| What to expect from Budget 2001 |
With slowing industrial growth, a dismal agricultural growth, the oil price shock and soaring inflation, the only silver lining in the clouds is the services sector growth as well as the export growth. But with an impending US slowdown, both these pluses may also get hit pretty soon. The government has also fallen short of its divestment targets and the capital markets are still in the doldrums. Against a tough backdrop such as this the FM has to contend with the usual wish list which the industry has placed before him.
We list out below some of the pre budget proposals which may or may not materialize wholly but are indicative of the thinking of the finance ministry at this point of time.
All the panels and advisory groups, along with the national level industry associations like CII and FICCI and Assocham etc., have demanded a lowering of personal as well as corporate tax rates, standardization of the standard deduction, removal of surcharge, and removal of incentives given to savings instruments like PPF, NSCs etc., and further sops to revive the mutual fund industry.
The Parthasarathi Shome Tax Advisory Group is understood to have plumped for the virtual removal of various tax exemptions cluttering the income-tax statute, rationalisation of the minimum alternate tax (MAT), reform of tax administration and pruning of multiplicity of levies. In the case of personal income-tax, the Shome panel is believed to have suggested that the 10 per cent marginal rate of tax for the amount between Rs 50,000 and Rs 60,000 be enhanced to Rs 1,00,000; similarly, the 20 per cent marginal tax rate for Rs 60,000 to Rs 1,50,000 be raised to Rs 2,00,000, while the 30 per cent rate for above Rs 1,50,000 be raised to Rs 2,00,000. There should not be surcharge on personal income-tax. It is also believed to have suggested reduction of standard deduction to 10 per cent of salaries subject to a ceiling of Rs 5,000, as also the withdrawal of provision for deductibility of interest on borrowed funds for construction of self-occupied property.
On corporate tax, it said the marginal rate today is higher than the maximum marginal rate of personal income-tax and higher than the tax rates in comparable countries. Hence, the sources said, the group favoured reduction of the corporate tax rate from 38.5 per cent to 30 per cent for domestic companies and from 48 to 30 per cent for foreign companies. In fact, it has stated that if top personal income-tax remains 34.5 per cent, corporate income-tax rate should be fixed at the same level.
On MAT, it said the 7.5 per cent of book profit (i.e., a flow) is amenable to manipulation due to evasion, accounting practices and incentives. Hence, a case existed to base MAT on a combination of stock and flow, the panel said. It is understood to have suggested reconstituting MAT as a tax equal to 0.75 per cent of adjusted net worth (same as capital employed under erstwhile Sec 80-J) plus 10 per cent of dividend distributed. Alongside, it recommends a set-off against future tax liability as provided under Sec 115JAA.
On dividend tax, it is believed to have suggested the abolition of dividend distribution tax and tax on distribution of dividend tax at companies end.
Referring to incentives for savings in the form of tax rebate for investment in PF, NSC, LIC under Section 88, deduction in respect of interest income from bonds, NSCs, Government security under Sec 80-L and exemption of interests from bonds, securities, certificates under Sec 10(15), the group said this had encouraged substitution, favoured debt financing, conferred higher tax benefits to richer tax-payers. It called for withdrawal of all these tax incentives including the one under 80-CCC which provides for deduction in respect of contribution to certain pension funds.
However, the panel is believed to have suggested a change in the incentives under Sec 80-D, 80-DD, 80-DDB and 80-E from income based deduction to tax credit at 10 per cent; it has also recommended rollover positions under Sec 54, 54B, 54D, 54EA and 54EB on certain exemptions given on long-term capital gains.
In a bid to expand the tax base, the group favours that income of various funds other than mutual funds should be taxed at 10 per cent and exemption for foreign income and remuneration under Sec 10(8), 10(8A), 10(8)B and 10(9) be deleted. It is also understood to have suggested scrapping of exemption of income derived by industrial units situated in special economic zones under Sec 10A and withdrawal of exemption to 100 per cent export-oriented unit and new industrial units located in backward areas under Sec 80-IB.
For excise, it seems to suggest a two-rate structure of 16 per cent together with a higher rate, with an increasing number of items being converged to fall under the 16-per cent rate to minimise classification constraints. The rates would have to be adjusted for inclusion of services in the Cenvat. In the place of additional excise duty in lieu of sales tax on sugar, tobacco and fabrics, additional duty on motor and spirit and additional duty on textile and textile articles, there should be a single levy under the Central Excise Act. On Customs duties, it is understood to favour that the basic tariff should be reduced from 25 to 20 per cent and CVD (countervailing duty) of 16 per cent be levied uniformly so that the issue of refunding the terminal excise duty is eliminated.
The removal of tax incentives given to PPF and other government instruments as well as the possible removal of the dividend tax will be a boost for the mutual fund industry and will be a step in the right direction. But more importantly the FM will have to set realistic targets for the divestment program and then make sure that he achieves them.
All in all the industry is confident that it will see a growth oriented budget from the FM!
Aru Srivastava
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