Prospective 14(A) Levy A Big Breather

The government's plan to implement Section 14 (A) of the Income Tax Act, 1961, with prospective effect from the assessment year 2002-03 has come as a welcome relief for the financial institutions (FIs), corporates and banks.

If, as per the Finance Act, 2001, it was made applicable with retrospective effect from the assessment year 1962-63, the FIs, corporates and banks would have had to shell out hundreds of crores of rupees.

However, investments in the infrastructure sector will continue to feel the heat due to the provisions of the Section 14(A) as it disallows expenditure incurred in respect of income earned which is not chargeable to tax under the law.

 

Taxation experts pointed out that the Union government will either have to amend the Finance Act or come out with a clear-cut circular in this regard so that I-T officials do not arbitrarily rake up old cases.

However, the FIs, corporates and banks -- which either extend term loans to core projects or have set up one -- cannot escape the Section 14(A) as it requires tax to be paid on the balance amount that remains after the borrowing cost is deducted from the total income received.

The corporate tax rate is at around 35 per cent which after exemptions comes down depending on the deductions applicable.

"Notwithstanding the fact that the Section 14(A) is likely to be made effective from the assessment year 2002-03, it will dampen the investments in the infrastructure sector," said an official with a financial institution.

The same logic holds true for dividend income that is received from the investments made in core-sector projects. Hitherto, the total income was exempt.

But, with the introduction of the new Section 14(A), the difference between the investments made and the income received will be subject to dividend tax.

The investments made by banks in tax-free bonds will also be hit as the expenditure to earn income was earlier allowed. But now, the Section 14(A) negates this.

Till recently, FIs, as part of their treasury operations, were offsetting their loss in equity investments against the capital gains.

But from the financial year 2002-03, this will be disallowed thereby hitting the equity investments made by them out of borrowed funds.