Business

Budget & You

Will you as taxpayer or consumer pay for the FM's largesse? No.

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Budget & You
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A Pitara Of Goodies
  • Tax for Rs 3-5 lakh slab is 20%; above Rs 5 lakh, 30%
  • Senior citizens' threshold hiked from
    Rs 1.95 lakh to Rs 2.25 lakh
  • Women's exemption threshold raised from Rs 1.45 lakh to Rs 1.80 lakh
  • For all others, tax threshold hiked from Rs 1.1 lakh to Rs 1.5 lakh
  • Banking cash transaction tax withdrawn from April 1, 2009
  • Increase in short-term capital gains tax to 15%
  • No FBT on creches, employee sports, guest house facilities
  • Duty on two-wheelers reduced from
    16% to 12%
  • Tax-GDP ratio up at 12.5%
  • General CENVAT rate on all goods down from 16% to 14%
W
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So, where will the money come from? From two sources—buoyant tax revenues and borrowings. More than 80 per cent of the income of the government comes from tax revenues, both direct and indirect. The economic boom has led to higher income levels of a growing mass of people and companies. This, coupled with moderate tax rates and fewer cracks to hide in, has meant buoyant tax revenues. So far, so good—but now, the worry. Instead of using the burgeoning tax revenues to fix the deficit gap, we are pushing back financial prudence by continuing to spend more than we earn. We remain in a revenue deficit zone, even as the fiscal deficit looks to be coming down. An important distinction needs to be made here to understand what these two are and why we need to worry about them.

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Like the government, we as individuals spend more than we earn when we take a home loan. So, a person with an income of Rs 6 lakh a year is able to afford a Rs 25 lakh home loan, but since this is an asset-creating loan that leverages future income and capital gains, it is not harmful to his financial health. But imagine a situation where we use our credit cards to fund current consumption—paying domestic staff (the government's wage bill), the security guard (defence expenditure), paying off the interest on previous loans taken (interest payment by government on previous debt) and subsidising the family laggard who still needs doles to survive (government subsidies like the loan waiver announced now)—and you have a serious financial problem.

The excess of revenue expenditure over revenue income is called revenue deficit, which the government agrees is not a happy animal to have on its balance-sheet. So, in 2003, it had promised under the Fiscal Reforms and Budget Management Act (FRBMA) to bring it down to zero by March 31, 2009. The finance minister, now that he has doled out all the pre-election goodies, cannot meet that target (incidentally, what happens to you and me if we don't meet our tax payment targets is really very different from what happens to a finance minster when he reneges on a financial target) next year. Says he: "Because of the conscious shift in expenditure in favour of health, education and the social sector, we need one more year to eliminate the revenue deficit. In my view, this is an entirely acceptable deferment." Not really, for though the fiscal deficit (the total borrowing of the government) is down, this is coming at the cost of public investment (which could be larger if the government's revenue deficit went to zero next year) rather than through a reduction in current consumption.

Even as we celebrate the short-term money in our wallets and wonder when the government will practise the financial prudence it preaches, one constituency is purring with happiness. If it was the year of the dog last year, this is surely the year of the tiger. The furry creatures get Rs 50 crore to get protection from their two-legged tormentors. Pity the tigers can't vote.

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