PC delivers: Politically Correct

The fiscal deficit, which measures the extent to which the government is spending beyond its means, is budgeted to come down from 3.7% of GDP to 3.3%. The primary deficit, a better measure of the government’s deficit as the legacy of previous governments is stripped away, now shows a surplus.

When the FRBM Act was passed in 2004, there was a lot of scepticism on how a populist UPA would achieve these targets. Budget 2007 shows the importance of Parliament tying the hands of the government. This reduction of deficits makes space for the private sector to invest and to generate growth.

Chidambaram’s speech, however, began on an ominous note with a ban on futures trading in wheat and rice, despite evidence that this has little to do with inflation. The Abhijit Sen committee set up to look into this will, hopefully, find a way to strengthen these markets instead of banning them.

On taxes, one element of strategy that has been rightly emphasised has been the lowering of customs duties. The peak rate has been reduced, and the customs rate on many goods has been reduced. This will help curb local inflation, reduce raw material prices in India, and bolster export competitiveness.

Lowering customs duties further requires the introduction of the Goods and Services Tax (GST). On this front, unfortunately, the budget failed to offer a roadmap. Phasing in the GST has to involve elimination of the Central Sales Tax (CST). All that was done was a one-percentage point reduction in the CST.

The ethos of the GST is to move towards low and uniform tax rates on all goods and all services. But the speech was replete with tax rate changes that tinker with the fine structure of the economy in ways that are now well understood to be deeply harmful.

In a case of extreme mission creep, tax policy has been harnessed for price control by promising differential excise rates to cement producers based on the price at which they sell. Service tax has been extended to a few more services — in contrast with the ethos of the GST which involves taxing all services.

In a new initiative on education, the FM announced 100,000 merit-cum-means scholarships for secondary students from Class IX to XII. The emphasis on primary schooling has resulted in students finishing primary schools but the limited number of secondary schools in rural India prevents them from going on to secondary education.

In addition to addressing the immediate issue of schooling for these children, for the economy there are important long-term implications of placing public resources in the hands of parents. The emphasis on merit, through an examination, is well-placed given the difficulties that the country expects to face in the development of good quality labour supply.

For the rest, Budget 2007 made a significant increase in the pet schemes of the UPA. Giving in to political pressure for larger spending on schemes, the Gross Budgetary Support for the Plan will be raised from Rs 1.7 lakh crore to Rs 2.0 lakh crore.

Expenditure on school education is slated to go up by 35 percent. Rs 7,324 crore will be spent on mid-day meal schemes. Rs 24,603 crore will be spent on Bharat Nirman. Rs 15,291 crore will be spent on health and family welfare, up by 22 percent from last year’s budget estimate. The rural job guarantee scheme is proposed to be extended from the present 200 districts to 330 districts. An initial budget of Rs 12,000 crore will be alloted to the scheme but since the scheme is demand-driven, if more money is needed, it will be provided later.

Budget 2007-2008

“Our human and development indices are low, not because of high growth but because growth is not high enough… Faster economic growth has given us once again the opportunity to unfurl the sails and catch the wind.”
— P Chidambaram

Basic Numbers

New limit for I-T exemption is Rs 1.1 lakh; 1.45 lakh for women; 1.95 lakh for senior citizens

• Fiscal deficit for 2006-07 revised to 3.7% of GDP against 3.8% budgeted; for 2007-08, 3.3%

• Revenue deficit for 2006-07: 2% of GDP; for 2007-08: 1.5%

•l Gross budgetary support for Plan raised by 18.7% to Rs 205,100 crore from Rs 172,728 crore

• Allocation for education up 34.2%

• Allocation for health and family welfare up 21.9%

• Central sales tax rate to be reduced from 4% to 3%

Social Sector

• Allocation for school education up 35%, with Rs 10,671 crore going to Sarva Shiksha Abhiyan

• 100,000 National Means-cum-Merit Scholarship Scheme a year (Rs 6,000 per student) for study in Classes IX-XII

• Initial allocation of Rs 12,000 crore for National Rural Employment Guarantee Scheme, to be expanded from 200 districts to 330 districts

• 1,396 ITIs be upgraded into centres of excellence in specific trades under public-private partnership

• Farm credit target Rs 225,000 crore, 50 lakh new farmers to be added to the banking system

Industry

• Peak customs rate for non-agricultural products cut from 12.5per cent to 10 per cent

• 1% higher education cess on all taxes

• No change in the general CENVAT rate

• Excise duty exemption limit for small-scale industry raised from Rs 1 cr to Rs 1.5 crore

• Increase in tax burden on cement (excise) and IT companies

• No surcharge on income tax on all firms and companies with a taxable income of up to Rs 1 crore

• No change in service tax rate

Individuals

• Threshold exemption limit for all assessees increased by Rs 10,000. New limit: 1.1 lakh

• Deduction cap on medical insurance premium under Section 80D to Rs 15,000

• Distribution tax on company dividends increased from 12.5% to 15%

• Distribution tax on money market mutual funds/liquid funds increased to 25%

• Cash Transactions Tax exemption limit raised from Rs 25,000 to Rs 50,000

• PAN to be made the sole identification number for securities market

PROPOSALS

Education

• Allocation for education up 34.2% to Rs 32,352 crore

• Sarva Shiksha Abhiyan (SSA) to be provided Rs 10,671 cr; provision for strengthening teachers training institutions up from Rs 162 cr to Rs 450 cr

• Next year, 200,000 more teachers to be appointed, 500,000 more class rooms to be constructed

• Provision for secondary education doubled from Rs 1,837 cr to Rs 3,794 cr

Health

• Allocation for health and family welfare up 21.9% to Rs 15,291 cr

• Allocation for NRHM up to Rs 9,947 cr

• all districts to complete preparation of District Health Action Plans by March 2007

Employment

• Initial allocation of Rs 12,000 cr for National Rural Employment Guarantee Scheme

• NREGS to be expanded from current 200 districts to 330 districts

• Provision of Rs 2,800 cr for SGRY

Agriculture

• 50 lakh new farmers to be brought into the banking system

• 2% interest subvention scheme for short-term crop loans to continue

• NABARD to issue rural bonds of Rs 5,000 crore

Income Tax

• 1% higher education cess on all taxes

• No surcharge on income tax on all firmsand coswith a taxable income of up to Rs 1 crore

• Dividend distribution tax on company dividends increased from 12.5% to 15%

Customs duty

• Peak rate for non-agricultural products cut from 12.5% to 10%

• 15 specified machinery cut from 7.5% to 5%

• Most chemicals and plastics down from 12.5% to 7.5%

• Seconds and defectives of steel down 20% to 10%, All coking coal exempt

• Polyester fibres and yarns cut from 10% to 7.5%, Raw materials cut from 10% to 7.5%

Excise duty

• No change in the general CENVAT rate

• Ad valorem component of excise duty on petrol and diesel cut from 8% to 6%

• Excise duty exemption limit for small-scale industry raised from Rs 1 crore to Rs 1.5 crore

• Biscuits whose retail sale price does not exceed Rs 50 per kg, all kinds of instant food mixes exempt

• Umbrellas and parts of footwear from 16% to 8%l Plywood from 16% to 8%

Income tax

• Threshold exemption limit for all assessees increased by Rs 10 000. New limit: Rs 1.1 lakh; for women: Rs 1.45 lakh; senior citizens: Rs 1.95 lakh

• Deduction cap on medical insurance premium under Section 80D to Rs 15,000 (Rs 20,000 for senior citizens)

• Exemption limit for individuals and HUFs from Banking Cash Transactions Tax raised to Rs 50,000

Your Money

• Section 54EC bonds to continue; PAN to be the sole identification number for all investors

• Certain works of art to be brought into the tax net

• Dividend distribution tax on company dividends increased from 12.5% to 15%

• Dividend distribution tax on dividends declared by liquid funds raised to 25%

• National Housing Bank to introduce reverse mortgage product

Prices

• Down: Gems and Jewellery, Edible oil, Medical equipment, Pet food,Watch dials, Umbrellas, All kinds of food mixes including instant mixes, Footwear, Plywood,Water purification devices

• UP: Cement, Cigarettes, Pan masala

Service tax

• No change in service tax rate

• Exemption limit for small service providers raised from Rs 4 lakh to Rs 8 lakh.

• Scope of some services currently taxed will be expanded or redefined

New services under the tax net

• 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

• Services provided by technology business incubators exempt, clinical trial of new drugs exempt

Tax Holiday

• Five-year income tax holiday for new two-, three- or four-star hotels and convention centers with a seating capacity of not less than 3,000 in Delhi and adjacent districts

• Extension of weighted deduction of 150% on expenditure relating to in-house research and development till March 31, 2012

• Extension of tax holiday to undertakings in Jammu & Kashmir till March 31, 2012