CII Communique - February, 2010

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Reign in Fiscal Deficit while Sustaining
Economic Recovery
For the fiscal year 2009-
10, the central government
runs a budgeted fiscal
deficit to the extent of
6.8% of GDP. Adding state
governments’ deficit and
off-budget liabilities, the
consolidated fiscal deficit
crosses the double-digit
mark at 10.2%. A high
fiscal deficit of this magnitude, among other things, would
have the tendency to crowd out private investment, push
up interest rates, discourage FDI inflows, and suffocate
the space for proactive monetary and fiscal policies.
CII believes that fiscal deficit during the next financial
year should be brought down to around 5%, without
jeopardizing the process of economic recovery, which
has yet to take a firm footing.
In its pre-budget memorandum, CII has provided a
detailed roadmap for reduction in fiscal deficit next year
by augmenting revenues and rationalizing expenditures.
Among the important measures to augment revenues,
CII has suggested widening the base of the service tax,
clearing at least a fourth of the over Rs. 2 lakh crores
that is believed to be locked up in various disputes and
litigations, and undertaking disinvestment to the tune
of Rs 40,000 crore. Rationalization of expenditure is
suggested through policy measures such as improving the
efficiency of expenditure on various social programmes,
shifting towards outcome budgeting, creating a third
party monitoring cell to ensure proper utilization of funds
on social programmes, implementation of long-pending
reforms in petroleum prices and subsidies (food and
fertilizer), and increasing capital expenditure.
Rationalize Corporate Taxes
Rationalization of corporate
tax in certain aspects has
the potential to provide a
major thrust to the growth
momentum in investment,
employment and output
in the manufacturing
sector of the economy.
With this in mind, the
CII memorandum has
suggested some special fiscal incentives for the entire
manufacturing sector. The fiscal incentive could be in
line with what was offered to select sectors (setting up
and operation of cold chains, warehousing facilities for
storing agriculture produce, and laying and operating
cross-country natural gas or crude or petroleum oil
pipeline networks for distribution on common carrier
principle) of the economy during the announcement of
the previous budget.
Tax incentive is also sought to promote the use of
advanced technology in the manufacturing sector. With
fast growing globalization and competitiveness, technology
is becoming increasingly important for firms to survive.
It is a well-known fact that technology is changing at a
rapid pace and unless we are able to replace assets fast,
we cannot match other countries in terms of productivity
and market share. The objective of penetrating the use
of advance technology in the manufacturing sector to a
large extent can be helped by raising the deprecation
rates on plant and machinery. At present, the depreciation
rate in the case of plant and machinery is only 15%,
which should be raised to 25%.
Scope also exists to rationalize the Minimum Alternative
Tax (MAT) to promote investment in the manufacturing
sector. It may be recalled that MAT was introduced to
counter the rapid increase in the number of zero tax
companies arising out of tax exemption, deduction
and higher depreciation and also widening the tax net.
Zero-tax companies are required to pay MAT at the rate
of 15%. While there may be some merit for imposition
of MAT, it is at the heavy cost of diluting the various
tax incentives that are offered to revitalize industry. CII
has, therefore, recommended reduction in MAT rates
substantially.
Another key recommendation pertaining to corporate
taxes relates to the amendments in tax laws that are
made with retrospective effect. This has happened
in numerous instances, apparently to neutralize the
decisions of the appellate authorities, namely ITAT, or
High Court, which were in favor of the assessee. Such
instances usually result in harassment of the assessee
at the hands the assessing officer, besides violating the
principles of equity, justice and fair play in payment
of taxation. The recommendation is therefore to avoid
introducing amendments with retrospective effect.
Encourage Research &
Development
In an increasingly competitive and
dynamic milieu, R&D expenses
determine the lifeline of a business.
The Indian manufacturing sector
has, however, not been able to
spend the desired amount on R&D.
Communiqué February 2010 | 7