Direct Tax Reform in Budget 2008 (expected)

The Direct Tax Reform in Budget 2008 has been announced by the Advisor to the Union Finance Minister of India on 6th December 2007. According to that, the number of high value transactions may be increased. Through these transactions the government will reassess the income tax structure. The number of those transactions that are used to enhance the scrutiny and evasion check will also be increased. In addition to the on going reporting system, that captures the investment and savings related transactions, the government will also enlist some consumption expenses like, high end home gadgets, foreign travel, cars and branded jeweleries into the Annual Information Report(AIR). The government intend to evaluate the data regarding those consumptions through appropriate billing of the high value consumption items.

The government will scrutinize the direct tax structure when the voluntary compliance levels of India have reached the global mark. Moreover, the direct tax collections have been increasing at a rate of over 40 percent for the last couple of years and, the assesses filing returns increased by 4.12 million in 2006 – 07 compared to 2003-04. The number of assesses altogether rises from 30.17 million to 31.92 million during 2006-07. The Finance Minister P Chidambaram has reportedly told that, the tax rates and income slabs might be restructured and with the improvement of tax compliance, the whole tax structure will keep changing.

It is believed that the growth of the economy of a country can be triggered by applying a small deficit in finances. In the year 2005 to 2006, budget proposals revealed that there was a revenue deficit, which amounted to Rs.95,312 crores. The fiscal deficit recorded was Rs.1,51,144 crores. It was observed that in the year 2004 to 2005, GDP/GFD ratio decreased by 0.5 per cent. Due to Fiscal Responsibility And Budget Management Act, the ratio between gross domestic product and that of gross fiscal deficit would be brought down still further. This is part of the expected financial sector reform in budget 2008.

History of deficits in yesteryears:
In the year 1970 to 1971, deficit accounted for Rs 1,408 crores.
Rs.8,299 crores was the deficit during the period 1980 to 1981.
It increased to Rs.44,632 crores during 1990 to 1991.
During the period 2000 to 2001, the deficit was Rs.1,18,816 crores.

It is difficult to ascertain the limit, which may be allowed to be resorted to in case the deficit is increasing. Few economists feel that the need of the hour is to reduce expenses and tax rates. However, the approach adopted by the government seems to be quite on the contrary. The government is raising the gross domestic product by means of these deficits. There is a clear indication that the GDP/GFD ratio is being treated as an indicator for estimating the graveness of the situation(deficits).

Even the Fiscal Responsibility And Budget Management Act, which is being heavily banked upon seems to be depending on the decrease of the GDP/GFD ratio. There are apprehensions about the validity and authenticity of the use of the ratio between GDP/GFD as an instrument for the estimation of deficits in the country.

Inflow of foreign exchange has increasingly become important and gained prominence in the past few years. Statistical data proved that between the period January 2007 to June 2007, the total amount of FDI or foreign direct investment amounted to USD$11.4 billion. This inflow is approximately 218% more as compared to what the inflow of foreign direct investment was in the year 2006. In 2006, the total amount of FDI accounted for USD$3.6 billion.

Expected financial sector reform in budget 2008 would discuss in details the net capital inflow in the country. The total amount of net capital inflow in India for the financial year 2006 to 2007 was reckoned to be USD 57 billion.

Financial sector reform in budget 2008 would improve the rate of inflation but the government has proved to be successful in maintaining a sound inflation rate in the country. The government in India has successfully struck an equilibrium between money supply and demand for various goods. The Indian government has set a target inflation rate of 5 per cent for itself.

Putting forward the issues concerned with the women in our country, women's organization Women Power Connect, has several demands from the upcoming budget 2008-09. Being an association of around 600 women's groups, WPC seeks the attention of union budget 2008-09 to be brought forward on different issues concerning the welfare of women.

Female child education
Enforcement of Domestic Violence Act
Enforcement of Pre-natal Diagnostic Techniques (Regulation and Prevention of Misuse) Act
Budget 2008-09 and Gender Budgeting

The women's groups were quite satisfied with the last years' budget 2007-08 that included several reformation plans for women. Now, this year, the organization anticipates a bit more hopes from the Finance Minister and is emphasizing on more planned and better sharing of public resources through gender budgeting. In spite of the gender cells being framed in most of the departments and Ministries of the Union Government last year, the estimated plans could not be brought into action because of the sex-segregated data that made it unmanageable to implement the planned programmes for women.

WPC desires for a better functioning of these cells through the grant of separate funds for training and capacity building of officers concerned with the budgeting in these ministries. WPC advised that there should be a sectoral analysis of budgetary allocation and its effect on women along with the establishment of in-built system that can help analyzing the budgetary policies and schemes with the help of gender lens in relation of budget estimates, revised estimates and actual outlays in case when audited figures becomes available.

Along with this, the association also stressed on unique listing of women specific items, and more fair operating of women's related programmes. The organization also expressed the necessity for the proper consolidation of schemes along with the granting of Rs.10 lakh to bring into action the planned programmes. It also emphasized on enhancing the prospects and scope for women.

The power sector needs sufficient funds to carry out various activities pertaining to the sector. One of the expected power sector reform in budget 2008, is that the government is planning to lift all restrictions pertaining to the inflow of venture capital funds in Budget 2008.

Re implementation of the pass through status to the power sector: By lifting impositions on the inflow of venture capital funds, the funds also become eligible for tax exemption in form of capital gains as well as dividends belonging to the company. Another expected power sector reform in budget 2008 is that, 78,577 mega watt capacity would be added to the existing capacity. This would incur a cost of Rs 10,30,000 crore. The venture capital funds are very feasible and serves as a means of fulfilling the energy security requirements of the nation. By realizing the benefits, the government has taken the decision of giving tax incentives to the power sector in India. This decision of the Indian government has been unanimously approved by all. Earlier the pass through status was given by the Indian government pertaining to the VC (Venture Capital) funds or venture capital funds belonging to as many as nine sectors. This also included the power sector but only last year, this facility was withdrawn. However, as an expected power sector reform in budget 2008, the government is intending to reestablish it once again.

One of the expected power sector reform in budget 2008 includes the removal of the withholding tax imposed on money borrowed from foreign infrastructural companies as well as financial organizations, which serve the power sector in India. This reform has been just proposed. If the proposal is implemented, the cost involved in borrowing funds from overseas companies may decrease by approximately 20 percent. The main aim of this reform is to decrease the power generation cost in the country. Withholding tax is usually imposed on the payment of interest on borrowings from overseas nations. The withholding tax rate is decided depending on the dwelling place of the creditor. Withholding tax is imposed to counterbalance evasion of taxes by international as well as domestic taxpayers.

Approximately Rs 10,00,000 crore investment is required by the power sector in the country. For the purpose, money invested in the domestic market alone is not sufficient. Funds from overseas also needs to be availed of. One factor, which is required to be kept in mind is that the objective of power sector reform is to allow consumers to enjoy cheap as well as dependable power in the country. Hence, the entire process ought to be cost effective and sound enough to encourage availability of foreign debts.

It is likely that if withholding tax is lifted funds worth Rs 52,500 crore would pass through during the tenure of the 11th Plan. The tax has also been withdrawn in the consumer's interest. It is ascertained that the above fund would be produced by means of several public as well as private sector projects in the overseas nations.

The idea of withdrawing the withholding tax was a long standing demand of the power sector industry.

Since the power sector industry is assumed to benefit from the infrastructural reforms, the coal sector is also being planned to be brought at par.

It was observed lately and even commented by eminent leaders of the country that a lot of fund was being channelized for financing subsidies in the guise of equities. However, the purpose for which the fund is being routed (subsidies), is not being met. The government has planned to take up the issue of subsidy in budget 2008 to discuss about the subsidies and related matter.

Issue of subsidy in budget 2008 would also take up matters related to the steps that ought to be taken with regard to subsidies pertaining to petroleum, food and fertilizers. The Indian government has decided to spend approximately Rs.1,00,000 crore on the above three, namely food, fertilizers and petroleum. Issue of subsidy in budget 2008 would also discuss matters related to the sources of livelihood. The Government feels that agriculture could not accommodate two thirds of the Indian population and serve as the sole food provider for such a large population.

It was felt that new methods related to agricultural production ought to be worked out so that there is an increase in the agricultural productivity in the country.

Talking about the employment opportunities, the Prime Minister stated that new policies would be implemented, which would create job opportunities in the non agricultural sector. As such the non agricultural sector should also be given focus. New ways of improving the non farming segment of the economy has to be worked out. What was needed presently was a manufacturing sector, which was labor intensive. He went on to say that India needs to opt for a “middle path”, which would take into account the prevailing environment in the market and also take into consideration, policies related to equities.

With regard to the issue of subsidy in budget 2008, it was decided that the right balance ought to be maintained pertaining to solutions worked out for the rural people as well as for the urban residents. Imbalances between urban as well as rural issues occur due to unequal provisions extended to the two sects of people.

Energy security is another issue that will be taken up by the government in budget 2008. The Prime Minister stressed the need to adopt measures, which could be sustained environmentally.

He assured that by the judicious implementation of the 11th Five Year Plan, the country would be able to surge ahead and be at par with other East Asian as well as other South Eastern nations of the world.

The Finance ministry has started consulting with Industry Majors about the 2008-09 budget on 22nd November. The Revenue secretary has fixed some meetings with the majors from different industrial sector to discuss several budget issues.

The government is planing to reduce the rate of excise duty from the current level, which is 16%, by 2%, for the industrialists' think this would help them to make the price level low.

• The cement industry had raised the prices in the 2007-08 budget due to which it was subject to a lot of criticism. Therefore, this year, the cement industry is also seeking low excise duty.
• The manufacturers of cement increased the price by 12 rupees per kilogram. So, in the new budget the government will implement a differential regime for the excise tax. Moreover, the government may permit easy imports through a reduction in custom duty.
• The countervailing duty will not be imposed on the imported cement. The government may introduce a two tier structure for the Goods and Service Taxes which will relate the Center to all the states.

l The current fiscal year (2007-2008) witnessed decreasing duties from 12.5 percent to 10 percent. Last fiscal year(2006-2007) witnessed decreasing customs duties from 15 percent to 12.5 percent. Studies reveal that in the year 1996 -1997, the customs duties was as high as 40 percent. The fiscal year prior to that (1995-1996) had customs duties at 50 percent. Hence, what we find is that there has been a gradual decline in the customs duties in recent years, the efforts of which were applied in the bygone years.

It has been observed that for the past few years, India has spontaneously deducted customs duties without having been influenced by foreign sources. In other words, expected trade reform in budget 2008 is also reckoned to work on trade liberalization. The road ahead....

The industrial sector is very apprehensive about further decrease pertaining to custom duties because it is exceedingly being felt that chances of further diminution is a distant possibility in the forthcoming financial year. Due to the appreciated value of rupee, over the months, imports have become comparatively cheaper. This has led to the increase in domestic competition.

There is a warning from FICCI that if the customs duties are reduced any further, the steps, which have been taken to rejuvenate the manufacturing sector would become null and void.

It is being anticipated that the customs duties is likely to become 7.5 percent. Some of the sectors of the economy would be still lower. Customs duties for hand made fibers decreased to 5 percent from 10 percent. Polyester fibers saw a decrease to 5 percent from 7.5 percent. In the Budget 2007, duties were dropped to 7.5 percent from 12.5 percent for plastic as well as chemicals. This is likely to go down further in the forthcoming budget.