Direct Taxes

Since the presentation of the Budget on 29th February, 2008 I have received a number of suggestions from Hon’ble Members of Parliament, various associations, trade and industry, on the proposals in the Finance Bill, 2008. I have also taken note of the valuable suggestions made by the Hon’ble Members of Parliament during the debate in the House over the last two days. In general, Members of Parliament have welcomed the relief in the various tax rates, but seem to have reservation on the proposals which envisage expansion in the tax base.

2. Sir, before I reply to the specific points raised in the House during the debate, I would like to touch upon the philosophy underlying the tax reform initiated by the UPA Government. I wish to quote the CMP:

“[The UPA Government] will initiate measures to increase the tax: GDP ratio by undertaking major tax reforms that expand the base of tax payers, increase tax compliance and make the tax administration more efficient. Tax rates will be stable and conducive to growth, compliance and investment.”

3. Let us measure the achievement of this Government against these goals. The tax : GDP ratio had indeed increased from 9.2 per cent in 2003-04 to 12.5 per cent at the end of 2007-08. The base of tax payers has also increased: the number of assessees has increased from 3,01,78,000 in 2003-04 to 3,25,00,000 in 2007-08. Compliance has also increased, as will be evident from the rate of growth of gross tax revenues. In the four years of the UPA Government, gross tax revenues have increased by 19.9 per cent, 20.1 per cent, 29.3 per cent and 25 per cent (provisional) over the previous year. The tax administration had indeed become more efficient. The cost of tax collection on the direct taxes side is 60 paise per Rs.100 and on indirect taxes side, 65 paise per Rs.100. As has been acknowledged by many Honourable Members, the cost of collection is perhaps among the lowest in the world.

4. There is of course another point of view that the Government must impose a higher tax burden on the rich. The marginal rate of tax on an individual or a corporate, including education cess, is 33.99 per cent. Besides, it is the corporate sector which pays the bulk of customs duties and excise duties. My endeavour has been to increase the effective rate of corporate tax paid by corporations, but my efforts are stalled because of demands for continuing exemptions or introducing new exemptions. I think I would not be revealing any secret if I say that every request for exemption has the support of one or more Members of this House, irrespective of political affiliations. In my view, the way forward is not to increase tax rates but to remove the exemptions. In the last four years, I have succeeded to some extent in removing exemptions or imposing sunset clauses, but I cannot say that I am fully satisfied. Work on this regard would have to continue. Eventually, we would have to move towards a system of taxation where the exemptions are few, each exemption is reviewed periodically and each exemption comes to an end after a reasonable period of time. I am confident that the new Income Tax Code that will be placed in the public domain for discussion will reflect my philosophy in this regard and I hope that, in due course, the new Income Tax Code will, after deliberations, become law.

5. Let me now deal with the changes in the Finance Bill which are being introduced through official amendments.

6. Clause 3 of the Finance Bill, 2008 seeks to amend the definition of ‘charitable purpose’ so as to exclude any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature or use of application, or retention, of the income from such activity. The intention is to limit the benefit to entities which are engaged in activities such as relief of the poor, education, medical relief and any other genuine charitable purpose, and to deny it to purely commercial and business entities which wear the mask of a charity. A number of Honourable Members have written to me expressing their concern on the possible impact of the proposal on Agricultural Produce Market Committees (APMC) or State Agricultural Marketing Boards (SAMB). Since there is no intention to tax such committees or boards, and in order to remove any doubts, I propose to insert a new clause (26AAB) in section 10 of the Income tax Act to provide exemption to any income of an APMC or SAMB constituted under any law for the time being in force for the purpose of regulating the marketing of agricultural produce. I once again assure the House that genuine charitable organisations will not in any way be affected. The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether an entity is carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organisations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as “advancement of any other object of general public utility.”

7. Similarly, I also propose to extend the exemption to the Coir Board with retrospective effect from 1st day of April, 2002.

8. The sunset clauses under section 10A and 10B of the Income tax Act stipulate 31.3.2009 as the date on which the exemptions will come to an end. The Kelkar Task Force on Direct Taxes recommended the elimination of tax exemption under Section 10A and 10B, and in the case of computer software recommended elimination with certain transitory arrangements pending entering into a totalisation agreement with trading partners. The Kelkar Task Force on implementing the FRBM Act recommended that Sections 10A and 10B should be grandfathered or should be phased out in two years beginning 2004. The Economic Advisory Council to the Prime Minister has also endorsed the view that the tax exemptions under Sections 10A and 10B should not be extended beyond 31.3.2009. My own view is broadly in accord with the recommendations of the Kelkar Task Forces and the EAC. The most appropriate occasion to announce a decision in this regard would have been Budget 2009-10. However, as things stand, the Budget for 2009-10 may not be presented in February, 2009 but only after the elections. Thus, we are faced with the peculiar situation. Therefore, in order to avoid any uncertainty as we draw close to 31.3.2009, it has been decided that the two Sections will be amended and the exemptions continued until 31.3.2010. This will give the Government sufficient flexibility to take a well considered decision and announce it at the appropriate time.

9. Under the law as it was amended by Finance Act, 2004, if a person liable to deduct tax at source on specified expenditure fails to do so or fails to pay the tax within the time allowed to him, the expenditure is disallowed, besides subjecting any delayed payment to interest and penalty. Several representations have been received from Honourable Members pointing out the hardship that arose in the first assessment year after the amendment, namely, during Assessment Year 2005-06. Apparently, mistakes were made in complying with the amended Section 40(a)(ia), particularly in respect of deductions that ought to have been made in respect of payments made in the month of March. With a view to mitigating this hardship, I propose to insert a new clause 8 in the Finance Bill, 2008 to provide that no disallowance under section 40(a)(ia) of the Income-tax Act shall be made in the case of a deductor, in respect of the expenditure incurred in the month of March, if the tax deducted at source on such expenditure had been paid before the due date of the filing of the return. The taxpayers will now get a time period of six months for depositing such tax deducted at source, relatable to payments in the month of March, to escape the disallowance of the expense under this section. Naturally, the proposed amendment has to be given retrospective effect from assessment year 2005-06.

10. Sir, clause 15 of the Finance Bill, 2008 seeks to insert a new proviso in sub-section (9) of section 80-IB so as to provide that no deduction shall be allowed to an undertaking engaged in refining of mineral oil, if it begins refining on or after 1st April, 2009. Consequent to this proposal, the three public sector refineries under construction in Paradeep, Bina and Bathinda may not qualify for tax benefit since their commissioning may not be completed before 1st April, 2009. With a view to ensuring that the benefit to these refineries is not denied on account of their inability to adhere to this deadline, it is proposed to amend the proposal to provide that such refineries would be eligible to avail of the benefit if they begin refining not later than the 31st March, 2012.

11. Some concerns have been expressed regarding the scope of Section 80IB(9) of the Income Tax Act. As Honourable Members are aware, this sub-Section allows a 100 per cent tax exemption in respect of an undertaking which begins “commercial production or refining of mineral oil” for a period of seven consecutive assessment years. The scope of this Section is under adjudication since Assessment Year 2001-02 before different tax authorities. In my view, we should allow the disputed issues to be resolved in the normal course by the tribunals and courts. Nevertheless, I wish to clarify certain doubts that may have arisen because of the “Notes on Clauses” attached to the Finance Bill. The statement in the Notes on Clauses is a mere re-statement of the Income Tax Department’s known position before the tribunals/courts which are adjudicating the matter. Besides, it is a well settled proposition of law that Notes on Clauses have no legal effect and are not binding on the courts. I may assure potential bidders that the benefit of Section 80IB(9), as finally interpreted by the courts, will be applicable to all exploration and production contracts, whether obtained through nomination or bidding.

12. Sir, other proposed amendments to the Finance Bill, 2008 are essentially consequential in nature.

Indirect Taxes

13. I shall take up customs issues first.

14. In order to encourage value addition and exports, I had proposed reduction in customs duty on some of the inputs of gem and jewellery industry in this year’s budget. I now propose to extend full exemption from basic customs duty to two more inputs, namely, cut and polished colored gemstones and rough synthetic gemstones that currently attract 5% duty.

15. Newspaper industry has represented that the international prices of newsprint have been rising alarmingly. I propose to reduce basic customs duty on newsprint from 5% to 3%.

16. Tapioca starch is manufactured primarily by a large number of small, unorganized units. Owing to a hefty increase in the volume of imports, the Government had imposed a safeguard duty on this item in the year 2005-06 for a period of three years. This levy expires on 1st May, 2008. In the meanwhile, the flood of imports continues. In order to allow some additional flexibility to this industry to adjust, I propose to increase the basic customs duty on this item from 30% to 50% with effect from 1st May 2008 coinciding with the expiry of the safeguard duty.

17. Anti-dumping duty is not levied on imports made by 100% Export Oriented Units (EOUs). However, these units often use imported inputs for the manufacture of goods that are sold domestically. They are also permitted to sell a portion of imported inputs into the domestic market. With a view to provide a level playing field to domestic units, it is now being prescribed that EOUs would be liable to pay anti-dumping duty on imported inputs either sold directly or contained in finished products that are sold in the domestic market.

18. I now move to my proposals on the excise side.

19. Packaged cement with a price above Rs.250 per bag (of 50 kg.) is currently chargeable to a specific rate of duty of Rs.600 per metric tonne (PMT). This results in a regressive duty structure and does not sufficiently discourage increase in price beyond threshold of Rs.250 per bag. I propose to correct this by changing the mode of levy on packaged cement in this price bracket to an ad valorem rate of 12% of retail sale price. For this purpose, the statutory rate for cement is being enhanced to Rs.900 PMT.

20. In recognition of the fact that electric vehicles are emission free and environmental friendly, the Government had fully exempted electric cars from excise duty in this year’s budget. It is proposed to extend this exemption to all electric vehicles, including two-wheelers and three-wheelers.

21. Ensuring availability of clean, potable drinking water is a very high priority of this Government. The House may recall that water filters functioning without electricity and pressurized tap water were fully exempted from excise duty in 2007-08 budget. The manufacturers of such filters have been representing that replaceable kits used in such water filters attract the peak rate of 14% excise duty and this is inhibiting a rapid growth in their use. I propose to fully exempt replaceable kits used in such water filters from excise duty.

22. Full exemption from excise duty/CVD available to shuttle-less looms was withdrawn in this year’s budget as domestic capacity for their manufacture has increased appreciably in recent years. However, there is still no production of projectile type of shuttle-less looms. I propose to restore the excise duty/CVD exemption on projectile type of shuttle less looms.

Inflation management

23. During discussions in this House in recent weeks, I have conveyed the Government’s concern over the recent rise in prices and its resolve to take every possible measure to stem the rise in inflation. The House is aware of the various fiscal and other initiatives, particularly the reduction in customs duties, that have been taken after the presentation of the Budget. To recapitulate, the import duty on semi-milled or wholly-milled rice was reduced from 70% to Nil. Subsequently, the Government reduced customs duty on crude edible oils to Nil and on refined edible oils to 7.5%. Customs duty on margarine and vanaspati was also reduced to 7.5%. Customs duty on maize imported under a Tariff Rate Quota of five lakh metric tonnes was also decreased from 15% to Nil. Despite these changes, some sectors of the industry such as steel continue to exhibit a sharp increase in prices.

24. Steel plays an important part in the economy. Currently, steel and steel products contribute about 21.3 per cent of the current inflation. We have looked at measures to augment the domestic availability of steel products as well as soften prices.

25. Accordingly, I propose to take the following measures:

(i) reduce the basic customs duty on pig iron and mild steel products viz. sponge iron, granules and powders; ingots, billets, semi-finished products, hot rolled coils, cold rolled coils, coated coils/sheets, bars and rods, angle shapes and sections and wires from 5% to Nil.

(ii) TMT bars and structurals are commonly used for construction of houses. In order to rein in the price, I propose to fully exempt the import of this item from CVD which is currently 14%.

(iii) I propose to reduce basic customs duty on three critical inputs for manufacture of steel, i.e. metallurgical coke, ferro alloys and zinc from 5% to Nil.

(iv) The objective of containing domestic prices will not be achieved unless we augment the domestic supply/availability of intermediates and finished products. Despite a slow down during 2007-08, the value of exports of steel items was as high as Rs.26000 crore in that year. In this background, there is a case for disincentivizing the export of steel. It is proposed to impose export duty on steel items at the following three different rates:

· 15% on specified primary forms and semi-finished products, and hot rolled coils/sheet.

· 10% on specified rolled products including cold-rolled coils/sheets and pipes and tubes.

· 5% on galvanized steel in coil/sheet form.

For this purpose, a uniform statutory rate of 20% is being incorporated in the Export Schedule and the aforesaid rates would operate through notification.

26. In order to ensure adequate availability of milk in lean summer months, it is proposed to reduce basic customs duty on skimmed milk powder from 15% to 5% for a Tariff Rate Quota of 10000 metric tonnes per annum.

27. Similarly, on butter oil, which is used for reconstituting liquid milk, reduction in duty from 40% to 30% is proposed.

28. A minimum export price of US $ 1200 per tonne is applicable to basmati rice. The margins of exporters of this item have been rising as a result of buoyancy in international prices. I propose to impose an export duty of Rs.8000 per tonne on this item along with a commensurate reduction in its minimum export price. Hence, the MEP will be re-fixed at US$1,000 per tonne.

29. While changes in import duty rates will be effective today, changes in export duty will come into effect on the date when the Finance Bill, 2008 receives the assent of the President.