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How IIM students view the Budget

Business Standard | March 18, 2005

Here is a sampling of the letters Business Standard received from some of the students at various IIMs.

Read between the lines

This Budget has an overall vision and the emphasis on infrastructure development and employment generation are good measures for maintaining growth.

On the direct tax front, there has been a big step towards reforming the complex nature of the Indian income tax system. At the same time, there are darker implications in disguise that accompany these structural reforms.

The personal tax slabs have been rationalised and look more realistic. The clubbing of all deductions and rebates from investments under one section gives more flexibility in choosing the portfolio mix.

What beats me, however, is how everyone has missed the FM's move towards the EET (exempt-exempt-taxed) system of taxing savings. The current EEE method allows tax exemption at all three levels -- investments, accumulations (by way of interest income) and withdrawals.

But under the EET system, the first two levels would continue to benefit and tax would be imposed on the entire amount of ultimate withdrawal. So, actually what one enjoys today is not exemption from tax but only deferment of tax.

Again, when we talk about corporate tax, the reduction of tax rate has been accompanied with higher surcharge and lower depreciation.

So, an effective tax rate of 33 per cent (down 2.7 percentage points from the existing rate) with lower depreciation allowance would result in higher tax outgo, particularly for the asset-based manufacturing sector.

The amendment of section 80E whereby the deduction for principal repayment of higher education loans has been disallowed only complicates matters for students like us and the new insertions for taxing fringe benefits and cash withdrawals are killing.

Sourabh Mundhra, IIM-Calcutta

High on rhetoric

Though Sensex gave a standing ovation to the Union Budget by reaching an all-time high of 6714 points, I believe that this Budget has been rather high on rhetoric.

One of the high points has been the emphasis on rural empowerment and infrastructure development. Initiatives like Bharat Nirmaan programme, increased investment in social sectors and the creation of a special purpose vehicle to fund infrastructure projects are steps in the right direction.

But the Budget disappoints one for its lack of fiscal austerity, no revenues from divestment being an instance.

On the corporate front, the reduced depreciation tax shield and increased surcharge has nullified benefits of bringing down tax rates from 35 per cent to 30 per cent.

The issue of fringe benefit tax has also not gone down well with India Inc. The levy of withdrawal tax does not fall in line with canons of taxation either.

In terms of personal taxes, rationalisation of tax slabs is a welcome step and should boost savings and investments in the economy. But to me, enhanced deduction for women was uncalled for.

For graduates like us, increased deduction of Rs100,000 for housing loan principal repayment is good news but withdrawal of tax benefit on principal repayment of educational loans doesn't augur well for those who have taken a loan to finance their studies.

Overall, the FM has tried to do a balancing act by giving a few sops on one hand, and taking away a few.

Vikash Kumar Bajaj, IIM-Calcutta

A positive message

The FM's mandate was to balance the political requirements of the Common Minimum Programme and the Left on one hand, and the 12th Finance Commission and the Fiscal Responsibility and Budget Management Act on the other. He has managed to do that fairly well in this Budget.

The Budget brings about movement on many issues such as rationalisation of excise duties, reduction in customs, expansion of the tax base and implementation of VAT (value added tax).

Agriculture, education and health have got attention, too. The issue of "growth with equity" has been addressed, and there is something in the Budget for the minorities, the backward castes, the underdeveloped states and women.

The move to expand the market for securitisation activities and mortgage-backed securities will take outstanding corporate credit to the capital markets, helping in broad-based price-discovery and greater liquidity in markets currently dominated by gilts. Rationalisation of stamp duty on corporate issues will ease debt issuance by mid-cap companies.

The move to give over the counter derivatives clearer legal validity will reduce losses associated with counterparty risks on these contracts, thus persuading banks and financial institutions to extend greater hedging opportunities to small-cap and mid-cap organisations.

This, in turn, will reduce the latter's cost of capital, and stimulate greater investment.

Derivatives will henceforth not be counted as speculative instruments for tax purposes. This market-growing move has a huge positive impact on loss set-off implications.

Allowing MFs to float gold exchange-traded funds, with contracts as small as Rs 100, will increase liquidity in the bullion markets and bring retail investors into the picture. Though it is a bold move, its implementation is crucial.

Allowing the Reserve Bank of India greater flexibility in setting CRR (cash reserve ratio) and SLR (statutory liquidity ratio) requirements enables it to treat banks based on their individual asset-liability portfolio risks rather than use one yardstick for all banks. This will bring about more prudence and efficiency in the banking sector.

At the same time this Budget is silent on divestment and that is the biggest negative.

Niranjan Rao R, IIM-Ahmedabad

A little more, Mr FM

After a long time the focus of a Union Budget has been on rural development and infrastructure creation. Yet one still gets a feeling that it is a nudge rather than push.

The FM has avoided any discussion on privatisation by providing no estimates from divestment. Though it may provide an upside to the government's revenue, it also reflects on the political undertone of the Budget.

Tax reforms have been commenced in line with recommendations of the Kelkar committee. Reduction in personal and indirect taxes should surely boost consumption.

One puzzling proposal is the tax on personal cash withdrawals in excess of Rs 10,000 from banks -- it is not clear how exactly it will rein in black money and whether the benefit of this proposal will offset the administrative problems banks will face and the annoyance, if not the actual costs, it would cause to the consumers.

The Budget gives with one hand and takes with the other in many places. For instance, benefits of reduction in corporate taxes have been negated by tax on fringe benefits. Similarly, reduced costs for capital investment (arising from cut in import duty on capital investment) will be offset by a cut in depreciation rate.

On the fiscal side, a fiscal deficit of 4.5 per cent of the GDP sounds optimistic since it is based on aggressive growth projections for tax revenues and the risk of fiscal slippage seems real. Though the FM could have become a little bolder, this Budget seems positive and sets a roadmap for future growth.

Nishant Jain, IIM-Ahmedabad

No bold steps

Budget 2005-06 was delivered amidst conditions of robust economic growth -- both manufacturing and services sectors are doing well and despite a bad monsoon, the GDP grew at an impressive 6.9 per cent.

The government's Common Minimum Programme seems to have formed the Budget's framework. Substantial amount has been earmarked for the rural employment guarantee scheme. While it is a good intention, it should be ensured that the amount is spent well and on quality rural asset creation.

In urban infrastructure, investment in transportation projects in mega cities would lead to definite productivity improvement; but the amount seems woefully inadequate.

In rural infrastructure, the focus is on electrification, telecom access and irrigation. Apart from capacity building, these would also imply the much-needed non-farm job creation.

For industry, while the implementation of VAT on schedule and a reduced tax rate are positives, the lack of labour law reforms and grey areas like fringe benefit tax are negatives.

However, the Budget ignores sensitive reform areas -- subsidies, labour laws and so on -- which is a pity because the buoyant economic condition gave the FM the leverage to take bold steps.

Ravi S Sundar Iyer, IIM-Ahmedabad

Implementation issues

Since this Budget comes when the economy is on the upswing, it carries high expectations towards various facets of employment generation and building infrastructure.

It has succeeded in providing significant coverage to rural sector with an emphasis on extension of rural credit and more involvement from the panchayats.

At the same time, steps need to be taken towards encouraging private sector participation in rural India. However, the government's decision to invest heavily in PSUs, instead of moving towards their divestment, is a step backwards.

Expanding market for securitisation activities, giving over-the-counter derivatives legal validity should help capital markets by enabling better price discovery and higher liquidity.

Not considering derivatives as speculative instruments will have a positive impact on their loss set-off implications. Flexibility in setting CRR/SLR requirements will allow the RBI to consider banks on basis of their asset-liability portfolio risks, again a welcome measure.

Taxpayers will enjoy more flexibility in managing savings due to the introduction of the consolidated deduction limit. Fringe benefit tax will provide greater incentive to companies for monetising benefits, thereby increasing the taxable income of employees.

Also, changes in depreciation structure might reduce incentives to employ additional capital in business. Reduction in the peak rate of customs duty across sectors should accelerate growth in import-intensive industries.

Improving tax/GDP ratio seems difficult in the light of the revenue-neutral impact of indirect tax and high GDP growth. Finally, though the Budget is ambitious in terms of growth and equity, it needs to sort out implementation and privatisation issues.

Narendra Singh, IIM- Ahmedabad


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Number of User Comments: 1




Sub: what is the flexibility?

Poeple say that the FM has given Flexibility in investment for tan deduction. What flexibility? The employed already contribute to PF- 12% Even now this ...


Posted by Kumar Santhanam




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