Dilip Lakhani: Serive tax base hike welcome

Finance Minister, while presenting the Finance Bill, 2007 has followed the policy of the ruling party i.e. maintaining moderate tax rate, bringing stability in the tax rates and creating a tax-friendly atmosphere.

The tax rates for all categories of assessees i.e. individuals, partnership firms and companies, have remained unchanged. Partnership firms and company having taxable income up to Rs. 1/- crore will not be liable to pay surcharge of 10%. Individuals having taxable income in excess of Rs 10 lakh are liable to pay surcharge at 10%.

The thresh hold limit of basic exemption for individuals have been raised from Rs 1,00,000 to Rs 1,10,000. In case of women assesses the thresh hold limit has been raised from Rs 1,35,000 to Rs 1,45,000. Both these categories of assesses have been given the relief of payment of tax of Rs. 1,000. In case of senior citizens, meaning a person who is of the age of 65 years or above, the threshhold limit has been raised from Rs 1,85,000 to Rs 1,95,000, and the relief from payment of tax of Rs 2,000/- have been granted.

The education cess, which was applicable to all categories of assesses irrespective of the income, has been raised from 2% to 3%.

Under Section 80D of Income Tax Act, 1961 the deduction from the total income was given up to Rs 10,000/- in respect of medical insurance premium paid to keep in force and insurance on the health of the assessee or his/her spouse or his dependant parents or dependant children. The said limit was prescribed in April, 1987. The finance minister has increased the limit to Rs 15,000 and in case of senior citizens to Rs 20,000.

In order to give relief to the corporative banks and to bring them in par with scheduled banks in the field of taxation, the provisions of Section 36(1)(viii) has been made applicable to the Corporative Banks. Under Section 36(1)(viii) 40% of the profits derived from the business of providing long term finance of the Corporative Bank will be exempt from payment of taxes. Under Section 43D of the Income tax Act, 1961 certain categories of assesses were permitted claim deductions of the provisions made for bad and doubtful loans while computing total income. This benefit was not available to Corporation Bank. The Finance Minister has extended this benefit now to the Corporative Bank. In case of mergers and acquisition certain benefits of carry forward of depreciation of business losses are available to the transferee company but this benefit was not available to a Corporative Bank. The Finance Minister has extended the benefit for carry forward of business loss and unabsorbed depreciation in case of merger/amalgamation of a Corporative Bank.

Any corporate body distributing dividend to the shareholders/unit holders are liable to pay dividend distribution tax at 12.5%. The Finance Minister has increase the levy of dividend distribution tax from 12.5% to 15%. The effective rate of dividend distribution tax will be 16.995 (15% tax plus 10% surcharge plus 3% education cess). By increasing the dividend distribution tax the Finance Minister has indirectly taxed the recipient dividend as the tax is deducted at source irrespective of the total income of the recipient of the dividend.

Any mutual fund declaring dividend in respect of the schemes launched by it (other than equity oriented fund) is liable to pay dividend distribution tax from the income distributed to the persons being individual or HUF. If the recipient of the income is person, other than individual and HUF, the dividend distribution tax was payable at 20%. The Finance Minister has increased the dividend distribution tax from the 12.5% & 20% in respect of the distribution of income by a money market mutual fund or a liquid fund. The objective of the Finance Minister is to bring on parity the investments by way of deposits in bank with the investments in money market and liquid funds. At present the investor had better opportunity to invest the short term surplus money into money market mutual fund or liquid fund as compared to the bank deposits.

Several companies who have set up their industrial undertaking in specified free trade zones and in software technology parks as well as in special economic zones are entitled to claim exemption u/s. 10A of Income Tax Act, 1961 and the profits derived by them is tax exempt from payment of income tax as well as from payment of minimum alternate tax (MAT).

Similarly, certain companies who have newly established industrial undertaking are also entitled to claim exemption u/s. 10B of Income Tax Act, 1961 and the profits derived by them is tax exempt from payment of income tax as well as from payment of minimum alternate tax (MAT). These categories of companies were not liable to pay any tax on their profits.

The Finance Minister has brought them within the net of MAT and they will be liable to pay minimum alternate tax. The major players who have claimed exemption u/s. 10A are information technology companies namely Infosys, Wipro, TCS etc. Even though the market perception was that these companies do not pay any tax because of exemption u/s. 10A & 10B but inreality these companies were paying income tax in respect of their income from industrial undertaking which were outside the scope of exemption u/s. 10A & 10B. By introduction of this amendment the author is of the view that there will not be any major implication on this software companies as these companies are already paying tax on their profits.

It is, however, clarified that each company will have to recompute its tax liability and if the company has exclusive undertaking which was eligible for deduction u/s. 10A or 10B of Income Tax Act, 1961 then the said company may have additional tax burden of 11.33% of the book profit.

Under 54EC an assessee had an option to invest the capital gains into specified securities. The Finance Minister has proposed ceiling of Rs. 50 lacs for available an exemption u/s., 54EC. Due to this proposed amendment the assessee will be entitled to invest into specified security only upto Rs. 50 lacs of the capital gains and in respect of the additional gains he will be liable to pay tax.

At present if an assessee holds any paintings, work of art, drawings, sculptures or archaeological collections then there was no capital gains on transfer of the said items. The Finance Minister has proposed to levy capital gain tax from transfer of the above items.

Inspite of several opposition the Finance Minister has not deleted the fringe benefit tax however, he has expanded the levy by including Employee Stock Option Plan as well as sweat Equity in to the net of Fringe Benefit Tax.

The Banking Cash Transaction Tax has also not been deleted however, the exemption limit for individuals and HUF is raised from 25,000 to 50,000.

The basic thresh hold limit for exemption for payment of service tax is raised from Rs. 4,00,000 to Rs. 8,00,000. This is a welcome amendment.

As regards Direct Taxes are concerned the clever advocate has smartly given a very small relief by increasing the thresh limit but has smartly collected more tax by making several amendments in the Income Tax Act, 1961.