The Budget is expected to achieve an annual growth of 7-8 per cent and double the growth of agriculture in three years. Also, it proposes to reduce the non-plan expenditure to Rs 3,32,239 crore against Rs 3,49,785 crore in the last Budget. It promises to wipe out the revenue deficit by 2008-09 against 2007-08 targeted in the Fiscal Responsibility and Budget Management Act.

The Budget proposes to launch new food-for-work programmes to step up employment in rural areas. While these are going to help in employment and in providing food, the increase in subsidy and their effect on banking sector has to be looked into. As envisaged through the pre-Budget discussions, the cess on education will realise Rs 4,000-5,000 crore in a year and Rs 3,057 crore at this moment.

As regards taxation reforms, one of the changes relate to enhancing the exemption limit. When viewed in the light of available statistics of taxpayers, approximately 1.4 crore assessees would go out of the tax net. The issue of integrating all the taxes with a useful management information system wherein income tax plays an important role has not been looked into.

On savings, one wonders whether it could have been more useful if he announced a graded concession for savings (say, 100 per cent tax concession for persons having income up to 1 lakh, 60 per cent concession for persons up to 2 lakh and so on) to avoid having low income persons in the tax net and also using this to increase the tax/savings ratio.

One of the major changes in the tax system relates to capital gains tax on securities. While long-term capital gains tax is proposed to be abolished, a turnover tax has been levied on all security transactions at the rate of 0.15 per cent. While most countries have effected turnover tax instead of capital gains tax, and this has helped in reducing volatility in stocks, this is not enough to deter volatility in the Indian context. Also, it could have serious implications for liquidity of the capital market.

However, one important reform relates to tonnage tax. This would provide a level playing field to this industry but it will have option to pay either tonnage tax or corporate tax.

Unfortunately, one of the important reforms that could have been attempted relate to levy of state-VAT on imports. It is useful to recall that even the Kelkar Committee had recommended that this was important to provide a level playing field to local manufacturers. As regards domestic taxes on commodities and services, we have not been very rational in giving exemptions.

The government has, in fact, come back to industry-specific reforms in place of general reforms. For example, the Budget has announced some industry-specific exemptions related to the automobile industry. It would now have 150 per cent exemption for in-house R&D. Companies doing research on biotechnology would be entitled to get 100 per cent tax exemption for 10 years. This approach is likely to lead us to the pressure tactics which ultimately create a mess of the tax system.

The finance minister has also announced that VAT would be implemented from April 1, 2005. While announcing this, the FM has stated that he would provide the services of a technical committee to see issues related to compensation. How-ever, some issues have not been tackled. These include reduction in the rate of Central Sales Tax and allowing the states to levy VAT on additional excise duty for which enactment has been passed but the notification has not been issued.

The author is Director, Foundation for Public Economics and Policy Research