Finance Minister P Chidambaram working on Union Budget India 2006

India’s FM, P Chidambaram, has a taxing job as the country awaits his dream budget for 2006. The common man’s focus is, as always, on Income Tax slabs and exemptions in the run-up to Budget 2006.

22 January 2006
MUMBAI, INDIA

With Finance Minister Palaniappan Chidambaram kick-starting the proceedings for the Union Budget 2006 with a slew of meetings with corporate honchos, the vexed issues of taxation and income tax slabs has come to the forefront.

Will the Union government leave income tax rates untouched and bring in new taxes in Budget 2006? The answer for both the high-curiosity queries seem to be yes, according to capital buzz.

The rationale for those betting on union government leaving taxes untouched in India Budget 2006 certainly seems to be Assembly elections in five crucial states, including the Left stronghold of West Bengal and Kerala, where the CPM-led coalition is almost sure to return to power. Then there is Tamil Nadu, where United Progressive Front’s key ally DMK is making a do-or-die pitch to return to power.

The Union Budget, which is traditionally presented on February 28, may however bring in fresh taxes like an inheritance tax. Indian Finance Ministry sources said the health ministry is pitching in for a cess to drive the ambitious nation-wide health mission.

It my be recalled that India’s corporate honchos inlcuding Reliance Infocomm chief Anil Ambani and Sunil Bharti Mittal of Airtel had met Chidambaram with a wishlist. Chidambaram is expected to hold extensive consultations with a cross-section of the society including trade union to hear them out before giving shape to Budget 2006. Given the circumstances in which India is in, it needs the mastery of Finance Minister Chidambaram, who is credited with a dream budget, to keep everyone from Left to Right of the political spectrum satisfied. 

The Union Budget 2006 is likely to shower sops for job-creating industries like textiles, leather, food processing, auto parts. At the same time it would endeavour to bring more services in the tax net. At present, 81 services which are in the tax net are levied tax at a rate of 10 per cent.

It may be recalled that the Indian Prime Minister Manmohan Singh had promised to bring down the peak customs duty further by 2-3 per cent from the present 15 per cent. This is an obvious move to achieve parity with the ASEAN level, sources said.

In the Union Budget 2005, P Chidambaram had introduced a Fringe Benfit Tax (FBT) which had drawn flak. Though it would be retained in Union Budget 2006, the Indian Finance Minister is reportedly keen to simplify it.

P Chidambaram is also not likely to provide relief to subsidies to Indian Oil public sector undertakings (PSUs), which are funded by the Union budget as well as the Oil firms.

Another issue which the Indian government is yet to take a stand on is the tax structure of Oil firms, as it awaits the C Rangarajan panel report on petroleum pricing policy. Rangarajan is a former RBI governor.

India’s automobile sector, considered the one of the fastest growing automobile sectors in the world, is likely to get a pat. The government is keen to boost auto demand. With this in mind, Chidambaram may move to exempt cars from special excise duty in Budget 2006, but this may be extended only to small cars. Luxury cars in India will still be hit after the 2006 Budget.

Tax reforms are Chidambaram’s pet initiative. The Indian Finance Minister, who himself filed his tax returns in Chennai, Tamil Nadu, would push for toning up tax administration and rationalizing its structure. Chidambaram is not happy with the number of individuals in the high-tax paying category. He thinks it conceals a bigger number who evade the government coffers somehow.

It remains to be seen how Chidambaram reacts to the Left’s proposal to tax the rich and fund the poor. He would have to strike some sort of a balance on this front, given the vehement opposition to this from the industry. Stay tuned for February 28, 2006 when the budget will be revealed in parliament.