The minister of finance, P.Chidambaram has opened his budget speech by citing the National Common Minimum Programme (NCMP) as the guiding light and said that the NCMP spells out seven clear economic objectives viz, growth rate of 7-8 per cent per year for a sustained period; universal access to quality basic education and health; generating gainful employment in agriculture, manufacturing and services, and promoting investment; 100 days' employment to the breadwinner in each family at the minimum wage; focus on agriculture and infrastructure; acceleration of fiscal consolidation and reform; and higher and more efficient fiscal devolution.
This year, a medium-term fiscal policy statement, a fiscal policy strategy statement and a macro economic framework statement were also presented alongwith the Budget. The Fiscal Responsibility and Budget Management Act (FRBM) and the macro economic backdrop aims at elimination of revenue deficit by 2008-09; growth to be sustained by increased production and value addition in agriculture, a marked improvement in industrial production and continued buoyancy in the performance of the services sector; and 5-year road map to achieve the NCMP objective of bringing about rapid growth with stability and equity.
Chidambaram has said in his budget speech that empowering the people, especially the poor with universal access to education and health and facilitating their full participation in the growth process through gainful employment, will enhance their welfare. Accordingly, the key features for making an assault on poverty and unemployment are : a) additional provision of Rs. 10,000 crore for Gross Budgetary Support (GBS) for plan; programmes such as Food for Work, Sarva Shiksha Abhiyan, Midday Cooked-Meal Scheme, basic health care, railway modernization and safety, Accelerated Irrigation Benefit Programme, drinking water, investment in agriculture, roads, and science and technology to receive priority; b) under Antyodaya Anna Yojana, coverage will be increased from 1.5 crore to 2 crore families with a provision of Rs.3500 crore for food subsidy; c) the Public Distribution System will be strengthened; d) work has already begun on the National Employment Guarantee Act to guarantee 100 days of employment in a year to one able-bodied person in every poor household; and new food for work programme will be launched in 150 most backward districts; e) Rs.1180 crore has been earmarked for programmes concerning the Scheduled Castes and Rs. 1146 crore for Scheduled Tribes; f) additional allocation for Rs. 50 crore for the National Minorities Development and Finance Corporation; and g) indicative target of credit linking 5.85 lakh self-help groups (SHGs) during the period up to March 31, 2007.
Union finance minister,Chidambaram has set for himself the key thrust areas in the budget viz, doubling agricultural credit in three years, accelerating the completion of irrigation projects and investing in rural infrastructure; providing farm insurance and livestock insurance; improving agricultural product markets, and promoting agri-businesses; drinking water for all; expanding water harvesting, watershed development and minor-irrigation and micro-irrigation schemes; enhancing investment in industry- public and private, domestic and foreign - to create new jobs; creating space for small-scale industry to thrive and grow; electricity for all; universal access to telecommunication facilities; more housing for the poor; access to medical care through health insurance; and encouraging savings, and protecting the savings of the senior citizens.
For education, the government would levy an education cess of 2 percent. The new cess will yield about Rs. 4000-5000 crore in a full year. This amount will be earmarked for education including cooked mid-day meal. The government also proposed to launch a programme in the central sector to upgrade 500 ITIs (Industrial Training Institutes) over the next 5 years at the rate of 100 ITIs per year. An education loan scheme has been in operation since April, 2001 under which loans upto Rs. 7.50 lakhs and Rs.15 lakhs are available for professional courses within the country and abroad respectively. The finance minister said that commercial banks have now agreed to waive the need for collateral for loans upto Rs. 7.5 lakhs, if a satisfactory guarantee is provided on behalf of the student.
The revised Universal Health Scheme has been made exclusive for persons and families below the poverty line. The revised premium would be Rs. 165 for individuals, Rs.248 for a family of five and Rs.330 for a family of seven without any reduction of benefits. If the premium subsidy of Rs.40 crore is fully spent, the number insured will rise to about 10 lakhs. In addition to this, a new Group Health Insurance Scheme will be introduced through public sector non-life insurance company for members of self-help groups and other credit link groups (CLGs). The premium will be Rs.120 per person but the insurance cover would be a sum of Rs. 10,000.
Boosting agricultural growth through diversification and development of agro-processing is one of the objectives of the NCMP. The agriculture sector requires massive investments. Such investments have to be through credit-enabled private investment and enhanced public investment. The finance minister intends to double the flow of agricultural credit in three years. The government has entrusted the implementation of this policy to the public sector and private sector banks, the Regional Rural Banks (RRBs) and the cooperative banks. Those RRBs who adopt new governance standards and abide by the prudential regulations will qualify for receiving funds from the Government for restructuring. A Task Force will also be appointed on reforms in the cooperative banking system.
Under the Accelerated Irrigation Benefit Programme (AIBP), last mile projects will be given priority. A corpus of Rs.8000 crore will be provided for Rural Infrastructure Development Fund (RIDF) during 2004-05. A scheme to repair, renovate and restore all the water bodies that are directly linked to agriculture will be launched. In the current year, the Finance Minister has proposed to begin with pilot projects in atleast five districts to be selected in each of the five regions of the country. The estimated cost of this project will be Rs.100 crore. A nationwide water harvesting scheme will be launched to cover one lakh irrigation units at an average cost of Rs. 20,000 per unit. NABARD will lend the money on easy terms with no margin money and Government will provide 50 percent subsidy through NABARD.
Under diversification of agriculture, National Horticulture Mission will be launched to double the horticulture production by 2011-12. States will be encouraged to emulate the Anand model and establish a State Level Cooperative Society. Government also proposes to launch a National Horticulture Mission. Government will also facilitate farmers to diversify into oilseeds.
The finance minister has announced that IDBI, IDFC, ICICI, SBI, LIC, Bank of Baroda, PNB will form an Inter-Institutional Group (IIG) to ensure speedy conclusion of loan agreements and implementation of infrastructure projects. All drinking water schemes will be brought under the umbrella of the Rajiv Gandhi Drinking Water Mission with allocation of Rs.2610 crore for Accelerated Rural Water Supply Programme (ARWSP) in the current year. Panchayati Raj Institutions (PRIs) will be encouraged to plan, implement, own, operate and maintain the rural water supply schemes in consultation with the state governments. Funds will be devolved on PRIs to implement the ARWSP. Under Rural Housing allocation for Indira Awas Yojana (IAY) has been raised by Rs.537 crore to Rs.2247 crore. The Government has set a target of 250,000 rural housing units per year.
The government has announced that an Investment Commission will be established. The Government has also proposed that a National manufacturing Competitiveness Council will be set up. The procedure for registration and operations will be made simpler and quicker for FIIs. Attempts will be made to integrate the commodities markets and the securities markets. For Public Sector, Board for Reconstruction of Public Sector Enterprises (BRPSE) will be established. 85 items of Small Scale Industries will be taken out of reserved list and ceiling for loans under the Capital Subsidy Scheme will be raised from Rs.40 lakh to Rs.1 crore.
The proposals of the finance minister also touch upon a legislation to provide regulatory framework for the defined contribution pension scheme for the central government employees recruited on or after January 1, 2004 to be introduced in parliament. To ensure recovery process of the debts of the banks, the Securitisation Reconstruction of Financial Assets and Enforcement of Security interest Act will be amended to make it stronger. There is no change in the existing rate of interests on all small savings instruments. A new scheme called Senior Citizens Savings Scheme is introduced offering an interest rate of 9 percent per annum. Government has also announced a pilot scheme for distribution of food stamps instead of PDS in two or three contiguous districts.
Bihar gets Rs.3225 crore under Rashtriya Sam Vikas Yojana. All ministries and departments will have to spend at least 10 percent of their plan budgets for the development of the North Eastern Region. Special assistance of Rs.300 crore will be provided to J&K. A Backward States Grant Fund with a corpus of Rs.25,000 crore is being set up and will become operational from 2005-06. Defence allocation has been increased to Rs.77,000 crore this year as against Rs.65,300 crore in BE 2003-04 including Rs. 33,483 crore for capital expenditure.
Presenting his tax proposals, the minister of finance, P. Chidambaram recalled the promise made in the National Common Minimum Programme (NCMP) that "tax rates will be stable and conducive to growth, compliance and investment". Through his policies on taxation the Finance Minister signalled the Government's commitment to moderation and stability in taxes; to increase in revenues from direct taxes and excise duties; and to expanding the service tax net because the services sector accounts for 51 per cent of GDP. The Minister underlined that though he himself was a votary of tax reforms but thought it unwise on his part to attempt any reforms in a hurried or piece-meal manner. " Seven months from now there will be another Budget and there will be an occasion to visit the subject of tax reform", he added.
The Finance Minister began with a good news that ' no one with a taxable income of one lakh will be required to pay income tax any more'. The measure will give relief to 1.4 crore assesses. The Minister expressed his inability to give more relief, or relief across the Board, in the current Budget, but he promised to revisit the subject if the compliance improves.
The Minister announced relief to certain sections of deserving tax payers. Family pension received by widows, children and nominated heirs of members of the armed forces and the paramilitary forces killed in the course of operational duties would be exempt from income tax. Benefit of Section 80DD and Section 80U is proposed to be extended in respect of persons suffering from autism, cerebral palsy and multiple disability. Shri Chidambaram also proposed exemption from capital gains tax in cases where the compensation or the enhanced compensation for acquisition of agricultural land in certain urban agglomerations has been received on or after April 1, 2004.
The Minister proposed the universally accepted formula of EET to be adopted for the 'defined contribution' pension scheme for new entrants into Central Government service w.e.f January 1, 2004. The EET signifies : exclusion of contributions from income for tax purposes; the accruals to be exempted from tax; and only the terminal benefits to be taxed at the applicable rate in the year of receipt.
The Minister also proposed to withdraw a few exemptions which have outlived their utility. Accordingly, tax exemptions on interest earned from a Non-Resident (External) Account and interest paid by banks to a Non-Resident or to a Not-Ordinarily Resident on deposits in foreign currency, and on payment made by an Indian company to acquire an aircraft or an aircraft engine on lease from a foreign state or a foreign enterprise would cease from September 1, 2004.
The Minister announced that purported gifts from unrelated persons, above the threshold limit of Rs. 25,000 will henceforth be taxed as income. However, gifts received from blood relations lineal a ascendants and lineal descendants. and those received on certain occasions like marriage etc. would continue to be totally exempt.
Shri Chidambaram also proposed to amend Section 80 1B of the Act to allow a deduction of 100 per cent of profits for 5 years and 25 per cent of profits for the next 5 years in the case of new agro-processing industries set up to process, preserve and package fruits and vegetables.
With a view to encouraging investment in the manufacturing sector, the Minister proposed to continue with the additional depreciation of 15 per cent on new plant and machinery acquired or installed in an existing undertaking. But, the required increase in installed capacity would be reduced from 25 per cent to 10 per cent.
Automobile industry is to be notified as an industry entitled to 150 per cent deduction of expenditure on in-house R&D facilities.
In order to promote renovation and modernisation of existing transmission and distribution lines in the power sector, the benefit under Section 80 1A is proposed to be extended to projects undertaken during April1, 2004 to March 31, 2006.
Shri Chidambaram also accepted the request of the Shipping industry and proposed to withdraw the concessational regime under Section 33 AC. Shipping companies will now have only an option to pay the tonnage tax or normal corporate tax on profits.
New hospitals with 100 beds or more set up in rural areas would be extended the benefit of Section 80 1B and would be entitled to a 100 per cent deduction of their profits for a period of five years.
Benefits available to the housing industry under Section 80 1B for projects approved before March 31, 2005, would now be extended till March, 31, 2007.
Shri Chidambaram proposed to abolish the tax on long-term capital gains from securities transactions altogether. Instead he proposed to levy a small tax on transactions in securities on stock exchanges at the rate of .15 per cent of the value of security. It will be levied on the buyer. In case of short-term capital gains, the rate of tax is proposed to be reduced to a flat rate of 10 per cent
Equity-oriented funds would continue to be exempt from tax on dividends; rate of tax on corporate unit holders of debt-oriented mutual funds would be raised to 20 per cent with no change for individuals and HUF unit holders.
Benefit to the telecom sector under Section 80 1A for services commenced before March 31, 2004 are proposed to remain extended till March 31, 2005.
The terminal date for 100 per cent deduction of profits for 10 years for companies carrying on scientific research and development and approved by the Department of Scientific and Industrial Research, is to be extended from April 1, 2004 to March 31, 2005.
The new industrial undertakings commencing production before March 31, 2004, in Jammu and Kashmir enjoy 100 per cent tax exemption . The date has now been proposed to be extended to March 31, 2005.
Turning to the indirect tax proposals, Chidambaram expressed his intention to align India's tariff structure to those of ASEAN countries. Another principle that was emphasised by the minister was that where an excise duty is levied, subject to only a few exceptions like goods when imported should attract an equivalent contervailing duty (CVD). The minister, therefore, proposed removal of exemption from CVD enjoyed by some imported goods where there is no corresponding exemption from excise duty on Indian made goods. Shri Chidambaram also pointed out that customs tariffs and excise duties are inter-related. While considering the tax regime for any sector, one must look at both customs duties and excise duties applicable to that sector, he added.
Coming to the specific sectors, Chidambaram said that steel as a leading metal should bear an excise duty of 16 per cent but in February this year the excise duty on steel was reduced from 16 per cent to 8 per cent. He observed that belying expectations, steel prices have not moderated but have risen sharply. He proposed to reduce the customs duty on non-alloy steel from 15 per cent to 10 per cent and to increase the excise duty on steel from 8 per cent to 12 percent so that the countervailing duty will also be applicable to imports. This would recoup some of the revenue losses since February, 2004, the finance minister hoped.
Peak rate on alloy steel, copper, lead, zinc and base metals was proposed to be reduced to 15 per cent; customs duties on refractory raw minerals and mineral products like graphite, asbestos, mica and gypsum to be reduced to 15 per cent. The customs duty on all catalysts is also proposed to be 15 per cent.
Proposing certain concessions to the agriculture sector, Chidambaram said that the duties on refined palm oil would be increased to 75 per cent as recommended by the tariff commission while customs duty on crude palm oil would be retained at 65 per cent with a view to encourage value addition.
The minister proposed to extend concessional customs duty rate of 5 per cent to more items pertaining to the tea and coffee plantation sector.
On the excise front, the finance minister proposed that full exemption for tractors, dairy machinery and hand tools such as spades, shovels, sickles etc. These items presently attract 16 per cent excise duty.
Excise duty on preparations of meat, poultry and fish will be reduced from 16 per cent to 8 per cent and excise duty on food grade hexane (used in the edible oil industry) would be reduced from 32 per cent to 16 per cent.
Coming to the health sector, the minister proposed certain rehabilitation aids should be fully exempt from customs duty, excise duty and CVD. Accordingly, Crutches, wheel chairs, walking frames, artificial limbs etc., for the disabled are to be fully exempt from customs duty. Restrictions on institutions for the visually-impaired and the hearing-impaired availing of import duty exemptions are to be removed and the list of exempted appliances to be enlarged. All ambulances registered as such are to be allowed the concessional excise duty of 16 per cent . Excise duty exemption is proposed to be extended to diagnostic kits for detection of all types of hepatitis.
In order to move towards the cenvat rate, the minister proposed to levy 8 per cent excise duty on contact lenses and playing cards. Excise duty on a few items like vaccum flasks, scented supari, imitation jewelry is to be increased from 8 per cent to 16 per cent.
The minister proposed full excise duty exemption on computers. He also proposed some excise relief to be given to LPG gas stoves of upto Rs. 2000/- MRP, footwear of upto Rs. 250/- MRP and writing instruments with MRP upto Rs. 200/-.
Concessional customs duty of 5 per cent on capital goods is proposed to be extended to the non-leather footwear industry, patent leather to be exempt from customs duty.
Describing platinum as a serious challenger to gold in the jewellery industry, Chidambaram proposed to reduce the import duty on platinum from Rs. 550 per 10 grams to Rs. 200.
The minister also proposed area specific exemptions enjoyed by states other than the North Eastern States and J&K to continue and be available to units set up or expanded on or before March 31, 2007.
Chidambaram proposed to withdraw the mandatory Cenvat duty from the handloom and powerloom sectors and proposed a new tax regime for textiles sector: no mandatory excise duty on pure cotton, wool and silk, whether it is fibre, yarn, fabric or garment. A different tax regime for blended textiles and pure non-cotton(polyester, viscose, acrylic and nylon) to have a different tax regime. Mandatory excise duty at the rate of 16 per cent has been proposed on man-made stapel fibre ; 24 per cent on polyester filament yarn(including textured yarn) and 16 per cent on other man-made filament yarn (including textured yarn).
The minister proposed to extend credit of service tax and excise duty across goods & services. Rate of service tax is proposed to be enhanced from 8 per cent to 10 per cent. Some more services have been added in the service tax net while mandatory verification of self assessment and the mandatory penalty for non-registration is proposed to be done away with.
The education cess of 2 per cent on income tax, corporation tax, excise duties customs duties and service tax is proposed to be levied as mandated by the NCMP.
The minister noted that there are large recoverable areas both in direct taxes and indirect taxes and hoped that he would be able to recover a tidy sum this year through a special, multi-pronged drive to recover the arrears.
Chidambaram concluded by saying that his tax proposals on direct taxes are expected to yield a gain of Rs. 2000 crore. On indirect taxes side, they are broadly revenue neutral.