Not much populism, but no reforms either

Written by Santosh Dalvi | Updated: Feb 19 2014, 08:16am hrs
Amidst constant interruption by some MPs shouting United Andhra slogans, the finance minister, P Chidambaram, tabled the interim budget 2014 before Parliament.

Proudly stating that even though when global powerhouses such as the United States, the European Union and Japan were struggling with global recession and financial crises, the Indian economy was able to keep its head above the water, the minister said that the UPA government was able to successfully navigate the Indian economy through the turbulent period.

Shorn of any populist announcements, the finance ministers interim budget speech was more a reiteration of the UPAs report card and congratulatory

of the UPA government for taking path-breaking decisions like passing the National Food Security Bill, controlling inflation and taking effort for increasing GDP. Rejecting the policy paralysis accusations levelled at the present government, Chidambaram stated, Let history be the judge of the last 10 years.

On the tax front, no major announcements were made on corporate tax; however, the finance minister proposed few measures to support investment and consumption in the manufacturing sector by cutting down the excise duty on some capital goods and non-durable items (specifically those for export purposes) from 12% to 10%.

Special focus was given to the auto and auto-ancillary sectors, where the excise duty rates were reduced as detailed in the accompanying table.

The excise duty cut on cars and SUVs should surely bring some cheer to vehicle manufacturers.

It may be noted that the excise duty cut would also lead to reduction in VAT since VAT is applicable on the excise duty component also. Considering VAT rates on automobiles are generally in the higher slab, i.e., 12.5%/14.5%, the effective benefit to the consumers will be of around 4.5%.

While the dip in duty rates is expected to create a surge in demand for the interim period, in view of the existing high interest rates for white goods and automobiles, the demand may not be sustainable in longer run.

Having said that, one would agree that Chapters 84, 85 and 87 constitute approximately around 40% to 50% of Indian manufacturing industry and hence the concessions announced for major products covered under these chapters is, by no means, insignificant.

If and when the variables work in the right direction and the demand for capital goods, automobiles and white goods travels north, this should have a ripple effect on the allied/related industries (such as steel and other component manufacturers).

Focusing on domestic manufacture of mobile handsets so as to reduce the dependence on imports, Chidamabaram said more funds will be allocated to the telecom sector and announced a restructuring of excise duties on mobile handsets. The excise duties have been restructured to 6% for all categories with CENVAT credit and 1% for those without CENVAT credit.

The benefits provided to the auto and telecom sectors seem to be a partial rollback of the increase in the duty rates made by the finance minister in his last Budget.

Also, the confusion surrounding whether rice is an agricultural produce or notand hence exempt from service tax or notwas put to rest by the minister by amending the Mega Exemption Notification and providing specific service tax exemption on services of loading, unloading, packing, storage and warehousing of rice. It seems that Chidambaram still disagrees that rice is an agricultural produce!

He expressed his regret over the stalled tax reforms and blamed the Opposition for delaying the implementation of two of Indias biggest tax initiativesthe Direct Taxes Code (DTC) and the Goods and Services Tax (GST).

All in all, the interim budget was an attempt made by the UPA-2 to reach out to the aam aadmi before the upcoming elections.

Kishore Purohit, senior manager, Indirect Tax at KPMG In India also contributed this article

The author is partner, Indirect Tax at KPMG in India. Views are personal.