Indian Finance Minister Attacks Sacred Cows On The Road To Reform

Mary Swire, Tax-News.com, Hong Kong

05 March 2001

With a combined central and regional fiscal deficit of 9%, slackening growth and pressure on manufacturing industry from a booming China, Indians expected little good news from Finance Minister Yashwant Sinha's budget on 28th February last week. In fact they were pleasantly surprised.

Obviously believing that a stimulus was required, Mr Sinha cut income tax rates for both individuals and companies by dropping tax surcharges of 15% and 11% respectively. Also (not such good news for savers) he reduced the artificially high Government-mandated interest rate on savings by one and a half percentage points, and hinted that this was a move towards liberalising the interest-rate market altogether.

Business was pleased by a reversal of last year's widely-disliked dividend tax hike, returning the rate to 10%, and by a roll-over scheme for capital gains if they are reinvested into new equity issues.

In order to pay for some of this largesse, and with a target central government deficit of 4.7% (down from 5.1% this year), the Minister extended the service tax to a number of new sectors, and pencilled in an ambitious 120 bn rupees' worth of privatisations for next year.

The extension of the service tax to online information and database retrieval services, however, has set the tax cat amongst the IT pigeons with a vengeance, and may not be the best way of encouraging a sector which is one of the few bright spots in India's recent economic development. Initially though it wasn't clear how far the tax would reach into the IT sector, with many hoping that it wouldn't catch dollar-billed services in addition to rupee-billed domestic services.

Said Skoch Consultancy Services managing director Samneer Kochhar: "The inclusion of these services may prove to be another of those "fumblers" which later leads to a spate of litigation due to difference of interpretation by the revenue department and the industry. There is need for clarification."

Scientific and technical consulting services have also been brought under the service tax net: "It needs to be clarified if software consultancy would be treated under the technical head or not," adds Kochhar.

But the most important part of Mr Sinha's speech was his clear intention to attack some of the vested interests and 'Spanish practices' which dog all attempts at reform in India. The first, and probably the easiest to get rid of, will be the abolition of rules that restrict many business activities to small companies, hobbling India's international competitiveness. The removal of restrictions on dismissals for companies with fewer than 1,000 employees will probably run into a wall of opposition. Reforming the catastrophic electricity industry will equally trample on many sensitive toes.

Still, markets responded with optimism and hope to the budget. If Yashwant Sinha's brave budget speech reflects a unified attitude towards reform on the part of his colleagues (worryingly, he was greeted with yells of rage from assembled deputies) then real reform may be possible.

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