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Sunday, March 04, 2007

Five points someone overlooked


We have been short-changed in the Budget, says India Inc. The corporate sector is like a strong oak tree while the agriculture sector is like a plant which has to be nursed, said Mr P. Chidambaram in defence, implying that the former does not need support any longer. "We have done nothing to hurt the growth story," he says.

Corporate India's grouse is that most of its suggestions have not been considered by Mr Chidambaram even as he proposed such not-so-friendly measures as higher education cess, application of the Minimum Alternate Tax on IT companies, extension of the Fringe Benefit Tax on employee stock options and increase in the dividend distribution tax to 15 per cent.

Focus on agriculture is fine, and with two-thirds of the population depending on it for their livelihood it is also probably necessary. But tending to the plant does not necessarily exclude caring for the oak because it is the latter that is generating the resources to help the former.

Here are five proposals which, had they been considered by the Finance Minister, might have balanced the Budget better between industry and agriculture. They would have certainly pleased India Inc. and the best part is that these measures are either revenue neutral or would have had but a minor impact on revenue. So, here are those proposals that were not to be:

excise duty on cars

The passenger car industry had suggested a reduction in the excise duty on all categories of cars and utility vehicles to 16 per cent. At present, except small cars conforming to a specified definition on size and engine capacity, all other vehicles suffer 24 per cent excise. Paan masala is the only other product to suffer a similar excise duty!

Mr Chidambaram could have considered the suggestion favourably given last year's experience, when sales of small cars shot up following the reduction in their excise duty.

Small-car sales zoomed 31 per cent when the overall car industry grew 23 per cent in April-January this fiscal. Incidentally, the growth rate for small cars for the whole of 2005-06 was half that.

The beneficial effect is clearly visible here with the increase in sales compensating for the revenue loss from duty reduction. Who knows, a reduction in duty on all cars this year could have stimulated sales in a similar manner. The auto industry is a major employer and contributes 5 per cent to GDP now. The trickle-down effect to the component sector in terms of investment and employment would have been tremendous. Did Mr Chidambaram miss something here?

Focus on tourism infrastructure

Tourism is an industry that is largely neglected especially given the potential in the country. As anyone who has travelled to any of the major cities recently would tell you, it is just impossible to get good hotel rooms for even a night's stay. Occupancy levels are at 100 per cent and most good hotels boast of a waiting list of guests.

How can tourism prosper in such conditions? While the hotel industry had asked for infrastructure status, Mr Chidambaram could have at least considered extending the five-year tax holiday that he has granted to new hotels coming up in the Capital and surrounding areas, to all over the country. Tourism is probably the next big thing waiting to happen and a couple of concessions to the sector would have gone a long way in promoting its growth.

Duty structure for petroleum products

The petroleum industry is riddled with tax conundrums and Mr Chidambaram has just made a peripheral attempt at solving them by reducing excise duty on petrol and diesel to 6 per cent.

He could have tried his hand at reforms by shifting to specific duties and abolishing the ad valorem component on the two products. This would have been an equitable measure as in the ad valorem mechanism the consumer pays more as duty when oil prices move up.

Customs duty on petrol and diesel, currently at 7.5 per cent, could also have been reduced to the same level as that of crude oil at 5 per cent.

There are no imports of petrol and diesel whatsoever and there are no revenue implications for the Government by reducing the duty. There is also no strong argument for extending protection to domestic refiners who are anyway efficient.

A dual-pricing system for cooking gas and kerosene could also have been attempted, as there is no reason why the thriving middle-class ought to enjoy subsidy on the two products.

Such a measure proposing subsidised prices only for the poor and deserving would have sent out a very strong signal on the Government's commitment to reform even as it would have reduced the subsidy burden significantly. But it was not to be.

Promoting savings

Last year, Mr Chidambaram had included bank deposits with a five-year term under Section 80C of the Income-Tax Act subject to the overall limit of Rs 1,00,000. Given the backdrop of rising inflation and the need to promote savings, he could have considered reducing the term for such deposits to three years.

As a further aggressive measure to promote savings, the Finance Minister could have considered re-introduction of Section 80 L, which used to offer a deduction of up to Rs 10,000 on interest from deposits.

Abolishing DDT for holding companies

This was a strong demand from India Inc. and in the interests of equity ought to have been considered by Mr Chidambaram.

At present, dividends suffer tax twice when they emanate from a holding company and pass on eventually to shareholders of the subsidiary or vice versa.

The holding company has to pay tax on dividend distributed by it to its shareholders, though such dividend is being paid out of its own dividend earnings from its subsidiaries which have already paid the tax.

The increase in DDT to 15 per cent would have gone down better if Mr Chidambaram had fine-tuned this aspect of holding-subsidiary company dividends.

Shareholders of a number of companies, particularly in sectors such as power where it is required to float independent subsidiaries for every project, would have benefited from this move.