Untitled Document

Bland but painful budget proposals
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.

This government's 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 business community.

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.

Extending the 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.

Banks have 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.

Perhaps the 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 or 'kade'.

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.

Finance minister 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.

Back to Business