Presumptive Taxation Rationalised

Special provisions were introduced for calculating profits and gains in connection with exploration of mineral oils to simplify the taxation of non-residents in India.

Accordingly, Section 44BB was introduced to provide that income of a non-resident taxpayer, who provides services or facilities in connection with prospecting for, or extraction or production of mineral oils, should be calculated at 10 per cent of the amount paid or payable to the taxpayer, or to any person on his behalf on account of the provision of such services and facilities.

Similar calculation of income is to be made, where the non-resident is engaged in supplying plant and machinery on hire for prospecting or extraction or production of mineral oils.

 

In this way, the profit element is taken at 10 per cent of the gross receipts.

According to Section 44BBB, the income of a foreign company engaged in civil construction or erection or testing or commissioning of plant and machinery for a turnkey power project is computed at 10 per cent of the amount paid or payable to such a taxpayer on account of civil construction, erection, testing or commissioning of the plant or machinery.

Section 44BBB further provides that turnkey power projects should be approved by the central government and financed under any international aid programme.

Under existing provisions, a presumptive profit, 10 per cent of the receipts, is taken as finally taxable income irrespective of the actual profit or loss made by the non-resident taxpayer.

This situation, sometime, creates an unintended hardship in cases where the actual profits are less than 10 per cent of the gross receipts.

To remove the unintended hardship, the Finance Bill 2003 proposes to amend Section 44BB and 44BBB to give a leverage to the taxpayer to offer for tax the actual income by way of profit, if the same is less than 10 per cent of the gross receipts.

Accordingly, the Finance Bill 2003 proposes that an assessee may claim lower profits and gains than the profits and gains specified under Section 44BB or, as the case may be, Section 44BBB, if he keeps and maintains such books of account and other documents as required under sub-section (2) of Section 44AAA and gets his accounts audited and furnishes a report of such audit as required under Section 44AB, and thereupon the assessing officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of Section 143.

The Finance Bill also proposes that the presumptive profit of 10 per cent under Section 44 BBB will be applicable in those turnkey power projects also which are not financed under any international aid programme.

The other provisions of presumptive taxation, like profits and gains of shipping business (Section 44B) and profits and gains of the business of operation of aircraft have not been amended. Therefore, in such cases non-residents are obliged to pay tax on the basis of a prefixed presumptive profit which is 7.5 per cent in case of shipping business and 5 per cent in case of operation of aircraft.

However, there appears no justification for not amending Section 44B and Section 44BBA.

These amendments will be effective from April 1, 2004 and will accordingly apply in respect of assessment year 2004-05 and subsequent years.