Expectations are running high for the Budget 2010 to do many things maintain growth, give employment, reduce the deficit, take steps to shift to the New Direct tax Code, take measures to implement GST, reduce inflation and increase revenue for the Government. All this has to be done with the idea of being popular enough to have voters on the Governments side. Its a tall order and the Finance Minster has a job that very few will envy.

Major Issues to Tackle Reducing the Deficit

Though there are several problems to be addressed, the major issues that the Finance Minister will need to tackle in the short term are the problems of reducing the deficit and increasing the revenues for the Government.

Reducing the deficit that is running at 40% of the expenses is not an easy job. If we had had the same deficit during the year 2000, the World Bank (if not the whole world) would have been up at arms against the Indian Government. But the Global Financial Meltdown has made Governments to take the task of reviving the economies on their shoulders and today almost every Government in the world is running huge deficits that are hardly making headlines. But the Governments are aware that this is not sustainable -more so the Indian Finance Minister.

His push to have the 3G spectrum auctioned before March 2010 show cases the urgency to bridge the deficit.

Reducing the Deficit by Reducing the Expenses

This unfortunately may not be the path of choice for the Mr. Pranab Mukherjee. The expenses may be reduced by removing subsidies on fuels petrol, diesel, LPG and kerosene; fertilizers; and electricity to farmers. Though it is a known fact that most of these subsidies do not really help the poor or the farming community, these are popular vote gaining routes traditionally in India. (India uses 17 times more water for a ton of sugarcane than the world average because the electricity to pump water is free. India uses 3 times more fertilizers that the world average for rice and wheat because they are available at subsidized rates). It is doubtful on whether the present Government is bold enough to touch on these issues.

The other way to reduce the expenses is going slow on infrastructure spending. This may be very attractive for the Finance Minister to implement as the effect of the reduced expenses will not be seen immediately. But this is the wrong rout to take as the future of the country will be set back by many years.

The popular employment scheme - Mahatma Gandhi National Rural Employment Guarantee Scheme which has in many farming states, increased the cost of labour and in several others made them not available, will continue to be popular.

So the Finance Minister does not have much option to reduce expenses but to go slow on the infrastructure. This is bound to affect the tax payer adversely.

Efforts to Increase the Income Will Add to the Burden 

The efforts to increase the one time income for the Government by selling assets like 3G spectrum and its holding in PSUs are on albeit in a slow pace.

The real way to increase the income will be to look at taxation. The Finance Ministry had given a number of benefits to the industry and the consumers by reducing the taxes to increase demand. A few of these measures have had good impact. For example the Excise Duty reduction related to motor vehicles has helped the industry immensely (and those who bought their cars and motor cycles in the last 2 years).

However the overall income for the Government has reduced due to the lower tax rates. These benefits may be withdrawn and the tax rates may be reset to what they were 2 years ago. The effect of this will be increase in the tax income for the Government.

Personal Income Tax Reforms May be Slow

Changes related to the Personal Income Tax like increasing the limits under Section 80C and hiking the tax slabs in a big way may not happen. A marginal increase in the tax slab as in the previous budget may be the best that individuals can expect.

Implementing and change in the 80C limit of increasing the tax slabs will reduce the income for the Government for the few years till there is better compliance and wider net of people who pay the taxes. This delay in increased income is something that the Finance Minister can not afford in 2010. So these measures will be postponed till 2011 when the New Direct Tax Code is planned to be implemented.

EET May be Postponed

The Exempt Exempt Tax Regime is currently implemented on the New Pension Scheme (and any pension scheme for that matter). It was planned to implement the same for all instruments like insurance, mutual funds, shares and even land and building by eliminating the long term capital gains tax. This is proposed as part of the New Direct tax Code. Budget 2010 may not extend the EET Regime to other instruments as the environment for the EET in the form of higher tax slabs and rationalized tax rates will not be implemented now.

BUDGET 2010

Budget 2010 could not be taxpayer friendly because of the insurmountable issues facing the Finance Minister Mr.Pranab Mukherjee. He has to worry about more pressing and threatening issues that need to be tackled will focus and energy. The individual tax payers and the companies may be the last of his worries in Budget 2010.