Budget Speech - Part B
Tax Proposals in the Budget 2006-07, in which he quoted Swami Vivekananda to conclude, "let us believe in our destiny, let us make our future."
XIV TAX PROPOSALS
118. Mr. Speaker, I shall now present my tax proposals. In the UPA Government’s first Budget, and more so in the second, I had attempted significant tax reforms. The results are encouraging. In 2004-05, gross tax revenues (provisional actuals) increased by 19.9 per cent over the actuals of the previous year and, according to Revised Estimates, in 2005-06, they are expected to increase by 21.4 per cent over the provisional actuals of the previous year. These figures confirm our belief that we should keep our tax rates moderate and stable.
119. I shall begin with my proposals on indirect taxes. Firstly, customs duties.
120. In line with the Government’s policy of reducing customs duties, I propose to reduce the peak rate for non-agricultural products from 15 per cent to 12.5 per cent. I believe that we are now only a short distance away from East Asian rates.
121. As the peak rate comes down, there is a need to reduce the duty on raw materials and intermediates.
122. The duty on primary steel is at 5 per cent. I propose to reduce the duty on alloy steel and primary and secondary non-ferrous metals from 10 per cent to 7.5 per cent. This will also be the rate of duty for ferro alloys.
123. In 2004-05, in view of the high international prices of steel, I had reduced the import duty on steel melting scrap to zero. With prices of steel coming down, I propose to restore the duty to 5 per cent and bring it on par with primary steel.
124. The duty on mineral products is now 15 per cent. I propose to reduce it to 5 per cent, with a few exceptions.
125. I also propose to reduce the duty on ores and concentrates from 5 per cent to 2 per cent.
126. Refractories attract a duty of 10 per cent. A number of materials required for manufacture of refractories are also at 10 per cent or higher rates. I propose to reduce these duties to 7.5 per cent.
127. Basic inorganic chemicals are crucial raw materials. I propose to reduce the duty from 15 per cent to 10 per cent. On basic cyclic and acyclic hydrocarbons and their derivatives, I propose to bring down the rate to 5 per cent. I also propose to reduce the duty on catalysts from 10 per cent to 7.5 per cent.
128. Plastics are important raw materials. Hence, I propose to reduce the duty on major bulk plastics like PVC, LDPE and PP from 10 per cent to 5 per cent. Simultaneously, the duty on naptha for plastics will be reduced to nil.
129. I propose to reduce the duty on styrene, EDC and VCM which are raw materials for plastics to 2 per cent.
130. I propose to give some concessions to vital drugs. I propose to reduce the customs duty on 10 anti-AIDS and 14 anti-cancer drugs to 5 per cent. I also propose to reduce the duty on certain life saving drugs, kits and equipment from 15 per cent to 5 per cent. These drugs will also be exempt from excise duty and countervailing duty (CVD).
131. Packaging machines serve a wide variety of industries, including food processing. I propose to reduce the duty on packaging machines from 15 per cent to 5 per cent.
132. I propose to extend the concessional project rate of 10 per cent to pipeline projects for transportation of natural gas, crude petroleum and petroleum products.
133. Honourable Members would recall that last year I had taken the power to impose a CVD on all imports to compensate for State level taxes. This levy was applied only to imports of ITA bound items and their inputs, except IT software. After the introduction of VAT in most States, I have received representations from trade and industry that this levy should be extended to all imports. The argument is persuasive, and I propose to impose a CVD of 4 per cent on all imports with a few exceptions. Full credit of this duty will be allowed to manufacturers of excisable goods.
134. In order to protect the domestic vanaspati industry, I propose to increase the customs duty on vanaspati to 80 per cent, the rate applicable to crude palm oil.
135. Export oriented units (EOUs) are allowed to clear their goods to the Domestic Tariff Area (DTA) at a concessional rate. With declining import duties, DTA units and EOUs should have a level playing field as regards excise duty or CVD. Hence, I propose to adjust the duty rates on clearances by EOUs to the DTA at 25 per cent of basic customs duty plus excise duty on like goods. This will still give the EOU a tariff advantage or, at any rate, in most cases, it will be on par with a DTA unit.
136. Finally, I have an important proposal that involves both excise and customs duties. Cotton textile industry has greatly benefited from the relief granted two years ago. The man-made textile industry is a growth- and employment-driver. It deserves encouragement. Hence, I propose to reduce the excise duty on all man-made fibre yarn and filament yarn from 16 per cent to 8 per cent. Simultaneously, I propose to reduce the import duty on all man-made fibres and yarns from 15 per cent to 10 per cent. Consequently, the import duty on raw materials such as DMT, PTA and MEG will also be reduced from 15 per cent to 10 per cent. The import duty on paraxylene is proposed to be reduced to 2 per cent.
137. I have a few proposals on the excise side. I reiterate that it is our intention to converge all rates at the CENVAT rate which is now at 16 per cent. There are only two items – aerated drinks and cars – that still attract the higher rate of 24 per cent. I propose to correct this substantially. I propose to reduce the excise duty on aerated drinks to 16 per cent. On cars, I propose to reduce the excise duty to 16 per cent, but only for small cars. A small car, for this purpose, will mean a car of length not exceeding 4,000 mm and with an engine capacity not exceeding 1,500 cc for diesel cars and not exceeding 1,200 cc for petrol cars. I am confident that industry will seize the opportunity to make India a hub for the manufacture of small and fuel-efficient cars.
138. I propose to impose an 8 per cent excise duty on packaged software sold over the counter. Customized software and software packages downloaded from the internet will be exempt from this levy.
139. I propose to fully exempt from excise duty DVD Drives, Flash Drives and Combo Drives.
140. Many food items, including packaged items, attract nil excise duty. With a view to giving a fillip to the food processing industry, I propose to fully exempt from excise duty condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta and yeast. Excise duty on ready-to-eat packaged foods and instant food mixes, like dosa and idli mixes, will be reduced from 16 per cent to 8 per cent.
141. Since leather and footwear are thrust sectors, I propose to exempt from excise duty two vegetable tanning extracts, namely, quebracho and chestnut. Footwear carrying a retail sale price up to Rs.250 is already exempt from excise duty. I propose to reduce excise duty on footwear with a retail sale price between Rs.250 and Rs.750 from 16 per cent to 8 per cent.
142. At present LPG stoves up to a value of Rs.2,000 attract excise duty of 8 per cent. I propose to extend the concessional rate to all LPG stoves without any value limit.
143. To promote the use of energy efficient lamps, I propose to reduce the excise duty on compact fluorescent lamps from 16 per cent to 8 per cent.
144. I propose to remove rate differences between different kinds of tableware and kitchenware. Consequently, glassware will attract excise duty of 16 per cent on par with ceramicware and plasticware.
145. Paper finds widespread use in education as well as in packaging. In order to encourage capacity addition, I propose to reduce excise duty on specified printing, writing and packing paper from 16 per cent to 12 per cent.
146. Domestically produced petroleum crude is subject to a cess under the Oil Industries Development Act. The rate of Rs.1,800 per metric tonne was fixed in 2002. After consulting the Ministry of Petroleum and Natural Gas, I propose to increase the cess to Rs.2,500 per MT. I have been assured that this increase will be absorbed by the oil producing companies and have no impact on retail prices of petroleum products.
147. There are two requests from trade and industry. I had exempted computers from excise duty in order to boost the use of computers. That purpose has been largely served. Domestic manufacturers have sought re-imposition of excise duty at 12 per cent in order to enable them to take CENVAT credit as well as to face competition from imports. I propose to accept the request. Since the 12 per cent excise duty will be eligible for full input tax credit, there should not be any impact on price.
148. The second request is to impose excise duty on set top boxes. I propose to accept the request and levy an excise duty of 16 per cent and, at the same time, reduce the customs duty from 15 per cent to nil. This change will equalize the duty rates on various types of set top boxes.
149. To round off, I would be failing in my duty if I did not raise the excise duty on cigarettes. Hence, I propose to increase the excise duty on cigarettes by about 5 per cent.
150. The bane of excise and customs tariffs is the plethora of exemptions. On the basis of a comprehensive review, I propose to remove many exemptions that were granted through notifications. Broadly, exemptions that are end-use based or have outlived their utility or need certification or give rise to disputes are being rescinded, with only a few exceptions. The exemption for the SSI sector will, however, remain unchanged.
151. We have also identified some more notifications which need to be removed. However, before taking a final view, I propose to put a list of such notifications on the Ministry’s website and invite comments.
152. This leaves service tax. In 2005-06, the services sector is estimated to contribute 54 per cent of GDP. Naturally, it should also contribute significantly to the exchequer. Continuing in the direction followed in the last few years, I propose to bring more services under the service tax net. The new services to be covered include ATM operations, maintenance and management; registrars, share transfer agents and bankers to an issue; sale of space or time, other than in the print media, for advertisements; sponsorship of events, other than sports events, by companies; international air travel excluding economy class passengers; container services on rail, excluding the railway freight charges; business support services; auctioneering; recovery agents; ship management services; travel on cruise ships; and public relations management services.
153. I also propose to expand the coverage of certain services now subject to service tax. I do not wish to burden the House with the details which are available in the Budget papers.
154. The leasing and hire purchase industry has faced some difficulty owing to the levy of service tax on all components of payments, including interest. I propose to rectify the anomaly. Accordingly, interest and instalments of the principal amount will be abated in calculating the value of the service.
155. It is my sense that there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate. I propose to take one step this year and increase the service tax rate from 10 per cent to 12 per cent. Let me hasten to add that since service tax paid can be credited against service tax payable or excise duty payable, the net impact will be very small.
156. I shall now turn to my proposals on direct taxes.
157. The good news is that there will be no change in the rates of personal income tax or corporate income tax.
158. The other piece of good news is that no new taxes are being imposed.
159. The one-by-six scheme under the Income Tax Act obliging certain categories of persons to file returns will stand abolished.
160. I propose to marginally revise certain tax rates in the quest for equity. While the corporate tax rate is 30 per cent, the rate under Minimum Alternate Tax (MAT) is only 7.5 per cent of book profits. I propose to increase the rate to 10 per cent, which is still only one-third of the normal rate. I also propose to include long-term capital gains arising out of securities in calculating book profits. I have already allowed MAT-paying companies to take credit for MAT over five years. I propose to extend the period to seven years as well as adjust MAT credit while calculating interest liability.
161. The rates for the Securities Transaction Tax (STT) were fixed when prices of securities were much lower. Reflecting the increase in implicit capital gains in securities transactions, I propose an increase of 25 per cent, across the board, on all rates of STT.
162. Section 80IA of the Income Tax Act applies to infrastructure facilities. For developing an industrial park the terminal date is March 31, 2006. I propose to extend the period to March 31, 2009. For the power sector, in view of the ultra mega projects, I propose to extend the date to March 31, 2010.
163. Last year, I recast the provisions relating to savings. Fixed deposits were not included. There is a demand that fixed deposits of certain tenure should qualify for tax exemption. I propose to include investments in fixed deposits in scheduled banks for a term of not less than five years in section 80C of the Income Tax Act. I also propose to remove the limit of Rs.10,000 in respect of contribution to certain pension funds in section 80CCC, subject to the overall ceiling of Rs.100,000.
164. I propose to align the definition of open-ended equity-oriented schemes of mutual funds in the Income Tax Act with the definition adopted by SEBI. I also propose to treat open-ended equity-oriented schemes and close-ended equity-oriented schemes on par for the purpose of exemption from dividend distribution tax.
165. I have revisited the exemptions in the Income Tax Act. As a result, I propose to remove the exemption under section 10(23G) which is not relevant when interest rates are moderate.
166. Cooperative banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income Tax Act. However, I propose to exclude all other cooperative banks from the scope of that section.
167. Section 54EC and section 54ED are tax shelters. I propose to restrict the scope of section 54EC to two institutions, viz., NHAI and REC. For NABARD, SIDBI and NHB, which are banks, we have already opened the route of zero coupon bonds to raise low cost funds. Government will, if needed, provide appropriate support to these institutions to enable them to access resources to fulfil their mandate effectively. I also propose to withdraw the benefit of section 54ED, which has become virtually redundant, with effect from April 1, 2006.
168. The Standing Committee on Finance has expressed concern that many charitable institutions misuse the provisions of the Income Tax Act. I propose to focus on one misuse, namely, receiving anonymous or pseudonymous donations. Accordingly, I propose that anonymous or pseudonymous donations to wholly charitable institutions will be taxed at the highest marginal rate. Such donations to partly religious and partly charitable institutions/trusts will be taxed only if the donation is specifically for an educational or medical purpose. However, I make it clear that such donations to wholly religious institutions and religious trusts will not be covered by the new provision.
169. Members of State Legislatures have complained that their constituency allowances are taxed differently from the constituency allowance received by Members of Parliament. I propose to remove the discrimination and treat them equally.
170. The Permanent Account Number (PAN) of the Department of Income Tax is the critical element in capturing incomes and expenditures. Scrutiny of Annual Information Returns (AIR) on high-value transactions reveals that 60 per cent of the transactions are without quoting PAN. Hence, I propose to take the power to issue PAN suo motu in certain cases. I also propose to take the power to direct persons to apply for PAN in certain cases. I propose to notify, in due course, more transactions for which quoting of PAN will be mandatory. I also propose to prescribe a few more transactions to be reported in AIRs.
171. Last year, I introduced two new taxes. The Banking Cash Transaction Tax (BCTT) has turned out to be a boon, not for the modest revenues it brought which was never its purpose, but for the remarkable trails that it has helped establish. To cite just one example, huge cash withdrawals in a bank branch in Chandni Chowk, noticed through the BCTT, led the Department of Income Tax to three entities which were carrying on the business of purchasing demand drafts from traders at a discount and helping the traders to avoid both sales tax and income tax. These entities would deposit the demand drafts in their own accounts and withdraw the cash. In a period of 18 months, they had laundered Rs.1,500 crore. BCTT has also helped the Department to detect bogus bills, accommodation entries, artificial loss claims and dummy firms. I propose to continue the BCTT for some more time until the AIR system is able to capture all significant financial transactions.
172. Fringe Benefit Tax (FBT) was introduced as a revenue raising measure. FBT can be justified on the principles of horizontal equity and vertical equity. Nevertheless, I have reviewed it with an open mind. I have also taken on board the views expressed by the apex chambers of commerce. I propose to make the following changes in chapter XII-H of the Income Tax Act:
- Value the benefit in the form of ‘tour and travel’ at 5 per cent instead of 20 per cent;
- Value the benefit in the form of ‘hospitality’ and ‘use of hotel boarding and lodging facilities’, in the case of airline companies and shipping industry, at 5 per cent instead of 20 per cent;
- Exclude the expenses on free samples of medicines and of medical equipment distributed to doctors;
- Exclude the expenses incurred on brand ambassador and celebrity endorsement; and
- Prescribe a threshold of Rs.100,000 under section 115WB(1)(c) so that only a contribution by an employer to an approved superannuation fund in excess of Rs.100,000 per year per employee will attract FBT. Under section 80C there is already an exemption up to Rs.100,000 for contribution by an employee to an approved superannuation fund. Honourable Members will note that, under these two provisions, there can now be a tax-exempt contribution up to Rs.200,000 per year for the benefit of an employee. This allowance, I believe, is generous enough in the case of an overwhelming majority of employees.
With these changes, I am confident that the debate on FBT will draw to a close. Let me remind everyone concerned once again that FBT is justified on the principle of equity.
Modernizing Tax Administration
173. I am glad to inform the House that technology is being increasingly employed to modernize tax administration. The Departments of Income Tax and Customs and Central Excise will undergo Business Process Reengineering (BPR). Nationwide networks will connect 745 income tax offices in 510 cities and 550 customs and central excise offices in 245 cities, creating national databases. National data centres, data warehousing facilities and disaster recovery sites are being set up. Jurisdiction-free filing of returns, online tracking of status of accounts and refunds of income tax will be possible. Introduction of a risk management system and Electronic Data Interchange (EDI) in the Customs Department will reduce dwell time for cargo. E-payments of customs and excise duties will be possible. Both Departments will have fully computerised networks by end 2006.
174. Our Government’s two Budgets have seen many innovations – the Gender Budget, the Outcome Budget etc. Today, I place before the House another innovation – a statement on revenue foregone, known worldwide as tax expenditure statement. This statement captures the departures from the normal tax regime. This exercise is a first attempt that will be fine tuned in the years to come.
VAT and CST
175. The House is aware that most States have implemented VAT with effect from April 1, 2005, and the unanimous opinion is that VAT has been a resounding success. I hope that the non-VAT States will soon join the mainstream, because the next stage of reform depends on all States implementing VAT. The Empowered Committee of State Finance Ministers has recommended that Central Sales Tax (CST) be phased out, and have requested the Centre to compensate them for the expected loss of revenue. Government has proposed that the loss of revenue may be compensated through monetary and non-monetary measures which, taken together, will ensure that the States’ revenues remain buoyant. Once the Empowered Committee and the Government reach an agreement, I shall return to the House with firm proposals, including legislative changes and a supplementary demand.
176. In the meanwhile, there is an urgent matter connected with CST and VAT which has to be attended to. It has become imperative to moderate the price of Liquified Petroleum Gas (LPG) for domestic use. States are taxing LPG (domestic) at high rates. They should also bear a portion of the burden of high prices of petroleum products. Hence, in order to moderate the price of LPG (domestic), I propose to include LPG (domestic) in the list of ‘declared goods’ under the CST Act.
177. My tax proposals on direct taxes are estimated to yield a gain of about Rs.4,000 crore. On the indirect taxes side, the gain is estimated at Rs.2,000 crore.
178. Mr. Speaker, Sir, I believe that the world has recognized the potential of India. It is now for us, the generation to which has been given the privilege of carrying the torch, to rediscover the greatness of this country and the potential of its people. The young people of India are building castles, it may appear that those castles are in the air, but as Henry David Thoreau said: "If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them." It is our duty to put the foundations on which the young can build their castles. The UPA Government has pledged itself to that task.
179. Over a hundred years ago, a restless young man in his quest for the core of all spirituality admonished his fellow men in the following words: "We reap what we sow. We are the makers of our own fate. The wind is blowing; those vessels whose sails are unfurled catch it, and go forward on their way, but those which have their sails furled do not catch the wind. Is that the fault of the wind?....... We make our own destiny." Those are the immortal words of Swami Vivekananda. Let us believe in our destiny, let us make our future.
180. Sir, with these words, I commend the Budget to the House.