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This is the part of Budget speech, where Finance Minister spoke about taxation.
PART - B of the Budget Speech [2008] -> VIII. TAX PROPOSALS
123. Mr. Speaker, I shall now present my tax proposals.
124. Many people are surprised by the buoyancy in tax revenues,
especially in direct taxes. I am not. I have always maintained that moderate and stable
tax rates coupled with a tax administration that shows no fear or favour will bring high
revenues to the exchequer.
125. The UPA Government inherited a tax to GDP ratio of 9.2 per cent in
2003-04. At the end of 2007-08, that ratio would have risen to 12.5 per cent.
126. High growth rates have helped. Changes in attitude have also
helped. Above all, information systems and technology have helped most. And, if I may add
in a lighter vein, having a lucky Finance Minister may have also helped! We are on course
to achieve the Budget Estimates of indirect taxes and exceed the Budget Estimates of
direct taxes. I take this opportunity to thank all tax payers and I promise them an
efficient and tax payer-friendly administration.
Indirect Taxes
127. I shall begin with customs duties.
128. The peak rate for non-agricultural products was 20 per cent in
January 2004 and now stands at 10 per cent. The collection rate is the closest
approximation to the level of protection to domestic industry, and that rate for all
imports stood at 10 per cent in 2006-07. Since April 2007, the Rupee has appreciated
against the Dollar by 9.8 per cent. Consequently, the case for reducing the peak rate at
this stage is very weak. Hence, I propose to make no change in the peak rate of customs
duty.
129. However, I find that in some cases it is necessary to reduce the
customs duty in order to provide a fillip to that industry or to promote value addition or
to remove inversion or any other anomaly. I shall refer to a few such cases.
130. I propose to reduce the customs duty on Project Imports from 7.5
per cent to 5 per cent. However, I also propose to impose the 4 per cent special CVD on a
few specified projects in the power sector.
131. In order to improve the supply of raw material, I propose to
reduce the duty on steel melting scrap and aluminium scrap from 5 per cent to nil.
132. On certain specified life saving drugs and on the bulk drugs used
for the manufacture of such drugs, I propose to reduce the customs duty from 10 per cent
to 5 per cent as well as to totally exempt them from excise duty or countervailing duty.
133. In order to reduce the cost of manufacture of cattle and poultry
feeds, I propose to reduce the duty on vitamin premixes and mineral mixtures from 30 per
cent to 20 per cent and on phosphoric acid from 7.5 per cent to 5 per cent.
134. The duty on bactofuges will be reduced from 7.5 per cent to nil.
This will increase the shelf life of milk and benefit the dairy industry.
135. I propose to fully exempt from duty specified parts of set top
boxes and specified raw materials for use in the IT/electronic hardware industry.
136. To establish parity between devices used in the information/
communication sector and the entertainment sector, I propose to reduce the duty on
convergence products from 10 per cent to 5 per cent.
137. To provide a fillip to the manufacture of sports goods, I propose
to reduce the duty on specified machinery from 7.5 per cent to 5 per cent. I also propose
to exempt from duty specified raw materials for sports goods.
138. The gem and jewellery industry has responded well to the duty
reductions made last year. In order to encourage value addition and exports, I propose to
exempt from duty rough cubic zirconia and to reduce the duty on polished cubic zirconia
from 10 per cent to 5 per cent. Similarly, the duty on rough coral will be reduced from 10
per cent to 5 per cent.
139. To facilitate training of helicopter pilots, I propose to remove
the duty on helicopter simulators.
140. In order to support domestic fertiliser production, I propose to
reduce the customs duty on crude and unrefined sulphur from 5 per cent to 2 per cent.
141. Thanks to a complex regime of export benefits and duty exemptions,
naphtha is exported from refineries and naphtha is imported by manufacturers of polymers,
leading to price distortions and revenue losses. I propose to correct the situation by
withdrawing the duty exemption on naphtha for use in the manufacture of polymers and
subject it to the normal rate of 5 per cent. However, naphtha imported for the production
of fertilisers will continue to be exempt from import duty.
142. Finally, in order to conserve chrome ore and make it available for
value added manufacture in India, I propose to increase the export duty from Rs.2,000 per
metric tonne to Rs.3,000 per metric tonne.
143. I shall now deal with excise duties.
144. The manufacturing sector is the backbone of any economy. It is
consumption that drives production and it is production that drives investment. Having
carefully studied current trends of production and consumption, I believe there is a need
to give a stimulus to the manufacturing sector. Hence, I propose to reduce the general
CENVAT rate on all goods from 16 per cent to 14 per cent.
145. I have looked at specific sectors where growth is flagging. These
sectors are important because they are growth and employment drivers. Some of them also
have large externalities. Therefore, I propose to:
• reduce the excise duty on all goods
produced in the pharmaceutical sector from 16 per cent to 8 per cent;
• reduce the excise duty on buses and their
chassis from 16 per cent to 12 per cent;
• reduce the excise duty on small cars from
16 per cent to 12 per cent and on hybrid cars from 24 per cent to the general revised rate
of 14 per cent;
• reduce the excise duty on two wheelers and
three wheelers from 16 per cent to 12 per cent; and
• reduce the excise duty on paper, paper
board and articles made therefrom manufactured out of non-conventional raw materials by
units not having an attached bamboo/wood pulp making plant from 12 per cent to 8 per cent
with a further reduction on clearances up to 3,500 MT from 8 per cent to nil. Furthermore,
excise duty on certain varieties of writing, printing and packing paper will be reduced
from 12 per cent to 8 per cent.
146. There are a number of products which are goods of mass
consumption. There is also the need to have tax parity on similar goods. Taking into
account requests from a number of industries, I propose to reduce the excise duty from 16
per cent to nil on a few items including composting machines, wireless data cards,
packaged coconut water, tea and coffee mixes, and puffed rice.
147. Further, I propose to reduce the excise duty from 16 per cent to 8
per cent on a few items including water purification devices, veneers and flush doors,
sterile dressing pads, specified packaging material, and breakfast cereals.
148. I propose to totally exempt from excise duty the anti AIDS drug,
Atazanavir, as well as bulk drugs for its manufacture.
149. To further encourage cold chain facilities, I propose to exempt
from excise duty, on end-use basis, refrigeration equipment (consisting of compressor,
condenser units, evaporator etc) above 2 TR (tonne refrigeration) utilising power of 50 KW
and above.
150. I propose to bring parity in the excise duty rates on bulk cement
and packaged cement. Accordingly, bulk cement will now attract excise duty of Rs.400 per
Metric Tonne or 14 per cent ad valorem, whichever is higher. Cement clinkers will be
liable to excise duty of Rs.450 per Metric Tonne.
151. Similarly, I propose to increase the excise duty on packaged
software from 8 per cent to 12 per cent to bring it on par with customised software which
will attract a service tax of 12 per cent.
152. Non-filter cigarettes are more toxic than filter cigarettes, yet
they enjoy a favourable tax regime, which is iniquitous. I propose to tax both filter and
non-filter cigarettes on par by applying - as Honourable Members may have guessed - the
higher rates.
153. In order to remove a source of misinformation, I propose to
abolish the ad valorem part of the excise duty on unbranded petrol and unbranded diesel
and replace the same by an equivalent specific duty of Rs.1.35 per litre. Henceforth,
there will be only a specific duty of Rs.14.35 per litre on unbranded petrol and Rs.4.60
per litre on unbranded diesel. There will be no impact on retail prices.
154. An excise duty of 1 per cent called NCCD is now imposed on
polyester filament yarn, which is the only yarn suffering this excise duty. I propose to
remove that duty and shift the levy to cellular mobile phones.
155. Finally, I turn to my proposals on service tax.
156. 55 per cent of the GDP is contributed by the services sector,
which is a growing sector that must contribute its legitimate share to the exchequer. I
propose to bring under the service tax net four services. They are:-
(i) asset management service provided under ULIP, to bring it on par
with asset management service provided under mutual funds;
(ii) services provided by stock/commodity exchanges and clearing
houses;
(iii) right to use goods, in cases where VAT is not payable; and
(iv) customised software, to bring it on par with packaged software and
other IT services
157. I also propose to remove unwarranted doubts raised in respect of
certain services and clarify that they are liable to service tax. These include money
changers, persons running games of chance, and tour operators using contract carriage
vehicles.
158. There are some miscellaneous changes but I do not wish to burden
the House with the same.
159. Finally, I am happy to announce that the threshold limit of
exemption for small service providers will be increased from Rs.8 lakhs per year to Rs.10
lakh per year. As a result, about 65,000 small service providers will go out of the tax
net.
Direct Taxes
160. I shall now deal with direct taxes.
161. I recall the Budget Speech of 1997. I believe that boldness pays.
I also believe that trust will beget trust, moderation will beget revenues and fairness
will beget compliance. Income tax payers have made out a persuasive case for some relief.
Accordingly, I propose to make some changes in the slabs for personal income tax. I
propose to increase the threshold limit of exemption:
• in the case of all assesses, from
Rs.110,000 to Rs.150,000, thus giving every assessee a relief at a minimum of Rs.4,000.
Consequently, the four slabs and rates will be as follows:
Up to Rs.150,000 NIL
Rs.150,001 to Rs.300,000 10 per cent
Rs.300,001 to Rs.500,000 20 per cent
Rs.500,001 and above 30 per cent
• in the case of a woman assessee, from
Rs.145,000 to Rs.180,000;
• in the case of a senior citizen, from
Rs.195,000 to Rs.225,000.
162. I do not propose to make any change in the corporate income tax
rates.
163. No change is proposed in the rate of surcharge.
164. I propose to add the Senior Citizens Savings Scheme 2004 and the
Post Office Time Deposit Account to the basket of saving instruments under Section 80C of
the Income Tax Act.
165. I propose to allow an additional deduction of Rs.15,000 under
Section 80D to an individual who pays medical insurance premium for his/her parent or
parents.
166. The Reverse Mortgage Scheme was notified by the National Housing
Bank in the current financial year. In order to clarify the tax issues arising out of the
scheme, I propose to amend the Income Tax Act to provide that:
(i) reverse mortgage would not amount to "transfer"; and
(ii) the stream of revenue received by the senior citizen would not be
"income";
167. Agricultural income is exempt from income tax. However, courts
have ruled that growing saplings or seedlings on land is agriculture but growing them in
pots is not agriculture. This does not seem fair. Hence, I propose to exempt from tax
income arising from saplings or seedlings grown in a nursery.
168. Companies engaged in certain businesses are allowed a weighted
deduction of 150 per cent on any expenditure on in-house scientific research. I propose to
add the business of production of seeds and manufacture of agricultural implements to this
list.
169. In order to promote outsourcing of research, I propose to allow a
weighted deduction of 125 per cent on any payment made to companies engaged in research
and development.
170. I propose to extend the benefit of amortisation of certain
preliminary expenses under Section 35D to assesses in the services sector.
171. To supplement measures that I announced earlier in respect of the
corporate debt market, I propose to exempt from TDS corporate debt instruments issued in
demat form and listed on recognised stock exchanges.
172. I propose to make some changes in the provisions of law pertaining
to Fringe Benefit Tax (FBT) that will give some relief to corporates and firms. Crèche
facilities, sponsorship of an employee-sportsperson, organising sports events for
employees, and guest houses will be excluded from the purview of FBT.
173. At present, a domestic company is liable to pay Dividend
Distribution Tax (DDT). As a result, the distributed dividend is sometimes taxed twice in
the hands of a subsidiary company and its parent company, causing hardship. In order to
remove the hardship, I propose to allow a parent company to set off the dividend received
from its subsidiary company against dividend distributed by the parent company, provided
that the dividend received has suffered DDT and the parent company is not a subsidiary of
another company.
174. I propose to insert a new sub-section (11C) in Section 80-IB to
grant a five year tax holiday to encourage hospitals to be set up anywhere in India,
except certain specified urban agglomerations, and especially in tier-2 and tier-3 towns
in order to serve the rural hinterland. This window will be open for the period April 1,
2008 to March 31, 2013, during which the hospital must commence operations.
175. Having regard to the significant rise in tourist arrivals,
especially for cultural tourism, I propose to grant a five year holiday from income tax to
two, three or four star hotels that are established in specified districts which have
UNESCO-declared 'World Heritage Sites'. The hotel should be constructed and start
functioning during the period April 1, 2008 to March 31, 2013.
176. I am happy to announce that the Coir Board will be included in
Section 10(29A) and exempt from income tax.
177. Dividends that are distributed attract a tax of 15 per cent. Short
term capital gains attract a tax of 10 per cent under Section 111A. There is merit in
equating the rates and hence I propose to increase the rate of tax on short term capital
gains under Section 111A and Section 115AD to 15 per cent. This will also encourage
investors to stay invested for a longer term.
178. At present, Securities Transaction Tax (STT) paid is allowed as a
rebate against tax liability. Further, STT on options is levied on the aggregate of the
strike price and the option premium and is borne by the seller. I propose to make some
changes. Henceforth, STT paid will be treated like any other deductible expenditure
against business income. Further, the levy of STT, in the case of options, will be only on
the option premium where the option is not exercised, and the liability will be on the
seller. In a case where the option is exercised, the levy will be on the settlement price
and the liability will be on the buyer. There will be no change in the present rates.
179. Transactions in commodity futures have come of age. Hence, I
propose to introduce the Commodities Transaction Tax (CTT) on the same lines as STT on
options and futures.
180. "Charitable purpose" includes relief of the poor,
education, medical relief and any other object of general public utility. These activities
are tax exempt, as they should be. However, some entities carrying on regular trade,
commerce or business or providing services in relation to any trade, commerce or business
and earning incomes have sought to claim that their purposes would also fall under
"charitable purpose". Obviously, this was not the intention of Parliament and,
hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable
organisations will not in any way be affected.
181. The Banking Cash Transaction Tax (BCTT) has served a very useful
purpose in enlarging the information system of the Income Tax Department. Since the
information is also being gathered through other instruments introduced in the last few
years, I propose to withdraw this tax with effect from April 1, 2009.
182. My tax proposals on direct taxes are revenue neutral. On the
indirect taxes side, the proposals are estimated to result in a loss of Rs.5,900 crore.
CST and a Roadmap towards GST
183. Following an agreement between the Central Government and the
State Governments, the rate of Central Sales Tax was reduced from 4 per cent to 3 per cent
in this financial year. It is now proposed to reduce the rate to 2 per cent from April 1,
2008. Consultations are underway on the compensation for losses, if any, and once
agreement is reached the new rate will be notified. I am also happy to report that there
is considerable progress in preparing a roadmap for introducing the Goods and Services Tax
with effect from April 1, 2010.
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