Bland but painful
The United National Front's second budget presented to parliament
last week may appear to be 'colourless', as a former finance minister
has described it, with none of the drama and marathon speeches that
marked some previous budgets. But a closer and more measured look
at the details reveals a picture that is somewhat confusing and,
more seriously, an indication that this budget could be more painful
than it looks.
To its credit,
the government warned ahead of the budget that the public should
not expect too much relief, given the fiscal constraints it faced
- an empty treasury, a mountain of debt, and the huge cost of maintaining
a bloated public sector.
commitment to continue policy measures announced in the previous
budget and restore the island's macro-economic fundamentals is certainly
welcome and has been commended by the various spokesmen for the
But a number
of concerns have been raised. There is a legitimate worry that the
new taxes that have been proposed could raise the cost of doing
business, make exports more expensive and erode the island's international
competitiveness, and ultimately fuel inflation.
value-added tax to the financial sector is seen as one of the most
negative features of this budget. Although the government has said
that banks cannot pass on the extra cost to clients, there seems
to be a near unanimous opinion that banks will do just that, probably
by raising their charges.
been doing phenomenally well, making what can be called more than
reasonable profits in an economic environment that almost all other
sectors have found difficult to operate in. Therefore, it is only
fair that they absorb the extra costs caused by the VAT and not
pass them on to clients. Nevertheless, the new tax, as the business
chambers have pointed out, goes against the government's announced
intention of reducing the cost of borrowing.
Even the cut
in corporate tax - to 30 percent from 35 percent from next April
for firms with a taxable income of over Rs 5 million a year - comes
with a qualifier. The gain from the tax cut is offset by the withdrawal
of the five percent tax credit, which had hitherto effectively lowered
corporate tax. This means that now these firms will effectively
have to pay a higher rate of tax - at 32.5 percent.
most worrisome tax proposal is the extension of VAT to the wholesale
and retail trade. Tax experts have asked whether this is really
worthwhile given the fact that the new measures will raise only
Rs 800 million in additional revenue, especially considering the
enormous administrative task of keeping tabs on each and every shop
As it is, the
government complains that the tax base is still not wide enough
and that traders have not passed on to consumers the benefit of
previous moves to reduce the cost of living by reducing the tax
burden of the business community.
This also proves what the public has long suspected - that the rapacious
trading community cannot be trusted not to make a quick buck when
given the chance to do so.
K.N. Choksy quite rightly has said that a "spectacular and
over-night recovery of the economy cannot be expected" in the
backdrop of fiscal excesses and irresponsibility of the past. The
government may not have been able to present a better budget.
But, its call
to the public to bear the pain a little longer might sound more
convincing if there is more effort to tax those members of the super-rich
which this country, despite its Third World status, does not seem
to be short of.