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April - May 2005

Business Forum

India’s Budget 2005

Finance Minister P. Chidambaram presented the coalition government’s budget for 2005-6 aimed at helping the poor and extending tax exemption to non-resident (external) account and on bank interest payable to non-resident Indians (NRIs).

“Bowing to popular demand, I propose to continue the exemption from tax on interest earned on accounts maintained by NRIs,” he told the Lok Sabha while presenting the budget.

Interest income accrued before March 31, 2005, on money deposited in an NR (E) account in any bank is at present exempt from income tax. Interest payable by a scheduled bank before April 1, 2005 to a non-resident or a person who is not ordinarily resident, on deposits in foreign currency, approved by RBI is also exempt from income tax.

As per the budget proposals, both these exemptions would now be available after April 1, 2005. These amendments would be in effect from April 1, 2006 and would apply in relation to the assessment year 2006-7 and subsequent years.

Chidambaram said he wanted to ensure the nation’s new prosperity brought “immediate relief to the common man.” The government’s goal is “to eliminate the scourge of poverty,” he said as he earmarked Rs.250 billion ($5.7 billion) for social programs in his second budget since the Congress party won power last May.

“Given the resilience of the Indian economy, it’s possible to mobilize the resources and launch a direct assault on poverty and unemployment. That’s the only way to bring immediate relief to the aam admi (common man),” he said.

Those eyeing greater trade with India would be pleased by Chidambaram’s aim to accelerate foreign trade. He said: “The government has fixed an ambitious target of $150 billion for exports by the year 2008-09 in order to double India’s share in world exports to 1.5 percent. We intend to further liberalize trade policy and extend full support to the efforts of our exporters.”

Eager to enhance foreign direct investment, Chidambaram laid stress on the need to take a “pragmatic view.” Citing the example of China, which has “received $500 billion worth of foreign investment since China opened its economy in 1980,” he said: “Our own experience has been that the automobile, software, telecommunication and electronics sectors have benefited from FDI and have assimilated themselves into the global production chain. I believe that there are opportunities in other sectors as well, such as mining, trade and pensions. The government will come forward with suitable proposals.” The gross budgetary support has been fixed at Rs.1725 billion for 2005-6.

What spells a major relief to tax payers, the budget has raised income tax exemption limit, restructured tax slabs, lowered corporate tax to 30 percent and slashed excise and customs duties on several commodities, including petrol and diesel.

Income up to Rs. 100,000 will be exempt across the board. Income between Rs. 100,000 and Rs. 150,000 will attract 10 per cent tax and Rs.150,000 to Rs.250,000 will attract 20 percent tax. Income beyond Rs. 250,000 will be taxed 30 percent.

Asserting that inflation has been moderated to five percent, Chidambaram projected a GDP growth of 6.9 percent in the current fiscal year with 8.9 percent in the manufacturing sector.

Announcing immediate relief for Indians affected by tsunami tragedy, Chidambaram unveiled a package of Rs. 102.16 billion for the victims.

With a 7.8 percent increase in defense allocation, Indian armed forces would continue to purchase hi-tech equipment. Compared to Rs.770 billion allocated last year, this year the defense ministry has been allocated Rs.830 billion.

Though Chidambaram has raised the exemption limit for women and senior citizens, he has slapped a 0.1 percent tax on cash withdrawals of Rs.10,000 a day from banks as “anti-black money” measure.

The NRIs in UK are happy and think that the Budget was progressive and aimed at all round development in the country.

Mr. Vijay Goel, partner at Singhania & co, Indian law firm said, “It is heartening that the government has withdrawn the move to tax NRE deposits. Though the country was flush with foreign exchange and did not need NRE help unlike earlier days, the budget did take into consideration the interests of the NRIs”,

Most of IT business thinks the budget was easy on IT-related items and welcomed the focus on infrastructure which he said will lead to all round development.

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