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(Article) CSM - May 2013: Budget 2013-14: No Pain No Gain

Budget 2013-14: No Pain No Gain

Union Finance Minister P Chidambaram on 28 February 2013 tabled the Union budget in the Parliament for the financial year 2013-14. P. Chidambaram was presenting his 8th Union Budget. The union Budget of 2013- 4 emphasized fast track economic growth with due importance on infrastructure development, skill development, employment generation and funding for social schemes. Three factors of Economic Concern discussed in the Union Budget 2013-14 were high fiscal deficit, slow growth and high inflation. Expressing his confidence on India returning back to the higher growth path Chidambaram advocated for support from all quarters to navigate through economic crisis. The Union Budget of year 2013-14 stressed on achieving a growth of 8 per cent on an immediate effect. The finance minister expressed his worry on Current Account deficit (CAD). CAD which required 75 billion Dollars to finance was high because of high import in Oil, coal and gold imports. The Budget, which came against the backdrop of a few key major reform announcements by the government, some tough decisions on fuel subsidy and some plain speak by the FM himself on how the growth momentum needed to be brought back, did not have that ‘awe’ factor which the markets and Corporate India had come to expect of Chidambaram. To be fair to the FM, however, he did attempt to address the key concerns in his speech, whether it was the need to create employment or bring in greater foreign investment or spur investment activity. But the measures announced in the Budget were clearly not Big Bang.

The best thing that can be said about the Budget, of course, is that it does nothing to unsettle the markets or corporate India – despite the 10 percent surcharge on the super rich (those with taxable incomes above Rs 1 crore) or even the higher surcharge on the dividend distribution tax. He plays with a pretty straight bat and delivers on his broad promise of  keeping the fiscal deficit under check – at 5.2 percent of GDP for FY13 – and targets 4.8 percent for FY14. He has cut expenditure to Rs 4.29 lakh crore in FY13 and talks of redeeming the promise of bringing down the fisc to 3 percent by 2016-17.

Surcharges find their way back for some “super rich” individuals and for profit making entities. While the Finance Minister has emphasised that this surcharge has been introduced for only one year to bridge revenue gaps, surcharges and cesses tend to have a persistency beyond their intended period of operation. Share buy backs by unlisted companies will be subject to a distribution tax. The proposed tax is not conditioned on the existence of accumulated profits nor capped to the amount of accumulated profits. Royalties and fees for technical service fees will be taxed at 25 percent, up from 10 percent presently, subject to tax treaty relief. Tax treaty relief itself will be conditioned on proof of tax residence (which was always the case) as well as beneficial ownership (a condition that has been implicitly ‘introduced’); there is some apprehension that there may be a hidden sting in what appears to be an innocuous clarification of a position that all tax treaties provide for anyway.

India Inc. was not asking for concessions. It had two basic demands. First, there was the expectation of better macroeconomic management. Equally important was the hope that the projects worth Rs. 700,000 crore that have been stalled owing to problems with government clearances will finally start to materialise. This doesn’t involve announcements in the Budget — though a mention of the problem may have helped; it calls for political will and better governance. Unlike the fiscal deficit or even the revenue deficit, the deficit of governance can’t be quantified. Yet, the ability of Mr Chidambaram to mount a successful salvage operation and inject meaning into the Prime Minister’s post-Budget hope that India will soon be on an eight per cent growth trajectory depends almost entirely on improving the quality of governance. Unless, of course, the UPA-2 believes that the next election is as good as lost and that the next best thing is to make life hell for whoever follows.

The Highlights of the Union Budget 2013-14 are as Follows:

  • Total budget expenditure was Estimated at16.65 trillion rupees in 2013-14
  • India’s 2013-14 plan expenditure seen at 5.55 trillion rupees
  • To allocate 801.94 billion rupees to rural development in 2013-14
  • Plan to allocate 270.49 billion rupees for agriculture in 2013-14
  • RBI expected GDP growth of 5.5% for Financial Year 2013- 14
  • 80194 crore rupees allocation have been made for rural development schemes including MGNAREGA, PMGSY, INDIRA AWAS YOYANA. The Jawaharlal Nehru National Urban Renewal Mission will to continue during the 12th plan period.

  • 3511 crore allocation to minorities which is 12 per cent hike over budget estimates, 110 crore rupees allotted for welfare of disabled.
  • 65867 crore rupees have been allocated to the Ministry of Human resources development which is 17 per cent hike over the revised estimates.
  • 500 Crore rupees have been earmarked for high tech crop diversification program.
  • Allocations also include 13215 crore rupees for mid day meal programme. 27,049 crore rupees for agricultural ministry and additional 200 crore to women and child Welfare Ministry.
  • 14000 crore Rupees will be provided for PSB recapitalization. He will  constitute a panel on transaction costs, and financial policies.
  • Education gets 65867 crore rupees, an increase of 17 percent over RE for 2012-13.
  • ICDS gets 17700 crore rupees. This is 11.7 percent more than the current year.
  • Drinking water and sanitation will receive 15260 crore rupees. 1,400 crore was provided for setting up water purification plants to cover arsenic and fluoride affected rural areas.
  • Health and Family Welfare Ministry had been allotted 37330 crore rupees.
  • Small Industries Development Bank of India (SIDBI) Refinance Fund doubled to an amount of 10000 crore rupees.
  • Plans of Government are to encourage PPP projects along with Coal India.
  • P Chidambaram announced setting up of a new allwomen’s bank.
  • 1000 crore Rupees initial capital for a new women’s bank which will be another public sector bank. The Bank will be set up by October 2013.
  • An amount of additional 10000 crore rupees allotted for Food Security Bill in FY14.
  • 3000 km of road projects will be awarded in first six months of FY14.
  • Finance ministry approved 50000 crore Rupees tax-free bonds in FY14. The government expects to raise 25000 crore rupees via taxfree bonds in FY13.
  • Refinancing capacity of SIDBI raised to Rs. 10,000 crore.
  • Technology Upgradation Fund Scheme (TUFS) for textile to continue in 12th Plan with an investment target of 151000 crore Rupees.
  • 14000 crore Rupees will be provided to public sector banks for capital infusion in 2013-14.
  • A grant of 100 crore each has been made to 4 institutions of excellence including Aligarh Muslim University, Banaras Hindu University, Tata Institute of Social Sciences, Guwahati and Indian National Trust for Art and Cultural Heritage (INTACH).

  • New taxes to yield 18000 crore Rupees.
  • A surcharge of 10 percent on persons (other than companies) whose taxable income exceeds Rs.1 crore have been levied.
  • Tobacco products, SUVs and Mobile Phones to cost more.
  • Relief of Rs. 2000 for the tax payers in the first bracket of 2 to 5 lakhs.
  • Voluntary Compliance Encouragement Scheme launched for recovering service tax dues.
  • 9000 crore Rupees earmarked as the first installment of balance of CST compensations to different States/UTs.

New Plans and Schemes rolled out in the Union Budget 2013-14:

  • Nirbhaya Fund: The Finance Minister announced the setting up of a fund called the Nirbhaya Fund - with the Government contributing 1000 crore Rupees for safety and security of the women in India. The Finance Minister announced that various initiatives were underway as well as a lot more were undertaken by Government and NGOs for empowering women and providing them safety and security.

  • 1000 crore Rupees scheme for training youth: A 1000 crore Rupees scheme for training youth for boosting up their employability and productivity was rolled out in the budget. The National Skill Development Corporation would be required to set up curriculum and standards for training different skills. The trained youth who will pass the test by the end of the training would get monetary reward of 10000 Rupees on an average. This initiative would motivate 10 lakh youth.

  • Proposal to set up India’s first Women’s Bank as a public sector bank with 1000 crore Rupees as initial capital.
  • Direct Benefit Transfer (DBT) Scheme to be rolled out throughout the country during the term of UPA Government. This scheme will help the poor. Under the scheme, a bank account will be opened for each beneficiary; and the bank account will be seeded with Aadhaar in due course.

  • 10000 crore Rupees earmarked for National Food Secur ity towards the incremental cost.
  • Drinking water and sanitation will receive 15260 crore Rupees. 1400 crore Rupees is being provided for setting up water purification plants to cover arsenic and fluoride affected rural areas.
  • Proposal to launch Inflation Indexed Bonds or Inflation Indexed National Security Certificates to protect savings from inflation.
  • Voluntary Compliance Encouragement Scheme launched for recovering service tax dues.
  • 9000 crore Rupees earmarked as the first installment of balance of CST compensations to different States/UTs.
  • The Interest Subvention Scheme: This scheme for short-term crop loans is proposed to be continued for loans by public sector banks, RRBs and Cooperative banks, and expanded to private scheduled commercial banks. Under the scheme, a farmer who repays the loan on time is able to get credit at 4 cent per year.

  • National Livestock Mission: 307 crore Rupees have been provided for setting up of the National Livestock Mission. This will attract investment and enhance livestock productivity. A sub-mission of  this Mission seeks to increase the availability of feed and fodder.

  • Assistance of the World Bank and Asian Development Bank will be sought to build roads in the North Eastern States and connect them to Myanmar.
  • The body of Rur al Infrastructure Development Funds (RIDF) is proposed to be raised to 20000 crore Rupees.
  • Plans for seven new ci ties were finalized for industrial corridorsand work on two new smart industrial cities at Dholera (Gujarat) and Shendra Bidkin (Maharashtra) will start during 2013-14.
  • Two new ports will be established in Sagar (West Bengal) and in Andhra  Pradesh.
  • A power transmission system will be constructed from Srinagar to Leh and for this 226 crore Rupees were provided in 2013-14.
  • Apparel Parks are proposed to be set up within the Integrated Textile Parks, to house apparel manufacturing units.
  • Standing Counci l of Experts: Standing Council of Experts is proposed to be constituted in the Ministry of Finance to analyse the international competitiveness of the Indian financial sector.
  • A number of proposals rel ating to capi tal market have been finalized in consultation with SEBI. These include simplification of procedure and uniforms norms for foreign portfolio investors, clarity relating to FDI investment, allowing FIIs to participate in new areas, etc.

  • Relief for taxpayers in the bracket of 2 lakh Rupees to 5 lakh Rupees tax credit of 2000 Rupees to every person with total income up to 5 lakh Rupees
  • Surcharge of 10 percent on persons with taxable income exceeding 1 crore rupees
  • Additional deduction of interest up to 1 lakh rupees on home loan for first home buyerSecurities Transaction Tax (STT) reducedThe Union Budget 2013-14 proposed reducing rates of Securities  Transaction Tax (STT) in respect of certain transactions. P. Chidambaram proposed the following reductions in the rates of STT:

  • Equity futures: From 0.017 to 0.01 per cent
  • MF/ETF redemptions at fund counters: From 0.25 to 0.001 percent
  • MF/ETF purchase/sale on exchanges: From 0.1 to 0.001 percent, only on the seller
  • Commodities Transaction Tax (CTT) introduced in a limited way; agricultural commodities will be exempted
  • Securitisation trust to be exempted from income tax. Budget in Indian Constitution Budget in Indian Constitution is an annual financial statement. It is included in part V, Chapter 2 of PARLIAMENT Procedure in  Financial Matters of Constitution of India.

As per the article 112 of Indian Constitution

(1) The President shall in respect of every financial year cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year, in this Part referred to as the annual financial statement.

(2) The estimates of expenditure embodied in the annual financial statement shall show separately-

  1. The sums required to meet expenditure described by this Constitution as expenditure charged upon the Consolidated Fund of India; and
  2. The sums required to meet other expenditure proposed to be made from the Consolidated Fund of India, and shall distinguish expenditure on revenue account from other expenditure.

On the other hand first signal of political pressure getting the better of good economic sense is the decision to cut petrol prices but not raise diesel rates. Under the January decision, the oil companies were to raise diesel prices by 45-50 paise a month till they are able to cover their losses fully. But over the weekend, while petrol prices were cut by Rs 2 a litre, diesel wasn’t raised. The February hike was missed. One newspaper reported that the oil companies have been advised to wait till the parliament session ends to raise diesel prices.

Once a policy decision is taken, why should the ministry keep intervening on when diesel prices should be raised or dropped? In fact, raising diesel prices on the day petrol prices were being cut would have been the best way to neutralise their political impact. But the UPA lost the opportunity. Now, even if diesel prices are raised next week, it will only show that government is afraid to implement its own reform.

The second signal is the food subsidy – which the budget placed at Rs 90,000 crore for 2013-14, including the Food Security Bill. The Congress party is pushing for a Bill that does  not discriminate between the level of food subsidy being given to above poverty line (APL) recipients and below poverty line (BPL) families. The finance ministry has now discovered that the subsidy bill will bloat 38 percent, from Rs 90,000 crore in the budget to Rs 1,24,747 crore, reports The Indian Express. If Chidambaram loses this fight with the party, it will be a clear signal that he is abandoning fiscal consolidation with half-measures.

The third signal is coming from Jairam Ramesh’s Rural Development Ministry. It has proposed all kinds of changes which will have a negative effect on reforms. After first proposing a Land Acquisition Bill that will raise land prices, it has proposed a National Right to Homestead Bill to provide houses to the rural poor. Every homeless rural family will thus be entitled to 10 cents (one- undredth of an acre) of land at a time when land prices will rise in general. Who is going to pay for this munificence? To compound matters, Jairam Ramesh is also concocting a National Land Reform Policy that wants to limit land holdings to a maximum of 15 acres. Now, India’s problem is the atomisation of land holdings due to family separations, and not excess land holdings (though this may exist in benami forms). Development requires a strategic shift which allows more rural landowners to opt out of agriculture and seek nonagricultural occupations or productive jobs in cities. On the other hand, the productivity of land needs to be improved by greater mechanisation and providing more avenues for contract farming – and this will be helped by increasing the land ceiling, and not reducing it.

Fourth, a significant chunk of Chidambaram’s revenues this year are coming from forcing public sector financial entities to buy disinvested equity. The government’s sale of Rashtriya Chemicals and Fertilisers was a nearflop, with the LIC having to pick up a big chunk of the offering. The Nalco sale had to be curtailed due to the paucity of investor interest. The point is this: raising revenues from disinvestment at the best of times is not the same as genuine fiscal consolidation. Raising it by transferring money from LIC to itself is an accounting fraud. And selling well below fair value in a fire sale and simply not right. On the other hand, if you add
up the measures, there’s probably enough to keep the political constituency happy with several steps aimed at the farm sector and the rural population. The interest subvention scheme for short-term crop loans will continue, and there are a slew of steps on education and health, with Rs 37,330 crore allocated to the health ministry. Almost Rs 66,000 crore has been allocated to the HRD ministry, and Rs 80,000 crore for rural development. There’s even a whole new bank for women. Some concrete steps have been announced on the infrastructure front. Infrastructure debt funds will be encouraged, there will be a regulatory authority for the road sector and there will be tax-free infrastructure bonds to the tune of Rs 50,000 crore. On the investment side, an important move which could be good news for smaller and medium companies is the investment allowance of 15 percent on companies investing over Rs 100 crore in plant and machinery between 1 April 2013 and 31 March 2015.

The Budget also aims to bring in a greater proportion of household sector savings into financial instruments and hence proposes to liberalise the Rajiv Gandhi Equity Savings Scheme, introduce inflationlinked instruments and give additional deduction of interest upto Rs 1 lakh for a person taking the first home loan of upto Rs 25 lakh, during 2013-14. Expectations have a way of getting ahead of themselves, but with plunging growth rates, declining savings and investment rates, stalled projects and spiralling costs, a battered economy and a bruised psyche pinned much hope on Budget 2013. Expectations were elevated also on account of a purposeful approach that the Government appeared to demonstrate since September 2012. Budget 2013 did not quite deliver to these expectations.

Government actions and tax proposals contained in Budget 2012 combined to heighten concerns on the approach of Indian Revenue authorities, the ambiguity of our tax laws and their predictability and our ill equipped dispute resolution processes. Recognising the damage that this was causing, the Government established expert committees to review the relevant provisions and to recommend actions that the Government should consider. After an extensive consultation process, the Shome committee submitted its final report in September 2012. Given the expressed concern and the determination that the Government demonstrated to alleviate it, it was not unreasonable to expect that Budget 2013 would address all these issues comprehensively. Yet, Budget 2013 is silent on a number of these matters, in particular the taxability of indirect transfers such as the one concerning Vodafone. Meanwhile, an overhang of uncertainty persists, which appears to be at conflict with the Finance Minister’s stated themes in relation to his tax proposals of clarity in tax laws and fair dispute resolution mechanism. At the same time, the approach of the Revenue authorities on the ground does not appear to accord with the objective of a non adversarial tax administration.

On the controversial GAAR provisions, the indications were that the Shome committee recommendations would be substantially adopted. However, the revised GAAR provisions per Budget 2013 do not consider a number of salutary recommen-dations contained in the Shome committee report, and unless these will figure in further guidance that is intended to be released at a later date, the pain that was apprehended when these provisions were initially introduced will have merely been deferred to FY 2015-16. Given the far reaching implications that these provisions could have, tax governance best practices would suggest that the Government should explain the recommendations that it has accepted and the ones that it has chosen not to act upon along with reasoned explanations, something that would have served to provide a level of reassurance that the Finance Minister seeks to provide but does not appear to have delivered upon.

Whatever the shortcomings, this Budget speech will get high marks for candour. The Finance Minister makes it clear that food inflation is the real worry and he would take all steps to ease the supply-side constraints to meet the growing demand for food items. The FM also made no bones about the fact that getting in foreign investment is a priority at this point, and India cannot choose between welcoming and spurning foreign investment. The Budget does focus on a few areas: an attempt at employment generation, some moves to please the capital markets, some steps which will make the small and medium enterprises and those who fund them happy. Equally important, he does not tinker with taxes much and keeps the base rates unchanged.

S. K. Singh