Sunday, February 20 2005 16:19 Hrs (IST) - World Time -

New Delhi: Finance Minister P Chidambaram may belief expectations in Union Budget 2005-06 as he has to balance tax and expenditure reforms with increasing pressures from Left parties, which could see imposition of new cess to raise resources for health and infrastructure development.

Expectations are high among the salaried class and India Inc since Chidambaram has promised comprehensive tax reforms to make the structure "simple, easy and compliant", but his hands appear tied with Left parties trying to derail some of the proposed reform measures, official sources said.

There could be some surprises given Prime Minister Manmohan Singh and the FM's commitment to economic reforms, they said, but the reforms would not be at the pace they would want them to be.

The Budget would adhere to promises made in the Common Minimum Programme (CMP) and big-ticket items of expenditure would be rural development, employment guarantee scheme, agriculture, health, and infrastructure development.

There were indications that Plan allocation would be stepped up to Rs 1,72,000 crore and the defence budget to Rs 83,000 crore. Besides, implementation of the 12th Finance Commission recommendations would result in an additional outgo of Rs 26,000 crore to the States in 2005-06, the sources said adding that this would require mobilisation of more revenue even while carrying forward tax reforms.

While there would be rationalisation of tax rates, the sources said, increased revenue was expected to come by widening the tax net (particularly service tax) and removing several exemptions barring those on housing and savings schemes.

Apart from bringing more services into the tax net, service tax rates could also be raised as a step towards introduction of goods and service tax to ultimately replace the present excise duty and service tax, the sources said.

In line with the promise to move toward ASEAN (Association of South East Asian Nations)-level import duties, customs duties may see some lowering particularly on raw materials to push domestic industries like the auto and fast-moving consumer goods sectors.

The "convoluted tax structure" on telecom, pharmaceuticals and man-made fibres would be simplified and notwithstanding the Left's demand to raise corporate taxes, the budget may provide adequate tax incentives to push up investments, especially in those sectors with potential for employment and exports, the sources said.

As per the CMP, the budget would step up allocations for employment guarantee programme, merging the present Food for Work Programme. Under the programme, asset creating public works would be taken up in rural areas.

The budget could also see the launch of new programmes for modernisation of coir, handlooms, powerlooms, garments, rubber, cashew, handicrafts, food processing, sericulture, wool development, leather, pottery and other cottage industries.

Enthused by the success of education cess to raise additional resources for primary education, the budget may see levying a cess on tobacco products like gutka and cigarettes to raise resources for the health sector.

The CMP has promised to raise public spending on health to at least 2-3 per cent of GDP in the next five years.

The sources said there could also be yet another cess to raise additional resources for development of sea ports in the country. Just as the cess on petrol and diesel to raise resources for highways development, a new cess could be imposed on select items to raise resources for modernisation of ports.

The budget may provide tax sops to IT and SEZs to boost exports with merchandise and services exports crossing $ 130 billion this year.

While the Income Tax exemption limit is expected to be raised to Rs one lakh as demanded by the Left parties, some exemptions might removed or lowered, including standard deductions, the sources said.

The Kelkar panel had proposed doing away with standard deductions completely to make up for the revenue loss.

There were expectations of excise duty on automobiles coming down and the loss in revenue made up by the buoyancy in growth of the auto sector, the sources said.

They said the banking sector too may see some tax incentives to encourage mergers and added that it would interesting to see how the budget dealt with expenditure control with subsidies accounting for Rs 1,15,824 crore in 2003-04, which was 4.25 per cent of GDP.

Even as the budget attempts moderation and stabilisation in tax rates, it would have to address the issue of fiscal consolidation and elimination of revenue deficit without which the economy would not be able to generate adequate resources for 7-8 per cent growth, the sources said adding that some bold reform measures would have to be taken.

How far Chidambaram would go depended upon the pulls and pressures of the UPA (United Progressive Alliance) partners, the Left parties added.