Salient Features of Budget 2007-08 and Tax Proposals

Direct Taxes

A. General

Hon’ble Shri P. Chidambaram, well known senior Advocate, noted jurist, expert on Commerce and Finance and Union Finance Minister placed Union budget proposals for the Financial Year 2008-09 before the Parliament on 29th February, 2008. It was 5th Budget of the U.P.A. Government. The total expenditure is estimated at Rs. 750,884 crores against Rs. 680,521 crores. Out of the total expenditure a sum of Rs. 243,386 crores is for Plan expenditure and Rs. 507,498 crores on Non-Plan. Non-Plan expenditure includes interest payment and Capital expenses. Total revenue receipts have been estimated at Rs. 602,935 crores against revenue expenditure of Rs. 658,114 crores, resulting in the revenue deficit of Rs. 55,179 crores equivalent to 1% of the GDP. The fiscal deficit is estimated at Rs. 133,287 crores which is 2.5% of the estimated GDP. Tax proposals on direct taxes are revenue neutral whereas on indirect taxes side, there would be a loss of Rs. 5,900 crores. The Hon’ble Finance Minister has stated: “I believe that boldness pays. I also believe that trust will beget trust, moderation will beget revenues and fairness will beget compliance. Income tax-payers have made out a persuasive case for some relief. Accordingly, I propose to make some changes in the slabs for personal income tax. I propose to increase the threshold limit of exemption”.

In my view, increase in gross tax revenue is because of the tax-payers and without any effort on the part of the tax administration. There is no check on the arbitrary actions of the tax administration. High pitched assessments continue. Tax is levied and collected without authority of law and the tax administration is accountable to none. There is no control on the tax collectors. There is no change in the mindset of the tax administrators. Unsustainable illegal demands are raised, not stayed, forcibly recovered and not automatically refunded. Efficiency, fairness and expeditiousness is lacking. Higher Authorities remain silent spectators. First Appeals are not quickly disposed of. Second Appeals are preferred by the tax department without any application of mind. Further appeals are preferred flouting the circulars of the Board and in a routine manner. Existing circulars of the Board have been diluted by insertion of a new section 268A and to make the decision of the Hon’ble Supreme Court in M/s. Berger Paints Ltd. ineffective.

In the Budget proposals, no efforts have been made to control the cost of governance. Substantial part of gross revenue receipts go away by way of interest and the cost of governance. Nation is falling in the debt trap. Poor is becoming poorer and rich the richer. As per latest Survey, 30 crores people of this largest democracy of the world have an average income of Rs. 12 per day against an Australian getting Dollar 17; i.e., about Rs. 400 per hour. New class of persons above the law is coming up and flourishing. Such class, multinationals and big industrial houses formulate the policy of the Governments. Evasion of tax revenue continues and there is proliferation of unaccounted money causing inflation. Prices of essential commodities are going up. Certain section of trade and industry indulge in acquisition, investment and speculation, causing price rise in goods and commodities. Land is becoming scarce. Rise in three years is more than double – triple. Cost of building material and labour has gone up manifold. ‘Roti, Kapda and Makan’ even after 60 years of Independence, remains a slogan and a dream. Sweet Home is beyond reach of lower middle class. Percentage of persons below poverty line has not reduced, rather increased. Violence and illicit trade is increasing. Consumer products are dumped in. ‘Purity is not a surety’. Politicians and persons in power are showing vulgar display of wealth and indulge in wasteful expenditure — causing heart-burning in a large section of the Society. Money power and muscle power is playing havoc. Tax plays a vital role in the economy of the country. ‘Economic Evolution Through Tax Revolution’ is possible. There should be a strong will and infrastructure to do so. Tax proposals are not innovative. Probably one may have to wait for Income-tax Code, which is likely to be placed before the Parliament by the end of 2008.

AGRICULTURE

More than 70% of our people live in villages. “Bharat” lives in villages. Agriculture is the main source of living of the villagers. The soul of India lives in villages. If we can improve the economic condition of villagers, spread education, improve health and maintain our culture, it would be commendable. Concerted efforts and co-operation of all people is necessity of the day. The Hon’ble Finance Minister has appreciated the efforts of the agriculturists. He stated: “The Ministry of Agriculture has estimated that the total output of food grains in 2007-08 will be 219.32 million tonnes and that will be an all time record. In particular, production of rice is estimated at 94.08 million tonnes; maize at 16.78 million tonnes; soya bean at 9.45 million tonnes; and cotton at 23.38 million bales (of 170 kg each) – and each of these will be an all time record. Government is conscious that while a lot has been done, a lot more needs to be done. Since the last Budget, Government has formulated and announced the National Policy for Farmers. Besides, Government has launched the Rashtriya Krishi Vikas Yojana with an outlay of Rs. 25,000 crore and the National Food Security Mission with an outlay of Rs. 4,882 crore. Both schemes will be implemented during the Eleventh Five-Year Plan period. We are determined to become self-sufficient in food grains”. The highly appreciable proposal is the waiver of bank loan. A waiver of Rs. 60,000 crores would be granted which would benefit about 4 crore of agriculturists.

EDUCATION & HEALTH

Allocation for the education sector has been increased by 20% and for health by 15%. However, looking to the inflationary trends and explosion in population, the increase would not benefit a larger section of the society. Question arise. Looking to the revenue receipts can we afford to spend more for the wasteful expenditure and welfare activities. The answer would be in negative. What is required is proper administration whereby the beneficiaries are benefited. It is well known and admitted that more than 85% of the expenditure is by way of distribution cost and leakages. An awareness amongst the beneficiaries and strict and efficient distribution system is necessity of the day.

SCHEDULED CASTES, SCHEDULED TRIBES, OTHER BACKWARD CLASSES, MINORITIES & WOMEN

All efforts have been made to appease the said vote bank, keeping an eye on the ensuing election. Exemption limit in income-tax for women has been enhanced to Rs. 1,80,000 against existing at Rs. 1,45,000. It should have been Rs. 1,85,000.

SENIOR CITIZENS

The exemption limit has been increased from Rs. 1,95,000 to Rs. 2,25,000 thereby an increase of Rs. 30,000 against enhancement in threshold limit of Rs. 40,000 in general. The Finance Minister has provided an impetus to the reverse mortgage scheme by providing for an exemption from capital gains tax when a property is transferred under such a mortgage. In a reverse mortgage, the property owner being a senior citizen of India surrenders the title of the property to a financial institution. The institution does not pay the entire consideration, but pays out regular monthly sums for an agreed period. The transferor is permitted to stay in the property along with his/her spouse for their lifetime. Thus, the transferor can ensure a regular cash flow in times of need and enjoy the benefit of staying in the property. The income in the hands of the transferor will also be tax exempt. After the transferor’s and spouse’s death, the property is transferred to the institution, and not to the heirs. Section 80D has been substituted to provide deduction in respect of health insurance premia of senior citizen–parents paid by any individual or H.U.F.. A national programme for the Elderly with a plan of Rs. 400 crores to establish, two National Institutes of Ageing, eight regional centres, and a department for geriatric medical care in one medical college/tertiary level hospital in each State. Welfare and care of the elderly citizens is appreciable. Still further attention is needed.

B. Tax proposals

PERSONAL TAX RATES

Tax exemption limit for personal tax rate has been enhanced to Rs. 1,50,000 against the limit of Rs. 50,000 during 2002; i.e., an increase of Rs. 1 lakh over a period of around six years. The slabs of tax rates have been changed :—

Income (in INR) Proposed	Rate	Existing Slab	Rate
0 to 1,50,000	Nil	0 to 1,10,000	Nil
1,50,000 to 3,00,000	10%	1,10,000 to 1,50,000	10%
3,00,000 to 5,00,000	20%	1,50,000 to 2,50,000	20%
Above 5,00,000	30%	Above 2,50,000	30%

It needs to be further streamlined by slab of 30% above 10 lakhs. Surcharge @ 10% shall be payable if income exceeds Rs. 10 lakhs against existing Rs. 8 Lakhs. Education Cess to continue. Tax benefit shall be to such tax-payers. There is no change in rate for Co-operative Societies. Firms & Local authorities.

CORPORATE TAX RATES

Corporate tax rate remain unchanged at 30% for an Indian company and 40% for a foreign company. There is no change in the rates of surcharge and the education cess.

SHORT TERM CAPITAL GAINS TAX RATE

Currently, long term capital gains earned on sale of shares and units of equity oriented mutual funds held for more than one year are tax exempt, provided securities transaction tax (‘STT’) has been paid on the same. Short term capital gains arising from transfer of shares and units of equity oriented mutual funds held for one year or less are taxable at the rate of 10%, provided STT has been paid on the same. The FM in a single stroke has sought to increase this rate to 15%; i.e., one and half times.

DIVIDEND DISTRIBUTION TAX

In order to help domestic companies effectively organize their business, the FM has proposed to permit a deduction to the company distributing dividends to its shareholders, of an amount equivalent to dividend paid by its subsidiary company. While this is a welcome move aimed at tax rationalization, it may result in unintended discrimination against foreign companies as well as large corporate houses who have multiple tier subsidiaries to house various business units. However, this relief will be available only at one level, and may not be available in the event the Indian parent company is in turn held by another entity, whether in India or outside India.

FRINGE BENEFIT TAX

The FM has brought marginal relief to the companies by proposing to exclude some of the expenditures from the ambit of FBT. The Budget seeks to include a provision in the Indian Income- Tax Act, 1961 (‘ITA’) deeming such FBT paid by the employer as actually paid by the employee to the extent it is actually recovered from the employee.

MINIMUM ALTERNATE TAX

The Budget proposes to increase the book profits of a company by including the amount of deferred tax and provision therefor. The intention behind this change is to specifically provide for add back of ‘below the line’ items since these were thought to be included in income tax (which was also added back to increase the book profits), but there existed some ambiguity with respect to the same. Further, the Budget has also clarified that income tax which would also go towards increasing the book profits would include dividend distribution tax, any interest paid, surcharge and education cess.

CAPITAL MARKETS

The increase in the short term capital gains tax rate from 10% to 15% would hit the FIIs hard as many of them are endowments, pension plans, universities or sovereign funds which are tax exempt in their home countries. Those FIIs which dared to invest without the shield of treaty countries such as Mauritius or Cyprus, will find themselves in a vulnerable position. On the brighter side, the Budget has provided for simplicity to participants in the securities market by making Permanent Account Number (tax-payers identification number) the sole identification number for all operations on the capital market. However, this will be subject to suitable threshold exemption limits. This will clarify a lot of confusion regarding the different identification numbers required for participants in the capital market so far.

FOREIGN CURRENCY EXCHANGEABLE BONDS

With a view to provide a level playing field to FCEBs, it is proposed that the conversion of FCEBs into shares or debentures of any company shall not be treated as a transfer for the purposes of capital gains tax. Also the cost of acquisition, for calculating capital gains at the time when the security would be finally sold, would be the cost at which the FCEBs would have been acquired.

CORPORATE BOND MARKET

The Budget has further announced measures to expand the market for corporate bonds. It is proposed that the ‘Empowered Committee of State Finance Minister’s to work with the Government to create a National Securities Market that will expand the market base and enhance the revenues of the State Governments.

SECURITIES TRANSACTION TAX

The Budget seeks to disallow the rebate and instead has introduced a deduction for the STT from the business income. This will increase the tax burden on the traders since a rebate is adjusted against the tax payable, whereas a deduction is adjusted against the income of the taxpayer.

COMMODITIES TRANSACTION TAX (‘CTT’)

A new tax called the CTT has been introduced with effect from April 1, 2008. CTT is proposed to be levied on taxable commodities transaction entered in a recognized association. CTT is proposed to be levied at the following rates:

	Taxable commodities  transaction	Rate	Payable  by
1	Sale of an option in goods or an option in commodity derivative	0.017% on option  premium	Seller
2	Sale of an option in goods or an option in commodity derivative, where option is exercised	0.01% on the settlement price of the option	Purchaser
3	Sale of any other commodity derivative	0.017% of the price at which the commodity  derivative is sold	Seller

A deduction of the CTT paid will be available to a tax-payer provided that the income from commodities transactions is taxable as the business income.

BANKING CASH TRANSACTION TAX (‘BCTT’)

The BCTT currently applicable at the rate of 0.1% on the receipt or withdrawal of cash on a single day exceeding INR 100,000 (for a company) from a scheduled bank has been proposed to be withdrawn with effect from April 1, 2009. The said tax was not of any benefit to the Revenue but was harsh to the genuine tax-payer. There lay ample provisions under the Income-tax Act to put a check on Cash Transactions. It deserved to be removed from 1-4-2008.

Wealth Tax

The rate and other provisions remain unchanged except corresponding provisions of income-tax. Looking to the revenue collection and the cost of administration, without any additional benefit, it is advisable to withdraw it too. Earlier the Better.

Value Added Tax

Central Sales Tax (CST) is proposed to be reduced from the existing 3% to 2% from April 1, 2008. Comprehensive Goods and Services Tax (“GST”) regime to be introduced from April 1, 2010.

Rationalisation, Simplification, Corrective and Promotional Provisions

1. Education and health has been key sector to serve the humanity. However, over years the said activities are not with the sense of service but as an industry to amass wealth. Many malpractices of Charging Capitation fee, development charges and fat tuition fee are prevalent in abundance and at the cost of the Indian exchequer. Currently, income earned by entities set up for charitable purpose is tax exempt u/ss. 10-13 of Income-tax Act. The term “charitable purpose” has been defined to include the activities of providing relief for the poor, education, medical relief and the advancement of any other object of general public utility. With effect from April 1, 2009, the scope of the term “any other object of general public utility” would be reduced to exclude entities which carry on activities in the nature of trade, commerce or business, or service in relation to trade, commerce or business. This amendment may serve to exclude entities such as sports associations, societies for the promotion of the art, heritage sites etc. which may have earlier enjoyed the tax exemption, if such entities are found to be carrying on activities in the nature of trade. This exclusion would apply irrespective of the nature of use or application of the income from such activities, or the retention of the income from such activities by that entity. It is a welcome measure. I hope service oriented charitable sector shall remain unpolluted.

2. Section 194C for TDS is being enlarged to provide that any association of persons or body of individuals, whether incorporated or not shall be liable to deduct income-tax at source under sub-section (1) of section 194C.

3. Amendment in section 195 has been proposed to provide that the person responsible for deduction of income tax shall furnish the information relating to payment of any sum to the non-resident or to a foreign company in a form and manner to be prescribed by the Board.

4. Amendments to the provisions of Dematerialisation of TDS and TCS certificates have been proposed to substitute section 199 and section 206C(4) so that the manner in which credit of TDS/TCS is to be given will be governed by Rules to be framed under section 199 and section 206C(4). The Board may make such rules as may be necessary for the purpose of giving credit in respect of TDS/TCS or tax paid by employer on perquisite under section 192(1A). The original provisions were introduced from 1-4-2005 but extended to 1-4-2008 and now to 1-4-2010. It shows the inaction and incompetence of the mighty Finance Ministry.

5. With a view to encourage outsourcing of scientific research, it is proposed to insert a new clause (iia) in sub-section (1) of section 35 to allow a weighted deduction of 125 per cent of the amount paid by a person to a company to be used for scientific research, if such company — (i) is registered in India; (ii) has as its main object the scientific research and development; (iii) is for the time being approved by the prescribed authority in the prescribed manner; and (iv) fulfills such other conditions as may be prescribed.

6. Scope of agricultural income has been expanded to provide that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income qualifying for exemption under section 10(1) of the Act.

7. A new sub-section (11C) in section 80-1B has been proposed to encourage investment in hospitals in non-metro cities located anywhere in India, other than the excluded area. The excluded areas are areas comprising the urban agglomerations of Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore and Ahmedabad, the districts of Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar and Gandhi Nagar and the city of Secunderabad. To avail of the benefit, the hospital should be constructed and begin functioning at any time during the period from April 1, 2008 to March 31, 2013 and must comply with additional conditions provided in the Act.

8. With a view to promote tourism and to attract tourists to certain World Heritage Sites in India, it is proposed to extend the scope of tax benefits available in section 80-ID also to new two-star, three-star or four-star category hotels located in specified districts having a World Heritage Site. Such hotels are required to be constructed and start functioning at any time during the period beginning on the 1st day of April, 2008 and ending on the 31st day of March, 2013. Specified districts having a World Heritage Site are proposed to be the districts of Agra, Jalgaon, Aurangabad, Kancheepuram, Puri, Bharatpur, Chhatarpur, Thanjavur, Bellary. South 24 Parganas (excluding areas falling within the Kolkata Urban Agglomeration on the basis of the 2001 census), Chamoli, Raisen, Gaya, Bhopal, Panchmahal, Kamrup, Goalpara, Nagaon, North Goa, South Goa, Darjeeling and Nilgiri..

9. Section 40A(3) is being substituted to provide that where a payment or aggregate of payments made to a single person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A, as the case may be.

10. Due date for filing of return by a company, persons required to audit u/s. 44AB and partners of such firms has been proposed as 30th day of September against 31st day of October; i.e., earlier by one month. Such assessee shall get six months time from the close of the financial year, which is more than enough.

11. Section 153B is amended to provide that — (i) if any proceeding initiated under section 153A or any order of assessment or reassessment made under sub-section (1) of this section has been annulled in any appeal or other legal proceeding, the abated assessment or re-assessment relating to any assessment year shall stand revived and if such order of annulment is set aside, such revival shall cease to have effect; (ii) that time limit for completion of such reassessment or assessment shall be one year from the end of the month in which the abated assessment revived or within the period already specified in section 153 or in sub-section (1) of section 153B, whichever is later; (iii) the period commencing from the date of annulment of a proceeding or order of assessment or reassessment referred to in sub-section (2) of section 153A till the date of the receipt of the order setting aside the order of such annulments by the Commissioner, shall be excluded in computing the period of limitation for the purposes of this section.

12. Satisfaction u/s. 271(1) would be deemed as sufficient if in any order of assessment contain any direction for initiation of penalty proceedings.

13. New section 292BB is proposed to be inserted to provide that where an assessee has appeared in any proceeding or co-operated in any inquiry related to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act has been duly served upon him in time in accordance with the relevant provision of the Act. Further, such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was — (a) not served upon him; or (b) not served upon him in time; or (c) served upon him in any improper manner. It is also proposed to amend clause (ii) of sub-section (2) of section 143 to provide that the notice under sub-section (2) of section 143 shall be served on the assessee within a period of six months from the end of the financial year in which the return is furnished. Uncalled for extension shows negligence and inefficiency in the tax administration.

14. Existing presumption u/s. 292C in respect of search is being extended to the books of documents etc. found in the survey operation.

15. It is proposed to — (i) amend section 148 of the Income-tax Act to provide that the Assessing Officer may assess or reassess an income which is chargeable to tax and has escaped assessment other than those income involving matters which are the subject matter of any appeal, reference or revision; (ii) amend section 151 of the Income-tax Act to provide that the Joint Commissioner, the Commissioner or the Chief Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice under section 148, need not issue the notice himself.

16. It is proposed to amend section 254 of the Income-tax Act and further provide that the aggregate of the period originally allowed and the period or periods so extended or allowed shall not, in any case, exceed three hundred and sixty-five days, even if the delay in disposing of the appeal is not attributable to the assessee. Thus total period of stay by the I.T.A.T. shall not exceed one year in any circumstance even if delay is caused on seeking of continuous adjournments by the department.

Revised Settlement Scheme

Drastic and draconian amendments were made in the Chapter XIX-A last year. Knowing that looking to the number of pending cases and the strength of the Hon’ble Settlement Commission, it would be impossible to dispose of in eight months, Central Board having prevailed, Section 245D(4A) was inserved mandating disposal by 31-3-2008 else case would abate and the matter shall go back to the Assessing Officer. Number of representations were made by all concerned to extend the date of abatement in cases admitted u/s. 245D(1) to 31-3-2010 against 31-3-2008. Number of Writs have been filed all over India and are pending. But the Finance Minister and the Finance Ministry has dumped such just, fair and reasonable demands to waste paper basket, causing great injustice to the applicants, and throwing them to the door-steps of the same tax administration, who objected and prepared highpitched arbitrary Rule 9 report. New sections 273AA and 278AA have been proposed to be inserted empowering the Commissioner of Income-tax to grant immunity from penalty or/and prosecution in specified circumstances, satisfaction and on conditions to be imposed. Such remedy shall be only on statute, as the existing section 273A. The tax-payer shall have to approach the Hon’ble High Court by a writ, a costly remedy.

Service Tax, Customs Duty & Central Excise

1. Services remain an important sector as it comprises 55% of the GDP. The service tax rate remains unchanged at 12% (plus an education cess of 3%). Five new services have been included. The threshould limit of service tax exemption for small service providers is proposed to be increased from INR 800,000 to INR 1,000,000 from April 1, 2008. Further, hotel booking services provided by a person located outside India to a foreign customer, in relation to a hotel booking in India is exempt from the service tax. Further, the Goods Transport Agency service is being exempted from the payment of service tax to the extent of 75% of the freight;

2. Customs Duty: The peak rate of Customs Duty remains unchanged at 10%. Special provisions for some specific sectors have been proposed reducing existing customs duty.

3. Central Excise: General Central Value Added Tax (“CENVAT”) rate has been reduced from 16% to 14%. Some reduction has been proposed on specific sectors. Small cars, two and three wheelers, life saving drugs, writing paper, etc. would be cheaper. Excise duty on non-filter cigarettes have been increased to bring them at par with filter cigarettes. It should have been increased on all type of cigarettes, being harmful to health.

Conclusion

It is a populistic Budget to appease all sections of the Society, to encash vote bank of Agriculturists, SC, ST, OBC, Minority & Women, keeping an eye the ensuing elections. The UPA Government may advance the general elections. Rail as well as Union Budgets have been appreciated all over. However, the innovation is lacking. No measures to check leakage and to make administration efficient and effective have been proposed. Cost of governance would go up. Rate of inflation is beyond control. Let us hope for a bright future.