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Introduction
Economic Situation
Key Objectives
Agriculture
Housing
Infrastructure
Small Scale Industry
Science & Technology
Banking
External Sector
Capital Market
Expenditure Management
PSU Reform
Revised Estimates
Budget Estimates
Indirect Taxes
Custom Duties
Direct Taxes - A
Direct Taxes - B
Closing StatementBudget 1998-99
Budget 1997-98
Budget 1996-97
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Mr. Speaker, Sir, I now turn to the proposals on the
direct tax side.
 | With growing liberalisation of the economy has come the need for
industrial restructuring so that companies can focus better on their core activities. The
corporate sector has been voicing the need for a flexible fiscal policy for regulating
business re-organisations. In response to this need, I propose a comprehensive set of
amendments to the Income Tax Act to make such business re-organisations fully tax neutral.
In the case of amalgamation of companies, the existing requirement of routing the proposal
through Board of Industrial and Financial Reconstruction is being removed. The legal
provision is proposed to be amended so that the eligibility for tax concessions is only
contingent upon a minimum of 75% of the fixed assets of the amalgamating company being
absorbed in the amalgamated company, and subject to the condition that the amalgamated
company will continue the business of the amalgamating company for a minimum of 5 years.
An enabling provision will be provided through the amendment of the Income-Tax Act, for
the detailed guidelines to be issued subsequently under the powers available from the
statutory provision. |
| In the case of de-mergers, I propose to introduce a legal provision so as
to permit the carry forward of accumulated losses and unabsorbed depreciation from the
de-merging company to the resultant company. I also propose to amend the legal provisions
so that, neither the companies involved, nor the shareholders, are subject to capital
gains tax as a result of the transactions. Further, it is proposed that all fiscal
concessions will survive for the unexpired period in the case of amalgamation and
de-mergers |
| Mr. Speaker, Sir, Government has been greatly concerned about the
persisting sluggishness in the capital markets. Government is also distressed to note the
negative perception of some sections of the investing public in regard to the schemes
operated by the Unit Trust of India. Based on the recommendations of the Committee headed
by Shri Deepak Parekh, and also taking into account a large number of suggestions offered
by various experts in the field, I now propose a substantial fiscal package to restore the
confidence of the shareholders in the UTI, and more generally to invigorate the capital
markets. |
| First, I propose to fully exempt from income tax all income from UTI and
other Mutual Funds received in the hands of the investors. This will not only reduce the
incidence of tax, but will eliminate the inconvenience faced by small investors in paying
tax and claiming refund in connection with income derived from such investments. |
| Presently if the income in the hands of the investors is fully exempt
from tax, this income is subjected to dividend tax under Section 115 (O) of the Income Tax
Act, at the stage of distribution of the dividend by UTI or mutual funds. As a departure
from the policy, and as the second element of the package, I propose to continue for 3
years the exemption for US-64, Scheme as also for all open-ended equity-oriented schemes
of UTI and mutual funds - with more than 50% investment in equity - from dividend tax.
However, income distributed by Mutual Funds, where the equity investment is less than 50%,
will become subject to the 10% dividend tax. |
| As a result of these two tax initiatives, investments in UTI and other
Mutual Funds will become much more attractive and equity-oriented schemes will be
relatively more attractive than schemes where equity investment is less than 50%. This
should encourage the return of small investor to the capital market and revive confidence.
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| A complaint has often been voiced that there is discrimination between
the rate of long-term capital gains tax on transfer of shares and securities as between
residents and non-residents. The current rate of long-term capital gains tax for resident
Indians
is 20% linked to a notional value of capital gains, computed with reference to a Cost of
Inflation Index. However, the rate of long-term capital gains tax for non residents is
only 10%. In response to this complaint, I now propose to amend the law so as to cap the
long-term capital gains tax for resident Indians on transfer of shares and securities, at
the 10% rate. |
| In some of the ‘sunrise’ sectors of the economy, the management
is adopting a policy of offering stock options and Sweat Equity, to their employees. The
tax implications of such transactions are somewhat ambiguous. Therefore, I propose in this
budget to make certain amendments in the law, to put it beyond doubt that such stock
options will be taxed as a perquisite at the time of exercise of the option by the
employee, and later as capital gains at the time of sale of the security. These
amendments, I expect, will remove the grey areas which exist in the current law relating
to such transactions. |
| For boosting high-tech sectors and supporting first generation
entrepreneurs, there is an acute need for higher investment in venture capital activities.
Very recently we have relaxed the guidelines under the existing scheme by removing the
requirement for time-bound investment and minimum lock-in-period of funds. I am also
harmonising the guidelines for registration of venture capital activity with the Central
Board of Direct Taxes, with those for registration with the Security and Exchange Board of
India. This will ensure uniformity in norms for registration with both the organisations.
I am confident that these initiatives will increase the attractiveness of the Venture
Capital Scheme and induce high net-worth investors to commit their funds to the
‘sunrise’ sectors, particularly, the Information Technology Sector. |
| Very recently, the Companies Act, 1956 has been amended to permit
transactions relating to buy- back of shares. There is some ambiguity in the
interpretation of the law as to whether such transactions would be treated as subject to
dividend tax in addition to capital gains tax. In view of this, I propose to amend the law
to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to
dividend tax, and would only be liable to capital gains tax. |
| Mr. Speaker, Sir, I wish to now turn to another area of special focus in
this budget, namely the Housing Sector. In regard to this sector, I propose a
comprehensive package of fiscal incentives focussed at: |
| the middle class investors wishing to purchase a dwelling unit; |
| the promoters of middle income housing projects; and |
| the housing finance companies. |
| As the first element of this package, I propose that the interest on a
loan for a self-occupied property be exempted from tax up to a ceiling of Rs.75,000,
increased from the current ceiling of Rs.30,000. This concession will encourage middle
class investors to take loans to purchase modest dwelling units of their own. |
| The second element of this incentive package relates to the scheme for
housing projects for enjoying a tax holiday under Section 80IA of the Income Tax Act. The
existing provision, inter-alia, requires that the built -up area of dwelling units should
not exceed 1000 sq. feet. There have been many representations that in towns other than
Mumbai and Delhi, the land cost is relatively less, and therefore, for the same capital
expenditure investors can afford to purchase dwelling units of slightly larger areas. In
view of this, it has been represented that the ceiling on built -up areas for dwelling
units in approved projects be increased from 1000 sq. ft to 1500 sq. ft at all locations
except Mumbai and Delhi. I propose to accept this suggestion and make
suitable modifications in the law. This amendment in the scheme for treating housing
projects as infrastructure will, I believe, also give a significant fillip to construction
activities in the smaller towns. |
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