SPEECH OF SHRI SACHINDRA CHAUDHURI
MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1966-67
Dated : February 28, 1966
I rise to present
the Budget of the Government of India for the year 1966-67. But before I do
so I must pay homage to our late Prime Minister, Shri Lal Bahadur Shastri.
His life was given, as indeed it had been lived, in the cause of our country
and our people. With him he had brought a deathless spirit and in Me death
he has made a gift of this spirit to the nation. With this heritage we have
to proceed in the service of our people, well guided by our beloved Prime
Minister and companioned by our esteemed colleagues. With the Honourable Members
I share this task.
2. The Budget of the Government of India is a major instrument for implementing
our plans and policies. It has to be framed, therefore, in response to current-economic
trends as well as the long-term requirements of the economy. Recent trends
in the economy have been outlined in the Economic Survey which was presented
to Parliament a few days ago. I shall, therefore, refer only to a few major
developments which have a bearing m the formulation of the next year’s
Budget.
3. In many ways, the year that is now drawing to a close has been a very difficult
one. Some of the difficulties such as the inadequate performance of the economy,
the sluggishness of the capital market, the pressure on the balance of payments
and the rise in the prices of essential commodities have been with us now
for a number of years; and it is imperative that budgetary and indeed all
economic policies are framed with a view to reversing these adverse trends,
At the beginning of the current fiscal year, it was our hope that the substantial
Improvement in agricultural production and national income which had taken
place in 1964-65 would make It possible to bring about a corresponding improvement
in the general economic situation. This expectation, however, has not been
realised as a result of a number of unforeseen adverse happenings. Apart from
the unprecedented failure of monsoons during the current year, we have had
to reckon with hostilities on our borders and a pause in foreign aid.
4. Honourable Members will recall that the Budget for the current year as
presented in February last had forecast a small overall surplus. In the early
part of the year itself, however, it became apparent that supplementary measures
for raising revenues were necessary to keep to our resolve of avoiding deficit
financing. Accordingly, the supplementary budget presented last August provided
for additional revenue measures with a yield of over Rs.100 crores for the
rest of the current financial year. Since then, the budgetary outlook has
become worse. On present indications, the current year will close with a large
deficit of about Rs.165 crores. As compared with the original Budget estimates,
taken together with the effect of the supplementary budget, the revenue account
is now likely to show a shortfall of Rs.53 crores. The major deterioration
of about Rs.112 crores, however, is likely to be on capital account. I do
not propose to burden Honourable Members with details of the variations that
are likely to occur on the revenue and capital account in relation to our
earlier estimates. I shall, therefore, mention only those changes which have
some relevance for the future.
5. Under revenue, receipts from income and Corporation taxes are now expected
to show a shortfall of the order of Rs.73 crores. On the other hand, Customs
receipts are likely to be Rs.31 crores more and Excise revenues Rs.16 crores
more; total tax receipts will, therefore, fall short by Rs.26 crores.
6. As for revenue expenditure, Honourable Members will appreciate that the
hostilities m our borders that wore started last August have made it necessary
to increase the outlay both on defence and border security. Revenue expenditure
on defence is expected to show an increase of Rs.20 crores over earlier estimates,
grants to States for border security, Rs.61/2 crores, and payments for Police
Battalions raised by the States for the Centre, Rs.11 crores, making a total
increase in expenditure under these three items of Rs.28 crores. The net result
of these and other variations on the revenue account is that the estimated
revenue surplus of about Rs.335 crores will now be reduced to Rs.282 crores.
7. On capital account, the major developments are a shortfall of Rs.43 crores
in respect Of external assistance and an addition of Rs.100 Crores by way
of loan assistance to the States which will not be recovered during the current
year iteslf. In response to the general weakness of the budgetary position
of the States as well as the need to enable the States to undertake special
agricultural programmes on an emergency basis, Central assistance by way of
loans to the State Governments for their Plans had to be increased by Rs.40
crores. In addition, it is estimated that loans of the order of another Rs.45
crores will be needed over the year to strengthen the budgetary position of
some of the States. An additional amount of Rs.10 crores was given to the
States as loans for the purchase and distribution of fertilizers. Loans to
the States in respect Of Small Savings will be larger by Rs.5 crores. The
requirements of the public sector concerns, notably the Heavy Electricals,
the Indian Oil Corporation, National Coal Development Corporation and Noyveli
Lignite are also likely to be higher, On the other hand, some savings in capital
expenditure on a number of heads may reasonably be expected.
8. Honourable Members will note that the net deterioration of Rs.112 crores
on capital account is really explained by two major factors, namely, additional
loan assistance to the States and the shortfall in external assistance. The
decline in Central tax receipts of the order of Rs.26 crores represents less
than 11 per cent of total tax receipts. Further, considering the gravity of
the situation that we had to contend with, the increase in revenue expenditure
on defence and border security has been modest. The shortfall in respect of
external assistance is naturally a matter which is largely beyond our control.
But for the additional liability of Rs.100 crores by way of loan assistance
to the States, not recoverable within the year iteself, the overall deficit
in the Centre’s Budget this year would have been only Rs.65 crores.
Even so, Honourable Members, I am sure, will agree with me that the developments
during the current year are a matter of concern and call for a greater degree
of realism in budget-making as well as greater sense of determination in restraining
expenditures, whether revenue or capital, whether Plan or non-Plan, whether
by the Centre or by the States.
9. I cannot emphasise too strongly that the weakness of the financial position
of the States and the tendency on the part of some of them to resort to unauthorised
overdrafts from the Reserve Bank are matters which have to be remedied. The
responsibility which we have assumed so far to clear these overdrafts inevitably
strains the Centre’s budgetary position. But this strain is bound to
be reflected in turn in the Centre’s ability to help the States in respect
of their Plans. Unauthorised overdrafts and deficit budgeting by some States
inevitably have repercussions on other States which are better able or more
willing to manage their affairs on a more realistic basis. Both the Centre
and the State Governments taken as a whole, therefore, have to share the responsibility
for ensuring that unsatisfactory budgetary practices such as budgeting for
deficit and unauthorised overdrafts from the Reserve Bank are avoided in future
by adopting common standards of discipline. We propose to devote urgent attention
to the problem in consultation with the Planning Commission and the State
Governments to ensure that the present unsatisfactory situation in regard
to financial management by some States does not continue.
10. The Budget of the Government of India for the year 1966-67 will necessarily
have to be framed in the light of the budgetary developments during the current
year which I have just outlined. As mentioned at the outset, it must also
take into account recent trends in the economy and the continuing requirements
of defence and development. The year 1966-67 is the first year of the Fourth
Five Year Plan. The Budget for 1966-67, therefore, should give to the Fourth
Plan as good a start as is possible consistent with the immediate need to
restore a greater measure of monetary and price stability. Honourable Members
will also appreciate that while It has always been our policy to restrict
expenditure on defence to the maximum extent possible so as to conserve all
possible sources for securing the well-being of our people, we cannot afford
to take any chances with the security of the nation, devoted though we are
to the cause of peace.
11. Honourable Members are already familiar with the major strands in the
country’s economic situation. The substantial improvement in agricultural
production that took place in 1964-65 could not be sustained in the current
year on account of adverse weather conditions. Although no precise estimates
of agricultural output in the current year are yet available it is clear that
there would be a substantial decline in the output of foodgrains as well as
a reduction, in varying degrees, in the outturn of commercial crops such as
jute, mesta, oilseeds, tobacco, tea and cotton. Honourable Members would,
I am sure, like me to take this opportunity to express our gratitude to friendly
countries and international institutions, and particularly to the Government
and the people of the United States, for agreeing to supply to us substantial
quantities of foodgrains at a time of need. Even with this help, however,
the availability of essential foodgrains and agricultural raw materials during
the coming year would be considerably restricted so that it becomes more necessary
than ever to restrict the expansionary impact of Government expenditure in
general.
12. The growth in industrial production has also slackened during the current
year. During the first six months of 1965-66, industrial production increased
by 7.3 per cent over the corresponding period of 1964-65. During the second
half of the current fiscal year, however, industrial production is expected
to increase by only 5 per cent so that over the year as a whole we are likely
to have an increase of about 6 per cent in industrial production. Our continuing
developmental efforts are showing results. Capacity in a number of industries
such as those producing finished steel, aluminium, engineering goods and chemicals
has been increasing steadily and can be expected to increase further in the
coming year. On the other hand, the shortage of domestic raw materials and
our inability to compensate this by larger imports has seriously contributed
to the sluggishness of industrial production in recent months.
13. Superficially, it might appear that our balance of payments position has
shown some improvement during the current fiscal year. In 1964-65, for example,
our foreign exchange reserves declined by Rs.72 crores. By contrast, it may
well be possible for us to avoid any decline in foreign exchange reserves
during 1965-66 with the help of a net drawing from the International Monetary
Fund of Rs.11.9 crores. But we have been able to stem the decline in our already
depleted reserves during the current year only on the basis of a highly restrictive
import policy. Fresh licensing for imports for the maintenance of the economy
during the current year has been on a very restricted basis; and this is already
beginning to affect industrial production despite a substantial decline in
the inventories of imported materials and components within the country.
14. Over the months to come, our needs for inescapable imports of foodgrains
and agricultural raw materials will increase as a result of the drought. It
will also become even more difficult than before to maintain the exports of
some of our agricultural products in the face of a decline in production.
Difficult as the foreign exchange situation has been and, indeed, is likely
to be over the months to come, I think it would be self-defeating to intensify
or even to maintain the present severity of our import restrictions. What
we need, indeed, is a significantly larger flow of maintenance imports over
the coming months so that inventories within the country are restored to normal
levels and capacity already created is utilised as fully as possible. It is
only m the basis of a more liberal import policy that we can hope to give
a fresh momentum to industrial production and greater regard for efficiency
all round in the immediate future. Situated as we are at present, it is not
possible for us to undertake a more liberal licensing of essential imports
of raw materials and components without external assistance in suitable forms.
But Honourable Members may be sure that it will be the constant endeavour
of this Government to seek the cooperation of international institutions and
friendly foreign governments to reduce the severity of our present import
restrictions.
15. Over a period, however, our ability to maintain imports at satisfactory
levels and to meet external obligations such as those for the repayment of
debt will necessarily have to turn m our own efforts to increase our foreign
exchange earnings not only by higher exports but also by way of increase in
invisible receipts from tourism, remittances, shipping and the like. During
the first three years of the Third Plan period, there was a rapid increase
in our exports which was all the more gratifying for the reason that it took
place despite the fact that the growth of production within the country failed
to come up to expectations. The same momentum in exports, however, has not
been maintained during the past two years; and we are confronted in the immediate
future with the patent possibility that the drought might affect adversely
some of our agricultural exports.
16. Fundamentally, we cannot give a continuing impetus to our export effort
without increasing production and productive efficiency all round and without
a check on general inflationary pressures within the country. While efforts
in these directions are required m a continuing basis in the interest of higher
export earnings as, indeed, of development along sound lines, we have not
hesitated to adopt a number of measures to give specific incentives for promoting
higher exports. The Tax Credit Certificate Schemes introduced during the year
and the Import entitlement schemes which have been in operation for some time
are examples of the inducements we offer at present to promote higher exports.
More recently we introduced the National Defence Remittance Scheme and I am
happy to say that the response to the scheme has been encouraging. It is in
view of this that the scheme has been extended now by another three months
though a second look may have to be taken to lower the rate of benefit inherent
in the scheme. We shall continue to review, modify and extend the export promotion
measures that we have designed in the light of our needs and experience to
make sure that they continue to provide a strong, stable and comprehensive
basis for a vigorous export drive.
17. With the best will in the world and the utmost effort we are capable of,
we still cannot dispense with foreign aid in the near future. We in India
have always recognised that foreign aid can at best supplement our own efforts
to raise both internal and external resources. No self-respecting nation can
ever look upon external assistance as a substitute for reasonable effort m
its own part or as a continuing feature of its economy. It is also both natural
and unavoidable that the willingness of our friends abroad to assist us will
depend on the confidence that we are able to inspire in our ability to grapple
with our problems and to put such aid as we get to the best possible use.
Only so can we hope, before long, to dispense with extraordinary forms of
external assistance altogether. We are hopeful that the Consortium organised
under the leadership of the World Bank will approach the task of mobilising
external assistance for our Fourth Plan in the same constructive way as it
has done in the past for our Second and more particularly for our Third Plan.
At the same time, Honourable Members will appreciate that the Plan itself
and our policies in support of the Plan have to be consistent not only with
reasonable developmental goals but also with a greater determination on our
part to rely increasingly on our own strength and resources.
18. I would like to refer, in particular, in this connection, to the need
to reduce our dependence on assistance under the United States PL 480 programme
for the import of foodgrains and other agricultural commodities. Honourable
Members will have, I am sure, every opportunity to review the measures that
we have set in motion for achieving a substantial increase in agricultural
production during the Fourth Plan period. I have to emphasise in particular
the fact that our budgetary position also has come to lean heavily on the
import of agricultural commodities under the PL 480 programme. We cannot possibly
regard a large accretion of resources to the Budget from PL 480 transactions
as anything but a fortuitous counterpart of our difficulties on the agricultural
front. The fact that we depend today to such a large extent on the PL 480
programme for supplementing our budgetary resources emphasises once again
the need for caution in regard to governmental expenditure as wen as for exploring
every available opportunity for raising more internal resources.
19. More and more, the possibility of raising additional internal resources
will depend m the growth and dynamism of the Indian economy itself. Whichever
way we look at it, therefore, It is of paramount importance to improve the
performance of the economy by raising productivity both in agriculture and
industry. From this point of view, I attach importance to strengthening and
maintaining the confidence of the private sector as also to the more efficient
working and management of our growing family of public enterprises. It is
not necessary for me to dwell at any length on the malaise of the capital
market which has continued now for more than three years. While we have endeavoured
to meet the genuine requirements of private industry for investment by greater
assistance from financial institutions, there cannot be any doubt that the
revival of the capital market and a greater flow of private savings to industry
in the form of equity investment are desirable in the larger social interest.
A democratic society desiring rapid development both in the public and the
private sector but averse to concentration of wealth and economic power has
all the more reason to make investments in the private sector as widespread
as possible. Growth of private industry in such circumstances must depend
more and more on the equity participation of a growing number of people drawn
from different strata of society. More widespread equity participation would
also facilitate stricter control on management in the private sector.
20. In the monetary field, till recently, a great deal of stringency has been
felt despite the fact that the supply of money has continued to increase at
a much faster rate than the supply of goods and services. Given the developments
in the budgetary field to which I referred earlier, it is not surprising that
money supply has increased at a faster rate than what had been envisaged.
But clearly, the combination of monetary stringency and a rapid-increase in
money supply is an indication of the fact that genuine savings have not increased
adequately and that a part of these have been diverted to less desirable forms
of investment. We cannot relieve monetary stringency by continuing to increase
money supply at the same rapid rate as we have done over the past few years.
To do so would only aggravate the inflationary situation in the country. Honourable
Members are well aware that the general price level in the country has shown
a significant increase of 7.6 per cent during the 12 months ending January
1966. While the Reserve Bank will continue to deploy flexibily the instruments
of monetary policy in keeping with the genuine requirements of credit for
achieving higher levels of production, we shall have to make sure that the
expansion of credit for legitimate purposes takes place increasingly on the
basis of growth of deposits and at the expense of credit expansion for less
desirable social purposes. Indeed, quite apart from these considerations,
It is essential to ensure that lending by the banking system is directed towards
socially desirable objectives such as greater economic opportunity to a wider
spectrum of producers and the prevention of undue concentration of wealth
and economic influence.
21. I may now sum up the main considerations which have guided me in framing
the next year’s Budget in the light of the developments, to which I
have referred so far. First and foremost, the Budget has to be production
oriented, creating a better psychological climate for a greater regard to
savings and efficiency all round. Secondly, while investments in progress
have to be completed as speedily as possible in the interest of better performance
of the economy and while the claims of national security have to be met, every
effort has to be made to restrain Government expenditure, particularly m general
administration and m pew schemes of development with a long gestation period.
With the restraints just indicated It is proper to state that it is the intention
of this Government to establish progress and press m with such enterprises
in the public sector as are beneficient to the country. The Bokaro Steel Plant
made possible with the assistance of the USSR to whom we are grateful is one
such project. I have also endeavoured to estimate revenue and capital receipts
on as realistic a basis as possible.
22. Coming now to the estimates of next year’s revenue expenditure,
Honourable Members would appreciate that certain increases are almost automatic
in the sense that they result from decisions already taken in the past or
from Constitutional obligations. Transfers to States m the basis of the recommendations
of the Fourth Finance Commission will, for example, lead to increase in expenditure
of Rs.77 crores under Statutory Grants and Rs.67 crores under States, share
of Union Excise duties. The cost of servicing debt will increase by Rs.42
crores and export promotion measures and the various tax credit schemes already
adopted will result in an increase in expenditure of another Rs.24 crores.
If these special items and certain self-balancing items such as PL 480 Grants,
Emergency Risks insurance Scheme and write back of Capital Grants are excluded,
revenue expenditure next year will show an increase of only Rs.46 crores.
While Plan expenditure m revenue account is less by Rs.36 crores, the increases
are accounted for by Rs.29 crores under Defence Services, Rs.141/2 crores
under Police, mainly for requirements of border security, Rs.111 crores under
grants for drought relief and Rs.6 crores to Union Territories to cover their
budgetary gaps. Administrative Services proper, excluding Police, would cost
Rs.99 crores next year as against Rs.93 crores this year and Rs.83 crores
last year. The increase of R9.6 crores next year includes Rs.21 crores m account
of next year’s election expenses. The balance of the increase in revenue
expenditure after excluding reductions under subsidies and aid, namely, Rs.18
crores, occurs mostly under non-Plan developmental heads, and includes committed
expenditure arising out of the completed Third Plan Schemes. Honourable Members
would appreciate that the small increases I have just mentioned represent
a considerable effort at economy and restraint. Most of the increases are
in respect of obligatory expenditure or items like Defence expenditure and
border security which in view of the circumstances that we have to contend
with, cannot but be regarded as absolutely unavoidable.
23. Disregarding certain self-balancing items, next year’s revenues
should show an increase of Rs.191 crores as compared to the revised estimates
for the current year. Customs duties are estimated to yield Rs.29 crores more
mainly because the increases in duties already made would yield results now
over a full year. Receipts from Excise duties are expected to increase by
Rs.108 crores mainly in response to larger production and clearances of petroleum
products from the new refineries as also of cement and iron and steel. Considering
the experience this year and the fact that the current year’s receipts
include a considerable portion of tax from voluntary disclosures, I have assumed
that receipts from Corporation and income taxes next year will be higher by
only Rs.20 crores.
24. Taking into account the factors that I have mentioned and a number of
other miscellaneous items, total revenue receipts next year at existing levels
of taxation are estimated at Rs.2617 crores and expenditure on revenue account
at Rs.2407 crores. The revenue surplus of Rs.210 crores next year will thus
be Rs.72 crores less than the revised estimates for the current year.
25. On capital account, I have assumed external borrowings of Rs.460 crores
as against Rs.490 crores in the current year. This is exclusive of fresh accretion
of PL 480 funds of Rs.230 crores. Market loans have been assumed at Rs.280
crores, about the same as in the current year. However, since repayments next
year are substantially higher, the net Market borrowing at Rs.86 crores next
year would be Rs.22 crores less than that during the current year. It is,
therefore, my hope that the target for market borrowing next year will be
fulfilled without any significant support from the Reserve Bank over the year
as a whole. Honourable Members would recall that since last October, we have
floated emergency market loans on tap. In view of the consolidated market
borrowing programme now proposed for the next year, the emergency loans on
tap will be discontinued at the end of March.
26. On Small Savings and Annuity Deposits, I have assumed no net increase
over the anticipated outcome of the current year. After taking account of
receipts under repayment of loans, accretions under miscellaneous debt and
deposit heads and the revenue surplus of Rs.210 crores, the total budgetary
resources in sight for total capital outlay next year, both Plan and non-Plan,
would be of the order of Rs.1835 crores.
27. I have considered whether the capital outlay next year could not be restrained
within the limits set by resources in sight to which I have just referred.
Unfortunately, while total capital outlay next year, excluding the notional
adjustment of PL 480 loans, and loan disbursements, would show a significant
reduction over the current year’s level, it has not been possible to
restrict the outlays within the strict limits set by resources in sight. Here
again, there are a number of items such as debt repayments where an increase
in outlay is unavoidable. Debt repayments next year at Rs.314 crores would
be larger by Rs.45 crores in relation to the current year. While there is
practically no increase in defence capital outlay next year, an additional
provision of Rs.20 crores is required for giving loans for the purchase and
distribution of fertilizers, seeds and pesticides and Rs.12 crores for loans
for drought relief. The provision for contribution to financial institutions
will also be larger by Rs.71/2 crores.
28. In regard to Plan schemes also, expenditures on continuing schemes have
to be provided for in the interest of speedy implementation, especially when
foreign exchange provision for their import requirements has already been
made. Some of the important increases that have been proposed in the next
year relate to the Bokaro Steel Plant and the development of Atomic Energy
which have been allotted Rs.13 crores and Rs.18 crores more respectively.
On the other hand, Plan assistance to the States and the Union Territories
by way of loans has been curtailed by Rs.135 crores and capital outlay m Railways
has been reduced by Rs.59 crores. On balance, and after taking into account
a number of miscellaneous items, total capital outlay including loan disbursement
and debt repayment next year will amount to Rs.1952 crores thus showing a
reduction of Rs.296 crores as compared with the current year.
29. In terms of Plan outlay, the Centre and the States next year are expected
to spend Rs.2081 crores, that is, Rs.144 crores less than the current year’s
budgeted Plan outlay of Rs.2225 crores. The State Plans excluding that of
Nagaland will account for an outlay of Rs.926 crores and the Central Plan,
an outlay of Rs.1155 crores. Of the States’ outlay, Rs.505 crores will
be financed by Central assistance and Rs.421 crores from the resources of
States concerned. The Centre’s Plan will be financed to the extent of
Rs.189 crores from the internal resources of the Railways, the Posts and Telegraphs
Department, the Hindustan Steel, the Indian Oil Corporation, the Oil and Natural
Gas Commission and other public sector enterprises, including the foreign
exchange resources to be mobilised by them directly. For the balance of Rs.1471
crores, inclusive of Rs.505 crores of Central assistance to the States, Rs.56
crores for the Union Territories and Rs.4 crores for Nagaland, as also Rs.143
crores for the Central Plan on Revenue account, provision has been included
in the Budget.
30. The distribution of the Plan outlay under different heads takes into account
the higher priority that needs to be given at the present stage to quick yielding
programmes of agricultural development and to the speedy implementation of
projects already in hand. To a certain extent, a comparison between the Plan
outlay next year with the Plan provision for the current year is misleading
in the sense that a part of the outlay included in the Plan during a Plan
period becomes committed and gets treated as non-Plan outlay from the beginning
of the next Plan period. Even so, there is no denying the fact that the exigencies
of the budgetary situation have made it necessary to exercise the utmost caution
in regard to both Plan and non-Plan expenditure during the coming year. The
gap between resources, in sight and total provision for expenditure in the
Centre’s Budget to which I will now turn has to be judged in the light
of this consideration.
31. The overall budgetary position for the next year may now be summarised
in conventional terms as follows. The revenue account will yield a surplus
of Rs.210 crores. The total disbursement on capital account, excluding the
notional adjustment of PL 480 Loans, will be Rs.1952 crores. This will be
met, apart from the revenue surplus, by internal and external borrowings of
Rs.744 crores, collections under Small Savings of Rs.135 crores, fresh accretion
to PL 480 Funds of Rs.230 crores, Annuity Deposits of Rs.44 crores, repayment
of loans of Rs.370 crores and receipts under miscellaneous debt and deposit
heads of Rs.102 crores, leaving an overall deficit of Rs.117 crores.
PART B
32. In the light of what I have said earlier, Honourable Members would have
gathered that I would have very much liked to avoid a deficit by the simple
method of containing revenue expenditure and capital outlays within the resources
available. I have explored this possibility to the maximum. Revenue expenditure
has been held down. In the case of Plan outlays, however, it is necessary
to provide for what is required for securing essential and productive development,
particularly in regard to agriculture and other continuing schemes. Consistent
with this, Plan outlays have also been kept down to the minimum. A further
reduction would retard agriculture and jeopardize the growth of the economy.
33. It is, therefore, Imperative for me to cover the deficit by raising additional
resources. This I have sought to do by methods which cause minimum disturbance
and hardship and ensure maximum simplicity. Honourable Members would recall
that in presenting the last Budget my predecessor had emphasised the importance
of stability and simplicity in the tax structure in the interest of providing
a proper climate of expectations for orderly growth. ‘ The supplementary
budget introduced last August took this process a step further, particularly
in regard to the rationalisation of import duties. I have kept these basic
objectives clearly in view in proposing measures for raising additional resources.
Even in so doing, I have sought to carry the process of simplification a step
further by proposing a number of changes and reliefs. I shall now explain
my proposals in detail.
34. Starting with indirect taxes, I propose to leave customs duties alone
as they were rationalised and raised only a few months ago. I, however, propose
to increase the excise duties on a few commodities, not simply for raising
revenue but also for restraining consumption where this can be done without
too much hardship and increasing exportable surpluses. Two commodities, namely,
optical bleaching agents and synthetic detergents will be subject to duty
for the first time.
35. The excise duty on crystal sugar will be raised from Rs.28.65 to Rs.37
per quintal. Correspondingly, the duty on khandsari will also be raised. Taken
together, these will bring in additional revenue of Rs.21.93 crores. Assuming
the duty is passed on fully to the consumer, the incidence will be only 8
to 9 paise per kilogramme of crystal sugar. As supply is expected to be adequate
to meet demand, there is some prospect that the whole of the duty may not
be passed on to the consumer.
36. The duty on cigars and cigarettes, as well as on unmanufactured tobacco
for use in the manufacture of cigarettes and pipe mixtures, will also be raised
by about 25 to 30 per cent. These increases are expected to yield additional
revenue of Rs.9.01 crores. The incidence of this increase will be about 5
paise per packet of expensive cigarettes and 1 to 2 paise per packet for the
relatively cheaper ones.
37. The excise duty on diesel oil not otherwise specified, that is, light
diesel, is proposed to be raised by Rs.60 per kilo litre in order to bring
it in line with duties on other petroleum products, so as to avoid undesirable
mixtures. The additional revenue expected is Rs.5.35 crores.
38. In order to restrain consumption of finer qualities of cloth which require
imported cotton, I propose to increase duties on cotton yarn and cotton fabrics
selectively. There will be no increase in the case of coarser counts of yarn.
In the case of fabrics, the increase will be only in respect of processed
products such as mercerised shrink-proof and organdie processed varieties.
The additional revenue from increases in the duty on yarn is expected to be
Rs.7.23 crores and on fabrics Rs.6.3 crores. Correspondingly, the duties on
rayon and synthetic yarns are also being slightly raised and the revenue yield
will be Rs.50 lakhs.
39. The excise duties on a few other items, namely, sodium silicate and carbon
dioxide are also being raised and the slab concessions on paper boards are
being reduced. The additional revenue expected from these three Items is Rs.1.46
crores. The new duties on optical bleaching agents and synthetic detergents
are expected to bring in Rs.58 lakhs. In order to give some relief to small
establishments which manufacture motor vehicle trailers, the ad valorem duty
of 5 per cent on such trailers as are manufactured in establishments employing
not more than five workers will be abolished. Altogether, the additional yield
from the changes in excise duties proposed together with corresponding increase
in countervailing duties, will be Rs.52.86 crores of which the States’
share will be Rs.10.07 crores. The Central resources, therefore, will be augmented
by Rs.42.79 crores.
40. I shall now turn to direct taxes. In the field of personal taxation, I
propose to increase the existing limits of total incomes not chargeable to
tax by Rs.500. Similarly, I propose to raise by Rs.500 the existing personal
allowances on which tax relief is given to resident individuals and Hindu
undivided families. Thus, the exemption limit in the case of individuals will
be raised from Rs.3,000 to Rs.3,500 the personal allowance of an unmarried
individual, from Rs.2,000 to Rs.2,500 and the personal allowance of a married
individual with more than one dependent child, from Rs.4,300 to Rs.4,800.
The effect of these will be a reduction in revenue by Rs.3.5 crores. The principal
reason is to provide a measure of relief to a class of tax payers who merit
their burden being lightened. But these measures will also accelerate the
performance of the task of the tax authorities by eliminating a large number
of small assessments and thereby enabling them to devote more and swift attention
to tax collections from higher incomes.
41. For similar reasons, I also propose to raise the exemption limit for annuity
deposits from Rs.15,000 to Rs.25,000. By this measure, the number of people
required to make annuity deposits will be reduced sizeably from 1,76,000 to
80,000, while the reduction in receipts will only be of the order of Rs.7
crores, after taking into account the corresponding gain to income-tax of
Rs.2.42 crores. I have, however, provided that even those in the income range
of Rs.15,000 to Rs.25,000 who desire to make annuity deposits, will be enabled
to do so and obtain the consequent tax relief on the amounts so deposited.
Another small change which I propose to make is to provide that persons on
attaining the age of 70 will hereafter be allowed to opt out of the Annuity
Deposit Scheme, irrespective of whether they were liable to make annuity deposits
before or not.
42. Having given these reliefs, I propose to levy a flat special surcharge
of 10 per cent of the amount of income-tax and surcharge in respect of earned
income and unearned income, payable by all non-corporate assessees. The additional
revenue from the special surcharge will be Rs.25.6 crores.
43. In regard to other personal taxes, I propose to abolish the expenditure
tax. I do so for administrative reasons. The yield from this tax is very little,
namely, Rs.60 lakhs or thereabouts which has not been commensurate with the
burden it puts on the administration and the inconvenience it causes to the
assessees. I recognise that on purely economic grounds, it would be a very
sound principle to replace the income-tax increasingly by a tax on expenditure,
so that the maximum incentive is provided for savings. Given the substantial
contribution made by income-tax to our revenues and the administrative difficulties
and inconvenience to assessees involved in the assessment of expenditure,
it is, however, not possible to attempt this substitution on any significant
scale at the present stage.
44. I also propose to revise the rates of gift tax in order to bring them
more closely in line with the rates of estate duty. In the process, the rates
applicable to different slabs of value of gifts are also being reduced. Thus,
the exemption limit is being raised from Rs.5,000 to Rs.10,000, the ‘rate
on the slab from Rs.10,000 to Rs.25,000 is being reduced from 8 per cent to
5 per cent and the rates on subsequent slabs, up to Rs.15,00,000, by varying
percentages. The present maximum marginal rate of 50 per cent will, however,
remain unchanged, but it will operate on the slab beyond Rs.15 lakhs. I also
propose to delete the provision for the aggregation of the value of gifts
to the same donee over a number of years. This provision was designed to prevent
avoidance of estate duty as well as gift tax at higher rates. But it is a
measure whose practical utility is not established, specially if the time
and trouble it involves on the part of both the administration and the assessees
are taken into account. But to some extent to balance this measure, I propose
to provide, by amendment of the Estate Duty Act, that gifts made within two
years of death will be treated as part of the estate. At present the relevant
period is one year. I have also taken this opportunity to raise the rates
of estate duty on certain intermediate slabs, namely, Rs.1 lakh to Rs.2 lakhs,
from 8 per cent to 10 per cent, Rs.31 lakhs to Rs.5 lakhs, from 15 per cent
to 25 per cent and from Rs.5 lakhs to Rs.10 lakhs, from 25 per cent to 30
per cent. The loss in revenue as a result of changes in the gift tax will
be Rs.1.71 crores, whereas the additional revenue from the changes in the
estate duty, which will go to the States, will be approximately Rs.70 lakhs.
45. I propose to make another change in respect of estate duty. Honourable
Members will recall that my predecessor had assured this House that the estates
of members of police forces killed in action in defending the borders of the
country would be exempted from estate duty in the same manner as members of
the armed forces. I have made a provision for this. I feel this is a recognition,
though small, of the courage and determination of members of this force in
defending our country.
46. Finally, I would like to refer to one change in regard to personal taxation
which will also serve as a transition to my proposals in regard to corporate
taxation. Honourable Members are aware that at present when an equity shareholder
is allotted a bonus share, he is liable to pay income-tax on the notional
capital gain accruing to him. I propose to discontinue this provision and
to provide that liability for tax will arise only when the capital gain is
actually realised. The loss to revenue from this measure will be only Rs.7
lakhs.
47. I shall now turn to corporate taxation. Here again, as in the case of
personal taxation, I propose to provide certain reliefs which I consider necessary
for providing a suitable climate for growth. At the same time, I propose to
increase the general rates of tax on corporate incomes by approximately 10
per cent. I shall now explain these proposals in some detail.
48. The existing tax of 12.5 per cent, levied on domestic companies with reference
to the amount of their bonus issues will be discontinued. The loss to revenue
will be only Rs.9 lakhs.
49. At present, the dividend tax of 7.5 per cent on companies to which it
is applicable is, ordinarily, leviable on the whole of the dividends declared
or distributed during the previous year. I propose now to provide that this
tax will be leviable only on that part of the equity dividend declared or
distributed which is in excess of 10 per cent of the paid-up equity capital.
The loss to revenue on this account is estimated at Rs.4.8 crores.
50. I also propose to reduce the rate of surtax provided under the Companies
(Profits) Surtax Act, 1964, from the existing level of 40 per cent to 35 per
cent. The loss to revenue on this account is estimated at Rs.2.5 crores.
51. As already mentioned, I propose, simultaneously, to raise the effective
rates of the basic corporate tax on companies. Thus, the rate of tax on profits
from life insurance business will be raised from 47.5 per cent to 52.5 per
cent. In the case of domestic companies in which the public are substantially
interested with a total income not exceeding Rs.25,000 , the rate of tax is
being raised from 42.5 per cent to 45 per cent, and the rate of tax on such
companies with higher incomes, from 50 per cent to 55 per cent. In the case
of closely-held domestic companies also the existing general rate is being
increased from 60 per cent to 65 per cent, and the concessions rate applicable
to industrial companies on the first rupees ten lakhs of their income from
50 per cent to 55 per cent. In the case of foreign companies, royalty and
technical service fees under certain approved agreements will bear the, same
effective rate of 50 per cent as at present, but their other income will be
taxed at 70 per cent, as against 65 per cent at present. Similarly, some fiscal
encouragement needs to be given to our industries to encourage them to provide
technical “knowhow” and technical services to newly developing
countries. I propose, therefore, to provide for a concessional rate of tax
on dividends received by an Indian company from a foreign company on shares
allotted to the Indian company in consideration for supplying technical “know-how”
or rendering technical services. This concessional rate will be 25 per cent.
A similar concessional rate of tax of 25 per cent will also be charged on
royalties, commissions, fees, etc., received by an Indian company from a foreign
company for supply of technical “know-how” and technical services.
The net gain to revenues as a result of the changes in the basic rates of
corporate taxation is estimated at Rs.43.46 crores, after allowing for the
consequent reduction of Rs.5.6 crores under surtax.
52. Honourable Members are aware that at present we have separate schedules
of priority industries, one for qualifying for development rebate at the higher
rate of 35 per cent and the other for a concessional treatment in respect
of the basic corporate tax. I propose to extend the list of priority industries
for the purposes of the development rebate by inclusion of three more industries,
namely, of the manufacture of tea, newsprint and printing machinery. The same
schedule will also apply for purposes of concessional treatment in the rate
of tax. As a measure of simplification, however, I propose to modify the form
of the concession. At present a special rebate on income-tax and surtax is
granted to companies on their income from priority industries. I propose to
replace this by a straight deduction of 8 per cent of the profits from priority
industries in computing the total taxable income of the companies concerned.
This direct manner of giving a rebate should greatly simplify the computation
of the tax liability.
53. At present, 75 per cent of development rebate actually allowed is required
to be put into a reserve. In the case of the shipping industry, I propose
to reduce this requirement to 50 per cent, in order to provide an incentive
for fresh investment in this industry where levels of profitability are relatively
low.
54. In order to provide a further incentive for the extension and renovation
of our tea plantations, I propose to liberalise the existing provisions in
the law in regard to the grant of development allowance. Firstly, the rate
of development allowance for new planting will be increased from the existing
quantum of 40 per cent, of the actual cost of planting to 50 per cent thereof
and, for replanting, from 20 per cent to 30 per cent. Secondly, I propose
that the allowance may be granted in two stages, first, for the year following
the year in which the land is prepared for planting or replanting, with reference
to the expenditure incurred up to that year, and, as to the balance, for the
fourth year. This will replace the existing provision under which the whole
of the allowance is granted only for the fourth year.
55. The rate schedule of depreciation allowable in respect of buildings, furniture,
plant, machinery, etc., has become highly complicated. It is necessary to
review the position in the light of recent developments and to make appropriate
changes so that the schedule may be both rational and simple. I propose, therefore,
to initiate a complete review during the next few months. The recommendations
of the Working Group on Plantations Labour Housing will also be taken into
account during this review. Meanwhile, I propose to provide that the cost
of small items of plant and machinery costing not more than Rs.750 per unit
may be allowed to be depreciated in full in one year. I also propose to allow
initial depreciation of 20 per cent on the cost of new buildings erected by
employers and occupied or used by employees drawing remuneration upto Rs.7,500
per annum. At present, this is allowed only in the case of buildings occupied
or used by those drawing remuneration upto Rs.200 per month.
56. At present when development rebate is allowed, the plant and machinery
concerned is required to be retained in the possession of the assessee for
a period of 8 years; otherwise, the rebate already allowed is liable to be
withdrawn. When such plant, however, is transferred in the course of amalgamation,
including merger of a subsidiary company with the parent company, the development
rebate is not withdrawn. This is, however, subject to the qualification that
the merged subsidiary company is an Indian company. I do not see any reason
for the exclusion of a foreign subsidiary as it comes in the way of merger
of such companies with their parent companies. I, therefore, propose to withdraw
this disqualification.
57. At present, approved financial corporations which are engaged in providing
long term finance for industrial development in India are entitled to deduct,
in the computation of their profits, an amount up to 10 per cent of their
total income carried to a special reserve account. In order to enable relatively
small financial corporations to build up their financial resources at an accelerated
pace, I propose to increase this deduction from 10 per cent to 25 per cent
of the total income, in cases where the paid-up capital of the corporation
does not exceed Rs.3 crores. This will benefit mainly those financial corporations
which are engaged in fostering industrial development on a regional basis.
58. I propose to make a number of changes relating to closely-held companies.
Firstly, in determining whether a company is to be regarded as closely-held,
I propose that for such of them as are mainly engaged in certain manufacturing
activities or in ship-building, the test of the public being substantially
interested should be regarded as satisfied if 40 per cent of the equity is
held by the. Government, public corporations or members of the public, etc.,
instead of 50 per cent, as at present. Secondly, companies, which are mainly
engaged in ship building will not be compelled to distribute their profits
upto the statutory percentage. Companies which are only partly engaged in
manufacturing activities will also not be required to make a compulsory distribution
of their profits relating to such activities. Finally, certain types of expenditure
incurred by a closely-held company for earning its income are at present not
allowed for purposes of determining the tax liability. I see, however, no
reason why such expenditure should not be allowed as a deduction in computing
the distributable income of such a company. I propose to provide for this.
59. Honourable Members are aware that certain fiscal concessions have already
been announced in respect of the National Defence Remittance Scheme. Thus,
capital gains arising on the sale of bank certificates obtained under the
Scheme would be liable to tax at the concessional rate of tax applicable to
long-term capital gains, even though such certificates may have been transferred
by the holder within a period of 12 months from the date of receiving the
certificates. Non-residents who make a gift of foreign exchange to a resident
in India by making a remittance under the Scheme would also be exempt from
the gift tax. I have made provisions for these concessions in the relevant
Acts.
60. With a view to encouraging small savings, the requirement of deduction
of tax at source will be waived, subject to certain conditions, in the case
of small investments in Government securities. Similarly, the interest on
the new series of National Savings Certificates to be issued through the State
Bank will bear the same concessional treatment as the existing series of National
Savings Certificates. In the case of income from units of the Unit Trust of
India, income upto Rs.1,000 win be excluded from total income for purposes
of tax assessment in the case of all assessees irrespective of the amount
of their other income. This should make for simplification as wen as greater
incentive for investment in the Unit Trust.
61. Finally, I would like to mention some other changes that I have proposed
essentially in the interest of simplification or better administration. I
propose that the total income of assessees should be rounded to the nearest
multiple of ten rupees and that the amount of tax, penalty, refund, etc.,
should be rounded to the nearest multiple of one rupee. As a measure of curb
on ostentatious consumption, I propose that for the calculation of depreciation
on motor cars acquired for the purposes of a business or profession, purchase
price above Rs.25,000 will be ignored. Those who are responsible under the
law for deducting tax at source will be charged, in case of default in fulfilling
these obligations, simple interest at the rate of 6 per cent per annum for
the period of the default. Another amendment relates to exemption of the income
of charitable trusts and institutions from income-tax. It is being provided
that a charitable trust or institution will forfeit the right to exemption
if any part of its income or property is used or applied directly or indirectly
for the benefit of those who might be closely associated with the trust or
foundation as authors, substantial contributors or their relatives.
62. Before I sum up the effect of the tax proposals which I have explained
so far, I would like to make two proposals designed to raise resources for
the benefit of the States. The first is to increase from 2 per cent to 3 per
cent the rate of Central Sales Tax leviable on inter-State sales. This will
come into effect from 1st July, 1966. This increase will yield an additional
revenue of Rs.19 crores to the States in a full year and Rs.9.5 crores in
the year 1966-67. Since the new rates will become effective from 1st July,
1966 and since collections are carried over from one quarter to the other,
the additional yield during the next financial year will accrue only during
two quarters of the year. Similarly, collections in the Union Territories
which form part of the Consolidated Fund of India will increase by Rs.1 crore
in a full year and Rs.50 lakhs in 1966-67.
63. The second proposal is to raise from 2 per cent to 3 per cent the ceiling
prescribed in respect of sales tax on goods declared to be of special Importance
in inter-State trade or commerce. This is a permissive amendment and would
enable the States to refix the rates of local sales tax on coal, cotton, cotton
yarn, hides and skins, Iron and steel, jute, and oil seeds within-the ceiling
of 3 per cent if they so desire. If all the States raise their local sales
tax rate to the permissible ceiling of 3 per cent from the prescribed date
of 1st July 1966, it would give them an additional revenue of Rs.7.5 crores
in the next financial year. During a full year, however, the additional revenue
would be Rs.15 crores.
64. I shall now sum up the effect of my proposals. The additional yield resulting
from the changes in the excise duties proposed will be Rs.52.86 crores of
which the share of the States will be Rs.10.07 crores. The gain to the Central
budget will, therefore, be Rs.42.79 crores. The net effect of the changes
in regard to personal taxation would be again to revenue of Rs.22.14 crores.
The additional yield from corporate taxation, after taking into account the
concessions in regard to the dividend tax and surtax and the elimination of
the tax on bonus issues, will be a gain to revenue of Rs.36.07 crores. The
changes in the inter-State sales tax which I have referred to will bring in
an additional revenue of Rs.50 lakhs to the Centre. The total revenue effect
of my tax proposals is an addition of Rs.101.51 crores. On the capital account,
there will be a reduction in the yield of annuity deposits of Rs.9.39 crores.
The total additional resources thus available for reducing the deficit of
Rs.117 crores will, therefore, be Rs.92 crores, leaving an overall gap of
Rs.25 crores.
65. Honourable Members will note, however, that the changes I have proposed
will also augment the resources of the States to a significant extent. Apart
from their share of Rs.10.07 crores in union excise and additional yield of
Rs.69 lakhs in respect of estate duty, they will get Rs.34 crores in a full
year from the two changes that I have proposed in respect of the sales tax.
66. In conclusion, may I say that I am keenly aware that by the compulsion
of circumstances I have had to propose additional resource mobilisation on
a considerable scale. The underlying budgetary position with which we end
the current financial year is itself not very satisfactory. This alone has
required maximum restraint on both Plan and non-Plan expenditure. At the same
time, there are minimum claims of defence, development and drought relief
which we cannot disregard without peril. In distributing the additional burdens,
however, I have endeavoured to make the spread equitable among the different
sections of the community and to put the strain where it can best be borne.
I have also incorporated a number of reliefs and changes which are designed
considerably to simplify the tax structure and which, I hope, will provide
a better climate for orderly growth. Honourable Members would also appreciate,
that, in presenting my budget proposals, I have kept clearly in view the need
to make the economy stable. To this end, I would have liked to avoid deficit
financing altogether and to budget for some surplus. If I have left a deficit
of Rs.25 crores, it is only because of my firm belief that a greater degree
of resource mobilisation would be self defeating as it would come in the way
of the buoyancy of production and revival of confidence which are so urgently
required. I cannot conclude my presentation of the Budget without sharing
with you, Sir, and the Honourable House a sentiment of optimism in this that
we are together and determined to change our fiscal climate for the better.
In whatever walk of life, in field or farm, factory or workshop, in offices
or Parliament, Sir, I earnestly invite every citizen of our country to share
with us in this House the task of building a more prosperous and happier India,
truly free from fear and from want.