New Delhi:The government is likely to extend tax breaks on personal income and cut duties on consumer goods in its annual budget as it looks to boost spending and revive slowing growth before general elections due by May 2009.
Analysts say the centre-left government wants to leave more money in the hands of consumers when it unveils the 2008/09 (April-March) federal budget on 29 February, its last full one before it faces the ballot.
Raising the tax-free income limit to boost consumer spending, lowering taxes to drive retail prices down and cutting an additional corporate tax are likely to be the centrepiece of Finance Minister Palaniappan Chidambaram’s plan.
“Since last year’s tax collections were buoyant, it gives him some leeway, and since next year is an election year, there is a likelihood of populist decisions,” said Rupa Rege Nitsure, economist with Bank of Baroda.
“He may increase the income-tax exemption, and on corporate taxes he will look at phasing out surcharge.”
Tax receipts have risen on a booming corporate sector and rapid economic expansion in recent years.
Latest finance ministry figures show corporate tax receipts rose 39% to Rs1.38 trillion ($34.5 billion) between April and mid-February from the same period a year earlier, and income tax receipts rose 46% to Rs903.56 billion.
Direct taxes receipts crossed Rs2.29 trillion in the period, up 40% from a year earlier, and looked set to top 3 trillion in the fiscal year which ends on March 31. The government had set a target of Rs2.67 trillion for 2007/08.
Economic growth, which has exceeded 9% in the past two fiscal years, is likely to moderate to 8.7% this fiscal year due to a series of interest rate rises which slowed demand for cars, real estate and some consumer durables.
Analysts said the revenue dividend from the surge in growth has given the finance minister room to use tax cuts to tackle this problem without having to worry much about public finances.
The government hopes lower duties on items such as washing machines, television sets and motorbikes will boost consumer demand slowed by high interest rates.
“I expect some duties on consumption sector, durables likely to be brought down, especially on cars, commercial vehicles; the latter showing sharp slippage in growth,” said Shubhada Rao, chief economist with Yes Bank.
Rao also expects the Congress party-led coalition to phase out a surcharge on taxes paid by companies, helping them sustain profitability. The surcharge is 10 % on a tax rate of 30%, making the effective corporate tax rate 33%.
Analysts also see Chidambaram possibly cutting peak import duties marginally from 10% to bring them closer to those in the Association of South East Nations and to help restrain inflation, which has risen above 4% in annual terms and is expected to rise further before the end of 2007/08.
As for lost collections, the government hopes the resultant surge in economic activity will make up for it.
Chidambaram may have a few other aces up his sleeve. Analysts say he could cut excise, or factory-gate tax, from an average 16% in the hope this would be passed to consumers via lower retail prices.