Budget speech 2007-08: Full text

FM'S SPEECH: Chidambaram said that there were many pluses and a few minuses, both of which he dealt with in his speech candidly.

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E-filing of corporate returns introduced this financial year has been a resounding success. Until January 31, 2007, 301,736 returns were electronically filed by corporates. Our analysis shows that the effective rate of tax paid by all corporates, thanks to numerous tax concessions and exemptions - several of them well-intended - was only 19.2 per cent. In 1996-97, we introduced the Minimum Alternate Tax (MAT) for companies with book profits, and its purpose is to bring about horizontal equity in taxation. MAT should therefore apply, as far as possible, to all corporate incomes. Hence, I propose to extend MAT to income in respect of which deduction is claimed under sections 10A and 10B of the Income Tax Act.

I also propose to partially modify a deduction that is available to certain companies. Without altering the overall limit of the special reserve equal to twice the net worth under section 36(1)(viii) of the Income Tax Act, I propose to stretch out the period by restricting the deduction to 20 per cent of the profits each year and limit the benefit to banks and certain financial corporations.

Venture capital funds are a useful source of risk capital, especially for start-up ventures in the knowledge-intensive sectors. Since such funds enjoy a pass-through status, it is necessary to limit the tax benefit to investments made in truly deserving sectors. Accordingly, I propose to grant pass-through status to venture capital funds only in respect of investments in venture capital undertakings in biotechnology; information technology relating to hardware and software development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels. In order to promote business tourism, I also propose to allow this benefit to venture capital funds that invest in hotel-cum-convention centres of a certain description and size.

In December 2006, I put a limit of Rs.50 lakh per investor per year with respect to capital gains bonds issued by NHAI and REC under section 54EC of the Income Tax Act. As a result, many small investors could obtain these bonds and save on capital gains. I propose to continue this provision and, accordingly, I propose to amend section 54EC to that effect.

I propose to expand the tax base of capital gains to include certain works of art.

I believe that my direct tax proposals have brought about more horizontal equity. It is also necessary to improve vertical equity. Having regard to the capacity to pay, I propose to raise the rate of dividend distribution tax from 12.5 per cent to 15 per cent on dividends distributed by companies.

Dividends distributed by money market mutual funds and liquid mutual funds enjoy concessional tax rates giving rise to huge arbitrage opportunities. I propose to address this distortion by raising the dividend distribution tax on dividends paid by such entities to 25 per cent for all investors.

Fringe Benefit Tax (FBT) has now stabilized. I have received a few representations regarding some aspects of sales promotion. Hence, I propose to clarify the doubts by excluding expenditure on free samples as well as expenditure on displays from the scope of FBT.

A number of companies provide fringe benefits to employees through Employees' Stock Option Plan (ESOP). I propose to bring ESOPs under FBT. The value of the fringe benefit will be determined, in accordance with a prescribed method, on the date of exercise of the option.

The Banking Cash Transactions Tax (BCTT) continues to be an extremely useful tool to track unaccounted monies and trace their source and destination. It has led the Income Tax Department to many money laundering and hawala transactions. Having regard to the experience gained, I propose to exclude cash withdrawals by the Central and State Governments from the scope of BCTT. Further, I propose to raise the exemption limit for individuals and HUFs from Rs.25,000 to Rs.50,000. As other instruments become more effective, I think it would be possible to review BCTT next year.

I have a proposal regarding the cess for education. While the cess of 2 per cent on all taxes to fund basic education will remain, I propose to levy an additional cess of 1 per cent on all taxes to fund secondary education and higher education and the expansion of capacity by 54 per cent for reservation for socially and educationally backward classes.

Finally, there is a small matter which has large beneficial consequences. In 2001, 'Aviation Turbine Fuel sold to turbo-prop aircraft' was included in the list of declared goods under section 14 of the CST Act. Turbo-prop aircraft have been replaced by new generation small aircraft which have taken air services to smaller airports and to the remote parts of the country. Hence, I propose to amend the provision to cover all small aircraft with maximum takeoff mass of less than 40,000 kgs operated by scheduled airlines.

Along with tax reforms, the Government has laid great emphasis on tax administration. The cost of collection of taxes in India is among the lowest in the world. A number of administrative goals have been set for 2007-08. These include expanding the coverage of Annual Information Returns, extending the Refund Banker System to more areas, extending the e-payment facility through more banks, making electronic filing of returns mandatory for more categories of assessees and creating new Large Tax Payer Units.

My tax proposals on direct taxes are estimated to yield a gain of Rs.3,000 crore. On the indirect taxes side, the proposals are revenue neutral.

CONCLUSION

Mr Speaker, Sir, our human and gender development indices are low not because of high growth but because growth is not high enough. Faster economic growth has given us, once again, the opportunity to unfurl the sails and catch the wind. Without growth, I could not have given a new thrust to agriculture. I could not have given relief to the small tax payer, the small service provider and to small scale industry. I could not have promised 100,000 scholarships or 100,000 jobs for the physically challenged. I could not have promised a massive ground water recharge programme or social security for rural landless households.

The UPA Government has delivered on the promise of savings and investment, and will deliver on the promise of encouraging more savings and translating the savings into more investment. It has delivered on the promise of growth, and will deliver on the promise of making growth more inclusive. I believe that, given a right mix of policies, the poor will benefit from growth that is driven by savings and investment and that is more inclusive. As Dr. Muhammad Yunus, the Nobel laureate, said, "Faster growth rate is essential for faster reduction in poverty. There is no other trick to it."

Sir, with these words, I commend the Budget to the House.