The Union Budget 1999-2000

By HP Ranina

Summary

In this Forum of Free Enterprise booklet, based on a public talk delivered in Mumbai on 28 February 1999, the tax expert H. P. Ranina reviews Finance Minister Yashwant Sinha’s second Union Budget, for 1999-2000, as ‘a model of realism and restraint’ that makes serious attempts to restore macro-economic balance to a fiscally disoriented economy. He highlights the budget’s primary balancing act in indirect taxation — rationalising the customs and excise duty structure into rates of 8%, 16% and 24% and removing the zero customs duty — and several innovative measures: a hundred new rural industrial clusters a year, additional credit to food-processing and agro-based industry, and a determined drive to raise at least Rs. 10,000 crore through strategic disinvestment of public-sector units to both fill the exchequer and revive the capital market.

Ranina judges the budget’s greatest thrust to be keeping the fiscal deficit in check while channelling resources to agriculture, irrigation, rural development and small-scale entrepreneurs, and calls deficit containment the ultimate ‘acid test’ of its success. He offers pointed criticisms: the Finance Minister could have revived the investment-allowance provision to reward high-growth and infrastructure companies; the proposal to tax perquisites when an employee exercises sweat-equity stock options unfairly burdens employees before they have funds; and the various statutes governing mergers and acquisitions should have been harmonised. He welcomes the proposed interest-bearing gold bonds as a way for small businessmen to unlock unproductive assets, and notes the eventual introduction of value-added tax as ‘the real answer’ to growth with commensurate revenue.

The second half of the booklet works systematically through the Finance Bill, 1999 — first the provisions affecting individuals (taxation of sweat-equity perquisites and Global Depository Receipts, raising the self-occupied-property interest deduction from Rs. 30,000 to Rs. 75,000, presumptive-income relief under Sections 44-AD and 44-AE, reduced interest rates on defaults, and revised return and intimation procedures) and then a long ‘Measures to Tone Up Industry’ section on corporate restructuring. Here Ranina explains the new statutory definition of demerger under Section 2(19-AA), the capital-gains and tax-holiday consequences of demergers, amalgamations and slump sales under Sections 47, 72-A, 80-IA and 80-IB, presenting these as a challenge to Indian industrialists to reorganise and build globally competitive corporations. He concludes that Sinha’s proposals mix economic realism with political sensitivity and that the Finance Minister ‘will create history’ only if he secures a consistent 8% growth rate, which Ranina deems the minimum needed over twenty years to dramatically reduce mass poverty. The booklet is bracketed by free-enterprise epigraphs from A. D. Shroff and Eugene Black and carries the standard disclaimer that the views are the author’s own.

Key points

• Ranina calls Yashwant Sinha’s second budget (1999-2000) ‘a model of realism and restraint.’

• The primary balancing act is in indirect tax: customs/excise rationalised to 8%, 16% and 24% rates, with VAT flagged as the eventual real answer.

• Innovative measures: 100 new rural industrial clusters a year, agro-industry credit, and at least Rs. 10,000 crore targeted from strategic PSU disinvestment.

• The dominant thrust is fiscal-deficit containment alongside higher resources for agriculture, irrigation, rural development and small-scale entrepreneurs.

• Criticisms: no revival of the investment allowance, unfair timing of tax on sweat-equity stock-option perquisites, and un-harmonised M&A statutes.

• Individual provisions: raised self-occupied-property interest deduction (Rs. 30,000 to Rs. 75,000), GDR taxation, presumptive-income relief, and lower default-interest rates.

• A detailed corporate-restructuring section defines demerger (Section 2(19-AA)) and sets out capital-gains and tax-holiday treatment of demergers, amalgamations and slump sales.

• He concludes Sinha ‘will create history’ only with a consistent 8% growth rate, the minimum he says is needed to cut mass poverty over twenty years.

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