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Budget 2010: What the FM is likely to do!

Last updated on: February 23, 2010 21:09 IST

Budget 2010: What the FM is likely to do!

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Rediff Business Desk


Despite the fact that the annual budgetary exercise has slowly been losing its significance, Budget 2010-11 is seen to be extremely significant.

Finance Minister Pranab Mukherjee has his hands full. He faces a tough challenge as he has to try and present a balanced Budget; one that will appease the aam aadmi and also not hamper growth.

And some of the reasons why the Budget 2010 will be extremely significant the impending are:

  • The Direct Taxes Code might come into force from the next fiscal year.
  • The government is struggling to keep inflation and food price rise under control.
  • The fiscal deficit is already at a distressing high. So should he push for fiscal consolidation or go in for big social sector and other spending?
  • Should he keep subsidies intact or should he bite the bullet and go in for tough reforms?
  • Should he push for faster growth without upsetting the common man, while still removing the excess liquidity in the system?
  • Should he continue with or withdraw the economic stimulus packages? Or should he do it only partially?

So what is it that Finance Minister Pranab Mukherjee is likely to do? Well, here are some views culled from various new agencies, newspapers and experts on what the February 26 Union Budget for 2010-11 might have in store for you.

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Image: Finance Minister Pranab Mukherjee.
Photographs: Reuters
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Income tax rates to be lowered?

All individuals want and expect reduction in personal taxes. But views on whether this will happen or not are varied. Some experts believe there might be no changes in personal income tax rates, while others seem feel that the finance minister may increase the slabs for personal income tax. The current slab of Rs 1.6 lakh (Rs 160,000) for taxable income may be increase to Rs 2.5 lakh (Rs 250,000) for men. There will be suitable increments to women and senior citizens. Income above this slab is taxed at 10% till the next slab.

The second slab may be increase to Rs 10 lakh (Rs 1 million) from the current Rs 3 lakh (Rs 300,000) for the taxation at 20%.

The third slab is expected to be raised to Rs 25 lakh (Rs 2.5 million) for the 30% tax rate. This is from an existing slab of Rs 5 lakh (Rs 500,000). The highest slab is expected to occur at Rs 50 lakh (Rs 5 million). This is an increase from the current slab of Rs 10 lakh.

Some economists feel that the deduction limit of Rs 100,000 under section 80C may be increased to Rs 250,000, to encourage the common man to resort to savings.

A Times of India report said that the government might also increase the exemption limit for reimbursement against medical and travel expenses. Currently, reimbursement of medical expenses up to Rs 15,000 is tax-free: this might be raised to around Rs 25,000. Transport allowance is tax-free up to Rs 800 a month: this could be raised to Rs.2,500 per month.

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Budget 2010: What the FM is likely to do!

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Another conjecture is that the interest paid on home loans which is currently not taxed up to Rs 150,000 might be increased to Rs 250,000, in another bid to keep the common man happy. However, many economists say that this is unlikely to happen.

The finance minister might reduce wealth tax to 0.25 per cent as suggested in the New Direct Taxes Code from the current 1 per cent, said an Economic Times report.

Corporate Tax might be reduced

Reports indicate that corporate tax rate might be lowered to 30 per cent in the Budget 2010-11, as a precursor to the New Direct Taxes Code that has recommended cutting it down to 25 per cent.

The stock markets too will be closely following the FM's proposals to see if he cuts corporate tax or removes corporate surcharge thereby helping boost corporate profitability. This move might prove to be a big booster dose for companies and the stock markets.

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Budget 2010: What the FM is likely to do!

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Fiscal consolidation; economic stimulus rollback

Mot people believe that with the economy back on an even keel and almost out of a slowdown, the indirect tax rate may be recalibrated to the pre-stimulus levels. Thus, the finance minister is seen as rolling back the stimulus.

Many economists however believe that a rollback of the economic stimulus or increase in tax rates might have a bad effect on the economy and might push it back into the quagmire of recession.

Chances are that the finance minister will partially roll back the stimulus packages leading to a rise in excise duties.

The government may take the first step towards fiscal consolidation by partially rolling back tax cuts given to the industry last year. The service tax rate may be restored to 12 per cent while excise duty could be increased marginally.

A first step towards withdrawing the post-crisis fiscal stimulus may be taken in the Union Budget for 2010-11, with an increase in the Cenvat rate for excise duty by 2 percentage points.

The government is likely to extend the 2 per cent interest subsidy given to exporters on rupee export credit from March 31 to December 2010.

The packages include assured employment programmes, infrastructure programmes related to roads, easy access to loans for companies, less interest rate on loans by reducing the CRR and SLR.

It is expected that the same support will continue this year too. One of the key things that can go against the continued stimulus is the very high inflation.

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Budget 2010: What the FM is likely to do!

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Food inflation

With food prices shooting through the roof and crippling the aam aadmi, the finance minister is under huge pressure to take steps to control runaway inflation in tandem with the Reserve Bank of India.

The opposition parties too are stalling the business of Parliament over the issue of price rise.

Currently, food inflation is dangerously close to 20 per cent. This has left a huge hole in the common man's pocket and a big dent in the government's image.

Thus reining in high inflation will be a major challenge for the finance minister.

The budget is likely to implement the Congress' poll promise of a Food Security Bill, apart from increasing funds for schemes under the Mahatma Gandhi National Rural Employment Guarantee Act.

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Budget 2010: What the FM is likely to do!

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Service Tax may rise

The finance minister might increase service tax rate to 12 per cent from 10 per cent. This will lead to a rise in the cost of over 109 services, such as beauty salons, health and fitness clubs and rent-a-car services, said a Hindustan Times report.

The government is aiming at service tax collections to the tune of Rs 75,000 crore (Rs 750 billion) for 2010-11.

Increase in Gratuity Limit

Already given the go ahead by a group of Ministers, the gratuity limit at the time of retirement may be increased to Rs 10 lakh from the current Rs 3.5 lakh (Rs 350,000). This is definitely less than the 'No Upper Limit', requested by the salaried class. But the increase in limit is much better than the archaic Rs 3.5 lakh.

This is definitely a blessing for people who are retiring. Many a times, with the higher income that the Central and State government employees enjoy, at the time of retirement, people are not getting the full amount that has accrued in their gratuity account.

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Budget 2010: What the FM is likely to do!

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Increase in self assessment slab

The self assessment slab is currently at Rs 40 lakh (Rs 4 million) for professionals and business people. This slab may be increased to Rs 1 crore (Rs 10 million). This will help to reduce the accounting burden for the self employed and professionals.

PAN card linkage

The PAN (Personal Assessment Number) card is currently the prime card required for any financial transaction.

However, there are a number of missing links in the implementation. For example, bank deposits in different banks (private and public sector banks and cooperative banks) are not linked. This has been used (misused) by tax payers and tax evaders by having a number of accounts in different banks to avoid tax on interest.

The same is happening with mutual funds with different folio numbers to avoid getting a KYC (Know Your Client) certification.

Making a PAN card mandatory has not been enough. The accounts also need to be integrated based on the PAN card.

The forthcoming budget may make this implementation mandatory. More than any other change in the income tax, this will be the biggest change, if implemented, as it is a disruptive change compared to the other marginal changes.

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Budget 2010: What the FM is likely to do!

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Double tax avoidance treaties

The Budget is expected to lay down a plan to plug loopholes in the double tax avoidance treaties, which cost the Indian exchequer billions in tax revenues, said Business Standard.

Jobs

Job creation schemes might be taken up on a bigger scale, although reports indicate that the finance minister might not increase the budget allocation to the NREGA substantially.

Defence

The defence ministry is expecting a 15-20 percent increase in it budget allocation for the next fiscal due to rise in expenditure on its modernisation drive and commitments following pay review, according to a report in The Financial Express.

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Budget 2010: What the FM is likely to do!

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Emphasis on social sector schemes

Social sector schemes -- including those related to health, education, infrastructure and development projects -- are likely to figure prominently in the finance minister's Budget proposals this year.

However, with the fiscal deficit getting out of control, the FM will have to a tightrope walk to strike a balance between controlling expenditure and providing funds for the social sector.

Divestment

Last year's budget was a major indicator of the government's view on divestment. With the Left parties no longer holding the government to ransom, it is likely that the finance minister might adopt an aggressive line on divestment of public sector units.

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Budget 2010: What the FM is likely to do!

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Agriculture reforms

Like the year before last when the then finance minister P Chidambaram waived off farmers' loans giving a major boost to the agriculture sector, this time too the government is keen to help the sector grow further.

There are indications that the finance minister might partially give in to the farmers' demands and provide some subsidies, although this might not be a move that is sustainable or based on economic logic.

GST implementation

This is a much talked-about and often-postponed implementation. There are a number of benefits from the implementation of GST (Goods and Services Tax). The major benefit for the common man is the potential reduction in prices of products. The reason being the tax burden in the form of multiples levels of taxes on products and services will come down.

The government will also benefit because more companies and services can be brought under the tax net. So the government will get lesser tax from more number of people leading to higher income and greater compliance. It is hoped that this budget will give a clear date for the implementation of GST.

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Income tax reforms objectives & progress

Overall the reforms related to income tax are to simplify the process of paying/collecting taxes, to expand the tax payers base so that the burden of tax is reduced and spread over many.

The direction taken by the authorities is on the right track however the speed till now is slow. The expectation from the forthcoming budget based on the pre-budget discussion is that there may be a few block buster changes.

Reforms in foreign investment

Reforms in the form of greater foreign investment in the financial services industry is expected from this budget -- insurance, for example. It is also expected that foreign investment in print media would be allowed at least to a small extent.

It is expected that foreign investment will also be allowed in the education sector. This will help to bring quality international education at affordable costs in India itself.

Safety of the student is another major benefit considering the physical pains that our students are undergoing in Australia.

For the economy, this can be a double benefit for our foreign exchange: one, investment will come in; two, outflow of foreign exchange due to students going abroad for higher education will come down.

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