Expectations from the Union Budget 1997-98

The United Front government, which is a minority government consisting of a 14 party coalition, has been making promises for a free economy in India. The coalition Government has also been promising impending legislation for giving relief to attract foreign investments in the country. The Securities Exchange Board of India (SEBI) has formulated the take-over code, which will make transactions transparent, and companies will have a free change of management, to one which has resources to run the company better.

The government has also set up a Disinvestment Committee for the disinvestment of shares held by the Government to the public, thereby reconstructing these companies. For this, many amendments in the various statutes through the Finance Bill will be required. The finance bill may make amendments in Section 72-A of the Income Tax Act 1961, to give some relief for sick companies when they amalgamate with healthy companies.

For healthy growth of the economy, it is essential that Section 72-A be amended to smoothen the process of mergers of sick companies into healthy companies. The amendments should provide that there should not be any need for approval from the specified authorities once the High Court has approved a scheme of amalgamation.

The United Front Government has opened the infrastructure sector to private entrepreneurs. In telecommunication and power sectors, the Government has already announced many reliefs. Power, telecommunication and transport will continue to remain as focal points for consideration in the forthcoming budget.

Prime focus areas in the Union Budget to be presented later in the month will be cash-starved infrastructure projects, which will receive substantial fiscal incentives and policies to enhance the financing of infrastructure projects. In the last budget some reliefs were announced. Tax exemption of capital gain tax under section 54-EA and 54-EB of the Income Tax Act 1961 for investment in infrastructure finance companies is already available. Investment in shares and securities of power and telecommunication companies is likely to be included in the list of infrastructure companies for making available new exemptions.

India is a tax haven country for exporters. To boost exports and ease the balance-of-payment position, further export incentives may be provided. One such measure could be exclusion of Section 80-HHC from the applicability of Minimum Alternate Tax (MAT).

The reduction in import duty on power equipment and coal are among the fiscal incentives as the Chari committee has already recommended privatization of coal mines.

To boost the capital market in the country, the Government has announced interim steps, and many promises have been made to improve investment climate in the country. It is expected that sops will be provided in the budget, which will encourage investors in the primary market. This could be by way of exemption on the income distributed by way of dividend from applicability of MAT, and/or otherwise to enhance the list of companies which could be exempted from MAT.

The government is concerned about deficit financing and for that it needs to collect more direct and indirect taxes. It has also found that a cut in the taxes has enhanced the collection of direct taxes, and there may be a further cut in corporate tax as well as the surcharge. Besides, the individual taxation needs to be brought down because of high inflation, keeping in view the pay commission recommendations for higher salaries.

Applicability of TDS provisions may be made more broad-based to bring in more areas in the tax net, to improve collections as well as to remove difficulties presently faced by companies. The provisions of section 272-A (2) are too harsh and it is expected in the budget that these would be eased, as the penalty levied is more than the tax involved.

In the last budget the Finance Minister had introduced MAT on companies. There has been all-round criticism of this step. The commerce minister had also called for scrapping of the provisions relating to MAT. The Honorable Prime Minister also seemed to be favorably inclined to this issue. The provisions relating to MAT may be withdrawn or are likely to undergo major changes. As a result, some more industries, specially the export sector, may get exemption from applicability of provisions relating to MAT.

The Hon. Prime Minister had recently announced that the Government would come out with a package of incentives to improve foreign investments and create a climate for investments so that no one gets disappointed. In this context, the Union Budget is likely to contain many measures towards liberalization.

Taxation of dividends has always been a bone of contention. There has been a consistent school of thought according to which taxation of dividend amounts to double taxation. Many persons escape this double taxation by splitting their holdings into modest lots and availing of tax exemptions for small shareholders. In all fairness, there may not be any tax on the dividends to encourage public investment in the corporate sector. Alternatively, tax exemption of income by way dividend may increase from the present level of Rs.3000.

A large number of investors invested in deep discount bonds of IFCI, IDBI and ICICI. The Central Board of Direct Taxes clarified that income from these bonds will be treated as interest income in the hands of the investors. Since deep discount bonds are very long-term investments issued at heavy discount, in all fairness income from these bonds may be treated as capital gains and not interest.

In Summary
In all probability, the forthcoming budget will be growth oriented, and it will improve investment climate both within and from outside the country, encourage savings, control unproductive Government expenditure, and remove unnecessary hurdles in the growth of industry. It will make efforts to make the working of Government more transparent, reduce controls and licenses, and take steps to make the economy of the country healthier.


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