News Bulletin >> July 2004

BUDGET 2004 - SALIENT FEATURES OF DIRECT TAX PROPOSALS

KK Chythanya
FCA, Bangalore

A. Corporate Taxation:

• Tax rates
- Domestic companies continue to pay tax at 35%
- Surcharge remains at 2.5%
- Cess of 2% is extra burden - sec 2(11) of Finance Act 2004
- Cess is on IT+SC
- Effective tax rate goes up to 36.5925%
- Foreign companies to pay tax at 40%, surcharge of 2.5% and cess of 2%
- Effective incremental rate for foreign company is 41.82 %
- MAT - effective rate raises to 7.84%
• Corporate tax on dividend remains - with SC and cess it works out to 13.07%
• Tax on dividend distributed by MF to corporate will be 20%
• Dividend remains tax free in hands of receiver

B. Industrywise impact:

• Corporate general
- Cess of 2%
- Condition for grant of additional depreciation of 15% - relaxation of increase in installed capacity from 25% to 10%

• Shipping
- Deduction for special reserve u/s 33AC scrapped wef 01.04.2005

• Power
- Investment in substantial renovation and modernisation of existing transmission or distribution lines qualifies for tax lllllholiday if made during 1.4.2004 - 31.3.2006
- Substantial renovation/ modernisation means increase in plant & machinery in transmission/distribution lines atleast lllllby 50% as compared to book value of same as on 1.4.2004
- Plant & machinery previously used by a State Electricity Board is not considered second hand for the purpose of lllllinvestment criterion
- Disqualification associated with splitting or reconstruction does not apply to splitting or reconstruction of SEBs

• Telecom
- Telecom industry is made subject to condition of new plant & machinery, non splitting up/reconstruction of existing lllllbusiness and similar conditions [sec 80IA(3)]
- Sunset clause extended from 31.03.03 to 31.03.05

• Capital markets
- Dividend tax remains nil for open ended equity oriented funds
- Dividend tax hiked from 12.81% to 20.91% in respect of dividend paid by MF to holders except Ind/HUF
- No tax on LTCG arising from sale of securities through a Recognised Stock Exchange on or after coming into force lllllof Securities Transactions Tax
- Lower tax on STCG from securities arising from a sale in Recognised Stock Exchange at 10% plus SC plus Cess [all llllltax payers including FIIs]
- Benefit of no tax slab to apply to above STCG to Individual/HUF
- New transaction tax
i) Applies to all security transactions in Recognised Stock Exchange
ii) Applies to both long term and short term securities
iii) Applies to even transactions in units of MF
iv) Applies to trading in derivatives like futures and options
v) Option - value considers option premium and strike price
vi) Applicable rate is 0.15% on transaction value
vii) Recognised Stock Exchange made liable for collection, remittance and assessment
viii) Provisions of Income tax Act are borrowed in the matter of powers, procedure and appeal
ix) Hits FIIs also who may not get tax credit in their countries for transaction tax
- Dividend stripping : Units to be held for minimum 9 months after record date for availing recognition of loss to the lllllextent of dividend stripped
- Bonus stripping :
i) Applies only to units allotted as bonus
ii) Unitholder sells original units (wholly or partly) while retaining bonus units within 9 months after record date
iii) Loss arising from such transfer to be ignored
iv) But such loss shall be taken as cost of acquisition for computing capital gains on sale of bonus units

• Automobile
- R&D weighted deduction of 150% (through notification)

• Housing [sec 80IB(10)]
- Sunset clause extended from 31.03.2005 to 31.03.2007
- Project to complete within 4 years from end of financial year in which approval was first granted
- Minimum one acre condition not to apply to reconstruction scheme of Central/State Governments and notified by lllllCBDT
- Cap on built up area of commercial establishment : lesser of 5% of aggregate built up area or 2000 sft

• Hospital [Sec 80IB(11B)]
- Rural hospital with minimum 100 beds
- Constructed during 1.10.04 to 31.3.2008
- 100% deduction during first 5 years

• Sundries
- R&D companies : sunset clause extended from 31.03.2004 to 31.03.2005 [Sec 80IA(4)]
- Food industry : Business of processing, preservation and packaging of fruits and vegetables to get tax holiday [Sec lllll80IB(11A)]

C. Non-Resident Taxation
• Interest on NRE deposit no longer exempt - wef 01.09.2004
• Interest on FCNR/RFC in the hands of NR and NOR no longer exempt - wef 01.09.2004
• Aircraft lease received by a non resident from an Indian company engaged in business of operation of aircraft - tax lllllpaid by Indian company is exempt if agreement is entered into after 31.08.2004 and approved by Central Govt. lllllBlanket exemption goes by withdrawal of sec 10(15A)
• Interest income of European Investment Bank - exempt if loan is granted under agreement with CentralGovernment.

D. Personal Taxation
• Basic tax rates to remain unchanged
• Surcharge remains at 10% for income above Rs.8.5 L
• No surcharge where total income doesn't exceed Rs.8.5L
• Cess on everybody on tax plus surcharge
• Even a person who does not pay surcharge has to pay cess
• Effective highest rate goes to 33.66% • New rebate under section 88D for Individual/HUF with total income not lllllexceeding Rs.1 Lakh.
• Certain gifts deemed as income
a) Applies only to Individual and HUF
b) Applies for receipt in cash or cheque or draft or any other mode
c) Includes even credit also
d) Exempt categories - Sum for consideration for goods or services
- By a relative out of natural love and affection
- By employer to employee or his dependents
- Sums paid in contemplation of death
- Sums representing exempt income
- Sums from transfers exempt from capital gains tax under section 47
- Marriage gifts received by an individual (from any donor) with a cap of Rs.1 L
- Non marriage gifts not exceeding in the aggregate Rs.25000 in a year
e) Relative includes in-laws and direct uncles and half ones
f) This will be taxed as income from other sources
• New pension scheme for central govt employee under sec 80CCD
- Deduction of own contribution not exceeding 10% of salary
- Deduction of govt contribution not exceeding 10% of salary
- Excess contribution by govt over 10% is deemed to be salary income and taxed
- Lumpsum/part payment received on closure or opting out to be taxed in the year of receipt
- Pension from annuity plan bought out on closure or opting out to be taxed in the year of receipt
• No tax on capital gains from compulsory acquisition of agri land in the hands of individual/HUF
- Where land was used for agri purpose within last two years
- Compensation/enhancement is received on or after 1.4.2004
• Deduction under section 80DD and section 80U extended to cover autism, cerebral palsy and multiple disability
• Rebate under sec 88 extended to housing loan repaid to employer being Central/State authority or board or corporation or body
• New rebate under sec 88D introduced
- Applicable only to resident individual
- Whose total income does not exceed Rs.1 L
- Entire tax on total income is exempt
- This rebate can be claimed in respect of special income like LTCG (non security) or LTCG (security) or STCG (security)

E. Procedures:
• Returns and assessments
- Return need not accompany TDS/TCS certificate
- Reference to valuation officer in the course of assessment/reassessment facilitated [SC decision in Amia Bala case lllllundone]
- Assessing officer "may" adopt the value fixed by valuation officer
- Time limit for completing assessment extended by time taken for AAR ruling

F. Tax Deduction & Collection:
• Load surcharge and cess on TDS
• Domestic withholding - failure to deduct and pay would mean disallowance of related expenditure (interest, lllllcommission, prof/tech fee, contract payments)
• Such deduction may however be claimed in subsequent year of payment
• This does not apply to domestic salaries and rent
• TDS on contract payments - threshold modified so as to discard `per contract' theory
- Contract consideration is no longer the criterion
- Where at a time payment/credit does not exceed Rs.20000, no TDS is required
- However, where aggregate payments in a financial year exceeds Rs.50000, TDS is required to be made
• TDS at 10% on payment of compensation on acquisition of immovable property reintroduced - Sec 194LA
• TDS certificate dispensed with [sec 203(3)]
• Credit available without producing certificate [sec 199(3)]
• Amount deducted and specified in the Statement referred to in sec 203AA is the basis of credit for TDS
• Quarterly statements are to be filed [sec 200(3)]
• Form and time limit for filing Quarterly statement _ yet to be prescribed
• Penalty for non compliance _ Rs.100 per day [sec 272A(2)(k)]
• 203AA statement is issued by Dept/agency
• It is an annual statement to be issued after end of financial year
• This substitutes TDS certificate
• Form and particulars and time limit for issue are yet to be prescribed
• Unified `tax deduction and collection account number' introduced (TDCAN) - sec 203A
• No need to apply for separate TCN No. - sec 206CA scrapped
• Existing TDS or TCS No. to be used as TDCAN
• Need to apply for TDCAN only if he has
- Neither TAN
- Nor TCN
• Efiling made mandatory for Government deductors [sec 206(2)]
• Quoting of PAN of deductee/collectee is a must in the return/statement
• Deductee/collectee is liable for penalty of §Rs.10000 for failure to intimate PAN - sec 272B

G. Tax Collection:
• TCS introduced for
- Parking lot
- Toll plaza
- Mining and quarrying
• Licensor or lessor to collect tax from licensee or lessee
• Public sector company being a licensee or lessee is exempt
• Tax collector to file quarterly statements
• TCS certificate dispensed with
• Credit available without furnishing certificate
• Basis of credit - annual statement issued by dept/agency
• Annual return introduced in place of half yearly return
• Efiling is made mandatory for company and Government

H. Sundries:
• Venture capital undertaking - definition linked to SEBI (VCF) Rules, 1996 [sec 10(23FB)]
• Commissioner empowered to cancel registration of a charitable trust [sec 12AA(3)]
• Inter head set off - Business loss is not available for set off against salary income [sec 71(2A)]
• J&K - Backward State tag : Sunset extended from 31.03.2004 to 31.03.2005 [Sec 80IB(4) 1^st & 4^th Proviso] and no llllldeduction in case of tobacco products/liquor/aerated softdrinks
• Non resident investors in GDRs/Non resident sportsperson and institutions/Non resident Indians are also required to lllllapply for PAN if any tax is deducted from income paid to them [omission of First Proviso to sec 139A(5A)]
• Any person making or causing to be made any entry or statement in any books of account or other relevant document lllllwith an intent to enable evasion of tax, interest or penalty is liable for prosecution and rigorous imprisonment - sec lllll277A
• Offence by company - Officers responsible may be prosecuted - sec 278B(3)
• Filing of annual information return - sec 285BA
- Every assessee/Govt officer/local authority/sub registrar/post master/collector under LA Act/RSE/RBI lllllofficer/depository is required to file
- Obligation if above person is responsible for registering or maintaining a record of any specified financial transaction
- Obligation on assessee if enters into any specified financial transaction
• Filing of annual information return - sec 285BA
- Covers transaction
a) of purchase or sale or exchange of goods or right or interest in a property
b) for rendering any prescribed service
c) under a works contract
d) by way of investment made or expenditure incurred
e) Taking or accepting any loan or deposit
• Filing of annual information return - sec 285BA
- Not applicable if aggregate value of transaction or transactions exceed Rs.50 K a year
- Higher ceiling may be prescribed
- Defective return may be notified for curing
- Penalty for non compliance - Rs.100 per day