Indian Budget 2007

Mr.P.Chidambaram (PC) made his budget presentation today. Nowadays, the importance and impact of an Union Budget has dimished – neverthless still relevant. It is a good thing that the role of a budget is reducing, indicating stability in government’s finance policy. I feel government should do even less tinkering on tax rates and handle allocations for tough problems like Poverty, Primary Education, Health & Defense and they should concentrate on widening the tax net, increase compliance and more important simplify processes.

Like many other business owners and India Inc, I was eager to see what new damage he is planning to cause like two years back with FBT. In this budget today, his intentions seem to be laudable, his promises on Agriculture, improving Infrastrucutre & Secondary education. I just hope he puts them into action.

Though in his budget speech he seemed to be helping SME (Small and Medium Businesses), he has successfuly managed to hide the real negative impacts to them. Like my auditor says, Mr.PC is an expert in creating ambiguity in tax laws by introducing new laws but just by removing commas and full-stops in existing text. After Mr.PC is a professional lawyer.

Though he has given some concessions to small units like the exemption of Service Tax to companies with turnover from 4 to 8 lakhs, he has increased the cess by 1% – which he claims to be spent on Secondary education, which I am happy to pay and hope he spends it fruitfully, introduced FBT to ESOPs (again with no clarity), increase in Dividend tax.

The notable good item in the budget is the introduction of tax holiday for budget hotels in NCR which is a welcome proposal for travel industry. Considering in India, how expensive hotel rooms are, especially in Mumbai and Bangalore Finance Minister should have extended it for entire country. But may be he wanted to reward only Delhi because it was ruled by Congress!. To understand how bad hotel rooms are in Mumbai, the typical Five Star property is US$450+ – the world’s premier Seven Star properties in Las Vegas, didn’t cost me more than US$200 during Mix ’06 last year.

Need for tax sops:

In principal, I agree that no tax exemption should be eternal. But in the case of the sunset clause of the Tax Holiday for software exports in 2009, I beg to differ with the government for not reconsidering it. With this tax holiday the Indian industry, especially the SMEs were helped in their formative years to plough back the money as capital investments. In my experience for over a decade now, I have never been able to raise capital from any nationalized banks or government schemes in India without collateral exceeding the loan value. Compare this with China where capital is realtively easier to get and so many tax breaks and government supports are available.

Another reason to support SMEs is that they  make the bulk of Indian Software Exports and provide the majority of Employment. They also provide employment in Semi-Urban areas and makes the rural educated fit for employment by biggies after gaining experience.

But minister seems to differ and seem to ignore the IT SMEs, may be because the SMEs though thousands in number have no “Political Capital” or “Media reach”.

To understand this, let us see two issues:

  1. Minister has decided to punish the indutry with MAT (Minimum Alternate Tax) of 11.33%. This will hardly affect biggies – for example for Infosys which is paying effectively 16.33% or so, MAT makes no difference as to them. But consider for a SME (and that too a new entrant) it is a difference between 0% tax to 11.33%. MAT is a big blow to SME, who are already struggling with Appreciating Rupee, Inflation and the rising cost of talent. All these three problems affect biggies as well, but they have the instruments due to their sheer size which SMEs don’t have.
  2. The 100% Tax Exemption elapsing in 2009, government says relocate to SEZs. I don’t understand which SME has the capital to pay the Sky-High prices for space in SEZs. Again for biggies this is not a problem, they can afford the space requirements, investments needed for a SEZ, but SMEs cannot. Let me be clear I am not saying there should be no tax for SME or special consideration needs to be given to SME, but all I am saying is to provide an uniform playing field. Give a tax holiday to all new units for at least first 5 years to stabilize, don’t give the holiday only SEZs which only the biggies can afford. Clearly with scrapping of STP and having only SEZ act it is not a level playing field.

Finally, considering that todays budget could have been worse, I am happy it is not that bad. Though I feel Finance Minister has wasted a golden oppurtunity to do bold steps, especially with India growing at its best and Tax collections at record high. All said he should be congratulated for having managed it so far, with the huge political compulsions he is facing with the left parties, the defeat from recent state elections and inflation.

Footnote: Not only because I am owner of a SME IT company, but I sincerely believe IT Industry will never go fully the Automobile way and be truly consolidated. Today worldwide Auto industry comprises about a dozen companies. Though M & As will continue to happen in IT Industry, Software being a Human Resource intensive and Knowledge innovations cannot be manufactured in a factory floor model – I belive Software will always have niche players competing hand-to-hand with biggies worldwide.

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