|Speech of Shri
Finance Minister, Government of India
27th February, 1999
Direct Taxes - Part 1
85. Mr. Speaker, Sir, I now turn to the proposals on the direct tax side.
86. With growing liberalisation of the economy has come the need for industrial restructuring so that companies can focus better on their core activities. The corporate sector has been voicing the need for a flexible fiscal policy for regulating business re-organisations. In response to this need, I propose a comprehensive set of amendments to the Income Tax Act to make such business re-organisations fully tax neutral. In the case of amalgamation of companies, the existing requirement of routing the proposal through Board of Industrial and Financial Reconstruction is being removed. The legal provision is proposed to be amended so that the eligibility for tax concessions is only contingent upon a minimum of 75% of the fixed assets of the amalgamating company being absorbed in the amalgamated company, and subject to the condition that the amalgamated company will continue the business of the amalgamating company for a minimum of 5 years. An enabling provision will be provided through the amendment of the Income-Tax Act, for the detailed guidelines to be issued subsequently under the powers available from the statutory provision.
87. In the case of de-mergers, I propose to introduce a legal provision so as to permit the carry forward of accumulated losses and unabsorbed depreciation from the de-merging company to the resultant company. I also propose to amend the legal provisions so that, neither the companies involved, nor the shareholders, are subject to capital gains tax as a result of the transactions. Further, it is proposed that all fiscal concessions will survive for the unexpired period in the case of amalgamation and de-mergers
88. Mr. Speaker, Sir, Government has been greatly concerned about the persisting sluggishness in the capital markets. Government is also distressed to note the negative perception of some sections of the investing public in regard to the schemes operated by the Unit Trust of India. Based on the recommendations of the Committee headed by Shri Deepak Parekh, and also taking into account a large number of suggestions offered by various experts in the field, I now propose a substantial fiscal package to restore the confidence of the shareholders in the UTI, and more generally to invigorate the capital markets.
89. First, I propose to fully exempt from income tax all income from UTI and other Mutual Funds received in the hands of the investors. This will not only reduce the incidence of tax, but will eliminate the inconvenience faced by small investors in paying tax and claiming refund in connection with income derived from such investments.
90. Presently if the income in the hands of the investors is fully exempt from tax, this income is subjected to dividend tax under Section 115 (O) of the Income Tax Act, at the stage of distribution of the dividend by UTI or mutual funds. As a departure from the policy, and as the second element of the package, I propose to continue for 3 years the exemption for US-64, Scheme as also for all open-ended equity-oriented schemes of UTI and mutual funds - with more than 50% investment in equity - from dividend tax. However, income distributed by Mutual Funds, where the equity investment is less than 50%, will become subject to the 10% dividend tax.
91. As a result of these two tax initiatives, investments in UTI and other Mutual Funds will become much more attractive and equity-oriented schemes will be relatively more attractive than schemes where equity investment is less than 50%. This should encourage the return of small investor to the capital market and revive confidence.
92. A complaint has often been voiced that there is discrimination between the rate of long-term capital gains tax on transfer of shares and securities as between residents and non-residents. The current rate of long-term capital gains tax for resident Indians is 20% linked to a notional value of capital gains, computed with reference to a Cost of Inflation Index. However, the rate of long-term capital gains tax for non residents is only 10%. In response to this complaint, I now propose to amend the law so as to cap the long-term capital gains tax for resident Indians on transfer of shares and securities, at the 10% rate.
93. In some of the sunrise sectors of the economy, the management is adopting a policy of offering stock options and Sweat Equity, to their employees. The tax implications of such transactions are somewhat ambiguous. Therefore, I propose in this budget to make certain amendments in the law, to put it beyond doubt that such stock options will be taxed as a perquisite at the time of exercise of the option by the employee, and later as capital gains at the time of sale of the security. These amendments, I expect, will remove the grey areas which exist in the current law relating to such transactions.
94. For boosting high-tech sectors and supporting first generation entrepreneurs, there is an acute need for higher investment in venture capital activities. Very recently we have relaxed the guidelines under the existing scheme by removing the requirement for time-bound investment and minimum lock-in-period of funds. I am also harmonising the guidelines for registration of venture capital activity with the Central Board of Direct Taxes, with those for registration with the Security and Exchange Board of India. This will ensure uniformity in norms for registration with both the organisations. I am confident that these initiatives will increase the attractiveness of the Venture Capital Scheme and induce high net-worth investors to commit their funds to the sunrise sectors, particularly, the Information Technology Sector.
95. Very recently, the Companies Act, 1956 has been amended to permit transactions relating to buy- back of shares. There is some ambiguity in the interpretation of the law as to whether such transactions would be treated as subject to dividend tax in addition to capital gains tax. In view of this, I propose to amend the law to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to dividend tax, and would only be liable to capital gains tax.
96. Mr. Speaker, Sir, I wish to now turn to another area of special focus in this budget, namely the Housing Sector. In regard to this sector, I propose a comprehensive package of fiscal incentives focussed at:
97. As the first element of this package, I propose that the interest on a loan for a self-occupied property be exempted from tax up to a ceiling of Rs.75,000, increased from the current ceiling of Rs.30,000. This concession will encourage middle class investors to take loans to purchase modest dwelling units of their own.
98. The second element of this incentive package relates to the scheme for housing projects for enjoying a tax holiday under Section 80IA of the Income Tax Act. The existing provision, inter-alia, requires that the built -up area of dwelling units should not exceed 1000 sq. feet. There have been many representations that in towns other than Mumbai and Delhi, the land cost is relatively less, and therefore, for the same capital expenditure investors can afford to purchase dwelling units of slightly larger areas. In view of this, it has been represented that the ceiling on built -up areas for dwelling units in approved projects be increased from 1000 sq. ft to 1500 sq. ft at all locations except Mumbai and Delhi. I propose to accept this suggestion and make suitable modifications in the law. This amendment in the scheme for treating housing projects as infrastructure will, I believe, also give a significant fillip to construction activities in the smaller towns.
99. For the construction activity to pick up any significant degree of momentum, it has to be ensured that housing finance companies stay financially viable. Currently, such housing finance companies are subject to tax on interest on loans, on accrual basis. In order to lessen the burden on such housing finance companies, I propose to amend the law so that the income of such companies will be taxable on actual basis, rather than accrual basis.
100. A significant number of individuals seeking accommodation in the major cities are the employees of the business sector. I feel that it is necessary to encourage the business sector to invest in housing for their employees so as to add to the net housing stock. In this spirit, I propose to increase the depreciation rate from 20% to 40% on new dwelling units purchased by the business sector for its employees.
101. This entire package of fiscal incentives for the housing construction sector will, I believe, be a powerful force for revival of the entire economy. The construction sector has very strong linkages with several other major sectors, notably steel and cement. A general upsurge in construction activities will not only increase the corpus of housing stock in the country, but will give a substantial fillip to industrial activity.
102. Apprehensions have been expressed in certain quarters regarding the incidence of a high level of Non Performing Assets (NPAs) in some of the banks. I am of the view that the banks should make every effort to clean up their books and to remove any misgivings, which may exist about the transparency of the accounts. To assist in this direction, Mr. Speaker, Sir, I propose to make tax deductible such amounts as are provided by banks as doubtful debts subject to a maximum of 5% of the such aggregate doubtful debts, in any one year. This concession will be available for a period of 5 years for such doubtful debts as are identified under the prudential norms prescribed by the Reserve Bank of India.