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Budget Highlights

Union Budget 2004-05 had a bag full of surprises for the capital markets as it sought to do away with long-term capital gains tax and reduce short-term capital gains tax to 10%. However, a transactions tax of 0.15% on all purchase deals has been levied.

The finance minister Mr. P. Chidambaram presented the Union Budget for the financial year 2004-05 in Parliament today. The provisions of the Budget pertaining to financial markets are enumerated below:

Changes to the existing Direct Tax structure –

Tax exemption limit raised to Rs 1,00,000
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 foreign currency deposits will cease to be effective from September 1, 2004.
Automobile industry will be entitled to 150 per cent deduction of expenditure on in-house R&D facilities.
Long-term gains from securities transactions to be abolished.
A transaction tax in securities on stock exchanges will be levied on the buyer at the rate of 0.15 per cent of the value of the security
Short-term capital gains from securities to be taxed at 10 per cent flat.
Equity-oriented mutual funds would continue to be exempt from dividend tax.
Rate of tax on corporate unit holders of debt-oriented mutual funds will be raised to 20 per cent. However, there is no change in the existing tax structure for individuals and HUFs.
Measures will be put in place to curb creation of losses via dividend and bonus stripping. To be eligible for claiming tax exemptions on short-term capital loss from sale of units – investors will now have to hold on to their units for a period of 9 months after the record date for declaration of dividend as against 3 months earlier. Moreover, to prevent the practice of bonus stripping, it is proposed that the loss on sale of original units where bonus units have been issued will be ignored and the loss will be treated as the cost of acquisition of the bonus units.

Changes to the existing Indirect Tax structure –

Rate of service tax increased from 8 per cent to 10 per cent.
An education cess of 2 per cent will be levied on all kinds of taxes, i.e., income tax, corporation tax, excise duties, customs duties and service tax.

Other major provisions include:

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.
Provisions for capital markets include:
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$ 1bn to US$ 1.75bn,
Banks with strong risk management systems in place will be allowed to have a greater exposure in equity markets,
An alternative trading system to be created for SMEs to raise equity and debt from the capital market,
Steps will be initiated to integrate the commodities and the securities markets.
Securitisation Act to be amended to address defaulted borrowers' concern as voiced by a recent Supreme Court judgement.
No changes in the interest rate on small savings instruments. A new scheme called the Senior Citizens Savings Scheme offering an interest rate of 9 per cent (against the general rate of 8 per cent) to be introduced.
The govt. aims to wipe out the entire revenue deficit by the year 2008-09 as against 2007-08 as enshrined in the Fiscal Stability and Budget Management Act (FRBM), 2003. Thus, an amendment to this effect in the Act will be made through the finance bill.