Tax Proposals in Budget as per Budget Speech

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Extracts from Budget Speech of FM

D I R E C T   T A X

87.       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.

88.       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.

89.       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.

90.       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 2009-2010. In order to tide over the slowdown in exports, I propose to extend the sun-set clauses for these tax holidays by one more year i.e. for the financial year 2010-11.

91.        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.

92.       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% on expenditure incurred on in-house R&D to all manufacturing businesses except for a small negative list.

93.       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.

94.       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.

95.       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 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.

96.       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.

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

98.       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.

99.       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.

100.      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.  In order 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.

101.      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 upto 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.

102.      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.

103.      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 of the poor, education and medical relief.

INDIRECT TAXES

104.      Madam Speaker, I turn to my main proposals on indirect taxes.

105.      I will first take up customs duties.

106.      Although our domestic industry has weathered the impact of the global financial crisis and the resultant slowdown with resilience, it is yet to fully find its feet. Manufacturing growth, which had turned negative in October 2008 on a year-on-year basis and remained in that zone till March this year, appears to be barely turning the corner. However, the global scenario remains worrisome and it is my view that the paramount need is to provide industry with a stable framework. My proposals on indirect taxes seek to achieve this by maintaining the overall rate structure for customs and central excise duties as well as service tax. I must hasten to add that I have not hesitated to act where distortions provide a compelling reason or where relief would provide a healing touch.

107.      Full exemption from basic customs duty was provided to Set Top Boxes in 2006 to enable their free import for the smooth introduction of the Conditional Access System (CAS). Now that production capacity has come up in the country, I propose to impose a nominal basic customs duty of 5 per cent on such Set Top Boxes to encourage domestic value addition.

108.      The electronic hardware industry has a strong potential for creating employment especially in the SME sector. I intend to reduce the basic customs duty on LCD panels from 10 per cent to 5 per cent to support indigenous production of LCD televisions.

109.      Full exemption from CVD of 4 per cent was available to accessories, parts and components imported for the manufacture of mobile phones till the 30th of June, 2009 . I propose to reintroduce this exemption for another year.

110.      For reasons that are apparent, industry sectors having an export-orientation have been adversely impacted by the demand compression in global markets. Presently, exporters of leather products, textile garments, footwear as well as sports goods are permitted to import raw materials, consumables etc. upto 3 per cent of the fob value of their exports free of duty. I propose to add a few more items to these lists. Full exemption from basic customs duty is being provided to rough corals for encouraging value-addition and export.

111.       It is imperative that the contribution of new and renewable energy sources of power is enhanced if we have to successfully combat the phenomena of global warming and climate change. I am reducing the basic customs duty on permanent magnets - a critical component for Wind Operated Electricity Generators - from 7.5 per cent to 5 per cent.

112.      On influenza vaccine and nine specified life saving drugs used for the treatment of breast cancer, hepatitis-B, rheumatic arthritis etc. and on bulk drugs used for the manufacture of such drugs, I propose to reduce the customs duty from 10 per cent to 5 per cent. They will also be totally exempt from excise duty and countervailing duty.

113.      Customs duty will also be reduced from 7.5 per cent to 5 per cent on two specified life saving devices used in treatment of heart conditions. These devices will be fully exempt from excise duty and CVD also.

114.      Gold bars currently attract customs duty at the specific rate of Rs.100 per ten grams while other forms of gold (excluding jewellery) are chargeable to a duty of Rs.250 per ten grams. These rates were fixed in 2004 and have not been reviewed even as the price of gold has increased manifold. I propose to partially restore the incidence by increasing these rates to Rs.200 per ten grams and Rs.500 per ten grams respectively. Along the same lines, the customs duty on silver (excluding jewellery) will be increased from Rs.500 per kg to Rs.1,000 per kg. These revised rates would also apply to gold and silver, including ornaments that are not studded, when imported by a bona fide passenger as baggage.

115.      I will now come to central excise duties.

116.      Hon’ble Members are aware that the Government announced a series of fiscal stimulus packages, one of the key elements of which was the sharp reduction in the ad valorem rates of Central Excise duty for non-petroleum products by 4 percentage points across the board on 7th of December 2008 and by another 2 percentage points in the mean CENVAT rate on the 24th of February, 2009.

117.      One of the consequences of these cuts was that pure cotton textiles came to be fully exempted from excise duty. We have received representations that full exemption prevents manufacturers from availing of export rebate of the duty paid from CENVAT credit. I propose to rectify this situation by restoring the erstwhile optional rate of 4 per cent for cotton textiles beyond the fibre stage.

118.      Ever since the revamp of the excise duty structure on textiles by my distinguished predecessor in the 2004 budget, a differential in rates has been maintained between the cotton sector and the manmade sector. In keeping with the integrity of the earlier structure, I propose to restore the rate of 8 per cent Central Excise duty on manmade fibre and yarn on a mandatory basis and on stages beyond fibre and yarn at that rate on optional basis. These changes, together with duty changes on intermediates, would imply that the duty on all types of manmade fibre and yarn and their intermediates would be the same, easing the problem of credit accumulation.

119.      Wool waste and cotton waste are chargeable to basic customs duty of 15 per cent.  These are used in the manufacture of cheaper varieties of textile articles such as blankets and rugs.  As a measure of relief to this sector, I propose to reduce the basic customs duty on these items to 10 per cent.

120.      With the Government’s proclaimed objective of introducing a Goods and Services Tax (GST) both at the national and State level, some more steps in that direction are necessary.  One measure that would facilitate the process is the further convergence of central excise duty rates to a mean rate - currently 8 per cent.  I have reviewed the list of items currently attracting the rate of 4 per cent, the only rate below the mean rate.  There is a case for enhancing the rate on many items appearing in this list to 8 per cent, which I propose to do, with the following major exceptions:

•           food items; and

•           drugs, pharmaceuticals and medical equipment.

            Some of the other items on which I propose to retain the rate of 4 per cent are:

•           paper, paperboard & their articles;

•           items of mass consumption such as pressure cookers, cheaper electric bulbs, low-priced footwear, water filters/purifiers, CFL etc.;

•           power driven pumps for handling water; and

•           paraxylene.

            The details are available in the relevant notifications.  

121.      Bio-diesel, obtained from vegetable oils and used for blending with petro-diesel, is currently exempt from excise duty.  I now propose to fully exempt petro-diesel blended with bio-diesel from excise duty.

122.      In order to encourage the use of this environment friendly fuel and augment its availability in the country, I also propose to reduce basic customs duty on bio-diesel from 7.5 per cent to 2.5 per cent - at par with petro-diesel.  With these proposals I hope to see a smile on the faces of the green brigade!

123.      My other proposals on central excise duties seek to address distortions that the manufacturing industry has been complaining about.

124.      The IT industry has pointed out that it is facing difficulties in the assessment of software which involves transfer of the right to use after the levy of service tax on IT software service. To resolve the matter, I propose to exempt the value attributable to the transfer of the right to use packaged software from excise duty and CVD.

125.      The construction industry has represented that they are facing difficulties on account of withdrawal of exemption on goods manufactured at site. I propose to restore full exemption to such goods, including pre-fabricated concrete slabs or blocks, when used for further construction at site.

126.      A specific component was added to the ad valorem duty of 24 per cent applicable to large cars and utility vehicles in June last year.  In the case of vehicles of engine capacity below 2000 cc, this component was Rs.15,000/- per unit while for vehicles of higher engine capacity it was Rs.20,000/- per unit.  These rates are now being unified at the lower level of Rs.15,000/- per unit.

127.      Petrol driven trucks provide a useful means of transport within cities and across short distances. These are chargeable to excise duty of 20 per cent.  I propose to reduce excise duty on these trucks to 8 per cent to equate the duty with similar vehicles run on diesel. 

128.      Madam Speaker, I fear that my proposals relating to gold and silver on the customs side would somewhat dent my popularity with women.  I propose to salvage this by fully exempting branded jewellery from excise duty.  

129.      I now turn to my proposals on service tax.

130.      It is an international practice to zero-rate exports. To achieve this objective, a scheme was announced in 2007, granting refund of service tax paid on certain taxable services used after the clearance of export goods from the factory.  For some time now, the exporting community has been expressing dissatisfaction over the difficulties faced in obtaining such refunds. Several procedural simplifications attempted in the past have also not yielded satisfactory results. The solution seems to lie in placing greater trust on the claims filed by the exporters.  Keeping this in view, I propose to make the following changes in the scheme:

•           Services received by exporters from goods transport agents and commission agents, where the liability to pay service tax is ab initio on the exporter, would be exempted from service tax.  Thus, there would be no need for the exporter to first pay the tax and later claim refund.

•           For other services received by exporters, the exemption would be operated through the existing refund mechanism based on self-certification of the documents where such refund is below 0.25 per cent of  fob value, and certification of documents by a Chartered Accountant for value of refund exceeding the above limit. 

131.      The Export Promotion Councils and the Federation of Indian Export Organizations (FIEO) provide a valuable service in augmenting our export effort.  I propose  to exempt them from the levy of service tax on the membership and other fees collected by them till 31st March, 2010 .

132.      In the goods transport sector, service tax is currently levied on transport of goods by road, by air, through pipelines and in containers.  However, goods carried by Indian railways or those carried as coastal cargo or through inland waterways are not charged to service tax.   In order to provide a level playing field in the goods transport sector, I propose to extend the levy of service tax to these modes of goods transport.  The new levy is not likely to impact the prices of essential commodities or goods for mass consumption, as suitable exemptions would be provided.

133.      As the Hon’ble Members are aware, services provided by chartered accountants, cost accountants, and company secretaries as well as by engineering and management consultants are presently charged to service tax.  Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree!  As such, I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law.  This tax would not be applicable in case the service provider or the service receiver is an individual.

134.      Vehicles having ‘Stage Carriage Permits’ and run by State undertakings are exempted from service tax. However, transportation of passengers undertaken by private enterprises in vehicles having ‘Contract Carriage Permits’ is, subjected to service tax.  In order to bring parity in tax treatment, I propose to exempt such transportation also from the levy of service tax.

135.      In July, 2008 goods transport agents (GTA) went on strike with several demands.  One of the demands that was accepted by the government was to exempt certain services, such as packing, cargo handling and warehousing, provided to GTAs en route, from service tax.  For this purpose an exemption notification was issued. It was also demanded by goods transport agents that the proceedings already initiated against such service providers should be dropped.  The Government has accepted this genuine demand. Therefore, I propose to make certain legislative changes required to fulfill this promise.

136.      Copies of notifications giving effect to the changes in customs, central excise and service tax will be laid on the Table of the House in due course.

137.      My tax proposals on direct taxes are revenue neutral. On indirect taxes, they are estimated to yield a net gain of Rs.2,000 crore for a full year