IF the Sensex is an indicator of corporate sentiment, even if not of corporate performance, then Union Budget 2009-10 has received the thumbs down from the corporate sector. The Sensex fell by 870 points (or 5.8 per cent) on Budget day, rose marginally the day after, only to fall by a further 400 points on the subsequent day. It is indeed true that market sentiments do not reflect in full the judgment of industry, being driven by whimsical expectations, fears and speculative urges. But statements from corporate leaders do suggest that a fair sample among them is not too happy or is downright unhappy with the Budget.
This is indeed surprising because the Finance Minister was quite clear about the need to support the private sector when he said: Private sector investment has been affected by the global macroeconomic conditions. Our government is committed to creating a facilitating environment in which a competitive private sector can thrive and play its rightful role in the nations economic development. Indias high growth of 8.5 per cent per annum from 2004 to 2008 was fuelled in very large part by private investment. I look forward to working closely with industry and our vibrant entrepreneurial community to address their outstanding concerns.
This perspective was reflected in his tax proposals as well. Despite the need to finance a burgeoning fiscal deficit, the Finance Minister imposed no additional taxation on the corporate sector other than raising the Minimum Alternate Tax (MAT) from 10 to 15 per cent. This hurts only a few firms. The governments own figures show that the average effective tax rate in financial year 2007-08 on 4,10,451 firms that had submitted tax returns electronically by March 31, 2009, exceeded 22 per cent and averaged 20.14 to 24.04 per cent in different profit classes. Although this is well short of the normal corporate tax rate (inclusive of surcharge and cess) of 33.99 per cent, it is well above the new level for the MAT. That is, on average, firms in the governments sample are in an effective tax rate range above the new MAT rate.
There are a large number of firms (1,61,916 to be precise) that pay zero or less than zero taxes. But these are largely companies that make losses. Their share in the total profits of all sample companies is less than 2 per cent, even though they constitute 40 per cent of the sample in terms of number. There are, however, 16 per cent of firms accounting for 45 per cent of sample firm profits that were subject to an effective tax rate of 0-20 per cent in 2007-08. It is a few of these firms falling in the 0-15 per cent effective tax rate range that would be affected.
It could hardly be argued that the fate of this set of firms influenced corporate sentiment substantially.
More so because the corporate sector has got a whole host of other benefits from the Budget. If we exclude MAT, the corporate sector has indeed obtained a bonanza. For example, the Finance Minister has chosen to extend for one more year (until 2010-11) the deduction from taxable income of the export profits of the Software Technology Parks of India (STPI) units, and units in the Special Economic Zones (SEZs), the Export Processing Zones (EPZs) and the Free Trade Zones (FTZs). This tax holiday was originally available until 2008-09 and was then extended to cover 2009-10. The major beneficiaries of this concession are the Software Development Agencies and the IT-Enabled Services Providers/Business Process Outsourcing units, in whose case the effective tax rates are as low as 12 and 15 per cent respectively. Revenue forgone under this head in 2008-09 was Rs.20,366 crore. Overall corporate tax concessions have meant that the revenue forgone by the government stood at Rs.68,914 crore in 2008-09, which was Rs.6,715 crore higher than in 2007-08. This increase was greater than the Rs.6,375 crore increase in the fiscal deficit between these two years.
Another major tax concession offered to firms in this Budget is the abolition of the Fringe Benefit Tax (FBT). Besides the accounting scrutiny, which firms were subjected to so as to assess whether they were complying with this form of taxation, the FBT was also a major burden on the corporate sector. In 2008-09, the sample of companies for which data are reported in the Annex on Revenue forgone under the Central tax system to the Budget documents paid as much as Rs.6,553 crore as FBT. This too was close to the increase in the fiscal deficit between 2007-08 and 2008-09. By abolishing FBT, the Finance Minister has forgone revenue of around this magnitude, since taxes on perquisites paid by individuals is unlikely to be anywhere near this amount.
Budgetary support for the corporate sector came in other forms as well. The Finance Minister has chosen to continue with the temporary excise duty exemptions granted in the stimulus packages announced in December 2008 and February 2009. The effective excise duty rates were cut across the board by 4 percentage points on December 7, 2008. On February 24, 2009, the mean excise duty rate of 10 per cent was further reduced by 2 percentage points from 10 per cent to 8 per cent. These changes were responsible for a significant share of the increase in excise revenues forgone from Rs.87,468 crore in 2007-08 to Rs.1,28,293 crore in 2008-09. With the Budget refraining from raising the excise duties back to the earlier levels, the revenue forgone in 2009-10 would be much larger. To the extent that the corporate sector does not pass on the benefits of the excise duty reduction to the consumer, it will garner a part of the revenue forgone. And to the extent that it does pass it on, it may spur demand for private sector products. In sum, revenues have been forgone in the Budget to support the corporate sector in the midst of the recession.
Besides these benefits given to industry through measures such as tax concession on investments made by the National Pension Scheme Trust in equity and the abolition of the Commodities Transaction Tax, the government has provided support to stock and commodity trading, which would benefit financial capital operating in these markets. Thus, from a tax point of view, private capital of all kinds should be happy with this Budget.
What then accounts for the corporate sectors muted or even adverse response to the Budget? An important factor here is that corporate expectations of concessions and reforms in this years Budget were exaggerated for two reasons. The first was the idea promoted by the media and interested financial analysts and encouraged by the government that a much clearer mandate for the Congress, a more stable government and the absence of the Left in the equations of power had paved the way for a new generation of reforms, which would include more privatisation, more liberalisation and more concessions for the corporate sector.
The second was that this view was strongly supported by the tone and content of the Economic Survey presented prior to the Budget. To quote the Survey: The reforms of the 1990s created a competitive environment in which Indian entrepreneurship could flourish. The fruits of these reforms emerged gradually in the form of rising output and employment and higher growth from 2003-04 onwards. However, there is a perception among financial and other investors that government has been slow on policy reforms, in the past five years. As long as economic growth was above trend these apprehensions did not matter, but an economy where the industrial (manufacturing) growth has been steadily declining for nearly eight quarters over 2007-08 and 2008-09 with the revival still uncertain, policy interventions are necessary. More so the sector has been one of the main drivers of the recent spurt in GDP [gross domestic product] growth.
Accompanying this statement is a box that details measures required for improving the investment environment and driving growth, which reads like a manifesto for accelerated reform. It is quite likely that such reform advocacy in a pre-Budget government document encouraged financial investors to rush to market.
However, compared with the Surveys advocacy, the reform moves in the Budget appear to be a major retreat. Consider privatisation, for example. It comes couched in populist rhetoric.
The Finance Minister begins by saying: The public sector undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 per cent government equity in our enterprises, I propose to encourage peoples participation in our disinvestment programme.
He then goes on to elaborate as follows: The average public float in Indian listed companies is less than 15 per cent. Deep non-manipulable markets require larger and diversified public shareholdings. This requirement should be uniformly applied to the private sector as well as listed public sector companies. I propose to raise, in a phased manner, the threshold for non-promoter public shareholding for all listed companies.
This is indeed a case for disinvestment and privatisation. But in language that is cautious. It came along with a rather limited programme for garnering resources through privatisation in the Budget. The signals were clearly mixed. Those who had rushed to the market misled by the media and the Economic Survey rushed out, and the stock market collapsed. The corporate sector that might otherwise have been happy that it had retained old concessions and garnered new ones was left disappointed. The Finance Ministers largesse was wasted.