Business Unimpressed By Indian Budget

by Lorys Charalambous, Tax-News.com, Cyprus

01 March 2002

Indian stock exchanges and business lobbies reacted negatively to yesterday's budget which sharply increased individual taxation. Yashwant Sinha, India's finance minister, faced with a mounting Government deficit, said he had little choice but to increase taxation and announced a set of four measures affecting individuals including an increase from the existing 2% income tax surcharge to 5% and a new 10% tax on dividends in the hands of recipients.

Many had expected Mr Sinha's fifth budget to include measures to stimulate India's weak economy, but instead he concentrated on structural reform, improvements in the farm sector, and trade liberalisation.

"This is a budget for consolidating, widening and deepening the reform process," Mr Sinha told the Indian parliament, and one think tank said that this budget resembled a pair of 'sensible walking shoes' compared with last year's showy but impractical budget which they likened to a pair of 'flashy roller skates'. Many of last year's headline measures, which were widely welcomed at the time, have not been put into effect.

Mr Sinha abolished the 'kishan' system of restrictions on the distribution of agricultural products and sharply increaed rural infrastructure spending, describing the budget as delivering "freedom for the farmer".

On the trade front, the budget includes a cut in government subsidies for fertilisers and kerosene, the introduction of market pricing for petroleum products and a reduction in the peak import tariff rate from 35% to 30%. There is to be a 20% overall increase in government infrastructure investment.

In an attempt to increase competition in the banking sector, Mr Sinha has simplified entry requirements for foreign banks and will allow them the same access to beneficial tax regimes as is available to Indian banks.

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