Tax Proposals-A

89. Sir, I now present my tax proposals.

90. There has been much talk of a tough budget. The temptation to raise taxes in the given situation was indeed great. But I recognise that direct tax policy must impart stability and confidence both to individuals and corporates. Therefore, any uncertainty in this regard must be ended. Tax rates introduced last year are moderate enough. I do not propose to introduce any changes in the rate structure either for individual or corporate taxes. I do hope that long-term stability in tax structure would create virtuous circles of increased productivity, voluntary compliance and enhance our tax widening efforts. In fact, I am going to announce a couple of concessions. Considering the difficulties experienced by the tax payers at the marginal level, the level for tax exemption is being raised from the existing limit of Rs.40,000 to Rs.50,000.

91. Salary earners having income upto Rs.1 lakh will be further pleased to know that I propose to raise the ceiling of standard deduction in their case from Rs.20,000 to Rs.25,000. Their pleasure, I hope, will be happily shared by those salary earners whose income is more than Rs.5 lakhs. They will henceforth not be entitled to this deduction. For salary earners having income between Rs.1 lakh and Rs.5 lakhs, no change is proposed in the existing position. I also propose to enhance the ceiling of tax-free reimbursement of medical expenses from Rs.10,000 to Rs.15,000.

92. In a country of our size, it is a matter of great anxiety that the total number of assessees constitutes less than 1.25% of our population. The scope for tax widening remains the single most formidable challenge in the area of direct taxes. It is well accepted tenet of taxation policy that moderate rates of taxes only make sense if the net is wide and the scope of evasion progressively minimised. Towards this objective, I propose to take some important initiatives. Last year, a scheme was introduced to cover 12 important cities where if you fulfil two of the four criteria, namely, possession of a house, subscription to a telephone, spending on foreign travel and possession of a motor vehicle, you would be obliged to file an income-tax return. This scheme had several lacunae which I propose to remove. In the first instance, the scheme is being extended now to cover 23 more cities in India taking the total coverage to 35 cities. The net itself is being enlarged to include two additional criteria, namely, holding a credit card and membership of expensive clubs, taking the total parameters to six. Finally, the matching of two out of four parameters apart from being an administratively onerous task provided an escape route to many potential assessees. I believe that if any one fulfils one of the six criteria, it would be reasonable to ask the individual to file his income-tax return. It could thereafter be determined whether he is liable for payment of taxes or not. This revised "One-by-Six", as the scheme would now be known, is a significant initiative in our tax widening efforts and it is my intention to raise the total number of individuals filing their income-tax returns by at least 50 percent during a full fiscal year.

93. Coupled with tax widening, tax evasion continues to be a serious handicap. While efforts at enforcement would be strengthened, I propose to undertake a new initiative in making it obligatory for assessees to quote their PAN or GIR number mandatorily in respect of certain high value transactions. These transactions would be :-

Purchase & Sale of immovable property

Purchase & Sale of motor vehicles

Transaction in shares exceeding Rs.50,000

Opening of new bank accounts

Fixed deposits of more than Rs.50,000

Applications for allotment of telephone connection

Payment to hotels exceeding Rs.25,000/-.

With increased usage of computerisation, this data will be fully utilised for increasing the tax-base and for preventing the leakage of revenue.

94. We must recognise that the cumbersome nature of our income tax forms coupled with complex procedures is a serious deterrent to an honest individual in becoming an assessee. I, therefore, propose to introduce, for the first time, a simple one page taxpayer-friendly return form to be hereinafter called, ‘SARAL’, applicable to all non-corporate taxpayers. SARAL can be filled up easily without the aid of Chartered Accountants or Tax Advisors. The ‘SARAL’, I hope, would become popular enough, through voluntary compliance and the assistance of NGOs, which I propose to muster, along with mobile vans for important cities, can be widely distributed and collected easily on spot. This will, apart from contributing to our tax widening effort, also make an important psychological difference in the mindset of potential tax assessees.

95. Litigation has been the bane of both direct and indirect taxes. A lot of energy of the Revenue Department is being frittered in pursuing large number of litigations pending at different levels for long periods of time. Considerable revenue also gets locked up in such disputes. Declogging the system will not only incentivise honest taxpayers, enable government to realise its reasonable dues much earlier but coupled with administrative measures, would also make the system more user-friendly. I, therefore, propose to introduce a new scheme called "SAMADHAN". The scheme would apply to both direct taxes and indirect taxes and offer waiver of interest, penalty and immunity from prosecution on payment of arrears of direct tax at the current rates. In respect of indirect tax, where in recent years the adjustment of rates has been very sharp, an abatement of 50 per cent of the duty would be available alongwith waiver of interest, penalty and immunity from prosecution.

96. Legal measures are also being proposed to limit and expedite litigation. These include enhanced scale of fees for filing appeals before the Appellate Commissioner and the Income Tax Appellate Tribunal, abolition of the level of Deputy Commissioner (Appeals), provision of direct appeals to High Courts to reduce delay, and also extension of the scope of the Authority for Advance Ruling to notified categories of resident tax payers.

97. Moderate rates and large concessions do not go hand in hand. I have, therefore, carried out a review of the various concessions and exemptions under the Income-tax Act. I find that many of them are no longer necessary and some of them are also being used for tax avoidance. I, therefore, propose to withdraw many of these provisions. These include exemption to the Export Import Bank of India and exemption in respect of certain perquisites of foreigners employed in India. The blanket exemption in respect of educational and medical institutions which is being misused, is proposed to be withdrawn, compelling such institutions to come under a discipline. However, safeguards are being provided to ensure that the institutions genuinely serving the social cause in either field do not lose the existing benefits.

98. I also propose to plug certain loopholes. Rule 5(a) of the First Schedule to the Income-tax Act relating to computation of profit of insurance business other than life insurance business is being amended to prevent leakage of revenue. Similarly, section 10(23G) of that Act is being recast to serve the objective of infrastructure financing without misuse of the concession. Under the existing provisions, there is no mechanism to ensure that the tax free funds raised by an infrastructure enterprise are actually used for infrastructure development within a reasonable time and are not used for any other purpose. I propose to provide such a mechanism.

99. Gift-tax has been levied in India since 1958. The revenue yield from this tax has been insignificant. Last year we collected barely Rs.9 crore. The Gift-tax Act has also not been successful as an instrument to curb tax evasion and avoidance. I, therefore, propose to discontinue the levy of gift- tax on gifts made after 30th September, 1998. At the same time, to ensure that there are no leakages of income-tax revenue through the mechanism of gifts, I propose to tax the gifts under the Income-tax Act itself in the hands of the recipients. However, the gifts from non-residents including NRIs through banking channels will continue to enjoy exemption as at present.

100. I have already said that housing is an area which requires our utmost attention. Therefore, I propose several incentives to encourage house-building activity. These include :-

Tax holiday for approved housing projects - 100 per cent deduction from profits for first five years and 30 per cent deduction for subsequent five years.

Increased deductions against income from house property - deduction for repairs and collection charges increased from 1/5th to 1/4th and deduction for interest on borrowed capital in case of self-occupied property increased from Rs.15,000 to Rs.30,000.

Carry-forward of losses from house property against future income under the same head to be allowed for 8 years.

Deduction equal to 50 per cent of the profits to companies engaged in housing projects aided by the World Bank.

Section 80GG in respect of deduction for rents paid is being reintroduced.

Exemptions to certain specified properties like commercial complexes under the Wealth-tax Act.

101. Other areas in the social sector for which new tax incentives are proposed or the existing ones being increased include employment generation, improvement of environment, upliftment of women, road safety, cooperatives and medical expenses of the handicapped.

102. I propose to allow a new deduction to companies with a view to encourage them to employ additional work force. An amount equal to 30 per cent of additional wages paid to the new workmen will be allowed as a deduction against profits, subject to certain conditions.

103. For improvement of environment, I propose to allow 100 percent deduction, subject to a ceiling of Rs.5 lakhs, to undertakings engaged in the collection or processing of biodegradable waste. I also propose to make activities which encourage the production of bacteria induced fertilisers eligible for 100 per cent deduction under section 35AC of the Income-tax Act. Necessary amendment in the rules will be notified for this purpose. Similar benefit is proposed to be extended to the activities of establishing and running of educational institutions, hospitals and medical facilities in rural areas exclusively for women and children and also creches and schools for the children of workers employed in factories or at project sites. I also propose similar amendment of rules to make activities which promote road safety and traffic awareness and prevent accidents eligible for 100 per cent deduction under section 35AC.

104. The promotion of sports and games in the country needs to be encouraged. I propose setting up of National Sports Fund and further propose that donations made to the Fund will be eligible for 100 per cent deduction.

105. I propose to extend 100% tax holiday granted to industrial undertakings located in any industrially backward State or district till the year 2000. I also propose similar extension of tax holiday to power sector upto the year 2003 and also to new refineries set up after 1st October, 1998. I also propose to extend infrastructure status to inland waterways and inland ports.

106. I further propose tax holiday benefits to radio paging services and services provided by satellite owners for telecommunication.

107. I also propose several measures in response to demands from business and industry. Certain categories of business reorganisations are proposed to be freed from any additional tax liability or loss of tax benefits keeping in view the necessity of such reorganisation consequent on economic liberalisation. No capital gain would be charged and the benefit of carry-forward of losses and unabsorbed depreciation would be allowed in case of specified reorganisations. Intangible assets are proposed to be allowed depreciation at the rate of 25 per cent. Provisions for amortisation of preliminary expenses are proposed to be liberalised. The period of amortisation is proposed to be reduced from 10 years to 5 years and the rate of deduction will consequently be doubled. Stock lending is proposed to be exempted from capital gains.

108. Delay in refund of excess tax collected tantamounts to denial of justice. It is a source of constant harassment, particularly of small tax payers. I intend to mitigate this difficulty by effecting an amendment in section 192 of the Income-tax Act which will enable adjustment of loss from house property against salary income, at the source itself. This, I believe, will eliminate a large number of refund claims.

109. In response to demands from tax payers, I propose to take further measures. Under the existing provisions of section 44AA of the Income-tax Act, every person carrying on business or profession is required to maintain account books, if his income from business exceeds Rs.40,000 or his total turnover exceeds Rs.5 lakhs. Considering the increased cost of engaging accountants, I propose to enhance these limits to Rs.1,20,000 and Rs.10 lakhs respectively. I further propose that the penalty leviable at the minimum rate of Rs.100 per day for failure to furnish certificates of tax deduction or collection at source under section 203 or to deliver copies of declarations under section 197A, shall not exceed the amount of tax deductible or collectible, as the case may be. Presently, there is no such ceiling on the quantum of penalty leviable which causes hardship, particularly to small businessmen.

110. Certain demands of the film industry have also engaged my attention and I propose to give relief to them. Under the existing rules, if a film is released on commercial basis at least 180 days before the end of the previous year, full amortisation of the cost incurred on production or acquisition of distribution rights of the film is allowed in the year of release itself whereas if the film is released later, full amortisation is not allowed in that year. Considering that nowadays film producers and distributors release a large number of prints simultaneously to counter the threat of video-pirates and cable television, resulting in shorter life span for exploitation of films, I propose to reduce the aforesaid period of 180 days to 90 days. This will enable the film industry to quickly recoup the cost of film production and distribution. I also propose that producers of films, who are required to furnish information in respect of all payments over Rs.5,000 to the Income-tax Department in any financial year would have to do so now only in respect of payments over Rs.25,000. I hope these measures would inspire the film industry to make better and healthier films.

111. A controversy has arisen recently regarding the deductibility of payments by way of extortion money. To set the controversy at rest, I propose to explicitly provide retrospectively since the inception of Income-tax Act, 1961 that any money paid by way of extortion will not qualify for deduction as a business expense. As further rationalisation measure, I propose to make certain amendments with regard to block assessment procedure and treatment of MODVAT credit in the valuation of inventories and capital assets.

112. The limit of room rent in hotels for the purpose of attracting expenditure tax is proposed to be increased from Rs.1200 to Rs.2000 per day.

113. Taxpayers all over the world have a sense of pride in discharging their legitimate dues to the government and the society recognises the important contribution they are making in enabling the State to discharge its responsibilities. In this country, regrettably, the culture of pride by honest taxpayer and a social recognition of his important role has yet to evolve. We must make a change in this mindset. Towards this objective, I propose to introduce a scheme called "SAMMAN" to demonstrate the society’s recognition of their important contribution to the national cause. The details of the facilities and recognition to be conferred on the taxpayers and PAN holders would be separately announced.

114. I hope the above measures alongwith SARAL, SAMMAN and SAMADHAN will go a long way in making our efforts to increase the tax payers compliance a success. But while we are doing what we can, I call upon the people of India to do their patriotic duty by the country and honestly pay their taxes.

115. Before I move on to indirect tax, I would like to state that a large number of suggestions were received from all sections of tax payers and I have got them carefully examined. It is not practicable to acknowledge all these communications individually. I do so now collectively and am extremely thankful to the tax payers for their valuable suggestions.

116. Hon’ble Members would see from the budget documents that the figure projected by way of revenue realisation from direct taxes is Rs.48,855 crore which is higher than the figure indicated in the interim budget. This is after taking into account the revenue loss of Rs.950 crore, worked out on a mechanical basis, arising out of certain proposals for reliefs and concessions placed before the House. We intend to make this loss up and collect the budgeted amount through improved collection of arrears, continuation of the tax base enlargement efforts, rigorous enforcement and tightening measures reflected in the budget proposals.