Finance Bill 2006 receives Presidential Assent

The Finance Bill 2006 received the Hon. President’s assent yesterday (19th April, 2006).

The immediate implication of this is that the effective rate of Service Tax is enhanced to 12.24%; including education cess. This new rate, in my opinion, would be effective from the date the same is notified.

Stay tuned here for updates on the notifications.

Highlights of Union Budget 2006-07

Economic Overview

  • Growth rate in 2004-05: 7.5%; while manufacturing sector grew at 8.1%.
  • Advanced Estimates indicate that the GDP growth rate is likely to be 8.1% with the manufacturing sector galloping away at 9.4% & agricultural growth up at 2.3%.
  • Gross Domestic Savings at current prices increased to 29.1% of GDP & Rate of Gross Capital Formation up to 30.1% of GDP.
  • Inflation, as on 11 Feb, 2006, was 4.02%.

Implementing the NCMP Mandate

  • Continued focus on fiscal prudence through increasing revenue & controlling expenditure, along with monetary stability.
  • Focus on agriculture is yielding results with the food grain output expected to reach 209 million tonnes (up by 5 million tonnes).
  • Government has launched the National Rural Employment Guarantee Scheme (NREGS) to fulfil its mandate of promoting employment.
  • Food-For-Work Scheme to be launched in the current year.
  • Investment rate for the economy increased to 30.1% in 2004-05 as directed in the NCMP.
  • The objective of strengthening infrastructure is being aggressively pursued, with over 5,000 MW of power capacity being added in 2005-06, and over 34,000 MW to be added during the 10th Plan; while over 40,000 un-electrified villages and almost 10,000 electrified villages have been covered under the Rajiv Gandhi Grameen Vidyutikaran Yojana.
  • 96% of the Golden Quadrilateral is expected to be completed & functional by June 2006; and the north-south & east-west corridors are expected to be operational by end 2008.
  • Focus would continue on improving airports and ports.

Bharat Nirman

  • This is supposed to be the vehicle for the government to use resources created from economic growth to enhance infrastructure and provide basic amenities to rural areas
  • The focus of this are the following six areas, with targets to be achieved by 2009; namely, Accelerated Irrigation Benefit Programme (AIBP), Accelerated Rural Water Supply Project (ARWSP), Rural Roads Programme, Rural House Construction, & Rural Telephone Connections.

The Flagship Programmes

  • In 2005-06, Gross Budgetary Support (GBS) for the Plan was Rs.143,497 crore in 2005-06, which is now increased by 20% to Rs.172,728 crore.
  • Education and health to continue to be major focus areas, with proposed allocations of Rs.24,115 crore (+31.5%) & Rs.12,546 crore (+22%) respectively.
  • Significant increases in allocations to the Ministry of Development of North-Eastern Region.
  • The total allocation for the 8 flagship programmes increased by 43.2% to Rs.50,015 crore.
  • Some details of these 8 flagship programmes are given below:
  1. Sarva Siksha Abhiyan: Independent surveys indicate that 93% of children in the age group of 6-14 years are in school. Significant additions to number of class-rooms & teachers. Allocation proposed to be increased to over Rs.10,000 crore in 2006-07 to fund 500,000 class-rooms & employ 150,000 teachers. Further, over Rs.8,700 crore to be allocated to the Prarambhik Siksha Kosh from the revenue raised through education cess.
  2. Mid-day Meal Scheme: Allocation increased to more than Rs.4,800 crore to ensure lunch to 12 crore school children. This is the largest school lunch programme in the world. Kudos.
  3. Rajiv Gandhi Drinking Water Mission: Over 56,000 habitations & 140,000 schools to be covered under this programme with an allocation of Rs.4,680 crore in 2006-07. An additional allocation of Rs.213 crore to be made to fund district-level water testing labs & providing water testing kits.
  4. Total Sanitation Campaign: The allocation is increased to Rs.720 crore in 2006-07.
  5. National Rural Health Mission: Rs.8,207 crore allocated to ensure that over 200,00 Associated Social Health Activists & over 1,000 community health centres become functional to provide 24×7 services. Leprosy has been eliminated by December 2005 (WHO definition adopted). Endeavour to eliminate polio by December 2007.
  6. Integrated Child Development Services: This scheme focuses on ensuring supplementary nutrition to children. This scheme is implemented with the help of the State Governments. The total proposed allocation for this scheme is over Rs.4,000 crores for 2006-07.
  7. National Rural Employment Guarantee Scheme: Allocation of Rs.14,300 under this scheme, with more funds to be allocated in case of need as required under the NREG Act.
  8. Jawaharlal Nehru National Urban Renewal Mission: The proposed allocation is Rs.6,250 crore; which includes funding for Mumbai metro rail & Bangalore metro rail.
  • National Social Assistance Programme: Old age pension under this scheme to be increased to Rs.200 per month (from present Rs.75 per month). This scheme covers destitute persons above 65 years. State Governments are requested to contribute an equal amount. I also propose to work with the Department of Posts and the banks to establish, within two years, a system under which the pension will be credited directly to the account of the beneficiary in a post office or a bank.
  • Kasturba Gandhi Balika Vidyalaya Scheme: Rs,300 crore allocated to open 1,000 new residential schools for girls from SC, ST, OBC & other minority communities. Additionally, an incentive of Rs.3,000 to be provided to a girl student who passes the VIII standard examination & enrols in a secondary school. This amount would be deposited in the girl students’ name & would be entitled to withdraw it at 18 years of age.

“To ensure value for public expenditure, an Outcome Budget was presented on August 25, 2005. Government intends to present a Performance Budget on the first Outcome Budget before the end of the Budget Session. The Outcome Budget for 2006-07 will be placed before this House by March 17, 2006.”

Investment

  • Equity support of[%name%] Rs.16,901 crore & loans of Rs.2,789 crore to be provided to ailing Central Public Sector Enterprise.
  • Total resources allocated are over Rs.122,700 crore.
  • Expert body / committee to be constituted to tap the potential of the gems & jewellery industry, & develop India as a hub for this industry.

Agriculture

  • Irrigation: The allocation is increased to over Rs.7,100 crore. Programme to repair, renovate & restore 20,000 water bodies covering 1.47 million hectares in the first phase.
  • Farm Credit: Banks requested to increase farm credit to Rs.175,000 crore, & add 50 lakh new farmers; with focus on tenant farmers through a separate window for self-help / joint liability groups. Farmers who had availed of crop loads from scheduled commercial banks, RRB’s & PACS for Kharif & Rabi 2005-06 to get an interest relief of 2% of the principal amount (up to Rs.1 lakh). This amount will be credited to their account before 31 March 2006.
  • Refinance extended by NABARD for short-term farm credit to be subsidised by the government from the Kharif 2006-07 season. Farmers to be able to borrow short-term funds of up to Rs.3 lakhs at 7% p.a. interest. The Hon. FM to make a detailed statement in due course.
  • Plantation Sector: Special Purpose Tea Fund to be set-up for re-plantation & rejuvenation of tea with an allocation of Rs.100 crore in 2006-07.
  • Micro Finance: A separate bill to formalise the micro-finance sector to be tabled in this session. Over 8 lakh self-help groups have been disbursed over Rs.4,800 crore. Additional 385,000 SHG’s are proposed to be included in 2006-07. Committee on Financial Inclusion to be formed to identify & resolve issues related to including more cultivator households to banking.
  • Horticulture & Fisheries: National Fisheries Development Board to be constituted.

Manufacturing

  • Textiles: Allocation to the Technology Upgradation Fund increased to Rs.535 crore. 7 parks sanctioned & another 10 identified for development under the Scheme for Integrated Textile Parks (SITP). Jute Technology Mission to be launched in 2006-07, & a National Jute Board to be established.
  • Handlooms: Additional 100 clusters to be covered for life & health insurance for this sector. Yarn depots to be set-up to ensure a continuous supply of yarn to weavers. ‘Handloom’ mark (a.k.a. ‘woolmark’) to be marketed.
  • Food Processing Industry: to be treated as a priority sector for bank credit. NABARD to set up a separate fund with an initial corpus of Rs.1,000 crore for re-financing agro-processing infrastructure & market development. National Institute of Food Technology Entrepreneurship & Management to be set-up.
  • Petroleum, Chemical & Petro-chemicals: 3 areas to be developed as Investment Regions to aid in the development of large projects.
  • Information Technology: Ministry of Information Technology to announce a detailed policy to encourage assembling & manufacture of IT hardware. India Infrastructure Finance Company to provide equity participation & fund viability gaps to new ventures in this sector.
  • Small & Medium Enterprises: 180 items identified for de-reservation. SME’s in the services sector to be treated on par with SME’s in the manufacturing sector for funding availability from SIDBI. The Credit Guarantee Trust for Small Industries to be requested to reduce the one-time guarantee fee to 1.5% (from 2.5%).
  • National Manufacturing Competitiveness Council: has finalised 10 schemes for promoting various needs. A 5-year programme has also been finalised & will be implemented in 2006-07.
  • Cluster Development: An Empowered Group of Ministers to formulate a policy for cluster development. This group will also be required to oversee the implementation of the policy.

Services Sector

  • Tourism: 15 tourist destinations / circuits to be developed following an integrated area development approach. This will be in addition to 50 villages to be developed based on their competency in handicrafts, handlooms & culture.

Infrastructure

  • Telecommunication: Over 50 million rural connections to be made operational in the next years; thereafter making rural telephony available on demand. A bill to be placed in this session to amend the Indian Telegraph Act.
  • Power: Efforts are being made to increase capacity in all areas, viz generation, transmission & distribution. The 82 projects under construction will add around 39,500 MW in the next 3 years. Bids invited for 5 ultra-mega power projects of 4,000 MW each. Empowered Committee of Chief Ministers & Power Ministers to be established to ensure implementation of the power sector reforms.
  • Coal: Comprehensive review of Coal Policy underway. 45 coal blocks allotted for captive consumption. Coal reserves of 20 billion tonnes to be de-reserved for power projects.
  • Road Transport: Development of 1,000 kms of highways to be awarded on a Design, Build, Finance & Operate (DBFO) basis.
  • Maritime Development: Detailed study to identify a suitable location for a new deep draft port in West Bengal to be undertaken.

Financial Sector

  • Banking: Special non-tradable securities issued for banking reforms to be converted to tradable SLR Government of India dated securities.
  • Insurance: KP Narasimhan Committee Report on a comprehensive law on insurance is being examined by the Insurance Regulatory & Development Authority, based on which a Insurance Act would be created.
  • Capital Market:

  1. FII limit for investment in government securities increased to $2 billion, & for investment in corporate debt to $1.5 billion.
  2. Ceiling on aggregate mutual fund investment in overseas instruments increased to $2 billion. Additionally, the 10% reciprocal share-holding requirement is removed.
  3. Qualified mutual funds to be allowed to invest, cumulatively, up to $1 billion in overseas exchange traded funds.
  4. RBI’s negotiated dealing system to be extended to qualified mutual funds, provident funds & pension funds.

Other Proposals

  • National Agricultural Innovation Project for research in agricultural science to be launched in July 2006.
  • Technology Business Incubators set-up at various places with seed funding from the Technology Development Board.
  • Rs.100 crore each to be allocated as grant to the Universities of Mumbai, Kolkotta & Madras for a specified research department or a research programme.


Tax Proposals

Note: figures in brackets are earlier duties / taxes.

Indirect Taxes – Excise & Customs Duties

  • Peak Customs Rate for non-agricultural products reduced to 12.5% (15%).
  • Steel Industry: Customs duty on Alloy steel, primary / secondary non-ferrous metals & ferro alloys down to 7.5% (10%), while that on steel melting scrap increased to 5% (nil).
  • Customs duty on mineral products reduced to 5% (15%), with exceptions; & on ores & concentrates to 2% (5%).
  • Import duties on materials used to manufacture refractories reduced to 7.5%.
  • Customs duty reduced to 5% for basic cyclic & acyclic hydrocarbons & their derivatives.
  • Catalysts to now attract an import duty of 7.5% (10%).
  • Customs duty on Plastic raw materials like PVC, LDPE & PP reduced to 5% (10%), & to nil for naptha used for plastics, while that on styrene, EDC and VCM reduced to 2%.
  • Pharmaceuticals: 5% customs duty on 10 anti-AIDS & 14 anti-cancer drugs, & exemption from excise duty CVD, & 5% (15%) import duty on certain life saving drugs, kits & equipment, & exemption from excise duty & CVD.
  • Import duty on packaging machines reduced to 5% (15%).
  • Petroleum & Natural Gas: Concessional project import duty rate of 10% extended to pipeline projects for transportation of natural gas, crude petroleum & petroleum products. 146. Cess on domestically produced petroleum crude increased to Rs.2,500 per MT (Rs.1,800 per MT).

The honourable finance minister has been given assurance that this increase in cess will not impact the retail prices of any of the petroleum products.

  • CVD of 4% extended to all imports with a few exceptions. Full credit of this duty to be allowed to manufacturers of excisable goods.
  • Duty rate for clearance by EOU to the Domestic Tariff Area (DTA) pegged at 25% of basic customs duty plus excise duty on like goods.
  • Cotton Textile Industry: Excise Duty on all man-made fibre yarn & filament yarn reduced to 8% (16%), while customs duty on the same is lowered to 10% (15%). Import duty on key raw materials like DMT, PTA & MEG also reduced to the same levels, 10% (15%), while that on paraxylene lowered to 2%.
  • Small cars to attract lower excise duty of 16% (24%). Small car defined as one not exceeding 4,000 mm in length & with an engine capacity not more than 1,500 cc for diesel cars & 1,200 cc for petrol cars.
  • Information Technology: Packaged software sold over the counter to attract an excise levy of 8%; while customised software & software downloaded from the internet will not attract any excise levies. Further, DVD drives, flash drives & combo-drives to also be fully exempt from excise levies. Excise duty on computers re-introduced at 12% (nil).
  • Food & Food Processing: Customs Duty on vanaspati increase to 80%. Excise duty on aerated drinks reduced to the CENVAT rate of 16% (24%). The following items to be exempted from any excise duties: condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta & yeast. Excise duty reduced to 8% (16%) on ready-to-eat packaged foods & instant food mixes.
  • Footwear & Leather: Two vegetable tanning extracts, quebracho & chestnut exempted from excise duty. Excise duty on footwear with a retail sale price between Rs.250 & Rs.750 to 8% (16%).
  • Excise duty on LPG stoves abolished (earlier 8%).
  • Energy efficient lamps compact fluorescent lamps (CFL’s) to now attract an excise levy of 8% (16%).
  • Paper Industry: Excise duty on specified printing, writing and packing paper reduced to 12% (16%).
  • While the import duty on Set-top boxes is reduced to nil (15%), these will attract an excise levy of 16%.
  • Excise duty on cigarettes increased by 5%.
  • Domestic LPG included in the list of ‘declared goods’ under the Central Sales Tax Act. Hence, state governments will no longer be able to tax domestic LPG.
  • Significant reduction in the exemptions granted for customs & excise duties proposed.
  • No changes in the exemptions granted to the SSI sector.

Service Tax

  • Service Tax Rate increased to 12% (10%).
  • New services included within the ambit of service tax, namely,
  1. ATM operations, maintenance & management
  2. Registrars, share transfer agents & bankers to an issue
  3. Sale of space or time, other than in the print media, for advertisements
  4. Sponsorship of events, other than sports events, by companies
  5. International air travel excluding economy class passengers
  6. Container services on rail, excluding the railway freight charges
  7. Business support services
  8. Auctioneering
  9. Recovery agents
  10. Ship management services
  11. Travel on cruise ships
  12. Public relations management services
  • Coverage of some additional services expanded.
  • Interest & Principal payments incurred for leasing & hire purchase not to be included in calculating the value of service provided.

Direct Taxes

  • No Change in the rates or slabs of personal or corporate income-tax.
  • 1 / 6 (one by six) scheme abolished.
  • Minimum Alternate Tax: Tax payable under MAT revised to 10% (7.5%) of book profits, which will now include long-term capital gains arising from sale of securities. However, corporates can take credit for MAT up to 7 years instead of the earlier restriction of 5 years; & can also take credit for MAT while calculating their interest liability.
  • Securities Transaction Tax (STT): Across the board increase by 25%.
  • Exemptions under section 80IA (Infrastructure Facilities): Terminal date extended to 31 March 2009 for industrial parks, while that for power projects the terminal date is extended to 31 March 2010.
  • Amendments to Section 80C & 80CCC (Savings & Deduction): Investments in Fixed Deposits in a scheduled bank with a tenure of not less than 5 years to be eligible for deduction under section 80C. Contribution to specified pension funds eligible for a deduction of Rs.1 lakh under section 80CCC.
  • Open-ended & close-ended equity schemes to be treated on par for the purposes of dividend distribution tax.
  • Deduction for dividend or interest or long-term capital gains under section 10(23G): will no long be available from 1 April 2006.
  • Anonymous / pseudonymous donations made to wholly charitable institutions to be taxed at the highest marginal tax rate. Such donations to partly religious / partly charitable institutions / trusts to be taxable only if the donations are specifically for educational or medical purposes. Thus, wholly religious institutions / trusts are exempt for this clause.
  • Tax Savings under sections 54EC & 54ED: The scope of section 54EC restricted to NHAI & REC only; while benefits under section 54ED are withdrawn from 1 April 2006.
  • PAN number to be compulsorily quoted for more transactions that will be notified.
  • P AN number to be suo-moto issued in certain cases.
  • Fringe Benefit Tax (FBT): Value of fringe benefit changed in the following cases –
  1. Tour & Travel reduced to 5% (20%)
  2. Hospitality & Use of Hotel Boarding & Lodging facilities for airline / shipping industry reduced to 5% (20%)
  3. Free medicine samples & medical equipment distributed to doctors to be exempted
  4. Expenses incurred on brand ambassador & celebrity endorsement to also be exempted
  5. Employers’ contribution to an approved superannuation scheme exempted upto Rs.1 lakh per employee.

Economic Survey 2005-06

The Economic Survey 2005-06 was released by the Hon Finance Minister yesterday. All the newspapers and other internet websites. Hence, I’ll not be repeating it here.

For those who would like to have soft copies of the Economic Survey 2005-06, here are the links:  All Chapters (.zip file), All Tables (.zip file)