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Interim budget may offer tax sops
February, 06th 2009

The forthcoming interim budget could hold some pleasant surprises. Policymakers are examining all options, including tax cuts, aimed
at giving a boost to the slowing economy and relief to industry to prevent job cuts.

The Constitution does not restrain an outgoing government from announcing tax measures in an interim budget, ahead of general elections.

Constitutionally, there is no bar, Union home minister P Chidambaram told reporters in response to a query on the issue.

If the government sticks to conventional norms of propriety and refrains from adopting any tax measures in the interim budget, the result would deprive the economy of any tax signal for five months while it is buffeted by the worst global economic crisis since the Great Depression.

In any case, the government can, without much of a problem, resort to extensions of existing policies (tax concessions for Software Technology Parks) or clarifications (restoration of tax benefit to hydrocarbon exploration leading to gas finds on par with oil finds).

However, Mr Chidambaram remained non-committal on the announcement of a stimulus package in the interim budget to be unveiled on February 16. Wait till February 16. There may be one (package), there may not be one, he told reporters after the Cabinet meeting.

Slowdown calls for some quick measures. Indeed, the established political practice is not to announce tax measures in an interim budget so as to avoid burdening the new government. But the present global economic slowdown poses unprecedented challenges, forcing governments in various countries to come up with unconventional methods to fight the situation.

The pressure on the government in India is also growing, as companies across sectors are slashing jobs. According to a latest government study, as many as five lakh people were rendered jobless between October 2008 and December 2008.

A very calibrated policy prescription ... is in the process of being formulated. You will see some indications in the vote-on-account, in the interim budget, minister of state for industry Ashwani Kumar said at a Ficci function. He said the government would come up with sector-specific packages to boost the areas which needed special attention, particularly labour-intensive ones.

Tax experts pointed that the previous NDA government had already set a precedent by announcing indirect tax cuts ahead of the vote on account. And at present, they said, the need of the hour is direct tax changes to provide more money in the hands of companies.

Keeping in view the pressures on the Indian industry, lowering of tax rates for companies and individuals may be considered as part of overall economic relief package. As an immediate relief, the removal of surcharge may be considered at this stage, KPMG executive director Vikas Vasal said.

A surcharge of 10% is levied on individuals with income levels above Rs 10 lakh and companies having income more than Rs 1 crore. As the government had given substantial relief to individual taxpayers in the last budget and the crucial issue now was to ensure safety of jobs in the country, various measures suggested by the industry are being examined.

Industry has sought tax benefits like cut in corporate tax rate from 30% to 20%, sops for the housing sector, clarity on tax holiday for gas and relief from payment of fringe benefit tax for exporters.

However, some sections within the government are opposed to tweaking the direct tax structure in the interim budget. A final decision would be taken at the highest political level. Something will come, but it is going to be ad hoc, a senior official in the commerce ministry who did not wish to be identified said.

To boost the economy, the government has already announced two stimulus packages the first in December 2008 and the second in January this year. In the first, the government cut excise duty by 4% across the board, besides effecting a hike in planned expenditure.

In the second package, it announced various measures to boost credit flow to the industry and hiked the rate of tax refunds to exporters paid under the popular Duty Entitlement Pass Book (DEPB) scheme to the November level. The scheme has also been extended up to December this year.

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