Overview of Tax Proposals
Overview of Tax Proposals
Dr. K. Shivaram, Advocate
The author has made a critical analysis of the provisions of the Finance Bill 2008 and argues that some of its provisions may be unconstitutional.
This year’s budget is also full of promises and very little on accountability. Unless the concept of accountability is introduced in the Income-tax Act as per the recommendation of Raja Chellia Committee (1992) 197 ITR st. 177 (257), whatever may be the law, the honest tax payers will have to face the difficulties of high-pitched assessment, recovery etc. The Hon’ble Finance Minister has stated that “Debt relief won’t be there every year, it is just a one –time distress measure”. I am of the view, we may not be surprised, similar to amnesty schemes for dishonest taxpayers once in five years, every Finance Minister before election once in five years definitely will try to give some amnesty scheme to farmers so that they will be get the desired support from the masses. Shri N.A. Palkhivala in his article on the occasion of Golden Jubilee celebration of ITAT stated that “Today the Income-tax Act, 1961, is a national disgrace. There is no other instance in Indian jurisprudence of an Act mutilated by more than 3,300 amendments in less than 30 years. Simple provisions like Sections 11 to 13 (which deals with exemptions of the income of charitable trusts) have suffered no less than fifty amendments”
Income-tax Act, 1961, has undergone more than 6000 Amendments.
This year also 62 amendments are proposed out of which, 22 are of retrospective in nature and most of the amendments are to overcome the judicial decisions. One fails to understand that when the Govt. is proposing to bring the new Income-tax Act what is the great urgency in bringing so many amendments.
2. Education cess
Govt. is collecting educational cess from all the assessees. One of the views expressed by an eminent Sr. Advocate is that it can be collected only where surcharge is applicable; i.e., where the taxable income is above 10 lakhs. This year’s memorandum explaining the provision has added the word “if any” [(2008)298 ITR (st) 192] which was not there earlier. It is interesting to note that the Govt. has collected about Rs. 20,229 crores upto 2006-07, and only Rs 5830 .67 crore was spent on the project of Sarva Shiksha Abhiyan and Rs 2911 crores on Mid-day Meal. Association can challenge the said provision and it may benefit all small assessees.
The amendment to section 254 is defiantly unconstitutional and deserves to be challenged. Many a times the stay granted matters are not disposed due to circumstances beyond the control of the assessee; i.e., matters are pending before special bench, third member, etc. In Mumbai bench all the matters relating to international taxation are referred to L bench. The L bench has not started functioning. In such a situation how the department is justified in enforcing the recovery of which is not in the control of the assessee. Speedy justice is fundamental right of the citizen. If Govt. is not in a position to render speedy justice the citizen cannot be compelled to pay the damages for no fault of theirs.
3. Rates of taxes
The initial exemption limit of taxation is proposed to be raised from Rs. 1,10,000/- to Rs. 1,50,000/- in case of individuals and HUFs. In case of women the limit of Rs. 1,45,000/- is proposed to be raised to Rs. 1,80,000/-. Similarly, in case of senior citizens, the limit of Rs. 1,95,000/- is proposed to be raised to Rs. 2,25,000/-. The rate of surcharge and Education Cess remain the same. There is no change in corporate income rates. Tax on short term capital gains from sale of securities subjected to STT is increased to 15% from 10%. Commodity transaction tax is introduced on commodities derivatives . No change in rates of STT. Banking cash transaction tax (BCTT) is withdrawn from 1st April, 2009.
4. Agricultural income – S. 2(1A) (Clause 3)
The definition of the term agricultural income has been expanded by incorporation of Explanation 3 u/s. 2(1A) to include any income derived from saplings or seedings grown in a nursery. This amendment is proposed with a view to bring an end to the disputes which had arisen between the assessee and the department with respect to income derived from nursery activities The amendment will take effect from 1-4-2009 (A.Y. 2009-10) onwards. One of the possible views could be this being the insertion of Explanation may have a retrospective application.
5. Charitable Purpose – S. 2(15) (Clause 3)
It is proposed to add proviso that the scope of the phrase “advancement of any other object of general public utility’ shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business including activity of rendering any service in relation to trade, commerce or business for fee, cess or any other consideration, irrespective of nature of application of income from such activity or retention of such income by concerned entity. The above amendment will be effective from A.Y. 2009-10.
The amendment seems to be to overcome the view of Apex court in CIT vs. Gujarat Maritime Board (2007) 295 ITR 561. The amendment will have far reaching implications on all charitable organizations, professional organizations as well as non profit companies. Income of professional organizations in respect of sale of publications, seminars may have to face the litigation. The professional organizations must take up this issue with the Government, very seriously.
6. Income of “SIKKIMESE” — S. 10(26AAA) (Clause 4)
Any income, which accrues or arises to “sikkimese” individual from any source in the State of Sikkim or by way of dividend or interest on securities is proposed to be exempt from tax. The amendment is retrospective from AY 1990-91 onwards.
7. Profits & gains of business or profession
1. Incentive for outsourcing of scientific research – S. 35(iia) (Clause 5)
It is proposed to allow a weighted deduction of 125% in respect of any sum paid for scientific research to a domestic company, which has as its main object of carrying out the scientific research and development is approved by the prescribed authority, in the prescribed manner.
However, with a view to avoid multiple claims for deduction ,it is proposed that such domestic company will not be entitled to claim weighted deduction of 150% as prescribed under section 35(2AB) of the Act.
2. Amortisation of preliminary expenses – S. 35D (Clause 6)
Benefit of amortization of specified preliminary expenses u/s. 35D has been extended to all undertaking. The amendment has been made with a view to provide a level playing field to the service sector organizations.
3. Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT) – S. 36(1)(xv) (Clause 7, Clauses 8 & 17)
S.T.T. and C.T.T. shall be allowed as a business expenditure and simultaneously rebate u/s. section 88E for such S.T.T. will be withdrawn. In section 40, clause 9, sub-clause (1b), shall be omitted with effect from the 1st day of April 2007.
4. Amount not deductible — S. 40(A)(3) (Clause 9).
At present disallowance in relation to payment made otherwise than by an account payee cheque drawn on a bank or account payee bank draft are disallowed, if such individual payment exceeds twenty thousand rupees. In order to plug the loophole of multiple payments, it has been proposed that all payments made to a person in a single day will be aggregated for the purpose of considering the disallowance.
It may be noted that the limit of Rs. 20,000 was fixed in the year 1997. Considering the inflation it is suggested that this limit may be increased to at least Rs. 50,000.
5. Actual cost – S. 43(b) (Clause 10)
A new Explanation 6 in section 43(6) is proposed to provide that where the assessee is not required to compute his income for any previous year or years preceding to the relevant previous year, then in such a case, depreciation provided in books shall be deemed to be the depreciation actually allowed.
The above Explanation was inserted to overcome ITAT decision in the case of Kandla Port Trust vs. ACIT (2007) 104 ITD 1 (Rajkot) which held that in case of an income which is exempt u/s. 10(20) till 31-3-2002, and since there is no liability to tax, no computation of income was required to be prepared, therefore, depreciation provided in books cannot be considered as ‘depreciation actually allowed’.
The Explanation will be applicable retrospectively with effect from Asst. Year 2003-04 onwards.
8. Capital gains – Ss. 47, 49 (Clauses 11 & 12)
Clause (xa) of section 47 has been inserted and it is proposed to provide that the conversion of Foreign Currency Exchangeable Bonds (FCEB) into shares or debentures of any company shall not be treated as ‘transfer’ within the meaning of the Income tax Act. Further, it is also proposed to substitute subsection (2A) of section 49 to provide that the cost of acquisition of the shares received upon the conversion of the bond shall be the price at which corresponding bond was acquired.
9. Reverse Mortgage Scheme. S. 47(xvi)10(43) (New sub-sections), (Clauses 4 & 11)
The innovative reverse mortgage product, announced by the Honourable Finance Minister in the budget for 2007-08 had received a modest response from the targeted borrowers. This is because of ambiguity in tax issues. The Banks are of the view that there is significant ageing population who could potentially benefit from this scheme.
It is proposed that any amount received by senior citizen under the notified scheme of reverse mortgage will be exempt from tax.
Similarly pledge of the residential property under the scheme of reverse mortgage will not be regarded as transfer of a capital asset and therefore shall not attract capital gain tax. The amendment is proposed to be effective from 1st April 2008.
A reverse mortgage is known as life time mortgage in the United Kingdom, and loan is also available to citizens aged 62 and above in the United States. In India also senior citizens; i.e., 60 years and above can avail the benefit of reverse mortgage scheme.
It may be noted that for all other sections of Income-tax Act the senior citizen means age of 65 years and above.
10. Deductions in computing total income – S. 80-C, (Clause 13), S. 80-D, (Clauses 13 & 14)
1. It is proposed to add following two saving instruments to be eligible for deduction u/s 80C within overall limit of Rs. 1 lakh.
(i) 5 year time deposit in an account under Post Office Time Deposit Rules, 2004.
(ii) Deposit in an account under the Senior Citizen Saving Scheme Rules 2004.
Deduction will be available retrospectively from A. Y. 2008-09 and will accordingly apply for deposits made after 1st April 2007.
2. Under section 80-D it is proposed to allow an additional deduction of up to Rs. 15,000/- to an individual assessee, on any payment made for insurance on the health of his parent or parents (though they are not dependent). It is further proposed that, if, either of the individual assessee’s insured parent, is a senior citizen then deduction is allowed up to Rs. 20,000/- (Senior citizen means 65 years and above).
11. Tax Holiday
1. Hospitals – Ss. 80-IB, (11 C), (Clause 15)
Section 80-IB(11C) it is proposed that hospitals constructed and started at any time during 1st April, 2008 to 31st March, 2013 will get 100% deduction for profits derived from operating and maintaining hospital. It should have at least 100 beds for patients. Deduction will be allowed for 5 consecutive assessment years beginning from the initial assessment year. It is further proposed that hospital can be located any where in India other than excluded area. Excluded areas are Urban agglomerations of Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore and Ahmedabad, the district of Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar and Gandhinagar and the city of Secunderabad.
2. Hotels – S. 80-ID, (Clause 16)
Section 80-ID it is proposed that 100% deduction be allowed to two star, three star or four star category hotels located in specified district having world heritage site. Deduction is allowed for 5 consecutive assessment year beginning from initial assessment year. The new Hotels should start functioning during 1st April, 2008 to 31st March, 2013. Specified districts having a world heritage site are proposed to be the districts of Agra, Jalgaon, Aurangabad, Kancheepuram, Puri, Bharatpur, Chhatarpur, Thanjavur, Bellary, South 24 Parganas, Chamoli, Raisen, Gaya, Bhopal, Panchmahal, Kamrup, Goalpara, Nagaon North Goa, South Goa, Darjeeling and Nilgiri. Deduction is to promote the tourism and attract tourists to certain World Heritage Sites in India.
3. Coir Industry – S. 19(29A) (Clause 4)
Income-tax Act provides for exemption of any income of certain commodity boards and export development authorities. It is proposed to extend the exemption to Coir Board established under the Coir Industry Act ,1953.
4. Mineral oil – S 80-IB (Clause 15)
At present the undertaking engaged in refining and commercial production of mineral oil is eligible for tax holidays for a period of seven years. It is proposed to deny the tax holiday to the undertaking which begins refining on or after 1st April, 2009.
12. Dividend Distribution Tax – S. 115-O (Clause 21)
A new sub–section (1A) is proposed to provide that the amount of dividend referred to in section 115-O (1) shall be reduced by the amount of dividend, if any, received by the domestic company during the financial year, if :
a) Such amount of dividend is received from its subsidiary
b) The subsidiary company has paid the dividend distribution tax on such dividend
c) The domestic company is not a subsidiary of any other company. It is also provided that the amount of dividend shall not be taken in to account for reduction more than once. It is explained that a company shall be subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company.
The proposed amendments to DDT will enable companies to structure and allocate capital to their businesses more efficiently. This measure has helped mitigate the cascading effect of taxation on dividend. The anomaly of double taxation has been rectified.
It is suggested that this concession should not be restricted to dividend received from subsidiary company only. Similar provision existed in section 80M which was deleted in 1984.
It is also suggested that if a company has invested in a Mutual Fund and received income from such mutual fund on which DDT is paid u/s 115 R , the said income also should be deducted from dividend distributed by the company for the purposes of DDT u/s 115-O. This will avoid double taxation of the income received from Mutual Fund.
13. Fringe Benefits – Ss. 115WB to 115WKB (Clauses 22 to 26)
FBT on guest house, crèche facilities, sponsorship of sports events and sportsmen abolished. Taxable Value of festival celebrations is reduced to 20% of expenditure.
It is also proposed to insert a new section 115- WKB to provide that where fringe benefit tax (with respect to allotment or transfer of specified security or sweat equity shares) has been paid by the employer and subsequently recovered from the employee, the recovery of the FBT shall be deemed to be tax paid by such employee in relation to value of fringe benefits provided to him. The deeming provision shall apply only to the extent to which the amount of recovery relates to the value of the fringe benefits provided to such employee. The new section further seeks to provide that, notwithstanding anything contained in this Act, in the above situation, the employee shall not be entitled to any refund out of such deemed payment of tax and shall also not be entitled to claim any credit of such deemed payment of tax against tax liability on other income or against any other liability.
1. Due date for filing return – S. 139 (Clause 23)
The Finance Bill seeks to advance the dates of filing return of assessee where due date is 31st October to 30th September of the relevant assessment year in respect of both Returns of Fringe Benefits and Returns of Income respectively.
2. Special Audit – S. 142 (2C), (Clause 28)
The Finance Bill also seeks to provide that the assessing officer u/s. 142(2C) may also extend the period within which the audit report is to be furnished by such further period or period as he thinks fit suo motu; i.e., on his own without any application made by the assessee.
Over all originally fixed and extended time cannot exceed 180 days.
3. Correction of arithmetical mistakes and adjustment of incorrect claim under section 143(1) & s. 156, (Clauses 29 & 37)
The assessing officer is empowered to make certain adjustments on account of arithmetical error or incorrect claims. These adjustments will be made only by computer processing without any human interface. The amendment is effective from 1st April, 2008. The CBDT will formulate the scheme.
4. Notice S. 143(2), (Clause 29)
Section 143(2) is amended so as to provide that no notice under the said clause shall be served on the assessee after the expiry of six months (earlier 12 months) from the end of the financial year in which the return is furnished.
14. Book Profit – S-115JB — (Clause 20)