Indian Budget Highlights 2007

News

Budget Highlights 2007-2008

Income tax limit not to be changed. Threshold limit raised by Rs 10,000 giving every assessee a relief of Rs 1,000 and senior citizens relief of Rs.2000.
Deduction in respect of medical insurance under Section 80 (D) increased to Rs 15,000 and Rs 20,000 for senior citizens
Surcharge on Corporate income tax on companies below Rs one crore removed
Tax free bonds to be issued by state-owned urban local bodies
Minimum Alternate Tax being extended to include exemptions given under section 10A and 10B and rate of tax increased to 10%.
Benefits of investment in venture capital funds confined to IT, biotechnology, nano-technology, seed-research, and dairy among some others
Dividend distribution tax raised from 12.5 to 15 per cent

Excise duty on Pan Masala without tobacco as mouth freshners reduced from 66 per cent to 45 per cent
Excise duty on cement reduced from Rs.400 per tonne to Rs.350 per tonne for cement bags sold at Rs.190 per bag at retail market. Those sold above Rs.190 will attract excise duty of Rs.600 per tonne
Two lakh people to benefit out of service tax exemption. Govt to lose Rs 800 crore as a result.
Service tax on Residents Welfare Associations whose members contribute more than Rs 3,000.

Excise duty for plywood reduced from 16 per cent to eight per cent
Food mixes to be fully exempted from excise duty
Bio-diesel to be fully exempted from excise duty
Water purification devices, small and big, fully exempted from excise
Specific rates of excise duty on cigarettes increased
Customs duty on polyester to be reduced from ten per cent to 7.5 per cent
Duty on lift irrigation, agricultural sprinklers and food processing equipment reduced from 7.5 per cent to five per cent
Duty on pet food reduced from 30 per cent to 20 per cent
Duty on sunflower oil to be reduced by 15 per cent
Duty reduced on watch dials and movements and umbrella parts from 12.5 to five per cent
Import duty of 15 specified machinery to be reduced from 7.5 per cent to five per cent
Total expenditure estimated at Rs 6,81,521 crore
Increase in gross tax revenue by 19.9 per cent, 20 per cent and 27.8 per cent in first three years of UPA government. Intend to keep tax rates moderate.
Peak customs duty rate on non-agricultural items reduced from 12.5 to ten per cent.
All coking coal fully exempted from duty.
Duties on seconds and defective reduced from 20 to ten per cent

VAT revenues increased by 24.3 per cent in the first nine months of 2006-07
A national level goods and services tax to be introduced from next fiscal
Fiscal deficit to be 3.7 per cent in the current year and revenue deficit two per cent

An autonomous Debt Management Office in government to be set up
An Expert Committee to be set up to study the impact of climate change in India .
Rs 150 crore to be given to Ministry of Youth and Sports for Commonwealth Games and Rs 350 crore to the Delhi Government for the purpose. Rs 50 crore to be provided for the Commonwealth Youth Games in Pune.
Rs 100 crore for recognising excellence in the field of agricultural research.

Any requirement for security of the nation to be provided.
Backward Regions Grant Fund to be raised to Rs 5800 crore.
E-governance allocation to be increased from Rs.395 to Rs.719 crore.
A high-powered committee report aimed at making Mumbai a world-class financial centre submitted. Public suggestions will be invited
Rs 50 crore provided to begin work on vocational education mission for which Task Force in Planning Commission is chalking out a strategy.
1,396 Indian Technical Institutes to be upgraded to achieve technical excellence.

CST rate to be reduced.
MFs to launch infrastructure funds.
PAN is the sole identification for all capital market transactions.
To hike provision for Textile Parks.
FDI inflows between April and January this fiscal touched $12.5 billion while portfolio investment reached $6.8 billion
Allocation for National Highway Development programme to be stepped up from Rs 9955 crore to Rs 12600 crore.
Work on Golden Quadrilateral road project nearly complete. Considerable progress made on North-South, East-West corridor and likely to be completed by 2009.
Northeastern region will get Rs 405 crore for highway development. Road-cum-rail project over Brahmaputra in Bogibil , Assam .
Textile Upgradation Fund raised to Rs 911 crore as against Rs 535 crore during 2006-07.
Health insurance cover for weavers to be enlarged to ancillary industries. Allocation increased from Rs 241 crore to Rs 321 crore.
A scheme for modernisation and technological upgradation of choir industry for which Rs 23.55 crore has been earmarked.
Tourism infrastructure to get an allocation of Rs.520 crore as against Rs.423 crore last year.
Reverse mortgage scheme for senior citizens
Allocation for SC/ST scholarships enhanced from Rs.440 crore to Rs.611 crore

Scholarships programme for minorities students to be of the order of Rs 72 crore for pre-metric, Rs 48 crore for graduate and postgraduate.
Total Budget for the Northeastern region raised from Rs 12,041 crore to Rs 14,365 crore.
New Industrial Policy for the northeastern region to be in place before March 31.
Women's development allocation will be Rs.22,282 crore.
Rs 2,25,000 crore farm credit proposed in the new budget. A target of additional 50 lakh farmers to be brought under farm credit.
Farmers' credit likely to reach Rs.1,90,000 crore as against the targeted Rs.1,75,000 crore during 2006-07.
Special Purpose Tea Fund to rejuvenate tea production.
Rs. 100 crore allocated for National Rainfed Area Authority.
School dropout rates high. To prevent dropout, a National Means-cum-Merit scholarship to be implemented, with an allocation of Rs 6,000 per child. Rs 1290 crore to be provided for elimination of polio. Intensive coverage will be undertaken in 20 districts in UP and 10 districts in Bihar . This will be integrated into NRHM.
National AIDS Control Programme to achieve zero level disease.
Measures for significant improvement of health care in rural area
Allocation for ICDS programme to be increased from Rs 4087 crore to Rs 4761 crore.

130 more districts under NREGA. Additional allocation of Rs.12,000 crore for it.
Rs 800 crore for Sampoorna Gram Rozgar Yojana in districts not covered by NREGA. Swarna Jayanti Swarozgar Yojana allocation increased from Rs 250 crore to Rs 344 crore.
Computerisation of PDS and integrated computerisation programme for FCI.
Allocation for schemes only for SCs and STs to be increased to Rs 3271 crore.
Rs 63 crore for share capital for National Minorities Development Finance Corporation following Sachar Committee recommendations.
Fertilser subsidy hiked.
Weather-based crop insurance scheme launched
AABY to cover rural landless labourers.
Farm credit to be enchanced.
Panel to be formed to monitor commodities forward market.
Housing sector to get boost.
Increased allocation for drinking water schemes in Metros.
Rs 12,000 crore allocation for rural employment scheme
National means-cum-merit schlorship launched.
More allocation for Urban Renewal Mission.
31% increase in Bharat Nirman to boost infrastructure companies.
Secondary education allowance to be increased from Rs.1,837 crore to Rs.3,794 crore.
Government committed to fiscal reforms.
Foreign exchange reserves stand at $180 billion
Allocation under Rajiv Gandhi Drinking Mission stepped up from Rs 4680 crore to Rs 5850 crore.
Government concerned over inflation and would take all steps for moderating it.
Already a number of steps on fiscal, monetary and supply management side have been taken.
Annual target of 15 lakh houses under Bharat Nirmal Programme to be exceeded.
Allocation for National Rural Health Mission stepped up from Rs 8207 crore to Rs 9947 crore.
Gross budgetary support in 2007-08 raised to Rs 2,05,100 crore from 1,72,728 crore in 2006-07. Of this, budgetary support to the Central plan will go up to 1,54,939 crore against 1,72,728 crore.
Allocation for AIDS control programme to be raised to Rs 969 crore
Manufacturing growth rate estimated at 11.3 per cent.
9.2 per cent GDP growth rate estimated in 2006-07.
Average growth for last three years is 8.6 per cent.
Saving rate of 32.4 per cent, investment rate of 33.8 per cent will continue.
A number of proposals to perk up agriculture to be announced.
Bank credit rate grew by 29 per cent during first ten months of 2006-07.
Inflation during 2006-07 estimated at between 5.2 and 5.4 per cent against 4.4 per cent during the previous year.
No new forward contract to be launched on wheat and rice from today.
Abhijit Sen report on forward trading to be submitted in two months' time.
Additional irrigation potential of 24 lakh hectares to be implemented, including nine lakh hectares under Accelerated Irrigation Benefit Programme
Economy in a stronger position than ever before
15,054 villages have been covered under rural telephony and efforts to be made to complete the target of covering 20,000 villages by 2006-07.
Allocation on Healthcare to increase by 21.9 per cent.
Allocation for education to be enhanced by 34.2 per cent
Two lakh more teachers to be employed and five lakh more classrooms to be constructe

Budget Highlighted Best 2006-2007

No FBT on Superannuation Fund upto Rs 1 lakh/employee

Increase in excise duty on computers

Excise duty abolition on branded foods

Customs duty cut on zinc

Duty cut on iron ore

Duty cut on vital drugs

Cut in peak customs duty

Proposal to privatise coal mining

Greater thrust on agriculture, irrigation

Excise duty on CFC reduced to 16%

Reduction of FBT on business conveyance

Removal of NHB from section 54EC

Increase in excise duty on computers

FBT on tour & travel expenses reduced to 5%

Inclusion of Fixed Deposits under Section 80C

Extension of tax breaks under Section 80IA

STT hiked by 25%

Short Term Transaction tax hiked by 25%

Cess on domestic crude hiked by Rs 700/tonne

Excise on specific footwear cut to 8% from 16%

Excise duty on cigarettes increased by 5%

Duty cut on naphtha, intermediates, polymers

Peak customs rate cut

Customs duty cut on textile machinery

Excise on all manmade fibres and yarn halved to 8%

Duty exemption to DVD driver, storage media manufacturers

Excise duty on small cars cut to 16% from 24%

Duty for DTA clearance by EOUs

Gross Budget Support up 20.4% at Rs 1,72,720 cr

Allocation for Education up 31.5% to Rs 24,115 cr

Reduction in duty on bulk chemicals

Promotion of IT-enabled sectors

Higher spend on e-governance initiatives

Boost for power sector in J&K

Higher allocation for J&K reconstruction

Dereserve coal blocks for power projects

50 mn additional rural telephone connections

1000 km expressways on BOT basis

To consider taking Hyderabad Metro under NURM plan

To remove 10% cap on overseas invst by Mutual Funds

Limit of FII investment in govt securities hiked

Continued Focus On Non-Conventional Energy

Development Of 15 Tourist Destinations

82 Power Projects To Be Completed In 1-2 years

Boost To Apparel Parks

Textile Allocation Increased to Rs 535 cr

Food Processing To Be Treated As Priority Sector

RIDF Gets Rs 4000 cr For Rural Roads

Increased Funding For Repair Of Water Bodies

2% Credit On Farm Loans

Rs 100 cr Fund To Help Tea Growers

To Double Farm Loans In 3-Years

Policy Changes To Attract More FDI In Infrastructure

Expert Body To Examine Various Aspects Including Tax

Urban Renewal Mission Gets A Grant Of Rs 4,595 cr

National Rural Health Mission To Get Rs 8207 cr

Spending On Flagship Plans at Rs 50,000 cr

Allocation For Education Up 31.5% to Rs 24,115 cr

10,600 Villages To Be Provided With Electricity

87,000 Houses To Be Build

Rs 944 cr Grant Given For Irrigation In Bharat Nirman

Expects 'Continued Buoyancy' In Capital Formation

Govt To Fund Disaster Rehabilitation

Rural Employment To Get Rs 14,300 cr

96% of Golden Quadrilateral To Be Completed By June 2006

Record 34,000 MW To Be Added Under 10th Plan

Foodgrains Output Likely To Be 209.3 MT In 2006-07

All Sectors, Barring Mining, Performing Satisfactorily

Govt To Aim For 10% Economic Growth

GDP Growth Likely To Be 8.1% in 2006-07

Salient Features of the Finance (No. 2) Bill, 2004

A. TAX RATES

No change in the tax rate�2 per cent additional surcharge on account of education cess
There is no change in the rate of tax applicable to individuals, Hindu Undivided Family (HUF), firms, companies etc. However, an additional surcharge, called the education cess, is being levied at the rate of 2 per cent on the amount of tax payable inclusive of surcharge. Accordingly one will have to compute one's tax liability on the basis of existing tax rates add surcharge to that and on the amount a further 2 per cent has to be added. This 2 per cent additional surcharge on account of education cess is also to be added while computing tax deductible at source by the deductor.
Persons having income up to Rs. 1 lac need not pay any tax
The Finance (No.2) Bill, 2004 proposes to exempt resident individuals having total income up to Rs. 1 lac. This exemption is to resident individuals only and as such the benefit will not be available to non-resident and other entities such as HUF, association of persons or body of individuals. This exemption has been proposed by inserting a new Section 88D by giving a rebate of the entire amount of tax payable. The Finance Minister in the budget speech has clarified that the persons who get covered by this exemption shall be required to file the return though the income tax liability shall get automatically rebated. It is to be further noted that persons having income above Rs. 1 lac shall not be entitled to this rebate. Persons having income of, say, Rs.1,01,000 shall be required to pay tax of Rs.9,200 plus 2 per cent education cess, i.e., a total tax liability of Rs.9,384 though the income exceeding Rs. 1 lac is only Rs.1,000. No marginal relief has been proposed in the Finance Bill at present. The rebate in the proposed Section 88D is different than the rebate up to Rs.15,000 allowable under Section 88B to senior citizens and the rebate up to Rs.5,000 allowable under Section 88C to resident women as the same are allowed to all such persons irrespective of the income.
Income distribution tax enhanced to 20 per cent for persons other than individuals and HUF
As per provisions of Section 115R, the mutual fund and the specified companies of the UTI have to pay distribution tax at the rate of 12.5 per cent at the time of the distribution of income. This Finance Bill proposes to retain the rate of 12.5 per cent on the income distributed to individual or a HUF. However, the income distribution rate has been enhanced to 20 per cent on income distributed to any person other than an individual or an HUF. This provision comes into effect from 9th July, 2004, i.e., with immediate effect. However, the exemption given to the open-ended equity oriented fund for a period of one year from 1st April, 2003 which was to expire on 31st March, 2004, has been extended indefinitely as the restriction of one year is proposed to be deleted. Now there will be no income distribution tax in the case of open-ended equity oriented funds. Whereas in the case of other funds which include debt funds the income distribution tax of 20 per cent will be applicable. No reasons have been stated for the enhancement of the rate from 12.5 per cent to 20 per cent. However, it appears that this move is directed to discourage corporates to make investment in the debt oriented mutual funds.
NRI interest on FCNR and NRE Deposits to be taxed
It is all bad news as regards NRI's interest income from Foreign Currency Non-Resident [FCNR] and Non-Resident External [NRE]Deposits.

Hon'ble Finance Minister Shri P. Chidambaram, while presenting the Union Budget 2004-2005, has proposed an amendment discontinuing income-tax exemption on the interest income of Non-Resident Indians derived from Non-Resident External [NRE] Accounts and Foreign Currency Non-Resident [FCNR] Accounts with effect from 1st September, 2004. It is also proposed to discontinue exemption relating to continued Foreign Currency Non-Resident [FCNR] and Resident Foreign Currency [RFC] Accounts, and denial is proposed for tax exemption hitherto available to a person defined as "Non-Resident" or "Resident but Not Ordinary Resident [R but NOR] also with effect from 1st September, 2004.

NOW,THE INVISIBLE BAD NEWS
With the discontinuation of exemption from interest earned from Non-Resident External [NRE] and Foreign Currency Non-Resident [FCNR] Deposits by Non-Resident Indians [NRIs], being liable to tax in India in all cases where income exceeds threshold limit of Rs 50,000/- will be required
i) apply for Permanent Account Number [PAN], and
ii) file a tax return every year

In all probability, Non-Resident Indians [NRIs] may not have an objection in paying marginal tax and thereby contribute to the economic development of the Nation, but the hardship of preparing accounts, filing tax return, await assessment etc is an unpleasant surprise for the Non-Resident Indians [NRIs] and this may see "FLIGHT OF CAPITAL"
A Memorandum should be presented to the Hon'ble Finance Minister suggesting adaptation of a middle path whereby the marginal tax may be collected and at the same time Non-Resident Indians [NRIs] may not be required to file a tax return.
This can be done by following the Distribution Tax method adopted in Dividend declared on Debt Funds by Indian Mutual Funds.
Alternatively, following the pattern of Chapter XII-A, "Special provisions relating to certain income of Non-Residents" as in Section 115G, non-filing of return of income should be provided for.

B. REBATE AND EXEMPTIONS

Long-term capital gain on listed securities to be exempt
The Finance Bill proposes to introduce a new sub-section (38) in Section 10 exempting income arising from the transfer of securities being long-term capital asset provided the transaction on the sale of such securities is entered into a recognized stock exchange in India on or after the date on which the provisions relating to levy of securities transaction tax are notified. This exemption shall be available to all assesses, both resident and non-resident. The only condition is that income should arise as an investor, not as a trader. The long-term capital asset should be a security and the transaction for the sale of such securities should be entered through a recognized stock exchange in India only. Accordingly those securities which are not listed shall not be eligible. Moreover for availing this exemption even in the case of listed securities, the transaction has to be necessarily routed through a recognized stock exchange. Transaction routed through a stock exchange outside India shall not be eligible. This exemption has been proposed in lieu of the securities transaction tax levied at the rate of 0.15 per cent on the value of the taxable securities transaction entered into any recognized stock exchange and is payable by the purchaser of the securities. The securities transaction tax should be collected by the stock exchange itself.
Short-term capital gain on listed securities to be taxed at the rate of 10 per cent
The Finance Bill proposes to introduce a new Section 111A on the line of the above-said Section 10(38) for levy of concessional 10 per cent tax on the income arising from the transfer of a short-term capital asset in respect of securities, the transaction of the sale of such securities is entered through a recognised stock exchange in India. The terms and conditions for concessional rate under this Section are exactly same as provided for claiming full exemption of long-term capital gain.
It is to be noted that the above exemptions can be availed when the transaction is by way of investment whether long-term or short-term and not when the transaction is entered as a trader. However, the liability to pay securities transaction tax shall be on all persons whether the transaction is as an investor or as a trader. Moreover the securities transaction tax is to be paid irrespective of the fact whether one earns income or incurs loss.
It is to be further noted that exemption under Section 10(36) introduced by the Finance Act, 2003 in respect of long-term capital gain on equity shares which form part of the BSE 500 Index and purchased on or after the 1st day of March, 2003 and before 1st day of March, 2004, long-term capital gain shall continue to be available. However, further extension for a period of 3 years announced by the then Finance Minister in the mini-budget speech on 3rd February, 2004 has not been implemented and no amendment granting extension has been proposed.
Capital gain from the transfer of agriculture land to be exempt
The Finance Bill proposes to insert a new sub-section (37) to Section 10 exempting capital gain arising from the transfer of agriculture land even if such land is situated in an area which is comprised within the jurisdiction of a municipality. Presently capital gain arising on transfer of agriculture land is exempt only when such land is outside the jurisdiction of a municipality and is also outside the area notified by the Central Government in the Official Gazette. This amendment proposes to exempt agriculture land falling within such area provided such land during the period of two years immediately preceding the date of transfer was being used for agricultural purposes by the HUF or the individual or his parent and the transfer is by way of compulsory acquisition under any law. The exemption shall be available for the compensation as well as enhanced compensation provided the same is received on or after the 1st day of April, 2004. This exemption is available only in respect of the capital gain and not on the accrued interest though the same was promised in the mini-budget of February, 2004 by the then Finance Minister.
Exemption to Central Government employees for contribution towards Pension Scheme
The amount contributed by the Central Government employees up to 10 per cent of their salary towards the pension scheme shall be eligible for deduction under the proposed new Section 80CCD. No rebate shall be allowed on this amount under Section 88. The amount contributed by the Central Government up to 10 per cent of the salary shall also be allowed as deduction in the computation of total income. However, on closure of such account or on opting out of the pension scheme or on receipt of pension from the annuity plan. the amount received shall be deemed to be the income of the year in which such amount is received and shall be charged to tax as income of that year. This amendment is being made retrospectively, i.e., from the Asstt. Year 2004-05.
Benefit of Section 80DD and 80U extended
The deduction available under Section 80DD in respect of maintenance and medical treatment of dependents with disability and under Section 80U for deduction in respect of persons with disability have been extended to include disability or severe disability suffering from autism, cerebral palsy or multiple disabilities.
Rebate for Repayment of housing loan under Section 88 extended
Presently the repayment of housing loan up to the limit of Rs.20,000 is eligible for claiming rebate under Section 88 of the Act provided such loans are from the Central or State Governments or banks etc. The benefit of this rebate is being extended on repayment of the amount borrowed by the assessee from the employer if he is an authority, board or corporation or any other authority established under a Central or State Act.

C. PLUGGING OF LOOPHOLES

Gift received from a non-relative to be taxed as income
The Finance Bill proposes to tax the sum received by any individual or HUF from any person other than from a relative out of natural love and affection on or after the 1st day of September, 2004. As per the proposal any sum received in cash or by issue of cheque/draft or by way of credit or any sum received otherwise than by way of consideration for goods or services shall fall within the definition of income under sub-section (24) of Section 2 of the Act. However, the amount received under a will or by way of inheritance or the sum received in contemplation of death of an individual or karta or member of HUF shall be outside the purview of the above definition. Further a sum up to Rs.25,000 in aggregate per year and a further sum up to Rs.1 lac received by an individual on the occasion of his marriage has been exempted under sub-section (39) of Section 10 of the Act.
It is to be noted that this provision is applicable only to an individual or HUF and make every sum received from any person chargeable to tax except those specifically excluded as stated above. The meaning of relative has been stated to be spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, lineal ascendant or descendent, lineal ascendant or descendent of the spouse of the individual and also include spouse of the above stated person. The objective of introducing this provision is to tax the gift received from non-relative. However, the wording of the proposed clause is very wide and may cause complications as the loan or deposit received by an individual or HUF apparently appears to get covered within the meaning of income under this clause. This income shall be chargeable under the head 'income from other sources'.
Holding period for units extended in case of dividend and bonus stripping
The Finance Bill proposes to amend sub-section (7) of Section 94 to extend the period of holding from three months to a period of nine months from the record date to avail the benefit of the loss, if any, suffered in the purchase or sale of units of a mutual fund. Accordingly if any person buys or acquires any units within the period of three months prior to record date and sells or transfers the units within a period of nine months after such record date, then the dividend or income received is exempt and the loss, if any, arising from such sale and purchase of units shall be ignored to the extent such loss does not exceed the amount of such income or dividend. There is no change in the holding period of shares.
Bonus stripping in units to be restricted
Presently as per the provisions of the Act, any bonus shares or units issued without consideration are taken at nil value while computing income. This Finance Bill proposes to introduce a new sub-section (8) to Section 94 providing that loss on sale of original units which have been acquired within three months prior to record date and which are sold or transferred within a period of nine months after such record date and in between additional units allotted without any payment on the basis of the holding of such units, then in such case the loss in the sale of the original units will be ignored and the amount of such loss shall be considered as the cost of purchase or acquisition of the bonus units allotted in between. The above amendment does not disturb the computation of income/loss in case of sale of bonus units otherwise than in the circumstances specified above, i.e., where the acquisition is within the period of three months from the record date and the sale is after the period of nine months from the record date and additional units are allotted on the basis of holding of the units on the record date. This amendment is also applicable to units not to sale/purchase of shares.
Business loss not to be set off against salary income
Presently under the Income Tax Act loss computed under any head of income other than under the head 'capital gain' is allowed to be set off against income under any other head. This Finance Bill proposes to amend Section 71 restricting set off of any loss under the head 'profit and gains of business or profession' against income under the head 'salaries'. The restriction shall be only for setting off business loss against salary income but business loss can still be set off against income from house property and income from other sources. The objective stated in the Finance Bill is to prevent abuse of the provision of set off of losses which apparently is an admission that administration is not competent enough to handle abuse of the provisions and by bringing this amendment wants to punish or deprive the benefit to a salaried employee of the legitimate and genuine loss incurred in the business or profession. Income tax is payable on the net income earned during the year and that income should be aggregate of the income and losses and not the income computed under different heads. The trends of amendments made in the recent years indicate that India is slowly adopting a Schedular system of taxation which obviously does not take into consideration the fundamental principle of taxation, i.e., ability to pay. Asking a person to pay income tax despite the said person having earned no income during the year appears to be illogical.
Denial of deduction of expenditure if tax not deducted
The Finance Bill proposes to extend the scope of the provisions of Section 40(a) whereby any interest, commission, brokerage, fee for professional services or fee for technical services or amount paid to a contractor or sub-contractor which is payable to a resident on which tax has not been deducted or after deduction it has not been paid within the time prescribed under Section 200(1) or in accordance with the provisions of Schedule XVIIB, the same shall not be allowed as deduction while computing income under the head 'profit and gains of business or profession'. This provision was already there in respect of payment to non-residents. However, this provision is being extended in respect of payment to residents also. It has been further provided that in any subsequent year if tax is deducted and paid on such sum the same shall be allowed as deduction in computing income of the year in which such tax has been paid. The objective stated for introducing this provision is to enforce compliance of provision of TDS. However, this provision is too harsh and is going to cause a lot of problem to the tax deductor. Firstly, there are enough provisions under the Act to enforce compliance of the provision of TDS. Under Section 201(1) on failure to deduct or failure to pay after deduction the person is treated as an assessee in default and the amount is recoverable from him. Under Section 201(1A) such person is liable to pay interest for the period of the default. Not only that, under Section 271C such person is liable for penalty which can be equal to the amount of tax involved. Under Section 221, on failure to pay tax penalty is further leviable. As such, there is no need to have further deterrent provision and to compute income which is in a manner not the actual income. Section 28 to Section 44D are meant to compute the profit of the business or profession and should not be used to enforce compliance in respect of tax liability of other persons. The applicability of Section 40(a) in respect of payment to a non-resident may be justified because such non-residents are not easily traceable and as such the tax liability of such persons gets compensated by denial of the benefit to the deductor. In the case of residents the traceability of the deductee is not a problem. Moreover there can be a practical problem where the deductor has failed to deduct tax and the deductee has paid tax on such income either by way of advance tax or by way of self-assessment tax and in such a situation the deductor cannot deduct tax again from the deductee and the benefit of deduction of such expenditure shall be lost forever as the condition of the proviso of claiming the deduction in the subsequent year when tax is deducted and paid shall never be fulfilled. In case the Revenue is of the view that there is not enough deterrence under the Act to enforce the compliance of TDS provision, then remedy should be sought under the TDS provisions by increasing the penalty or by way of better administration rather than computing the business income in a manner which is not the real income earned from the business or profession.
Exemption of interest income to non-residents withdrawn
The Finance Bill proposes to amend Section 10(4)(ii) providing that the exemption available to non-resident individuals by way of interest on the non-resident (external) account shall not be available on or after the 1st day of September, 2004. Similarly exemption under Section 10(15)(iv)(fa) in respect of interest payable by a scheduled bank on deposits in foreign currency to a non-resident or to a person who is not ordinarily resident, is being withdrawn from 1st September, 2004. Over the past few years exemption to various non-residents available under the Act are being slowly withdrawn. The reason for the withdrawal of such exemption is that India loses tax and these non-residents are required to pay tax in their country of residence. With this amendment these non-residents will pay tax in India and shall be entitled to claim benefit of the same in the country of their residence on the basis of Double Taxation Avoidance Agreement. With the withdrawal of these two exemptions available to non-residents as well as to those persons who have been non-resident individuals coming back to India, there will be no encouragement to retain their deposit or money in India except on the consideration of higher return.
Scope of tax deduction on payment to contractor widened
The Finance Bill proposes to amend Section 194C(3) to provide that tax shall be required to be deducted in respect of a contract where the amount credited or paid to a contractor or sub-contractor exceeds Rs.20,000 or Rs.50,000 in the aggregate during a Financial Year. As per the existing provisions, no tax is required to be deducted in case the value of each contract does not exceed Rs.20,000. To prevent the practice of splitting the contract to less than Rs.20,000, the above amendment has been proposed and shall be effective from 1st October, 2004.
Cancellation of registration of trust and withdrawal of approval
The Finance Bill proposes to amend Section 12AA giving power to the Commissioner of Income Tax (CIT) to cancel the registration granted under Section 12AA if the CIT is satisfied that the activities of any trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution after giving a reasonable opportunity of being heard. This order passed by the CIT cancelling the registration shall be appealable to the ITAT under section 253(1)(c) though not specifically mentioned in the Bill as under this sub-section the order passed by the Commissioner under Section 12AA is an appealable order and the order under the proposed amendment shall be passed under Section 12AA(3) which forms part of Section 12AA. Similarly the national committee which grants approval under Section 35AC for carrying out eligible project or scheme is being empowered to withdraw the approval where the association or institution fails to furnish to the national committee, after the end of each financial year, a report in such form and stating further such particulars and within such time as may be prescribed after giving a reasonable opportunity of being heard. This order of the withdrawal of the approval by the national committee is not an appealable order. Both the amendments shall be effective from 1st October, 2004.
Withdrawal of exemption on payment for acquiring an aircraft on lease from a non-resident
The Finance Bill proposes to withdraw the exemption available under Section 10(15A) in respect of any payment made by an Indian company engaged in the business of operation of aircraft to acquire an aircraft or an aircraft engine on lease from a government of a foreign state or foreign enterprise (non-resident) under an agreement entered into on or after 1st day of September, 2004. Since the payment shall be chargeable to tax, the Indian company at the time of making payment of lease money shall be required to deduct tax at source.
However, provisions of sub-section (6BB) of Section 10 are being revived to provide that if tax on the above-said payment is payable by the Indian company under the terms of the agreement, the tax so paid shall not be included in computing the total income of the foreign enterprise. This benefit shall be available only on such agreements as are entered on or after the 1st day of September, 2004.
Assessing Officer empowered to refer the matter to the Valuation Officer
The Finance Bill proposes to introduce a new Section 142A with retrospective effect i.e., from 15th November, 1972 to clarify that the AO has and always had the power to make reference to the Valuation Officer. It has been provided that where an estimate of the value of any investment referred to in Section 69, or Section 69A or Section 69B is required for the purpose of making an assessment or reassessment, the AO may require the Valuation Officer to make an estimate of the same and report to the AO. The Valuation Officer on such reference shall have all the powers that he has under the Wealth Tax Act. The AO on receipt of the report and after giving the opportunity of being heard may take into account such report in making such assessment. This amendment is being made to over-rule the judgement of the Supreme Court in the case of Amiya Bala Paul vs CIT [2003] 262 ITR 407 (SC) where it has been held that the AO under the existing provisions does not have the power to refer the matter to the Valuation Officer. That is why the amendment is being made retrospectively. However, it has been clarified that the department does not want to unsettle the cases already decided. It has been provided that nothing contained in the section shall apply in respect of assessment made on or before 30th day of September, 2004 and where such assessment has become final and conclusive on or before that date except where a reassessment is required under Section 153A in the case of a search. As such, where appeals are pending at any stage the assessment may not be said to become final and conclusive and the Amina Bala Paul (supra) judgement may not be directly applicable.
Infrastructure capital company to pay Minimum Alternate Tax
Provisions of Section 115JB are proposed to be amended to restrict the benefit of not paying Minimum Alternate Tax available to infrastructure capital company under Section 10(23G) in respect of its income by way of dividends other than dividend referred to in Section 115-O, interest, or long-term capital gain of a infrastructure capital fund or a infrastructure capital company or a cooperative bank from investment made in any undertaking engaged in an infrastructure project or a housing project or a hotel or a hospital project. Now while computing book profit such income shall not be excluded.

D. INCENTIVES

Exemption to new hospital in a rural area
The Finance Bill proposes to allow the benefit of deduction under Section 80-IB to an undertaking operating and maintaining a hospital in a rural area. The exemption shall be 100 per cent of such profit for a period of five Asstt. Years beginning from the year in which the undertaking begins to provide the medical services. Only that undertaking shall be eligible for deduction, if such hospital is owned by the assessee and is constructed during the period between 1st October, 2004 and 31st March, 2008 in accordance with the local regulations in force and has at least 100 beds for patients. A hospital shall be deemed to have been constructed on the day on which a completion certificate is issued by the concerned local authority. For claiming deduction the assessee shall be required to file an audit report in the prescribed form. The objective of introducing this amendment is stated to be the penetration of medical services in the rural areas. But it is a moot question how a hospital with 100 beds will be economically viable in a rural area.
Tax holiday for agro-processing industry
The Finance Bill proposes to extend the benefit of Section 80-IB to undertakings engaged in the business of processing, preserving and packaging of fruits and vegetables. The deduction will be available under sub-section (11A) of Section 80-IB which presently provides exemption in respect of profit derived from the integrated business of handling storage and transportation of food grains. Exemption shall be 100 per cent of the profit for first five years and 25 per cent of the profit for the next five years (30 per cent in the case of a company). All the conditions provided under Section 80-IB shall need to be complied with for availing the exemption.
Extension of time limit for benefit under Section 80-IB for the State of Jammu and Kashmir
The benefit of the provisions of Section 80-IB(4) in respect of industrial undertakings engaged in the manufacture or production or operation of cold storage plant which were available to units set up up to 31st March, 2004 in the industrially backward states, have been extended for a period of one more year for the State of Jammu and Kashmir. As such, industrial undertakings in the State of Jammu and Kashmir set up till 31st March, 2005 shall be eligible for claiming the benefit under Section 80-IB(4). However, a negative list has been provided in the 13th Schedule to specify the commodities which should not be manufactured by such undertakings i.e., cigarettes, cigars, alcoholic drinks and beverages etc.
Time limit extended for availing benefit for housing project under Section 80-IB
The present sub-section (10) of Section 80-IB which provides 100 per cent exemption to an undertaking developing and building house project if the housing project is approved by a local authority before 31st March, 2005. The said sub-section is proposed to be substituted to widen the scope. The time limit for obtaining approval from the local authority is being extended up to 31st March, 2007. However, time limit for completion of the housing project within four years from the end of the Financial Year in which the project is approved by the local authority is being introduced. The date of the approval shall be the date on which the building plan is approved and the date of the completion shall be the date on which the completion certificate is issued by the local authority. A further condition has been provided that the built-up area of the shops and other commercial establishments included in the housing project shall not exceed 5 per cent of the aggregate built-up area of the housing project or 2000 sq. ft. whichever is less. Further to encourage the re-development of slum dwelling the condition of minimum plot size of one acre is being relaxed in case the project is carried out in accordance with the scheme framed by the government for reconstruction or redevelopment of existing building which are notified by the board in this behalf. The 'built-up area' is also being defined to mean the inner measurement of the residential unit at the floor level including the projections and the balconies as increased by the thickness of walls but not including the common area shared with other residential units.
Time limit for 80-IB benefit extended for companies carrying on scientific research
The time limit for getting approval from the prescribed authority for availing the benefit under Section 80-IB(8A) to the company carrying on scientific research and development has been extended by one year till 31st March, 2005. Similarly the time limit for providing telecommunication services has been extended by one more year, i.e., till 31st March, 2005.
Benefit extended to renovation and modernization of transmission and distribution lines in power sector
Benefit of tax holiday under Section 80-IA is being extended to an undertaking which undertakes substantial renovation and modernization of existing transmission or distribution line in the power sector. A 100 per cent deduction shall be allowed for ten Asstt. Years starting from the year in which such renovation and modernization takes place. It has been further provided that the restriction of transfer of old plant and machinery and splitting of old business shall not apply in the case of State Electricity Boards.
Additional depreciation on increase of installed capacity
The Finance Bill proposes to amend the provision of Section 32(1) allowing additional depreciation of 15 per cent on a new plant and machinery acquired and installed on or after 1st April, 2002 even if there is an increase in the installed capacity of 10 per cent in the case of an existing undertaking as against the existing requirement of increase in installed capacity of 25 per cent. Accordingly the limit of 25 per cent increase in the installed capacity for claiming additional depreciation shall stand modified to 10 per cent.

E. TAX DEDUCTION AND TAX COLLECTION AT SOURCE

Tax to be deducted on payment of compensation
The scope of tax deduction at source is being widened by making the provisions applicable of deducting tax at source at the rate of 10 per cent on the amount of compensation or enhanced compensation on account of compulsory acquisition of any immovable property other than the agriculture land. However, no deduction shall be made where the amount of such compensation during the Financial Year does not exceed Rs.1 lac. This amendment is being proposed by inserting a new Section 194LA and shall be effective from 1st October, 2004.
Tax to be collected on lease of parking lot/toll plaza/mines
The scope of collection of tax at source is also being widened to provide for collection of tax by every person who grants a lease or a licence or enters into a contract or otherwise transfers any right or interest in any parking lot or toll plaza or a mine or quarry to another person other than a public sector company for the use of such parking lot or toll plaza or mine or quarry for the purpose of business. The tax shall be collected at the rate of 21 per cent and shall be effective from 1st October, 2004.
Tax Deduction and Tax Collection Account Number to be common
It is proposed to have a common number for tax deduction at source and tax collection at source. Accordingly the requirement of obtaining a separate tax collection account number is being withdrawn and the penalty for not obtaining the same is being deleted. This provision shall be effective from 1st October, 2004.
Filing of TDS return and TCS return in computer media made mandatory for companies as well as government deductors.
The Finance Bill proposes that with effect from 1st April, 2005, TDS and TCS return shall be filed in computer media by the companies and government deductors. As per the present position only companies are mandatorily required to file TDS return on computer media. With the proposed amendment the companies as well as government deductors shall now be required to file both the TDS as well as TCS returns in computer media only.
Paper TDS returns can now be filed with any authority or any agency
The Finance Bill proposes that the paper TDS return required to be filed under Section 206(1) can now be filed with any authority or agency specified by rules made by the CBDT. This amendment has been made to implement the scheme of filing TDS return with NSDL or UTI instead with the Assessing Officer so that the data of the paper return can be digitalized. This amendment shall be effective from 1st October, 2004.
TCS return to be filed annually
The present provision of filing TDS returns half yearly is being amended to provide for filing of TDS returns annually. This amendment shall also be applicable from 1st October, 2004.
No requirement to issue TDS and TCS certificates
The Finance Bill proposes to make a far reaching change in the procedure for the issue of TDS and TCS certificates. Provisions of Section 203 are proposed to be amended to provide that there shall be no requirement for the issue of TDS certificate by the deductor on or after 1st April 2005. Similarly provisions of Section 199 are being amended to provide that credit of the tax deducted shall be given to the deductee without the production of the TDS certificate.
Deductor to submit quarterly statement
An additional obligation is being put on the deductor to prepare and submit quarterly statement, in respect of the tax deducted and paid, to the prescribed income tax authority or person authorized by such authority, setting forth such particulars and within such time as may be prescribed. Failure to file such statement within the time shall be liable to penalty under Section 272A(2) at the rate of Rs.100 for every day during which the default continues.
Prescribed authority to issue annual statement to deductee
On the basis of these statements submitted by the deductor, the prescribed income tax authority shall issue a yearly statement to the person from whose income the tax has been deducted specifying the amount of tax deducted or paid or such other particulars as may be prescribed as per the above scheme. This will be an intimation to the deductee of the amount deducted and paid by various deductors on his behalf
The deductor shall now be required to file one annual return and four quarterly statements, but will not be required to issue TDS certificate and on the basis of the quarterly statement, annual statement shall be issued to the deductee by the tax authority on the basis of which the credit shall be allowed to the deductee without enclosing any TDS certificate with the return of income. Consequently the provisions of Section 139(9) are proposed to be amended to not to treat the return as defective where TDS certificates are not enclosed. To implement the above scheme, all assesses including non-residents shall now be required to intimate the Permanent Account Number to the person deducting or collecting tax so that the credit for the TDS or TCS can be given. The above amendment shall be applicable from 1st April, 2005.

F. OTHER AMENDMENTS

Obligation to furnish annual information return extended to government agencies and other authorities
The obligation to file the annual information return introduced by the Finance Act, 2003 in respect of any financial transaction entered into by an assessee with any person as may be prescribed is proposed to be extended to the government agencies and other authorities. Last year the obligation was placed on the assessee only. Since government agencies and other authorities do not fall in the definition of assessee, this amendment is being proposed by this Finance Bill. The other agencies and authorities shall include local authority, public body, association, registrar, sub-registrar, transport authority. Post Master General, Collector, recognized stock exchange, depository, Reserve Bank of India etc. The annual information return shall be required in respect of transaction registered or recorded or entered into on or after 1st April,, 2004. The annual information return shall be furnished within the prescribed time in such form and manner including in magnetic media as may be prescribed. The financial transaction include transaction for those purchase, sale or exchange of goods or property or right or interest in the property or transaction for rendering services or a transaction under a works contract or a transaction of an investment or expenditure or taking or accepting of any loan or deposit, where the value or aggregate value of such transaction during the previous year exceeds Rs.50,000 or such higher value as may be prescribed. The CBDT has been authorized to provide different values for different specified transactions. On failure to furnish to return, the penalty of Rs.100 per day shall be leviable during which the failure continues under Section 271FA
Falsification of books of accounts to be an offence
The Finance Bill proposes to introduce a very serious provision to provide punishment with rigorous imprisonment for falsification of the books of accounts or documents etc. The provisions of this section shall be applicable to a person who makes or causes to be made any entry or statement which is false and which such person either knows to be false or does not believe to be true in any books of accounts or other documents relevant to or useful in any proceeding against such person or the other person. By way of explanation it has been further provided that it shall be sufficient under this section for levying a charge to allege a general intent to enable the other person to evade any tax penalty or interest without specifying ,any particular instance. The term of the punishment shall not be less than three months but may extend to three years with fine also. The scope of this provision is very wide and encompasses any person who willfully and with the intent to enable any other person make or cause to be made any entry. Not only that, the knowledge that the entry is false or belief that it is not true shall also make the person liable under this provision. The explanation further widens the implication by diluting the onus on the Revenue. The Revenue is just to allege a general intent without proving the allegation specifically.
Offences by a company
A new sub-section 3 is being inserted in Section 278B to provide that if an offence under the Act has been committed by a company, the company shall be punished with fine and the person who was in charge of and was responsible for the conduct of the business of the company, or any director, manager, secretary or other officer of the company shall be liable for punishment of imprisonment and fine wherever so provided. This amendment is made to extend the scope of the director, manager, secretary etc. Similar amendment has been proposed in the Wealth Tax Act also. This amendment shall be effective from 1st October, 2004.
Introduction of tonnage tax for shipping industry
The Finance Bill proposes a new scheme for levying tax on Indian shipping industry for making it more competitive in line with the other nations who have introduced tonnage based taxation. Under the scheme of presumptive taxation, the notional income arising from the operation of the ship is determined based on the tonnage of the ship. The notional income is taxed at the normal corporate rate for the year and the tax shall be payable even if there is a loss in any year. A company may opt for the scheme and once such option is exercised there is a lock-in period of ten years. If a company opts out in between it is debarred re-entry for ten years. At the same time a company can be expelled in certain circumstances. A company owning at least one ship with a minimum tonnage of 15 tonnes and having a valid certificate can join the scheme. The option has to be exercised within three months at any time between 1st October and 31st December 2004 by making an application to the concerned Joint Commissioner who shall pass an appropriate order. Ships like fishing vessel, pleasure crafts are excluded. The business of qualified ships shall be considered as separate business and separate accounts are to be maintained and the same are to be audited also. The manner of computation of daily tonnage income has been provided for by multiplication by the number of days the ship's operation which gives the annual tonnage income of the ship. A company opting for the scheme cannot set off loss nor any depreciation and the loss and depreciation are deemed to have been allowed. The profit from the business of operating qualified ship is not to be taken into consideration for the purpose of Minimum Alternate Tax. The company is required to create a reserve of at least 20 per cent of its book profit to be utilized for the purpose of acquisition of any ships and also to company with the minimum training requirements. Maintenance of paper accounts and audit of the same is mandatory. The amendment is effective from 1st April, 2005.
Automobile industry to get 150 per cent deduction for R & D expenditure
The Finance Minister has announced in the budget speech that the automobile industry will be notified as an industry entitled to 150 per cent deduction of expenditure on in-house research and development facilities.
Recovery of arrears
The Finance Minister in the budget speech has addressed his concern to the large recoverable areas both in the direct and indirect taxes. He has proposed to come out with a special multi-prong drive to recover these arrears. The details of such scheme is to be announced later on. It appears that there will be some such scheme which may include certain concession in case arrears of taxes are paid by the assesses.

Indian Budget highlights 2007 - 2008

Website Maintained & Promoted by CorpMedia Inc.