Budget Speech - PART B
Direct Tax Proposals
- 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.
- I shall begin with my direct tax proposals.
- 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.
- 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.
- 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.
- 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
- 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
- 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.
- 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.
- 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.
- 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
- 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
- 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.
- 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.
- 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.
- 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 :-
- Export profits will be exempt from MAT and will
be eligible for full deduction under section 80HHC.
- A system of credit will be introduced in respect
of the payment of MAT. When a company pays MAT, the tax credit earned by it shall be allowed to
be carried forward for a period of 5 assessment
years and, in the assessment year when regular tax becomes payable, the difference between
the regular tax and tax computed under MAT for
that year will be set off against the MAT credit available.
Thus, at the proposed new rate of corporate tax, every company including the zero tax
companies, would have to pay income-tax of not less than
10.5 per cent on its book profits.
- 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
- 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.
- 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.
- I have already announced that Telecommunication
will qualify as an infrastructure. I, therefore, propose to extend
the following benefits to this sector :-
- Tax holiday under section 80 IA;
- Amortisation of licence fees; and
- Inclusion of investments made in debentures and
equity shares of a public company providing telecommunication services for the purposes of
tax rebate under section 88.
- 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.
- 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.
- 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.
- 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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