Union Budget 2012: The speech that Pranab should make

Budget  2012-2013

Madam Speaker,

I rise to present the Union Budget for 2012-13.

Unlike in the past, I am trying to set a new trend of brevity with this budget. I do not plan to make a long speech on the economy and where it is headed when the pre-budget survey is already with you. Last year, I made the mistake of making a budget speech with 13,877 words and I must confess if I was not the one reading it, I would have fallen asleep half-way when the most important parts were at the end of it. This year’s budget speech is less than a quarter the size of last year’s but I hope to curtail it even further next year. I seek your indulgence this year.

I will also avoid putting in too many figures and outlays in the budget text – these are anyway available in the detailed budget documents – and only speak about the operative parts that impact us all as individuals and companies and as a society.

The broad policy objectives of this budget are as follows:

First, to revive growth and investment in the economy by restoring business confidence. Without growth, nothing else can be achieved.

Second, to make this growth inclusive by ensuring that all Indians rise above poverty and are well-fed, educated and healthy.
Third, to ensure that all the expenditures made in the budget are well spent and not wasted.

Fourth, to curb inflation by gradually closing the gap between revenues and expenditure.

So let me begin with the first objective – reviving business confidence.

There is nothing as energising as tax cuts. I am opting for a simple regime where taxes are extremely reasonable and easy to calculate and pay. In personal taxes, I would like to make three far-reaching changes. Given rising costs of living, I am raising the tax-free income limit to Rs 3,00,000 (Rs 3 lakh per annum) for all Indians. There will be no separate limits for women or senior citizens, but since the limit has been raised for all substantially, everyone will benefit.

 Union Budget 2012: The speech that Pranab should make

In personal taxes, I would like to make three far-reaching changes. Given rising costs of living, I am raising the tax-free income limit to Rs 3,00,000 for all Indians. Reuters

Next, to promote saving, I propose to club all investments currently deductible from income – provident fund contributions, equity-linked savings schemes (ELSS), post office savings schemes, medical insurance, insurance premia, infrastructure bonds, interest payments on home loan EMIs, etc – under an omnibus Section 80 C with a total limit of Rs 3,00,000. In other words, if you want to take the whole Rs 3 lakh as deduction on home loan interest, you can. If you want to claim all of it as ELSS investment, you can. The choice is yours.

This means anyone earning up to Rs 6,00,000 per annum – and who invests half of it in various savings of insurance schemes – will be free from tax.

This brings me to the next big change: I propose to abolish all tax brackets and impose a flat tax of 20 percent on earnings above the tax-free limit. All perks will be taxed at 20 percent flat – as will income. I know many people have developed a living out of creating ingenious perks that are taxed less or not at all, but with the flat tax, we will take all the heartburn out of taxation. We will have a clean, transparent and simple tax system.

Inflation is the scourge of the fixed income groups. Since there is no chance that we can abolish inflation permanently – and it may not even be advisable to have a zero-inflation economy – henceforth the tax slabs will be automatically indexed to inflation. Not entirely, but the tax-free bracket will be raised each year at the previous year’s average inflation rate minus 2 percent.

To give the middle class an inflation-resistant savings instrument, the government of India will launch inflation-index bonds where the rate of interest, to be reset quarterly, will be the previous year’s average inflation rate plus 2 percent. This brings me to corporate taxes.

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With a view to reviving business confidence, this year I plan to lenient this year. First, the corporate surcharge of 5 percent is being abolished. Second, I propose to abolish the minimum alternate tax (MAT) altogether. The reason is simple: MAT was introduced in order to tax companies that somehow manage to avoid them by taking refuge under various provisions – like setting up shop in backward areas or in export processing zones, or software technology parks, or whatever. The point is, these companies avoided tax because they took the incentives to do what the government wanted them to do. It makes no sense then to tax them for doing what we wanted them to do – which is invest for growth. So the 18.5 percent MAT is being abolished with effect from financial year 2012-13.

As for the Direct Taxes Code, we will implement it from October 1 this year, after the parliamentary committee submits its final recommendations. I have anyway tried to incorporate some of the suggestions it has made in this budget.
India is largely a service economy, with nearly 55-60 percent of our GDP coming from services. Services have been growing robustly, often at 9-10 percent annually. However, it is grossly undertaxed.

With a view to expanding the scope of service tax, and also in preparation for a smooth changeover to a Goods and Services Tax once states agree to it, this budget proposes to extend service tax to all sectors barring a short negative list – among the sectors excluded will be education and health services, financial services, including stock exchange and banking transactions, and a few others.

I also propose to raise the service tax to 12 percent – the level it was in the pre-Lehman crisis period.  We need buoyant markets to help companies and even the government to raise capital efficiently. This budget will propose two changes in taxes – a halving of the securities transaction tax on both shares and derivatives, and the imposition of a long-term capital gains tax on financial assets at 10 percent – which is half the flat tax rate of 20 percent, subject to the usual cost inflation adjustment. I am sure the rich will not mind paying this small tax – which is not only moderate, but comes over and above the shift to lower taxes in general for all classes of taxpayers.

Between them, the hike in service tax and its extension will raise more revenues than I will lose in direct tax concessions to individuals and companies. I, of course, do not expect even direct tax collections to fall since better compliance and economic buoyancy will improve my revenues.

This brings me to indirect taxes.

Once again, to prepare ourselves for the introduction of GST, excise and service taxes have to be in alignment. So, this year I have decided to align both service and excise at 12 percent. I am sure the restoration of business confidence and the increase in post-tax disposable incomes in the hands of consumers will cause no dent whatsoever in corporate sales due to the hike in service and excise.

This brings me to customs duties. Madam Speaker, we have simply too many tax rates and too many duties like basic customs, special duties, and countervailing duties. I would like to simplify – with a few important exemptions for agricultural products and products in sensitive sectors like cigarettes, excise, life-savings drugs, and some others which I will not list now.

The peak rate of customs duty will be 7.5 percent.
The average customs duty on all products will be 5 percent, and countervailing duties will be levied at a rate applicable to central excise on that product. Once GST comes into being, the countervailing duties will rise to the level of state and central GST put together. Of course, the country reserves the right to levy anti-dumping duties where warranted.

What will this do to our domestic manufacturing? I expect our domestic manufacturing sector to become more competitive as it can import cheaper raw materials and export at a cheaper price. There will be some casualties, but the overall gain to the economy will be larger than the failure of a few uncompetitive companies.

I expect the changes made in direct and indirect taxes to result in a net increase in revenues, but I am deliberately not trying to quantify it – though the budget papers do make estimates of tax revenues – since these changes will take some time to work themselves out through the economy. Where needed, both the Central Board of Direct Taxes and the Central Board of Customs and Excise will issue the necessary clarifications and make small changes to the scheme, if warranted. But these changes will put India on the road to 10 percent growth over the next two or three years.

The remaining part of my budget speech deals with reforms and structural changes that will improve the quality of both revenues, and expenditures.

First, GST. The Goods and Services Tax is the biggest single reform planned by this government, and so we will leave no stone unturned to get it legislated as soon as possible. Some states are objecting to it since they are worried about a potential drop in revenues. I would like to encourage them by making an open-ended promise that for the first three years the Centre will fully compensate them for any revenue losses – with the full knowledge that overall we won’t have to pay out a single rupee as compensation. I hope they will now agree to introduce GST from next year and make the necessary investments in IT infrastructure this year.

Second, black money. Madam speakers, we have expended a lot of energy in the last few years over black money – both at home and abroad. While we will continue to make changes in tax treaties with the tax havens like Switzerland and also in our own laws to discourage the creation of black money, we need to do something practical that will actually enable us to get some of this money back and put it to use in our country.

So, despite all the moral hazards involved, I have decided to bite the bullet and propose a tax amnesty scheme for all Indian wealth held abroad without disclosure. Our scheme will be simple to understand and administer. Any Indian citizen remitting money from abroad under this scheme will be issued 10-year bonds in a new India Long-term Infrastructure Fund that will carry no interest. There will be an additional 15-year bond that will carry 1 percent interest. Both bonds will be listed on the stock exchanges and can be traded.

Those taking advantage of the scheme will be given immunity from prosecution and roving enquiries on the source of funds. Funds generated from this amnesty scheme – which will be open for the next 6 months – will be used to fund infrastructure projects. I expect to garner Rs 50,000-1,00,000 crore conservatively.

Third, subsidies. Honourable members will have noted that our subsidy bills are becoming unsustainable. In the past we have tried to protect citizens from price increases, but the net result of this policy has not been lower inflation – but higher dependence on imported oil and a fall in production.

Three subsidies – food, fertiliser and fuel – account for over Rs 3,25,000 crore of our annual expenditures – and more than two-thirds of our already high fiscal deficit. This is the road to ruin.

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I propose to start fixing the subsidy problem from this year. In the first stage, I propose to end all fertiliser subsidies – which will top Rs 1,00,000 crore this year – and instead compensate farmers fully for the higher prices of fertilizers by giving them an above normal increase in minimum support prices. I see two benefits from this: one, the imbalance in the use of urea vis-à-vis other phosphatic and potassic fertilizers will end. Also, more investments will start flowing into the fertiliser sector, reducing our dependence on imports.

However, in the short-term, this will increase our food subsidy bill since the increase in food prices cannot be fully passed on to the poor in one go. We will raise the issue prices of foodgrain sold through the public distribution system in several stages. I expect a rise in the food subsidy bill by around Rs 50,000 crore this year as a result.

As for fuel subsidies, we have already deregulated petrol and aviation fuel. The bulk of our subsidies are really in diesel, kerosene and cooking gas (LPG). In diesel, we will move towards deregulation in stages, by raising diesel prices by Rs 2 per litre every second month for the next one year. If international oil prices move adversely, we will also cut some of the duties on fuels to soften the blow. But deregulation will be full and total by 1 April 2013.

As for kerosene, we are not touching it now, but as soon every citizen gets a Unique ID, we will consider cash transfers in lieu of subsidy. As for cooking gas, we will do the same, but till then we will limit it to four subsidised gas cylinders for existing connections. Those using more than four cylinders a year will pay the full market price – which will be around Rs 800 per cylinder. All new customers will have to pay full market prices till the UID scheme separates those who are ineligible from those who are eligible.

I see many benefits flowing from this. First, our oil companies will improve their profitability and begin competing for customers. Today, they have no incentive to compete or improve customer service. Many private players will also enter the picture and offer gas at competitive prices. Secondly, higher prices will force people to conserve scarce fossil fuels.

The gradual deregulation of diesel will increase road transport costs in the short run, but in order to mitigate the hardships of small truck and bus operators, we are working out an interest subvention scheme under which old vehicles can be replaced by new fuel-efficient vehicles and financed by low-cost loans. Government will subsidise such loans to the extent of 5 percent this year, three percent next year, and 1 percent in the third year.

I expect the automobile sector to boom and create many more jobs as India’s ageing fleet of old trucks and buses is replaced with a young, fuel-efficient fleet. Levels of pollution in cities should also fall as a result. With these changes in mind, it was not considered necessary to impose a tax on diesel cars, which are anyway more fuel-efficient on the highway than petrol cars.

Fourth, expenditure management. Madam speaker, the bane of our budgeting system is that there is no way to check wastage and corruption bedeviling a huge part of our outlays for various schemes and projects. I am proposing two changes from this year to tackle this endemic problem.

One, we will create a permanent expenditure monitoring system both in the finance ministry and in the various spending ministries with the explicit purpose of giving real-time information on what is happening to projects, their state of implementation, cost overruns, etc. This way we can find out if a project is not going to achieve its objectives, and scrap it before it is too late.

Moreover, these expenditure cells will also have to achieve certain efficiency ratios consistently and reduce them over time. Else, their funding will be cut and they have to fend for themselves. For example, if we plan to spend Rs 40,000 crore on our flagship Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the cost of administering it should not be more than, say, 5 percent of the corpus, and it should fall over a period of time through internal efficiency measures. This will send a strong message that government is not an endless source of easy money.

The second reform we are proposing is that all schemes proposed by the administrative ministries must come with their own funding plan – it could be through a cess for road-building, but more often than not, new schemes should be funded through public-private partnerships and appropriate policy changes. Only schemes that will never get funding and are vital to our people should be directly funded by the exchequer.

Most important, and this is what will get the fiscal deficit down in stages, we have decided that till we achieve a fiscal deficit of 3 percent of GDP, annual expenditure increases will be kept at half the level of projected revenue growth – with the figures being reviewed every quarter.

Fifth, revamp of social spending schemes. The flagship MGNREGS is not doing too well, despite improving rural incomes dramatically over the last five years. The main problem is corruption and bad scheme design. In many places the scheme is looking like a dole without creating worthwhile assets that will improve agricultural and rural productivity.

Our party is also committed to Food Security, which has been opposed by many states as being anti-federal. Some members of the National Advisory Council are also unhappy with the centralised structure of the scheme.

Taking all the criticisms and suggestions for improvement into account, the central government has decided to merge both social security schemes into one where there is both income generation and food security. Under the revamped scheme, MGNREGS wages will be paid partly in cash and partly in terms of cheap foodgrain. Labour under MGNREGS will be used to build assets for food security – godowns, storage, rural link roads, etc. The scheme will also be made into an off-peak agricultural season scheme; during the peak agricultural season, when demand for labour is high, only cheap grain will be supplied to beneficiaries.

We are, however, aware that the scheme may not always work as intended, and in true federal spirit, we are willing to fund states which want to implement the scheme differently with their share of the MNREGS/Food Security funding plan. We are also willing to allow the scheme to take a different shape in different states so that after one or two years we know what works and what doesn’t.

Madam Speaker, with these words, I commend the budget to the House.

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Updated Date: Mar 15, 2012 22:16:13 IST