Chidambaram takes middle path in Budget 2004

NEW DELHI: Finance minister P Chidambaram today presented the Budget for 2004-05, which has taken a middle path of not unveiling any big ticket and grand vision.

Finance minister P Chidambaram outside Parliament after presenting Budget 2004 While an initial reading is that some sectors like telecom and computer hardware have been major beneficiaries, the media and entertainment industry, by and large, have been ignored, unless the cascading effect of increased service tax of 2 per cent on advertising, cable and broadcast services are taken into account.

The increase in service tax to 10 per cent from 8 per cent could well open up another round of face-off between the advertising and broadcast industries, which has still not been able to settle its differences over service tax of 8 per cent being levied till now. The two percentage increase in service tax, though lower than the expected 12 per cent, would also make cable operators start anew their demand of hiking the monthly cable rates for cable TV service to Indian households.

In the expanded service tax net, the government has also brought in TV or radio programme production houses.


The capital markets, which were northward bound during the initial part of the Budgetary announcements and had crossed the 5,000-mark, crashlanded after Chidambaram announced the introduction of turnover tax.

Excise duty on black and white TV sets too have been raised, which may have some effect on the penetration of various broadcast-related services in rural India where even today b/w TV sets hold sway.

The scanning of Budget papers is also on because the foreign direct investment (FDI) levels have been upped in the telecom and insurance sectors to 74 and 49, respectively from their current levels. It is still not clear whether cable industry can rejoice with an excise duty exemption granted on cables and whether in the near future the FDI limit in cable industry too would be brought at par with telecom.

Meanwhile, Chidambaram opened his Budget speech by citing the National Common Minimum Programme (NCMP) as the guiding light and said that it spells out seven clear economic objectives, namely, growth rate of 7-8 per cent per year for a sustained period; universal access to quality basic education and health; generating gainful employment in agriculture, manufacturing and services, and promoting investment; 100 days' employment to the breadwinner in each family at the minimum wage; focus on agriculture and infrastructure; acceleration of fiscal consolidation and reform; and higher and more efficient fiscal devolution.

This year, a medium-term fiscal policy statement, a fiscal policy strategy statement and a macro economic framework statement were also presented along with the Budget. The Fiscal Responsibility and Budget Management Act (FRBM) and the macro economic backdrop aims at elimination of revenue deficit by 2008-09; growth to be sustained by increased production and value addition in agriculture, a marked improvement in industrial production and continued buoyancy in the performance of the services sector; and 5-year road map to achieve the NCMP objective of bringing about rapid growth with stability and equity.

The finance minister has set for himself some key thrust areas in the Budget like doubling agricultural credit in three years, accelerating the completion of irrigation projects and investing in rural infrastructure; providing farm insurance and livestock insurance; improving agricultural product markets, and promoting agri-businesses; drinking water for all; expanding water harvesting, watershed development and minor-irrigation and micro-irrigation schemes; enhancing investment in industry- public and private, domestic and foreign - to create new jobs; creating space for small-scale industry to thrive and grow; electricity for all; universal access to telecommunication facilities; more housing for the poor; access to medical care through health insurance; and encouraging savings, and protecting the savings of the senior citizens.

For education, the government would levy an education cess of 2 per cent. The new cess will yield about Rs. 40,000-50,000 million in one full year. This amount will be earmarked for education, including cooked mid-day meal. The government also proposed to launch a programme in the Central sector to upgrade 500 ITIs (Industrial Training Institutes) over the next five years at the rate of 100 ITIs per year.

With an aim to boost foreign investment in the country, the Government has announced that an Investment Commission will be established and the procedure for registration and operations will be made simpler and quicker for FIIs. FII investment limit in the debt market too has been increased to $ 1.75 billion from $ 1 billion. Presenting his tax proposals, Chidambaram recalled the promise made in the National Common Minimum Programme (NCMP) that "tax rates will be stable and conducive to growth, compliance and investment". Through his policies on taxation the finance minister signaled the government's commitment to moderation and stability in taxes; to increase in revenues from direct taxes and excise duties; and to expanding the service tax net because the services sector accounts for 51 per cent of GDP. The minister underlined that though he himself was a votary of tax reforms, he thought it unwise on his part to attempt any reforms in a hurried or piece-meal manner. "Seven months from now there will be another Budget and there will be an occasion to visit the subject of tax reform," he added. 

Direct Taxes

The Finance Minister began by saying that "no one with a taxable income of Rs 1 lakh (100,000) will be required to pay income tax any more." The measure will give relief to 14 million assessees. He also announced relief to certain sections of deserving taxpayers.

Family pension received by widows, children and nominated heirs of members of the armed forces and the paramilitary forces killed in the course of operational duties would be exempt from income tax. Benefit of Section 80DD and Section 80U (of the Income Tax Act) is proposed to be extended in respect of persons suffering from autism, cerebral palsy and multiple disability.

An exemption from capital gains tax in cases where the compensation or the enhanced compensation for acquisition of agricultural land in certain urban agglomerations has been received on or after April 1, 2004 has been proposed too.

With a view to encouraging investment in the manufacturing sector, the Minister proposed to continue with the additional depreciation of 15 per cent on new plant and machinery acquired or installed in an existing undertaking. But, the required increase in installed capacity would be reduced from 25 per cent to 10 per cent.

Automobile industry is to be notified as an industry entitled to 150 per cent deduction of expenditure on in-house R&D facilities. In order to promote renovation and modernisation of existing transmission and distribution lines in the power sector, the benefit under Section 80 1A is proposed to be extended to projects undertaken during April1, 2004 to 31 March, 2006.

Chidambaram proposed to abolish the tax on long-term capital gains from securities transactions altogether. Instead he proposed to levy a small tax on transactions in securities on stock exchanges at the rate of 0.15 per cent of the value of security (the markets reacted negatively to this). It will be levied on the buyer. In case of short-term capital gains, the rate of tax is proposed to be reduced to a flat rate of 10 per cent Equity-oriented funds would continue to be exempt from tax on dividends; rate of tax on corporate unit holders of debt-oriented mutual funds would be raised to 20 per cent with no change for individuals and HUF (Hindu undivided family) unit holders.

Indirect Taxes

Turning to the indirect tax proposals, Chidambaram expressed his intention to align India's tariff structure to those of ASEAN countries. Another principle that was emphasised by the minister was that where an excise duty is levied, subject to only a few exceptions like goods when imported should attract an equivalent countervailing duty (CVD). The minister, therefore, proposed removal of exemption from CVD enjoyed by some imported goods where there is no corresponding exemption from excise duty on Indian made goods. Customs tariffs and excise duties are inter-related. While considering the tax regime for any sector, one must look at both customs duties and excise duties applicable to that sector, he added.

Coming to the specific sectors, Chidambaram said that steel as a leading metal should bear an excise duty of 16 per cent but in February this year the excise duty on steel was reduced from 16 per cent to 8 per cent. He observed that belying expectations, steel prices have not moderated but have risen sharply. He proposed to reduce the customs duty on non-alloy steel from 15 per cent to 10 per cent and to increase the excise duty on steel from 8 per cent to 12 percent so that the countervailing duty will also be applicable to imports (the Sensex dropped dramatically on hearing this). This would recoup some of the revenue losses since February, 2004, the FM hoped.

Chidambaram concluded by saying that his tax proposals on direct taxes are expected to yield a gain of Rs. 20,000 million. On indirect taxes side, they are broadly revenue neutral.

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