Council For Fair Business Practices

Important Information :

Union Budget 2007-08:

Series of public meetings on the Union Budget was arranged in association with Forumof Free Enterprises. CFBP's Budget Analysis Meeting was held on 2.03.07 at the Babubhai Chinai Committee Room of Indian Merchants' Chamber. Shri Anil Harish spoke on the Direct Taxes Charges, Shri Dadi Engineer on Indirect Tax Charges while Shri Shailesh Haribhakti analyzed the overall view of the budget.

The Union Budget 2007-08 presented by the Honorable Finance Minister in the Lok Sabha is a “mixed” bag. The Budget is an outcome of promises of coalition partners in the government. The efforts are directed towards agriculture, health care, education and hospitality which are recogniozed as critical sectors for driving growth at all levels.

The increase in dividend distribution tax and inclusion of export oriented units under the scope of MAT are perceived as dampeners in the Budget. On the other hand, the Honorable Finance Minister has given a lot of attention to the social sector. Agriculture, which has been languishing at growth rate of mere 2.3% as against 11% growth of manufacturing sector, has received a well deserved attention.

In the long run, this is expected to give a boost to the economy. It is heartening that the revenue and fiscal deficits have been reduced in line with the commitments under the FRBM. Commitment of transforming Mumbai as a world class financial cetnre is a huge draw. The Challenge is to deliver the same within the specified time frame.

Not much tinkering with tax rates and enhancing tax compliance has been the forte of the present Honorable Finance Minister.

1. Basic exemption and rate of tax:

Individuals and HUFs

Basic exemption increased from Rs.1,00,000/- to Rs. 1,10,000/-. In addition to the existing Education Cess there will be another one called “Secondary and Higher Education Cess on Income-tax” at 1% of the Income-tax and surcharge (not including the regular Education Cess) in all cases. Maximum rate of Tax will be 30% + 3% + .66% + .33% = 33.99%.

Companies and Firms

The additional 1% for Secondary and Higher Education Cess will be charged in all cases. However, Companies and Firms having taxable income upto Rs.1 Crore will not be liable to pay surcharge. Their rate will be 30% + .6% + .3% = 30.9%. For Companies and Firms with income more than Rs.1 Crore, the rate will be 33.99%

2. Dividend Distribution Tax on Dividend on Shares:

will now be (15% + 1.5%) + 2% + 1% thereon i.e. 15% + 1.5% + .33% + .165% = 6.995% (Section 115-)
Section 115R :

(i) 25% + + + on income distributed by a Money Market
Mututal Fund or liquid fund.

(ii) 12.5% + + + on income distributed to an individual or HUF mutual fund other than a Money Market MF or Liquid Fund.

(iii) 20% + + + on income distributed to any other person by a Fund other than a MMMF or liquid Fund.

3. Capital Gain on Sale of Art:

Section 2(14)(ii) states that personal effects (except jewellery) are not capital assets. This is now to be amended to exclude also archaeological Collections, Drawings, Paintings, Sculptures or any Work of Art, with effect from Assessment Year 2008-2009.

4. Definition of India:

Section 2 (25A) – Definition of “India” amended to include territorial waters, seabed, subsoil, continental shelf, exclusive economic zone or any other maritime zone, and air space.

5. Section 9 Accrual of Income:

Retrospective Amendment w.e.f. 1.6.1976.Where income is deemed to accrue or arise in India under clause (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the Non resident, whether or not the NR has a residence or place of business or business connection in India

6. Compensation for Disaster:

Section 10(10BC). A provision is to be inserted to the effect that compensation received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir , in the event of disaster, as defined in the Disaster Management Act, 2005, shall be exempt.

7. Venture Capital:

S.10 (23FB) is to be amended to say that income of a VC Company or VC Fund from investment in a VC Undertaking will be exempt only if:-the shares of the VC undertaking are not listed, and if it is engaged in the business of:

(A) nanotechnology

(B) IT relating to hardware and software development.

(D) Bio-technology

(E) Research and development of new chemical entities in the pharmaceutical sector

(F) Production of bio-fuels, or

(G) Building and operating a composite hotel cum-convention center with seating capacity of more than 3,000, or Dairy or Poultry industry.

8. Sez:

Section 10AA to be amended to provide that manufacture or production has to be by a new (not a reconstructed) unit.

9. Charitable Trusts

S.12AA: A Trust need not apply for registration within one year of formation.It may apply at any time. Sections 11 and 12 will apply for the assessment year relevant to that financial year.

10. Valuation of accommodation given to employees:

Explanations are to be inserted in section 17(2) to provide as under, some with retrospective effect from 1.4.2002 and some with retrospective effect from 1.4.2006.

Sr. No.	Facility	Employer	Owned/Rented	w.e.f. 1.4.2002 Value of Perquisite	w.e.f. 1.4.2006 value of perquisite
1	Unfurnished accommodation	Other than Government	Owned	10% of salary, if population of city exceeded 4 lakhs in 1991. 7.5% of salary, if population was less than 4 lakhs.	20 15
2	Unfurnished accommodation	Other than Government	Rented by employer	10% of salary or actual amount paid, whichever is lower.	20
3	Furnished accommodation	Government		Licece fee determined by Government plus valuation of use of furniture.	Same
4	Furnished accommodation	Other than Government	Owned	As in 1 above plus 10% of Cost of furniture.	Same
5	Furnished accommodation		Rented	As in 2 above plus hire charges for furniture.	Same
6	Hotel room 15 days on transfer			Exempt	Same
7	Hotel room			24% of salary for that period	Same

11. Section 35(2)(ab):

Weighted deduction for expenditure on scientific research at 150% of the amount is allowed.This provision is till 31-03-2007 and is to be extended upto 31-03-2012.

12. Co-operative Banks:

Co-operative Banks are normally not classified as Scheduled Banks i.e. they are not included in the Schedule to the Banking Regulation Act. Last year there was a change in the Income-tax on Co-operative Banks and they now do not get a deduction under Section 80P. Therefore, a Co-operative Bank is now allowed to write off a provision for doubtful debts under Section 36(vii)(a)

13. Investment of long term capital gain into specified bonds – Section 54EC:

Two amendments are being made to the Section. The first is a retrospective one giving the Central Government the power to notify a limit for claiming exemption by investing into bonds. This gives legistlative sanction to the Notification which was issued in December 2006 limiting the investment to Rs.50,00,000/- per assessee. The second Amendment proposed is that the maximum investment on or after 01-04-2007 for this purpose will be Rs.50,00,000/-.

14. Section 80CCD – Pension Scheme:

This provision presently applies only to employees of the Central Government but is now to be extended to other employees. It provides that a deposit in a notified pension scheme will be eligible for deduction to the extent of 10% of salary.

15. Section 36(1)(1b):

Insurance premium only if paid by cheque is allowable. Now it may be paid in any manner
other than cash. This would include Credit Cards as set out in the Explanatory Memorandum.

16.Section 36(1)(viii):

Special Reserve for certain entities was allowed to the extent of 20% of the profits. This is now to be amended to restrict the amount to 10% of the profit and no more than twice the amount of paid-up share capital and general reserve. Specified Entities are certain Financial Corporations, Co-operative Banks, Housing Finance Companies and other Financial Corporations which give long-term finance including for infrastructure facilities.

17. Disallowance of expenditure in cash sec.40A(3):

The disallowance presently is 20% of the amount paid in cash exceeding Rs.20,000/-. Now the entire amount paid in cash will be disallowed. The exception only is that no disallowance shall be made having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. Accordingly, this has now become discretionary.

18. Esops etc:

Section 49. Since ESOPs and Sweat Equity are to be covered under FBT, it is being provided that when FBT has been charged with reference to a particular value, then that will be deemed to have been the cost of the shares..

19. Section 80D(1) – Deduction in respect of Medical Insurance Premium:

Payment in future may be made by any mode of payment other than cash. The maximum amount deductible now will be Rs.15,000/- (instead of Rs.10,000/-) and Rs.20,000/- (instead of Rs.15,000/-) in the case of a senior citizen.

20. Section 80E – Interest on loan taken for higher education:

This deduction will now also be available to close relatives.

21. Infrastructure – Section 801A:

Gives a deduction against the profits of certain infrastructure assets. This is now being extended to provide for distribution network for natural gas and for navigational channels in the sea.
The deduction will be available only to the actual developer of the infrastructure facility and not to a contractor.

22. Section 80IB(4) - Jammu and Kashmir:

This relates to profits from Industrial Undertaking. This provision is being extended for 5 years upto 31-03-2012, and a new Industrial Undertaking will have to commence by that date to get an exemption.

23. Section 80ID: Hotels and Convention Centres in and around Delhi:

A new provision is to be introduced for tax exemption in respect of Convention Centres of capacity of more than 3000 and 2 star, 3 star and 4 star hotels in the National Capital Territory of Delhi and the districts of Faridabad , Gurgaon, Gautam Budh Nagar and Ghaziabad . The hotel or Centre must commence between 1.04.2007 and 31.03.2010. The deduction available will be 100% of the profit for the first 5 years. No other deduction under Chapter VIA or S.10AA will be allowed.

24. Transfer Pricing:

Section 92CA(3A) and Section 153. At present in a case of Transfer Pricing, the Assessing Officer may refer the matter to a Transfer Pricing Officer who has to give his report and the regular Assessing Officer then has to act on the Report and complete the assessment as this takes some time. An extension of time is now to be given for completion of such assessments. While the assessment in normal cases has to be completed in 1 year 9 months from the end of the assessment year, in the case of Transfer Pricing, the time limit will be extended by a year.

25. MAT – minimum alternative tax:

Companies will now have to pay MAT even on profits which is exempted under Section 10A (Free Trade Zones) or Section 10B (100% EOUs), but not on profits of units in SEZs.

26. Section 153D:

This states that assessments in search cases may be done only with the approval of the Joint Commissioner.

27. Assessment of shipping income – Section 172:

At present there is no time limit for completion of an assessment. This is now being provided for.

28. Section 193 – TDS:

Certain 8% Government Bonds were taxable but there was an exemption on TDS. This is now being exempted to provide that interest on these bonds will be subject to TDS at the rate of 10% + + +.

29. Section 194A:

A person earning on interest from a bank of less than Rs.5,000/- was not subject to TDS. This is now being raised to Rs.10,000/-.

30. TDS on Brokerage – Section 194H:

TDS on Brokerage will now be at 10% + +.

31. Section 194(1) – TDS on rental of Plant and Machinery:

At present the position is that if a person takes certain premises on rent and also pays rent on plant and machinery and furniture the rent paid for such plant and machinery is also subject to TDS at the rate of 15% (for individuals and HUFs) and (20% for Companies etc.).
It is now being proposed that the rate of TDS for property will be 15% or 20% but that the rate of TDS for rent on plant etc. in such cases will be at the rate of 10% + +.

32. TDS on Professional Fees:

Section 194J. It is proposed that the rate of TDS of 5% is to be increased to 10%

33. Settlement Commission:

Section 245A – 245K. The entire procedure for settlement is now changing. An application may now be made only while assessment proceedings are going on (unlike at present when an application can be made even while proceedings are pending before the CIT (Appeals). Application cannot be made in the case where a reopened assessment or an assessment in a search and seizure case is going on. The minimum amount of tax payable will have to be Rs.3,00,000/- instead of Rs.1,00,000/- at present. Once the application is made, the test for admission is not whether there is complexity or not but whether the form of the application is correct and whether the tax and interest on the declared income have been paid.
Notice will be given within 1 week of filing the application and within 2 weeks the Settlement Commission has to admit or reject the application. If such an Order is not passe within 2 weeks then it will be deemed that the application has been admitted and that the subsequent hearing will be proceeded hereunder. At present there is no time limit for assessment of proceedings. There will be a time limit of 9 months from the end of the month in which the application was made.
Section 245H(1) is to be amended to provide that the Settlement Commissioner shall not grant immunity from prosecution under any law other than the Income-tax Act.

34. Appeals on the question of deduction of tax at source – Section 248 and Section 249:

There are various situations which arise and a contract may for instance contain a provision for payment to the other party (often a foreign entity) to be net or tax. In such a case the payer is liable for the tax. The Payer may however have certain doubts about this.
The Payer will now be able to pay over the TDS to the Government and file an Appeal within 30 days of the payment and claim refund

35. Section 254 – Stay by Tribunal:

A stay may be granted for 180 days and a further 150 days and the Appeal shall be decided within that time.

36. Section 271AAA(1) – Penalty of 10% on undisclosed income in search cases:

Banking Cash Transaction Tax – BCTT

There will be no tax on withdrawals on office or assessment of the Central and State Government.The basic exemption is now increased to Rs.50,000/- in the case of individuals and HUFs.The figure of Rs.1,00,000/- for other taxable entities remains the same.

Service Tax

Cess of 1% “Secondary and Higher education cess at 1% is being imposed.
Additional services to be included are:

(i) Telecommunication services (this includes various telecommunication services which are presently specified as taxable services;

(ii) Services outsourced for mining of mineral, oil or gas

(iii) Services provided in relation to renting of immovable property, other than residential properties and vacant land, for use in the course or furtherance of business or commence (such services provided by or to a religious body are excluded);

(iv)Services provided in relation to the execution of a works contract (sales tax is levied on transfer of goods involved in the execution of works contract by States);

(v)Development and supply of content for use in telecommunication services, advertising agency services and on-line information and database access or retrieval services;

(vi) Asset management services including portfolio management and all forms of fund management service provided by any person, except a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern;

(viii)Design services.

The above changes will come into effect from a date to be notified after the enactment of the Finance Bill, 2007.Scope of Specified Taxable Services is being amended. Some of the newly taxed services will be:

(i) Sale of space in business directories, yellow pages etc.

(ii) Renting of motor vehicles.

(iii) Services provided in relation to marriage functions.

(vi) Computer hardware engineering consultancy.

Threshold being increased to Rs.8 lakhs.
Resident Welfare Associations charging more than Rs.3,000/- per month to a member exempt.