Response to the Union Budget 2004 from ISB

Press Release
Response To The Union Budget 2004
From Indian School Of Business (ISB), Hyderabad

Tax reforms:
The budget carries the positive announcement of expanding the coverage of service tax as well as an increase in the service tax rate from 8% to 10%. The Government has also taken the positive step to integrate the tax structures for goods and services across goods and services. Another positive move was to announce a date for VAT implementation. However, not much was announced to further rationalize the direct and indirect tax regimes or as follow-up steps to implement the Kelkar Committee report.

Education cess of 2%:
The additional cess is over and above the existing surcharges. This will increase the effective tax rate. However, the FM has played it safe by giving out a mixed bag on direct and indirect taxes, such as increasing the income tax slab to Rs 100,000, excise exemptions on computers etc., dampening the effect of the additional cess.

Increase in FDI cap for telecom insurance and aviation:
Increased FDI cap for the insurance sector will invite new players into the market, since 49% will give enough control for the FDI's. This will also result in the existing players pumping in more capital to this sector on an overall basis. This will also lead to a development in the insurance sector. The LIC, GIC and other government insurance agencies, which will face greater competition.

The telecom sector with its need for capital and longer gestation periods is capital thirsty. With the given hike in FDI, a further flow of investment can be expected. This should be a positive boost to increasing the poor penetration rates that India currently has. However, in the recent past, the consolidation in the cellular industry has witnessed the exit of many foreign investors. Further, the domestic players have shown an ability to raise the required capital.

Farm subsidies and insurance:
The FM has set a target to double agricultural credit in three years. Further, duties on farm equipment such as tractors have been removed. Greater subsidies have been announced to the sector.

So far as these moves assist the farm sector in modernizing and hence bettering farm output, it is a positive action. However, studies have demonstrated that subsidies do not necessarily reach the intended audience. What is necessary is an efficient machinery to ensure that the benefits reach the intended audience, i.e., the small farmer.

Increased emphasis on PSU's, reduced focus on privatization and disinvestment:
The current government appears to have taken a leftist stand with its increased focus on supporting and/or retaining control over PSU's. Moves such as investments to support ailing PSU's should not result in diverting public money to support weak PSU's, with no tangible value addition.

Service tax:
Though the service tax net has been somewhat broadened with new sectors added to the existing 58 sectors, and the increase in service tax rate from 8% to 10%, inclusion of the entire transport sector was conspicuous by its absence. Further, inclusion of service tax under the CENVAT credit scheme is a positive step towards a value added tax regime.

Contributed by -
Ms. Bhuvana Ramalingam,
Director - Communications,
Indian School of Business, Hyderabad.