• FEBRUARY 28, 2001

Tax cuts: Should industry cheer?

One of the most important aspects of the budget is the creation of a positive sentiment in the market without sacrificing on the tax revenues. The FM’s tax proposal’s are designed to encourage consumption and propel investments. The removal of surcharges at the higher end of taxable income, the reduction of excise in aerated drinks as well as the heavy tariffs on tea and coffee coupled with the reduction in small saving rate is certainly not politically palatable though they seem to have gone a long way in boosting the market sentiment. As has been the case with the reduction in the dividend tax from 20% to 10%. Infact the reduction in small savings rate along with the reduction in the dividend tax would not only propel the inflow into equity funds but also help debt funds (these lost out last year) make a come back.

A significant proposal (on the indirect taxes front) was the exemption on steel and cement used in Gujarat. This coupled with the reduction in the duties on motorcycles and scooters, which is likely to be passed on, could possibly lead to a rise in consumption propelling a virtuous cycle. Or may be considering the fact that the Chinese manufactures cost almost 50% of their Indian counterparts, an 8% excise duty cut could only help the two wheeler manufacturers to compete on a slightly better footing.

The same holds true for ketchup, fruit squashes and jams for consumer non durables manufacturers who are equally likely to pass on these excise cuts to boost market share.

The service tax would bring auto mechanics, banking and financial services, video tape producers and even cable operators such as Siticable under the tax net. However, the biggest service tax providers viz. the road fleet operators are still out of the tax net and considering the problems that the government had in implementing the tax proposals, cable operators are not likely to be an easy target either.

One is also not sure about the proposal to exempt capital gains from tax if the proceeds were to be invested in the primary markets. We would witness yet again dubious promoters with wishy washy projects make a comeback. After all, the NBFC companies which floated public issues in the primary market boom in the mid–nineties have not been heard of ever since. Caution is a virtue, time to exercise it.

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