'A Budget that lacks overall vision'
"This is a Budget for consolidating, widening and deepening the reform process. This is a Budget devoted to development…"
- Extract from Finance Minister Yashwant Sinha's Budget speech.
 Yashwant Sinha presented his fifth Budget on February 28. In earlier years, his performance was variable: every other Budget tended to be good. Last year's Budget was intended to be good; at any rate it reduced some direct taxes and was therefore good for the middle class. By that count, this year's Budget should not have been very good. It has fulfilled the laws of consistency.
This year, Sinha faced a massive shortfall in revenue on account of the industrial slowdown; the actual tax revenue was Rs 206.83 billion below what was budgeted. To make up for this shortfall he was under pressure to increase taxes.
But the economy is suffering from low demand and low growth; so a fiscal stimulus, in the form of lower taxes or higher expenditure would have been justified.
And if he had given such a stimulus, he would have been left with an even larger fiscal deficit, which is very unpopular amongst foreign investors and watchers of the Indian economy abroad.
In the event, he decided to raise taxes. He raised income tax in the highest bracket by 3 per cent. The government is going to abolish price control on petroleum product on 1 April. That enabled him to raise taxes on such products; but the yield from them will largely go to finance a subsidy on kerosene and liquefied petroleum gas.
He also raised the tax on dividend receipts. Thus he raised the income tax burden on the top taxpayers. They did not appreciate his measures; share prices began to fall almost as soon as he began his speech.
This year Sinha, who has changed his team of civil servants almost every year, had chosen a team virtually devoid of macroeconomic expertise. The result is a Budget that has no overall vision and does not seek to address the economic slowdown. But there are many changes in detail, in tax rates as well as in regulations. At least some of them will be difficult to administer.
Sinha has had one of the longest tenures as finance minister in independent India's history. Finance ministers would expect to gain in experience and reputation with the passage of years. This has not happened with Sinha.
His own qualities, his position in his party, and the political pressures it faces as the principal partner of a loose coalition, have all contributed to this variable performance. For instance, the increase in import duties on agricultural goods in the past two years is due to political compulsions, or to the way the party has tended to deal with them.
The proliferation of various allocations, funds and schemes owes itself to the party's pressures. And Sinha's inconsistency on the tax treatment of dividends seems likely to be his own.
The combination of the three forces - Sinha, his party, and the political jigsaw puzzle - has resulted in a policy zigzag over the years, and has contributed to the loss of growth momentum. The slowdown will reverse itself in the coming year - the stock market presages an upturn - but the extent of the uptick will continue to be limited by the lack of clarity in policy direction.
Here's a summary of the Budget proposals.
UNION BUDGET IN BRIEF
Direct Taxes
- Tax rates remained unchanged except in case of foreign companies where rate reduced from 48 to 40 per cent. The 2 per cent earthquake surcharge replaced by a 5 per cent general surcharge.
- Taxes borne by the employer in respect of perquisites will not be grossed up.
- Dividend income, which bore a tax of 10 per cent in the hands of distributing companies and mutual funds, will now be taxed in hands of recipients
- Instead of being fully tax-free, profits of units in export processing zones and software technology parks will be tax-free to the extent of 90 per cent.
- Specified Individuals and Hindu Undivided Families will have to withhold tax at source.
Indirect Taxes
- Peak rate of customs duty reduced from 35 per cent to 30 per cent.
- Customs duty on the baggage of persons transferring residence to India reduced, and exemption limit raised.
- A further list of ten new services notified under the provisions of service tax.
- More items will be taxed at the CENVAT rate of 16 per cent.
- Special Excise Duty of 8 per cent abolished on all except 8 items.
- Nine new items will bear CENVAT on the basis of the Maximum Retail Prices.
- Revised central Excise Rules, 2002 and CENVAT Credit Rules, 2002 enacted.
Others
- Sectoral caps removed on FII investments; now the share of foreign portfolio investors in the equity of companies can be raised to any limit set by their boards.
- Dereservation of over 50 items from SSI list.
- Foreign banks allowed to set-up subsidiaries in India; hitherto they could only open branches.
- NRIs' non-convertible accounts abolished; they will now be allowed to repatriate their Indian rupee earnings in respect of rent, pensions, interest etc.
- Price control on petroleum products will go.
BUDGET PROPOSALS
- This section summarises the significant proposals on direct and indirect taxes made by the Finance Minister on February 28, 2002. The direct tax provisions in the Finance Bill would ordinarily apply to the financial year commencing on April 1, 2002 (Assessment Year 2003-04). The indirect tax provisions would apply with immediate effect unless otherwise specified.
- The proposals contained in the finance bill are subject to ratification by the Parliament.
Direct Taxes
Income Tax
- The basic individual and HUF tax rates remain unchanged
|
Income Range (Rs) |
Rate (%) |
|
Upto 50,000 |
Nil |
|
50,001 - 60,000 |
10 |
|
60,001 - 150,000 |
20 |
|
150,001 and above |
30 |
- Tax rates applicable to partnership firms remain at 35 per cent and that of cooperative societies at 30 per cent. Corporate tax rates for domestic and foreign companies are
|
Category |
Existing Rate (%) |
Proposed Rate (%) |
|
Domestic Companies |
35 |
35 |
|
Foreign Companies |
48 |
40 |
Surcharge of 5 per cent to apply in all the above cases except for individuals with income up to Rs 60,000. The earthquake surcharge of 2 per cent is abolished.
Salary
- Taxes borne by the employer in respect of perquisites will not be grossed up. Such tax will not be permitted as expenditure.
- Perquisites not to be taxed in case of employees having a salary of less than Rs 100,000 a year (only in respect of Financial Year 2001-02).
- Tax exemption on travel to home country by a foreign citizen and family now withdrawn.
Income from House Property
- Deduction allowed in respect of interest on capital borrowed for construction extended beyond April 1, 2003, provided construction is completed within three years from end of financial year in which capital is borrowed. Deduction allowable only on submission of interest certificate from lender.
Income From Business And Profession
- Additional depreciation allowed at 15 per cent on plant & machinery of a new undertaking or that acquired by an existing undertaking to achieve an increase in installed capacity beyond 25 per cent.
- Change in the cost of plant and equipment on account of exchange rate fluctuations will be allowed only if it affects the actual payment made for it.
- Interest payable on capital to a partner of a firm reduced from 18 per cent to 12 per cent.
- Receipts in the nature of non-compete fees and exclusivity rights to be taxed as business income.
- Existing deduction of 5 per cent available to Indian Banks in respect of provision for bad and doubtful debts increased to 7.5 per cent.
- Existing deduction of 5 per cent available to Indian Banks and other financial institutions in respect of provision for bad and doubtful assets increased to 10 per cent.
Capital Gains
- Tax benefit under section 54EC extended to investment in bonds issued by Small Industries Development Bank of India ('SIDBI') and National Housing Bank ('NHB').
- Where declared receipts on sale of real estate are at variance with the assessed value for stamp duty purposes, the latter will be adopted as deemed consideration.
Income from Other Sources
- In 1996, income tax on dividends in the hands of shareholders and unitholders was abolished, and they were instead taxed at the rate of 10 per cent in the hands of the company or mutual fund that paid them. Now they again become taxable in the hands of the shareholders
Carry-forward and Set off
- Losses on long term capital assets to be henceforth allowed carry forward and set off only against long term capital gains.
- Benefit of carry forward of losses/depreciation in cases of amalgamation of a company extended to the telecommunication services.
- In case of amalgamation or demerger, balance of instalments of unclaimed expenditure arising from an earlier voluntary retirement scheme allowed to the successor entity.
Exemptions
- Withdrawal of existing exemption in respect of grossing-up of taxes when: a) tax on technician's remuneration is paid by an employer; b) tax on royalties, technical fees etc paid to a foreign company by the Indian government or an Indian company under agreement entered after May 21, 2002.
- Existing tax holiday at 100 per cent to Export Oriented Units ('EOU'), Export Processing Zones ('EPZ'), Software & Hardware Technology Parks ('STP' & 'EHTP') limited to 90 per cent, may be further reduced next year.
- Withdrawal of exemption in respect of casual and non-recurring receipts.
- Withdrawal of existing tax exemption to Housing Boards, Sports Bodies, Marketing Authorities, National Dairy Development Board, Prasar Bharati and Oil Industry Development Board.
Rebate and Deductions
- Benefit of tax holiday at 50 per cent for 5 years in respect of building, owning and operating multiplex theatres (in non-metros) and convention centres constructed prior to March 31, 2005.
- Deduction under section 80HHD enhanced in respect of foreign exchange earnings of hotels, tour operators and travel agents
|
Financial Year |
Existing* (%) |
Proposed* (%) |
|
2002-03 |
40 |
50 |
|
2003-04 |
20 |
30 |
|
2004-05 |
Nil |
Nil |
* includes transfer to reserves
- Furnishing of audit report mandatory for corporates claiming tax holiday under section 80-IA and 80-IB.
- Deduction reintroduced in respect of dividends received by a domestic company from another domestic company, though limited to the extent of dividend further distributed by the recipient company.
- Rebate under section 88 towards contribution to life insurance premia, provident fund, etc. revised as follows
|
Gross Income (Rs) |
Existing (%) |
Proposed (%) |
|
Upto 150,000 |
20/30* |
20/30* |
|
150,001 - 500,000 |
20 |
10 |
|
Above 500,000 |
20 |
Nil |
* for salaries less than Rs 100,000
Return of Income, Assessments and Appeals
- Assessing Officer allowed initiation of limited scrutiny to verify specific claims of loss, exemption, deduction, allowance or relief.
- Assessing Officer allowed to order payment of advance tax even in cases where assessee has paid tax in earlier instalments.
- Credit of tax in respect of TDS to be allowed if certificate of tax withholding is produced within three years from the end of the financial year to which return of income pertains.
- Scheme to allow bulk filing of employee tax returns by employer through electronic media.
- Settlement Commission to admit an application within one year of submission and preferably pass the final order within four years, without referring back case to the Assessing Officer.
- Accelerated assessment under section 174A for entities or ventures formed for short duration.
- Survey teams now allowed to impound books for up to 15 days without any prior approval.
- Provisions relating to search and seizure rationalised and further clarified.
Tax Withholding
- Individuals and HUFs whose gross receipts from business exceed Rs 4 million or receipts from a profession exceed Rs 1 million, now responsible for tax withholding on rentals, professional charges, contractor payments, interest and commissions.
- Tax withholding at 5 per cent instead of 10 per cent in respect of brokerage or commissions (other than insurance commission) exceeding Rs 2,500.
- Tax withholding on dividends, income from units of UTI or mutual funds at 20 per cent in respect of non-residents.
- Tax withholding on dividends, income from units of UTI or mutual funds exceeding Rs 2,500 at 10 per cent in respect of resident taxpayers.
Special Rates of Taxation
- Benefit of taxing dividends or long term capital gains at 10 per cent extended to Global Depository Receipts ('GDR') issued against existing shares of an Indian company.
Minimum Alternate Tax ('MAT')
- In computing book profits for purposes of MAT, the amounts withdrawn from reserves created prior to April 1, 1997 not to be reduced unless created by debiting the profit & loss account.
- Amounts withdrawn from reserves on or after April 1, 1997 not to be reduced unless book profits in the year of creation of such reserves were increased by such amounts.
- Book profits to exclude amounts transferred to reserves by shipping companies.
Interest and Penalties
- Penalty to be levied on concealed income, where such income has an effect of reducing the loss declared or converting such loss into income.
- Interest payable on refund to assessee reduced from 0.75 per cent to 0.67 per cent per month.
- Penalty of Rs 10,000 to be levied on failure to obtain Permanent Account Number ('PAN') or giving of incorrect PAN.
- Penalty of Rs 5,000 to be levied unless the return of income is filed by the end of relevant assessment year.
Other Provisions
- Certain provisions of Transfer Pricing clarified i.e., a) where applying the most appropriate method results in different prices, option provided to take the price that is within 5 per cent of the arithmetical mean; and b) enterprises to include Permanent Establishments in India.
- Requirement to seek prior approval in respect of sale of immovable properties (Form 37I) abolished.
Non-Profit Organisations
- Religious and charitable trusts whose gross receipts exceed Rupees ten million are no more required to publish accounts in a local newspaper.
- Trusts, charitable institutions and like bodies are now required to submit return of income. Penalty for delay in filing return of income to be levied at Rs 10,000. Furthermore, regulations governing accumulation of income made more restrictive. Central government empowered to withdraw exemptions accorded to such bodies.
Wealth Tax
- No significant changes proposed
Expenditure Tax
- Applicable only in respect of room charges, the limit of which is enhanced from Rs 2,000 to Rs 3,000.
Indirect Taxes
Customs Duty
To address the issues of distortions, anomalies and inequities in the commodities tax structure, significant rationalisation of tax structures relating to customs duties have been undertaken.
The number of rates has been reduced and procedures made more transparent. In an endeavor to bring down the customs duties to ASEAN levels in the next three years, the peak customs duty on all imports have been brought down to 30 per cent from the prevailing 35 per cent.
In addition, protection measures have been fine-tuned to discourage import of cheaper second hand products.
Highlights
- Peak rate of customs duty reduced from 35 per cent to 30 per cent. Only two basic customs duty slabs of 10 and 20 per cent proposed in 3 years.
- The existing 4 ad valorem rates of basic customs duty structure modified as follows
|
Existing Rate (%)
(ad-valorem)
|
Proposed Rate (%)
(ad-valorem)
|
|
5 |
5 |
|
15 |
15 |
|
25 |
25 |
|
35 |
30 |
- Basic Customs Duty and Special Additional Duty ('SAD') imposed on certain items for the first time.
- Developers and manufacturing/processing units in Special Economic Zones ('SEZ') entitled to exemption on all inputs including capital goods.
- Implementation of zero duty regimes under Information Technology Agreement postponed till the year 2005. Customs duty reduced to 5 per cent on number of hardware inputs and 15 per cent on specified capital goods.
- Customs duty on cellphones, radio pagers, radio trunking terminals increased to 10 per cent from 5 per cent and Countervailing Duty ('CVD') exempt.
- Threshold limit of baggage under Transfer of Residence Rules ('TR') increased from Rs 0.15 million to Rs 0.5 million and duty reduced from 35 per cent to 30 per cent. TR baggage concession extended to laptop/notebook computer, desktop computer, portable photocopying machine, Digital Video Disc ('DVD') player, Video Cassette Disc ('VCD') player, electrical/LPG cooking range and video home theatre.
- Drugs used for treatment of cancer and other critical diseases exempt. 5 per cent duty imposed on specified drugs and items used in the manufacture of AIDS test kits, specified ENT and eye equipment.
Customs duty reduced by 10 per cent on various refractory raw materials for steel production.
- Customs duty on copper, zinc, lead, tin and aluminum reduced by 10 per cent.
- Customs duty on cement and clinkers reduced to 20 per cent from 25 per cent.
- Customs duty on specified equipment for ports reduced to 10 per cent from 25 per cent. Duty on ships for breaking increased to 15 per cent from 5 per cent and CVD & SAD exempt.
- Legislative changes proposed to simplify procedures.
Changes in Basic Customs Duty rates of certain industries
|
Industry |
Rate (%) |
|
|
From |
ñ
ò
ó
|
To |
|
Steel |
|
|
35 |
ò
|
25 |
|
|
35 |
ò
|
25 |
- Silicon metal (99% purity)
|
35 |
ò
|
25 |
|
|
35 |
ò
|
25 |
- Calcined / Brown fused
alumina
|
35 |
ò
|
25 |
|
|
35 |
ò
|
25 |
|
|
35 |
ò
|
25 |
|
|
35 |
ò
|
25 |
|
|
25 |
ò
|
15 |
|
|
25 |
ò
|
15 |
|
Petroleum |
- Kerosene for Public Distribution
System
|
5 |
ñ
|
10 |
- Kerosene for parallel marketing
system
|
35 |
ò
|
20 |
|
Textile |
- Specified items of reeling, twisting,
weaving and processing machinery for silk textile industry
|
25 |
ò
|
10 |
- Processed woven fabrics of
cotton
|
25/30/35 |
ò
|
25/30 |
- Processed woven fabrics of flax and
flax yarn
|
35 |
ò
|
30 |
|
|
25/30/35 |
ò
|
25/30 |
|
Agriculture |
|
|
70 |
ñ
|
100 |
|
|
0 |
ñ
|
5 |
- Pepper, cloves and cardamom
|
35 |
ñ
|
70 |
- Natural rubber and poppy
seeds
|
35 |
ñ
|
70 |
|
|
5 |
ñ
|
10 |
- Agricultural machinery and
implements
|
25 |
ò
|
15 |
|
Industry |
Rate (%) |
|
|
From |
ñ
ò
ó
|
To |
|
Drugs &
Pharmaceuticals |
|
|
35 |
ò
|
30 |
|
|
0 |
ó
|
0 |
- Bulk drugs and Drug
intermediates
|
35 |
ò
|
30 |
- Glucometer and test strips
|
25 |
ò
|
10 |
|
Automobiles & Auto
Components |
- Parts of two/four wheelers
|
35 |
ò
|
30 |
|
|
35 |
ò
|
30 |
|
|
35 |
ò
|
30 |
|
|
35 |
ò
|
30 |
- Transmission shafts, gear boxes , brake
linings
|
30 |
ó
|
30 |
|
Capital Goods |
|
|
25 |
ó
|
25 |
- Plant, machinery, equipment, tools and
surveillance systems, etc. imported by RBI
|
0 |
ñ
|
5 |
- Specified capital goods for
IT/Electronics/Telecom
|
25 |
ò
|
15 |
|
|
25 |
ó
|
25 |
|
Consumer Durable/Fast Moving Consumer
Goods (‘FMCG’) |
- Televisions (B/W and CTVs)
|
35 |
ò
|
30 |
- Components for audio systems and
CTVs
|
30 |
ó
|
30 |
|
|
35 |
ò
|
30 |
- Air conditioners and parts
|
35 |
ò
|
30 |
|
|
35 |
ò
|
30 |
|
Cement |
|
|
25 |
ò
|
20 |
|
|
25 |
ò
|
20 |
|
|
35 |
ò
|
20 |
|
Others |
|
|
25 |
ò
|
20 |
- Specified studio/earth station
equipment
|
35 |
ò
|
25 |
- Specified inputs for
IT/Electronics/Telecom
|
25/35 |
ò
|
5 |
- Raw materials for sports
goods
|
35 |
ò
|
15 |
- Equipment, parts and spares for
planetarium
|
35 |
ò
|
15 |
- Video cassette/tapes of educational
nature
|
0 |
ñ
|
5 |
- Recorded magnetic tape, floppy
diskettes etc. imported by UGC for use in computers
|
0 |
ñ
|
5 |
- Recorded magnetic tape, micro films,
scientific and technical instruments and computers imported by R&D
institutions
|
0 |
ñ
|
5 |
Excise Duty
Single rate of 16 per cent as rate of CENVAT retained in the excise duty structure. Reforms aimed at widening the tax base and rationalisation and simplification in the duty structure.
Excise duty imposed on a few more items, which have remained exempt so far. The rationalisation is aimed at reducing disputes, litigation and the cost of compliance to the assessees.
In addition, the proposals are in a direction to encourage voluntary compliance.
Highlights
- Central Excise Tariff Act amended removing the limits imposed on the Finance Ministry to hike Excise Duty to a maximum of 100 per cent.
- Single rate of 16 per cent retained with more items added to this category. Only one CENVAT rate of 16 per cent proposed in 2 years.
- SED abolished on all items except motor cars, multi-utility vehicles, polyester filament yarn, soft drinks & concentrates, tyres for replacement, air conditioners, pan masala, chewing tobacco & tobacco products.
- CENVAT increased to 16 per cent from 8 per cent on LPG, kerosene, CNG as vehicular fuel, and diesel engines up to 10HP.
- CENVAT increased to 8 per cent from 4 per cent on specified items.
- CENVAT of 4 per cent imposed on specified items for the first time.
- 9 new items included in the Maximum Retail Prices ('MRP') basis for valuation.
- SSI exemption withdrawn on granite, extended to air guns, air pistols and air rifles.
- Anti AIDS drugs exempt from CENVAT.
- Revised Central Excise Rules, 2002 and CENVAT Credit Rules, 2002 enacted with effect from March 1, 2002.
- Special excise benefits provided to the textile industry. Exemption to handloom fabrics, ready-made garments made from handloom fabrics and certain specified jute machinery.
- Ad valorem duty on petrol reduced to 32 per cent from 90 per cent. Surcharge of Rs 6 per litre imposed on motor spirit and Rs 5.25 per litre on ethanol doped motor spirit imposed.
- Excise duty on High Speed Diesel reduced to 16 per cent from 20 per cent.
- Mobile pre-cooling equipment, stationary pre-cooling equipment and control equipment supplied to cold storage exempt.
- Compounded levy scheme for independent power processors abolished.
Change of Duty rates of certain industries:
|
Industry |
Rate (%) |
|
|
From |
ñ
ò
ó
|
To |
|
Textiles |
|
|
16 |
ò
|
12 |
- Textile made-ups and woven
garments
|
16 |
ò
|
12 |
- Processed knitted fabrics of
cotton
|
0 |
ñ
|
12 |
|
|
0 |
ñ
|
8 |
- Processed woven fabrics of
wool
|
16 |
ò
|
12 |
- Knitted/crocheted garments
|
0 |
ñ
|
12 |
|
|
16 |
ó
|
16 |
|
Petroleum |
|
|
8 |
ñ
|
16 |
|
|
8 |
ñ
|
16 |
|
|
8 |
ñ
|
16 |
|
|
20 |
ò
|
16 |
|
Consumer Durable |
|
|
4 |
ñ
|
8 |
|
|
32 |
ò
|
16 |
|
|
4 |
ñ
|
8 |
|
|
4 |
ñ
|
8 |
|
|
4 |
ñ
|
8 |
|
|
4 |
ñ
|
8 |
- Table and kitchenware of
glass
|
4 |
ñ
|
8 |
- Bicycles and part thereof
|
0 |
ñ |
4 |
|
Others |
|
|
0 |
ñ
|
4 |
- Crankshafts for sewing
machines
|
0 |
ñ
|
4 |
- Glasses for corrective spectacles and
flint buttons
|
0 |
ñ
|
4 |
- Apparatus for X-rays, medical equipment
and other goods
|
0 |
ñ
|
4 |
|
|
0 |
ñ
|
4 |
- Articles of woods (other than flush
doors)
|
0 |
ñ
|
4 |
- Table, kitchen or other household
articles of copper
|
0 |
ñ
|
4 |
|
Cement |
|
|
32 |
ò
|
16 |
Central Sales Tax - PAN made compulsory for registration under Sales Tax. Persons already registered under Central or State Sales Tax to obtain PAN.
- Implementation of Value Added Tax ('VAT') deferred by a year i.e. till April 1, 2003.
- Definition of 'Sale' extended.
- Inter-state transfers of goods other than by way of sales to be made with statutory declarations.
- Amendments on regulations relating to sale made in the course of inter-state trade and sale/purchase of declared goods within a state.
Service Tax
- Service tax of 5 per cent to be imposed on the following services from notified dates:
- Life insurance
- Inland cargo handling
- Storage and warehousing services (except for agriculture produce and cold storage)
- Event management
- Rail travel agents
- Health club and fitness centers
- Beauty parlours
- Fashion designers
- Cable operators
- Dry cleaning services
- Hotels exempt from service tax till March 31, 2003.
- Corporate bodies providing banking and financial services covered under the ambit of service tax.
- Legislative changes proposed to simplify procedures. Credit for tax on input services available to final service provider for similar category of services.
- Unique Service Tax Code ('STC') number to be allotted to service providers registered under the Service Tax Rules, 1994.
- Services tax provisions not to apply to Exclusive Economic Zones ('EEZ's).
- Time limit for issue of notice for recovery of service tax enhanced to 1 year from 6 months.
Other Proposals
Industry and Capital Market
- Sectoral cap on Foreign Institutional Investors ('FII') to be removed except in a few specified sectors.
- Reserve Bank of India ('RBI') to publish an issuance calendar in respect of future issues of Government securities.
- Proposal to introduce new a Government Securities Bill to replace Public Debt Act, 1949.
- Process of demutualisation and corporatisation of stock exchanges expected to be completed during the year.
- Legislative changes to be proposed in the Securities and Exchange Board of India ('SEBI') Act, 1992 to ensure investor protection and bring efficiency in capital market regulation.
- Expansion of futures and forward trading to cover all agricultural commodities.
Small-Scale Industries ('SSI')
- Dereservation proposed in over 50 items in respect of knitwear, certain agricultural implements, auto components, chemicals and drugs.
- Limit for composite loans to SSI increased from Rs 200,000 to Rs 500,000.
- Exemption limit for collateral security enhanced from Rs 25,000 to Rs 500,000. Furthermore, the project cost limit under National Equity Fund increased from Rs 2.5 million to Rs 5 million.
Infrastructure
- Accelerated Power Development Programme ('APDP') to be redesignated as the Accelerated Power Development and Reform Programme ('APDRP') with focus shift from generation to transmission and distribution.
- Highway project, the Golden Quadrilateral, to be substantially completed by December 2003, a year ahead of schedule.
- Proposal to corporatise major ports in a phased manner.
- Private sector participation in greenfield airports to be encouraged through a package of concessions and allowing recovery of user fee at existing and new airports.
- Petroleum Reform
- Administered Price Mechanism ('APM') dismantled from April 1, 2002 and to be henceforth market determined
- Private companies to be permitted in distribution
- Petroleum Regulatory Board proposed
- Subsidies on LPG and kerosene to be phased out over 3-5 years.
- Urban Reform Incentive Fund ('URIF') to be set up with an initial allocation of Rs 50 billion to assist States in reforming urban areas.
- An Infrastructure Equity Fund of Rs 100 billion will be set up to provide equity investment in infrastructure projects.
- Six tourism circuits to be identified for development in line with international standards, with resource mobilisation through private and public sector involvement.
Banking & Finance
- Nominee directors of a company, when appointed by public financial institutions and banks, will not be disqualified for election as directors in other companies even in case of defaults by the company of nominee appointment.
- Banking Sector Reform bill will be later introduced to facilitate foreclosure and enforcement of securities in case of defaults to enable institutions in realising their dues.
- An Asset Reconstruction Company to be set up by June 30, 2002 for initiating measures to take over Non Performing Assets ('NPA') and create market for securitised loans.
- The Deposit Insurance Credit and Guarantee Corporation ('DICGC') to be converted into the Bank Deposits Insurance Corporation ('BDIC') to deal with depositors' risks and distressed banks.
- Corporatisation of IDBI to be done within a year.
- Foreign banks allowed to be set up either as branches or as subsidiaries in India, with a requirement on subsidiaries to adhere with detailed Indian banking regulations.
- NHB to launch a Mortgage Credit Guarantee Scheme for providing protection to lenders against defaults on housing loans.
Capital Account Liberalisation
- Full convertibility of deposit schemes for Non Resident Indians ('NRI').
- On providing certification, NRIs allowed to repatriate their current earnings viz. rent, dividend, pension, interest, etc. from India.
- Limit enhanced for Indian companies to invest abroad under the automatic route from $50 million to $100 million.
- Limit enhanced for Indian companies to acquire and form joint ventures abroad under the automatic route from 25 per cent to 50 per cent of their net worth.
- In line with ADR/GDR issues, Indian mutual funds allowed to invest in rated securities in countries with fully convertible currencies.
- RBI to consider utilisation of amounts over 50 per cent of export earnings to prepay External Commercial Borrowings ('ECB').
- Foreign Currency Convertible Bond ('FCCB') Scheme under the automatic route allowed up to $50 million.
Others
- Proposal to launch Jai Prakash Rozgar Guarantee Yojana ('JPRGY') for generating employment in the most distressed districts of the country.
- An insurance scheme namely Janraksha to be introduced through public sector insurance companies for providing health care to the rural population.
- Proposal to set-up a venture capital fund for small innovations through SIDBI in co-operation with the National Innovation Foundation.
- Administered interest rates for small savings to be benchmarked to the average annual yields of government securities in the secondary market. Accordingly, most administered interest rates reduced by 50 basis points from March 1, 2002 with a corresponding reduction to be made in Government of India Relief Bonds. Annual ceiling of Rs 200,000 proposed for investments in these bonds.
Impact on Capital Markets and Key Industries
Impact on Capital Markets
The market witnessed intense selling across the board after the finance minister presented the Budget. The trading session began with the BSE Sensex down two points at 3,704 amid low activity.
The Sensex plunged to an intra-day low of 3,537 and trading ended with the index at 3,562.31, 144 points below its previous close. But it gained 3.27 per cent to close at 3670. on Friday.
Impact on Key Sectors and Industries
- Tax Rates: No change in corporate tax at 35 per cent. For foreign companies corporate tax reduced from 48 per cent to 40 per cent. Exemption on Capital gains under section 54EC on amounts invested in bonds issued by SIDBI and NHB. 16 per cent special excise duty abolished on a number of items; now only confined to 8 items.
- Roads: Golden Quadrilateral highways project to be completed substantially by December 2003, one year ahead of schedule. Plan outlay for roads and highways up by 39 per cent.
- Ports: Major ports to be corporatised in a phased manner. Private sector investments have been facilitated. In order to develop world-class infrastructure facilities, customs duty on specified equipment reduced to 10 per cent.
- Airports: Modalities for inviting offers for the corporatisation of the international airports at Delhi, Mumbai, Chennai and Kolkata completed and the leasing process to be completed in 2002-03.
- Shipping: Shipping companies essentially taken out of the purview of MAT.
- Textiles and Textile machinery: Package of incentives provided to encourage growth in this sector.
- Steel: Basic customs duty on seconds and defectives of steel increased to the bound rate of 40 per cent. Customs duty reduced to 10 per cent on a number of refractory raw materials in order to lower production costs in the steel industry.
- Fertilisers: Subsidy reduced by five per cent through an increase in the issue price of urea, DAP and MoP. Subsidy on SSP lowered by Rs 50 per tonne.
- Information Technology ('IT'): Import duties on IT capital goods reduced by 15 per cent, duties on a number of hardware inputs reduced to 5 per cent. The promised zero duty regime on IT products to be introduced only from 2005.
- Telecom: Countervailing duty on cellular phones and pagers exempted while basic customs duty raised from five per cent to 10 per cent. Proposal to set up a 75,000 km fibre optic network.
Recent Policy Changes and Performance Indicators
Legislative Amendments & Initiatives
- Communications Convergence Bill, 2001 proposes establishing a regulatory body namely Communications Commission of India ('CCI') and a Communications Appellate Tribunal to entertain appeals against CCI decisions.
- Competition Bill, 2001 will replace the Monopolies and Restrictive Trade Practices ('MRTP') Act, 1969 and reduce existing 14 restrictive practices to 4.
- Electricity Bill, 2001 intends to free generation from licensing (except hydro-electric projects) with trading recognised as a distinct activity. The Bill also provides for formulation of a National Electricity Policy, obligation to supply and gradual phasing of cross-subsidies.
- The Foreign Trade Development And Regulation Amendment Bill, 2001 will replace the Foreign Trade (Development and Regulation) Act, 1992, to allow imposing quantitative restrictions on imports as an emergency action.
- Major Port Trust (Amendment) Bill, 2001 to replace the Major Port Trusts Act, 1963 and allows transferring undertaking of any major port to a successor company.
- Repeal of Sick Industrial Companies (Special Provisions) Act, 1985 Government repealed the Sick Industrial Companies (Special Provisions) Act, 1985 ('SICA') and replaced this with a National Company Law Tribunal. The operative provisions of SICA to be merged into the Companies Act, 1956.
Exchange Control Regulations
Foreign Direct Investment ('FDI')
- FDI ceiling in private banks raised from 20 to 49 per cent though management control limited by retaining cap on voting rights at 10 per cent.
- Non-Banking Financial Companies ('NBFCs') allowed to be set-up as 100 per cent operating subsidiaries with minimum capoitalisation of USD 50 million without the requirement to later disinvest its equity to Indian entities.
- Guidelines announced for licensing production of arms and ammunitions by private companies with a cap of 26 per cent in respect of FDI.
- Guidelines announced allowing FDI for wholly owned subsidiaries and joint ventures to develop integrated townships.
- 100 per cent FDI allowed under automatic route in hotel and tourism sector and for Mass Rapid Transport Systems in all metropolitan cities, including associated commercial development of real estate.
- 100 per cent FDI allowed under automatic route in drugs and pharmaceuticals, except those which attract compulsory licensing or produced by recombinant DNA technology and specific cell/tissue targeted formulations.
- International Financial Institutions viz. ADB, IFC, etc., allowed to invest in domestic companies under the automatic route, subject to SEBI/RBI guidelines and sector caps.
Securities Law and Regulations
- Foreign Venture Capital Investors registered with SEBI and State Industrial Development Corporations allowed to participate in public issues through book building route.
- All scrips brought under rolling settlement from December 31, 2001.
- Effective March 8, 2001 all sale transactions to be backed by deliveries.
- Restriction on short sales withdrawn effective July 2, 2001.
Direct Taxes
- Valuation of Perquisites: Rules framed to deal with valuation of non-monetary benefits provided to employees viz. accommodation, cars, educational facilities, interest free loans, travel, etc. These would be effective from April 1, 2001, though the taxpayer may opt to follow the rules with effect from October 1, 2001.
- Transfer Pricing Rules: Rules finalised on 'Transfer Pricing' with effect from April 1, 2001 to ensure that dealings between related entities across international borders are at arms length and to properly allocate income, profits and expense between respective tax jurisdictions.
- Employee Stock Option Plan ('ESOP'): Guidelines defined wherein shares, debentures or warrants received under the ESOP would be exempt from tax.
Company Law
The Companies (Amendment) Bill and The Companies (Second Amendment) Bill, 2001
- Proposal to expedite revival and rehabilitation of sick industrial companies and protect workers.
- National Company Law Tribunal and Appellate Tribunal to be instituted for expeditious settlement of cases relating to sick companies, recovery of debts due to banks and financial institutions.
- Proposal to create a new chapter for voluntary conversion, formation and management of 'Producer Companies' which are engaged in agricultural, horticultural, floricultural produce and in handloom, handicrafts and related products & services.
Others
- Companies with inadequate or no profits can still pay managerial remuneration at twice the existing rates.
- Investor Education & Protection Fund established to regulate unclaimed dividends.
- Buy-back of shares permitted without seeking shareholder's approval when not exceeding 10 per cent of equity share capital and free reserves.
- Listed companies permitted to pass resolution in General Meeting through postal ballot.
- Interest rate reduced by 1 per cent in respect of manufacturing companies and NBFCs.
- Maintenance of cost accounting records mandatory for consumer electronics, industrial electronics, computers, communication & broadcasting equipment, auto components and strategic electronic systems.
- Issue of shares with differential rights permitted to companies having distributable profits for three financial years preceding the year in which shares are to be issued.
- 11 new Accounting Standards introduced and made mandatory by the Institute of Chartered Accountants of India.
EXIM Policy
Market Access Initiative: To promote trade, the Government would assist in carrying out market research, product studies, provide information on warehousing & marketing facilities in selected countries and directly promote activities through media advertising and buyer-seller meets.
Agri-Economic Zones ('AEZ') introduced to promote export of agricultural products.
Special Economic Zones
- Duty-free import and procurement from Domestic Tariff Area ('DTA').
- No license even for those items reserved for SSIs.
- Recovery period for export proceeds increased from 180 days to 365 days.
- 100 per cent of export proceeds permitted to be retained as convertible foreign exchange.
- Subcontracting part production abroad permitted.
- Infrastructure status accorded under the Income Tax.
Quantitative Restrictions ('QR') removed for remaining 715 items and Import of new and second hand automobiles allowed subject to certain conditions.
Export Promotion Capital Goods ('EPCG') Scheme: Imports of jigs, fixtures, dies, moulds to be allowed for the full CIF value of the license instead of restricting to 20 per cent. Penalty for value wise shortfall under EPCG waived.
Advance License: Duty free import and procurement of fuel permitted. Advance licence facility extended even where the buyer supplies some inputs free of cost and to deemed exports and intermediate supplies.
Duty Entitlement Passbook ('DEPB') Scheme: DEPB can be claimed advance payment and validity of scheme extended up to the last day of the month in which expiring. DEPB rates rationalised in line with changes in customs duty.
EOU/EPZ/EHTP/STP Units
- Units permitted to achieve minimum export performance of three times instead of five times the value of capital goods over 5 years. Highest Net Foreign Exchange Performance requirement pegged at 10 per cent.
- Supplies made to bonded warehouses to be treated as exports
- Sub-contracting or part production abroad permitted
- Development Commissioners can approve projects beyond USD 20 million
- Procedure provided to convert domestic units into EOUs which have outstanding export obligation.
Medium Term Export Strategy 2002-07
The export strategy has identified 25 focus markets and 6 focus sectors have been identified i.e. engineering/electrical/electronics (including instruments and repaired products); textiles; gems and jewellery; chemicals and allied (including marine products and plantations); leather and footwear.
The strategy then suggests a four-point approach for identifying products and markets for exports (a) product-market penetration strategy for existing products (b) market diversification strategy for existing products (c) product diversification strategy for existing markets (d) product market diversification for new products and new markets.
Infrastructure Sector
Roads: Phase I of the National Highway program to be completed by December 2003.
Rural Infrastructure: Rs 25 billion assistance from Pradhan Mantri Gram Sadak Yojana ('PMGSY') to provide connectivity of every village. Pradhan Mantri Gramin Yojana ('PMGY') extended to cover rural electrification and aims at total rural electrification by 2007.
Performance of Infrastructure Sector
Power: Generation of power showed a steady increase. During 2000-01, 499.45 billion kwh of power was generated as compared to 480.68 billion during 1999-2000. For the period April - December 2001-02, generation stood at 383.12 billion kwh.
Roads: Under the Golden Quadrilateral Project, 1020 kms have been four-laned and 3761 kms are under implementation. 20 projects involving an investment of Rs 17,070 million have been undertaken under the Build, Operate and Transfer scheme.
Telecommunications: 2.4 million lines including fixed, cellular and WLL, were provided by the public sector units, while the private sector provided 2 million fixed and cellular lines (upto December 31, 2001). The number of phones provided by the public and private sector was higher by 7 per cent over the previous year.
Ports: The total volume of cargo handled at major ports went up from 272 million tonnes in 1999-2000 to 281 million tonnes during 2000-2001 registering a 3.3 per cent growth. For the period April - December 2001, ports handled 213 million tonnes of cargo.
Others
- Only 29 drugs to be under price control as per the new Pharmaceutical Policy.
- Divestments
- Tatas bag VSNL: The Government off-loaded 25 per cent stake in VSNL, along with management control, for Rs 14.392 billion
- IBP sold to Indian Oil: Indian Oil bagged control of petroleum marketing company IBP, by acquiring 33.58 per cent stake from by the Government by paying Rs 11.536 billion
- Three ITDC hotels sold: Hotel Corporation of India's Centaur Hotel (Delhi) sold to Radisson Hotel, Delhi for Rs 830 million; ITDC's Lodhi Hotel, (Delhi) sold to Silver Links Singapore for Rs 762.20 million; Qutab Hotel, (Delhi) sold to Sushil Gupta & Associates for Rs 356.7 million; Laxmi Vilas Palace, (Udaipur) sold to Bharat Hotels for Rs 75.2 million.
- Go-ahead to set-up new private banks: RBI accorded "in principle" approval to Kotak Mahindra Finance ('KMFL') and Robo India Finance Ltd to set-up private banks. IDBI in 1995 was the last private bank to be set-up.
Macro Economic Indicators
Growth Parameters
- GDP: Growth rate of GDP in 2001-02 estimated at 5.4 per cent against 4 per cent in 2000-2001. This is largely attributed to agriculture sector growth at 5.7 per cent in 2001-02 against a negative growth rate of 0.2 per cent in previous year.
- Industrial growth: Industrial growth continues to be low at 2.3 per cent in April-December 2001, lowest during the last ten years, compared to 5.8 per cent in April-December 2000.
- Inflation: Inflation by end of January 2002, in terms of Wholesale Price Index ('WPI'), touched lowest in last two decades at 1.3 per cent.
- Foodgrain production: Foodgrain production estimated at 210 million tonnes in 2001-02 against 199 million tonnes during 2000-01.
Foreign trade
- Exports-Imports: Exports during April-November, 2001 valued at USD 28,850.81 million which was 0.50 per cent higher than USD 28,708.14 million in April-November 2000. Imports during the same period were valued at USD 34,723.77 million representing a growth of 1.19 per cent against imports of USD 34,314.48 million during April - November 2000.
Foreign Exchange Reserves: Foreign Exchange Reserves stood at $48.93 billion as on January 11, 2002 and compare favourably against the reserves of $42.26 billion on March 30, 2001 and $38.04 billion on March 31, 2000.
Document prepared by Corporate Catalyst (India) Pvt Ltd
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