JUNE 15, 2009

Union Budget 2009 - Some Random Thoughts!

By B.V. Kumar, Former CBEC Member

THE President of India while addressing the Joint Session of Parliament on June 4 th, outlined, probably for the first time the broad blueprint of the coming Union Budget. In a way it indicated to the Finance Minister, the direction given by the Prime Minister as to what is expected from him to put the economy back on rails. The Government, according to the President's address proposes to undertake an ambitious programme of development combined with social security for the underprivileged.

For e.g. the Government promises to infuse massive resources into roads, ports, education, rural development, telecom and health. The President said “infrastructure is a fundamental enabler for a modern economy and infrastructure development will be a key focus area for the next five years. Public investment in infrastructure is of paramount importance ………………………… bottlenecks, especially in railways, power, highways, ports, airports and rural telecom will be systematically removed.”

Some of the objectives indicated include :

•  Universalize secondary education.

•  Eradicate all urban slums in five years.

•  50% reservation for women in Panchayats and Urban Local bodies.

•  Add 13,000 MW power each year.

•  Broadband coverage to reach every Panchayat in 3 years, 40% rural tele-density in five years.

•  25 kgs. of rice or wheat a month at Rs. 3 a Kg. for all BPL families through a National Foods Security Act, (NFSA) for which provision for Rs. 50,000 crores would be provided.

According to Finance Ministry's sources the Finance Minister is likely to present the Budget on July 3 rd. Combined with the provision already made for the NREGA programme which makes it mandatory for BPL card holders to be given 100 days of work a year, the NFSA will guarantee that food grains at subsidized prices would be available to those who are entitled to claim. Similar initiatives are also being planned through the Right to Free and Compulsory Education Bill while seeking to universalize secondary education.

While the mandate given to the Finance Minister is loud and clear, he has to take into account the backdrop of the ground realities as they exist today, both within the country and the global scenario. According to projections made by the Ministry of Commerce, the imports during 2009-10 are likely to be around USD 300 Billion as against as anticipated exports of USD 200 Billion with a trade deficit of USD 100 Billion.

The task entrusted appears at first sight as a contradiction in terms. While resources have to be raised to meet the ambitious programmes envisaged for social and economic development, economic revival is to be achieved by providing a package of incentives and stimuli to industry, agriculture and the service sector.

Studies in economic growth have shown that accelerated economic growth can be achieved without increasing the level of taxation. In fact in the late 80's and the early 90's brining down the rates of direct and indirect taxes have resulted in increased Revenue Receipts.

Economic growth may occur as a result of stimuli in the form of an increase in capital formation or availability of new technical knowledge, and changes in economic institutions. Moulding of attitudes by the Government or the community, which are favourable to growth, would help to bring about economic growth, as against attitudes, which are inimical to growth. When such stimuli are combined with incentives in the form of rewards for efforts for promoting economic growth and provide the necessary freedom to seize economic opportunities and exploit such situations by the entrepreneurs, it will result in accelerated economic growth. While growth occurs as a result of each stimulus, it tends to become tangential when it ultimately reaches its limit. Continuous growth therefore implies successive stimuli and the introduction of the new stimulus should be before its predecessor begins to flag. This will yield if not a steady rate of growth, successive surges of expansion.

As an economist and as a former tax administrator, my firm belief is that the Finance Minister should start dismantling the various repressive taxation policies followed by his predecessor who was more a Minister for Revenue rather than a Finance Minister with a vision. He would certainly made a good Home Minister but not necessarily a good Finance Minister.

Some of the steps that the Finance Minister could consider introducing in the forthcoming Budget are:

•  The effective rates of Excise Duties are required to be reduced across the Board from the existing rate of 10% to 7.5% and in respect of certain goods required for infrastructure development to 5%.

•  The peak rate of Customs Duty can be reduced to 10% and the effective rates on raw materials, components and high technology capital goods to an effective rate of 5%. This will help industrial production and economic growth resulting in higher levels of employment.

•  The peak rate of Service Tax can be brought down to 5%, since this is one area in the private sector where the people at large are self employed or they generate further employment. There should be an alignment in the duty structure between the Service Tax and Excise Duty. Service Tax should also be abolished on Erection, Commissioning or Installation Services, Works Contract Services and Banking and other Financial Services, which will have an impact on the overall cost of major projects.

•  To encourage manufacture of computer hardware within the country, while Excise Duty / CVD can continue, to give a certain amount of protection to the indigenous hardware industry, the basic components required for the manufacture of computer hardware are required to be totally exempted. At the same time, assemblies and sub-assemblies should suffer CVD so that indigenous manufacture is encouraged. Certain components such as microprocessors and other high technology products, which are manufactured by only a few multinationals, should be permitted to be imported at nil rate of duty. In fact if the said multinationals are prepared to establish their manufacturing units within the country all possible incentives should be provided. Special Additional Duty of Customs (SAD) should be totally abolished.

•  It should be examined whether there is a need to continue to impose Additional and Special Additional Duties under Miscellaneous Acts (for e.g., Additional Duties of Excise (Goods of Special Importance) Act, 1957; Additional Duties of Excise (Textiles And Textile Articles) Act, 1978 etc., and various Cesses' and whether they contribute significant Revenue to the exchequer. If not it is better to contribute the beneficiaries from the Consolidate Fund of India rather than have such statutes causing additional administrative expenditure.

•  It is necessary to abolish the Fringe Benefit Tax (FBT) and the Minimum Alternative Tax (MAT), which are resented by the assessees.

•  The small-scale sector, which approximately contributes 50% of the Gross National Product as far as industrial production is concerned and which is labour intensive requires to be encouraged. In this connection, the PMO have done considerable amount of work and reports have been submitted by the National Commission for Enterprises in the Unorganized Sector (NCEUS). The Budgetary Division of the Finance Ministry would be benefited by drawing upon the recommendations made by NCEUS.

•  In addition to the proposals on taxation, it is also necessary to bring about reforms in the Customs Act, 1962 the Central Excise Act, 1944 and the Rules and Regulations made thereunder, which are repressive.

•  The mandatory penalty of 100% introduced under the Customs and Central Excise enactments are required to be abolished and status quo ante is required to be restored. The introduction of the mandatory penalty has resulted in increased corruption and unnecessary litigation. The Settlement Commission has been made into an ineffective and impotent organization by the former Finance Minister. It is time that it is made functional and the law is restored to its original form with necessary improvements.

•  Keeping the downturn in exports it is necessary to encourage 100% EOUs, SEZ Promoters / Developers and Units in the SEZ by simplifying procedures relating to exemption from taxes (Customs, Excise, Income Tax, Sales Tax / VAT, Service Tax, etc.,). Service Tax should be abolished on all exports of services resulting in earning of Foreign Exchange in convertible currencies.

It is also necessary to carry forward some of the flagship programmes of the UPA Government forward, which would result in inclusive growth. The President in her speech to Parliament has already outlined such programmes in great detail. To achieve universalization of Secondary Education, it is necessary to open Central Schools in all the District Headquarters at the first stage and the Taluk Headquarters at a later stage. This would bring about quality education at reasonable cost and break the monopoly of the private sector in demanding capitation fee for admission even to Primary and Secondary Schools.

Keeping in mind that the average growth in the agricultural sector is only 2.3% during 2007-08, it is necessary for the Government to revamp the Five Year Plan, shifting its emphasis to agriculture and infrastructure. It is time for the Finance Minister to totally exempt investment in power, fertilizers, ports, highways and other infrastructure projects from direct and indirect taxes.