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Swallowing the pill - Views on News from Equitymaster
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  • Apr 27, 2002

    Swallowing the pill

    In the last few years every government and every Finance Minister has stressed the need for tightening the belt. They have also stressed on infrastructure development, widening the tax base and of course rationalization of subsidies.

    In few of the budgets presented there have been signs of progress on all these fronts. Yes, the FM has announced measures in all these areas, but then we all know what are the ground results. To give the government credit, it has managed to take the first steps towards labour reforms, divestments, second-generation reforms and of course setting its own house in order.

    However, Mr. Sinha seems to have hit a roadblock in improving Government revenues or more importantly keep a check on expenditure. So he seems to have taken an easy option out, that of flogging the existing taxpayer. The knack of taking the easy way out could also be evident from the fact that the Government was the biggest beneficiary from the cut in small savings rate last year. That said, the lower interest rate has helped stoke a consumer finance boom.

    Mr. Sinha's rollback act!
      Budget proposal New proposal
    Insurance 5% service tax

    5% service tax rolled back for the savings portion of the premium.

    Personal Tax Sec 88 benefits reduced from 20% to 10%

    Sec 88 benefit for individuals earning between Rs 1.5 lakhs to 5 lakhs now stand at 15%. Individuals earning above Rs 5 lakhs get no Sec 88 benefits. The FM has also hiked savings eligible for the rebate from Rs 80,000 to Rs 100,000.

    Dividend Tax

    Dividend to be taxed at the hands of the shareholder or the mutual fund owner at the assessee's applicable tax bracket.

    Dividend earnings brought under Section 80L. That means dividends earned from companies and mutual funds upto a maximum of Rs 9,000 are tax exempt. Also, dividends earned below Rs 1,000 will not be subject to TDS, giving relief to small investors. However, dividends from equity funds are not part of this proposal.

    Mr. Sinha boldly announced the rise in LPG and kerosene prices. He also announced a urea price hike as well, and signaled doing away with Sec 88 tax benefits. However, a month later the Finance Minister was forced to partially roll back LPG price hike and recently has done away with the Rs 0.2 m cap on investments in RBI Relief Bonds for retirees. Yesterday, we saw rollback of the service tax on insurance and hike in Sec 88 benefits to 15%.

    The larger idea here is not to question the validity of the measures. We all understand that he is under pressure to take one step forward, one step back owing to political pressure from constituents. But it is the office of India’s Finance Minister that seems to be undermined. If one had to rollback one need not have mooted the same in the budget in the first place. Mr. Sinha’s constant rollbacks have reduced the annual budget proceedings to something of a ‘snakes & ladders’ game. It would be better in future if he consults the ruling coalition members first and then presents the budget. This could be the only way to avoid rollbacks in future. Having said that, the strategy could be to include several stringent measures and then roll back on low priority items. In such case, the Finance Minister is better off, as high priority measures do not lose momentum at the same time satisfying the roll back lobby.

    It is unlikely that budget day will evoke the same buzz of anticipation in the years to come if markets expect most announcements to be rolled back. The government’s compromising under political weight has also cast a shadow on the post APM regime. The current divide in the parliament over Gujarat has also put the reform and divestment agenda under threat. The government has always stressed on biting the bullet. But it seems Mr. Sinha is made to swallow his own pill.

    Also read: Taxpayers take it on the chin



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