The Hindu Business Line : Stress on moderation, stability in tax rates

The Union Budget has provided some relief for some of the salaried class. Those who earn up to Rs 1 lakh of taxable income would no longer pay any income tax. More personal income tax benefits were expected, but the Finance Minister has said he would revisit the subject in February 2005. _ Shaju John

PART B

XI. TAX PROPOSALS

I shall now deal with my tax proposals.

Taxation is a key tool of fiscal policy. The NCMP has promised that "tax rates will be stable and conducive to growth, compliance and investment".

Thanks to policies initiated in the 1990s, direct tax rates are now moderate and require only fine tuning from time to time. Indirect taxes have also been moderated through a calibrated reduction in customs and excise duties. The proportion of direct tax revenues to GDP has increased from 1.9 per cent in 1990-91 to 3.8 per cent in 2003-04. As expected, the proportion of indirect tax revenues to GDP has declined from 7.9 per cent in 1990-91, but the decline has been rather sharp with the proportion at 5.3 per cent in 2003-04.

The weak spot is central excise. Excise revenues are stuck, rather stubbornly, at around 3.3 per cent of GDP. While reduction in excise duty rates partly accounts for this situation, the expansion of the manufacturing industry ought to have given us larger revenues.

Through my policies on taxation, I wish to signal that we remain committed to moderation and stability in tax rates; that we remain committed to increasing revenues from direct taxes and excise duties; and that we remain committed to expanding the service tax net because the services sector accounts for 51 per cent of GDP.

I shall also use tax policies to provide incentives to certain kinds of investment and to influence certain kinds of behaviour in the market.

I am a votary of tax reforms but it would be unwise on my part to attempt to do tax reform in a hurried or piece-meal manner.

Seven months from now there will be another Budget, and there will be an occasion to visit the subject of tax reform.

Direct taxes

I shall begin with my direct tax proposals. Let me give you the good news first. No one with a taxable income of Rs 1,00,000 will be required to pay any income tax any more. It was not easy to reach this decision. While the tax rates are moderate, it is the tax slabs, which cause concern.

However, I am unable to alter the tax slabs because I cannot afford to lose a large amount of revenue at a time when the Government has assumed a larger responsibility for investment and welfare programmes.

Out of nearly 3.4 crore persons filing income tax returns, only 2.7 crore assessees are taxpayers. My proposal will give relief to 1.4 crore assessees. The method that I have adopted is somewhat novel.

While everyone will file his return according to the current tax slabs and tax rates, and compute his taxable income and the tax payable, any one with a taxable income of Rs 1,00,000 will have his income tax liability automatically rebated. I cannot give more relief, or relief across the Board, in this Budget. If compliance improves, I promise to revisit the subject.

I propose to give relief to certain sections of deserving tax payers. Accordingly, I propose to exempt from income tax the family pension received by widows, children and nominated heirs of members of the armed forces and the paramilitary forces killed in the course of operational duties. This is my humble salute to their supreme sacrifice.

I propose to extend the benefit of Section 80DD and Section 80U in respect of persons suffering from autism, cerebral palsy and multiple disability.

Farmers have brought to my notice that agricultural land situated in certain urban agglomerations fall under the definition of capital asset and the compensation for acquisition of such land is subjected to capital gains tax. Such compensation deserves to be exempted from capital gains tax. I propose to do so in cases where the compensation or the enhanced compensation has been received on or after April 1, 2004.

A new `defined contribution' pension scheme for new entrants into Central Government service has come into effect from January 1, 2004. The tax treatment of contributions made to the scheme has engaged the attention of Government.

I propose to adopt the universally accepted formula of EET: that is, the contributions will be excluded from income for tax purposes; the accruals will also be exempt from tax; and only the terminal benefits will be taxed at the applicable rate in the year of receipt.

I propose to withdraw a few exemptions, which have outlived their utility. Interest earned from a Non-Resident (External) Account and interest paid by banks to a Non-Resident or to a Not-Ordinarily Resident on deposits in foreign currency will not be exempt from tax.

Similarly, any payment made by an Indian company to acquire an aircraft or an aircraft engine on lease from a foreign state or a foreign enterprise will not be exempt from tax. These exemptions will cease prospectively from September 1, 2004.

Hon'ble Members are aware that I abolished the gift tax in 1997. That decision remains, but a loophole requires to be plugged to prevent money laundering. Accordingly, purported gifts from unrelated persons, above the threshold limit of Rs 25,000, will now be taxed as income.

Gifts received from blood relations, lineal ascendants and lineal descendants, and gifts received on certain occasion like marriage will continue to be totally exempt.

In order to promote agro-processing industries, I propose to amend Section 80 IB of the Act to allow a deduction of 100 per cent of profits for 5 years and 25 per cent of profits for the next 5 years in the case of new agro-processing industries set up to process, preserve and package fruits and vegetables.

Investment in the manufacturing sector deserves the Government's attention. Hence, I propose to continue with the additional depreciation of 15 per cent allowed under Section 32(1)(iia) on new plant and machinery acquired or installed in an existing undertaking; however, the required increase in installed capacity will now be 10 per cent, and not 25 per cent.

The automobile sector has done well and needs to be encouraged. I therefore propose to notify the automobile industry as an industry entitled to 150 per cent deduction of expenditure on in-house R&D facilities.

The power sector also deserves tax concessions. The Electricity Act 2003 envisages unbundling of generation, transmission and distribution. In order to promote renovation and modernization of existing transmission and distribution lines, I propose to extend the benefit under Section 80 IA to projects undertaken during the period April 1, 2004 to March 31, 2006.

The shipping industry has demanded the levy of a tonnage tax to make it intentionally competitive. Tonnage tax will also induce more ships to fly the Indian flag. I propose to accept the request. Consequently, the concessional regime under Section 33 AC will be withdrawn and shipping companies will now have only an option to pay the tonnage tax or normal corporate tax on profits.

I propose to extend the benefit of Section 80 IB to new hospitals with 100 beds or more set up in rural areas. Such hospitals will be entitled to a 100 per cent deduction of their profits for a period of five years.

The housing industry enjoys certain benefits under Section 80 IB for projects approved before March 31, 2005. I propose to extend the time limit to March 31, 2007.

A small problem has plagued the reconstruction and development of existing buildings under approved plans in the city of Mumbai. Perhaps the problem is there in some other cities too. I, therefore, propose to relax the condition of minimum plot size of one acre in the case of housing projects, as long as the projects are implemented in accordance with a scheme for reconstruction or development approved by the Central or State Government.

Capital gains tax is another vexed issue. When applied to capital market transactions, the issue becomes more complex. Questions have been raised about the definitions of long-term and short-term, and the differential tax treatment meted to the two kinds of gains. There are no easy answers, but I have decided to make a beginning by revamping taxes on securities transactions. Our founding fathers had wisely included entry 90 in the Union List in the Seventh Schedule of the Constitution of India.

Taking a cue from that entry, I propose to abolish the tax on long-term capital gains from securities transactions altogether. Instead, I propose to levy a small tax on transactions in securities on stock exchanges.

The rate will be 0.15 per cent of the value of security. Thus, a transaction involving securities valued at, say, Rs 1,00,000 will now bear a small tax of Rs 150. The tax will be levied on the buyer.

In the case of short-term capital gains from securities, I propose to reduce the rate of tax to a flat rate of 10 per cent. My calculation shows that the new tax regime will be a win-win situation for all concerned.

I propose to make a change in the tax on dividends distributed by mutual funds. Equity-oriented mutual funds will continue to be exempt from tax. Debt-oriented mutual funds are now required to withhold 12.5 per cent of the income distributed to unit holders. Individuals and HUF unit holders will continue to enjoy the benefit of this rate. However, in the case of corporate unit holders, I propose a rate of 20 per cent. I am sure corporates will understand, because I am doing no more than partially closing a window of arbitrage opportunity.

I propose to put an end to bonus-stripping and dividend-stripping in units by making a suitable amendment to Section 94 of the Act.

I also propose some measures to widen the tax base and to plug revenue leakage. I do not wish to take the time of the House detailing each measure.

Tax deduction at source (TDS) and tax collection at source (TCS) are being extended to some more activities. Amendments are proposed to Section 40(a)(i) and Section 194 C.

The telecom sector enjoyed certain benefits under Section 80 IA for services commenced before March 31, 2004. Pending a detailed examination of the needs of the telecom sector, I propose to extend the terminal date to March 31, 2005.

Companies carrying on scientific research and development and approved by the Department of Scientific and Industrial Research before April 1, 2004 are entitled to 100 per cent deduction of profits for 10 years. On the request of the Department of Bio-Technology and pending a detailed examination, I propose to extend the terminal date to March 31, 2005.

New industrial undertakings in Jammu & Kashmir enjoyed 100 per cent tax exemption if they commenced production before March 31, 2004. Pending a detailed examination of the incentives required to promote industrial development in Jammu & Kashmir, I propose to extend the date to March 31, 2005.

Indirect taxes

Now, I turn to my indirect tax proposals. The policy signal that needs to be reiterated is that customs duties will be brought down in a measured way. It is my intention to align India's tariff structure to those of ASEAN countries. Eventually, there should be a uniform rate of tax on goods and services. During the last four years, my predecessors had adjusted excise duties and moved them towards a Central VAT rate. That process must continue. The most important goods in the manufacturing sector must therefore bear an excise duty of 16 per cent.

Another principle that requires to be emphasized is that where an excise duty is levied, subject to only a few exceptions, like goods when imported should attract an equivalent countervailing duty (CVD). In my tax proposals, I have, therefore, removed the exemption from CVD enjoyed by some imported goods where there is no corresponding exemption from excise duty on Indian made goods.

I may also point out that customs tariffs and excise duties are inter-related. While considering the tax regime for any sector, one must look at both customs duties and excise duties applicable to that sector.

The peak rate of customs duty was reduced to 20 per cent in January 2004. I propose to maintain the peak rate for the rest of the current fiscal year.

I shall now deal with specific sectors beginning with metals, minerals and industrial raw materials. Steel is the leading metal. Normally, it should bear an excise duty of 16 per cent.

However, in February this year, excise duty on steel was reduced from 16 per cent to 8 per cent, but with the caveat that the decision will be reviewed when the regular budget is presented. Belying expectations, steel prices have not moderated but have risen sharply. I propose to reduce the customs duty on non-alloy steel from 15 per cent to 10 per cent and to increase the excise duty on steel from 8 per cent to 12 per cent so that the countervailing duty will also be applicable to imports. I hope to recoup some of the revenue losses since February 2004.

Alloy steel, copper, lead, zinc and base metals are basic raw materials used in a variety of industries. I propose to reduce the peak rate on such metals to 15 per cent. I also propose to reduce the customs duties on refractory raw minerals and mineral products like graphite, asbestos, mica and gypsum to 15 per cent. The customs duty on all catalysts will also be 15 per cent.

I propose certain concessions to the agriculture sector. To encourage value addition, while retaining customs duty on crude palm oil at 65 per cent, I propose to accept the recommendation of the Tariff Commission and increase the duty on refined palm oil to 75 per cent.

Some items of plantation machinery attract a customs duty of 5 per cent. I propose to extend the concessional rate to more items pertaining to the tea and coffee plantation sector.

On the excise front, I propose to make a number of concessions. Tractors attract an excise duty of 16 per cent. Hereafter, tractors will be fully exempt. Likewise, dairy machinery, which attracts an excise duty of 16 per cent will be fully exempt. Hand tools such as spades, shovels, sickles etc, which currently attract a 16 per cent excise duty will also be fully exempt.

Excise duty on preparations of meat, poultry and fish will be reduced from 16 per cent to 8 per cent and excise duty on food grade hexane (used in the edible oil industry) will be reduced from 32 per cent to 16 per cent.

I propose to give some concessions to the health sector. A number of items for the disabled are already exempt from import duties or attract a concessional duty of 5 per cent.

I propose that rehabilitation aids such as talking books, braille computer terminals, braille writers and typewriters, assistive listening devices, cochlear implants and stair lifts be fully exempt from customs duty. They will also be exempt from excise duty and CVD. Crutches, wheel chairs, walking frames, artificial limbs, etc. for the disabled will also be fully exempt from customs duty.

There are some restrictions on institutions for the visually-impaired and the hearing-impaired availing of import duty exemptions. I propose to remove these restrictions as well as enlarge the list of exempted appliances. Ambulances used by government and municipal hospitals alone have been allowed the concessional excise duty of 16 per cent. I propose that all ambulances registered as such will be entitled to this benefit. Diagnostic kits for detecting hepatitis B alone are exempt from excise duty. I propose to extend the exemption to kits for detection of all types of hepatitis.

In order to move toward the Cenvat rate, I propose to levy excise duty on contact lenses and playing cards. I also propose to increase the excise duty from 8 per cent to 16 per cent on a few items including vaccum flasks, plastic insulated ware, scented supari, prefabricated buildings, laboratory glassware, black and white television sets, populated PCBs, imitation jewellery, candles and parts of clocks and watches. Let me hasten to add that in all these cases the general SSI exemption will continue to be available, and consumers and small manufacturers will not be affected at all. Even other manufacturers will avail of Cenvat credit.

In order to protect matches made in the non-mechanised sector, I propose to increase the excise duty on matches made in the mechanized/semi-mechanised sector from 8 per cent without Cenvat credit to 16 per cent with Cenvat credit.

The Information Technology sector has, by and large, been kept out of the reach of the tax collector. Under the Information Technology Agreement, customs duty will be brought down to zero in 2005. Meanwhile, I propose to abide by the bound rates under the agreement.

I propose to exempt specified raw materials for manufacture of parts of cathode ray tubes and specified capital goods for manufacture of mobile handsets, plasma display panels etc. from excise duty. Specified items for manufacture of telecom grade optical fibres and cables are also proposed to be exempt from customs duty. Mobile switching centres imported by cellular mobile telephone service providers are now exempt from customs duty. I propose to extend the exemption to imports by universal access service providers.

Computers attract excise duty of 8 per cent. I propose to grant full exemption.

I propose to give some excise relief to LPG gas stoves bearing an MRP up to Rs 2,000, footwear with MRP up to Rs 250 and writing instruments with MRP up to Rs 200.

I propose to reduce the excise duty on amusement rides from 20 per cent to 10 per cent.

Having been Commerce Minister, export promotion is close to my heart. I propose to extend the concessional customs duty of 5 per cent on capital goods enjoyed by the leather industry to the non-leather footwear industry too.

Finished leather of all kinds is exempt from customs duty. I propose to exempt patent leather also.

Platinum is a serious challenger to gold in the jewellery industry. Both should be treated alike. Hence, I propose to reduce the import duty on platinum from Rs 550 per 10 grams to Rs 200. I propose that rough coloured precious gemstones should be exempt from customs duty just as rough semiprecious stones are.

Area specific exemptions from excise duty have been granted from time to time. The North Eastern States and J&K are in a class by themselves. The exemptions enjoyed by them will continue. Sikkim, Uttaranchal and Himachal Pradesh were also granted area-based exemptions. Hon'ble Members are fully aware of the arguments in favour and the rival arguments against. I have to be fair to both sides. Accordingly, I propose that area specific exemptions enjoyed by States other than the North Eastern States and J & K will continue and be available to units set up or expanded on or before March 31, 2007.

I shall now deal with the most challenging tax problem that I faced this year. This relates to the textile sector. Last year, handlooms and powerlooms were brought into what is described as the Cenvat chain.

The intention was good but, I am afraid, the decision did not take into account the decentralized and fragmented nature of production of fabrics in the country. Besides, the so-called Cenvat chain had nearly 40 exemptions at different stages. In fact, two exemptions were added after the decision.

I am conscious that the Agreement on Textiles and Clothing will come to an end on December 31, 2004. Our textile sector must, therefore, be made more efficient and competitive. Those who can compete because of their organizational strength should be allowed to compete; for the rest, we must allow more time to comply with a mandatory tax regime. Meanwhile, there must be a level playing field.

If I have understood correctly the mind of Hon'ble Members of Parliament, and of the leaders of various political parties, I believe that there is a universal demand to free the handloom and powerloom sectors from the Cenvat regime. After giving my anxious consideration to the complex issues, I propose to withdraw the mandatory Cenvat duty. Instead, I propose to introduce a new tax regime for the textile sector and, in this exercise, I am happy to say that I have the full support of the Minister of Textiles.

Let me now explain briefly the new regime.

Firstly, the mandatory Cenvat chain will stand abolished.

Secondly, there will be no mandatory excise duty on pure cotton, wool and silk, whether it is fibre, yarn, fabric or garment.

Thirdly, blended textiles and pure non-cotton (polyester, viscose, acrylic and nylon) will have a different tax regime.

Fourthly, there will be a mandatory excise duty on man-made staple fibre at 16 per cent; on polyester filament yarn (including textured yarn) at 24 per cent; and on other man-made filament yarn (including textured yarn) at 16 per cent.

Every manufacturer - be it handloom or powerloom or composite mill - will have the option to choose between two routes. One will be the exemption route and the other will be the Cenvat route. Under the exemption route, no excise duty will be payable at any stage (except on man-made fibre and filament yarn). Under the Cenvat route, credit can be taken for all excise duties paid at earlier stages.

For the purposes of the optional Cenvat route, it is necessary to specify in the Tariff schedule the applicable excise duty rates. For the pure cotton sector, the uniform rate will be 4 per cent on yarn, fabrics, garments and made-ups. For the blended textiles sector and pure non-cotton sector, the uniform rate will be 8 per cent.

It is my firm belief that the millions of handloom weavers and powerloom weavers will welcome the new regime. As far as the composite mills are concerned, there is no cause for worry.

They are also free to take the exemption route, but if they choose to opt for the Cenvat route, they may do so and claim Cenvat credit for all duties paid at earlier stages. Garment exporters should give the new regime a fair chance. I expect that prices of fabrics will moderate and garment exporters will stand to benefit. Their concerns, if any, can be addressed through the drawback or DEPB mechanism.

In course of time, it is possible that some manufacturers of handlooms and powerlooms will take advantage of the low uniform rates of duty and opt for the Cenvat route.

There remains the service tax. I propose to take a major step towards integrating the tax on goods and services.

Accordingly, I propose to extend credit of service tax and excise duty across goods and services. In order to neutralize the revenue impact of such extension, and keeping in mind the mean Cenvat rate, I propose to enhance the rate of service tax from 8 per cent to 10 per cent.

58 services have been brought under the net so far. I propose to add some more this year.

These are business exhibition services; airport services; services provided by transport booking agents; transport of goods by air; survey and exploration services; opinion poll services; intellectual property services other than copy right; brokers of forward contracts; pandal and shamiana contractors; outdoor caterers; independent TV/radio programme producers; construction services in respect of commercial or industrial constructions; and life insurance services to the extent of the risk premium. I may clarify that there is no intention to levy service tax on truck owners or truck operators. Nor, as was clarified by my predecessor, is there any intention to levy service tax on the savings part of the premium collected by an insurer.

I also propose that some currently taxable services should be redefined to cover all service providers falling under the same category, but I do not wish to burden this speech with the details.

Exemptions granted in the case of some taxable services are proposed to be removed. The administration of service tax will be made more tax-payer-friendly. I propose to do away with the mandatory verification of self assessment and the mandatory penalty for non-registration.

Finally, there is the tax mandated by the NCMP. That is an education cess on all taxes. I propose to levy a cess of 2 per cent on income tax, corporation tax, excise duties, customs duties and service tax.

Besides my tax proposals, I have looked at another source of revenue. There are large recoverable arrears both in direct taxes and indirect taxes. Even the undisputed arrears are quite substantial. I have, therefore, assumed that I would be able to recover a tidy sum this year. A special, multi-pronged drive will be made to recover these arrears, the details of which will be announced later.

My tax proposals on direct taxes are expected to yield a gain of Rs 2,000 crore. On the indirect taxes side, they are broadly revenue neutral.

XII. CONCLUSION

Mr Speaker, Sir. The countries of the world, India included, have set for themselves the Millennium Development Goals. Our date with destiny is not at the end of the millennium, but in the year 2015.

Will we achieve those goals? In the eleven years that remain, it is in our hands to shape our destiny. Progress is not always on a linear path, nor is it inevitable. Two thousand years ago, Saint Tirvalluvar said:

Aran Izhukkathu Allavai Neeki Maran Izhukka

Maanam Udayathu Arasu

(They are good rulers who observe ethics, commit no crime and walk the path of honour and courage)

If we bring thought and passion to our governance, and walk the path of honour and courage, we can make the future happen. And this century will be India's century.

Sir, with these words, I commend the Budget to the House.