E&Y Analysis: Direct Taxes

Ernst & Young on how Budget 2008 will impact businesses and individuals.

Tax Rates No change has been made in corporate and individual tax rates. Surcharge and cess have also been left unchanged.

However, the Finance Bill, 2008, proposes to enhance the basic exemption limit for individuals, hindu undivided families (HUFs) and association of persons (AOP) from Rs 110,000 to Rs 150,000. For women and senior citizens, the exemption limit would be Rs 180,000 and Rs 225,000, respectively.

Further, the slabs have been upwardly revised, thereby extending considerable tax savings:

Slabs                                     Tax Rate (in %)
Up to Rs 150,000                  Nil
Rs 150,001 to Rs. 300,000    10
Rs 300,001 to Rs. 500,000    20
Above Rs 500,000                 30 (Paragraph A of Part I)

Enlargement of scope of 80c and 80d
It is proposed to enlarge the scope of deduction under Section 80C by including five-year time deposits with post offices and deposits in accounts under the Senior Citizens Savings Scheme Rules, 2004, within the ambit of eligible saving instruments.

In respect of the medical insurance premium paid by an individual to effect or keep in force the medical insurance of his parents, it is proposed to allow an additional deduction of up to Rs 15,000 (Rs 20,000 in case of senior citizens) under Section 80D. Further, the existing condition that parents should be dependent on the individual is proposed to be dispensed with. (Clause 13, 14)

Weighted deduction for sum paid to a company engaged in scientific research

It is proposed to extend a weighted deduction of 125 per cent to an entity that makes a payment for scientific research to an approved Indian company whose primary object is to undertake scientific research and development. However the company undertaking the scientific research shall not be eligible for any weighted deduction. (Clause 5)

The service industry permitted to amortise preliminary expenses for tax purposes

Under the existing provisions of Section 35D, deduction of specified preliminary expenses incurred in relation to extension or setting up of an industrial unit is permitted equally over five years. The Bill proposes to allow amortisation of such expenses even in respect of non-industrial units, thereby extending the benefit to service companies as well. (Clause 6)

Securities transaction tax to be allowed as business expenditure
At present, the securities transaction tax (STT) paid is allowed as rebate against tax liability under Section 88E if the income from securities on which the tax is levied is included under the head "profits and gains of business and profession". It is proposed that henceforth, the STT paid shall be allowed as a deduction from taxable business profits. The amendment would increase the tax incidence in the hands of the traders of securities. (Clauses 7, 8, 17)

Disallowance of expenditure not paid through account payee cheques/drafts
Payments made other than by an account payee cheque or draft exceeding Rs 20,000 is disallowed/considered as income if paid in subsequent year under the provisions of Section 40A(3). It is proposed to provide that such payments made to a single party in one day will be aggregated to determine whether the limit of Rs 20,000 is breached or not. Further, it is proposed to rationalise the prescribed exceptional circumstances when Section 40A(3) will not apply. (Clause 9)

Tax holiday for hospitals and hotels
To encourage investment in hospitals set up in areas other than metros and other specified urban agglomerations, a tax holiday for five years under Section 80 IB is proposed provided they commence operations between April 1, 2008, and March 31, 2013.

It is also proposed to extend the five-year tax holiday under Section 80ID to two- three and four-star hotels located in the districts that have a world heritage site provided they commence operations between April 1, 2008, and March 31, 2013.

Tax holiday to oil refineries set up after April 1, 2009, is sought to be withdrawn.
(Clause 15, 16)

Increase in short-term capital gains tax rate
It is proposed to increase the tax rate on short-term capital gains arising from transfer of an equity share in a company or a unit of an equity-oriented fund which is chargeable to STT from 10 per cent to 15 per cent.
(Clause 18, 19)

Amendment in the scope of book profits for MAT purposes
The Bill proposes to amend Section 115JB retrospectively from April 1, 2001, to clarify that provision for deferred tax shall be added to the adjusted book profits for calculation of minimum alternate tax (MAT). Further, the scope of the term 'income tax' to be added to book profits has been enlarged to include dividend distribution tax (DDT), any interest charged under the Act, any cess, and surcharge.
(Clause 20)

Partial relief in respect of re-distribution of dividend
To partly neutralise the cascading effect of dividend distribution tax (DDT), it has been proposed that the amount of dividend on which DDT has been paid, received by a domestic holding company (holding more than 50 per cent nominal capital), shall be reduced from the dividends declared by the said holding company for the purposes of levying DDT.

The benefit is available only at one level, that is, the domestic holding company should not in turn be a subsidiary of any other company and the same amount of dividend cannot be reduced more than once.
(Clause 21)

Rationalisation of fringe benefit tax
The following sums/expenditure incurred by the employer are proposed to be exempt from FBT: Any expenditure and/or payment made through non-transferable electronics meal card; Crèche facility for children of employees, sponsorship of an employee sportsman and organising sports events for employees; maintenance of any guest house

Reduction in the value of fringe benefit on account of festival celebrations to 20 per cent from 50 per cent.
(Clause 22, 23)

Advancement of return filing date for certain categories of assessees
At present, the due date for filing income tax returns and the fringe benefit returns for corporate assessees and those assessees who are required to get their accounts audited is October 31. The Bill proposes to advance the due date for such assessees to September 30. (Clause 24, 27)

Rationalisation of TDS provisions
No TDS would be required from June 1, 2008, on interest payable on dematerialised debt bonds listed on recognised stock exchanges in India.

Scope of 194C has been enlarged to include AOP and/or body of individuals within the scope of deductor

At present, a person making foreign remittance under Section 195 of the Act is required to furnish an undertaking to its authorised dealer and a certificate from an accountant in a specified format. The Bill proposes to introduce electronic filing of such information in prescribed form and manner.

Tax deducted at source (TDS)/tax collected at source (TCS) certificates shall continue to be issued by deductors till April 1, 2010, since the national-level information technology infrastructure of the Income-Tax Department is not yet operational.

Amendments are proposed in Section 191 and Section 201 with retrospective effect to clarify that where a person is required to deduct tax at source but fails to do so, he shall also be deemed to be an assessee in default. The amendment is being brought in to nullify interpretations wherein a person could take a plea of not being an assessee in default since no taxes were deducted by him.
(Clauses 38, 39, 40, 41, 42, 43, 44, 45, 54)

Clarification on stay of demand by the Income-Tax Appellate Tribunal
It has been clarified that the total period of stay originally allowed or subsequently extended by THE Income-tax Appellate Tribunal cannot exceed 365 days in any case even if the delay in disposing of the appeal is not attributable to the assessee.
(Clause 46)

Introduction of commodities transaction tax
A new tax, Commodities Transaction Tax (CTT), is proposed to be levied on taxable commodities transactions with respect to purchase or sale of commodities entered in a recognised association. Such tax would be allowed as expenditure for the purposes of computing business profits.
(Clauses 7, 97 to 116)

Discontinuation of banking cash transaction tax
Banking Cash Transaction Tax (BCTT) was introduced by the Finance Act, 2005, and is presently levied at the rate of 0.1 per cent on the taxable banking transaction. It is proposed that no BCTT shall be charged in respect of any taxable banking transaction after March 31, 2009.
(Clauses 120)