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FM Speaking about Taxation in his speach [Stub of budget speech]

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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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