The finance minister?s Budget proposals for fiscal year 2010-11 have been enthusiastically received, primarily because he has been able to curtail the fiscal deficit and bring it down to 5.5% of GDP for the year. The message which he has sent is that he is prepared to take unpleasant decisions like curbing non-plan expenditure, increasing the excise duty rates which rolls back the stimulus given last year, and retain the service tax rates to its present level of 10%.
The expanding of slabs of income to which the rates of income-tax will apply will greatly benefit the middle class citizens, and for those who earn around Rs 8 lakh, there would be a whopping saving of Rs 50,000 in tax every year. This reduction in tax payment is expected to benefit around 65% of tax payers in India. Therefore, this is actually an additional stimulus which will enhance the purchasing power in the hands of the people and give a substantial fillip to our consumption-driven economy.
The India growth story has caught the fancy of the entire world because it has not been affected by the global meltdown which has afflicted other countries, both in the developed and the developing worlds. It is for this reason that India is increasingly attracting large capital inflows from global investors who are looking at a safe destination for earning a rate of return which is higher than what they earn in their own country. This has been reflected in the buoyancy of the Indian capital market at a time when markets are flat elsewhere.
The Budget proposals also deal with financial sector reforms which will permit opening of additional bank branches and also enable non-banking financial companies, which satisfy certain conditions of capital adequacy norms, to convert themselves into banks. In fact, it is expected that many more important policy changes will be announced to take forward the reform agenda during the course of the next financial year.
Market analysts and financial pundits have hailed the Budget proposals because of the determination shown by the Centre to bring about fiscal consolidation. Globally, there is a lot of nervousness, especially among some of the European countries like Greece, Ireland, Portugal and Spain which are having large fiscal deficits. Both the Euro and the Pound Sterling are under pressure, which is also contributing to volatility in the exchange rates. In this backdrop, India is perceived as a safer destination for investments, attracting higher capital flows.
What is commendable is the finance minister?s approach to a difficult situation. While acknowledging the need for withdrawing the stimulus package of last year in a calibrated manner, he has increased the allocation for Plan expenditure to a very substantial extent by having higher outlays for education, health, rural development and infrastructure. A crucial point highlighted by him in his Budget speech pertains to the encouragement of public-private partnership for the development of infrastructure projects.
On the corporate tax front, the reduction in the rate of surcharge from 10% to 7.5% was unexpected, and, therefore, industry has been jubilant and has given a thumbs up to the Budget proposals. While the increase in minimum alternate tax from 15% to 18% will dampen the spirits of some companies, it must be remembered that credit would be available in future for the minimum alternate tax which has been paid. It was widely anticipated that the dividend distribution tax might be hiked and the long-term capital gains tax exemption may be removed, but mercifully this has not been done.
Increasing the incentive for scientific research expenditure has been acclaimed as a step in the right direction. In fact, it will make India one of the important centres for development of intellectual property. It has also been announced in the Finance Bill, 2010 that no capital gains tax would be payable when a company is converted into a limited liability partnership. In such a case, the benefit of carry forward of losses and unabsorbed depreciation will also be available.
Special concession has been given for building and operating a new hotel of 2-Star or above category. The benefit of section 35-AD has been extended to such hotels whereby expenditure of a capital nature is allowed as a deduction in the year in which the expenditure is incurred.
In order to help small enterprises, the benefit of presumptive taxation has been extended to enterprises where the turnover is up to Rs 60 lakh from the present level of Rs 40 lakh. In such cases, 8% of the total turnover or gross receipts is deemed to be the presumed income, on which tax would be payable at the relevant rates. Further, such businessmen would not be required to have a tax audit report.
This year?s Budget proposals have been formulated in the background of a difficult international environment, moderating growth scenario and decelerating exports. The strong linkage with international markets combined with rapid surge in capital inflows has imposed serious constraints on domestic macro-economic policy instruments.
Despite the bleak global scenario and inflationary pressures in India, the minance minister has ensured that India?s economy continues to perform at a higher pace than in the last four years. While the economy will continue to be under stress in the area of inflation and diminishing food security, the virtuous cycle of growth will be sustainable.
This is a growth-oriented Budget because more disposable income will now be left in the hands of millions of taxpayers who will be inclined to spend more money in view of the fact that there are a large number of young consumers.
India is undoubtedly considered to be one of the top three investment destinations in the world. This year?s Budget proposals will ensure that India?s place as an economic superpower remains firmly entrenched in the global environment
?The author is a Supreme Court advocate and a tax expert