PROVISIONS RELATING TO DIRECT TAXES
The provisions in the Finance Bill, 1997, in the sphere of direct taxes relate to the following matters:-
(i) Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1997-98; the rates at which tax will be deductible at source during the financial year 1997-98 from interest (including on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, and other categories of income liable to deduction of tax at source under the Income-tax Act, rates for computation of "advance tax", deduction of income-tax from "Salaries" and charging of income-tax on current incomes in certain cases for the financial year 1997-98.
(ii) Proposal to omit the levy of surcharge in the case of domestic companies.
(iii) Amendment of the Income-tax Act, 1961, with a view to promoting welfare, providing incentives for infrastructure development, industrialisation, rationalisation of certain provisions, checking tax evasion and avoidance and expanding the tax base.
(iv) Amendment of the Expenditure-tax Act, 1987, for providing incentives for development of tourist infrastructure.
(v) Amendment of the Interest-tax Act, 1974, for reduction of rate and rationalisation of certain provisions.
(vi) Proposal to introduce Voluntary Disclosure of Income and Wealth Scheme, 1997 for declaration of undisclosed income and wealth.
2. Subject to certain exceptions, which have been indicated while dealing with the relevant provisions, the Bill follows the principle that changes in the provisions of the tax laws should ordinarily be made operative prospectively in relation to current incomes and not in relation to incomes of past years. The substance of the main provisions in the Bill relating to direct taxes is explained in the following paragraphs:-
In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1997-98, the rates of income-tax (including surcharge thereon in the case of domestic companies) have been specified in Part I of the First Schedule to the Bill and are the same as those laid down in Part III of the First Schedule to the Finance (No.2) Act, 1996, for the purposes of computation of "advance tax", deduction of tax at source from "Salaries" and charging of tax payable in certain cases during the financial year 1996-97.
The rates for deduction of income-tax at source during the financial year 1997-98 from incomes other than "Salaries", have been specified in Part II of the First Schedule to the Bill. These rates apply to income by way of interest on securities, interest other than "interest on securities", dividends, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are broadly the same as those specified in Part II of the First Schedule to the Finance (No.2) Act, 1996, for the purposes of deduction of income-tax at source during the financial year 1996-97. However, there are some important changes also, e.g.,
(i) in the case of foreign companies, the rate of deduction of tax from royalty and fees for technical services has been reduced from 30 per cent. to 20 per cent. in cases where the relevant agreement in pursuance of which the said royalty and fees are received has been entered into on or after the 1st day of June, 1997;
(ii) in the case of non-resident Indians, the rate of deduction of tax from long-term capital gains relating to a foreign exchange asset, as referred to in Chapter XII-A of the Income-tax Act, has been reduced from 20 per cent. to 10 per cent.;
(iii) no surcharge will be levied on deduction of income-tax at source.
The rates for deduction of income-tax at source from "Salaries" during the financial year 1997-98 and also for computation of "advance tax" payable during that year in the case of all categories of taxpayers, have been specified in Part III of the First Schedule to the Bill. These rates are also applicable for charging income-tax during the financial year 1997-98 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year or assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates specified in the said Part III are indicated in the following paragraphs.
Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, associations of persons, etc.
There is no change in the exemption limit which remains at Rs.40,000. However, the tax rates have been significantly reduced at all income levels and the income slabs have also been changed.
The table below gives the income slabs and the rates of income-tax, (a) as specified in Paragraph A of Part I of the First
Schedule to the Bill, i.e., the existing slabs and rates; and (b) as specified in Paragraph A of Part III of the First Schedule to the Bill, i.e.,
the proposed slabs and rates:-
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Rates specified in Rates specified in
Paragraph A of Part I of Paragraph A of
Income slab the First Schedule to the Income slab Part III of the First
Bill (i.e. existing rates) Schedule to the Bill
(i.e. proposed rates)
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Upto Rs. 40,000 Nil Upto Rs. 40,000 Nil
Rs. 40,001 - Rs. 60,000 15% Rs. 40,001 - Rs. 60,000 10%
Rs. 60,001 - Rs. 1,20,000 30% Rs. 60,001 - 1,50,000 20%
Above Rs. 1,20,000 40% Above Rs. 1,50,000 30%
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The impact of reduction of tax rates in the case of individuals, HUFs, etc. at different income levels would be as under:
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Total Income Existing Tax Liability New Tax Liability Proposed Relief
(Rs.) (Rs.) (Rs.) Amount (Rs.) Percentage
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41,000 150 100 50 33.3
42,000 300 200 100 33.3
43,000 450 300 150 33.3
44,000 600 400 200 33.3
45,000 750 500 250 33.3
50,000 1,500 1,000 500 33.3
55,000 2,250 1,500 750 33.3
60,000 3,000 2,000 1,000 33.3
75,000 7,500 5,000 2,500 33.3
1,00,000 15,000 10,000 5,000 33.3
1,20,000 21,000 14,000 7,000 33.3
1,50,000 33,000 20,000 13,000 39.4
1,75,000 43,000 27,500 15,500 36.0
2,00,000 53,000 35,000 18,000 33.9
2,50,000 73,000 50,000 23,000 31.5
3,00,000 93,000 65,000 28,000 30.1
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In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Bill. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.
In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Bill. This rate will now be 35 per cent.
In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Bill. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.
In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Bill. The new rates will be 35 per cent. in the case of a domestic company and 48 per cent. in the case of a foreign company.
The surcharge hitherto levied in the case of a domestic company having income exceeding seventy-five thousand rupees has been discontinued. This will further reduce the burden of companies by 3 percentage points. [Clause 2 & First Schedule ]
The Bill proposes to enhance the upper limit of standard deduction to twenty thousand rupees in the case of all persons.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [ Clause 4 ]
Under the existing provisions of clause (iia) of section 57 of the Income-tax Act, a standard deduction of a sum equal to 33-1/3 per cent. of the family pension or Rs.12,000, whichever is less, is allowed.
The Bill proposes to enhance the upper limit of the deduction from twelve thousand rupees to fifteen thousand rupees.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [ Clause 20 ]
Under the existing provisions of section 88B of the Income-tax Act, a special tax rebate of forty per cent. of the net tax payable is allowed to persons who have attained the age of 65 years and have a gross total income not exceeding one hundred twenty thousand rupees. The maximum tax rebate available is Rs.8,400 at present.
The Bill proposes to increase the rate of rebate available to the senior citizens to hundred per cent. of the tax payable subject to a limit of ten thousand rupees. Further, the Bill proposes to extend this rebate to all senior citizens irrespective of any income limit.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [Clause 31]
Under the existing provisions of section 80G of the Income-tax Act, ordinarily a deduction of fifty per cent. of the donation is allowed in the computation of income of the donor. However, in respect of donations to certain funds, hundred per cent. deduction is allowed.
In order to garner funds to mobilise relief efforts, the Bill proposes to amend section 80G to provide for hundred per cent. deduction in respect of donations made to Chief Minister's Relief Fund/ Lieutenant Governor's Relief Fund of any State or Union Territory. The deduction will be available to only one fund for each State or Union Territory.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [ Clause 23 ]
Under the existing provisions of the Income-tax Act, short-term capital gains become chargeable to tax on sale of a depreciable asset if the sale consideration exceeds the written down value of the block of assets. In the case of a sick industrial company, there should not normally be any capital gains on the sale of any asset except land. Capital gains tax arising on the sale of land slows the process of revival of such companies.
It has, therefore, been proposed in the Bill to amend section 47 of the Income-tax Act to provide that the capital gains arising from the transfer of land of a sick industrial company managed by its workers' co-operative, under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985, will be exempt from tax. It is also proposed that the exemption on such transfers shall be available if made within the period commencing from the previous year in which the said company has become a sick company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds accumulated losses.
The proposed amendment will take effect from 1st April, 1998, and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [ Clause 16]
Under the provisions of section 80-IA of the Income tax Act, a five year tax holiday and a deduction of 25% (30% in the case of companies) in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward states/districts.
The country requires large investment in the telecommunication sector, both basic and cellular. In order to encourage investment in this sector, it is proposed to grant 100% deduction from the profits and gains of an assessee engaged in the business of providing telecommunication services for the initial five assessment years. It is also proposed to provide a deduction of 25% (30% in the case of companies) from such profits and gains for a further period of five years. The deduction will be allowed to an undertaking which begins to provide the telecommunication services at anytime during the period beginning on 1st April, 1995 and ending on 31st March, 2000.
The proposed amendment will take effect retrospectively from 1st April, 1996 and will, accordingly, apply in relation to assessment year 1996-97 and subsequent years. [ Clause 25]
In order to give fillip to this sector in addition to tax holiday, the Bill proposes to insert a new section 35ABB in the Income-tax Act. The section seeks to provide that any capital expenditure incurred and actually paid by an assessee on the acquisition of any right to operate telecom services by obtaining licence will be allowed as a deduction in equal instalments over the period for which the licence remains in force.
It further seeks to provide that where the licence is transferred and proceeds of the transfer are less than the expenditure remaining unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer, shall be allowed in the previous year in which the licence has been transferred. It also seeks to provide that if the licence is transferred and proceeds of the transfer exceed the amount of expenditure remaining unallowed, the excess amount shall be chargeable to tax as profits and gains of business in the previous year in which the licence has been transferred. It also seeks to provide for amortisation of unallowed expenses in a case where a part of the licence is transferred. The restrictive provisions of this section shall not apply in relation to a transfer in a scheme of amalgamation whereby the licence is transferred by the amalgamating company to the amalgamated company, the latter being an Indian company.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [Clause 6]
Under the existing provisions of the Income-tax Act, a tax rebate of twenty per cent. of the sums paid towards Life Insurance Premia, Provident Fund, etc. is available to an individual or an HUF, subject to a maximum of twelve thousand rupees.
The Finance (No.2) Act, 1996 amended section 88 of the Income-tax Act, through a new clause (xvi), to include investments in debentures of, and equity shares in, a public company engaged in infrastructure including power sector for rebate under this section. By investing in such shares or debentures, a maximum rebate of fourteen thousand rupees may be claimed.
The Bill proposes to include subscription to equity shares and debentures of a public company for the purpose of providing telecommunication services, (whether basic or cellular) also, forming part of eligible issue of capital for availing the tax rebate under clauses (xvi) and (xvii) of the section.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [ Clause 30]
Under the existing provisions of clause (23F) and clause (23G) of section 10 and clause (viii) of subsection (1) of section 36 of the Incometax Act, the relevant incometax exemption or deduction, is not available to undertakings engaged in the power and telecommunication sectors. The exemption under sub-clause (iv) of clause (15) of section 10 is also not available to undertakings engaged in providing telecommunication services.
Since both power and telecommunication are important infrastructure sectors, it is necessary to provide the tax exemption or deduction under the provisions mentioned above. The Bill, therefore, proposes to make appropriate amendments to achieve this objective.
The Bill proposes to widen the definition of the expression "industrial undertaking" occurring in the Explanation in subclause (iv) of clause (15) of section 10 so as to bring within its scope an undertaking engaged in the business of providing telecommunication services.
The Bill also proposes to widen the definition of the expression "venture capital undertaking" occurring in the Explanation in clause (23F) of section 10 so as to bring within its scope an undertaking engaged in the business of generation or generation and distribution of electricity or any other form of power or engaged in the business of providing telecommunication services.
The Bill further proposes to widen the definition of the expression "infrastructure facility" occurring in the Explanation in clause (23G) of section 10 so as to bring within its scope a project for generation or generation and distribution of electricity or any other form of power or a project for providing telecommunication services.
The Bill also proposes to widen the meaning of the expression "infrastructure facility" in clause (viii) of subsection (1) of section 36 by assigning to it the same meaning as is proposed to be given in clause (23G) of section 10. This will enable a financial corporation engaged in providing long-term finance for a project for generation or generation and distribution of electricity or any other form of power or for providing telecommunication services to claim deduction under clause (viii) of subsection (1) of section 36.
The proposed amendments will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 199899 and subsequent years. [Clause 3]
Under section 80-IA of the Income-tax Act, deduction was allowed, in computing the taxable income, in respect of profits derived from the business of a hotel which started functioning during the period from 1.4.1990 to 31.3.1995.
With a view to further encouraging the development of tourism infrastructure in remote regions where such facilities either do not exist or are scarce, the Bill proposes that a tax concession of 50% of the profits for ten assessment years be given to hotels which start functioning at any time during the period from 1.4.1998 to 31.3.2002. The deduction shall be available to hotels which are located in a hilly or rural area or a place of pilgrimage or where tourism infrastructure needs to be developed. These hotels will also be exempted from the levy of expenditure tax for a period of ten years. In respect of hotels located in any other place, the deduction shall be 30 per cent. of the profits. The hotels located in the metropolitan cities of Calcutta, Chennai, Delhi and Mumbai will not be eligible for the tax deduction.
The proposed amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years. [ Clause 25]
Under the provisions of section 80-IA of the Income tax Act, a five year tax holiday and a deduction of 25% (30% in the case of companies ) in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward states/districts.
The Bill proposes to extend the tax holiday to industrial parks notified for this purpose in accordance with any scheme to be framed by the Central Government. This tax holiday is expected to encourage investments in industrial infrastructure. Those industrial parks which start operating during the period beginning on 1st April, 1997 and ending on 31st March, 2002 will be eligible for 100% deduction for the initial five assessment years followed by 25% (30% in case of companies) deduction from profits for the next five years.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years. [Clause 25]
Under section 35 of the Income-tax Act, certain deductions are allowed in respect of expenditure on scientific research.
The Bill proposes to introduce a new sub-section( 2AB) to allow a company, a deduction of a sum equal to 1-1/4th times the sum paid on any expenditure incurred by a company on scientific research including an expenditure of capital nature related to the business. This deduction will be available to the companies having in-house Research & Development facility approved for the purpose of this section by the prescribed authority and engaged in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipment, chemicals or any other article or thing notified in this behalf. It is also proposed that no deduction shall be allowed in respect of expenditure on land and building. It is also proposed that the company shall enter into an agreement of co-operation and audit with the prescribed authority before approval of the research and development facility.
The proposed amendment will take effect from 1st April, 1998 and will, accordingly, apply in relation to assessment year
1998-99 and subsequent years. [ Clause 5]