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T. N. Manoharan

T. N. Manoharan examines the implications of the proposed amendments in Budget 2003

BUDGET 2003-04 is widely commented upon as a growth-oriented one. But there is also apprehension that some of the proposals may lead to all-round inflation. As regards the income-tax amendments proposed in the Finance Bill, 2003, one appreciable aspect is that none of the amendments proposed is made with retrospective effect, aiming to overcome court decisions rendered in favour of taxpayers. Interestingly, some of the proposed amendments in the income-tax law have the effect of reversing or modifying the amendments made by the Finance Act, 2002 by the then Finance Minister, Mr Yashwant Sinha. What follows is an analysis of the amendments.

Dividend tax

Dividend taxation was shifted from the company to the hands of the shareholders last year in spite of strong opposition. The primary consideration that appeared to have prevailed in bringing such a change was that the promoters earn enormous amount of dividend that escapes 30 per cent tax rate while the company pays a mere 10 per cent as dividend distribution tax under Section 115-O. If the top 100 dividend-paying companies declared about Rs 14,000 crore as dividend last year, it is a misnomer to believe that Government would realise tax at 30 per cent amounting to Rs 4,410 crore, including surcharge from the shareholders. This belief is unfounded due to the fact that substantial shareholding is held by mutual funds which are exempt from tax under Section 10(23D) of the Income-Tax Act and corporate shareholders as well as individuals may not pay much tax due to deduction under Sections 80M and 80L respectively.

Besides, there are lakhs of small-time investors whose total income, including dividend, does not exceed the basic exemption limit of Rs 50,000. There are few others who, in spite of deriving huge dividend income, end up paying no tax as the same gets set off against business loss incurred by them. Again, there are many shareholders who are not known to the I-T Department. It is expedient to collect 12.5 per cent from about 6-lakh companies in the country than unsuccessfully chasing millions of investing population and ultimately end up gathering hardly 50 per cent of the amount otherwise collectible as corporate dividend distribution tax.

The move by the Finance Minister to restore the exemption of dividend in the hands of shareholders is welcome, as the same would, apart from earning more revenue to the exchequer, save enormous amount of paperwork for the corporates who deduct tax at source and also help the department, by reducing the work of verification of the authenticity of TDS certificates before granting credit.

Contributions to trust

A trust is required to spend 85 per cent of its income towards its objects to get 100 per cent exemption. Contributions made out of current year income to other trusts with similar objects shall be treated as application of income for the objects and, therefore, qualify for exemption. Alternatively, a trust can accumulate income for specified purpose to be utilised within five years.

Last year, the law was amended to provide that if contribution is made to other trusts out of such accumulated funds, the same will not be treated as application of income for the objects of the trust and, therefore, would be liable to tax. Generally, every trust deed has an inbuilt clause to enable contribution of accumulated funds to a trust with similar objects in case of winding up of the trust. It was represented that in such a situation there should be no tax liability on the donor trust. This has been accepted and suitable amendment is proposed in the Bill.

Limited scrutiny

If there is a demand payable or refund due as per return of income filed, the assessing officer (AO) is required to send an intimation to that effect under Section 143(1). In other cases, acknowledgement issued on filing of return of income shall be deemed intimation. AOs could select cases for regular assessment (comprehensive scrutiny) by issuing notice under Section 143(2).

Last year, the law was amended to enable an AO to issue notice for limited scrutiny in cases where he considers that any loss, exemption, deduction, allowance or relief made in the return is inadmissible. This amendment brought into force from June 1, 2002, is proposed to be withdrawn with effect from June 1, 2003. Though the reasons for dropping this procedure is not spelt out, none of the taxpayers seem to mourn that limited scrutiny survived only for a limited period. Added to this is the good news that only 2 per cent of the returns will be selected on random basis for regular assessment.

Self-declaration for senior citizens

Originally, Form 15H could be furnished by any person who claims that his tax liability is nil so as to obtain income such as interest, NSS proceeds, dividend, and so on, without deduction of tax at source. Last year, the law was amended to provide that if a person's aggregate income from those sources exceeded Rs 50,000, Form 15H cannot be furnished by them and tax must be deducted at source. It was pointed out that genuine hardship is caused in the case of senior citizens who might receive such income to the tune of a lakh or even more but will not be liable to tax in view of the tax rebate under Section 88B which was Rs 15,000, now proposed to be increased to Rs 20,000. The Finance Minister also made a mention in his speech that because of the tax rebate, senior citizens will not be required to pay tax on income up to Rs 1,53,000. Section 197A is, thus, modified enabling senior citizens to file self-declaration in Form 15H to obtain such income without tax deduction at source.

TDS by individuals and HUF

Last year, individuals and HUFs, the turnover of whose business or profession exceeded the limit of Rs 40 lakh or Rs 10 lakh, as the case may be, in the immediately preceding year were made liable to deduct tax at source on amounts paid or credited in the nature of interest, sub-contract bills, rent, fees for professional or technical services, commission or brokerage beyond the limits prescribed under the relevant provisions.

This requirement is proposed to be done away with only in respect of professional fee paid or credited by individuals and HUF exclusively for personal purposes. For instance, an individual businessman need not deduct tax at source when he pays fee to his surgeon for the operation performed on him. Similarly, a doctor need not deduct tax at source on the amount payable to his architect for designing his residential house. It may not be out of place to mention here that individuals and HUFs need not deduct tax in respect of contract payments under Section 194C(1).

Repayment of loans

Section 269T was modified last year to include `loans' in addition to `deposits', thereby requiring repayment of loans and deposits to the tune of Rs 20,000 or more only by account-payee cheque or draft. This amendment could cause unintended hardship when daily sales are deposited in cash-credit account during the normal course of business. Section 269T is proposed to be amended so as to exclude the repayment of any loan or deposit taken or accepted from government, any banking company, post office savings bank, co-operative bank, statutory corporation; government company and such other institution which the Central Government may notify, from the purview of Section 269T.

Violation of Section 269T attracts penalty under Section 271E. This provision was not amended last year to include loans repayment in violation of Section 269T. Section 271E is now proposed to be amended so as to enable imposition of penalty on repayment of loans also in violation of Section 269T. It is heartening to note that the amendment relating to the exclusion of loans is made retrospectively from June 1, 2002, and the amendment relating to imposing of penalty is made prospectively with effect from June 1, 2003.

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