As in the past six years, stress has been placed on the social sector by making larger allocation of expenditure for irrigation, rural roads and primary health services. These will not only bring relief to the farming community but also provide employment opportunities for landless labour. The finance minister has shown his commitment to boosting tourism by not only privatising the construction and maintenance of international airports in Mumbai and Delhi but also setting up new international air terminals in Jaipur and Goa which are popular tourist destinations.

On the indirect tax front, no major concession has been announced possibly because it was done in the mini-budget proposals introduced earlier. The streamlining of the service tax regulations and administrative changes for excise procedures would help the business community in faster clearance of manufactured goods.

The widely expected increase in exemption limit of personal taxation has been deferred until a new government is formed; in any case it would not be a wise decision even later, as there would be a tremendous leakage of revenues. What has surprised most stock market analysts is the extension of the capital gains tax exemption under section 10(36) for a substantial period of three years. This would enable investors who subscribe to new issues listed on a stock market or who purchase shares which are constituent of the BSE-500 Index to enjoy tax-free capital gains provided such shares are held for at least one year from the date of purchase and all transactions are effected through a stock exchange.

The finance minister has incorporated the contents of a circular issued at the beginning of this year in the Income-tax Act. This circular pertains to taxation of business process outsourcing units. This is emerging as a big opportunity for foreign companies to set up Indian branches or associate concerns. In a case where a non-resident carrying on manufacture and sale of goods or merchandise or provision of services outside India, outsources some of its incidental activities viz. conclusion of contracts and procurement of orders (which enable the core activities to be carried on abroad) to an IT-enabled entity in India, which constitutes a permanent establishment of the non-resident principal, the profit can be considered to be embedded in the income of the permanent establishment taxable in India, if the price charged in respect of the above services by the permanent establishment is an arm’s length or fair market price.

On the other hand, where a non-resident or a foreign company outsources the whole or part of its core revenue generating business activities to an IT-enabled entity in India, such as the services of a travel agent, software developer, software maintenance, investment consultant, debt collection service, etc., and the IT-enabled entity in India renders the services either directly to the customers abroad or through the non-resident principal, a considerable portion of the profits derived by the non-resident or the foreign company from its customers abroad would be attributable to the activities performed by the IT-enabled entity in India. So long as the Indian entity earns profit as a result of arm’s length dealing with its foreign parent company or associated company, the profits attributable to operations in India would have generated revenue for the Indian government. Thus, if the finance minister had exempted from tax in the hands of foreign companies such core revenue generating activities, no revenue would have been lost. In any case, by bringing in this amendment, India will lose this valuable employment generating business to other countries where a more favourable tax regime prevails.

The finance minister has taken courage in both hands by not extending the provisions pertaining to foreign exchange earnings, namely, sections 80-HHB, 80-HHBA, 80-HHC, 80-HHD, 80-HHE, 80-HHF, 80-O, 80-R, 80-RR and 80-RRA which will cease to apply from the assessment year 2005-06, relevant to the financial year commencing on April 1, 2004. None of these measures are now required as they have outlived their function of earning foreign exchange for the country which has gathered momentum based on the fundamentals of the Indian economy. In his speech before Parliament yesterday, the finance minister has rightly highlighted the progress made by the Indian economy and the higher growth rate which has been put on a sustainable basis. Lower revenue spending on some development projects has helped the government to reduce the fiscal deficit to 4.8 per cent of GDP. However, the buoyancy in tax revenues has been made possible as a result of the economy growing at the rate of 7.5 per cent over the previous year. The government would naturally like to ride on the wave of confidence built up over the past few years in the hope that it would be able to come back to power and trigger off reforms at a faster pace. Labour reforms, administrative and procedural reforms, judicial reforms etc. need to be set on course. Perhaps, the more daunting challenge is yet to be faced because the next five years must provide the critical thrust which the economy needs to propel it into a double-digit rate of growth.

The author is an Advocate, Supreme Court