Budget Speech
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VIII. INDUSTRY
87. As Hon’ble Members know, in the current year so far, industry
has stimulated overall growth, despite a decline in agriculture. We must, therefore,
consolidate these gains and build on the robust industrial growth demonstrated in the last
few quarters.
Promoting investment: tax treatment of dividends and capital gains
88. For this, we need to promote investment in the industrial sector,
and improve the debt and equity markets. Mr. Speaker, I am also committed to bringing the
small investors back to the equity markets by restoring their confidence.
Dividend distribution tax
89. From April 1, 2003, it is proposed that dividends be tax free in
the hands of the shareholders. Correspondingly, there will be a 12.5 per cent dividend
distribution tax on domestic companies. While mutual funds, including UTI-II, renamed UTI
Mutual Fund, will also pay dividend distribution tax, it is proposed to exempt equity
oriented schemes from the purview of the tax for one year. UTI-I, however, will be exempt
from the dividend distribution tax.
Long-term capital gains tax
90. In order to give a further fillip to the capital markets, it is now
proposed to exempt all listed equities that are acquired on or after March 1, 2003, and
sold after the lapse of a year, or more, from the incidence of capital gains tax. Long
term capital gains tax will, therefore, not hereafter apply to such transactions. This
proposal should facilitate investment in equities. I will, however, reexamine the effects
of this exemption in the next Budget, and the Scheme will be in force until then.
Stock markets
91. My predecessor had already announced that stock exchanges will have
a corporate structure. To enable this, necessary amendments to the Securities Control and
Regulation Act will be proposed in the current session. With a view to enhancing investor
confidence, it is necessary to separate the ownership of these stock exchanges from their
management; resulting in demutualisation. In the process of corporatisation or
demutualisation, it is possible that capital gains accrue. Therefore, as a one time
measure, at the time of corporatisation or demutualisation of the stock exchanges, in
accordance with a scheme approved by the SEBI, should gains arise, then the consequential
transactions shall be fully exempt from capital gains tax.
Research and development
92. Hon’ble members, as I have already said, knowledge is
industry; and this is particularly so when our imperative is to be the best, in all
aspects in general, but particularly in product design and quality. To encourage R&D,
it is proposed to extend the tax holiday to R&D companies established up to March 31,
2004.
Textiles
93. In industry, textiles is the largest employment provider in the
country. It also contributes substantially to our exports. The main thrust of my proposals
for the textile sector, therefore, is to have a moderate rate structure; to complete the
CENVAT chain to promote compliance; to encourage modernisation; and, to eliminate evasion.
Keeping these objectives in view, as a package of incentives, the following measures are
proposed:
- reduce excise duty on polyester filament yarn from 32 per cent to 24 per cent;
- reduce excise duty on all spun and other filament yarns from 16 per cent to 12 per cent;
- retain the 8 per cent excise duty rate for pure cotton yarn only;
- reduce excise duty on all knitted cotton fabrics and garments from 12 per cent to 8 per
cent;
- reduce excise duty on all woven fabrics and other knitted fabrics from 12 per cent to 10
per cent;
- reduce excise duty on garments from 12 per cent to 10 per cent;
- withdraw exemption for all knitted and unprocessed woven fabrics;
- remove the scheme of deemed credit so as to complete the CENVAT chain;
- retain exemption for hand processed fabrics but only if no power or steam is used in any
process;
- continue the existing exemptions for handloom fabrics, silk, khadi and polyvastra; and
- reduce the basic customs duty on paraxylene from 10 per cent to 5 per cent.
94. The procedure for the decentralized sector will be simplified so as
to exempt job workers from maintaining any central excise records or even from central
excise registration. Garments and fabrics manufactured by non-profit charitable
institutions will, however, be exempt from excise duty.
95. As for customs, the duty on apparel grade raw wool shall now be
reduced from 15 per cent to 5 per cent. Further, to encourage modernisation of the textile
industry, it is proposed that the customs duty on a large number of textile machinery and
their parts be reduced from the existing 25 per cent to just 5 per cent.
96. Simultaneously, it is necessary to give a helping hand to the
power-looms. For this decentralized sector, it is proposed to strengthen the existing
programme for Induction of Technology in the Weaving Sector further by offering a
‘Power-loom Package for Modernisation’. This package will have the following
three features.
97. First, the Technology Up-gradation Fund Scheme will be enlarged to
cover modernisation of power-looms.
98. Second, to create a better working environment and obtain higher
productivity, a new Power-loom Workshed Scheme will be introduced by the Ministry of
Textiles together with the State Governments. Improvement of other infrastructure of
existing power-loom clusters will be taken up under the revised Textile Sector
Infrastructure Development Scheme.
99. Third, as a welfare measure, all powerloom workers will be covered
under the Special Insurance Scheme, which will provide them insurance cover against death,
accident and disability.
100. Recognising the need to prevent sickness in the textile industry,
Government is considering a mechanism for restructuring the debt portfolios of viable and
potentially viable textile units. The details will be decided in consultation with all the
stake holders.
Pharmaceuticals
101. All the benefits listed under health-care will also promote
pharmaceutical industry. Besides, income tax concessions to pharmaceuticals,
bio-technology and information technology are at par. All drugs and materials imported or
produced domestically for clinical trials will be exempt from customs and excise duties.
Customs duty on import of Reference Standards by the industry has been reduced from 25 per
cent to 5 per cent.
Information technology (IT)
102. IT is India’s showpiece success story. We have to not just
maintain its momentum of growth, but continuously encourage it. Therefore, it is proposed
that the concessions extended to IT under Sections 10A and 10B of the Income Tax Act will
continue as originally envisaged. As per law such companies as are currently covered by
these tax exemptions lose the benefits upon change in their ownership or shareholding.
This is not logical. I am, therefore, removing these restrictions; the benefit of such tax
exemptions will remain even in the case of amalgamation or de-merger.
103. Another anomaly is levy of excise duty on pre-loaded software in
the case of computers. As software is already exempt from excise duty, I see no reason why
this benefit should be denied simply because it gets loaded in a computer. From now, the
value of pre-loaded software will be excluded for the purpose of charging excise duty on
computers.
104. Customs duty on specified electronic components for IT industry is
being reduced in conformity with our WTO commitment.
105. In addition, customs duty on a number of capital goods used by the
telecom and IT sector for manufacture of components will be reduced from 25 per cent to 15
per cent. For optical fibre cables, used widely for networking to provide bandwidth to the
IT community, the customs duty is also being reduced from 25 per cent to 20 per cent. To
help the domestic industry to manufacture e-glass roving used for making optical fibres,
it is proposed to reduce the import duty on specified raw materials for the manufacture of
e-glass roving from 30 per cent to 15 per cent.
106. Telecom and domestic satellite service companies enjoy the benefit
of tax holiday. Since it takes quite some time for such projects to materialize, I propose
to extend the deadline of setting up the units by one more year to March 31, 2004.
Bio-technology
107. Biotech is our today’s sunrise, tomorrow’s showpiece
industry. The Government, to facilitate units engaged in R&D in bio-technology and the
pharmaceuticals sector, has decided to remove the existing restriction of minimum export
obligation of Rs.20 crore for availing exemption from customs duty for specified
equipments. Further, the restriction of full exemption being limited to only 1 per cent of
last year’s export turnover is also lifted for R&D units. Moreover, in respect of
R&D units with manufacturing facilities, the benefit of full customs duty exemption
for specified equipment will also be available for their manufacturing activity to the
extent of 25 per cent of the previous year’s export turnover.
108. So far as benefits under direct taxes are concerned, biotech
enjoys the same tax incentives as the IT or pharmaceuticals industry.
Tourism
109. Tourism, in addition to generating incomes, is amongst the most
effective employment creating sectors. To provide a set of incentives to this industry,
the following proposals will be implemented:
- withdraw the expenditure tax;
- extend the benefit of Section 10(23G) to financial institutions that advance long-term
capital to hotels in three-star and above categories;
- the benefit of set-off of unabsorbed loss and depreciation on amalgamation will
henceforth be available to hotels under Section 72A of the Income Tax Act;
- continue the exemption for the hotel industry from the levy of service tax; and
- reduce basic customs duty on imported equipment for ropeway projects to 5 per cent
without payment of CVD and SAD.
110. It is our hope and expectation that the States, on their part,
will now give a commensurate boost to the tourism sector by abolishing the luxury tax that
they charge.
Gems and jewellery
111. Traditionally, India has always excelled in the field of diamond
and gem cutting, polishing and in the craft of gold smithy. With a view to nurturing this
industry, it is proposed to reduce the customs duty on rough, coloured gem stones from 5
per cent, and on semi-processed, half-cut or broken diamonds from 15 per cent to nil.
Customs duty on cut and polished diamonds and gem stones will also be reduced from the
present 15 per cent to 5 per cent.
112. As for gold, it is proposed to reduce the customs duty on imported
gold to Rs.100 per 10 grams from the present level of Rs.250 per 10 grams, but only when
it is brought in the form of serially numbered bars, or in the form of gold coins, not as
‘tola’ bars, please. It is my hope and expectation that this will become the
first step in enabling India to shortly emerge as the gold-trading capital of the world.
113. The gems and jewellery industry has also been quite apprehensive
about withdrawal of benefits under Sections 10A and 10B of the Income Tax Act. I would
like to assure them that no such step is contemplated. Keeping in view the substantial
value addition that takes place in the case of cutting and polishing of diamonds and gems,
it is also proposed to extend the benefits under Sections 10A and 10B of the Income Tax
Act to these activities.
Strengthening ECGC
114. Export Credit Guarantee Corporation of India Ltd. (ECGC) has been
playing a crucial role by providing credit insurance cover for exports from the country.
There is great potential for project exports from India with our exporters winning bids
against intense international competition. In order to enable ECGC to provide adequate
underwriting support to such projects, the Government has decided to increase its share
capital to Rs.80 crore.
Small-scale industry (SSI)
115. A vibrant small-scale industry, contributing to both industrial
and export growth, is critical for sustained growth in income and employment.
Mr. Speaker, as I have already said, the full benefits of the declining
rates of interest have percolated neither to agriculture, nor to small-scale industry. The
recent announcement by the State Bank of India and the decision by the Indian Bank
Association about an interest rate band of 2 per cent above and below PLR for secured
advances will help the SSI sector in obtaining bank finance at moderate rates of interest.
In addition, benefits and entitlements available to this sector shall be placed on the
Ministry’s website, for ready reference.
116. Accessing the global market with consumer goods of quality, at
competitive prices, produced in both large- and small-scale establishments operating under
flexible conditions, is the goal that we need to target. Members will recall that last
year, Government had announced the dereservation of over 50 items. After consultations
with stakeholders in respect of certain other items in the reserved list, it is now
proposed to withdraw SSI reservation from another 75 items of laboratory chemicals and
reagents, leather and leather products, plastic products, chemicals and chemicals products
and paper products. The Minister of Small Scale Industries will announce the details of
these items separately. To help further investment in the SSI sector, Government will
examine the question of a limited partnership act.
Promoting India: India Development Initiative
117. An initiative to promote India as both a production centre and an
investment destination, called ‘India Development Initiative’, shall be
established in the Ministry of Finance, with an allocation of Rs.200 crore for 2003-04.
This initiative will also leverage and promote our strategic economic interests abroad.
Disinvestment
118. Disinvestment receipts for the current year are estimated at
Rs.3360 crore. I am confident that the pace of disinvestment will accelerate in the coming
year. I wish to also state that details about the already announced Disinvestment Fund and
Asset Management Company, to hold residual shares post disinvestment, shall be finalized
early in 2003-04. Mr. Speaker, Sir, disinvestment is not merely for mobilizing revenues
for the Government, it is mainly for unlocking the productive potential of these
undertakings, and for reorienting the Government, away from business and towards the
business of governance.
IX. OTHER REFORMS
Banking
119. Foreign direct investment (FDI) in the banking companies in India
is presently capped at 49 per cent from all sources under the automatic route. For
facilitating the setting up of subsidiaries by foreign banks, as well as for inviting
investment in private banks, this limit will be raised to at least 74 per cent.
120. The voting rights of any person holding shares of a banking
company are restricted to 10 per cent irrespective of his/her shareholding. The Banking
Regulation Act, 1949 will be amended to remove this limitation.
121. I now also extend the benefit of Sec. 72A of Income Tax Act to
nationalized banks. Any banking company can now merge with a nationalized bank with
consequential tax benefit.
122. As the Hon’ble Members know, the Government is determined to
contain the problem of non-performing assets (NPA) and ensure a credit market that
functions efficiently. Following the Budget announcement last year, the Credit Information
Bureau has already been established. It is proposed to provide the necessary legislative
support to this Bureau.
Interest rate
123. High rates of interest, in a low inflation regime, clearly act as
disincentive to investment. It is, therefore, important that administered interest rates
on public provident fund and other small saving schemes be adjusted in line with the
market rates. Accordingly, rates of interest on public provident fund, and small savings
schemes, etc. will be reduced by one percentage point with effect from March 1. Interest
on relief and savings bonds will also be reset accordingly. Hon’ble Members may,
however, note that the real returns – adjusted for inflation – offered on these
instruments are still a remunerative 6.3 per cent per year; higher than what they were
between 1991-92 and 1995-96.
Capital account
124. Over the last few months, Government has taken a number of steps
to ease restrictions on capital account mobility. After careful assessment,
I would like to announce the following additional steps:
- To enable diversification, overseas investment under the automatic route will be
permitted to corporates with a proven track record, even where the investment is not in
the same core activity. Further, the current restriction, limiting such investment to 50
per cent of the net worth of the Indian company, will now be raised to 100 per cent.
- Prepayment of ECB dues under the automatic route will be permitted by removing the
current ceiling of US $100 million.
125. The Government is already considering a major review of sectoral
limits for investments by Foreign Institutional Investors. In order to facilitate their
easy entry into the stock markets, the process of their registration will be further
streamlined. Several steps have recently been taken to ease flows of Capital. There will
be more initiatives in this regard.
External aid
126. Mr. Speaker, Sir, a stage has come in our development where we
should now, firstly, review our dependence on external donors. Second, extend support to
the national efforts of other developing countries. And, thirdly, reexamine the line of
credit route of international assistance to others. Having carefully weighed all aspects,
I propose the following measures:
- While being grateful to all our development partners of the past, I wish to announce
that the Government of India would now prefer to provide relief to certain bilateral
partners, with smaller assistance packages, so that their resources can be transferred to
specified non-governmental organisations (NGO’s) in greater need of official
development assistance. The current agreed programmes will, however, continue and reach
their completion. Of course, there will be no more ‘tied aid’ any longer.
- Having fought against poverty, as a country and a people, we know the pain and the
challenge that this burden imposes. For the Heavily Indebted Poor Countries (HIPCs), owing
overdue payments of substantial sums to India, I am happy to announce that we will be
considering a debt relief package. This will be announced shortly in consultation with the
Ministry of External Affairs.
- I am also happy to announce that the Government proposes to generally discontinue the
practice of extending loans or credit lines to fellow developing countries. Instead, in
future, I propose to utilize the ‘India Development Initiative’, which I have
already announced, for providing grants or project assistance to developing countries in
Africa, South Asia and other parts of the developing world.
Reform and reorganisation of the Ministry of Finance
127. Responsibilities of the Department of Company Affairs, the Foreign
Promotion Investment Board (FIPB), and the regulation of the new Pension Funds Scheme have
recently been added to the Ministry of Finance. There is, therefore, need to reorganize
the Ministry, also to go back to the simpler and more direct name as the Ministry of
Finance. The Department of Company Affairs is now being absorbed as a Department –
and will sadly no longer stand shoulder to shoulder with Finance.
128. In the Ministry of Finance, the Department of Economic Affairs
will be restructured and have separate divisions dealing with economic policy; analysis:
international and national; capital markets; budget; banking; trade and aid concerns; and
infrastructure and coordination.
129. To remain better abreast of agriculture, an Expert Advisory
Council, to advise the Ministry of Finance, will be set up for agriculture.
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