Financial Express By Mahesh Vyas  - March 1, 2010

Corporate India has been optimistic on India’s growth prospects. A recent pre-Budget survey of 127 CEOs/CFOs conducted for Bloomberg UTV showed that 74% of them are more confident this year than in the previous year, 61% will expand capacities, 68% will hire more this year and more than 80% will invest this year.

CMIE’s CapEx survey shows that the investment juggernaut that began in 2004 continues to roll. New investment proposals continue to be made even as the stock of outstanding proposals mount. CapEx shows the value of new capacities that will get created in 2011-12 will be over twice the capacities created in 2010-11.

The Prime Minister’s Economic Advisory Council and the finance ministry’s Survey have both been very sanguine about the economic outlook—as have been most private agencies.

This was the comfortable backdrop against which India Inc prepared to hear Pranab Mukherjee’s Budget proposals for 2011-12. And, the grand old master did nothing to spoil the party, or to exaggerate the possibility of India actually reaching an over 10% growth in the near future.

Nobody really expected a fall in corporate tax rates. But, the FM shaved off 2.5 percentage points (ppt) from the surcharge to 5%. This is the second consecutive year of a 2.5 ppt fall in the surcharge. Between 2009-10 and 2001-12, the total direct corporate tax rate has thus fallen from 33% to 31.5%. When UPA-1 came to power, the corresponding rate was 35.875%. Thus, over its eight-year tenure, the UPA has cut the corporate tax rate quite substantially.

The effective corporate tax incidence, as observed from the annual reports of companies, is always lower than the corporate tax rate, even if we exclude loss-making companies from the computations because of various exemptions companies avail of.

Interestingly, the effective corporate tax incidence has increased even as the tax rate has declined in recent years. According to the Prowess database, in 2009-10, the corporate tax incidence at 25.3% was higher than its level in 2008-09 when it was 24.7%, or in 2007-08 when it was 23.2%. Tax rates have come down from 38.5% in 2000-01 to 33% in 2009-10. During this period, tax incidence has risen from 22% to 25%. Apparently, the impact of the removal of the several exemptions that corporates enjoyed has been greater than the fall in the tax rates.

It is very likely that the corporate tax incidence will continue to rise in spite of the fall in the surcharge in the past two years. The FM has not announced an extension of the tax benefit available to software companies. Most IT companies avail of tax exemption on their export revenue from Software Technology Parks (STPI) or from SEZs. The STPI units are currently paying MAT on their export revenue and are exempt from normal tax. However, the tax incentives available under the STPI scheme are only till March 2011. And the Union Budget 2011-12 has proposed to increase the minimum alternate tax (MAT) rate from 18% to 18.5% of book profits. Further, the government has proposed to levy MAT on the software units operating in the SEZs, which are currently getting exemption under section 10AA of the Income Tax Act.

The impact of these is likely to be significant. The government has been using MAT aggressively. MAT was 7.5% of book profits till 2005-06. It rose to 10%, then 15% and 18% in 2006-07, 2009-10 and 2011-12, respectively. This year, while the increase in the tax rate has been marginal, the removal (or non-continuation) of the exemptions to STPI implies a substantial effective increase in the direct tax rate on corporates.

The FM has not rolled back, any further, the indirect tax reductions introduced in the wake of the 2008 global financial crisis. The lower excise duty, though, has been raised by a percentage point. The service tax remains unchanged. But, its application has been extended to newer services.

Historically, the share of indirect taxes in total sales of companies has been reducing. Again, using the Prowess database, we find that in 2000-01, indirect taxes accounted for 8% of sales of non-finance companies. This ratio dropped to 4.9% in 2009-10.

It is unlikely that this ratio would change much following the Budget announcements.

The FM’s speech seems to reveal a preference for the manufacturing sector, whose share in the GDP he wishes to raise from 16% to 25% in 10 years. The government’s spending on infrastructure is projected to grow by 23% in 2011-12.

Given that a significant portion of the current investment projects in the country are in the infrastructure and manufacturing sectors, this stance of the Budget is likely to compliment the current confidence of India Inc referred to earlier. Union Budget 2011-12 has not made any great policy announcements or any populist announcements. Instead, it has revealed a preference to complete some of the good work that has been in the workings for some time now. It has built confidence in stating that Bills related to the Goods and Services Tax, the Direct Taxes Code and the Companies Bill will be placed before Parliament soon—two of them in this Budget session. In a sense, this is Budget with a focus on business as usual, and that is a good thing.