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July 16, 2009

Demystifying The Budget 2009

Before analyzing lets see who PRANAB MUKERJEE IS….He rose through a series of cabinet posts to become the Finance Minister of India from 1982 to 1984. In 1984, he was rated as the best Finance Minister of the World according to a survey of Euromoney magazine. His term was noted for India not withdrawing the last US$ 1.1 billion instalment of an IMF loan. Dr. Manmohan Singh was serving RBI as Governor during Pranab's term as Finance Minister. He was victimised by a coterie of Rajiv Gandhi by not being included in Rajiv's cabinet after Lok Sabha election held subsequent to Indira Gandhi's assassination. He was pushed out of the Congress party for a brief period, and during this period he formed his own political party Rashtriya Samajwadi Congress, but later merged it with Congress party in 1989 after settlement with Rajiv.[4] His political career revived when P. V. Narasimha Rao chose to appoint him as deputy chairman of the planning commission and subsequently as a union cabinet minister. He served as External Affairs Minister for the first time from 1995 to 1996 in Rao's cabinet. In 1997 he was voted Outstanding Parliamentarian.
Now with above credibility we analyze as follows
Viewed in the backdrop of a challenging external environment & in the context of the new government's mandate of inclusive growth, budget 2009-10 scores reasonably well on all fronts. The finance minister has reiterated the need to put the economy back on the 9% growth trajectory. The finance minister had to do a tough balancing act between the conflicting objectives of accelerating economic growth, carrying the underprivileged sections of society along and fiscal prudence. The highlight of the budget is the continued focus and increased allocation for schemes targeting inclusive growth. While this may put fiscal pressure on the government in the short run, it may create demand and stimulate the economy.

The finance minister has remarked that the government is committed to returning to fiscal responsibility and budget management (FRBM) targets at the earliest and that is reassuring. The markets are disappointed with the higher budget deficit and the lack of policy announcements on FDI. The fiscal deficit is indeed high and the very high interest burden as percentage of GDP is a source of concern, but I am confident that the government will take corrective measures as soon as the global economy stabilizes. Besides, we can expect progress on policy issues in due course of time.

Finance minister may have increased the income-tax exemption limit for senior citizens by Rs 15,000 but the move is unlikely to earn him too many pats on the back. The exemption limit will now be Rs 240,000. It is not enough, "The money saved is so insignificant that it will make very little difference to our lives." The complaints are not surprising since the amount of tax paid will be only Rs 1,545 less than what they shelled out in 2008-09. Apart from this, all categories of taxpayers stand to benefit greatly in case their income is more than Rs 10,00,000, thanks to abolition of 10% surcharge on total tax liability in this budget. The changes in tax rates are more or less along expected lines, except the increase in MAT rate. The announcement of implementing a goods and services tax (GST) from April 1, 2010 is a positive. One of the key issues facing the government is oil subsidies and the need for a market-driven pricing regime for petroleum products. Subsidizing petrol and diesel is unproductive and undesirable. This issue is also likely to be addressed in the near future. For the government, the challenge now is to reduce the fiscal deficit to moderate levels. It also needs to focus a lot more on implementation of policies. As the finance minister said in his Budget speech, the challenge is to reorganize and improve delivery of services to the common man and ensure that the benefits of pro-poor schemes reach the deserving.

More money in the hands of the middle class and rural folk will spur demand for fast-moving consumer goods (FMCG) like soaps, detergents, shampoos and cosmetics in the near term. And they are set to become even more affordable in the long run, if all goes well with the rollout of goods and services tax (GST). There’s a small catch. Dental hygiene became a tad expensive with rise in price of toothbrush due to a duty hike by 4% to 8%. It’s not clear how existing duties would be eventually merged with GST, the FMCG industry will benefit from sops doled out to salaried individuals on the tax front and the rural thrust in the budget. India’s 350 million strong middle-income consumers contribute 40-45% to the revenues of the FMCG sector, pegged at Rs 1,20,000 crore. “Removal of surcharge on income tax itself will increase an individual’s post-tax salary by 5%. This is good enough for the FMCG sector. “Increased spending on farmers and the poor will further fuel demand growth in rural India.“GST will reduce evasion of taxes and will provide supply chain benefits to the industry which will further lead to cost saving.” However, product prices will be determined by the level at which GST is introduced.

IT is facing tough times, with a decline in global outsourcing orders and growing protectionist cries in developed markets. And, the IT industry desperately needed some solace. And that’s what India’s international showpiece sector got from the budget. The extension of tax holiday under sections 10A and 10B of the Income Tax Act for one more year benefits IT units that would not have completed 10 years of operation by then. More than 70% of the industry would benefit from this, especially a lot of smaller companies. The older companies will have more of their units completing 10 years by next year, Many grey hair estimate that the effective tax rate on the company will go up to 24-25% next year, from 18-20% now, because of many of their units going out of the purview of sections 10A/10B. There are two other advantages. Packaged software is no more a product, but a service. It will not attract VAT but service tax. The other is the move to set up an alternative dispute resolution mechanism for resolution of transfer pricing disputes. “Formulation of ‘safe harbor’ rules to reduce the impact of judgmental errors in determining transfer prices will eliminate confusion, complexity and disputes It simplifies the process of doing business, with its moves on transfer pricing, packaged software and FBT,”

India Inc got a jolt in the form of a hike in rates for Minimum Alternate Tax (MAT). Companies paying MAT—instead of the regular corporate tax—could soon see a higher outgo under this head as the finance minister hiked rates from the earlier 10% to 15% After including the different surcharges, the effective rate would now be nearly 17%.MAT is the tax that a corporate compulsorily pays in case its corporate tax outgo—after accounting for all the exemptions—is below a threshold limit. In taxman’s parlance it is the tax that a corporate pays on its ‘book profit’, which is different from its profit in ‘the profit & loss’ account. In India, MAT was introduced about 15 years ago after the government found that despite substantial profits, a large number of corporates were not paying any tax. Often MAT is criticized as an antithesis to any concession or exemption. Even if there is some justification for MAT, in a slowing economy it is more important for a company to have immediate cash flow, international tax and corporate law expert. “When more and more developed countries are reducing their tax rates to a level below 30%, a MAT rate of 15% definitely looks higher,’’.In India, a number of IT and infrastructure companies pay MAT instead of the regular corporate tax. “These (companies paying MAT now) may end up paying a higher tax now,’’. “There’s nothing much one can do about it except absorb it,’’ A case of grin and bear it.