Indian Budget 2011 Comment
"In my view, the FM has pulled off a delicate balance between fiscal prudence and significant policy initiatives, without going overboard with public spending. The policy boost for banking and infrastructure sectors in particular should set the tone for sustaining the growth momentum.
"Conforming to growth forecasts in the Economic Survey, the Finance Minister (FM) announced that the economy is likely to grow at 8.6% in real terms during the current fiscal year. Improved macro-economic indicators seem to have helped the FM announce ambitious targets of fiscal consolidation with the aim to reduce fiscal deficit to 3% by 2014. While inflation remains one of the major macro-economic worries, the FM has pegged the current fiscal deficit at 4.8 percent (a much improved performance vis-?-vis Budget 2009 estimate of 5.5 percent).
"Clearly, the FM's budget speech was replete with major policy reforms agenda including significant proposals for the infrastructure and banking sectors. The FM proposed a legislative amendment to pave the way for new banking licenses and indicated that the RBI would issue revised guidelines for fresh banking licenses by March 2011.
"On the tax policy front, an announcement on the roll-out of new tax legislations, i.e. Direct Taxes Code, and Goods & Services Tax would be welcomed by Trade & Industry. The FM has re-affirmed the Government's commitment to roll-out the DTC by April 2012, post the standing committee's report; however, the FM held back from committing to the calendar for GST roll-out. The proposal to further liberalise FDI policy is an encouraging move.
"As far as resource mobilisation from non-tax sources is concerned, the government shall continue to pursue strategic disinvestment targets with a revenue target of whopping INR 400 billion.
"In line with anticipation, the FM did not propose significant changes in headline income tax rates, except a marginal increase in the basic exemption limit for individual taxpayers. A half percent increase in Minimum Alternate Tax (MAT) would however hurt the critical industries which are otherwise eligible for tax holiday incentives; though, reduction of surcharge may marginalise the overall impact. SEZ developer and units may feel the heat more than any other industry as the FM proposed to extend MAT applicability to hitherto exempt SEZ developer and units. The proposal to tax foreign dividends at an incentivized rate of 15 percent would encourage outbound investments. To boost infrastructure debt financing, tax withholding on interest paid by notified infrastructure debt funds has been reduced to 5 percent; these funds are also exempt from income tax. Although I would have expected the FM to broaden the incentives to equity as well as debt funds for infrastructure financing.
"On the indirect taxes front, the status quo on tax rates is in line with the industry's expectations; the FM has however, proposed to broaden the service tax net with a view to mop up additional revenues of INR 4 billion. There were let down nevertheless; the countervailing duty in lieu of state VAT on import has not been withdrawn. The proposals for indirect tax amendments broadly hovered around transition to the GST regime, as the Government braces for the overhaul with the Constitution Amendment Bill likely to be proposed in the current parliament session."
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