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10 key measures of Budget 2003-04 - Views on News from Equitymaster
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  • Feb 28, 2003

    10 key measures of Budget 2003-04

    Personal Taxes: It turned out to be an encouraging budget for individuals. For one, standard deduction has been hiked from a maximum of 25,000 per annum to 30,000 p.a. (40% of salary, whichever is less). The FM removed the security surcharge of 5% for individuals earning below 8.5 lacs. However, if you are earning above 8.5 lacs per annum then you pay double, i.e. 10% as security surcharge. In effect, good for the middle class pockets. The FM has also retained leave travel concessions (LTC). Also, education expenses upto Rs 12,000 per child per annum will now be exempt under Section 88 (for 2 children). We hope that this encourages both parents and children to pursue higher studies. Also, tax sops on housing loans have been left untouched.

    Interest rates: The FM cut administered interest rates on small savings and PPF by 1% effective March 1, 2003. In effect, he’s brought these rates closer to the real interest rates, thus reducing the threat of a bloated pension liability going forward. In the long term, its good for individuals, as its saves the PPF pool and improves the chances of the government keeping its PPF commitments. Added to that, exemption under section 80L (for interest and dividend related income) has been increased from Rs 9,000 p.a. to 15,000 p.a.

    Senior Citizen focus:  The FM has tried to soften the blow of cut in interest rates on PPF and other fixed income securities by announcing tax exemptions for senior citizens and pensioners. The FM has now guaranteed the return on senior citizens pension policy at 9% per annum. The LIC will be reimbursed for any shortfall due to this measure. In a way, it’s a social security net for senior citizens. Also, from now on, senior citizen income has effectively become tax-free upto 183,000 per annum. Added to that, VRS consideration to employees will be tax exempt upto Rs 5 lacs.

    Equity investments:  Come FY04, and equity investors will no longer pay the 10% dividend tax. Also, even mutual funds will be exempt from the 12.5% dividend distribution tax for 1 year. Also, equity investments bought from March 1, 2003 and sold after one year, will no longer be taxed under capital gains. All these measures are likely to serve as a boost for both equity markets and investors. However, companies will have to shell out 12.5% as dividend distribution tax.

    Excise duty:  The 3-tier excise structure i.e. 8%, 16% and 24% (except for petroleum products and tobacco) was largely left unchanged. In line with this, excise duty on capital goods like A/C’s, passenger cars and tyres has been reduced from 32% to 24% in line with the aforesaid excise structure. So, one can hope that A/C’s and cars will become more affordable now. Excise duty on PFY was also reduced from 34% to 20%. However, excise on cement was hiked to Rs 400 per tonne (from Rs 350 per tonne earlier).

    Import duty:  Custom duty rationalising continues. The peak rate of custom duties was reduced from 30% to 25%.

    Benefits to banks:  The foreign direct investment (FDI) limits for private and MNC banks has been upped from 49% to 74%. This is a big thumbs up to foreign participation in India’s banking sector and we could see a spate of consolidation moves in the coming years due to this. Also, in a bid to improve the asset quality of banks the government has decided to buyback high cost interest loan portfolio of banks. This will enable banks to realise one time gains on their G-Sec portfolio and these gains can then be used for higher NPA provisioning.

    Connection moves:  The FM focused on development plans for roads, ports, railways and airports. Consequently, the FM announced outlays for modernisation of Delhi and Mumbai airports, modernisation of JNPT Mumbai port and the Cochi port. For development of roads, he outlined 48 new road projects, over and above the existing PM’s road project. 25% of these roads will be cemented. The FM also announced a ‘Rail Vikas Yojana’ for development of railways network with a plan outlay envisaged at Rs 80 bn. The total infrastructure outlay of on all these measures is pegged at Rs 600 bn. The focus on the 4 major links to transportation is welcome and a big step towards a ‘connected’ India.

    Power and telecom focus:  For development of the power infrastructure, the FM announced that mega power status would now be given to all power projects meeting the existing norms. A new electricity bill has already been mooted with broad guidelines to reduce government interference. Also, for telecom the FDI limit has been hiked from 49% to 74%.

    Agriculture benefits:  The loans to agriculture and to small-scale sector will now be available at maximum 2% above prime lending rate (PLR). This should encourage investments in both the segments and improve credit off take. Also, the FM addressed the fertiliser subsidy issue by hiking the support prices.

    All in all, Budget 2003-04, was as expected a ‘populist’ budget with an eye on the next elections. The cut in PPF rate, senior citizen benefits are good moves. However, the continued focus on infrastructure development is very encouraging. We can only hope that the FM can achieve all that he promised, keeping his 5.6% budget deficit target.



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