INDIA - UNION BUDGET 2002 

HIGHLIGHTS OF DIRECT TAX AMENDMENTS

Rates of Taxes

• No changes in Basic Income Tax Rates for both domestic companies & individuals
• A new Surcharge at 5% has been levied.
• Tax rate for Foreign Companies has been reduced from 48% to 40%.
• Dividends are to be taxed in the hands of the shareholders and consequently, companies need not pay tax on dividends distributed.

Exempt Incomes

• Interest income received by Non Resident Indians on National Savings Certificates will be exempt from tax only if it is issued before June 1, 2002.

• Dividend income received from domestic companies and income from units of UTI or mutual funds will cease to be exempt from tax.

• The tax holiday available to STP/FTZ/SEZ units, EOUs, etc, has been limited to 90 percent of the eligible export profits instead of 100 percent of such profits in relation to Assessment Year 2003-04.

Salary Income

• Tax borne by the employer on salary paid to foreign technician employees will cease to be exempt from tax in the hands of such employees.

• Free passage provided to a foreign citizen and his family for travel out of India on home leave or on termination of services will cease to be exempt from tax.

• Tax paid by an Indian concern or by the Government on income paid to a nonresident will cease to be exempt from tax.

• The tax exemption for income received by an employee under a VRS will now also be available to employees of notified institutions having national or state importance. At present it is available for employees of public sector companies, other companies, local authorities, Universities, State or Central Government.

• An option has been granted to employers to pay the tax on the non-monetary benefits provided to employees. Once such tax has been paid by the employer, the value of such non-monetary benefits will be exempt from tax in the hands of the employees.

Income from House Property

• Earlier, the Income Tax Act provided that where a property has been acquired or constructed with capital borrowed on or after 01.04.1999 and such acquisition or construction is completed before 01.04.2003, then, the interest thereon shall be allowed as a deduction upto a limit of Rs.1,50,000/-.

• The Act has now been amended to provide that the deduction will be allowed if

1. The Property has been constructed / acquired within 3 years from the end of the financial year in which the capital is borrowed, and
2. The taxpayer furnishes a certificate from the lender specifying the amount of interest payable

• The deduction is allowable even where a new loan is taken to close out an existing loan.

Business Income

Non Compete Fee

• Any sum received by way of

• non compete fee or,
• by way of fee for not sharing know how, patent, copy right, trade mark, license, franchise or any other business or commercial right of similar right or information or technique likely to assist in the manufacture or processing of goods or provision for services.

        will now be chargeable to tax under the head "Income from Business or Profession".

Depreciation

• Taxpayers are now permitted to claim an additional depreciation to the extent of 15% of the actual cost of the asset, when they set up a new undertaking or go in for a substantial expansion of their undertaking.
• This incremental depreciation is allowable only on new machinery and plant other than ships and aircraft acquired and installed after 31.03.2002. The deduction is not available to assessees other than those engaged in business of manufacture or production of any article or thing. The incremental depreciation is allowable when:

1. Where the industrial undertaking is a new industrial undertaking on the entire actual cost of new machinery or plant or
2. Where the industrial undertaking existed before 1.4.2002, then, there should have been a substantial expansion, by way of increase in installed capacity by not less than 25%.

• It may be noted that this incremental deduction in respect of depreciation will be available only in the first year in which it is acquired and not in subsequent years.

Amounts not deductible

• Tax paid by the employer on behalf the employee and which is not taxable in the hands of the employee shall not be allowed as a deduction in the hands of the employer.
• The deduction allowable in respect of interest on capital paid by a partnership firm to its partners is restricted to 12% of the capital.

Minimum Alternate Tax

• The provisions relating to Minimum Alternate Tax permit a company to reduce the lower of either (i) the loss brought forward as per books or (ii) the unabsorbed depreciation as per books. The explanation to the Section also clarified that loss shall not include depreciation.
• A great deal of debate has arisen in cases where the loss brought forward as per books or the unabsorbed depreciation as per books is NIL
• The amendment proposes to provide that where either the loss brought forward as per books or the unabsorbed depreciation as per books is NIL, nothing shall be reduced in computing the book profits. This amendment will take effect from the time when section 115JA was enacted i.e. from the Assessment Year 1997-98 onwards.

Capital Gains

Guideline value deemed to be the full value of consideration

• A new section 50C is proposed to be introduced to provide that the guideline value of an immovable property for stamp duty purposes shall be deemed to be the full value of consideration in respect of the property.
• It is also provided that, if the assessee were to claim that a value lesser than the guideline value be taken as the full value of consideration, then, the assessing officer may refer the valuation of the immovable property to a valuation officer whose valuation shall be binding.

Exemptions

• Currently, exemption from Capital Gains is available where the amount of capital gains is invested within 6 months from the date of transfer, in certain specified instruments. It is proposed to add to this list of eligible instruments, bonds issued by the National Housing Bank or the SIDBI.

Provisions Relating to Carry Forward and Set-off of Capital Gains / Losses

• Presently, it is permitted to offset both short-term and long-term capital loss against any capital gains. It is now proposed that the set off & carry forward would be done in the following manner :

Business Reorganization

• Under the present provisions of the Income Tax Act, the benefit of carry forward and set off of losses in a Scheme of Amalgamation, is not available for certain classes of companies.
• It is now proposed to include undertakings engaged in the business of providing telecommunication services (basic or cellular), including radio paging, domestic satellite service, network of trunking, broadband network and internet services in the definition of industrial undertaking, for the purpose of enabling set off and carry forward of losses under a scheme of amalgamation.

Deductions from Taxable Income

Dividends Received

• Domestic Companies would be entitled to a deduction on the amount of dividends received by them from other domestic companies, provided the receiving company distributes the entire dividend received on or before the due date for filing its return of income.

Multiplex Theatres / Convention Centers

• A deduction of 50% of the profits and gains shall be allowed for a period of five consecutive years beginning from the initial assessment year, if the profits and gains are derived from the following businesses :

  • Building, owning and operating a multiplex theatre, not located within the municipal jurisdiction of Calcutta, Chennai, Delhi or Mumbai.
  • Building, owning and operating a Convention Center

• It also provides that the deduction shall be allowable only if such Multiplex Theatre or Convention Center, is constructed at any time during the period beginning on 1^st April 2002 and ending on 31st March 2005.

Rebates From Tax Liability

Rebate under section 88

• Section 88, which provides for Income Tax rebate for Individuals and HUF, is sought to be amended to reduce the rebate in the case of high-income assessees. The amendment seeks to provide that the deduction would be available as under:

Transfer Pricing

Arms Length Price not applicable in certain cases

• The Arms Length Price would not be applicable where the impact of these provisions would bring down the income taxable in India or increase the losses allowable computed on the basis of the entries in the books of accounts.

Mere participation not enough

Mere fact of participation by one enterprise in the management or control or capital of the other enterprise or participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in Section 92A (2) are fulfilled.

Withholding Tax

With the abolition of tax on distributed profits, Domestic Companies are now required to deduct tax at source on dividend payments at the rate of 10% for Indian Residents.

Dividend payments / Interest payments to LIC, GIC and its four subsidiaries do not attract withholding tax.

• Individuals and HUFs who have a turnover from business exceeding Rs 40 Lacs or turnover from profession exceeding Rs 10 Lacs during the previous financial year, are now required to deduct tax in the next financial year on the following types of payments :

• payments to sub-contractors;
• commission or brokerage payments;
• rental payments; and
• Professional services fees.
• payments to sub-contractors;
• commission or brokerage payments;
• rental payments; and
• Professional services fees.

Withholding tax applicable on commission and brokerage payments has been reduced from 10 percent to 5 percent.

Withholding tax would be applicable at the rate of 10 percent in respect of income from units of UTI or other mutual fund, payable to residents.

Others

Furnishing of Returns

Individuals who have salary income may at their option furnish a return of income to their employer. The employer shall in turn furnish the return in electronic form before the due date to the Department.

Delayed Submission of TDS Certificates

A Return shall not be considered defective for failure to furnish a certificate of tax deducted at source where the same has not been received by the assessee provided the certificate is furnished within two years from the end of the relevant assessment year.

Repayment of Deposits / Loans

Earlier, Section 269T provided that repayment of any deposit shall not be made by any mode other than by account payee cheque or account payee bank draft if the amount of the deposit together with the interest thereon is Rs 20,000 or more.

It is now proposed to include the term "Loan" also within the ambit of this provision

Provisions relating to Appropriate Authority Removed

Under Chapter XXC, an assessee transferring an immovable property beyond a specified value had to obtain a no objection certificate from the Appropriate Authority constituted under the said chapter. It is now proposed to drop Chapter XXC from the statute books.