The Bangalore International Centre (BIC) organised an interactive discussion on the Union Budget 2007-08 and also Karnataka Budget 2007-08 on 26th March 2007.

The basic analysis of the two budgets was done by Prof . S L Rao and Shri Amarnath Kamath, a well-known Chartered Accountant. A distinguished audience took active part in the interactive session that followed.

Prof. S L Rao, in his observations, drew attention to the fact that the Union Budget was framed and presented against the backdrop of Punjab elections and the rising curve of inflation and felt that the Finance Minister had to do more of a balancing act within the limitations of this backdrop. The economy was buoyant and the obvious need was to accelerate the growth process and contain inflation. However, Prof. Rao regretted that the thrust and the impact of the budgetary proposals were unlikely to have any impact on either growth or inflation. He also noted that the Oil Bonds and FCI Bonds, issued earlier by the Government to contain the prices of oil, gas and food grains, do not find any reflection in the budget and that if this, amounting to almost Rs.26,000 crores, is taken into account, the fiscal deficit would be much larger than 3.8% which has been projected by the Finance Minister in the budget. He lauded the increased allocations made to the Social and Developmental Sectors, like Education and Health, but felt that the utilisation of the allocated funds is likely to be the major inhibiting factor towards achievement of the stated objectives. As regards subsidies, Prof. Rao was of the opinion that there are enormous leakages inherent in the existing schemes and unless these are plugged, the wastages would defeat the objectives of the schemes. He did not see much merit in the proposal to ban trades in futures and also expressed his reservations on the increased allocations to defence expenditure. An interesting point highlighted by Prof. Rao was that the bureaucratic processes in issuing sanctions to budgetary allocations approved by the Parliament are so involved and time-consuming that, effectively at the implementation level, one gets only 6 months to utilise the budgetary allocations made for 12 months! Quite obviously the level of implementation remains consistently low on an average and there is a flurry of activities towards the end of the financial year to somehow utilise the funds so that they do not lapse. This often leads to unproductive and unnecessary expenditure. As regards the Karnataka Budget, Prof. Rao noted that Central Grants constituted about 16% of the receipts in the State Budget and wondered whether this represented a certain amount of intrusive role of the Union Government in affairs which so far have remained an exclusive domain of the State Governments.

Mr. Amarnath Kamath, in his remarks, noted that the budget has shattered the hopes of many who were hoping for another “dream budget” from the Finance Minister. In view of the buoyancy in revenues and low fiscal deficits the expectations were high that growth would be stimulated by structural adjustments and tax reforms in the budgetary proposals. The budget however does not move in that direction at all. On the other hand, there are certain proposals like the differential excise duty on cement, imposition of Fringe Benefit Tax on Employees’ Stock options, extension of MAT to IT companies and Service Tax on Rentals of Commercial Properties which are positively retrograde. No effort has been made to contain the inflationary pressures, excepting reducing customs duties on certain items which, however, appear to be somewhat ad hoc and disjointed. Mr Kamath admitted that, on balance the budget presented by the Finance Minister is not a bad budget; however, it is a timid budget which does not propel growth or contain inflation.

Other points highlighted by Mr. Kamath were as under:

a) While the basic exemption for all categories of tax-payers has been raised, this has effectively been nullified by increasing the education cess from 2% to 3% of the tax;
b) Dividend Distribution Tax (DDT) has been raised from 12.5% to 15%. After surcharge and cess, the effective tax rate climbs to 16.995%. Taxing Corporate dividends amount to double taxation as dividends are declared from post-tax income. If the investor is taxed again, the same stream of income is being subjected to an effective tax rate of 50.98% (33.99% + 16.99%). Apart from that, foreign investors (NRIs, FIIs etc) have to pay tax in their host country also on such dividends received, as DDT is not a tax envisaged under the Double Taxation Avoidance Agreements. Thus foreign investors may end up bearing triple tax on one income;
c) RBI Savings Bonds have now been made subject to TDS which has dismayed many, including senior citizens;
d) Karnataka Budget has been structured as a “please-all” budget. However, a lot will depend on raising additional resources, keeping the fiscal deficits down and purposeful utilisation of allocated amounts in the developmental and infrastructural sectors.

A stimulating interactive session followed the presentations by Prof. S L Rao and Shri Amarnath Kamath. The session concluded with a vote of thanks by the Director.