Extracts from Budget Speech as delivered by Honorable Finanace Minister Shri. Pranab Mukherjee on Direct Taxes

Madam Speaker,

            I now come to Part B of my proposals.

135.     The life of a Finance Minister is not easy. Various players, including policy makers, politicians, agriculturists and business houses, participate in the making of the economy. When everything goes well with the economy, we all share in the joy. However, when things go wrong, it is the Finance Minister who is called upon to administer the medicine. Economic policy, as in medical treatment, often requires us to do something, which, in the short run, may be painful, but is good for us in the long run. As Hamlet, the Prince of Denmark, had said in Shakespeare’s immortal words, “I must be cruel only to be kind.”

            With this reminder, let me now turn to the tax proposals.

136.     Last year, I had set the compass for movement towards the DTC in Direct Taxes and GST in Indirect Taxes. My tax proposals for fiscal year 2012-13 mark further progress in that direction.

Direct Taxes

            I shall now deal with direct taxes.

137.     Last year I provided relief to individual taxpayers by enhancing the exemption limit as a move towards DTC rates.  Although DTC will not be effective from this year, I propose to introduce the DTC rates for personal income tax.  I propose to enhance the exemption limit for the general category of individual taxpayers from `1,80,000 to `2,00,000. This measure will provide tax relief upto `2,000 to every  taxpayer of this category.  I also propose to raise the upper limit of the 20 per cent tax slab from `8 lakh to `10 lakh.  The proposed personal income tax slabs are:

            Income upto `2 lakh                                                Nil

            Income above `2 lakh and upto `5 lakh                   10 per cent

            Income above `5 lakh and upto `10 lakh                 20 per cent

            Income above `10 lakh                                            30 per cent

            These changes will provide substantial relief to taxpayers.

138.     I propose to allow individual taxpayers, a deduction of upto `10,000 for interest from savings bank accounts.  This would help a large number of small taxpayers with salary incomes upto `5 lakh and interest from savings bank accounts up to ` 10,000, as they would not be required to file income tax returns.

139.     Within the existing limit for deduction allowed for health insurance,
I propose to allow a deduction of upto `5,000 for preventive health check-up.

140.     Senior citizens who do not have any income from business are proposed to be exempted from the payment of advance tax.  This will reduce their compliance burden.

141.     In the case of corporates, I am not proposing any change in the tax rates.  However, I propose certain measures to allow corporates to access lower cost funds and to promote higher level of investments in several sectors.

142.     In order to provide low cost funds to some stressed infrastructure sectors, the rate of withholding tax on interest payments on external commercial borrowings is proposed to be reduced from 20 per cent to 5 per cent for three years.  These sectors are:

•        power;

•        airlines;

•        roads and bridges;

•        ports and shipyards;

•        affordable housing;

•        fertilizer; and

•        dams

143.     The restriction on Venture Capital Funds to invest only in nine specified sectors is proposed to be removed.  It is further proposed to remove the cascading effect of Dividend Distribution Tax (DDT) in a multi-tier corporate structure.  I also propose to continue to allow repatriation of dividends from foreign subsidiaries of Indian companies to India at a lower tax rate of 15 per cent as against the tax rate of 30 per cent for one more year i.e. upto March 31, 2013.

144.     Investment linked deduction of capital expenditure incurred in the following businesses is proposed to be provided at the enhanced rate of 150 per cent, as against the current rate of 100 per cent.

•        Cold chain facility

•        Warehouses for storage of food grains

•        Hospitals

•        Fertilisers

•        Affordable housing 

145.     The following new sectors are proposed to be added for the purposes of investment linked deduction:

•        bee keeping and production of honey and beeswax

•        container freight station and inland container depots

•        warehousing for storage of sugar

146.     To promote investment in research and development, it is proposed to extend the weighted deduction of 200 per cent for R&D expenditure in an
in-house facility beyond March 31, 2012 for a further period of five years. 

147.     I also propose to provide weighted deduction of 150 per cent on expenditure incurred for agri-extension services in order to facilitate growth in the agriculture sector. 

148.     For the power sector, besides access to low cost funds as outlined above, I also propose extension of the sunset date by one year for power sector undertakings so that they can be set up on or before March  31, 2013 for claiming 100 per cent deduction of profits for 10 years.  Additional depreciation of 20 per cent in the initial year is proposed to be extended to new assets acquired by power generation companies.

149.     For SMEs, the turnover limit for compulsory tax audit of accounts as well as for presumptive taxation is proposed to be raised from `60 lakh to
` 1 crore.

150.     In order to augment funds for SMEs, I propose to exempt  capital gains tax on sale of a residential property, if the sale consideration is used for subscription in equity of a manufacturing SME company for purchase of new plant and machinery.

151.     Considering the shortage of skilled manpower in the manufacturing sector and to generate employment, I propose to provide weighted deduction at the rate of 150 per cent of expenditure incurred on skill development in manufacturing sector in accordance with specified guidelines. 

152.     In order to reduce transaction costs in the capital markets, I propose reduction in Securities Transaction Tax (STT) by 20 per cent (from 0.125 per cent to 0.1 per cent) on cash delivery transactions.

153.     In order to moderate the outgo on profit linked deductions, I propose to extend the levy of Alternate Minimum Tax (AMT) on all persons other than companies, claiming profit linked deductions.

154.     I propose to introduce a General Anti Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel.

155.     I propose a series of measures to deter the generation and use of unaccounted money.  To this end, I propose

•        Introduction of compulsory reporting requirement in case of assets held abroad.

•        Allowing for reopening of assessment upto 16 years in relation to assets held abroad.

•        Tax collection at source on purchase in cash of bullion or jewellery in excess of ` 2 lakh. 

•        Tax deduction at source on transfer of immovable property (other than agricultural land) above a specified threshold.

•        Tax collection at source on trading in coal, lignite and iron ore.

•        Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value.

•        Taxation of unexplained money, credits, investments, expenditures  etc., at the highest rate of 30 per cent irrespective of the slab of income.

156.     My proposals on Direct Taxes are estimated to result in a net revenue loss of  ` 4500 crore for the year.