The Finance Act, 2005
An Exhaustive Analysis of the Finance Act, 2005
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
Taxation of income from Zero Coupon Bonds: The Act provides that the income from transfer of zero coupon bonds shall be treated as income from capital gains. Zero coupon bonds have been defined in the newly inserted clause 48 to S. 2, to mean a bond:
The definition of the term transfer , in relation to capital gains, given under clause 47 of section 2 has been amended by inserting a new clause (iva) to include the maturity or redemption of a zero coupon bond. Amendment has also been carried out in the definition of “short term capital asset” to include a zero coupon bond held by the assessee for a period of not more than 12 months. Provisions of S. 112 have also been amended to provide that where the tax payable in respect of long term capital gains on zero tax bonds exceeds 10% of the amount of capital gains before giving effect to the second provisio to section 48, then such excess shall be ignored for the purpose of computing the tax payable by the assessee, thus bringing it on parity with other securities. The effect of this is that the zero tax bonds will be taxed at 10% if the assessee does not claim the benefit of indexation.
In S. 194A(3) clause (x) has been inserted w.e.f 1st June 2005 to provide that no tax shall be deducted at source from the amount paid or payable in relation to zero coupon bonds issued on or after 1st June , 2005.
Deduction to the issuer of the zero tax bonds: Section 36 has been amended by inserting clause (iiia) to provide for deduction from income from business of profession of the assessee who issues the zero tax bonds, of the pro rata amount of discount on a zero tax bond having regard to the period of life of such bond. For this purpose the ‘discount’ has been defined to mean the difference between the amount received or receivable by the infrastructure capital company or fund or the public sector company issuing the bonds, and the amount payable by such company on maturity or redemption of such bonds. The period of life of the bonds, means the period commencing from the date of issue of the bonds and ending on the date of its maturity or redemption.
Standard Deduction eliminated:
Section 16(i) of the Act has been omitted w.e.f 1st April, 2006. The effect of omission of S. 16(i) is that the assessees deriving income from salaries shall not be entitled to the Standard Deduction w.e.f Asstt Year 2006-07.
“In connection with his voluntary retirement”:
In S. 35DDA of the Act, for the words, “at the time of his voluntary retirement” the words “in connection with his voluntary retirement” have been substituted. The effect of this amendment is that w.e.f Asstt Year 2004-05, if an assessee incurs an expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance of any scheme or schemes of voluntary retirements, 1/5th of such amount shall be deducted in computing his business income, and the balance shall be deducted in the four succeeding previous years.
Under the law as it stood before the amendment, where part payments were made on voluntary retirement, only the first part was allowed to be so amortised since only payments made “at the time of voluntary retirement” were referred to in this section. Now all payments made in any year shall be independently eligible for amortisation.
Elimination of tax rebates for senior citizens and women:
S. 88C and S. 88D have been eliminated w.e.f 1st April 2006, which means that from Asstt Year 2006-07, senior citizens and women shall not be entitled to the additional rebate or Rs.20,000 and Rs. 5,000 respectively that they were entitled to earlier. This has been done since the benefit to be given to the senior citizens and the women has been built into the tax structure, by providing the higher exemption limit of Rs. 1.50 lakhs for the senior citizens and Rs. 1.25 lakhs for women.
Changes in the provision of the law relating to deduction of amount spent on higher education:
S. 80E earlier provided for a deduction of Rs. 40000 for repayment of loan taken for the purpose of pursuing higher education, including interest on such loan. The section has been amended w.e.f Asstt Year 2006-07 as under:
Exemption from TDS for truck operators:
Section 194C provides for deduction at source from payments made to contractors and sub-contractors. A proviso has been inserted to this section by the Finance Act to exempt a sub-contractor engaged in transportation activities, subject to the following conditions:
Tax treatment of derivatives:
The law relating to taxability of derivatives has been changed substantially. Earlier, S. 43(5) provided that a sale and purchase of shares which was settled otherwise than delivery was deemed to be a ‘speculative transaction’ The transactions excluded earlier were transactions in the nature of hedging, jobbing or arbitrage. By inserting a new proviso to S 43(5) the law now provides for exclusion from the definition of speculative transactions, “an eligible transaction in respect of trading in respect of derivatives referred to in clause (aa) of section 2 of the Securities Contracts ( Regulation ) Act, 1956, carried out in a recognised stock exchange”
For this purpose an eligible transaction has been defined as a transaction carried out electronically on screen based systems through a stock broker or a sub-broker or such other intermediary registered under section 12 of the SEBI Act, 1992, in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, or the SEBI Act, 1992, or the Depositories Act, 1996 and the rules, regulations or byelaws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange, which is supported by a time stamped contract note issued by such stock broker or sub broker or such other intermediary to every client indicating in the contract note the unique client ID allotted under any Act and PAN allotted under the Income Tax Act.
This amendment is effective from Asstt Year 2006-07.
Furnishing of quarterly return in respect of payment of interest without TDS:
Newly inserted section 206A casts a responsibility on the banks, co-operative societies or public companies responsible for paying to any resident an interest ( other than interest on securities) not exceeding Rs. 5,000 , to prepare and furnish quarterly returns in the form and manner as prescribed in the law, every quarter before 30th June, 30th Sept, 31st Dec and 31st March on a computer readable media.
The apparent purpose of the new provision is to keep track of the depositors who keep small deposits, sometimes of undisclosed money, to avoid falling within the limits of TDS.
The section further provides that the Central Govt may, by notification in the Official Gazette, require any person other than the one mentioned above, who is liable to a resident any income liable for TDS, to prepare a similar return.
A new clause (l) has been inserted in S. 272A(2) to provide for a penalty of Rs. 100 for every day of default on the part of the authorities to furnish such quarterly return.
The amendment is applicable from 1st June 2005.
Set off of losses of a bank in a scheme of amalgamation:
This retrospective amendment effective from Asstt Year 2005-06 provides for carry forward and set off of accumulated losses and unabsorbed depreciation of a bank against the profits of another bank in a scheme of amalgamation, by way of introduction of a new Section 72AA. Section 47 of the Act has also been amended to provide that any transfer of capital asset by a banking company to a banking institution shall not be regarded as transfer for the purpose of capital gains. Amendment has also been carried out in S 49 in this regards. The whole scheme is discussed below:
Other amendments:
Banking Cash Transaction Tax
If there is one proposal that received the sharpest criticism of the House when the Finance Minister delivered the Budget, it was the proposal to levy tax on banking cash transactions. While there is another proposal equally illogical, that of taxability of fringe benefits, the full implications of the latter took some time to sink in. The uproar in the House was a reflection of the reaction the proposal was to receive from the public.
Later during the meetings with industrialists the Finance Minister admitted that the proposed law was poorly conceived, and that they were working on an alternative methodology to track the black money. This article attempts to analyse the inconsistencies in the proposed laws.
Proposal to tax certain banking transactions are contained in Chapter VII of the Finance Bill. This chapter extends to the whole of India and shall come into force on 1st June, 2005, and shall apply to taxable banking transactions entered into on or after the commencement of this chapter.
“Taxable banking transaction” has been defined to mean:
Clause 95 provides that the amount for the purpose of the transaction of term deposit shall be the amount received on encashment of such deposit.
The proposed law provides for the taxability, after the date of commencement of this chapter, in respect of the taxable banking transactions, at the rate of 0.1% of the value of such transaction.
Sub-clause (2) of Clause 95 of the Finance Bill provides that the Banking Cash Transaction (BCT) tax shall be payable:
While the above clause provides for the liability of payment, Clause 97 casts a responsibility on every scheduled bank to collect BCT tax from every person liable to pay such tax. The tax so collected shall be payable by the bank to the credit of the Central Govt before the 15th of the month following the month of the collection. If a bank fails to so collect the tax, it will still be the responsibility of the bank to pay such tax.
Clause 98 prescribes for furnishing of the return of BCT Tax by the bank within the prescribed time after the end of the financial year, and provides that where no such return has been furnished, the Assessing Officer may serve on the bank a notice to furnish such return. A revised return may also be submitted before the assessment is made.
Clauses 99 to 112 lay down the detailed procedure for assessment, and provides for interest, penalties, rectification of mistakes, appeals, etc.
ANALYSIS
The apparent purpose of the law is to track black money. The Finance Minister stated in his budget speech that he is concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amount of cash. These cash withdrawals leave no trail, and presumably become part of the black economy.
While the Finance Minister must be congratulated for a very pragmatic and growth oriented budget, one fails to understand what prompted him to propose a very illogical BCT law. I have discussed the key issues below.
This proposed law is an example of illogical thinking and poor drafting. It certainly does not serve the purpose of tracking the cash transactions, but on the other hand, will be chaotic if implemented in the present form. It is only hoped that the provisions do not encourage people to keep money at home, or in non-scheduled banks, which would prove to be exactly contrary to the intentions of this law. Long queues at the banks, where people will withdraw less than Rs 10000 daily is also not ruled out.
Fringe Benefit Tax
Consequent upon the introduction of the fringe benefit tax, the following amendments have been made in section 2:
Clause 37 of the Finance Act 2005 has created the new law relating to taxability of fringe benefits, by inserting new sections 115W to 115WL in the Income Tax Act. Section 115W(a) defines an employer to be a company, a firm, an association of persons or a body of individuals, a local authority and every artificial juridical person, but excluding any fund or trust or institution eligible for exemption u/s 10(23C) or registered u/s 12AA . Section 115WA is the charging section which provides that there shall be levied a fringe benefit tax @ 30% on the fringe benefits levied or deemed to be levied by an employer to his employee. Clause (2) of section 115W clarifies that fringe benefit tax shall be payable by an employer even if he is not liable to pay income tax other wise. S. 115WB (1)defines the fringe benefits to mean any privilege, service, facility or amenity, directly or indirectly, provided by an employer , whether by way of reimbursement or otherwise, to his employees ( including former employee or employees); any free or concessional ticket provided by the employer for private journey of the employees or their family members; and any contribution by the employer to an approved superannuation fund of for employees.
Subsection 2 of s. 115WB provides that fringe benefit tax shall be levied even when activity is carried on, not with an intention of deriving profits or gains, and lists out the following 17 categories of expenses, and an employer shall be deemed to have been provided the fringe benefits if he incurs such expenses. The expenses specified are:
Sub-section. 3 of S. 115WB provides that for the purpose of sub section (1) the privilege, service, facility or amenity does not include perquisite in respect of which tax is paid or payable by the employee.
As per S. 115WC(1) the fringe benefit shall be the aggregate of the following:
Notes:
S. 115WD casts a duty upon every employer to furnish a return of income before the due date, which is prescribed as the same date, as prescribed U/S 139(1). The section also makes provision for issue of notice by assessing officer in case the assessee does not furnish a return of income, and also provides for the revised returns. Sections 115WE, WF, WG, and WH lays down a detailed procedure for assessment, best judgment assessment and assessment of fringe benefits escaping assessment.
S. 115WJ casts a duty on the assessee to pay an advance tax of 30% of the fringe benefit tax, quarterly, on or before the 15th of the month subsequent to the last month of the quarter, but the advance tax for the quarter ending 31st March shall be payable by the 15th of March! The assessee shall be liable to pay interest on the shortfall of the advance tax.
ANALYSIS:
Expenses on maintenance of guest house shall be taxable, though the employees of the company may or may not derive some collective benefits from the guest house maintained by the employer for his business purpose.
Provision of hospitality of every kind to any person is taxable. “Any person” need not be an employee of the company. Thus, the law presumes that even in respect of hospitality extended to the customers of a company, a benefit of personal nature seems to flow to the employees! Even in cases of hotels, 5% of all expenses incurred on provision of hospitality to its customers would be taxable as fringe benefits.
All conveyance, tour and travel expenses, expenses on running and maintenance of cars and aircrafts would be considered fringe benefits. This would be so even in cases of companies, which are in the business of providing travel services to its customers, though, the amount would be 5% in their case instead of 20%.
Fringe benefits are deemed to have been given to employees even in respect of depreciation on motor cars and aircrafts.
Individuals, HUF’s and Trusts spared:
The law is applicable to all employers, excluding an individual, an HUF and charitable trusts and institutions.. The earning of business income is not the criteria for taxability, the law clarifies that the tax would b levied on all activities whether or not such activities are carried on with the object of deriving income, profits or gains. The assessees who are not required to pay tax under the Income Tax Act since their income is exempt, and the assessees who do not have a taxable income, or have a loss during a year shall also be liable to pay the fringe benefit tax. While local authorities are also included in the definition, Governments have been excluded.
Contradicts with the Sections pertaining to Presumptive Taxation:
Section 44AD, AE, and AF provides for presumptive taxation of certain assessees, viz., civil contractors, transporters, and retail traders. In the cases of these three categories of assessees, income is presumed at a fixed rate, and the provisions of S. 44AA relating to the maintenance of books of accounts do not apply to such assessees, which means the assessee declaring his income under the Presumptive Taxation method, is not required to maintain books of accounts. Fringe benefit tax presumes maintenance of books of accounts, which contradicts with the wordings of these three sections of presumptive taxation.
An Act within the Act:
The fringe benefit tax is a self-contained law. Chapter XII-H, with Sections from 115W to 115WL, contain the definition section, the charging section, the procedure for filing of return, assessment, and payment of tax, interest etc. In effect, this is the creation of a whole new law, for taxing expenditure. The ostensible purpose of the law is to “adopt a two pronged approach to the taxation of fringe benefits under the Income-Tax Act. Perquisites which can be directly attributable to the employees will continue to b taxed in their hands in accordance with the existing provisions of section 17(2) of the Income-Tax Act and subject to the method of valuation outlined in rule 3 of the Income-Tax Rules. In cases, where attribution of the personal benefit poses problem, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been to the employees” ( Memorandum to the Bill).
No threshold limit, covers all and sundry:
The proposed law has not specified any threshold limit, and it covers all employers( except individuals, HUF’s and Trusts) irrespective of the number of employees. Since it is a deeming provision, even in a situation where there are no employees, if the amount is spent on the specified heads, the tax would be attracted.
Tax Treatment of Specified Savings
The Act has modified the law relating to taxability of certain specified savings completely, by deleting the existing section 88, and replacing it with S.80C. Changes at the point of accrual of income are also made by deleting S.80L. Consequential amendments have also been made in Ss.10, 54EC, 54ED, 80CCC, 80CCD, 295, and a new section 80CCE has been inserted.
The new S.80C:
The new Section provides a deduction not exceeding Rs. One lakh to an individual and an HUF, in respect of the following payments:
Where an assessee terminates his life insurance policy within 2 years ( clause (i) ), or terminates his participation to unit-linked insurance plan within 5 years( clause (x) ), or transfers his house within 5 years of obtaining possession ( clause (xviii) ) , then no deduction shall be allowed under the relevant clauses, and the deduction so allowed in the preceding years shall be deemed to be the income of the previous year. Similarly when the equity shares or debentures on which the deduction has been allowed under this section are sold within a period of three years from the date of acquisition, the amount of deduction allowed earlier shall be deemed to be the income of the year of sale.
Ss. (7) clarifies that for the purpose of this section, investments referred to in S. 88(2) shall be eligible for deduction in the manner specified in this section.
A Section 80CCE is inserted to clarify that the aggregate amount of deduction under sections 80C, 80CCC, and 80CCD shall not exceed Rs. One lakh.
Section 80L of the Act stands omitted.
Higher deduction:
Section 88 provided for rebate from tax liability as under:
Sectoral caps removed:
The earlier law provided for maximum qualifying amount in respect of many of the investments. Thus, it provided for a limit of Rs. 70,000 in respect of specified savings, which also included repayment of housing loans ( with a limit of Rs. 20,000) and tuition fees ( with a limit of Rs. 12,000 per child, with a maximum of 2 children) , and an additional limit of Rs. 30,000 in respect of infrastructure shares, debentures and bonds. The amendment does away with all internal limits, and provides that all specified investment shall be covered irrespective of the amount of each investment. For example, the assessee shall now have an option of utilising the full limit by making a payment of Rs. 1,00,000 towards PPF. This means a considerable flexibility for the taxpayers, and a great deal of simplicity in assimilating the provision. The only sectoral limit that now remains is in respect of the education expenditure being restricted to any of the two children.
Can we implement the EET system? :
The Memorandum to the Bill clarifies that ‘the existing provisions of Income Tax Act do not accord a homogeneous to the taxation of financial savings’. ‘There is a considerable variation in the taxation of the contributions made to savings schemes , the tax levied on the accumulation, and the tax treatment at the final stage of withdrawal.’ The Memorandum further explains that the desire of the Govt. is to remove this distortion and tax the income on EET basis. Under this scheme, the contribution to the specified savings is exempt from tax ( E), the accumulation is also exempt from tax(E), but the withdrawals from the savings are taxed(T)
The Memorandum confesses that ‘shift from the existing EEE method to EET method is likely to impose transitional administrative problems’. ‘It is therefore proposed to set up a committee of experts to work out the roadmap of moving towards the EET’. The proposed amendments to the law seem to be the first step in moving towards the EET. The deletion of S.80L, which had partially exempted the accrual, is another step in this direction. But whether an absolute shift to EET could be possible especially in respect of investments committed in the past is a difficult question to answer.
Some of the savings are made with a longer time horizon, and under the existing laws, they enjoy exemption from taxes on withdrawal. For example, S. 10(10D) exempts from tax all sums received from LIC. If an attempt is made to put this sum to taxable, it would amount to taxing the amount which, was spent by the assessee when the law provided for exemption on withdrawals. It is not possible to apportion the amount between the amount, which was paid when the EEE scheme was prevalent, and the amount paid during the existence of EET regime. Any attempt to put the old investment to tax would mean a breach of promise on the part of the Govt.
If a scheme like EET is to be implemented within the framework of the existing laws, the law would be required to be amended to provide that the specified savings made after the specified dates, would fall under the tax net. Payments made in respect of policies contracted earlier would continue to be under the EEE scheme. Even when implemented on this pattern, it would entail a detailed record keeping by the assessees, lest it results in a mix-up causing confusion. This is not easy to implement. Until then the taxpayer can have his cake and eat it too.
Old wine in old bottle:
This method of taxation of specified savings is not new. The savings were taxed till 1990, under the same S.80C which was omitted by the Finance Act, 1990. The apparent reason which seems to have prompted the shift to this method is, ‘ a large number of countries have adopted this method and many countries are moving towards it’. However , it seems the implementation issues may make the shift to EET difficult, which may mean a bonanza for the taxpayer: he would continue to get higher deduction, with no tax being put on withdrawal.
“Out of his income chargeable to tax”:
The Finance Bill had proposed that the deduction u/s 80C shall be allowable only if the amount deposited was ‘out of his income chargeale to tax’ . On second thought the lawmakers decided to delete these words, as it could have led to frivolous litigations. The Act does not require the amount invested to be out of income chargeable to tax.
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
Taxation of income from Zero Coupon Bonds: The Act provides that the income from transfer of zero coupon bonds shall be treated as income from capital gains. Zero coupon bonds have been defined in the newly inserted clause 48 to S. 2, to mean a bond:
- issued by any infrastructure capital company or infrastructure capital fund or public sector company on or after the 1st day of June, 2005;
- in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or public sector company; and
- which the Central Govt may by notification in the Official Gazette specify in this behalf.
The definition of the term transfer , in relation to capital gains, given under clause 47 of section 2 has been amended by inserting a new clause (iva) to include the maturity or redemption of a zero coupon bond. Amendment has also been carried out in the definition of “short term capital asset” to include a zero coupon bond held by the assessee for a period of not more than 12 months. Provisions of S. 112 have also been amended to provide that where the tax payable in respect of long term capital gains on zero tax bonds exceeds 10% of the amount of capital gains before giving effect to the second provisio to section 48, then such excess shall be ignored for the purpose of computing the tax payable by the assessee, thus bringing it on parity with other securities. The effect of this is that the zero tax bonds will be taxed at 10% if the assessee does not claim the benefit of indexation.
In S. 194A(3) clause (x) has been inserted w.e.f 1st June 2005 to provide that no tax shall be deducted at source from the amount paid or payable in relation to zero coupon bonds issued on or after 1st June , 2005.
Deduction to the issuer of the zero tax bonds: Section 36 has been amended by inserting clause (iiia) to provide for deduction from income from business of profession of the assessee who issues the zero tax bonds, of the pro rata amount of discount on a zero tax bond having regard to the period of life of such bond. For this purpose the ‘discount’ has been defined to mean the difference between the amount received or receivable by the infrastructure capital company or fund or the public sector company issuing the bonds, and the amount payable by such company on maturity or redemption of such bonds. The period of life of the bonds, means the period commencing from the date of issue of the bonds and ending on the date of its maturity or redemption.
Standard Deduction eliminated:
Section 16(i) of the Act has been omitted w.e.f 1st April, 2006. The effect of omission of S. 16(i) is that the assessees deriving income from salaries shall not be entitled to the Standard Deduction w.e.f Asstt Year 2006-07.
“In connection with his voluntary retirement”:
In S. 35DDA of the Act, for the words, “at the time of his voluntary retirement” the words “in connection with his voluntary retirement” have been substituted. The effect of this amendment is that w.e.f Asstt Year 2004-05, if an assessee incurs an expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance of any scheme or schemes of voluntary retirements, 1/5th of such amount shall be deducted in computing his business income, and the balance shall be deducted in the four succeeding previous years.
Under the law as it stood before the amendment, where part payments were made on voluntary retirement, only the first part was allowed to be so amortised since only payments made “at the time of voluntary retirement” were referred to in this section. Now all payments made in any year shall be independently eligible for amortisation.
Elimination of tax rebates for senior citizens and women:
S. 88C and S. 88D have been eliminated w.e.f 1st April 2006, which means that from Asstt Year 2006-07, senior citizens and women shall not be entitled to the additional rebate or Rs.20,000 and Rs. 5,000 respectively that they were entitled to earlier. This has been done since the benefit to be given to the senior citizens and the women has been built into the tax structure, by providing the higher exemption limit of Rs. 1.50 lakhs for the senior citizens and Rs. 1.25 lakhs for women.
Changes in the provision of the law relating to deduction of amount spent on higher education:
S. 80E earlier provided for a deduction of Rs. 40000 for repayment of loan taken for the purpose of pursuing higher education, including interest on such loan. The section has been amended w.e.f Asstt Year 2006-07 as under:
- The deduction allowable now is in respect of interest on loan, and not on principal and interest as was allowed earlier.
- The loan should be taken from any financial institution, or any approved charitable institution for the purpose of pursuing higher education.
- The deduction shall be allowed in the initial assessment year and seven subsequent assessment years, or until the interest has been paid off, whichever is earlier.
- 100% of the interest paid shall be deductible.
- Higher education has been defined to mean full time studies for any graduate or post graduate course in engineering, medicine, management, or for post graduate course in applied science or pure science including mathematics and statistics.
Exemption from TDS for truck operators:
Section 194C provides for deduction at source from payments made to contractors and sub-contractors. A proviso has been inserted to this section by the Finance Act to exempt a sub-contractor engaged in transportation activities, subject to the following conditions:
- The sub-contractor is an individual;
- The sub-contractor does not own more than two trucks at any time during the previous year;
- The sub-contractor produces a certificate in the prescribed form and verified in the prescribed manner and within such time as may be prescribed;
- The person responsible for paying the amount to such sub-contractor shall furnish to the prescribed authority, such particulars as may be prescribed in such manner and such form as may be prescribed.
- This amendment is effective from 1st June, 2005.
Tax treatment of derivatives:
The law relating to taxability of derivatives has been changed substantially. Earlier, S. 43(5) provided that a sale and purchase of shares which was settled otherwise than delivery was deemed to be a ‘speculative transaction’ The transactions excluded earlier were transactions in the nature of hedging, jobbing or arbitrage. By inserting a new proviso to S 43(5) the law now provides for exclusion from the definition of speculative transactions, “an eligible transaction in respect of trading in respect of derivatives referred to in clause (aa) of section 2 of the Securities Contracts ( Regulation ) Act, 1956, carried out in a recognised stock exchange”
For this purpose an eligible transaction has been defined as a transaction carried out electronically on screen based systems through a stock broker or a sub-broker or such other intermediary registered under section 12 of the SEBI Act, 1992, in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, or the SEBI Act, 1992, or the Depositories Act, 1996 and the rules, regulations or byelaws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange, which is supported by a time stamped contract note issued by such stock broker or sub broker or such other intermediary to every client indicating in the contract note the unique client ID allotted under any Act and PAN allotted under the Income Tax Act.
This amendment is effective from Asstt Year 2006-07.
Furnishing of quarterly return in respect of payment of interest without TDS:
Newly inserted section 206A casts a responsibility on the banks, co-operative societies or public companies responsible for paying to any resident an interest ( other than interest on securities) not exceeding Rs. 5,000 , to prepare and furnish quarterly returns in the form and manner as prescribed in the law, every quarter before 30th June, 30th Sept, 31st Dec and 31st March on a computer readable media.
The apparent purpose of the new provision is to keep track of the depositors who keep small deposits, sometimes of undisclosed money, to avoid falling within the limits of TDS.
The section further provides that the Central Govt may, by notification in the Official Gazette, require any person other than the one mentioned above, who is liable to a resident any income liable for TDS, to prepare a similar return.
A new clause (l) has been inserted in S. 272A(2) to provide for a penalty of Rs. 100 for every day of default on the part of the authorities to furnish such quarterly return.
The amendment is applicable from 1st June 2005.
Set off of losses of a bank in a scheme of amalgamation:
This retrospective amendment effective from Asstt Year 2005-06 provides for carry forward and set off of accumulated losses and unabsorbed depreciation of a bank against the profits of another bank in a scheme of amalgamation, by way of introduction of a new Section 72AA. Section 47 of the Act has also been amended to provide that any transfer of capital asset by a banking company to a banking institution shall not be regarded as transfer for the purpose of capital gains. Amendment has also been carried out in S 49 in this regards. The whole scheme is discussed below:
- Newly inserted clause (viaa) to section 47 provides that any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the central Govt u/s 45(7) of the Banking Regulation Act, 1949, of a capital asset by a banking company to a banking institution shall not be regarded as transfer for the purpose of capital gains.
- An amendment to S 49 of the Act provides that where the capital asset becomes the property of the assessee in the mode described in clause (1) above, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of improvement of the assets incurred or borne by the previous owner or the assessee , as the case may be.
- The newly inserted S 72AA provides that notwithstanding anything contained in sub clauses (i) to (iii) of section 72A(2)(1B), where there has been an amalgamation of a banking company with another banking institution , the accumulated losses and the unabsorbed depreciation of such banking company shall be deemed to be the losses or depreciation of the banking institution for the previous year in which the scheme of amalgamation was brought into force and all provisions of this Act relating to the set off and carry forward of loss and depreciation shall apply accordingly.
- This should come as a real bonanza for the banks which recently made an acquisition of loss making banks, merging the latter with itself, for example, the recent merger of Global Trust Bank with Oriental Bank of Commerce. The brought forward losses of the bank shall be deemed to be the losses of the acquiring bank of the year of the merger. Retrospective application of the provision, might result in these banks claiming refund of the Advance tax paid.
Other amendments:
- S. 80 D repealed: The general exemption limit has been raised to Rs. 1 lakh, from the existing limit of Rs. 50,000. S. 80D provided that where the total income did not exceed Rs. 1 lakh, the assessee was entitled to a deduction from income tax, an amount equal to 100% of such tax, and where the income exceeded Rs. 1 lakh, a relief was provided on the marginal taxation if it exceeded the amount of income exceeding Rs. 1 lakh. This provision is no longer required since the basic exemption limit has been increased to Rs. 1 lakh, and has thus been eliminated.
- Speculative losses carry forward period curtailed: The law earlier provided for the carry forward of speculative losses for a period of 8 years. S 73(4) has been amended to provide that no speculative losses shall be carried for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. This amendment shall be effective from the Asstt Year 2006-07.
- Dredger to be treated as qualifying ship for the purpose of tonnage tax scheme: By deleting a ‘dredger’ from the list of exclusions provided under section 115VD, dredgers are now qualifying ships for the purpose of Tonnage Tax Scheme.
- Exemption of interest in Non-resident (External) Account to continue: S. 10(4)(ii) of the Act has been amended to provide that income by way of interest on moneys standing to the credit of individuals in a Non-Resident(External) Account shall continue to be exempt even after 31st of March , 2005.
- Exemption of interest on Foreign Currency Deposits to continue: S. 10(15)(iv)(fa) has been amended to provide for the continuation of exemption of interest to a non-resident or to a person who is not ordinarily a resident on deposits in foreign currency where the acceptance of such deposits is approved by the Reserve Bank of India, even after 31st of March, 2005.
- Extension of time limit for setting up of industries in Jammu and Kashmir U/S 80-IB: Terminal date for setting up of industrial undertaking and commencement of eligible business in the State of Jammu and Kashmir has been extended by two more years, to 31st March, 2007. According to sub-section (4) of S. 80-IB, industrial undertakings engaged in manufacture or production or operation of a cold storage plant set up in the State of Jammu and Kashmir are eligible for a deduction of 100% deduction of profits for a period of 5 years, followed by 25% deduction for the next 5 years. ( This deduction is 30% in case of companies)
- BOT tax benefits extended to Govt authorities also: Under the provisions of S. 80-IA, a company or a consortium of companies are eligible for a 100% deduction of profits for a period of 10 years in respect of the income from the activity of developing or operating and maintaining or developing , operating and maintaining any infrastructure facility. The section has been amended to include an authority or board of corporation or any other body established or constituted under a Central or State Act.
Banking Cash Transaction Tax
If there is one proposal that received the sharpest criticism of the House when the Finance Minister delivered the Budget, it was the proposal to levy tax on banking cash transactions. While there is another proposal equally illogical, that of taxability of fringe benefits, the full implications of the latter took some time to sink in. The uproar in the House was a reflection of the reaction the proposal was to receive from the public.
Later during the meetings with industrialists the Finance Minister admitted that the proposed law was poorly conceived, and that they were working on an alternative methodology to track the black money. This article attempts to analyse the inconsistencies in the proposed laws.
Proposal to tax certain banking transactions are contained in Chapter VII of the Finance Bill. This chapter extends to the whole of India and shall come into force on 1st June, 2005, and shall apply to taxable banking transactions entered into on or after the commencement of this chapter.
“Taxable banking transaction” has been defined to mean:
- a transaction, being withdrawal of cash ( by whatever mode) exceeding ten thousand rupees on any single day by a person from scheduled bank; or
- a transaction , being purchase of a bank draft or a banker’s cheque or any other financial instrument on payment of cash exceeding ten thousand rupees on any single day by a person from any scheduled bank; or
- a transaction, being receipt of cash from any scheduled bank exceeding ten thousand rupees on any single day by a person on encashment of term deposit, whether on maturity or otherwise, from that bank.
Clause 95 provides that the amount for the purpose of the transaction of term deposit shall be the amount received on encashment of such deposit.
The proposed law provides for the taxability, after the date of commencement of this chapter, in respect of the taxable banking transactions, at the rate of 0.1% of the value of such transaction.
Sub-clause (2) of Clause 95 of the Finance Bill provides that the Banking Cash Transaction (BCT) tax shall be payable:
- in respect of cash withdrawal, by the person who withdraws the cash;
- in respect of purchase of draft or pay order, by the person who buys such instrument;
- in respect of encashment of term deposits, by the person who encased such deposit;
- in respect of withdrawal of cash exceeding ten thousand rupees, by the bearer of such instrument.
While the above clause provides for the liability of payment, Clause 97 casts a responsibility on every scheduled bank to collect BCT tax from every person liable to pay such tax. The tax so collected shall be payable by the bank to the credit of the Central Govt before the 15th of the month following the month of the collection. If a bank fails to so collect the tax, it will still be the responsibility of the bank to pay such tax.
Clause 98 prescribes for furnishing of the return of BCT Tax by the bank within the prescribed time after the end of the financial year, and provides that where no such return has been furnished, the Assessing Officer may serve on the bank a notice to furnish such return. A revised return may also be submitted before the assessment is made.
Clauses 99 to 112 lay down the detailed procedure for assessment, and provides for interest, penalties, rectification of mistakes, appeals, etc.
ANALYSIS
The apparent purpose of the law is to track black money. The Finance Minister stated in his budget speech that he is concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amount of cash. These cash withdrawals leave no trail, and presumably become part of the black economy.
While the Finance Minister must be congratulated for a very pragmatic and growth oriented budget, one fails to understand what prompted him to propose a very illogical BCT law. I have discussed the key issues below.
- When it is true that large amount of cash is withdrawn every day, some of the money may be withdrawn for no ostensible purpose, still it does not make it a case for taxing all cash transactions. There are many genuine purposes for which one has to withdraw cash. Take the example of a construction company which makes payment of lakhs of rupees at the construction site to the daily wage earners, the amount being paid to each of such worker being a small sum of money. Can they force the daily wage earner, who lives hand to mouth, to have a bank account where the amount would be credited after two days?
- The law is applicable to all persons, including individuals, businesses, trusts, Governments and to all withdrawals whatever be the purpose of such withdrawal. It seems the Finance Minister believes that even in respect of withdrawal by the Government, black money is generated!
- In a country where banks are closed on all religious ceremonies and festivals, and where bankers sometimes go on a strike, people often carry cash balance with them on such occasion so that the work is not hampered. Is it justified to tax such transaction?
- When there is an unexpected medical emergency, and the hospital refuses to take cheque, or the payment for medicine has to be made in cash, does it look justified to charge transactions such as these to tax?
- In an agrarian economy, where 70% population is dependent on agriculture, where the poor farmers often come to the nearby towns and cities to sell their produce, many of them don’t even have bank accounts, can a cheque payment be forced upon them? It may be worth mentioning here that even in respect of disallowance of payment in excess of Rs. 20000 not made through a crossed cheque, there are many exceptions provided under Rule 6DD, which recognise the difficulty in carrying on transactions through banking system. Unless a law is made making it compulsory to receive and give payments by cheques, it is not proper to assume that the economy would suddenly become a cashless economy. Large cash dealings will continue to be made, the only consequence of this law will be that the Govt would be richer by an estimated amount of Rs.4500 crores.
- The law provides for taxability of BCT in respect of ‘scheduled banks’. Since co-operative banks have been kept out of the provision of the law, and since people need to withdraw cash for many purposes, this measure is likely to shift large balances to co-operative banks. The financial health of many of the co-operative banks is in a bad state, many of the co-operative banks are controlled by politicians, and do not have much credibility. This may result , on the one hand, in erosion of deposit of scheduled banks, and on the other in larger funds at the disposal of small co-operative banks with unhealthy track records.
- The logic that a large amount of cash is withdrawn from the bank and it becomes a part of the black economy is a faulty one. The fact is that a substantial part of money remains in cash form and is never deposited in bank. The money in bank is substantially the declared or the white money, and if this proposal becomes a law, it would have the effect of taxing the honest money lying in the bank in lieu of the tainted money. The limit of Rs.10000 is set so low, that most of the middle class salary earners would also be covered in the law.
- The Finance Minister wants this 0.1% tax to be a kind of tracking device, kind of a trail over the cash withdrawn from the bank. There are other measures, such as PAN, which the Govt has been using to track financial transactions, and the transaction of the nature proposed to be taxed under BCT law could have been easily brought within the ambit of the requirement of compulsory quoting of PAN. We boast of a very sophisticated level of computerisation being implemented in the Income Tax Department, the imposition of this tax only goes on to prove the inefficiency of the Government is making use of the potentials of computerisation. It is absurd the people should pay the price for Govt.’s inefficiency by way of a tax on withdrawal from bank.
- The implementation of BCT tax would be an ordeal for the banks. Banks would have to collect tax, keep a record of tax so collected, and pay the tax to the Govt. every month. They would have to file an annual return and would have to get it assessed. The cost per transaction to the bank of doing this exercise is likely to be more than the tax collected in most of such transactions. In case of ATM withdrawals, the software would be required to be modified, so that the machines would pay 0.1% less than the amount requisitioned by the customer.
- The law speaks of a transaction exceeding Rs. 10,000 on a single day. It is not clear whether this limit is in respect of a branch, or of the banking company. On plain reading of the provision, it seems the limit is in respect of ‘any schedule bank’, which means if more than Rs. 10,000 are withdrawn in aggregate from different branches of the same bank, the provision would be attracted. In a bank where branches are not networked, it would be impossible to monitor the transactions.
- There will be considerable difficulties in implementing the withdrawals from ATM’s. If a customer withdraws Rs. 9,000 in the first transaction, and later withdraws an amount of more than Rs. 1,000, the tax would be required to be deducted on the whole amount. This is going to be a challenging job for the bank and the designers of the software. ATM’s work on the principle of redundant distributed processing, where the data is processed locally at the ATM, and is updated later in the central database. If somebody withdraws less than Rs. 10,000 per transaction, and before the central database is updated, makes another withdrawal from another ATM, he would be able to avoid tax, adding to the problems of the bank.
- The Finance Minister has said that this tax has been inspired by the Brazilian model. However, in Brazil, the tax is on all withdrawals from bank, whether by way of cheque or otherwise. The Finance Minister decided to single out cash withdrawal transactions and put then under the tax net. The provision of Entry 82 of the Union List, (read with Article 246(1) of the Constitution) would have to be stretched too far for justifying the levy of tax on something which is neither income nor an expenditure in commercial sense of the term.
- Taxable transaction is defined to mean, inter alia , a transaction of encashment of a term deposit of an amount exceeding Rs. 10,000. Proviso to Clause 95 says that no banking transaction tax shall be payable if the amount of term deposit is deposited to any account of the bank. It the intention is not to tax this amount, I wonder how this would be monitored, if the amount gets merged with the account of a person, and he makes a combined withdrawal from that account.
This proposed law is an example of illogical thinking and poor drafting. It certainly does not serve the purpose of tracking the cash transactions, but on the other hand, will be chaotic if implemented in the present form. It is only hoped that the provisions do not encourage people to keep money at home, or in non-scheduled banks, which would prove to be exactly contrary to the intentions of this law. Long queues at the banks, where people will withdraw less than Rs 10000 daily is also not ruled out.
Fringe Benefit Tax
Consequent upon the introduction of the fringe benefit tax, the following amendments have been made in section 2:
- Definition of assessee to include an assessee in respect of fringe benefits tax also: Sec 7(a) has been amended to provide that assessee shall mean any person in respect of whom any proceedings under this Act has been taken for the assessment of his income or assessment of fringe benefits or the income of any other person in respect of which he is assessable, or of the loss sustained by him or by any such person, or the amount of refund due to him or to such other person. The effect of this amendment is that if a fringe benefit tax is payable by any person, and any proceeding has been taken under this Act for the assessment of the tax on fringe benefit tax, such person shall be an assessee for the purpose of this Act.
- “Fringe benefits” formally defined: A new Clause 23B has been inserted in section 2, to define fringe benefits to mean any benefits referred to in section 115WB.
Clause 37 of the Finance Act 2005 has created the new law relating to taxability of fringe benefits, by inserting new sections 115W to 115WL in the Income Tax Act. Section 115W(a) defines an employer to be a company, a firm, an association of persons or a body of individuals, a local authority and every artificial juridical person, but excluding any fund or trust or institution eligible for exemption u/s 10(23C) or registered u/s 12AA . Section 115WA is the charging section which provides that there shall be levied a fringe benefit tax @ 30% on the fringe benefits levied or deemed to be levied by an employer to his employee. Clause (2) of section 115W clarifies that fringe benefit tax shall be payable by an employer even if he is not liable to pay income tax other wise. S. 115WB (1)defines the fringe benefits to mean any privilege, service, facility or amenity, directly or indirectly, provided by an employer , whether by way of reimbursement or otherwise, to his employees ( including former employee or employees); any free or concessional ticket provided by the employer for private journey of the employees or their family members; and any contribution by the employer to an approved superannuation fund of for employees.
Subsection 2 of s. 115WB provides that fringe benefit tax shall be levied even when activity is carried on, not with an intention of deriving profits or gains, and lists out the following 17 categories of expenses, and an employer shall be deemed to have been provided the fringe benefits if he incurs such expenses. The expenses specified are:
- entertainment;
- provision of hospitality of every kind by the employer to any person, whether by way of provision of food or beverages or in any manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include-
- any expenditure on, or payment for food or beverages provided by the employer to his employees in office or factory;
- any expenditure on or payment through paid vouchers which are not transferable and usable only at eating joints or outlets;
- conference ( other than fee for participation by the employees in any conference)
- Sales promotion including publicity. However this expenditure is excluding the following:
- expenditure, (including rental) on advertisement of any form in any print( including journal, catalogues or price list) or electronic media or transport system;
- expenditure on press conference, business convention, fair or exhibition;
- expenditure on the publication in any print or electronic media of any notice required to be published by or under any law or by order of a court or tribunal;
- expenditure on advertisement by way of signs, art work, painting, banners, awnings, direct mail, electric spectaculars, kiosks, hoardings, bill boards or by way of such other medium of advertisement;
- expenditure by way of payment of any advertisement agency for the purpose of clause (i) to (iv) above.
- employees’ welfare. For the purpose of this clause, any expenditure incurred or payment made to fulfil any statutory obligation or mitigate occupational hazards or provide first aid facilities in the hospital or dispensary run by the employer shall not be considered as expenditure on employee welfare.
- Conveyance, tour and travel ( including foreign travel);
- Use of hotels, lodging and boarding facilities;
- Repair, running ( including fuel) and maintenance of motorcars and amount of depreciation thereon;
- Repair, running ( including fuel) and maintenance of aircrafts and amount of depreciation thereon;
- Use of telephone ( including mobile phone) other than expenditure on leased telephone line;
- Maintenance of any accommodation in the nature of guest house other than accommodation used for training purposes;
- Festival celebrations
- Use of health club and similar facilities
- Use of any other club facilities;
- Gifts;
- Scholarships;
Sub-section. 3 of S. 115WB provides that for the purpose of sub section (1) the privilege, service, facility or amenity does not include perquisite in respect of which tax is paid or payable by the employee.
As per S. 115WC(1) the fringe benefit shall be the aggregate of the following:
- In respect of free ticket the full value of ticket, in respect of concessional ticket, the full value reduced by the amount paid by or recovered from the employee;
- Actual amount of contribution to superannuation fund;
- 20% of expenses referred to in clause (A) to (K);
- 50% of expenses referred to in (L) to (P);
Notes:
- In the case of employer engaged in a hotel business, fringe benefit in respect of clause (B) shall be 5% instead of 20%;
- In the case of employer engaged in a construction business, fringe benefit in respect of clause (F) shall be 5% instead of 20%;
- In the case of employer engaged in a pharmaceuticals business, fringe benefit in respect of clause (F) shall be 5% instead of 20%;
- In the case of employer engaged in a software business, fringe benefit in respect of clause (F) and (G) shall be 5% instead of 20%;
- In the case of employer engaged in a motor transport business, fringe benefit in respect of clause (H) shall be 5% instead of 20%;
- In the case of employer engaged in a air transport business, fringe benefit in respect of clause (I) shall be NIL
S. 115WD casts a duty upon every employer to furnish a return of income before the due date, which is prescribed as the same date, as prescribed U/S 139(1). The section also makes provision for issue of notice by assessing officer in case the assessee does not furnish a return of income, and also provides for the revised returns. Sections 115WE, WF, WG, and WH lays down a detailed procedure for assessment, best judgment assessment and assessment of fringe benefits escaping assessment.
S. 115WJ casts a duty on the assessee to pay an advance tax of 30% of the fringe benefit tax, quarterly, on or before the 15th of the month subsequent to the last month of the quarter, but the advance tax for the quarter ending 31st March shall be payable by the 15th of March! The assessee shall be liable to pay interest on the shortfall of the advance tax.
ANALYSIS:
Expenses on maintenance of guest house shall be taxable, though the employees of the company may or may not derive some collective benefits from the guest house maintained by the employer for his business purpose.
Provision of hospitality of every kind to any person is taxable. “Any person” need not be an employee of the company. Thus, the law presumes that even in respect of hospitality extended to the customers of a company, a benefit of personal nature seems to flow to the employees! Even in cases of hotels, 5% of all expenses incurred on provision of hospitality to its customers would be taxable as fringe benefits.
All conveyance, tour and travel expenses, expenses on running and maintenance of cars and aircrafts would be considered fringe benefits. This would be so even in cases of companies, which are in the business of providing travel services to its customers, though, the amount would be 5% in their case instead of 20%.
Fringe benefits are deemed to have been given to employees even in respect of depreciation on motor cars and aircrafts.
Individuals, HUF’s and Trusts spared:
The law is applicable to all employers, excluding an individual, an HUF and charitable trusts and institutions.. The earning of business income is not the criteria for taxability, the law clarifies that the tax would b levied on all activities whether or not such activities are carried on with the object of deriving income, profits or gains. The assessees who are not required to pay tax under the Income Tax Act since their income is exempt, and the assessees who do not have a taxable income, or have a loss during a year shall also be liable to pay the fringe benefit tax. While local authorities are also included in the definition, Governments have been excluded.
Contradicts with the Sections pertaining to Presumptive Taxation:
Section 44AD, AE, and AF provides for presumptive taxation of certain assessees, viz., civil contractors, transporters, and retail traders. In the cases of these three categories of assessees, income is presumed at a fixed rate, and the provisions of S. 44AA relating to the maintenance of books of accounts do not apply to such assessees, which means the assessee declaring his income under the Presumptive Taxation method, is not required to maintain books of accounts. Fringe benefit tax presumes maintenance of books of accounts, which contradicts with the wordings of these three sections of presumptive taxation.
An Act within the Act:
The fringe benefit tax is a self-contained law. Chapter XII-H, with Sections from 115W to 115WL, contain the definition section, the charging section, the procedure for filing of return, assessment, and payment of tax, interest etc. In effect, this is the creation of a whole new law, for taxing expenditure. The ostensible purpose of the law is to “adopt a two pronged approach to the taxation of fringe benefits under the Income-Tax Act. Perquisites which can be directly attributable to the employees will continue to b taxed in their hands in accordance with the existing provisions of section 17(2) of the Income-Tax Act and subject to the method of valuation outlined in rule 3 of the Income-Tax Rules. In cases, where attribution of the personal benefit poses problem, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been to the employees” ( Memorandum to the Bill).
No threshold limit, covers all and sundry:
The proposed law has not specified any threshold limit, and it covers all employers( except individuals, HUF’s and Trusts) irrespective of the number of employees. Since it is a deeming provision, even in a situation where there are no employees, if the amount is spent on the specified heads, the tax would be attracted.
Tax Treatment of Specified Savings
The Act has modified the law relating to taxability of certain specified savings completely, by deleting the existing section 88, and replacing it with S.80C. Changes at the point of accrual of income are also made by deleting S.80L. Consequential amendments have also been made in Ss.10, 54EC, 54ED, 80CCC, 80CCD, 295, and a new section 80CCE has been inserted.
The new S.80C:
The new Section provides a deduction not exceeding Rs. One lakh to an individual and an HUF, in respect of the following payments:
- payment of life insurance premium (including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family)
- payment made for a contract of deferred annuity(including payment made in respect of spouse and children of the assessee);
- payment by way of deduction from salary by the Govt. of an amount not exceeding 1/5th of the salary for the purpose of securing a deferred annuity to the employee;
- contribution to provident fund to which the Provident Funds Act, 1925 applies;
- contribution to any provident fund set up by the Central Govt and notified in the Official Gazette(including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family);
- employee’s contribution to a recognised provident fund;
- employee’s contribution to an approved superannuation fund;
- subscription to specified securities;
- subscription to savings certificates under Govt. Savings Certificates Act, 1959;
- contribution to ULIP(including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family);
- contribution to unit-linked insurance plan of the LIC Mutual Funds(including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family);
- annuity plans of LIC or other insurers;
- subscription to units of mutual funds notified u/s 10(23D);
- contribution to pension funds notified u/s 10(23D);
- subscription to deposit schemes and contribution to mutual funds set up by National Housing Bank;
- subscription to the deposit schemes of notified public sector housing finance companies, or authorities dealing with housing accommodation;
- tuition fees paid to any university, college or other educational institution situated within India( in respect of any two children of the assessee);
- any payment by way of the following payments in respect of house property :
- loan repayment of a housing development board or similar a housing authorities;
- repayment of loan to any company or a co-operative society of which the assessee is a member;
- repayment of loan borrowed from Central Govt, any State Govt, banks, LIC, or National Housing Banks, housing finance companies, housing finance societies, assessee’s employer in case of employees of the Govt, public companies, public sector companies, universities, colleges or local authorities;
- stamp duties, registration fee and other expenses incurred for transfer of the house property to the assessee.
- membership fee of a co-operative society or a company;
- the cost of repairs and renovation incurred after the completion of the house property, or its occupation;
- any expenditure in respect of which a deduction is allowed under the provisions of taxability of income from house property;
- subscription to eligible issues of capital by public companies;
Where an assessee terminates his life insurance policy within 2 years ( clause (i) ), or terminates his participation to unit-linked insurance plan within 5 years( clause (x) ), or transfers his house within 5 years of obtaining possession ( clause (xviii) ) , then no deduction shall be allowed under the relevant clauses, and the deduction so allowed in the preceding years shall be deemed to be the income of the previous year. Similarly when the equity shares or debentures on which the deduction has been allowed under this section are sold within a period of three years from the date of acquisition, the amount of deduction allowed earlier shall be deemed to be the income of the year of sale.
Ss. (7) clarifies that for the purpose of this section, investments referred to in S. 88(2) shall be eligible for deduction in the manner specified in this section.
A Section 80CCE is inserted to clarify that the aggregate amount of deduction under sections 80C, 80CCC, and 80CCD shall not exceed Rs. One lakh.
Section 80L of the Act stands omitted.
Higher deduction:
Section 88 provided for rebate from tax liability as under:
- where gross total income is Rs. 1,50,000 or less, 20% of such investments;
- where the income under the head “salaries” does not exceed Rs. 100,000 and the “salaries” income is not less than 90% of the gross total income, deduction eligible is 30% of such investments;
- where the gross total income is between Rs. 1,50,000 and Rs. 5,00,000, 15% of such investments;
- where the gross total income is more than Rs. 5,00,000, no deduction shall be available.
Sectoral caps removed:
The earlier law provided for maximum qualifying amount in respect of many of the investments. Thus, it provided for a limit of Rs. 70,000 in respect of specified savings, which also included repayment of housing loans ( with a limit of Rs. 20,000) and tuition fees ( with a limit of Rs. 12,000 per child, with a maximum of 2 children) , and an additional limit of Rs. 30,000 in respect of infrastructure shares, debentures and bonds. The amendment does away with all internal limits, and provides that all specified investment shall be covered irrespective of the amount of each investment. For example, the assessee shall now have an option of utilising the full limit by making a payment of Rs. 1,00,000 towards PPF. This means a considerable flexibility for the taxpayers, and a great deal of simplicity in assimilating the provision. The only sectoral limit that now remains is in respect of the education expenditure being restricted to any of the two children.
Can we implement the EET system? :
The Memorandum to the Bill clarifies that ‘the existing provisions of Income Tax Act do not accord a homogeneous to the taxation of financial savings’. ‘There is a considerable variation in the taxation of the contributions made to savings schemes , the tax levied on the accumulation, and the tax treatment at the final stage of withdrawal.’ The Memorandum further explains that the desire of the Govt. is to remove this distortion and tax the income on EET basis. Under this scheme, the contribution to the specified savings is exempt from tax ( E), the accumulation is also exempt from tax(E), but the withdrawals from the savings are taxed(T)
The Memorandum confesses that ‘shift from the existing EEE method to EET method is likely to impose transitional administrative problems’. ‘It is therefore proposed to set up a committee of experts to work out the roadmap of moving towards the EET’. The proposed amendments to the law seem to be the first step in moving towards the EET. The deletion of S.80L, which had partially exempted the accrual, is another step in this direction. But whether an absolute shift to EET could be possible especially in respect of investments committed in the past is a difficult question to answer.
Some of the savings are made with a longer time horizon, and under the existing laws, they enjoy exemption from taxes on withdrawal. For example, S. 10(10D) exempts from tax all sums received from LIC. If an attempt is made to put this sum to taxable, it would amount to taxing the amount which, was spent by the assessee when the law provided for exemption on withdrawals. It is not possible to apportion the amount between the amount, which was paid when the EEE scheme was prevalent, and the amount paid during the existence of EET regime. Any attempt to put the old investment to tax would mean a breach of promise on the part of the Govt.
If a scheme like EET is to be implemented within the framework of the existing laws, the law would be required to be amended to provide that the specified savings made after the specified dates, would fall under the tax net. Payments made in respect of policies contracted earlier would continue to be under the EEE scheme. Even when implemented on this pattern, it would entail a detailed record keeping by the assessees, lest it results in a mix-up causing confusion. This is not easy to implement. Until then the taxpayer can have his cake and eat it too.
Old wine in old bottle:
This method of taxation of specified savings is not new. The savings were taxed till 1990, under the same S.80C which was omitted by the Finance Act, 1990. The apparent reason which seems to have prompted the shift to this method is, ‘ a large number of countries have adopted this method and many countries are moving towards it’. However , it seems the implementation issues may make the shift to EET difficult, which may mean a bonanza for the taxpayer: he would continue to get higher deduction, with no tax being put on withdrawal.
“Out of his income chargeable to tax”:
The Finance Bill had proposed that the deduction u/s 80C shall be allowable only if the amount deposited was ‘out of his income chargeale to tax’ . On second thought the lawmakers decided to delete these words, as it could have led to frivolous litigations. The Act does not require the amount invested to be out of income chargeable to tax.
posted by Dr. Tejinder Singh Rawal at 3:55 am
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