UNION BUDGET -TAX MATTERS

Will the Finance Minister axe the taxes in this Budget 2008-09, is the moot question on all minds be they in the corporate sector, professionals or the 'aam admi'. The run-up to the Budget has been rife with speculation on whether it would be a populist Budget or a balanced one given the ongoing global economic scenario. The main source of revenue for any Government, taxation is one area any Finance Minister finds hard to touch. While the direct tax collection has been buoyant, the indirect tax scenario has not been so cheerful. Decelerating customs revenue growth and low excise revenue are obviously the main problems confronting the Finance Minister as he chalks up the taxation plans. He is thus expected to focus on better mobilization of earnings through direct and service taxes

But then, if anything, the Finance Minister has the comfort factor of presenting the Budget in the backdrop of a booming economy. In line with a GDP growth of 9.4 per cent recorded last fiscal, the economy is expected to record a growth rate of over 9 per cent in 2007-08. The annual inflation rate, as measured by the Wholesale Price Index (WPI) is in the range of 4 per cent to 5 per cent. On the other hand, while the Indian cereal output of around 200 million tonnes projected for the current fiscal may raise comfort levels as far as food security is concerned, India cannot expect to stay isolated from global conditions, especially with a spiralling crude oil prices.

The fiscal situation too has improved. The aggregate gross fiscal deficit relative to the GDP declined considerably in 2006-07 and is further expected to go down in 2007-08 to touch 2.6 per cent of GDP, about 70 basis points lower than the estimated 3.3 per cent. The revenue deficit too has improved to around 0.9 per cent of GDP, 60 basis points lower than the 1.5 per cent Budget target for 2007-08. The Government is hopeful of achieving the targetted zero revenue deficit by the end of 2008-09, the terminal year of the Fiscal Responsibility and Budget Management Act, 2003.

The most significant and notable source of improvement, however, has been in the collection of central taxes, mainly the personal and corporate income taxes. Direct tax revenues are likely to cross Rs 325,000 crore, which is Rs 68,000 crore more than the Budget Estimates. Indirect tax revenues are also expected to cross the Budget Estimates by about Rs 4,000 crore. Economists peg the factors responsible for the unprecedented  growth in revenue collection to include moderate tax rates, change in taxpayer behaviour, better compliance owing to easier tax laws and a technology driven Income Tax Department, which has become more taxpayer friendly.

The one thing that is feared to derail this rosy picture is agriculture, with its painfully slow growth rate. Appreciating Rupee is another area of concern, with exporters taking a severe hit this year. This has had a fall-out on several sectors, including manufacturing, which contributes a major bulk of the tax revenue, as well as the IT services. The other factors that pose a potential risk to the growth outlook are infrastructure bottlenecks, high inflation rate of assets, especially housing prices in the international market, widening trade deficits and turbulent global financial market.

In this backdrop, there is pressure on the Finance Minister to churn out a  more benevolent Budget as far as taxes are concerned. Industry as well as economists have suggested widening the tax base and increasing the tax revenue to check tax avoidance. They have also called for rationalisation of the provisions of direct tax laws. Acknowledging that no Finance Minister would like to upset the apple cart when the going is good, the economists, however, see merit in reduction of tax rates, wherever appropriate, while maintaining the rigour of fiscal administration.

Personal Income Tax

Recognizing the urgent need to increase the taxpayers' base, they have recommended collection of smaller tax amounts from more persons rather than a bigger tax amount from few persons. The economists have also impressed upon the Finance Minister to try not to touch Personal Income Tax (PIT). Rather, they have urged him to use the improved revenue to improve expenditure on infrastructure and rationalising indirect taxes.

Among the anticipations from the forthcoming Budget, in order to make a taxpayer save around Rs 2,000 every year, the fixed deduction limit might be raised by 20 per cent to Rs 120,000. The Budget 2008-09 is also expected to raise the relief for personal income tax level from Rs 1.1 lakh to Rs 1.25 lakh a year. However, taxable income of up to Rs 1.5 lakh is likely to continue to extract 10 percent income tax.

With the government announcing that it will focus more on the tax compliance issues, the Budget is not expected to increase the maximum marginal rate of personal income tax further in a bid to encourage voluntary compliance. The maximum marginal rate of personal income tax is expected to be in the region of 30 per cent. However, the taxpayer base is not large as a large portion of the population lies below the poverty line.

But with the rising economic growth over the past few years, Government is able to include almost eight lakh new tax payers in the tax net. It is understood that more transactions would be added into the scope of the Annual Information Return and Permanent Account Number (PAN). Other measures may include the newly formed Computer Aided Scrutiny System that is used for tax scrutiny. The Tax Deducted at Source (TDS) returns for the companies will be the next important source to expand the tax net. Already, the Government has made the PAN compulsory for all tax calculations. Now it also wants to develop a new tax code to simplify the overall tax structure. Fringe Benefit Tax (FBT) is another area for considerable strengthening.

Agriculture

With agriculture sector emerging as one of the chinks in the economy, this is expected to be one of the focus areas in the Budget 2008-09. In a bid to woo investment by private players, the Finance Minister has been impressed upon to grant tax holidays for schemes like cold chain establishment. Agri-economists also want tax reduction for agriculture extension services.

Information Technology

The 2007 Budget had spelt dismay, rather than delight for the Indian IT-BPO industries. Among the minus side of the Budget 2007-08 was that IT companies were brought under the tax net with the levy of FBT on ESOPs. A 2.5 per cent increase was effected on dividend distribution tax. While there were no attractive deals for individual tax payers, new education cess (of one per cent), and add on service tax for houses being used as commercial office premises had been levied. This increased the Cost To Company (CTC) per employee for the employers.

The other demand has been that of decoupling the IT sector from the BPO industry. The IT sector has enjoyed tax breaks for over 30 years, the BPO industry being 5 years old has had very little time to benefit from this. The IT sector might be mature enough to sustain without tax breaks, but taking away tax sops will adversely affect the BPOs. Taking away tax breaks would also affect the Software Technology Parks of India (STPI).

The IT industry in its pre-Budget memorandum has called for decoupling of BPOs from the IT, abolition of service tax, FBT, ESOP, MAT as taxable perk. They want continuation of 10A tax holiday for at least another five years and extension of the STPI tax holiday beyond 2009 for a period of 10 years or more that is coterminous with the current IT-SEZ scheme.

Telecom

The telecom firms in India are facing the burden of various forms of levies and taxes, which they want to be lessened in the Budget 2008-09. The industry wants a more transparent system through the promotion of a single levy. License fee is heterogeneous across the country, which needs to be removed. In its place the telecom firms want a uniform license fee structure of 6 per cent all over the country.

Hydro-carbon

Tax holiday has also been mooted for the hydro-carbon sector, at par with tax incentives granted for the power sector. Meantime, the Indian industry has at the same time been very much concerned on various cesses and levies imposed from time to time. For instance, the National Calamity Contingent Duty (NCCD) has been imposed by the Government on select items like motor vehicles, crude oil and polyester filament yarn. This has not been abolished so far, creating uncertainty in the minds of investors. The NCCD, say tax consultants, has added significance in view of the hike in crude oil price in the international market. It is thus important for the government to rationalise excise and customs duty structure in the case of petrol and diesel imports, they feel.

Charitable Institutions

The IT exemption enjoyed by these organisations is likely to be removed as it is feared that in the disguise of charity, these establishments may be indulging in the misappropriation of funds by being registered under the Section 12A thereby avoiding tax payment.

Capital Transaction Tax

With black money transaction increasingly a major issue, the Government is believed to be working towards introduction of Capital Transaction Tax (CTT) in Budget 2008-09. This tax would be imposed depending on the "circle rate" prevailing in the state, where the deal is being registered.  The move is seen as benefiting the treasury or exchequer as well by becoming a means of retrieving revenues at a time when the property market or the real estate industry is booming with opportunities galore.