Dear friends,
Listed below are some of the highlights of the budget proposals for the year 2005-06. hope you find it useful.
BUDGET AT A GLANCE � FEB 2005
General
o The growth rate in the current year is estimated to be 6.9 %, with the manufacturing sector expected to grow at 8.9 %.
o Proposal to introduce a 10 % capital subsidy scheme for the textile-processing sector in addition to the normal benefits available under the TUF Scheme.
o In April-January 2004-05, exports and imports have grown by 25.55 % and 34.72 %, respectively, in US dollar terms.
o To make Mumbai a regional financial centre.
o Increase the allocation for Defence in 2005-06 to Rs.83,000 crore, which will Include an allocation of Rs.34,375 crore for capital expenditure.
o Fiscal correction in 2004-05, and the year is expected to end with a revenue deficit of 2.7 % and a fiscal deficit of 4.5 % of GDP.
Banking sector
o To remove the lower and upper bounds to the statutory liquidity ratio (SLR) and provide flexibility to RBI to prescribe prudential norms;
o To allow banking companies to issue preference shares, since preference share capital can be treated as regulatory capital under specified circumstances as per Basel norms;
o To introduce specific provisions to enable the consolidated supervision of banks and their subsidiaries by RBI in consonance with the international best practices in this regard;
o To remove the limits of the cash reserve ratio (CRR) to facilitate more flexible conduct of monetary policy
o To enable RBI to lend or borrow securities by way of repo, reverse repo or otherwise.
o The management of Cooperative banks in India is in shambles. Six State Central Cooperative Banks and 140 District Central Cooperative Banks do not comply with Section 11 of the Banking Regulation Act, 1949. Changes proposed to bring them under the ambit of RBI with special financial assistance to wipe out losses
Capital Markets
o The securities transaction tax (STT) is increased to 0.02% for all categories of transactions.
o To amend the Income Tax Act to provide that trading in derivatives in specified stock exchanges will not be treated as �speculative transactions� for the purposes of the Income Tax Act
o Authorize Securities and Exchange Board of India (SEBI) to set up a National Institute of Securities Markets for teaching and training intermediaries in the securities markets and promoting research
o Permit FIIs to submit appropriate collateral, in cash or otherwise, as prescribed by SEBI, when trading in derivatives on the domestic market.
o The definition of �securities� under the Securities Contracts (Regulation) Act, 1956 to be amended so as to provide a legal framework for trading of securitized debt including mortgage backed debt
o A high level Expert Committee on corporate bonds and securitization to be appointed to look into the legal, regulatory, tax and market design issues in the development of the corporate bond market.
o Since, Over the counter (OTC) derivatives play a crucial role in mitigating the risks of corporates, banks and other financial entities, it is proposed to take measures to provide for clear legal validity of such contracts.
o All stock exchanges to be corporatized and de-mutualized.
o Rationalize the stamp duty rules, so that it applies uniformly regardless of the issuing entity.
o Mutual funds to introduce Gold Exchange Traded Funds (GETFs) with gold as the underlying asset, in order to enable any household to buy and sell gold in units for as little as Rs.100. Such units could be traded in the same manner as units of mutual funds.
Indirect taxes
VAT
o The value added tax (VAT) will be applicable with effect from April 1, 2005. VAT is a modern, simple and transparent tax system that will replace the existing sales tax and eliminate the cascading effect of sales tax. It is in force in more than 130 countries ranging from Sri Lanka to China. India too has a VAT at the Central level (CENVAT), but only for goods.
Customs Duties.
o To reduce the peak rate for non-agricultural products from 20 % to 15 %.
o To bring down the customs duty rates on capital goods and raw materials as well as correct any inverted duty structures.
o To reduce the customs duties on selected capital goods and parts thereof to below 15 %, to 10 % in some cases and to 5 % in some others.
o For most textile machinery- to reduce the duty from 20 % to 10 %
o To reduce the duty on refrigerated vans from 20 % to 10 %.
o leather and footwear industry- to reduce the customs duties on seven specified machinery from 20 % to 5 %.
o The duty on ethyl vinyl acetate (EVA), an input for the footwear industry, is also proposed to be reduced from 20 % to 10 %.
o Pharmaceuticals and biotechnology are sunrise sectors- to reduce the customs duty on nine specified machinery used in these two sectors to 5 %.
o To reduce the customs duties on specified parts of battery-operated road vehicles and for printing presses from 20 % to 10 %.
o For primary and secondary metals- to reduce the customs duties from 15 % to 10 %.
o Industrial raw materials such as catalysts, refractory raw materials, basic plastic materials, molasses and industrial ethyl alcohol, which are key inputs to manufacture, will now be liable to a reduced customs duty rate of 10 %.
o To reduce the duty to 5 % on Lead
o Coking coal with high ash content currently attracts a duty of 15% reduced to 5 %
o The customs duty rates on polyester and nylon chips, textile fibres, yarns and intermediates, fabrics, and garments are proposed to be reduced from 20 % to 15 %.
o The electronics and telecom- On 217 Information Technology Agreement (ITA) bound items, the duty is required to be brought down to nil. Consequently, to provide a level-playing field to the domestic industry- the customs duty on specified capital goods and all inputs required for the manufacture of ITA bound items is to be removed.
o To impose a countervailing duty (CVD) of 4 % on all imports to compensate for the State level taxes, in particular the forthcoming State level VAT that is proposed to be imposed on corresponding domestic goods. A CVD is to be levied amounting to 4 % on the imports of ITA bound items and their inputs that currently attract nil duty. Credit for the CVD will be available against payment of excise duty. However, because we have a soft corner for these wares, IT software will be exempt from the proposed CVD.
o No changes in the customs duties applicable to agricultural goods.
o Increase the duty on cut flowers from 30 % to 60 %.
o To reduce the duty rate on cloves to 35 %.
o Import duty on atmospheric drinking water generators from 20 % to 5 %.
o The customs duty on crude petroleum will be reduced from 10 % to 5 %.
o On LPG for domestic consumption and on subsidized kerosene, the customs duty will be nil. On both products, the excise duty will also be nil.
o Reduction in the customs duty on other petroleum products, including motor spirit (MS) and diesel (HSD) from the current level of 20 or 15 % to 10 %
Excise duty
o Reduce the excise duty on Filament yarn, tyres and air conditioners to 16 %.
o Manufacturers of motor cars and aerated drinks, the other two items, would have to wait for some more time.
o The CENVAT exemption route for natural fibres will remain in force.
o Independent texturizers have the option to avail of the above exemption route or pay 8 % excise duty with CENVAT credit.
o Reduction in the excise duty to 8 % from 16 % on Imitation jewellery
o Branded jewellery will be levied an excise duty of 2 %.
o There is no levy on unbranded jewellery, including unbranded gold jewellery.
o Excise duty on mosaic tiles at 8 %
o Road tractors for semi-trailers of engine capacity exceeding 1800 cc now 16 %
o Agricultural tractors will continue to remain exempt.
o Surcharge of Re.1 per kg on tea abolished
o Excise duty of Re.1 per kg on refined edible oils and Rs.1.25 per kg on vanaspati abolished
o Reduction in the excise duty from 16 % to 12 % on matches made by mechanized and semi mechanized sectors
o Hand-made matches are fully exempt from excise duty will continue to enjoy adequate protection.
o To raise the ceiling for SSI exemption based on turnover from the level of Rs.3 crores per year to Rs.4 crores per year. Further, SSI units will now have only two options: full either exemption on the first clearance of Rs.1 crore or normal duty on the first clearance of Rs.1 crore with CENVAT credit.
o To restore the excise duty rate on iron and steel to the normal level of 16 %. This should have little effect on prices because the entire duty is modvatable by most categories of consumers.
o Increase the specific duty on molasses from Rs.500 per MT to Rs.1000 per MT to adjust partially for a hefty increase in molasses prices.
o Increase the specific duty on cement clinkers from Rs.250 per MT to Rs.350 per MT as an anti-avoidance measure.
o To increase the cess on petrol and diesel by 50 paise per litre. The additional resources will be earmarked exclusively for the national highways
o Increase the specific rate on cigarettes by about 10 % and impose a surcharge of 10 % on ad valorem duties on other tobacco products including gutka, chewing tobacco, snuff and pan masala. However, biris will not be subject to this levy.
Service Tax
o The rate of service tax remains at 10 %.
o Those service providers whose gross turnover does not exceed Rs.4 lakh per year have been exempt from service tax
o New services to be covered include pipeline transport of goods; site formation, demolition and like services; membership fees of clubs and associations; packaging and specialized mailing services; survey and map making services; dredging services in rivers and harbors; cleaning services for commercial buildings and similar premises; and construction of planned residential complexes, with more than 12 dwelling units, developed by builders.
Direct Taxes
o The new tax brackets and the new rates will be as follows:
1. Up to Rs.1 lakh .. nil
2. Rs.1 lakh to Rs.1.5 lakh .. 10 %
3. Rs.1.5 lakh to Rs.2.5 lakh .. 20 %
4. Above Rs.2.5 lakh .. 30 %
o The level at which the surcharge of 10 % will apply will be raised to Rs.10 lakh taxable income.
o Relief under Section 88 and 80L removed
o The threshold exemption level for women assessee has been pegged at Rs.1.25 lakh and for senior citizens at Rs.1.5 lakh.
o Standard deduction abolished.
o To allow every taxpayer a consolidated limit of Rs.1 lakh for savings, which will be deducted from the income before tax, is calculated. (in lieu of Sec. 80L & 88
o In addition to the sum of Rs.1 lakh, the following six deductions will continue to receive the same tax treatment as prevails today:
i) interest paid on housing loan for self-occupied house property;
ii) medical insurance premia;
iii) specified expenditure on disabled dependant;
iv) expenses for medical treatment for self or dependant or member of a HUF;
v) deduction in respect of interest on loans for pursuing higher studies; and
vi) deduction to a person with disability.
o To continue the exemption from tax on interest earned on accounts maintained by Non Resident Indians.
o Perquisites that are usually enjoyed collectively by the employees and cannot be attributed to individual employees are not taxed in either the hands of the employer or the employee. Hence, Fringe Benefits Tax introduced at the rate of 30 % to be borne by the employer on such perqusites but exemption provided for transport services for workers and staff and canteen services in an office or factory
Corporate Taxation
o For domestic companies, the corporate income tax rate will be 30 % with a surcharge of 10 percent.
o The rate of depreciation will be 15 % for general machinery and plant, but the initial depreciation rate will be increased to 20 %.
o To remove the requirement of 10 % increase in installed capacity for availing of the benefit of initial depreciation.
o To encourage technological up gradation, the withholding tax on technical services has been reduced from 20 % to 10 %.
o Credit will be allowed for the Minimum Alternate Tax (MAT) paid under Section 115 JB of the Income Tax Act.
o No changes in the tax regime applicable to foreign companies.
o Extend up to September 30, 2005 the exemption from tax on agreements to acquire aircraft or aircraft engines on lease.
Anti Evasion Measures
o To amend the one-in-six criteria for filing income tax returns. Mobile telephone will be removed. Instead, payment for electricity of more than Rs.50,000 per year will be included as a criterion for filing a return of income.
o To levy a tax on withdrawal of cash on a single day of over Rs.10,000 or more from banks at the rate of 0.1 %. Thus, a person withdrawing Rs.10,000 in cash would have to pay a small sum of Rs.10.
o Requirement for banks to report to the Government all deposits that are exempt from TDS on interest.
To conclude, I think the Honorable Finance Minister has done a commendable job.
Regards
Rabindranath Gonsalves
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