Manmohan Singh – 1994 Budget

Finance Minister Manmohan Singh
Budget Year :1994


Manmohan Singh


Sir,  It is with a sense of great privilege, and also deep humility, that I rise to  present the Budget for 1994-95.

2 . Less than three years have passed since our Party, under the inspiring  leadership of Prime Minister Shri P.V. Narasimha Rao, came into office, as a minority  Government at that time, facing the awesome task of rebuilding a shattered economy.  The Prime Minister had pledged that we would give top priority to grappling with  the grave economic crisis and put the economy back on a path of strong sustainable  growth. In pursuit of this mandate we embarked on a far reaching programme of  economic restructuring and reform.

3 . Three years are not enough to complete economic restructuring in a country  as complex as India, but it is time enough to take stock. I am sure all Honourable  Members will agree that the economic situation has shown substantial improvement.  Progress on the external front has been dramatic.  · Our foreign currency reserves, which were a little over $1 billion in June,  1991 are now close to $ 13 billion. Our gold, which earlier had been  pledged abroad, is back in our possession.  · Exporters are responding very well to our sweeping reforms of exchange  rate and trade policies. Our exports have increased by a remarkable 21  per cent in dollar terms in the first 10 months of 1993-94. This compares,  for the corresponding period, with a decline of 3 per cent in 1991-92 and  a rise of 2 per cent in 1992-93.  · Despite all the fears that liberalisation would lead to a flood of imports,  the dollar value of our imports during April-January 1993-94 was less  than one per cent higher than imports during the corresponding period of  1992-93. For the fiscal year 1993-94, imports are likely to be lower than  even 1990-91.   · The current account deficit in our balance of payments during 1993-94  will be less than half a per cent of GDP compared to over 3 per cent in  1990-91 and 2 per cent in 1992-93.  · Contrary to what many feared, the exchange rate for the rupee has  remained remarkably steady despite unification and lifting of trade controls.  Foreign exchange is flowing through legal channels in ample quantities  instead of through hawala transactions as earlier.  · International confidence in India has been restored. Foreign direct and  portfolio investment, which was hardly $150 million in 1991-92, is likely  to be around $3 billion in 1993-94.

4 . The news on the domestic economy is also encouraging. Inflation has  been reduced from the peak of 17 per cent in August 1991 to about half that level  at present. Agricultural performance has been strong. Food stocks in the public  system stood at over 23 million tonnes on 1st January, 1994. This is the highest  level in seven years and provides invaluable insurance against any possible crop  failure. Industrial growth is also recovering, though more slowly than we had hoped.  Overall economic growth is estimated at about 4 per cent for the second year in a  row. Fears that the reform programme might lead to a large scale increase in  unemployment have turned out to be unfounded. The latest available data of persons  registered with employment exchanges and seeking jobs show a fall of 1.4 per cent  in November 1993 as compared to November 1992.

5 . The slow growth of industry in 1993-94 is a matter of concern and is  largely due to the sluggishness of the capital goods sector. If capital goods are  excluded, the rest of the manufacturing sector shows 6 per cent growth in the  second quarter and is expected to improve in the rest of the year. The recession in  the capital goods industries is primarily because investment activity slowed down  temporarily as firms adjusted their investment plans to the new situation. There  are signs that this restructuring process is well advanced and many companies are  now launching major programmes to enhance their international competitiveness.  The turnaround in investment is, therefore, beginning.

6 . In real life the picture is never entirely rosy and there are some warning  signals which we must heed. It has not been possible to contain the fiscal deficit in  the current year to the level we had originally targeted. The slower pace of industrial  recovery in 1993-94 led to a shortfall in revenues and various expenditures have  also exceeded Budget estimates. The slippage in the fiscal deficit in 1993-94 has  been less damaging than might have been the case ordinarily, mainly because of  the existence of sizeable idle industrial capacity and low investment levels. But as  investment begins to revive, we cannot afford continuing weakness on the fiscal  front. Unless the deterioration witnessed in the current year is speedily reversed,  there is a serious danger that we may slip back into a position where large  government deficits fuel inflation, widen the current account imbalance and push  up interest rates, making it impossible to bring about the rapid economic growth  we need to raise living standards and create productive jobs in adequate numbers.

7 . In formulating this Budget, I have sought to address six major tasks:  – First, we must accelerate the reform and modernisation of our tax system  we began two years ago.  3  – Second, we must correct the slippage in the fiscal deficit that has occurred  in the current year.  – Third, we must build on the demonstrable success already achieved in  the external sector where our strong performance has vindicated our  strategy of phased integration with the world economy.  – Fourth, the Budget must provide a major stimulus for a strong industrial  recovery, especially for investment and capital goods production.  – Fifth, and most importantly, we must reorient our development policies  and programmes to address more effectively the problems of poverty,  unemployment and social deprivation which affect a large mass of our  people, particularly in rural areas.  – Sixth, we have to consolidate and deepen the progress we have made in  restoring the health of our banking system.

8 . Last year we moved to a unified, market-determined exchange rate system.  The system has worked extremely well. The time has come to take the next step  and move towards convertibility on the current account. Current account  convertibility will substantially liberalise the access to foreign exchange for all current  business transactions and also liberalise foreign exchange access for travel, education  and medical expenses, etc. This will virtually eliminate reliance upon illegal channels  for such transactions. The details of these liberalisations are being separately  announced by the Reserve Bank. Consistent with the progressive liberalisation of  our external payments regime, we shall review the Foreign Exchange Regulation  Act, 1973, and undertake necessary changes, including, if necessary, its replacement  by new legislation.

9 . Our policies towards foreign direct and portfolio investment have yielded  good results and have helped us reduce our reliance on foreign borrowing. Much of  the direct investment approved has been for critical infrastructure sectors. As  envisaged in my Budget speech last year, Government is currently negotiating  bilateral investment treaties with several major investor countries.

1 0 . Our external debt, which is a cause of concern, is growing more slowly  now. It grew by about $6 billion per year on an average in the latter half of the  1980s. In 1990-91 the debt grew by over $8 billion. In 1991-92 and 1992-93, the  increase averaged only about $3 billion. In the first half of 1993-94, external debt  has increased by hardly $300 million. Furthermore, the recent increase in debt has  been more than offset by the sharp increase in our foreign currency reserves. I  would like to assure the House that we shall remain vigilant on this front so that  external debt remains within prudent levels. There is no question of India falling  into a debt trap. In fact, we propose to respond to the easier payments position by  retiring some of the high cost debt we have incurred in the past. Indian companies  will be freely permitted to pre-pay past foreign loans.

1 1 . Honourable Members are aware that some of our external debt is owed to  the IMF. We had approached the Fund in our hour of difficulty. Now that our  payments situation has improved considerably and our reserves have been rebuilt  to comfortable levels, we are in a position to repay the Fund somewhat ahead of  schedule. Repayments of principal and interest amounting to $1.4 billion are due  to the Fund in 1994-95. Instead of following the regular schedule of payments, we    intend to pre-pay the entire amount at the beginning of the year. This decision to  pre-pay in no sense detracts from the excellent relations we have with the Fund  which has helped us immensely in our time of need. We will not hesitate to seek  financial support again, if conditions warrant.

1 2 . At present exporters and other foreign exchange earners, are permitted to  retain up to 15 per cent of foreign exchange receipts in an account designated in  foreign currency. It has been decided to increase the percentage of retention allowed  from 15 to 25 per cent. As a special incentive, for 100% Export Oriented Units and  units in Export Processing Zones as well as units in Electronic Hardware Technology  Parks and Software Technology Parks, the retention allowed will be 50 per cent.  This facility is designed to protect exporters from having to incur conversion costs  when they make payments for imports. The necessary notifications are being  separately issued by the Reserve Bank of India.

1 3 . Turning to the need to strengthen fiscal discipline, I have long felt that  Government should not be able to finance its deficits by creating money, through  unlimited recourse to the Reserve Bank, by issue of ad hoc Treasury Bills. This  practice has also weakened the Reserve Bank’s capacity to conduct effective monetary  policy. As a corrective measure, I propose to phase out the Government’s access to  ad hoc Treasury Bills over a period of three years. In 1994-95 the budget deficit is  being limited to about two-thirds of one per cent of expected GDP, or Rs.6,000  crore. Normally, net issue of ad hoc Treasury Bills for the year as a whole should  not exceed this amount. It has also been agreed with the Reserve Bank that the net  issue of ad hoc Treasury Bills should not exceed Rs.9,000 crore for more than ten  continuous working days at any time during the year. If this happens, the Reserve  Bank will automatically sell Treasury Bills in the market to reduce the level of ad  hoc Treasury Bills. This is a historic step which will in due course contribute to a  significant improvement in fiscal and monetary discipline, and give the Reserve  Bank greater scope for effective monetary management. In subsequent years, the  recourse to ad hoc Treasury Bills will be progressively reduced and by 1997-98,  the Government will cease to have direct recourse to the Reserve Bank for financing  its deficit and will have to meet its entire requirements through borrowing from the  market.   . Interest rates have an important influence on investment in industry and  other sectors of the economy. There have been repeated demands that interest  rates should be brought down. The minimum lending rates charged by banks have  been brought down already by three percentage points over the past year. The  Financial Institutions have also reduced their effective rates. I am happy to inform  the House that the All-India Financial Institutions are now reducing their minimum  lending rate by a further one percentage point to 14 per cent exclusive of interest  tax. Simultaneously, the commercial banks’ minimum lending rate on term loans  of three years and above is also being reduced from 15 per cent to 14 per cent. The  Reserve Bank is separately issuing the notification. These changes take effect from  tomorrow and will help to stimulate investment in the economy.

1 5 . Government had earlier proposed certain amendments to the Companies  Act to streamline the Act in line with the contemporary requirements. Several  representations have been received from industry seeking modifications of these  proposals to give Indian companies an environment in which they can compete  5  effectively in the highly competitive market place. Government has reconsidered  the matter in the light of these representations and it is proposed to submit a new  Bill to Parliament which will be responsive to these concerns.

1 6 . We live in a world where science and technology have become a major  determinant of the power and wealth of nations. India is proud of the achievements  of its scientists and technologists, but a great deal more needs to be done to make  science and technology an effective instrument of national renewal. To accelerate  the development and application of indigenous technology to production processes,  I propose to credit the 5 per cent cess on payments of royalty for imported  technologies which is presently collected under the Research and Development  Cess Act, 1986, into a new Fund for Technology Development and Application. This  Fund will be placed at the disposal of the Department of Science and Technology  to help the indigenously developed technologies reach the stage of commercial  application. Necessary amendments to this effect will be made in the R & D Cess  Act. I shall propose some further measures to promote research and development  when I come to my tax proposals.

1 7 . I would like to assure the House that our policies are geared towards  promoting a dynamic and internationally competitive industrial sector. I am confident  that given our vast reservoir of skilled manpower and entrepreneurship, Indian  industry has the capacity and the will to meet the challenge of global competition.  Government and industry will work as active partners to usher in the second  industrial revolution which is both more efficient and more employment-oriented.  This year, my revenue proposals, to which I will come later, include a strong package  of measures to boost industrial investment and capital goods production. Looking  ahead, I have a vision of our industrial firms acquiring a global reach and their  names becoming household words in far off, distant lands.

1 8 . Let me now turn to some issues relating to agriculture. An adequate flow  of institutional rural credit to agriculture is vital for the development of the rural  sector and this flow at present is unduly low in relation to need. The reasons  include high costs of intermediation incurred by banks and cooperatives,  fundamental weaknesses in the institutional structure and unsustainable restrictions  on credit and interest rate policy. I propose to take a number of significant steps to  lay the basis for a long-term improvement in rural credit. The National Bank for  Agriculture and Rural Development (NABARD) is the apex agency for rural credit.  I am providing Rs.100 crore for augmenting its share capital and the Reserve Bank  will contribute an equivalent amount. This will nearly triple NABARD’s share capital  and equip it to play a strong leadership role in strengthening the system of rural  credit.

1 9 . One of our major concerns in rural credit has been the weak condition of  the Regional Rural Banks (RRBs). Of the 196 regional rural banks, as many as 150  have shown losses in each of the past five years. Many have completely wiped out  their equity and reserves and in some the losses are eating into deposits. This is an  unsustainable situation and long-term structural measures are necessary if these  banks are to be rehabilitated. The Reserve Bank has already announced some  measures giving RRBs greater flexibility in their lending operations to make them  more viable. I propose to take up 50 of the 196 RRBs from all over the country in  the course of 1994-95 for undertaking comprehensive restructuring, including  cleaning up of their balance sheets and infusion of fresh capital. The form and  modality of the restructuring and associated financial support will be worked out  6  during the year. The experience with these 50 RRBs will guide our approach in  later years to the other RRBs. The success of this programme will depend on full  cooperation from State Governments and sponsor banks, who are shareholders, as  well as the employees of RRBs. Our objective is to transform presently weak and  ailing RRBs into financially viable and effective instruments of decentralised rural  banking.

2 0 . In addition, we must find ways of strengthening the co-operative credit  structure which has played a significant role in rural development through credit  support. As against Rs.6,295 crore of new lending by co-operatives during 1992-  93, they are expected to reach Rs.8,500 crore during 1993-94. During 1994-95 we  are planning for a further increase to Rs.9,600 crore. This quantitative expansion  must be accompanied by organisational and structural changes which ensure  financial viability. The Government proposes to initiate a series of measures for  strengthening the cooperative structure. NABARD will be entering into memoranda  of understanding with State and District Cooperative Banks and concerned State  Governments for implementing State-specific development action plans to revamp  the cooperative system and improve its viability.

2 1 . These measures to strengthen the rural credit system are being  accompanied by a substantial increase in the budget provision for Rural Development  to which I will come shortly. It will also be our objective to ensure that our policies  towards agriculture eliminate all unnecessary restraints on farmers. Restrictions  on domestic movement of foodgrains and other agricultural goods must be completely  removed, so that our farmers can reap the benefits of an unified national market.  They must also be increasingly free to export, thus not only making their due  contribution to our national export effort, but also benefiting from profitable export  opportunities.

2 2 . Honourable Members are aware, we have embarked on a basic  restructuring of the banking system aimed at ensuring full financial viability of its  operations and strengthening its competitive capability. I provided a sum of Rs.5,700  crore as capital contribution to the nationalised banks in 1993-94 to help them  make necessary provisions against bad and doubtful loans and meet the new capital  adequacy norms. I had indicated last year that there would be additional capital  needs in 1994-95 and 1995-96 and also that this burden could not be borne  exclusively by the Budget. I am happy to report to the House that in December  1993 and January 1994, the State Bank of India successfully raised over Rs.2,200  crore from the public through issue of equity and another Rs.1,000 crore through  a bond issue. To allow the nationalised banks to access capital markets in the  same way, and mitigate the burden on the Budget, legislative amendments were  introduced in the Lok Sabha in the Winter Session. Their speedy passage will help  many of these banks to mobilise the capital they need to meet their requirements.  Many nationalised banks will nevertheless require additional support during 1994-  95 and I am providing Rs.5,600 crore in 1994-95 as additional capital contribution  for these banks. As before, this capital will be provided in the form of Government  bonds on which there will be no immediate cash outgo. Interest payments and  amortisation will of course be a charge on future budgets.

2 3 . I am grateful to this House for quick passage last August of the Recovery  of Debt due to Banks and Financial Institutions Act, 1993 which provides for the  establishment of Special Recovery Tribunals. These Tribunals will soon be  7  operational, and will play a major role in improving the recovery of banks’ dues. I  am also happy to report that the Reserve Bank is setting up the Board for Financial  Supervision to supervise the banks and other financial institutions. To alert banks  and financial institutions and put them on guard against borrowers who have  defaulted in their dues to other lending institutions, the Reserve Bank of India is  putting in place arrangements for circulating among banks and financial institutions  names of the defaulting borrowers above a threshold limit. The Reserve Bank will  also publish a list of defaulting borrowers in cases where suits have been filed by  banks and financial institutions. Both these measures will encourage greater  discipline among the borrowers.

2 4 . The Government attaches high priority to reforms of the capital markets  aimed at creating an efficient and competitive capital market subject to effective  regulation by the Securities and Exchange Board of India (SEBI) which will ensure  adequate investor protection. After a temporary setback in 1992 following the  securities scam, the capital market recovered ground quickly. The funds mobilised  in the capital market through public and rights issues, duly approved by SEBI, in  the first ten months of 1993-94 were over Rs.18,000 crore, as compared to less  than Rs.16,000 crore in the same period of 1992-93 and under Rs.6,000 crore for  the full year, 1991-92. In addition, a number of Indian companies raised funds  abroad through Euro-equity issues and Foreign Currency Convertible Bond Issues.  The Government is committed to a thorough modernisation of the capital market  and rapid improvement of trading practices with a view to ensuring transparency  and speed of settlements. The model National Stock Exchange with screen-based  trading is expected to begin operation by the middle of this year. The establishment  of a Depository System of scrip-less trading is another important objective.  Government intends to bring before Parliament separate legislation for the  establishment of Depositories. The Government also proposes to make further  amendments to the SEBI Act and the Securities Contracts (Regulation) Act in order  to give additional powers to SEBI.

2 5 . In my Budget speech last year, I had announced the establishment of a  High-Powered Committee to study the insurance industry and make  recommendations on directions for its development in future. The Committee on  Reforms in the Insurance Sector was appointed under the Chairmanship of Shri  R.N. Malhotra, former Governor of the Reserve Bank of India. The Committee has  recently submitted its report, which underscores the need for progressive  deregulation of the insurance sector to create a more competitive and financially  strong insurance industry, functioning under an independent regulatory authority.  The report is now under active consideration of the Government. It is my intention  to evolve a broad national consensus about the future direction and content of  reform in this important sector.

2 6 . Efficient and abundant infrastructure services are a necessary precondition  for the success of our economic reforms and especially for international  competitiveness. Our electric power sector is faced with severe problems, including  problems of financial viability of the State Electricity Boards which must be solved  if the supply of reliable power is to keep pace with ever-increasing demand. The  sector requires major changes in the working of State Electricity Boards,  rationalisation of tariffs and restructuring of responsibilities for generation,  8  transmission and distribution. A Committee of the National Development Council  is looking into a comprehensive reform of our power system and it will be necessary  to face up to a number of hard decisions in this sector.

2 7 . Significant steps have been taken in the oil and gas sector to promote  investment including private investment in exploration, development, refining and  marketing. We propose to deepen and intensify these initiatives. To promote  modernisation and investment in the coal industry, Government is reviewing the  policy framework for investment, pricing and distribution. New initiatives are under  consideration in the Telecommunications Sector.

2 8 . I shall now briefly go over the Revised Estimates for 1993-94.

2 9 . Budget estimates for 1993-94 had placed the total expenditure at  Rs.131,323 crore. This is now expected to go up to Rs.143,872 crore, that is, an  increase of Rs.12,549 crore.

3 0 . Budget estimates for the current year provided Rs.41,251 crore as budget  support for Plan Expenditure. This is now being increased by Rs.4,775 crore to  Rs.46,026 crore. Of this increase Rs.3,493 crore are for assistance to States for  financing their plans. A large part of this increase relates to externally-aided projects.  I have also provided Rs.856 crore as advance plan assistance to special category  States to cover their opening deficits and Rs.339 crore as additional special plan  loan to Punjab to help that State in the process of recovery.

3 1 . Under the Central Plan, a provision of Rs.600 crore has been made for the  new Employment Assurance Scheme announced by the Prime Minister on 15th  August, 1993. I have also augmented the current year’s provision for the National  Renewal Fund by Rs.320 crore, taking the total to Rs.1,020 crore. This increase  will fund implementation of Voluntary Retirement Schemes in Public Sector  Undertakings and also finance training and counselling.

3 2 . Non-plan expenditure in the current year will require an additional  provision of Rs.7,774 crore. An additional Rs.2,200 crore has to be provided for  food subsidy and Rs.900 crore for fertilizer subsidy. I am including a provision of  Rs.632 crore towards assistance to States for providing concession to farmers on  decontrolled fertilizers. It has also become necessary to provide an additional  Rs.2,320 crore for Defence expenditure. Honourable Members will appreciate that  there can be no question of compromise on the external and internal security of  our country.I am providing an additional Rs.303 crore more for Police. Other  increases include Rs.219 crore for pensions and Rs.500 crore for loans to States as  their share of small savings collections, following improved collections.

3 3 . Gross tax revenue, which was estimated in the Budget at Rs.84,867  crore, is now expected to yield Rs.8,117 crore less. Of this, about Rs.822 crore is  due to tax receipts of the National Capital Territory of Delhi flowing into its own  Consolidated Fund from 1st of December, 1993. There is also a consequential  reduction in expenditure on this account. The rest of the shortfall is mainly  under Customs and Union Excise Duties. Customs revenue is Rs.5,227 crore  lower than expected mainly because imports have not increased as originally  estimated. There is a shortfall of Rs.2,001 crore in excise duty mainly due to the  setback in production in certain high revenue yielding sectors of the economy.  Due to the delay in finalisation of the procedure for disinvestment of equity holding  9  in Public Sector Enterprises, the related receipts this year are estimated at Rs.2,500  crore compared to the Budget estimate of Rs.3,500 crore.

3 4 . The shortfall in receipts has necessitated a larger resort to borrowings.  However, I have made serious efforts to ensure that the increased borrowing does  not lead to excessive growth of high powered money. Instead, we have seen to it  that the Government has borrowed on the basis of market-related instruments  such as the 364 days Treasury Bills which were started in 1992-93. We have also  introduced certain other new instruments such as zero coupon rate bonds and 3  year loans for conversion of maturing 364 days Treasury Bills.

3 5 . External loans net of repayments are placed at Rs.3,837 crore compared  to the Budget estimate of Rs.5,454 crore.

3 6 . Taking into account other variations in receipts and expenditure, the  current year is expected to end with a budget deficit of Rs.9,060 crore. The fiscal  deficit, which was estimated at Rs.36,959 crore in the original Budget, is now  expected to go up to Rs.58,551 crore. The fiscal deficit as a percentage of GDP will,  therefore, be 7.3 per cent, which is much higher than projected at the budget  stage. I am far from happy with this development. But, as I have stated earlier,  there were special circumstances in 1993-94 which warranted somewhat higher  deficit. In a situation characterised by idle industrial capacity, I was concerned  that an attempt to bring about a sharp reduction in the fiscal deficit might well  have been counter-productive. However, we cannot afford to repeat large fiscal  deficits. We must return to the path of fiscal rectitude.

3 7 . I now turn to the Budget estimates for 1994-95.

3 8 . In order to maintain the tempo of development activities, the budgetary  support for the Central Plan 1994-95 has been increased to Rs.27,278 crore from  Rs.23,241 crore in Budget estimates 1993-94, an increase of about 17.4 per cent.  The total outlay of the Central Plan of Rs.70,141 crore for 1994-95 will be financed  by budgetary support to the extent of 39 per cent as against 36 per cent in Budget  estimates 1993-94. The balance of the Central Plan outlay will be financed by the  internal and extra-budgetary resources of the Central Public Sector Enterprises.

3 9 . I am providing Rs.19,304 crore as Plan assistance to States and Union  Territories in 1994-95 compared to Rs.18,010 crore in Budget estimates 1993-94.  The total budgetary support from the Central Government’s budget to the Central  and the State Plans will be increased by 13 per cent from Rs.41,251 crore in  Budget estimates 1993-94 to Rs.46,582 crore in 1994-95.

4 0 . The increased budgetary support to the Central Plan is being directed to  support higher outlays in important social sectors such as Rural Development,  Education, Health and Family Welfare and Women and Child Development, and  Welfare of Scheduled Castes, Scheduled Tribes and Other Backward Classes. In  response to the vital need for greater employment generation and capital formation  in rural areas, and in order to focus more sharply on alleviation of rural poverty,  the outlay for the Department of Rural Development has been increased from  Rs.5,010 crore in Budget estimates 1993-94 to Rs.7,010 crore in 1994-95,  representing a massive increase of 40 per cent over the previous year. Honourable  Members will recall that the allocation for Rural Development was Rs.3,100 crore    in Budget estimates 1992-93. In two years, we have more than doubled this provision.  For the new Employment Assurance Scheme announced by the Prime Minister on  15th August, 1993, which is being implemented in 1752 identified blocks, an outlay  of Rs.1,200 crore has been provided as compared to the 1993-94 outlay of Rs.600  crore. Similarly, the allocations for the Jawahar Rozgar Yojana have also been  enhanced from Rs.3,306 crore in Budget estimates 1993-94 to Rs.3,855 crore in  1994-95. It is estimated that 1150 million mandays of employment are likely to be  generated in 1994-95. I have also increased the allocation for the Accelerated Rural  Water Supply Programme, including the Rajiv Gandhi National Drinking Water  Scheme, by Rs.150 crore in 1994-95.

4 1 . The Prime Minister’s Rozgar Yojana was launched on October 2, 1993, to  provide self-employment opportunities to one million educated unemployed youth  in the country by setting up 7 lakh micro enterprises through industry, service  and business ventures. The Scheme intends to cover urban areas during 1993-94  and whole of the country from 1994-95 onwards. A provision of Rs.145 crore has  been made for 1994-95.

4 2 . The outlay for Agriculture will be Rs.2,005 crore in 1994-95. A major  thrust is being given to horticulture development, with a 42 per cent increase in  allocation from Rs.130 crore in Budget estimates1993-94 to Rs.184 crore in 1994-  95. A major scheme for promoting use of plastics in drip irrigation is under  implementation for which an enhanced outlay of Rs.45 crore has been kept during  1994-95.

4 3 . In the Eighth Plan, we have given high priority to the development of  human resources. The bulk of outlay for this sector is in the plans of the States.  The outlay for education in the Central plan is being increased by 17.6 per cent, to  Rs.1,541 crore in 1994-95. Special efforts are being made for strengthening of  elementary education, for which the outlay has been increased from Rs.442 crore  in Budget estimates 1993-94 to Rs.523 crore in 1994-95. The allocation for the  University Grants Commission has been increased from Rs.159 crore in the Budget  estimates for 1993-94 to Rs.209 crore in 1994-95. Special allocations have been  made to upgrade the quality of libraries and laboratories in the system of higher  education. Provision has also been made for the establishment of an Indian Institute  of Technology and for two Central Universities in Assam.

4 4 . The outlay for Health has been increased by nearly 20 per cent from  Rs.483 crore in Budget estimates 1993-94 to Rs.578 crore in 1994-95. A revamped  National Programme for the Control of Blindness, will be implemented from the  next year. The allocation for the Leprosy Eradication Programme has been increased  from Rs.35 crore in Budget estimates 1993-94 to Rs.94 crore in 1994-95. Control  and prevention of AIDS is of paramount importance; an increased provision of  Rs.83 crore has been made for 1994-95.

4 5 . The outlay for the Department of Family Welfare has also been increased  from Rs.1,270 crore in Budget estimates 1993-94 to Rs.1,430 crore in 1994-95.

4 6 . The provision for the Welfare of Scheduled Castes, Scheduled Tribes and  Other Backward Classes, inclusive of support to States for specified schemes, has  been increased in 1994-95 to Rs.982 crore. The share capital contribution by the  Central Government to the National Scheduled Castes and Scheduled Tribes Finance  11  and Development Corporation and the National Backward Classes Finance and  Development Corporation is being increased from Rs.53 crore in Budget estimates  1993-94 to Rs.76 crore in 1994-95.

4 7 . Recognising the critical role of infrastructure, Plan outlays in Power,  Petroleum and Natural Gas, Telecommunication, Railways and Transport, have all  been increased. The Plan outlay for power sector has been raised from Rs.7,461  crore in Budget estimates1993-94 to Rs.8,464 crore in 1994-95; and within this  total, the budget support for this sector has been increased by over 27 per cent  from Rs.2,445 crore in Budget estimates 1993-94 to Rs.3,117 crore in 1994-95.  The Plan outlay for the Telecommunication services has been increased from  Rs.6,321 crore in Budget estimates 1993-94 to Rs.7,246 crore in 1994-95. The  outlay for Roads has been stepped up from Rs.593 crore in Budget estimates 1993-  94 to Rs.665 crore in 1994-95. We have also increased the budget support to the  Railways by 20 per cent from Rs.960 crore in Budget estimates 1993-94 to Rs.1,150  crore in 1994-95. To sustain long-term development, cost recovery for infrastructure  services has to become much more effective. Investments in infrastructure sectors  must increasingly be financed through internal and extra-budgetary resources of  Public Sector Undertakings.

4 8 . The role of science and technology is critical for modernising our economy  and making it globally competitive. The outlay for the Department of Science &  Technology has been raised by 19 per cent from Rs.189 crore in Budget estimates  1993-94 to Rs. 225 crore in 1994-95.

4 9 . Total non-plan expenditure next year is placed at Rs.1,05,117 crore  compared to Rs.97,846 crore in the Revised estimates of current year. I have to  draw the attention of the Honourable Members to a major factor which has been  contributing to the sizeable increase in non-plan expenditure year after year, and  this is the interest burden. The provision for interest payments next year is placed  at Rs.46,000 crore. This is an increase of Rs.8,000 crore over the current year’s  Budget estimates whereas the increase in total non-plan expenditure is Rs.15,045  crore. Honourable Members will appreciate that the major part of the interest  burden is a legacy from the past and it continues to grow because of the continued  high level of Government borrowing. Interest payments can be reduced only if we  can implement a programme of phased reduction in the Government’s total borrowing  requirements or fiscal deficit. This can become a reality only if our tax system  becomes more buoyant, our public enterprises generate more internal resources  and we reduce expenditure on subsidies. A bold programme for disinvestment of  government equity in public enterprises and earmarking a part of the sale proceeds  purely for debt reduction would also be of great help.

5 0 . Defence is another important element in non-plan expenditure. We cannot  take chances with our national security. I am, therefore, providing Rs.23,000 crore  for Defence as against Rs.19,180 crore in the Budget estimates for 1993-94 which  was itself raised to Rs.21,500 crore in the Revised estimates. I am providing Rs.4,000  crore each for food subsidy and fertilizers subsidy. I am also providing Rs.341  crore being the balance amount payable by Government under the scheme of Debt  Relief to Farmers. Furthermore, I am providing for a net expenditure of Rs.365  crore on account of Government’s assumption of exchange loss liability on Foreign  Currency Non-Resident Accounts Scheme, which was previously borne by the  Reserve Bank of India.

5 1 . The provision made in next year’s Budget for non-plan expenditure other  than the provisions for interest payments and defence is actually Rs.2,729 crore  less than in the Revised estimates for the current year.

5 2 . Coming to receipts, gross tax revenue at existing levels of taxation is  placed at Rs.87,136 crore. States’ share of taxes next year is estimated at Rs.24,394  crore compared to Rs.22,244 crore in the Revised estimates of current year. External  loans net of repayments are placed at Rs.4,279 crore compared to Rs.3,837 crore  in the current year’s Revised estimates.

5 3 . Taking into account maturing liabilities, the net Small Savings collections  next year are placed at the same level as in the current year, that is, Rs.6,000  crore. I am taking a credit of Rs.4,000 crore next year as receipts from disinvestment  as a continuation of the policy of mobilising non-inflationary resources from the  sale of public sector equity. Total receipts are estimated at Rs.1,45,699 crore and  total expenditure at Rs.1,51,699 crore leaving a gap of Rs.6,000 crore.


5 4 . I now turn to the tax proposals for 1994-95. This year I shall begin with  the proposals relating to indirect taxes.

5 5 . Over the years, our indirect tax structure has grown into a complex maze  of high and multiple rates, with numerous exemptions, and different rates being  applicable for the same product for different uses and users. This has resulted in  unnecessary complexity leading to administrative abuse, mounting litigation and  uncertain economic impact. All this has effectively eroded the tax base and buoyancy  of the system and created serious economic distortions. My proposals, in both  customs and central excise, aim at simplifying the structure and continuing the  process of moving to moderate rates of taxation.

5 6 . Customs duties though lowered in the past three budgets need to be  brought down further to make key imported raw materials and capital goods available  to Indian industry at reasonable costs and also to reduce unduly high levels of  protection to industry. At the same time, the scale of duty reduction has to be  calibrated to ensure that it does not place unreasonable pressure on domestic  producers of similar products. In this framework, the key features of my customs  tariff reform proposals are:-  · Further reduction in the peak rate of customs duty;  · Substantial reduction in duties on key raw materials, such as steel and  chemicals;  · Reduction in customs duties on capital goods to boost investment combined  with other incentives which will help the domestic capital goods industry;  · Reduction or removal of anomalies caused by import duties on raw  materials and components being higher than on finished products;  · A systematic effort to unify rates on similar products to serve both economic  rationality and to reduce the scope for classification disputes;  13  · A major pruning of notifications including end use exemptions to about  half their present number, thus reducing discretionary power and  possibilities for disputes;

5 7 . I propose to reduce the peak rate of customs duty from 85% to 65%.  Items like baggage and liquor will however continue to attract higher duty as at  present.

5 8 . Availability of capital goods at a reasonable cost is necessary to enhance  our competitiveness and promote investment. It is also necessary to ensure that  our domestic capital goods industry, which has tremendous potential, is not at a  comparative disadvantage due to anomalies in the tax structure . To further both  these objectives , I propose the following package of measures:  (a) I propose to reduce basic customs duty on project imports and general  capital goods from 35% to 25%. The facility of project imports is being  extended to include port development. All this will help to reduce cost of  investment and modernisation in Indian industry. Import duty on parts,  whether imported as parts of original equipment, or as spares is also  being reduced to 25% from the present rates varying from 25% to 85%.  Import duty on fertiliser projects and power projects will continue at nil  rate and 20% respectively without any countervailing duty.  (b) Domestic suppliers of capital goods have consistently argued that if  domestic capital goods are to compete with imports, there should be a  countervailing duty on imports of capital goods equivalent to the excise  duty on domestic capital goods. I propose to accept this demand.  (c) I am simultaneously extending the benefit of Modvat to capital goods so  that full credit of excise duty paid on domestic capital goods or  countervailing duty paid on imported capital goods will be available at one  time. This has been a long standing demand of all sectors of Indian  industry.  (d) At present, machine tools attract duty at varying rates of 40%, 60% and  80%. I propose to simplify the structure by charging duty at 35% or 45%  only.  (e) With the reduction of duty on finished capital goods it is necessary to  reduce the customs duty on steel, which is a key input. I propose to  reduce the customs duty on steel from a range of 75% to 85% at present  to 50%. Import duties on primary forms of major non-ferrous metals copper,  zinc and lead are also being unified at 50%. These proposals will give a  strong boost to investment in the economy and will help the domestic  capital goods industry, in particular.

5 9 . To help domestic metal producers, the import duties on all ores and  concentrates are being reduced and unified at 10%. To reduce the cost of inputs for  the secondary steel sector, I propose to reduce the import duty on melting scrap  from 12.5% to 10% and on iron ore pellets from 15% to 10%.

6 0 . In order to give a thrust to the export efforts of our leather industry,  14  which is a major export earner, and is also employment intensive, I propose to  reduce import duty on a large number of items of machinery and raw materials  used in this industry from rates varying from 25% to 50% at present to a uniform  level of 20% without the addition of countervailing duty.

6 1 . Electronics and telecommunication are vital for rapid economic development  and can greatly contribute to generation of both additional employment and exports.  I propose to rationalise the tariff structure for these sectors as follows :  (a) The import duty on computer parts is being reduced from 80% to 50%.  The duty on specified components is being reduced from 50% to 40% and  on specified piece parts from 35% to 30%.. The import duty on application  software is being reduced from 85% to 20% .  (b) In order to encourage the telecommunication sector, I propose to reduce  import duty on non-electronic parts for manufacture of such equipment  from 50% to 40% and on optical fibre from 85% to 40% to encourage  manufacture of optical fibre cables in the country.

6 2 . The domestic watch industry has a significant growth potential . To enable  this industry to become internationally competitive, I propose to reduce the import  duty on certain items of machinery for the industry from 50% at present to 25%.  I also propose to reduce the duty on certain components and raw materials for the  watch industry from 70% and 50% at present to 25% and 20% respectively.

6 3 . The present import duty structure for medical equipment is complex and  involves in some cases time consuming administrative procedure. The domestic  industry is also not able to compete with imported equipment because it is now  available duty-free to hospitals on production of certificates by designated authorities.  In order to remove the above hindrances , I propose to abolish the system of  certification for charitable hospitals and freely permit import of specified medical  equipment at 15% without any countervailing duty. The list of such equipment is  being separately notified and can be expanded on merits. Import at zero rate for  government hospitals and for all specified life saving and sight saving equipment  is, however, being continued. Import duty on other medical equipment which is at  present 85% is being reduced to 40%. Components for their manufacture will be  allowed to be imported at 15% customs duty. This differential will help manufacture  of medical equipment by indigenous industry.

6 4 . The import duty structure for coal and petroleum is being simplified.  Crude petroleum and coal will attract import duty of 35% as against Rs.1500 per  metric tonne and 85% respectively. Duty on coke is being reduced from 85% to  25%. LPG and other petroleum gases will attract import duty at 15%. Naphtha and  kerosene will continue to be exempted from basic customs duty. Other petroleum  products will attract an import duty of 30%. These changes do not affect the  administered prices of petroleum products to consumers.

6 5 . The present import duty structure for chemicals provides for a lower rate  of duty of 15% for the basic feed stocks and peak rate of 85% for the finished  chemicals. The overall dispersal of the rates is being reduced by the reduction of  peak rate to 65%. In addition, duties on DMT, PTA and MEG are being reduced  from 70% to 60% and on intermediates like xylenes and toluene, the duty is being  15  reduced from 40% to 30%. The 15% rate for basic feed stocks has been kept  undisturbed.

6 6 . In the pharmaceutical sector, import duty on a large number of raw  materials which at present varies from 85% to 50% is being lowered to two rates of  50% or 25%. In a few cases, there has been some upward adjustment of import  duty having regard to the need to protect the interest of domestic manufacturers of  drug intermediates.

6 7 . While I have no doubt that the phased reduction of customs tariffs is  essential for the longer term interest of our industry, I am also fully aware of the  concern of some industries about the dumping of certain imported goods at artificially  low prices. I assure the House that our anti dumping provisions will be reviewed  and further strengthened, if necessary.

6 8 . I now turn to my proposals for central excise.

6 9 . This Budget proposes a major reform of the excise tax structure as part  of our programme of modernising our tax system. The principal features of this  restructuring are:  · Extension of Modvat to capital goods and petroleum products;  · Shift in the bulk of excise taxation from specific to ad valorem rates which  will assure much greater built -in buoyancy of revenues.  · Reduction in the total number of ad valorem tax rates to about half the  existing number which will be a major step towards simplicity and  transparency;  · Continuing the process of lowering rates when they are unduly high;  · Application of uniform rates for similar commodities to the extent possible.  This will reduce classification problems, scope for misuse and widespread  litigation;  · Removal of complicated price list procedure;  · Reduction of the number of special exemption notifications by about half.

7 0 . These steps will promote growth of manufacturing output and employment,  will make tax administration easier, less discretionary and also reduce the scope  for misclassification, disputes and evasion. They will increase revenue elasticity  and pave the way for an eventual adoption of a Value Added Tax.

7 1 . Inevitably, a major restructuring involves changes in many rates for several  products as products have to be reclassified into fewer rate categories. Furthermore,  duty rates have been adjusted in some cases to compensate for loss of revenue  because of the extension of Modvat. However, I have ensured that items of mass  consumption are not burdened by higher taxes. For example, full exemption continues  for many goods such as handloom products, unbranded drugs, domestic electric  bulbs, bicycles, baby food, cooking oil, spices, jams, jellies, sauces, tea and coffee.  And care has been taken not to raise the rates on, for example, sugar, matches and  vanaspati. There should be no adverse effect on prices of essential items of  consumption of the common man.

7 2 . I will now highlight a few major areas of special interest.

7 3 . Sir, the House may recall that the Modvat scheme was introduced in  1986. Its subsequent extension has greatly helped to reduce the cascading effect of  input taxes. But the coverage remains incomplete. Petroleum products, textiles,  matches, tobacco products and capital goods had been left out of the scheme.  There is a persistent demand from industry to make the scheme more comprehensive.  I now propose to extend the Modvat scheme to two important sectors namely,  capital goods and petroleum products.

7 4 . I propose to rationalise the structure for petroleum products. At present,  the excise duty rates are specific. There are numerous exemptions depending on  the end use. I propose to replace the existing specific rates by a uniform advalorem  rate of 10% on all petroleum products with the exception of motor spirit which will  attract duty of 20%. End use exemptions will be virtually eliminated. Existing  concessions for the fertilizer industry are, however, being continued. These changes  have no impact on the administered prices of these items.

7 5 . The current duty structure for cotton and man made fabrics is a  combination of ad-valorem and specific rates. I propose to switch over to ad-valorem  rates of 5%, 10% and 20% only instead of the numerous specific and ad-valorem  rates currently prevailing.

7 6 . The present excise duty structure on fibres and yarns is complicated and  different specific rates are prescribed for different varieties of yarn and fibres. This  has required frequent testing of samples to determine the correct duty liability. In  order to obviate all problems of classification and to make the excise duty neutral  as between various fibres and yarns, I propose to impose a uniform excise duty of  20% on all fibres and blended or spun yarns. On cotton yarn, excise duty is,  however, proposed at 5% only instead of the present complex and varying specific  rates depending on the count of the yarn. As regards filament yarns, revenue  considerations preclude moving to a uniform excise duty. I have thus proposed an  ad-valorem duty rate of 60% for polyester filament yarn, 30% for nylon and  polypropylene yarn and 15% for viscose filament yarn. For industrial yarns, lower  rates of 30%, 20% and 10% have been prescribed. The scheme of Modvat is being  extended to yarns made from fibres. With this Modvat will cover all yarns. These  changes are largely a simplification and rationalisation of the structure. Combined  with the reduction in customs duties, they should help to moderate prices in this  sector.

7 7 . I propose to fix a uniform duty of 15% on all metals, except aluminium for  which the duty will be 20% as against 25% now. However, a lower duty of 10% will  be available to pig iron and certain other products of iron.

7 8 . The excise duty structure on drugs differentiates between Schedule I,  Schedule II and other drugs. Schedule I drugs which are for the National Health  Programme and are under price control are fully exempted from excise duty. This  will continue. Single formulations of Schedule II drugs attract excise duty at 10%  while other branded drugs pay excise duty at 15%. I propose to unify these rates  at 15%. I propose to charge a moderate 10% excise duty on branded ayurvedic and  homoeopathic medicines and medicines of other alternative systems. At present,  bulk drugs producers cannot get full benefit of Modvat credit because the excise  duty on bulk drugs is 5% which is too low. This is being raised to 10% to enable  17  them to get full credit. Unbranded drugs, however, will continue to be exempted  from excise duty.

7 9 . In order to simplify the duty structure for various chemicals and chemical  based products like dyes, paints, tanning preparations, etc., I am proposing a  uniform duty of 20% on such products instead of present rates varying from 5% to  25%. A uniform duty of 30% is being proposed for major bulk plastics , synthetic  paints and detergents, which currently attract 35%.

8 0 . The paper duty structure is complicated due to ad-valorem rates of nil,  10%,15%,25%,30%, specific rates and specific cum ad-valorem rates. This is now  being simplified by making the general rate of duty on paper at 20%, keeping nil  rate for news print, stationery articles etc., 30% for paper based laminates and  floor coverings and 10% or 15% for paper made from unconventional raw materials.  I am enlarging the scope of the exemption currently available to paper mills using  unconventional raw materials. This exemption limits the benefit by clubbing the  clearances of paper from more than one factory of a manufacturer. I am now  allowing this concession to be availed of by each factory separately.

8 1 . The duty rate of 70% applicable to cosmetics and similar personal care  products are too high for items which are now increasingly forming part of the  consumption basket of ordinary people. The rate is, therefore, being reduced to  50%.

8 2 . I am also proposing certain changes in the general small scale industry  exemption scheme. At present only registered units are eligible for concessions  upto a clearance value of Rs. 75 lakhs. Non-registered units can get exemption  only up to Rs. 30 lakhs. I propose to do away with this distinction so that small  scale units can get the exemption meant for them irrespective of whether they are  registered or not. This will satisfy one of the major demands of small scale industry.  The scope of the small scale exemption scheme is also being expanded to cover a  number of additional items including certain iron, steel and copper products.

8 3 . Under the present scheme, a small unit manufacturing goods under the  brand name of another unit is entitled to duty concession only if the brand name  does not belong to a large unit. There have been reports of bigger units avoiding  payment of duty by getting their brand names registered in the name of smaller  units. This does not allow a small manufacturer to promote his own brand. With  the advent of international brand names in the country, it is necessary to check  the misuse of the scheme in the interest of domestic industry. I, therefore, propose  that the benefit of duty concession would not be available to clearances of goods  bearing the brand name of another manufacturer.

8 4 . One of the persistent demands of the small scale industries has been to  allow them to pay duty even though they are otherwise entitled to exemption as  this will enable their customers to claim the benefit of Modvat credit. There is  considerable merit in this request, and I propose to give the option to those who  will like to exercise it.

8 5 . It may be recalled that in the last budget, in order to give encouragement  to the ship breaking industry, basic customs duty on ships for breaking up was  reduced to 5%. Countervailing duty was payable in addition. Ferrous metals obtained  from breaking up of ships were consequently exempted from excise duty. There  18  have been some disputes regarding liability of countervailing duty on ships for  breaking up. In order to obviate the disputes, I propose to exempt ships for breaking  up from countervailing duty and correspondingly adjust the basic customs duty to  15%. For the ship breaking industry, all goods obtained from such breaking up are  also proposed to be exempted from excise duty so that ship breaking activity is  completely outside the excise control.

8 6 . As I am continuing the specific rates of duties on cigarettes, and these  have remained unchanged for two years despite an increase in price, I propose to  increase the duties on cigarettes by about 12%. However, in the non-filter segment,  the excise duty for upto 60 mm category is being reduced from Rs. 120 per thousand  to Rs. 60 per thousand, for increased utilisation of tobacco in this industry, which  would in turn help the tobacco growers.

8 7 . Over the years, while attempts have been made to widen the base for  domestic indirect taxes, the services sector has not been subjected to taxation. Yet  this sector accounts for about 40% of our GDP and is showing strong growth.  There is no sound reason for exempting services from taxation , when goods are  taxed and many countries treat goods and services alike for tax purposes. The Tax  Reforms Committee has also recommended imposition of tax on services as a  measure for broadening the base of indirect taxes. I, therefore, propose to make a  modest effort in this direction by imposing a tax on services of telephones, non-life  insurance and stock brokers. The tax will be charged at 5% on the amount of  telephone bills , the net premium charged by the insurance companies, and the  brokerage or commission charged by the stock brokers in relation to their services.  These proposals will come into force from a date to be notified later on.

8 8 . The existing system of determination of value of goods for charging excise  duty is cumbersome and time-consuming. It involves filing of price lists in advance  by the assessee and their approval by the excise officer. The process has to be  followed whenever there is a change in the price. As a measure of procedural  simplification, I have decided to dispense with the requirement of price lists. The  assessee will now be allowed to pay excise duty on the basis of the value arrived at  from the invoice. I am sure that this facility will be widely welcome by the industry.  This will also help lay the ground for eventual adoption of a value added tax which  relies on invoice value.

8 9 . The details of the revenue implications of the measures announced are  given in the Explanatory Memorandum to the Finance Bill.

9 0 . I have also proposed certain other amendments in the Finance Bill seeking  to effect changes in the Customs Act, and Excise and Customs Tariffs. The  amendments are merely enabling provisions and do not have significant revenue  implications. Besides, there are proposals for amendment of some of the existing  notifications. In order to save the time of the House, I do not propose to recount  them.

9 1 . Copies of notifications giving effect to the above changes in customs and  excise duties will be laid on the Table of the House in due course.

9 2 . I now turn to my direct tax proposals for 1994-95.  9 3 . I propose to carry forward the basic philosophy which has guided our tax  reforms of moving to a simpler system with moderate rates of tax and a much  greater reliance on broadening the base, with better tax administration.

9 4 . I have received numerous representations from workers, trade unions,  and other bodies representing middle class citizens for raising the exemption limit  for income tax which is now Rs.30,000. I am persuaded that there is merit in the  demand and I propose to raise the exemption limit to Rs. 35,000. With this, a  salary or wage earner with a gross income of Rs. 50,000 will pay no income-tax. A  working woman with a salary of Rs. 52,000 will also pay no tax.

9 5 . I also propose to adjust the tax slabs which have not been changed for  two years. At present, the first bracket is from Rs. 30,000 to Rs. 50,000 with a tax  rate of 20 per cent. Henceforth the first slab will be Rs. 35,000 to Rs. 60,000, with  the same rate of 20 per cent. tax . The second slab at present is from Rs. 50,000  to Rs. 1,00,000 with a tax rate of 30 per cent. Hereafter, the second slab will be Rs.  60,000 to Rs. 1,20,000 with the same rate of 30 per cent. tax. The maximum tax  rate of 40 per cent. which at present applies to incomes above Rs.1,00,000 will  henceforth be applicable to incomes above Rs. 1,20,000.

9 6 . I had stated last year that I was forced to retain the surcharge of 12 per  cent on non-corporate incomes for one more year. I am happy to announce that I  now propose to withdraw the surcharge completely.

9 7 . Last year, I had indicated that while major reforms of the corporate tax  structure are desirable they would have to be deferred by one year. I now propose  to implement these reforms which will help both our private and public sector  companies to save more, invest more, and become more competitive.

9 8 . At present, widely held companies are taxed at 45 per cent. while other  domestic companies attract 50 per cent tax. I propose to do away with the distinction  which now exists between the tax rates for widely held and closely held domestic  companies and lower both rates to a single rate of 40 per cent.

9 9 . All domestic companies having income exceeding Rs.75,000 are liable to  pay surcharge at the rate of 15 per cent. Much as I would like to eliminate this  surcharge, revenue constraints compel me to continue this levy for the present.  The tax on companies incorporated abroad, but earning income in India, is 65 per  cent at present. In line with the general reduction in corporate tax rates, this rate  is being reduced to 55 per cent.

100.One of the consequences of our economic policies is the need to assist  Indian companies to re-structure themselves to improve their competitive position  in the market. This may call for divestment of part of the business assets or  realisation of potential value from dormant assets, both of which will entail longterm  capital gains tax. This acts as a deterrent to re-structuring. The present rate  of such long-term capital gains tax on domestic companies is 40 per cent, whereas  long-term capital gains of individuals are taxed at only 20 per cent. I, therefore,  propose to lower the rate of capital gains tax on domestic companies to 30 per cent.

101.I also propose that, just like shares, even units of Unit Trust of India and  other approved Mutual Funds, if held for more than 12 months, will be treated as  long-term capital assets, with consequential benefits; the required holding period  for such units at present is 36 months. This will bring some welcome relief to  investors in units who generally belong to lower middle or middle classes.

102.The rates of taxation of investment income (i.e. dividend and interest  20  income) of non-residents vary with the tax status of the recipient. I propose to  rationalise the scheme of such taxation by having a uniform rate of 20 per cent. on  such income in the hands of all non-resident companies and non-resident individuals  (be they Indians or foreign nationals).

103.Representations have been received from Non-Resident Indians that they  should not lose their Non-Resident status even if they visit India and stay for more  than 149 days. I propose to raise this period of stay to 181 days.

104.Two years ago I introduced a special tax rebate for senior citizens (i.e.,  those aged 65 and above) at 10 per cent of the tax due if their income was below  Rs. 50,000. Last year I increased the tax rebate to 20 per cent and also increased  the income limit to Rs. 75,000. I now propose to raise the tax rebate admissible to  them from 20 per cent of the tax due to 40 per cent and make the benefit available  to senior citizens having income upto Rs. 1 lakh.

105.In 1992, we had decided to club the income arising to a minor child with  that of the parent. This causes undue hardship in cases involving handicapped  children and their parents. In order that the post-tax income of a child who is  physically handicapped is not reduced, I propose to exempt the incomes of such  handicapped children from the provisions of clubbing, both under the Income-tax  and Wealth-tax Acts.

106.For enabling self-employed people to contribute to a pension fund to provide  for security in their old age, the Unit Trust of India is going to set up a fund. I  propose to include contributions to such a pension fund among the amounts which  qualify for tax rebate under Section 88 of the Income-tax Act.

107.Investment in the development of human resources is an essential prerequisite  for growth and progress. Several students take loans for their studies. As  a means of helping students from poorer families, who take loans from financial  institutions, I propose to allow a deduction from income of Rs.25,000 per year on  account of repayments of principal and payment of interest up to a cumulative  total of Rs. 2 lakhs. This tax concession will be available to students who undertake  graduate or post-graduate studies in Engineering, Medicine or Management, or  post-graduate studies in pure sciences, applied sciences, Mathematics or Statistics.

108.Encouragement of science and technology is essential for promotion of  growth. At present, when an assessee makes a contribution to a National Laboratory  under the aegis of Indian Council of Agricultural Research, Indian Council of Medical  Research or Council of Scientific and Industrial Research, he or she gets a weighted  deduction of 125 per cent of the contribution. I propose to extend this benefit to all  Universities, deemed Universities, Indian Institutes of Technology and scientific  laboratories under the aegis of the Defence Research and Development Organization,  the Department of Electronics, the Department of Bio-technology and the Department  of Atomic Energy.

109.Several Universities and Co-operative Societies have made representations  that the tax exemption under section 10(10C) for approved Voluntary Retirement  Schemes should be extended to their employees. I propose to accept their  representations.  110.A statement has already been made in the last session of Parliament,    signifying Government’s intention to exempt the incomes of Government Corporations  established for the welfare of the backward classes. I propose to make legislative  amendments for carrying out this commitment.

111.The system of community of property (COMMUNIAO DOS BENS) is peculiar  to the people living in Goa, Daman, Diu, Dadra and Nagar Haveli. Recently, certain  judicial decisions have been handed down according to which business income of  a Goanese family becomes taxable entirely in the hands of a single entity. The  decisions affect the time-honoured method of dividing such income equally and  assessing such income separately in the hands of the husband and wife. This I  understand has given rise to unnecessary tensions and anxiety amongst the Goan  couples. To set at rest all controversies in this area, I propose to make suitable  amendments in the Income-tax Act to ensure that, excepting for salaries, any other  income arising to the citizens governed by the system of community of property in  Goa will be divided equally and assessed separately in the hands of the husband  and the wife.

112.We have, in the last few years, liberalised the taxation of perquisites in the  form of medical expenditure in the case of employees. I propose extending the  scope of the benefit by including reimbursement of bills paid by employees to  recognised private hospitals.

113.In order to give relief to those living in their own houses and as an incentive  for house construction, I propose to raise the deduction on account of interest on  borrowed capital for house construction from Rs.5,000 to Rs.10,000 for purposes  of income tax.

114.We have been implementing a simple presumptive scheme of taxation for  the assessees in the unorganised sector for the past two years. The scheme was to  have ended with this year. I propose to continue with the scheme. My hope is that  more people will avail of this very simple scheme and come forward readily to  contribute their mite to the national tax effort without any fear or inhibition.

115.In addition, I am introducing a new estimated income scheme for  contractors with a turnover of upto Rs.40 lakhs and for truck-owners who own  upto ten trucks. In the case of contractors, the net profit will be estimated at 8 per  cent. of the gross receipts. In the case of truck owners, the income will be estimated  at Rs. 24,000 per truck per year for Light Commercial Vehicles and Medium Motor  Vehicles, and Rs. 30,000 per truck per year for Heavy Transport Motor Vehicles. In  both these cases, no further deduction on account of depreciation or interest or  other expenses will be allowed. In both cases, the scheme is optional. This scheme  is based on the recommendation of the Chelliah Committee on Tax Reforms. The  scheme will be simple and free of irritants, and I expect an enthusiastic response.

116.Last year, I announced a five-year tax holiday to new industrial  undertakings commencing production in States specified in the Eighth Schedule to  the Income-tax Act. There have been repeated and widespread demands that the  benefit should be extended to backward districts in other States. I had announced  the setting up of a Study Group to go into this question. The Group’s report has  been received and is under consideration. As a stimulus to new investment in  backward districts in other States of the country, I propose to extend this concession  to such districts which are backward according to certain guidelines which will be  prescribed.

117.Government has already announced its intention of allowing the deduction  in respect of profits of new industrial undertakings engaged in the manufacture of  items listed in the Eleventh Schedule of the Income-tax Act to large-scale units  also, provided such units are set up in the backward States enumerated in the  Eighth Schedule. I propose to give legislative shape to this intention.

118.In order to continue to give encouragement to the export of computer  software, I propose extending the exemption for such export profits for one more  year.

119.We have an ambitious programme of attracting tourists to this country. It  has been strongly urged that the present rate of tax on expenditure incurred in  hotels discourages tourism. I, therefore, propose to reduce the rate of expenditure  tax from 20 per cent. to 10 per cent.. I am doing so on the expectation that the  State Governments too will follow suit and reduce their taxation on hotels in order  to encourage tourism within the country and attract more foreign tourists to our  land.

120.Pollution control is of vital importance to all of us. I, therefore, propose to  include pollution control among the eligible projects for concession under section  35AC of the Income-tax Act, so that a person who makes a contribution to such a  project can claim 100 per cent of such contribution as a tax deduction.

121.The exemption limit for gift-tax is Rs.30,000 and an additional exemption  of Rs.30,000 is available for gifts to dependant relatives on the occasion of marriage.  Marriages are joyous occasions of family re-union, and honest tax-paying citizens  have a right to be free from tax considerations as far as possible on such auspicious  occasions. I, therefore, propose to raise the exemption for such gifts on the occasion  of marriage of a dependant relative from Rs.30,000 to Rs.1,00,000.

122.As conventionally estimated, the proposed changes in custom duties will  result in a revenue loss of Rs. 2,981 crores and a revenue gain of Rs. 699 crores.  On the Excise side, the revenue gain is anticipated at Rs. 2,106 crores and reliefs  will amount to Rs. 2,000 crores. The effect of changes in Direct taxes will result in  a loss of Rs. 1,075 crores in the personal Income-tax collections and Rs. 1,355  crores in Corporation tax. The estimated loss on Expenditure-tax is Rs. 75 crores.  Taking into account an estimated gain of Rs. 600 crores on account of taxes on  services, the total net loss on account of tax measures by conventional methods of  calculation amounts to Rs. 4,081 crores. The loss to the States on account of  reliefs in personal Income-tax is Rs. 625 crores and the gains on the Excise duty  Rs. 148 crores. On the basis of these calculations, the Centre will suffer a net loss  of Rs. 3604 crores.

123.Normally, a revenue loss of this magnitude at a time when the fiscal  system is under pressure would require levy of additional taxes or an increase in  existing rates. I have not followed this course of action for several reasons. The  revenue loss calculations do not give any credit for simplification and rationalisation  of the tax structure which will help revenue collections. Fiscal experts are near  unanimous that there is considerable evasion of taxes in our system and that it is  possible to reduce tax rates and yet mobilise additional revenue by improving tax  administration and compliance. The simplification in the indirect tax structure  that is now being introduced, will reduce the scope for discretion, disputes and   litigation, all of which are a source of tax evasion. The shift to ad-valorem excise  duties will also add to buoyancy. I also propose to make a major effort at improving  tax administration. Tax laws are going to be administered fairly and firmly.  Computerisation, which has already begun in both Departments, is expected to  further improve tax administration. I also hope that tax payers who have long  argued for moderation in the rates of taxes and held out assurances that this  would improve compliance, will now live up to their side of the bargain. They have,  in the long run, the most to gain from the success of this experiment.

124.Economic life everywhere is characterised by great uncertainty. There is  always the possibility that things may not work out the way I have assumed.  Although one cannot be dogmatic in these matters, my considered view is that the  risks involved in the course of action I have proposed, do not cross the limits of  prudence. The consequence of postponing the tax reform, or of imposing additional  taxes to offset the revenue loss as conventionally calculated, would be wholly  unproductive in a situation where our economy is characterised by sizeable unutilized  industrial capacity, record food stocks and comfortable foreign exchange reserves.  Any such course could give a setback to the economic recovery which our country  needs, and which is now on the horizon.

125.For these reasons, I do not propose to assume any revenue loss as a  result of the Budget proposals. The Budget deficit will therefore remain at Rs.  6,000 crores and the fiscal deficit at Rs. 54,915 crores. At this level, the fiscal  deficit will be around 6 per cent. of GDP. This is higher than I would like to see, but  as I have said, all tax reforms involve some risks.

126.This Budget is being presented at a critical time for the economy. There  are moments in history which call for determined and decisive action. The  consequences of inaction or ill-designed responses can be horrendous and are felt  for decades to come. June, 1991 was such a moment. Thanks to the magnificent  leadership provided by the Prime Minister Shri P.V. Narasimha Rao, we have been  successful in reversing the adverse tide in our fortunes. However, the task of national  reconstruction is by no means over. It is by its very nature a task which should  occupy us for the rest of the decade. But we pursue this task today from a stronger  position. The economy has been restored to health and shows all the potential for  rapid growth in the years ahead. Our agricultural sector is strong and well placed  to respond to the new policies. Our industrial sector, both, private and public, has  begun the difficult process of restructuring to face increasingly competitive market  conditions. The climate for investment – both domestic and foreign – has vastly  improved. The tax structure now proposed goes a long way towards the kind of  modern tax system and moderate tax rates and an emphasis on compliance, which  is the hallmark of all successful countries. I am confident that it will provide a  strong stimulus for new investments, economic revival and international  competitiveness which is what the economy needs today. The medium term objectives  set out in the report of the Tax Reform Committee are now clearly within our reach.

127.Mr. Speaker, Sir, this Budget is inspired by a firm conviction that India  has all the material and human resources to be a front-ranking nation of the world.  We are on the threshold of a new century, indeed a new millennium. There are  tremendous opportunities, provided we have the wisdom and foresight to seize  them. There are also immense dangers if we falter or appear indecisive. Sir, this  24  then is a time for hard work, for recapturing the high noon of idealism which  inspired our freedom struggle, for a firm determination to hold aloft, undimmed  and untarnished, the bright torch of India which, as Jawaharlal Nehru was fond of  saying, embodies her great and eternal spirit so that its light reaches every home  and rekindles hope, faith and courage, and pride in being an Indian. Let us strive  tirelessly, as the great poet Rabindranath Tagore said in his prayer, to build an  India where “the clear stream of reason has not lost its way into the dreary desert  sand of dead habit”. May we be worthy of this noble task and of this ancient and  sacred land of India.

128.Sir, I commend the Budget to this august House.  [28th February, 1994]

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