TMI BlogFinance Act, 1997--Explanatory Notes on provisions relating to Direct TaxesX X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 4 and 21 of the Interest-tax Act, 1974 ; --amended section 4 of the Expenditure-tax Act, 1980 ; and --introduced the Voluntary Disclosure of Income Scheme, 1997. Provisions in brief 3. The provisions of the Act, 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 in the financial year 1997-98 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act ; rates for computing "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) Amendment of the Income-tax Act, 1961, with a view to,-- including the power and telecommunication sectors within the scope of tax exemption under sub-clause (iv) of clause (15), clause (23F) and clause (23G) of section 10 and sub-clause (vii) of sub-section (1) of section 36 ; --removing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tizens ; --reducing tax rate applicable to payments of royalty and technical services fees in case of foreign companies ; --reducing the rate of long-term capital gains tax in the case of non-residents ; --modifying Minimum Alternative Tax on companies ; --providing that approvals by the Chief Commissioner or Commissioner will include Director-General or Director ; --providing for obligatory filing of return based on certain economic indicators ; --amending section 143 of the Income-tax Act ; --amending provisions relating to charge of tax in the case of a firm ; --removing tax deduction at source (TDS) on interest on Government securities ; --providing for TDS from winnings from lottery, etc., in kind ; --providing for TDS returns on magnetic media ; --increasing the exemption limit on the employer's annual contribution to recognised provident fund ; (iii) Amendment of the Interest-tax Act, 1974, with a view to,-- --reducing the rate of interest-tax ; --removing doubt regarding power of the Board to issue instructions. (iv) Amendment of the Expenditure-tax Act, 1987, with a view to,-- --exempting new hotels in remote areas from the levy of expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special cases during the financial year 1997-98 6. 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 Act. 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, assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs. A. Individuals, Hindu undivided families, etc. 7.1 Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc. 7.2 There is no change in the exemption limit which remains at Rs. 40,000. However, the tax rates have been significantly reduced at all inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (1) of section 36 13.1 The existing sub-clause (iv) of clause (15) of section 10 of the Income-tax Act provides for tax exemption to interest payable by, inter alia, an "industrial undertaking" in India on any moneys borrowed or debt incurred by it in a foreign country subject to fulfilment of certain conditions. An "industrial undertaking" for this purpose has been defined to mean any undertaking which is engaged in specified activities. The list of specified activities includes power generation and distribution but does not include telecommunication services. 13.2 Clause (23F) of section 10 provides for tax exemption to any income by way of dividend or long-term capital gains of a venture capital fund or venture capital company from investments made in the equity shares of a "venture capital undertaking". A "venture capital undertaking" has been defined to mean a company whose shares are not listed in a recognised stock exchange and which is engaged in the manufacture or production of such articles or things (including computer software) as may be notified. Since power and telecommunication are not covered within the ordinary meaning of "manufacture or production of art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng power on or after 1st April, 1993, or projects for providing telecommunication services on or after 1st April, 1995. The exemption under clause (23G) will be available to any infrastructure capital company so long as the investee is an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility as defined in this clause. No approval from the Central Board of Direct Taxes is required for getting exemption under this clause or for inviting investments in terms of this clause. The investment could be by way of shares or long-term finance. The term "long-term finance" will have the same meaning as assigned to it in clause (viii) of sub-section (1) of section 36. Thus it would mean any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereon during a period of not less than five years. For the purposes of this clause, investment by way of bonds and debentures will be treated as long-term finance. (iv) the definition of "infrastructure facility" in clause (viii) of sub-section (1) of section 36 with a view to including therein projects for generation or generation and dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.1 Sub-clause (iii) of clause (17) of section 10 provides for exemption of any income by way of "all other allowances not exceeding six hundred rupees per month in the aggregate received by any person by reason of his membership of any State Legislature or of any Committee thereof, which the Central Government may, by notification in the Official Gazette, specify in this behalf". 15.2 The limit of Rs. 600 was fixed in 1986 keeping in view that Members of Parliament received at that time tax exempt constituency allowance of Rs. 1,250 and that the area of the constituency of a member of a State Legislature is generally much smaller than that of a Member of Parliament. However, with the increase in the quantum of allowances of Members of Parliament since 1986, the limit of Rs. 600 per month also requires upward revision. 15.3 The Act, therefore, substitutes the ceiling of Rs. 600 per month by Rs. 2,000 per month. 15.4 This amendment will take effect from 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 3] Exemption of dividend income and levy of new tax on distributed profits on domestic comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , has been inserted in section 10 to exempt the dividend income in the hands of shareholders. The exemption will, however, be available only in respect of dividends distributed by domestic companies and not by any other entity, say, the Unit Trust of India or any mutual fund. In order to remove any doubt on this account, sub-section (3) of section (32) of the Unit Trust of India Act, 1963, which provided for treating UTI as a company and the income distributed by it as dividend has been omitted with effect from 1st day of June, 1997. 16.9 Other consequential amendments have also been made at several places in the Income-tax Act, e.g., omission of sections 80AA, 80M, etc. 16.10 The new provisions regarding payment of tax on distributed profits shall take effect from the 1st day of June, 1997. Section 194 of the Income-tax Act will apply to dividends paid between 1st April and 31st May, 1997. The provisions regarding exemption of dividend income in the hands of shareholders shall take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Sections 3, 21, 22, 27, 28, 32, 33, 34, 35, 40, 47, 49, 50, 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to operate telecom services and for which payment has actually been made to obtain a licence, will be allowed as a deduction in equal instalments over the period for which the licence remains in force. It further provides 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 provides that where 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 further provides for amortisation of unallowed expenses in a case where a part of the licence is transferred and to which provisions of sub-section (3) do not apply. The provisions of sub-sections (2), (3) and (4) pertaining to transfer 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 36(1)(viii) to incorporate the condition of maintenance of special reserve 21.1 Clause (viii) of sub-section (1) of section 36 permits the deduction of an amount not exceeding forty per cent. of the profits derived from the business of providing long-term finance carried to any special reserve, created by a financial corporation or a public company. The deduction is admissible provided that the corporation or the company is approved by the Central Government for this clause and the aggregate of the amounts carried over to the special reserve from time to time does not exceed twice the amount of paid up share capital and general reserves. While this clause imposes a condition of creation of a special reserve, it does not impose any condition on the maintenance of the reserve. 21.2 In order to incorporate the condition regarding maintenance of the reserve, clause (viii) has been amended by substituting the words "special reserve created" with the words "special reserve created and maintained". An amendment has been made in section 41 in order to bring to tax any amount withdrawn from such special reserve in the year in which the amount is withdrawn. For this purpose, a new su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1998-99 and subsequent years. [Section 8] Introduction of provisions for maintenance and audit, etc., of accounts in certain cases 23.1 Two schemes of computing presumptively the profits and gains of business of civil construction, and plying, hiring or leasing goods carriages were introduced under section 44AD and section 44AE respectively by the Finance Act, 1994, with effect from April 1, 1994. Under section 44AD, the income from business of civil construction or supply of labour for civil construction work is presumed at eight per cent. of gross receipts, provided the gross receipts from such a business do not exceed Rs. 40 lakhs. Under section 44AE the income from business of plying, hiring or leasing of goods carriages is presumed at the rate of Rs. 2,000 per month or part thereof from a heavy vehicle and Rs. 1,800 per month or part thereof from other vehicles, provided an assessee does not own more than ten goods carriages. Both the schemes are optional to the assessee. He can declare income higher than the income calculated presumptively on the aforesaid bases or he can declare lower income and substantiate his return in the assessment proceedings. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted. 25.2 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 14] Amendment of provision for computing profits and gains of shipping business in the case of non-residents 26.1 The Finance Act, 1975, introduced section 44B in the Income-tax Act, 1961, regarding computation of profits and gains of shipping business in the cases of non-residents. It provided that a sum equal to seven and a half per cent. of the receipts shall be taken to be profits and gains of such business. The following amounts are taken as receipts :-- (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf ; and (ii) the amount received or deemed to be received in India by or on behalf of the assessee. 26.2 It has come to the notice that the non-resident assessees, carrying on shipping business, are splitting their receipts in such a manner that the receipts in respect of carriage of passengers, livestock etc., which are the subject-matter of computation of profits under this section, are reduced and receipts in respect of other charges su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck broker's card 28.1 Under the existing provisions of section 45 of the Income-tax Act, 1961, corporatisation of membership of recognised stock exchanges involves transfer of a capital asset and is, therefore, subject to capital gains tax. 28.2 In order to encourage more brokers to corporatise, increase their liquidity and consequently their volume of trading resulting eventually in giving a boost to the capital markets, the Act exempts from tax capital gains arising on corporatisation of membership of a recognised stock exchange by inserting clause (xi) in section 47 of the Income-tax Act. A new sub-section 47A(2) has been inserted providing for withdrawal of such exemption if the transferor retains shares allotted on transfer of membership for less than three years. This exemption will be allowed only in respect of corporatisation effected on or before the 31st December, 1997. 28.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 only. [Sections 16 and 17] Modification of provisions relating to mode of computation of capital gains in certain cases 29.1 Under section 48 of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gains tax. Capital gains tax would be leviable only where such an extinguishment of right to manufacture, etc., is for any consideration. Such receipts will be subjected to capital gains tax on the same basis as already adopted for taxing transfer of goodwill and tenancy rights. The cost of acquisition and cost of improvement will be determined in the same manner as for goodwill. 30.4 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 19] Raising of standard deduction for recipients of family pension 31.1 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. 31.2 The Act enhances the upper limit of the deduction from twelve thousand rupees to fifteen thousand rupees. 31.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 20] 100 per cent. deduction to donations made to a Chief Minister's/Lie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services, the Act provides for hundred per cent. deduction from the profits and gains of an enterprise carrying on the business of providing telecommunication services, whether basic or cellular, for the initial five assessment years and thereafter twenty-five per cent. (thirty per cent. in the case of companies) of such profits and gains for subsequent five years. The deductions shall be available to an undertaking which begins to provide the telecommunication services (whether basic or cellular) at any time during the period beginning on the 1st April, 1995, and ending on 31st March, 2000. 34.3 The amendment will take effect retrospectively from the 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 25] Tax holiday to industrial parks 35.1 Under the provisions of section 80-IA of the Income-tax Act, a five year tax holiday and a deduction of 25 per cent. (30 per cent. 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. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of generation, or generation and distribution, of power or to an industrial undertaking set up in backward States or districts. 37.2 The Act extends the tax holiday to undertakings commencing commercial production of mineral oil in the North-Eastern Region. Such undertakings are eligible for 100 per cent. deduction for seven assessment years. 37.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 25] Omission of section 80JJ regarding deduction from the business of poultry farming 38.1 Section 80JJ provides for a deduction up to 33-1/3 per cent. of profits from the business of poultry farming. The poultry industry has since grown considerably. The concession has been reviewed in this context. 38.2 The Act omits section 80JJ of the Income-tax Act in respect of deductions from the profits and gains from the business of poultry farming. 38.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 26] Higher deduction in respect of interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, through new clauses (xvi) and (xvii), to include investments in debentures of, and equity shares in, a public company or units of mutual fund, as the case may be, 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. 41.3 The Act, now, includes subscription to equity shares and debentures of a public company for the purpose of providing telecommunication services (whether basic or cellular), also as forming part of eligible issue of capital, for availing of the tax rebate under clauses (xvi) and (xvii) of the section. 41.4. The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in respect of the assessment year 1998-99 and subsequent years. [Section 30] Rebate of income-tax in the case of senior citizens 42.1 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 rebat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 36] Minimum alternative tax on companies 45.1 The minimum alternative tax (MAT) on companies was introduced by the Finance (No. 2) Act, 1996, with effect from the 1st April, 1997. This was necessary due to a rise in the number of zero-tax companies in view of tax preferences granted in the form of exemptions, deductions and high rates of depreciation. The rate of minimum tax was kept at a modest figure by deeming 30 per cent. of book profits as total income. This modest amount is likely to go down further with the downward revision of corporate tax rate to 35 per cent. and abolition of surcharge. 45.2 The Act exempts the export profits that are eligible for deduction under section 80HHC or under section 80HHE from the purview of the minimum alternative tax. 45.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. 45.4 The Act also inserts a new section 115JAA to provide for a tax credit scheme by which the MAT paid can be carried forward for set-off against re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is the Assistant Director or Deputy Director. 46.3 In order to remove this difficulty, sections 132(8), 132(10) and 281B have been amended to provide that the approval as required under these sections may be granted by the Director-General or Director also. 46.4 The amendment will take effect retrospectively from the 1st October, 1996. [Sections 41 and 57] Obligatory filing of return based on certain economic indicators 47.1 One of the possible ways by which a large number of persons can be brought under the tax net is to identify potential taxpayers through economic indicators. There could be a number of such economic indicators which may be employed for this purpose. 47.2 The Act has, therefore, inserted a proviso to section 139 of the Income-tax Act as a result of which it has become mandatory for all persons who satisfy two of the following economic criteria to furnish their returns of income :-- (a) are in occupation of immovable property exceeding a specified floor area whether by way of ownership, tenancy or otherwise ; or (b) are the owners or lessees of a motor vehicle ; or (c) are subscribers to a telephone ; or (d) have incurred expenditure for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns or, as the case may be, body of individuals as specified in the Finance Bill of the relevant year. 49.2 The new tax rate applicable to individuals, association of persons, etc., in the highest slab of income is 30 per cent. whereas the new rate applicable to firms is 35 per cent. Since these two rates are now different unlike in the past, an amendment of section 167A is necessary. 49.3 The Act, therefore, amends section 167A to substitute the words "maximum marginal rate" by the words "rate as specified in the Finance Act of the relevant year." 49.4 This amendment will take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Sections 44] Removal of tax deduction at source (TDS) on interest on Government securities 50.1 Section 193 of the Income-tax Act provides for tax deduction at source (TDS) at the rates in force on the amount of any interest payable on any income by way of interest on securities. The proviso to section 193 provides for exceptions to this requirement and lists cases where TDS is not required to be made. 50.2 With a view to attract investment in Government securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the 1st day of June, 1997. [Sections 48, 53, and 56] TDS returns on magnetic media 52.1 Section 206 of the Income-tax Act provides for filing of returns of TDS by persons responsible for deducting tax in accordance with the provisions of Chapter XVII-B. 52.2 The returns filed under section 206 contain voluminous data, particularly in the cases of large organisations. Preparing these returns as also processing the data contained therein for checking its correctness requires substantial manual effort. 52.3 Therefore, in order to make filing of returns and processing of data easier, the Act amends section 206 to provide for filing of returns on magnetic media such as floppies, diskettes, etc., as may be specified by the Board. It has also been provided that a return on magnetic media shall fulfil the specified conditions, namely (i) the return will be checked and authenticated by the Assessing Officer, and (ii) he shall take due care to preserve the computer media by duplicating, transferring, mastering or storage without loss of data. 52.4 It has also been provided that the information in the returns on magnetic media shall be admitted in evidence in any proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. [Section 60] Expenditure-tax Exemption from the levy of expenditure-tax in the case of new hotels in remote areas 56.1 Under section 3 of the Expenditure-tax Act, 1987, tax is charged on expenditure incurred in a hotel where the room charges for any unit of residential accommodation are Rs. 1,200 or more per day per individual. 56.2 The Act has inserted a second proviso to section 4 of the Expenditure-tax Act to secure that expenditure-tax will not be charged during the period of ten years commencing from April 1, 1998, on any expenditure incurred in a new hotel in a hilly or rural area or a place of pilgrimage or such other place as the Central Government may specify in accordance with the provisions of section 80-IA of the Income-tax Act, 1961. This concession will be available to eligible hotels which start functioning during the period from April 1, 1997, to March 31, 2001. However, hotels located in metropolitan cities of Calcutta, Chennai, Delhi and Mumbai will not be eligible for exemption from the expenditure tax. 56.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subse ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
