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February 27, 1999
Sinha revamps tax structure, announces steps to revive markets, housing sector
A Special Correspondent
In a 'realistic' Budget for 1999-2000, Finance Minister Yashwant Sinha today announced a series of steps to reform the indirect tax structure, revive the capital markets and boost the rural economy. He also came up with measures to attract foreign direct and non-resident Indian investment.
Presenting the Budget in the Lok Sabha, the finance minister announced the heralding of the 'second generation of reforms.' Sinha said he would introduce a discussion paper in this regard before the current session of Parliament ended.
''My goal is to help build a consensus on basic issues so that we can act more decisively to raise the growth in income, output and employment in our economy to a higher, sustainable level,'' the finance minister said.
He said his aim was to lower costs and prices and stimulate productivity, growth and employment. He said the value-added tax with ''very small number of rates had been made the bedrock of his second consecutive Budget''.
''Reform the reforms,'' he said was Prime Minister Atal Bihari Vajpayee's mandate.
The Budget has been well received, with the Bombay Stock Exchange Sensex zooming by more than 150 points in less than four hours after the Budget was presented.
''The Budget's emphasis on the capital markets is commendable,'' CRISIL Managing Director R Ravimohan told the Rediff Budget Chat. ''I expect market sentiment to improve on a sustained basis, barring political uncertainty.''
Among the measures announced by Sinha for the capital markets were tax exemptions on income from the Unit Trust of India and other mutual funds.
The UTI's once-popular US-64 scheme, which had seen its fortunes plummet after Pokhran II is being restructured with government assistance to remove uncertainty and boost market confidence.
Sinha reduced the long-term capital gains tax for resident Indians on the transfer of shares and securities to 10 per cent.
The government has also decided to create the Foreign Investment Implementation Authority within the industry ministry to ensure that foreign direct investment approvals are quickly translated into investment flows and projects.
Admitting that there had been complaints about the 'slow approval' of FDI proposals, Sinha said the government has decided to expand the list of automatic approvals covering important industrial and services sectors. The expanded list will be announced separately by the industry minister.
The Foreign Investment Promotion Board, Sinha said, would be directed to give its decision on all proposals within 30 days.
In order to strengthen the participation of non-resident Indians in the development of the country, some more initiatives have been proposed.
The facility of automatic approval for investment up to 100 per cent by NRIs/ overseas corporate bodies will be extended for all items, except those which attract notified FDI equity caps, or compulsory licensing or public reservation under the industrial policy or are reserved for the small scale sector.
''NRIs are positively welcome -- that seems to be the Budget message,'' Duncans Limited Chairman G P Goenka told the Rediff Budget Chat. ''By and large, the NRIs have cause to be happy, if not to rejoice. The effort is there to take care of their problems. NRIs are welcome, that's the bottomline.''
The existing RBI approval mechanism for NRI investment in the Indian mutual funds will be simplified to a post-facto reporting mechanism.
The minister said he had also asked the Securities and Exchange Board of India to work out the modalities for enabling the country's major stock exchanges to open trading terminals abroad, which would facilitate the participation of NRIs in the capital markets.
The existing scheme of export credit in foreign currency is being revamped to make available pre-shipment and post-shipment credit at internationally competitive rates and to bring about major simplification of procedure in a bid to revitalise the country's exports. The Reserve Bank of India would separately announce the details of the revamped scheme.
The minister also announced the abolition of stamp duty on the transfer of debt within the depository mode.
He took note of the competition faced by the Indian corporates from globalisation and liberalisation and announced measures to promote business reorganisation. He said in the case of amalgamation of companies the existing requirement of routing the proposal to the Board for Industrial and Financial Restructuring was being removed.
In case of demerger, the finance minister proposed the introduction of a legal provision so as to permit carry forward of accumulated losses and unabsorbed depreciation from the demerging company to the resultant company.
He also announced the creation of a Guarantee Redemption Fund. The system of zero-based budgeting is to be initiated for preparation of the next Budget.
Sinha promised a new competition law to replace the Monopolies and Restrictive Trade Practices Act saying the need now was not to restrict monopolies but promote competition.
Recognising the country's strength in information technology, he reduced significantly the import duty rates for several critical inputs like integrated circuits, micro assemblies and CD-ROMs.
He fixed the disvestment target for 1999-2000 at Rs 100 billion.
He said India had the potential of becoming a 'superpower' in the entertainment industry. The government would provide help to realise this potential. He said this sector would now be given the same facilities as available to export of goods and merchandise.
Despite such measures, the Budget seems to evoke outright pessimism in some quarters.
''There is not much to feel good about,'' former finance minister P Chidambaram told the Rediff Budget Chat. ''If you are an investor, will you feel good if you are told that customs duties have gone up substantially, that your capital goods will have to bear higher customs duties or higher excise duties, and that you would have to pay a surcharge of 10 per cent on both corporate tax and personal income tax? There will be few investors in the world or in India who will feel good after this Budget.''
''There is very little in the Budget to stimulate the economy in the immediate term. The protectionist measures to help in improving profitability will unfortunately not lead to growth in size of markets,'' IndAsia Fund Advisers Chairman Pradip Shah told the Rediff Budget Chat.
''The finance minister's deafening silence on infrastructure, besides some small sops given on housing is indeed very sad for the economy. Infrastructure expenditure was expected by all,'' said Federation of Indian Chambers of Commerce and Industry president Sudhir Jalan.
''Also conspicuous by its absence was any announcement on a reduction in interest rates,'' Jalan added. ''The FM should have made his intentions clear instead of beating about the bush.''
However, Bajaj Auto Chairman Rahul Bajaj found it to be ''a very positive Budget, keeping in mind what one can expect from a Budget'' He told told the Rediff Budget Chat, ''We shall unfortunately continue to have problems of a weak government and resulting political uncertainty, creating a situation where we require decisions that may not be populist and so cannot be taken.''
Shattering such apprehensions, in a way, is Sinha with his decision to impose an across-the-board surcharge of 10 per cent on corporate tax and also a 10 per cent surcharge on all other assessees. This is likely to be unpopular with the corporates and middle class.
In respect of individuals and Hindu undivided families the applicability of the surcharge is limited to those having a total income of Rs 60,000 or more.
This would mean a two per cent surcharge on individuals in the 20 per cent slab and three per cent in the top 30 per cent slab. In effect the income tax rates for these two categories would now be 22 per cent and 33 per cent respectively.
''The finance minister seems to have negated all the major benefits that he had announced in the first part of the Budget during the last five minutes of his speech,'' Jalan told the Rediff Budget Chat. ''The surcharge on direct taxes is the most disappointing feature of the Budget and signals a reversal of a process that started some years ago.''
The finance minister also proposed a fiscal package to boost housing and construction activity. Among the steps proposed are raising tax deduction on interest on house loans for self-occupied houses from Rs 30,000 to Rs 75,000. He strengthened the housing finance companies through liberal tax treatment of income on non-performing assets.
A new Gold Deposit Scheme supported by tax incentives to mobilise idle gold and thus reduce gold imports has been announced. Under the scheme selected banks would be permitted to accept gold deposits and issue interest-bearing certificates or bonds which on maturity could be reclaimed in gold. This scheme is expected to have a major impact on the bullion market. Sinha made it clear that the scheme would not enjoy any amnesty.
The scheme has taken into account the propensity of Indian housewives to accumulate the yellow metal and, to encourage the scheme, the finance minister has exempted interest on the bonds from income tax. Besides the value of assets deposited in the scheme would be exempt from wealth tax.
''The scheme is a good one in the sense that it will check the abnormal import of gold,'' Southern Petrochemicals Industries Corporation Chairman A C Muthaiah told the Rediff Budget Chat.
Sinha, who tried to strike a balance between the need for controlling the fiscal deficit and increasing development expenditure, made a beginning by cutting non-plan expenditure by announcing 'down-sizing' of the government.
He said four secretary-level posts in the government were being abolished immediately. 'It is funny the government's downsizing effort should result in just doing away with four secretary-level posts,'' Muthaiah said
Another measure announced is the proposed creation of an Expenditure Reforms Commission which would reduce the role and the administrative structure of the government.
This has to be seen in the context of the fiscal deficit ballooning to 6.5 per cent during 1998-99, much above the targeted level of 5.6 per cent of GDP.
Significantly, the controversial issue of subsidies has remained largely untouched in the Budget.
''I believe these decisions, including genuine privatisation of public sector units, are not likely to take place with the present arithmetic in the Lok Sabha,'' Bajaj said.
The finance minister also outlined a medium-term strategy for restoring the fiscal health of the economy. He said it was proposed to reduce the revenue and fiscal deficits by 0.7 per cent and 0.6 per cent of the GDP respectively. The revenue deficit would be eliminated in four years and the fiscal deficit would come down below 2 per cent of the GDP.
Sinha said the revenue deficit for the year 1999-2000 would be Rs 541.47 billion while the fiscal deficit was expected to be Rs 799.55 billion. This amounts to 2.7 per cent and 4 per cent respectively on the basis of the new series of GDP announced by the Central Statistical Organisation and after excluding the payment of the share of small savings collection to state governments.
Sinha said the fiscal deficit was likely to touch 6.5 per cent of the GDP in 1998-99 as against the budgeted target of 5.6 per cent on the basis of comparable GDP estimates. However, if the increase over the small savings loans to states and Union territories is excluded, the adjusted fiscal deficit would be 5.9 per cent.
''The projected fiscal deficit, with or without adjustment, is a major risk factor unless government expenditure can be substantially curtailed,'' Confederation of Indian Industry past president Dhruv M Sawhney told the Rediff Budget Chat.
The finance minister unveiled a series of schemes to revitalise the rural sector and agriculture. These include the launching of a National Movement for Watershed Management involving local-level participation, improving the flow of credit and improving post-harvest storage and marketing, incentives to states for consolidating fragmented land holdings and a programme for rural industrialisation.
Sinha said in 1998-99 the GDP growth rate was 5.8 per cent with the farm sector leading the way.
However, it is still not clear whether the Bharatiya Janata Party has allocated 60 per cent of the Plan funds to agriculture, as promised in its national agenda for governance.
''Although the FM talked a lot about agriculture, there is nothing much in the Budget for the agri-sector. I don't think the Budget will give an impetus to the agricultural sector,'' said Muthaiah.
As far as the common man is concerned, he would be affected in some measure by the one rupee increase in diesel price as well as the increase in the prices of certain postal items like competition postcard, which would now cost Rs 4 instead of Rs 3, and inland letter which would now cost Rs 2 instead of Rs 1.50.
Ordinary postcards, money orders and packets containing printed books and newspapers have, however, been spared.
The finance minister announced a major overhaul of excise duties with the present 11 rates being reduced to only three, with a central rate of 16 per cent, a merit rate of 8 per cent and a demerit rate of 24 per cent.
''The biggest surprise is the increase in the rate of direct taxes,'' G P Goenka told the Rediff Budget Chat. ''Usually, the trend is to reduce taxes.''
A basic duty of five per cent has been imposed on a number of commodities by withdrawing exemptions or imposing a tariff.
As a result of the restructuring of the excise rates many items of daily use like cooking gas and kerosene would cost less while items like condensed milk and supari (betel nut powder) would be dearer.
The finance minister also announced that the excise duty on packed tea had been abolished. However, excise duty at Rs 2 per kg has been imposed on bulk tea.
In a significant step, the finance minister abolished with immediate effect the special customs duty. The peak rate of customs duty is to be reduced from the existing level of 45 per cent to 40 per cent. The special additional duty of customs would continue to be at the rate of four per cent.
The general restriction by five per cent on full convertibility of modvat has been abolished. The restriction on full availability of modvat on petroleum products has also been abolished.
Excise duty exemption for dyeing, printing, bleaching for mercerising of spun yarn available to independent processes has also been abolished. They will now attract normal duty applicable to these yarns.
The existing seven major ad valorem rates of custom would be reduced to five basic rates.
A surcharge of ten per cent of basic duty is to be imposed across the board -- except on items such as gold and silver, crude petroleum and petroleum products -- on all 40-per-cent rated commodities and certain General Agreement on Tariffs and Trade- bound items. The surcharge would come into force with immediate effect and would apply till March 31, 2000.
The government's power to grant ad hoc exemption has been restricted to goods of strategic and secret nature and charitable purposes.
''The Budget is long on long term initiatives and short on short term measures to boost the economy,'' Pradip Shah told the Rediff Budget Chat. ''I would have liked the government to have boldly reduced excise duties to expand markets at this time rather than take a strong protectionist stand which, while protecting the profits of many sectors in India, will restrict demand and lead to inefficiency.''
On science and technology, the finance minister announced a Rs 200 million National Foundation for Innovators, the constitution of a technology mission on vaccines and a National Bio-diversity Board for the protection of bio-diversity.
On banking, the finance minister said five more debt recovery tribunals and four more debt recovery appellate tribunals would be set up. He also said that a bill would soon be brought forth in Parliament for strengthening the provisions of recovery of debt due to banks and financial institutions.
The present drug policy is to be reviewed to reduce the 'rigours' of price control.
A new integrated handloom promotion scheme -- the Deen Dayal Hathkargha Protsahan Yojana -- is to be launched.
He also announced a number of measures for the small scale industry including a new credit insurance scheme to aid SSI units for availing investment credit. The annual turnover limit of SSI units for computation is to be raised to Rs 50 million from Rs 40 million.
He said the entire population would have food, health care, education, employment and shelter within a decade and announced Annapurna scheme for indigent senior citizens.
In a bid to give a boost to the two-wheeler industry, the finance minister exempted two-wheeler owners from filing income tax returns. Ownership or lease of a motor vehicle is one of the six economic criteria for filing returns. The proposed amendment will come into effect from June 1, 1999.
Additional reportage: UNI
Finance Minister Yashwant Sinha's Budget speech in Real Audio
How the government earns and spends
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