21 Feb 2010

Budget 2010-11: What to expect?

Now when the Budget for the Financial Year 2010-11 has been slated to be announced by the Finance Minister, Government of India on the upcoming 26th of February, I pondered over the issue and decided against not writing on it. Given the persistence of our friend and also the importance of the issues at stake in the Budget this year, I thought of putting in the outlook at this end for the year. 

The first and foremost question is whether the 'Direct Tax Code' will be introduced in this year. Promising to revamp the entire structure of Direct taxes in India (subsuming inter alia the Income Tax, Wealth Tax, Dividend Distribution Tax) and proposing to change the legal structure in which Double Taxation Avoidance Agreements work in the country, the Code has been hailed by the Finance Minister as an exercise to "improve the efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base". Unveiled on 12th August last year, sufficient breathing time has been given to the industry and general public at large to make their representations against any of the provisions in the proposed Code which they seek to pitch up for amendment. It is also made known from the commercial circles that the consultative process is long over and the Ministry officials are light-lipped over the issue as to whether it would be introduced in this Budget. The introduction of the Code in the present Budget would imply that all payments made and transactions undertaken from 1st April onwards would be subsequent to the provisions of the Code in as much as they would be taken in the financial year 2011-12. 

However, one thing is for sure. If the Code is introduced in this year's Budget, it will revolutionize the way in which industry and citizens work in India. The Code brings along with it the features which are peculiar to a developed nation. The taxation structure has been worked on the principle of ability to pay principle and thus while it provides the requisite relief to those in the lower-rungs, those higher up in the economic strata will be severely called upon to contribute to the exchequer in the form of taxes. On top of that, the Code also contains stringent Anti-Avoidance Rules which can strip-off any legal construction of a potential tax-avoidance scheme to make liable to tax such transactions which on the face of it are tax-compliant. 

Moving on, another possibility is the onset of the Goods and Service Tax (GST) in the Budget. The possibility, however, is faint in view of the fact that important Constitutional changes are required to be made and also the critical issues require an agreement between the State Governments as well. We had written on GST in detail earlier and so would refrain from commenting on its again. Nonetheless the Direct Tax Code and the GST combined carry the potential to trigger the economic growth of the country in as much as the emphasis is to tax the cream (profits) while leaving the nurturing milk (investments) for being utilized in the progressive growth of the country. If someone envisaged India to be a developed country by 2020, then it is essential that either in this or in any case by the next Budget both the Code and GST become operational.

To make it clear as to why I am discussing the Code and GST in such detail is because of the fact that sooner of later (i.e. in this year or the next) both of these are bound to get implemented given the firm resolve of this Government and the clear-headed policy making being undertaken at the North Block. In this background it is but obvious that the Budget in this year (if it does not carry either of these) would only be a stop-gap arrangement for a year making the way clearer for these two significant legislation. 

And now that I have played my part, I would take liberty to discuss the other issues which are the possibility in this Budget, as my close friend Sumit Agrawal has put, which he claims to be "a discussion based on various media reports and public information". He inter alia states as under;
  1. There is an expectation that current individual income tax exemption limit (1.6 lakh rupees for men and 1.9 lakh for women taxpayers) could extend to 2.0 lakh for men and 2.3 lakh for women tax payer. This is expected from the Budget Speech, given the fact that Fringe Benefit is now taxable in the hands of the salaried employee, not raising the slabs significantly will increase the tax burden salaried class. Increasing inflation is another issue which is expected to be factored through this increase.

  2. Deduction for investment in Mutual Fund ELSS Scheme and Insurance Policies to take benefit of section 80C of Income Tax may be reviewed. On the other hand, the limit for tax exempt investments under Section 80C is expected to increase from Rs. 1,00,000 to 1,50,000/-, though the industry seems to be demanding and pushing for more.

  3. The government may come out with a detailed action plan for disinvestment through offloading its stake in many Public Sector Undertakings (PSUs) which would ensure returns for exchequer and assist government in reducing its deficit. There seems to be plans of offloading govt. stake in NMDC and Satluj Jal Vidyut Nigam. However, disinvestment in NTPC and REC is already on track whereby REC is set to come out with an offer for sale of 42,933,000 equity shares by the President of India, acting through the Ministry of Power, Government of India. State-run Satluj Jal Vidyut Nigam (SVJN) may come out with an IPO sooner.

  4. There is also an industry demand of increase in the gratuity limit of Rs 350,000 to 10,00,000/.

  5. In contrast to last year's reduction in excise duty, this year excise may be increased in the range of 1 to 2%. This would mean possible increase in prices of coffee, white goods (cars, refrigerators etc.)

  6. Securities Transaction Tax is now charged at the rate of 0.125% both on the buyer and the seller for equities in the case of delivery-based transactions, a paltry 0.025% for day traders and 0.017% for the derivatives segment. Traders demand that it should be left unchanged. 
One may also take note of the recently published Annual Economic Check-up of India conducted by the IMF which makes interesting observations facing India on the economic front. Nonetheless, we are keeping our fingers crossed for the 26th. 

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