On 29 February, India’s finance minister, P Chidambaram, announced the country’s 2008-09 budget. The package contained many gifts to the lower and middle classes – raised exemption caps on income taxes, slashed excise duties, double-digit spending hikes in health and education, and a swath of populist initiatives. But perhaps the most significant measure is a farm loan waiver of Rs600 billion (US$15 billion) that will wipe away some of the debt of India’s 40 million farmers. The giveaway was widely viewed as a plea for votes in national elections that will come no later than next year.
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And while the focus was clearly on farmers and the lower and middle classes, changes were also announced that affect international businesses and investors.
The government plans to increase short-term capital gains tax (which is levied on income derived from the sale of an investment that’s less than a year old) from 10% to 15%. This may not, however, affect foreign institutional investors that operate through countries like Mauritius and Singapore.
Chidambaram also proposed a commodities transaction tax, and making commodity exchanges and clearing houses subject to service tax. No changes were made to corporate income tax, surcharge or securities transaction tax.
One bright spot for big business: Mint reported that proposed changes to dividend distribution taxes will remove the incidence of double taxation on dividend distribution for large conglomerates with dividend-paying subsidiaries.
The Bombay Stock Exchange Sensex index dropped sharply following the budget announcement, a fall that was widely seen as a reaction to the higher taxes on stock market transactions, as well as concern over the financing of farm loan waivers.
The budget projects an annual deficit of more than Rs1.3 trillion, about 2.5% of India’s projected GDP.
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