on the food stability front as well.

Considering the fact that the stock exchanges have seen a beating of the investors and have really gone up and down like a merry-go-round, I would not be surprised if the Securities Transaction Tax is raised up again. I am not sure about the capital gains front, but the there might be change in the tax rates here as well (though the changes for this are really slim). As for the employees, hitting the middle class hard as usual, more perquisites may as well be brought within the Fringe Benefit Tax front.

Having a tussle with the Ministry of Commerce over a year now and most prominently because of the strengthening of Rupee in dollar terms, I am expecting the FM to go sweet over the exporters and bring in a special package for the exporters. Further, the Special Economic Zones (SEZs) coming in line of fire from all across the country, I expect atleast a policy statement from the FM in his budget speech (if not a change in the provisions) on the manner in which they would be handled in future. This has become necessary in the wake of the increasing concerns and instances of farmers being deprived of their properties for making way for the SEZs.

Then I am expecting (and hoping that this would not be missed by the FM) more expenditure being allocated towards development of infrastructure, especially the renewed interest in airports and sea-ports and roads , if India really has to come anywhere close to a double digit GDP growth-rate.

Further readings:

  1. Yahoo news on Budget 2007-08
  2. BusinessMapofIndia's article

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