New Delhi: India’s finance minister P. Chidambaram extended a tax holiday for software companies located in certain locations while replying to the discussions on the Budget in parliament on Tuesday, but his at least hour-long speech had a bigger, more critical theme: fighting inflation.
The Finance Bill, 2008, (the Budget) was passed by Lok Sabha after a walkout by members of the Left Front, which supports the ruling United Progressive Alliance government without being part of it, because Chidambaram’s reply did not address their demands including a complete ban on all futures trading in commodities.
The tax holiday for software firms located in parks run by the autonomous Software Technology Parks of India, or STPI, was originally meant to expire in 2009 but has now been extended up to 2010. Chidambaram admitted that the right time to announce this would have been in Budget 2009, but added that he was doing so now because “...as things stand, the budget for 2009-10 may not be presented in February 2009, but only after the general elections...”
Chidambaram, who emphasized his opposition to extending tax sops, declined to make concessions on other Budget proposals such as introducing a transaction tax in commodities exchanges.
Software stocks rose in a strong Mumbai market, already buoyed by RBI’s decision not to increase lending rates. Trade body Nasscom said Chidambaram’s decision would benefit back-office firms and small and medium-sized software firms that have already been hit by the rupee’s appreciation in 2007 and signs of slowdown in the US. Many larger firms have already secured permission to set up special economic zones which come with their own set of incentives, including a tax holiday.
“This benefit will also give us time to come up with other workable and acceptable options for the future, beyond 2010,” Nasscom said in a statement.
“This is a good move and will benefit the small and medium-sized companies that are finding it difficult to move into special economic zones (SEZ) due to the lack of availability of SEZ space as well as high rental costs,” said V. Balakrishnan, chief financial officer of Infosys Technologies Ltd.
While the minister devoted a large part of his reply to new measures on containing inflation, including cuts in customs duty and introduction of levies on export of steel, he ignored specific demands of the Left Front, such as a cut on duties levied on petroleum products and a ban on futures trading in essential commodities.
“We walked out because the minister did not address our concerns,” said a disappointed Mohammad Salim, deputy leader of the Communist Party of India (Marxist). “He talked about higher procurement, but said nothing about the agrarian crisis. He spoke about inflation, but said nothing about futures trading, which should be banned.”
Bidyut Chakrabarty, a professor of political science at the University of Delhi, said: “By staging a symbolic walkout, the Left merely reiterated that while it does not want to share the blame for the price rise, it does not want to pull down the government. However, this time it may have done so also on the basis of indications that the government was about to press ahead with the India-United States nuclear deal.” Chakrabarty added that the Left Front’s attempt to distance itself from the Congress was a move aimed at the next elections.
As part of the Centre’s initiative to contain inflation, Chid- ambaram reduced customs duty on a variety of steel products and introduced a three-tier export duty of 5%, 10% and 15% on steel products.
The minister also replaced the fixed excise duty of Rs600 per tonne on cement by an ad valorem (by value) duty of 12% on every 50kg cement bag priced above Rs250, which aims to discourage companies from nudging up the price of cement bags currently priced around Rs250.
Chidambaram also used fiscal measures to mitigate inflationary pressures in food prices, which have been one of the key drivers of the recent rise in inflation rate. He reduced customs duty on skimmed milk from 15% to 5% and from 40% to 30% on butter oil, which is used for reconstituting liquid milk. An export duty of Rs8,000 a tonne has been levied on basmati rice.
“On the whole, the minister presented a picture of helplessness,” said the Bharatiya Janata Party’s M.A. Kharabela Swain, who had initiated the debate on the Finance Bill, “Though the minister tried to allay fears on food security, by referring to healthy output, he did not explain just why the country had to depend on imports for several items and why prices were refusing to come down.”
Significantly, while the minister referred to higher allocation for education, he refrained from mentioning the around Rs60,000 crore farm loan waiver that had dominated his Budget speech on 29 February and his reply to the subsequent debate on the demand for grants. While the Finance Bill deals with direct and indirect taxes, the demand for grants deals with the government’s expenditure.
“We are not dealing with the loan waiver in the Finance Bill. The deadline for that is 30 June,” Chidambaram said later, when asked about the reason for not accepting Congress general secretary Rahul Gandhi’s suggestion for extending the scope of the waiver.
In a relief to public sector refiners, the minister announced an extension to the seven-year tax holiday for companies starting operations by 31 March 2012, instead of 1 April 2009 announced earlier for three specific refinery projects floated by Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd.
Vishwanath Kulkarni contributed to this story.