Government of IndiaMinistry of Finance Budget 97-98

Budget Speech - PART B

Direct Tax Proposals

  1. Let me preface my tax proposals by saying that I have set for myself the goal of augumenting the net tax revenues of the Central government by a healthy 15-16%; I believe that through the measures proposed by me we will attain this goal.

  2. I shall begin with my direct tax proposals.

  3. The CMP affirms that "the United Front government will continue with tax reforms and take other steps to augment revenues legitimately due to the government and to curb tax evasion." I believe that a good tax policy should aim at moderate rates, a wider tax base, simpler procedural rules and securing greater compliance. Households and the corporate sector are our best savers; we must reward them. From another point of view, however, the tax to GDP ratio for the Central government, which currently is only around 10.5 per cent, needs to increase to sustain the needs of public investment and social sector expenditure. Moreover, the proportion of direct taxes should increase in the total tax revenues of the government.

  4. It is inexplicable that in a country of over 900 million people, only 12 million people are assessed to income-tax and, what is worse, only about 12,000 assessees are in the tax bracket of income above Rs.10 lakhs. I intend to make a beginning in widening the tax net by an amendment of Section 139 of the Income-tax Act. My proposal is that residents of large metropolitan cities who satisfy any two of the following economic criteria, namely, ownership of a four-wheel vehicle, occupation of immovable property meeting certain prescribed criteria, ownership of a telephone and foreign travel in the previous year, should normally fall within the taxable slabs and should voluntarily file their tax returns. I appeal to them to cooperate in our endeavour. If anyone fails to do so, the Income-tax Department would serve upon him a notice obliging him to file his return so that taxes, if due from him, could be collected. Those who live in apparent comfort must have the satisfaction of finding their names in the records of the Income-tax Department.

  5. With the same objective, I also propose to introduce a new Estimated Income Scheme for retail traders. The scheme will apply to persons engaged in the business of retail trade of any goods or merchandise having a total turnover of less than Rs. 40 lakhs. A trader with a turnover of less than Rs. 8 lakhs will stand exempted, given the present exemption limit. The income of the trader will be estimated at 5 per cent of the total turnover. Assessees who file a return showing income less than 5% of turnover will be required to maintain books of account and get their accounts audited.

  6. With the aforesaid steps, the existing presumptive scheme under section 115K, popularly known as the Rs. 1400 scheme, which has not yielded the desired results, is being discontinued.

  7. Members may recall that, last July, I had reduced the income-tax rate for the first income slab from 20 per cent to 15 per cent. It was, I believe, a step in the right direction. If we look at comparative income-tax slabs in other developing Asian countries, it will be evident that tax rates in India are still high and constitute an important reason for tax evasion. It is now widely accepted that moderate rates of taxation encourage savings, foster growth and motivate voluntary compliance. I have received wise counsel from many Hon'ble Members. I have, therefore, decided to lower the rates of personal income-tax across-the-board in a significant manner. The current rates of 15, 30 and 40 per cent are being replaced by the new rates of 10, 20 and 30 per cent. The rate will be 10 per cent in the first slab of Rs.40,000 to Rs.60,000, 20 per cent in the slab of Rs.60,000 to Rs.150,000 and 30 per cent for all incomes above Rs.150,000.

  8. The new tax rates are so moderate that there is now little justification for increasing the exemption limit. However, salaried persons deserve some relief. I, therefore, propose to increase the limit of standard deduction to Rs.20,000, which will, henceforth, apply uniformly to all salaried taxpayers. An employee drawing a salary of Rs.75,000 per annum and contributing 10 per cent thereof to the provident fund would have to pay no tax at all.

  9. During the last meeting of the National Development Council, a suggestion was made that the government should think of a scheme to harness `black money' for productive purposes. I have balanced the economic and the ethical arguments. I have considered various options. And I believe that the time is opportune to introduce a Voluntary Disclosure Scheme. This would be a simple scheme where, irrespective of the year or the nature or the source of the funds, the amount disclosed, either as cash, securities or assets, whether held in India or abroad, would be charged at the revised highest rate of tax. Interest and penalty will be waived. Immunity would be granted from any action under the Income-tax, Wealth tax and the Foreign Exchange Regulation Acts. The date of commencement of the scheme will be notified separately, but the scheme will end on December 31, 1997. Of the total resources which can be secured under the Scheme, a substantial part - 77.5 per cent - will accrue to the State governments. I hope they will cooperate in our endeavour in attracting people to avail of this new opportunity being offered to those who have shied away from paying legitimate taxes in the past. The share which becomes available to the Central government will go entirely towards financing the Basic Minimum Services programme and infrastructure needs.

  10. I also propose to give some further relief to our senior citizens. I propose to increase the rate of rebate available to them to 100 per cent, from the existing 40 per cent, subject to a limit of Rs.10,000. Thus, a senior citizen having an income upto Rs.1 lakh would not have to pay any tax. Senior citizens with higher incomes will also enjoy this exemption limit but will be taxed above the threshold level of Rs.1 lakh.

  11. Responding to demands from Chief Ministers, I propose to amend section 80G of the Income-tax Act to provide for 100 per cent deduction in respect of donations made to the Chief Minister's Relief Fund or Lieutenant Governor's Relief Fund.

  12. Turning to corporate taxes, I had in my last budget reduced the rate of surcharge from 15 per cent to 7.5 per cent and had expressed the hope that I would take a similar step in my next budget. I propose to abolish the balance surcharge on companies.

  13. Corporates should be encouraged to undertake new investments. Hence, I propose to reduce the tax rate applicable to both domestic and foreign companies. The rate for domestic companies will now be 35 per cent and for foreign companies 48 per cent. The reduction in the corporate rates, apart from better compliance, should impart an added momentum to the growth process, create multiplier beneficial effects all around and also attract greater foreign investment.

  14. There has also been a demand from the corporate sector that the tax rate of 30 per cent on royalty and technical services fees payable to foreign companies is too high and acts as a hindrance to the transfer of technology. I, therefore, propose to reduce this rate to 20 per cent.

  15. I have received requests from non-resident Indians that the capital gains tax rate in their case arising on transfer of securities should be at par with the rate applicable in the case of FIIs. I see merit in their demand and, accordingly, propose that the rate be reduced from the existing 20 per cent to 10 per cent.

  16. The Minimum Alternate Tax (MAT) on companies, which was introduced last year, has been the subject of extensive debate. A large number of representations have been received to repealor reviewthe provisions. The economic rationale for MAT has, I am afraid, not been altered and I am unable to accept the request that the provision introduced last year be totally withdrawn. However, there is a case for a review of the manner in which the tax is charged and collected. I, therefore, propose to make the following changes in the provisions of MAT :-

  17. Another area of vigorous debate over many years relates to the issue of tax on dividends. I wish to end this debate. Hence, I propose to abolish tax on dividends in the hands of the shareholder.

  18. Some companies distribute exorbitant dividends. Ideally, they should retain the bulk of their profits and plough them into fresh investments. I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distributed profits at the moderate rate of 10 per cent on the amount so distributed. This tax shall be an incidence on the company and shall not be passed on to the shareholder.

  19. In order to encourage investments in government securities, called gilts, I propose to abolish Tax Deducted at Source (TDS) on such securities. I also propose to include gilts for the higher deduction limit of Rs.15,000 under section 80L of the Income-tax Act as is available in respect of income received from the units of UTI or approved mutual funds.

  20. I have already announced that Telecommunication will qualify as an infrastructure. I, therefore, propose to extend the following benefits to this sector :-

  21. In order to encourage the development of tourism infrastructure, I propose to give a deduction of 50 per cent of the profits in respect of new hotels which are located in a hilly area or a rural area or a place of pilgrimage or a specified place of tourist importance. These hotels will also be exempted from the levy of expenditure tax. In respect of hotels located in other places, excluding the four metropolitan cities, the deduction shall be only 30 per cent of the profits.

  22. Taxing financial intermediation goes contrary to the canons of sound public finance. Today, an interest-tax at the rate of 3 per cent is levied on the interest income of lending institutions, including banks and NBFCs. I propose to reduce the levy to 2 per cent and I hope to eliminate this levy progressively. This will help to keep down the cost of borrowing.

  23. As a measure of simplification, I propose to amend Section 37 of the Income-tax Act to provide for the removal of artificial disallowances on account of advertisement, travelling, hotel expenses, entertainment expenses etc. incurred for legitimate business purposes.

  24. I have also decided to eliminate a number of exemptions which continue to remain on the statute book and have since lost their relevance or rationale. These include exemptions and deductions under sections 10 (15A), 10 (26AA), 80GG and 80JJ.

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