101. Sir, I now present my tax proposals, indirect taxes first.
102. In my earlier budgets, I have endeavoured to ensure a continuity of approach in framing my revenue proposals. The principles that have guided me have been the need for growth in revenues, simplification and rationalization of the tax regime, and effective tax compliance through measures, which are friendly for the honest taxpayer, and a deterrent to the evader. I have reduced the number of rates in both customs and excise duties, simplified procedures and introduced measures to improve tax compliance. I have given up my discretionary power to grant excise and customs duty exemptions in individual cases thus saving hundreds of crore of revenue for Government. The policy of penalties against tax evaders has also been made non-discretionary. With all these steps I have sought to put an end to a system that pressure groups or lobbies could influence. My attempt this year is to take this process to its logical conclusion.
103. In my last budget, I had introduced the rate of 16% as the rate of Central Value Added Tax (CENVAT). I had also rationalized the rates of special excise duty to three, namely, 8%, 16% and 24%. The single rate of CENVAT now contributes about 68% of the total excise revenues from ad valorem duties.
104. I now propose to reduce the three rates of special excise duty to a single rate of 16%. As a consequence, I propose to abolish the 8% special excise duty on the following items:
(1) Glazed tiles
(2) Mattresses and articles of bedding
(3) Carpets and floor coverings
(4) Painted canvas, studio back cloth, etc
(5) Linoleum and textile wall coverings etc.
(6) Scooters and motorcycles, and
These items will now be charged to CENVAT only at the rate of 16%.
105. White cement and other special cements, yachts and pleasure boats, arms and ammunition for private use and articles of fur skins, will attract SED of 16% and a total duty of 32%.
106. The special excise duty on aerated soft drinks, soft drink concentrates supplied to vending machines, and motorcars will be reduced to 16%, thus putting an end to the rate of 24% special excise duty. These items also will now bear a total duty of 32%. There will be no change in respect of products, which already attract this rate of 32%.
107. There are a few items that currently attract CENVAT at half the rate, namely, 8%. All these items will henceforth be charged to the normal rate of 16% except cotton yarn including sewing thread, LPG, kerosene and diesel engines up to 10 HP, which I am leaving at 8% for the present in the larger public interest.
108. After these rationalization measures about 80% of the revenue in respect of ad valorem duties will come from the single rate of 16% and about 17% from the combined rate of 32%.
109. India is the world’s second largest producer of fruits and vegetables. However, most of these are wasted in the absence of proper storage and processing facilities. Food-processing industry dealing in perishable fruits and vegetables needs special support. I, therefore, propose to exempt food preparations based on fruits and vegetables completely from excise duty. This will include a very wide range of products of common use like pickles, sauces, ketchup and juices, etc. This, along with the support I have given to creation of better storage facilities will give a fillip to the food processing industry and will go a long way in improving the rural economy of our country.
110. The Eleventh Finance Commission has recommended a special levy for the replenishment of the National Calamity Contingency Fund. As an ad hoc measure, this was provided for in the current year through a special surcharge on corporate taxes. I propose to establish this funding on a regular basis through a special surcharge of excise on a range of products the use of which should be discouraged on health grounds. I propose to levy a surcharge of 15% on cigarettes. The duty on biris would increase from Rs 6 to Rs 7 per thousand biris. The total duty on pan masala would be 55%/60%. Miscellaneous tobacco products like chewing tobacco would be charged to a total duty of 60%.
111. Excise duty on High Speed Diesel was reduced from 16% to 12% in September last year. I propose to restore it to the normal CENVAT rate of 16%. I also propose to restore special excise duty on motor spirit to the previous rate of 16%. The burden of increase in duty is not proposed to be passed on to the consumers except for any technical corrections.
112. LPG is charged to excise duty at 8%. I propose to apply the same rate of duty to Compressed Natural Gas, which is exempt at present.
113. A special scheme of charging excise duty from independent textile processors on compounding basis was introduced in December 1998. The working of this scheme has resulted in serious distortions. I have therefore decided to revert to the ad valorem duty structure for independent textile processors with effect from 1, March 2001. Independent processors would be allowed to take CENVAT credit of the duty paid on inputs on a deemed basis.
114. There is no economic logic to continue with excise duty exemption on garments sold under a registered trade name. I propose to impose a duty of 16% on such garments.
115. Products of SSI units are exempt from excise duty up to Rs one crore. This exemption is intended to provide fiscal support to the genuinely small producers. I propose to withdraw this exemption in respect of the following items, in which misuse of the exemption is more than likely:
« Ball or roller bearings
« Arms and ammunition for private use
116. The excise duty structure on matches comprises rates of duty ranging from 25 paise to Rs 2.40 per hundred boxes of 50 sticks each. I propose to rationalise the existing rates to a more rational structure with a duty rate of 50 paise for the handmade sector, Re.1 for the middle sector, Rs 2 for the semi-mechanized sector and Rs 3 for the mechanized sector.
117. Mr. Speaker, Sir, in the matter of rates of duties of excise I have almost achieved the ultimate with only one basic rate of CENVAT and one rate of special excise duty. The procedures in excise have also been made modern. I can humbly claim that excise duty is now a model of value added tax up to the manufacturing stage.
118. The only issue, which remains to be tackled now, is the issue of individual exemptions. The regime of exemptions is incompatible with a simple, equitable and rational tax structure that has now been put in place. I am not doing away with the exemptions altogether, realizing that this may come as a sudden shock to those who are accustomed to exemptions. However, I will like to give notice to them to be prepared to pay duties like anyone else. For the present, I am making a modest beginning by imposing a nominal duty of 4% on some items like goggles, imitation jewellery, rubberized mattresses etc. which in four equal annual installments will be taken to 16%. More and more items will be put on this escalator every year.
119. Structural changes have taken place in the economy with the service sector growing faster than other sectors. I am expanding the net of service tax and I propose to add the following services to the list of taxable services:
Ø Authorized Service Stations for servicing of vehicles including two wheelers
Ø Port Services
Ø Broadcasting Services
Ø Photographic Services
Ø Convention Services
Ø Sound Recording Services
Ø Scientific and Technical Consulting Services
Ø Telex Services
Ø Telegraph Services
Ø Facsimile Services
Ø On-line Information & Data Base Retrieval services
Ø Video Tape Production Services
Ø Services auxiliary to Insurance
120. I propose to bring the service provided to lease circuit line holders also in the tax net.
121. I now turn to my proposals relating to customs duties.
122. In my previous budgets, I have reduced the total number of major customs duty rates to four, that is, 35%, 25%, 15% and 5%. I do not wish to propose any further reduction in the number of customs duty rates this year. However, I propose to discontinue the surcharge of 10%. With this, peak level of customs duty will decline marginally from 38.5% to 35%.
123. All agricultural produce already attracts the peak rate of duty of 35% or more. Current tariffs on major cereals are: Wheat (50%), Rice (70%/80%) and Maize (50%). I now propose to increase the customs duty on tea, coffee, copra, and coconut and desiccated coconut from the present 35% to 70%.
124. Similarly, I propose to increase the rate of duty on crude edible oils ranging from 35% to 55% at present to a uniform rate of 75% and on refined oils from 45%/65% to 85%. A lower rate of 45% would apply to soyabean oil on account of WTO binding. I also propose to enhance the rate of customs duty on the import of crude palm oil by vanaspati manufacturers from 25% to 55% and restrict this concession to sick vanaspati units only. The others will pay 75%. I wish to assure the House that in order to safeguard the interest of our farmers we shall move swiftly whenever any perceptible threat on account of imports is noticed.
125. The House is aware that Government has committed itself to abolish customs duty on IT and telecom products and their inputs and components under the ITA 1 Schedule by 2003. The customs duty on these products is proposed to be reduced to 15% from 1, March 2001 from current levels.
126. Mr. Speaker, Sir, with the abolition of the remaining Quantitative Restrictions in April this year second hand cars will also become freely importable. To allay the fears of surge in import of second hand cars, the rate of basic customs duty on their import will be raised to 105%, which is three times the peak rate. The total duty now applicable to second hand cars will be more than 180%. I propose a similar structure of duty for the import of old multi utility vehicles, scooters and motor cycles.
127. In order to provide a level playing field for domestic liquor producers, I propose to levy CVD at a suitable rate on imported liquor, taking into account the levies of state excise on domestic production.
128. Our textile industry has to modernize itself and acquire the latest technology in order to face global competition and attain high quality of production. I propose to reduce the basic customs duty on specified textile machines, including shuttle-less looms, from 15% to 5%. As a measure of further relief to the textile sector, I propose, to reduce the customs duty on silk waste, cotton waste and flax fibre from 35% /25% to 15%.
129. There are some cases of anomaly in customs duty between raw materials and intermediate goods on the one hand, and intermediate goods and final products on the other. DMT, PTA, MEG and Caprolactum are raw materials for production of man-made fibers and yarns. However, the customs duty on these materials is higher than the rate applicable to fibers and yarn. I propose to reduce the customs duty on DMT, PTA, MEG and Caprolactum from 25% to 20%, which is the WTO bound rate for synthetic fibers and yarns. Similarly, soda ash is an input for the production of glassware, detergents etc. and currently attracts the peak customs duty of 35% along with the final products. I propose to reduce it to 20%. I also propose to reduce the customs duty on polyester chips and nylon chips for the manufacture of fibers and yarns from 35% to 25%.
130. On the same analogy, the customs duty on high quality DBM, seawater magnesia and fused magnesia is being reduced from 25% to 15%.
131. Gems and jewellery have considerable potential for export. I propose to reduce the customs duty on cut and polished coloured gem stones from 35% to 15%. I also propose to reduce the customs duty on specified equipment when imported by training institutes sponsored by the Gem and Jewellery Export Promotion Council from 25% to 15%. The rate of customs duty on rough diamonds would now be 5%.
132. CNG kits and their parts attract low duty at 5%. I propose to extend the same treatment to LPG conversion kits and their parts.
133. LNG is not produced in India. The burden of CVD on the import of LNG adds to the cost of LNG projects. I therefore propose to exempt LNG from CVD.
134. For the same reason, I also propose to exempt wattle extract from the application of CVD.
135. I propose to reduce the customs duty on cement, and clinkers from 35% to 25%. I am confident that this reduction would help softening of domestic prices of cement for the benefit of consumers.
136. Mr. Speaker, Sir, accredited pressmen and cameramen are allowed to import cameras, computers, fax machine etc. up to a value of one lakh rupees for their professional use without payment of customs duty once in five years. In view of many good photographs they have taken of use, I propose to reduce this long waiting period from five years to two years.
137. In order to encourage better quality of cinematography I propose to reduce the customs duty on cinematographic cameras, projectors and certain other related equipment used by the film industry from 25% to 15%.
138. In order to discourage smuggling I propose to reduce the duty on gold from Rs 400 per 10 grams to Rs 250 per 10 grams.
139. Several industry associations have pointed out that the CVD on the imported consumer products should also be charged on the basis of maximum retail price; otherwise it does not provide a level playing field. I accept the logic of their argument. The Finance Bill contains the enabling provision to implement this decision.
140. I propose to withdraw the exemption from customs duty on a few items and impose on them a nominal duty of 5%.
141. I have already promised that our customs tariff would be brought down to East Asian levels. I will like to move progressively within three years to reduce the number of rates to the minimum with a peak rate of 20%. The modalities for this will be worked out in time for the next budget.
142. Sir, a number of steps are also being taken for greater procedural and administrative efficiency.
143. A new Manual of Procedures and Instructions on Central Excise and Customs would be brought out by 1, September 2001. The emphasis would be on simplicity, brevity and transparency. I also propose to simplify the central excise rules to make them user friendly.
144. My proposals on the excise side are estimated to result in a revenue gain of Rs 4677 crore in a year. On the customs side my proposals are estimated to result in a revenue loss of Rs 2128 crore. I estimate that the indirect tax revenue next year would be Rs 1,40,992 crore.
145. 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.
146. In Direct Taxes, my thrust during the last three years has been on providing stability of tax rates, widening the tax base, rationalizing and simplifying the tax laws and giving impetus to economic growth. These efforts have resulted in increasing the direct tax revenue from Rs 46,428 crore in 1998-99 to an estimated Rs 74,467 crore this year. In addition, the number of assessees has increased significantly from a little over one crore in March 1998 to 2.3 crore at the beginning of this year. I, therefore, propose to continue with the same rates this year also. Co-operative Societies, however, will henceforth pay 30% tax instead of 35%.
147. While imposing the surcharge of 10 % on corporates and non-corporates in my budget of 1999-2000, I had promised that this would be a temporary levy. However, I was constrained to increase the surcharge on non-corporate tax payers at the higher income levels to 15% due to the unexpected expenditure burden of Kargil. During the course of this financial year I had further levied a surchage of 1% on corporates towards the National Calamity Contingency Fund and an additional 2% on all tax payers for the Gujarat Earthquake relief. I now propose to remove all surcharges payable by corporates and non-corporates except the surcharge of 2 % for relief to quake hit areas of Gujarat. Individuals having an income of up to Rs 60,000/- will not be subject to this surcharge.
148. As a welfare measure, Sir, I propose to allow 100% deduction for donations to the National Trust for welfare of persons with autism, cerebral palsy, mental retardation and multiple disabilities.
149. Hon’ble Members are aware that the modified one-by-six scheme, which I introduced in the Finance Act, 1998 to identify potential income-tax assessees and to bring them into the tax net, has paid rich dividends. I, therefore, propose to extend the one-by-six scheme to all urban areas in the country as defined by the 1991 Census. Changes arising out of the 2001 census will be incorporated subsequently.
150. Certain companies are not filing their returns of income, presumably on the plea that they are not having any taxable income. These companies go out of fiscal discipline and their financial transactions during the initial years escape scrutiny. I therefore, propose that all companies should file their returns even if they incur a loss.
151. Sir, another effective measure of widening the tax base is to further enlarge the scope of deduction of tax at source. Income tax at source will henceforth be deductible at the rate of 10 % on income by way of commission or brokerage exceeding Rs 2,500/-, except on transactions relating to shares and securities.
152. Winnings from lotteries, crossword puzzles etc. are currently taxed at 40%. As the marginal personal income tax rates have now stabilized at 30%, this income will also now be taxed at 30%. Television game shows are very popular these days. I wish the winners well. At the same time, I propose that income tax at the rate of 30% will be deducted at source from the winnings of these and all similar game shows.
153. At present, tax is deducted at source on income from interest on time deposits only if such income exceeds Rs 10,000/- in respect of deposits with a Bank or Housing Finance Company and Rs 5,000/- in other cases. These threshold limits have led to the erosion of tax base and under-reporting of taxable income due to splitting up of deposits. I, therefore, propose to lower this limit to Rs 2,500/- in all cases.
154. With economic liberalization, the pay package of salaried class is undergoing many changes. It is being divided into various components and the forms of perquisites and benefits or amenities provided by the employers are assuming new dimensions. To align our tax system with the present structure of pay packages, I propose that the value of perquisites, benefits or amenities shall be determined on the basis of their cost to the employer, except in respect of houses and cars where different criteria will be adopted for simplicity.
155. Sir, I also propose to provide relief to salaried persons in the lower income range having income up to rupees one lakh. Such persons will get an enhanced tax rebate at the rate of 30% in respect of their eligible investments under section 88 of the Income Tax Act, as against 20% at present.
156. In the case of Export Oriented Units, and units located in Export Processing Zones, Free Trade Zones and Software Technology Parks 25% of their sales in the domestic market are currently tax exempt. I propose to provide for the taxation of profits from these domestic sales of such units.
157. I.T. Sector continues to do well and should be encouraged to do better. I, therefore, propose that profits derived by the units located in the software technology parks from the export of "on-site" services will be eligible for deduction like their other export income. Units located outside these zones will also get the benefit of tax exemption on such export earnings. I further propose that the condition relating to transfer of ownership of companies in sections 10A and 10B of the Income-tax Act shall not apply in respect of companies in which public are substantially interested.
158. The income of NABARD, National Housing Bank and Small Industries Development Bank of India (SIDBI) was exempted from tax in order to provide fiscal support in the initial years of their functioning. Now these institutions have come of age and are working on commercial lines. I, therefore, propose to withdraw the tax exemption available to these institutions.
159. The interest payable on certain External Commercial Borrowings (ECBs) is currently exempt from tax. Having regard to the fact that interest received by the lender is taxable in the country of his residence and he would get a credit for any tax paid by him in India, any exemption from tax liability in the host country does not benefit the lender but only results in reducing our tax revenues. I, therefore, propose that the tax exemption in respect of interest paid on such External Commercial Borrowings will not be available for such borrowings made on or after the first day of June 2001.
160. Certain interest income up to a limit of Rs 12,000 is deductible at present under section 80L. In addition, income from Government securities is also deductible up to Rs 3,000. I propose to reduce the maximum limit of this deduction to Rs 9,000.
161. The tax payable on the distribution of dividends of domestic companies and income in respect of Units of Mutual Funds and UTI was increased from 10% to 20% last year. To provide a stimulus to the growth of capital market, I propose to reduce this tax to 10%.
162. To help revive investor-interest in primary issues I propose to exempt long-term capital gains arising from the sale of securities and Units if such gains are reinvested in primary issues of shares of public companies.
163. Sir, the tax incentives in the form of tax holidays for infrastructure facilities are proposed to be further rationalized and enlarged. For the core sectors of infrastructure namely, roads, highways, rail system, water treatment and supply, irrigation, sanitation and solid waste management systems, I now propose a ten-year tax holiday which may be availed of during the initial twenty years. In the case of airports, ports, inland ports and waterways, industrial parks and generation and distribution of power, which also become commercially viable only in the long run, a tax holiday of ten years is being proposed to be availed of during the initial fifteen years. The period of commencement of business for power and industrial parks is also being extended up to 31, March 2006.
164. The five-year tax holiday and 30 % deduction for next five years was available to the telecommunications sector till 31, March 2000. I propose to reintroduce this concession retrospectively for the units commencing their operations on or before 31, March 2003. These concessions will also be extended to internet service providers and broadband networks.
165. Sir, in addition to the tax holiday proposed for development of infrastructure, tax incentives have also been provided for the investors providing long-term finance or investing in the equity capital of the enterprises engaged in infrastructure facility. Any income by way of interest, dividends or long-term capital gains from such investments is fully exempt. I propose to extend this concession to guarantee commissions and credit enhancement fees earned by financial institutions from infrastructure enterprises. Co-operative Banks will also be eligible for exemption of their income from investments in approved infrastructure facilities.
166. To be globally competitive, our companies need to increase their investment and expenditure for Research and Development. Currently, a weighted deduction of 150% of the expenditure on in-house research and development in certain areas is allowed to companies. Sir, I propose to extend this weighted deduction to biotechnology as well for clinical trials, filing patents and obtaining regulatory approvals. I also propose that the entire amount paid to specified projects under the India Millennium Mission, 2020 will be eligible for 125 % weighted deduction.
167. To encourage development of industrial infrastructure, I had provided 100% deduction of export profits for a period of ten years to units operating in the Special Economic Zones last year. I now propose to give further tax incentives for the development of these zones. The concessions available for infrastructure by way of a 10-year tax holiday will be available to the developers of Special Economic Zones on the same lines as developers of industrial parks. The income of investors making long term investment for the development of SEZs will also be exempt.
168. The storage of food grains and their transportation are our major concern. Sir, I propose to provide a tax holiday for five years and 30% deduction of profits for the next five years to the enterprises engaged in the integrated business of handling, transportation and storage of food-grains.
169. Sir, for promoting the industry that provides the cup that cheers, I propose to increase the development allowance available for tea from 20% to 40%. This additional allowance will be used only for re-plantation, rejuvenation, and modernization of tea plantations and processing facilities.
170 There has been a long-standing demand from the Shipping Industry that the rate of depreciation available in respect of ships and inland water vessels may be increased. I propose to increase this rate of depreciation to 25%.
171. To encourage investments in weaving, processing and garment sectors of the textile industry, I propose to allow accelerated depreciation at the rate of 50% on plants and machinery purchased under the Technology Up-gradation Fund Scheme.
172. In order to give a boost to the commercial vehicles sector presently facing recession, I propose to allow accelerated depreciation at the rate of 50% on new commercial vehicles for one year.
173. Each of my past three budgets has provided for increasing tax incentives for the housing sector. Sir, continuing with this practice, I propose to further increase the maximum amount of deduction available for interest payable on housing loans for self-occupied houses from rupees one lakh to rupees one and a half lakhs.
174. For persons having income from house property, the present deduction of 25 % of annual value for repairs etc. is proposed to be enhanced to 30%. However, there will be no further deductions, except for the expenditure incurred by way of interest payment on housing loans.
175. I propose to extend the tax incentives allowed by way of deduction or rebate on payments of LIC premium to all insurance companies that have been approved by the Insurance Regulatory and Development Authority
176. The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern. I had set up an Expert Group in November 1999 to examine the issues relating to transfer pricing. Their report has been received, proposing a detailed structure for transfer pricing legislation. Necessary legislative changes are being made in the Finance Bill based on these recommendations.
177. The foreign telecasting channels will henceforth be taxed in India, on their income computed in accordance with the provisions of the Income-tax Act.
178. Sir, I propose to bring about a number of measures that will be friendly to the taxpayer. The time limits for issue of refunds, reassessment and reopening of assessments by the Income-tax Department are proposed to be reduced. The Department will also no longer have power to withhold the refund due to an assessee. Similarly, there will be no requirement to obtain a Tax Clearance Certificate under section 230A from the Assessing Officer before transfer of immovable property. I also propose to remove the discretion presently available in deciding the quantum of penalties. Henceforth, a fixed amount of penalty will be leviable for most of the defaults.
179. Certain educational and medical institutions are required to be approved for claiming tax exemption. At present, these institutions have to file their application for approval to the Central Board of Direct Taxes. Sir, I propose to delegate this power to Chief Commissioners of Income-tax.
180. To sum up, Sir, my proposals made in this Budget on the Direct Taxes will result in a revenue loss of Rs 5,500 crore, which I propose to make up with tax buoyancy and increased voluntary compliance. I estimate that the direct tax revenue in 2001-2002 would be Rs 84,800 crore.
181. Mr. Speaker, Sir, with these proposals I estimate total tax revenue receipts for the Centre at Rs 163031 crore and the fiscal deficit at Rs 116314 crore or 4.7% of GDP. I could have managed a lesser fiscal deficit but that would have been possible only at the cost of growth, which was unacceptable.
182. This is a budget for carrying forward the second generation of economic reforms. This is a budget for growth. This is a budget for equity with efficiency. This is a budget for a new deal to the people of India in the new millennium.
183. Mr. Speaker, Sir, with these words, I commend the budget to this august house.