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  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  FEBRUARY 28, 2007

    Lots of details, yet picture still fuzzy!
    MYSTOCKS | FREE NEWSLETTER

    Mr. Chidambaram sounded like a man with one mission: make India's new growth story more 'inclusive' - the new mantra in North Block. It was the main thread running through the Economic Survey 2006-07 released by the Finance Ministry yesterday. Growth has to empower equity, if it needs to be self-feeding and live up to its name. The Finance Minister (FM) was also very happy to note export growth doubling in FY07 - but was silent on the current account deficit growing. Should one read the picture minutely and see his stress on export growth as a positive statement on special economic zones (SEZs)? Broadly, he affected the common man thus:

    1. Increased tax burden for high 'tax-payers': To mitigate the impact of inflation on real value of incomes, the FM has increased the threshold slab for income tax payers by Rs 10,000. This will marginally reduce tax liability by Rs 1,000. And at the same time, he has increased the education cess by another 1% to fund secondary education in the country. For people with a tax liability above Rs 100,000, the net impact of both these measures is negative. He has also proposed to extend capital gains tax to certain select art objects.

    2. No change in service tax or Cenvat rates, but more services taxed: People expected both these rates to change in order to shift to a general Goods and Service Tax (GST) regime. The inflationary impact of higher tax rates in an atmosphere of inflation control must have guided his decision. The FM has raised the exemption limit for annual incomes of small service providers from Rs 400,000 to Rs 800,000. He has also extended the net to include services outsourced for mining of mineral oil or gas, renting of immovable property for use in commerce or business, development and supply of content for use in telecom and advertising purposes, asset management services provided by individuals; and design services.

    3. Peak import duty reduced from 12.5% to 10%: The FM has reduced customs duty on several commodities and intermediate goods like chemicals and machinery. If passed on, they will reduce the general level of prices on the finished goods in the domestic markets.

    4. Increased dividend distribution tax: Mr. Chidambaram has raised the rate of dividend distribution tax from 12.5% to 15% on dividends distributed by companies. To reduce the huge arbitrage opportunities available to money market mutual funds and liquid mutual funds that enjoy concessional tax rates, he has raised the dividend distribution tax on dividends to 25% for all investors.

    5. Fringe Benefit Tax to include ESOPs: The value of the fringe benefit will be determined, in accordance with a prescribed method, on the date of exercise of the option. He has also excluded expenditure on free samples as well as expenditure on displays from the scope of FBT.

    6. The Banking Cash Transactions Tax: will now be applicable to cash withdrawals by individuals and HUFs above Rs 50,000. The FM also has excluded cash withdrawals by the Central and State Governments from the scope of BCTT with the promise of may be granting the 'aam aadmi' relief too from this tax after next year.

    7. Infrastructure given a few sops: Only if venture capital undertakings invest in mostly uncharted areas will the Finance ministry give them a pass through status. This is bad news for those who have raised and invested private equity in retail and real estate kind of sectors.

      To better utilise India's growing foreign exchange reserves that are currently adding to the money supply, Mr. Chidambaram has proposed to allow two overseas subsidiaries of the India Infrastructure Finance Company Limited (IIFCL) to borrow US dollars from the Reserve Bank of India and lending to companies building infrastructure in India to co-finance their overseas expenditure.

    8. PAN, the sole identification number: For all participants in the securities market, their PAN number will be the only identification number with an alphanumeric prefix or suffix to distinguish a particular kind of account.

    9. Emphasis on rural well-being: What with agriculture still monsoon dependent and an increasing number of farmers ending lives because of indebtedness, the FM has announced a slew of small measures that will benefit the small and marginal farmers. Weather insurance cover, the Aam Aadmi Bima Yojana to be extended by the LIC, building rural roads, irrigation projects, more emphasis on better quality seeds, scholarships to keep children continue education to Std XII, upgradation of rural healthcare and sanitation, and, better availability technical education systems seems to encompass all the spheres of life. However, what percent of the expenditures are to be spent on these measures is yet to be disclosed.

    10. E-governance to spread to states as well as to FCI: Seeing improved tax collections after the introduction of e-payment of central taxes, Mr. Chidambaram wants states to implement the same. He has also provided for computerisation of the Public Distribution System (PDS) and the Food Corporation of India (FCI) to better manage the food stocks, especially in times of scarcity as these.

    Besides these, the FM has put forward proposals to involve the private sector in the running of the largely defunct state-run Indian technical institutes to make vocational education more employable as also to reduce the burden on the state exchequer. By waiving debt and increased allocations, he has tried to improve the fiscal outlook of the states.

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