What will the new tax picture be like after the radical changes that Finance Minister P Chidambaram has proposed come into force? Read on to find out. . .
Personal Taxation
The exemption limit has been increased to Rs 100,000
New rates of income taxes for individuals:
Upto Rs 100,000 -- Nil
Rs 100,001 to Rs 150,000 -- 10%
Rs 150,001 to Rs 250,000 -- 20%
250,001 and above -- 30%
Surcharge shall be levied only on income above Rs 1,000,000 onwards as against Rs 850,000 earlier.
Salary
Standard Deduction (Rs 30,000 earlier) will not longer be available.
Any perquisites received by an employee and claimed as an expense by the company but correspondingly not treated as income/perquisites of the employee, will be taxed in the hands of the company. This would mainly apply where benefits are availed collectively by employees and cannot be attributable to a single employee. This tax would be called Fringe Benefits Tax and the company would be liable to tax at the rate of 30% on an appropriately defined base.
TDS from salary would be increased by 10% surcharge, if the salary exceeds Rs 1,000,000.
Tax Treatment of Savings
The three sections i.e. 80L, 80CCC and 88, are being proposed to be replaced by a new Section 80CCE to provide that any investment in any of the schemes falling under Section 80C, Section 80CCC and under Section 80CCD upto a sum of Rs 100,000 would be entitled for deduction from the total income upto the extent of deposit.
{Earlier, the provisions of Section 80L provided for deduction from the gross total income, including any income by way of interest on government securities (such as NSC), interest on debentures of public sector companies, interest on deposits with banking companies or financial corporations, etc. up to a limit of Rs 12,000. An additional deduction of Rs 3000 was allowed in respect of Government Securities. Under Section 80CCC, a deduction from income up to Rs 10,000 was available on deposits by an individual towards any annuity plan of LIC or any other insurance.
Under Section 88, a deduction from the tax payable on the total income of an individual or HUF was available in respect of any sums, paid or deposited by way of Life Insurance Premium, contribution to provident fund, schemes of differed annuity, National Savings Certificates, Infrastructure bonds, payment of tution fees, repayment of principal amount of housing loans etc. The available deduction was limited to investment of Rs 70,000 and an additional investment in infrastructure bond was Rs 30,000. The ceiling for repayment of housing loan was Rs 20,000. The ceiling for payment of Tution Fees was limited to Rs 24,000.
Out of these investments, a rebate of 20% was available from the tax payable for persons with gross total income, not exceeding Rs 150,000; 15% for individuals whose gross total income was between Rs 150,000 to Rs 500,000. No rebate was available for individuals whose income exceeded Rs 500,000.
Benefits under Sections 80L and 80CCC, 80CCD, 88, 88B, 88C, 88D discontinued.
New provision Section 80C introduced in lieu of the above discontinued benefits. The key features of the new provision are,
This will be in the nature of exemption leading to lower total income, under earlier Section 88 benefits, which were in the nature of rebate
Total exemption available is Rs 100,000 no limit or cap on any specific saving mode or option
Exemption available to all taxpayers irrespective of income bracket earlier Section 88 did not provide benefit to those having income exceeding Rs 500,000.
No exemption/adjustment for interest income
All saving modes/options under Section 88 covered and also 80CCC and 80CCD covered.
However, following benefits will continue irrespective of the above changes,
Interest paid on housing loan for self-occupied house property
Medical insurance premium
Specified expenditure on disabled dependant
Expenses for medical treatment for self or dependant or member of a HUF
Deduction in respect of interest on loans for pursuing higher studies Section 80E
Deduction to a person with disability
Voluntary Retirement Scheme
Presently, one fifth of the amount, received by an employee at the time of VRS, is allowed as a deduction in the current year and the balance is allowed to be deducted in four equal installment in four succeeding year. The difficulty was that where part payments were received, only payment received in the first year was allowed to be amortised over 5 years and the balance was not allowed as a deduction. The proposed amendment provides for amortisation of the entire amount in the first year even though it has not been received.
Filing of Return
Earlier the one-by-six scheme prescribed that return was to be filed compulsorily, if any of the following six items were present and whether the person had taxable income or not,
Occupation of a House
Ownership of a motor car
Expenditure on foreign travel
Holder of credit card
Subscriber to the cellular phone
Member of a club where the entrance fee is more than Rs 25,000
In addition to the above six categories, the provisions relating to filing of returns are being amended to make it compulsory if any person satisfies any one of the categories, mentioned below,
All partnership firms will have to file return of income, irrespective of their level of income.
The basis of filing the return has been shifted from total income to gross total income. This means that all persons, who do not have taxable income because of deduction under chapter VI-A (e.g. 80HHC, 80U, 80RRA, 80R, 80HHF etc.) or under sections 10A, 10B and 10BA, will now have to file returns compulsorily.
The conditions of subscription to a cellular phone is now deleted and such persons would not be required to file their returns if their income is below the maximum amount, not chargeable to tax.
If a person consumes electricity and the expenditure incurred is more than Rs 50,000 in the year, then he would be required to file his return of income, irrespective of the level of income.
TDS Certificates not to accompany return of income
Presently, every assessee is required to file original copies of TDS certification, alongwith return of income. However, now, with the online system, credit is given immediately and an individual can visit the site to see whether proper credit has been given. Hence, the requirement of filing TDS certificate for taxes, deducted on or after April 1, 2006, would not be required.
Section 88B omitted
The earlier provision provided that if an individual had total income up to Rs 100,000 no tax would be payable. Since the general exemption has been increased to Rs 100,000, this section becomes infructous and is proposed to be omitted.
Tax Rebate for Senior citizens under Section 88B
Section 88B provided that incase of an individual whose age is 65 years and above, he would get a deduction of the tax payable on the whole of such amount or Rs 20,000, whichever was less. Therefore, a senior citizen who had to pay tax of less than Rs 20,000, would get a rebate of the entire tax. This section is now omitted. However, the exemption limit, in the case of senior citizens, has been increased from Rs 100,000 to Rs 150,000.
Tax Rebate for Women under Section 88C
Section 88C provided that a woman whose age is below 65 years would get a deduction of the tax payable of the whole of such amount or Rs 5,000 whichever was less. Therefore a woman who had a tax payable of less then Rs 5,000 would get a rebate of entire tax. This section is now omitted. However, the exemption limit has been increased from Rs 100,000 to Rs 125,000.
Interest on accounts, maintained by NRIs
The exemption on tax on interest on accounts, maintained by NRIs, will continue.
Revival of exemption on interest on foreign currency deposit
Under Section 10(15(iv)(fa)), the interest payable by a scheduled bank, before April 1, 2005 to a non-resident or to a NOR on deposits of foreign currency, was exempt to tax if the acceptance of such deposit was approved by RBI. It is proposed to extend the exemption on and after April 1, 2005 as well.
Royalty and fees for technical services in case of Non-Residents
It is proposed to reduce the rate of tax on royalty and fees for technical services in case of non-resident from the existing 20% to 10%.
Interest, paid on loans taken for pursuing higher education
Presently, a deduction of Rs 40,000 is allowed to an individual, under Section 80E, on account of any amount paid by him during the year for re-payment of loan or interest thereon, taken from any financial institution or any approved charitable institution for the purpose of pursuing higher education.
It is proposed to amend the section whereby the entire interest would be allowed without limit as a deduction from the total income. However, no deduction shall be allowed for repayment of the principal amount. This deduction, in respect of the interest, shall be restricted to 8 years beginning from the year in which the payment of interest on the loan begins.
Depreciation
Under the present provision of Section 32, general plant and machinery is entitled to depreciation at the rate of 25% and an additional initial depreciation of 15% on new plant and machinery, subject to certain conditions.
It is proposed to reduce the rate of depreciation of general plant and machinery to 15% and increase the initial depreciation to 20%. The requirement of creating a minimum increase of 10% in the installed capacity for availing the initial depreciation will no longer be required.
New provision for levy of Banking Cash Transaction Tax
It is proposed to introduce a new tax called Banking Cash Transaction Tax. Under this legislation, any person withdrawing cash exceeding Rs 10,000 from any scheduled bank in a single day or purchases a bank draft or bankers cheque, exceeding Rs 10,000 in a single day or receives cash from a scheduled bank, exceeding Rs 10,000 in a single day on encashment of a term deposit (on maturity or otherwise) would be liable to pay Banking Cash Transaction Tax at the rate of 0.1% of the value of each transaction.
Changes in Securities Transaction Tax (STT)
Presently, the levy of transaction tax and exemption/concession on capital gain, arising from securities, bought or sold through recognised stock exchanges were liable for security transaction tax at the following rates:
0.075% on the value of transactions of delivery-based purchase of an equity share in a company or a unit of an equity-oriented fund, entered in a recognised stock exchange to be paid by the buyer,
0.075% on the value of transactions of delivery-based purchase of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange to be paid by the seller,
0.015% on the value of transactions of non-delivery based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange to be paid by the seller,
0.01% on the value of transactions of derivatives, whether option or future, entered in a recognised stock exchange,
0.15% on the value of transactions of sale of units of an equity-oriented fund to the mutual fund.
The proposed new rates shall be as under:
0.1% on the value of transactions of delivery-based purchase of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange to be paid by the buyer,
0.1% on the value of transactions of delivery-based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange to be paid by the seller,
0.02% on the value of transactions of non-delivery based sale of an equity share in a company or a unit of an equity- oriented fund, entered in a recognised stock exchange, to be paid by the seller,
0.0133%, on the value of transactions of derivatives, being option or future, entered in a recognised stock exchange,
0.2% on the value of transactions of sale of units of an equity-oriented fund to the mutual fund.
The proposed amendment will take effect from the June 1, 2005.
Trading in derivatives
It is proposed to amend the existing provisions to provide that trading in derivates in specified stock exchanges will not be treated as speculative transaction under the income tax act.
Amendment in the MAT provisions
Under the existing provisions, under Section 115JB, where the income tax, payable by a company is less than 7.5% of its books profit, the book profit is deemed to be the income of the company and the company is liable to pay income tax at the rate of 7.5%. No credit was given or allowed in respect of the taxes, paid in the subsequent year.
The above is now proposed to be amended and now Section 115JAA will provide that any tax, paid under Section 115JB(1), will now be allowed as credit in the subsequent year. No credit would be allowed in respect of MAT, paid in the assessment year, prior to 2006-07.
Exemption on lease rental, paid by acquiring an aircraft engine
Under the existing provision, there was an exemption under Section 10(15A) in respect of lease of aircraft or an aircraft engine by a government of a foreign state or a foreign enterprise from an Indian company, engaged in the business of operating an aircraft. This exemption was available up to April 1, 2005. It is proposed to provide that the exemption would continue in respect of any agreement on or before September 30, 2005. However, the benefit of the exemption would be available in respect of lease payment, made pursuant to any agreement entered on or after October 1, 2005.
Tax holiday for setting up industry in the State of Jammu & Kashmir
The deduction, under Section 80-IB(4) for industrial undertaking, engaged in the manufacture or production or operations of a cold storage plant in the State of Jammu & Kashmir, has been extended for two more years i.e. from March 31, 2005 to March 31, 2007.
Sunset clause for units in special economic zone
Under the existing provision, any undertaking in a SEZ, which begins to manufacture or produce the articles or things or computer software after March 31, 2002, is allowed deduction under Section 10A(1A) of 100% of the export profits for first 5 years and 50% for the next two years and lastly by 50% of the export profits to a special reserve account for the next 3 years.
A sunset clause is proposed to be inserted so as to provide that no deduction would be allowed to such an undertaking, which begins to manufacture or produce the articles or things or computer software after March 31, 2009 in the SEZ.
Our view
The budget specifically aims at wooing the "aam adami". The Budget greatly benefits agriculturists, scheduled castes, scheduled tribes, minorities, senior citizens, women, rural areasin effect, the common man.
Rollback in some of these provisions towards the middle of the year.
We find that most of these amendments will find a place in the Finance Act. However, the legislations, relating to Bank Cash Transaction Tax, would be seriously opposed by the politicians, while passing the Bill in parliament.
We feel that the exemption limit in respect of senior citizens and women would be further raised as the benefits they will receive, will actually be lower than what they enjoyed earlier.
The Budget highlights for Taxation have been contributed by LegalPundits.com
Investment Guide 2005. Get this latest issue of Money Simplified absolutely FREE! Click here!