Budget 2012 has some positive aspects too

Last Updated: Mon, Mar 26, 2012 04:45 hrs

One has been hearing the negative aspects of the Budget too often. Economists have been denouncing it for its high percentage of fiscal deficit and not providing enough for the different social programs. Others are talking against it for not curtailing subsidies enough or for not creating a more favorable climate for investment. Those writing on indirect taxes are eloquent about not reducing exemptions but giving more of them. All of them may be partially correct, but not fully since certain things have to be done only in the circumstances beyond which the Budget cannot go. For example, fiscal deficit should be reduced but how one does it without increasing tax has not been pointed out by the economists. So, one must also emphasize the positive aspects, in order to make the assessment fair.

First, a big step towards the GST is the introduction of the comprehensive service tax in place of the 17-year old selective list, which has now swelled to 120 services with 120 definitions and 1,200 circulars , (on an average of 10 circulars per service).

It was a circular raj and a paradise for service tax practitioners. Now, for the first time all services will be chargeable to tax. Only those in the Negative List will not be charged. It is transparent and reasonable as is in the whole world wherever the GST is in vogue. Though there is an exemption list, it is an aberration, which may be corrected later, if better sense prevails, ever. The best part of the comprehensive service tax is that it makes every service liable to tax and there is no need for a definition for any service to be chargeable to tax. Only those in the Negative List are not being taxed. They are basically chargeable to tax, but the government in its wisdom is not charging them. This list has 17 heads, which have reportedly been agreed to by the states also.

The reason why this comprehensive service tax is greatly significant is that next year it will be easy to bring in comprehensive goods tax (excise duty). That will mean, all goods will be chargeable to excise duty except those in the Negative List. Once this is done, possibly in the next Budget, then the two can be easily combined to make a Comprehensive Goods and Services Tax at the central level. At that stage, at least nearly half of the GST will have been done even though the full GST may get delayed due to lack of agreement with the states.

The second positive point is the increase of the rate of duty of excise and service tax from 10 to 12 per cent. Some economists have said that that it will lead to cost push inflation. This is not fully correct since inflation depends on a plethora of factors and on monetary policy also.

Also we have to take into account that the input duty credit (Cenvat) is nearly 60 to 70 per cent. The net effect of 2 per cent higher duty is reduced to a large extent. Again, the higher collection of duty will reduce the fiscal deficit which is anti inflationary. Lastly, the rate of 12 per cent is being viewed as stable rate for the ultimate GST rate. Stability will do good to the industry, trade and service.

The third move, which is very positive in nature is that with the retrospective amendment to restate the legislative intent of the Section 9 and 195 of the Income Tax Act, corporates cannot create any special purpose vehicle (SPV) in any tax haven just by doing some paper work and shift Indian capital gains to those havens. Contrary to intense criticism by some, this amendment will bring clarity and stability in the approach, which will make coming of foreign capital more easy.

Last but not the least, other positive sides to the budget are the government's decision to allow the corporate sector to raise funds at competitive rates globally, allocate higher amounts for infrastructure development and for social sectors, and an affirmation on pruning subsidies.

More from Sify: