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FM begins repairs,cuts spending,meets fiscal deficit target,taxes ‘super rich’

Budget is in line with medium-term fiscal consolidation plan and sovereign ratings will continue 'unaffected'.

Written by ENS Economic Bureau | New Delhi | Published: February 28, 2013 10:25:22 pm

The last full budget of the UPA government has begun a repair job for an economy that has hurtled from a heady 9 per cent plus growth rate to an abysmal 5 per cent rate,setting an austere tone largely through expenditure compression and a little bit of additional taxation.

Finance minister P Chidambaram’s efforts bore fruit as later in the day,rating agency Standard & Poor’s said it will not downgrade India to a junk status as an investment destination. It said the budget is in line with the medium-term fiscal consolidation plan and the sovereign ratings will continue “unaffected”.

Not giving in to the pressure of delivering an extravagant pre-election budget,Chidambaram has exercised utmost restraint on expenditure to contain the fiscal deficit at 5.2 per cent for 2012-13. Simultaneously,he took a number of measures to spur growth such as a 15 per cent investment allowance for fresh investments of over Rs 100 crore and extra sops for housing. He has also set the ball rolling for implementing the Goods and Services Tax by setting aside Rs 9,000 crore to compensate states for phasing out the Central Sales Tax. He promised to introduce the Direct Taxes Code Bill back to the House in the current Budget session. These two legislation will complete the long-pending reforms in taxation.

The Finance Minister also tried to plug the numerous holes that Budget 2012-13 offered,such as the exaggerated assumption on not just tax receipts,but also receivables from spectrum auction. He has estimated a modest economic recovery after a 10-year low growth rate of 5 per cent this fiscal. His estimate of a nominal 13.4 per cent growth rate translates into a real growth rate of 6.4 per cent assuming an average annual inflation of 7 per cent.

Chidambaram scored brownie points with the political class with a 10 per cent surcharge on the super rich or those who earn Rs 1 crore-plus and customs duty hike on a range of products associated with the affluent such as luxury cars,high-end motorbikes and yachts. “When I need to raise resources,who can I go except those who are relatively well-placed in society? There are 42,800 persons,let me repeat,only 42,800 persons,who admitted to a taxable income exceeding Rs 1 crore per year,” he said,justifying the surcharge. He also hiked excise on cigarettes,cigars,mobile phones and special utility vehicles. His combined direct tax and indirect tax measures will yield him Rs 18,000 crore in additional receipts.

To give growth a fillip,he announced incentives for the construction and real estate sectors,student start-ups and medium and small enterprises. The most notable was a long-standing demand from India Inc of an investment allowance at the rate of 15 per cent to manufacturing companies that invest more than Rs 100 crore in plant and machinery during the next two years,over and above currently allowable depreciation.

The finance minister also allowed an extra Rs 1 lakh interest deduction for first-time home buyers taking a loan of up to Rs 25 lakh,a move that will encourage builders to focus on affordable housing.

The fiscal deficit has been contained at 5.2 per cent of GDP in 2012-13,lower than the budgeted 5.3 per cent,largely because total spending by the government was Rs 60,100 crore less than Budget estimate. For 2013-14,fiscal deficit is projected at 4.8 per cent of GDP,with the underlying assumption that tax revenues will be up by almost a fifth,aided by a massive Rs 55,814 crore through disinvestment.

While the efforts at fiscal consolidation seem to have done their bit for investors and global rating agencies,the markets were unnerved by a glint of uncertainty over the tax status of investment routed through Mauritius. The BSE benchmark Sensex nosedived 291 points after a strong start to settle at 18,861.54,its lowest close since November 27. The uncertainty relates to residency certificate for FIIs as being the necessary,but not the sufficient pre-condition to enjoy benefits under the Double Taxation Avoidance Agreement (DTAA).

At a press conference after presenting the Budget,Chidambaram said,“There are certain DTAAs which require only residency certificate,but some others that look for both residency certificate and beneficial ownership. We have to look at each DTAA. I am willing to even explain the explanation.”

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