X. TAX
REFORM, REVISED ESTIMATES AND BUDGET ESTIMATES |
I now come to
taxes, tax reforms, and the book-keeping of the current year, as also 2003-04. Mr.
Speaker, I want to emphasise six important aspects in this regard. First, the coming year
will be historic with the States switching over to a Value Added Tax (VAT). The Central
Government has been a partner with the States, in the highest tradition of cooperative
federalism, in this path-breaking reform. This will also involve an amendment to the
Additional Excise Duty Act. Second, it is proposed to make 2003-04 the year when a
long-overdue Constitutional amendment to integrate services into the tax net in a
comprehensive manner is enacted and implemented. This will give a boost to revenues, and
help implement VAT. Third, there will be major improvements in tax administration through
greater application of IT, and a discretion-free, impersonal system. Fourth, excise duties
are being rationalised further. Fifth, the momentum of reducing customs duty is being
maintained so as to improve the competitiveness of Indian industry in international
markets. And, sixth, Government shall continue to strive towards fiscal consolidation
through expenditure reprioritisation, and revenue augmentation.
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| State-level Value Added
Tax (VAT) |
The Conference of
State Chief Ministers, presided over by the Prime Minister, held on October 18, 2002
confirmed the final decision that all States and Union Territories would introduce VAT
from April 2003. The Empowered Committee of State Finance Ministers, on February 8, 2003,
has again endorsed the suggestion that all State legislations on VAT should have a minimum
set of common features. Apart from avoiding cascading of taxes, the introduction of VAT is
expected to increase revenues as the coverage expands to value addition at all stages of
sale in the production and distribution chain. However, in view of the apprehensions
expressed by a large number of States, about possible revenue loss, in the initial years
of introduction of VAT, the Central Government has agreed to compensate 100 per cent of
the loss in the first year, 75 per cent of the loss in second year and 50 per cent of the
loss in the third year of the introduction of VAT; this loss being computed on the basis
of an agreed formula.
The Government of
India considers the introduction of VAT, at the State level, to be a historic reform of
our domestic trade tax system, It will assist the States to transit successfully from the
erstwhile sales tax system to a modern domestic system, at present in use in over 120
countries.
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| Additional excise duty
(AED) in lieu of sales tax |
While continuing
to give States the additional 1.5 per cent of all shareable taxes and duties, in order to
enable them to generate more revenues, the Additional Duties of Excise (Goods of Special
Importance) Act, 1957 is being amended, from a date to be notified. This will allow the
States to levy sales tax on textiles, sugar and tobacco products at a rate not exceeding 4
per cent. This will also enable the States to integrate these three important products in
the VAT chain.
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| Service tax: a proposed
Constitutional amendment |
To enable levy of
tax on services as a specific and important source of revenue, an amendment to the
Constitution is proposed. This Constitutional amendment, and the consequent legislation
would give the Central Government the power to levy the tax and both the Central and the
State Governments sufficient powers to collect the proceeds.
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| Central Sales Tax |
With the
introduction of VAT, there is need to now phase out the CST, and move to a completely
destination-based system. This can not be done in one step. We must let VAT stabilize; but
also recognize that these two – VAT and CST – cannot remain in tandem, in
perpetuity. Therefore, in the first instance, the ceiling rate of CST for inter-State sale
between registered dealers will be reduced to 2 per cent during 2003-04, with effect from
a date to be notified. The Government of India will compensate the States for loss of
revenue from this reduction of the CST. This will be done, as all these steps have been
undertaken, only after arriving at a consensus with the Empowered Committee of State
Finance Ministers.
- I do wish to place on record my high
appreciation of the cooperation that I have received from this Committee. Without that, I
simply could not have reached here.
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| Task Forces |
As the
Hon’ble Members are aware, in September 2002, three Task Forces were set up: one each
on Direct and Indirect Taxes, and the third on Corporate Governance.
These were
chaired respectively by Dr. Vijay Kelkar and Shri Naresh Chandra. The former also issued
preliminary proposals in November, in the form of consultative papers for public comment.
After evaluating all these comments, final reports were given in December, 2002.
Public response
to these Task Forces and their Reports has been overwhelming. This is a tribute to the
excellent work done by Dr. Kelkar and Shri Naresh Chandra and their selfless and dedicated
teams.
By opening up the
budget-making process, the Kelkar Committee Reports have more than fulfilled my basic
purpose of involving, as far as practical, our citizens, in the annual budgetary exercise.
I have personally benefited very greatly from these Reports, as also from this open
debate. I take this opportunity to express my sincere gratitude to the two Chairmen and
all members of the Task Forces, as also members of the public for their valuable comments
and suggestions.
With regard to
the Naresh Chandra Committee Report, corporate governance is high on the Government’s
agenda. There will be a set of regulations that does not inhibit managerial initiative
while instituting a mechanism for early detection of frauds and their prevention. For this
purpose, a Serious Frauds Office has already been set up.
Now, let me deal
with the two reports on taxation. The Ministry has analysed them fully.
The basic
philosophy of these reports is sound. For a modern, forward-looking and in the long run,
revenue-beneficial taxation system the proposals that have been mooted may be the most
appropriate. There is need to, eventually, move away from an exemption and discretion
based system to a different, more current order. That is the ideal that the Task Forces,
particularly in respect of direct taxes have suggested; a radically new approach to
taxation.
This ideal is
difficult to achieve in one leap, and I can scarcely cross the existing conceptual chasm
in two. We cannot ignore the commitments made, or wish them away. That is why I choose to
bridge the divide. We will, therefore, stay with the basics of the present system of
taxation, but we will, indeed have already accepted, most of the suggestions made by the
Task Forces designed to eliminate procedural complexities, reduce paper work, simplify tax
administration and to enhance efficiency, also integrate such tax proposals as the system
can, at present, absorb, with one overriding thought: Mr. Speaker, Sir, this will be a
move away from a suspicion-ridden, harassment generating, coercion-inclined regime to a
trust-based, ‘green channel’ system. I do this entirely on the basis of my faith
in my countrymen and women.
I now come to the
tax proposals proper. What I describe below are the major changes proposed, not every
detail of change, apart from those already described in the portion dealing with specific
sectors. Details are contained in the Finance Bill and the relevant notifications, which
will be laid on the Table of the House in due course. Moreover, as the Hon’ble
Members are aware, Budget Day restrictions in respect of clearance of goods have been
revoked to allow economic activity to continue without any hindrance.
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