Announcements that were not needed

TAXING MATTER

Finance Minister Jaswant Singh has started a new culture of announcement of relief concerning direct and indirect taxes through notifications and promises made in Parliament, while presenting the interim Budget.

Earlier, through notifications on January 12, 2004, he announced concessions concerning direct taxes in the nature of (i) one-by-six scheme not to apply to pensioners, (ii) scheme for filing returns by salaried employees through employers and (iii) changes of interest rates prescribed under income tax rules for valuation of perquisites.

Continuing the practice, he has announced more concessions concerning the income tax, which are in the nature of promises and have been described in paragraph 29 of the Budget speech as "conviction" and "commitment" from the government. The benefits promised are:-

• Under Section 801-A, an industrial undertaking, which generates/distributes power, can claim deduction equal to 100 per cent of profit for 10 years starting from the initial assessment year falling between April 1, 1996 and March 31, 2006. The period will be extended up to 2012 and the benefit can also be availed of in cases of takeover by the state electricity boards.

Since the benefit was available up to March 31, 2006, this announcement could have been made at the time of presenting regular Budget. There was no emergency to make this announcement during the presentation of interim Budget.

Exemption of listed equities, acquired on or after March 1, 2003 (and held for 12 months) but before March 1, 2004, from the long-term capital gains tax is to be extended for three years. The justification given is to "provide stability". This could have been well thought of while giving exemption by the Finance Act, 2003.

A promise, which relates to farmers, is to give exemption from tax on capital gains when agricultural land is acquired by the government. Similarly, there will be no tax deduction at source on the interest earned on the enhanced compensation payable for acquisition of such land.

In case of shipping undertakings, it is proposed to switch over from the income tax to the "tonnage tax". The reason given is that more than 90 per cent of world shipping, tonnage is subject to low levels of taxation and this change will provide "a level playing field so that Indian shipping becomes internationally competitive".

With the going away of 33AC benefit because of change to the tonnage tax, the benefit envisaged may not ensue unless the rate of tonnage tax is kept low, say one or two per cent.

An announcement in this regard was not needed at this juncture. Case studies could have been carried out to see whether the projected benefit would ensue and then only the change should have been announced at the time of regular Budget.

The announcement concerning business processing outsourcing seems redundant as the position in this regard has already been clarified by the Central Board of Direct Taxes (CBDT) through the circular No. 1 of 2004, which says the question of tax in India will arise only when the BPO unit has created a "permanent establishment" in India. No tax is to be charged, when services are of an ancillary and auxiliary nature.

In paragraph 31 of the speech, the finance minister has promised revising the benefit concerning 'standard deduction' affecting the salaried class, which, according to him, has doubtlessly "the best track record of income tax compliance". Promise has also been made in regard to review of exemption limits and to re-align them appropriately.

Tax treatment of family pension of war widows will be reviewed.

No promise has been made for the continuance of exemptions, which are to cease from April 1, 2005. Some examples of are:-

• Deduction in respect of profits and gains from projects outside India (Section 80HHB);.
• deduction in respect of profits and gains from housing projects in certain cases (Section 80HHBA);
• deduction in respect of profits concerning export business (Section 80 HHC);
• deduction in respect of earnings in convertible foreign exchange (Section 80HHD); and
• deduction in respect of profit from export of computer software (Section 80HHE).

Obviously, the exemptions are not to be extended in view of commitment made in paragraph 144 of the last year's Budget speech, where the finance minister said, "There is need to, eventually, move away from an exemption and discretion-based system to a different and more current order."

Thus, except the announcement concerning the listed equities and that concerning mutual funds, there was no need to make announcements about other areas, which could have been taken care of at the time of presentation of regular Budget.

These announcements seem to have been prompted by political considerations and it goes to the credit of the finance minister that he has not made any secret about it.

In paragraph 4 of the Budget speech, he said: "We hold that economic development is not about economics alone, it is always simultaneously, a political statement too for 'development' devoid of compassion is misnomer".

However, it would be better if finance and politics are not mixed.