The cold reception that the Union budget was accorded by the stock markets seems to have prompted the finance minister to come out with several clear measures that should go some way in perking up the spirits of the sectors which are the prime movers in the markets. Yashwant Sinha seems to be a chastened man who has realised that tax concessions that take away with one hand what is given with the other create acute frustration and end up with everyone feeling worse off.
The decision not to be parsimonious while giving tax sops has touched two areas vital to the information technology sector. First, the double taxation of options exercised under employees' stock option schemes has been ended by retaining only the capital gains tax. This should enable such schemes to become more popular and effective instruments in the hands of high-tech startups which are seeking to leverage the full value of their workforce. Mr Sinha has also thankfully extricated the venture capital funds from the taxation morass that they had sunk into and ordained that these funds, which are the incubators of the new economy, will be true pass-through vehicles. The Indian venture capital industry, which is very much in swaddling clothes, should now use its tax-free status to be up and running.
Mr Sinha has also given the pharmaceuticals industry a much needed boost as it is a major player among the knowledge based industries but has of late lost some of its shine. A 10-year tax holiday for R&D companies in the pharma and biotechnology field, as also the hiked 150 per cent tax deduction allowed for R&D expenditure should energise Indian companies that are serious about inventing new molecules and holding their own in the coming new patents regime. The proposed Rs 150-crore R&D fund may be no more than a token and its utility will depend on the way it is administered but such gestures send the right signals.
But some of Mr Sinha's changes in indirect taxes cannot be welcomed in unqualified terms. He has not given up the old habit of finance ministers making little changes in elaborate definitions and for obscure items in response to lobbying or for populist effect. If heeng can be exempted from cenvat then why not a whole host of other herbs? It is not also clear how halving the cenvat on biscuits packs of 100 grams and below that cost Rs 5 or less will improve the government's popularity among the poor. If, as he has himself declared, the aim is to simplify the tax structure, this is hardly the way to go about it.
Mr Sinha has also continued the recent trend of extending protection to domestic sectors by raising the customs duty on tea, coffee and poultry meat. Saving domestic producers from dumping at a time of international oversupply is understandable but the key to the price stability of the last two years has been an easy supply situation for essentials aided by the option of cheap imports. If domestic prices start going up behind rising tariff walls (the inflation rate is already creeping up) then Mr Sinha's entire gameplan will go haywire.
