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Budget unlikely to fiddle with tax rates
June, 17th 2009

Apprehensions that finance minister Pranab Mukherjee may touch the tax payer to help bankroll UPA's promised surge in welfare and infrastructure programmes may not come to pass with government disinclined to tinker with direct tax rates and personal income-tax rates.

The contours of UPA 2's first budget are still taking shape but there have been three rounds of discussions between Mukherjee and Prime Minister Manmohan Singh and the overall thrust of the exercise is becoming visible. The thinking so far is that a "tax shock" may not be the best way to find resources for the government's spending plans as it could end up dampening consumption at a time when demand remains sluggish.

There is a political deterrent as well. The thinking seems to be that a tax hike may not go down well at a time when there is a sense of expectation that UPA 2's first budget will have a feel-good touch.

However, the budget may not be altogether painless with the possibility of cesses being increased like a further Rs 1 on every litre of petrol and diesel, or an increase in the education levy. These would be sugar-coated by being presented as "development-friendly" impositions while the government skirts around the politically sensitive area of personal taxes.

There is a possibility of some changes in areas like service taxes which impact consumer activity but will help government make up a part of what it has given away by way of three stimulus packages since late last year. There may be some other such "adjustments" in the budget's fine print even as the main task seems to be to get the confidence levels back after the economic downturn.

So far as the issue of increasing taxes is concerned, the argument that the tax payers' pockets need to be spared at a time when some segments of the economy like FMCGs are showing signs of recovery, seem to be winning during the budget deliberations.

The view that the government should consider some sort of "rich tax" to mop up resources has been heard but may not find favour. The hurdles facing the option include the voting pattern in urban areas where Congress turned out to be the favourite in big cities like Mumbai and Delhi where job losses remain a real concern. Tax payers may not be a huge or even homogeneous constituency but, as the protests against increase in prices of LPG and fuel show, they have a disproportionately loud voice.

The government does not seem keen to do much with interest rates on small savings either. It is felt that a fairly vulnerable section depends on returns on fixed investments and has already been hurt by the economic slowdown. This includes pensioners who have been hit by drop in value of mutual funds and who are largely banking on fixed deposits returns.

Sources admit that more resources would need to be mobilised for increased spending on health and education and the promised national Food Security Act. While the FM will have to do an accounting exercise, it is recognised that this year's budget need not be as scrupulous about the fiscal deficit. There is a case for higher spending, even if this means more borrowings, while nurturing the "green shoots" of recovery.

Officials hope that disinvestment is given a firm push, though it can only be one of the sources of additional revenue. Government is looking at higher FDI flows and greater accruals to its tax kitty when economic activity gathers momentum.

A case has been advanced for increasing tax incentives on home loans but there is no clarity as yet on this. Government's efforts remain concentrated on ensuring lower interest rates. There is a feeling that the realty sector perhaps waited too long to offer price cuts. The recognition that the sector might well have over-leveraged itself is there, but may not necessarily translate into tax breaks.

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