129. I now turn to my Direct Tax proposals.
130. Mr. Speaker, Sir, my edifice of Direct Tax proposals rests on four pillars of stability, economic growth, rationalisation and simplification.
131. Our existing rates of personal taxation at 10%, 20% and 30% are only three in number and quite moderate. Although the basic exemption limit is Rs.50,000, the real exemption limit goes much higher when the other exemptions and deductions are taken into account. For example, salaried persons start paying tax only on crossing Rs.75,000 per year because of the standard deduction. If the tax rebates and deductions available for savings are taken into account, the effective limit of exemption gets close to Rs.1 lakh. Thus I feel that the present rates of taxation as well as the exemption limit are reasonable. I, therefore, propose to maintain them at the same levels.
132. Although the 10% surcharge imposed last year was meant to be temporary, I am constrained to continue with it, in view of the heavy and unexpected expenditure burden, mainly on account of defence requirements and transfer to states mandated by the Finance Commission.
133. Having restrained myself from imposing any additional taxes during the course of the year when there was much talk of a Kargil tax, I now propose increasing the surcharge moderately from 10% to 15% on non-corporate tax payers having total taxable income above Rs.1,50,000 per year. This will slightly increase their marginal rate from 33% to 34.5%. I trust that these relatively better-off sections of society would bear this additional burden cheerfully.
134. Lest it is felt that I am being discriminatory in not increasing the surcharge on corporates, let me clarify that they would also get their opportunity to contribute to the national effort in other ways a little later.
135. Despite the financial constraints, I would like to propose some positive measures on personal taxation.
136. As an expression of our gratitude to the contribution made by senior citizens during their active years and taking into account the possible hardships that they face in the advanced years of their life, I propose to raise the tax rebate available to them from Rs.10,000 to Rs.15,000. At the marginal tax rate of 30%, this translates into an exemption of an additional Rs.15,000 from their gross income, or substitutes the need to save an additional Rs.25,000 to avail of a similar exemption under section 88.
137. I have always maintained that despite all challenges, my job as Finance Minister in making a budget is easier than that of an average house-wife struggling to balance the family budget. As a token of appreciation and recognition of women as productive contributors to the economy, I propose an additional rebate of Rs.5,000 for women tax-payers from their tax liability. This would be subject to the overall ceiling of Rs.15,000 if they also happen to be senior citizens.
138. With a view to acknowledging the services rendered by the members of defence forces and in token of our gratitude for their exceptional courage and valour, I had provided exemption from tax for the pension and family pension of gallantry award winners of these services. I now propose to extend similar benefits to gallantry award winners of para military forces and other forces engaged in national and civil defence.
139. I now turn to the role of taxation as a facilitator of economic growth. Knowledge-based industries are fast emerging as the front-runners of the Indian economy. To accelerate their growth, and encourage investment in them as mentioned in Part A of my speech, I propose to introduce a new regime for venture capital funds. The highlights of this would be:
140. I hope these incentives will facilitate the coming together of Saraswati (i.e. knowledge) and Laxmi (i.e. wealth) to bless entrepreneurs and investors.
141. Various tax benefits are already available for the infrastructure sector. I propose to extend these benefits to two additional and essential sectors of urban infrastructure, viz. water treatment and solid waste management. I also propose to include investments in public companies providing long term finance for urban infrastructure as approved investments for charitable trusts. This will enable more investment in projects for development of urban infrastructure.
142. To provide a more focussed incentive for infrastructure development, I propose to delete the existing provisions 54EA and 54EB and replace them with a new provision, whereby tax exemption from capital gains would be available only if investment is made in bonds to be issued by National Bank for Agriculture and Rural Development (NABARD) and the National Highways Authority of India (NHAI). These bonds will have a lock-in period of five years and their proceeds will be used for providing finance to the agricultural sector and for the National Highway Development Project (NHDP).
143. I propose to continue the thrust given to the housing sector last year and extend the benefits already available for two more years, i.e. for houses or projects which are completed by 31st March 2003. I hope this will sustain and accelerate house construction activity.
144. To supplement the package of incentives of this sector, I also propose that the 20% rebate of tax under section 88 of the Income-tax Act would now be available for repayment of housing loans up to Rs. 20,000 per year as against Rs.10,000 earlier.
145. Presently, the exemption from tax on long-term capital gains is not available if the capital gain from transfer of capital assets is invested in a house, if one house is already owned. I am removing this restriction. Even if they own one house, taxpayers can make an investment in a new house and claim exemption from capital gains tax on sale of capital assets.
146. Last year I had provided for 100% exemption on export profits to the entertainment industry. However, this benefit was limited to corporate entities only. I propose to extend the benefits available to corporates to non-corporate assessees as well with effect from Financial Year 1999-2000. This will remove the perceived discrimination to the non-corporate film makers, but I do hope that this industry will move towards corporatisation and modernization rapidly which is possible without in any way curbing individual creativity.
147. To address a long-standing demand of the entertainment industry and with a view to streamlining the procedures, I also propose to increase the limit of reporting of payments made by a film producer, during production of a film, to the tax authorities to Rs.50, 000 from the present level of Rs.25,000.
148. I hope these concessions combined with what I have already done on the indirect tax side, will reassure the entertainment industry that "Hum Saath Saath Hain".
149. Shipping provides the transportation sinews to our international trade, and has a strategic relevance also. To enable the Indian Shipping Industry, which is facing serious challenges, to generate resources for strengthening and modernising its fleet, I propose to allow deduction of their entire profits, against 50% as at present, if these are kept in a reserve to be used for purchase of new ships. This 100% deduction would be available for five years beginning from the next year.
150. Investment in human resources is an essential precursor for sustainable economic development. To enable meritorious students, especially those from not so affluent backgrounds, to avail of opportunities for higher education, I propose to increase the maximum amount of repayment of loan for higher education from Rs.25,000 to Rs.40,000 as an allowable deduction. This would translate into loan amounts exceeding Rs. 3 lakhs, which would help such students to defray the increasing cost of higher education, especially in management and professional courses.
151. Availability of vocational training can go a long way in mitigating the problem of unemployment. It can also bridge the paradoxical mismatch between wide spread unemployment on the one hand and a shortage of properly trained manpower on the other. In order to remedy the situation I propose to allow 100% deduction of payments made for the establishment and running of institutions for vocational education and training by the private sector in rural areas and small towns.
152. Barring some significant but scattered achievements, we are not a major force in the international sports arena. Like many other activities, modern sports and athletics need money and infrastructure for their development. While some sports have access to abundant funding, most others suffer for want of adequate support. To rectify this situation, I propose that 100% deduction would be available for donations made by corporate entities to the Indian Olympic Association for the development of infrastructure and for the sponsorship of games and sports. I hope that with this concession, IOC would be better equipped to promote sports in the country.
153. Last year, my proposals on corporate restructuring were widely welcomed by Indian industry. However, there have been persistent demands to clarify and rationalise some of the provisions. I, therefore, propose to remove ambiguities in this regard by making suitable changes in the provisions of the Income- tax Act. I also propose that resulting companies as a consequence of splitting of statutory bodies like SEBs will enjoy the benefits of demerger if they fulfil the conditions notified by the Central Government.
154. Last year, I had dispensed with the condition of continuity of the same business for carry forward and set off of loss. I propose to liberalise the provisions relating to carry forward and set off of unabsorbed depreciation on the same lines. The condition of continuity of same business will be dispensed with and unabsorbed depreciation may be carried forward and set-off even if the same business is not continued.
155. To give greater restructuring flexibility and freedom to the corporates, including PSUs, I propose to make the conditions for tax exemption of voluntary retirement benefits of employees more liberal and to simplify the procedure for tax exemption of benefits given to employees of Public companies and Co-operative Societies. It will not be necessary any longer to obtain the approval of the tax authorities for their voluntary retirement schemes if these are formulated in accordance with the prescribed guidelines.
156. The various exemptions currently available while calculating Minimum Alternate Tax (MAT) and the credit system has undermined the efficacy of the existing provision and has also led to legal complications. To address these issues, I propose that the Minimum Alternate Tax be now levied at the revised rate of 7.5% of the "book profits" as determined under the Companies Act instead of the existing effective rate of 10.5%. However, this will now be uniformly applied barring one exception that I will mention later. There will also be no credit for Minimum Alternate Tax paid. This should bring all zero tax companies within the tax-net, which is also the basic purpose of this tax. The new system has the virtue of a lowered rate of tax, a simple method of computation, and an equitable spread.
157. To promote industrialization in less developed areas, I propose to extend the tax holiday available for new units set up in industrially backward States and industrially backward Districts for another two years. Similarly, I also propose to extend the existing tax benefit for new Small Scale industrial units for another two years, i.e., till 31st March, 2002.
158. To strengthen our capital market, I propose to provide 100% exemption to the income of Investor Protection Funds of Stock Exchanges to give them incentives for setting up of such funds.
159. At present, no tax is payable in the hands of shareholders on the dividend income received from a domestic company, only the company pays additional income-tax at the rate of 10% on the amount of dividends distributed by them. The large gap in the tax treatment of dividend income and interest income has been widely criticized. To reduce this anomaly, I propose to increase the rate of tax on dividends distributed by domestic companies from 10% to 20%. I would clarify that dividend income in the hands of share holders will continue to remain tax free.
160. In a similar vein, to reduce the distortions arising out of the differing tax treatment for interest incomes from mutual funds and other instruments, like bank deposits and corporate deposits, I propose to increase the rate of tax on income distributed by debt oriented Mutual Funds and UTI from 10% to 20%. However, I would like to clarify that the income distributed under the US-64 and other open-ended equity oriented schemes of UTI and Mutual Funds will continue to be exempt from this tax, as at present.
161. Currently, banks and financial institutions pay an interest tax of 2%, which adds to their cost. To remove this impediment to financial transactions, I propose to abolish this tax. This is a significant measure which will benefit the financial sector, and consequently the depositors and users of the products and services of the banks and financial institutions.
162. The life insurance sector is now opened up and would no longer remain a public sector monopoly. It is currently taxed at a special rate which is likely to need a revision in the altered scenario. I would like to undertake such revision on the basis of expert advice and in the light of international practice. I propose to constitute an Expert Committee for this purpose and I hope to bring necessary amendments based on its recommendations during the course of the year.
163. One of the major initiatives towards better tax compliance has been the introduction of the one-by-six scheme. This, along with other measures, has contributed substantially to increasing the number of tax-payers, which had languished at the level of just over a crore till 1996-1997, but has now crossed the two crore mark, with the biggest boost coming over the last two years. The momentum generated by this and other measures to widen the tax base needs to be sustained. I, therefore, propose to extend the one-by-six scheme from the existing 54 cities to an additional 79 cities in the country. With this, all the cities having a population of two lakh and more on the basis of the 1991 Census would stand covered.
164. In keeping with international practice, it is proposed to promote a common Business Identification Number to be used by different agencies and departments. In our context, the Permanent Account Number of income-tax would be that instrument. To begin with, the CBEC and DGFT will use PAN for their assessees, importers and exporters. I hope that in near future, the PAN card will replace the ration card as the primary identification document for a sizeable number of people.
165. With a view to intensifying the drive for PAN allotment, I propose to open special counters in all cities where the one-by-six scheme will be in operation (including 79 cities where the scheme is being extended) to issue PAN cards to the taxpayers within 30 days of their filing the application. This facility will become operational with effect from the 1st of July, 2000.
166. A large number of farmhouses have come up in the vicinity of metropolitan and big cities. Many of these generate commercial income from being hired out for residential accommodation and for holding functions and events. No tax is paid on this income, which is mis-declared as agricultural. This blatant and visible misuse of an exemption originally intended only for genuine farmers cannot be condoned or allowed to continue. I, therefore, propose to make suitable changes in the law to ensure that the income from farmhouse from anything other than genuine agricultural operations will be brought in the tax net.
167. It is my earnest desire to make the system of tax collection as user friendly and efficient as possible. The tax payer should be able to pay taxes with speed, convenience and dignity. With this in view, I propose to expand and revamp the presently available facilities of tax collection to provide that taxpayers would be able to pay their tax in any branch of nationalised banks where they maintain an account. This facility would be available in all towns and cities covered under the one-by-six scheme with effect from 1st August, 2000. For operational reasons, this facility would initially be offered in computerised branches only, but would be expanded continuously.
168. I also propose to further streamline the system of refunds. While the present practice of sending the refund cheques to the tax payers under advice to their banks would continue, the Tax Department would also offer the facility of issuing refunds directly on the bank accounts of assessees if the tax payers so desire. For operational reasons, this facility would also initially be started from computerised branches of banks, with continuous expansion as the banks get progressively computerised.
169. With almost every sector of the economy expecting a special treatment, our Income-tax Act has become a vast compilation of exemptions. Income is income and should be taxed. There should be no permanent exemptions. With this in view, I want to make a beginning towards rationalising the existing system of concessions and exemptions. Export earnings of various kinds presently enjoy exemptions from income-tax ranging from 50% to 100% of income. I have, therefore, decided to phase out these concessions over a period of five years. To begin with, I am withdrawing these concessions by 20% from the financial year 2000-2001, and by 20% each subsequent year till they reach a zero level. I would add that exporters would continue to enjoy exemption from MAT till the full phase out. The revenues garnered from this rationalization measure will help to finance universalization of primary education and other investments in human resources.
170. My rationalisation measures also include the following:
171. To sum up, Mr. Speaker, Sir, as a result of various proposals made in this budget on the direct taxes, the estimated revenue in 2000-2001 would be Rs.72,105 crore, including the component of additional resource mobilisation of Rs.5,080 crore.
172. Mr. Speaker, Sir, with these proposals I estimate total tax revenue receipts for the Centre at Rs.1,46,209 crore and the fiscal deficit at Rs.1,11,275 crore or 5.1% of GDP. I could have sought a deeper cut in the fiscal deficit, but a substantially higher level of revenue mobilization would have hurt the industrial recovery under way at present. Thus, in the short-run, I had to carefully balance the need for fiscal consolidation with the need to nurture the recovery phase of a growth cycle. I hope this august House will support the balance I have struck in this budget.
173. Growth is not just an end in itself. It is the critical vehicle for increasing employment and raising the living standards of our people, especially of the poorest. Sustained, broad-based growth, combined with all our programmes for accelerating rural development, building roads, promoting housing, boosting knowledge-based industries and enhancing the quality of human resources, will impart a strong impetus to employment expansion. There can be no better cure for the problem of poverty than this in our country.
174. Sir, the millenium has heralded the arrival of the Indian economy on the global stage. In two short years, we have shown that Indian talent and Indian effort is second to none. In two short years we have ensured that "made in India" is a compliment for any product or service. In two short years we have sent notice to the world that India will be an economic superpower in the 21st century. The worlds eyes are now upon us, and we will deliver.
175. Mr. Speaker, Sir, with these words, I commend the budget to this august House.