Late Extra: India budget: taxing exercises begin

India's Finance Minister Jaswant Singh has begun working on the budget for the next financial year. The Finance Bill 2004-05 promises to be an interesting document and will demand all the expertise of Jaswant Singh and his advisory committee on how to retain the prevailing 'feel good factor' and narrow the deficit chasm.

Political factors, which might impact on the formulations aside especially since the next fiscal will be in the general election year, there, are many others, which the policy shapers will have to grapple with — hopefully successfully.

The Non-Resident Indian over the past two decades has followed the Indian budget with growing interest. In the early years the NRI interest was limited and narrow more focused on customs reliefs rather than macro issues that the Indian economy had to face.

Over the years the ambit of NRI interest in the Indian budget has grown.

As matters stand today the NRI is as much a player on the Indian economic scenario as his resident compatriot. In the last Indian Finance Act the tax relief extended to returning Indians was lowered from nine to two years.

That was forecasted in this column correctly but I was incorrect in assuming that Indians living working abroad would not return till they were forced to.

The past nine months have shown that more Indians have returned willingly from the West than from the Arabian Gulf.

The returnees whatever the reasons, are largely from the professional and services sector with a smarting of businessmen. It is this segment, which is now under the Indian finance ministry's scanner.

Tax structure

Admittedly, there are many in this category who have been resident throughout but were not liable to pay tax on the services they provided. The two are now being brought under the single tax structure, which is presently being worked on.

Returning Indians who came back armed with consultancy contracts payable in foreign currencies will also have to declare their earnings and pay tax on those.

The other avenue through which more taxes can be realised by the Indian government under consideration is the reintroduction of the 'Gift Tax'. That tax had been withdrawn in 1998 and NRIs who were remitting cash gifts to their 'assumed' loved ones would have to now work in the tax payable.

Remarkable thing

Foreign donors had been exempted but the tax authorities have left their fate in the hands of the Indian finance ministry. Presently the proposal covers only the receiver of the gift.

The Indian government has been pleasantly surprised with the increase of slightly more than 18 per cent in direct tax collection till October.

The remarkable thing is that a large proportion of this rise is not that which has been forcibly extracted but paid voluntarily. The taxman's knock and the resultant fear factor has been reduced to a certain extent.

The Finance Minister's most taxing problem will be how to reduce the growing fiscal deficit which is presently hovering around 53 per cent thanks to the rising subsidies on a whole range products.

The answer may lie in enlarging the tax ambit of both direct and indirect taxes. That is why the reintroduction of the 'Gift Tax' is significant, as it would impact on immovable property to a large extent.

With exemption given under the Gift Tax the government had lost two tax head. If the 'Gift Tax' is reintroduced it would partially cover the loss to the exchequer due to withdrawal of inheritance tax. And in fact be able to collect more by way of 'Gift Tax'.

The writer is an Indian-based journalist