Partial rollback

Under pressure from his party, Yashwant Sinha makes minor amendments in his tax proposals.

"THE Budget will remain essentially intact," said Finance Minister Yashwant Sinha as he moved an amended Finance Bill for the consideration of Parliament late in February. The basis for his conviction, after he had weathered relentless pressures to alter the substance of the Budget, was evident. The amendments he felt compelled to introduce entailed a revenue loss of Rs.2,150 crores, which was a tiny fraction of the total expenditure that had been provided for in the Budget. By another reckoning, the revenue forgone by the budgetary announcements that had been partly or fully reversed would not be more than 0.12 per cent of the gross domestic product (GDP). With necessary savings and improvements in tax administration factored in, Sinha was confident that he would contain the overall fiscal deficit within the budgeted figure of 5.3 per cent of GDP.

Considering the record of recent revenue shortfalls and expenditure excesses, this may seem altogether too rosy a prognosis. But Sinha clearly had no choice. Just a fortnight earlier, he had been severely berated at the Bharatiya Janata Party's National Executive meeting in Goa for being unimaginative in his handling of the economy and unattentive to the interests of the party's main constituencies. Presented with a charter of demands by his party, Sinha also faced freely circulating rumours about his imminent replacement. He clearly had to produce some evidence of political sensitivity, while avoiding any overt appearance of fiscal imprudence.

Principal among the Goa charter of demands was the restoration of the 20 per cent rebate allowed under Section 88 of the Income Tax Act for certain varieties of savings, like life insurance and Provident Fund investments. In a gesture that deeply alarmed the salaried classes, Sinha had slashed the rebate to 10 per cent for individuals with a taxable income between Rs.1.5 lakhs and Rs.5 lakhs, and done away with it entirely for those in higher income groups.

When the moment of reckoning came, he only yielded ground reluctantly, raising the allowable rebate to 15 per cent. To mollify his disgruntled partymen, he however, raised the ceiling on investments that would be eligible for this concession to Rs.70,000 from the current level of Rs.60,000. Plain arithmetic would show that Sinha has gone more than halfway to meet the demands of his party, his insistence on not restoring the status quo being perhaps a symbolic assertion of the budgetary prerogatives of the Finance Minister.

Another demand was that the service tax imposed on insurance premia be rolled back. Although levied on the insurance provider rather than the subscriber, the measure was seen as a disincentive to the entry of new investments in the insurance sector. In the long-term, it was also estimated that it would raise the costs of providing the service and impinge on the savings of the middle class too.

On this front, Sinha has again chosen to make a symbolic assertion of his prerogatives by rolling back the service tax to cover only the risk component of insurance premia. This is effectively a complete rollback, since the risk component is never more than a small fraction of the total insurance premia. But the Finance Minister's symbolism has engendered a potentially nightmarish administrative scenario for insurance companies, which would now have to make elaborate calculations on each policy to segregate just this component for meeting their service tax liabilities.

Investors in the country's languishing stockmarkets were keen to see that the decision to tax dividend earnings as part of the recipient's income would be reversed in favour of the earlier procedure of levying a flat 10 per cent tax at source. Sinha gave little away here, though he did agree to extend the 80L exemption to small shareholders, subject to a ceiling of Rs. 9,000.

For the farm sector, Sinha has raised the import duty on dairy products by 8 per cent, though he has refused to entertain any suggestion that the increase in urea prices be reversed. Other industries that have been given the benefit of excise duty concessions include textiles, bicycles, toys, granite and marble. The export sector has been granted a series of concessions, notably in the form of tax holidays for units located in special economic zones.

Although Sinha had to fight off a determined effort to gain still more concessions before he finally saw the Finance Bill through Parliament, he seemed to have won an appearance of the Prime Minister's endorsement. The day after he laid out his menu of rollbacks, Prime Minister Atal Behari Vajpayee, while addressing the annual conclave of the Confederation of Indian Industry (CII), urged the assembled businessmen to retain their faith in the country and his Finance Minister.

Although welcome, this may be only a temporary respite for the embattled Finance Minister. Among the demands that the BJP had made of him at Goa was the introduction of a monthly income plan to benefit senior citizens and retired people. Just a week later, concrete and rather startling details began leaking out of the parlous state of the Unit Trust of India's monthly income plans (MIPs). On the five MIPs of five-year tenures that are due for redemption this year, UTI is running an estimated deficit of Rs.1,500 crores. Against a corpus value of close to Rs.6,000 crores, the actual market value of the instruments that UTI is holding against these funds is no more than Rs.4,500 crores.

The Finance Ministry and all the regulatory bodies that are tasked with administering the system seem conspicuously short of ideas on how to deal with the situation. The Government has asked the Industrial Development Bank of India (IDBI) which is notionally one of the promoters of UTI, to make good the shortfall. But this stratagem of transferring the onus of redeeming the investments from one troubled institution to another is no more than a temporary expedient.

Anxious to avoid any panic in the markets, the statutory regulators, the Securities and Exchange Board of India (SEBI), entered into emergency confabulations with UTI late in April. It rejected the initial plan advanced by UTI, to roll over the MIP falling due for redemption on April 30. It decreed instead that UTI should reach into its development reserve fund (DRF) to meet the shortfall. Estimated to be in the range of Rs.1,500 crores, the DRF, however, is mostly locked up in non-liquid investments like real estate.

On April 30, UTI redeemed the MIP '97 at the assured unit rate of Rs.10. Assets acquired under the scheme were liquidated, and the shortfall was made good by reaching into the DRF. The figures remain opaque as of now, but there is little doubt that when investments of close to Rs.2,000 crores under MIP '97 (II) fall due for redemption on June 30, UTI will have to think of other devices to make good the deficit in its books.

Faced with the debacle of UTI's US-64 scheme last year, Sinha had resolutely refused to make any budgetary provision for undoing the damage, confining himself in his Budget speech to a vague promise to make the functioning of the institution more transparent. But as the difficulties of the country's largest mutual fund multiply, he may find that the investing public may not be quite so indulgent of his efforts at self-absolution.

Successive waves of electoral adversity have left the BJP in a somewhat disoriented state. The grievances that Sinha has had to attend to were only one among the many themes that have been heard amidst the din of those calling for a return to the hardline politics of the 1990s. Having tried his hand at mollifying the hurt sensitivities of the urban middle class, Sinha may well find that his efforts have not quite been adequate, given the magnitude of the crisis of confidence within the economy. Although he may have temporarily renewed his lease on his job, the Finance Minister may well find more searching tests lying in wait for him in the future.