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FINANCE ACT, 1989

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..... ax computed in accordance with the provisions of section 115B of the Income-tax Act on any income from winnings from lotteries, etc., shall be increased by a surcharge calculated at the rate of 5 per cent of the income-tax. No surcharge shall, however, be payable by a non-resident. Finance Act, 1989 Rates for deduction of income-tax at source during the financial year 1989-90 from incomes other than "salaries" 5.1 The rates of deduction of income-tax at source during the financial year 1989-90 from incomes other than "salaries", have been specified in Part II of the First Schedule to the Finance Act, 1989. These rates apply to income by way of interest on securities, interest other than interest on securities, dividends, insurance commission, winnings from lotteries, crossword puzzles and horse races and income of non-residents (including non-resident Indian) other than salary income. These rates are basically the same as those specified in Part II of the First Schedule to the Finance Act, 1988 for purposes of deduction of tax at source during the financial year 1988-89. In respect of payments referred to above as also payments made to a contractor or a sub-contractor w .....

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..... of income-tax have been specified in Paragraph A of Part III of the First Schedule. In the case of co-operative societies, and local authorities the rates of income-tax have been specified in Paragraph B and Paragraph C respectively, of Part III of the First Schedule to the Act, which is the same as in Part I of the First Schedule to the Finance Act, 1988. The rate Schedule applicable in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding the exemption limit), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons has been restructured for reducing the rate of tax in the slab of income from Rs. 18,000 to Rs. 25,000 from 25 per cent to 20 per cent. The impact of this relief on income up to Rs. 50,000 is as under: TABLE Total income Tax relief Total income Tax relief Rs. Rs. Rs. Rs. 18,000 Nil 24,000 300 19,000 50 25,000 350 20,000 100 30,000 350 21,000 150 40,000 350 22,000 200 50,0 .....

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..... decision of the Supreme Court may take a long time. Finance Act, 1989 10.2 Therefore, as a measure of rationalisation, it has been clarified by way of insertion of an Explanation to clause ( 1A ) of section 2 that capital gains arising from the transfer of the aforesaid agricultural land will not constitute 'revenue' within the meaning of section 2( 1A )( a ) of the Income-tax Act. Finance Act, 1989 10.3 This amendment will take effect retrospectively from 1st April, 1970 and will, accordingly, apply in relation to the assessment year 1970-71 and subsequent years. [Section 3 of the Finance Act, 1989] Finance Act, 1989 Incentives under the Exchange Risk Administration Scheme 11.1 The Finance Minister, in his Budget Speech for 1988-89, had announced the framing of a Scheme for exchange risk protection to borrowers of foreign currency from the financial institutions. In accordance with the said announcement, a scheme known as the Exchange Risk Administration Scheme (ERAS) has been evolved. Finance Act, 1989 11.2 Under the ERAS, a separate fund known as the 'Exchange Risk Administration Fund' (ERAF) can be set up by the financial institutions wh .....

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..... ness or profession". Finance Act, 1989 11.8 The above amendments will take effect from 1st April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent assessment years. [Sections 4 8 of the Finance Act, 1989] Finance Act, 1989 Tax concessions in respect of new deposit scheme for retiring employees 12.1 With a view to obviate the need for retiring Government employees to seek alternative sources for investment of their retirement benefits and also to maintain the level of funds in various employees welfare schemes, a new deposit scheme has been formulated in which a retiring Government employee may invest the whole or part of his retirement benefits for a lock-in period of three years. The scheme will apply to all Central or State Government employees. The following tax concessions are allowable in respect of the deposits made under the scheme: ( i ) the interest earned in respect of deposits shall be exempt from income-tax [Section 10( 15 )( iv )( i )]; and ( ii ) the deposits made shall be fully exempt from wealth-tax [Section 5(1)( xxviic )]. Finance Act, 1989 12.2 These amendments will come into force wit .....

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..... f professional tax was Rs. 250 per annum, it was not considered proper to provide for a separate deduction in this regard. By the Constitution (Sixtieth Amendment) Act, 1988, article 276(2) has been amended to raise the ceiling of professional tax from Rs. 250 to Rs. 2,500 per annum with the object of enabling the State Government to raise additional resources. The payment of Rs. 2,500 per annum by way of professional tax would have caused hardship to salaried employees, if a separate deduction was not allowed to them. Persons deriving income from business or profession are allowed to claim deduction in respect of such tax as business expenses. Finance Act, 1989 13.4 With a view to providing relief to the salaried taxpayers, it has been provided by amending section 16 of the Income-tax Act that the tax on employment, by whatever name called, levied by a State under article 276 of the Constitution shall be allowed as a deduction in computing their income under the head "Salaries". Finance Act, 1989 13.5 These amendments will come into force with effect from 1st April, 1990 and will, accordingly, apply in relation to the assessment year 1990-91 and subsequent years. .....

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..... on" have also been amended and the amended sub-section (3) prescribes the mode for computation of profits of business or profession of an assessee for the purposes of sub-section (1). Finance Act, 1989 14.3 In order to give adequate notice to the taxpayers, these amendments have been made effective from 1st April, 1991 and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. Finance Act, 1989 14.4 Sub-section (5A) of section 32AB of the Income-tax Act provides that the amounts deposited with the Development Bank in accordance with the Scheme, shall not be permitted to be withdrawn before the expiry of a period of five years from the date of deposit except in the case of ( a ) closure of business, ( b ) death of the taxpayer, ( c ) partition of Hindu undivided family, ( d ) dissolution of the firm, ( e ) liquidation of the company, and ( f ) in such other circumstances as may be specified in the Scheme. This sub-section is being interpreted in a manner that in a case withdrawal is made by a taxpayer of any amount standing to his credit in the deposit account after a period of five years from the date of deposit, the condition rega .....

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..... nt year to which the aforesaid previous year relates. This proviso was introduced to remove the hardship caused to certain taxpayers who had represented that since the sales tax for the last quarter cannot be paid within the previous year, the original provisions of section 43B will unnecessarily involve disallowance of the payment for the last quarter. Finance Act, 1989 15.2 Certain Courts have interpreted the provisions of section 43B in a manner which may negate the very operation of this section. The interpretation given by these Courts revolves around the use of the words "any sum payable". The interpretation given to these words is that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. Thus, the sales tax in respect of sales made in the last quarter was held to be totally outside the purview of section 43B since the same is not statutorily payable in the financial year to which it relates. This is against the legislative intent and, therefore, by way of inserting an Explanation it has been clarified that the words"any sum payable", shall mean any sum, liability for which has been incurred by the t .....

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..... eir gross total receipts. In the series of such provisions, the Finance Act, 1989, has inserted a new section 44BBB for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects. Finance Act, 1989 16.2 The new section 44BBB provides that, notwithstanding anything to the contrary contained in sections 28 to 44AA of the Income-tax Act, the income of foreign companies as are engaged in the business of civil construction or erection or testing or commissioning of plant or machinery in connection with a turnkey power project shall be deemed at 10 per cent of the amount paid or payable to such assessee or to any person on his behalf, whether in or out of India. For this purpose, the turnkey power project should be approved by the Central Government and should be financed under any international aid programme. It is also clarified that erection of plant or machinery or testing or commissioning thereof will include laying of transmission lines and systems. Finance Act, 1989 16.3 This amendment will come into force with effect from 1st April, 1990 and will, accordingly, apply in relation to the ass .....

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..... National Housing Bank has become operational. In order to help the National Housing Bank to mobilise the resources, certain tax incentives have been provided in the Income-tax and Wealth-tax Acts. These are : ( i ) by amending section 80C of the Income-tax Act to provide that the deposits made in the Home Loan Account Scheme of the National Housing Bank will qualify for deduction from the gross total income of taxpayers subject to the existing ceiling and rates; ( ii ) by amending clause ( h ) of sub-section (2) of section 80C of the Income-tax Act to provide that the re-payment of loan to the National Housing Bank will qualify for deduction to the extent of Rs. 10,000 under the overall ceiling of Rs. 40,000. ( iii ) by amending section 54E of the Income-tax Act to provide that the taxpayers will now get tax exemption/concession on capital gains, if the net consideration is invested in the bonds and debentures issued by the National Housing Bank; ( iv ) by amending section 5 of the Wealth-tax Act to provide that the investment made in the National Housing Bank will be exempt from wealth-tax subject to the overall ceiling of Rs. 5 lakhs. Finance Act, 1989 18.2 The a .....

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..... have been amended, so as to extend the scope of the provisions to investment in shares of companies which are incorporated for setting up hospitals. Finance Act, 1989 20.4 These amendments will come into force with effect from 1st April, 1990 and will, accordingly, apply in relation to the assessment year 1990-91 and subsequent years. [Section 15 of the Finance Act, 1989] Finance Act, 1989 Tax incentives for poultry farming 21.1 Section 80JJ of the Income-tax Act, which, inter alia, provided a deduction of Rs. 15,000 in respect of income from poultry farming was omitted by the Finance Act, 1985 with effect from 1st April, 1986. Lately, however, it has been brought to the notice of the Government that persons engaged in poultry farming have been facing hardship because of various adverse circumstances. Therefore, as a measure of fiscal support to persons engaged in poultry farming, a deduction at the rate of thirty-three and one-third per cent of the income from poultry farming is being provided by insertion of the new section 80JJ in the Income-tax Act. The deduction under this section would be available also to persons engaged in poultry breeding. Finan .....

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..... of section 115B of the Income-tax Act, the profits and gains of life insurance business is taxable at the rate of twelve and one-half per cent of the actuarial surplus. Sub-section (2) of section 115B provides that the profits and gains of life insurance business may be taxed at the rate of ten per cent, if two and one-half per cent of its profits and gains and thirty-three and one-third per cent of the income-tax so payable is deposited in the Social Security Fund notified by the Central Government. The provisions of sub-section (2) of section 115B were made applicable only in respect of the assessment year 1989-90. With a view to ensure continuity of flow of funds to the Social Security Fund, it has been provided that the assessee engaged in the life insurance business will be taxed at the rate of ten per cent of its actuarial surplus for another year, i.e. , assessment year 1990-91, if it deposits two and one-half per cent of its profits and gains and thirty-three and one-third per cent of the income-tax so payable during the relevant previous year, in the Social Security Fund set up and notified by the Government of India. Finance Act, 1989 23.2 This amendment will ta .....

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..... e reserve created or provision made in the same year itself, though the reserve when created had not gone to increase the book profits. Such adjustments lead to unintended lowering of profits and consequently the quantum of tax payable gets reduced. By amending section 115J with a view to counteract such a tax avoidance device, it has been provided that the "book profits" will be allowed to be reduced by the amount withdrawn from reserves or provisions only in two situations, namely :— ( i ) if the reserves have been created or provisions have been made in a previous year relevant to the assessment year commencing before 1st April, 1988; or ( ii ) if the reserves have been created or provisions have been made in a previous year relevant to the assessment year commencing on or after 1st April, 1988 and have gone to increase the book profits in any year when the provisions of section 115J of the Income-tax Act were applicable. Finance Act, 1989 24.5 This amendment will come into force with effect from 1st April, 1988 and will, accordingly, apply in relation to assessment year 1988-89 and subsequent years. [Section 19 of the Finance Act, 1989] Finance Act, 1989 Mo .....

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..... uld be left for completing the assessment. The Finance Act has, therefore, provided that the period of one year for completing the assessment is enhanced to two years from the end of the assessment year in which the gifts were first assessable. Finance Act, 1989 25.4 These amendments will come into force with effect from 1st April, 1989. [Sections 20, 28 and 31 of the Finance Act, 1989] Finance Act, 1989 Modification of provisions relating to tax deduction at source 26.1 Under the existing provisions of sub-section (2A) of section 192, relating to deduction of tax at source on any income chargeable under the head "Salaries", the employer has been given power to deduct tax at source after taking into consideration relief allowable under sub-section (1) of section 89 of the Income-tax Act in respect of salary paid in arrears or in advance to employees of Government or public sector undertakings. Finance Act, 1989 26.2 With a view to reduce infructuous work in the Income-tax Department, sub-section (2A) of section 192 has been amended so as to give similar powers to other employers being a company, co-operative society, local authority, institution, assoc .....

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..... the Assessing Officer is erroneous insofar as it is prejudicial to the interests of revenue, he may pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the same or directing a fresh assessment. By the Finance Act, 1988, an Explanation was substituted with effect from 1st June, 1988 to the relevant sections of the Income-tax Act, Wealth-tax Act and Gift-tax Act, to clarify that the term 'record' would include all records relating to any proceeding available at the time of examination by the Commissioner. Further, it was also clarified that the Commissioner is competent to revise an order of assessment passed by an Assessing Officer on all matters except those which have been considered and decided in an appeal. The above Explanation was incorporated in the Finance Act, 1988 to clarify this legal position to have always been in existence. Some appellate authorities have, however, decided that the Explanation will apply only prospectively, i.e., only to those orders which are passed by the Commissioner after 1-6-1988. Such an interpretation is against the legislative intent and section 263 o .....

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..... certain difficulties pointed out by the Government of Sikkim, the Finance Act has provided that the Income-tax Act, 1961 will now stand extended to the State of Sikkim from the 1st day of April, 1990, and will, accordingly, apply in relation to the assessment year 1990-91 and subsequent years. Section 26 of the Finance Act, 1989 also provides that any law corresponding to the Income-tax Act, 1961 which was in force in the State of Sikkim will be deemed never to have ceased to have effect in relation to the previous year commencing on 1st April, 1988 and ending on the 31st of March, 1989. Such a provision became necessary as the earlier notification issued by the Ministry of Home Affairs had extended the Income-tax Act, 1961 to the State of Sikkim with effect from 1st April, 1989, i.e., from the assessment year 1989-90 and accordingly the law already in existence in the State of Sikkim stood repealed from 1-4-1988. Finance Act, 1989 29.2 The Wealth-tax Act, 1957 and the Gift-tax Act, 1958 stand extended to the State of Sikkim pursuant to the Central Government's notification No. SO 148(E), dated 23rd February, 1989. The Wealth-tax Act will, therefore, apply to the net wea .....

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..... of the Wealth-tax Act, in the case of an association of persons including a society registered under the Societies Registration Act, 1860, wealth-tax is payable either at the normal rates or at the rate of three per cent, whichever is more beneficial to revenue. Under section 167B of the Income-tax Act, a society registered under the Societies Registration Act, has been excluded from the purview of that section which provides for taxation of association of persons at the maximum marginal rate. As a measure of rationalisation, the Finance Act has excluded societies registered under the Societies Registration Act, 1860 from the purview of section 21AA of the Wealth-tax Act. Finance Act, 1989 31.2 This amendment will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years. [Section 29 of the Finance Act, 1989] EXPENDITURE TAX Finance Act, 1989 Enhancing the rate of tax 32.1 Under the provisions of section 4 of the Expenditure Tax Act, 1987, tax is chargeable at the rate of ten per cent of any chargeable expenditure incurred in a hotel to which the Act applies. By amendment .....

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..... s book in Form 2, shall be issued in exchange of the provisional receipt indicating the name of the depositor, his address, the amount of deposit(s) made, and account number, duly initialled by an authorised official of the accounts office. ( d ) Date of realisation of the cheque, pay order or demand draft shall be the date of deposit and the deposit shall be deemed to be made on that date only. ( e ) A depositor may open only one account under this scheme, provided that where the retirement benefits have been received on different dates, more than one deposit can be made in this account. Such deposits shall be made within three months from the date of receiving that retirement benefit from the Government. Deposits and withdrawal 5. ( a ) The account shall be opened with a deposit of a minimum of one thousand rupees, and all deposits will be in the multiples of one thousand rupees. ( b ) All withdrawals shall be in the multiple of one thousand rupees. ( c ) A depositor may, at his option, withdraw by applying in Form 3 or as near thereto as possible, the entire balance or part thereof after the expiry of three years from the date of deposits. Where depo .....

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..... nomination and every cancellation or variation thereof shall be registered in the accounts office and shall be valid from the date of such registration, the particulars of which shall be entered in the Pass Book. Closure of account 9. ( a ) The account may be closed by the depositor on or after the expiry of three years from the date of initial deposit or last deposit where more than one deposit is made in the account. ( b ) If the depositor dies within the period of three years, or thereafter, the account shall be closed as soon as death is reported to the bank and the amount paid to the nominee. Where, however, the deposit account is held jointly with the spouse or where the sole nominee is the spouse of the depositor, the spouse may, at his/her option, request for continuance of the account and the account then shall be continued in the name of such spouse on same terms and conditions as applicable to account. Pass book 10. The pass book shall be presented to accounts office at the time of collecting interest and also at the time of withdrawal and closure. Transfer from one accounts office to another 11. A depositor may apply for transfer of his .....

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..... mt./Kumari...................... ..........……………………........................................................ Address................................................................................................................................... ............................................................................................................................................…to receive the sum due under the said account in the event of my death during the minority of the nominee(s). Date.................... Depositor Signature of witness: Name and address : FOR THE USE OF ACCOUNTS OFFICE The account has been opened on...................with Rs................under Deposit Scheme for Retiring Government Employees, 1989 Account No....................... Pass Book No.................. has been issued. Date.......................... Authorised Officer FINANCE ACT, 1989 FORM 2 [ See para 4( c )] Form of Pass Book to be issued to the depositor under Deposit Scheme for Retiring Government Employees, 1989 Cover page Obverse DEPOSIT SCH .....

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..... from the date of deposit. 2. The Pass Book No...............................................................................is enclosed. Date: Place: Signature or Thumb Impression of Depositor TO BE USED BY THE ACCOUNTS OFFICE Date of initial deposit.................................................................................................. Amount available in the account Rs........................................................................ Date on which last withdrawal was allowed........................................................... Amount available for withdrawal in accordance with para............................ of the Scheme. Withdrawal of a sum of Rs.....................................................................sanctioned. Signature of Official........................................................................................................... RECEIPT Received a sum of Rs.......................................... (Rupees............................................) by way of withdrawal from Deposit Scheme for Retiring Government Employees, 1989. Date: Place: Signature or Thumb Impression of Depositor .....

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..... nomination, I hereby nominate the person(s) mentioned below who shall on my death, become entitled to the payment of the sum due on the above account, to the exclusion of all other persons. _______________________________________________________________________ Sl. Name(s) of Full address(es) Date of birth Propertionate No. the nominee(s) nominee in amount for cases of minor each nominee _______________________________________________________________________ *To be filled in case of variation only. %As the nominee(s) at Serial No.(s).................………………………….......................................is/are minor(s), I appoint Shri/Smt./Kumari............................ (Name full address) as the person to receive the sum due on the account in the event of my death during the minority of the nominee(s). % Delete if not applicable. Signature / Thumb Impression of Depositor Depositor's Address: (1) Witness : Name : Address : (2) Witnes .....

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..... e paid every six months on 30th June and 31st December. The interest due on the deposits if not drawn on the due date will continue to earn interest at the same rate. 6. Nomination facility will be available. 7. The account under the Scheme may be opened by depositor either in his name or jointly with his/her spouse. If the depositor dies within a period of three years or thereafter, the account shall be closed and amount paid to the nominee. If the account is held jointly with his/her spouse or the spouse of the depositor is sole nominee, the spouse will be permitted to continue accounts on the same terms and conditions. 8. Depositors will be provided with the pass book indicating the amount deposited, amount withdrawn, interest, etc. 9. The whole of the interest earned on the deposits under the Scheme is exempt from income-tax. 10. The whole of the amount of deposits under this Scheme is exempt from wealth-tax. The ceiling of exemption of wealth up to Rs. 5 lakhs will not apply to the deposits made in this Scheme. 11. The Scheme which will be known as Deposit Scheme for Retiring Government Employees, 1989, will be initially operated through the selected br .....

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..... at, Sachivalaya Complex, Sardar Bhavan, Block-4, Gandhinagar-382010. Subject: Deposit Scheme for Retiring Government Employees, 1989 - Tax liability of nominee - Clarification regarding Sir, I am directed to refer to your Letter No. NBY-RGS-1589-GOI-46/B/90 dated 15th July, 1989 on the subject cited and to state that it has been clarified by CBDT that no tax liability under the Income-tax Act and the Wealth-tax Act will arise on the amount payable to the nominee on the death of the depositor under the Deposit Scheme for Retiring Government Employees, 1989. FINANCE ACT, 1989 ANNEXURE B PRESS RELEASE Venture capital guidelines In his Budget Speech for 1988-89, the Finance Minister had referred to the difficulties faced by a new entrepreneurs in raising equity capital, and declared that "it has been decided to formulate a scheme under which Venture Capital Companies/Funds will be enabled to invest in new companies and be eligible for the concessional treatment of capital gains available to non-corporate entities". 2. Venture Capital Companies/Funds which went to avail of concessional treatment of capital gains referred to in the Budget Speech .....

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..... virtue of his position in the VCC/VCF. Venture Capital Assistance 3. ( i ) It is intended that Venture Capital Assistance should go mainly to enterprises where the risk element is comparatively high due to the technology involved being relatively new, untried or very closely held, and/or the entrepreneurs being relatively new and not affluent though otherwise qualified; and the size being modest. For successful units, the possibility of high returns would exist, but the projects would initially find it difficult to raise equity from the market, especially when public issues are no longer readily available for small, grainfield companies. The assistance should mainly be for equity support, though loan support to supplement this may also be done. Venture Capital Assistance, therefore, should cover those enterprises which fulfil the following parameters:— ( a ) Size : Total investment not to exceed Rs. 10 crores. ( b ) Technology : New or relatively untried or very closely held or being taken from pilot to commercial stage, or which incorporates some significant improvement over the existing ones in India. ( c ) Promoters/entrepreneurs : Rela .....

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..... should be addressed to Ministry of Finance, Investment Division, North Block, New Delhi, with a copy to Chairman, Securities Exchange Board of India for foreign/NRI participation in capital issues. Debt-equity ratio 6. Debt-equity ratio may be maximum 1 : 1.5. Underwriting/listing 7. ( i ) The VCC/VCF may be listed according to the prescribed norms. Its issue may be underwritten at the discretion of the promoters. ( ii ) For assisted units also, listing guidelines would apply. Investment by widely held VCF would be treated as public participation for this purpose. Exit 8. Pricing of the shares at the time of disinvestment by a public issue of general offer of sale by the VCC/VCF, may be done by them, subject to this being calculated on objective criteria like book value, profit-earning capacity, etc., and the basis is adequately disclosed to the public. Eligibility for tax concession 9. The preferential tax treatment would be available to the approved venture capital company/fund only in respect of financing of such assisted units as are eligible to be treated as venture capital units as defined in paragraph 3. For this purpose, the unit see .....

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