Finance Bill, 2010CA Vikash Mundhra 26 February 2010

The provisions of the Finance Bill, 2010 relating to direct taxes seek to amend the Income-tax Act, inter alia , in order to,-

• lower the tax burden on individual taxpayers by widening the tax slabs;

• allow conversion of private company and unlisted public company into Limited Liability Partnerships (LLP) without attracting capital gains tax ;

• reduce the compliance burden on small business houses by raising the turnover limits for compulsory audit ;

• promote investment in Research and Development (R&D);

• encourage savings for funding infrastructure by providing deduction on investment in long-term infrastructure bonds ; and

• simplify and rationalize the provisions of TDS .

TAX RATES

Income tax slabs for individual or HUF taxpayers has been brought about as follows

Range	Resident Woman	Senior Citizen	Other Individual / HUF
	Tax Rate
Income upto Rs 1.9 lakh	Nil	-	-
Income upto Rs 2.4 lakh	-	Nil	-
Income upto Rs 1.6 lakh	-	-	Nil
Income above Rs 1.6 / 1.9 / 2.4 lakh and upto Rs. 5 lakh	10 percent	10 percent	10 percent
Income above Rs.5 lakh and upto Rs. 8 lakh	20 percent	20 percent	20 percent
Income above Rs. 8 lakh	30 percent	30 percent	30 percent

The tax computed as above is further increased by 3%. There is no change in the basic exemption limits. But the tax slab has been widened resulting in tax savings upto Rs.51,500 as illustrated below:

Income of a male , 30 years	Tax Payable including education cess & SHEC		Net Saving in tax
	FIN. YEAR 2010-11	FIN. YEAR 2009-10
Rs. 3,00,000	Rs.14,420	Rs.14,420	Nil
Rs. 4,00,000	Rs.24,720	Rs.35,020	Rs.10,300
Rs. 5,00,000	Rs.35,020	Rs.55,620	Rs.20,600
Rs. 7,00,000	Rs.76,220	Rs.1,17,420	Rs.41,200
Rs. 8,00,000	Rs.96,820	Rs.1,48,320	Rs.51,500
Rs. 10,00,000	Rs.1,58,620	Rs.2,10,120	Rs.51,500
Rs. 20,00,000	Rs.4,67,620	Rs.5,19,120	Rs.51,500

 

SURCHARGE

The Rate of Surcharge applicable to a domestic company (in case total income exceeds Rs.1 crore) shall be reduced from 10% to 7.5% .

 

TAXATION OF CERTAIN TRANSACTIONS WITHOUT CONSIDERATION OR FOR INADEQUATE CONSIDERATION

Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000/-) by an individual or an HUF is chargeable to income tax in the hands of recipient under the head ‘income from other sources'. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision.

The existing definition of property for the purposes of section 56(2)(vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art.

A . These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF , without consideration or at a price lower than the fair market value does not attract the anti-abuse provision

In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested). Section 2(18) provides the definition of a company in which the public are substantially interested.

 

B . The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition o f property so as to provide that section 56(2)(vii) will have application to the ‘property' which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.

 

C . In several cases of immovable property transactions, there is a time gap between the booking of a property and the receipt of such property on registration, which results in a taxable differential. It is, therefore, proposed to amend clause (vii) of section 56(2) so as to provide that it would apply only if the immovable property is received without any consideration and to remove t he stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property.

These amendments are proposed to take effect retrospectively from 1st October, 2009 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.

 

D . It is proposed to amend the definition of ‘property' as provided under section 56 so as to include transactions in respect of ‘bullion'.

This amendment is proposed to take effect from 1st June, 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.

DEDUCTION IN RESPECT OF LONG-TERM INFRASTRUCTURE BONDS

In tune with the policy thrust of promoting investment in the infrastructure sector, it is proposed to insert a new section 80CCF in the Income-Tax Act to provide that subscription during the financial year 2010-11 made to long-term infrastructure bonds (as may be notified by the Central Government), to the extent of Rs. 20,000 , shall be allowed as deduction in computing the income of an individual or a Hindu undivided family.

This deduction will be over and above the existing overall limit of tax deduction on savings of upto Rs.1 lakh under section 80C, 80CCC and 80CCD of the Act.

 

RATIONALISATION OF PROVISIONS RELATING TO TAX DEDUCTION AT SOURCE (TDS)

Under the scheme of deduction of tax at source as provided in the Income-tax Act, every person responsible for payment of any specified sum to any person is required to deduct tax at source at the prescribed rate and deposit it with the Central Government within the specified time. However, no deduction is required to be made if the payments do not exceed prescribed threshold limits.

In order to adjust for inflation and also to reduce the compliance burden of deductors and taxpayers, it is proposed to raise the threshold limit for payments mentioned in sections 194B, 194BB, 194C, 194D, 194H, 194-I and 194J as under:

Sl. No.	Section	Nature of Payment	Existing Threshold Limit	Proposed Threshold Limit
1	194B	Winnings from lottery or crossword puzzle	5,000	10,000
2	194BB	Winnings from Horse Race	2,500	5,000
3	194C	Payment to Contractors	20,000 (single transaction) 50,000 (for aggregate during the year)	30,000 (single transaction) 75,000 (for aggregate during the year)
4	194D	Insurance Commission	5,000	20,000
5	194H	Commission or Brokerage	2,500	5,000
6	194I	Rent	1,20,000	1,80,000
7	194J	Fees for professional or technical services	20,000	30,000

 

CERTIFICATE OF TAX DEDUCTION AT SOURCE ( TDS ) AND TAX COLLECTION AT SOURCE(TCS)

The existing provisions of section 203(3) of the Income-tax Act dispense with the requirement of furnishing of TDS certificates by the deductor to the deductee on or after 1st April, 2010. Similarly, under section 206C(5) of the Act, a collector of tax at source will also not be required to issue tax collection certificate to the person from whom tax has been collected on or after 1st A p ril, 2010.

Considering the fact that the TDS /TCS certificate constitutes an important document for the deductee/collectee, it is proposed that the deductor/collector will continue to furnish TDS /TCS certificates to the deductee/collectee even after 1st April, 2010 . These amendments are proposed to take effect retrospectively from 1st April, 2010.

 

DISALLOWANCE OF EXPENDITURE ON ACCOUNT OF NON-COMPLIANCE WITH TDS PROVISIONS

The existing provisions of section 40(a)(ia) of Income-Tax Act provide for the disallowance of expenditure like interest, commission, brokerage, professional fees, etc. if tax on such expenditure was not deducted, or after deduction was not paid during the previous year. It is proposed to amend the said section to provide that no disallowance will be made if after deduction of tax during the previous year (in any month of the previous year), the same has been paid on or before the due date of filing of return of income specified in section 139(1), i.e. 30 th September for assessees liable for Tax Audit and for the other assesses, it shall be 31 st July.

Further, this amendment is proposed to take effect retrospectively from A.Y. 2010-11

Under the existing provisions of section 201(1A) of the Act, a person was liable to pay simple interest at one per cent for every month or part of month in case of failure to deduct tax or payment of tax after deduction.

With a view to discourage the practice of delaying the deposit of tax after deduction, it is proposed to increase the rate of interest for non-payment of tax after deduction from the present one per cent to one and one-half per cent for every month or part of month.

 

DEDUCTION IN RESPECT OF CONTRIBUTION TO THE CENTRAL GOVERNMENT HEALTH SCHEME

Under the existing provisions of section 80D, deduction in respect of premium paid towards a health insurance policy. The Central Government Health Scheme (CGHS) is a medical facility available to serving and retired Government servants. This facility is similar to the facilities available through health insurance policies. It is, therefore, proposed to also allow deduction in respect of any contribution made to CGHS by including such contribution under the provisions of section 80D.

 

MINIMUM ALTERNATE TAX UNDER SECTION 115JB

Under the existing provisions of section 115JB of the Income Tax Act, a company is required to pay a Minimum Alternate Tax (MAT) of 15% on its book profit, if the income-tax payable on the total income, as computed under the Act is less than such amount of MAT computed. Under the current Finance Act, this rate of MAT has been increased to 18%.

 

LIMIT OF TURNOVER OR GROSS RECEIPTS FOR THE PURPOSE OF AUDIT OF ACCOUNTS AND FOR PRESUMPTIVE TAXATION

Under the existing provisions of section 44AB, every person carrying on business is required to get his accounts audited if the total sales, turnover or gross receipts in business exceed Rs.40 lakh in the previous year. Similarly, a person carrying on a profession is required to get his accounts audited if the gross receipts in profession exceed Rs.10 lakh in the previous year.

In order to reduce compliance burden of small businesses and professionals, it is proposed to increase the aforesaid threshold limit from Rs.40 lakh to Rs.60 lakh in the case of persons carrying on business and from Rs.10 lakh to Rs.15 lakh in the case of persons carrying on profession.

It is also proposed that for the purpose of presumptive taxation u/s 44AD, the threshold limit of total turnover or gross receipts would be increased from Rs.40 lakh to Rs. 60 Lakh . In this context, it is worthwhile to note that sec. 44AD has been inserted by Finance (No. 2) Act, 2009.

In view of the amendment proposed above, it is also proposed to increase the maximum penalty , leviable u/s 271B for failure to get accounts audited u/s 44AB or to furnish a report of such audit, from Rs. One Lakh to Rs. 1,50,000.

 

WEIGHTED DEDUCTION FOR SCIENTIFIC RESEARCH AND DEVELOPMENT

Under the existing provisions of section 35(2AB) of the Income-tax Act, a company is allowed weighted deduction of 150% of the expenditure (not being expenditure in the nature of cost of any land or building) incurred on scientific research on an approved in-house research and development facility.

In order to further incentivise the corporate sector to invest in in-house research, it is proposed to increase this weighted deduction from 150% to 200%.

The existing provisions of section 35(1)(ii) of the Income-tax Act provide for a weighted deduction to the extent of 125% of any sum paid to an approved scientific research association or to an approved university, college or other institution to be used for scientific research. Such deduction is also allowed for any sum paid to a National Laboratory or a university or an Indian Institute of Technology (IIT) or a specified person for the purpose of an approved scientific research programme.

In order to encourage more contributions to such approved entities for the purposes of scientific research, it is proposed to increase this weighted deduction from 125% to 175%.

 

INVESTMENT LINKED DEDUCTION FOR HOTEL BUSINESS

Benefits of profit linked deduction under Chapter VI-A of the Income-tax Act are currently available to specified categories of hotels in Uttarakhand and Himachal Pradesh; National Capital Territory and adjacent districts; 22 districts having World Heritage Sites and North-Eastern States, which start functioning before specified dates mentioned in the Act.

In view of the high employment potential of this sector, it is proposed to provide investment linked incentive to the hotel sector, irrespective of location, under section 35AD of the Income-tax Act. The investment-linked tax incentive allows 100 per cent deduction in respect of the whole of any expenditure of capital nature (other than on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the “Specified Business” during the previous year in which such expenditure is incurred.

Currently, such “specified business” means the business of setting up and operating cold chain facilities, warehousing facilities for storage of agricultural produce and laying and operating a cross-country natural gas or crude or petroleum oil pipeline network. It is now proposed to include the business of building and operating a new hotel of two-star or above category , anywhere in India, which starts functioning after 1.4.2010 within the purview of “specified business”.

 

DEDUCTION FOR DEVELOPING AND BUILDING HOUSING PROJECTS

Under the existing provisions of section 80-IB(10), 100% deduction is available in respect of profits derived by an undertaking from developing and building housing projects approved by a local authority before 31.3.2008. This benefit is available subject to, inter alia , the following conditions:

(a) the project has to be completed within 4 years from the end of the financial year in which the project is approved by the local authority.

(b) the built-up area of the shops and other commercial establishments included in the housing project should not exceed 5% of the total built-up area of the housing project or 2,000 sq.ft. whichever is less.

To allow for extraordinary conditions due to the global recession and the resultant slowdown in the housing sector, it is proposed to increase the period allowed for completion of a housing project in order to qualify for availing the tax benefit under the section, from the existing 4 years to 5 years from the end of the financial year in which the housing project is approved by the local authority. This extension will be available for housing projects approved on or after 1.4. 2005.

Further, it is also proposed to enhance the current norms for built-up area of shops and other commercial establishments in housing projects in order to enable basic facilities for the residents. The built-up area of the shops and other commercial establishments included in the housing project is proposed to be 3% of the aggregate built-up area of the housing project or 5000 sq. ft., whichever is higher. This benefit will be available to projects approved on or after 1.4.2005, which are pending for completion.

 

DEFINITION OF “CHARITABLE PURPOSE”

For the purposes of the Income-tax Act, “charitable purpose” has been defined in section 2(15) which, among others, includes “the advancement of any other object of general public utility”. However, “the advancement of any other object of general public utility” is not a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.

The absolute restriction on any receipt of commercial nature may create hardship to the organizations which receive sundry considerations from such activities. It is, therefore,  proposed to amend section 2(15) to provide that “the advancement of any other object of general public utility” shall continue to be a “charitable purpose” if the total receipts from any activity in the nature of trade, commerce or business , or any activity of rendering any service in relation to any trade, commerce or business do not exceed Rs.10 Lakhs in the previous year.

 

CONVERSION OF A PRIVATE COMPANY OR AN UNLISTED PUBLIC COMPANY INTO A LIMITED LIABILITY PARTNERSHIP (LLP)

The Finance (No. 2) Act, 2009 provided for the taxation of LLPs in the Income-tax Act on the same lines as applicable to partnership firms. Section 56 and section 57 of the Limited Liability Partnership Act, 2008 allow conversion of a private company or an unlisted public company (hereafter referred as company) into an LLP. Under the existing provisions of Income-tax Act, conversion of a company into an LLP has definite tax implications. Transfer of assets on conversion attracts levy of capital gains tax. Similarly, carry forward of losses and of unabsorbed depreciation is not available to the successor LLP.

It is proposed that the transfer of assets on conversion of a company into an LLP in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45, subject to certain conditions. These conditions are as follows:

(i) the total sales, turnover or gross receipts in business of the company do not exceed Rs.60 lakh in any of the three preceding previous years;

(ii) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company;

(iii) no consideration other than share in profit and capital contribution in the LLP arises to partners;

(iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50% of the profits of the LLP for a period of 5 years from the date of conversion;

(v) all assets and liabilities of the company become the assets and liabilities of the LLP; and

(vi) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion.

It is also proposed to allow carry forward and set-off of business loss and unabsorbed depreciation to the successor LLP which fulfills the above mentioned conditions.

It is also proposed that if the conditions stipulated above are not complied with , the benefit availed by the company shall be deemed to be the profits and gains of the successor LLP chargeable to tax for the previous year in which the requirements are not complied with.

It is also provided that the cost of acquisition of the capital asset for the successor LLP shall be deemed to be the cost for which the predecessor company acquired it.

Credit in respect of tax paid by a company under section 115JB is allowed only to such company under section 115JAA. It is proposed to clarify that the tax credit under section 115JAA shall not be allowed to the successor LLP.

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