Union Budget : 1997-98

By HP Ranina

Summary

HP Ranina, an authority on taxation, delivers an enthusiastic appraisal of Finance Minister P. Chidambaram’s Union Budget for 1997-98, presented in a lecture at Mumbai on 1st March 1997 under the auspices of the Forum of Free Enterprise. Subtitled ‘Foundation for an Indian Economic Miracle’, the booklet treats the Budget as a watershed liberalisation document: it caps personal income tax at 30%, slashes corporate tax (including surcharge) from 43% to 35%, abolishes tax on dividends in the hands of shareholders, opens insurance cautiously to joint ventures in pension and health business, and frames a comprehensive incentive package for petroleum exploration.

Ranina walks through the technical machinery of the Finance Bill in lawyerly detail — the new economic-indicators test (vehicle, immovable property, foreign travel, telephone) that obliges previously untaxed citizens to file returns under amended section 139; the Voluntary Disclosure of Income and Wealth Scheme, with 30% / 35% rates and ironclad confidentiality protections; a tax-credit scheme for Minimum Alternate Tax (new section 115-JAA) carrying MAT forward over five assessment years; section 35-ABB amortisation of telecom licence fees; and extended five-year-plus-five tax holidays for telecom, power, industrial parks and backward-area undertakings under section 80-IA. He also notes the 1-1/4 times deduction for in-house R&D expenditure under a new sub-section 2-AB of section 35.

On indirect taxes, Ranina welcomes the reduction in excise and customs duties, the absence of a feared hike on luxury motor-cars, and the decision to grant administrative and financial autonomy to public sector units, alongside liberalisation of infrastructure, telecom, oil, gas and power, and a review of the Urban Land (Ceiling and Regulation) Act, 1996. While the policy decision on full capital-account convertibility has been deferred pending a Reserve Bank of India committee report, Ranina is confident the Rupee will soon emerge as one of the world’s prime currencies. He concludes that GDP growth will rise to 7.5% in 1997-98 and that, like Ludwig Erhard in post-war Germany and Lee Kwan Yew in Singapore, Chidambaram will be remembered as ‘the architect of India’s economic miracle’.

Key points

• Personal income tax capped at 30% — Ranina calls this an unprecedented low in India’s fiscal history and competitive with European, US, Japanese and East Asian rates.

• Corporate tax (with surcharge) cut from 43% to 35% and tax on dividends in shareholders’ hands abolished, expected to revive the primary equity market.

• Voluntary Disclosure of Income and Wealth Scheme (VDIS) introduced at 30% (individuals) / 35% (corporates and firms), with strong confidentiality protections and no admissibility against the declarant under Income-tax, Wealth-tax, FERA or Company Laws.

• Amended section 139 obliges anyone meeting two of four economic indicators — motor vehicle, immovable property, foreign travel, telephone — to file an income-tax return, with a Rs.500 penalty for non-filing.

• MAT not abolished but a new section 115-JAA tax-credit scheme allows MAT paid to be carried forward five years and set off against regular tax; exporters exempted from MAT.

• New section 35-ABB amortises telecom licence fees over the licence period; 100% deduction (then 25–30% for five further years) for telecom undertakings starting between 1.4.1995 and 31.3.2000, extended retrospectively from 1.4.1996.

• Containment of fiscal deficit and discontinuance of ad-hoc treasury bills expected to rein in inflation and restore structural stability to the fiscal regime.

• Insurance sector cautiously opened: LIC and GIC permitted joint ventures with Indian companies in pension business and health insurance; Urban Land (Ceiling and Regulation) Act, 1996 to be reviewed; PSUs given administrative and financial autonomy; full capital-account convertibility deferred but expected sooner than anticipated.

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