Chidambaram takes on the world

Taxes, duties cut across the board

Despite shortcomings, it is the best budget in decades. Finance minister P Chidambaram has combined global vision with stern expenditure control to perform the ultimate conjuror\’s trick. He has slashed income tax, corporate tax, customs duties, provided huge sums for the Pay Commission award and higher Plan and social spending, and yet cut the fiscal deficit to 4.5 per cent of GDP.

Historically, India\’s tax rates have been way above global levels. Mr Chidambaram has courageously cut income and corporate tax pates to 30 per cent and 35 per cent, respectively. These are comsource on gilts could at long last lead to the rise of an active debt market, now that foreign investors have been allowed to trade in gilts. Unfortunately, they are still not allowed repos, and this is an important part of the unfinished agenda.

Left critics say Mr Chidambaram has given too much to businessmen, but he has retained the minimum alternative tax (MAT). However, he has exempted exporters from it, and this could revive exports, which have slowed down this year. The cut in corporate tax means the net impact of MAT is also down from 12.9 per cent of book profits to 9 per cent.

Mr Chidambaram has sought to widen the tax base. He has replaced Dr Man Mohan Singh\’s failed presumptive tax with a new one that has some teeth. Traders with a turnover exceeding Rs 8 lakh will be presumed to have a profit of 5 per cent, and will have to submit audited returns if they claim a lower profit. All residents of metropolitan cities with substantial wealth like cars or houses will be obliged to file tax returns.

Mr Chidambaram has slashed through the jungle of diverse excise duty rates and multiple exemptions. He aims ultimately for a mean excise collection of 18 per cent with no more than four rates. He has made a start by rationalising rates, and promises in his next budget to abolish most exemptions. This strategy sacrifices no revenue, yet reduces the scope for tax evasion through misdeclaration, corruption and litigation.

Services account for more than 40 per cent of GDP, yet have largely escaped indirect taxation. Mr Chidambaram has extended his servcices tax to several areas like road transport and travel agencies and caterers, and hopes to garner Rs 1,200 crore. Services should be taxed no differently from manufactures, and so this is a move in the right direction.

Despite its many positive features, the budget has several shortcomings. These are:

  • The amnesty scheme for tax evaders is unethical, and will en courage future evasion. Many who would have paid income tax at 40 per cent by the end of this financial year will now grossly under state their income and later declare the balance at the lower rate of 30 per cent under the amnesty.
  • At 35 per cent, the corporate tax remains above the maximum income tax rate, and gives partnerships and proprietary firms an unwarranted edge over corporate. Corporates will pay a tax of 10 per cent on distributed profits, but not the others.
  • The provident fund contribution of employers has been increased from 10 per cent to 12 per cent. This is effectively an additional tax on companies which goes to well-paid workers rather than the government.
  • Mr Chidambaram\’s insurance reforms are a mere scratch and fiddle. A few Indian-majority companies can enter health insurance but nothing else.
  • While the Abid Husain Committee suggested the scrapping of all 836. reservations for small-scale indHstries, Mr Chidambaram has scrapped only 14.
  • He has failed to set up an Expenditure Commission. He claims he wants an A team for the purpose, defining this as Members of Parliament. What? Can anyone seriously believe that MPs are the best-qualified to restrain government spending? They do not even vacate government houses or pay their power and phone bills.
  • He has done nothing to reduce the staggering oil pool deficit.
  • Much of the additional sums Mr Chidambaram allotted for social schemes last year remained unspent. But subsidies to loss-making PSUs shot up from a budgeted Rs 682 crore to Rs 1,649 crore. So much for public sector reform.

These shortcomings pale in comparison with Mr Chidambaram\’s greatest achievement — he has finally brought about discipline in spending. In his first year as finance minister, total spending at Rs 202,298 crore is actually Rs 2,571 crores less than budgeted. This is largely because he put off 3,000 crore of Pay Commission liabilities.

By contrast, Dr Man Mohan Singh routinely exceeded budgeted spending limits by Rs 10,000 crores per year, and this constantly undercut his reforms. Dr Singh failed to discipline spending ministries, but Mr Chidambaram has done so.

He has proved that, if only you hold firm on spending, you can cut taxes, raise plan pending and yet cut deficit.

That means, remarkably, that Mr. Chidambaram suddently looks a better finance minister than even the redoubtable Dr. Singh

Life Under Chidambaram: Taxing Times,Relaxing times

With courage and pragmatism other Asian nations have found their rightful places.India haas also reachd that stage.



  • Gross fiscal deficit introduced as the key indicator
  • Major changes in centre-state sharing of the resource pool


  • Venture funds allowed to take up 20% in companies
  • FII investment limits in companies raised to 30%


  • Excise duty cuts for itemsof household consumptions
  • Urban Land Ceiling Act to be amended


  • Import duty on capital goods cuts from 25% to 20%
  • Cheaper imports for steel sector inputs


  • Sections 370 and 372 to be merged; 60% ceiling for ICDs and loans


  • Export earnings can be used for JVs without RBI approval

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