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Finance Minister Yashwant Sinha's Budget Speech

BUDGET 2000

Part 6

Service tax is emerging as an area of promise as well as problems. Many experts advise me that the best way to deal with this tax is to make it applicable to all services in one go. However, some others have suggested basic changes in the very structure of the service tax. I have decided not to make any changes for the present. I am setting up an Expert Group to go into all aspects of the matter, review the experience so far, and give me its considered advice.

My proposals on the excise side are estimated to result in revenue gain of Rs.3,252 crore in a year. On the customs side, my proposals are estimated to result in a revenue loss of Rs.1,428 crore. Copies of the notifications issued to give effect to the changes in excise and customs duties shall be laid on the Table of the House in due course.

Direct taxes

I now turn to my Direct Tax proposals

Mr. Speaker, Sir, my edifice of Direct Tax proposals rests on four pillars of stability, economic growth, rationalisation and simplification

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.

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.

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.

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.

Despite the financial constraints, I would like to propose some positive measures on personal taxation. Despite the financial constraints, I would like to propose some positive measures on personal taxation.

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.

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.

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.

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: (i) No approval of Venture Capital Funds by tax authorities would be required. (ii) The principle of "pass through" would be applied in tax treatment of Venture Capital Funds, whose income would be free of tax, except when not distributed within the period that may be prescribed in the guidelines of SEBI. Income in the hands of its investors, which would otherwise be taxable, would also be kept tax free, and there would only be a one-time payment of tax by the Venture Capital Fund at the rate of 20%, when the Fund distributes its income to the investors. The same rate would apply to undistributed incomes also.

I hope these incentives will facilitate the coming together of Saraswati (i.e. knowledge) and Laxmi (i.e. wealth) to bless entrepreneurs and investors 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.

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).

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.

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.

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.

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.

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.

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".

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.

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.

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.

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.

Continued

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