Business Today

Watch your wallet

Sanjiv Shankaran        Print Edition: March 18, 2012

The tax proposals in any fiscal Budget are decisions based on political considerations. Whether it is a cut here or a hike there, they are decisions taken by a politician, not a bureaucrat. Given this, stakeholders in the four industries covered in this issue - auto, infrastructure, consumer goods and information technology - should perhaps lower their expectations this year - the portents are not good. The same goes for individuals.

According to an income tax officer, who retired a few years ago, bureaucrats working on the Budget look for ways to raise revenue. Tax breaks come from "politicians, and only when they want to incentivise". Incentivisation may not be high on the agenda this year. So, the chances of any tax breaks in the Budget are slim, concluded a panel that discussed Finance Minister Pranab Mukherjee's options (see Last Chance To Get It Right) at a discussion held in Business Today's office on February 20. The panel comprised BJP leader and former finance minister Yashwant Sinha, former SEBI chief M. Damodaran, BMR Advisors chairman Mukesh Butani, FICCI secretary general Rajiv Kumar and Standard Chartered Bank Research Head Samiran Chakraborty. It identified fiscal stress as the single biggest challenge facing Mukherjee.

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Separately, Durgesh Shankar, former member of the Central Board of Direct Taxes (CBDT), who worked on last year's Budget, said Mukherjee would joke: "I have an infinite appetite (for revenue)." One way to satiate that appetite would be to turn down most requests for a fiscal concession.

Mukherjee, in fact, may have no choice but to go in for some belttightening. The fiscal deficit (excess of expenditure over income, which is covered by loans) is set to overshoot last year's Budget estimates of 4.6 per cent of gross domestic product (GDP) by a full percentage point or more. Consequently, industry may have to wait longer to see some of its keenest fiscal wishes become a reality.


The auto industry could be affected more than most other sectors by the government's fiscal compulsions. On December 22, the Prime Minister's Economic Advisory Council recommended that the median excise duty be increased to bridge the fiscal deficit. On the back of high interest rates, an increase in excise duty on cars would hurt the industry.

Another worry for the auto industry is about diesel cars being targeted through some sort of fiscal disincentive, as the boom in this segment has an impact on the fiscal deficit. Subsidised diesel sales have widened the deficit and finance ministry mandarins have indicated that there is a strong likelihood that they will be taxed more.

KPMG, which worked with BT to examine fiscal issues for various sectors, identified a list of direct and indirect tax breaks industry hopes to get. For instance, the infrastructure sector hopes to get concessions on amortisation of development costs, given the long gestation period of a typical infrastructure project. In addition, the sector wants concessions to import machinery at lower prices. The wish list has remained pretty much the same over the last few years.

In fact, the wish lists of industry as a whole, given to the finance minister every year, are predictable, says Durgesh Shankar. The predictability of these wish-lists makes it possible for finance ministry bureaucrats to give their famous 'blue sheet' to the minister three months before D-Day. Simply put, the blue sheet is a first cut of the Budget numbers. According to D. Swarup, memberconvenor of the Financial Sector Legislative Reforms Commission, who was at the heart of the Budget making process between 1999 and 2005, it is a single sheet that captures the entire Budget and the assumptions underpinning it. "Black on light blue was more distinctive than black on white," he reminiscences.

Ernst & Young, which worked with BT to analyse potential changes in personal tax, concluded that Mukherjee may offer individuals some of the benefits proposed in the Direct Tax Code. On the heels of two years of high inflation, a decline in tax liabilities is something that would cheer the taxpayer. And it would also be politically prudent.

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