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Monday, Jul 12, 2004

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A guided tour of the Budget from direct tax angle

V. K. Subramani

THE Finance Bill, 2004 has a lot of surprises for taxpayers, especially professionals. The amendments are innovative in the sense that the Finance Minister, Mr P. Chidambaram, has attempted to substitute certain words and sentences and the impact of this is both interesting and intriguing. However, taxpayers, in general, and the business community, in particular, may not be happy with the following: a) no new tax rebate if the income exceeds Rs 1,00,000; b) gifts being taxed as income; c) widening of the tax deduction provision for allowance of expenditure claim; d) application of Section 194 C based on aggregate contract and subcontract payments; e) powers of the valuation cell restored which could result in increased tax litigation; and f) tax on securities transaction.

Gifts deemed as income

GIFTS of more than Rs 25,000 received by an individual or HUF from any person not being a relative after September 1, 2004, will be deemed as income of the recipient. However, if the sum is received on the occasion of one's marriage, it is not chargeable to tax (even if the gift is in excess of Rs 25,000, that is). [Section 2(24)(xiii) inserted]

The gift is chargeable to tax as income under the head "income from other sources" (Section 56(v)). However, gifts received from a relative, being a spouse, brother or sister or any lineal ascendant/descendant, will not be subject to tax (Sections 10(39) and 2(24)(xiii)).

Exempt incomes

INTEREST paid or credited to Non-resident (External) Account after September 1, 2004, will not be eligible for exemption (the required proviso to Section 10(4) has been inserted).

The foreign government or enterprise deriving income from an Indian company engaged in the business of operation of aircraft, as a consideration of acquiring an air craft or an aircraft engine on lease, is also eligible for exemption provided the agreement is entered into after August 31, 2004, and is approved by the Central Government (Section 10(6BB) amended). Earlier, agreements made before April 1, 1999, were only exempted from tax.

Family pension received by widow or children or a nominated heir of the armed forces personnel, including para-military forces, is exempt from tax [Section 10(19].

Agricultural lands owned by individuals or HUFs, situated within the limits specified in Section 2(14), are capital assets; yet, upon their compulsory acquisition, capital gains arising therefrom shall not be chargeable to tax. [Section 10(36)]

Income arising from transfer of long-term capital asset, being securities entered into in a recognised stock exchange shall be exempt from tax (Section 10(38)).

Securities transaction tax contained in chapter VII of the Finance (No. 2) Act, 2004 shall be applicable from the date of its notification in the Official Gazette. The proposed securities transaction tax provides for levy of tax at 0.15 per cent of the value of securities sold.

Cancellation of registration to trusts

THE Commissioner of Income-tax, having granted registration under Section 12AA, is satisfied that the activities of the trust or institution are not genuine or are not being carried out in accordance with objects of the trust, can pass an order in writing cancelling the registration of the trust or institution (Section 12AA(3)).

Contribution to pension scheme

CONTRIBUTION made by the Central Government to pension schemes of Central Government employees shall be treated as income (Section 17(1)(vii)).

Correspondingly if the contribution of the Central Government is less than 10 per cent of the salary of the employee, it is eligible for deduction at 100 per cent under Section 80 CCD (2). The impact of section will be tax neutral if the contribution of the Central Government is below 10 per cent of the employee's salary.

However, the employee's own contribution is eligible for deduction from the total income at 100 per cent subject to the limit that the contribution does not exceed 10 per cent of his salary income. Salary, for this purpose, would mean basic pay and dearness allowance if the terms of employment so provide. However, salary does not include other allowances and perquisites (Section 80 CCD(1)).

Additional depreciation

ADDITIONAL depreciation at 15 per cent of the cost of plant and machinery is available if the production capacity is enhanced by 10 per cent (capacity expansion has been reduced from 25 per cent to 10 per cent, as per the amended Section 32(1)(iia)).

For example, if the production capacity of a company is 1,00,000 tonnes as on March 31, 2004, and if the company installs plant and machinery during 2004-05 resulting in an increase in the production capacity to 1,10,000 tonnes, then the assessee is eligible for 15 per cent additional depreciation on the cost of plant and machinery installed during the financial year 2004-05. Before the amendment, the assessee would have had to increase the installed capacity to 1,25,000 tonnes for getting additional depreciation.

Tonnage tax for shipping companies

DEDUCTION in respect of shipping companies under Section 33 AC would not be available from the assessment year (AY) 2005-06 onwards. Shipping companies are subjected to tax in terms of chapter XII-G, consisting of Sections 115 V to 115 VZC.

Section 115 VE (5) gives assessees the option either to pay tax in accordance with the normal provisions of the Income-Tax Act or presumed income in terms of Section 115 VG.

Section 115 VG provides that the tonnage income of each qualifying ship shall be the daily tonnage income of such ship multiplied by a) the number of days in the previous year; or b) the number of days in the part of the previous year where the ship is operated for only part of the previous year.

The computation of income on deeming basis is as presented in Table 1.

For example, if the daily net tonnage of the qualifying ship is 20,000 tonnes, then the income would be as shown in Table 2.

No deduction without TDS

ANY interest, commission/brokerage or fees for professional/technical services payable to a resident will not be eligible for deduction if no tax has been deducted or after deduction has not been remitted. However, if it is deducted or paid in any subsequent year, then it is eligible for deduction in that year in which such tax has been paid (Section 40(ia)).

Till now, Section 40(a)(i) covered payments outside India or payment to non-resident within India. The proposed Section 40(ia) covers payment to residents and the coverage is not only interest and fees for technical services but also payments, such as commission, brokerage or fees for professional services.

Incentives for housing projects

HOUSING projects approved before March 31, 2007, are eligible for deduction under Section80-IB (10). However, the undertaking must complete the construction within four years from the end of the financial year in which it is approved by the local authority. The size of the project with a minimum of one acre has been dispensed with provided the housing project is carried out in accordance with a scheme framed by the Central Government or State Government for this purpose.

There has been relaxation as regards housing projects, by providing for built-up area for the shops and commercial establishments, which should not exceed 5 per cent of the aggregate built-up area or 2,000 sq.ft., whichever is less.

Earlier, there was no provision for shops and commercial establishment and, hence, such housing projects accommodating such commercial ventures were not eligible for deduction under Section 80-IB (10).

Others

SET-OFF of business loss against salary income not possible: Where the net result of the income under the head "profits and gains of business or profession" is a loss and the assessee has income under the head `salaries', then the assessee shall not be entitled to set off such business loss against salary income. (Section 71(2A)).

Tax incentives for electricity companies: Units engaged in generation of power or commences transmission or distribution of power are eligible for deduction under Section 80-IA even if they undertake substantial renovation and modernisation of the existing transmission or distribution lines. "Substantial renovation and modernisation" would mean increase in plant and machinery by at least 50 per cent of the book value existing as on April 1, 2004 (Section 80-IA(2)(a) amended).

The time limit for undertaking substantial renovation and modernisation is at any time during April 1, 2004 to March 31, 2006.

Units engaged in generation or generation and distribution of power get extended time limit up to March 31, 2006, for getting deduction under Section 80-IA(4) (iv) as against the earlier time limit of March 31, 2004.

(The author is an Erode-based chartered accountant.)

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