Budget Speech - Part B

XIII. TAX PROPOSALS

122. Mr. Speaker, I shall now present my tax proposals.

123. The UPA Government promised that "tax rates will be stable andconducive to growth, compliance and investment". The increase in gross taxrevenue is proof of a promise fulfilled. While we have raised more tax revenue,we have also left more money in the hands of the people as savings and forinvestment.

124. Gross tax revenue has grown by 19.9 per cent, 20.0 per cent and 27.8 percent in the first three years of this Government. The tax to GDP ratio hasincreased from 9.2 per cent in 2003-04 to 11.4 per cent in 2006-07. We intend tokeep our tax rates moderate and stable and administer the tax laws in a taxpayer-friendly manner.

Indirect Taxes

125. I shall begin with indirect taxes. Firstly, customs duties.

126. In January 2007, Government announced wide ranging reductions intariffs. Import duties on capital goods, project imports, metals and specifiedinorganic chemicals were reduced by 2.5 percentage points and, in some cases, by5 percentage points. Duties on some edible oils were reduced by 10 to 12.5percentage points.

127. In order to take one more step towards comparable East Asian rates, Ipropose to reduce the peak rate for non-agricultural products from 12.5 per centto 10 per cent.

128. I propose to reduce the duties on most chemicals and plastics from 12.5per cent to 7.5 per cent.

129. The duty on prime steel is 5 per cent. Seconds and defectives augmentsupply. Keeping in mind the need for a differential, I propose to reduce theduty on seconds and defectives of steel from 20 per cent to 10 per cent.

130. I propose to fully exempt from duty all coking coal irrespective of theash content.

131. Last year, I reduced the excise duty on all man-made fibres and yarnsfrom 16 per cent to 8 per cent. To further encourage this industry, I propose toreduce the customs duty on polyester fibres and yarns from 10 per cent to 7.5per cent. Consequently, the customs duty on raw-materials such as DMT, PTA andMEG will also be reduced from 10 per cent to 7.5 per cent.

132. Another industry that is a growth- and employment- driver is gem andjewellery. I propose to bring down the duty on cut and polished diamonds from 5per cent to 3 per cent; on rough synthetic stones from 12.5 per cent to 5 percent; and on unworked corals from 30 per cent to 10 per cent.

133. I propose to fully exempt dredgers from import duty.

134. To augment irrigation facilities and processing of agriculturalproducts, I propose to reduce the duty on drip irrigation systems, agriculturalsprinklers and food processing machinery from 7.5 per cent to 5 per cent.

135. While specified medical equipment attract a concessional duty of 5 percent, other equipment are taxed at 12.5 per cent. I propose to bring down thegeneral rate of import duty on medical equipment to 7.5 per cent.

136. In order to make edible oils more affordable, I propose to exempt crudeas well as refined edible oils from the additional CV duty of 4 per cent. I alsopropose to reduce the duty on sunflower oil, both crude and refined, by 15percentage points.

137. I have good news for cat and dog lovers. I propose to reduce the duty onpet foods from 30 per cent to 20 per cent.

138. I propose to reduce the duty on watch dials and movements as well asumbrella parts from 12.5 per cent to 5 per cent.

139. In order to promote research and development, I propose to extend theconcessional rate of 5 per cent duty available to public funded researchinstitutions to all research institutions registered with the Directorate ofScientific and Industrial Research. For the pharmaceutical and biotechnologysector, I propose to reduce the duty on 15 specified machinery from 7.5 per centto 5 per cent.

140. Import of aircraft, including helicopters, by Government and scheduledairlines is, at present, exempt from all duties, and that position willcontinue. However, there is no reason to allow the exemption to other privateimporters. Hence, I propose to levy an import duty of 3 per cent, which is theWTO bound rate, on all private import of aircraft including helicopters. Suchimport will also attract countervailing duty and additional customs duty.

141. The Hoda Committee has submitted a report on mineral policy. Taking aleaf out of the report, and in order to conserve our natural resources as wellas to raise revenue, I propose to impose an export duty of Rs.300 per metrictonne on export of iron ores and concentrates and Rs.2,000 per metric tonne onexport of chrome ores and concentrates.

142. I shall now turn to my proposals on excise duties and service tax.

143. There will be no change in the general CENVAT rate or in the service taxrate.

144. On February 15, 2007, Government reduced the price of petrol and dieselby Rs.2 per litre and Re.1 per litre, respectively. I had agreed that theRevenue will bear a part of the burden. Hence, I propose to reduce the advalorem component of excise duty on petrol and diesel from 8 per cent to 6 percent.

145. Keeping in mind the special needs of several sectors and the interest ofthe consumers, I propose to grant relief from excise duty in deserving cases,especially job creating sectors:

• I propose to raise the exemption limit for small scale industry (SSI) from Rs.1 crore to Rs.1.5 crore.
• The food processing sector is poised to achieve high growth. Concessions were extended last year to several items of food. This year, I propose to fully exempt from excise duty biscuits whose retail sale price does not exceed Rs.50 per kilogram. I also propose to fully exempt from excise duty all kinds of food mixes including instant mixes. I can no longer be accused of being partial to idli and dosa mixes.
• I propose to reduce excise duty on umbrellas and parts of footwear from 16 per cent to 8 per cent.
• Plywood helps to save wood. Hence, I propose to reduce excise duty on plywood from 16 per cent to 8 per cent.
• Biodiesel will greatly reduce our dependence on fossil fuels. Hence, I propose to fully exempt biodiesel from excise duty.

146. To provide access to pure drinking water for households and communities,I propose to fully exempt from excise duty water purification devices operatingon specified membrane based technologies as well as domestic water filters notusing electricity.

147. Pipes used for carrying water from a water supply plant to a storagefacility are exempt from excise duty. I propose to extend the exemption to allpipes of diameter exceeding 200 mm used in water supply systems.

148. There has been a significant increase in the retail price of cement.Last year, at this time, a bag of 50 kilogram was sold at a Maximum Retail Price(MRP) of Rs.190 or less which, I understand, is a remunerative price. I proposeto reward cement manufacturers who hold the price line and tax those who do not.Accordingly, I propose to reduce the present rate of excise duty of Rs.400 permetric tonne to Rs.350 per metric tonne on cement which is sold in retail at notmore than Rs.190 per bag. On cement that has a higher MRP, the excise duty willbe Rs.600 per metric tonne.

149. I strongly support the campaign "say no to tobacco". Hence, Ipropose to increase the specific rates of excise duty on cigarettes by about 5per cent. Similarly, excise duty (excluding cess) on biris, which was last fixedin 2001, will be raised from Rs.7 to Rs.11 per thousand for non-machine madebiris and from Rs.17 to Rs.24 per thousand for machine made biris. There is anexemption from excise duty for unbranded biris up to 20 lakh biris in a year.Complaints have been received of misuse of the exemption. This exemption willhenceforth be available subject to fulfilment of the condition of declarationwith the Department of Central Excise and regular monitoring.

150. Pan masala containing tobacco will continue to bear an excise duty of 66per cent. However, in the case of pan masala not containing tobacco, the dutywill be reduced from 66 per cent to 45 per cent. I also propose to withdraw theexemption for pan masala containing tobacco and other tobacco products that isnow given to units in the North Eastern States.

151. Based on a comprehensive review of exemptions and having posted them onthe website and having invited comments, I propose to remove certain excise dutyexemptions which are redundant or have outlived their utility.

152. I propose to raise the exemption limit for small service providers fromRs.400,000 to Rs.800,000. Consequently, 200,000 assessees out of a total of400,000 assessees will go out of the service tax net. The revenue loss will beRs.800 crore, but I am happy to give away this sum in the interest of the smallservice provider and the consumer.

153. While I bid goodbye to 200,000 assessees, I welcome the new assesseeswho will be brought into the fold. I propose to extend service tax to:

• Services outsourced for mining of mineral, oil or gas;
• Renting of immovable property for use in commerce or business; however, residential properties, vacant land used for agriculture and similar purposes, land for sports, entertainment and parking purposes, and immovable property for educational or religious purposes will be excluded;
• Development and supply of content for use in telecom and advertising purposes;
• Asset management services provided by individuals; and
• Design services.

154. State Governments levy a tax on the transfer of property in goodsinvolved in the execution of a works contract. The value of services in a workscontract should attract service tax. Hence, I propose to levy service tax onservices involved in the execution of a works contract. However, I also proposean optional composition scheme under which service tax will be levied at only 2per cent of the total value of the works contract.

155. I propose to exempt service tax on services provided by Resident WelfareAssociations to their members who contribute Rs.3000 or less per month forservices rendered.

156. In order to encourage innovation, I propose to exempt from service taxall services provided by technology business incubators. Similarly, theirincubatees whose annual business turnover does not exceed Rs.50 lakhs will beexempt from service tax for the first three years.

157. To make India a preferred destination for drug testing, I propose toexempt clinical trial of new drugs from service tax.

158. The scope of some services that are currently taxed is being expanded orredefined. However, I shall not burden the House with the details.

159. The telecommunications industry has repeatedly requested that themultifarious taxes, charges and fees applicable to the industry should beunified and a single levy on revenue should be collected. The request meritsconsideration. Hence, I propose to request the Department of Telecommunicationsto constitute a committee to study the present structure of levies and makesuitable recommendations to Government.

Direct Taxes

160. I shall now move to direct taxes.

161. In the current year, there has been better tax compliance byindividuals. I hope this trend will continue.

162. The current slabs and rates of personal income tax (PIT) were introducedonly two years ago. They constitute a moderate tax regime. A comprehensivereview should await the proposed Income Tax code which will be introduced inParliament this year. Nevertheless, without altering the rates, I am inclined toconsider giving some relief to tax payers, especially in view of the cooperationthey have extended to the Department of Revenue. Accordingly, I propose that:

• the threshold limit of exemption in the case of all assessees be increased by Rs.10,000, thus giving every assessee a relief of Rs.1,000;
• consequently, in the case of a woman assessee, the threshold limit be increased from Rs.135,000 to Rs.145,000, giving her a relief of Rs.1,000;
• the threshold limit of exemption in the case of a senior citizen be increased from Rs.185,000 to Rs.195,000, giving him or her a relief of Rs.2,000; and
• the deduction in respect of medical insurance premium under section 80D be increased to a maximum of Rs.15,000 and, in the case of a senior citizen, a maximum of Rs.20,000.

163. On the corporate income tax (CIT) side too, there has been bettercompliance. Consequently, I propose to keep the same rate of CIT with oneimportant modification. In order to encourage small and medium enterprises toinvest and grow, I propose to remove the surcharge on income tax on all firmsand companies with a taxable income of Rs.1 crore or less. This will benefitabout 1,200,000 firms and companies.

164. Profit-making cooperative banks, other than primary societies andprimary banks (i.e., PACs and PCARDBs), have been brought on par with otherbanks. However, I have noticed some anomalies and I propose to correct them inthe interest of the cooperative banks. Accordingly, the benefit of Section36(1)(viii) will be available to cooperative banks. Likewise, cooperative bankswill also be allowed deduction in respect of provision for bad and doubtfuldebts under section 36(1)(viia). Amalgamation and de-merger of banking companiesis tax neutral and this benefit will be extended to cooperative banks.

165. Section 80IA of the Income Tax Act lists the infrastructure facilitiesthat are entitled to tax concessions. There are some obvious claimants to thisbenefit. One is cross country natural gas distribution network, including gaspipeline and storage facilities integrated to the network. The second isnavigation channel in the sea. I propose to extend the tax concession to thesetwo facilities.

166. In order to facilitate the creation of urban infrastructure, I proposeto allow issue of tax-free bonds through State Pooled Finance Entities formedfor raising funds for a group of urban local bodies.

167. Last year, I had constituted an expert body to advise the Government ontax policy in respect of the gem and jewellery industry. Taking into account itsrecommendations, the best international practices and the need for a simple taxregime, I propose to introduce a benign assessment procedure for assesseesengaged in diamond manufacturing and trading who declare profits from suchactivities at 8 per cent or more of the turnover. Instructions in this regardwill issue shortly.

168. We will require 20,000 more hotel rooms for the Commonwealth Games.Hence, I propose a five year holiday from income tax for two, three or four starhotels as well as for convention centres with a seating capacity of not lessthan 3,000. They should be completed and begin operations in the NationalCapital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon,Ghaziabad or Gautam Budh Nagar during the period April 1, 2007 to March 31,2010.

169. Section 35(2AB) allows a weighted deduction of 150 per cent forexpenditure relating to in-house research and development. I propose to extendthe concession for five more years until March 31, 2012.

170. Undertakings in Jammu & Kashmir presently enjoy a tax holiday thatis due to end on March 31, 2007. Considering the importance of promoting furtherinvestment in that State, I propose to extend the benefit for another five yearsup to March 31, 2012.

171. E-filing of corporate returns introduced this financial year has been aresounding success. Until January 31, 2007, 301,736 returns were electronicallyfiled by corporates. Our analysis shows that the effective rate of tax paid byall corporates, thanks to numerous tax concessions and exemptions - several ofthem well-intended - was only 19.2 per cent. In 1996-97, we introduced theMinimum Alternate Tax (MAT) for companies with book profits, and its purpose isto bring about horizontal equity in taxation. MAT should therefore apply, as faras possible, to all corporate incomes. Hence, I propose to extend MAT to incomein respect of which deduction is claimed under sections 10A and 10B of theIncome Tax Act.

172. I also propose to partially modify a deduction that is available tocertain companies. Without altering the overall limit of the special reserveequal to twice the net worth under section 36(1)(viii) of the Income Tax Act, Ipropose to stretch out the period by restricting the deduction to 20 per cent ofthe profits each year and limit the benefit to banks and certain financialcorporations.

173. Venture capital funds are a useful source of risk capital, especiallyfor start-up ventures in the knowledge-intensive sectors. Since such funds enjoya pass-through status, it is necessary to limit the tax benefit to investmentsmade in truly deserving sectors. Accordingly, I propose to grant pass-throughstatus to venture capital funds only in respect of investments in venturecapital undertakings in biotechnology; information technology relating tohardware and software development; nanotechnology; seed research anddevelopment; research and development of new chemical entities in thepharmaceutical sector; dairy industry; poultry industry; and production ofbio-fuels. In order to promote business tourism, I also propose to allow thisbenefit to venture capital funds that invest in hotel-cum-convention centres ofa certain description and size.

174. In December 2006, I put a limit of Rs.50 lakh per investor per year withrespect to capital gains bonds issued by NHAI and REC under section 54EC of theIncome Tax Act. As a result, many small investors could obtain these bonds andsave on capital gains. I propose to continue this provision and, accordingly, Ipropose to amend section 54EC to that effect.

175. I propose to expand the tax base of capital gains to include certainworks of art.

176. I believe that my direct tax proposals have brought about morehorizontal equity. It is also necessary to improve vertical equity. Havingregard to the capacity to pay, I propose to raise the rate of dividenddistribution tax from 12.5 per cent to 15 per cent on dividends distributed bycompanies.

177. Dividends distributed by money market mutual funds and liquid mutualfunds enjoy concessional tax rates giving rise to huge arbitrage opportunities.I propose to address this distortion by raising the dividend distribution tax ondividends paid by such entities to 25 per cent for all investors.

178. Fringe Benefit Tax (FBT) has now stabilized. I have received a fewrepresentations regarding some aspects of sales promotion. Hence, I propose toclarify the doubts by excluding expenditure on free samples as well asexpenditure on displays from the scope of FBT.

179.