Morarji Desai – 1968 Budget

Finance Minister : Morarji Desai
Budget Year :1968

BACK

Morarji Desai

1  SPEECH OF SHRI MORARJI R.DESAI, DEPUTY PRIME MINISTER AND  MINISTER OF FINANCE INTRODUCING THE BUDGET FOR THE YEAR 1968-69 

Sir,  I rise to present the Budget for the year 1968-69. The Indian economy is emerging  now from one of the most difficult periods since independence. Successive droughts,  shortage of food and raw materials, rising prices, subdued industrial demand, inadequacy  of exports and savings and sluggishness in the capital market had combined to create  a feeling of despondency which has afflicted us in the recent past. Honourable Members,  I am sure, would agree that we can now look back on the past two years with a sense  of relief. With the help of our friends abroad and the efforts of our own people, we  have been able to avoid a major disaster and to impart at the same time a new sense  of dynamism to our programmes of agricultural development.

2. I look upon the coming financial year with a certain degree of optimism  and with the expectation that given the right policies, it can become a year of revival.  With the sharp increase in agricultural production and rising incomes, there would  undoubtedly be some increase in the demand for industrial products. Recent trends in  exports have been encouraging. The price level is registering a decline. The objective  of policy in the coming year must be to consolidate the gains: so that a major  developmental programme can be undertaken in our Fourth Five-Year Plan which will  be launched in the following year.

3. Honourable Members are already familiar with the various aspects of the  new agricultural strategy. The availability of nitrogenous fertiliser has been more than  twice as high this year as in 1965-66. Arrangements are in hand to maintain supplies  at a high level in the coming year. The area under high yielding varieties of seeds is  expected to increase from 15 million acres this year to 21 million acres next year. In  recent years we have concentrated on minor irrigation works in order to get quick  results from investments. In the current year, 3 to 31/2 million acres were covered by  new minor irrigation facilities and the target for the coming year is another 31 million  acres. Major irrigation schemes on which substantial progress has been made also  deserve our prior attention.

4. We have to make earnest efforts to ensure that we introduce the same kind  of technological advance in commercial crops as we have achieved in respect of  foodgrains. Increased productivity per acre is essential if adequate returns to the farmer  are to be reconciled with reasonable prices to the domestic consumer and  competitiveness in export markets. The processing industries can make a valuable  contribution in this regard; and I shall have occasion later to refer to a measure I  propose to introduce to encourage these efforts.

5. Assurance of remunerative prices to the farmer for his products is an  integral part of the new agricultural strategy. I should like to assure the House that  inadequacy of finance will not be allowed to stand in the way of purchase by  Government and the Food Corporation of such supplies as may be forthcoming at the  procurement prices. The target of procurement is 7 million tonnes; and well-planned  procurement measures by all concerned will have to be undertaken to reach this target.  Even with this target, import of substantial amount of foodgrains appears to be necessary  in order that the long unfulfilled programme of building up a sizeable buffer stock can  be achieved after making allowance for replenishment of private inventories and some  increase in consumption. An agreement has already been signed to import 3.5 million  tonnes of foodgrains from the U. S. A. under PL 480.

6. The steady rise in prices over the last few years has been a matter of  all-round concern. Over the four years ending March 1967 prices had risen by 60 per  cent and there was a further rise during the earlier part of the current financial year. In  recent months there has been a downward trend. A part of the recent decline is no  doubt seasonal; bit it is reasonable to hope that the increasing flow of foodgrains and  consumer articles will help in the stabilisation of prices at reasonable levels.

7. Sir, I am happy to say that Government was able to get agreement this  year that a part of the increase in dearness allowance which was due to Government  employees be credited to their provident funds instead of being paid in cash. These  special contributions can be withdrawn in the coming year. But may I request my  Honourable friends to join me in an earnest appeal to Government employees not to  withdraw these contributions as that will help in maintaining a climate of price stability.  Economics, they say, is a dismal science; and I see no escape from saving more in  order to preserve the value of the savings.

8. A substantial part of increase in incomes would need to be ploughed back  into further investment, if an adequate tempo of development is to be achieved and  maintained. In part, investments will be undertaken directly by those who save out of  larger incomes. Farmers will wish to purchase pumps, tractors and other equipment.  In part, however, savings of all classes have to be mobilised for outside investment,  public or private.

9. The small savings movement has a vital role to play in securing this  objective. Net small savings have been relatively low in the recent past, in consequence  of the droughts. I am making a number of modifications in the small savings schemes  and necessary notifications are being issued in this regard. Briefly, we are introducing  a new five-year deposit scheme with a tax-free return of about 4.5 per cent and are  accordingly revising the return on the existing five-year cumulative time deposit scheme,  and the 12-year and 10-year tax-free savings certificates. With a renewed drive for  collection, particularly, in the rural areas, these measures should help in greater  mobilisation of resources.

10. The return on provident fund accumulations of Government employees is  also being raised; I propose to do so, however, on the first Rs.10,000 of accumulations  only. Those who are self-employed do not have the facility of saving through provident  funds. I propose, therefore, to introduce a public provident fund scheme under which  all sections of the community will have the opportunity of contributing to a provident  fund, and to avail of the income-tax benefits provided for under the law in respect of  contributions to such funds. It is my hope that in time, this provident fund scheme will  secure substantial resources for the exchequer. Self-employed persons such as doctors,  lawyers, artists, actors and actresses, like old soldiers, are never known to retire. But  they too reach their prime some day. Something laid by-legitimately, and with  considerable saving in tax liability-should prove valuable even to those who have a  greater claim to immortality than most of us.

11. A moderate increase in exports has occurred during the current year; and  the increase in imports has been less than that in exports. Nevertheless, our foreign  exchange reserves declined by $ 60 million between April and mid-November, 1967;  and it became necessary to draw $ 90 million from the International Monetary Fund.  In recent weeks, there has been a welcome increase in reserves. In response to better  export performance, which may be expected to continue. The fact that we have been  able to get some debt relief this year has also helped in managing the over-all foreign  exchange position. With the revival of industrial activity, import demand will be strong  once again; and this underscores the fact that we cannot restore viability to our balance  of payments without a sustained increase in export earnings . Basically, this is a  question of increasing the production of exportable goods and increasing efficiency  and savings all round. Export policies have also to be geared promptly to changing  circumstances.

12. That is why we announced a number of changes in export duties on the  7th of February without waiting for the presentation of the Budget when every Finance  Minister likes to mix the bitter with the sweet. The urgency of the situation was such  that 1 had to forego the certainty of receiving at least one bouquet in the midst of  whatever brickbats that may be in store. We have been giving cash assistance to some  of our exports, particularly the newer manufactures. Certain adjustments in these rates  of assistance have already been made. Government propose to maintain the new  structure of assistance intact-encouraging neither uncertainty nor perpetual expectations  of further assistance. We have also recently streamlined and simplified the procedures  for release of foreign exchange for the purpose of export promotion.

13. One of the important needs of the export sector has been the provision of  adequate and cheap credit. During the year, the industrial Development Bank enlarged  the facilities for medium-term export credit; and the Reserve Bank also took measures  to ensure that credit for exports of newer manufactures was available at particularly  concessional rates. It is desirable that credit should be available for exports generally  at a relatively low rate of, interest. I am, therefore, making provision in the Budget for    the coming year for grant of a subsidy towards interest charges on export finance  provided by the banks. The Reserve Bank will announce the details of the scheme  which will include the prescription of a ceiling on interest charges qualifying under  the scheme.

14. An adequate expansion of India’s export earnings is only possible within  an appropriate international framework. It is a matter of gratification for us that the  second session of UNCTAD is being held in New Delhi. It is our earnest hope that the  deliberations of the Conference will help in promoting co-operation in trade and aid  between the developed and the developing countries and among the developing  countries themselves.

15. As the Honourable Members are aware, we took a series of steps during  the year to stimulate industrial output. With the revival of agricultural production and  the consequent rise in incomes, a number of consumer goods items such as cotton  yarn and vanaspati are showing an increase in production. There are also signs of a  revival in the production of commercial vehicles. Industries supplying the needs of  agriculture have done well even in the recent past and continue to do so. The level of  private investment should pick up in response to the generally better economic outlook.  Continued increase, in exports and progress towards reducing the dependence on  imports will also be necessary to create and sustain a climate of industrial revival. In  this connection, it is a matter of satisfaction that our capital goods industries have won  valuable export orders in the recent past and that we hope, to get sizeable orders for  wagons, rails and other steel products from the Soviet Union. I expect an increase in  the industrial production of the order of at least 5 to 6 per cent in the coming year.  This increase, though moderate as compared to our past performance, would represent  a significant advance over the rate of growth in the last two years.

16. The working of public Sector undertakings has been engaging our earnest  attention. The public sector has been particularly hit by recession because it is mostly  engaged in the production of capital goods or producer goods. The general recovery in  the economy will undoubtedly help, but the basic problem of achieving a long-term  improvement in efficiency and yields will have to be tackled urgently. The  recommendations made by the Administrative Reforms Commission are being actively  studied and  trust before long certain concrete steps will be taken to effect a lasting  improvement.

17. Now that I have taken you through a survey of savings and exports, of  prices and production, I could perhaps turn safely to some inconvenient facts of life.  In my Budget Speech last year, I had referred to the need to avoid deficit financing in  the circumstances then prevailing in the country. These circumstances have changed  for the better; but unfortunately, not my budgetary fortunes so far. In actual practice,  the current year is expected to end with a large deficit of Rs.300 crores at the Centre.  Honourable Members would appreciate that it is neither an easy nor a pleasant matter    for me to come to this House with this particular piece of information. It is some  solace that the worsening in the budgetary position has little to do with unexpected  increase in expenditure. The deterioration has come about on account of shortfalls in  revenues and foreign aid utilisation which in turn have been due to the low level of  economic activity and also, because of a decline in the resources of the States and  public sector enterprises. To some extent perhaps, we were also misled into undue  optimism by the oft repeated charge of underestimation of resources. As soon as the  picture regarding shortfall in resources started emerging, I tried to make judicious  readjustment of outlays. The manoeuvrability for such an exercise in the midst of the  year is extremely limited, particularly if this is super-imposed on a tight budget. There  was also the consideration of the effect which any drastic cut in public spending  would have had on the recessionary situation. In fact there were suggestions from  most quarters to step up expenditure in one way or the other. Some steps were also  taken in this direction. However, the expenditure estimates in totality have been  contained; and on this count at least I can claim Some credit for having taken to heart  the admonitions of the Honourable Members.

18. The Budget which 1 presented in May last had assumed the utilisation of  external assistance, other than PL 480, of Rs.865 crores. Actual aid utilisation is not  expected to amount to more than Rs.756 crores, thus showing a shortfall of as much  as Rs..109 crores. The receipts from import duties will be about Rs.125 crores less  than assumed in the original Budget. Further, the Railway revenue shows a shortfall  of Rs.17 crores, their ordinary working expenses being at the same time, Rs.23 crores  higher-in all, a deterioration of Rs.40 crores. On the Posts & Telegraphs side also,  there is a similar deterioration of Rs.22 crores. I The internal resources of public  sector undertakings have gone down by Rs.41 crores, the bulk of which is in respect  of Hindustan Steel.

19. There is one other factor which has also contributed to the large deficit  this year-I am referring to the overdrafts of States. Last March we had provided Rs.55  crores’ to some States in order to enable them to clear their overdrafts with the Reserve  Bank which were likely to be outstanding at the end of 1966-67. In the Budget that I  presented last May, I had also made a provision of Rs.50 crores for the same purpose.  In the event, a total of Rs.113 crores was given to the States in respect of their overdrafts  at the end of the last fiscal year; it was hoped that with the burden of past overdrafts  taken care Of, the States would be able to avoid similar overdrafts in the current fiscal  year. Unfortunately, some of the States are still running overdrafts and 1 have decided  to provide Rs.50 crores more in the current year’s Revised Estimates to clear the  overdrafts once again at the end of the current year. While we have thus decided to  safeguard the Plans of the States next year, Honourable Members would appreciate  that we cannot allow a similar situation to develop next year also. I trust that the State  Governments will not precipitate a situation in which we will be obliged to reconsider  the existing banking facilities enjoyed by the States with the. Reserve Bank.

20. Next year’s revenue receipts at existing levels of taxation are estimated at  Rs.3132 crores, being Rs.1 38 crores more, than the current year’s Revised Estimates.  The major increase of Rs.86 crores occurs under excise duties. Income tax is likely to  show an improvement of about Rs.10 crores only as the profitability in the corporate  sector this year will be reflected in the assessment next year. Customs revenue is  expected to show a slight fall of Rs.3 crores, the anticipated improvement, under  import duties being more than offset by reduction under export duties. The rest of the  increase in revenue next year occurs mainly under interest receipts. Of the total revenue  receipts, Rs.423 crores will be transferred to the States as their share of Central taxes  and duties.

21. External aid, other than PL 480, is placed at Rs.775 crores. Next year’s  repayment liabilities are Rs.193 crores, thus giving a net figure of Rs.582 crores. The  rupee accruals in respect of PL 480 imports as also the dollar credit under the new  agreements are placed at Rs.274 crores as against Rs.366 crores this year.

22. Next year’s expenditure estimates include Rs.1015 crores for Defence as  against Rs.970 crores in the Revised Estimates, thus showing a rise 6f Rs.45 crores  which is mostly accounted for by dearness allowance increases and somewhat larger  provision for replacement stores. Included in these estimates is also an increase of  Rs.2 crores for pension charges and Rs.7 crores under Capital. Border roads account  for a provision of Rs.48 crores which is Rs.5 crores higher than in the Revised Estimates.

23. Sir, I am well aware that our defence expenditure should receive the utmost  scrutiny so that the resources available for development are not unduly eroded. The  question of reducing the magnitude of defence expenditure without detriment to national  security has been continually receiving our earnest attention. Significant progress has  already been achieved towards improving the teeth-to-tall ratio and further measures  to Improve this are in hand; likewise, other measures for improving the  cost-effectiveness of our defence outlays are also under consideration. It is obvious  that with the substantial increase in the price-level that has taken place over the recent  past, some increase in defence expenditure would become unavoidable. Honourable  Members would, however, be interested to note that as a percentage of gross national  product, defence expenditures have already come down from 4.4 per cent in 1963-64  to an estimated 3.2 per cent in 1967-68.

24. The Budget estimates for 1968-69 include Rs.243 crores on account of  non-Plan grants to States and Union Territories. A provision of Rs.223 crores has also  been made for giving non-Plan loans to States and Union Territories of which Rs.105  crores is for purchase and distribution of fertilisers, seeds and pesticides, and Rs.20  crores for scarcity relief. The provision for non-Plan expenditure under the  developmental heads is estimated at Rs.237 crores as against Rs.214 crores this year  in part as a result of increased provision for export promotion. Rs.186 crores are  provided under heads relating to Administration as against Rs.177 crores this year, the  7  bulk of the increase being on account of higher dearness allowance. The total interest  charges are estimated at Rs.550 crores as against Rs.50 8 crores this year.

25. The resources for the Plan next year on the basis of the estimates just  mentioned and a number of miscellaneous items not mentioned here, are placed at  Rs.1544 crores of which Rs.170 crores are to be contributed by public sector  undertakings including the Railways and the Posts and Telegraphs.

26. The requirements for meeting the Plan outlays of the Centre and those of  the Union Territories as well as for providing Plan assistance to States are, however,  much larger. In making provision for the Plan at the Centre, a balance has to be struck  between the constraint of resources and the need to maintain the progress in respect of  continuing schemes and the initiation of new schemes in sectors of high priority. On  this basis, a sum of Rs.615 crores has been allocated for providing assistance to the  States as against Rs.595 crores this year. Rs.65 crores have been provided for Union  Territories-one crore more than this year. The provision of Rs.1179 crores for the  Centre’s own Plan will only be marginally higher than the current year’s budgeted  outlay of Rs.1172 crores and the expected outlay of about Rs.1150 crores. In the  aggregate, the provision for the Plan in the Centre’s Budget for the coming year  amounts to Rs.1859 crores as against the expected outlay of about Rs.1809 crores in  the current year. This would, of course, be augmented by the resources that the States  themselves are able to raise for their Plans. Honourable Members may like to note that  a provision of Rs.140 crores is being made for building up a buffer stock of foodgrains  which has a valuable part to play in underpinning our plans for development. If account  is taken of this, what may be broadly caned “planned outlays for development” would  show a significant increase over the current year.

27. I would also like to point out that of the Plan assistance of Rs.615 crores  to the States, Rs.590 crores has been already allocated among the different States by  the Planning Commission and the remaining Rs.25 crores is being specifically  earmarked for a speedy completion of selected major irrigation projects. It is my  earnest hope that the State Governments will provide adequate resources for the urgent  requirements of minor irrigation and rural electrification. Over the year, depending  on the economic situation, I will do my best to supplement the efforts of the States  in these two priority areas.

28. The main items forming part of the Centre’s outlay of Rs.117 9 crores are:  Rs.172 crores for the Railways, Rs.153 crores for iron and steel, of which Rs.110  crores are for Bokaro, Rs.82 crores for petroleum and Rs.70 crores for chemicals  including fertilisers. The provision for agriculture is Rs.53 crores, that for Posts and  Telegraphs Rs.48 crores and for financial institutions Rs.35 crores. I quite realise that  these provisions do not meet the requirements of all the Ministries; but the constraint  of resources has left me with no choice.

29. Honourable Members would note that we have decided to appoint a Finance  Commission in advance of the due date so that its findings are available for the  formulation of the Fourth Plan. A copy of the Notification constituting the Commission  and incorporating its terms of reference is being laid on the Table of the House today.  I have been particularly keen for sometime that the various financial problems between  the Centre and the States, and among the States themselves, should be objectively  reviewed so that solutions are found which are not only just but accepted as such by  all concerned. The recommendations of the Commission, I am sure, will serve this  purpose and contribute towards national integrity and harmony.

PART B  30

Sir, I now come to the much awaited and perhaps much dreaded part of  my Budget speech. I trust the Honourable Members will not take me to task if the  proposals I unfold do not fulfil the expectations of dread. With resources available for  the Plan next year of Rs.1544 crores and the proposed Plan provision of Rs.1859  crores, there is a gap in the Centre’s Budget of Rs.315 crores. A deficit of this kind is  usually an invitation to a Finance Minister to sharpen his knife for a major operation  for mobilisation of additional resources. On this occasion, I propose to engage myself  essentially in a minor operation in the nature of plastic surgery-taking out a little  flesh here and adding a little bit there in order to make the tax-system more efficient  and attractive.

31. A number of radical suggestions for tax reform have been made from time  to time by Honourable Members, individual scholars and associations of labour, trade  and industry. The final report of Shri Bhoothalingam has been received and will be  made available to Honourable Members. The Public Accounts Committee has also  recently made a number of suggestions in this regard; and we are awaiting the  recommendations of the Administrative Reforms Commission. Over the year, I have  given the most anxious consideration to the revision and simplification of the tax  structure, both direct and indirect. While some changes are obviously desirable and  could be introduced without further delay, fundamental changes in the tax system  should not be made without a very thorough study of all the Implications. I am having  such a study undertaken in earnest and am hoping that the climate of the country will  be conducive to the acceptance of more thoroughgoing changes in the next Budget.

DIRECT TAXES

32. Coming to direct taxes first, my main proposals in the field of corporate  taxation relate to the discontinuance of the ‘dividend tax’ on excess distributions of  equity dividends and a reduction in the surtax on company profits from 35 per cent to  9  25 per cent. The abolition of the ‘dividend tax, apart from making for simplification,  should improve the climate for equity investment. The reduction in the surtax on  company profits is intended as a spur to efficiency.

33. I propose to introduce a number of concessions to promote higher  agricultural productivity, particularly by encouraging the efforts of user industries. I  propose to make a provision for the deduction, in the computation of business profits  of companies, of an amount equal to one and one-fifth of the expenditure incurred by  them in providing agricultural inputs, such as, fertilisers, seeds, implements and  pesticides, and extension services, in spheres related to the particular industry in which  the company is engaged. This weighted deduction will be available where the qualifying  expenditure is incurred by the company directly and also through approved associations  or organisations. The development of the seed processing industry occupies high priority  in our agricultural programme. I, therefore, propose to accord to it the ‘priority industry’  treatment.

34. As part of the measures designed primarily to assist export promotion, I  propose to extend the concession of development rebate at the higher rate of 35 per  cent of the cost of new equipment, to the manufacture of vegetable oils and oilcakes  through the solvent extraction process, processed concentrates for cattle and poultry  feeds and processed fish and fish products. I propose also to provide for the grant of  an Export Markets Development Allowance to taxpayers other than foreign companies  at the rate of one and one-third of the revenue expenditure incurred for the development  of export markets. Further, to encourage export of technical ‘know-how’ and technical  services by Indian companies, I propose to exempt from tax the whole of their income  consisting of dividends, royalties and fees derived through these activities from foreign  companies.

35. In the field of taxation of personal incomes, I have reached the conclusion  that in the interest of simplification of the tax structure and convenience of taxpayers,  the Annuity Deposit Scheme should be discontinued. Accordingly, I propose that no  Annuity Deposits will be required to be made on incomes arising after the current  financial year.

36. Last year, as a measure for stimulating investment in equities, Indian  company dividends were exempted from income-tax in cases where the total income  from dividends of the taxpayer during the year did not exceed five hundred rupees. I  propose to extend this concession by exempting the first five hundred rupees of such  dividend income from tax even where the total dividend income exceeds five hundred  rupees in the year.

37. For several years past the rate structure of tax on personal incomes has  included the levy of separate surcharges in relation to unearned incomes and earned  incomes in excess of specified limits. Under our integrated scheme of direct taxation  which comprises, besides income-tax, an annual tax on wealth and taxes on gifts and  10  inheritance, I do not see any need or justification for differentiating between unearned  and earned incomes through the levy of surcharges on income-tax, which result in  complications in tax calculations. I, therefore, propose to discontinue the levy of separate  surcharges on unearned and earned incomes. Simultaneously, in order to maintain the  progressiveness of the income-tax, I propose to step up the basic rates of income-tax  on incomes over Rs.1 lakh from the present rate of 65 per cent to 70 per cent on  income in the slab between rupees one lakh and rupees two and half lakhs and to 75  per cent on income above that level. I also propose to step up the rates of ordinary  wealth-tax on wealth in the slab over Rs.10 lakhs by half per cent, that is, from 2 per  cent to 21/2 per cent on wealth between Rs.10 lakhs and Rs.20 lakhs, and from 21/2 per  cent to 3 per cent on wealth above Rs.20 lakhs.

38. In a situation where both the husband and the wife are tax-payers in their  own right, It would be improper for any outsider to decide as to who is dependent on  whom. At present, we avoid this ticklish question by allowing both parties to claim a  spouse allowance. This still leaves open the question as to who brings more tax benefit  to the partnership through marriage. To eliminate this unintended strain on the  relationship of marriage, I propose to provide that where both the husband and the  wife have taxable incomes, the spouse allowance will be available to neither.

39. As a measure of relief to totally blind individuals, I propose to provide for  the deduction of Rs.2,000 in the computation of their taxable income.  40. I also propose to simplify the existing basis of the calculation of tax on  partnership incomes derived from registered firms. This will be done by deducting the  tax borne by the firm itself in computing the partners’ shares in the income of the firm.  At present, we grant rebate of tax at the average rate to the partners on the proportionate  amount of the tax borne by the registered firm. In order to maintain the overall incidenceof  tax, I propose to make a consequential upward adjustment in the rates of tax on  registered firms. Some rationalisation is also being undertaken in regard to rate structure  of tax on the incomes of cooperative societies and Local Authorities.

41. There are a number of changes I propose to introduce in regard to the  computation of income from house property, deduction for the cost of maintaining a  vehicle by salaried employees, procedure for grant of refunds and withholding of tax  from interest payments.. It is not necessary for me to go into the details of all these  changes which are spelt out in the Explanatory Memorandum on the Finance Bill.

42. I shall now refer to some of the measures that I propose to introduce for  countering tax evasion and avoidance. In this context, I propose to take steps for  setting up, departmentally, an organisation for valuation of lands, buildings and other  assets. Further, J propose also to have administrative instructions issued to secure  that, as far as possible, the same value is adopted for an asset for the purposes of  income-tax, wealth-tax, gift-tax and estate duty.

43. Another measure is to classify as short-term capital gains, the gains arising  from the sale or transfer of capital assets within 24 months of their acquisition, as  against the present period of twelve months.

44. The deductible amount of entertainment expenditure in businesses and  professions is already subject to certain limits. These limits are often circumvented  through entertainment undertaken out of entertainment allowances or ‘expense accounts’  operated by employees. Henceforth, such expenditure will also be brought within the  purview of the limits. The existing restriction in the case of companies on the deductible  expenditure on provision of perquisites, benefits and amenities to their higher-paid  staff will be extended to non-corporate enterprises. An alternative monetary limit of  Rs.1,000 per month for each employee will also be laid down. Further, depreciation  allowance and maintenance expenditure admissible to the employer on residential  accommodation and household equipment such as refrigerators and air-conditioners  provided by him to the employees free of charge, will also be brought within these  limits.

45. Tax liability is sometimes artificially reduced by diverting profits to  relatives and associate concerns in the form of excessive payments for goods and  services. Claims are also made for deduction of expenses in large amounts shown to  have been paid in cash, often with a view to frustrating investigation as to the identity  of the recipients and the genuineness of the claim. To plug these loopholes, I propose  to provide that payments made in businesses and professions to relatives or associate  concerns will have to pass the test of reasonableness in order to qualify for deduction.  Further, I propose to provide that payments made in amounts exceeding Rs.2,500 after  a date to be notified later will be allowed as a deduction only If these are made by  crossed cheques or by crossed bank drafts.

46. In order to expedite tax assessments, I propose to reduce the period of  time limitation for completion of assessments in original proceedings for 1969-70 and  later years from four years to two years from the end of the relevant assessment year.  As a corollary to this, the time limitation for making applications for refund of tax  will also be reduced, likewise, to two years from the end of the relevant assessment  year.

47. I propose to lay down very stringent penalties on those who continue to  avoid taxes by concealing their incomes or wealth. For this, the penalties for  concealment of income or wealth will be stepped up to a minimum of 100 per cent and  a maximum of 200 per cent of the concealed income or wealth. In the case of persons  defaulting in the statutory obligation to deduct tax at source and pay At to the credit  of the Central Government, I propose to provide for punishment of rigorous  imprisonment up to six months and a fine of not less than 15 per cent per annum of the  tax in default, on conviction before a court. Currently, such punishment is only a fine  upto Rs.10 for every day of default.

48. The changes proposed by me in regard to corporate taxes and the taxes on  personal incomes will take effect prospectively i.e., in relation to incomes on which  advance tax is payable or tax is deductible at source during the coming financial year,  1968-69. Similarly, the proposed increases in the rates of ordinary wealth-tax will take  effect prospectively from the assessment year 1969-70. The discontinuance of annuity  deposits from the coming financial year is expected to bring in, in a full year, additional  tax revenue of the order of Rs.18 crores due to non-deduction of deposits in computing  the taxable income. Other changes in the taxation of personal incomes are likely to  result in a reduction in revenue to the extent of about Rs.4 crores in a full year, leaving  a net gain to revenue of about Rs.14 crores. I have not taken into account the gain to  revenue on account of increase in the rates of wealth-tax as the benefit of It will  accrue only during the financial year 1969-70. Together with the changes in corporate  taxation, which Imply a loss in revenue next year of about Rs.4 crores, the yield from  direct taxes would show an increase of Rs.10 crores next year as a result of all the  changes I have proposed.

49. Before concluding the subject of Direct Taxes, I should like to add that I  have been impressed with the view expressed in this Honourable House that the medium  of the Finance Bill should not be utilised to make too many changes in the income tax  law. Accordingly, I have brought up only such changes in regard to which delay would  have been inadvisable, leaving out changes concerning structural or administrative  matters to be considered and brought up separately in the course of the year.

INDIRECT TAXES

50. I now come to indirect Taxes. In keeping with the objective of maintaining  price stability for items of essential consumption, I have maintained the utmost restraint  in proposing changes in excise and customs duties. At the same time, some additional  taxation of items of less essential consumption cannot be avoided. There is also need  to deploy the instrument of indirect taxation for assisting export promotion and Import  replacement. I have also taken the opportunity of removing anomalies and introducing  a measure of rationalisation and simplification.

51. It is proposed to levy an excise duty on six now commodities, namely,  confectionery and chocolates, leather cloth, embroidery, parts of wireless receiving  sets like valves and transistors, steel furniture and crown corks. The duty on  confectionery and chocolates is proposed at 80 paise per kilogram which is expected  to yield an annual revenue of Rs.2.4 crores. The duty on embroidery and steel furniture  will be at the rate of 20 per cent d valorem which together will yield a revenue of  Rs.5.4 crores in a full year. Leather cloth will bear a duty of 25 per cent ad valorem  yielding an annual revenue of Rs.1.52 crores. On crown corks a duty of one paisa per  piece is proposed which will yield an annual revenue of Rs.1.50 crores. The statutory  rate of duty on valves and transistors is proposed to be fixed at Rs.5 per piece, but the  effective rates at present are being fixed at Rs.3 and Rs.1 per piece respectively by  13  exemption notification. The likely yield would be Rs.2.90 crores. The new levies on  confectionery, embroidery and steel furniture will be confined to the organised sector  of these industries manufacturing the products with the aid of power. These new  levies will collectively yield a revenue of Rs.13.72 crores in a full year.

52. Among the commodities which are already excisable, the existing rates of  duty on all varieties of unmanufactured tobacco other than tobacco dust are proposed  to be stepped up by about 10 per cent. On this occasion, I have decided to be Impartial  between the different devotees of nicotine, be they addicted to the humble bidi, hookah  and chewing tobacco or to cigarettes, cigars and the pipe. These increases will yield  an additional revenue of Rs.6.36 crores in a full year. Another item on which increase  has been proposed is jute manufactures of which the rate of basic excise duty on  hessians is being increased from Rs.375 to Rs.450 per tonne and on other manufactures  from Rs.175 to Rs.250 per tonne. These increases will yield an additional revenue of  Rs.4.02 crores in a full year.

53. My next proposal is to increase the basic excise duty on complete  refrigerators and airconditioners from 20 per cent to 30 per cent ad valorem and that  on component parts from 30 per cent to 40 per cent. This measure will appeal to at  least those Honourable Members who pulled me up in the last Budget session for  overlooking such obvious Items of less essential consumption. The increase in duty on  these Items will yield an additional revenue of Rs.2.40 crores in a full year.

54. It will be recalled that as a part of the Budget proposals last year the duty  on sized cotton yarn of fine and super-fine counts was increased substantially.  Representations have been received from the powerloom weavers that the burden of  this duty at the weaving stage is rather heavy. It is therefore proposed to re-adjust the  rate structure in such a way that relief is afforded on sized yarn and duties suitably  stepped up at the processing stage of powerloom fabrics. The overall budgetary effect  will only be marginal. It is also being ensured that the incidence of the duty on composite  mill fabrics, handloom fabrics and hosiery remains more or less unchanged. Particular  care is being taken to ace that the handloom sector is left unaffected, and in fact some  relief is proposed to be given to this sector by exempting totally hank yarn in plain  straight reels of new French counts 29 or more but less than 34-the latter being  equivalent to a shade more than 40 British counts. This will involve a loss of about  Rs.10 lakhs in a full year. Representations have also been received from the smaller  producers of aluminium that the effect of the Budget proposals of last year has affected  their profitability adversely. It is proposed to afford some relief to these smaller  producers by reducing the effective duty to the extent of Rs.150 per tonne; this  concession will be available only to those ore-based producers whose clearance of  aluminium and products made out of aluminium had not exceeded 12,500 tonnes in  the previous financial year. The revenue effect of this concession will be a loss of  about Rs.25 lakhs in a full year.

 

55. Rationalisation of the existing concessions to certain paper manufacturers  and exemptions applicable to some varieties of paper are being given effect to by  notifications, the overall revenue effect of which will be a nominal gain of Rs.15  lakhs in a full year.

56. The ceiling rates fixed in the Mineral Products (Additional Duties of  Excise and Customs) Act, 1958 have no w been found to be inadequate. The  over-recoveries in the hands ‘ of the oil companies which have to be appropriated to  the Consolidated Fund through levy of these additional excise duties require a higher  rate of levy. It is accordingly proposed that the ceiling rates in respect of Motor spirit,  Refined diesel oil and Petroleum products not otherwise specified be raised sufficiently  and the effective rates which are fixed by notification issued by the Central Government  stepped up suitably. These changes will yield an additional revenue of Rs.10.13 crores  in, a full year, but the consumers will not be affected as the duties, though recovered  from the oil companies, cannot be passed on by way of price increases to the consumers.  The cumulative effect of all the proposals relating to excise duty will be an additional  revenue of Rs.36.4 3 crores in a full year.

57. It is proposed to continue the levy of special excise duties at the existing  rates for another year. The provision for levy of regulatory duty of excise in the same  manner as in section 42 of the Finance Act 1967 is being continued though there will  be no levy of this duty at present.

58. For some time past 1 have been exercised over the administrative burden  on the excise department and the complaints of abuse associated with the existing  system of physical control. I have accordingly decided to extend the system of selfassessment  by the manufacturers, to all manufacturers, big and small, making exception  in respect of a few excisable commodities only which present complications in  assessment or where there is substantial movement in bond. A large measure of trust  will thus be placed in the manufacturers, their declarations and their accounts. Day to  day verification of clearances by Central excise officers will be dispensed with and  replaced by periodical cheek of the self-assessed documents and accounts to ensure  that the amounts due to Government have been properly assessed and paid. This  change in procedure will, however, necessitate certain essential revenue safeguards.  To this end, the penal provisions for unauthorised removal of the goods or other  contraventions of the rules and regulations with intent to evade payment of duty are  proposed to be made more stringent.

59. I have also reviewed the existing system of control on the tobacco growers  for the purpose of levying excise duty on unmanufactured tobacco. Steps are being  taken by which the need for the excise officers to contact the growers will be  considerably reduced. The excise control on sparse growing areas is also being  simplified.  15  60. The levy of local sales tax by the States on goods declared to be of special  Importance in inter-State trade is limited to 3 per cent at present. On a request from  some of the States, suitable amendment is being made in the Central Sales Tax Act  deleting mill-made silk fabrics from this list of goods. This will give the States freedom  to levy sales tax on It without any restriction.

61. I was reminded last year that in spite of my much discussed aversion to  alcoholic liquors, I had not made any proposals in this regard. I should retrieve my  reputation now; and I propose to increase the Import duty on whisky, brandy, and a  few other alcoholic liquors by about Rs.9 per bottle. I also propose to increase the  Import duty on cloves, cassia and cinnamon by about Rs.12 to 13 per kilogram. There  is a high margin of profit in respect of these spices and their use is confined to the  comparatively affluent sections of the community. The proposals with regard to these  consumer goods will yield an extra revenue of Rs.2 crores.

62. My next proposal is in regard to chemicals, plastics, synthetic resins and  miscellaneous articles not otherwise specified in the Customs tariff schedule. The  present effective rate of 50 per cent ad valorem is proposed to be raised to 60 per cent  ad valorem with some exceptions. This will yield an additional revenue of Rs.12  crores. The proposed increase is not likely to cause any hardship because the cost of  chemicals is usually, a small fraction of the price of the manufactured article, and  secondly, because imported chemicals are usually not required in the manufacture of  articles consumed by the common man; wherever they are, the existing rate is proposed  to be maintained. Thus, though the tariff item regarding chemicals covers drugs and  medicines too, the present rate on the latter as also on the chemicals and intermediates  required for their manufacture is being maintained by issue of exemption notifications.  Similarly, the existing rate on carbon black and red phosphorus will be continued by  issue of an exemption notification. Further, sulphur, dye intermediates recommended  by the Tariff Commission and various other chemicals, the duty on which had been  specially reduced or exempted wholly in the past, will continue to pay duty at the  existing rates. In this connection I should like to make a special mention of an exemption  that is proposed for chemicals and intermediates used in the manufacture of insecticides,  pesticides and fungicides. Some of these have already been exempted, but it is now  proposed to issue an omnibus exemption notification covering all such chemicals and  intermediates as are not manufactured in the country. This concession is being given  to encourage the use of these products as an aid to agricultural production.  63. The last proposal on the Customs side is an increase in duty on some of  the iron and steel products which at present carry a specially reduced rate of 15 per  cent ad valorem. This rate is proposed to be raised to 271 per cent add valorem as a  specially reduced rate is no longer justified in view of the indigenous production  which is coming up. The revenue effect of this proposal will be an additional yield of  Rs.1.50 crores in a year.

64. The special duty of Customs is being continued for another year but a  notification is being issued exempting imported goods from this levy so as to maintain  the status quo. The provision for levy of regulatory duty of Customs in the same  manner as in section 39 of the Finance (No.2) Act, 1967 is being continued though  there will be no levy of this duty at present.

65. As a result of the proposals relating to excise duties, there will be an  additional yield of Rs.3.80 crores on account of the increased collections under  countervailing duty. The aggregate additional revenue under import duties will be  Rs.19.30 crores.

POSTS AND TELEGRAPHS

66. I had occasion to mention earlier that the deterioration in the revenue  budget of the Posts & Telegraphs Department this year would be of the order of  Rs.22 crores. The result is that they have not only not been able to pay the due  dividend liability to the General Revenues but have not, also been able to cover  their working expenses this year. The working expenses of the Post Office Branch  have particularly gone up very rapidly due to the increase in staff costs. It has been  agreed that the shortfall of this year and the last two years should be made good  over a period of three years commencing from the next year. On this basis and at  existing tariffs, It is anticipated that the deficit in the revenue budget of the Posts  4-Telegraphs Department next year would be Rs.23.83 crores. Honourable Members  are aware that a Tarill Enquiry Committee under the Chairmanship of Shri Mahavir  Tyagi had been appointed to evolve definite principles on which the tariff policy of  the Department might be based. The Committee’s interim report covering the Post  Office Branch has since been received and based on the principles suggested by the  Committee, It is proposed to revise the postal tariffs. The interim report and a  Memorandum showing the proposed changes is being circulated separately along  with the Budget papers and I shall, therefore, mention only the more important  changes. The postage on letters upto 15 grams is proposed to be increased from 15  paise to 20 paise and that for a letter-card from 10 paise to 15 paise and for a post  card from 6 paise to 10 paise. The postage for books, pattern and sample packets  and book packets containing printed books and registered newspapers will also be  raised. The money order commission which is 15 paise per Rs.10 will now be 20  paise per Rs.10 upto Rs.200 and 30 paise per Rs.20 thereafter. The postage charges  for foreign malls will also be revised. The Committee has not yet reported on the  tariffs for other branches, but in view of the loss in the working of the Telegraphs  Branch, It is proposed to make a small increase in some of the inland telegraph  rates. These changes are expected to bring in an additional revenue of Rs.24.70  crores on the Postal side and Rs.1.08 crores on the Telegraphs side in a full year.  The changes would be given effect to from dates to be notified later and are expected  to cover the deficit of the Posts & Telegraphs Department next year.

67. I might add that 1 have already taken account of the increases in the posts  and telegraphs rates in preparing the Budget Estimates for 1968-69 so that they will  not count towards reduction of the initial deficit of Rs.315 crores. Similarly, the changes  in fares and freights announced by my colleague, the Railway Minister, have also  been taken into account before striking the deficit.  SUMMING UP  68. To sum up, the additional revenue next year from the measures of taxation  1 have proposed would be Rs.65.73 crores of which Rs.10 crores would be under  direct taxes, Rs.36.43 crores under excise and Rs.19.30 crores under customs. Of this,  a sum of about Rs.15 crores will accrue to the States leaving a balance of Rs.50.73  crores available for the Centre’s Budget. I hope the State Governments will utilise this  addition to their resources for minor irrigation and rural electrification.  69. On capital account, the abolition of the Annuity Deposit Scheme will  mean a loss to the Central exchequer of Rs.35 crores next year. Part of this loss will  be made up by contributions to the new public provident fund for which I am taking  credit for Rs.10 crores only. There will, therefore, be a net loss on capital account of  the order of Rs.25 crores. The net gain to the Centre’s Budget on revenue and capital  account taken together of all the changes will be of the order of Rs.25 crores so that  the initial deficit of Rs.315 crores goes down to about Rs.290 crores.

70. Honourable Members may well appreciate the immense reservation with  which I have reconciled myself to a large deficit next year. A number of considerations  have weighed with me. In so far as the Plan outlays are concerned, It is clear that any  further reduction can only lead to dislocation of the progress of continuing schemes  even in critical areas such as agricultural development, fertiliser production and family  planning where we are poised for substantial achievements. We have also to keep in  mind the problem of unemployment among technicians which is already a matter of  concern. Besides, it would be shortsighted to retard the process of recovery by putting  an undue curb on Governmental spending. I am sure that no section of the House  would have commended such an approach. The other alternative was to put up proposals  for massive mobilisation of resources. It is my judgement that this would hurt the  economy and retard the process of growth.

71. I have done my best to restrict the outlays on Defence and Administration.  I am happy to note the earnestness in all parts of the Defence Services to eschew  every form of avoidable expenditure. I am anxiously awaiting the finalisation of the  Reports of the Administrative Reforms Commission. I need hardly reiterate that  Government would go into the recommendations of the Commission with earnestness  and promptness in order that the objectives of efficiency and economy in administration  can be fulfilled as early as possible.

72. In estimating the resources at the existing rates of taxation, having been  bitten once, I have assumed a modest recovery in industrial production. If, as I hope,  the modifications in taxation I have proposed succeed in Improving the climate for  saving, investment and export, the economy might revive more vigorously and this  would help in moderating the actual deficit. Honourable Members may rest assured  that I have not changed my belief that we cannot afford to indulge in large budgetary  deficits year after year. If I have reconciled myself to a deficit next year, it is in the  expectation that by assisting the revival of the economy at this stage, we shall be able  to achieve a more satisfactory budgetary balance before long.

73. No Finance Minister can claim either perfect foresight or absolute wisdom.  But I do feel that the situation is as hopeful as it is challenging. The utmost co-operation,  discipline and even a measure of self-denial by all sections of the community will be  necessary If we are to meet the challenge. I would like to appeal to all the Honourable  Members for their co-operation and constructive suggestions so that, together, we can  turn the present challenge into hope and opportunity for the future. On my part, I can  only assure a continuous watch on Implementation of economic policies and a readiness  to take appropriate action from time to time. In conclusion, It is my earnest hope that  the Budget I have had the honour of presenting today reconciles as best as possible the  variety of concerns that are so anxiously felt in this Honourable House and in the  country as a whole.  (February 29, 1968)

Previous Budgets