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Finance Minister Yashwant Sinha's Budget Speech

BUDGET 2000

Part 7

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.

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.

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.

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.

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.

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.

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.

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.

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 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.

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.

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. 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.

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.

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.

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.

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.

• My rationalisation measures also include the following:
• Trusts running educational institutions and hospitals will not be denied exemption even if their trustees avail medical and educational facilities from them. Such benefit alone will be taxed.
• Investments made in public sector companies will continue to be eligible investments for trusts, for a certain period after the disinvestment by the Government even after these companies stop being public sector companies.
• Interest for delayed payment of dividend tax and tax on distributed profits by mutual funds and UTI will be reduced from 2% per month to 1.5% per month.
• Exemption of allowances received by employees will be raised in conformity with the recommendations of the Fifth Pay Commission.
• Limit of gross receipts for compulsory maintenance of books by professionals will be enhanced from Rs.60,000 to Rs.1,50,000.
• Advisory limit for disposal of departmental appeals by Appellate Tribunal will be provided for in law.

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.

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.

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.

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 world's eyes are now upon us, and we will deliver.

Mr. Speaker, Sir, with these words, I commend the budget to this august House.

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