The Finance Minister’s second budget proposal in less than nine months have shown that, with his feet firmly on the ground, he can reach new heights in creating the right environment for the Indian economy to successfully reach a growth rate of 10% in the next three years. He has been able to forge a new strategy for pushing the reform agenda with great dexterity. India is indeed fortunate to have him as the Finance Minister at this critical stage.

 

While continuing with the earlier measures for promoting rural development, increasing agricultural output by bringing in more acres under irrigation and giving additional allocations for infrastructure development, the Finance Minister has also continued to show the humane side by making large allocations for education, health and employment schemes.

 

The most heartening aspect of his budget speech is that he has given an account of the performance based on the promises made in the last year’s budget proposals. This clearly indicates the ability of the Government to deliver on its promises. The fact that both the manufacturing and services sectors have performed magnificently has given more ability to the Government to push through with the reform process.

 

The budget proposals have attempted to tackle the issues of growing unemployment, inflation and the low rate of the manufacturing sector which was evident in the past. To boost the manufacturing sector, he has brought down the rates of customs duty which will bring down the input cost of raw material. He has also rationalized the excise duty structure, specially to help the textile industry which is employment-oriented. Unfortunately, the Finance Minister has not given a boost to the tourism industry which has employment potential for millions of young persons.

 

The reduction in the rate of corporate tax to 33%, the granting of relief in respect of the minimum alternate tax, treating derivative trading as non-speculative, reducing the customs duty across the board and rationalizing the excise duty structure will have their impact in giving a greater boost to investments. While reduction in the rate of depreciation from 25% to 15% on plant and machinery may hurt the capital goods intensive sector, it will considerably benefit the service sector, notably, banking, insurance, IT-enabled service, etc.

 

Perhaps, the Finance Minister may be faulted for not coming out boldly on disinvestments of public sector units and taking credit for a substantial amount from the sale proceeds. He has also made no mention of the need to control population and measures in this regard. While the real estate sector has been given its due emphasis, no proposal has been announced which would give a boost to the tourism sector in India which can attract five times the number of tourist it currently receive and be a source for creating employment for millions of young persons.

 

The non-resident Indian community will breathe a sigh of relief that interest on NRE/FCNR deposits will continue to be exempt. Tax-payers in India will greatly benefit by the reduction in tax rates across the board which will give a benefit of Rs. 24,000 per annum in taxes on income of Rs. 2, 50,000. While the standard deduction and benefit under section 80-L and 88 have been removed, a new section 80-C has been introduced to allow deduction up to Rs. 1, 00,000.

 

Anew Chapter XII-H has been introduced to tax fringe benefits which include free or concession tickets for travel, entertainment, gifts, club facilities, use of telephone, etc. Very elaborate provisions have been made by inserting sections 115-W to 115-WL. A new return would have to be filed by companies providing such fringe benefits, failure for which would attract penalty. One wonders whether it was necessary to make such elaborate rules just for taxing the value of perquisites given to a handful of executives.

 

The streamlining of income-tax structure would result in middle-class tax-payers benefiting to the extent of almost Rs. 2,000 per month. While the rebate under section 88 has been removed, he has introduced a new provision for allowing more forms of savings a deduction to the extent of Rs. 1, 00,000. In other words, the effective rate of exemption of taxable income can be up to Rs. 2, 00,000 per individual.

 

In sum and substance, the budget proposal will help every sector, agriculture, industry and services. It will help in generating more employment, increasing production and curbing inflationary pressures. It needs to be seen whether the administrative reforms in the department of revenue are, in fact, carried out. The Finance Minister has promised to place before Parliament, a revised and simplified Income-tax Bill. Therefore, the budget proposals of the Finance Bill, 2005 are certainly not the last word. As and when the income-tax Bill is introduced, the full picture will emerge on the broad framework of direct taxation which the Finance Minister has in mind.

 

This is undoubtedly a growth-oriented budget which will make its impact on the lives of people not only in the fiscal year 2005-06 but also in the years to come. With the implementation of the budget proposals being taken up seriously by the Government, it will not be far when India will have a growth rate running into double digits.