Taxes and the Indian Corporate Sector

The buildup to the Union Budget of 2008 was marked by a pronounced expectation – an expectation that the soaring tax collection would encourage the finance minister to lower direct taxes on corporates. The argument simply put was that lower taxes on corporates would lead to their retaining a higher proportion of their profits, which would then be used to spur growth in economic activity and this in turn would lead to higher tax collections. But given the reality of an election year and the need to raise resources to fund many of the well-intentioned schemes directed towards health, education and agriculture sectors, the finance minister did not want to risk lowering direct corporate tax collections owing to lower rates of taxes. Direct taxes on corporates have been left unchanged. The long term demand of the software industry to extend the tax holiday beyond March 2009 has not been met either. Infrastructure, which had been the pet theme of the government over the last few years, also seems to have gone out of favour in an election budget.

If these were some of the prominent expectations of the industry which have been belied, the positives came from the many changes in indirect taxes so as to stimulate growth by boosting local consumption. The most impacting change has been the reduction in excise duty, where the general central value added tax has been reduced from 16% to 14% across all goods. This tax cut has come at a very opportune moment, a moment when industry was seeing a steady slow-down in international & domestic demand and a pressure on input costs. Given that the manufacturing sector is a high employment generator, the finance minister has been quick to react to the deceleration of growth in the manufacturing sector. In addition to excise cuts, the Central Sales Tax (CST) has been cut from 3% to 2%. These two reductions are likely to positively benefit many manufacturing industries but the impact is likely to be most significant in the auto, consumer and FMCG sectors.

Customs duty has in general been left untouched though there has been some minor tinkering with some specific sectors like Electronics, Sports Goods, Metals, Pharma, and Project imports.

Apart from this across-the-board excise duty cut, the present budget provides additional support to many sectors. Some of the more prominent changes are:

• Reduction in excise duty on all goods produced in the pharmaceutical sector, and a few other products like water purification devices, doors, sterile dressing pads, specified packaging material, and breakfast cereals from 16% to 8%
  
• Reduction in excise duty on small cars, two wheelers and three wheelers, buses and their chassis from 16% to 12%
  
• Reduction in the excise duty on some categories of paper, paper board from 12% to 8%
  
• Some products like anti AIDS drugs, cold chain facilities, composting machines, wireless data cards, packaged coconut water, tea and coffee mixes, and puffed rice have been completely exempt from excise duty
  
• Increase in excise duty on packaged software from 8% to 12%, to place it at par with customised software
  
• An additional excise duty of 1% called NCCD has been imposed on cellular mobile phones
  
• Excise duty on Non-filter cigarettes has been raised, thereby putting them at par with filter cigarettes.

What does all this add up to? In the short run, many of the sectors which have seen a reduction in excise duty will see a strengthening of demand owing to price cuts. But the long term picture of the Indian industry remains unaltered by Budget -2008, and the former, as of now, remains coupled with global economic conditions.