Sinha sets the tone for lower interest rates

Finance minister Yashwant Sinha on Wednesday said the government has created a conducive environment for the Reserve Bank of India to cut lending rates by reducing interest on the general provident fund and abolishing the tax on interest rates in the budget.

Sinha sets the tone for lower interest rates 

My responsibility is to create necessary conditions and now it is up to RBI to bring any changes in interest rates, Sinha said while attending his first seminar after presenting the budget organized by Ficci. Sinhareiterated that the stock market was set to bounce back once the budget benefits sink in. He was confident that the market capitalization lost in the sharp crash in share prices on Tuesday in the post-budget trading will be recouped soon. The finance minister put to rest the speculation that all the software companies will be dragged to the tax net. He said that various export tax concessions currently being enjoyed by export processing zones and software technology parks (STP) will continue despite the proposal to tax 20 percent of the export earnings of companies.

Sinha said the Government proposed to amend the RBI Act to give it greater autonomy. He said the concessions will be available only to units set up before April 1, 2000. Software technology parks and EPZs are currently enjoying tax holidays for a period of up to 10 years. Defending the decision to bring export earnings under the tax net in a phased manner, Sinha said there was reason to treat exports differently, as the domestic industry too was facing global competition due to the process of liberalization and opening up of the economy.

Reacting to industry demands for a steep 2 percent cut in interest rates to bring back the `feel-good factor in the industry, Sinha said, "The feel-good factor is a very elusive concept. Explaining the rationale of minimum alternate tax (MAT) and tax on dividenddistributed, Sinha said that MAT is basically to cover the corporates which are escaping the tax net, availing various types of exemptions. The exemptions have to be rationalized in such a way that companies having book profit, have to pay a minimum tax of 7.5 percent.

Calling for an equal distribution of the burden, Sinha said that there is no way that he could have dispensed with a surcharge on a higher level of income tax."I have deliberately kept corporate tax out since any further addition will not be in the interest of the economy since the minimum corporate tax is being paid at 38.5 percent.

Referring to the 100 percent hike in the dividend tax, Sinha said the increase in dividend tax will affect only the affluent section of investors mainly those who are in the 30 percent income tax bracket and are investing in the equity market. A hike in dividend tax is not such a calamity as has been made out to be and corporates know how to pass the tax on to shareholders," he said.

Sinha said the softer options were exhausted and should look at harder options with more pragmatism. Referring to the increased allocation for defense, Sinha said that keeping the allocation low was not in the interest of the nation. "If I had kept the defense budget at last year's level, I would have brought down the fiscal deficit by 0.6 percent, pegging the total deficit at 4.5 percent", he said.