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XII. TAX PROPOSALS
Indian Budget 2005-06
Full Text of P. Chidambaram, Minister of Finance, Budget Speech(Feb 28, 2005)
109. Mr. Speaker, Sir, I shall now present my tax proposals.
110. I had articulated the UPA Government’s principles and our approach to taxation in my Budget speech in July 2004, and, hence, there is no need to repeat them. While adhering to those principles, it is Government’s intention, as announced by the Prime Minister, to undertake major tax reforms to improve the tax to GDP ratio, expand the tax payer base, increase tax compliance and make tax administration more efficient.
Indirect Taxes
111. I shall begin with my proposals on indirect taxes. First, customs duties.
112. I intend to advance the Government’s declared policy of making the customs duty structure closer to that of our East Asian neighbours. Therefore, I propose to reduce the peak rate for non-agricultural products from 20 per cent to 15 per cent.
113. Consistent with the peak duty rate, I propose to bring down the customs duty rates on capital goods and raw materials as well as correct any inverted duty structures.
114. In order to promote investment, I propose to reduce the customs duties on selected capital goods and parts thereof to below 15 per cent, to 10 per cent in some cases and to 5 per cent in some others.
115. For most textile machinery, I propose to reduce the duty from 20 per cent to 10 per cent, in order to help the textile industry acquire a competitive edge in the post-quota regime. Similarly, to encourage the food processing industry, I propose to reduce the duty on refrigerated vans from 20 per cent to 10 per cent.
116. To give a leg-up to the leather and footwear industry, I propose to reduce the customs duties on seven specified machinery from 20 per cent to 5 per cent. The duty on ethyl vinyl acetate (EVA), an input for the footwear industry, is also proposed to be reduced from 20 per cent to 10 per cent.
117. Pharmaceuticals and biotechnology are sunrise sectors. I propose to reduce the customs duty on nine specified machinery used in these two sectors to 5 per cent.
118. I also propose to reduce the customs duties on specified parts of battery-operated road vehicles and for printing presses from 20 per cent to 10 per cent.
119. For primary and secondary metals, I propose to reduce the customs duties from 15 per cent to 10 per cent. Similarly, industrial raw materials such as catalysts, refractory raw materials, basic plastic materials, molasses and industrial ethyl alcohol, which are key inputs to manufacture, will now be liable to a reduced customs duty rate of 10 per cent. On lead, I propose to reduce the duty to 5 per cent.
120. Coking coal with high ash content attracts a duty of 15 per cent. I propose to bring the rate down to 5 per cent.
121. Keeping in mind the crucial need to encourage the textile sector, the customs duty rates on polyester and nylon chips, textile fibres, yarns and intermediates, fabrics, and garments are proposed to be reduced from 20 per cent to 15 per cent.
122. The electronics and telecom sectors merit special attention. On 217 Information Technology Agreement (ITA) bound items, the duty is required to be brought down to nil. Consequently, to provide a level-playing field to the domestic industry, I propose to remove the customs duty on specified capital goods and all inputs required for the manufacture of ITA bound items.
123. However, I intend to take the power to impose a countervailing duty (CVD) of 4 per cent on all imports to compensate for the State level taxes, in particular the forthcoming State level VAT that is proposed to be imposed on corresponding domestic goods. For the present, I propose to levy a CVD of 4 per cent only on the imports of ITA bound items and their inputs that attract nil duty. Credit for the CVD will be available against payment of excise duty. However, because we have a soft corner for these wares, IT software will be exempt from the proposed CVD.
124. I do not propose to make any changes in the customs duties applicable to agricultural goods. In fact, I have decided to increase the duty on cut flowers from 30 per cent to 60 per cent. However, at the request of the trade, and since there is little domestic production, I propose to reduce the duty rate on cloves to 35 per cent.
125. In order to encourage the import of technology to produce pure drinking water, I propose to reduce the import duty on atmospheric drinking water generators from 20 per cent to 5 per cent.
126. I have some proposals on the Excise side too. Government’s intention is to bring as many goods as possible to the CENVAT rate of 16 per cent. Today, 5 items attract 24 per cent. Out of the 5, I have picked out three — polyester filament yarn, tyres and air conditioners — and I propose to reduce the excise duty on these goods to 16 per cent. Manufacturers of motor cars and aerated drinks, the other two items, would have to wait for some more time.
127. Last year, I took a big step forward to prepare the textile industry to meet the challenges of the post-quota regime. I re-affirm that the CENVAT exemption route for natural fibres will remain in force. I now propose to give independent texturizers the option to avail of the exemption route or pay 8 per cent excise duty with CENVAT credit.
128. Imitation jewellery now attracts an excise duty of 16 per cent. Since they are products predominantly consumed by the less affluent sections, I propose to reduce the excise duty to 8 per cent. At the same time, expensive and premium jewellery is now manufactured and sold under alluring brand names. On such branded jewellery, I propose to levy an excise duty of 2 per cent. I may clarify that there is no levy on unbranded jewellery, including unbranded gold jewellery.
129. In order to remove certain distortions in the tax treatment of comparable products, I propose to levy an excise duty on mosaic tiles at 8 per cent and on road tractors for semi-trailers of engine capacity exceeding 1800 cc at 16 per cent. I may clarify that agricultural tractors will continue to remain exempt.
130. Some sectors deserve relief, since they produce goods for the common citizen. Today, there is a surcharge of Re.1 per kg on tea. I propose to abolish the surcharge. There is also an excise duty of Re.1 per kg on refined edible oils and Rs.1.25 per kg on vanaspati. I propose to abolish both levies and fully exempt the two items.
131. Even while protecting the handmade sector that makes matches, it is necessary to give some relief to the mechanized and semi-mechanized sectors. Hence, I propose to reduce the excise duty from 16 per cent to 12 per cent on matches made by these two sectors. Hand-made matches are fully exempt from excise duty and, therefore, will continue to enjoy adequate protection.
132. I would like to provide some tax relief to the small scale industry (SSI). Hence, I propose to raise the ceiling for SSI exemption based on turnover from the level of Rs.3 crore per year to Rs.4 crore per year. Further, SSI units will now have only two options: either full exemption on the first clearance of Rs.1 crore or normal duty on the first clearance of Rs.1 crore with CENVAT credit.
133. I propose to restore the excise duty rate on iron and steel to the normal level of 16 per cent. This should have little effect on prices because the entire duty is modvatable by most categories of consumers.
134. I propose to increase the specific duty on molasses from Rs.500 per MT to Rs.1000 per MT to adjust partially for a hefty increase in molasses prices. I also propose to increase the specific duty on cement clinkers from Rs.250 per MT to Rs.350 per MT as an anti-avoidance measure.
135. The National Highways Development Project requires very large resources. In order to raise additional resources, I propose to increase the cess on petrol and diesel by 50 paise per litre. The additional resources will be earmarked exclusively for the national highways, and a suitable amendment is being proposed to the Central Road Fund Act, 2000.
136. The levy of an education cess has been widely applauded. The health sector demands similar treatment. What better way is there to fund health care than tax those goods which are health hazards? I, therefore, propose to raise some additional resources and allocate the proceeds to finance the National Rural Health Mission. Accordingly, I propose to increase the specific rate on cigarettes by about 10 per cent and impose a surcharge of 10 per cent on ad valorem duties on other tobacco products including gutka, chewing tobacco, snuff and pan masala. However, biris will not be subject to this levy.
137. Finally, there is the issue of taxes on petroleum products. After examining the Lahiri committee’s report, I propose to make major changes in the customs and excise duty rates. The customs duty on crude petroleum will be reduced from 10 per cent to 5 per cent.
138. On LPG for domestic consumption and on subsidized kerosene, the customs duty will be nil. On both products, the excise duty will also be nil.
139. On other petroleum products, including motor spirit (MS) and diesel (HSD), I propose to reduce the customs duty from the current level of 20 or 15 per cent to 10 per cent. I also propose to fix the excise duties on petrol and diesel as a combination of ad valorem and specific duties.
140. The proposed changes are revenue neutral, and I have been assured that there will be no increase in the retail prices of these products as a result of the changes in the duty structure.
141. Consequent upon the changes made in customs and excise duties, the drawback rates for exported goods will be reviewed and modifications, wherever necessary, will be notified by April 30, 2005.
142. Hon’ble Members are aware that many goods are chargeable to excise duty on a value with reference to their maximum retail price (MRP), after allowing suitable abatement. The system of quantifying the abatement should be made transparent. There should also be a mechanism to review the rate of abatement to reflect changed circumstances. Hence, as a trade facilitation measure, I propose to set up an advisory committee to advise the Government on the extent of abatement for both excise duty and service tax.
143. The other indirect tax is service tax. Since the services sector accounts for about 52 percent of the GDP it is necessary to cast the net wide.
144. Last July, I raised the rate of service tax to 10 per cent. I propose to maintain that rate.
145. I also propose to grant relief to small service providers. Accordingly, I propose to exempt from service tax those service providers whose gross turnover does not exceed Rs.4 lakh per year. According to my calculation, 80 per cent of the present service tax payers will gain from the exemption.
146. I propose to include some additional services in the service tax net. New services to be covered include pipeline transport of goods; site formation, demolition and like services; membership fees of clubs and associations; packaging and specialized mailing services; survey and map making services; dredging services in rivers and harbours; cleaning services for commercial buildings and similar premises; and construction of planned residential complexes, with more than 12 dwelling units, developed by builders.
147. I also propose to expand the coverage of certain services, but I shall not burden you with the details.
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