A Sock in the Bread Basket

A Budget which is innocuous in its continuation of the reform process... this

would sum up finance minister Yashwant Sinha's fifth essay pretty accurately.

Having brought down the poverty rate by about 9%, the Budget looks like another

attempt to enhance the lot of the common man. For the Indian middle-class,

meanwhile, the mailman continues to bring in only bad news.

LARGER PLAN: No bad news for the economy, but tough for the salaried

For this fiscal, Sinha was presented with two alternative strategies. One was

to go for all-out with a pump-priming strategy–undertaking public expenditure

programs of all types, irrespective of their relevance even if it meant further

increasing the fiscal deficit. On careful consideration, this was not favored.

The other–a more relevant, fiscal strategy was advanced under which the

government should undertake investment in infrastructure development like ports,

railways, national highways, roads, electricity generation and transmission,

agricultural infrastructure like irrigation, rural housing, elementary education

and health services. Sinha has pushed this strategy in his Budget for 2002-03.

By all accounts, this is the most appropriate fiscal strategy for the current

economic situation in the country.

All these reform measures will integrate the Indian economy into the global

picture. It will open up opportunities for the Indian private sector. The

corporate lobby, which is a powerful self-interest group in the country, is not

happy with the raising of surcharge from 2% to 3% and retaining the dividend tax

at the individual receiving end. The non-removal of minimum alternate tax has

further disappointed the corporate lot. The additional 15% investment allowance

has not consoled corporates either. Not only is the salaried class feeling

cheated, all its calculations have also gone awry, following the restrictions in

the limit for rebate under Section 88. The FM’s slash on this one section

could well qualify as the cruelest cut of them all. It reads well and is metric,

but what it actually holds out is something we need to look at closely.

As HDFC chairman Deepak Parekh says, "This is not a dream Budget,

neither the best one in the last five years. But it is honest."

The story line for the common man includes tax slabs, the interest rates and

the service taxes that have been reframed to meet the deficit. The removal of 2%

deduction for Gujarat relief fund has been compensated by the increased outlay

for defense by 5%. This has increased the burden by 3%. The 5% surcharge on

income tax payers due to this heightened national security considerations would

in real terms mean an additional tax liability of 1.94% on an income of Rs

60,050 and 2.94% for incomes above Rs 65,000. Says A Sudarshan, QMS coordinator,

Center for Development of Advanced Computing (C-DAC), "The individual has

lost the incentive for ‘savings’ and even general insurance related

investments have not been spared. This Budget is the greatest disappointment, on

the personal tax front, and almost the worst in so many years! Thumbs down to

this Budget."

In also what appears to be a major step towards phasing out exemptions on

income tax, the minister said the 20% tax rebate available to income tax payers

under Section 88 would be modified. And henceforth it will be available at the

existing rate only to individuals with taxable income upto Rs 1,50,000. People

with taxable income between Rs 1.5 lakh to 5 lakh would get a rebate of only 10%

of the amount invested and no rebate would be allowed to those in the above 5

lakh category. The special rebate of 30% for the ones with taxable salary upto 1

lakh would however continue. D S Brar, MD Ranbaxy Laboratories claims that,

"The surcharge on income tax is a negative development and the Budget has

been a bit of a disappointment with no impetus for growth." Elaborates

Sudarshan, "Assuming my salary does not change, I stand to lose the 10%

incentive under Section 88 (reduced to 10% from the earleir 20%). That’s a

straight reduction of nearly a 1,000 per month."

The administered interest rate has also been reduced by 50 basis points or

0.5%. This would mean a dip in earnings on savings in the Employees Provident

Fund and small-scale savings instruments. The benefit from the reduction of

interest rates in small saving deposits would be passed on to the states. The

feeling is that Sinha seems to have taken the easy way out–tax the section of

the society, which doesn’t have a lobby, unlike powerful industry associations

for the corporate sector or equally powerful politicians for the agriculture

income earners.

Has that made you heady? Not to worry. Just stretch for another drink. Budget

2003 has reduced customs duty on imported liquor from 210 to 182 %. You may want

to drop that after-lunch cigar though! Cigars, cheroots and cigarillos of

tobacco or tobacco substitutes which have been exempt so far shall attract 16%

Centav (Central Value Added Taxes). Teetotalers have reason to rejoice too.

Excise on tea has been halved to Re 1 per kg.

Again for those with a fetish for goods from other parts of the globe, the

reduction in peak tariff duty will make life easier. The proposed removal of the

16% special excise duty makes it easier for you to waste more time in front of

the mirror. Cosmetics and toiletries will cost less as manufacturers pass the

cost benefits to consumers to boost volumes. But with the proposed imposition of

a 5% service tax on health club and fitness centers, beauty parlors, fashion

boutiques, dry cleaning saloons, etc, looking good will certainly cost a lot

more.

Yashwant SInha could have maintained status quo on Section 80CC, as this was making people forcefully invest some money into social security. Now, this is in danger of becoming part of the ‘can look at it later’ phenomena

As a result of the dismantling of administered price mechanism (APM) for

petroleum products, the price of diesel will come down by around 50 paise per

liter and of petrol by around Re 1 per liter. Meanwhile, the 1997 government

decision on the dismantling of APM mandated the subsidy on LPG and kerosene oil

to be reduced to 15 and 33% respectively by April 1, 2002. Accordingly, the

price of LPG is being raised by about Rs 40 per cylinder and of kerosene oil

through the public distribution system (ration shops) by about Rs 1.50 per liter

from March 1, 2002.

Although basic customs duty on cellular phones have been doubled to 10% with

the exemption of countervailing duty (16%), effective rate have declined from 21

to 10%. To make up for these cuts, the minister has brought ten more services

like life insurance, including auxiliary services relating to life insurance,

inland cargo handling, event management services etc under the net of excise

duty.

"These measures have had a negative impact on the market sentiment. The

Budget has a workman like approach and has taken several pinpointed steps

towards growth. The positives have been somewhat overshadowed by the withdrawal

of dividend tax exemptions at the hands of the recipients, less than adequate

reduction of administered interest rates and imposition of service tax on

several new categories," maintains K V Kamath, MD and CEO, ICICI.

For all his professed ‘poor-friendly’ policies, Sinha has still not

managed to avoid anomalies. A number of products used by the poor and lower

middle-class have been taxed more. The following items will cost more –

candles, toothbrushes, postage, kerosene, pulses, Black and White TVs, electric

bulbs below Rs 20 per unit, imitation jewelry, glass kitchenware, watches and

clocks below Rs 500 each, confectionery, switches fuses and plugs and

sanitaryware.

Now, look at what will be cheaper post-Budget–imported liquor, cosmetics

and toiletries, readymade garments, cell phones, furskin, artificial furs (what

with Hollywood celebrities endorsing them), yachts, helicopters, and arms and

ammunition. This Budget will dampen the morale of the middle-class, not to speak

of the poorer sections. If the finance minister thought that increased spending

by this segment would revitalize the manufacturing sector, he may be in for a

nasty surprise. Incidentally, Sinha’s Budget also leaves some loopholes

unattended. Clause 10CC to Section 10, to be inserted in the Income-Tax Act,

says that if the tax on the value of perquisites enjoyed by an employee is paid

for by the employer, the same will not be treated as income in his/her hands.

The Bill also has a caveat. Such payments by the employer (tax on

employee-perquisites) will not be deducted in arriving at the taxable income of

the employer. The tax implication under the new dispensation works out to a

lower sum. The cascading effect of the tax on perquisite tax, applicable

earlier, no longer prevails. "The minister could have maintained status quo

on section 80CC as this was making people forcefully invest some money into

social security which now may become a ‘can look at it later’

phenomena," maintains K Kasi Vishwanath, manager HR, Wipro Infotech.

Then there’s the flipside. The perquisite tax paid by an employer/company

cannot be deducted as business expenditure in arriving at the taxable income of

the business of the employer. The disallowance may result in a larger sum of

pre-tax (perquisite tax) profits being subjected to corporate taxation. In the

process, the savings in employee compensation may be offset by the additional

burden of corporate taxation. But there is a saving grace. All said and done, a

dormant Budget that’s shot down most demands. Going back on promises and

sticking to his long chosen path of reform, Sinha has come down hard on the

salaried. Even limiting our attempts at faking beauty, the finance minister has

sure left both partners high and dry!

Dhanya Krishnakumar In New Delhi