Budget 2008: An Analysis

The Indian economy appears to have settled on a steady and high growth path in recent years. A boost in investment, strong industrial performance and modest inflation has helped not only in achieving growth, but also other associated business sentiments. The  growth of the Gross Domestic Product in excess of 8 percent has been achieved by the economy in only five years of recorded history. With up-coming elections, the Budget 2008 is expected to meet the concerns of the ‘Aam- Aadmi’. A step in the right direction would be to enhance the limits of specific tax-free allowances provided to individual salaried taxpayers.

Currently, these limits are very low and have not been looked at in the light of the rising Cost of Living Index over the years. Other avenues for providing relief to a salaried taxpayer could be a deduction for the payment of life insurance premiums for dependent parents and the enhancement of specified investment limits (for availing deductions) such as life insurance premiums, provident funds, etc. Interestingly, a global personal taxation comparison survey undertaken by Mercer in 2007 identifies India as the least favorable economy in Asia with respect to personal tax rates.

Over the years, the income tax slabs have been modified, but on each occasion, the impact has been minimal, since realignment, either has been negligible or has been accompanied by removal of other tax deductions. Hopefully, the Budget 2008 will address this issue. Like salaried taxpayers, Corporates, too, have their ‘wish list’ of expectations from the Budget. India’s corporate tax base rate is currently pegged at 30 percent, at par with the Asia Pacific average.

However, surcharge, cess, Dividend Distribution Tax and Fringe Benefit Tax (FBT) actually raises the tax rate above the Asia Pacific average. India appears well on course for matching or even beating its federal fiscal deficit target for this financial year and pushing for an even smaller shortfall next year — thanks to the country’s rapid economic growth.

Finance Minister Palaniappan Chidambaram delivers his annual budget on Feb. 29, the last full one of this administration. Analysts expect him to say he bettered a goal of cutting the federal deficit to 3.3 percent of GDP for the year to March 31 from 3.7 percent a year earlier.

However, this year’s target, enshrined in a four-year-old fiscal responsibility drive, excludes the deficits of state governments. If they were included, the overall shortfall would be 6.0 percent of GDP, economists estimate. It also ignores off-balance sheet items, such as oil bonds issued in lieu of raising government-set fuel prices to match global trends. With world oil prices rallying strongly and hitting records just this week, the government may have to issue more bonds in coming quarters.

The main problem for the Finance Minister is low revenue, which has been decelerating the customs revenue growth. This further leads to the lowering of excise revenue. Therefore, while making the budget the Finance Minister will obviously be focusing on better mobilization of earnings through direct and service taxes.

Nasscom addresses five issues in its pre-budget memorandum. Nasscom suggests the Government to:

(1)Continue the Software Technology Park of India scheme up to 2010,

(2) Liberalize the eligibility criteria for the scheme of Large Tax Payer Unit. According to the current benchmark, those companies will be eligible only who pay an amount of 10 crores or more as advance tax.

(3) Inculcate some relevant provisions in the domestic laws so that an efficient mechanism or process for full tax credit can be provided.

(4) Start a mechanism for the Advance Pricing Agreements on the issues like, transfer pricing to ensure high tax certainty.

(5) Refund the service tax paid by the companies on the services used for exporting BPO applications and computer softwares.

Tamal Roy