This was Pranab Mukherjee's fourth budget of his career as finance minister and the second for the United Progressive Alliance (UPA) government in its second straight term after being voted back to office in May last year. Following are the important items to note in his budget:
1. Slabs for individual tax payers:
• There will be no tax for income upto Rs 1.6 lakh. (This was the same earlier)
• For income between 1.6 lakh - 5 lakh, the tax liability will be 10%. (The older slab was 1.6 - 3 lakh)
• For income between 5 lakh - 8 lakh, the tax liability will be 20%. (Earlier 20% tax was deducted on Rs 3-5 lakh income)
• Individuals with income of above Rs 8 lakh will have tax liability of 30%. (Earlier 30% was deducted on income of Rs 5 lakh and above)
• The government would allow a deduction of up to Rs 20,000 for investments in long-term infrastructure bonds. The deduction would be in addition to Rs 100,000 allowed under Section 80C of India's Income Tax Act.
The government says that it will lose Rs 21,000 crore due to income tax sops.
2. Fuel Price hike
Petrol and diesel prices will go up by Rs 2.67 a litre and Rs 2.58 per litre, respectively, after Finance Minister Pranab Mukherjee today raised customs and excise duties on the two, virtually putting the Kirit Parikh Committee report on fuel price in cold storage. Mukherjee also imposed 5 per cent import duty on crude (currently nil), a move that would impact refiners like Reliance Industries and Essar Oil with their input cost going up.
Components of Petrol price
I decided to find out the Components of Petrol price in India and to my surprise, I found that for a Rs 22 litre petrol at pumps, consumers in India pay Rs 28 tax extra!!
Suppose if the petrol price per litre is Rs 51.90, here the break-up of cost calculated by the government:
• Basic Price = Rs 21.93
• Excise duty = Rs 14.35
• Education Tax = Rs 0.43
• Dealer commission = Rs 1.05
• VAT = Rs 5.5
• Crude Oil Custom duty = Rs 1.1
• Petrol Custom = Rs 1.54
• Transportation Charge = Rs 6.00
• Total price = Rs 51.90
NjoyTV’s view on “Should Fuel price be deregulated?”
Let’s understand first what is regulation of fuel prices and why it is done. As we know that regulation means control of the prices by government to save the consumer from the vagaries of market. For example, suppose the prices of crude increases by 100% in the international market which pushes the input costs of the Oil refining companies in India. Now strict regulation of govt will ensure that they can’t really increase the price of Petrol by corresponding hike in input costs. So, what will they do? They will absorb some of the burden and rest will be absorbed by the government in the form of providing subsidies and financial aid to Oil companies. All this is done to contain inflation (& hence vote bank!!) as prices of many commodities are dependent on diesel and kerosene prices which affect a large chuck of the country’s population.
Impact of Subsidies-
It’s impact on consumer is visible but what a voter or a common man doesn’t realize is it’s impact on fiscal deficit and hence the economy of the country. Consider this: In the Budget estimate for 2009-10, Petroleum subsidy was pegged at Rs 3,109 crore, although it was finally Rs 14,954 crore!! (Business Standard, Feb-26-2010). This huge subsidy bill could have been utilized to improve infrastructure, education, unemployment or health reform measures.
Also state-run oil marketers are expected to lose some Rs 40,000 crore on their fuel sales in 2009-2010 since the government did not allow them to raise pump prices in line with international crude.
Taking a note of the above mentioned impacts, Kirit Parikh committee was set up in last budget year to see if the impact of deregulation of fuel prices. Kirit Parikh report had recommended removal of government control over motor fuels linking the petrol prices with international market, raising cooking gas price by Rs 100 per cylinder and kerosene by Rs 6 a litre, petrol by Rs3.9/litre and diesel prices by around Rs3.2/litre, respectively (at current levels of global gasoline and diesel prices).
So, is it right to deregulate price?
Yes, I think so. First of all it will save crores of rupees (currently doled out as subsidies) which can be utilized by govt for other constructive purposes. Secondly, it will reduce fiscal deficit. Thirdly, it will save Oil companies from being bankrupt and hence it will attract investment in this sector. After deregulating prices, govt can reduce excise duties and custom’s duty on fuel which may be used as a tool to contain inflation in this case. The ministry can always intervene in case of extraordinary volatility to buffer the consumer, the threshold being $100 per barrel of crude price.
As to save farmers and Below Poverty line people, I feel that India should adopt dual pricing system for the simple reason that millionaires using diesel run vehicles don’t need subsidies but farmers using diesel need them. As Business Standard reports, “There has been some discussion on using smart cards to sort the genuine beneficiaries from the pillion riders -- the ministry is not clear how to weed out the non-deserving.”
(NjoyTV Note: This is solely my view based on my learning from news channels and papers. It may be different from yours.. as you know I am an engineer and not an economist (at least now!!) But you can raise your voice in comments section of this article)
3. Impact on Common man
Most FMCG companies including Hindustan Unilever, Colgate Palmolive, Nestle, Reckitt Benckiser and Dabur have large manufacturing operations in excise-free zones which do not get impacted by either an increase or cut in excise duty.
Things getting costlier:
• Soaps, talcum powder, shampoos, hair colour, diapers and sanitary napkins are set to go up 2-5%. Products like diapers and sanitary napkins which were fully exempt from excise will now attract duty of 10%. Cigarettes and gutka also getting very costlier as the weighted average increase in excise duties of around 17%, coupled with the recent VAT hikes in different states, is amongst the steepest tax hikes on cigarettes in recent years.
• Frequent fliers will also suffer with 10% tax now applicable to domestic flights as well. Coaching institutes who were earlier not charging any service tax on accounts that it is non commercial, will not be able to do so any longer.
• For businessmen, there is some bad news: MAT rate up from 15% to 18%; 5%custom’s duty on crude brought back; mean rate of excise up from 8% to 10%.
Things getting cheaper:
• Deodorants and perfumes could get cheaper by 5%, as excise duty on medicinal and toilet preparations act is being reduced from 16% to 10%. The uniform customs duty of 5% plus CVD of 4% on import of medical equipment has been introduced against current general maximum rate of 16.78% which will benefit private hospitals.
• As a green agenda, Solar powered and electric cars to get cheaper.
• For businessmen, there is a good news that he surcharge on Indian firms has been cut from 10% to 7.5%.
• For investors, there is a good news: Deduction of investments upto Rs 20,000/- in long term infrastructure bonds over and above existing Rs 1 lakh limit under section 80C of I-T Act. This is a win-win situation for both investors and government as investors will pay now less tax if they invest in infrastructure and government has now attracted investment in infrastructure which is still lagging far behind 2021 plan.
Impact on IT industry (This is my industry, at least for now!!)
There is some disappointment for the IT sector. The IT industry was expecting an extension of the tax holiday (STPI) for another couple of years as it is struggling due to the global slowdown. No further extension has come as a disappointment for the IT sector, but analysts believe the markets were expecting it.
Also, MAT has been increased from 15% to 18%, it will affect all software companies as this is immaterial of the fact whether they operated under the Software Technology Parks of India or the Special Economic Zones or not. Though companies say that MAT hike won’t matter much as it is offset by lower surcharge!
4. Miscellaneous
• The Advance Estimates for Gross Domestic Product (GDP) growth for 2009-10 pegged at 7.2 per cent.
• Ownership of PSUs like Oil India Limited, NHPC, NTPC and Rural Electrification Corporation, etc has been broad based, i.e. government will divest its investment and allow people to invest in them. This will raise about Rs 25,000 crore during the current year.
• A Nutrient Based Subsidy policy for the fertilizer sector has been approved by the Government and will become effective from April 1, 2010. This will lead to an increase in agricultural productivity and better returns for the farmers and overtime reduce the volatility in demand for fertilizer subsidy and contain the subsidy bill.
• Allocation for NREGA(renamed to Mahatma Gandhi National rural employment guarantee scheme), Indira awas yojna, Raji awas yojna, and other social schemes has been increased
• The moderate increase in elementary education funding from Rs 26800 crore to Rs 31036 crore will ensure that SSA(Sarva Shiksha Abhiyan) is well funded for the implementation of RTE(Right to education).
• ISRO’s budget allocation has been increased handsomely by as much as 35%.
• Allocation for UID project has been increased.
• Defense budget increased by a measly 4%, lowest in last 7 years
5. Overall Analysis of Budget-2010
Overall, I would say, it’s a good budget as it is moving forward on reforms:-By equalizing excise and service tax at 10%, broadening Income-tax slabs, reducing surcharge on corporate, lowering of customs/excise duties on green technologies, clarity of implementation on gradual reduction of stimulus, Better management of revenue and expenditures under the global circumstances as the revenue was higher and expenditure was lower acc to revised estimates in 2009-10 leading to fiscal deficit of 6.7%.
Though there are some negatives also like sudden increase in the prices of fuel, increasing MAT from 15% to 18.5%, Food inflation (above 17%), etc. which the finance minister needs to have a close look.
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Courtesy:
I would like to thank the following websites/channels which helped me compile this article: indmusings.blogspot.com, economictimes.com, moneycontrol.com, trak.in, business-standard.com, businesstoday.indiatoday.in, Rahul Bajaj’s interview, indiabudget.nic.in, pagalguy.com various threads.
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