Business

Devil In The Details

Chidambaram had said an absolute no to rollbacks. But the vexed turnover tax is nearly gone. Others may follow.

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Devil In The Details
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8/10, 9/10—that's how businessmen initially rated finance minister P. Chidambaram's third, and the UPA's first, budget. A newspaper jury—comprising 10 CEOs like Anand Mahindra, Nandan Nilekani and Kumarmangalam Birla—gave the FM a composite rating of 7.5. In post-budget interviews, Chidambaram boasted he had adhered to most of industry's demands. But two weeks later, sections of India Inc have changed their stance; some allege that a few proposals cater to the interests of powerful lobbies, both political and business.

So, CEOs and political parties are putting pressure on Chidambaram to roll back some proposals. What's giving them confidence is the FM's about-turn—or almost that—on the turnover tax on securities. Last week, Chidambaram reduced or abolished it (from 0.15 per cent of transaction value) for intermediaries like day traders and bond traders respectively. "We are happy because it shows that they (the policymakers) listen to us," says a relieved Motilal Oswal of Motilal Oswal Securities. If the FM's listening to brokers and institutional investors, then he is likely to cow down to the demands of the Left parties and the business community as well—that is the reasoning.

During his Lok Sabha speech last Wednesday, Chidambaram hinted that he may reduce the FDI (foreign direct investment) equity caps in telecom and insurance. His budget had increased the cap to 74 per cent (from 49) in telecom and 51 per cent (from 26) in insurance. But the Left parties vociferously opposed it; later, so did the BJP. And Arun Shourie, former disinvestment minister, said the nda had resisted the FDI increase in telecom because of security apprehensions raised by the intelligence agencies.

However, sources attribute the dilly-dallying over FDI in telecom to a tussle between two business lobbies. The previous regime decided to back the domestic firms that don't want foreigners like Singapore Telecom and Hutchison to increase their India exposure. Then Chidambaram opted for a policy U-turn, obviously to send the right signals to international investors who were waiting for the UPA's first budget to gauge whether this coalition, despite ideological differences between its constituents, is serious about economic reforms. Now, the FM thinks that "national interests" should—and will—be taken into account before deciding on FDI cap hikes in various sectors.

Another controversial issue that Chidambaram will possibly reconsider relates to the aviation sector. In his budget, the tax exemption given to all airlines for leasing aircraft was withdrawn. This has angered most airlines, including Indian Airlines and Air-India, who feel that the move favours just one private player, Jet Airways, which owns most of its fleet. "The lead time for acquiring an aircraft is around 18 months, so airlines generally opt for leasing. A-I will lose

Rs 91 crore since 15 of its 34 aircraft are leased and another dozen are in the pipeline. It will be hit by another Rs 100 crore on account of the 14 planes it plans to lease for the new Air-India Express service," explains an A-I spokesperson.

There are ways to wriggle out of the problem. One, the airlines can finalise lease agreements before September 1, 2004, the cut-off date for removal of the exemption. Two, they can sign agreements with nations with whom India has signed double-taxation treaties and, hence, save taxes. Three, they can register the lease agreements in third countries. But both IA and A-I, being state-owned and bureaucratic, are doubtful of pursuing these alternatives. "Everyone else associated with the travel industry is making money during the current tourism boom. But we cannot make money, although we are the cause for their existence," laments the A-I spokesperson.It seems that the UPA government, which is obsessed with "reconstructing" the public sector, will end up hurting the two psu airlines!

One can see the yawning gap between the UPA's public stance and its budget proposals in other areas. Although the FM has consistently talked about removing all exemptions, he has removed some and added new ones in his budget. The most glaring example of the new benefits pertains to Cenvat, introduced in 2000 to make the excise duty regime more liberal and transparent. This year, powerlooms and handlooms have got the option to decide whether they want to be part of the Cenvat chain or not. What the proposal implies is that powerlooms and handlooms can now refuse to pay duty on their products if they do not claim drawbacks on duties paid at the raw materials and intermediate stages. This benefits the looms located in south India, especially Tamil Nadu.

Explains Arun Goyal, an expert in indirect taxes, "Yashwant Sinha imposed a 16 per cent duty on powerlooms and handlooms, which subsequently suffered as they now came under the ambit of the inspector raj. Jaswant Singh reduced this duty to 8 per cent and all opposition quietened down. But Chidambaram has created a distortion by his new proposals, largely to please his constituency in TN."

Similarly, consider the distortion in another sector—publishing—where an exemption has been removed. The result: import duty on lightweight coated paper, used mostly by magazines, has gone up from 5 per cent to 21 per cent which, claims the Indian Newspaper Society, "is a major setback for the publishers of magazines." Since paper constitutes over 60 per cent of the direct cost of magazines, the impact is substantial.

But why is the business community not creating a public hue-and-cry, as would normally be the case, about these controversial proposals? Simply because it doesn't want to be perceived as being too critical of the UPA. "Until a few months ago, most businessmen were openly pro-BJP. So now they don't want to rub this regime the wrong way by publicly criticising the budget proposals," says a Delhi-based middleman who works for several business houses. Therefore, they are using the silent lobbying ways to convince PC to reboot some of his budget proposals.

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