Unlocking the Budget Code

“It is my privilege to present the Budget for 2007-08” were the words of our honourable finance minister Shri P.Chidambaram as he set the ball rolling & opened the yearly mystery package, generating a wave of curiosity across the nation as to what the budget is going to unfold. The Budget every year, comes with an enigma attached to it & umpteen number of predictions & analysis welcome its arrival. At last, the year long wait was over & as the ball rolled, it entered into the “Direct Taxes” segment raising millions of eyebrows on its way. Amendments in Direct Taxes is a major arrow that is released by the budget from its armour, which has a deep impact on the income & investment patterns. Below mentioned are some of the significant amendments, which might be taken a note of: -

v      The basic exemption limits for Individuals, HUFs and AOPs hiked by Rs10,000.

v      An additional cess of 1% has been brought into picture for secondary and higher education, resulting in an increase in the education cess from 2% to 3%.

v      The definition of “Capital Asset” is now broadened to include works of art viz-archaeological collections, drawings, paintings, sculptures, etc thereby seeking to tax, the gains arising on the transfer of such Personal Effects.

v      Income in the nature of interest, royalty or technical services would be deemed to accrue or arise in India, and included in the income of a Non Resident, whether or not such non-resident has a residence, place of business or business connection in India. (Section 9)

v      ‘Minimum Alternate Tax’ extended to FTZ, STPI, EOU and EHTP units.

v      Disallowance u/s 40A (3) is raised from 20% to 100% of the expenditure.

v      Rate of Dividend Distribution Tax enhanced from 12.5% to 15% in case of domestic company and 20% in case of Money Market or Liquid Funds.

v      Weighted deduction of 150% on Scientific Research and Development incurred by specified industries extended upto 31/3/2012.

v      Deduction u/s 80E, which was earlier allowed only to an Individual for the interest on loan taken for his/her higher education, is now extended to interest on such loan taken for a relative, being spouse or children.

v      The deduction U/s 80D towards Mediclaim Insurance Premium paid by an individual or HUF is hiked from Rs.10,000 to Rs. 15,000. Senior citizens are entitled to Rs.20,000/- deduction.

v      Time limit u/s 80IA and 80IB for commencement of Project extended from 31/3/2007 to 31/3/2008 in case of Power Generating Plants and in the case of units situated in Jammu & Kashmir, it is extended to 31/3/2012.

v      Fringe Benefit Tax is sought to be charged on specified securities including ESOPS / Sweat Equity Shares allotted to employees, on the date of vesting of the option.

Some of the relevant amendments are explained in detail as below –

Threshold limits

 The threshold limit of exemption in the case of Individuals, HUFs and AOPs is increased by Rs.10,000, however the basic rate schedule of personal income tax remains unchanged. Consequently, the revised threshold limit for Individuals, HUFs and AOPs would be Rs.1,10,000/- and that for women assessee and senior citizen would be Rs.1,45,000 and Rs.1,95,000/- respectively. However, the increase in the basic exemption of Rs.10,000 acts as a double edged sword, since after a certain limit its benefit is offset by way of an additional 1% levy in the form of secondary and higher education cess.

For eg: Those earning more than 5.1 lakhs will be hit by this amendment, for instance an individual earning Rs.10 lakhs would have paid Rs.2,55,000 in the  assessment year 07-08, whereas he will end up paying Rs.1,470 more i.e. Rs.2,56,470 in the assessment year 08-09.

Surcharge of 10% will apply to companies & firms if their total Income Exceeds 1 Crore. It remains the same for all other assessees.         

Amendment in taxation on’ source’ basis

Prior to the amendment to Sec 9, business income of a foreign company or other non-resident person is chargeable to tax to the extent it accrues or arises through a business connection in India or from any asset or source of income located in India. The effect of the amendment is that, where income in the nature of interest, royalty and fees for technical services received by a non-resident is also taxable in India whether or not the non-resident has a residence or place of business or business connection in India. Provided that the capital funds borrowed on which such interest is paid, patents, inventions, model, design, secret formula or trade mark or similar property on which royalty is paid and technical services rendered are used for business and profession carried on in India

Fringe Benefit Tax

Employee stock option plans (ESOPs)/Sweat Equity shares will now be brought under the purview of the fringe benefit tax (FBT) and hence taxed @ 33.99 % on the entire difference between the fair market value on the date of vesting of options and the exercise price of options minus the amount recovered from the employee. FBT on ESOPs will be calculated at the time of vesting the options to the employees and not at the time of allotment. The exercise value of the ESOP is the price at which the options, granted to the employees, are converted into shares. Wherein the ‘fair market value’ is still to be decided by the government, it could be calculated based on the Black Scholes Method.

Expenditure incurred on the display of products and distribution of free samples is removed from the purview of FBT.

The provisions relating to the payment of advance FBT will be in line with the provisions for payment of advance income tax.

Disallowance U/s. 40A(3)

Cash payments other than by way of account payee cheques or account payee bank drafts exceeding Rs. 20,000 are now disallowed at 100% as compared to 20% in the earlier years. Where such payment relates to prior years liability, which has been allowed as a deduction in those previous years, then it will be treated as income in the year of payment.

Budgets in the recent past have been conducive to economic growth & have opened up the Indian economy thereby unleashing the Indian Entrepreneur. They have propelled the Indian corporates to take huge strides & unfurl their flags on foreign shores & hence establishing the country on an international scene. Though the Budget this year tinkered around with some rates here & there, allowing & withdrawing few exemptions, it has not really come up with something strikingly positive, not doing any harm as such at the same time. To sum it up in short it was a “Stay Happy” kind of a Budget & the focus now shifts to “Budget 2008-09”.   

Quick Bites:

 The CBDT has come out with new income tax return forms for the various categories of assessees. For further details log on to http://incometaxindia.gov.in/