The Hindu Business Line : No bad news on income taxes

The good news is that there will be no change in the rates of personal income tax or corporate income tax. The other piece of good news is that no new taxes are being imposed. The one-by-six scheme under the Income Tax Act obliging certain categories of persons to file returns will stand abolished.

Raising the floor MAT

I propose to marginally revise certain tax rates in the quest for equity. While the corporate tax rate is 30 per cent, the rate under Minimum Alternate Tax (MAT) is only 7.5 per cent of book profits. I propose to increase the rate to 10 per cent, which is still only one-third of the normal rate. I also propose to include long-term capital gains arising out of securities in calculating book profits. I have already allowed MAT-paying companies to take credit for MAT over five years. I propose to extend the period to seven years as well as adjust MAT credit while calculating interest liability.

Trade is costlier

Higher tax for traders, greater flexibility for investors.

The rates for the Securities Transaction Tax (STT) were fixed when prices of securities were much lower. Reflecting the increase in implicit capital gains in securities transactions, I propose an increase of 25 per cent, across the board, on all rates of STT.

Extended tax holiday

Section 80IA of the Income Tax Act applies to infrastructure facilities. For developing an industrial park the terminal date is March 31, 2006. I propose to extend the period to March 31, 2009. For the power sector, in view of the ultra mega projects, I propose to extend the date to March 31, 2010.

Savings flexibility

Last year, I recast the provisions relating to savings. Fixed deposits were not included. There is a demand that fixed deposits of certain tenure should qualify for tax exemption. I propose to include investments in fixed deposits in scheduled banks for a term of not less than five years in Section 80C of the Income Tax Act.

I also propose to remove the limit of Rs 10,000 in respect of contribution to certain pension funds in Section 80CCC, subject to the overall ceiling of Rs 1,00,000.

What is open-end fund

I propose to align the definition of open-ended equity-oriented schemes of mutual funds in the Income Tax Act with the definition adopted by SEBI. I also propose to treat open-ended equity-oriented schemes and close-ended equity-oriented schemes on par for the purpose of exemption from dividend distribution tax.

Exemptions go

I have revisited the exemptions in the Income Tax Act. As a result, I propose to remove the exemption under Section 10 (23G), which is not relevant when interest rates are moderate.

No taxing co-operatives

Cooperative banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under Section 80P of the Income Tax Act. However, I propose to exclude all other cooperative banks from the scope of that section.

Restricted shelters

Section 54EC and Section 54ED are tax shelters. I propose to restrict the scope of section 54EC to two institutions, viz., NHAI and REC. For NABARD, SIDBI and NHB, which are banks, we have already opened the route of zero coupon bonds to raise low cost funds. Government will, if needed, provide appropriate support to these institutions to enable them to access resources to fulfil their mandate effectively. I also propose to withdraw the benefit of section 54ED, which has become virtually redundant, with effect from April 1, 2006.

Know your `donee'

The Standing Committee on Finance has expressed concern that many charitable institutions misuse the provisions of the Income Tax Act. I propose to focus on one misuse, namely, receiving anonymous or pseudonymous donations. Accordingly, I propose that anonymous or pseudonymous donations to wholly charitable institutions will be taxed at the highest marginal rate. Such donations to partly religious and partly charitable institutions/trusts will be taxed only if the donation is specifically for an educational or medical purpose. However, I make it clear that such donations to wholly religious institutions and religious trusts will not be covered by the new provision.

Members of State Legislatures have complained that their constituency allowances are taxed differently from the constituency allowance received by Members of Parliament. I propose to remove the discrimination and treat them equally.

We will give PAN

The Permanent Account Number (PAN) of the Department of Income Tax is the critical element in capturing incomes and expenditures. Scrutiny of Annual Information Returns (AIR) on high-value transactions reveals that 60 per cent of the transactions are without quoting PAN. Hence, I propose to take the power to issue PAN suo motu in certain cases. I also propose to take the power to direct persons to apply for PAN in certain cases. I propose to notify, in due course, more transactions for which quoting of PAN will be mandatory.

The `trail' tax

The Banking Cash Transaction Tax (BCTT) has turned out to be a boon, not for the modest revenues it brought which was never its purpose, but for the remarkable trails that it has helped establish. To cite just one example, huge cash withdrawals in a bank branch in Chandni Chowk, noticed through the BCTT, led the Department of Income Tax to three entities which were carrying on the business of purchasing demand drafts from traders at a discount and helping the traders to avoid both sales tax and income tax.

These entities would deposit the demand drafts in their own accounts and withdraw the cash. In a period of 18 months, they had laundered Rs 1,500 crore. BCTT has also helped the Department to detect bogus bills, accommodation entries, artificial loss claims and dummy firms.

I propose to continue the BCTT for some more time until the AIR system is able to capture all significant financial transactions.