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Return to Main Page of Budget 2005-2006

Indian Budget 2005-06
Full Text of P. Chidambaram, Minister of Finance, Budget Speech(Feb 28, 2005)


Institutions of Excellence

92. On January 6, 2005, the Prime Minister spoke about his intention to set up a Knowledge Commission to look into the issue of building quality human capital. Government believes that investments in institutions of higher education and Research and Development organizations are as important as investments in physical capital and physical infrastructure. What we need are world class universities, and we must make a beginning with one institution. We must have a university that will be ranked alongside Oxford and Cambridge or Harvard and Stanford. I am happy to inform the House that we have selected the Indian Institute of Science (IISc), Bangalore, which enjoys a high reputation as a centre of excellence in research and development. We shall work to make IISc, in a few years, a world class university. I propose to provide an additional sum of Rs.100 crore as a grant for this purpose.


93. In a remarkable display of the spirit of cooperative federalism, the States are poised to undertake the most important tax reform ever attempted in this country. All States have agreed to introduce the value added tax (VAT) with effect from April 1, 2005. VAT is a modern, simple and transparent tax system that will replace the existing sales tax and eliminate the cascading effect of sales tax. It is in force in more than 130 countries ranging from Sri Lanka to China. India too has a VAT at the Central level (CENVAT), but only for goods.

94. In the medium to long term, it is my goal that the entire production–distribution chain should be covered by a national VAT, or even better, a goods and services tax, encompassing both the Centre and the States.

95. The Empowered Committee of State Finance Ministers, with the solid support of the Chief Ministers, has laboured through the last 7 years to arrive at a framework acceptable to all States. The Central Government has promised its full support and has also agreed to compensate the States, according to an agreed formula, in the event of any revenue loss. I take this opportunity to pay tribute to the Empowered Committee, and wish the States success on the introduction and implementation of VAT.

Twelfth Finance Commission

96. On February 26, 2005 I laid before Parliament the recommendations made by the Twelfth Finance Commission (TFC). TFC’s recommendations cover tax devolution, grants to States, debt relief, financing of relief expenditure and related matters. States stand to gain considerably by the award.

97. However, the implementation of the TFC recommendations will put a large burden on Central finances through the period 2005-10, and especially in the first year, 2005-06, when the change to the new pattern will take place. Consolidation and rescheduling of Central loans, reduction in the interest rate and specific grants under different heads will affect both capital and revenue receipts of the Central Government. The total impact on the Central budget for 2005-06 will be approximately Rs.26,000 crore or an addition of three-quarters of a percentage point as a proportion of GDP. Needless to say, this will have an impact on Government’s capacity to abide by the Fiscal Responsibility and Budget Management Act (FRBM) in 2005-06.

Defence Expenditure

98. Last July, in order to catch up with the backlog of expenditure that had not been provided for, I had increased the allocation for Defence to Rs.77,000 crore. I am happy to inform the House that, after a gap, defence expenditure in 2004-05 has matched the Budget Estimates. I propose to increase the allocation for Defence in 2005-06 to Rs.83,000 crore, which will include an allocation of Rs.34,375 crore for capital expenditure.

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