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Home > Business > Business Headline > Budget 2005-06 > Report


Spending for aam aadmi, Bharat nirman

BS Bureau in New Delhi | March 01, 2005 09:52 IST

The finance minister announced massive hikes in spending programmes while handing out tax concessions to both individuals and companies, in the government's Budget for 2005-06.

The result did not measure up as the promised "dream budget" but the end result pleased almost all. The stock market surged and the TV channels were full of happy sound bytes-partly a result of relief that no damage had been done.

Members of Parliament thumped their desks as each new spending commitment for 'Bharat Nirman' was mentioned, while reformers were given a cut in the peak tariff to 15 per cent and lower tax rates with reduced tax exemptions (the net effect will be more revenue for the government).

Businessmen were happy with the drop in the corporate tax rate and the commitment to spend more on infrastructure.

The financial sector got a lot of attention, not just from the finance minister but also from the announcements made later in the day by the Reserve Bank governor.

The stock market responded enthusiastically, climbing by 2.2 per cent and with the Sensex closing at an all-time high, cheered by only a marginal increase in the turnover tax and easier norms for derivatives trading.

The aam aadmi got the benefit of a re-drawing of income-tax slabs and savings incentives.

The tax exemption limit is now Rs 1 lakh annual income, with a 10 per cent slab to Rs 1.5 lakh, and 20 per cent on the next Rs 1 lakh. The 30 per cent tax slab therefore kicks in at Rs 2.5 lakh (against Rs 1.5 lakh today).

The 10 per cent surcharge kicks in above Rs 10 lakh, while women and senior citizens get additional tax exemptions.

In addition, all tax incentives on savings have been clubbed in a single envelope of Rs 1 lakh, replacing such hoary staples as the standard deduction and the Section 88 benefit.

The tax benefit on housing loans, however, survives, but some perquisites that have so far escaped the tax net will no longer do so.

Companies will benefit from a dropping of the tax rate from 35 per cent to 30 per cent, but there will be a surcharge of 10 per cent, so the effective tax rate is the same as the highest income tax rate.

However, the depreciation norm has been tightened from 25 per cent to 15 per cent, so most companies are likely to end up paying more tax, not less. But companies paying the minimum alternate tax can now set off   their payments against future tax liability.

In indirect taxation, three of the five industries on the maximum 24 per cent excise slab have been dropped to the 16 per cent category (tyres, polyester filament yarn and air-conditioners).

The changes in tariffs are more significant. Apart from the dropping of the peak tariff on non-agricultural items from 20 per cent to 15 per cent, the duty on a number of capital goods and industrial raw materials has also been dropped.

The taxation of petroleum products has been restructured, with no revenue impact other than an extra cess of 50 paise per litre on petrol and diesel to fund the highway programme.

The service tax has been extended to more services (including house construction), and another 108 items taken off the reserved list for small-scale industries, while the SSI excise exemption limit stands raised from Rs 3 crore to Rs 4 crore (Rs 30 to 40 million). 

The real focus of the finance minister's speech, however, was on the spending measures, with a sharp increase in the Central Plan outlay.

Amid the chorus of approval, what attracted criticism was the tax on cash withdrawals of more than Rs 10,000 in any single day, at 0.01 per cent.

What was given up was fiscal correction. The finance minister said the fiscal deficit for next year would be 4.3 per cent of GDP, higher than the original intention of 4 per cent.

However, even this was achieved only after pushing some of the financing of Plan expenditure on to the states' own borrowing programme, to the extent of another 0.8 per cent of GDP.

The revenue deficit for next year is unchanged at 2.7 per cent, and eliminating this by 2008-09 (as the law requires) is now a task fit for Hercules.

The message for the day: the National Common Minimum Programme gets priority over fiscal correction.


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