The Hindu : Proposals to widen tax base, encourage compliance

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Friday, Mar 01, 2002

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Proposals to widen tax base, encourage compliance

PART B

Sir, I now present my tax proposals.

I have formulated my tax proposals against the backdrop of the current economic slow-down. My tax proposals are intended to revive demand, promote investment, accelerate economic growth and enhance productivity. They are also aimed at widening the tax base, rationalisation and simplification of tax structures and encouraging voluntary compliance.

I present my indirect tax proposals first.

In my earlier budgets, I have made strenuous efforts to address the issues of cascading, distortions, anomalies and inequities in the commodity tax structure. I have achieved significant rationalisation of tax structures relating to both excise and customs duties. The number of rates are few, and procedures more transparent than before. The service tax, though confined to limited number of services, has gained ground.

In 2000-2001, I had introduced the rate of 16 per cent as the rate of Central Value Added Tax (CENVAT) in the excise duty structure. Last year, I had reduced the three rates of special excise duty to a single rate of 16 per cent. This rationalisation in the duty structure has considerably reduced disputes and litigation and the cost of compliance to the assessees. Above all, it has put in place a system, which is stable, just and rational. We only need to refine it further.

Special excise duty on eight items

I propose to abolish the 16 per cent special excise duty on a number of items. Henceforth, the special excise duty shall be confined to the following 8 items only:

Polyester filament yarn

Motor cars

Multi-utility vehicles

Tyres for replacement

Aerated soft drinks and soft drink concentrates

Air conditioners

Pan masala, and

Chewing tobacco and miscellaneous tobacco preparations

I propose to do away with the concessional rate of 8 per cent excise duty applicable to LPG, kerosene, auto CNG and diesel engines up to 10 HP which will now attract the CENVAT rate of 16 per cent.

The rates of excise duty have now been considerably moderated. However, several exemptions still continue. In my last budget, I had imposed excise duty at a moderate rate of 4 per cent on a few items. I propose to increase this rate from 4 per cent to the next slab of 8 per cent this year. Simultaneously, I propose to impose excise duty at 4 per cent on a few more items, which have remained exempted so far.

Cigars, cheroots and cigarillos of tobacco or tobacco substitutes which have been exempt so far shall attract 16 per cent CENVAT.

In view of the abolition of Administered Price Mechanism on petroleum products and in order to provide for the subsidy on LPG and kerosene oil, I propose to make some changes in the duty structure of petroleum products.

The rate of cess applicable to indigenous crude oil under the Oil Industry (Development) Act will be increased from Rs. 900 per metric tonne to Rs. 1,800 per metric tonne with effect from March 1, 2002. I propose to reduce the ad valorem rate of excise duty applicable to motor spirit from 90 per cent to 32 per cent. However, I propose to impose on it a surcharge of six rupees per litre. But the surcharge on ethanol-doped motor spirit will be five rupees and twenty five paise per litre.

The Indian textile industry occupies an important place in our economy. It is the second largest provider of employment after agriculture. The Multi-Fibre Agreement will be phased out by 2004. Domestic market has already been opened up. Our textile industry has to prepare itself for the challenges ahead.

I have carved out a special package of incentives for the textile industry.

I propose to maintain the excise duty rates on yarns. At present, cotton hank yarn is exempt from excise duty but is being widely misused. In order to ensure that the benefit accrues only to the handloom weavers I propose to bring hank yarn within the net of excise duty at 8 per cent, but at the same time, provide for appropriate subsidy on the price of hank yarn purchased by them. This will put an end to misuse and target the subsidy better. The Ministry of Textiles would announce the details of the subsidy scheme.

In order to enable the weavers to avail of CENVAT credit scheme, I propose to allow the weavers of grey fabrics to pay excise duty on an optional basis. I propose to extend a similar option to the knitting sector.

In all humility, I can claim credit for introducing the CENVAT rate of 16 per cent in the excise duty structure. However, in the case of textiles, I am making an exception and granting a remission of 4 per cent. The rate of excise duty on fabrics, made-ups and garments would be 12 per cent. This special dispensation shall continue till 28.2.2005. Industrial fabrics would, however, continue at 16 per cent.

At present, hand processing of textile fabrics by independent processors is exempt from excise duty even if power is used on 12 specified processes in the case of cotton fabrics or 7 specified processes in the case of man-made fabrics. I propose to confine this exemption to only 3 processes, namely, scouring, hydro-extraction and calendering.

I propose to abolish the compounded levy scheme for independent power processors as it is incongruous with the reduced rate of duty that I have proposed.

Handloom sector is not affected by my budget proposals. Excise duty exemption on handloom fabrics continues. I now propose to grant exemption to handloom garments also from excise duty subject to certification by Handloom Export Promotion Council.

In order to enable the textile industry to modernise itself and acquire new technology, I propose to exempt excise duty on automatic shuttleless looms. I also propose to exempt excise duty on specified processing machinery and specified silk reeling, weaving and twisting machinery. The customs duty on such machinery is also proposed to be reduced from 25 per cent to 10 per cent. I also propose to exempt specified jute machinery from excise duty. I hope this package will enable the textile industry to face global competition.My proposals include special dispensation of excise duty structure for the petroleum refineries located in the northeast region. With effect from March 1, 2002, the petroleum products produced by all these refineries shall be charged to excise duty at half of the normal rates of excise duty otherwise applicable to petroleum products.

Inland Air Travel Tax is exempted for air travel within the northeast States. I propose to extend this exemption on air travel to and from northeast States.ea industry is currently facing a number of problems in the domestic as well as international markets for a variety of reasons. In order to promote the interest of tea growers, I propose to reduce the excise duty on tea from Rs. 2 per kg to Re.1 per kg.

Anti-AIDS drugs exempted

We have to face the menace of HIV-AIDS with determination. I propose to exempt specified anti-AIDS drugs from excise duty with effect from March 1, 2002.

Specified cold chain equipment are exempt from excise duty. I propose to add three more equipment to this list to promote the preservation of fruits and vegetables.

The excise duty exemption scheme for the small-scale sector is applicable to granite. In view of the fact that it is not available to marble, I propose to withdraw this exemption from granite also. The scheme of excise duty assessment based on maximum retail price of goods has resolved valuation disputes in a dramatic way. I propose to extend this scheme to 9 more categories of items this year, thus raising the number to 92 categories of items.

The justification of taxing more services does not require any elaboration. This year, I propose to extend the service tax to the following services:

Life insurance, including insurance auxiliary services relating to life insurance

Inland cargo handling

Storage and warehousing services (except for agriculture produce and cold storages)

Event management

Rail travel agents

Health clubs and fitness centres

Beauty parlours

Fashion designers

Cable operators

Dry cleaning services

Service tax is applicable to specified services provided by banks and non-banking financial companies. I propose to extend the service tax to corporate bodies that provide similar services. The tax on these services shall come into force from a notified date.

Our tourism industry has been adversely affected by recent events. In December 2001, I had announced exemption from service tax on the services provided by hotels. The exemption expires on March 31, 2002. I propose to extend this exemption for one more year up to March 31, 2003.

Customs duty proposals

I now present my proposals relating to customs duties.

The House may recall that in my last budget, I had announced that I would move progressively to reduce the peak rate of customs duty to 20 per cent within three years. I had also said that the modalities for this would be worked out in time for the next budget. I had accordingly set up an Inter-Ministerial Working Group to recommend the modalities. The Group has suggested a road map for this starting with this year's budget. After careful consideration of the group's report, I have decided that, by the year 2004-05, there would be only two basic rates of customs duties, namely, 10 per cent covering generally raw materials, intermediates and components and 20 per cent covering generally final products. The existing rates would be adjusted and subsumed in these two basic rates with some exceptions on account of WTO bindings or higher tariffs for agricultural products. In accordance with the road map, I propose to reduce the peak rate from 35 per cent to 30 per cent this year. I also propose to make some changes to take care of some current problems.

Our steel industry has been affected by slowdown in demand and has suffered large losses. In order to reduce its cost of production, I propose to lower customs duty on a number of refractory raw materials by 10 per cent. These include natural graphite powder, silicon metal, sintered alumina, fused zirconia and boron carbide. I also propose to reduce the duty on graphite electrodes of above 24 inches diameter from 25 per cent to 15 per cent.

Ships imported for breaking are charged to customs duty at 5 per cent along with CVD and special additional duty. I propose to revise this by increasing the basic duty on ships for breaking from 5 per cent to 15 per cent and exempting them from CVD and special additional duty. This is to reduce the disparity between rolled products produced by the steel plants and cheaper products produced from ship breaking.

The steel industry is troubled by imports of seconds and defectives at cheaper prices. In order to address their concern, I propose to increase the basic customs duty on seconds and defectives of steel to the bound rate of 40 per cent.

Non-ferrous metals are used for large number of applications by different segments of industry. I propose to reduce the customs duty on copper, zinc and lead from 35 per cent to 25 per cent and on aluminium and tin from 25 per cent to 15 per cent.

In the EXIM policy for the year 2000-2001, the Minister of Commerce and Industry announced the scheme of setting up of special economic zones that are intended to provide comprehensive facilities at one place for export production. Special economic zones would be entitled to procure duty free equipment, raw materials, components, etc., whether imported or purchased locally. The benefit of such exemption shall be applicable to both the developers of special economic zones as well as the units located therein.

In order to encourage development of world class infrastructure facilities, I propose to reduce the customs duty on specified equipment for ports and airports to 10 per cent. In view of the difficulties being faced by the civil aviation sector, I propose to exempt duty on aeroplanes, helicopters, gliders, simulators of aeroplanes and their parts and raw materials.

India is signatory to the Information Technology Agreement. The House may recall that, in 1998, I had announced that zero duty regime on IT products would be preponed and implemented by 2003. However, the local manufacturers have urged me strongly that it may be made effective only from 2005. This would give them an opportunity to gear up to meet the challenge of international competition. I have decided to accept their demand. As a further measure of assistance to indigenous industry, I propose to reduce the customs duty on a number of hardware inputs to 5 per cent and on certain capital goods to 15 per cent. The duty on certain IT items would be reduced to 10 per cent or 5 per cent as per the WTO binding.

The use of cellular phones is increasing by leaps and bounds but import through unauthorised channels is a matter of concern. I, therefore, propose to exempt cellular phones and pagers from CVD. The basic customs duty is, however, being increased from 5 per cent to 10 per cent.

Sir, I have repeatedly assured the House that our customs tariffs would be pegged at appropriate levels to protect the interest of the farmers. In my last budget, I had increased the customs duty on tea, coffee, copra, coconut and desiccated coconut to 70 per cent. This year, I propose to increase the customs duty on tea and coffee to 100 per cent and on natural rubber, poppy seeds, pepper, cloves and cardamom to 70 per cent. I also propose to increase the duty on pulses from 5 per cent to 10 per cent.

I propose to reduce the customs duty on agricultural machinery and implements from 25 per cent to 15 per cent to encourage our farmers to acquire new and efficient technology.A number of drugs are exempt from customs duty. I propose to include eight more drugs used for treatment of cancer and some other critical diseases in the list of fully exempted drugs. Vaccine for immunisation against Japanese Encephalitis shall also be exempt from customs duty. It has been reported that certain drugs that are presently exempted from customs duty are now made indigenously. In order to provide reasonable incentive to the domestic manufacturers of these drugs, I propose to impose a basic customs duty of 5 per cent on these drugs.

India has a large number of diabetic patients. They have to undergo frequent blood sugar tests. In order to provide some relief to them, I propose to reduce the customs duty on Glucometers and test strips from 25 per cent to 10 per cent.

As a measure of rationalisation and removal of anomaly, I propose to reduce the customs duty on non-PDS kerosene from 35 per cent to 20 per cent and increase the customs duty on kerosene sold under the PDS scheme from 5 per cent to 10 per cent.

In order to promote interest in science, I propose to reduce the customs duty on planetarium equipments, parts and accessories to 15 per cent and also exempt them from CVD and special additional duty of customs.

India has the technical capability to become an uplinking hub for television channels for the SAARC countries. In order to promote state-of-the-art uplinking facilities at competitive costs, I propose to reduce customs duty on certain earth station equipment and studio equipment from 35 per cent to 25 per cent.

I propose to reduce the customs duty on cement and clinkers from 25 per cent to 20 per cent. This should help in keeping the domestic prices under control.

The customs duty on imported liquors is bound at 182 per cent for the current year under the WTO. Accordingly, I propose to reduce the customs duty on these items from 210 per cent to 182 per cent. I also propose to rationalise the rates of CVD applicable to liquors and wines to 75 per cent for value upto $25 per case and 50 per cent for others.

Passengers returning from abroad on transfer of residence are allowed certain items of personal use on payment of customs duty at a flat rate of 35 per cent. I propose to reduce this to 30 per cent and also add a few more items such as lap top computers, portable photocopy machines, digital video disc players, video cassette disc players in the eligible list of items. The overall limit is also being raised from Rs. 1.5 lakhs to Rs. 5 lakhs.

I propose to impose a nominal customs duty of 5 per cent on some of the items that are exempt at present. I also propose to impose special additional duty on certain other items that are currently subjected to 5 per cent customs duty.

I have proposed a few other changes that are of a minor nature. I have also proposed some legislative changes with regard to customs, excise and service tax laws that are contained in the Finance Bill. I do not wish to take the time of the House in elaborating on them in detail. The customs and excise duty structures have been greatly simplified in the past few years. With the changes that I have proposed, the revenue from 16 per cent CENVAT will be more than 85 per cent of the total revenue from ad valorem duties. In the next two years it can be reduced to one, namely 16 per cent. The customs tariff will also comprise of only two basic rates in three years' time. <122>The discretionary powers need to be replaced by rule-based mechanism. All these aspects of tax administration deserve to be examined in their entirety. I propose to set up an expert committee to make a comprehensive study of these aspects.

My proposals on the excise side are estimated to result in a revenue gain of about Rs. 6,700 crores in a year.

On the customs side, my proposals are estimated to result in a revenue loss of about Rs. 2,200 crores. However, I anticipate buoyancy in indirect tax revenue and estimate that the total collection next year would be Rs. 1,43,702 crores.

Copies of the notifications issued to give effect to the changes in excise and customs duties shall be laid on the Table of the House in due course.

No change in IT rates

I now turn to direct taxes.

Personal income tax rates have been at 10 per cent, 20 per cent and 30 per cent and corporation tax at 35 per cent for several years. They are reasonable and therefore, I have left them unchanged in my last four budgets. I do not propose to change them this year also.

At the same time, it is important to recognise the need for specific interventions to provide a stimulus for industrial growth. I outline these now.

I have already mentioned the need to provide incentives for fresh investments in the industrial sector. To give impetus to such investment, I propose to allow additional depreciation at the rate of 15 per cent on new plant and machinery acquired on or after April 1, 2002, for setting up a new industrial unit, or for expanding the installed capacity of existing units by at least 25 per cent.

There is disparity between the rates of corporation tax applicable to foreign companies and domestic companies. This disparity arose in the past, partly due to certain levies like surcharge being applicable to domestic companies but not to foreign companies. To correct this, I propose to reduce the rate applicable to foreign companies from 48 per cent to 40 per cent.

The small-scale industry sector has been making an important contribution to the economic growth, and deserves continued support. In order to enable the Small Industries Development Bank of India (SIDBI) to augment its resources and provide cheaper credit to the small-scale sector, I propose to allow capital gains exemption under Section 54EC of the Income-Tax Act to amounts invested in bonds issued by the SIDBI.

In my budget for 2000-2001, I had announced the setting up of a Credit Guarantee Scheme for small-scale industries. Accordingly, the Credit Guarantee Fund Trust for Small Industries has been constituted. I propose to grant full exemption from tax to the income of this trust.

Cut in housing loan interest

Continuing the thrust given to the housing sector over the last four years, I propose to allow the deduction for interest payable on housing loans for self-occupied houses even where such houses are acquired or constructed after March 31, 2003, as long as the acquisition or construction is completed within three years from the end of the financial year in which the loan was taken. For giving a further impetus to investment in the housing sector, I propose to extend the capital gains exemption provided in section 54EC of the Income-Tax Act to bonds issued by the National Housing Bank.

The shipping industry in India is internationally competitive and is capable of further growth. In my budget for 2000-2001, I had provided for a deduction of the entire profits of a shipping company if the amount deducted was kept in a reserve for purchase of new ships. However, the aggregate of the amounts that can be transferred to such reserve is limited to twice the amount of the paid up share capital of the company. I propose to extend it to cover share premium reserve and general reserve also. This reserve will not be considered while computing the book profits and shipping companies would thus be out of the purview of minimum alternate tax (MAT).

Presently, banks are allowed to deduct up to 5 per cent of their total income against provisions made by them for bad and doubtful debts. In order to strengthen the financial position of banks, I propose to increase this allowance to 7.5 per cent of the total income. Further, in my budget for the year 1999-2000, I had granted an option to banks to deduct up to 5 per cent of their NPAs falling in the category of loss or doubtful assets as on the last day of the accounting year. I propose to enhance this optional deduction to 10 per cent, and also allow a similar option of deduction up to 10 per cent of loss or doubtful assets to public financial institutions.

There has been a persistent demand that the benefit of carry-forward and set off of past losses in cases of mergers of companies owning industrial undertakings, should be extended to more sectors.

The telecommunication sector, in particular, is undergoing a phase of rapid consolidation and expansion. With a view to encourage its growth, I propose to extend this benefit to companies providing telecom services and eligible for deduction under Section 80-IA. I also propose to constitute an expert group to examine the extension of this benefit to other companies in the services sector, including the financial services sector.

Fiscal relief to tourism sector

In order to provide further fiscal relief to the tourism sector, I propose to take the following measures:

Expenditure tax on hotels will, henceforth, apply only to room charges, and will be payable only where such charges are Rs. 3,000 or more per day, as against the existing threshold of Rs. 2,000 per day.

The deduction available under Section 80HHD of the Income-Tax Act in respect of foreign exchange earnings of hotels or tour operators will be enhanced to bring it in line with the deduction available to exporters under section 80 HHC.

A deduction of 50 per cent of the profits earned by units setting up and operating large convention centres will be allowed for 5 years under Section 80-IB.

I have emphasised the importance of the entertainment industry in Part A of my speech. To give a further boost to this fast-growing sector, I propose to allow, for the next five years, a deduction of 50 per cent of the profits earned by units constructing and operating multiplex theatres in non-metropolitan towns.

Last year, for ensuring a degree of transparency in the affairs of charitable and religious trusts as well as certain other institutions claiming exemption under Section 10(23C), I had introduced provisions requiring them to publish their accounts in a local newspaper, if their total receipts during a year exceeded Rs. 1 crore.

I have received a large number of representations pointing out the possibility of misuse of such information by anti-social elements.

In view of these representations, I propose to delete this requirement. I further propose to rationalise certain provisions relating to these trusts and institutions so as to allow the accumulation of any part of their income only up to a maximum period of five years and to clarify that inter-trust donations may only be made either from the corpus or from the current year's income.

Tax deductions for quake funds

Following the Gujarat earthquake last year, I had granted a 100 per cent tax deduction to donations made to certain approved charitable trusts and institutions that were to be applied before March 31, 2002, in relief work. As such relief work is still going on in many areas, I propose to extend the terminal date for utilisation of such donations from March 31, 2002, to March 31, 2003.

Last year, I had rationalised the rules for valuation of perquisites on the basis of their cost to the employer, except in respect of houses and cars where different criteria are adopted for simplicity. To relieve the burden on lower salaried employees, I propose to provide that no perquisites will be assessed for the assessment year 2002-2003 in the case of employees whose taxable salary, excluding perquisites, is up to Rs. 1,00,000. For subsequent years, I propose to give an option to the employer to pay the tax on perquisites on behalf of the employees.

Under Section 89 of the Income-Tax Act, a tax relief is provided in case of additional tax burden imposed in any one year due to receipt of arrears of salary. As a welfare measure, I propose to allow this relief also in cases where family pension is received in arrears.

In continuation with the taxpayer-friendly measures brought about by me in my earlier budgets, I propose to abolish the provisions of Chapter XXC of the Income-Tax Act, which require a clearance to be obtained from the appropriate authority before registering a transfer of an immovable property.

Sir, some of the exemptions and deductions currently provided in the Income-Tax Act have become redundant and are not in harmony with the moderate tax regime that we have in India. The Advisory Group on Tax Policy and Tax Administration for the 10th Plan has recommended deletion of a number of such exemptions. I have carefully examined each recommendation of the group and have come to the conclusion that some of these exemptions are indeed unnecessary. I, therefore, propose to withdraw or discontinue the exemptions, which are not required any longer.

The advisory group has also recommended deletion of various exemptions granted to incomes of approved or notified bodies or institutions, including educational and medical institutions. I do not think that the exemptions allowed to these institutions and bodies, which are fulfilling social objectives, should be withdrawn. However, I propose to require all such bodies and institutions to file returns of income every year so as to enable a periodical verification of whether the prescribed conditions, which primarily relate to application of the income, are being fulfilled and also to enable the prescribed authority to withdraw the approval or notification of such entities if they are found to have violated any such conditions.

Last year, I had withdrawn the tax-exemption allowed to income earned by the NABARD, the National Housing Bank and the SIDBI, since these institutions have come of age and are working on commercial lines. For the same reasons, I propose to withdraw this year the exemption allowed to income of the National Dairy Development Board, the Prasar Bharati and the Oil Industry Development Board.

Various amendments made over the years in the rules relating to depreciation have given rise to a plethora of such rates for different types of assets. The relevance and the need to continue with these rates, and whether they should be scaled down to a maximum rate of 60 per cent, should be a matter for open discussion. The relevant details will be put up on the website of the Finance Ministry. After taking into account the views expressed, a revised schedule of depreciation rates will be notified.

Under the present system of taxation of dividends and income from units, the company or the mutual fund pays a 10 per cent tax, and the income is exempt in the hands of the recipient. Such a system not only taxes income in the hands of a person to whom it does not belong; it also militates against the pass-through status which is the very essence of a mutual fund. There is also an inherent inequity in the present system, which allows persons in the high-income groups to be taxed at much lower rates than the rates applicable to them. I propose to abolish the distribution tax of 10 per cent on companies and mutual funds on the dividends or income distributed by them. Such income will henceforth be taxed in the hands of the recipients at the rates applicable to them, and will be subject to tax deduction at source at the rate of 10 per cent. In order to avoid a cascading effect, companies receiving such income will be entitled to claim a deduction for the amount in turn distributed by them as dividends. To continue the support given by me to equity oriented funds of the UTI and other mutual funds, the income received during the financial year 2002-2003 by unit holders of such funds will be taxed only at 10 per cent as at present.

A tax rebate of 20 per cent of the amount invested in certain instruments specified in Section 88 of the Income-Tax Act is presently allowable to all individuals and HUFs, as an incentive for retaining a part of their earnings in the form of savings. Tax-payers in the higher tax brackets, however, do not require fiscal incentives to save through the various designated instruments. I, therefore, propose to allow the rebate at the existing rate of 20 per cent only to persons having taxable income up to Rs. 1,50,000. Persons having taxable income between Rs. 1,50,000 and Rs. 5 lakhs will henceforth get a rebate of only 10 per cent of the amount invested, and no rebate will be allowed where taxable income exceeds Rs. 5 lakhs. The special rebate of 30 per cent for persons having taxable salary income up to Rs. 1 lakh will, however, continue. Presently, tax exemption is available to certain categories of employees receiving amounts up to Rs. 5 lakhs as VRS compensation. I propose to extend this exemption to employees of certain institutions of national or State-level importance to be notified in this behalf.

To sum up, Sir, my proposals made in this budget on the Direct Taxes will result in a revenue gain of Rs. 6,000 crores, including the component of surcharge of Rs. 2,750 crores. I estimate that the direct tax revenue in 2002-2003 would be Rs. 91,585 crores.

Mr. Speaker, Sir, with these proposals I estimate total tax revenue receipts for the Centre at Rs. 1,72,965 crores and the fiscal deficit at Rs. 1,35,524 crores or 5.3 per cent of GDP.

Mr. Speaker Sir, this is a budget for consolidating, widening and deepening the reform process. This is a budget devoted to development. This is a budget to further promote partnership with the States for a better tomorrow for the people of India.

Mr. Speaker, Sir, with these words, I commend the budget to this august House.

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