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Analysis: Circle of hope

Analysis: Circle of hope
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First Published: Wed, Feb 28 2007. 07 58 PM IST
Updated: Wed, Feb 28 2007. 07 58 PM IST
Every year, most pin our hopes on the budget. Some look for largesse, some await corrections and there are others that pray – “ lets hope, status quo be maintained”!
In the midst of these anxious moments and months of representations that proceed, the Finance Minister of India, rises to the occasion, to present his Budget. After few hours of cacophony, one realizes that their hopes have either come crashing or soared a few notches!
This year’s Budget was no different. It had its share of winners and losers. While it brought smiles to witness the sustained GDP growth of plus 8 percentage year on year, the drivers of this GDP, namely the service sector having to bear the brunt of incremental taxes was perhaps the dampener.
Take the example of the BPO industry. It has consistently contributed to the robust foreign exchange reserve, but is now saddled with a Minimum Alternate Tax and a Tax on Employee Stock Options! Coupled with this, levy of service tax on leasing of immovable property could hurt them as well, since lease of large office space is a necessary feature of this industry. Nonetheless, there is a silver lining for them. This tax would be creditable for domestic service providers, who have an output service tax. For service exporters, the route of refunds and rebates of input taxes exist with more certainty now, as they no more have to meet the onerous condition of “ services being delivered outside India” to qualify for this benefit. Instead it would suffice, if the services have been performed in India and used outside India, for the export benefits to trigger!
The Finance Minister has attended to the infrastructure sector, though some new concerns have also emerged from this budget. For example, imposition of service tax on Engineering Procurement Construction (“EPC”) contracts, overruling the Supreme Court decision in the case of IHI on taxability of offshore services, continuation of service tax on exploration and production operations, levy of service tax on mining of mineral and gas are some of the areas of concern.
These proposals would have significant impact on power projects and oil installations, since they have no means to recoup the input service taxes unlike a refinery or even a pipeline. The good news, however, is that the imposition of service tax on EPC contracts has not been extended to core infrastructure such as roads, ports, airports, bridges etc! These select industries would additionally benefit (just as other infrastructure would) since the Government has reduced excise duty on cement to ensure that the market maintains a basic and affordable price point.
In the recent past, India has witnessed significant investment in iron & steel manufacturing, around the East Coast, which uses iron ore as a feed. Perhaps to disincentives export of these ores from India, the Government appears to have imposed an export duty on Iron ore. Correspondingly, customs duty exemption for coking coal is likely to boost this industry as well.
The gradual reduction of the peak rate of customs duty in the past few years have continued with the peak rate now resting at 7.5%. Some of the key gainers on account of various customs exemptions and concessions would be, chemicals and petrochemicals, agriculture, textiles, R&D, health, digital cinema development projects and dredgers. However, the buoyancy in the airline industry might be damned with the introduction of customs duty of 3% on import of aircraft parts except where these are imported by Government or scheduled airline
From an Excise duty perspective, exemptions have been accorded to packaged biscuits, food mixes, water purification plans, bio-diesel, DVD drive/DVD writer, flash memory etc. To reduce the inflationary trend, the Government had recently reduced the price of Motor Spirit and Diesel and has now extended a reduction of 2% on the excise duty rate for Motor Spirit and High Speed Diesel. On outsourcing arrangements, excise duty is now required to be paid on the sale price of the principal and the concept of cost construction method being followed by the job worker has been dispensed with.
Finally, the road map to GST now appears to be clear and though the target of 2010 appears to be ambitious, it does generate hope ! A country that has fewer taxes and exceptions and a tax policy that does not saddle business with consumption taxes instead allows it to pass it on to the consumer, would auger well for the Economy in the long run. Reduction of the CST rate from 4% to 3% is perhaps one such long awaited and modest step ! There are many more needed and many more that is aspired & hoped ! Perhaps the next year around, we would pin our hopes, just the same way we did this time around – and the circle of hope would go on !
The author is Executive Director, BMR and Associates
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First Published: Wed, Feb 28 2007. 07 58 PM IST
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