Government of India

“If we bring thought and passion to our governance, and

walk the path of honour and courage, we can make the

future happen. And this century will be India’s century.”

BUDGET 2004-05

July 8, 2004.
 Key Features of Budget 2004-2005

NATIONAL COMMON MINIMUM PROGRAMME

Economic Objectives
• Growth rate of 7 - 8 per cent per year for a sustained period;
• Universal access to quality basic education and health;
• Gainful employment in agriculture, manufacturing and services, and
promoting investment;
• 100 days’ employment to the breadwinner in each family at minimum
wage;
• Focus on agriculture and infrastructure;
• Acceleration of fiscal consolidation and reform; and
• Higher and more efficient fiscal devolution.

FRBM AND THE MACROECONOMIC BACKDROP

• Elimination of revenue deficit by 2008-09.

• Growth to be sustained by increased production and value addition in

agriculture, a marked improvement in industrial production, and
continued buoyancy in the performance of the services sector.

• 5-year road map to achieve the NCMP objective of bringing about rapid
growth with stability and equity.

POVERTY AND UNEMPLOYMENT

• Additional provision of Rs.10,000 crore for Gross Budgetary Support
(GBS) for plan; programmes such as Food for Work, Sarva Shiksha
Abhiyan, Midday Cooked-Meal Scheme, basic health care, railway
modernisation and safety, Accelerated Irrigation Benefit Programme,
drinking water, investment in agriculture, roads and science and
technology to receive priority.

• Antyodaya Anna Yojana : coverage to increase from 1.5 crore to 2

crore families; provision of Rs.3500 crore included in the allocation for
food subsidy.

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 • Public distribution system to be strengthened.

• Food for Work Programme: work begun on the National Employment

Guarantee Act to guarantee 100 days of employment in a year to one
able-bodied person in every poor household; a new Food for Work
programme in 150 districts classified as most backward to be launched;

• Allocation of Rs.1180 crore for programmes concerning the Scheduled

Castes and Rs.1146 crore for Scheduled Tribes;

• Additional allocation of Rs.50 crore for the National Minorities

Development and Finance Corporation.

• Indicative target of credit linking 5.85 lakh self-help groups (SHGs) during
the period up to March 31, 2007.

THRUST AREAS

• Doubling agricultural credit in three years, accelerating the completion of

irrigation projects and investing in rural infrastructure;

• Providing farm insurance and livestock insurance;

• Improving agricultural product markets, and promoting agri-businesses;

• Drinking water for all;

• Expanding water harvesting, watershed development and minor-irrigation

and micro-irrigation schemes;

• Enhancing investment in industry – public and private, domestic and

foreign – to create new jobs;

• Creating space for small-scale industry to thrive and grow;

• Electricity for all;

• Universal access to telecommunication facilities;

• More housing for the poor;

• Access to medical care through health insurance; and

• Encouraging savings, and protecting the savings of the senior citizens.

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EDUCATION AND HEALTH
• A cess of 2 per cent on Union taxes & duties will yield about Rs.4000 -
5000 crore in a full year; to be earmarked for education including cooked
midday meal.
• Programme to be launched to upgrade 500 ITIs over the next 5 years.
• Collateral waived for educational loans up to Rs.7.5 lakh, if a satisfactory
guarantee is provided on behalf of the student.
• Universal Health Insurance Scheme to be redesigned and made
exclusive for persons and families below the poverty line; revised
premium of Rs.165 for individuals, Rs.248 for a family of five and Rs.330
for a family of seven without any reduction in benefits; premium subsidy
to be Rs.40 crore in a year; number of insured to rise to about 10 lakh.
• A new Group Health Insurance Scheme to be introduced through public
sector non-life insurance companies for members of Self-Help Groups
(SHGs) and other credit linked groups (CLGs); premium will be Rs.120
per person and the insurance cover would be for a sum of Rs.10,000.
• Allocation of Rs.259 crore for prevention and control of HIV/AIDS.

AGRICULTURE AND THE RURAL ECONOMY

• Credit: Regional Rural Banks (RRBs) that adopt a new governance
standard and that abide by the prudential regulations will qualify for
receiving funds from the Government for restructuring; Task Force to be
appointed on reforms in the cooperative banking system; report by
October 31, 2004.

• Irrigation, Rural Infrastructure: last mile projects under the Accelerated

Irrigation Benefit Programme (AIBP) to be given priority; provision of
Rs.2800 crore in 2004-05; corpus of Rs.8000 crore to be provided during
2004-05 for the Rural Infrastructure Development Fund (RIDF) with
revised guidelines.

• Restoring Water Bodies: scheme to repair, renovate and restore all the
water bodies that are directly linked to agriculture to be launched; pilot
projects to begin in five districts; National Water Resources Development
Project to be launched.

• Water Harvesting: nationwide water harvesting scheme to be launched;

to cover one lakh irrigation units at an average cost of Rs.20,000 per
unit; loan on easy terms by NABARD with no margin money; 50 per
cent capital subsidy through NABARD.

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 • Flood Control: Rs.30 crore allotted in the current year.
• Diversification: National Horticulture Mission to be launched to double
horticulture production by 2011-12; States to be encouraged to emulate
the Anand model and establish a State Level Cooperative Society for
promoting horticulture; Government to facilitate farmers to diversify into
oilseeds by promoting superior seed-technology and through an
appropriate policy of price support; India must become a single market
for all products, particularly agricultural produce - States urged to enact
the model law.
• Research and Development: Allocation of Rs.1000 crore in 2004-05
against Rs.775 crore in BE 2003-04.
• Agri-Business: Action initiated to improve the governance of the Small
Farmers Agri-business Consortium (SFAC) including the appointment of
a banker as the chief executive; necessary additional capital to be
provided to SFAC.
• Risk Mitigation: National Agricultural Insurance Scheme (NAIS) which
insures the yield being redesigned; Pilot scheme insuring farm income
launched during Rabi 2003-04 in 19 districts extended to Kharif 2004;
weather insurance scheme being introduced by the Agricultural
Insurance Company (AIC) on a trial basis in 20 rain gauge stations.

INFRASTRUCTURE
• Inter-Institutional Group (IIG) formed by IDBI, IDFC, ICICI Bank, SBI, LIC,
Bank of Baroda and Punjab National Bank to ensure speedy conclusion
of loan agreements and implementation of infrastructure projects.

• All drinking water schemes to be brought under the umbrella of the Rajiv
Gandhi Drinking Water Mission; allocation of Rs.2610 crore for
Accelerated Rural Water Supply Progamme (ARWSP) in the current
year; funds to be devolved on panchayati raj institutions for
implementation; provision of Rs.151.25 crore for Urban Water Supply
Programme in the current year; first large desalination plant to be
installed near Chennai and more such plants to be installed along the
Coromandel coast through public-private partnership.
• Sethusamudram Ship Canal Project: Environmental Impact
Assessment study completed; techno-economic feasibility report
expected shortly; SPV to be established to raise funds; Government
participation through a mix of equity support and debt-guarantee.
• Construction of an International Container Transshipment Terminal
(ICTT) at Vallarpadam in Kochi port on BOT basis.

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• Rural Housing: allocation for Indira Awas Yojana (IAY) raised by Rs.537
crore to Rs.2247 crore; National Housing Bank has offered to reduce the
rate of refinance by 25 basis points under the Golden Jubilee Rural
Housing Finance Scheme; RBI has agreed to revise the norms of
re-payment for rural housing loans by banks, so that the instalments
coincide with crop cycles; Target of 250,000 rural housing units per year.

INDUSTRY

• An Investment Commission to be established.

• A National Manufacturing Competitiveness Council to be set up.

• Sectoral cap for FDI to be raised from 49 per cent to 74 per cent in
telecommunications; from 40 per cent to 49 per cent in civil aviation; and
from 26 per cent to 49 per cent in insurance.

• Capital Markets: Procedures for registration and operations to be made

simpler and quicker for FIIs; investment ceiling for FIIs in debt funds to be
raised from US$ 1 billion to US$ 1.75 billion; banks with strong risk
management systems to be allowed greater latitude in their exposure to
the capital market; an alternative trading platform to be created for small
and medium enterprises (SMEs) to raise equity and debt from the capital
market; steps to be initiated to integrate the commodities markets and the
securities markets.

• Public Sector: equity support of Rs.14,194 crore and loans of Rs.2,132

crore to Central PSEs (including Railways) in 2004-05; Board for
Reconstruction of Public Sector Enterprises (BRPSE) to be established;
financial support for restructuring Hindustan Antibiotics Limited; Rs.508
crore for Indian Telephone Industries (ITI).

• Small Scale Industry: 85 items to be taken out of the reserved list;

ceiling for loans under the Capital Subsidy Scheme to be raised from
Rs.40 lakh to Rs.1 crore; rate of subsidy to be raised from 12 per cent to
15 per cent; more sub-sectors and technologies to be made eligible for
assistance; subsidy to be met from provision of Rs. 135.24 crore for
“Promotion of SSI Schemes”.

• Regeneration of Traditional Industries: Fund for the Regeneration of

Traditional Industries to be set up with an initial allocation of Rs.100
crore.
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 OTHER PROPOSALS
• VAT: a broad consensus among the States to implement VAT with effect
from April 1, 2005; formula to be evolved for determining the
compensation for the loss of revenue, if any.

• Pension Reform: legislation to provide a regulatory framework for the

‘defined contribution’ pension scheme for the Central Government
employees recruited on or after January 1, 2004 to be introduced in
Parliament.

• Export Promotion: Bill for regulating Special Economic Zones to be

introduced.

• Securitisation Act: relevant provisions of the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest
Act to be amended to address the Supreme Court’s concerns regarding a
fair deal to borrowers while ensuring that the recovery process is not
delayed or hampered.

• Interest Rates: no change in the existing rates of interest on small

savings instruments including PPF, GPF and Special Deposit Scheme;
new scheme called the Senior Citizens Savings Scheme offering an
interest rate of 9 per cent per annum to be introduced.

• Reform of Public Distribution System: pilot scheme for distributing

food stamps, instead of distributing food through fair price shops to be
introduced in two or three contiguous districts.

• Gender Budgeting: Report of the Expert group on “Classification

System of Government Transactions” to be examined and if possible, to
be implemented from Budget for 2005-06.

• Subsidies: blue print to target the subsidies at the poor and truly needy
to be prepared.

• States’ Finances: States’ share of Union taxes and duties to increase to

Rs.82,227 crore from Rs.63,758 crore in BE 2003-04; rate of interest on
Central Government loans reduced from 10.5 per cent to 9 per cent with
effect from April 1, 2004; States to be allowed to raise fresh loans and
repay their old high-cost loans to NABARD and some other agencies;
States to be consulted on allowing them to increase their open market
borrowings and reducing their dependence on loans from the Central
Government; passing on of external loans on a back-to-back basis to be
considered.

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• Special Economic Packages: Bihar will be assisted through the
Rashtriya Sam Vikas Yojana; a provision of Rs.3225 crore made for the
present.
• North Eastern Region (NER): all Ministries and Departments to spend
at least 10 per cent of their Plan budget for schemes and programmes in
the NER (Rs.5823 crore); amount remaining unspent is transferred to the
non-lapsable pool for development of the NER; Rs.650 crore provided
from the Central pool of resources for specific projects and schemes in
the region, up from Rs.550 crore in 2003-04.
• Jammu & Kashmir: special assistance to be provided for a reasonable
Plan size; financial support to be provided for the Baglihar project;
Rs.300 crore will also be provided to ensure smooth switch-over from the
current overdraft arrangement with the Bank of Jammu & Kashmir to the
Ways & Means scheme of the RBI.
• Backward States’ Commission: Backward States Grant Fund to be set
up with a corpus of Rs.25,000 crore to be provided over a period of five
years; will become operational from 2005-06.
• Defence Modernization: increase in allocation to Rs.77,000 crore (as
against Rs.65,300 crore in BE 2003-04) including Rs.33,483 crore for
capital expenditure.

TAX REFORMS
Direct taxes
• No one with a taxable income of Rs.100,000 will be required to pay
income tax.
• Family pension received by widows, children and nominated heirs of
members of the armed forces and the paramilitary forces killed in the
course of operational duties to be exempt from income tax.
• Benefit of Section 80DD and Section 80U to be extended in respect of
persons suffering from autism, cerebral palsy and multiple disability.
• Compensation for acquisition of agricultural land in certain urban
agglomerations to be exempt from capital gains tax in cases where the
compensation or the enhanced compensation has been received on or
after April 1, 2004.

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 • EET to be adopted for the ‘defined contribution’ pension scheme for new
entrants into Central Government service.

• Tax exemptions on interest earned from a Non-Resident (External)

Account and interest paid by banks to a Non-Resident or to a Not-
Ordinarily Resident on deposits in foreign currency, and on payment
made by an Indian company to acquire an aircraft or an aircraft engine on
lease from a foreign state or a foreign enterprise, to cease from
September 1, 2004.

• Gifts from unrelated persons, above the threshold limit of Rs.25,000 to be

taxed as income; gifts received from blood relations, lineal ascendants
and lineal descendants and gifts received on certain occasions like
marriage will continue to be totally exempt.

• Deduction of 100 per cent of profits for 5 years and 25 per cent of profits
for the next 5 years to be allowed in the case of new agro-processing
industries set up to process, preserve and package fruits and vegetables.

• Additional depreciation of 15 per cent allowed on new plant and

machinery acquired or installed in an existing undertaking to continue
with the required increase in installed capacity at 10 per cent instead of
25 per cent.

• Automobile industry to be notified as an industry entitled to 150 per cent

deduction of expenditure on in-house R&D facilities.

• Benefit under Section 80 IA to be extended to power sector projects

undertaken during the period April 1, 2004 to March 31, 2006.

• Request of shipping industry for the levy of a tonnage tax to be accepted.

• Benefit of Section 80 IB to be extended to new hospitals with 100 beds or

more set up in rural areas; Such hospitals to be entitled to a 100 per cent
deduction of their profits for a period of five years.

• Benefits to the housing industry under Section 80 IB for projects approved

before March 31, 2005 - time limit to be extended to March 31, 2007.

• Tax on long-term capital gains from securities transactions to be

abolished; Instead, a tax on transactions in securities on stock
exchanges to be levied on the buyer at the rate of 0.15 per cent of the

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 value of security; rate of tax on short-term capital gains from securities to
be reduced to a flat rate of 10 per cent.

• Equity-oriented mutual funds to continue to be exempt from tax on

dividends; rate of tax on corporate unit holders of debt-oriented mutual
funds to be raised to 20 per cent with no change for individuals and HUF
unit holders.

• Benefits to the telecom sector under Section 80 IA for services

commenced before March 31, 2004 - terminal date to be extended to
March 31, 2005.

• 100 per cent deduction of profits for 10 years to companies carrying on

scientific research and development and approved by the Department of
Scientific and Industrial Research before April 1, 2004 - terminal date to
be extended to March 31, 2005.

• 100 per cent tax exemption to new industrial undertakings in Jammu &
Kashmir if they commenced production before March 31, 2004 - date to
be extended to March 31, 2005.

Indirect Taxes
• Intention to align the tariff structure to those of ASEAN countries.

• Eventually there should be a uniform rate of tax on goods and services.

• Removal of exemption from CVD enjoyed by some imported goods
where there is no corresponding exemption from excise duty on Indian
made goods.
• Customs duty on non-alloy steel to be reduced from 15 per cent to 10 per
cent and the excise duty on steel to be increased from 8 per cent to 12
per cent so that the countervailing duty will also be applicable to imports.
• Peak rate on Alloy steel, copper, lead, zinc and base metals to be
reduced to 15 per cent; customs duties on refractory raw minerals and
mineral products like graphite, asbestos, mica and gypsum to be reduced
to 15 per cent; customs duty on all catalysts also to be 15 per cent.
• While retaining customs duty on crude palm oil at 65 per cent, the duty
on refined palm oil to increase to 75 per cent.
• Customs duty of 5 per cent on some items of plantation machinery to be
extended to more items pertaining to the tea and coffee plantation sector.

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 • Tractors, dairy machinery and hand tools such as spades, shovels,
sickles, etc. which attract a 16 per cent excise duty to be fully exempt.

• Excise duty to be reduced from 16 per cent to 8 per cent on preparations

of meat, poultry and fish and from 32 per cent to 16 per cent on food
grade hexane (used in the edible oil industry).

• Certain rehabilitation aids to be fully exempt from customs duty, excise

duty and CVD; Crutches, wheel chairs, walking frames, artificial limbs,
etc. for the disabled to be fully exempt from customs duty; restrictions on
institutions for the visually-impaired and the hearing-impaired availing of
import duty exemptions to be removed and the list of exempted
appliances to be enlarged; all ambulances registered as such to be
allowed the concessional excise duty of 16 per cent; excise duty
exemption to be extended to diagnostic kits for detection of all types of
hepatitis.

• Excise duty to be levied on contact lenses and playing cards; excise duty
to be increased from 8 per cent to 16 per cent on a few items; in all these
cases the general SSI exemption will continue to be available.

• Excise duty on matches made in the mechanized/semi-mechanised

sector to be increased from 8 per cent without Cenvat credit to 16 per
cent with Cenvat credit.

• Specified raw materials for manufacture of parts of cathode ray tubes and
specified capital goods for manufacture of mobile handsets, plasma
display panels, etc. to be exempt from excise duty; specified items for
manufacture of telecom grade optical fibres and cables to be exempt
from customs duty; customs duty exemption to be extended to imports by
universal access service providers.

• Full excise duty exemption to be granted on computers; some excise

relief to be given to LPG gas stoves bearing an MRP up to Rs.2000,
footwear with MRP upto Rs.250 and writing instruments with MRP upto
Rs.200.

• Concessional customs duty of 5 per cent on capital goods to be extended

to the non-leather footwear industry; patent leather to be exempt from
customs duty.

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• Import duty on platinum to be reduced from Rs.550 per 10 grams to
Rs.200; rough coloured precious gemstones to be exempt from customs
duty.

• Area specific exemptions enjoyed by States other than the North Eastern
States and J & K to continue and be available to units set up or
expanded on or before March 31, 2007.

• New tax regime for textiles: mandatory Cenvat chain to be abolished; no

mandatory excise duty on pure cotton, wool and silk, whether it is fibre,
yarn, fabric or garment; blended textiles and pure non-cotton (polyester,
viscose, acrylic and nylon) to have a different tax regime; mandatory
excise duty on man-made staple fibre at 16 per cent; on polyester
filament yarn (including textured yarn) at 24 per cent; and on other man-
made filament yarn (including textured yarn) at 16 per cent.

• Service Tax: credit of service tax and excise duty to be extended across
goods & services; rate of service tax to be enhanced from 8 per cent to
10 per cent; addition of some more services; mandatory verification of
self assessment and the mandatory penalty for non-registration to be
done away with.

• An education cess of 2 per cent on income tax, corporation tax, excise

duties, customs duties and service tax to be levied.

• Tax proposals on direct taxes expected to yield a gain of Rs.2000 crore.

On the indirect taxes side, they are broadly revenue neutral.

.......

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 NOTE

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