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March 2, 2001                                       Feedback  

    - EXIM POLICY '00



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'There is nothing in the Budget to suggest that the growth will accelerate'

Prof B B Bhattacharya

The salaried class will get a positive benefit, with the withdrawal of income tax surcharge, other than the recent Gujarat surcharge. That means the highest tax rate would now be reduced from 35.1 per cent to about 31.2 per cent.

But for higher income category, the affective tax rates will go up for the following reasons. One, perks would now be brought under taxation. Two, tax concessions on accrued interest rates has been brought down from 15,000 to 9,000 per individual. Three, the interest rate on PF will now come down to 8.5 percent from 12 percent a year ago. Government employees will not get leave travel allowances for two years. This may adversely affect the Indian Airlines and the railway upper class traffic.

The Budget speech of the finance minister mentions that the current inflation is solely due to international oil price hike. This is however, not true. Prices of fruits, vegetables and many agricultural products have also gone up, sharply, in the recent months. In this respect, the Budget is too optimistic to ignore the impact of inflation.

Industry has reaped maximum benefit. But in the past, industry has not always passed the benefits, in terms of lower excise taxes, to the consumers. There is nothing in this Budget to ensure that this time it would be different.

It is quite possible that industry will absorb the reduction in excise and increase the profit, on which they will pay lower dividend tax. In such a case, the purpose of excise tax deduction would be lost.

The second caveat is that the government has decided to encourage private debentures and bonds over government securities. The FM has announced a new regulatory body, like SEBI, to ensure that small investors are protected in the bond market. But past experience, again, has not been good in this respect. Many NBFCs have done the vanishing trick after getting household money. The government must ensure better protection for the small investor this time, failing which it can lead to another scam.

The finance minister has given a tax holiday on investment in food processing industry. So the emphasis appears to be more relief to agriculture and less on taxation.

The Budget proposes that the yield from divestment -- targeted to be Rs 120 billion would be exclusively ear-marked for development expenditure. However, any shortfall in this realisation of divestment proceeds would automatically affect the development expenditure.

This Budget corrects the anomaly in the import duty structure, corresponding to the withdrawal of quantitative restrictions. The import duty on agricultural commodities like tea, coffee, coconut, palm oil etc, has been raised from 35 per cent to 70 per cent plus. Farmers will get relief from international competition. However, the relief would be temporarily because this duty would have to be brought down to about 20 per cent again by 2005.

Industry would be the major beneficiary of this Budget. They get several benefits: Lower excise, lower import duties on raw materials, lower dividend tax and wider tax holiday schemes. They would also benefit from lower interest rates on PFs and small savings. However, there is nothing in the Budget to suggest that the growth will accelerate.

The government has promised a review of the reservation for small scale industries dealing in export items. The small scale industry would also be affected by the proposed industrial disputes act.

(The impact of this Budget on software exports is) Nothing specific except that many services using software would now be under the tax network.

Import duties on computer hardware and accessories have been reduced further in this Budget. On the other hand, the IT sector would have to pay tax, upto 40 per cent of their profit.

The Budget assumes that when the international oil prices would be stable then the domestic inflation rate will come down to about three or four per cent. However, the Budget has not yet considered the impact of the proposed revision of administered prices, like fertilizers, petroleum, electricity, postal tariffs etc. This cost is generally passed on to the consumers. So my expectation is that the inflation rate would continue to be above six per cent in the next financial year.

Prof B B Bhattacharya is the officiating director at the Delhi-based Institute of Economic Growth.


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