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What I liked and did not like about Budget 2007

March 1, 2007

Here is my humble take on PC Chidambaram’s budget. From the point of view of an ordinary, concerned citizen. Ofcourse, not all points have been covered, but just some issues which were on top of mind for me.

Some things I like (not listed in order of importance):
1) The maximum you can deduct for medical insurance premiums has increased from Rs 10,000 earlier to Rs 15000/- And senior citizens have something more to smile about – they get an even higher tax deduction – at Rs 20,000.

2) Tax holidays for in-house R&D for pharma companies have been extended until 2012.

3) There has been a hefty 22 percent increase in the family and health welfare budget. The government is going to give a lot of concessions to companies which manufacture HIV and polio medicines. There has also been a duty reduction in import of medical equipment as well. And there is to be an insurance cover for unorganised workers. Life Insurance Corporation will cover the head of the family or one earning member against death or disability for a premium of Rs 200/-. The governments, both central and state, will contribute towards this amount, not the worker. This scheme is called the Aam Admi Bima Yojna (AABY) and is still in the planning stage. However, overall, the health budget is still just about 1 percent of our GDP and so we have a long way to go.

4) Those who take loans for higher education for their children or spouses can claim a tax deduction. Earlier this facility was available only for loans one took for oneself.

5) Our Defense budget as a percentage of our GDP is lower than than of either China or Pakistan and as we are surrounded by these two hostile countries, I am glad that the defense allocation has increased by almost 8 percent. Even then it is barely 2.5 percent of our GDP and the defense forces are asking for a minimum of 3 percent, which they could well get by next year. Kargil has taught us that war can break out any time, and well, whats the use of good health and education if we aren’t alive to enjoy them? Pakistan and China spend over 4.5 percent of their GDP monies on defense. And the latest news is that China has increased its defense budget by 18 percent this year!

6) Customs duty on non-agricultural products has decreased, and the amount varies, depending on the products. While those industries which import raw material and other goods will benefit (and so will consumers who buy them), others will face tough competition! These new, lower levels of duty are believed to be more on par with duties in other Asean countries though and I guess thats a good thing. Last year too this duty had been slashed. In some cases like in the case of plastics and chemicals, the duty has been cut from 12.5 percent to 7.5 percent! Customs duty on polyester fibre and yarn has decreased from 10 percent o 7.5 percent. Prices of goods like umbrellas and watches will fall as duties on the parts used for their manufacture has reduced from 12.5 percent to 5 percent.

7) On a smaller level, its good to hear that excise duty on all food mixes has been exempted. For working women, ready to eat mixes are not a luxury, but a necessity. While those earning higher salaries can afford to hire cooks, its the middle class woman who has to bear the burden of cooking in the home even if she is out 12 hours a day.

8. Now unless your bank interest exceeds Rs 10,000 you don’t have to pay tax. Earlier this limit was Rs 5000/-

9) There is some help for the agricultural sector – like increased crop loans, help in production of seeds, and planning of a better water supply system.

10) Taking a cue from advanced countries, India has started something called ‘Reverse Mortage.’ This means that senior citizens can take a loan from a bank against their house (either as a lumpsum or in monthly payments) and in return pay back nothing! All they have to do is pledge their home, but they get to live there throughout their life. Cool, eh?
11) Scholarships for 100000 students from classes 9 -12 at the rate of Rs 6000/- per annum. The brightest students will be selected. While some people feel this will not curb the drop-out rate, I think it will help. I know of a poor family with a bright kid who pulled their child out of school after the 10th because the cost of coaching and college classes plus books was not affordable. Even if this scholarship is a drop in the ocean, it will help those clever children who work hard.

Some things I don’t like:
1) Quite a surprise, but employee stock options offfered to employees by companies will now come under the ‘fringe benefits’ category and will be taxed.

2) The expected increase in FDI (Foreign Direct Investment) in the Retail sector has not happened. Today just over 50 percent FDI is permitted in single brand retail. There has been some criticism of late about organised retail…about it taking away from the livelihood of the smaller kirana (grocery) shops. But I believe that the good kiranas will survive anyway as they offer a lot of personalised service. In fact there was some hype about this ‘foreign invasion’ in the newspapers and now even Walmart has chickened out of entering India under its own brand name. Walmart will tie-up with Bharti, but will stick to the back-end – the brand will be Indian.

3) Whats upsetting is that even though real estate prices are going through the roof the budget has actually done something to make it worse. There is going to be a 12.5 percent service tax on commercial lease rentals. This will mean that rents will go up and property prices too. Its going to have a bad impact on all industries, particularly the retail industry. How is the retail industry going to cope?

4) In the earlier budget builders who built small apartments got a tax rebate on their profits, but this concession has not been renewed. As it is real estate in metros is beyond the buying power of the middle class, and now this! Its the rich who can buy and they go for four bedroomed apartments without the blink of an eye. It is thought that this might discourage builders from making smaller apartments.

5) The animation, gaming and special effects industries were hoping for a tax holiday or some sops. But they have been ignored. Actually this is a burgeoning industry and could rake in a lot of revenue…but obviously the FM doesn’t think so.

6) Budget analysts are saying that the Finance Minister has not done enough to curb inflation. What he has done is stop future trading in commodities and well, he has reduced excise duties on some products. This isn’t going to help, analysts say, not to tackle the rising food prices. When the Finance Minister was quizzed about this, he said on live television that this has to be done ‘outside’ the budget. Whatever that means.

Some things I am ambivalent about:
The Education Cess has increased from 2 percent to 3 percent for those beyond a certain income bracket and also across all industries. Is this really going to help? Is this money going to be used right? Or will it be eaten up by ministers? I know they have big plans for the education sector – right from increasing the capacity of higher educational institutions, building more of them, investing both in primary and secondary education…but when government taxes ordinary citizens who are paying tax anyway, its worrisome. Let them tax the industries, why force this cess on individuals? How do we know that our hard earned money is not going to line some minister’s pocket? Instead, what they could ask is for each citizen to sponsor one child’s education. In fact this should be made compulsory. Perhaps it is a impractical suggestion as it will allow people to cheat… but it will mean less money to eat for the government officials.

Something funny!
The finance minister cut customs duty on pet foods from 30 percent to 20 percent and according to news reports this has made the “opposition hounds bay for the FM’s blood”! Its hilarious, the amount of fuss everyone is making about this harmless piece of reduction. Not just the opposition, but also the coalition partners (the Left) are complaining that when the prices of rice and dal are going up, why is the FM so bothered about food for cats and dogs?

Related Reading: What people wanted from budget 2007
Indian Forbes billionnaires show the economy is going great guns

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