Reply by Mr. P Chidambaram to the debate of Finance Bill, 2007, this bill has been passed by the Lok Sabha After his reply

Dated: - 03-05-2007

SHRI P. CHIDAMBARAM  replying to the discussion, said  :  The Finance Bill is essentially a Bill that concerns the tax laws of the country, such as Income Tax Act, the Excise Act, and the Customs Act.  In the three years of the UPA Government, we have increased the tax, GDP rate from 9.2 per cent to 11.2 per cent of this, the ratio of direct taxes to GDP is 5.6 per cent and it is rising every year.  For 2007-08, I have projected a tax, GDP ratio of 11.8 per cent.  I am happy to report that in 2006-07, for the first time in recent history, actual tax collections exceeded both Budget Estimates and Revised Estimates.  Gross tax revenue at Rs.4,71,742 crore exceeded the Budget estimates by Rs.29,589 crore and exceeded Revised Estimates by Rs.3,894 crore.  The savings rate has increased from 29.7 per cent in 2003-04 to 32.4 per cent in 2005-06.  The investment rate has increased from 28 per cent in 2003-04 to 33.8 per cent 2005-06.  I placed before the House for the first time a statement called 'Statement of Revenue Foregone'.  It captures the loss of revenue due to various exemptions.  While some hon. Members pleaded for removal of exemptions, other hon. Members have urged to grant more exemptions or increase the concessions to certain sections of taxpayers.  The need for resources is growing every year.  For example, Plan expenditure has increased from Rs.1,22,280 crore in the last year of the NDA  Government, 2003-04, to Rs.2,05,100 crore in the B.E. for 2007-08.  Within Plan expenditure, many key sectors have witnessed a sharp increase in budgetary support.  It has registered a healthy increase  in the fourth year of the UPA Govt.  In Agriculture, Education, Rural Development & Land Resources, Drinking water, Road Transports & Highways, it has been Rs.8090 crore, Rs.28,672 crore, Rs.29000 crore, Rs.7560 crore and Rs.14,066 crore respectively.  On the Non Plan side too, the demand for resources has increased to keep pace with the need for expenditure.  The allocation for defence has been increased from Rs.65,300 crore in 2003-04 to Rs.96,000 crore in the B.E. for 2007-08.  Grants to State and UT Governments have increased tremendously.  In 2007-08, we will provide more than twice the amount, Rs.38,403 crore.  Out of every rupee of tax revenue collected by the Central Government approximately 30 per cent goes to the States and Union Territories.  While Education Cess is not directly shared with the States, the amount collected goes into a non-lapsable account to support Sarva Shiksha Abhiyan and the Mid-Day Meal Scheme.  According to the Budget Estimates, the collections under cess and surcharge will be Rs.15,592 crore in 2007-08.  Export Duty on iron ores will be shared according to the normal formula applicable to the Customs Duties.  As against an effective threshold of Rs.80,000 for salaried tax payers, we increased the threshold to Rs.1 lakh.  Besides, we continued with the exemption of up to Rs.9,600 per year for Transport Allowance, and up to Rs.15,000 per year for medical reimbursement.  Look at the tax brackets.  I can say with confidence that taking into account, the revised tax bracket and the applicable rate, every individual tax payer has been benefited under the UPA Government.  As against the earlier method of giving tax rebate, which often resulted in the full benefit not accruing to the tax payer, we have introduced Section 80C.  In 2007-08, I have proposed to raise the first tax bracket from Rs.1 lakh to Rs.1,10,000.  That is an increase of 10 per cent.  This reflects indirectly, the corrections in inflation in two years, which amounts to about 9.72 per cent.  The woman assessee gets a relief of Rs.1,000 per year and a senior citizen gets a relief of Rs.2,000 per year.  We have raised the exemption limit for health insurance premium from Rs.10,000 to Rs.15,000 for individuals and in the case of senior citizens, to Rs. 20,000. Similarly, we have extended the tax exemption on interest on education loan in the case of loans taken by any relative of the assessee.   Regarding the number of individual assesses who admit to an income of more than Rs.10 lakh per year,  in 2003-04, the number was approximately 97,500.  In 2005-06, the number is estimated to have increased to approximately 1,40,000.  There is a tax on dividends except that it is called dividend distribution tax and collected at the point where dividends are distributed.  As far as limit is imposed on investors in respect of capital gains bonds, when there were no limit for investor, the bonds were virtually monopolized by big investors who had huge capital gains.  As a result, many small investors who came in the later months of the year, could not access these bonds.  Hence, we decided to put a limit of Rs.50 lakh per investor.  Regarding tax holiday for new hotels to all parts of the country,  I am inclined to separately look into the incentives that could be given to the hotel industry to promote tourism.  Some issues about TDS was also raised.  If there is no tax liability or if there is a reduced tax liability, the tax collected is refunded.  Besides, under Section 197, an assessee can apply to the Assessing Officer for issue of a certificate for deduction at a lower rate or a nil rate.  Regarding exemptions to corporate sector, it is my intention to review exemptions periodically and ensure that the corporate sector pays its share of taxes.  About the contribution of the BCTT, the BCTT continues to be a valuable tool to track unaccounted moneys.  I have exempted Central and State Governments from the scope of BCTT and have raised the limit to individuals and HUFs from Rs.25,000 to Rs.50,000.  With the assistance of the Ministry of External Affairs, we are addressing the issue of revision of DTAA with Mauritius.  There is a tax on long-term capital gains, on all assets other than listed securities.  It is only on listed securities that we have exempted long-term capital gains if the security is held for more than one year.  Regarding the collection of tax arrears, I would like to say the collections in 2004-05, 2005-06 & 2006-07 have been Rs.7,084 crore, Rs.8064 crore and Rs.12,285 crore.  Similarly, under indirect taxes, the collection of these three years have been Rs.2,642 core, Rs.3,139 crore and Rs.3,466 crore.  Many Members referred to the growth rate in excise duty.  I suspect the reasons are both tax evasion and tax exemption.  Beginning April 1, 2007, we have introduced mandatory e-payment of excise duty.  We have set a target growth rate of 10 per cent for 2007-08 over 2006-07.  Regarding drip irrigation and sprinkler irrigation systems as well as to pan masala, I have actually reduced the customs duty on drip and sprinkler irrigation systems from 7.5 per cent to five per cent.  Pan masala with tobacco continues to attract an excise duty of 66 per cent.  Next issue is service tax.  Service tax was first introduced in 1994-95.  Service taxes are value added taxes just as excise duty is tax on value addition on goods.  Although services account for 56 per cent of GDP, service tax contributed 7.92 per cent of the total tax collection in 2006-07.  Hon. Members, may recall that there was no threshold exemption from service taxes until 2004-05.  UPA Government introduced the threshold exemption of Rs.4 lakh on 1.4.2005.  This year, I have increased the threshold exemption to Rs.8 lakh.       

Renting is liable to Service Tax.  We have introduced Service Tax only in respect of renting of large commercial properties.  Properties used for education and religious purposes for sports and entertainment are exempted.  Revised Estimates of Plan expenditure in 2006-07 is Rs.1,72,730 crore.  RE of non-Plan expenditure is Rs.4,08,907 crore.  As regard to the number of Income Tax Officers leaving the service prematurely 103 Group 'A' Officers out of a total number of 4150 have left the service since June 2004.  But on an average about 65 Group 'A' Officers have been recruited every year in the last five years to the Income Tax Department and hence there is no cause for alarm.  The Budget allocation to the North-Eastern region has indeed been increased to Rs.14,365 crore in 2007-08. 

Several Members have made valuable interventions on the question of inflation.  There are five reasons behind the present inflation.  First, the world wide increase in commodity prices, including crude oil;  second, the supply demand mis-match which can be attributed to stagnation in production over the last ten years for wheat, paddy and pulses; third, rise in public expenditure which increases demand;  fourth, the higher rate of growth of GDP stimulating higher demands of goods and services and Fifth, capital inflows enhancing the money supply beyond normative levels.  There are three instruments to moderate inflation - fiscal policy, monetary policy and supply side measures.  On fiscal policy, custom duties and excise duties have been reduced on a large number of goods of mass consumption.  On the monetary policy side, the Reserve Bank of India has taken a number of measures to moderate demand and credit growth.  On supply side measures,  the Minister of Agriculture has already explained measures taken by the Government to augment production and productivity of essential food articles, especially, food grains and pulses.  Ministry of Finance have not hesitated to provide funds for many of the food articles.  The Budget for 2007-08 has given a new thrust to agriculture. The measures taken by the Government will bear fruit in the near future.  Where as the present inflation is concerned average inflation in 2006-07 was 5.4 per cent and peak inflation was 6 per cent.  However,  the average inflation and the peak rates were much higher in 1998-99, 2000-01 and 2003-04.  Nevertheless, the Government of the day moderated inflation thereafter.  The current inflation will definitely be moderated due to a combination of supply side monetary and fiscal measures taken by the Government and the Reserve Bank of India. 

As far as the tax proposals on indirect taxes is concerned, the export duty on iron ore was imposed.  Some representations have been received on export duty on iron ore fines especially fines with low FE content. The Export Duty is proposed to be reduced on Iron Ore Fine of FE content 62 per cent and below to Rs.50 per tonne as also the Custom Duty to Nickel from 5 per cent to 2 per cent and to N-Paraffin from 10 per cent to 7.5 per cent.  The Customs Duty of Refrigerator Motor Vehicle is also proposed to be reduced  from 10 per cent to 0 per cent; the Excise Duty CVD from 16 per cent to 8 per cent as also the Customs Duty of cutting and polishing of diamonds to 0 per cent.  Soyabari and Ready to Eat packaged food be exempted from Excise duty.  Biscuits whose retail price does not exceed Rs.100 per kg be also exempted.          The water purification devices based on specific membrane technology were exempted from Excise Duty.  BARC has requested that this exemption should be extended to water purification equipment based on poly-couflone membrane which has been accepted. The cement industry has not respond positively to the dual Excise Duty regime.   Hence the Government has decided to replace the dual rates of cement.  Now onwards the concessions granted to cement sold at Rs.190/- or less per bag will continue; for cement sold at a higher price the Ad valorem rate will apply.

Hon. Members are aware that I proposed an increase in the excise duty on beedis.  The increase was Rs.4 per thousand for non-machine made beedis.  In response to a representation received from the industry and a number of hon. Members, I propose to cut this by half per cent.  On machine made beedis also, the increase will now be from Rs.22 to Rs.26 per thousand as against the original budget proposal of Rs.29 per thousand.  Domestic producers of zip fasteners and some hon. Members have represented against the excise duty of 16 per cent.  Accepting these representations, I propose to reduce the excise duty from 16 per cent to eight per cent.  Hon. Members are aware that I proposed to levy customs duty, CVD and additional customs duty on import of aircraft excluding imports by Government and scheduled airlines.  The Ministry of Civil Aviation has made a strong representation in favour of exemption for aircraft imported for certain purposes.  I accept this request and exempt these categories also from duties. 

Now I turn to direct taxes.  In the Finance Bill, I have restricted the pass through status to venture capital funds making investments in eight sectors.  There has been a request that this concession should be extended to infrastructure sectors as well.  Accordingly, the concession will be extended to investments made by venture capital funds in the infrastructural facilities. Representations have been received regarding clause 10 of the Finance Bill which amend section 17 of the Income Tax Act.  I am responding favourably.  I intend to give relief but I want you to know the history of section 17 because that is very important to understand what I am saying.  Since 1987-88, rent free or concessional rent accommodation was taxed at ten per cent of salary or the fair market rent whichever was less.  In 2001-02, the concept of fair market rent was dropped and the value of the concessional accommodation was taken as 7.5 per cent or ten per cent of the salary.  This provision was challenged in the Supreme Court.  In financial year 2005-06, the value of the concessional accommodation was revised to 15 per cent or 20 per cent.  Recently, the Supreme Court has upheld the validity of the provision.  However, in accordance with the Court's ruling it was decided to insert a deeming provision through clause 10 of the Finance Bill, which is what we are doing.  However, I have received a number of representations complaining about the 20 per cent rate and the 15 per cent rate which I introduced in 2005-06.  I have reviewed the rate.  Every employee will get substantial relief.  I also propose to give retrospective effect to the reduction, from the financial year 2005.  Representations have been received against taxing ESOPS as a fringe benefit.  Worldwide ESOPS are subject to tax.  Hence, the tax will stay.  However, I propose to give some relief.  Every year the market value of ESOPS to the purpose of taxation will be reckoned on the date of vesting of the option and not the date of allotment of transfer of shares.  The period of holding of ESOPS shall also be reckoned from the date of such allotment of transfer. 

Some official amendments are also being moved to give effect to certain Budget announcements, such as the new and nascent industrial policy, tax neutral status for amalgamation and demerger of cooperative banks and extending the tax benefit under Section 80(c) of the Income Tax Act for investment in NABARD Rural Bonds.  Today, an hon. Member has raised three issues.  First was about Section 12(A) of the Income Tax Act.  The present provision requires that you should file your application before expiry of one year from the creation of the Trust and gives the CIT the power to condone the delay.  In practice what we found is that Trusts file applications very belatedly and ask for condonation for several years.  Clause 8 of the Finance Bill proposes to withdraw the power of condonation.   But we have said that you may file the application at any time you like after the formation of the Trust, but the exemption, of course, will be available only from the date of your application.  Out of 1,11,745 cooperatives 1,10,800 are exempted.  Finally, there was some question about the MSP.  We have given better remunerative prices to wheat and paddy in the four years of the UPA Government. 

With these words, I commend the Finance Bill and I would request that the same may be passed.

The Bill was passed 

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P.D.T. ACHARY,

Secretary-General.