If
the Sensex is an indicator of corporate sentiment, even
if not of corporate performance, then Union Budget 2009-10
has received the thumbs down from the corporate sector.
The Sensex fell by 870 points (or 5.8 per cent) on budget
day, rose marginally the day after, only to fall by
a further 400 points on the subsequent day. It is indeed
true that market sentiments do not reflect in full the
judgment of industry, being driven by whimsical expectations,
fears and speculative urges. But, statements from corporate
leaders do suggest that a fair sample among them is
not too happy or is downright unhappy with the budget.
This is indeed surprising because the Finance Minister
was quite clear of the need to support the private sector
when he said: ''Private sector investment has been affected
by the global macroeconomic conditions. Our Government
is committed to creating a facilitating environment
in which a competitive private sector can thrive and
play its rightful role in the nation's economic development.
India 's high growth of 8.5% per annum from 2004 to
2008 was fuelled in very large part by private investment.
I look forward to working closely with industry and
our vibrant entrepreneurial community to address their
outstanding concerns.''
This perspective was reflected in his tax proposals
as well. Despite the need to finance a burgeoning fiscal
deficit, the Finance Minister has imposed no additional
taxation on the corporate sector other than raising
the Minimum Alternate Tax (MAT) from 10 to 15 per cent.
This hurts only a few firms. The government's own figures
show that the average effective tax rate in financial
year 2007-08 on 4,10,451 firms that had submitted tax
returns electronically by 31 March, 2009 exceeded 22
per cent and averaged 20.14 to 24.04 per cent in different
profit classes. Even though this is well short of the
normal corporate tax rate (inclusive of surcharge and
cess) of 33.99 per cent, it is well above the new level
for the MAT. That is, on average firms in the government's
sample are in an effective tax rate range above the
new MAT rate.
There are a large number of firms (161916 to be precise)
that pay zero or less than zero taxes. But these are
largely companies that make losses. Their share in the
total profits of all sample companies is less than 2
per cent, even though they constitute 40 per cent of
the sample in terms of number. There are, however, 16
per cent of firms accounting for 45 per cent of sample
firm profits that were subject to an effective tax rate
of 0-20 per cent in 2007-08. It is a few of these firms
falling in the 0-15 per cent effective tax rate range
that would be affected. It could hardly be argued that
the fate of this set of firms influenced corporate sentiment
substantially.
This is all the more so because the corporate sector
has got a whole host of other benefits from the budget.
If we exclude MAT, the corporate sector has indeed obtained
a bonanza. For example, the Finance Minister has chosen
to extend for one more year (till 2010-11) the deduction
from taxable income of the export profits of STPI units,
and units in SEZs, EPZs and FTZs. This tax holiday was
originally available till 2008-09 and was then extended
to cover 2009-10. The major beneficiaries of this concession
are the Software Development Agencies and the IT-Enabled
Services Providers/Business Process Outsourcing Units,
in whose case the effective tax rates are as low as
12 and 15 per cent respectively. Revenue forgone under
this head in 2008-09 was Rs. 20,366 crore. Overall corporate
tax concessions have meant that the revenue foregone
by the government stood at Rs. 68,914 crore in 2008-09,
which was Rs. 6,715 crore higher than in 2007-08. This
increase was greater than the Rs. 6,375 crore increase
in the fiscal deficit between these two years.
Another major tax concession offered to firms in this
budget is the abolition of the Fringe Benefit Tax (FBT).
Besides the accounting scrutiny which firms were subjected
to so as to assess whether they were complying with
this form of taxation, the FBT was also a major burden
on the corporate sector. In 2008-09, the sample of companies
for which data are reported in the Annex on ''Revenue
foregone under the Central tax system'' to the budget
documents paid as much as Rs.6,553 as Fringe Benefit
Tax. This too was close to the increase in the fiscal
deficit between 2007-08 and 2008-09. By abolishing FBT
the Finance Minister has foregone revenue of around
this magnitude, since taxes on perquisites paid by individuals
is unlikely to be anywhere near this amount.
Budgetary support for the corporate sector came in other
forms as well. The Finance Minister has chosen to continue
with the temporary excise duty exemptions granted in
the stimulus packages announced in December 2008 and
February 2009. The effective excise duty rates were
cut across the board by 4 percentage points on 07.12.2008.
Later, on 24.02.09, the mean excise duty rate of 10%
was further reduced by 2 percentage points from 10%
to 8%. These changes were responsible for a significant
share of the increase in excise revenues foregone from
Rs. 87,468 crore in 2007-08 to Rs. 1,28,293 crore in
2008-09. With the budget refraining from raising the
excise duties back to their earlier levels, the revenue
foregone in 2009-10 would be substantially larger. To
the extent that the corporate sector does not pass on
the benefits of the excise duty reduction to the consumer,
it will garner a part of the revenue foregone. And to
the extent that it does pass it on, it may spur demand
for private sector products. In sum, revenues have been
foregone in the budget to support the corporate sector
in the midst of the recession.
Besides these benefits given to industry through measures
such as tax concession on investments made by the National
Pension Scheme Trust in equity and the abolition of
the Commodities Transaction Tax, the government has
provided support to stock and commodity trading which
would benefit financial capital operating in these markets.
Thus, from a tax point of view private capital of all
kinds should be happy with this budget.
What then accounts for the corporate sector's muted
or even adverse response to the budget? An important
factor here is that corporate expectations of concessions
and reforms in this year's budget were exaggerated for
two reasons. The first was the idea promoted by the
media and interested financial analysts and encouraged
by the government that a much clearer mandate for the
Congress, a more stable government and the absence of
the Left in the equations of power had pave the way
for a new generation of reforms, which would include
more privatisation, more liberalisation and more concessions
for the corporate sector.
The second was that this view was strongly supported
by the tone and content of the Economic Survey presented
prior to this budget. To quote the Survey: ''The reforms
of the 1990s created a competitive environment in which
Indian entrepreneurship could flourish. The fruits of
these reforms emerged gradually in the form of rising
output and employment and higher growth from 2003-04
onwards. However, there is a perception among financial
and other investors that Government has been slow on
policy reforms, in the past five years. As long as economic
growth was above trend these apprehensions did not matter,
but an economy where the industrial (manufacturing)
growth has been steadily declining for nearly eight
quarters over 2007-08 and 2008-09 with the revival still
uncertain, policy interventions are necessary. More
so the sector has been one of the main drivers of the
recent spurt in GDP growth.'' Accompanying this statement
is a box that details measures required for ''improving
the investment environment and driving growth'' which
reads like a manifesto for accelerated reform. It is
quite likely that such reform advocacy in a pre-budget
government document encouraged financial investors to
rush to market.
However, compared with the Survey's advocacy, the reform
moves in the budget appear to be a major retreat. Consider
privatisation, for example. It comes couched in populist
rhetoric. The Finance Minister begins by saying: ''The
Public Sector Undertakings are the wealth of the nation,
and part of this wealth should rest in the hands of
the people. While retaining at least 51 per cent Government
equity in our enterprises, I propose to encourage people's
participation in our disinvestment programme.'' He then
goes on to elaborate as follows: ''The average public
float in Indian listed companies is less than 15 per
cent. Deep non-manipulable markets require larger and
diversified public shareholdings. This requirement should
be uniformly applied to the private sector as well as
listed public sector companies. I propose to raise,
in a phased manner, the threshold for non-promoter public
shareholding for all listed companies.''
This is indeed a case for disinvestment and privatisation.
But in language that is cautious. It came along with
a rather limited programme for garnering resources through
privatisation in the budget. The signals were clearly
mixed. Those who had rushed to market misled by the
media and the Survey rushed out, and the stock market
collapsed. The corporate sector that might otherwise
have been happy that it had retained old concessions
and garnered new ones, was left disappointed. The Finance
Minister's largesse was wasted.
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