Be a responsible citizen. Come, pledge to always check and share verified and vetted news.
3-min read

Income Tax: Businesses fear more taxes in Budget 2012

News18test sharma |

Updated: March 14, 2012, 4:22 PM IST
facebook Twitter google skype whatsapp
Income Tax: Businesses fear more taxes in Budget 2012
India's businesses worry that the finance ministry will ask them to shoulder a bigger tax burden in the budget.

India's businesses, already facing high interest rates and a global economic slowdown, worry that the finance ministry will ask them to shoulder a bigger tax burden in the budget set for release on Friday to trim the fiscal deficit.

After a drubbing in recent state elections, the government has little room to cut subsidies costing 2.5% of GDP. But without fiscal consolidation, the Reserve Bank of India will have a harder time lowering interest rates without stoking inflation.

Growth in Asia's third-largest economy is expected to dip below 7% in the current fiscal year ending March, the slowest pace in three years, while manufacturing may cool to 4% from 7.2% in the previous year.

The following reflects industry expectations for the budget:


Industrial chambers including the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII) are lobbying hard for a delay in hiking tax rates but do not expect any major tax relief.

Prime Minister Manmohan Singh's economic advisory council, headed by former RBI governor C Rangarajan, wants to roll back fiscal stimulus by raising tax rates by about 2 percentage points on most manufactured products and widening the service tax net.

After the 2008 global financial crisis, India approved a nearly USD 37 billion fiscal stimulus package, mainly tax cuts for industry, and this has not been fully withdrawn.

The trade groups may get little sympathy for their bid to delay reversal of tax breaks. Finance Minister Pranab Mukherjee has limited room to prune spending, while the tax-to-GDP ratio has fallen to 10.5% from near 12% in the year before the financial crisis.

However, to cheer up capital markets, Mukherjee may abolish the transaction tax on trading of shares. Fiscal consolidation might also please investors because it would be seen as paving the way for interest rate cuts by the central bank.


Mukherjee, who says he is losing sleep over a rising subsidy bill, could try and tweak fuel, fertilisers and food subsidies while allocating more funds for education, health, farm produce and infrastructure like ports, railways and roads.

The government's draft legislation on food security -- to provide subsidised food to nearly 60% of the 1.2 billion population -- may take more time to get parliament's approval, and fuel prices could be increased outside the budget to trim the subsidy bill.

The total budget subsidy bill could touch USD 50 billion this fiscal year, against USD 32 billion a year ago, thus widening the fiscal deficit to more than 5.5% of GDP, well above the initial target of 4.6% of GDP.

The next budget is likely to show a fiscal deficit of near 5% of GDP in the fiscal year beginning April 1, with growth estimated at between 7.5% and 8%. Economists in a Reuters poll conducted in January pegged GDP growth at 7.9%.

Economists widely criticized the last budget for overly optimistic growth forecasts and unrealistic spending cut plans. Some worry the next installment may contain more of the same.


Industry has sought to keep factory gate duties and service taxes held at the current levels.

CII wants the government to fast track at least 100 big manufacturing and infrastructure projects like a Delhi-Mumbai industrial corridor to remove bottlenecks in industrial growth.

More than 70 state-funded projects are running late by more than two years over land-acquisition and environmental issues, racking up nearly USD 19 billion in extra expenses, or 20% of the total projected costs.


The finance ministry is likely to tweak various corporate tax exemptions without changing the current 30% rate for corporate profits.

That tax rate puts India on a par with other emerging economies such as Mexico, but considerably higher than some Asian economies, according to data from the Organisation for Economic Co-operation and Development. In South Korea, for example, the corporate tax rate is 22%.

A parliamentary panel, headed by former Finance Minister Yashwant Sinha, has recommended phasing out various corporate tax exemptions, estimated at nearly USD 18 billion in 2011-12.


The cash-starved civil aviation, real estate and capital markets hope for further easing of rules on foreign investors as a way to attract more money, which should help improve access to cheaper funds from overseas and ease inflation.

Foreign investment inflows, which include direct investment and portfolio money, are estimated around USD 25 billion in 2011/12 fiscal year against about USD 12 billion in the last fiscal year, says Rangarajan, but a widening gap between exports and imports is putting pressure on the current account deficit also.

Manufacturing and service exports, estimated at USD 400 billion this fiscal year, expect marketing incentives and policy support in the budget to grow amid fading global growth prospects.

The government may provide more funds for exporters' bodies to explore new markets in Africa, Latin America, and transport subsidy in addition to assuring them a relatively stable Indian currency.

First Published: March 14, 2012, 4:22 PM IST
Read full article
Next Story
facebook Twitter google skype whatsapp