March 14, 2012 / 9:58 AM / 5 years ago

FACTBOX-India's business fear more taxes in budget

NEW DELHI, March 14 (Reuters) - India's businesses,
already facing high interest rates and a global economic
slowdown, worry that the finance ministry will ask them to
shoulder a bigger tax burden in the budget set for release on
Friday to trim the fiscal deficit.	
   After a drubbing in recent state elections, the government
has little room to cut subsidies costing 2.5 percent of GDP. But
without fiscal consolidation, the Reserve Bank of India will
have a harder time lowering interest rates without stoking
inflation.	
    Growth in Asia's third-largest economy is expected to dip
below 7 percent in the current fiscal year ending March, the
slowest pace in three years, while manufacturing may cool to 4
percent from 7.2 percent in the previous year.	
    For a preview of the budget, click on 	
    The following reflects industry expectations for the budget:	
     	
    TAX REFORMS	
    Industrial chambers including the Federation of Indian
Chambers of Commerce and Industry (FICCI) and the Confederation
of Indian Industry (CII) are lobbying hard for a delay in hiking
tax rates but do not expect any major tax relief.	
    Prime Minister Manmohan Singh's economic advisory council,
headed by former RBI governor C Rangarajan, wants to roll back 
fiscal stimulus by raising tax rates by about 2 percentage
points on most manufactured products and widening the service
tax net.	
    After the 2008 global financial crisis, India
approved a nearly $37 billion fiscal stimulus package, mainly
tax cuts for industry, and this has not been fully withdrawn.	
    The trade groups may get little sympathy for their bid to
delay reversal of tax breaks. Finance Minister Pranab Mukherjee
has limited room to prune spending, while the federal tax-to-GDP
ratio has fallen to 10.5 percent from near 12 percent in the
year before the financial crisis. 	
    However, to cheer up capital markets, Mukherjee may abolish
the transaction tax on trading of shares. Fiscal consolidation
might also please investors because it would be seen as paving
the way for interest rate cuts by the central bank. 	
      	
    CUTTING SUBSIDIES:	
    Mukherjee, who says he is losing sleep over a
rising subsidy bill, could try and tweak fuel, fertilisers and
food subsidies while allocating more funds for education,
health, farm produce and infrastructure like ports, railways and
roads.	
    The government's draft legislation on food security -- to
provide subsidised food to nearly 60 percent of the 1.2 billion
population -- may take more time to get parliament's approval,
and fuel prices could be increased outside the budget to trim
the subsidy bill.	
    The total budget subsidy bill could touch $50 billion this
fiscal year, against $32 billion a year ago, thus widening the
fiscal deficit to more than 5.5 percent of GDP, well above the 
initial target of 4.6 percent of GDP. 	
    The next budget is likely to show a fiscal deficit of near 5
percent of GDP in the fiscal year beginning April 1, with growth
estimated at between 7.5 percent and 8 percent. Economists in a
Reuters poll conducted in January pegged GDP growth at 7.9
percent.	
    Economists widely criticized India's last budget for overly
optimistic growth forecasts and unrealistic spending cut plans.
Some worry the next installment may contain more of the same.	
  	
    BOOSTING PRIVATE INVESTMENT	
    Industry has sought to keep factory gate duties and service
taxes held at the current levels.	
    CII wants the government to fast track at least 100 big
manufacturing and infrastructure projects like a Delhi-Mumbai
industrial corridor to remove bottlenecks in industrial growth.	
    More than 70 state-funded projects are running late by more
than two years over land-acquisition and environmental issues,
racking up nearly $19 billion in extra expenses, or 20 percent
of the total projected costs.	
     	
    TWEAKING TAX RATES:	
    The finance ministry is likely to tweak various corporate
tax exemptions without changing the current 30 percent rate for
corporate profits. 	
    That tax rate puts India on a par with other emerging
economies such as Mexico, but considerably higher than some
Asian economies, according to data from the Organisation for
Economic Co-operation and Development. In South Korea, for
example, the corporate tax rate is 22 percent.  	
    A parliamentary panel, headed by former Finance Minister
Yashwant Sinha, has recommended phasing out various corporate
tax exemptions, estimated at nearly $18 billion in 2011/12.	
    	
    FOREIGN INVESTMENT FLOWS:	
    The cash-starved civil aviation, real estate and capital
markets hope for further easing of rules on foreign investors as
a way to attract more money, which should help improve access to
cheaper funds from overseas and ease inflation.	
    Foreign investment inflows, which include direct investment
and portfolio money, are estimated around $25 billion in 2011/12
fiscal year against about $12 billion in the last  fiscal year,
says Rangarajan, but a widening gap between exports and imports
is putting pressure on the current account deficit also.    	
    Manufacturing and service exports, estimated at $400 billion
this fiscal year, expect marketing incentives and policy support
in the budget to grow amid fading global growth prospects.	
    The government may provide more funds for exporters' bodies
to explore new markets in Africa, Latin America, and transport
subsidy in addition to assuring them a relatively stable Indian
currency.	
($1=49.86 Indian rupees)             	
	
 (Reporting by Manoj Kumar; Editing by Emily Kaiser and Ramya
Venugopal)

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