Budget 2011: Full text of Pranab Mukherjee's speech — Part II

Following is the remainder of finance minister Pranab Mukherjee's speech while tabling the Union budget for the financial year 2011-12 in the Lok Sabha today:

Click here for Part I of the finance minister's speech

Budget Estimates 2011-12

I now turn to the Budget Estimates for 2011-12.

The Gross Tax Receipts are estimated at Rs9,32,440 crore which is an increase of 24.9% over the Budget Estimates for 2010-11. After devolution to States, the net tax to Centre in 2011-12 is Rs6,64,457 crore. The Non Tax Revenue Receipts for 2011-12 are estimated at Rs1,25,435 crore.

The total expenditure proposed for 2011-12 is Rs12,57,729 crore, which is an increase of 13.4% over the Budget Estimates for 2010-11. The Plan Expenditure at Rs4,41,547 crore marks an increase of 18.3% and the Non Plan Expenditure at Rs8,16,182 crore is an increase of 10.9% over BE 2010-11. As 2011-12 is the last year of the Eleventh Plan, I am happy to share that Eleventh Plan expenditure in nominal terms is more than 100% of the expenditure envisaged for the Plan period.

The total plan and non-plan transfers of Rs2,01,733 crore to States and UT Governments in 2011-12 have increased by 23% over the Budget Estimates 2010-11. This includes grants of Rs13,713 crore in 2011-12 to local bodies as per the recommendation of the Thirteenth Finance Commission.

Hon'ble Members are aware that in the course of 2010-11, I had the opportunity to effect a further improvement in the fiscal balance, due to the higher than anticipated non-tax revenues from 3G spectrum auctions. I chose to do that and much more. While I provided additional resources of about Rs50,000 crore to critical infrastructure and social sectors and also to meet the expenditure on subsidies, I have brought down the fiscal deficit from 5.5% to 5.1% of the GDP for 2010-11. For 2011-12, I have kept it at 4.6% of GDP, which improves upon my own target for 2011-12 indicated in the fiscal road map presented in the last Budget. In the Medium Term Fiscal Policy Statement being presented to the House today, the rolling targets for fiscal deficit are placed at 4.1% for 2012-13, and 3.5% for 2013-14.

There has been some concern expressed regarding the stickiness of Government's revenue deficit in the post-global crisis phase of the economy. For 2010-11 as against a target of 4%, the revenue deficit is estimated at 3.4% of GDP. In the past few years the transfers to States and other developmental expenditure have grown significantly. These are classified as revenue expenditure even though a considerable part of the expenditure from these transfers is in the nature of capital expenditure. In 2010-11, Rs90,792 crore from such revenue expenditures were in the nature of capital expenditure. Similarly, in 2011-12 grants-in-aid for creation of capital assets, which are now shown separately in the Budget documents, are about Rs1.47 lakh crore. Taking these budget provisions into account, the "effective revenue deficit" is estimated at 2.3% in the Revised Estimates for 2010-11 and 1.8% for 2011-12.

In my last Budget, I had stated that Government would avoid issuing bonds in lieu of subsidies to oil and fertiliser companies. I have adhered to this decision, thereby bringing all subsidy related liabilities into our fiscal accounting.

The fiscal deficit of 4.6% of GDP in 2011-12 works out to Rs4,12,817 crore. Taking into account the various other financing items for fiscal deficit, the net market borrowing of the Government in 2011-12 would be Rs3.43 lakh crore. In addition, Rs15,000 crore is proposed to be financed through Treasury Bills. Accordingly, the Central Government debt as a proportion of GDP is estimated at 44.2% for 2011-12 as against 52.5% recommended by the Thirteenth Finance Commission.

PART B

Madam Speaker,

I shall now present my tax proposals.

In the formulation of these proposals, my priorities are directed towards making taxes moderate, payments simple for the taxpayer and collection of taxes easy for the tax collector.

Direct Taxes

I shall now deal with direct taxes.

As Government's policy on direct taxes has been outlined in the DTC, which is before Parliament, I have limited my proposals to initiatives that require urgent attention.

Last year I provided relief to individual taxpayers by broadening the tax slabs. To take us closer to DTC rates, I propose to enhance the exemption limit for the general category of individual taxpayers from Rs1,60,000 to Rs1,80,000 this year. This measure will provide a uniform tax relief of Rs2,000 to every taxpayer of this category.

Senior citizens deserve our special attention. For them, I propose
— to reduce the qualifying age, from 65 years to 60 years;
— to enhance the exemption limit from Rs2,40,000 to Rs2,50,000;
— To create a new category of Very Senior Citizens, 80 years and above, who will be eligible for a higher exemption limit of Rs5,00,000.

In the case of corporates, my initiative of phasing out the surcharge continues. I propose to reduce the current surcharge of 7.5% on domestic companies to 5%. Simultaneously, I propose to increase the rate of Minimum Alternate Tax (MAT) from the current rate of 18% to 18.5% of book profits to keep the effective rate of the MAT at the same level. As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of Special Economic Zones as well as units operating in SEZs.

To attract foreign funds for financing of infrastructure, I propose to:
— create special vehicles in the form of notified infrastructure debt funds;
— subject interest payment on the borrowings of these funds to a reduced withholding tax rate of 5% instead of the current rate of 20%;
— exempt the income of the fund from tax.

In order to promote savings and raise funds for infrastructure, an additional deduction of Rs20,000 for investment in long-term infrastructure bonds was notified by the Central Government in 2010-11. I propose to extend this window for one more year.

It has been represented that the taxation of foreign dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested abroad. For the year 2011-12, I propose a lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary. I do hope these funds will now flow to India.

In order to give a boost to production in the agriculture sector, I propose to extend the benefit of investment linked deduction to businesses engaged in the production of fertilisers.

Considering the importance of housing, I also propose investment linked deduction to businesses which develop affordable housing under a notified scheme.

In this Decade of Innovation, I enhanced the weighted deduction on payments made to National Laboratories, universities and Institutes of Technology, for scientific research, to 175% in the last budget. I propose to further enhance this to 200%.

In order to strengthen our system of collection of information from foreign tax jurisdictions, I propose to provide a toolbox of counter measures to discourage transactions with entities located in non-cooperative jurisdictions as may be notified by the Government.

My proposals on direct taxes are estimated to result in a net revenue loss of Rs11,500 crore for the year.

Indirect Taxes

I shall now turn to my indirect tax proposals.

In view of the healthy growth in indirect taxes in 2010-11, I had the option to roll back the Central excise duty to levels prevailing in November 2008. I have chosen not to do so for two reasons. I would like to see improved business margins translated into higher investment rates. I would also like to stay my course towards GST. I have therefore decided to maintain the standard rate of Central excise duty at 10%.

I propose certain changes in the Central Excise rate structure to prepare the ground for the transition to GST, beginning with a reduction in the number of exemptions. At present, there are about 100 items that are exempt from Central Excise as well as State VAT. In addition, there are as many as 370 items that enjoy exemption from Central Excise duty but are chargeable to VAT. I propose to withdraw the exemption on 130 of these items that are mainly in the nature of consumer goods. The remaining 240 items would be brought into the tax net when GST is introduced.

A nominal Central Excise duty of 1% is being imposed on the 130 items that are entering the tax net. No Cenvat credit would be available for the manufacture of these items. Basic food and fuel would continue to be exempt. This levy would also not apply to precious metals and stones. In case of jewellery and articles of gold, silver and precious metals, the levy would apply only to goods sold under a brand name.

Most of the States have increased their merit rate of VAT from 4% to 5%. In line with this, I also propose to enhance the lower rate of Central Excise duty from 4% to 5%.

Ready-made garments and made-ups of textiles are currently under an optional excise duty regime. A manufacturer is required to pay duty only if he wishes to avail of Cenvat credit. Our garment and made-ups industry has come of age and has shown handsome growth in recent years. As part of base expansion, I propose to convert the optional levy into a mandatory levy at a unified rate of 10%. The levy would, however, apply only to branded garments or made-ups and not to those tailored or made to order for a retail customer. Credit of tax paid on inputs, capital goods and input services would be available to manufacturers of these products. Keeping in mind the fragmented nature of this industry, full SSI exemption is also being extended to these products. Export of these items would continue to be zero-rated.

We have a long term commitment to align our customs duty rates to those prevailing in ASEAN countries. The peak rate of customs duty has been reduced over the years and has settled at 10%. In view of continued uncertainties in the global economy, I propose to hold the peak rate at its current level. However, some rationalisation is being done to unify three rates namely, 2%, 2.5% and 3% at the middle level of 2.5%.

I now turn to proposals that are aimed at encouraging some of the thrust sectors that are in need of attention.

Agriculture & Related Sectors

Hon'ble Members would recall that, in the last Budget, I had announced a package of measures to improve the availability of storage and warehouse facilities for agricultural produce as well as to incentivise food processing.

I have received encouraging feedback on the impact of these measures. I propose to enlarge the scope of these exemptions by:
— extending full exemption from excise duty to air-conditioning equipment and refrigeration panels for cold chain infrastructure;
— including conveyor belts in the full exemption from excise duty to equipment used in cold storages, mandis and warehouses.

A concessional rate of basic customs duty of 5% was provided to specified agricultural machinery in the last budget. This duty is being reduced further to 2.5% and the concession is also being extended to parts of such machinery to encourage their domestic production.

Micro-irrigation is an environment-friendly and efficient means of irrigation especially for dry land farming. I propose to reduce the basic customs duty on micro-irrigation equipment from 7.5% to 5%.

De-oiled rice bran cake constitutes an important ingredient of cattle feed and its improved availability would have a positive impact on milk production. I propose to provide full exemption from basic customs duty to this item. Simultaneously, an export duty of 10% would be levied to discourage its export.

Manufacturing Sector

For the manufacturing sector, my proposals seek to encourage domestic value addition vis-a-vis imports, to remove duty inversions and anomalies and to provide a level playing field to the domestic industry. The major proposals are to:
— reduce basic customs duty on raw silk (not thrown) from 30 to 5%;
— reduce basic customs duty from 5% to 2.5% on certain textile intermediates and inputs for chemicals, ferro-alloys and paper;
— reduce basic customs duty on certain specified inputs for manufacture of certain technical fibre and yarn from 7.5% to 5%;
— fully exempt stainless steel scrap from basic customs duty;
— reduce import duties on specified raw material for the manufacture of syringes and needles to 5% basic and 4% CVD;
— extend the concession available to parts, components and accessories for manufacture of mobile handsets till 31st March, 2012, and to include few more items in its ambit;
— expand the raw material list for manufacture of specified electronic components that are fully exempt from basic customs duty;
— reduce excise duty (and hence CVD) on parts of ink-jet and laser-jet printers from 10% to 5%.

Iron ore attracts an export duty of 15% in the case of lumps and 5% in the case of fines. This is a natural resource which needs to be conserved. I propose to enhance the rate of export duty for all types of iron ore and unify it at 20% ad valorem. Iron ore is also exported in a value-added, pelletised form. Full exemption from export duty is being provided to iron ore pellets to encourage the value addition process for fines.

As a measure of relief to cement industry, I propose to replace the existing excise duty rates with composite rates having an ad valorem and specific component with some rationalisation. The basic customs duty on two critical raw materials of this industry, viz petcoke and gypsum, is proposed to be reduced to 2.5%.

To drive the financial inclusion agenda of the Government, I propose to fully exempt cash dispensers from basic customs duty. Full exemption is also being extended to parts of such machines to encourage their domestic production.

Environment

Full exemption from basic customs duty and a concessional rate of Central Excise duty of 4% was provided to specified parts of electrical vehicles in the last Budget on actual-user basis. I propose to extend the concession to batteries imported by such manufacturers for the replacement market.

Fuel cell or Hydrogen cell technology is a promising green technology for the automobile sector. I propose to extend the concessional excise duty of 10% to vehicles based on this technology.

Hybrid vehicles enjoy a concessional excise duty rate of 10%. However, import dependence for their critical parts/sub-assemblies is still quite high. It is proposed to grant specified parts of such vehicles full exemption from basic customs duty and special CVD. In addition, a concessional rate of excise duty of 5% is being prescribed to incentivise their domestic production.

In response to the growing demand for green products, a technology has been developed indigenously for the conversion of fossil fuel vehicles into hybrid vehicles through the fitment of a kit. I propose to reduce the excise duty on such kits and their parts from 10% to 5%.

In the last Budget, Central Excise duty on LED lights was reduced from 8% to 4% to promote their use. The basic component of these lights viz the LED attracts an excise duty (hence, CVD) of 10% and a special CVD of 4%. The excise duty on LEDs is being reduced to 5% and special CVD is being fully exempted.

The solar lantern enables our countrymen in far-flung villages to partake of developments in green technology. The basic customs duty on such lanterns is being reduced from 10% to 5%. Basic customs duty on a few more inputs used in the manufacture of solar modules/cells is being reduced to Nil.

Environmental considerations demand promotion of laundry soaps which conserve water and are gentle on the soil. To this end, full exemption from basic customs duty is being provided to Crude Palm Stearin for use in the manufacture of laundry soap.

Pre-tanning or tanning processes in the leather industry use chemicals which are pollutants. To encourage use of green processes, full exemption from basic excise duty is being granted to enzyme based preparations for pre-tanning.

Infrastructure

Capital goods imported for the expansion of existing mega or ultra mega power projects enjoy a concessional basic customs duty of 2.5% and full exemption from CVD. This creates a disability for the domestic suppliers who are required to pay Central Excise duty on supplies to such projects. I propose to correct this anomaly by providing a parallel excise duty exemption.

Bio-based asphalt is an emerging, green technology for the surfacing of roads. Full exemption from basic customs duty is being extended to bio-asphalt and specified machinery for its application in the construction of national highways. Tunnel-boring machines required for the construction of highways are also being included in this exemption.

Other Proposals

Works of art and antiquities are exempt from customs duties when imported for exhibition in a public museum or national institution. In recent years, many organisations have joined the cause of promoting and popularising both traditional and contemporary art. Some of them have been active in locating heritage works of Indian art and antiquities in foreign countries and bringing them back home. To encourage such initiatives, I propose to expand the scope of this exemption for works of art and antiquities to also apply to imports for exhibition or display, in private art galleries or similar premises that are open to the general public. Department of Culture will notify details of the scheme separately.

Full exemption from import duty is available to spares and capital goods required for ship-repair units. This exemption is being extended to imports by ship owners too.

The concessional basic customs duty of 5% and CVD of 5%, presently applicable to high-speed printing presses imported by newspaper establishments, is being extended to mailroom equipment.

The Indian film industry has represented that colour, unexposed jumbo rolls of cinematographic film are not manufactured domestically and have to be imported. I propose to exempt jumbo rolls of 400 feet and 1000 feet from CVD by providing full exemption from excise duty.

I propose to provide outright concession to factory-built ambulances in place of the existing refund-based concession from excise duty. A refund-based concession is available to taxis having a seating capacity not exceeding 7 persons including the driver. I propose to extend this to vehicles up to a seating capacity not exceeding 13 persons including the driver.

Some of the other relief measures that I propose are:
— Reduction in basic customs duty on raw pistachio from 30% to 10%;
— Reduction in basic customs duty on bamboo for agarbatti from 30% to 10%;
— Reduction in basic customs duty on lactose for the manufacture of homoeopathic medicines from 25% to 10%; and
— Reduction in central excise duty on sanitary napkins, baby and adult diapers from 10% to 1%.

My proposals relating to customs and Central excise are estimated to result in a net revenue gain of Rs7,300 crore for the year.

Service Tax

The actual collections of Service Tax do not reflect the full potential of this sector. While retaining the standard rate of service tax at 10%, I seek to achieve a closer fit between the present service tax regime and its GST successor by:
— Bringing in a few new services into the tax net to expand the tax base while ensuring that the impact is predominantly on sections of society that have the ability to pay;
— Suitably expanding or rationalising the scope of existing service categories;
— Rationalising certain provisions relating to import of services and valuation;
— Modifying provisions of the Cenvat Credit scheme to achieve a more realistic balance between input credits and output tax and harmonising the provisions of the scheme across goods and services;
— Rationalising penal provisions to reinforce the message that honest taxpayers would be facilitated and deviants would be dealt with severely; and
— Adoption of Point of Taxation rules for services which would shift the basis for tax collection from "cash" towards "accrual" basis as with Central Excise duty.

I propose to levy service tax on the following new services:
— Hotel accommodation, in excess of declared tariff of Rs1,000 per day with an abatement of 50% so that the effective burden is only 5% of the amount charged;
— Service provided by air-conditioned restaurants that have licence to serve liquor, by giving an abatement of 70%. Thus, the effective burden will be 3% of the bill.

I imposed service tax in 2010-11 on health check-up or treatment. This levy has resulted in differential treatment between persons who make payments themselves and others where payments are made by an insurance company or a business entity. Thus, I propose to replace it with a tax on all services provided by hospitals with 25 or more beds that have the facility of central air-conditioning. Though the tax is on high-end treatment, I propose to sweeten the pill by an abatement of 50% so that the actual burden is kept at 5% of the value of service. I also propose to extend the levy to diagnostic tests of all kinds with the same rate of abatement. However, all Government hospitals shall be outside this levy.

I propose to raise the service tax on air travel by Rs50 in the case of domestic air travel and Rs250 on international journeys by economy class. I also propose to tax travel by higher classes on domestic sector at the standard rate of 10% to bring it on par with journeys by higher classes on international air travel.

Services provided by life insurance companies in the area of investment are also proposed to be brought into tax net on the same lines as ULIPs. I propose to expand the scope of legal services to include services provided by business entities to individuals as well as representational and arbitration services by individuals to business entities. There shall, however, be no tax on services provided by individuals to other individuals.

There are certain other changes mainly by way of rationalisation or expansion in the scope of certain services or by plugging existing loopholes. I do not wish to take the valuable time of the House in further elaboration here.

The strength of a good value-added tax lies in the free flow of the credit of the tax paid at the previous stage. Due to complexities, there have been many legal disputes on the availability of credit on a number of inputs or input services. These provisions are being rationalised by laying down clear definitions so that the scope of inputs and input services that are eligible and those that are not is clear. Allocation of CENVAT credit to exempt and taxable goods and services is also being streamlined.

The number of assessees in service tax has grown manifold. I find that a large number of them comprise individuals or sole proprietors with small turnovers. Any audit at their premises tends to dislocate their activities for the duration of the audit. I, therefore, propose to free all individual and sole proprietor taxpayers with a turnover upto Rs60 lakh from the formalities of audit. This will give relief to a large number of taxpayers. I also intend to give all assessees with turnover upto Rs60 lakh the benefit of 3 percentage points in interest on delayed payment.

In keeping with our thrust to encourage voluntary compliance, the penal provisions for Service Tax are being rationalised. A key component of this strategy would be to treat less harshly those who have maintained truthful records but have fallen short of discharging their tax liability. Simultaneously, deliberate evaders with unrecorded business transactions will be dealt with more severely. Similar changes are being carried out in Central Excise and Customs laws. The details of the provisions are in the Finance Bill.

My proposals relating to service tax are estimated to result in net revenue gain of Rs4,000 crore for the year.

Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST. I propose to initiate an informed public debate on the subject to help us finalise the approach to GST.

Copies of notifications giving effect to the changes in Customs, Central Excise and Service Tax will be laid on the Table of the House in due course.

My proposals on direct taxes are estimated to result in a revenue loss of Rs11,500 crore for the year. Proposals relating to indirect taxes are estimated to result in a net revenue gain of Rs11,300 crore, leaving a net loss of Rs 200 crore in the Budget.

As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities. With oneness of heart, let us all build an India, which in not too distant a future, will enter the comity of developed nations.

Madam Speaker, with these words, I commend the Budget to the House.