The Hindu Business Line : Income-tax exemption limit raised by Rs 10,000 for individuals

As the House is aware, the thrust of reforms over the last few years, including the previous term of this Government, has been to improve the efficiency and equity of our tax system. This is sought to be achieved by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the base. These policy changes have been accompanied by requisite re-engineering of key business processes, coupled with automation, both for direct and indirect taxes. On the direct tax side, a recent initiative for further improving efficiency is the setting up of a Centralised Processing Centre (CPC) at Bangalore where all electronically filed returns, and paper returns filed in entire Karnataka, will be processed.

These tax reform initiatives have produced impressive results. The Centre’s Tax-GDP ratio has increased to 11.5 per cent in 2008-09 from a low of 9.2 per cent in 2003-04.The healthy growth in tax revenues over the last five years is essentially attributable to growth in direct taxes. Further, the share of direct taxes in the Centre’s tax revenues has increased to 56 per cent in 2008-09 from 41 per cent in 2003-04, reflecting a sharp improvement in the equity of our tax system. The Government is committed to furthering this process of tax reform.

In the course of preparation of this Budget, I have had the opportunity to interact with a large number of stakeholders and receive valuable inputs. Most suggestions were for structural changes in the tax system. Tax reform, like all reforms, is a process and not an event. Therefore, I propose to pursue structural changes in direct taxes by releasing the new Direct Taxes Code within the next 45 days and in indirect taxes by accelerating the process for the smooth introduction of the Goods and Services Tax (GST) with effect from April 1, 2010.

The Direct Taxes Code, along with a Discussion Paper, will be released to the public for debate. Based on the inputs received, the Government will finalise the Direct Taxes Code Bill for introduction in this House sometime during the Winter Session.

To further enhance efficiency in tax administration, I intend to merge the two authorities for Advance Rulings on Direct and Indirect Taxes by amending the relevant Acts. This will enable the Authority for Advance Rulings, set up under Section 245-O of the Income Tax Act, 1961, to also function as the Authority for Advance Rulings for Indirect Taxes.

I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure, in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual GST comprising a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by April 1, 2010 after due consultations with all stakeholders.

I shall now deal with direct taxes.

Madam Speaker, there have been demands by the corporate sector for reduction in tax rates. However, tax rates are determined by the size of the tax base; if the tax base is higher, the tax rates can be lower. The Income Tax Act is riddled with a plethora of tax exemptions, which substantially erode the tax base. The extent of this erosion is presented to this House in the form of a Revenue Foregone Statement. The growth in the direct tax revenue foregone is relatively higher than the growth in the direct tax revenues. Accordingly, I do not propose to make any change in the Corporate Tax rates.

With a view to providing interim relief to small and marginal taxpayers and senior citizens, I propose to increase the personal income tax exemption limit by Rs 15,000 from Rs 2.25 lakh to Rs 2.40 lakh for senior citizens. Similarly I also propose to raise the exemption limit by Rs 10,000 from Rs 1.80 lakh to Rs 1.90 lakh for women tax payers and by Rs 10,000 from Rs 1.50 lakh to Rs 1.60 lakh for all other categories of individual taxpayers. Further, I also propose to increase the deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability to Rs 1 lakh from the present limit of Rs 75,000.

In the past, surcharges on direct taxes have generally been levied to meet the revenue needs arising from natural calamities. The Government has set up the National Calamity Contingency Fund to build up resources to meet emergency situations. As a corollary, surcharge on direct taxes should be removed. However, this has to be balanced with the revenue needs of the Government. Therefore, in the first instance, I propose to phase out the surcharge on various direct taxes by eliminating the surcharge of 10 per cent on personal Income Tax.

Deduction, in respect of export profits, is available under sections 10A and 10B of the Income-Tax Act. The deduction under these sections would not be available beyond the financial year 2009-10. In order to tide over the slowdown in exports, I propose to extend the sunset clauses for these tax holidays by one more year, i.e. till the financial year 2010-11.

Abolition of FBT

The Finance Act, 2005 introduced the Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees. This tax has been perceived as imposing considerable compliance burden. Empathising with these sentiments, I propose to abolish the Fringe Benefit Tax.

The competitive ability of an economy rests on its progress in the area of Research and Development (R&D). In order to incentivise the corporate sector to undertake R&D work, I propose to extend the scope of the current provision of weighted deduction of 150 per cent on expenditure incurred on in-house R&D to all manufacturing businesses, except for a small negative list.

Under the present scheme of the Income Tax Act, tax exemptions are largely profit-linked. Such incentives are inherently inefficient and liable to misuse. Therefore, it is proposed to incentivise businesses by providing investment-linked tax exemptions. To begin with, I propose to extend investment-linked tax incentives to the businesses of setting up and operating ‘cold chain’, warehousing facilities for storing agricultural produce and the business of laying and operating cross-country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle. Under this method, all capital expenditure, other than expenditure on land, goodwill and financial instruments will be fully allowable as deduction.

MAT rate hiked

Minimum Alternate Tax (MAT) was introduced to address inequity in taxation of corporate taxpayers. In the quest for greater equity, I propose to increase the rate of MAT to 15 per cent of book profits from the present rate of 10 per cent. However, to grant relief to corporate taxpayers, I also propose to extend the period allowed to carry forward the tax credit under MAT from seven years to ten years.

The New Pension System (NPS) is an important milestone in the development of a sustainable, efficient, voluntary and defined contribution pension system in India. While the NPS will continue to be subjected to the Exempt-Exempt-Taxed (EET) method of tax treatment of savings, it is proposed to provide necessary fiscal support to the NPS for the establishment of this much-needed social security system. Accordingly, I propose to exempt the income of the NPS Trust from Income Tax and any dividend paid to this Trust from the Dividend Distribution Tax. Similarly, all purchase and sale of equity shares and derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax. I also propose to enable self-employed persons to participate in the NPS and avail of the tax benefits available thereto.

In order to further improve the investment climate in the country, we need to facilitate the resolution of tax disputes faced by foreign companies within a reasonable time frame. This is particularly relevant for such companies in the Information Technology (IT) sector. I, therefore, propose to create an alternative dispute resolution mechanism within the Income Tax Department for the resolution of transfer pricing disputes. To reduce the impact of judgemental errors in determining transfer price in international transactions, it is proposed to empower the Central Board of Direct Taxes (CBDT) to formulate ‘safe harbour’ rules.

Removal of CTT

The Finance Act, 2008 introduced the Commodity Transaction Tax (CTT) to be levied on taxable commodity transactions, entered in a recognised association. The Prime Minister’s Economic Advisory Council has recommended abolition of the CTT. I, therefore, propose to abolish the Commodity Transaction Tax.

The House will agree that it is desirable to bring about transparency in the funding of political parties in the country. With a view to reforming the system of funding of political parties, I propose to provide that donations to electoral trusts shall be allowed as a 100 per cent deduction in the computation of the income of the donor. For this purpose, Electoral Trusts will be such trusts as are set up as pass-through vehicles for routing the donations to political parties and are approved by CBDT.

Section 80E of the Income-Tax Act provides for a deduction in respect of interest on loans taken for pursuing higher education in specified fields of study. I propose to extend the scope of this provision to cover all fields of study, including vocational studies, pursued after completion of schooling.

Anonymous donations to charitable institutions are presently liable to tax so as to prevent unaccounted money being routed to such entities in the garb of anonymous donations. However, some organisations are facing genuine problems in complying with the procedural requirements. To mitigate the practical difficulties being faced by such charitable organisations, I propose to grant relief to such organisations by not taxing anonymous donations received to the extent of 5 per cent of their total income or a sum of Rs 1 lakh, whichever is higher. To facilitate the business operations of all small taxpayers and reduce their compliance burden, I propose to expand the scope of presumptive taxation to all small businesses with a turnover up to Rs 40 lakh.

All such taxpayers will have the option to declare their income from business at the rate of 8 per cent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts. As a procedural simplification, I also propose to allow them to pay their entire tax liability from business at the time of filing their return by exempting them from paying advance tax. This new scheme will come into effect from the financial year 2010-11.

Madam Speaker, in the context of the geo-political environment, it is necessary for us to create our own facilities for energy security. Accordingly, I propose to extend the tax holiday under section 80-IB (9) of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, also to natural gas. This tax benefit will be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks, which are awarded under the New Exploration Licensing Policy-VIII round of bidding. Further, I also propose to retrospectively amend the provisions of the said section to provide that “undertaking” for the purposes of section 80-IB (9) will mean all blocks awarded in any single contract. Under the present provisions of section 2 (15) of the Income Tax Act, “charitable purpose” includes relief of the poor, education, medical relief, and the “advancement of any other object of general public utility”.

However, the “advancement of any other object of general public utility” cannot involve the carrying on of any activity in the nature of trade, commerce or business. I propose to provide the same tax treatment to trusts engaged in preserving and improving our environment (including watersheds, forests and wildlife) and preserving our monuments or places or objects of artistic or historic interest, as is available to trusts engaged in providing relief for the poor, education and medical relief.

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