Many assessees who thought they had bought peace with the revenue authorities under ’98 amnesty scheme Kar Vivad Samadhan Scheme (KVSS), are now realizing there are miles to go before they can sleep peacefully. A recent Bombay High Court judgement says there are circumstances under which the I-T department can claim tax for the years for which the assessee has secured a KVSS certificate. The HC, in a recent decision ruled that the scheme would be applicable only for that part of income which was “determined” and not for the remaining income which would be taxed at the regular rate. The KVSS provisions stipulated that only “ determined income” could be brought under the scheme. The court gave this verdict in a petition filed by Killick Nixson. In this case, the Company had made declarations under KVSS and had mentioned that an appeal had been filed before the Income Tax Appellate Tribunal (ITAT) against the order of Commissioner (Appeal). The tax amount payable was worked out at Rs.26.5 lakh. There was income amounting to Rs.9.9 lakh under four heads and the CIT returned the assessment to the assessing officer for reassessment. Since the assessing officer had not reassessed on the issue of income and tax payable under these four heads, this part of income was construed as “ income not determined” . S.B.Dastur, who represented the company, consented that under the KVSS provision, the certificate was conclusive. He also urged that the scheme would be totally unworkable if the department’s contention was accepted. The division bench comprising Justice S.H.Kapadia and Justice V.C.Daga held the there is no merit in the argument of the company.

FOREIGN branch income of the companies will be computed on the same basis as Indian income and will be subjected to tax, taking into account the provisions of DTAA (double tax avoidance agreement). However, in the case of foreign branch income, there is no case for a lower level of tax on the policy holders portion of the surplus. Besides, non-taxability of bonus or profit received by the policy holders in respect of life insurance policies should continue. The committee also recommends that there should be a system of regular consultation between the CBDT and IRD in all matters of tax policy on life insurance sector.

The Expert group on "Taxation oflife Insurance Sector' has suggested a new tax package for life Insurance Corporation (LIC). The package makes a distinction between the income of the shareholders of LIC and the income of policy-holders, and suggests different tax rates. According to the expert group's suggestions, shareholders surplus will now be taxed at the prevailing rate of tax applicable to corporates, which is 38.5 per cent, while the policy-holders surplus is proposed to be taxed at the rate of 7 per cent. LIC is currently taxed at 12.5 per cent and there is no segregation for tax purposes between shareholders and policy-holders.LIC sources, however, said the incidence of taxation will come down about 8.5 percent from the current rate of 12.5 per cent if the proposed package is implemented. The figure of 8.5 per cent will be a weighted average of the differential rates of taxation that has been proposed, ie 38.5 per cent on shreholders surplus and 7 per cent on policy-holders surplus. Shareholders surplus is calculated as 5 per cent of the actuarial surplus. Actuarial surplus is the surplus of LIC arrived at after estimating the current assets value, over what is required to meet long term liabilities. The rest of the surplus- the surplus after deducting shareholders surplus- is policy-holders surplus. For example, the actuarial surplus for the period' 98-99 amounted to Rs 5,300 crore. The I-Trustee demand payble by the LIC at the prevailing rate of 12.5 per cent of amounted to Rs.662.5 crore. However, under the proposed tax package, the tax leviable will be reduced to Rs 450 crore. When asked whether the government will implement the recommendation of this report, the minister of state for revenue, GN Ramchandran, told ET, " It is a policy decision taken at higher levels. Whatever decision we take will be reflected in the budget." HDFC chief Deepak Parekh, and a 11-member expert group said: "The proposed package, by distinguishing between the income of shareholders and policyholders, is correct. The distinction is necessary as they are different kinds of income." The reasoning given by the rxpert group-headed by former member of Central Board of Direct Taxes, VU Eradi- for a softer approach to the LIC, is that LIC is likely to have a comparative disadvantage when pitted against the new entrants in the insurance sector, who will not be paying tax as their expenditure will exceed their income for the initial years. The expert group further points out that the new entrants in this sector will be concentrating on higher profit-yielding single-premiumpolicies and urban and semiurban areas, while LIC will have to continue with its obligation of providing cover in the rural sector and weaker sections of the socity. Besides, the bulk of the investments made by LIC will be in government bonds. Any additional tax burden will make the LIC's functioning totally non-viable, the expert group points out. KVM Pai, chief commissioner, Income-tax, Mumbai said," I cannot say anything now. The report has not been submitted to the government so far." However, the suggestion to consider the investment of LIC- after deducting the management expenses- as taxable income, was not accepted by the expert group. This is known as income-expenditure (IE) method. Though this method is in vogue in countries like the UK, the expert group found it complicated and cited innumerable amendments required in the laws to implement this tax structure. The taxable income determined through such a tax structure will be nearly RS 9,000 crore. The expert group is of the opinion that strict control and supervision exercised by the IRDA and the fact that the surplus will be determined on the basis of accounts prepared by IRDA regulations, will reduce the possibility of suppression of income. The report says the possibility of suppression of income by inflating the expenditure is higher in the IE method. Source: The Economic Times Dated: 2 January 2001

The recent decision of the Central Board of Direct Taxes (CBDT) not to scrutinies income-tax returns will continue for at least two years, it is learnt. When the decision to stop scrutiny was taken four months ago, the revenue authorities were not sure how long the department will continue accepting forms without scrutiny. However, it is now certain that the tax administration will require a two year time span for completing its cadre restructuring exercise and the first phase of computerisation. The decision to stop scrutiny of returns was taken to facilitate the smooth transition of the administration into a new system. Currently, only chief commissioners are vested with powers to order scrutiny of any return. They intervene only if the suspected concealment is massive, running into several crores of rupees or in cases where the concealment is apparent from the way returns have been filed. The CBDT wants total computerisation of tax administration to reduce direct interaction between I-Trustee officers and the assesses.

TAXATION Laws (Amendment) Bill 2000 which paves way for increase in surcharge on corporate tax by one per cent has been notified by the government. Domestic companies will be required to pay eleven per cent surcharge on corporate tax for the assessment year 2001-02. The increased surcharge is intended to form corpus for the National Centre for Calamity Management which is being set up by the government on the recommendations of the Eleventh Finance Commission to monitor natural calamities relating to cyclone, drought, earthquakes, fire, flood and hailstorm. The Bill had been cleared by Parliament in the winter session. Assistance provided by the Centre to states in this regards will be financed by this additional levy of special surcharge on the central tax for a limited period. The Act come into force with immediate effect. The government has also notified Appropriation (No 5) Bill 2000 which seeks to appropriate Rs 2,639.09 crore out of the Consolidated Fund of India to meet the supplementary expenditure of the Central Government for the financial year 2000-01. The Appropriations (Railway) No 5 Bill 2000 which seeks to appropriate Rs 30,000 out of the Consolidated Fund of India to meet supplementary expenditure of the Central Government on Railways for the financial year 2000-01 has also been notified. Source: The Economic Times Dated: 12th January, 2001

Money received on tenancy surrender not taxable: HC M Padmakshan MUMBAI IN A landmark decision, a division bench of the Bombay High Court has given relief to several thousands of tenants who were asked to pay tax on the amount they received on surrendering tenancy rights. The high court, in a recent decision on an appeal filed by Cadell Weaving Mill Co against a decision of the Income Tax Appellate Tribunal, has held that such income is not taxable. The decision will be applicable to all such transactions, carried out before April 1, ‘95. The high court order will help thousands of tenants who are fighting their cases at various stages of litigation. YP Trivedi, who appeared for the applicants, told ET, "This is a correct decision from the high court. The earlier decision by the ITAT has affected the poor and middle class people of this country." TP Ostwal, secretary of the Bombay Chapter of International Fiscal Association, told ET, "This is a correct order which puts an end to the thousands of cases filed against the order of the department." With this decision it is also clear that slum dwellers, who are given alternate accommodation, need not pay tax. The department has been claiming tax on the income arising from the surrender of slum dwellers’ tenancy rights. An amendment was made in the I-T Act to the effect that such income would attract capital gains tax at the rate of 20 per cent, from April 1, ‘95. The high court ruling will be applicable on all such transactions made before this date. The ruling was given by a division bench comprising Justice SH Kapadia and Justice VC Daga. The department argued that receipts on surrender of tenancy rights cannot be computed as capital gains tax. This is because cost of acquisition is the basis of ascertaining capital gains. In the case of tenancy rights there is no cost of acquisition. Hence, the department considered that such income can be computed as casual and non-recurring income and taxable. Cadell Weaving Mill had approached the high court against a decision by the Income-Tax Appellate Tribunal in ‘95, upholding this line of argument that income arising from the surrender of tenancy rights is "casual and non-recurring" income and taxable. Following this order, the I-T department has started issuing demand notices to many tenants who surrendered their tenancy rights for alternate premises. Besides, it has also re-opened several thousands of assessments, to tax the income related to surrender of tenancy rights. The background of the case is as follows: Cadell Weaving had obtained in ‘89 Rs 1.4 crore by surrendering the possession of its premises to the landlord. The profit and loss account maintained by the assessee disclosed this amount as profit but did not declare the amount for the purpose of taxation. Cadell Weaving defended its decision not to declare the amount for taxation on the basis of a Supreme Court judgement. The Supreme Court had held that tenancy rights are a capital asset and transfer of a capital asset yields capital gains. If, for some reason or other, the amount cannot be taxed under capital gains, it cannot be taxed under any other head. However, the assessing officer did not agree with the contention of Cadell Weaving. He treated this amount as casual and non-recurring income, under the head "income from other sources". The assessing officer held that under the scheme of I-T Act, whichever receipts fall within the natural meaning of income should be taken as income. The assessing officer’s decision was upheld by ITAT. Sinha declines comment on savings rate talk Mahajan opposes FM's bid to tax e-commerce MFs want dividend tax cut Tax breaks for SEZs to lure pvt funds on cards Plan panel in bid to finalise state outlays before Budget Big players want small textile units under excise net Budget won’t relay tremors after quake, feels industry Reforms must in consumption and production Expenses on earning income set to lose tax exempt status Small cars may lose excise advantage as govt rethinks Hindujas stay in A-I race, talk with airlines Electrical & electronics cos demand fair play Tour operators slugfest on Consumers apprehensive about employment BIFR asks govt to approve diversification of Bibcol Subterranean sounds may warn of earthquakes Amount received due to surrender of tenancy not taxable: HC Money received on tenancy surrender not taxable: HC Source:-The Economic Times 15-2-2001

Though the institute of Chartered Accountants of India (ICAI) sought to change the rules of the game for the leasing industry by issuing a new accounting standard, the Income Tax Department has thought otherwise. In a circular issued by Central Board of Direct Taxes (CBDT) today, it has been clarified that depreciation would continue to be claimed by the lessor in its profits computed for income-tax purposes. However, in accordance with the accounting standard issued by Institute of Chartered Accountants of India, the lessor would not be able to provide for depreciation in its accountants with effect from financial year ’01-02. When ICAI issued exposure draft to its accounting standard couple of months back, exports had voiced concerns that CBDT may also follow suit in regard to claiming of depreciation by the lessee. CBDT had also made a proposal about five years back to bar lessors from claiming depreciation, but dropped it following vehement protests by leasing industry. Experts believe that if Central Board of Direct Taxes were to do so, it would have a far reaching impact on corporate finance and more particularly, for finance companies. It would have also sounded a death knell for the leasing industry. Central Board of Direct Taxes has now sought to allay these fears the circular states that ,”it has come to notice of the board that new accounting standard of Institute of Chartered Accountants of India requires capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the income Tax Act”. It may be interesting to note that leasing companies have filed a suit in the Madras High Court to stop ICAI from implementing its accounting standard is mandatory in nature from next fiscal. The Central Board of Direct Taxes circular goes on to clarify further that in case of sale and lease back of assets without any alteration in the situation of assets and its working, the denial of depreciation claimed has to be considered keeping in view principles laid down by the Supreme Court in case of McDowell and Company. In case where assets were factually non-existent, having been created though hawala transaction; the question of allowance of depreciation does not arise, it adds. Source : The Economic Times Dated : 10 February, 2001

The Union Cabinet today approved the promulgation of an ordinance called Taxation Law Amendment Laws, 2001 to raise Rs 1,300 crore towards relief and rehabilitation of the Gujarat earthquake victims. The amount would be collected through the levy of a 2% surcharge on individuals and companies alike for the assessment year ’01 – ’02. ET had first front-paged the news about the government imposing an earthquake surcharge. This was dismissed by finance minister Yashwant Sinha as “speculation”. The levy would be in addition to the surcharge already imposed by the Finance Bill 2000. In case of individuals it would apply to persons with income above Rs 60,000 for assessment year ’01 – ’02. The effective reta of corporate tax has now become 39.2% for the assessment year ’01 – ’02, against 38.5% projected earlier. In case of a bill pending in Parliament to implement the eleventh Finance Commission’s recommendations also goes through, companies will have to pay another 1% surcharge for setting up a national calamity fund. In case of individuals, the effective rate of tax in the highest bracket (exceeding Rs 1.5 lakh per annum) works out to be 34.5% after today’s revision. Though the income tax rate is 30% in the highest bracket, individuals with incomes exceeding Rs 1.5 lakh are already subject to a 15% surcharge. In case of individuals with income between Rs 60,000 and Rs 1.5 lakh, the effective rate of tax now works out to 23.4% instead of 23% earlier. Individuals below Rs 60,000 would, however, not subject to the earthquake levy. Simultaneously, the Union Cabinet also cleared a slew of amendments to the IT law which would provide exemptions to those making contributions to the relief and rehabilitation effort Under the amendments cleared, 100% deduction would be permitted for donations made to charitable institutions for providing relief to earthquake victims of Gujarat. Earlier, this was available only to the prime minister’s and chief minister’s relief funds. Five conditions would, however, have to be met to quality for deductions. These include: · Deductions would be available only to institutions registered under Section 80G · The institutions would have to maintain a separate account of expenditure for providing relief to earthquake victims. · The exemption would be available to donation which are received on or before September 30, ’01. · The amount would have to be utilized before March 31, ’02 · If the amount is not utilized, the money would have to be given to the PM’s relief fund or the institution will have to pay the tax. Detailed accounts have to be filed with the CBDT before June 30. ’02. All materials, including construction material for earthquake relief, will also be exempt from import duty. Any material produced by indigenous industry including cement, steel, tents, etc which can be used for earthquake relief will not be subject to excise duty. Benefits under Section 35AC will be available to all assessee including corporate who wish to take up relief work. Source : The Economic Times Dated : 2 February 2001

THOSE of you who may have been wondering whether those monthly tax free reimbursements for expenses on telephone calls and conveyance were in fact taxable can rest easy. You won’t be hit suddenly with massive tax demands because the Income-Tax Appellate Tribunal has ruled that they are not taxable, even if they are a fixed amount given to the employees along with the salary. The ITAT, a quasi judicial body which decides on the disputes between assessees and the I-T department, gave this order in an appeal filed by the I-T department against the order of a commissioner (Appeal). The assessing officer in this case has demanded interest from the assessee, namely, Merchant Marine Education & Research Centre, for not deducting taxes by way of deduction at source on the reimbursement of the conveyance and telephone charges given to its employees. The assesing officer’s point of view is this case was that the company has been giving conveyance as part of the salary and there was no precise record kept for the travelling and telephone charges. The AO has found out that reimbursement of conveyance allowance was made along with disbursement of salary at a fixed rate. Also, the claim of reimbursement of expenses were obtained from the employees, after the disbursement was made. The employees have also not furnished any journey details. The AO considered these reasons sufficient to consider it a part of the salary. According to him it was a fixed allowance in addition to the salary given to all the employees depending on their grade. In the AO’s opinion the company ought to have deducted tax at source in accordance with the provisions of sec 192 of I-T Act. According to the counsel for the assessee, the employees have given declaration regarding incurring of expenses though the amount has been given on fixed basis and even given during the leave period. He referred to the earlier decision of ITAT in ICICI Ltd vs 4th ITO. Since the company believes that the amount was given to its employees for traveling for official purpose, the amount does not come within the purview of “salary”. Accordingly no deduction was made. The ITAT bench comprising M A Bakshi and S V Mehrotra gave the order justifying the company’s decision not to deduct tax on account of the payment made on conveyance and telephone bills. The ITAT has observed that the staff were not paid a separate travel allowance even for travel from their residence to any other place of duty other than the fixed allowance. Source : The Economic Times Dated : 14 February, 2001

The forthcoming Budget is expected to resolve the issue of whether expenditure incurred for earning income which is exempt from tax, is allowable as deduction or not. Since the law is uncertain on this issue at present, the government has been losing a few thousand crores on this count every year. This is one of the issues the finance ministry has been examining and it is likely that the Budget will contain a proposal amending the Income Tax Act which will allow tax authorities to disallow such expenditure. For example, if a party borrows money and invests that money in infrastructure bonds, or a similar investment, the income arising from such investments is exempt from tax. The issue at present is whether the interest payable on account of the borrowing is allowable as deduction or not. There are two Supreme Court judgments on this issue. The first one is in Orissa State Warehousing Corporation (1999) 237 ITR 589(SC). The apex court, in this case, had stated that such expenditure (in this case interest payable on account of borrowing) is not allowable as deduction. However, in a subsequent decision in the case of Rajasthan State Warehousing Corporation (2000) 242 ITR 450 (SC), the Supreme Court held that in an integrated business having taxable as well as non-taxable income, expenditure incurred for earning tax-exempt income can be allowed as deduction. It is however, understood that there was no reference to the previous Supreme Court decision during the course of hearing of this particular case. Since two Supreme Court decision expressed divergent views on the same issue, the law on this issue has become uncertain. The revenue authorities have also realised that they are also losing revenue as big financial institutions have started taking advantage of the situation by claiming exemption on the interest arising from investment and the expenditure incurred on borrowing the money. Now the finance ministry has taken notice of the inherent contradiction in this issue and contemplates amending the law. Source : The Economic Times Dated : 14 February, 2001

It's final. Voluntary retirement scheme expenditure will now be treated as 'capital expenditure' for taxation purpose. This means that such expenditure will be disallowed for the purpose of computing taxable income. The reasoning of the I-T authorities is that since such expenditure is expected to yield benefit in the long run, there is no need for allowing a deduction. In a circular dated January 23, the Central Board of Direct Taxes has clearly stated that any ex-gratia amount, which resulted into an 'enduring benefit' to assessees, should be treated as 'capital expenditure'. VRS expenditure was treated as 'revenue expenditure' and charged against profit and loss account of assessees. Consequently, the taxable net profit would come down sharply and thus assesses had to pay lower tax on the profit arrived after VRS payments. "In the event, the expenditure is laid out for acquiring or bringing into existence as asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure," the circular said. "If any such asset or advantage for enduring benefit of the business is thus acquired or brought into existence, it would be immaterial whether the source of payment was the capital or the income of the concern or whether payment was made once and for all or was made at instalments," it added. The move is most likely to hit public sector banks and some pharma companies which have resorted to VRS in order to restructure operations. Public sector banks who top the list of largest 100 tax payers, are certainly the major contributors to the tax kitty -- and this move is aimed at forestalling revenue loss. The CBDT directive would translate into an additional tax burden of around Rs 1,400 crore for public sector banks as they have resorted to huge VRS programmes in order to restructure operations, feel banking sources. Source : The Economic Times Dated : 22 February, 2001

The budget has indeed taken steps to curb investors from taking advantage of dividend stripping by investing in mutual funds for the short term. This was possible under Sec 94. But realizing that this results in "unintended benefit flows to the taxpayer", the government intends to introduce a new Sub-section (7) in the above section. "If a person buys or acquires securities or unit within a period of three months prior to the record date fixed for declaration of dividend or distribution of income and sells or transfers the same within a period of three months after such record date, and the dividend or income received or receivable is exempt, then, the loss, if any, arising from such purchase or sale shall be ignored to the extent such loss does not exceed the amount of such dividend or income, in the computation of the income, chargeable to tax, of such person". The finance ministry was expected to plug this loophole and they have done it

The Budget-2001 has reduced the efeective surcharge to 2% from the exisiting higher levy.The surcharge shall not be applicable in case of a person having income of Less than Rs. 60,000.

The finance Bill-2001 has brought about a change in method of taxing perquisites, which shall be taxable at cost to the Company as against pre-determined amount previously.The Amendment is likely to cause a higher tax burden on the executives receiving higer level of perquisities.

The Madras tribunal has ruled that NBFCs should be allowed to be deduct provisions for non-performing assets from profits before offering these for the purpose of taxes.This is a significant ruling and might give some relief to the trouble-torn leasing and hire-purchase industry. The ruling relates to provisions for NPAs that leasing and hire purchase companies are required to make as per the Reserve Bank of India rules. Tax laws have always maintained that a provision is not an Expense. However, there are specific provisions in the tax laws relating to provisioning by banks and financial institutions, though none for NBFCs. The Madras Tribunal directive now restores this imbalance. A word of caution, though. The NBFCs will be relieved only if the ruling of the Madras Tribunal is the final word on the law. For a long time now, finance companies have been imploring the Central Board of Direct Taxes for a level-playing field with banks and financial institutions. The tax authorities have yet to oblige. According to Vinod Kothari, an eminent leasing and hire purchase expert, this is an extremely important ruling and NBFCs must make the most of it. Though a ruling by Tribunal does not have a very persuasive force with tax officers other than those under the jurisdiction of the particular Tribunal, the case is worth trying, and the arguments given in this case are very strong indeed. So, till the tax authorities react, NBFCs can exult in this victory of sorts. In the case of Overseas Sanmar Financial Ltd, the Madras ITAT Bench C has held that provisioning against bad and doubtful debts by an NBFC, as per the norms of the Reserve Bank of India is deductible against the income of the company. It stated further that the RBI is only a wing of the finance ministry to which the CBDT is attached. If the RBI by its mandatory circulars or accounting standards requires an NBFC to make a certain provision, which it deems necessary for true and fair assessment of the profitability/assets of the company, the CBDT must give effect to it for tax purposes as well. Here is an important citation from the ruling: “The consequence is the share in the true income of the NBFC would have to be restrained to that part that is arrived at after allowing for provision for doubtful and non-performing assets. RBI’s directive to account for income on cash basis is an appreciation of the fact that it does not make sense to account the income on accrual basis giving no credence to the actual recovery and later allowing deduction for irrecoverable debts including debts that could not be recovered in full from the security provided because of erosion in the value of the security. The Department that is partner in income earned by companies and other persons to our mind should accept the concept of income as directed to be shown by the RBI and after deducting for provision for doubtful loans and advances from such income.”

1st May, 2003. The finance Minister has proposed and amendment to the Finance Bill, 2003. In the original proposal contained in the Bill,long-term capital gains on sale of Equity shares acquired after 1st march, 2003 but before 1st march, 2004 were to be exempt. This prompted many to think that they can acquire the Equity Shares by gift from near relatives and claim exemption. In the amendment now passed by Loksabha, the word "purchase" has been substituted for "acquire" so planning by Gifts is now ruled out. In another amendment, it is now stated that capital gains will be exempt only if the shares are purchased from a stock exchange. Thus private transfers will now not be eligible for exemption from capital gain tax.

7th May 2003. Today in the Loksabha, a Bill known as "The Election and Other Related Laws (Amendment) Bill,2003, was introduced. The Bill provides that any person giving donations to political parties would get deduction under the Income-tax Act. There is no ceiling on amount of deduction for individuals, HUFs and partnership firms. Companies can contribute upto 5% of their profits.

Tax exemption for over 5 lakh package

19^th November, 2003: The commissioners of income tax (appeals) in Mysore, Mangalore and Hyderbad have ruled in separate cases that assessees can claim relief under Section 10(10 C) even if the assessable income is over Rs 5 lakh, if such payment is in the nature of compensation received by the assessee from his employer in connection with the termination of his employment”. The only rider is that the assessee must have been in continuous service for “ not less than 3 years”. Besides, the number of years of service remaining under the terms of employment should not be less than three years. Currently, the income-tax department taxes all income over Rs 5 lakh received as compensation for voluntary retirement.

Legal sources said employees of other industries could now claim income-tax relief too. The assessing officers’ contention was that relief under Section 10(10C) of with Income Tax Act, read with Rule 2BA, was permissible to the extent of Rs 5 lakh only in respect of exgratia payment received under voluntary retirement schemes. Further, they ruled that relief under Section 89(1) was allowed in respect of exgratia payment in excess of Rs 5 lakh, only if the Central Board of Direct Taxes deemed it fit. The appellant in the Mysore case pointed out that the Madras High Court had ruled in favour of an appellant who had claimed relief under Section 89(1) of the Income Tax Act.

· 50% Dearness Allowance of the pay will be merged with basic salary of Central government employees · No change made to tax structure · Government committed to 2nd green revolution. · Govt to focus on jobs generation, poverty eradication and fiscal consolidation · GDP growth is expected to be 7.5 to 8 percent in the current fiscal year. Level of growth is matter of great satisfaction, says finance minister · Declining interest rates and buoyant capital markets have boosted the economy · First RBI forex report today · Six hospitals- one each in Andhra Pradesh, J&K, Tamil Nadu, West Bengal, Jharkhand and Uttraranchal- to be upgraded to the levels of AIIMS · All farmers will be eligible for credit cards by March 31, 2004 · Kisan Credit Cards to be made ATM-compatible · Committee to be set up for agriculture credit. · Tea growers to get loans up to Rs.200, 000 at 9% interest rate. · The loan limit on credit card for small- scale entrepreneurs to be raised from Rs.200, 000 to Rs.10, 00,000 · National Cattle Development Board to be set up · Non-lapsable defence modernization fund of Rs 25,000 crore being created · Accelerated drinking water projects for Banglore, Chennai, Hyderabad and Delhi to be implemented. · Additional innovative funding to be given to speedier execution of Indira Gandhi Canal project in Rajasthan. · Airport in Jaipur to be upgraded to an international airport. · IDBI’s role to be strengthen as a lead development financial institution. · Service tax procedures simplified · Long-term capital gains tax break extended by 3 years. · E filing of excise returns from June 30. · Income tax deduction, standard deduction to be revisited. · Rs 15,000 crore for co-operative sector · Stamp-duty cut up to 50% · Defence modernization fund of Rs 25,000 cr · I-T exemption on power projects extended · Tax burden reduced for shipping companies · Farm fund to give loans at 200 basis points below PLR · Task force to review desert development programmes. · Special package for tea, industry to be announced · Countervailing duty for power sector to be examined · Single return and registration for service tax payers · Rs 11,145 crore savings achieved in expenditure · Customs clearance to be on basis of self-assessment from June 30 · E-filing of excise returns to be introduced from June 30 · Net tax revenue pegged at Rs 1,87,539 crore · Non-tax revenue pegged at Rs75, 488 crore, an increase of Rs 5732 crore. · Fiscal deficit at 4.8% of GDP, revenue deficit at 3.2% · Singh promises to rein in inflation at 4.3%

The going may be easy for senior citizens subscribing to dada-dadi bonds being launched from April 1. The government is looking at providing greater flexibility in terms of exit option, making the bonds transferable, tradeable in the secondary market and eligible as collateral for loans from banks and financial institutions. The government is also weighing the option of making the bonds taxable. The interest rate on these bonds may be fixed at or over 9% given that the taxable Varishta Bima Pension Yojana provides for an assured annual return of 9%. Strictly speaking, there cannot be any like-to-like comparison between these two schemes. The other option is to make the dada-dadi bonds tax free, in which case the effective yield from the bonds has to be over 8%, since public provident fund deposits offer 8% tax-free, equivalent to 11.4% taxable. Finance minister Jaswant Singh has given an assurance that the dada-dadi bonds will carry an interest higher than the prevailing rate of interest and all citizens above 60 years would be eligible to subscribe to these bonds. The expert committee set up to undertake comprehensive review of all small-savings interest rates and the structuring of these instruments is scheduled to meet on Friday to finalize the features of the dada-dadi scheme. RBI deputy governor Rakesh Mohan chairs the five-member committee, which includes expenditure secretary D Swarup. The government may provide a flexible exit option, keeping in mind the age factor. Currently, premature encashment option is not available in the 8% taxable (savings) bonds, which can be redeemed only after six years. There is, however a provision for premature encashment in the 6.5% tax-free bonds after a minimum lock in of three years. These bonds can be redeemed after five years. While the 8% taxable bonds are not transferable, the 6.5% tax-free bonds are transferable only by gift. Neither bonds are tradeable on the secondary market. They are also not eligible as collateral for loans. These features may not be replicated in the dada-dadi bonds as the government is looking at making them transferable and tradeable. The government could, however, have an investment ceiling on the dada-dadi bonds. The 6.5% tax-free and 8% taxable bonds do not have any investment ceiling. One of the suggestions made is to index the rate of interest on dadi bonds to inflation, as the idea is to protect the real income of senior citizens. But by promising an interest rate that is higher than the prevailing rate, the government is going against the basic philosophy of the Reddy Committee, which recommended benchmarking of the administered interest rates to the G-sec yields of similar maturity.

2nd April 2004: Equity-oriented Mutual Funds (MFs) including UTI AMC will now have to pay 12.5% dividend distribution tax. These funds were exempt from paying dividend tax for one year beginning April 1 2003 upto March 31 2004; companies undertaking R&D were entitled to a 100% deduction for ten years under Section 80 IB (8A). But from 01/04/04 this facility ceases to exist, exporters will also now have to pay income tax on their profits. With elections just around the corner, the finance minister, Jaswant Singh has given assurance to extend the benefit for another year if the BJP-led government comes to power, but this is possible only if relevant changes are made in the Income Tax Act. The government has also shown intention to extend the concession given to investors purchasing listed equities who enjoyed capital gains tax exemption. The finance minister went by the past precedents and refrained from tinkering with the sunset clauses, while presenting the vote on account. This was notwithstanding pressure from the export community, which protested against the phasing out of 80 HHC and 80 HHE. The new government, which comes into power at the Centre, can always restore the provisions with retrospective effect. This effects not only the exporters, but companies carrying out scientific research and development, mutual funds and investors.

13 April 2004:Wipro Technologies did not produce separate books of accounts for the units for which it had claimed tax benefit under Section 10A of the Income-Tax Act. The income tax department therefore has demanded a 261.4 crores tax payment. The Finance Ministry is still processing the software industry’s demand for clarification on the legal intent of Section 10 A which confers a tax holiday to new undertakings set up in software technology parks and commencing production after April 1, 1994. The Assessing Officer is understood to have held that the units for which tax benefits were being claimed were not independent units but expansion of existing units. The tax benefit was denied because separate books of accounts were not produced and profit figures could not be substantiated for the units for which the tax deductions were claimed. Wipro Technologies made a formal representation to the Central Board of Direct Taxes last week saying that it was eligible for a tax holiday. It has also sought a clarification on the legal intent of the income tax provision. The issue is now sub-judice as the matter is before the Commissioner of Income Tax (Appeals). Undertakings set up and commencing production after April 1, 1994 are entitled to a tax holiday under Section 10A. However, the existing income tax law says that the undertaking will not qualify for the benefit if it is formed as a result of splitting up or reconstruction of a business already in existence. It also says that the benefit will not be given if the undertaking is formed by the transfer of new business of machinery or plant previously used for any purpose. The assessing officer has mentioned the ruling of ITAT Hyderabad, where the tax deduction was disallowed to expansions since the original unit was set up before the tax concession was in force.

19th April 2004: The government might ease tax liability for large sections of industry soon by reducing the rates at which various tax deduction at sources (TDS) are made. Falling interest rates in the economy has prompted the government to consider such a move. TDS is charged on the total receipts of an individual or a company and not on the actual income earned. Hence, at the current rates, the tax liability has grown disproportionately against the actual income earned by the entity. The reduction of TDS rates is expected to remove this irregularity. This step is major because over 50 per cent of the annual income tax revenue earned by the department is accounted for by TDS returns. After a decade the ministry has crossed its enhanced revised tax receipts estimate to mop-up Rs 1,04,287 crores as per the data available till April 15. This makes the ministry confident that in spite of the rationalisations it would not slip in meeting the tax mop-up target for 2004-05. Most of the TDS provisions from Section 193 to 197 of the Income Tax Act, 1961, were last changed in the mid nineties. But the rates of interest in the economy have come down considerably since then. As a result, the profitability conditions have changed and it is felt that the TDS rates on various economic activities are on the higher side.

12th July 2004: The 2% education cess is levied on income and corporate tax is applicable from April 1, ’04. This would be an observant for India Inc and individual tax payers. The education tax is with retrospective effect – i.e. beginning April 1, ’04, it is dissimilar from the proposed securities transaction tax. The securities transaction tax is levied only after the government notifies an effective date. The 2% education cess is payable as additional surcharge under income tax.

            This means that the taxpayer has to factor in the 2% cess while, say, withholding tax at source or paying dividend distribution tax. Tax professional says, “Technically speaking, companies will be well advised to take the same into consideration. Though practically speaking the taxpayer can pay the cess on dividend distribution tax after the Finance Bill is passed.”

            Including 2% education cess, the tax rate for domestic companies is 36.6% and for foreign companies is 41.8%. Companies have paid their first installment of advance tax in June. Around 15% of their expected tax liability for the current fiscal is paid by the Corporates in their first installment. The cess cannot be legally enforced till the passage of the Finance Bill; therefore the proceedings will accrue later to the government.

            The government has budgeted receipts of Rs 4,910 crore from the education cess on direct and indirect taxes. Of this Rs 1,590 crore will be realised from corporation tax, Rs 920 crore from income tax, Rs 750 crore from custom, Rs 1,500 crore from excise and Rs 150 crore from service tax.

13th July 2004: There is shocking news for those salaried employees who do some part-time business to make extra money. The Finance Minister P. Chidambaram has played a clever trick against them. As per the amendments in the Finance Bill, which is passed by the Parliament, these taxpayers will not have an option of setting off their business losses against their income from salary.

At present, numerous taxpayers who deliver part-time services like consultancy and freelancing incur their expenses on telephone bills, depreciation on car, etc. They show such expenses as their business loss and such losses are set off against their salary incomes to lower their tax liability.

This clearly indicates that the taxpayers are taking advantage of the loophole in the I-T law.

24th July 2004: To constitute a permanent establishment of foreign entity in India, the country manager in India, of a foreign entity, has been held by the Authority for Advance Rulings (AAR). The foreign entity will be taxable in India, but only to extend that profits can be attributed to Indian operations. A foreign entity can be taxed in India only if it has a permanent establishment (PE) in India. If a person acting on behalf of the company is held to be a dependent agent, a PE is constituted.

            Andhra Pradesh government has honored Sutron Corporation, headquartered in US by two contracts. Each contract consists of two parts – the first dealt with supply of goods to specimen remote stations and the on- the- spot training of personnel. The second part dealt with providing local material and services. For the second leg of the contract, the foreign entity entered into a separate agreement with a local Indian company.

Based on the facts presented, the AAR held that Naresh Goel, Sultron’s country manager in India was not an independent consultant. He was an employee of US Company, for which he was paid a fixed remuneration, in addition to various perks such as local conveyance and driver’s salary.

Mr. Goel, apart from various other activities, was authorised to submit bids and sign contracts with the AP government, thus, he was a dependent agent. His place of residence, from where the activities were carried out, was held by the ARR to be an office or permanent establishment of Sutron Corporation in India.

The AAR held that the profits under the contracts with the AP government for the sale of equipment, the installation and the service agreement would be deemed to accrue and arise in India. Only so much of the profits would be taxed in India, as can be attributed to the establishment. Typically, once a PE is held to exist in India, attribution of income, which can be subject to tax in India, becomes a tricky issue. In this case, while the contracts were executed in India, the goods were delivered in US to the carrier appointment by the buyer (AP government).

Dinesh Kanabar, partner, RSM & Co. said, “As regards attribution, courts have held in several instances that when goods are sold outside India, no income can accrue or arise in India.”

13th July 2004: The provisions for anti-dividend stripping (buying securities prior to declaration of dividend/interest and selling them after receiving dividend/interest) are already contained in the Act. The Budget proposes to increase the time period between the record date for payment of dividend and sale of mutual fund units (not the stock and shares) from 3 to 9 months. Hence, units bought prior to 3 months from record date and sold within 9 months after the record date would attract dividend-stripping provision under section 94(7) of the Act.

Further, anti-bonus stripping (buying securities cum-bonus, receiving the bonus securities and thereafter selling the securities partly) provision are proposed to be inserted vide sub-section 8 to section 94 of the Act. Hence all purchases of stocks, shares and units 3 months prior to the record date of declaration of bonus and sale thereof with 3 months (for stocks and shares) or 9 months (for units) shall be covered and any loss arising on bonus stripping will not be allowed for tax purposes.

24th July 2004: The finance minister has hold on to the 0.15% transaction tax on delivery-based trade in equity. The tax is to be share equally between the buyer and seller. This means that for every transaction worth Rs 100, the buyer and the seller will have to pay 7.5 paise each. The benefit of the new tax treatment on capital gains will be available when STT is paid.

The tax rate for day traders and arbitrageurs has been lowered to 1.5 basis points or 0.015%. This group is among the prime beneficiaries, since they will be allowed to take credit for STT, while paying income tax on business profits. The original proposal did not extend such a credit facility. It means that traders who pay tax on business income will not have an extra tax burden on account of STT. Those who don’t will now, not only pay a small amount of tax but also leave an audit trail for potential use by taxmen. For derivative traders, the tax rate has been cut to one basis point (0.01%) and they will also be allowed to take credit for STT against business tax on profits.

The rate changes have been proposed, based on a distinction between two sets of intermediaries in the capital market – one for those who pay capital gains tax and the other for those who pay income tax on business profits. Credit for STT will therefore be available even on delivery-based transaction in cases where they are declared as business profits.

            Unit holders of equity-oriented funds have now been given the benefit of the new capital gains tax treatment, as units will be treated as securities. But like any other equity traded on the stock exchange, they would now have to pay a STT of 0.15%.

27th July 2004: In Board’s Circular No. 2 of 2002, dated February 15, 2002 states the tax treatment on income from deep discount bonds. Thereafter, the Board has received various requests for a clarification regarding tax deduction at source under section 193 of the Income-tax Act from interest on deep discount bonds. The taxpayers have to face the difficulties in view of section 199 of the Income-tax Act, which provides that credit for tax deduction at source shall be allowed only in the year in which the corresponding income is declared.

            It is further simplified that only at the time of redemption of such bonds, irrelevance of whether the income from the bonds has been declared by the bonds-holders on accrual basis from year to year or is declared only in the year of redemption, tax is required to be deducted at source under section 193 or section 195, as the case may be.

            It is further clarified that a person will be entitled to make an application under section 197 of the Income-tax Act, requesting the Assessing officer to issue a certificate for no deduction of tax or deduction at a lower rate. It is for such a person who declares the Income from a deep discount bond on annual accrual basis during the term of the bond. In such a case, the assessee should furnish, along with the prescribed From No.13, details of the income offered for tax by him from year to year .In case the assessee is not the original subscriber, and has acquired the bonds from some other person, he shall furnish the relevant particulars including the name, address and PAN of such other person. If the Assessing Officer is satisfied that the applicant assessee, has declared his income from the bonds from year to year on accrual basis during the period the bond was held by him, he shall issue a certificate allowing the tax deduction at source at such reduced rate as is justified by the total income of the applicant in the year of redemption.

Similarly, an assessee being a resident individual, who is the original subscriber of a deep discount bond, may furnish a declaration in From No.15H in accordance with section 197A if the has been declaring income on the bond from year to year on accrual basis, and no tax is payable on his total income, including the interest accruing during that year, in the year of redemption. However, such a declaration cannot be filed by an individual, other than a senior citizen availing tax rebate under section 88B of the Income-tax Act, if the amount of a accumulated interest, being paid on redemption, exceeds the maximum amount not chargeable to tax in his case [Source: CBDT Circular No. 4 of 2004, dated May 13, 2004].

29th July 2004: Transaction tax is the charge that the stock exchange levies on every transaction in securities is listed on the exchange. It is the percentage of total value of the transaction and can be levied on either the buyer or seller, or seller, or both for every trade they undertake in securities. Many stock exchanges levy this fee as a charge for providing the trading facility to investors.

            This is meant for meeting the operational costs of the exchanges. Though, in some countries, the government levies a small tax on every stock market transaction as a revenue collection tool and in lieu of tax imposed on profits from such trades.

As a result, transaction tax goes to the government as part of its revenue collections and it is in addition to the fee levied by the exchanges as operational charges.

30th July 2004: P. Chidambaram, the finance minister has finally set on the argument over the taxation of business process outsourcing (BPO) units in India. The difference between core and non-core (incidental) activities performed by a BPO unit of a foreign company will be done away with. This should legally make parallel the Indian tax practice with international norms. And, from now on, tax will be attributed to a foreign company only if its dependant BPO outfit in India is paid less than the market price. An official statement will be made shortly.

            The difference between the market price (i.e. arm’s length price) and the actual price paid to the Indian company will be taxed in the hands of the foreign company. Mainly, the taxman will have no caution in determining what is core and non-core activity.

            Near the beginning of this year, government had threatened to tax the India-based captive BPO units of overseas MNCs. The concern was whether the work done by the captive unit in India enhanced the MNC headquarters’ profitability by intentionally keeping pricing low - or, in other words, whether the MNC paid a sub-market price to the captive Indian BPO to improve its global profitability.

The circular issued by CBDT in January this year had differentiated between the core and non-core activities for the tax purposes. Core activity characteristically considered when it contributes significantly to the overseas parent’s turnover or profits. For example, research and development work or even direct selling through callings from India is considered as a Core activity. Non-core activity typically referred to low-end work, such as payroll processing, which did not typically add to the bottomline. This created confusion as it was reckoned that tax authorities could use their discretion while defining core activities for tax purposes.

 Transfer pricing rightly used

According to Samir Gandhi, tax partner with Deloitte, Haskins and Sells, “This is a correct application of the transfer pricing principle where due weightage is given not only to services rendered in India by the BPO unit but also to the assets - brand name, customer relationship etc - deployed and business and economic risk taken by the foreign company.”

The profits of a non-resident or foreign company attributable to the business activities carried out in India become taxable under the Income Tax Act if the non-resident or foreign or foreign company is treated as having a business connection in India (under ITA section 9) or a permanent establishment (PE) under article 5 of a tax treaty.

            The CBDT circular held that the manner and extent of the attribution of profits resulting from BPO units will ultimately depend on the facts of each case and the nature of services provided by the BPO unit, as determined in accordance with the provisions of the relevant treaty and applicable domestic law.

04th August 2004: The government is likely to exempt special economic zones (SEZs) and export oriented units (EOUs) from the 2% education cess. Government sources said that the concession is expected to be extended to software technology parks (STPs) and electronic hardware technology parks (EHTPs) too. On the basis of suggestions from the commerce department, the finance minister is considering this move.

At present, the cess is applicable on the domestic tariff area (DTA) sales of SEZs, EOUs, STPs and EHTPs. Sale in the domestic market by any SEZ unit attracts full custom duty whereas EOUs pay 50% of their custom duty or excise on the product; whichever is higher. After achieving net foreign exchange (NFE) criteria whereby their exports have to be higher than imports, EOUs are allowed to sell in the domestic market. The sources said, SEZ units and EOUs had demanded that they should be exempted from the 2% education cess and the commerce ministry has supported this view. The finance ministry has to take the final decision, is expected to provide the exemption before the 2004-05 Finance Bill is passed.

            Nearly 1,700 EOUs and more than 600 SEZ units will be benefited. To promote exports, the government has exempted SEZ units from import duties and income tax. The income-tax concession available to EOUs, however, is set to be phased out by 2009. While the government is drafting a new legislation for SEZs, the Kelkar committee on fiscal responsibility and budget management (FRBM) has suggested that the concession available to EOUs under Section 10 A and 10 B of the Income-Tax Act should be phased out in two years. Presently, the cess is applicable on all central levies including customs, excise and service tax, apart from income tax and corporate tax. The only exemptions are items on which the bound rate and the applied rate of customs duty are same and products on which a import duty ceiling has been imposed under bilateral or international agreements.

12th August 2004: Crossing the Rs 1 lakh income tax limit will result in loss of various benefits. To calculate the total income, for the salaried, there are the amounts received under various heads from their employer plus the value of any perquisites that may arise. From this amount, various deductions like standard deduction and professional tax are taken out to arrive at the remaining figure of the income from salary. Then in the situation of income from house property, people who are residing in their own houses bought with a loan and have interest payments, will have a negative figure, which can go on to reduce the total income of the person. Next is income from business, which gets added to the total income though one has to remember that losses from business cannot be adjusted against income from salary as per a new provision in this Budget. Capital gains as well as income from other sources are then added together and the total of all this is the gross total income.

Set-off of losses are undertaken at this stage and after that various deductions like the amount paid as premium for medical insurance and premium for pension payments, donations, repayment of education loan, 80L etc are reduced to arrive at the total income liable to tax. This term is often referred to as taxable income or taxable total income.

This is the concluding figure that one has to consider for the Rs 1 lakh benefit. One major thing to note that there are a slew of rebates available like Section 88, which provides for rebate at a certain percentage of the amounts invested in specified investments or a rebate of Rs 5,000 for women, which will not be considered for the purpose of total income. Hence investments in these avenues will not be helpful to investors in reducing the burden of the taxable income to bring them down below the Rs 1 lakh limit.

The next step is to check whether the total income figure so arrived at is below Rs 1 lakh. If yes the additional rebate of the tax payable will be applicable and the final tax to be paid for the individual will come to zero thus release them from any payment necessities.

09th August 2004: Salaried employees will no longer have to chase their employers for Form 16 in June before filling their income-tax returns. Instead of the employer, the income-tax department will now issue a tax-deducted at source (TDS) certificate to the salaried class. The Finance Bill seeks to amend Section 200 of the Income Tax Act and states that any employer deducting TDS will have to file quarterly statement to the income-tax authorities. The taxman will then prepare and deliver a statement to every person whose income tax has been deducted. An advocate said the employer would not be in the picture and the onus would be on employees to ensure that they had the necessary TDS certificates to file their returns.

31st August 2004: There are numerous people with the income just above 1 lakh who may be in anticipation of a pay rise and are looking forward to the possibility of a larger income not being taxed in the outcome of the passage of the Finance Bill. However, there are several things they need to understand. It will be appropriate to be ready with your chequebook to pay some taxes. The benefit here is that you will not pay more than what you earn above the one-lakh mark. The additional relief, which is provided by the finance minister, needs to be understood in the right context as regards the exact benefit and its applicability.

            The first point is that the benefit of the rebate for income tax is for all those who have a total annual income of not more than Rs 1 lakh. It means that the figure for importance is total income and this has to be either less than Rs 1 lakh or even Rs 1 lakh. In such a case, the tax liability for the individual will turn out to be zero.

            When income crosses the Rs 1-lakh mark, the individual will be saddled with a tax burden that will have to be paid. This implies that the situation of not paying tax because of the rebate disappears. The benefit in the final version of the Finance Bill relates to this extra sum.

The good news is that the extra amount of tax will not be more than the additional amount of income that is earned. This change is necessary, because a normal calculation results in a tax burden that is more than the additional income. For example, if the income of the individual is Rs 1,01,000, with the new cess the tax amount payable comes to Rs 9,384. But this will actually leave him worse off than someone, who has earned, say, Rs 99,000. However, now the individual will pay a tax, which is restricted to Rs 1,000 in this case, as this is the figure by which the income exceeds Rs 1 lakh.

So, even though the amount of tax payable is limited, it is in no circumstances, eliminated. It effectively means that a person will end up in the same situation at the end if he earns Rs 1 lakh and if he earns Rs 1,10,000, because in the second of two case, the entire additional amount of Rs 10,000 will have to be paid as taxes, leaving the person with a net figure of Rs 1 lakh.

            Calculations show that the higher one goes the better will be the situation in terms of income coming home. For example, someone with a final income of Rs 1,15,000 will have a net income of Rs 1,02,760, which is just Rs 2,760 more than someone with Rs 1,00,000. Nonetheless, the person with an income of Rs 1,20,000 is better off by Rs 6,740 than the person with an income of 1,00,000. Thus, all those who manage to wrangle out some raises from their employers might not find their overall situation improving too much.

At the same time, there is also an option for reducing the tax burden further through the use of other rebates like Section 88. Therefore, all those who have just crossed the Rs 1,00,000 mark should look at other options to see whether they are cost-effective. However, calculation show that when this additional benefit is available, it will be senseless to try and save some bucks under a rebate like Section 88 as the cost-benefit ratio is extremely unfavorable for the individual.

Imagine the case of a person who nets an income of Rs 1,05,000. In his case, the tax payable comes to Rs 10,200. In order to save this element of tax, the Section 88 investment will have to be to the tune of Rs 51,000, which is extremely improbable on such a low level of income. On the other hand, the person can pay Rs 5,000 as tax and go home with the net income figure of Rs 1 lakh and plan other investments according to affordability.

14th September 2004: There is good news for the taxpayers. The government is set to revisit direct tax rates in the ‘05-06 Budget to effect further moderation in the rate structure, if tax compliance improves in the coming months. If that sounds like velvet, here’s the iron fist couched inside: The government is very strong-minded to collect every paise of tax due to it. It has already launched a media campaign to bolster advance tax collections and recover arrears. Finance minister, P Chidambaram said “It will be a soft and friendly campaign, but backed by a determination to collect tax dues, including arrears.”

However, for the next fiscal, the government will look at a further moderation in the rates. Officials reckon that while the existing tax rates are moderate, there is scope for further moderation. One option is to re-adjust the existing income tax slabs. Personal income tax payers with an annual income of Rs 111,250 (taxable income up to Rs 109,000) have been given relief in this fiscal. But tax slabs were not tinkered with in the Budget. Corporate tax rates also remain unchanged. The tax rate on domestic companies is 35% and for foreign companies it is 40%. These companies have to pay an additional surcharge of 2.5% and an education cess of 2%.

Now, the focus is clearly on meeting the tax collection targets set forth in the Budget. Gross tax revenue is estimated at Rs 317,733 crore. Corporate tax collections are budgeted at Rs 50,929 crore and the income tax collections at Rs 88,436 crore. These include arrears of around Rs 6,000-7,000 crore in direct taxes. The ministry anticipates a surge in advance tax collections due by September 15, on the back of encouraging first quarter corporate results. As the Finance Bill has become act now, the government will also collect the 2% education cess with the direct taxes.

23rd September 2004: The Securities Transaction Tax (STT) will be levied on all shares traded in stock exchanges from October 1. Finance minister P Chidambaram has cleared the date for the rollout of the new tax rule announced in this year’s budget. The new capital gains regime will apply to all ‘sell’ transactions effective from this date, even if shares were bought prior to October 1, 2004. So investors who have already bought shares will gain if they sell these shares on or after October 1. This is because the concessional capital gains tax of 10% will apply to ‘sell’ transactions i.e. shares sold on or after October 1. Shares sold before October 1 will attract the marginal rate, which is 30% in most cases. The new rules will be notified shortly, said senior officials.

The STT will be levied on the volume weighted average price for all shares i.e. the aggregate value of all trades carried out by a person divided by the total quantity of shares traded by the person on a given day, gives the volume weighted average price. The STT rates are 0.15% on delivery-based trades, where the levy will be equally split between the buyer and seller. An STT rate of 0.015% will be levied on sellers in non-delivery based equity transactions and 0.010% on sellers of derivatives. Wherever STT is paid, long-term capital gains tax will be nil, whereas short-term capital gains will be taxed at 10%. The benefit of the set-off on securities transaction tax (STT) against tax paid on business income has also been extended across all categories of investors paying the levy. For investors paying the levy, tax payable on business income will now be net of the STT paid.

When MFs invest their money (collected from unit holders) to buy shares, the STT will apply. However, no STT will be levied on units allotted to investors and it will only be imposed when these units are sold back to the MF. Market players say that the underlying sentiment in the market is to book profits once the new tax regime takes effect in October. They believe that retail and high networth investors are reluctant to sell in the market in September. This is another key reason for share prices to run up sharply over the past few weeks. The trend in the index futures segment is an indicator of this effect.

The price of the October futures is trading at a higher discount to the underlying Nifty index than September. The September Nifty futures closed at Rs 1752 while the Nifty index closed at 1754. The October Nifty futures closed at Rs 1747. The open interest in September futures fell, while that in October futures rose. Market players say that investors who hedge their positions against a fall in share prices by short selling Nifty futures are rolling over their outstanding positions to October futures. A CEO of a leading institutional brokerage pointed out “The market psychology is such that everyone expects selling to start in the first week of October. However, not everyone will go on a selling spree. Those who bought mid-cap shares earlier this year may sell.”

24th September 2004: The government may retain the central sales tax (CST) rate at 4% in the ensuing fiscal, when states switch over to the value-added tax system. According to sources, the proposal came from the finance minister P Chidambaram during his meeting with the Empowered Committee of State Finance Ministers on VAT is to continue with the 4% CST rate for one year till the VAT rule stabilise. The Centre has promised to provide 100% compensation to states in the first two years of CST phase-out. This will be reviewed in the third year. A one-year deferment in the CST phase-out would give both the Centre and states some official pardon, considering that the annual revenue mobilised from CST is over Rs 15,000 crore. The entire precede goes to the states’ pooled money.

Different options on CST phase-out may be looked at 4% in the first year of introduction of VAT, 2% in the second year and nil in the third year. The technical expert committee on VAT will also provide inputs on the timing of the CST phase-out. The phasing out after the introduction of VAT will enable states to move to a destination-based system. The finance minister is also understood to have given an indication that it may be politically tough to push for another constitutional amendment that would give states the power to levy service tax. States want the power to levy service tax, as it would also help shore up revenues after transition to VAT.

But as of now, the constitution gives the Centre the power to levy service tax and states and the Centre to collect and appropriate the proceeds. Mr. Chidambaram has understood to say that he was awaiting the recommendations of the Twelfth Finance Commission on the devolvement of service tax proceeds to states. Currently, 28% of the service tax proceeds are transferred to states and this will continue till a final view is taken. A separate meeting would be convened to discuss this issue, including the constitutional amendment.

29th September 2004: The final utterance has been said on the taxation of business process outsourcing (BPO) units. Tax will be levied on the income of a foreign company with a BPO arm here, which qualifies as a permanent establishment (PE). On the other hand, a foreign company outsourcing services to a BPO outfit here will not be taxed in India if it does not have a PE. The final circular issued by the Central Board of Direct Taxes (CBDT) is broadly on the same lines as the draft circular issued earlier.

The amount to be taxed in India is the BPO’s arms-length income. This is the BPO’s income had it been a separate enterprise, dealing independently with its head office. Simply put, if the foreign company has a fixed place of business of its own in India or functions through a dependant agent, it will be construed to have a PE in India and will be liable to tax. A senior finance ministry official said, “The profits attributable to the PE on which the foreign company will be taxed in India will be determined on the arms-length principle on the premise that the PE is a distinct and separate enterprise dealing independently with the head office.”

At the same time as computing the profits of the PE, deduction of expenses incurred in connection with the activity of the PE in India or elsewhere would be allowed. What expenses are deductible would have to be determined in accordance with the accepted principles of accountancy and the provisions of the Income Tax Act. The dependent agent will be separately assessable on his personal income, again, on the basis of the arms-length principle. Tax experts, however, say that the word PE and business connection have been used synonymously. According to experts, “This may not be correct as a PE is a much narrower definition.” According to them, the circular does not address a situation where the taxable foreign entities are non-treaty countries. It also does not fully address the industry’s view that the payment of arms-length price should extinguish the tax liability of foreign enterprise.

The new CBDT circular has been issued after withdrawing a controversial BPO circular issued on January 2, ’04. The earlier circular differentiated between ‘core’ and ‘incidental’ services for tax purposes. According to the latest circular, a foreign company is treated as having a PE in India under Article 5 of the Double Taxation Avoidance Agreements entered into by India with different countries if the company carries on business in India either through a sales office or agent (other than an independent agent). In such cases, the profits of the foreign company attributable to the business activities carried out in India by the PE becomes taxable under Article 7 of the DTAA.

4th October 2004: To get better the momentum and precision of tax collections, the Income Tax department has set up a new online accounting system called Oltas. This is in process since June 1, 2004. This arrangement makes the process very easy for payment of taxes and make certain that taxpayers get a improved service. All designated branches of banks across India have been networked with Tax Information Network (TIN) and the I-T department.

Let us look at how the taxpayer can benefits from these changes. The foremost feature of Oltas is that now an easy single-copy challan has to be filled up as an alternative of the four-copy challan earlier. Under the old system, there were seven different types of challans for depositing direct taxes into the government account. In Oltas, only three types of challans have replaced these. As a result, there is one for payment of income-tax, corporation tax and wealth tax (challan no ITNS 280); another for depositing tax deducted at source from corporates or non-corporates (challan no ITNS 281); and a third one for payment of gift-tax, estate duty, expenditure tax and other direct taxes (challan no ITNS 282). The challans can be downloaded from the I-T departments website: http://www.incometaxindia.gov.in/.

These challans are also available at all local income-tax offices. Every challan has a unique identification number known as the challan identification number (CIN). This CIN comprises of three parts, namely, a seven-digit basic statistical return (BSR) code of the branch where the tax is deposited; date of deposit of the tax and the serial number of the challan. Therefore, CIN, along with the permanent account number (PAN) of the taxpayer is unique for every challan throughout the country. This system is used for identifying a challan in Oltas, which ensures that correct credit is given for payments of taxes by the taxpayers. When a taxpayer pays his tax at any of the designated bank branches, the collecting branch will accept his cash/cheque and will stamp the counterfoil of the challan with a rubber stamp containing the CIN. The new challan is divided into two parts: it has a main portion at the top and a counterfoil at the bottom. The bank will retain the main portion of the challan and will return the counterfoil, duly stamped to the taxpayer.

The branch will then capture the entire data of the challan and transmit it electronically to the I-T department. The department will use this information received from the banks to give credit for the taxes paid by the assessee. The bank will send the paper copy of the challan to the zonal accounts office. The taxpayer has to take care to fill the challan properly, since there is only one copy of it. He has to ensure that all the right columns are ticked and he obtains a proper stamped acknowledgement from the banks indicating the CIN. The PAN and the tax-deduction account number (TAN) should be correctly indicated in the challan. The new challan has fewer fields than the old one and therefore, can be filled up faster. Furthermore, if the taxpayer is paying taxes at his own bank branch, he can get the acknowledgement for taxes paid immediately rather than visit the branch again under the old system. In Oltas, the taxpayer no longer needs to attach copies of the challan with his return of income. He has to only indicate CIN in his income-tax return for proof of payment of prepaid taxes, such as advance tax or self-assessment tax. Thus, Oltas ensures an accurate and prompt credit for all taxes paid by the taxpayer.

20th October 2004: In an short while, when you make any high value purchases such as a Versace ensemble, or a Tag Heuer watch, or a Mont Blanc pen you will now have to carry your PAN card along with you.

Purchases of what value will now require compulsory quoting of PAN?

The Finance Ministry is become hard to continue compulsory quoting of PAN to the high-value purchases of over Rs 50,000. Individuals who are buying items of personal use will have to quote their PAN number in payments against their bills.

When is this new law coming into effect?

The Income Tax rules (Rule 114B) will be amended soon to include such high-value purchases to the list of transactions where quoting of PAN is already mandatory. Changes in the IT rules can be done outside the Budget.

Why is the government so keen for this new law?

The government wants to keep track of high networth individuals who could be tax evaders. Finance Minister P Chidambaram had in July this year directed taxmen to track lifestyle expenses of the non-salaried class. Of the 3.4 crore IT assessees, there are just 75,000 assessees with taxable income of over Rs 10 lakh.

As of now, where is quoting of PAN necessary?

Presently, quoting PAN is compulsory for a host of transactions including sale and purchase of immovable property valued at over Rs 5 lakh and sale and purchase of motor vehicles. Time deposits of over Rs 50,000, sale or purchase of securities whose value exceeds Rs 10 lakh, a deposit of over Rs 50,000 in any account with post office savings bank and so on all need quoting of PAN.

What about annual information return (AIR)?

Some of the financial transactions for which PAN quoting is compulsory such as purchase and sale of immovable property and cars — will be also included in the list of transactions for which annual information return (AIR) have to be filed. The responsibility of filing AIR to tax authorities will rest with the third party. For example, the registrar of immovable property will have to file information returns. Likewise, the car dealer will have to furnish AIR to tax authorities. The tax information network will receive the AIR for digitisation. These will be matched with IT returns filed by individuals.

Will high value purchases also be included in the AIR?

20th October 2004: Payment of income tax through Internet has now become possible. IDBI Bank Ltd. has launched this facility on 16th of this month. Account holders of IDBI Bank Ltd., who are registered for net banking with the bank, can avail of this facility and pay Income Tax 24 x 7 x 365. IDBI account holders desirous to pay taxes over Internet would have to log on to this site (www.incometaxindia.gov.in) or http://tin.tin.nsdl.com and follow the instructions. After payment, account holders would be able to generate the taxpayers’ counterfoil containing the Challan Identification Number (CIN). Other banks are also likely to provide similar facilities in near future.

23rd October 2004: The finance ministry has announced a scheme that would enable individuals and tax deductors to file returns over internet, using digital signatures, while the department of coal has announced Coalnet, a wide area network, which links it with all its constituent organisations. The IT department is unveiling the guidelines for an interconnected grid of statewide area networks.

The Central Board of Direct Taxes (CBDT) has notified a new scheme for the 2004-05 assessment year, under which salaried individuals with PAN numbers in 60 cities would be permitted to file returns and enclosures electronically, provided they do so with their own digital signatures. Such people should have income from salaries alone, and not under the head of ‘profits and gains’ of business or profession. The CBDT has also authorised eligible categories of chartered accountants, advocates, employers who deduct tax from salaries and registered companies to function as ‘e-return intermediaries’. These registered e-intermediaries may receive paper returns from taxpayers, digitise and transmit them electronically to the IT department through the internet, using digital signatures.

The department of coal has been interlinked to Coal India (CIL) headquarters and 8 subsidiaries. VSATs have been deployed for video conferencing right up to the room of the minister. The next phase would interlink subsidiary companies to its offices, and senior officers of the department would be able to track developments remotely sitting in the conference room of the department in Delhi. For the time being, the ministry of communications and information technology is creating a core, common infrastructure that can be shared by all departments and both state and central governments. Access centres will be set up across the country.

28th October 2004: The government’s attempt to boost its revenues by cracking down on dividend stripping has received a setback. The Income-tax Appellate Tribunal (ITAT) Mumbai has said dividend stripping carried out prior to FY02, was part of legitimate tax planning. The Finance Act 2001 closed a loophole that allowed dividend stripping. No specific calculation has not been made on the amount of tax collected by denying tax benefits to dividend stripping, tax officials say off the record that the tax collected this way would be in excess of Rs 1,000 crore. The term “dividend-stripping” is taxman’s jargon for buying mutual fund units at the time of announcement of a dividend, and selling it at post-dividend price for recording a loss, which is used to claim a tax benefit.

The Finance Act 2001 has incorporated a provision disallowing any loss claimed if a unit is sold within three months of the date of purchase. However, many assessing officers had disallowed even claims for assessments prior to assessment year 2002-03 (FY02) when the new provision becomes operational. The assessing officers were retrospectively operating the relevant provision introduced in the Finance Act 2001. The current ITAT decision is expected to provide relief to those who were aggrieved by such decisions.

The ITAT, in this case, has accepted the argument that transactions made prior to assessment year 2002-03 (when the new provisions became operational) were entitled to the tax benefit as the new provision was not retrospective. Since the ITAT is the second appellate authority on tax matters, after Commissioners of Income Tax (CIT) — Appeals, its decision will have a bearing on those who claimed tax benefits for similar transactions.

8th November 2004: In its effort to recover sum unpaid amounting to over Rs 85,000 crore, the income-tax department, Mumbai, has started attaching properties and assets of taxpayers who have not paid their dues. A core committee comprising senior officials of the I-T department, Mumbai, at a meeting, decided to speed up the recovery proceedings including issuing orders for attachment of assets and properties of assessees who have not paid up their arrears despite several reminders.

According to I-T source “There are provisions in the Income-tax Act to recover arrears by attaching properties and assets.” Mumbai, which accounts for nearly 40% of the all India direct tax collection, also accounts for 40% of the Rs 85,000 crore of arrears.

8th November 2004: The Supreme Court's decision in TCS's case that shrink-wrapped software is a 'good' and thus liable to sales tax, is likely to have a positive offshoot effect, at least on one front. This decision will provide some clarity in the realm of international taxation. The reason is that the Supreme Court (SC) in its decision points out that in case of shrink-wrapped or off-the-shelf products, the copyright in the program remains with the originator of the program. In other words, there is no transfer of copyright. This observation provides clarity that payment made for purchase of shrink-wrapped software should not be treated as royalty.

Last fiscal, tax authorities levied huge demands on Indian importers of shrink-wrapped software. The contention of the tax authorities was that such payments constitute royalty in the hands of the foreign exporters. Thus, the Indian payer's ought to have deducted tax at source. Under the Income-tax (I-T) Act, 1961, the rate of withholding tax for royalty payments is 20%, though it can be as low as 10% under the provisions of a few tax treaties. This issue is still pending at various levels of appeal.

The definition of royalty under the I-T Act, means the transfer of all or any rights in respect of any copyright, literary, artistic or scientific work. Even the Organization of Economic Co-operation and Development (Oecd) in its model convention defines royalty to include the use of a copyright. Further, Oecd's commentary points out that payments made for shrink-wrapped software, which is put to general use is not a royalty payment.

Under the Indian Copyright Act, a buyer of a book is eligible for its fair use. Similarly, a lawful possessor of shrink-wrapped software is eligible for its general use, including the right to make copies. There is no transfer of Intellectual Property rights in either case. Thus if purchase of a book is regarded as an outright purchase and not a royalty payment, the same treatment should be meted out for shrink-wrapped software.

A senior official of a software company adds, “The SC's decision strengthens the argument that Indian importers need not deduct tax at source on import of shrink-wrapped software.” A few countries have held that sale of a shrink-wrapped software is sale of a copyrighted product (such as a book) and not a transfer of a copyright. Thus, the payments made for it do not constitute Royalty. Both the United States and Australia have taken such a view.

CBDT, based on the recommendations of the Emerging Task Force, is currently discussing the issue of withholding taxes when software - both shrink-wrapped and customised, is imported into India. A draft circular is expected to be issued this month.

9th November 2004: Payment for transfer of technology, if the transaction takes place outside India, will be liable to be taxed in India, according to a ruling by the Authority for Advance Ruling (AAR) on an application filed by global pharma major Pfizer. The AAR also accepted an argument put forward by Pfizer, the company that had applied before the AAR, that technical information and know-how, which is transferred through diskettes, can be construed as capital assets and can claim exemption accorded to capital gains. The AAR decides on matters related to taxation. Though its decisions are binding only on the particular case it decides, its rulings are considered as general guidelines on similar matters.

TP Ostwal, senior tax consultant, said, “Such issues crop up on a regular basis. It is high time the Central Board of Direct Taxes (CBDT) came out with a circular clarifying the issue. In the Pfizer case, the AAR just followed the principles laid down by the apex court on similar issues.” In this case, the issue was whether the consideration paid to Pfizer by a Denmark-based company, EAC Nutrition, for transferring trademarks and technical know-how on ways to produce Protinex and Dumex — manufactured and marketed in India by Pfizer India, a group company of Pfizer — is taxable in India or not.

The transfer of the relevant documents occurred in Bangkok. Hence, two issues were considered. The first one was whether transfer of know-how could be considered royalty that is taxable in India. The second issue dealt with the taxability of a transaction that took place outside India. In this case, the transaction was carried out between Pfizer India, Panama and EAC Nutrition, Denmark. Pfizer Corporation owned the technological know-how for manufacturing nutritional food supplements Protinex and Dumex, manufactured and sold by Pfizer India, a group company. In November 2003, EAC Denmark acquired the trademark and technology information from Pfizer Corporation.

Under a separate agreement, Pfizer Corporation and EAC agreed to terminate the licence granted to Pfizer India to manufacture under the same trademark. Around $7m was paid as consideration for extinguishments of the licence. The dossier containing the technology information was handed over to EAC in Bangkok. EAC had withheld tax at the rate of 21% on payment of consideration to the applicant, Pfizer Corporation, for the transfer of technology and the tax has been deposited with the government of India. Pfizer Corporation had approached the AAR, objecting to the withholding of tax on the ground that Pfizer Corporation, based in Panama, has transferred the documents containing know-how and technical information outside India to EAC, Denmark and hence, it’s not taxable in India. To support this point of view the company cited Supreme Court’s decision in the matter of Scientific Engineering House (1986) and another apex court verdict in the case of ACC (’01). Both these rulings had been cited to support the view that if technical information is put on media like diskettes, then the transaction could be construed as one pertaining to tangible assets. Since they are considered tangible assets handed over outside India, the capital gains on transfer of assets cannot be subject to taxation in India.

Besides, a non-resident is taxable in India only if the income is received in India or it accrues or arises outside India. The department’s argument was that the payment was for transfer of process of manufacture and it was, in fact, imparting technical know-how. Hence, it should be considered as royalty taxable under Section 9 (1) of I-T Act. The AAR ruled that, “We are, therefore, of the view that receipt from transfer of technical information in the form of dossier in Bangkok is a receipt on transfer of capital asset and is not chargeable to tax in India under Section 5 (2) (11), read with Section 9 (1) of the Act, as the asset in question was situated outside India.”

November,16 2004 NOTIFICATION NO-280/2004, Dated : November 16, 2004 In exercise of the powers conferred by section 295. read with section 44AB, of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely : 1. (1) These rules may be called the Income-tax (Fourteenth Amendment) Rules, 2004. (2) They shall come into force from the 1st day of December, 2004. 2. In Appendix -II to the Income-tax Rules, 1962, - (A) in Form No. 3CA, in item No. 3, after the words, figure and letters "Form No. 3CD", the words "and the Annexure thereto" shall be inserted; (B) in Form No. 3CB, for item No. 4, the following items shall be substituted, namely : "4. The statement of particulars required to be furnished under section 44AB is annexed herewith in Form No. 3CD. 5. In my/our opinion and to the best of my/our information and according to explanations given to me/us the particulars given in the said Form No. 3CD and the Annexure thereto are true and correct."; (C) in Form No. 3CD, for the Note occurring at the end, the following shall be substituted, namely : "Note : 1. The Annexure to his Form must be filled up failing which the Form will be considered as incomplete. 2. This Form and the Annexure have to be signed by the person competent to sign Form No. 3CA or Form No. 3CB, as the case may be. Annexure PART A 1. Name of the assessee : 2. Address : 3. Permanent Account Number : 4. Status : 5. Previous year ended : 31st March 6. Assessment year : PART B NATURE OF BUSINESS CODE Sl. No. Parameters Current year Preceding Year 1. Paid up share capital 2. Share Application Money 3. Reserves and Surplus 4. Secured loans 5. Unsecured loans 6. Current liabilities and provisions 7. Total of Balance Sheet 8. Gross turn over 9. Gross profit 10. Commission received 11. Commission paid 12. Interest received 13. Interest paid 14. Depreciation as per books of account 15. Net Profit (or loss) before tax 16 Taxes on income paid/provided for in the books .................... Signed Place : .................. Date : .................. Note : Please enter the relevant code pertaining to the main are of your business activity. The codes are as follows : Sector Sub-Sector Code (1) Manufacturing Industry Agro-based industries 0101 Automobile and Auto parts 0102 Cement 0103 Diamond cutting 0104 Drugs and Pharmaceuticals 0105 Electronics including Computer Hardware 0106 engineering Goods 0107 Fertilizers, Chemicals, Paints 0108 Four & Rice Mills 0109 Food Processing units 0110 Marble & Granite 0111 Paper 0112 Petroleum and Petrochemicals 0113 Power and energy 0114 Printing & publishing 0115 Rubber 0116 Steel 0117 Sugar 0118 Tea, Coffee 0119 Textiles, Handloom, Power looms 0120 Tobacco 0121 Tyre 0122 Vanasapati & Edible Oils 0123 Others 0124 (2) Trading Chain stores 0201 Retailers 0202 Wholesalers 0203 Others 0204 (3) Commission Agents General Commission Agents 0301 (4) Builders Builders 0401 Estate agents 0402 Property Developers 0403 Others 0404 (5) Contractors Civil contractors 0501 Excise Contractors 0502 Forest Contractors 0503 Mining Contractors 0504 Others 0505 (6) Professionals Chartered Accountants, Auditors, etc. 0601 Fashion designers 0602 Legal Professionals 0603 Medical professionals 0604 Nursing Homes 0605 Specialty hospitals 0606 Others 0607 (7) Service Sector Advertisement agencies 0701 Beauty Parlours 0702 Consultancy Services 0703 Courier Agencies 0704 Computer Training/Educational and Coaching institutes 0705 Forex Dealers 0706 Hospitality services 0707 Hotels 0708 I.T. enabled services, BPO service provides 0709 Software development agencies 0711 Transporters 0712 Travel agents, tour operators 0713 Others 0714 (8) Financial Service Sector Banking Companies 0801 Chit Funds 0802 Financial Institutions 0803 Financial service providers 0804 Leasing Companies 0805 Money Lenders 0806 Non Banking Finance Companies 0807 Share Brokers, sub-brokers, etc. 0808 Others 0809 (9) Entertainment Industry Cable T.V. productions 0901 Film distribution 0902 Film laboratories 0903 Motion Picture producers 0904 Television Channels 0905 Others 0906 Sd/- (D.P. Semwal) Director (TPL-III) F.No.142/24/2004-TPL

1st December 2004: Decks have been cleared for the introduction of Value-added Tax from April 2005, and a white paper on the new tax regime will be circulated among states in 15 days. "A draft white paper on Value-added Tax will be ready within 15 days and circulated in the country," Asim Dasgupta, the chairman of the Empowered Committee on VAT, said after a meeting with Finance Minister P Chidambaram. After the white paper is circulated, states will go for a nationwide awareness campaign.

Leading industry and trade bodies – CII, Ficci, Assocham, Confederation of All India Traders, and Bharatiya Udyog and Vyapar Sangh – will interact with VAT panel regularly so that their apprehensions and doubts over the implementation of the new tax regime can be addressed. Dasgupta, who is also West Bengal Finance Minister, said most of the states are ready with their VAT legislations and the remaining states are expected to get the nod of their respective assemblies in the winter session. He said a delegation from Uttar Pradesh, which has been the only state to oppose VAT introduction, will meet him in Kolkata on December 4.

4th December 2004: Service tax on goods transport agencies — a Budget announcement kept in abeyance after the truckers' strike in September — will now come into effect from January 1, 2005 with certain modifications. A notification issued today said service tax would be levied on 25% of the gross amount charged from the customer. Transportation of fruits, vegetables, eggs or milk will not attract any service tax. Service tax will also not be levied if the gross amount charged on all consignments transported in goods carriage is not more than Rs 1500. For individual consignments, the limit has been set at Rs 750.

Persons making payments towards freight will be liable to pay service tax in case the goods are transported from a factory registered under the Factories Act, companies under the Companies Act and a corporation established under any law. Also goods transported from registered societies, cooperative societies, excisable goods under central excise will attract service tax. The tax is to be paid by goods transport agencies. The changes are in tune with the recommendations of a committee constituted to examine an appropriate mechanism for collection of service tax from goods transport agencies.

8th December 2004: The government will introduce legislation for special economic zones by the end of this month. The highlights of the fiscal package include, among other sops, 20-year income tax holiday for SEZ units and enhanced I-T benefits for Offshore Banking Units (OBUs). SN Menon said, “The government is working on a legislative framework and a fiscal package for SEZs to be put in place by December end.” The draft bill has been sent to the law ministry for approval. Mr. Menon said the new legislation would also give complete freedom to developers to allocate space, as well as infrastructure and services, on commercial terms. In case of mismanagement of services or insolvency of the developer, an administrator may be appointed for up to one year for stability.

The government has given an in-principle approval to 33 SEZs, while five others, including Wipro’s Salt Lake SEZ in West Bengal; two in Pondicherry and one in Bangalore are under consideration. On OBUs in SEZs, he said that out of the 16 approved units, six have started functioning. Apart from tax benefits, the OBUs will be exempt from requirements like CRR, SLR and priority sector lending. Mr. Menon said the government has proposed to further simplify the procedures for attracting foreign direct investment, which will not require approval of the Foreign Investment Promotion Board (FIPB). He said that after the changes are incorporated, investors will only require the nod of Board of Approval, which will be headed by the additional secretary in the commerce ministry. An approval committee headed by the development commissioner will grant approval for manufacturing and service units at the zone level.

10th December 2004: Cyprus, the newest EU member, is all set to become the newest low-tax country for routing foreign investments into India. The country taxes corporate profits at rates lower than those in Mauritius. Dividends and profits from trade in securities are normally tax-free in Cyprus. Tax consultants have been advising FIIs to avoid the Mauritius route due to the questions being raised on the money laundering front and the majority of the new FIIs registering with Sebi are dumping Mauritius for Luxembourg.

Cyprus was one of the 10 new member states that joined the EU’s ranks recently, along with Hungary, Poland, the Czech Republic, the Slovak Republic, Slovenia, Estonia, Latvia, Lithuania and Malta on May 1 2004. Ernst & Young has established a cross-border strategic tax task force to advise clients on issues arising from the accession, says the company website. “We expect a large number of foreign investors operating in India out of Mauritius to shift to Cyprus. It is only a matter of time,” said a tax consultant at the Mumbai office of one of the big four. This is more so because the majority of the new FIIs registering with Sebi these days originate from Europe. “Cyprus now fulfils all OECD norms and the EU Code of Conduct. With the recent revisions to its corporate law, it is excellently positioned as an entry-level jurisdiction for anyone seeking to do business, especially FIIs operating in India,” said a top FII source.

Profits from the disposal of shares, stocks and securities in any recognised stock exchange are exempt from income tax in Cyprus. Cyprus corporate tax rates are now the lowest in Europe at 10%. The only exception being the Isle of Man’s 12.5%. Unilateral tax relief has been introduced for foreign tax paid abroad. This will be credited against any Cyprus tax, regardless of the existence of any double taxation agreement with the country where the foreign tax is paid. “Cyprus also has a framework under which FIIs can pay lower taxes in their home countries. These tax treaties allow companies to set off taxes paid here against the taxes they pay in their home countries,” a tax expert said.

Tax losses can be set off against future profits

About 50% of the interest received by corporations, excluding interest received in the context of the ordinary trading activity of the corporation (banks, interest on debtors) is exempted from tax. Capital gains tax is imposed only on the disposal of property situated in Cyprus. Dividend income can be exempt from tax if the Cyprus Company holds at least 1% stake directly in the company paying the dividend. The exemption does not apply if the company paying the dividend engages directly or indirectly in over 50% of its activities that produce investment income and the foreign tax burden on the income of the company paying the dividends is substantially lower than the Cypriot tax burden. The country treats a company as its tax resident if it is managed and controlled from Cyprus. All expenses incurred in earning income can be deducted from taxable profit. Tax losses in a year can be carried forward and set off against future profits.

13th December 2004: A recent ruling given by The Authority for Advance Rulings (AAR), chaired by Justice Quadri, has cleared the path for the application of the Indo-UAE tax treaty. In it’s ruling, the AAR has firmly held that merely because there is no tax incidence in the other country (the UAE, in this particular case), it does not imply that such income can be taxed in India. The AAR has emphasised that tax treaties override domestic tax laws. The AAR held, “It is clear that under the tax treaty, capital gains arising from alienation of shares in Indian companies in the hands of a UAE resident are taxable only in the UAE and not in India.” In this case, Emirates Fertiliser Trading, which was a UAE resident partnership firm, filed an application with the AAR.

15th December 2004: Next time your employer provides some food and beverages, be sure to check out the more details because you may suddenly find yourself paying tax on the amount spent on such items. For starters, while consumption of alcoholic beverages, during working hours may or may not be against office rules, you can be sure that under the tax laws, the employee will foot some of the tax bill. While tea and coffee are fine, remember not to gorge too much on food at one go.

At present, several benefits made available to an employee by the employer qualify as perquisites. These perquisites are then valued according to the rules laid down for this purpose and the value of such perquisites are added to the income of the employee and taxed accordingly. Recently, there have been some changes in the rules regarding a couple of items on the perquisite list and both employers, as well as employees, would do well to consider the details of these changes. Among the changes, one related to free meals has to be considered carefully. First the words ‘free meals’ present earlier has been substituted by ‘free food and non-alcoholic beverages’. Earlier meals could include several items, which differed from company to company. The recent changes make it clear that any alcoholic beverage provided free of cost during working hours to the employee will be considered as perquisites. The employer can still continue giving paid vouchers to his employees for this purpose as long as the amount is within the limit specified by the tax department, which stands at Rs 50 per meal.

According to chartered accountants, the word to note is ‘per meal’ and hence, there need not be a restriction of just Rs 50 per day because one can eat more than one meal during a day. Further more, these vouchers should not be transferable from one person to the other and more importantly, should be for use at eating joints only. This has to be considered carefully, for some vouchers given by companies may be redeemable at other places where there are food items and may not necessarily be an eating joint. One also has to note that while looking at the exact meaning of the word ‘meal’, one has to exclude tea and snacks provided during working hours. The venue where this is received is also important and the places include office or business premises.

17th December 2004: Amid reports of FIIs migrating from Mauritius to newer destinations seeking better tax and administrative environment, there comes good news for FIIs based in Mauritius. The Supreme Court (SC) has dismissed a curative petition filed against its recent decision on the Indo-Mauritius Double Taxation Avoidance agreement.

A curative petition is the last appellate forum for the judicial process in the country. Hence, the implication of the petition’s dismissal is that the status quo on this issue continues. Earlier, a two-judge bench of the SC had upheld a government circular stating that even a certificate of residence from the Mauritius government made the company eligible for tax exemption under the Indo-Mauritius DTAA. TP Ostwal, senior chartered accountant, said “Judicial challenge to the CBDT circular on this issue ends with the dismissal of the curative petition. It means the status quo continues.” Bijal Ajinkya, an associate of Nishidh Desai Associates, said, “The decision is in tune with the principles of international taxation. This enhances India’s credibility in the international fora as the judgment of the Supreme Court is in line with the principles of public international law and also adds to the confidence of the international investor community.”

Earlier, the SC had dismissed a review petition on the same issue. The Supreme Court verdict had clearly underlined the tax benefits available for Mauritius-based companies in India. Litigation on the issue began with the I-T department’s decision to question the authenticity of claims by certain corporates that they were Mauritius-based. As the department investigated these claims of residence in Mauritius, the CBDT issued a circular on April 13, 2000, stating that a certificate of residence issued by the Mauritius government should be accepted as proof of residence. This circular was challenged by a host of entities, including the People’s Union for Civil Liberties and a retired income tax officer, SK Jha, before the Delhi High Court. The Delhi High Court quashed the CBDT circular, holding it ultra vires Section 90 of the I-T Act, which allowed treaties only for the purpose of avoiding double tax and not for encouraging trade and investment. It was also held that the circular took away the discretion of the I-T department in determining the residence of an entity.

17th December 2004: The finance ministry is considering raising the minimum taxable income limit further in keeping with the policy of reducing tax burden on low income groups. In Budget 2005, the ministry will attempt a revamp of the direct tax structure, with a view to “removing the regressiveness in the current structure, so that low income groups get more benefits,” according to senior officials. While moving the Finance Bill in August this year, finance minister P Chidambaram had exempted payment of income tax for those with taxable income of up to Rs 1,11,250, and provided rebates for income between Rs 1 lakh and Rs 1,11,250 so that the real income after tax would not be less than Rs 1 lakh. Officials indicated that people with taxable income higher than the threshold fixed in August might get the benefit of waiver of tax payment in this year’s Budget. “We would like to get rid of as much exemptions, deductions and rebates as possible, in an effort to simplify the tax structure and make it more user-friendly,” an official said. “We are looking at tax incentives critically.”

Mr. Chidambaram did not change the tax rates or slabs in the last Budget, even as he mentioned in the Budget speech that tax slabs “were causing concern.” He had said that he was unable to alter the tax slabs in the wake of “larger responsibility” assumed by the government for investment and welfare programmes. Officials said in the forthcoming Budget, there would be a definite attempt to expand the direct tax base. A new methodology for tracking high value transactions is being considered. The idea is to progressively shift the incidence of tax more to the high-income groups, while reducing the burden on the lower middle class. Of the nearly 3.4 crore persons filing income tax returns, only 2.7 crore assessees are taxpayers. Of this, around 1.4 crore assessees benefited from the exemption for taxable income of up to Rs 1,11,250.

30th December 2004: Describing the value added tax (VAT) as the most important tax reform measure attempted in the last 10 years, finance minister P Chidambaram today asserted that the system will be implemented from April 1, 2005. "All states are on board. Eleven states have already sent their VAT bills, and other states are expected to send their bills soon. We are on the right path, and the VAT system will be implemented from April 1, 2005," he said. Lauding the efforts of Asim Dasgupta, chairman of the empowered committee of state finance ministers on VAT, Chidambaram highlighted some measures accepted by the committee.

Stating that there would be four types of tax rates - 0%, 1%, 4% and 12.5%, he said about 530 items have been identified for VAT, and 250 of them would attract only 4% tax. The empowered committee has agreed to fix the threshold limit of turnover at Rs 5 lakh. "At this limit, around 75% of small traders would be out of the tax net," Chidambaram said, adding "traders with turnover up to Rs 40 lakh would have the facility of compounding system, which would minimise the need for detailed account-keeping." The empowered committee has agreed for continuing existing incentives given by state governments to specific industries. "No new incentives would be allowed. Whatever in the pipeline will continue," he said.

4th January 2005: The empowered committee of state finance ministers may come up today with a ‘white paper’ on value-added tax after consultation with trade and industry bodies to ensure smooth implementation of the new tax regime from April. VAT panel, headed by West Bengal finance minister Asim Dasgupta, readied the white paper in December-end, but decided to issue it after a final consultation with trade and industry representatives scheduled today, official sources said. The paper would lay down the VAT rates for about 530 items — 4% for medicines, agri and manufactured inputs, 12.5% for final products. Precious metals would attract 1% VAT, while items relevant to national security would be exempt.

‘Demerit goods’ may attract higher VAT rates while sugar, tobacco and textiles covered under special additional duties would be out of VAT net. Petroleum products, whose prices are market determined, have also been kept out of VAT ambit. The white paper would also lay down procedures for collection of VAT from traders. Sources said most traders would be out of the VAT ambit. Traders with an annual turnover of up to Rs 40 lakh would be exempt from filing VAT returns, while traders with Rs 40 lakh to Rs 5 crore would have to pay VAT at 1%. The panel had assured traders that the new tax regime would be transparent.

17th January 2005: The government has decided to impose VAT on 550 goods. The State level VAT to have will have dual rates of 4% & 12%. There will be 1% Value Added Tax on gold and silver goods. But there will be no state level VAT on petrol, diesel and alcohol.

18th January 2005: Union Finance Minister P Chidambaram on Friday asserted that all state governments were gearing up for the introduction of the Value Added Tax regime from April 2005. "Every state government has either passed laws or promulgated ordinance for VAT regime. We will enter the VAT regime from April," Chidambaram told reporters here. He dismissed reports that Uttar Pradesh was dragging its feet on the VAT issue. Chidambaram said West Bengal Finance Minister Asim Dasgupta, who is the chairman of the empowered committee on state finance ministers, had seen the draft VAT regulation that was being readied by the UP government. Asked about Karnataka's concern that there would be revenue loss to the state following the entry into the VAT regime, he said "I don't believe that will be the case. I believe VAT will be revenue enhancing and not revenue reducing". Chidambaram said the Centre is committed to compensate any revenue loss as per the agreed formula in the VAT white paper.

19th January 2005: Sooner or later, imports may come under the purview of value-added tax (VAT). Official sources told FE that a proposal of the empowered committee of state finance ministers to bring imports in the VAT chain was being considered by the finance ministry. However, finance minister P Chidambaram is unlikely to exercise this option in the forthcoming budget. It is reckoned that VAT regime would need to settle down before the new impost could be brought in. Imposition of the VAT — an alternative to sales tax — on imports would require an amendment to the constitution.

Explaining the rationality behind the move, the sources said that idea of imposing VAT on imports wasn’t incompatible with any multilateral obligation of the country, including those under the World Trade Organisation. VAT could be imposed on imports even as the government was keen to progressively reduce customs duties to the Asean level, the sources said. Also, since VAT permits input tax set-off, imposing it on imports would not result in any cascading effect. The empowered committee has had a round of deliberations on the proposal with the finance ministry, sources said. North Block is learnt to have indicated that it was not averse to the idea. VAT on imports would require establishment of suitable tax collection mechanism as also adequate safeguards for protection of interest of land-locked states. VAT or its equivalents on imports exist in many Asian countries, at an average rate of 4-5%.

19th January 2005: States will have the option to exempt rice and other foodgrain from value added tax (VAT) in the first year of the new regime, subject to a review later. The empowered committee of state finance ministers has decided to provide states the option to either exempt specific foodgrain from VAT or levy the merit goods rate of 4%, considering their socially sensitive nature, convenor, Asim Dasgupta said. In addition, the committee also gave tea-growing states the freedom to impose 4% VAT on tea, instead of the general rate of 12.5% in the first year of VAT, since the tea plantation sector was facing serious difficulties. Again, the decision would be reviewed later. All tax-paid goods purchased on or after April 1 ’04 and still in stock as on April 1 ’05 would be eligible to receive input tax credit, said Mr. Dasgupta. Resellers holding tax-paid goods on April 1 ’05 would also be eligible for input tax credit. Inter-satte trade date would be totally computerised.

Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4% and 12.5%, plus a specific category of tax-exempted goods and a special VAT rate of 1% for gold and silver ornaments etc. In general, all goods, including declared goods, will be covered under VAT and will get the benefit of input tax credit. The largest number of goods (270) comprising items of basic necessities such as drugs and medicines, agri and industrial inputs, capital goods and declared goods would be under 4% VAT rate. There will be about 46 commodities under the exempted category, including a set of maximum of 10 commodities which each state would be allowed to select from a broader approved list for VAT exemption. The exempted commodities include natural and unprocessed products in unorganized sector as well as items that are legally barred from taxation. The remaining commodities would be under the general VAT rate of 12.5%. The few goods that would be outside VAT as a matter of policy would include liquor, lottery tickets, petro products, as the prices of items are not fully market-determined. These items will continue to be taxed under the sales tax act of the respective states. Mr. Dasgupta said the committee did not want to include more commodities under the exempted category. The central sales tax (CST) would be phased out after one year of VAT regime, to avoid the tendency among some traders to book local sales as CST.

24th January 2005: Value Added Tax (VAT) leads to avoidance of multiple taxation and lowering of taxes for the manufacturers and traders and lowers prices of final goods for consumers. How does VAT work? It is basically providing set-off for the tax paid at every stage of value-addition to the goods. The VAT liability, according to the White Paper released, is calculated by deducting input tax credit from tax collected on sale during the payment period. In the present regime, inputs worth Rs. 1,00,000 are purchased for producing final goods worth Rs 2,00,000 in a month. Then Input tax is paid at 4 per cent and output tax paid at 10 per cent. In this, the input tax works out to Rs 4,000 and output tax on sales works out to Rs 20,000. Under the VAT regime, the levy on sales of final goods worth Rs 2,00,000 would work out to Rs 16,000 (output tax of Rs 20,000 minus Rs 4,000 set off as input tax). The input tax credit will be given to both manufacturers and traders for purchase of inputs and supplies meant for both sale within the states as well as other states.

28th January 2005: With the end of the financial year drawing near it’s high time for late-risers to draw up their savings plans and save on paying income tax. Think of long-term investments while saving. It makes more financial sense as you end up having a sizeable nest egg. There are many options for professionals to save as well as invest for the future. The more common ones are the public provident fund (PPF), National Savings Certificate (NSC), ULIP, housing loans, LIC and infrastructure bonds. While a number of public sector banks offer PPF accounts, NSCs are available from major post offices. While most banks offer housing loans, financial institutions such as PFC and IDBI offer infrastructure bonds. Private sector bank ICICI has recently joined the infrastructure bond bandwagon.

Income tax rates vary, depending on the annual income slabs one falls under. The slabs are

* annual income up to Rs 50,000 Tax: nil

* annual income between Rs 50,001 and Rs 60,000 10%

* annual income between Rs 60,001 and Rs 1,50,000 20%

* annual income of Rs 1,50,001 plus 30%

For those earning Rs 1 lakh or below a year, they do not have to pay income tax due to rebate provided under Section 88D of the Income Tax Act. The best option for income tax payees is the PPF. “It’s flexible in terms of how much one invests, starting from the minimum of Rs 500 a year and slowly ramping up annual deposits as one’s income rises.” Besides being a long-term investment plan (there is a lock-in period of 15 years, though loans are available from the 3rd year) it is also competitive compared to other savings instruments in the market with its 8% interest rate.

Another good option for first-time investors is to opt for NSCs, which again provides an 8% interest. It’s a good idea to roll your investments and earn a bigger amount later. Reinvest your NSCs every six years. But a catch is that the interest from NSCs should not be more than Rs 12,000 a year. Then the extra income will become a taxable. Section 88 of the Income Tax Act provides investments avenues that will lessen the tax burden. Under this section a maximum of Rs 1 lakh can be invested. This is further divided into two categories: Rs 70,000 in instruments such as PPF, LIC, NSC, ULIP and housing loan principal repayment. The rest Rs 30,000 can be invested in infrastructure bonds. There is also a rebate for school tuition fees paid for children, which is included in the Rs 70,000 limit.

For those earning Rs 5 lakh plus annually there are no rebates under Section 88. These professionals would be better off opting for a pension plan and a medical insurance plan (each up to Rs 10,000 yearly). A number of insurance companies offer a slew of pension and mediclaim plans. Women assesses and senior citizens have special rebate from income tax. Most income tax experts feel that for those who have just fallen under the tax net the best option is to split their money in to a number of investment options, especially in cumulative schemes. This way a taxpayer gets into the habit of saving for the future from an early age.

28th February 2005: Providing major relief to tax prayers, Finance Minister P Chidambaram announced total exemption for income of Rs. One lakh per year. Persons getting annual income of Rs one lakh to Rs.1.25 lakh will have to pay 10% income tax while those getting Rs.1.25 lakh to Rs.2.5 lakh will have to pay 20%. Those getting about Rs.2.5 lakh will be subjected to 30% income tax. Announcing these in the 2005-06 budget, Finance Minister P Chidambaram announced that the level at which the surcharge of 10% will apply has been raised to Rs.10 lakh taxable income.

The minister announced that standard deduction has been removed. Instead, every taxpayer will be allowed a consolidated limit of Rs one lakh for savings, which will be deducted from the income before tax is calculated. All prevailing sectoral caps are to be removed. The rebate under section 88 is to be eliminated and section 80L will be omitted.

In addition to the sum of Rs one lakh, the deducation on interest paid on housing loan for self-occupied house property, medical insurance premia, specified expenditure on disabled dependant, expenses for medical treatment for self or dependant or member of a HUF, deducation in respect of interest on loans for pursuing higher studies and deduction to a person with disability will continue to receive the same tax treatment as prevails now.

The threshold exemption levels for women have been revised to Rs.1.25 lakh and for senior citizens to Rs.1.5 lakh.

28th February 2005: Employers giving perks other than conveyance and canteen allowances will now have to pay a Fringe Benefit Tax at the rate of 30 percent. Announcing the new tax, which will be on an "appropriately defined base", Finance Minister P Chidambaram said there are many perquisites disguised as fringe benefits escaping tax. Neither the employer nor the employee pays any tax on these benefits, which are of considerable material value, he said. At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee, that position will continue. In addition, the Minister has proposed that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer. However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net, he said.

16th March 2005: Finance minister P Chidambaram today told Parliament that the existing sales tax system would continue in those states that were unable to implement value-added tax (VAT) from April 1. “No state has communicated its unwillingness to pass the VAT legislation,” Chidambaram said in a written reply. Uttar Pradesh, Uttaranchal, Jharkhand, Tamil Nadu, Mizoram, Nagaland, Himachal Pradesh and Chandigarh are yet to have their VAT legislation approved.

Replying to a query on special relief to small dealers and traders, Chidambaram said: “Small dealers with an annual turnover not exceeding Rs 50 lakh, who are otherwise liable to pay VAT, shall have the option of a composition scheme with payment of tax at a small percentage of turnover. “As decided by the empowered committee, it is expected that a number of state level taxes on purchase or sales of goods, like state sales tax, turnover tax, purchase tax, additional sales tax, surcharge, entry tax (not in lieu of octroi) etc will be subsumed in VAT.”

The latest status on VAT legislation is like this: five states -- Haryana, Rajasthan, Bihar, Tripura and Jammu & Kashmir have enacted the legislation, including an Ordinance, without presidential assent. Whereas presidential assent has been communicated to 11 other states, namely, Madhya Pradesh, West Bengal, Kerala, Andhra Pradesh, Karnataka, Gujarat, Assam, Delhi, Maharashtra, Chhattisgarh and Meghalaya. In Punjab, Orissa, Pondicherry, Manipur, Daman & Diu, Dadra & Nagar Haveli, the VAT legislation is ready and has been sent for Presidential assent. In Arunachal Pradesh, Goa and Sikkim, the legislation has been approved by the state assemblies but is yet to be sent for presidential assent.

“The empowered committee of state finance ministers has decided to implement VAT and has finalised the VAT design, after prolonged deliberations and due consideration of advantages offered by the VAT system,” Chidambaram said.

18th March 2005: Finance minister P Chidambaram has hinted at withdrawing the controversial tax proposal relating to imposition of 0.1% tax on withdrawal of Rs 10,000 or more a day from at least a savings bank account. Replying to the three-day debate on the Budget for 2005-06 in the Lok Sabha on Thursday, Mr. Chidambaram said, “I have not dealt with tax proposals. I am sensitive to the concerns of the members and you will have some good news at the time of discussion on the Finance Bill.” Though Mr. Chidambaram did not specifically refer to the proposal for 0.1% tax on cash withdrawals, he hinted at it by saying Prime Minister Manmohan Singh had asked him why there was so much uproar in the House when he had proposed it during the Budget presentation. He added, “I told the Prime Minister that I was applying yours and mine austere standards when I had made the proposal.” During the debate, members cutting across party line demanded withdrawal of the proposed tax on cash withdrawal from banks. Referring to other tax proposals including the fringe benefit tax on corporates, he said, “I have not dealt with any aspects of the Finance Bill. I will deal with this in greater details when we take up the Finance Bill.”

22nd March 2005: State finance ministers on the value-added tax (VAT) committee will hold a meeting on March 24 to discuss the launch of the tax scheduled for April 1, the committee's chairman said on Monday. The launch of the tax, India's most significant tax reform for years, was thrown into doubt at the weekend after the main opposition party the Bharatiya Janata Party (BJP) said five states that it ruled will not implement the tax at the launch date. Ashim Dasgupta chief of the tax committee told, "We are meeting on the 24th of March. We will have a news conference and we will give you our views."

VAT, levied on the value manufacturers and retailers add to goods at each sale point in the chain, is due for adoption by India's states to replace a web of sales taxes that lead to duplicate taxation. Economists and a leading traders' lobby said the reform, the centerpiece of the government's overhaul of the tax system, might be delayed or implemented only in some of India's 29 states as a result of the BJP decision. But officials of the ruling Congress-led coalition said the introduction of the tax would go ahead as planned.

22nd March 2005: Government vowed today to launch the value-added tax (VAT), its biggest tax reform in years, on its target date of April 1 even though five states ruled by the main opposition party are backing out. "There is no way VAT will be delayed. It will be launched on schedule," Ramesh Chandra, secretary of the VAT committee of state finance ministers, said today. The new tax, which has been delayed five times in 10 years, hit a fresh setback over the weekend when five states ruled by opposition Bharatiya Janata Party (BJP) said they would not implement the plan in its present form and demanded changes.

"We have consulted experts. We were pleasantly surprised when they said states which do not implement VAT will be the losers, especially when 75% of the country will launch it," Chandra said. Value-added tax (VAT), levied on the value that manufacturers and retailers add to goods at each sale point in the chain, seeks to replace a complex web of sales taxes, which resulted in duplicate taxation. It is the centerpiece of the cash-strapped government's overhaul of India's complex and inefficient tax system. It aims to create a uniform tax across India's 29 states, curb tax evasion and increase the government's tax takes. Chandra said a panel of state finance ministers on VAT would meet on Thursday to finalise the launch of the tax on April 1.

23rd March 2005: Holders of pension plans, sold by private insurance companies, could see their bonuses vastly slashed if the Income Tax department succeeds in pressing home its claims. I-T sources said the insurers have reported huge losses in their respective pension schemes. But the department has reasoned that under Section 10 and Section 80CCC of Income tax Act, the pension schemes are exempt from tax only if they make a profit under the schemes.

Further, the department’s argument is that these companies have run up huge losses under these schemes only because they have been offering assured returns to subscribers. Therefore, the department’s contention is that tax breaks under Section 80 CCC should not be granted to such pension schemes.

This is but one part of the I-T department’s close scrutiny of the working of life insurers. The department plans to reopen the assessment of all private life and non-life insurance companies for earlier years, as it feels that the losses reported by these companies were “exaggerated”. Except for the public sector major Life Insurance Corporation, most of the insurers have recorded losses till date.

The I-T department said the insurance companies reported losses only because they set off provisions for shoring up their solvency margins against their income. The department is now contesting the set-off. Every insurance company has to make provisions, out of its income, to shore up its solvency margin, according to the norms of the Insurance regulatory Development Authority.

If the I-T department succeeds in its contention that a provision is not an expense and, therefore, not eligible to be set off against the year’s income, the insurance companies’ losses will be vastly reduced.

The companies’ tax liability will go up. “It will have an impact on the capacity of the insurance companies to pay bonuses and dividend thereafter as the payment has to be made out of their own resources,” a top I-T source said. The source said most private insurers have not furnished their actuarial reports “to avoid showing the real extent of their losses and income.”

24th March 2005: Finance Minister P Chidambaram said today that 21 out of 29 states would launch the Value Added Tax (VAT) on the scheduled date of April 1, 2005. The launch of VAT, India's most significant tax reform for years, had been in doubt after the main opposition Bharatiya Janata Party (BJP) said last weekend that five states it rules would not implement the tax on April 1. "Most state finance ministers are strongly committed to launch VAT from April 1. At least 21 states are ready to launch VAT. I urge the other states not to miss the historic opportunity," said Chidambaram. VAT has been delayed five times in the past 10 years.

28th March 2005: The Institute of Chartered Accountants of India (ICAI) has approved the guidance note on accounting for state level value added tax (VAT). The guidance note requires that the input tax paid on purchase of inputs and capital goods, which are available, as VAT credit should not be included in the cost of purchase. The note also requires that input credit available on opening stock at the commencement of the scheme should be credited to the opening stock account. The guidance note has specified that VAT collected from the customers should not be included in the sales figure and similarly VAT paid should not be treated as expenditure in financial statements. The guidance note recognises that the VAT payable on sales in an indirect tax that would ultimately be borne by the final consumer. The guidance note, which deals with many accounting issues that are likely to arise on implementation of the state level VAT, would be released shortly.

31st March 2005: The government insisted it would launch a new value-added tax (VAT) as planned on Friday, despite a countrywide strike against the reform by thousands of wholesale and retail traders. Shopkeepers across India were planning to keep their shutters down for a second day on Thursday in a three-day protest against the levy, which they complain is complex, has been poorly prepared and could lead to a heavier tax burden for them.

The measure, India's biggest tax reform for years, has been delayed five times in nearly 10 years but a senior official said it was set to go ahead on time despite the protest and objections by some state governments. “VAT will be launched tomorrow and there is absolutely no question of deferring it," said Ramesh Chandra, secretary of the federal panel overseeing VAT implementation. "Systems are very much in place."

The tax aims to create a uniform system, curb rampant evasion and increase revenue for the cash-strapped state governments. At least 21 out of the 29 states are expected to adopt it. But some states, including five led by the main opposition Bharatiya Janata Party (BJP), are refusing to implement it, fanning worries among traders that they will lose out to businesses in the holdout states.

VAT is levied on the value manufacturers and retailers add to goods at each point of sale and will replace a web of sales taxes across the states that create duplicate taxation. It will cover 550 goods and have two basic rates of 4 percent and 12.5 percent, with a special rate of 1.0 percent for gold and silver ornaments.

Traders say they do not yet know which rates apply to which goods. They also complain that other taxes, including a central sales tax, will continue to run alongside VAT. The government intends to phase out the central sales tax by April 1, 2006.

31st March 2005: Coinciding with the 3-day traders bandh against VAT implementation, the mid-term appraisal of the 10th Plan has pointed to "serious design flaws" in the tax even as Planning Commission deputy chairman Montek Singh Ahluwalia maintained that it was a more "rational" system. "There are serious design flaws in the suggested VAT structure. The proposed VAT does not extend to all indirect taxes on goods as entry tax and octroi will continue," the Plan panel said in the draft mid-term appraisal of Tenth Plan. "All in all, the combined incidence of central and state VAT would be close to 30%. It could be higher if we consider taxes that are going to be retained after VAT is introduced," it said.

Ahluwalia, however, said; "VAT is a more rational system. States that don't adopt VAT would, in fact, be imposing a cost on their own producers. I can assure that both international and domestic investors setting up new plants prefer to set them up in states that have VAT than those who don't." The Commission strongly recommended that to boost the manufacturing sector, the effective rate of indirect tax of both centre and states will have to be brought down to the ASEAN level of 10-12%. "High tax burden will keep prices high and dampen demand, particularly in the case of low-income consumers," it said.

31st March 2005: A day before 20 states switchover to the Value-Added Tax, World Bank and IMF said the new regime would prevent evasion, push up revenue and help cash-starved government to come out of debt trap. "A comprehensive VAT widens tax net, as it makes tax evasion difficult. Going by the experience of other countries, vat has proved beneficial and leads to revenue buoyancy," world bank country director Michael Carter said in an interview on the eve of the new tax coming into effect.

Asked whether implementation of VAT in patches was feasible, he said, "21 states is better than none. It is interesting to see what happens in other states." Although traders are opposing vat claiming it had some serious flaws, carter said, "There is no reason not to implement VAT just because there are some flaws in it. It will be a learning process for states. You got to have flaws when you are implementing something for the first time." IMF also endorsed tax reforms but said more needed to be done to instill fiscal discipline among state governments.

12th April 2005: Notification No. 121/2005 Dated 30.03.2005: The Central Board of Direct Taxes, vide this notification, has specified Electronic Filing of Returns of Tax Collected at Source Scheme, 2005. It shall be applicable to all persons filing returns of tax collected at source on computer media under sub-section (5B) of section 206C of the Income-tax Act, 1961. It consists of methodology for preparation and furnishment of e-TCS Returns. It explicitly makes a mention of the procedure to be followed by e-TCS intermediary and its general responsibilities. It also, declares the powers of the e-filing Administrator and powers of the Board as regard to revocation of the authorisation of an e-filing Intermediary.

13th April 2005: The empowered committee on value added tax (VAT) today said lack of uniformity in VAT rates among states was a serious issue, and advanced its meeting to April 15-16 to consider the matter. "We are ready to admit that VAT rates are not uniform (among states). That is why we have advanced our meeting, which was earlier scheduled for May, to April 15-16," Ramesh Chandra, empowered committee secretary, said today. On traders' grievances over VAT, he said doors of negotiations were open, and asked the traders to present their case before the committee.

On the controversial issue of VAT on CSD canteens, he said it was up to the defence and finance ministries to give concessions to these canteens. Various issues like difference in VAT tax structure between states have surfaced after implementation of VAT from April 1. So far, 20 states have implemented the new system. Uttar Pradesh, Tamil Nadu, Uttaranchal, besides BJP-ruled states - Rajasthan, Madhya Pradesh, Gujarat, Jharkhand and Chhattisgarh has not introduced VAT.

14th April 2005: Prime Minister Manmohan Singh today said he had promised the armed forces to look into their demand to exempt from value added tax (VAT) goods sold at the CSD canteens. “I promised them (the armed forces) that I will look into it," said Mr. Singh. The Prime Minister said the armed forces had brought to his notice the hardship faced by them due to implementation of value added tax in the CSD canteens.

16th April 2005: The Empowered Committee of State Finance Ministers on Vat will take a decision on Saturday on removing variations in tax rates. The committee will also discuss in detail the issue of price rise due to implementation of Vat by states from this month, its chairman Asim Dasgupta said. As a preparation for the meeting, the committee collected data on variation in Vat rates and other implementation issues from officials of the 21 states that have switched over to the new tax system.

18th April 2005: The empowered committee on value added tax (VAT) will take a final decision on tax treatment of petroleum products by the end of the month. The move comes in the face of rising fuel costs due to increase in tax rates on petroleum products and severe revenue loss to some states. States like Delhi and UP will have to face revenue loss from diesel till the VAT panel resolves the issue of floor rate of tax on petroleum products on April 26, state government officials said today.

They added that Delhi may have to take out diesel from the VAT list as Asim Dasgupta, chairman of the empowered committee, made it amply clear that petroleum products will be out of VAT as their prices are not market-determined. "Petroleum products are still out of VAT. There will be no deviation. The reason why petroleum products have been kept out of VAT is that they are not marketable commodities and fall under the administered price mechanism," Dasgupta said.

Delhi has imposed a VAT of 20% on diesel, which is much higher than the earlier sales tax of 12%. Uttar Pradesh also charges 20% sales tax on diesel. In contrast, neighboring states like Haryana and Punjab have kept it at 12% and 8.8%, respectively. The empowered committee had earlier decided on a minimum tax rate of 20% on diesel. The Delhi government has admitted it has lost 40-50% revenue during the first 13 days of imposition of VAT. A K Walia, finance minister of Delhi, said: "We are losing revenue to the neighboring states. We have asked the empowered committee to ask other states to increase the tax on diesel to 20% or allow us to violate the floor rate."

19th April 2005: The empowered committee on Vat will take a final decision on tax treatment of petroleum products by the month-end. The move comes in the face of rising fuel costs due to increase in tax rates on petroleum products and severe revenue loss to some states. States like Delhi and Uttar Pradesh will have to face revenue loss from diesel till the Vat panel resolves the issue of floor rate of tax on petroleum products on April 26, state government officials said. Sources said Delhi may have to take out diesel from Vat list as empowered committee chairman Asim Dasgupta made it amply clear that petroleum products will be out of Vat as their prices are not market-determined. “Petroleum products are still out of Vat. There will be no deviation. The reason why petroleum products have been kept out of Vat is that they are not marketable commodity and fall under administered price mechanism,” Mr. Dasgupta said. Delhi has imposed Vat on diesel at 20%, which is much higher than the earlier sales tax of 12%. Uttar Pradesh also charges 20% sales tax on diesel. In contrast, neighboring states like Haryana and Punjab have kept it at 12% and 8.8% respectively. Delhi government said that it had lost revenue by 40-50% during the first 13 days of Vat regime.

19th April 2005: The Government on Tuesday said it is not considering imposing tax on foreign institutional investors (FIIs) to curb volatility in the stock markets. "Government is not presently considering imposition of tax on FIIs," Minister of State for Finance S S Palanimanickam said in a written reply in the Rajya Sabha. FII investments in Indian securities market are governed and regulated by the provisions of Sebi Act, 1992, Sebi (Foreign Institutional Investors) Regulations, 1995 and Fema, 1999, he said. FIIs are also required to ensure compliance with the guidelines, directives and instructions issued by Sebi or the RBI or the Union Government, the Minister of State for Finance said.

23rd April 2005: It has been the steady companion of the salaried class over the past two decades. However, if the current budget is passed in its present form, then one would have already taken the last benefit when collecting the March payslip.

The item at the centre of attention is standard deduction and bearing the brunt of the impact here will be the salaried class, as well as senior citizens receiving a pension. In the midst of this gloom, there is a silver lining. Though available to only a select few, the standard deduction available for family pension still continues.

Standard deduction was a fixed sum that the salaried could deduct from their gross income, and the deduction here was based on the income earned by the individual. For those with salary incomes less than Rs 5 lakh, the standard deduction available was Rs 30,000, while for above Rs 5-lakh income, it was Rs 20,000.

According to chartered accountants, the logic behind giving such a deduction was that the salaried, too, had incidental expenses related to earning their income. Further, unlike those in business or professions, the expense cannot be set off against the income earned, this benefit was considered necessary.

There will be a negative impact on this front for individuals, but for the present, it is being masked under the change in slabs that have been proposed in this budget due to which the overall tax to be paid will reduce.

Amidst the gloom among working individuals as well as senior citizens receiving pension, there is still a standard deduction that several people can take the benefit of. This is the standard deduction that is available in case of family pension. A family pension is a regular monthly amount that is payable by the employer to a person belonging to the family of an employee in the event of his death.

The sum allowed as a deduction is a maximum of Rs 15,000 or one-third of the amount of the pension, whichever is higher. It has to be noted that the standard deduction that is proposed to be eliminated by this year’s budget is the one that is calculated under Section 16 of the Income Tax Act.

The standard deduction in the case of family pension is under Section 57 of the Act. Tax experts say that such benefits should continue because it provides much needed relief for families trying to cope with the loss of their family members.

26th April 2005: Twenty one states, which have switched over to value added tax (VAT), today agreed to adopt uniform rates for industrial input, capital goods and essential commodities like medicines, salt, bread and PDS items. "It has been possible to arrive at a full consensus among states on convergence of VAT rates. All states will come out with notifications on VAT rates by the end of this month," Asim Dasgupta, chairman of the empowered committee on VAT, said after a marathon meeting of state finance ministers today. Medicines, medical equipment and devices will attract 4% VAT. "The empowered committee will form a view on what is to be included in life saving drugs," Dasgupta said.

The meeting also discussed thread-bare the tax treatment of petroleum products. "Diesel and petrol will be out of VAT while LPG can attract VAT," he said. Dasgupta said industrial inputs and capital goods will attract VAT at 4%. He, however, added there will be a small list of capital goods like building material that will be exempted. Essential items like branded and unbranded salt, bread, gur, jaggery and all food items distributed through the public distribution system will be exempted from VAT.

27th April 2005: Petrol & diesel, salt, bread, khadi, gur, jaggery to be exempt from VAT. The empowered committee of state finance ministers on the value-added tax (VAT) has decided that all industrial inputs, medicines, medical equipment and devices will attract a uniform 4% tax. The 4% rate will also apply to capital goods, barring a small negative list of items like building materials.

The chairman of the empowered committee, Asim Dasgupta, said the 21 states that had signed up for the VAT would notify the rates by the end of this month. Dasgupta said the committee would take some time to finalise its view on life saving drugs. Till then, such medicines will continue to attract 4 per cent VAT. He said a view regarding petroleum products had also been taken. “Diesel and petrol will be out of VAT,” he said.

The committee also decided to expand the list of exempt items to include branded and unbranded salt, all kinds of bread, khadi, gur, jaggery and goods distributed through the public distribution system. States have been given the option to impose either VAT, 4 per cent or no tax on atta, maida and suji. An option of 4 per cent or 12.5 per cent VAT rate on dry fruits has also been given to states.

2nd May 2005: While moving official amendments to the Finance Bill on Monday, finance minister P Chidambaram is all set to blunt the criticism against his budget proposals by whittling down both the controversial tax proposals on fringe benefits and cash withdrawals. He is also likely to raise the exemption limit for women and senior citizens. Perpetual tax exemptions to units located in special economic zones is also set to be granted.

The FM is set to spare savings bank accounts from the 0.1% tax on cash withdrawals. And that’s not all. The threshold limit for the tax that would be levied mainly on withdrawals from current accounts and encashment of term deposits is being raised to Rs 25,000 for individuals and HUFs. The limit will be even higher at Rs 1 lakh for businesses. This means a 0.1% tax will have to be paid by companies, firms and institutions only if cash withdrawals exceed Rs 1 lakh on a single day. This is far more liberal than the original budget proposal to levy the tax on withdrawals exceeding Rs 10,000 on a single day.

Corporate India will have to look at paying the proposed fringe benefit tax, but will feel the bite a whole lot less. Advertising is set to be exempt from FBT. Expenses on conveyance, tour and travel (including foreign travel) are likely to attract FBT. Use of telephone including mobile phones will attract a 20% FBT — higher than the originally-proposed 10%. Expenditure on leased lines is, however, set to be excluded. Pharma and IT companies will be gainers, with a lower tax burden. Individuals and HUFs engaged in business will be out of the purview of FBT.

2nd May 2005: Charities and universities can now heave a sigh of relief. Charitable trusts, universities and institutions already enjoying income tax exemption will also be exempt, with a recast of the definition of ‘employer’.

Fringe benefits would mean any privilege, service, facility or amenity, directly or indirectly provided by an employer, whether by way of reimbursement or otherwise. The deeming provisions may, however, stay.

Senior citizens and women have reason to cheer too. The FM is set to announce a hike in the threshold exemption for senior citizens from the proposed Rs 1.5 lakh to Rs 1.85 lakh. A pensioner with a taxable income up to Rs 1,85,000 will not have to pay income tax. For women, the threshold exemption is set to be raised from the originally proposed Rs 1.25 lakh to Rs 1.5 lakh. The tax burden of these segments worked out to be higher than last year due to the withdrawal of standard deduction and deduction under 80 L of the Income-Tax Act.

A higher threshold exemption will at least ensure that their tax liability does not rise further. Investors too, can a heave a sigh of relief, with the government planning to do away with the restrictions on eligibility of tax benefits under Section 80 C. The term “income chargeable to tax” is set to be dropped.

2nd May 2005: Finance Minister P Chidambaram on Monday did not dilute the effect of the fringe benefit tax and retained it at 30 per cent for corporate India. However, for individuals, he had some respite in the form of removing the withdrawal tax altogether for savings bank account holders. For current account holders, withdrawals of over Rs 25 lakh will be taxed.

            Chidambaram also brought some cheer to women tax payers, hiking the exemption limit to Rs 1.35 lakh per annum. For India Inc, the fringe benefit tax noose seems to have tightened, with the several deemed benefits now coming under its ambit. Contributions to superannuation funds will attract the FBT as will concessional tickets provided to staff by companies and phone mobile bills.

The following are highlights of what Finance Minister Chidambaram announced on the floor of Parliament:

• Expenses on conferences to come under FBT

• Repairs and maintenance of cars to come under FBT

• Guest house and club facilities, gifts to be under FBT

• Foreign travel expenses to be under FBT

• Sales promotion expenses exempted from FBT

            • Contribution to superannuation funds to be under FBT

2nd May 2005: Software companies are set to be the biggest beneficiaries of the recast in the proposed FBT valuations. For all employers, 20% of the total expenses incurred on conveyance, tour and travel (including foreign travel) will be the base on which FBT will be charged.

But for software companies, only 5% of such expenditure will be charged to FBT. Another sweetener is that only 5% of the total expenses incurred by software firms on use of hotel, boarding and lodging will be taken for calculating FBT.

This will substantially reduce their tax liability. Extensive travel undertaken by software professionals could be the rationale for lowering the valuation. In fact, FM P Chidambaram has gone on record to say that FBT will not be levied on legitimate business expenses.

Employers in sectors (other than computer software) will be taxed on 20% of the total expenses on use of hotels. Pharma companies will also stand to gain. Here too, the base for calculating expenses on foreign travel and tour will be 5%.

The government is also set to continue with sops for employers in the hotel business. The value of fringe benefits will be 5% instead of 20% on any expenditure incurred on or payment through paid vouchers that are not transferable and usable only at eating joints.

For transporters, the value of fringe benefits will be 5% instead of 20% on expenses incurred in the repair, running (including fuel) and maintenance of cars and the amount of depreciation.

For airlines, the value of fringe benefits on expenses incurred for repair, running (including fuel) and maintenance of aircraft and the amount of depreciation will be taken as nil.

5th May 2005: The government has dropped the move to exempt life-saving drugs from the purview of the value added tax (Vat). They will continue to attract 4% tax. While states will have the freedom to make exceptions to this rule for a select list of medicines, the empowered committee of state finance ministers has decided not to notify drugs in the category of goods exempted from Vat.

At its meeting here on April 26, the empowered committee had resolved to firm up a list of life-saving drugs in the wake of the proposal made by some states to exempt at least some commonly used medicines from Vat.

On that day, the panel had also announced the decision to add a small number of items including salt and bread to the original list of 46 items eligible for exemption. Also, Vat on medical equipment and devices were cut from peak rate of 12.5% to 4%. But a final decision on the proposal to keep drugs out of Vat could not be taken. “There will not be further exemptions,” Ramesh Chandra, the panel’s member secretary said on Wednesday.

11th May 2005: Investors from United Arab Emirates (UAE) have to pay capital gains tax on their investments in India, according to a ruling by the Authority for Advance Ruling (AAR), a quasi judicial body which decides on the taxability of cross-border ventures in advance. The AAR gave this ruling on Monday on an application filed by Abdul Razaq Memon, a UAE national, who sought the opinion of the AAR on the issue of whether tax is payable on the capital gains arising from his Indian investments. The AAR ruled that he had to pay tax. According to sources, the AAR ruled that the Double Taxation Avoidance Agreement between India and the UAE was not useful for this purpose since UAE does not have a tax regime.

G.S.R. (E).- In exercise of the powers conferred by sub-section (1) and sub-section (2) of section 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:-

1. Short title and commencement.-

(1) These rules may be called the Export of Services Rules, 2005.

(2) They shall come into force on the 15th day of March, 2005.

2. Definitions.- In these rules, unless the context otherwise requires,-

(a) “Act” means the Finance Act, 1994 (32 of 1994);

(b) “input” shall have the meaning assigned to it in clause (k) of rule 2 of the CENVAT Credit Rules, 2004;

(c) “input service” shall have the meaning assigned to it in clause (l) of rule 2 of the CENVAT Credit Rules, 2004.

3. Export of taxable service.- The export of taxable service shall mean,-

(1) in relation to taxable services specified in sub-clauses (d), (p), (q), (v) and (zzq) of clause (105) of section 65 of the Act, such taxable services as are provided in relation to an immoveable property which is situated outside India;

(2) in relation to taxable services specified in sub-clauses (a), (f), (h), (i), (j), (l), (m), (n), (o), (s), (t), (u), (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv), (zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzj), (zzl), (zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw), (zzx) and (zzy) of clause (105) of section 65 of the Act, such services as are performed outside India:

Provided that if such a taxable service is partly performed outside India, it shall be considered to have been performed outside India;

(3) in relation to taxable services, other than,-

(i) the taxable services specified in sub-clauses (a), (f), (h), (i), (j), (l), (m), (n), (o), (p), (q), (s), (t), (u), (v), (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv), (zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzj), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzs), (zzt), (zzv), (zzw), (zzx) and (zzy); and

(ii) the taxable service specified in sub-clause (d) as are provided in relation to an immoveable property, of clause (105) of section 65 of the Act,-

(i) such taxable services which are provided and used in or in relation to commerce or industry and the recipient of such services is located outside India:

Provided that if such recipient has any commercial or industrial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of services only if-

(a) order for provision of such service is made by the recipient of such service from any of his commercial or industrial establishment or any office located outside India;

(b) service so ordered is delivered outside India and used in business outside India; and

(c) payment for such service provided is received by the service provider in convertible foreign exchange;

(ii) such taxable services which are provided and used, other than in or in relation to commerce or industry, if the recipient of the taxable service is located outside India at the time when such services are received.

Explanation.- For the purposes of this rule “India” includes the designated areas in the Continental Shelf and Exclusive Economic Zone of India as declared by the notifications of the Government of India in the Ministry of External Affairs Nos. S.O.429(E), dated the 18th July, 1986 and S.O.643(E), dated the 19th September 1996.

4. Export without payment of service tax.- Any service, which is taxable under clause (105) of section 65 of the Act, may be exported without payment of service tax.

5. Rebate of service tax.- Where any taxable service is exported, the Central Government may, by notification, grant rebate of service tax paid on such taxable service or service tax or duty paid on input services or inputs, as the case may be, used in providing such taxable service and the rebate shall be subject to such conditions or limitations, if any, and fulfillment of such procedure, as may be specified in the notification.

[F. No. B2/4/2004-TRU]

(V. Sivasubramanian)

Deputy Secretary to the Government of India

4th June 2005: Corporates would soon have guidance on how they should account and disclose the amounts paid towards fringe benefit tax (FBT).

The Institute of Chartered Accountants of India (ICAI) has finalised a Guidance Note that requires corporates to disclose FBT as a separate line item in their financial statements.

This would also imply that FBT would have to be disclosed separately in both the quarterly as well as annual earnings disclosures of corporates.

"The FBT has to be shown as a line item that is separate from the current tax liability of the company. FBT is not a tax on income of the company and therefore cannot form part of the current tax liability," said Mr Ved Jain, Chairman, Fiscal Laws Committee of the ICAI.

He also said that FBT couldn't be considered as part of employee cost as it was an additional tax and the liability to pay this tax was on the employer and not on the employee.

6th June 2005: The UP Income Tax Dept. wanted India Glycols to file its return from Moradabad where they have their factory and registered office whereas the company has been doing so from Kolkata for a long time. The matter finally landed up at High Court which has ruled that Notice by AO of Moradabad to file IT return where factory and registered office are located is not valid when Principal place of business is Calcutta.

The petitioner was having its principal place of business at Calcutta, as such since day one it was filing returns in Calcutta. Petitioner has a factory and registered office at Moradabad. ITO Moradabad issued notices to petitioner for filing returns in Moradabad as it is having its registered place of business thereat. Commissioner (Lucknow) held that the AO, Moradabad, had got jurisdiction as petitioner is having registered office thereat. So petitioner should have filed and in future would file returns with appropriate official.

Observations of HC:

++ In the writ petition, in paragraph 3 the petitioner has stated "it has been filing its income-tax return in Calcutta", where its principal place of business, viz., its corporate office is situated. It has also been averred that the permanent account number (PAN) of petitioner No.1 under the said Act has been allotted by respondents Nos.1 and 2 in Calcutta. It was further submitted that till today the petitioner has been filing returns and the appropriate AO has been assessing the same. Of course, during the pendency of the writ petition, he contends, pursuant to the interim order passed in this petition, returns are being filed regularly. It is the settled position of law to decide the question of jurisdiction in a writ matter, the court is to look into amongst others the place of business of the respondent against whom the relief is sought for and the records relating to the case situate within the territorial limit of the particular court, and the cause of action either partly or wholly shall have arisen within the territorial limit of the court.

++ Under section 124 of the said Act an assessee cannot be compelled to file its return with the Assessing Officer, within whose jurisdiction the assessee does not have its principal place of business, meaning thereby an inappropriate AO cannot ask the petitioner to submit returns and this statutory protection is being enjoyed by the assessee under the aforesaid section. Such protection of the petitioners will be taken away by the impugned two orders as well as notices. Moreover, the petitioners have already submitted the returns for the assessment years for which the impugned notice has been issued and the orders have been passed. The petitioner-company therefore, in effect would be compelled to file fresh returns and to be assessed once again and it may so happen that because of late filing of returns the petitioner might be subjected to penalty and also payment of interest.

++ Principal place of business of the company is termed and/or treated as the place wherefrom all control over the business activities is located. This principal place of business may or may not be a registered place of business.

++ In this case the petitioners have stated in the writ petition specifically that the principal place of business is located at Calcutta and as such respondent No.2 having been satisfied as to the fact of location of the petitioner's principal place of business at Calcutta, has assessed. I am unable to find lawful reason how such a decision could be rendered nugatory by the counterpart at Lucknow or for the matter at Moradabad.

6th June 2005: Rich tax-payers who also earn pots of money as farm income, which is tax-free, can sit back and relax, as they will not get scrutiny notices from tax authorities.

The Central Board of Direct Taxes (CBDT) is set to exclude returns filed by individuals — or non corporate assessees — claiming “exempt” income over Rs 2 lakh from the compulsory scrutiny basket.

“The Board has proposed dropping all such cases from compulsory scrutiny following the wide variation in interpretation of ‘exempt’ income by field formations. This created considerable confusion last year,” said a senior official.

The CBDT had, for the first time last fiscal, called for compulsory scrutiny of all returns where the exempt income was above Rs 2 lakh for non-corporate assessees. For corporate assessees, all cases where income exceeding Rs 10 lakh has been claimed as “exempt” was brought under compulsory scrutiny

Besides individual tax payers, I-T returns of trusts and institutions who enjoy income-tax exemptions may also be excluded from the compulsory scrutiny basket.

Senior officials said that I-T returns of banks and PSUs, NSE 500 and BSE ‘A’ group companies will, however, continue to be under compulsory scrutiny this fiscal. So would stock brokers. Chief commissioners are, however, set to be given powers to issue general guidelines for pruning down the number of cases to be taken up for scrutiny

Exempt income includes dividends that are tax free at the hands of the shareholder and long-term capital gains arising out of equity transactions struck on a stock exchange. It also includes gratuity, interest on specified tax-free bonds, agriculture income and so on.

The CBDT’s move had meant that even a rich farmer’s returns would be scrutinised, if he filed a tax return showing a taxable interest income. However, just a month after issuing these guidelines last year, the CBDT sent revised instructions calling for scrutiny only in “certain cases”.

The intention was to scrutinise cases where unaccounted income is likely to have been camouflaged as exempt income. There could be cases where a small plot of land that is not even under cultivation is shown to fetch massive farm income.

22nd June 2005: The income tax department will set up help centres for assisting small tax payers, other than corporate and salaried tax payers from July 1, 2005. The help centres would be functional during the period from July 1 to September 9 from Monday to Friday, the income-tax department said in a release today.

There would be at least one or two such help centres in the jurisdiction of each chief commissioner of Income Tax (CIT) which would be set up in co-operation with local trade or industry associations. The centres, to be located outside the IT offices, would be manned by trained personnel from the IT department while the necessary infrastructure would be provided by the association.

The facilities to be provided by the help centres include helping small tax players in filling up their returns, forms, challans, computing their income, calculating tax liability and guide tax payers with tax related advice. The income-tax department would also review the further continuance of this service after September 30, it said.

4th July 2005: Empowered Committee on value added tax will meet on Saturday to take up the issues arising after three months of implementation of the new tax system by 21 states, including compensation formula for any losses incurred by states due to VAT. "We will meet on July 9 to discuss implementation issues relating to VAT," Empowered Committee member secretary Ramesh Chandra said.

To a query on reported inability by states to comply with the directive of VAT panel to provide commodity-wise revenue collection data to calculate the compensation package, Ramesh Chandra said no state has told him so. Though it may be difficult to provide commodity-wise revenue collection data, it is always possible to have classification-based data, he said. "There may be a number of commodities, say in grocery, and to provide for revenue data for each commodity may be difficult task. But such data for grocery can be provided," the VAT panel secretary said.

Besides compensation formula, impact of new tax system on prices and ways to make VAT more consumer-friendly would also be discussed, he said. In short, implementation issues will be the agenda of the meeting, he said. Sources said shift of bullion trade from Delhi to two non-vat states, Rajasthan and Gujarat, is most likely to come up at the meeting. Though the issue is not in agenda, the panel will take it up if Delhi raises the matter, Ramesh Chandra said.

The Exchange has received queries from various quarters with respect to evidence of payment of securities transaction tax for claiming deduction under section 88E of the Income-tax Act.

In this regard, it may be noted that the Central Board of Direct Taxes has issued notification no. 1 dated 6th January, 2005 in respect of the same which was earlier informed by the Exchange vide its circular reference no. NSE/F&A/5757 dated 13^th January, 2005 to its members.

The said notification can be accessed at the link - http://www.incometaxindia.gov.in/Notifications/Incometaxact/2005/0120050106.asp

As may be seen, the assessee is required to furnish self-verified Form 10DB in respect of evidence of payment of securities transaction tax paid on the value of transactions entered into by him on a recognized stock exchange for claiming deduction under section 88E of the Income-tax Act alongwith his return of income.

A copy of the same is given below as Annexure for ready reference.  

ANNEXURE

Notification No. 1 of 2005, dt. 6th Jan., 2005

S.O. 30(E).- In exercise of the powers conferred by section 295 of Income Tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, namely:-

1.

1.      These rules may be called the Income-tax ( First Amendment) Rules, 2004.

2.      They shall come into force from the date of their publication in the Official Gazette.

2. In the Income-tax Rules, 1962, -

(A). after rule 20A, the following rule shall be inserted, namely:-

‘ Evidence of payment of security transaction tax for claiming deduction under section 88E.

20AB. The evidence of payment of securities transaction tax which is required to be furnished alongwith the return of income by the assessee under first proviso to section 88E,–

(i) on value of transaction entered into by him in a recognised stock exchange, shall be in Form No. 10DB and shall be verified in the manner indicated therein;

(ii) on value of transaction of sale, by him, of a unit of an equity oriented fund to the Mutual Fund, shall be in Form No. 10DC and shall be verified in the manner indicated therein.’

(B). In Appendix-II, after Form No. 10DA, the following Forms shall be inserted, namely:-

Form No. 10DB

(See rule 20AB)

Form for evidence of payment of securities transaction tax on transactions entered in a recognised stock exchange

1. Name of the assessee:

2. Address of the assessee:

3. Permanent Account Number (PAN) of the assessee:

4. MAPIN of the assessee:

5. Name of the Stock Exchange in which transaction entered into:

6. Financial Year:

7. Name of the stock broker:

8. Address of the stock broker:

9. Stock broker code:

10. Details of value of securities transactions and securities transaction tax collected from the assessee:

Verification

I, ________________ (full name in block letters), son/ daughter of ___________ solemnly declare that to the best of my knowledge and belief the information given in this Form is correct and complete and that the total amount of securities transaction tax shown therein is truly stated and is in accordance with the provisions of Chapter VII of the Finance (No.2) Act, 2004 and Securities Transaction Tax Rules, 2004.

Date :

Place :

 *CODES IN RESPECT OF TAXABLE SECURITIES TRANSACTION

Instructions

(i) Where an assessee has entered into transactions in a stock exchange under different client code through the same stock broker, details in this Form be filled separately for each such client code.

(ii) Separate Form be furnished in respect of transactions entered into in different stock exchanges and also for the transactions entered in same stock exchange through different stock brokers.

(iii) In column 4 of Table of item 10, fill the details of securities transaction tax collected by the stock broker from the assessee.

(iv) Where the assessee entering into a transaction is a stock broker on which securities transaction tax has to be paid by him, item 1 and item 7 shall be same and such assessee shall, in column 4 of the Table of item 10, fill the details of securities transaction tax collected from him by the stock exchange.

Form No. 10DC

(See rule 20AB)

Form for evidence of payment of securities transaction tax on transactions of sale of unit of equity oriented fund to the Mutual Fund

1. Name of the assessee:

2. Address of the assessee:

3. Permanent Account Number (PAN) of the assessee:

4. MAPIN of the assessee:

5. Name of the Mutual Fund having the equity oriented fund of which units sold by the assessee to that Fund:

6. Address of the Mutual Fund referred to in item 5:

7. Details of value of securities transactions and securities transaction tax collected from the person:

VERIFICATION

I, ________________ (full name in block letters), son/ daughter of ___________ solemnly declare that to the best of my knowledge and belief the information given in this Form is correct and complete and that the total amount of securities transaction tax shown therein is truly stated and is in accordance with the provisions of Chapter VII of the Finance (No.2) Act, 2004 and Securities Transaction Tax Rules, 2004.

Date :

Place :

[Name and Signature of the assessee] 

Instructions

(i) This Form be furnished separately for the transactions with each Mutual Fund.

(ii) Details of securities transaction tax paid on sale of units of various equity oriented fund under a Mutual Fund be given separately.”

Note: The principal rules were published under notification NO. S.O. 969 dated the 26th March, 1962 which has been amended from time to time, and last such amendment was made vide notification S.O.No. 1340(E) dated 2004.

F.No. 142/23/2004-TPL

21st July 2005: All textile items will come under value added tax (VAT) from the next fiscal year, empowered committee secretary Ramesh Chandra said today. States have agreed that the VAT rate on textile items will not exceed 4% when it is implemented from April 1, 2006, Chandra said at a trader’s conference. At present, textile items attract additional excise duty and are exempt from VAT.

12th August 2005: All savings, including mutual fund schemes, fixed deposits, and small savings schemes, could come under the proposed taxation method of exempt-exempt-tax (EET).

The ministry of finance has constituted a five-member expert team whose mandate would be to work out a roadmap for moving towards the EET method of taxation of savings.

Chairing the committee, R Kannan, appointed actuary of SBI Life on deputation from the Reserve Bank of India, said: “All savings instruments, including mutual funds and fixed deposits in addition to small savings schemes, will be looked into.”

The mandate outlined to the committee does not identify any particular savings instrument. The term “savings instruments” could even mean savings in bank accounts.

“We have to take into account both from the savers and government’s point of view. In the case of savings, decision taken should optimally increase savings. The government, of course, would like to increase revenue through taxation. Hence the idea is to offer concession and at the same time increase total savings, even if this means decreasing the tax rate,” said Kannan.

If the government decides to include more savings instruments under EET, it will offer greater scope for individuals in terms of exemption at the time of contribution.

13th August 2005: Empowered committee of state finance ministers will meet on August 24 to discuss post-Vat implementation issues, including uniform floor rate (UFR) of tax on bullion. “The committee will meet to discuss the implementation issues that have come up after introduction of Vat,” empowered committee secretary Ramesh Chandra said.

When asked whether the complaint of the Delhi government about shift in bullion trade to Rajasthan and Gujarat because of less tax rate in the two states would be taken up, he said all implementation issues, including this one, would be discussed at the meeting.

Delhi has complained to the Vat panel about less than UFR tax on bullion in Rajasthan and Gujarat because of which the trade on precious items is being shifted to the two states.

Considering Delhi’s complaint, the Vat panel at its meeting on July 9 had decided that all states would impose at least 1% tax on bullion from August 1.

17th August 2005: The last date for paying the first installment of the FBT, introduced in the last Budget, has been postponed to August 31, ’05, compounding the confusion over what kind of expenditure will come under its purview. The confusion arises from the delay by the Central Board of Direct Taxes (CBDT) in issuing a note clarifying about 100 questions on the FBT in Mumbai.

Some companies, like Tata Consultancy Services (TCS), have paid FBT before August 15. They have paid the tax on the condition that if it is found later that the amount paid was in excess of what was necessary, the balance will be adjusted towards the next installment. But many companies are waiting for the clarification and are hoping that the CBDT will release the note clarifying all the issues related to the new tax. The CBDT note was supposed to be issued before August 15, the last date for making the first installment of FBT.

FBT, as the Budget proposals envisage, is to be paid by the employer and the revenue authorities expect to raise Rs 3,000 crore from this tax this fiscal. For example, the provisions are not clear how to treat the gifts given to the employees by the company. If it is treated as entertainment, the company will have to pay tax at a regular rate on 20% of the expenditure incurred, including cost of gifts. If the gifts are not treated entertainment, the company needs to pay tax on 50 % of the cost.

10th October 2005: With five BJP-ruled states, Tamil Nadu and Uttar Pradesh yet to adopt Vat (Uttaranchal has adopted Vat effective October 1 and Jharkhand has announced its intent to join from January 1, 2006), the problems of incomplete implementation of the tax persists.

Despite a great amount of harmonisation, lack of uniformity in Vat rates among states continues to dog many industries. The rate differential in commercial tax rates among Vat and non-Vat states too has left scope for gainful discrimination –sometimes precipitating rate wars among states.

As for commodities like gold, precious stones and petroleum products, non-adherence by some states to the prescribed uniform floor rates (UFRs) results in trade diversion, to the detriment of states that are bound by UFRs.

A formula for the phasing out of the central sales tax (CST) on inter-state transactions - which distorts the Vat system - is yet to be worked out. The latest meeting of the empowered committee of state finance ministers resolved to cut the CST from 4% to 2% effective from April 1, 2006. A definite commitment on total withdrawal of CST continues to be elusive. Before phasing out CST, the finance ministry and the states will have to work out a scheme for neutralising the resultant revenue loss to states.

Since input tax credit is available only to the extent of the sales within the state, from which the inputs are sourced, bigger companies marketing their products across the country are unable to fully utilise the tax set-off facility offered under Vat.

18th November 2005: The fringe benefit tax law may get simpler and easier on corporates. Revenue secretary KM Chandrashekar said the finance ministry would address the concerns of the industry during the budget exercise. He has also promised a new scheme for deduction on research and development expenditure.

He added along with rationalisation of the tax structure, the finance ministry would need to broaden the tax base as well as increase revenue mobilisation.

“The complexity of the structure of FBT seems to be the most worrisome feature. We will certainly try to take the concerns aboard and see what can be done during the budget exercise,” he said at conference on international tax organised here by Ficci.

FBT was introduced in Budget for ’05-06 and the levy has so far yielded Rs 1,700 crore in revenues for the Center. The levy is a presumptive tax where it is presumed that a portion of expenditure incurred by companies and other employers under certain heads have been spent on employees. Currently, 20-50% such expenditure is taxed at the rate of 30%. These include expenses on sales promotion, transportation, leave travel and medical allowance.

The revenue secretary said the department had tried to address some of the concerns of the industry through an explanatory circular issued in September ’05. “We are still open to suggestions and simplification,” he added.

Some chambers of trade and commerce want the government to scrap the tax altogether. A scrapping of the tax is unlikely, at least in the next Budget.

Mr. Chandrashekar has also said that the revenue department, in consultation with department of science and technology, would rework the two schemes for expenditure on research and development-weighted deduction scheme and specific deduction-to bring a proposal that would ensure more focused and fruitful expenditure in R&D.

A committee has been constituted under the chairmanship of eminent scientist RA Mashelkar to recommend an appropriate scheme.

21st November 2005: Small businesses, including partnership firms, may be exempted from paying fringe benefit tax (FBT) in the Budget for ‘06-07. The finance ministry may prescribe a turnover-based exemption to provide relief to small businesses, who are, in any case, not the real targets of FBT.

It’s mostly big corporates who disguise as expenses what they pay out to their employees as fringe benefits. Consequently, the FBT could be fine-tuned further in the run up to the Budget.

Some of the expenses, where the deemed benefit to employees is negligible but is currently covered by the tax, may also be spared. On the other hand, Sodexho and Accor meal and gift vouchers issued by companies to their employees could be brought into the tax net.

The ministry had recently exempted political parties and charitable trusts and institutions eligible for income tax exemption from the levy. Finance ministry is considering ways to make the tax more acceptable as well as simpler to implement.

Revenue secretary KM Chandrasekhar had recently told a tax conference in New Delhi that the ministry would address the industry’s concerns during the budget exercise. “We are open to suggestions on simplification. We will certainly try to take these ideas aboard and see what can be done during the budget exercise,” he had said.

The FBT was introduced in Budget ‘05-06 as surrogate tax on the employer. It’s levied on fringe benefits provided or deemed to have been provided by an employer to his employees. It has been designed as a presumptive tax to be applied only on certain nature of expenditure incurred by employers.

Business chambers have been demanding scrapping of the tax, but that’s a demand the ministry is unlikely to accede to. There have been demands that loss-making entities should be exempted from paying the tax. The ministry is unlikely to agree to this demand either.

But it may some see-reason on taxing expenses on brand ambassadors, given that the deemed benefit to employees by their company. Currently, 20% of the expenses incurred on brand ambassadors are subject to 30% FBT.

At the same time, expenditure on making an advertisement is not subject to the tax. Many tax experts point to inconsistency in the tax department’s circular on FBT given that brand ambassadors are usually used in advertisements.

23rd November 2005: Disclosure of bank account details will soon be mandatory to get refund of excess income tax paid. The I-T has decided that all cheques and pay orders to be issued next year onwards will have the assessee’s bank account details printed on it.

Refund cheques will not be sent out beginning next year until the assessee submits his bank account number and branch code, revenue department sources said. Income tax assessees are required to submit their bank details in the tax return form.

This is being done to prevent fraudsters from encashing such cheques by opening a false account. The proposal will also reduce burden on the banks of physically verifying the cheque presented for payment with the advice note issued by the tax department.

Since the cheques have three months validity, the RBI branch or designated SBI branch would have to retain advice notes issued till the cheques are presented.

The bank details, like in dividend cheques issued by companies, will work as a security feature as the account holder alone would be able to encash the pay order. “Eventually, we want to move towards electronic clearing of refunds,” the department sources said.

That would anyway require the assessee to declare his bank account details such as bank name, address of branch and account number as well as mandate the tax department to make such transfer.

At present, electronic clearing scheme (ECS) transfer is an option available to salaried taxpayers in a dozen cities including Delhi, Mumbai, Chennai, Ahmedabad, Bangalore and Hyderabad. However, only claims that are below Rs 25,000 can be refunded through electronic clearing at present.

The tax department has also decided that where the salaried assessee leaves the ECS mandate column in the tax return form blank, the refund would be made through electronic transfer.

Only in cases where the income tax assessee specifically states that he does not want an ECS transfer-refusing the mandate to the tax department would the refund be made by a cheque.

3rd March 2006: Highlights of the Union Budget 2006-07

• GDP growth for FY06 likely to be 8.1% with the manufacturing sector at 9.4% ; agricultural growth bounced back to 2.3%; inflation, as on February 11, 2006 was 4.02%; non-food credit growing by over 25%.
• Focus on Agriculture: output of food grains expected to be 209.3 MT, 5 MT more than the previous year.
• Promoting employment: National Rural Employment Guarantee Scheme launched; in the current year, Rs 11,700 crore to be spent to create rural employment.
• Enhancing Investment: Investment rate increased from 25.3% in 2002-03 to 30.1% in 2004-05.
• BHARAT NIRMAN: In the first year of implementation, 2005-06: Rs 944.18 crore released so far as grant under AIBP, target of 600,000 hectares of irrigation potential expected to be created this year; against target of 56,270 habitations, 47,546 habitations covered until January, 2006.
• Allocation for eight flagship programmes to increase by 43.2% from Rs.34,927 crore in 2005-06 to Rs.50,015 crore.
• Sarva Siksha Abhiyan: 93% of children in age group 6-14 years are in school, number of children not in school has come down to about one crore; outlay to increase from Rs 7,156 crore to Rs 10,041 crore in 2006-07; 500,000 additional class rooms to be constructed and 150,000 more teachers to be appointed; Rs 8,746 crore to be transferred to the Prarambhik Siksha Kosh from revenues through education cess.
• National Rural Employment Guarantee Scheme: allocation of Rs 14,300 crore for rural employment in 2006-07 with Rs 11,300 crore under NREG Act and Rs 3000 crore under SGRY, more funds to be provided according to need.
• Government to provide equity support of Rs 16,901 crore and loans of Rs 2,789 crore to Central PSEs (including Railways); infusion of Rs 1,180 crore in cash and non-cash sacrifices of Rs 2,566 crore in last two years to restructure ten PSEs, including Indian Telephone Industries Limited and Heavy Engineering Corporation Limited; to develop India as a hub for gems and jewellery, an expert body to be constituted.
• Micro Finance: 801,000 SHGs credit-linked in two years with credit of Rs 4,863 crore disbursed to these SHGs; another 385,000 SHGs to be credit- linked in 2006-07; NABARD to open a line of credit for financing farm production and investment activities through SHGs; Committee to be appointed on Financial Inclusion.
• Petroleum, Chemicals and Petro-chemicals: a Task Force setup to facilitate development of large PC&P Investment Regions; three such Investment Regions expected to be developed in 2006-07.
• Tourism: development of 15 tourist destinations and circuits to be taken up; 50 villages with core competency in handicrafts, handlooms and culture, close to existing destinations and circuits, to be identified and developed; 4 new institutes of hotel management to be established in Chhattisgarh, Haryana, Jharkhand and Uttaranchal; Plan allocation increased from Rs.786 crore to Rs.830 crore.
• Telecommunication: to reach 250 million connections by December, 2007, provision of Rs 1,500 crore for Universal Services Obligation Fund in 2006-07; more than 50 million rural connections to be rolled out in three years.
• Power: five ultra mega power projects of 4,000 MW each to be awarded before December 31, 2006; to create an enabling and empowered framework to carry out reforms an Empowered Committee of Chief Ministers and Power Ministers to be setup
• Petroleum: under NELP VI., 55 blocks and area of 355,000 sq kms offered; investment of Rs.22,000 crore expected in the refinery sector, in the next few years.
• Banking, Insurance and Pensions: net capital support to banking sector standing at Rs 22,808 crore, to be restructured to facilitate increased access of banks to additional resources for lending to the productive sectors; Bill on insurance to be introduced in 2006-07.
• Capital Market: limit on FII investment in Government securities to be increased from $ 1.75 billion to $ 2 billion and the limit on FII investment in corporate debt from $ 0.5 billion to $ 1.5 billion; ceiling on aggregate investment by mutual funds in overseas instruments to be raised from $ 1 billion to $ 2 billion with removal of requirement of 10% reciprocal share holding; limited number of qualified Indian mutual funds to be allowed to invest, cumulatively up to $ 1 billion, in overseas exchange traded funds; an investor protection fund to be setup under the aegis of SEBI
• Twelfth Finance Commission: Rs 94,402 crore to be released as States’ share in gross tax revenues in current year compared to Rs 78,595 crore in 2004-05; grants- in-aid to States are Rs 25,134 crore in RE 2005-06 against Rs 12,081 crore in 2004-05.
• Gross Budgetary Support and Gross Fiscal Deficit: Centre's gross tax- GDP ratio: 9.2% in 2003-04, 9.8% in 2004-05, 10.5% in 2005-06 (RE), 11.2% in 2006-07 (BE); Gross Fiscal Deficit less than Gross Budgetary Support for Plan in 2004-05; revenue deficit for in 2005-06 to be 2.6% and fiscal deficit 4.1%.

BUDGET ESTIMATES FOR 2006-07

• Plan Expenditure: estimated at Rs.172,728 crore, up by 20.4 per cent; Non-Plan Expenditure: Rs.391,263 crore, up by 5.5 per cent.
• Revenue Deficit and Fiscal Deficit: revenue deficit estimated at Rs.84,727 crore, 2.1 per cent of the GDP; fiscal deficit estimated at Rs.148,686 crore, 3.8 per cent of the GDP.

TAX PROPOSALS

Indirect Taxes:

• Customs · peak rate for non-agricultural products reduced from 15% to 12.5%; duty on alloy steel and primary and secondary non-ferrous metals reduced from 10% to 7.5%; this will also be the rate of duty for ferro alloys; on steel melting scrap raised to 5% and brought on part on par with primary steel;
• Duty on ores and concentrates reduced from 5% to 2%.
• Duty on refractories and on a number of materials for manufacture of refractories reduced to 7.5%.
• Duty to be reduced on major bulk plastics like PVC, LDPE and PP from 10% to 5%; on naptha for plastics to NIL; on styrene, EDC and VCM which are raw materials for plastics to 2%.
• Reduction of customs duty on 10 anti-AIDS and 14 anti-cancer drugs to 5%; on certain life saving drugs, kits and equipment from 15% to 5%; these drugs also exempt from excise duty and CVD.
• Duty on packaging machines to be reduced from 15% to 5%.
• CVD of 4% to be imposed on all imports with a few exceptions; full credit to be allowed to manufacturers of excisable goods.
• Customs duty on vanaspati to be increased to 80%.
• Reduction of: excise duty on all man-made fibre yarn and filament yarn from 16% to 8 %; import duty on all man-made fibres and yarns from 15% to 10%; import duty on raw materials such as DMT, PTA and MEG from 15% to 10%; import duty on paraxylene to 2%.
• Excise: With the intention to converge all rates at the CENVAT rate at 16%; duty on aerated drinks and small cars to be reduced to 16%.
• 8% duty to be imposed on packaged software sold over the counter; customised software and software packages downloaded from the internet to be exempt; DVD Drives, Flash Drives and Combo Drives to be fully exempt from excise duty.
• Condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta and yeast to be fully exempt; duty on ready-to-eat packaged foods and instant food mixes, like dosa and idli mixes, to be reduced from 16% to 8%.
• Vegetable tanning extracts, namely, quebracho and chestnut to be exempt from duty; duty on footwear with a retail sale price between Rs 250 and Rs 750 to be reduced from 16% to 8%.
• Concessional rate of 8% to be extended to all LPG stoves.
• Duty on compact fluorescent lamps to be reduced from 16% to 8%.
• Excise duty on specified printing, writing and packing paper to be reduced from 16% to 12%.
• Re-imposition of excise duty at 12% on computers to enable domestic manufacturers to take CENVAT credit as well as to face competition from imports; price not to be impacted as duty to be eligible for full input tax credit,
• Duty of 16% to be levied on set top boxes with reduction in customs duty from 15 per cent to nil.
• Increase in excise duty on cigarettes by about 5%.
• Service tax: New services to be covered including ATM operations, maintenance and management; registrars, share transfer agents and bankers to an issue; sale of space or time, other than in the print media, for advertisements; sponsorship of events, other than sports events, by companies; international air travel excluding economy class passengers; container services on rail, excluding the railway freight charges; business support services; auctioneering; recovery agents; ship management services; travel on cruise ships; and public relations management services.
• Leasing and hire purchase to be treated on par with loan transactions, interest and installment of principal amount to be abated in calculating value of the service.
• Proposal to set April 1, 2010 as the date for introducing national level Goods and Service Tax (GST); service tax rate increased from 10 per cent to 12% as another step towards converge between service tax rate and the CENVAT rate; net impact likely to be very small in view of credit available for service tax or excise duty payable.
  
  Direct Taxes
• No change in rates of personal income tax or corporate income tax; no new taxes are being imposed.
• One-by-six scheme will stand abolished.
• Marginal revision in certain tax rates in the quest for equity- Minimum Alternate Tax (MAT) rate increased from 7.5% of book profits to 10% which is only one-third of the normal rate; long-term capital gains arising out of securities included in calculating book profits; period to take credit for MAT increased from five years to seven years.
• Increase of 25%, across the board, on all rates of STT.
• Investments in fixed deposits in scheduled banks for a term of not less than five years included in section 80C of the Income tax Act; limit of Rs 10,000 in respect of contribution to certain pension funds removed in section 80CCC subject to overall ceiling of Rs 100,000.
• Definition of open-ended equity-oriented schemes of mutual funds in the Income tax Act aligned with the definition adopted by SEBI; open-ended equity-oriented schemes and close-ended equityoriented schemes to be treated on par for exemption from dividend distribution tax.
• Anonymous or pseudonymous donations to wholly charitable institutions to be taxed at the highest marginal rate; such donations to partly religious and partly charitable institutions/trusts to be taxed only if the donation is specifically for an educational or medical purpose; such donations to wholly religious institutions and religious trusts not to be covered by the new provision.
• Permanent Account Number (PAN) is the critical element in capturing incomes and expenditures; scrutiny of Annual Information Returns (AIR) on high- value transactions reveals that 60% of the transactions are without quoting PAN; hence proposal to take power to- issue PAN suo motu in certain cases and to direct persons to apply for PAN in certain cases; in due course, more transactions to be notified for which quoting of PAN to be mandatory, a few more transactions to be prescribed to be reported in AIRs.
• Banking Cash Transaction Tax (BCTT) to continue for some more time until the AIR system is able to capture all significant financial transactions.
• Fringe Benefit Tax (FBT) introduced last year as a revenue raising measure; justified on the principles of horizontal equity and vertical equity; on review, following changes being proposed
• Value the benefit in the form of ‘tour and travel’ at 5% instead of 20%;
• Value benefit in the form of ‘hospitality’ and ‘use of hotel boarding and lodging facilities’, in case of airline companies and shipping industry, at 5% instead of 20%;
• Prescribe a threshold of Rs 100,000 under section 115WB(1)(c) so that only a contribution by an employer to an approved superannuation fund in excess of Rs 100,000 per year per employee to attract FBT. Under section 80C there is already exemption up to Rs 100,000 for contribution by an employee to an approved superannuation fund.

11th March 2006: Over a million permanent account numbers (PANs) of the estimated 43 million issued may soon be deactivated on account of the revelation that individuals have received more than one number.

Both fraudulent and unintentional, these “duplicate” PANs have come to light after the revenue department completed its investigation into the matter. According to officials, between 2% and 3% of the 43 million PAN cards issued so far fall in this category.

Government officials said the department was in the process of sending letters to all taxpayers who were found to be in possession of duplicate PAN cards to ascertain if the multiple cards were in their name.

The department has in its communication to such taxpayers also identified the PAN card they should retain and quote for all future transactions.

Officials said since all cases of duplicate PAN cards had now been clubbed by the department, action would be taken against any assessee found to be deliberately using more than one PAN. The exercise to identify duplicate PAN cards was initiated a year ago.

“We are also informing all taxpayers who have been allotted duplicate PAN cards to contact our call center, Ayakar Sampark Yojana, and provide the PAN they intend to use,” an official said.

Officials said this year’s Budget provision empowering the department to issue PAN card suo motu would also allow the department to assign cards for all those transactions reported under the Annual Information Return that do not contain PANs.

Nearly 30% of the 17,00,000 transactions reported under the AIR up to December 31, 2005, did not have the relevant PAN.

The income tax department has now introduced an online system for taxpayers to know their PAN.

12th April 2006: With the beginning of a new financial year comes the arduous task of filing your income tax returns of the previous year. For the purpose of income tax, your income comprises of your salary, revenue from house property, business and profession, capital gains from the sale of assets and income from any other source. If your income from all these sources during the course of a financial year exceeds the basic exemption limit applicable to you for that year, then you are required to file your tax returns.

Exemption Limits

Currently, there are three broad categories into which individuals are divided. Each of these categories comes with a basic tax exemption limit. If the income earned exceeds this limit, only then are you liable to pay income tax.

Individual male taxpayers enjoy a basic exemption limit of Rs 1 lakh.

Individual female taxpayers enjoy a higher exemption limit of Rs 1.35 lakh.

Senior citizens (persons above the age of 65 years) enjoy the highest exemption limit of Rs 1.85 lakh.

Tax Payable On...

Tax is payable on only that amount of income that exceeds the basic exemption limit.

Due Date

Normally, the due date for filing returns is July 31. However, it is extended to October 31 if you are a ‘working partner’ in a firm whose accounts are required to be audited or where your personal accounts are required to be audited under any law.

PAN

Acquiring a Permanent Account Number (PAN) from the IT department is a prerequisite for filing your returns.

Form To Be Used

Any person other than a company can file returns using Form No. 2D (also known as ‘Saral’).

Additional Documents To Be Filed

Along with the duly completed Saral, you must submit a statement showing the computation of your total income and the final tax payable. Depending on the components of your income, you might also have to attach additional documents such as: Form 16 in case of salary income.

Form 16A in case of non-salary income such as brokerage, contract, rent or professional fees.

In case you have made any investments prescribed under Section 80 or if you have taken a loan from any financial institution, then supporting papers have to be appended. Details of advance tax or any self-assessment tax that have been paid by you need to be mentioned in Saral. A photocopy of the challan should also to be attached.

Audit reports in case you are undergoing a tax audit or any other audit, as prescribed by law. “Profit and Loss Account” and “Balance Sheet and Capital Account” in case you are not covered by any audit and you have income under the head “business and profession”.

If You Miss The July 31 Deadline

If, however, the return of income is not filed by July 31 (or October 31 as the case may be), then it can still be filed before March 31 of the relevant assessment year.

Penalty

If however, you do not file returns before March 31, then a penalty of Rs 5,000 will be levied on you.

Conclusion

25th April 2006: The main aim of tax planning is to reduce the incidence of income tax on you. This becomes imperative if you are the sole earning member of your family.

Reducing Your Tax Liability

Being salaried, you can reduce the incidence of tax in two steps: Firstly, by structuring your salary in a manner that will enable you to optimally utilise all the deductions related to it.

Secondly, by making investments/payments in pre-determined avenues which offer a deduction from the total taxable income, to the extent of the investment /payment made, subject to the maximum permissible limit.

STEP 1

Minimising The Tax Liability On Your Salary Income

Here’s taking a look at the various components of your salary and the tax exemptions attached to them...

House Rent Allowance (HRA)

If you stay in a rented house and receive HRA from your employer, you can claim a tax exemption to the extent of the least of the following three: 50% of your salary, if your house is situated at Mumbai, Calcutta, Delhi or Madras and 40%, if it is in any other place or Actual HRA received or Rent paid less 10% of the salary. Alternatively, if you are staying in your own house and you have taken a loan from a financial institution, on or after April 1, 1999, for the purpose of construction /acquisition of the house, then you can claim a deduction of up to Rs 1.5 lakh per annum from your total taxable income. If, however, you have taken the loan prior to April 1, 1999, then the deduction available is only Rs 30,000. employer (in the form of ticket restaurant coupons, etc.) do not attract tax.

Medical Reimbursement

You are eligible for a deduction of up to Rs 15,000 in the form of “medical reimbursements” from your employer. However, in order to claim this benefit, you must produce proper vouchers, such as medical bills, certificates from your doctor, etc.

Leave Travel Allowance (LTA)

If the entire amount available under LTA is actually incurred for travel for two journeys which are undertaken in a block of four calendar years, the entire LTA component does not attract tax. However, if only a partial amount is utilised, then the balance (i.e. the LTA available less the actual expenses) will attract tax.

STEP 2

Availing Of Provisions Under Section 80

Under Section 80 of the IT Act, you can claim tax deduction from your total taxable income to the extent of the investment/payment made in certain pre-determined avenues. Here’s taking a look at some of them...

Section 80C:

This section allows you to claim a 100% deduction from taxable income for any investment in or purchases of certain specified instruments up to a consolidated amount

Cash Vouchers

Non- refundable cash vouchers such as free meals provided by your of Rs 1 lakh per financial year. Some popular instruments allowed as deductions under this section include premiums paid for servicing life insurance policies, equity linked savings schemes of mutual funds, PPF and fixed deposits held with scheduled banks for a term of 5 years or more.

Section 80CCC:

This section offers a tax benefit on the servicing of pensions plans. As per the last union budget, the ceiling fixed for such deductions is Rs 1 lakh. However, there is a condition that the total deduction available to you under sections 80C, 80CCC and 80CCD (i.e. deduction in respect of contribution to pension schemes of the central government) are restricted to an aggregate of Rs 1 lakh.

Section 80D:

As per this section, premium paid towards servicing of health insurance can be deducted from your taxable income. However, this section comes with a ceiling of Rs 10,000 (Rs. 15,000 for senior citizens).

Section 80DD:

This section allows you to claim a deduction from your taxable income for expenses incurred for the medical treatment, training and rehabilitation of a dependant who has severe or ordinary disability. The benefit can be extended to specified amounts deposited in schemes framed by LIC, UTI and other identified institutions for the benefit of such dependants.
Section 80DDB:

Under this section, deduction for expenses that you incur on the medical treatment of certain specified ailments is available to the extent of Rs 40,000. For senior citizens, the limit for the deduction is raised to Rs 60,000. However, if you receive any reimbursement for these medical expenses from an insurer or your employer, you have to reduce the reimbursement amount while arriving at the final deduction applicable under this section to you.

Section 80E:

This section allows you to claim a deduction for interest on loans taken for pursing higher education.

Section 80G:

Any sum that you have paid in the current financial year as donations to certain specified funds, charitable institutions, etc., can be deducted from your taxable income.

Note: This article has been created based on the tax laws pertaining to the financial year 2006-07.

2nd May 2006: Here’s some good news for salaried employees who may be struggling to maintain details on exactly how they spend their allowances. Even if you lose your restaurant bills, or laundry bills, or other evidence to prove that your allowances have been spent in full, you can still claim tax exemption, provided the claim is reasonable, thanks to a recent order by the Income-Tax Tribunal, Mumbai.

The order means that if a salaried employee spends his allowance during the course of his duty, the I-T department is bound to accept the contention of the tax payer that he had spent the allowance in full, even if the claim is not backed by the necessary evidence. The allowance thus claimed should appear reasonable and should be in proportion to the salary.

These issues have been analysed in an Income-Tax Appellate Tribunal (ITAT) order in the case of an employee with the Shipping Corporation of India, Madanlal Mohanlal Narang, who claimed exemption for uniform making allowance and uniform washing allowance amounting to Rs 51,554. The tax authorities declined to exempt the allowance from taxation on the ground that the evidence produced to prove that he had actually spent the amount, was insufficient.

The ITAT order says that the tax authorities cannot insist on details of expenses actually incurred unless the specific allowances are disproportionately high compared to the salary received by him or is unreasonable with reference to the nature of duties performed by the taxpayer.

Senior chartered accountant TP Ostwal said, “The decision is in tune with the current realities as it is impossible for an ordinary man to preserve all the documentary evidences of expenditure and the employers of large companies will not make frivolous payment without the business need”.

Section 10 (14) (I) of the Income-Tax Act provides for allowances for the purpose of meeting expenses incurred for official duties, but the exemption is available only to the extent to which such expenses are actually incurred. The assessing officer disallowed the exemption only on the ground that there were insufficient proofs that the tax payer has actually spent the allowance.

The ITAT, in its order dated April 21 quotes CBDT circular on April 1 1955. It said, “Special allowance or benefit being reasonable and not disproportionately high — No details of expenses actually incurred need be asked for the purpose of granting exemption under section 4 (3) of 1922 Act”.