Budget this year is likely to keep hard reforms at bay, focus on checking inflation and announce the road map for Goods and Services Tax as part of major indirect tax reforms that will make legal, medical, rail and hospitality services more expensive.
A clear directive has gone from Prime Minister Manmohan Singh to Finance Minister P Chidambaram that nothing should be done in the Budget that affect the price line as inflation hits the 'Aam Admi' (common man) the most, official sources told PTI, adding there would not however be populist measures that may threaten fiscal stability at a time when the economy was on a roll.
The prime minister's punch line has been 'money does not grow on trees and you can't spend your way to prosperity', the sources said, adding the government was keen to see that the Budget does not signal any laxity on fiscal front which means there would be efforts to bring down the fiscal and revenue deficit targets in 2006-07 keeping in line with the commitment made in the Fiscal Responsibility and Budget Management Act.
As a logical step forward with the implementation of the state-level Value Added Tax last year, Chidambaram is widely expected to introduce Goods and Services Tax as part of the indirect tax reforms to move towards national value added tax, the sources said.
This means that while most of the excise duty would be pushed towards single rate of 16 per cent, more services would be brought into the tax net and the tax rate on services might also be raised from the present level of 10 per cent to align it with the 16 per cent Cenvat rate.
Services accounted for 52 per cent of GDP and the service tax has done exceedingly well this year growing at 66 per cent so far and revenue collections from this indirect tax is expected to far exceed the Budget target of Rs 17, 500 crore (Rs 175 billion).
Expectations are that service tax projections in the forthcoming Budget could be doubled to Rs 35,000 crore (Rs 350 billion) by bringing in more services into the tax net like medical, legal, rail, hospitality, trade fair, multiplexes and fashion desinger services.
At present there are 81 items that attract service tax. There is a strong resentment to two new taxes introduced in the Budget last year - Fringe Benefit Tax and Bank Cash
Transaction Tax. Prime Minister Manmohan Singh has made it clear that taxes should not be "confiscatory".
Trade and industry in their pre-Budget memorandum have emphasised that if revenue was the issue for introducing FBT, the better way will be to hike corporate tax by 2-3 per cent to generate the additional revenue rather than introduce a regressive Fringe Benefit Tax.
The Bharatiya Janata Party has gone on record that fringe benefit is a business expenditure as it is an incentive for increasing productivity of employees. FBT therefore acts as a dampener in raising industrial productivity.
Chidambaram has already said that he would simplify FBT to remove some of the glitches in its implementation, the sources said, adding it was expected that FBT would be modified. The sources said corporates might be given the option of either paying FBT or pay an equivalent amount by way of increased corporate tax to ensure there was no loss of revenue.
Another indirect tax reform maybe the reduction of customs duty to bring it down to the ASEAN (Association of South East Asian Nations) level. Both Manmohan Singh and Chidambaram have given enough indications that import tariffs will be brought down.
It is however to be seen if the finance minister adopts a big bang approach to reduce it to the ASEAN level of 8-9 per cent in one go or in stages. Presently the peak customs duty has been brought down to 15 per cent.
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