Budget Tales: Cigarette the friend of finance ministers and Rajiv Gandhi's Budget of 1987

Last Updated: Tue, Jan 29, 2019 12:44 hrs
Rajiv Gandhi

Former Prime Minister Rajiv Gandhi followed in the footsteps of his mother and grandfather- politicians who served Finance Minister and as Prime Minister. Rajiv Gandhi briefly held the finance portfolio between January and July 1987. This, came after he sacked V.P. Singh who had held the Finance position in his cabinet since 1984.

Commentators including Sam Pitroda have credited Gandhi as responsible for sowing seeds of the Information Technology revolution. MTNL and VSNL were the two entities formed during the Gandhi's time at office.

But, the budget speech made by Gandhi in 1987 contains several duties including a tax referred to as Minimum Corporate Tax (MAT or Minimum Alternate Tax). As such a major movement to bring about a technological change was missed in the budgets of 1987.

The proposal for a provision whereby every company would pay a "minimum corporate tax" on profits declared was to earn the government Rs 75 crores. Under this new provision, a company will pay tax on at least 30% of its book profit.

Speaking about the Minimum alternate tax, Gandhi said, "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called "zero-tax" highly profitable companies deserves attention. In 1983, a new Section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn."

A major assessment tweak proposed in this budget was depreciation rules for plant and machinery assessment that were modified to allow three rates- 100%, 50% and 33.33%. "Apart from simplifying assessment, this will enable industry to replace and modernise capital equipment faster," reasoned Gandhi in his speech.

One of the salient features of the budget had been the definition of cigarettes and certainly the phrase Gandhi remarked.

"In looking for more revenue, I have to fall back on the ever dependable and reliable friend of Finance Ministers and the certified enemy of Health Ministers. Lately, I am told, the friendly relationship has been marred by disputes and litigation," he said.

In his proposal, he sought duties for non-filter cigarettes of size upto 70mm. For cigarettes with filters, he sought four slabs namely upto 70 mm, over 70 upto 75 mm, over 75 upto 85mm, over 85 upto 100mm. With the new definition, the budget targeted earning a revenue of Rs 200 crores.

Indira Gandhi too in her maiden budget speech of 1969-70 had raised the taxes on cigarettes.

Similar to cigarettes, Gandhi also sought a levy on tax on expenditure in expensive hotels. He said, "Those who can afford to patronize high class hotels should also be afforded the further pleasure of contributing to the national exchequer."

The housing sector received a few significant proposals. For instance, the finance minister allowed repayment of loans and payments up to Rs 10,000 annually on residential property for deduction under section 80C of Income-Tax. The setup of National Housing board by the Reserve Bank to provide funds for housing was announced in this budget. The equity capital earmarked for its setup was Rs 100 crores. The FM also earmarked Rs 125 crores for the Indira-Awaas Yojana, and said that one million houses would be built as part of the Seventh plan for Scheduled castes and Scheduled tribes.

On agriculture, Gandhi said that his government's policies proved successful. He said, "We are committed to providing remunerative prices, and increased availability of water, power, seeds, fertilizers and credit to our farmers. Foodgrain production will exceed 150 million tonnes despite a poor monsoon. We have increased incentives to our farmers to reduce our dependence on imports of sugar and edible oils. They have responded magnificently."

While there were no changes in personal income taxes, several duties and licenses still hovered at higher rates. For instance computer peripherals imported under Open General License were reduced from 150% to 130%. A major boon however was tax holidays for software companies processing exports in free trade zones.

Image Courtesy: President Reagan, Nancy Reagan & Rajiv Gandhi and Sonia Gandhi during a state dinner in US.