Indian Budget 2005-06
Full Text of P. Chidambaram, Minister of Finance, Budget Speech(Feb 28, 2005)
XII. TAX PROPOSALS
148. I shall now turn to my proposals on direct taxes.
149. Last July, as an interim measure, I made a provision under which a person with a taxable income of Rs.100,000 would not be required to pay any income tax. About 1.4 crore assessees got relief. I promised to revisit the subject in this Budget.
150. As part of a major overhaul of direct taxes, I propose to alter the tax brackets after taking due note of the universal demand of Members of Parliament and the need to provide stability in the medium term.
151. Accordingly, I propose that the new tax brackets and the new rates will be as follows:
Up to Rs.1 lakh .. nil
Rs.1 lakh to Rs.1.5 lakh .. 10 per cent
Rs.1.5 lakh to Rs.2.5 lakh .. 20 per cent
Above Rs.2.5 lakh .. 30 per cent
Further, the level at which the surcharge of 10 per cent will apply will be raised to Rs.10 lakh taxable income. Hon’ble members will be happy to note that tax payers in every tax bracket will gain from my proposal.
152. Besides, I propose to fix the threshold exemption level for women at Rs.1.25 lakh and the exemption level for senior citizens at Rs.1.5 lakh. These revised exemption levels will be in lieu of the prevailing tax rebate provisions.
153. Given the higher exemption limits and the scaling up of tax brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the standard deduction.
154. There is now a plethora of exemptions, ostensibly intended to promote savings. Some exemptions are based on the principle of deduction from taxable income and some exemptions are based on the principle of tax rebate. I believe the time is ripe to clean up these exemptions. At the same time, it is necessary to encourage savings, and tax relief is a method to induce people to save. Further, I think that the State must be neutral between one form of saving and another, and allow the tax payer greater flexibility in making savings/investment decisions.
155. For all these reasons, in addition to the basic exemption limits, I propose to allow every tax payer a consolidated limit of Rs.1 lakh for savings which will be deducted from the income before tax is calculated. All prevailing sectoral caps will be removed. The rebate under Section 88 is being eliminated and Section 80L is being omitted to reflect the new regime.
156. In addition to the sum of Rs.1 lakh, the following six deductions will continue to receive the same tax treatment as prevails today:
i) interest paid on housing loan for self-occupied house property;
ii) medical insurance premia;
iii) specified expenditure on disabled dependant;
iv) expenses for medical treatment for self or dependant or member of a HUF;
v) deduction in respect of interest on loans for pursuing higher studies; and
vi) deduction to a person with disability.
157. Tax treatment of savings is a complex issue but we can benefit from the best international practices in this regard. We have already introduced EET-based taxation in the defined contribution pension scheme applicable to newly recruited government servants. Before we fully migrate to the EET system for all kinds of savings, it is necessary to resolve a number of administrative issues. Hence, without making any change for the present, I propose to set up a committee of experts that will work out the road map for moving towards an EET system.
158. Bowing to popular demand, I propose to continue the exemption from tax on interest earned on accounts maintained by Non Resident Indians.
159. While the tax reliefs that I have given today should warm the hearts of the tax payers, I have also an obligation to raise resources, especially to meet the large requirements of NCMP-mandated programmes.
160. I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value. At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer. However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net. The tax is not a new tax, although I am obliged to call it by a new name, namely, Fringe Benefits Tax. The rate will be 30 per cent on an appropriately defined base.
161. I believe I have given a large measure of relief to personal income tax payers, and I hope all sections of the people and all members of the House are happy. This leads me to corporate income tax.
162. The corporate income tax rate, the surcharge thereon and the rates of depreciation are inter-linked. Any reform would have to address all three elements. The international best practice is to provide for depreciation at rates that would enable the investor to replace the asset before its economic life ends. In India, in addition to the depreciation rate we have allowed an initial depreciation in order to encourage new investment. Hon’ble members may recall that, last July, I reduced the condition relating to increase in installed capacity from 25 per cent to 10 per cent.
163. I am also obliged to keep in mind that a number of profit making companies continue to pay low tax, even if well within the law, by taking advantage of liberal depreciation rates and of exemptions and incentives. Moreover, the current depreciation rates lean towards employing capital rather than labour.
164. There is also a demand that corporate tax rates should be aligned with the highest marginal personal income tax rate.
165. After careful consideration of the pros and cons, the interest of the revenue and the need to give the corporate sector a measure of relief, I propose the following tax structure.
166. For domestic companies, the corporate income tax rate will be 30 per cent. There will also be a surcharge of 10 percent. The rate of depreciation will be 15 per cent for general machinery and plant, but the initial depreciation rate will be increased to 20 per cent.
167. The corporate sector will find that the proposed tax structure is fair, gives them relief of nearly 3 per cent in the tax rate, encourages new investment and ensures equity among all sections of corporate tax payers.
168. As a further measure of relief, I propose to remove the requirement of 10 per cent increase in installed capacity for availing of the benefit of initial depreciation.
169. To encourage technological upgradation, I propose to reduce the withholding tax on technical services from 20 per cent to 10 per cent.
170. I also propose that credit will be allowed for the Minimum Alternate Tax (MAT) paid under Section 115 JB of the Income Tax Act.
171. I do not propose to make any changes in the tax regime applicable to foreign companies.
172. Last July, I had indicated that I would review the terminal dates on exemptions given for specific purposes. Accordingly, I propose to extend the terminal date, in the following three cases, from March 31, 2005 to March 31, 2007:
• Weighted deduction of 150 per cent of expenditure on in-house research and development facilities of companies engaged in the business of biotechnology, pharmaceuticals, electronics, telecommunication, chemicals or any other notified product;
• Deduction of profits of new industrial undertakings in Jammu & Kashmir;
• 100 per cent deduction of profits of companies carrying on scientific research and development and approved by the Department of Scientific and Industrial Research.
173. In deference to the request from Air India and Indian Airlines, I propose to extend up to September 30, 2005 the exemption from tax on agreements to acquire aircraft or aircraft engines on lease.
174. The securities transaction tax (STT) has stabilized, but the rates are widely perceived to be too low. I, therefore, propose to make a very nominal increase in the rates for all categories of transactions. Thus, a day trader who is liable to pay STT at 0.015 per cent will now be liable to pay at 0.02 per cent. This small increase should not ruffle anyone’s feathers. This nominal rate of increase will apply to all categories.
175. As Hon’ble Members are aware, there have been significant developments in the past decade in the capital market including the introduction of trading in financial derivatives. We have also established a transparent system of trading with adequate safeguards for audit trail. Hence, I propose to amend the Income Tax Act to provide that trading in derivatives in specified stock exchanges will not be treated as “speculative transactions” for the purposes of the Income Tax Act.
176. I propose to amend the one-in-six criteria for filing income tax returns. Mobile telephone will be removed. Instead, payment for electricity of more than Rs.50,000 per year will be included as a criterion for filing a return of income.
177. The NCMP requires the Government to introduce special schemes to unearth black money and assets. I am obliged to carry out the mandate, but without giving undeserved relief or an amnesty. I am concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash. These cash withdrawals leave no trail, and presumably become part of the black economy. Therefore, I propose to introduce two anti tax-evasion measures: Firstly, I propose to levy a tax on withdrawal of cash on a single day of over Rs.10,000 or more from banks at the rate of 0.1 per cent. Thus, a person withdrawing Rs.10,000 in cash would have to pay a small sum of Rs.10. Secondly, I propose to require banks to report to the Government all deposits which are exempt from TDS on interest. I intend to observe the results of these steps before I propose any further measures.
178. Many administrative reforms are underway in the Department of Revenue. Among them are the tax information network (TIN) and the on-line tax accounting system (OLTAS).
179. As a measure of facilitation, I propose to follow international practice and establish large taxpayer units (LTUs). To begin with, these units will be set up in major cities. I would like to invite large tax payers, whether of corporate tax or income tax or excise duties or service tax, to participate in the programme and avail of the single window service. For small taxpayers, I propose to set up Help Centres in cooperation with industry associations, professional bodies and NGOs.
180. I have received many suggestions on amendments to the direct tax laws and the indirect tax laws. I have decided to accept some suggestions that require to be acted upon immediately, but I do not propose to burden the Finance Bill with those changes. Instead, I intend to introduce a separate Bill for that purpose during this session. In due course, I intend to place before Parliament a revised and simplified Income Tax Bill.
181. My tax proposals on direct taxes are expected to yield a gain of Rs.6,000 crore. On the indirect taxes side, they are broadly revenue neutral.
Indirect Taxes Click here