Fiscal deficit careens out of control
Sinha slashes subsidy bill, food prices to rise
Sensex loses heart, slips 294 pts
Govt to bring down stake in banks to 33%
Radical steps to simplify indirect taxes
Dividend tax to hit bottomlines
Cellphone companies jubilant
Shot in arm for venture capital funds
Tax shelter provisions must go
Software firms baulk at tax on export income

New Delhi, Feb 29 
The government�s fiscal deficit has shot up to an astounding Rs 1,08,898 crore or 5.6 per cent of the GDP against a budgeted Rs 79,955 crore or 4.1 per cent of the GDP, leading to fears of recessionary forces being unleashed.

This astounding fiscal slippage of Rs 28,943 crore is way beyond what any analyst had estimated. While tax collection fell short of target by about 4 per cent, budgeted expenses shot up by 7 per cent.

Among other things, the government fell short of the divestment target by a whopping Rs 7,400 crore. The fiscal deficit estimated in the coming fiscal too will be a high of Rs 1,11,275 crore or 5.1 per cent of the GDP.

The end result of this huge overspend could result in inflationary pressures and higher real interest rates which, in turn, could result in another bout of recession for the economy. High real interest rates because the government is borrowing heavily to square up part of its deficit, the rest of the deficit being accounted for by more money being put into circulation which in turn fuels a price rise.

What went wrong in the 1999-2000 budget was principally a huge overrun on the non-plan expenditure, mainly on account of the Kargil war, pension benefits which the government had not been able to anticipate, interests and ways and means advances to financially beleaguered states.

The non-plan expenditure went up by 8.4 per cent or Rs 17,461 crore over the initial estimate of Rs 2,06,820 crore.

Plan expenses which normally fell short of estimates too overshot by a mild 3 per cent. On the other hand, tax revenues fell short by Rs 5,900 crore. The shortfall is due to lower customs revenue collections because of very slow growth in non-oil imports.

Trying to explain away the unusually high deficit in the 2000-2001 budget, the finance minister told Parliament that he had spared industry from higher levels of taxation which could have helped him bridge the deficit, which the domestic industry, already been hit hard by the excise and customs changes, might wince at.

But the fact remains that the high fiscal deficit will lead to higher borrowing forcing the government closer towards a debt trap.

The government now estimates a 33 per cent rise in its market borrowings to Rs 76,383 crore for the fiscal 2000-01 from Rs 57,461 crore for 1999-2000.

The market borrowings of the government include zero coupon bonds, loans in conversion of maturing treasury bills, 364 days treasury bills etc.

This implies that the total debt of the government will now go up from Rs 9,80,870 crore to Rs 10,57,253 crore which would be more than half the GDP of the country in 2001.

The government has estimated a total receipts of Rs 3,38,487 crore for 2000-01 as against the budget estimated figure of Rs 2,83,882 crore for 1999-2000.

In comparison, the revised estimates of total receipts for the current fiscal stood at Rs 3,03,738 crore.

The finance minister has also estimated a total capital receipts of Rs 1,34,814 crore for 2000-01 compared with Rs 1,01,042 crore budget estimates for 1999-2000. The revised estimates of total capital receipts for the current fiscal stood at Rs 1,24,234 crore.

An increase of Rs 11,000 crore in budgetary support to the plan has been announced, raising it to Rs 88,100 crore in 2000-2001 compared with Rs 77,000 crore last year.

The central sector plan outlay has been increased by Rs 13,813 crore to Rs 1,17,334 crore for 2000-01 as against Rs 1,03,521 crore in 1999-2000.

Central assistance to state plans has been increased by Rs 3,824 crore to Rs 36,824 crore in 2000-01 compared with Rs 33,000 crore in 1999-2000.    

New Delhi, Feb 29 
The millennium�s first budget will hit where it hurts, by slashing subsidies and raising food and fertiliser prices.

Middle class families classified by the government as those living above the poverty line, will have to pay �economic� prices of Rs 8.20 a kilo of wheat and Rs 11.78 a kilo of rice when buying foodgrain from ration shops.

They are currently paying about three fourths the economic price (calculated as the cost of purchasing, storing and distributing foodgrain through the nation wide chain of ration shops) at Rs 6.82 a kilo of wheat and Rs 9.05 a kilo of rice.

As open market prices are pegged upon prices charged by the government through its nation-wide food distribution network, these can be expected to go up too.

On the other hand, poor families will have to pay half the economic price, whereas they were paying about a third of this price.

At the same time the government also announced that all those who fill up tax assessment forms will no longer be able to draw sugar rations. The rest will have to pay Rs 13 a kilo, an increase of 60 paise.

These politically unpopular moves will save the government about Rs 6,000 crore, finance ministry mandarins say. The total food subsidy bill is being pegged at Rs 8,210 crore in the coming fiscal.

The government had tried to hike wheat and rice prices in 1998 but that move met with failure on fears that a hike in public distribution system (PDS) prices would have a negative fallout on its electoral prospects, which saw prime minister Atal Behari Vajpayee ordering a roll back of the hike on January 2, 1999. Whether the government actually manages to go through with this measure will be worth watching.

Besides opposition from its own allies and the opposition, farmers too can be expected to voice their angst against the government�s decision to raise urea, DAP and MOP prices. Mulayam Singh Yadav was heard voicing his apprehensions quite loudly in Parliament, with several MPs from various parties nodding in agreement.

The government has announced an increase of 15 per cent in urea and MOP prices and a 7 per cent hike in DAP prices. The budget also made it clear that the retention pricing scheme which subsidises companies manufacturing fertilisers will be reviewed and caps set on the maximum subsidy paid out to them.

All this is expected to help save about Rs 2,500 crore, keeping the total fertiliser subsidy bill down to Rs 12,651 crore.    

Mumbai, Feb 29 
The markets have snubbed Yashwant Sinha�s opus. Hours after he finished his speech, the BSE sensex greeted his budget with a 293.71-point plunge � its fifth largest single-day fall � as operators and institutions pounded shares in a session that alternated between panic and despair.

Players, feeling let down after the finance minister failed to deliver anything substantial for the capital markets, dumped stocks in a selloff that ensured the sensex fluctuated in a margin of a mind-boggling 520 points. In other words, the difference between the highest and lowest point of the day showed just how a damp-squib budget can send stocks into a tailspin.

The 30-scrip index opened strong at 5827.81 and hit the day�s high of 5903.49. However, it plumbed an intra-day low of 5383.61 as the disappointment began to sink in. It later closed a little higher at 5446.98 in a net loss of 5.12 per cent over Monday�s finish.

�A total lack of imagination from the finance minister,� is how prominent BSE broker summed the bloodbath in the trading ring. Like him, most brokers were of the opinion that the finance minister had failed to grab an opportunity to make history in presenting his third budget.

Infotech companies, whose values had been shooting through the roof in the days that led to the budget, suddenly saw their shares being clobbered in such a manner that the phenomenal gains notched up till now looked like a bubble � something that just needed a lacklustre budget to prick it.

For economy stocks, there couldn�t have been anything worse, as operators swarmed the counters with sell orders in what resembled a distress selling. Hopes that this sector would be offered a salad of sops in the budget were belied.

�The next few days will see extreme volatility. The markets are expected to remain in a state of tizzy, hitting highs and lows, as marketmen grope for hidden benefits and encouraging clues in the budget,� said an analyst at Khandwala Securities.

A senior official at Dresdner Kleinwort Benson, however said the FIIs will be back in the market after a few days while Damani said it will take a few days for the market to come to terms with the disappointment. Till such time, analysts say the market might remain listless.

Dealers attributed the sudden reversal in the market�s course to a host of factors. One was the reduction in tax exemptions on export earnings by 20 per cent every year in a phased manner. The other, more unsettling reason, was the increase in tax on dividends to 20 per cent.

What deepened the angst was that these measures were not accompanied by moves to prune wasteful, government expenditure. For instance, dealers said the government had not done anything about the subsidies on petroleum products, and did far less than what it should have done in the case of fertilisers.

There were a few things the market felt happy about though: proposals leading to major tax liberalisation for venture capital funds, reducing government equity in public sector banks and increasing FII investment limit to 40 per cent. These are expected to improve the market mood in the coming days.

The volume of business on the BSE hit a historic high of Rs 7650.76 crore. Satyam computer was the most active scrip with a turnover of Rs 1395.81 crore. Market leader Satyam Computers fell by Rs 18 to Rs 5050, Zee Telefilms by Rs 109.75 to Rs 1307.25, Lever by Rs 170.40 to Rs 2900 and ITC by Rs 65 to Rs 748. Infosys was the only index-based scrip that gained Rs 154.60 at Rs 8704.60.

The disappointment with the budget was evident on the Calcutta Stock Exchange (CSE) too. The CSE-40 index lost over 210 points from the day�s high of 2457.58 after the tax proposals were announced.

CSE president J.M. Choudhary said the raising of corporate tax on dividend pay-outs hit the sentiment. However, he welcomed hike in cap on FII investment from 30 per cent to 40 per cent. Senior CSE member Dinesh Deora said the finance minister�s proposal to bring the zero-tax companies into the tax net also played a part in weakening the sentiment.    

Calcutta, Feb 29 
The government today announced it will dilute its ownership in public sector banks to a level of just 33 per cent of the equity of public sector banks. Fresh capital will be raised by issuing shares will be sold to the general public.

The measure was announced by finance minister Yashwant Sinha in his budget. Sinha justified the decision saying the move will help shore up the government�s finances.

He gave an assurance that no public sector bank will be closed. The government has also decided to provide the recapitalisation funds to weak banks to enable them to achieve the necessary capital adequacy ratio.

The managements of major public sector banks breathed easier after the announcement. They also started working out when and how to go to the market to raise funds.

Among the banks that are likely to seek the government�s nod for an overseas or domestic issue are State Bank of India (SBI) and Bank of Baroda (BoB).

�Banks are in need of funds and the finance minister�s announcement regarding reduction of government�s stake in banks to 33 per cent will certainly make resource raising from the market more attractive,� a senior officer from one of the nationalised banks said.

Speaking to The Telegraph, G G. Vaidya, chairman, State Bank of India (SBI) said the move to bring down the government�s stake in banks to 33 per cent �is very good� at a time when competition was getting stiffer.

When asked about SBI�s fund raising plans, Vaidya said when the bank �needs additional capital it will approach the government� to raise money from the market. The government currently holds 59.72 per cent in SBI. It had been planning an overseas listing some months ago but the government�s ownership of it was held against it.

In Bank of Baroda, the government holds around 66 per cent. Dr K C Chakravarthy, general manager, BoB, also welcomed the finance minister�s announcement that while weak banks will not be closed, their boards could be superseded.

Bank managers also said the dilution of the government stake would mean more freedom to take business decisions. Harbhajan Singh, chairman of the Calcutta-based Allahabad Bank, said: �The government has taken years to arrive at such a decision. This will give more autonomy to the banks� boards and will make the banks more accountable.�

Bankers said the boards will now have more professionals. It will mean better credit appraisal, improvement in credit management and speedy recovery of loans. Banks will be able to function like other corporate bodies.

�We will not have to report to the Parliament Accounts Committee regularly. Moreover, the public will have a say in the board and they can keep a watch on use of resources,� said a senior banker from Mumbai.

However, weak banks that have accumulated huge losses feel the measure will not be helpful. V.P. Shetty, executive director of Uco Bank, said: �The capital base of the stronger banks like the State Bank of India or Oriental Bank of Commerce will be further strengthened. But it will be difficult for us to raise tier-I or tier-II capital.� He said the finance minister had not specified how much recap funds will be provided to the weak banks.

Biswajit Chowdhury, chairman of the United Bank of India, said: �We have been asked by the finance ministry to submit a restructured plan. The government will sanction recap funds to us after considering the plan.�

The government is also proposing to set up a modified Financial Restructuring Authority (FRA). It will amend the required legislations to enable the FRA to exercise special powers including all the powers of the board of banks.

To give greater operational flexibility to the Reserve Bank of India (RBI) for conduct of monetary policy and regulation of financial system, Sinha said proposals for amending the legislation would be brought to Parliament.

The Public Debt Act of 1944 would also be replaced by a Government Securities Act to facilitate development of government debt market. Sinha proposed to introduce a new bill for strengthening the hands of depositors in situations of malafide or fraudulent actions of non-banking finance companies.

The finance minister also announced seven additional Debt Recovery Tribunals (DRTs).    

One of the most important changes which the Union finance minister has introduced in his budget for the year 2000-2001 is the convergence of the existing three ad-valorem rates of central excise duty into a single rate of 16 per cent Cenvat, which is the new name given to central excise duties. He has abolished the 8 per cent rate of duty and moved most of the items at this rate to the rate of 16 per cent. While doing so, the items exempted are medicinal grades of oxygen and hydrogen peroxide, anaesthetics, potassium iodate and medical and surgical gloves. Items of common use � cutlery and knives, house hold glassware, electric bulbs of MRP up to Rs.20 per bulb, clocks and watches, tooth powder, sanitary towels, napkins for babies and soap for distribution through PDS � have been exempted from duty. Other items left untouched �at least for the present� are kerosene, LPG, laundry soap, cotton yarn and diesel engines up to 10 HP. This has been done basically because these are items of mass consumption and for the common man.

While claiming to converge the three ad-valorem rates to a single rate of 16 per cent Cenvat, the imposition of special excise duties at three different rates of 8 per cent , 16 per cent and 24 per cent which are not modvatable, the finance minister has not dispensed with the need for classification of goods for determining at which rate special excise duty would be chargeable. This cannot be said to be a measure of simplification although one understands the need for collecting additional resources by levying a special excise duty. He has also said items which are currently charged to 24 per cent duty shall continue to bear the same incidence comprising 16 per cent Cenvat and 8 per cent special excise duty. When all goods are subjected to the 16 per cent rate, they are sure to become costlier and this would affect large number and variety of goods.

While the Modvat scheme is proposed to be given up, apparently because of the complex rules regulating it, the new scheme, to be know as Cenvat scheme will have simpler rules. The scheme is proposed to be extended fully to cigarettes for the first time and full MODVAT credit would be available on project imports in future. In view of the complexity of the scheme for collection of excise duty from steel re-rollers and induction furnaces based on their annual capacity of production, he has decided to subject them to the ad-valorem duty. By an amendment of the Central Excise Act in the past, excise duty on goods sold from depots became chargeable on the basis of the depot price and not at the factory gate price. He has reverted back to the assessment at the factory gate price in the case of steel alone. Other industries may also claim similar benefit.

Among the measures taken for simplification of the tax collection machinery is the decision to dispense with all statutory records in excise and rely on the manufacturers� records. This completes the process initiated last year and is apparently based on the experience of its working. This is a welcome step for industry.

There are two other important changes that need special mention: firstly, excise assessees will be allowed to pay excise duty in fortnightly instalments from 1st April, 2000. This means that the age-old practice of day-to-day payment of excise duty before removal of goods from the factory has been given up and reliance is being placed on the assessees that they would calculate the duty payable on the clearances made during the fortnight and pay at the end of that fortnight. This indeed is a revolutionary step and should provide great relief to manufacturers who, instead of mobilising funds for payment of duty in advance, can deposit excise duty after having sold the goods and having received the sale proceeds. This should save considerably on costs and one would have to see whether the goods become cheaper by way of saving on interest costs. The monthly payment scheme introduced last year for the small scale sector would continue.

The second innovation in the words of the finance minister himself, �a path breaking departure from the traditional approach�, is the adoption of �transaction value� for assessment of excise duty � a concept borrowed from the customs side introduced in 1988 after India accepted the Gatt valuation code and amended its law. With elaborate rules for determination of valuation of imported goods, the system which is internationally accepted, one would have to see how the same concept would work on the excise side. This is proposed to be introduced from 1st July, 2000.

With the experience of satisfactory working of the assessment based on maximum retail price, it has been decided to extended it to 24 new items. The innovation proposed in reducing the mandatory penalty in case of default in payment of duties to 25 per cent instead of 100 per cent in case in which the assessee pays up the duty demanded within 30 days of receiving the order, is undoubtedly a welcome step and should provide the necessary incentive to the assessees not to pursue litigation endlessly even when they know that they do not have a good case. How one wishes, more such incentives were provided by the tax departments of the government � a measure which would provide better tax compliance.

On the custom side, the rates of duty has been reduced from 5 to 4 i.e. 35 per cent, 25 per cent, 15 per cent and 5 per cent.

The surcharge of 10 per cent will be continued on revenue considerations. The Special Additional Duty (SAD) of customs introduced in 1998-99 was not levied on traders and they were happy because they were exempted. The Finance Minister has corrected the discrimination by withdrawing this exemption.

The exact implications of placing several hundred items on the free list of imports effective 1st April, 2000 to comply with India�s international trade treaty obligations will have to be carefully studied although they are being placed at the peak rate of 35 per cent plus surcharge in order to accord tariff protection to similar goods manufactured in India.

The experience of placing number of agricultural and horticultural products on the free list of imports in earlier years should prove a useful guide for what is going to happen in future.

The reduction in the duty on computers from 20 per cent to 15 per cent on floppy diskettes from 20 per cent to 15 per cent, on CD ROMs and microprocessor from 5 per cent to nil would provide the necessary incentive to the information technology sector. Similarly, the reduction in the basic custom duty on specified raw materials for manufacture of optical fibres from 15 per cent to 5 per cent and on cellular phones from 25 per cent to 5 per cent is most welcome. Similarly, reduction of duty on cinematographic cameras, and other related equipment from 40 per cent to 25 per cent and on colour positive films in jumbo rolls and colour negative films in rolls of certain sizes from 15 per cent to 5 per cent will provide solace to the entertainment industry.

The reduction in the basic customs duty on platinum and non-industrial diamonds from 40 per cent to 15 per cent in order to encourage jewellery exports is also welcome.

The reduction in basic custom duty on crude oil from 20 per cent to 15 per cent and on petroleum products from 30 per cent to 25 per cent except on kerosene will considerably affect the customs revenue.

It is heartening to note that the abolition of Finance Minister�s discretionary power to grant ad hoc exemption of customs and excise duty except for goods of strategic nature or for charitable purposes made last year has helped the the government to save Rs.500 crores this year. One rarely comes across cases where Ministers willingly give up their powers.

Although by amendments of the Customs Act and the Central Excise Act, the power to issue show cause notices for short levy of duties by officers below the rank of Commissioners is proposed to be taken away, the implications of such an amendment need to be studied carefully.

Even if the show cause notices are issued by subordinate officers, since these would, under the new provisions, require prior approval of the commissioner or the chief commissioner, appeals against such orders should correctly lie to the tribunal and thus increase its intake by reducing the intake of commissioner (appeals).

N.K. BAJPAI is a retired member of Customs & Excise Appellate Tribunal and Advocate of Supreme Court.    

Mumbai, Feb 29 
The finance minister�s proposal to double the tax on dividend from the present 10 per cent to 20 per cent at the corporate level will hit the bottomlines of companies with a huge dividend outgo.

Most likely to be hit by the move are companies like Hindustan Lever, Glaxo and other MNCs, with the tax leaving a negative impact on their bottomline.

�The finance minister could have instead taxed the shareholder on a slab basis,� said Kumar Mangalam Birla, chairman of the A V Birla group.

The positive side to this proposal, according to G P Gupta, chairman of IDBI, was that it will restrain companies from dishing out large dividends and instead prod them to plough back their earnings for the future growth of the company.

However, the markets have taken it as a negative sign.    

New Delhi, Feb 29 
Finance minister Yashwant Sinha has sought to give a major impetus to the cellular industry by reducing the cost of cellular phones and their accessories.

The basic customs duty on cellular phones has been brought down from 25 per cent to five per cent. The duty on batteries used in cellular phones has also been reduced from 40 to 15 per cent.

�The reduction in duty of cellular phones would improve their availability through proper channels and would curb the menace of the grey market,� said Sinha.

In addition, the government has reduced the basic customs duty on specified raw materials for manufacturers of optical fibres from 15 per cent to five per cent.

To give impetus to Internet services in India, the government has extended the five per cent concessional rate currently offered to specified telecom equipment.

According to the Cellular Operators Association of India, the cellular industry is expected to grow from 1.6 million subscribers to about three million subscribers by the end of the current year. �The reduction in handset prices is bound to increase the number of cellular subscribers in India. We expect a major growth in the current year after this reduction,� said T. V. Ramachandran, executive vice chairman of COAI.

However, the cost of telecom transmission equipment are set to go up due to increase in special additional duty on imports.

The Telecom Equipment Manufacturers Association of India (TEMA), while, welcoming the budget said, �the reduction in duty will help in growth of telecom equipment in the country. It will also help the telecom equipment manufacturers to pass on the benefit to the consumers.� �It offers us a good opportunity to provide wide range of products to suit the various customers,�� a senior marketing executive in Motorola said.

Manoj Kohli, chief executive officer of Escotel Mobile Communications Limited, said �the telecom industry can now look forward to a significant acceleration of teledensity and growth towards masses. �    

New Delhi, Feb 29 
In a bid to promote sunrise industries, finance minister Yashwant Sinha has come up with a slew of sops for venture capital funds whereby VCFs would have to make a one-time payment of tax at a rate of 20 per cent when the fund distributes the income to investors.

The same rate would apply to undistributed incomes too.

Income in the hands of the investor, which would otherwise be taxable is tax free.

The principle of �pass through� would be applied in tax treatment of VCFs, whose income would be free of tax, except when not distributed within a period prescribed by Sebi.

If Sebi stipulates a time period of three years, the income earned in that period would not be taxed. But once the income is distributed, it would be taxed.

However, even after the three-year-period if the income is not distributed, the 20 per cent tax would apply. Sinha also said that VCFs would not require any approvals from the tax authorities.

The Securities and Exchange Board of India (Sebi) has been appointed the nodal agency for registration and regulation of both domestic and overseas venture capital funds. The minister also added that projects besides the dotcom companies must be funded by the VCFs.

This liberalisation will give a strong boost to non-resident Indians wanting to invest the capital, knowledge and enterprise in ventures within the country, he said.

In order to strengthen the capital markets and encourage stock exchanges to set up Investor Protection Fund, the budget has decided to provide 100 per cent exemption to the income of Investor Protection Funds for stock exchanges.

However the decision to increase tax on dividend income, to be paid by corporates, from 10 per cent to 20 per cent was called harsh by industry. This has been done because of the large gap in the tax treatment of dividend income and interest income. However, dividend income in the hands of shareholders would remain tax free. Industry feels that this would hit the companies and would also force them to reduce dividends. �This would dampen the market sentiments,� they said.

Similarly, the government has decided to increase the rate of tax on income distributed by debt oriented mutual funds and UTI from 10 per cent to 20 per cent. However, the US-64 and other open-ended equity funds would be exempted from the tax.

Sinha also announced a proposal to increase the ceiling of foreign institutional investment (FII) in Indian companies from current 30 per cent to 40 per cent. This will give greater access to Indian companies to foreign portfolio.

Under the existing policy on portfolio investment, FIIs are permitted to invest in a company up to an aggregate of 24 per cent of equity shares, which can be increased to 30 per cent subject to approval by board of directors.

Sinha said the government was committed to encourage Indian firms and businesses to grow into strong, India-based multinationals. To promote this, it was necessary to further

liberalise the policy for acquisition of companies abroad to enable Indian corporates in the knowledge-based sector to have greater flexibility to undertake capital account transaction for acquisition of business abroad.    

Traditionally, the Central government�s budget proposals have played a very significant role in pointing to the direction of the economy. As a result, expectations run high, often resulting in acute distress and disappointment when reality does not match high hopes.

The reason for the exaggerated importance of the budget is the predominance of the government sector in the economy, controlling as it did, from its �commanding heights� significant areas of industry, finance and the capital market. However, globalisation and the process of liberalisation has changed all that. In a few years from now, when the government restricts itself more and more to its role of governance and necessary regulation of economic activity, the budget would pass mostly unnoticed, as it does today in developed countries.

In the Indian context, the impact of the decisions taken in the budget on inflation, on the consumer price index and thus on the common man cannot be ignored.

There are various proposals in this year�s budget, aimed at rural development, particularly in the areas of agriculture, education, healthcare, provision of drinking water and adequate finance. Let us hope that a substantial portion of the benefits will flow to the target group, namely those below the poverty line who constitute well over a third of the country�s population.

The spurt in defence expenditure because of Kargil, the unforeseen expenditure on the general election and calamities like the Orissa cyclone have pushed the fiscal deficit to 5.6 per cent of GDP in the revised estimate for 1999-2000. With consummate skill, the finance minister has succeeded in reining it back to 5.1 per cent for the budget estimate of 2000-01. He has also announced a proposal for legislation ensuring fiscal discipline. Without it, all the gains of higher industrial production, lower inflation and unprecedented foreign exchange reserves would be of no avail for ensuring stability, sustained growth and amelioration of poverty.

On the indirect tax front, Union finance minister Yashwant Sinha has taken the reform process further by having only one central excise duty rate of 16 per cent, with a special excise duty for some items above and below the benchmark.

Domestic industry had hoped for a rise in certain customs duty rates, but their hopes have not really materialised.

In the field of direct taxes, the tax concessions for senior citizens and women have been stepped up.

The rate structure remains unaltered but the surcharge has been raised to 15 per cent of the tax for higher-income-level, non-corporate assesses.

The increase in dividend tax is generally acceptable, particularly when low-income investors have other acceptable options like investing in open-ended or equity-based units.

Removing unnecessary bureaucratic controls over venture capital funds and from voluntary retirement schemes is a step in the right direction.

House construction would surely receive a boost because of the extension of existing benefits by two years.

Similarly, extending the benefit of exemption from capital gains to those who invest in a new house, also to those who already have a house is a very welcome step.

The withdrawal of exemptions and credit coupled with a lower rate of tax for the purpose of levying minimum alternate tax is also a step forward in the reform process.

Reformists would also appreciate the proposal for phasing out exemption of export profits over a period of five years.One however apprehends that interested lobbying would kill or effectively neutralise this very salutary and overdue measure.

Now that we have a reasonable rate structure and a reasonable rate of corporate tax, all tax shelter provisions must go. And when all unnecessary tax exemptions are removed from the statute, MAT itself would not be necessary.

Apart from the well-accepted reasons of equity and simplicity, scrapping such incentives and disincentives would make the law less arbitrary and therefore would substantially reduce the scope of graft.

The author is a tax consultant and a former CBDT official    

New Delhi, Feb 29 
Finance minister Yashwant Sinha feels Indian software companies have matured enough to pay tax on their incomes arising from exports. While the budget makes an effort to boost the information technology sector, Sinha has imposed a tax on income earned from software exports.

The hardware sector, however, has a lot to cheer about. Computers sales are set to zoom with major excise duty cuts announced in hardware. The budget 2000-01 is expected to provide the much needed fillip to the hardware sector of information technology. Apart from excise duty cuts, the Centre has reduced the customs duty on many critical hardware items, including ready-to-use computers, from 20 to 15 per cent.

Importantly, the duty on computers has been brought down from 20 per cent to 15 per cent. Import duty on computer mother boards has also been cut from 20 to 15 per cent. Import duties on specified capital necessary for manufacture of semiconductor components has been reduced from 15 per cent to 5 per cent.

The duty on microprocessor for computers � the brain in all computers � has been slashed from five per cent to nil. Integrated circuits and data graphics display tubes for colour monitors used in computers will not attract any import duty now; duty on floppy diskettes has been slashed from 20 to 15 per cent.

What has spurred Sinha into these duty cuts is the commitment made by India to advance its target date for abolishing import duties on finished infotech goods from January 1 2005 to January 1 2003. This date may be advanced further after negotiations with the US and west European countries.

Also, as a corollary, duty on intermediate products and finished goods have remain unchanged. This would give the hardware industry sufficient time to adjust to the imminent zero-duty regime.

However, the software industry is peeved that they would have to pay an income tax on their export earnings. �Export earnings of various kinds now enjoy exemptions from income-tax ranging from 50 per cent to 100 per cent. I have, therefore, decide to phase out these concessions over a period of five years,� Sinha said in his budget speech.

In the first phase starting 2000-01, the government will withdraw the concessions to the software industry by 20 per cent. The exercise will be repeated every year till reliefs are reduced to zero after five years.    


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