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REGISTERED NO. D. 221

The Gazette of India

EXTRAORDINARY

PART I—Section 1

PUBLISHED BY AUTHORITY

No. 20] NEW DELHI, SATURDAY, FEBRUARY 17, 1965/PHALGUNA 8,1886 Separate paging is given to this Part in order that it may be filed as a separate compilation

(71)

Budget 1965-66

Finance Minister's Speech

New Delhi, the 21th February 1965

Sir.

I rise to present the Budget of the Government of India for tho year 1965-06. On this, the first occasion in independent India, when our beloved leader, Jawaharlal Nehru, is absent from these proceedings, may I say that I miss him, as I am sure we all do. Honourable Members would permit me, therefore to begin by paying my humble tiibute to his sacred memory. For seventeen long years after Independence, Jawaharlal Nehru dominated the Indian scene, giving meaning and substance to our aspirations as a nation. No aspect of our life, be it related to unity in the country, or economic planning for a better future, or the maintenance of peace and goodwill among nations, escaped the mark of his unmistakable genius. Even such mundane matters as the Budget and economic policy were raised to a lofty plane, where they became instruments for advance towards a shining vision of economic independence, of prosperity with social justice. It is now left to us, to my leader the Prime Minister, to his colleagues In the Cabinet, as, Indeed, to Honourablo Members and to everyone else In the country, to carry forward the legacy of Jawaharlal Nehru according to our lights. And I can only hope that the Budget I am about to present will help to fulfil this obligation in some small measure.

2. This year's Budget has a unique significance in many ways. As the last budget of the current Plan period, it marks the climax of our efforts for tho fulfilment of the Third Plan, It represents, at the same time, the setting of the stage for the more complex and sophisticated and, indeed, difficult tasks which await us in the coming Plan period. Honourable Members are by now already familiar with our preliminary thinking on the Fourth Plan, Apart from serving the ends of our plans for development, budgetary policy must also make an Impact on the immediate problems that confront us from year to vcar. On particular aspects of the economic situation which have caused as anxiety during the past year such as tho rising prices, the difficulties in raising adequate resources for investment and the sharp decline in our foreign exchange reserves, I have made statements in the House from time to time. Like last year, the Economic Survey has also been published a few days in advance of the Budget. My task today is to that extent lightened. I shall, therefore, proceed to outline straight- away the budgetary outcome for the current year as now estimated.

3. The Budget forecast an overall uncovered gap of Rs. 97 crores. It now looks as if the deficit will be somewhat smaller at about Rs. 80 crores. This has been possible in spite of sizable increases In expenditure in certain directions, both revenue and capital. This, relief and rehabilitation of refugees has claimed Rs. 12 crores more. Increases of dearness allowance have raised expenditure this year by Rs, 38 crores. On the capital side, apart from larger provision for the purchase of fertilizers and for the Food Corporation of India, there has been a sizable increase of Rs. 85 crores in loans to Stato Governments due mainly to larger ways and means advances, and Increased Central assistance for Plan schemes, particularly for agriculture, irrigation and power. These additional out- lays have been offset by reductions in expenditure under other items and by Improvement in revenue collections. The reduction In the capital outlay of the Centre relates mainly to the steel plants, defence and net outlay on food purchases. Details of variations in expenditure are given as usual in the Explanatory Memorandum.

4. Revenue collections are expected to show an improvement of Rs. 49 crores under Customs and Rs. 60 crorcs under Income and Corporation Taxes. Excise receipts are expected to be about the same as budgeted, together with a reduc- tion in revenue expenditure of Rs. 42 crores spread over many heads, the revenue surplus is now expected to be Rs. 229 crores as against the Budget Estimate of Rs. 83 crorea.

5. Under capital receipts, collections under small savings have been encouraging this year and are now estimated at Rs. 135 crores as against the Budget Estimate of Rs. 125 crores. The Railway funds deposited with Government, however, show u decline in relation to Budget Estimate and receipts from foreign loans are likely to be lower by Rs. 43 crores.

6. Honourablo Members will see that despite substantial additional require- ments l'or various purposes I have just referred to, such as increase In dearness allowance, refugee rehabilitation and assistance to the States, the overall deficit for the current year will be somewhat less than originally forecast. In part, this reflects the success of our efforts to bring about economies in expenditure after the presentation of the last Budget. In an otherwise difficult situation, the re- duction in the overall deficit calls for some satisfaction. But with the continuance of inflationary pressures in the economy, the need for restraint on wasteful or avoidable expenditure and for efforts to get the maximum benefit from outlays already incurred remains as great as ever. Only so can we reconcile our detilre tor rapid economic growth and the imperative requirements of financial stability, both internal and external.

7. Honourable Members will have noticed also that the revenue surplus this yejr will be even larger than last year. It is, however, the overall position, taking the revenue and capital account together, which is really relevant for the health and stability of the economy as a whole. In a growing economy, with pioTesaive Increase in Plan outlays, the balancing of the capital budget cannot be done entirely by mobilisation of voluntary savings and external assistance. These have to be supplemented increasingly by public savings realised through a r^ver^ue •surplus. The achievement of a sizable revenue surplus this year is. therefore, a step in the right direction.

8. Turning to developments in the economy, agricultural production recovered somewhat during the 1963-04 season from the low level In the preceding year. During the current year, there Is every likelihood of total production of food- grains and commercial crops showing a further and substantial Increase. Under normal circumstances, the improvement in agricultural production should have led to a decline In prices from the high levels already reached. The prevalence of inflationary pressures at different levels in the economy and speculative with- holding of supplies have, however, prevented prices from falling to +hf extent that they should have. The fiscal and monetary measures which we hav- taken and are now taking will, I hope, bring about a fall in prices to the extent economically justified. We shall, however, take care that the agencies we have created for the purchase of foodgrains will maintain prices at levels remunerative to the farmer, so that he will have a continuing incentive for producing more. These agencies will at the same time take advantage of the current improvement In supplies to build up buffer stocks so that, in future, we shall be able to deal better with any fluctuations in agricultural output.

9. Industrial production has been rising at the rate of 8 to 9 per cent per annum for the last two years. During the first half of the current voar, there were some signs of a slackening In the pace of production. But industrial pro- duction is expected to recover during the second half of the current fiscal year and the increase In production for the year as a whole should be of the order of 8 per cent. Taken together with the Improvement in agricultural production, the growth rate of the economy In 1964-65 should be higher than in lf"63-64 when national income in real terms is estimated to have increased by about 4.V per cent.

10. In a number of Important Industries such as steel, cement, aluminium, cotton-spinning, etc., further Increases in production would depend on the establish- ment of new capacity. Programmes of expansion in the public sector in steel, machine-building, fertilizer production, etc., ore making progress, and these should result in improvement in supplies over the next two or three years. Indian Industry has now reached a stage, when it can. and must, branch out into new and complex lines of development. The expansion of capacity we need now, both lii the public and the private sector, has to take place not only In <. .-itablished industries but even more so in new activities where requirements of capital and technical know-how are heavy. We have taken several measures tn encourage greater ploughing back of profits for Investment as well as to provide greater loan finance to private industry. It is equally important to encourage a larger flow of individual savings so as to promote a greater participation by Individual citizens in the growth of industry. The new financial institutions that we have created can assist in this process, by dissemination of information and otherwise enable Individuals to judge better the kind of Industry that they should invest In. But

the primary objective must be to raise the capacity for individual saving and to improve the performance of Industry so that it Is able to earn ar,-J uller an attractive return on the capital invested.

11. Efficiency in the running of enterprises, whether public- or rivate. depends tc a great extent on appropriate pricing policies. On the one hand, purtjs paid b" industry for scarce resources and materials it uses should reflect thoir true scarcity. At the same time, the prices charged by enterprises for their products should provide sufficient resources to industry for expansion without exploitation of the consumer. We are attempting to evolve a price structure for dgrlcultural commodities in keeping with these general principles. In regard to industrial products also, we have endeavoured to raise the cost of capital and of imports vi keeping with the scarcity of savings and foreign exchange in the economy, while permitting increases in the prices of final products wherever necessary. Despite continuing difficulties in regard to raw materials and the general upward piessurc on prices the policy of decontrol initiated in 1963 has been carried for- ward, particularly in respect of steel products. We have also raised the pilces to the extent necessary of a number of basic commodities, such a^, coal, from time to time.

12. Improvement in productive efficiency and appropriate pricing policies are- as much important for public sector enterprises as they are for private industry. In my last Budget Speech I had drawn attention to the importance of a careful cnoice of projects, after a detailed examination of costs and benefits. Careful selection of projects, quick implementation, efficient working, appropriate pricing policies and adequate returns on investments are all integral parts ef the process of ensuring rapid growth. It is in this sense that we have to devote increasing¹ attention to planning in depth. Maximising the fruits of past investment offera the best scope for further advance. Consolidation and expansion, a firm foot on th; ground and sights set high, are not thus conflicting but complementary objectives.

the coming year which have been presented so far reveal deficits. I propose to have discussions with State Governments to make sure that thqir operations fire generally in line with our policy of curbing inflationary pressures in the economy.

16. Honourable Members are aware that proper monetary management in the country has been rendered difficult for some time by the existence of unaccounted income and wealth In the country. This unaccounted income and wealth, which U derived mainly from tax evasion and from violations of price control measures, has been responsible to a considerable extent far speculative activity end for I id- dins up the prices of goods and property in general. Apart from the measures we have already taken including searches, stricter enforcement and more severe penalties, I propose to take some additional measures to mitigate substantially the mischief of unaccounted incomes and wealth already in existence and to reduce- the scope and incentive for their accumulation over the years to come. I propose also to take some measures to discourage excessive investment in urban property, which comes in the way of adequate resources being available for more produc- tive purposes.

17. In my statement to the House on February 17, I had dwelt at some length on our extremely difficult foreign exchange position. I do not wish to repeat what I had already said on that occasion. I would only underline the fact that our foreign exchange reserves have been depleted to such an extent that we are unable at present to withstand any small pressure on these reserves, without running into a critical situation. Some strengthening of our foreign exchange reserves is, therefore, a matter of vital importance. We have made considerable progress in reducing our reliance on imports in a number of fields. Our export promotion during recent years Is also a matter of some satisfaction. Even so, given the necessity to strengthen the reserves and to meet the requirements of imports in a growing economy, the need for vigorous export promotion remains. as great as ever,

18. We have been receiving sizable assistance from friendly foreign govern- ments and international institutions. Honourable Members will, I am sure, join me in expressing once again our gratitude to our friends abroad for giving us a helping hand. The Aid-India Consortium organised by the World Bank pledged a further sum of $1028 million last year in support of the Third Five Year Plan. A significant portion of this assistance is not tied to specific projects but is intended for import of materials, components and spares in general. This kind of assistance is of special importance to us in the context of current balance of pay- ments difficulties and I have every hope that Consortium assistance during the coming year will include even larger sums for purposes which give immediate relief to the balance of payments. Outside the Consortium, we have received generous assistance from the United States for the import of foodgrains and other agricultural commodities under the PL 480 programme. Countries which are not members of the Consortium have also provided additional assistance in 1964. More recently, we have concluded an agreement with the U.S.S.R. for the Bokaro Steel Plant. I should not fail to mention also the gift of 150,000 tons of wheat from Australia which was announced only a few days ago. This generous and timely gesture is a matter of particular satisfaction to me as, I am sure, it augurs well for increasing cooperation between our two Commonwealth countries.

19. Considerable progress has been made in the utilisation of external assist- ance, which has now reached a rate, when it practically equals the commitment of new assistance. Even so, a part of the assistance committed during the current Plan period will necessarily be carried over into the Fourth Plan. We are cur- rently reviewing our foreign exchange requirements during the Fourth Plan period and we hope, during the coming year itself, to initiate discussions with friendly foreign governments and institutions to secure advance commitment for our requirements, to the maximum extent possible. It is only on the basis of such advance planning for foreign aid that we can be confident of beginning the- Fourth Plan without any hiatus in the process of growth.

20. In some measure, we have also been endeavouring to assist other develop- ing countries. Our aid to Nonal next year, for example, is estimated to be Rs. 8'5 crores. Assistance for Sikkim and Bhutan will be of the order of Rs. 6'2 crores, We have endeavoured also to facilitate joint ventures in a number of African countries for the establishment of industries such as sugar, cotton, textiles, cement and vegetable oil. During the next year, we nropose to provide Rs. 46' lakhs for technical assistance to countries in South and South-East Asia and Africa and Rs. 1 • 43 crores by way of contribution to the United Na+ions expanded Pro- gramme of Technical Assistance and the United Nations Special Projects Fund.

21. There has been a great deal of discussion In India in recent months about the role of private foreign investment in our plans for development. We have recognised for a long time that private foreign investment has a role to play not only as an essential supplement to assistance from friendly foreign governments and international institutions but also as a catalyst for the development of techni- 'cal skills and enterprise among our own people. For this reason, we have encouraged private foreign investment in association both with the public and the private sector. All the incentives and facilities that we have given to Indian enterprise for promoting Investment are available equally to private foreign enter- prise; and we give every facility for repatriation of profits to foreign investors. This policy of hospitable and fair treatment will be continued in future; and our general policies, whether in regard to taxation, industrial licensing or price con- trols, must be consistent with our desire to harness every possible source of dynamism and enterprise, whether domestic or foreign, public or private, to the task of rapid economic growth.

22. The Fourth Five Year Plan will involve large investments in the public and the private sector. The first and foremost precondition for mobilisation of resources for financing these investments is the maintenance of an environment of financial and monetary stability. It is only then that voluntary savings could be encouraged and directed to productive uses. Equally important is a degree of stability in our taxation policies. It may be necessary to adjust the rates of indirect taxation from year to year in keeping with supply and demand conditions. But a greater degree of stability in regard to the structure of direct taxation Is of vital importance as it has a bearing on long-term decisions in regard to savings -and investment. My budget proposals this year have been designed to serve this -end at least in part. I for one do not consider that the scope for additional resource mobilisation is already exhausted. But there is no reason why what- ever framework we need for raising resources for the Fourth Plan should not be 'erected in all its essentials before we embark on the implementation of the Plan.

23. In the ultimate analysis, the resources available to the public sector and to the private sector, the resources available by taxation, by mobilisation of savings or by realisation of adequate profits, are all part of the same pool. -We cannot hope to tap one particular source without affecting other sources or divert more to one particular channel without affecting what is left for other purposes. More production and restraint on consumption, avoidance of waste and efficient use of scarce resources, are the only ultimate instiuments for promoting higher sayings and investment. Budgetary policy, therefore, is not simply or even primarily a matter of balancing receipts and expenditures. It is no doubt of paramount importance to keep deficit financing within safe limits and, indeed, to avoid it altogether. But the level at which the budget is balanced and the manner in which this balance is secured are even more relevant to the flow of savings and investments and to the performance of the economy as a whole.

24. The budget estimates for the next year to which I shall now turn have been framed with these considerations in mind. The expenditure on revenue account is estimated at Rs. 2,116 crores, which is Rs. 117 crorcs more than the revised estimate for the current year. At existing rates of taxation, including the 10 per cent surcharge on imports I announced ten days ago, the total revenue is expected to be RE. 2,353 crores. The revenue surplus will, therefore, be Rs. 237 crores, i.e. Rs. 8 crores more than In the current year,

25. Of the total revenue expenditure of Rs, 2,116 crores next year, Rs. 749 crores will be for Defence Services. This is Rs. 32 crores more than in the cur- rent year. But actual rupee expenditure will not increase quite so much because purchases of stores and aircraft, the full value of which is included in the expendi- ture estimate are being made on deferred payment terms. Expenditure under civil heads is estimated at Rs. 1,367 crores, which is Rs. 85 crores more than in the current year. If the amounts transferred to the Special Development Fund in respect of PL 480 grants are disregarded, the actual increase in civil heads would, in fact, be greater, The major part of the increase is explained by the additional provision of Rs. 38 crores for flebt servicing, Rs, 39 crores for grants-In- aid to States and Union Territories, Rs. 9 crores for Administrative Services, particularly under Police and Rs. 20 crores for Social and Developmental Services.

26. The revenue next year is expected to increase by Rs. 125 crores. Here again, if PL 480 grants, which are of a self-balancing nature are left out, the actual increase would be greater. As usual, the principal heads of revenue account for most of the increase; Rs. 70 crores under Income and Corporation Tax, Rs. 54 crores under Union Excise Duties and Rs. 20 crores under Customs. In

addition, interest receipts from State Governments and public sector enterprises and surplus profits of the Reserve Bank will show an improvement of Ra. 39 crores.

27. The provision for capital outlay, including all loans except those to the State Governments and Union Territories, is estimated at Rs. 1,114 crores, repre- senting an increase of Rs. 104 erores over the current year. This is accounted for mainly by larger provision of Rs. 24 crores for roads, Rs. 23 crores for food purchases, Rs. 15 crores for Atomic Energy, Rs. 12 crores for Defence and Rs. 16 crores for the Industrial Development Bank. Loans to State Governments and Union Territories are estimated at Rs. 712 crores, practically at the level of the current year. Loans for Plan assistance, however, will be Rs. 28 crores more, and ways and means loans correspondingly less.

28. The total Plan outlay of the Central and the States next year will be Rs. 2,225 rrores, Rs. 241 crores more than the current year's budgeted Plan outlay of Rs 1,984 crores. The State Plans will account for an outlay of Rs. 1,027 crorea and the Central plan for Rs 1.198 crores. Of the total States' outlay, Rs. 650 crores will be financed by Central assistance and Rs, 377 crores from the resources of the States themselves. The Centre's Plan, it may be noted, will be financed nartly by Rs. 160 crores of contribution from the internal resources of Railways, Posts and Telegraphs Department, Hindustan Steel and other public sector enter- prises. To this extent, therefore, a provision in the estimates of the Central Government is not necessary. For the balance of Rs 1,688 crores, inclusive of Rs. 300 crores on revenue account and assistance to States, provision has been made in the Budget. Honour-able Members will be glad to note that, the contribu- tion of Rs. 160 crores from the Railways, Posts and Telegraphs and public sector enterprises will be Rs 45 crores higher than in the current year. With more -public sector enterprises coming into production and beginning to yield surpluses, they should be able to contribute increaslnglv to the growth of the economy with- out putting an additional strain on the budget.

29. I have referred earlier to the need for keeping public borrowing within the limits set bv a realists expectation of the flow of"genuine savings. In keeping with this principle, T have provided for public borrowing at Rs. 270 crores next vear as atrainst Rs. 293 crores in the current year. For the same reason, receipts •from small savings have boon assumed at the level of the current year, namely Rs. 135 crores R^ceiDts from foreign loans, will however be higher and ara estimated at Rs 669 crores

30 To sum up the overall position for next year, there will be a surplus o| revenue account of R.s. 237 croi-c at existing rates of taxation. The total dlfl' burspment on capital account of Rs. 2094 rrores, inclusive of debt repayment o Rs. 267 crores. will be met. apart from the revenue surplus, by internal ant external borrowings of Rs. 030 ernres. collections under small savinei of Ps. 13> crores, repayment of loans nf Bs 334 crores investment of PL 480 funds of Rs. 101 vrorcs, annuity deoosits of R.s. 65 crores. and receipts under miscellaneous debt anc 'lenosit hends of Rs. 203 crores. In the aggregate, Honourable Members would hi hanoy to know that for the first time in mnnv years, the Budget for next ye^r, al existing rates of taxation, is expected to show a small overall surplus of Rs. It crores

31. Honom-able Members micht well ask whv. pfter havinR announced a small surolus for thf next year. I should not let the Budget well alone find resume mv SPTI. It is however, necessary particularly on the eve of the Fourth Plan, to take R good look at our tav structure RS R whole and to make adiustments or chanees to give desirable effects. And it is this that I have sought to do with the proposals I am about to make.

iNDirtucT TAXATION

32. Indirect taxation has two esseriial objectives: to raise revenues for the State and to serve PS an instrument of orice policy. Those indirect taxes which a*-e rlesitmed nrivrarilv to raise revenue have to be adiusted not only in thV Ugh* of revenue reeds but also in the lieht nf fhe)r irrmaet on the budgets of individual citizens. I feel that in our present rixeumstnr'CPS where high nrices have put a strain on a section of our people a measure of relief is called for in those areas where the supply position is such that one ma-" reasonably expect the relief to ¹ip massed on to the"consumer. Clearly Riven the needs of the State, relief In indirect taxation cannot be extensive. Nor can indirect taxes be reduced in those areas where restraint on consumption is essential from the point of view of economy in imports or, releasing larger supplies for exports.

33. In a growing economy with shortages at various levels, there is also o tendency for the price structure to be distorted. It is common knowledge that excessive profits are being made in the sale of products based on scarce materials whether imported or Indigenous, and I propose to make selective increases In both import and excise duties to mop up these surplus profits. We have today arrangements for the distribution of scarce materials among priority users. We propose to strengthen these arrangements. It has to be recognised at the same time that control over distribution cannot always be carried to the point whore the requirements of all end-users are met through a central agency. Nor is there any reason to eschew the price mechanism to the extent that it can be used to supplement distribution arrangements. What I have essentlaly sought to do, therefore, is to increase indirect taxation in those areas where It might correct existing distortions in the price structure and mop up some surplus profits and to use the additional revenue from these measures for providing relief to the consumer to the extent possible.

34. My proposals for concessions in regard to indirect taxation relate to excise duties only. I propose to remove the excise duty on fontwear, cycle parts, cycle tyres and tubes, printing and writing paner used in the publication of registered dailies including their weekly issues. The effective rotes of fabric dutv on price-controlled varieties of grey as well as processed coarse and medium cotton cloth are proposed to be reduced by 50 per cent duty on vegetable pro- duct by about 50 per cent and on cheaper tvne of printing and writing paper and certain other qualities of typing and manifold paper by 30 per cent I also propose on other grounds to reduce the duty on rayon yarn of coarser and industrial denlers, on cellulosic staple fibre and, marginally, on staple fibre yarn. Duties on a few other items such as silk fabrics, gramophones, cigars and silver are also proposed to be removed on grounds of insignific?nt revenue. These reductions will mean a loss of revenue of Rs 29 5 crores in 1965-66.

35. I have made these reductions in duty on articles of common consumption as I expect them to be passed on to the consumer. If this expectation Is not realised Jt will become necessary to re-impose the duties In the course of the year That is why the proposed reductions are being made not by reducing the statutory rates of duty hut by issuing notifications under powers already vesting in Government.

36 In selecting the items for concessions in excise duty, I have given cnreful consideration to the reduction of duty on kerosene. I have, however, come to the conclusion that we cannot afford to give relief in dutv on kerosene which is an important Item of imoort. Quite apart from ^this, even at present the duty on kerosene is low enough to encourage its use bv lorries amd for other non-domestic nurposes and there is little to he gained bv encouraging further Aversion of kerosene to those users.

17 T am also taking the opportunity of making certain technical adjustments in excise dutfes mainly in respect of cigarettes and tyres. On the present pattern

IZ j£y£ nertorme on black sheets ar-d hoops bv Rs. 40 per tonne on skelp by TK

l oW Tie anti-fragmentation provision is also being rephrased.

40 The net loss of revenue as a result of all the changes in excise duties will be Rs 13 crores in 1965-66

41 The revenue from Union Excise Duties has increased steadily from Rs 14 > crores in 1955-56 to about Rs 773 crores in 1964-65 It is a matter of some satis- faction that, for the first time in many years, we are able to give a measure of relief to the consumer without any significant sacrifice of revenue in the aggregate

42 Ten days back, I had announced the imposition of a regulatoiy Customs Duty at 10 per cent of the value of imported goods This duty must continue in the present circumstances In addition, it is necessary to increa-e the present rates of duty in some cases, where theie is a very large gap between the landed prices and the current market prices I propose, therefore, to increase the import duty on stainless steel plates and sheets from 30 per cent to 100 per cent ad valorem and the duty on steel in plates from Rs 100 per tonne plus 5 per cent to Rs 325 per tonne, continuing the present preference of Rs 20 per tonne where it is applicable It is also proposed to laise the duty on non-cellulosic art silk yarn and thread from Rs 7 5 per kilogram or 55 per cent which ever is higher to Rs 10 25 per kilogram or 75 per cent v*h chever is higher I piopose to raise the duty on paints, colours and painters' materials not otherwise specified from 60 per cent to 75 per cent, on sodium hydro sulphite from 40 per cent to 100 per cent, on essential oils and perfumery not otherwise specified from 75 per cent to 100 per cent and on paper not otherwise specified but excluding newsprint and printing and writing paper from 50 per cent to 75 per cent I also propose to increase the statutory import duty on raw cotton to 50 paise per kilogram in order to be able to increase the effective duty in the course of the year, if this becomes necessary The increases m import duties along with the surcharge on them will yield a revenue of Rs 6 5 crores in 1965-66 In addition, there will be increase in revenue of Rs 8 crores as a result of the countervailing duty on steel tin plates, iron and steel products and copper The total additional revenue from Customs will be Rs 14 5 crores,

43 The changes in indirect taxes wi|l have immediate effect under the Provisional Collection of Taxes Act The net effect including Customs and Excise, will be a small increase in revenue of Rs 15 crores in 1965-66.

Export Promotion

44 Honourable Members are aware that we have at present a number of provisions for giving fiscal relief for the promotion of exports Relief from the incidence of Customs and Excise duties is being given by way of drawbacks. In view of the difficulties experienced by nascent export industries in a growing economy such as ours which is afflicted by shoitages at various levels leading to higher cost of production we also give a measure of relief to these industries in regard to railway freights and taxation of profits

45 While these measures to counteract the disabilities of our export indus-¹ tries have had a degree of success in promoting higher exports, there are still other imposts on raw materials and components that go into the end-product that is exported which makes it necessary to provide some more assistance td export industries on a discriminating basis For one thing, there are a variety of taxes levied in India today such as the sales tax and octroi m respect of which relief from taxation on exports is not available at present It is difficult to refund the fractional parts of Import Duties and Excise Duties on raw materials com- ponents and intermediate products which enter into the production of export commodities In general, it is necessary to mitigate the disadvantages of new export industries which have yet to achieve their full competitive position m the world markets I propose therefore, to taka powers to issue tax credit certi- ficates to exporters up to 15 per cent of the value of such exports The exact quantum of assistance will vary from commodity to commodity and will be determined after a careful examination The tax credit certificates could be used for payment of taxes or refunded in cash to the extent that their value exceeds tax liability

46 Honourable Members are aware that the case for protecting the infant industries of developing countries from competition from abroad bv levying pro- tective import duties has been recognised by expert opinion as well as by inter- national agencies for a leng time The case for subsidising nascent exports from developing countries is equally strong and is, indeed based on the same consi- derations This point of view is already gaming acceptance amon" pronnmiV

experts as well as among international institutions I think: it is only appropriate, therefore, that we should aim. ourselves with powers to give direct financial assistance related to export earnings so that our export promotion efforts could become more effective as well as efilcient

CORPORATE TAXATION

47. Honourable Members are a\\are that the structure ol our corporate taxation has undergone many changes during the past two years These, were necessitated primarily by the paramount need of raising resources In my last Budget I had introduced several changes to reduce the seventy" of our corporate taxation I am well aware that the feeling still persists that corporate taxation m India Is high and that some of its features Inhibit the progress of the corporate sector. I have carefully examined the incidence of the diflerent taxes which are now on the statute book and I have come to the conclusion that there is need for some modification of the present structure of corporate taxation without altering its essential features which are bound The dividend tax, for example, has come in for a great deal of criticism Expeilence so far has shown that it has not materially affected the dis- tribution pattern of dividends I cannot help feeling, however, that in the present context, when we have to do everything possible to combat inflationary pressures in the economy and to generate sufficient resuurces for investment in the corporate sector, there is continuing need for a degree of restraint on dividend distribution Similarly, we have not yet had time enough to assess the full effects of the surtax and there is, therefote, little reason for making any material change in this parti- cular aspect of corporate taxation also However, I have decided to make a number of changes in the general scheme of coiporate taxes which, I hope, will meet at least a part of the difficulties of the corporate sector.

48 Industries producing articles mentioned In Part IV of the First Schedule to the Finance Act, 1964, are entitled to certam tax benefits I propose to enlarge that list by the addition of lime stone, flame and drip proof motors, malleable iron and steel castings, calcium ammonium nitrate and ships

49 I had announced last year that Section 104 companies wholly or mainly engaged in the manufacture or processing of goods or in mining or in the genera- tion or distribution of electricity or any other form of power whose whole income did not exceed Rs 5 lakhs will be liable to tax at 50 per cent on the first Rs 2 lakhs of income I propose now to enlarge this concession All such companies—except foreign companies—will under my proposal be liable to tax at 50 per cent on the first Rs 10 lakhs of their income irrespective of the total size of their income. Under Section 104, for certain types of companies, the penalty rate of taxation for non-distribution of profits at present is 37 per cent I propose to reduce this rate to 25 per cent for companies other than trading companies In the case of manu- facturing companies, we have given certain concessions to enable them to build up adequate reserves For non trading companies, e g , companies part of whose busi- ness Is in the manufacturing field, companies providinjr various services and com- panies engaged in constructional activities, I propose to provide that the higher statutory percentage of 90 per cent for compulsory distribution of profits will be attracted only if the accumulated profits and reserves exceed twice the amount of their paid up capital and loan capital, or the value of their fixed assets At present, where in a public company 51 per cent or more of the shares are held by another company in which the public are substantially interested or by a 100 per cent sub- sidiary of such a company, the first mentioned company does not qualify for being regarded as a company m which the public are substantially interested It is proposed to change this position and to treat such a company as one in which the public are substantially Interested

50 Overcrowding has become a serious problem in many of our major cities. Some incentive is, therefore, required to induce big factories to shaft from such cities I propose, therefore, in the case of public companies to reTund the tax on any capital gains made on the sale of land and buildings in these cities to the extent that the capital gams are re-invested with prior approval of Government on land and buildings including housing for the employees In a new area

51 I had stated last year that I propose to revise the rate of development rebate under Section 33 of the Income Tax Act Honourable Members will recall that the general rate of development rebate now Is 20 per pent It has been sug- gested that the development rebate should be applied in a selective manner and we have already sought to do so to some extent in the case of coal mining machinery and for ships I propose now to reduce the standard rate ot development rebate to 15 per cent except In the case of Industries included in a new Fifth Schedule to the Income Tax Act Industries included in this Schedule will be entitled to claim a development rebate of 25 per cent The rebate for coal mining machinery and for

ships will continue at the rate of 35 per cent and 40 per cent respectively. The undertaKings lor which the development rebate is now being reduced will, however, continue to enjoy toe existing benefit of 20 per cent up to 31st March 1967.

52. Often it is said that the total incidence of income-tax and surtax on com- panies reaches very high levels having the ellect of inhibiting investment. I do- not tnink that it is so, but to allay any misgivings on this score, I propose to provide a ceiling limit to the income-tax excluding the tax relating to bonus issues, out including tne tax charged with reference! to distribution of equity dividends, and surtax at 70 per cent of the total income of companies. Any excess of the aggregate tax liability in respect of these taxes over this limit will be allowed as a deduction from the surtax otherwise chargeable from the company. This pro- vision will apply to Indian companies and any other company declaring its divi- dends within India in which the public are substantially interested.

53. The various changes in taxation aftectinc the corporate sector that I have outlined should go some way in meeting the genuine dilllculties of this sector. I also propose to take some additional powers to stimulate production and to provide resources for the expansion of industry. Given the needs of the State, I cannot do so by giving up existing sources of revenue. A part of the improvement in revenues, however, could well be utilized for meeting the requirements of industrial expan- sion and for pioviding a stimulus to greater production from existing investments. 1 propose, therefore, to take powers to provide that tax credit certificates to the extent oi 25 per cent of the Central Excise Duty paid by any manufacturing unit on production in addition to its production in the base year may" be issued to the unit. Similarly, I propose to take powers to provide for issuing tax credit certi- ficates for 20 per cent of the additional Corporation Tax ihcludlng surtax paid by any manufacturing company over the corresponding tax paid during the base year This would be further subject to the limit of 10 per cent of the overall tax for the year concerned. These certificates are meant to be used for purposes rele'vant to the expansion of the industry namely redemption of debentures or repayment of loan from approved institutions.

54. The Government had recently set up a Tea Finance Committee and that Committee had made certain recommendations lor rellgf in direct tax for tea com- panies. I propose to accept these recommendations in a modified form and the necessary provisions have been included in the Finance Bill.

55. I also propose to allow in the case of companies a deduction for expenditure incurred by them for payment towards family planning amongst their employees. Where such expenditure is of a capital nature, it will be allowed as a deduction over a period of five years.

PERSONAL TAXATION

56. I now come to my proposals for personal taxation. Honourable Members would recall that earlier in my speech I had referred to the need for curbing ex- cessive investment in urban property which has been rising rapidly In value due to a variety of reasons. Without such a curb, investment in more productive direc- tions cannot be encouraged. There has also been a demand that there should be some ceiling on vast accumulations of urban property. I have considered this PTO- blem from various angles and have come to the conclusion that the best way of dealing with it through a fiscal measure is by way of an additional wealth tax on such properties. The tax will apply to urban property in towns with a population of one lakh or more. In view of differences in urban property values in towns of different sizes, I have decided to provide for diferent exemption limits according as the population of the town is between 1 lakh and 4 lakhs, 4 lakhs and 8 lakhs, 8 lakhs and 16 lakhs and over 16 lakhs. The exemption would vary from Rs. 2 lakhs in the smallest of these ranges to Rs. 5 lakhs in the highest ct these ranges. Honourable Members will see that the classification of towns that I have adopted for this purpose is the same as is already available for purposes of granting com- pensatory and other allowances to Central Government employees. Urban pro- perties in excess of these exemption limits will, under my proposal, bear an "addi- tional wealth tax at progressive rates rising from one per cent to four per cent on successive slabs of the total market value of such property. It is not possible for me now to estimate precisely the revenue from this source, but as at present I would put down the additional revenue expectea at Rs. 1 5 crores in 1985-66. I would like to emphasise, however, that the purpose of this levy is as much to raise re- venue as also to a c h i ^e wider social purposes. It may be that as a result of this measure, property owners may transfer properties to corporate bodies which are not now liable to the wealth tax or property owning companies may come up, If this tendency develops, Government will deal with It at the appropriate time

57'. I propose now to restore the exemption from wealth tax for five years fgr equity investment in new industrial companies. This concession will apply in respect of companies issuing capital for the first time after the 28th February 1965. The companies issuing bonus shares pay a tax of 12 1/2 per cent on the face value of these shares. It stands to reason that if a person pays capital gains tax on bonus shares issued to him some part of the tax paid by the company^jm the same issue should go to mitigate his liability for capital gains tax. i propose, therefore, to allow a rebate of 10 per cent of the face value of bonus shares from the capital gains tax on such shares but limited to the amount of such tax.

58. In the region of personal taxation of incomes, the first need is for simplifica- tion of the tax structure. For one thing, the distinction between income-tax and super-tax is something of an anachronism and the manner in which we allow for* various deductions as at present is also not conducive to either simplicity or com- prehension of net incidence. I have endeavoured to simplify the whole tax struc- ture by integrating super-tax with income-tax and in other ways. This simplifica- tion will cost something to exchequer for a little while. But it will improve tax administration and help to modify the attitude of the ordinary citizen towards his tax liability.

59. Basically, I wish to provide for a system in which the present free allowance for purposes of income-tax will be discontinued, thus eliminating Inter alia the element of acute discrimination against unmarried worrlfen "anfl~^achelors. Incomes in future wilJ be chargeable to tax, subject to relief on account of personal allow- ance for every individual of Rs. 2000 with an additional allowance of Rs. 1500 for a married individual and Rs. 400 for each dependent child up to a maximum of two children. For a married individual with two dependent children no tax will thus be payable up to an income of Rs, 4300 as against Rs. 4000 as at present. The relief by way of personal allowances will, at the new rate, amount to the same absolute sum of Rs. 215 as a maximum for all assefsees. This simplification will entail a loss of revenue ot Rs, 3.64 crores.

60. Another change in the direction of simplication that I wish to make relates to deductions in respect of contributions to provident fund, insurance premiums and Cumulative Time Deposit Scheme. Apart from raising the monev limit for concession relating to these items from Rs. 10,000 to Rs. 12,500 for individuals, it is proposed to give the concession by a straight deduction from income of 50 per cent of the amount contributed to the items eligible for the relief. This measure. I am sure, will facilitate the calculation of tax liability by each individual. I am also introducing a new provision for exempting from tax Income up to Rs. 2,400' on account of institutional care of handicapped dependents. In the case of non- institutional care the limit will be Rs. 600. Honourable Members would agree with me that a measure of relief in this respect is justified on social grounds.

61. While streamlining the tax structure, and replacing the present taxes by a revised and unified schedule, I have lowered taxes at all levels of personal in- comes. In the new schedule, the highest marginal rate of taxtion on earned In- comes which will be reached at over Rs. 70,000 will be 65 per ijent. At the same time, the surcharge on earned Income has also been regarded at 5 per rent for incomes between Rs. 1 and R's, 2 lakhs, 10 per cent for incomen between Rs. 2 and 3 lakhs and 15 per cent for incomes above Rs. 3 lakhs. In our scheme of taxation, we have come to regard an income of Rs. 15.000 as the divid- ing line for various purposes. The Annuity Deposit Scheme, for example, does not apply to incomes upto Rs. 15.000. I have also decided that the same limit should be considered as the free limit for purposes of the unearned income-tax surcharge. The present limit for this purpose is proposed, therefore, to be raised from Rs. 10,000 tp Rs. 15.000. With the base for unearned income-tax surcharge being lowered by this measure as well as by the reduction in tax rates in gen"ml, there- is a case for increasing the surcharge on unearned incomes. Accordingly. I pro- pose to levy a surcharge on the tax at the rate of 20 per cent on unearned incomes between Rs. 15.000 and Rs. 50,000 and at the rate of 25 per cent on such incomes above Rs. 50,000.

62. The Finance Bill looks very bulky as it contains a number of amendments to the Income Tax Act, 1961. This has in the main become necessary in order t

63. As I have just said the changes proposed will mean a reduction in tax: at all levels of personal income The highest marginal rate on unearned income will go down from 88 • 125 per cent to 81:25 per rent and that on earned income from