Budget For Growth Introduced in India

by Mary Swire, Tax-News.com, Hong Kong

09 July 2009

The Indian finance minister, Pranab Mukherjee, has introduced a budget for 'Aam aadmi', or the 'common man'. The budget outlines three 'challenges': to restore 9% growth, 'inclusive development' and better public services. This will entail increasing spending by 36% to INR10.2 trillion (USD211bn). The budget deficit will increase to 6.8% of GDP in this tax year, from 6.2%, forcing the government to borrow a record INR4.51 trillion (USD93bn) according to government estimates. After overhauling subsidies and achieving growth of 9% in the next two years, the government plans to cut the deficit to 5.5% of GDP by March 2011 and to 4% in the following 12 months.

Mukherjee said sustaining high growth is now 'more complex' and that capital inflows are needed. Changes to foreign investment rules were expected but not announced on this day. Like other aspects of this budget such as the application of asset sales, further information is expected to trickle out over the coming weeks. At present the government has planned for very modest asset sales but at the same time made it clear that they are prepared to enter a major program for disposing of up to 49% of 'public sector undertakings', and hint of further announcements to come.

To support consumption in rural India, where more than three-fifths of India’s 1.2 billion people live, INR391bn (USD8bn) was allocated to a rural jobs program, which benefited 45 million households last year. This represents a 44% increase on last year, the minister said. The government will provide rice and wheat at a subsidized rate of 3 rupees a kilo to the rural poor. The government wants to create 12 million new jobs each year and reduce poverty by half, by 2014.

The finance minister announced spending of INR1.79 trillion (USD37bn) on roads, telecommunications and power, where capacity constraints, according to the finance ministry, have restrained the nation’s annual economic growth by a good two percentage points. Spending on infrastructure is planned to rise to 9% of GDP by 2014. Policy, regulatory and institutional bottlenecks will be removed to speed up implementation of infrastructure projects. The India Infrastructure Finance Company Limited (IIFCL) and banks will work on a takeout financing scheme to facilitate incremental lending on infrastructure. Measures to free up capital for financing new projects will be introduced.

The main tax changes include the removal of Fringe Benefit Tax on the value of fringe benefits provided by employers to their employees; and the Commodity Transaction Tax on taxable commodities transactions entered in a recognized stock exchange has been abolished, aiming to tempt more investors to a market that has doubled to USD1 trillion in the past three years. Whilst there are no changes proposed to corporate tax rates, the tax rate on companies paying Minimum Alternate Tax (MAT) will be raised to 15% of book profits. MAT tax credits can now be carried forward ten years. The surcharge on personal income tax but not on corporate income tax has been removed. The threshold for levy of the wealth tax has been increased from INR150.000 to INR300,000.

Zero Coupon Bonds issued by an infrastructure capital company and infrastructure capital fund or public sector company are considered to be long term capital assets if held for a period of more than 12 months. Gains on the sale of such bonds are now subject to a lower tax rate (10% or 20% as the case may be). It is proposed that bonds issued by scheduled banks, including nationalized banks, will also be eligible for the same treatment. In view of the preferential tax treatment, these banks should be able to issue such bonds to source long term funds.

Income of the National Pension Scheme (NPS) Trust will be exempted from income tax. Companies which pay dividends to this trust would also not be required to pay Dividend Distribution Tax. Similarly, all purchase and sale of equity shares and derivatives by the NPS Trust will be exempt from the Securities Transaction Tax. Self employed persons would be able to participate in the NPS and avail themselves of the tax benefits.

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