BUDGET 1999-2000
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Surfeit of surcharges in the name of rationalisation

Wilima Wadhwa

Since the economic reform process started in 1991, the Budget has become more than a statement of government accounts. It has also become a vehicle of announcing major structural policy measures. Consequently, there are huge expectations attached to it.

Given the coalition government which is pulled in different directions by the allies, not much was expected this year in terms of a far-reaching policy statement. The Budget has lived up to these expectations. It epitomises the government's philosophy of huge promises with nothing to back them up.

The economy is in a recession. Industrial production is lagging, recording a measly growth of 3.5 per cent. Exports and foreign direct investment have actually fallen. The rate of growth of GDP is below six per cent.

What has the 1999-2000 Budget done to address these problems? A great deal is being made about rationalisation of the excise duty rates. The existing 11 slabs have been reduced to three basic slabs. However, if one adds back the surcharge to the basic rate, commodities which were being taxed at 40 per cent, will still continue to be taxed at the same rate of 40 per cent.

Also, products which attracted a five per cent duty, will now be taxed at eight per cent, and commodities in the 13 and 15 per cent rates will now be taxed at 16 per cent. As for the demerit goods, the erstwhile 25 per cent will now be reduced to 24 per cent. Most importantly, petroleum continues to attract an excise duty of 32 per cent and the duty on diesel has been increased by one rupee per litre. Clearly, one cannot expect any decline in the inflation rate.

The rationalisation of custom duties follows the excise model. We will now have only five slabs, instead of seven. First, some of those that had a zero per cent duty will be taxed at 5 per cent. Those with 5 per cent will remain unchanged, 10 is increased to 15, 20 and 25 have been merged to 25, 30 and 35 to one of 35, while those at 40 per cent remain unchanged.

Yashwant Sinha was quick to add that he has abolished the 5 per cent Special Additional Duty. However, he slipped in a 10 per cent uniform surcharge on all commodities barring crude oil and petroleum products. He also left out those that were attracting a basic duty of 40 per cent.

What is the advantage of this rationalisation? The peak rate is down from 45 (40 plus a SAD of 5) to 40 per cent. The net effect will be an increase in the level of domestic protection. For instance, note that products in the earlier 30 per cent slab will now be taxed at 38.5 per cent.

The finance minister has increased the tax on 14 million income-tax payees. This has been done by way of a 10 per cent surcharge on the basic rates. In a period of recession, this will only reduce demand further.

The surcharge is also applicable on the existing corporate tax rate of 35 per cent, taking it to 38.5 per cent.

Notwithstanding the swadeshi sop of higher protection, this will adversely affect an already floundering industrial sector.

Of course, all this is because of the terrible state in which the minister finds his finances. The inability of the government to curb its expenditure led to a whopping fiscal deficit of 6.5 per cent this year.

There are two parts to a large deficit. One is revenue and the other expenditure. Other than reducing the number of secretaries by four, he has not done anything concrete on expenditure management. Note that he has not reduced the number of IAS officers by four, just the number of posts.

He has not put a freeze on new recruitment which is the only way to downsize the government. He has not criticised the 21.5 per cent increase in expenditure last year. Instead, he has transferred Rs 250 billion of net small savings out of the Central expenditure calculations, to convince us that in the coming year there will be a negligible increase of 0.7 per cent in total expenditure.

Last year, the revised estimate of expenditure was Rs 140 billion more than the Budget estimate.

He has not touched subsidies. In fact, both the food subsidy and the subsidy to public sector enterprises will go up.

The clever juggling continues with revenues. On the face of it both excise and custom duties have been lowered. However, in both cases surcharges have been added back. Similarly, the increase in direct taxes, both income and corporate, has been done through a surcharge.

Why were the basic rates not increased? The obvious answer is that it is easier to slip in a surcharge than to announce that all direct tax rates have been increased by 10 per cent across-the-board. However, there is a more practical answer to this question. Any tax revenue raised via surcharges does not have to be shared with the states. Thus, the finance minister has ensured that the additional revenue through the various surcharges flows straight into the Central government coffers.

What about exports which are considered to be an engine of growth? The minister made the usual noises about exports. The higher custom duties will mean more protection to domestic industries. So who will export? Clearly, this is not an important issue. After all, our share in world exports is only 0.7 per cent.

However, if some dedicated exporters still want to go to the international market, they will have to wait for some RBI announcements and the deliberations of a high powered committee under the revenue secretary. Obviously, the post of the revenue secretary is not being abolished! In the mean time, our swadeshi industries have been given a level playing field, while our consumers will pay a higher price for the goods they buy.

As for the second generation of reforms, the minister has promised a paper so that a consensus can be reached before proceeding any further. Meanwhile, we will have to wait and watch, as we have been doing for some time now.

Budget 1999-2000

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