The Finance Bill, 2002 has been presented in Parliament. A lot of
debate is expected to take place before the bill becomes law. Some of the proposals
mentioned in the bill are fairly controversial and open to more than one point of view.
This article aims to present a bird eye’s view of the various direct tax proposals
proposed by the Finance Minister. It is based on the speech of the Finance Minister in the
Parliament while presenting the budget. Obviously, on indepth study of the bill, more
intricacies will be found in the bill and debated. Given below are the proposed changes in
direct tax laws :-
Rate of Income Tax :
Personal and corporate income tax rates have not been changed
and are proposed to be the same as F.Y. 2001-2002.
Rate of Surcharge :
Surcharge on income tax is proposed to be increased from 2 % to
5 % for all cases except individuals and Hindu Undivided Families having total income not
more than Rs 60,000.
Rate for Foreign Companies :
The rate of income tax for foreign companies is
proposed to be reduced from 48 % to 40 %
Additional Depreciation :
In order to provide incentives for fresh investments in
the industrial sector, additional depreciation @ 15% on new plant and machinery acquired
on or after 1st April, 2002 for setting up a new industrial unit, or for expanding the
installed capacity of existing units by at least 25% is proposed.
Section 54 EC :
Benefit u/s 54EC in respect of long term capital gains is proposed
to be given on investment in bonds issued by SIBDI and National Housing Bank.
Exemption to Credit Guarantee Fund Trust for Small Industries :
Income of the Credit
Guarantee Fund Trust for Small Industries is proposed to be exempted from income tax.
Interest for house property :
Deduction for interest payable on housing loans for
self-occupied houses is proposed to be allowed even where such houses are acquired or
constructed after 31st March 2003, as long as the acquisition or construction is completed
within three years from the end of the financial year in which the loan was taken.
Shipping Industry :
Shipping companies are entitled to a deduction of the entire
profits if the amount deducted was kept in a reserve for purchase of new ships. However,
the aggregate of the amounts that can be transferred to such reserve is limited to twice
the amount of the paid up share capital of the company. The Finance Minister proposes to
extend it to cover share premium reserve and general reserve also. This reserve will not
be considered while computing the book profits and shipping companies would thus be out of
the purview of minimum alternate tax (MAT).
Deduction for NPA :
Banks are allowed to deduct upto 5% of their total income
against provisions made by them for bad and doubtful debts. The Finance Minister proposes
to increase this allowance to 7.5% of the total income. Banks also have an option to
deduct upto 5% of their NPAs falling in the category of loss or doubtful assets as on the
last day of the accounting year. The Finance Minister proposes to enhance this optional
deduction to 10%, and also allow a similar option of deduction upto 10% of loss or
doubtful assets to public financial institutions.
Carry Forward of losses for telecom companies on merger :
The Finance Minister
proposes to extend the benefit of carry forward and set off of past losses in cases of
mergers of companies ( currently available only to companies owning industrial
undertakings ) to companies providing telecom services and eligible for deduction under
section 80-IA. The Finance Minister also proposes to constitute an expert group to examine
the extension of this benefit to other companies in the services sector, including the
financial services sector.
Tourism Sector :
The Finance Minister has proposed the following changes for fiscal
relief to the tourism sector :-
Expenditure Tax on hotels will, henceforth, apply only to room charges, and will be
payable only where such charges are Rs 3,000 or more per day, as against the existing
threshold of Rs 2000 per day.
The deduction available under section 80HHD of the Income-tax Act in respect of foreign
exchange earnings of hotels or tour operators will be enhanced to bring it in line with
the deduction available to exporters under section 80 HHC.
A deduction of 50% of the profits earned by units setting up and operating large
convention centers will be allowed for 5 years under section 80-IB.
Entertainment Industry : The Finance Minister proposes to allow, for the next
five years, a deduction of 50% of the profits earned by units constructing and operating
multiplex theatres in non-metropolitan towns.
Environment : A deduction u/s 35 AC is proposed in respect of amounts paid to a
company or institution approved by the National Committee for Social and Economic Welfare,
for carrying out projects of softwood plantation on degraded non-forest land. A deduction
under this section will also be available in respect of payments towards conservation of
natural resources and afforestation.
Charitable and Religious Trusts : Currently, charitable and religious trusts as
well as certain other institutions claiming exemption under section 10(23C) are required
to publish their accounts in a local newspaper, if their total receipts during a year
exceed Rs 1 crore. The Finance Minister proposes to delete this requirement. Further, it
is proposed to allow the accumulation of any part of their income only upto a maximum
period of five years. Inter-trust donations may only be made either from the corpus or
from the current year’s income.
Donation for Gujarat Earthquake : It is proposed to extend the terminal date for
utilization of donations received by certain approved charitable trusts and institutions
for Gujarat Earthquake Relief work ( that were to be applied before 31st March 2002 ) from
31st March 2002 to 31st March 2003.
Perquisites : The Finance Minister proposes that no perquisites will be assessed
for the assessment year 2002-2003 in the case of employees whose taxable salary, excluding
perquisites, is upto Rs 1,00,000. For subsequent years, it is proposed to give an option
to the employer to pay the tax on perquisites on behalf of the employees.
Relief u/s 89 for arrears of pension : The relief u/s 89 is proposed to be
extended to family pension received in arrears.
Abolition of Pre-emptive Purchase Rights of Government for Immovable Property : The
Finance Minister proposes to abolish the provisions of chapter XX-C of the Income Tax Act,
1961 relating to Pre-emptive Purchase Rights of Government for Immovable Property. This
implies Form 37 I need not be filed for acquisition of any immovable property.
Filing of Returns by bodies claiming exemption : The Finance Minister has
proposed that all approved or notified bodies or institutions, including educational and
medical institutions claiming exemption from income tax shall file returns of income every
year so as to enable a periodical verification of whether the prescribed conditions, which
primarily relate to application of the income, are being fulfilled and also to enable the
prescribed authority to withdraw the approval or notification of such entities if they are
found to have violated any such conditions.
Withdrawal of Income Tax Exemption to NDDB, Prasar Bharti and OIDB : The Finance
Minister proposes to withdraw the income tax exemption granted to National Dairy
Development Board, Prasar Bharti and the Oil Industry Development Board.
Depreciation Rates : The Finance Minister proposes to reduce the various rates of
depreciation for different types of assets to fewer rates. Accordingly, in order to
discuss the relevance and the need to continue with these rates, and whether they should
be scaled down to a maximum rate of 60%, the relevant details will be put up on the
website of the Finance Ministry. After taking into account the views expressed, a revised
schedule of depreciation rates will be notified.
Taxation of Dividend / Mutual Fund Income : Under the present system of taxation
of dividends and income from units, the company or the mutual fund pays a 10% tax, and the
income is exempt in the hands of the recipient. The Finance Minister proposes to abolish
the distribution tax of 10% on companies and mutual funds on the dividends or income
distributed by them. Such income will henceforth be taxed in the hands of the recipients
at the rates applicable to them, and will be subject to tax deduction at source at the
rate of 10%. In order to avoid a cascading effect, it is proposed that companies receiving
such income will be entitled to claim a deduction for the amount in turn distributed by
them as dividends. However, in respect of equity oriented funds of the UTI and other
mutual funds, the income received during the financial year 2002-2003 by unit holders of
such funds will be taxed only at 10% as at present.
Rebate u/s 88 : The provisions relating to rebate u/s 88 of the Income Tax Act,
1961 are proposed to be changed substantially. It is proposed that the existing rate of
rebate of 20% will be allowed only to persons having taxable income upto Rs 1,50,000.
Persons having taxable income between Rs 1,50,000 and Rs 5,00,000 will henceforth get a
rebate of only 10% of the amount invested, and no rebate will be allowed where taxable
income exceeds Rs 5,00,000. The special rebate of 30% for persons having taxable salary
income upto Rs 1,00,000 will, however, continue. It has been clarified that while the
existing limits on the qualifying amounts of investment will remain, rebate will be
allowed on investments made at any time during the year, as long as the amount invested is
less than the taxable income of the year.
VRS : Currently, tax exemption is available to certain categories of employees
receiving amounts upto Rs 5,00,000 as VRS compensation. The Finance Minister proposes to
extend this exemption to employees of certain institutions of national or State-level
importance to be notified in this behalf.
Sampark : The Finance Minister has launched a Scheme called "Sampark"
to be run by the Income Tax Department, which will enable taxpayers to obtain information
and forms through the Internet. User-friendly software will be made available by the
Department to enable taxpayers to prepare their returns of income.
Penalty for wrong quotation of PANo : The Finance Minister proposes to make a
specific provision in the Income Tax Act for imposing a penalty of Rs 10,000 in all cases
where a false PAN is quoted in documents relating to specified transactions.
Quotation of PANo : It is proposed to make quotation of PANo compulsory under
Rule 114 B of the Income Tax Rules for expenditure exceeding Rs 25,000 incurred in cash on
foreign travel, purchase of bank drafts exceeding Rs 50,000 in cash and making cash
deposits exceeding Rs 50,000 in any bank account. It is also proposed to introduce rules
to provide that any transaction specified in rule 114B which is incurred in cash must be
reported within a certain period to the Income Tax Department.
Lower deduction for 100 % Export Oriented Units and units situated in FTZs/ Software
Parks, etc : The Finance Minister proposes to restrict the 100% deduction of export
profits allowed to certain units under sections 10A and 10B of the Income Tax Act to a 90%
deduction for the assessment year 2003-2004.
