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Budget 2006-07 to focus on farm, infrastructure

With assembly polls impending in five states, the budget is unlikely to have hard reforms like cutting subsidies.

india Updated: Feb 27, 2006 00:54 IST
Press Trust of India
Press Trust of India

With the economy cruising along, the budget is expected to give a big push to agriculture and infrastructure while carrying forward indirect tax reforms, laying down a roadmap for Goods and Services Tax, simplifying Fringe Benefit Tax and cutting deficits in 2006-07.

As assembly polls will be conducted in five states in May, the budget to be presented on Tuesday is unlikely to have hard reforms like cutting subsidies. Prime Minister Manmohan Singh is understood to have given a directive to hold the price line as it hits the common man the most.

While there may not be any reduction in income and corporate tax rates, the salaried class is expected to breathe easy as FBT is likely to be modified or may provide an option to India Inc to pay at a flat rate.

Both Prime Minister and Finance Minister P Chidambaram have already stated that Customs duties would be brought down to Asean level of 8 to 9 per cent peak duty. It is to be seen if Chidambaram will reduce the present peak customs duty of 15 per cent in one go or in phases.

Around a dozen services are likely to be added to the list of 81 taxable services, as the sector contributes to around 52 per cent of GDP. The tax has recorded a buoyant growth of 66 per cent this year and would far exceed the target of Rs 17,500 crore.

Employment generating sectors like textiles, leather, food processing and auto components may get fiscal incentives in the Budget.

Giving indication of the financial package for indebted farmers, the Prime Minister had said in the Lok Sabha recently, "We will try to improve access to credit at a lower cost to farmers. The Finance Minister will be addressing this matter in his Budget speech."

A higher spending is also anticipated for infrastructure especially for the Bharat Nirman programme, National Rural Employment Guarantee Programme and Urban Renewal Mission.

The budget is likely to give a fillip to savings as there is a demand for tax sops on bank deposits and mutual funds. The budget may also announce a roadmap for bringing some savings under the 'EET' mode, which will enable taxing only withdrawals.

In fact, increase in the savings rate was highlighted by the Prime Minister as one of the key factors to put the economy on a sustained growth rate of 8 to 10 per cent per annum.

To wean away investment from small savings schemes to equity and debt markets, the Budget is likely to bring investment in mutual funds to the list of savings instruments exempted from income tax.

As a measure to discourage small savings, the Government has done away with bonus for Post Office Monthy Income Scheme on the maturity of deposits for new subscribers from Feb 13.

Besides, the budget may bring debt funds on par with equity schemes by abolishing long-term capital gains tax on them.

The Finance Minister may also do away with duplication of securities transaction tax on unit-linked schemes.

For the next fiscal, Chidambaram is likely to peg the fiscal deficit at 4 per cent as per the FRBM target. However, the target may be achieved not so much through expenditure pruning but more revenue through economic growth.

It is going to be tight walk for the Finance Minister to remove tax exemptions though the exercise has been on for the last few years to plug leakages.

Exemptions are also given to charitable trusts and institutions, to export oriented units, SEZ and the like. There are export incentives like duty drawback and Duty Entitlement Passbook Scheme. Then there are tax exemptions to certain sectors like handlooms.

In a recent report to Parliament, the Standing Committee of Finance said: "Continuance of exemption provisions in the tax statute not only leaves tremendous scope for evading tax but also prompts people to resort to unwarranted tax planning."

Legal and medical services, which so far have escaped the service tax net, may come under its purview in this budget.

There is widespread speculation that cars might become cheaper as the special additional excise duty of eight per cent would be withdrawn to move towards single rate of 16 per cent excise duty. Besides cars, aerated drinks currently attract eight per cent special additional excise duty.

The budget is not likely to heed to industry chambers proposal to raise the income tax exemption limit from the current Rs one lakh to Rs 1.5-2 lakh to leave more disposable income at the hands of consumers, which would spur demand.

As far as demand for NRIs on liberalising FDI is concerned, particularly in retail, the Prime Minister had given an indication that there would be no hasty decision on that count.

Services offered by multiplex, fashion designers, healthcare and trade fairs may also come under the tax net to please the Left parties, whose other proposals are too extreme for the Finance Minister to incorporate in the Budget.

Chidambaram may find it too difficult to heed the Left parties proposal on introducing inheritance tax and imposing tobin tax on FII outflow.

First Published: Feb 26, 2006 15:20 IST