The Hindu Business Line : Finance Act, 2007

Five hundred in 3 years, two taxation laws, amendment Acts, apart from the annual Finance Acts, three new taxes hitherto unknown in India. The Government can take pride for making the income-tax law more complex than ever before. The cost of compliance has gone up enormously.

Some loopholes have been plugged. Section 56 of the Income-Tax Act, 1961 has been amended almost every year. The latest amendment provides that the receipt from one or more persons aggregating to more than Rs 50,000 in any financial year, without consideration, will be treated as income of the individual or Hindu Undivided Family. Earlier, the limit was set at Rs 25,000. The concept of aggregation of all receipts was not known earlier. The latest amendment takes effect from April 1, 2006. Even today, gifts in kind will fall outside the ambit of Section 56 and not be considered as income.

A new Section 44DB has been introduced woth effect from the Assessment Year 2008-09. This lays down that in the event of amalgamation or demerger of co-operative banks, benefits of depreciation under Section 32, amortisation of preliminary expenses under Section 35D, amortisation of amalgamation and demerger expenses under Section 35DD, and amortisation of VRS payments under Section 35DDA will continue to be allowed to the amalgamated, or resulting, bank for the balance period.

Section 72AB (newly introduced), gives similar benefit in respect of carry forward and set off of accumulated losses and unabsorbed depreciation allowance in the case of amalgamation or demerger of co-operative Banks. Both Sections 44DB and 72AB ensure that the benefits will not be available when a co-operative bank merges with a nationalised or a private bank. The benefit is limited to amalgamation or demerger of co-operative banks only.

Capital gains

An interesting issue has been raised by a leading Chartered Accountant from Mumbai on the interpretation of Section 54EC and the newly added Proviso. The intention is to limit the quantum of relief by way of exemption from the levy of capital gains tax to investments in a specified bond to the extent of Rs 50 lakh only per assessee in any financial year. Section 54EC (1) refers to capital gains from the transfer of “a long-term capital asset”. The Proviso has to be read along with the main Section 54EC (1). The exemption is to be computed with reference to the capital gains arising on transfer of each long-term capital asset. The limit of Rs 50 lakh should be applied to each item of long-term capital gain.

Shares in unlisted public companies are liable for long-term capital gains tax since the Securities Transaction Tax is not paid. It is possible to argue that the capital gains on each capital asset has to be computed separately and the limit of Rs 50 lakh can be breeched. It looks as though the Finance Minister’s intention that there should be a cap of Rs 50 lakh per assessee for investment in bonds in claiming exemption has not succeeded because of lacunae in drafting. Obviously, we will have a retrospective amendment in the next Finance Act.

ESOP

The Fringe Benefit Tax applies to shares falling under the category of Employees Stock Option Plan and to Sweat Equity Shares. The Proviso to Section 17(2)(iii) has been omitted. ESOP will not be taxed in the hands of the employee as perquisite. A new Section 115WKA has been introduced with effect from the Assessment Year 2008-09. It is now possible for the employer to recover the FBT on ESOP or Sweat Equity Shares from the employee or the Director.

FBT is considered additional income-tax under Section 115WA. It is not allowable as a deduction in computing the total income of the company under Section 40(ic). The recovery of FBT from the employee will not, therefore, amount to income in the hands of the company. At the same time, the FBT paid by the employee to the employer cannot be added to the cost of shares in the hands of the employee.

Book Profits Tax

Amendment to Section 115JB lays down that with effect from the Assessment Year 2008-09, income derived from undertakings in free-trade zones and export oriented units, covered by Section 10A and Section 10B, will suffer Minimum Alternate Tax (MAT). At the same time, income derived by a unit set up in Special Economic Zones, falling under Section 10AA, will not suffer MAT.

The Finance Act makes it clear that the apparent is not the real. Tax rates stated in the Finance Act Schedule have to take into account surcharge and cess. The tax on dividend distribution is apparently raised from 12.5 per cent to 15 per cent with effect from April 1, 2007. In reality; the rate goes up to nearly 17 per cent, including surcharge and education cess.

There will be all-round regret that the income-tax code has become the most complicated tax law of the past 50 years.It is significant that nobody talks of simplification and rationalisation of the law these days. A real pity.

(The author is a former Chief Commissioner of Income-Tax.)