Budget Speech
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X. TAX REFORM, REVISED ESTIMATES AND BUDGET ESTIMATES
130. I now come to taxes, tax reforms, and the book-keeping of the
current year, as also 2003-04. Mr. Speaker, I want to emphasise six important aspects in
this regard. First, the coming year will be historic with the States switching over to a
Value Added Tax (VAT). The Central Government has been a partner with the States, in the
highest tradition of cooperative federalism, in this path-breaking reform. This will also
involve an amendment to the Additional Excise Duty Act. Second, it is proposed to make
2003-04 the year when a long-overdue Constitutional amendment to integrate services into
the tax net in a comprehensive manner is enacted and implemented. This will give a boost
to revenues, and help implement VAT. Third, there will be major improvements in tax
administration through greater application of IT, and a discretion-free, impersonal
system. Fourth, excise duties are being rationalised further. Fifth, the momentum of
reducing customs duty is being maintained so as to improve the competitiveness of Indian
industry in international markets. And, sixth, Government shall continue to strive towards
fiscal consolidation through expenditure reprioritisation, and revenue augmentation.
State-level Value Added Tax (VAT)
131. The Conference of State Chief Ministers, presided over by the
Prime Minister, held on October 18, 2002 confirmed the final decision that all States and
Union Territories would introduce VAT from April 2003. The Empowered Committee of State
Finance Ministers, on February 8, 2003, has again endorsed the suggestion that all State
legislations on VAT should have a minimum set of common features. Apart from avoiding
cascading of taxes, the introduction of VAT is expected to increase revenues as the
coverage expands to value addition at all stages of sale in the production and
distribution chain. However, in view of the apprehensions expressed by a large number of
States, about possible revenue loss, in the initial years of introduction of VAT, the
Central Government has agreed to compensate 100 per cent of the loss in the first year, 75
per cent of the loss in second year and 50 per cent of the loss in the third year of the
introduction of VAT; this loss being computed on the basis of an agreed formula.
132. The Government of India considers the introduction of VAT, at the
State level, to be a historic reform of our domestic trade tax system, It will assist the
States to transit successfully from the erstwhile sales tax system to a modern domestic
system, at present in use in over 120 countries.
Additional excise duty (AED) in lieu of sales tax
133. While continuing to give States the additional 1.5 per cent of all
shareable taxes and duties, in order to enable them to generate more revenues, the
Additional Duties of Excise (Goods of Special Importance) Act, 1957 is being amended, from
a date to be notified. This will allow the States to levy sales tax on textiles, sugar and
tobacco products at a rate not exceeding 4 per cent. This will also enable the States to
integrate these three important products in the VAT chain.
Service tax: a proposed Constitutional amendment
134. To enable levy of tax on services as a specific and important
source of revenue, an amendment to the Constitution is proposed. This Constitutional
amendment, and the consequent legislation would give the Central Government the power to
levy the tax and both the Central and the State Governments sufficient powers to collect
the proceeds.
Central Sales Tax
135. With the introduction of VAT, there is need to now phase out the
CST, and move to a completely destination-based system. This can not be done in one step.
We must let VAT stabilize; but also recognize that these two – VAT and CST –
cannot remain in tandem, in perpetuity. Therefore, in the first instance, the ceiling rate
of CST for inter-State sale between registered dealers will be reduced to 2 per cent
during 2003-04, with effect from a date to be notified. The Government of India will
compensate the States for loss of revenue from this reduction of the CST. This will be
done, as all these steps have been undertaken, only after arriving at a consensus with the
Empowered Committee of State Finance Ministers.
136. I do wish to place on record my high appreciation of the
cooperation that I have received from this Committee. Without that, I simply could not
have reached here.
Task Forces
137. As the Hon’ble Members are aware, in September 2002, three
Task Forces were set up: one each on Direct and Indirect Taxes, and the third on Corporate
Governance.
138. These were chaired respectively by Dr. Vijay Kelkar and Shri
Naresh Chandra. The former also issued preliminary proposals in November, in the form of
consultative papers for public comment. After evaluating all these comments, final reports
were given in December, 2002.
139. Public response to these Task Forces and their Reports has been
overwhelming. This is a tribute to the excellent work done by Dr. Kelkar and Shri Naresh
Chandra and their selfless and dedicated teams.
140. By opening up the budget-making process, the Kelkar Committee
Reports have more than fulfilled my basic purpose of involving, as far as practical, our
citizens, in the annual budgetary exercise. I have personally benefited very greatly from
these Reports, as also from this open debate. I take this opportunity to express my
sincere gratitude to the two Chairmen and all members of the Task Forces, as also members
of the public for their valuable comments and suggestions.
141. With regard to the Naresh Chandra Committee Report, corporate
governance is high on the Government’s agenda. There will be a set of regulations
that does not inhibit managerial initiative while instituting a mechanism for early
detection of frauds and their prevention. For this purpose, a Serious Frauds Office has
already been set up.
142. Now, let me deal with the two reports on taxation. The Ministry
has analysed them fully.
143. The basic philosophy of these reports is sound. For a modern,
forward-looking and in the long run, revenue-beneficial taxation system the proposals that
have been mooted may be the most appropriate. There is need to, eventually, move away from
an exemption and discretion based system to a different, more current order. That is the
ideal that the Task Forces, particularly in respect of direct taxes have suggested; a
radically new approach to taxation.
144. This ideal is difficult to achieve in one leap, and I can scarcely
cross the existing conceptual chasm in two. We cannot ignore the commitments made, or wish
them away. That is why I choose to bridge the divide. We will, therefore, stay with the
basics of the present system of taxation, but we will, indeed have already accepted, most
of the suggestions made by the Task Forces designed to eliminate procedural complexities,
reduce paper work, simplify tax administration and to enhance efficiency, also integrate
such tax proposals as the system can, at present, absorb, with one overriding thought: Mr.
Speaker, Sir, this will be a move away from a suspicion-ridden, harassment generating,
coercion-inclined regime to a trust-based, ‘green channel’ system. I do this
entirely on the basis of my faith in my countrymen and women.
145. I now come to the tax proposals proper. What I describe below are
the major changes proposed, not every detail of change, apart from those already described
in the portion dealing with specific sectors. Details are contained in the Finance Bill
and the relevant notifications, which will be laid on the Table of the House in due
course. Moreover, as the Hon’ble Members are aware, Budget Day restrictions in
respect of clearance of goods have been revoked to allow economic activity to continue
without any hindrance.
Direct taxes Rates
146. Rates of income tax, both corporate and non-corporate, have
remained largely stable since 1997. As stability and continuity are commended as virtues
in tax regimes, I intend to be virtuous. Corporate tax structure will, therefore, be left
as it is; except that the 5 per cent surcharge, levied last year in connection with the
security of India, will be halved in the case of corporate assessees, firms, foreign
companies, cooperatives, and local authorities. In the case of individuals, Hindu
Undivided Families (HUF), and Association of Persons etc., this surcharge will be removed
entirely, except in the case of those earning an income above Rs.8.5 lakhs. From them,
that is those earning above Rs.8.5 lakh, I will collect a 10 per cent surcharge on the
tax, which works out to less than 3 paise out of an income of a rupee. But, I have
provided some relief to them, as well, for example, in standard deduction.
Standard deduction
147. There are more salaried taxpayers at income levels of Rs.2 lakh
and above than the non-salaried. I do often wonder, why? That is why the salaried always
complain, saying they do not have – that cliché phrase – a level playing field;
I agree, they do suffer a more exacting regime. Therefore, as already announced, their
standard deductions are raised.
148. Individual taxpayers having income from dividends, interest, etc.
are given a general deduction of Rs.9,000. As promised by me earlier, this deduction has
now been increased to Rs.12,000. An additional deduction of Rs.3,000 is allowable in
respect of interest from Government securities. Thus, the total deduction available under
Section 80L will be Rs.15,000. Though dividend will not be taxable in the hands of the
recipient from next year, I propose to retain this deduction at Rs.15,000 for next year
also.
Tax deduction at source
149. A lot of unintended difficulties are caused by certain provisions
dealing with tax deductible at source (TDS); much too tedious to elaborate here. I want to
correct this. Therefore, in simple terms, it is now provided that individuals and HUF
carrying on business or profession need not deduct tax at source, from payments made by
them for personal purposes.
Not ordinarily resident
150. There is a category of taxpayers in India ordinarily not found
elsewhere – the ‘not ordinarily resident’. They do not normally have to pay
tax on their foreign sourced income. There has been confusion on this provision in the
past due to differing legal interpretations. To set matters at rest, the relevant
definition has been suitably amended so that the benefit will now be available to persons
for two years in case they remain non-residents for the last nine out of 10 years.
Administrative reform
151. In the area of tax administration, Government has initiated a
whole basket of reforms, mainly on the basis of the recommendations of the Kelkar
Committee. Some of the principal ones are:
outsourcing of non-core activities of Income Tax Department, namely
allotment of PAN, and creation of data bank of high value transactions through tax
information network;
immediate abolition of present discretion-based system for selection
of returns for scrutiny; this will be replaced by a computer generated, intelligent,
random selection of only 2 per cent of the returns, annually;
expanding the scope of taxpayer services, including extension of
interactive voice response system to more cities and software for preparation of returns;
direct crediting of all refunds to the bank account of the taxpayer,
through electronic clearance system; but obviously only if the taxpayer furnishes a bank
account number;
reduce the compliance cost of the taxpayer, through halving the
number of forms presently used in furnishing of applications, returns, etc., for the
purposes of tax deduction and tax collection at source, from the present 42 to just 22.
Hon’ble Members, if in only one attempt I could halve this headache, please reflect
upon the immense possibilities that lie on this route;
immediate introduction of a one-page only return form for individual
tax payers, having income from salary, house property and interest, etc. This has already
been devised, and will come into operation from April 1 onwards;
the Income Tax Act is being amended to enable electronic filing of
returns;
abolition of tax-clearance certificates currently needed by a person
leaving India, or any person submitting a tender for a government contract. Henceforth,
only expatriates who come to India in connection with business, profession or employment,
would have to furnish a guarantee from their employer, etc. in respect of the tax payable
before they leave India. An Indian citizen, before leaving India, will only have to give
his/her permanent account number, and the period of his/her intended visit abroad to the
emigration authorities; and
simplifying the procedure and methods employed during search and
seizure, and during survey by the Income Tax department. First, hereafter, stocks found
during the course of a search and seizure operation will not be seized under any
circumstances. Second, no confession shall be obtained during such search and seizure
operations. Third, no survey operation will be authorized by an officer below the rank of
Joint Commissioner of Income Tax. Finally, books of account impounded during survey will
not be retained beyond ten days, without the prior approval of the Chief Commissioner.
152. These, Hon’ble Members, are only a few steps on this long
road called simplification and rationalisation of taxation. It is not for nothing that
even Albert Einstein had ruefully observed that he found ‘Income Tax the most
difficult thing upon Earth to understand’.
153. Mr. Speaker, please sympathize with me. I endeavour to make easy
that which Einstein found so difficult.
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