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TMI BlogFinance Act, 1997--Explanatory Notes on provisions relating to Direct TaxesX X X X Extracts X X X X X X X X Extracts X X X X ..... est-tax Act, 1974 ; --amended section 4 of the Expenditure-tax Act, 1980 ; and --introduced the Voluntary Disclosure of Income Scheme, 1997. Provisions in brief 3. The provisions of the Act, in the sphere of direct taxes relate to the following matters :-- (i) Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1997-98 ; the rates at which tax will be deductible at source in the financial year 1997-98 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act ; rates for computing "advance tax", deduction of income-tax from "salaries" and charging of income-tax on current incomes in certain cases for the financial year 1997-98. (ii) Amendment of the Income-tax Act, 1961, with a view to,-- including the power and telecommunication sectors within the scope of tax exemption under sub-clause (iv) of clause (15), clause (23F) and clause (23G) of section 10 and sub-clause (vii) of sub-section (1) of section 36 ; --removing certain exemptions ; --revising monetary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services fees in case of foreign companies ; --reducing the rate of long-term capital gains tax in the case of non-residents ; --modifying Minimum Alternative Tax on companies ; --providing that approvals by the Chief Commissioner or Commissioner will include Director-General or Director ; --providing for obligatory filing of return based on certain economic indicators ; --amending section 143 of the Income-tax Act ; --amending provisions relating to charge of tax in the case of a firm ; --removing tax deduction at source (TDS) on interest on Government securities ; --providing for TDS from winnings from lottery, etc., in kind ; --providing for TDS returns on magnetic media ; --increasing the exemption limit on the employer's annual contribution to recognised provident fund ; (iii) Amendment of the Interest-tax Act, 1974, with a view to,-- --reducing the rate of interest-tax ; --removing doubt regarding power of the Board to issue instructions. (iv) Amendment of the Expenditure-tax Act, 1987, with a view to,-- --exempting new hotels in remote areas from the levy of expenditure-tax. (v) Introduction of the Voluntary Disclosure of Income Scheme, 1997. Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m "salaries" during the financial year 1997-98 and also for computation of "advance tax" payable during that year in the case of all categories of taxpayers, have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 1997-98 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs. A. Individuals, Hindu undivided families, etc. 7.1 Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc. 7.2 There is no change in the exemption limit which remains at Rs. 40,000. However, the tax rates have been significantly reduced at all income levels and the income slabs have also been changed. The Table below gives the income slabs and the rates of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt incurred by it in a foreign country subject to fulfilment of certain conditions. An "industrial undertaking" for this purpose has been defined to mean any undertaking which is engaged in specified activities. The list of specified activities includes power generation and distribution but does not include telecommunication services. 13.2 Clause (23F) of section 10 provides for tax exemption to any income by way of dividend or long-term capital gains of a venture capital fund or venture capital company from investments made in the equity shares of a "venture capital undertaking". A "venture capital undertaking" has been defined to mean a company whose shares are not listed in a recognised stock exchange and which is engaged in the manufacture or production of such articles or things (including computer software) as may be notified. Since power and telecommunication are not covered within the ordinary meaning of "manufacture or production of articles or things", the companies engaged in generation or distribution of power or in telecommunication services remain outside the purview of the exemption under this clause. 13.3. Clause (23G) of section 10 provides tax exemption to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise carrying on the business of developing, maintaining and operating any infrastructure facility as defined in this clause. No approval from the Central Board of Direct Taxes is required for getting exemption under this clause or for inviting investments in terms of this clause. The investment could be by way of shares or long-term finance. The term "long-term finance" will have the same meaning as assigned to it in clause (viii) of sub-section (1) of section 36. Thus it would mean any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereon during a period of not less than five years. For the purposes of this clause, investment by way of bonds and debentures will be treated as long-term finance. (iv) the definition of "infrastructure facility" in clause (viii) of sub-section (1) of section 36 with a view to including therein projects for generation or generation and distribution of electricity or any other form of power or projects for providing telecommunication services. The amended definition will be as given in clause (23G) of section 10. 13.7 These amendments will take effect from 1st day of April, 1998, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any Committee thereof, which the Central Government may, by notification in the Official Gazette, specify in this behalf". 15.2 The limit of Rs. 600 was fixed in 1986 keeping in view that Members of Parliament received at that time tax exempt constituency allowance of Rs. 1,250 and that the area of the constituency of a member of a State Legislature is generally much smaller than that of a Member of Parliament. However, with the increase in the quantum of allowances of Members of Parliament since 1986, the limit of Rs. 600 per month also requires upward revision. 15.3 The Act, therefore, substitutes the ceiling of Rs. 600 per month by Rs. 2,000 per month. 15.4 This amendment will take effect from 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 3] Exemption of dividend income and levy of new tax on distributed profits on domestic companies 16.1 According to the existing provisions of the Income-tax Act, corporate dividends are taxed in the hands of shareholders under the head "Income from other sources". The companies, while paying dividend, deduct tax at source at the rates in force and issue ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In order to remove any doubt on this account, sub-section (3) of section (32) of the Unit Trust of India Act, 1963, which provided for treating UTI as a company and the income distributed by it as dividend has been omitted with effect from 1st day of June, 1997. 16.9 Other consequential amendments have also been made at several places in the Income-tax Act, e.g., omission of sections 80AA, 80M, etc. 16.10 The new provisions regarding payment of tax on distributed profits shall take effect from the 1st day of June, 1997. Section 194 of the Income-tax Act will apply to dividends paid between 1st April and 31st May, 1997. The provisions regarding exemption of dividend income in the hands of shareholders shall take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Sections 3, 21, 22, 27, 28, 32, 33, 34, 35, 40, 47, 49, 50, 51, 53 and 56] Enhancing of standard deduction for the salaried taxpayers 17.1 Under the existing provisions of section 16 of the Income-tax Act, a standard deduction of a sum equal to 33-1/3 per cent. of the salary or Rs. 15,000, whichever is less, is allowed. A higher deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less than the expenditure remaining unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer, shall be allowed in the previous year in which the licence has been transferred. It also provides that where the licence is transferred and proceeds of the transfer exceed the amount of expenditure remaining unallowed, the excess amount shall be chargeable to tax as profits and gains of business in the previous year in which the licence has been transferred. It further provides for amortisation of unallowed expenses in a case where a part of the licence is transferred and to which provisions of sub-section (3) do not apply. The provisions of sub-sections (2), (3) and (4) pertaining to transfer shall not apply in relation to a transfer in a scheme of amalgamation whereby the licence is transferred by the amalgamating company to the amalgamated company, the latter being an Indian company. 19.2 This amendment will take effect retrospectively from the 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 6] Amendment of section 36 of the Income-tax Act for allowance of bad deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a financial corporation or a public company. The deduction is admissible provided that the corporation or the company is approved by the Central Government for this clause and the aggregate of the amounts carried over to the special reserve from time to time does not exceed twice the amount of paid up share capital and general reserves. While this clause imposes a condition of creation of a special reserve, it does not impose any condition on the maintenance of the reserve. 21.2 In order to incorporate the condition regarding maintenance of the reserve, clause (viii) has been amended by substituting the words "special reserve created" with the words "special reserve created and maintained". An amendment has been made in section 41 in order to bring to tax any amount withdrawn from such special reserve in the year in which the amount is withdrawn. For this purpose, a new sub-section (4A) has been introduced in this section, and a reference to this sub-section is also made in sub-section (5) of this section. 21.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Sections 7 and 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d section 44AE respectively by the Finance Act, 1994, with effect from April 1, 1994. Under section 44AD, the income from business of civil construction or supply of labour for civil construction work is presumed at eight per cent. of gross receipts, provided the gross receipts from such a business do not exceed Rs. 40 lakhs. Under section 44AE the income from business of plying, hiring or leasing of goods carriages is presumed at the rate of Rs. 2,000 per month or part thereof from a heavy vehicle and Rs. 1,800 per month or part thereof from other vehicles, provided an assessee does not own more than ten goods carriages. Both the schemes are optional to the assessee. He can declare income higher than the income calculated presumptively on the aforesaid bases or he can declare lower income and substantiate his return in the assessment proceedings. The assessees, who opt for these schemes, are not required to maintain books of account. 23.2 Public response to these schemes has been below the expected level. A large number of assessees falling in the ambit of these schemes tend to file returns with lower income. In order to ensure that a larger number of taxpayers opt for these simp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Act, 1961, regarding computation of profits and gains of shipping business in the cases of non-residents. It provided that a sum equal to seven and a half per cent. of the receipts shall be taken to be profits and gains of such business. The following amounts are taken as receipts :-- (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf ; and (ii) the amount received or deemed to be received in India by or on behalf of the assessee. 26.2 It has come to the notice that the non-resident assessees, carrying on shipping business, are splitting their receipts in such a manner that the receipts in respect of carriage of passengers, livestock etc., which are the subject-matter of computation of profits under this section, are reduced and receipts in respect of other charges such as demurrage or handling charges, etc., are inflated. The result is that while the liability of the clients remains the same, the amount on which profits and gains are computed under section 44B gets reduced. 26.3 In order to avoid loss of revenue on this account, it has been clarified that the meaning of the expression "the amount paid or payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulting eventually in giving a boost to the capital markets, the Act exempts from tax capital gains arising on corporatisation of membership of a recognised stock exchange by inserting clause (xi) in section 47 of the Income-tax Act. A new sub-section 47A(2) has been inserted providing for withdrawal of such exemption if the transferor retains shares allotted on transfer of membership for less than three years. This exemption will be allowed only in respect of corporatisation effected on or before the 31st December, 1997. 28.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 only. [Sections 16 and 17] Modification of provisions relating to mode of computation of capital gains in certain cases 29.1 Under section 48 of the Income-tax Act, 1961, capital gains arising from the transfer of a capital asset are computed by deducting from the full value of consideration, (a) the indexed cost of acquisition and the indexed cost of any improvement of the asset ; and (b) the amount of expenditure incurred in connection with such transfer. 29.2 The purpose of indexation was to tax the real rather than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 30.4 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 19] Raising of standard deduction for recipients of family pension 31.1 Under the existing provisions of clause (iia) of section 57 of the Income-tax Act, a standard deduction of a sum equal to 33-1/3 per cent. of the family pension or Rs. 12,000, whichever is less, is allowed. 31.2 The Act enhances the upper limit of the deduction from twelve thousand rupees to fifteen thousand rupees. 31.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 20] 100 per cent. deduction to donations made to a Chief Minister's/Lieutenant Governor's relief fund 32.1 Under the existing provisions of section 80G of the Income-tax Act, ordinarily a deduction of fifty per cent. of the donation is allowed in the computation of income of the donor. However, in respect of donations to certain funds, hundred per cent. deduction is allowed. 32.2 In order to encourage donation of funds for relief efforts, the Act amends section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king which begins to provide the telecommunication services (whether basic or cellular) at any time during the period beginning on the 1st April, 1995, and ending on 31st March, 2000. 34.3 The amendment will take effect retrospectively from the 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 25] Tax holiday to industrial parks 35.1 Under the provisions of section 80-IA of the Income-tax Act, a five year tax holiday and a deduction of 25 per cent. (30 per cent. in the case of companies) in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward States/districts. 35.2 The Act extends the tax holiday to industrial parks notified for this purpose in accordance with any scheme to be framed by the Central Government. This tax holiday is expected to encourage investments in industrial infrastructure. Those industrial parks which start operating during the period beginning on 1st April, 1997, and ending on 31st March, 2002, will be eligible for 100 per cent. deduction for the initial fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, apply in relation to the assessment year 1998-99 and subsequent years. [Section 25] Omission of section 80JJ regarding deduction from the business of poultry farming 38.1 Section 80JJ provides for a deduction up to 33-1/3 per cent. of profits from the business of poultry farming. The poultry industry has since grown considerably. The concession has been reviewed in this context. 38.2 The Act omits section 80JJ of the Income-tax Act in respect of deductions from the profits and gains from the business of poultry farming. 38.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 26] Higher deduction in respect of interest income from Government securities 39.1 Section 80L of the Income-tax Act provides for deduction from the income received from interest on certain securities, dividends, etc., from the gross total income of the assessee. The deduction available is Rs. 12,000 in a normal case. In respect of dividends from any Indian company and income received from the units of the UTI or approved mutual funds, further deduction of Rs. 3,000 is allowed. 39.2 The Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of providing telecommunication services (whether basic or cellular), also as forming part of eligible issue of capital, for availing of the tax rebate under clauses (xvi) and (xvii) of the section. 41.4. The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in respect of the assessment year 1998-99 and subsequent years. [Section 30] Rebate of income-tax in the case of senior citizens 42.1 Under the existing provisions of section 88B of the Income-tax Act, a special tax rebate of forty per cent. of the net tax payable is allowed to persons who have attained the age of 65 years and have a gross total income not exceeding one hundred twenty thousand rupees. The maximum tax rebate available is Rs. 8,400 at present. 42.2 The Act increases the rate of rebate available to the senior citizens to hundred per cent. of the tax payable subject to a limit of ten thousand rupees. Further, the Act extends this rebate to all senior citizens irrespective of any income limit. 42.3 The amendments will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 31] Reduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m tax was kept at a modest figure by deeming 30 per cent. of book profits as total income. This modest amount is likely to go down further with the downward revision of corporate tax rate to 35 per cent. and abolition of surcharge. 45.2 The Act exempts the export profits that are eligible for deduction under section 80HHC or under section 80HHE from the purview of the minimum alternative tax. 45.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. 45.4 The Act also inserts a new section 115JAA to provide for a tax credit scheme by which the MAT paid can be carried forward for set-off against regular tax payable during the subsequent five-year period subject to certain conditions, as under :-- (1) When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax. The regular tax in this case means the tax payable on the basis of normal computation of total income of the company. (2) MAT credit will be allowed carry forward facility for a period of five assessment years immediately su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght under the tax net is to identify potential taxpayers through economic indicators. There could be a number of such economic indicators which may be employed for this purpose. 47.2 The Act has, therefore, inserted a proviso to section 139 of the Income-tax Act as a result of which it has become mandatory for all persons who satisfy two of the following economic criteria to furnish their returns of income :-- (a) are in occupation of immovable property exceeding a specified floor area whether by way of ownership, tenancy or otherwise ; or (b) are the owners or lessees of a motor vehicle ; or (c) are subscribers to a telephone ; or (d) have incurred expenditure for themselves or for any other person on travel to any foreign country. 47.3 A new section 271F has been inserted providing for a levy of penalty of Rs. 500 in cases where the return which was required to be filed under the proviso to section 139(1) is not furnished. 47.4 The amendment will take effect from the 1st April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. 47.5 The urban agglomerations of cities where this provision will be applicable have been notifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the relevant year." 49.4 This amendment will take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Sections 44] Removal of tax deduction at source (TDS) on interest on Government securities 50.1 Section 193 of the Income-tax Act provides for tax deduction at source (TDS) at the rates in force on the amount of any interest payable on any income by way of interest on securities. The proviso to section 193 provides for exceptions to this requirement and lists cases where TDS is not required to be made. 50.2 With a view to attract investment in Government securities, the Government has decided to exempt such securities from the provisions of TDS. 50.3 The Act, therefore, inserts a new clause (iv) in the aforesaid proviso, in lieu of the existing clauses (iiia) and (iv), to exempt interest payable on any security of the Central Government or a State Government from the requirement of tax deduction at source. 50.4 This amendment will take effect from the 1st day of June, 1997. [Section 46] TDS from winnings from lottery, etc., in kind 51.1 According to the provisions of section 194B, any per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of returns and processing of data easier, the Act amends section 206 to provide for filing of returns on magnetic media such as floppies, diskettes, etc., as may be specified by the Board. It has also been provided that a return on magnetic media shall fulfil the specified conditions, namely (i) the return will be checked and authenticated by the Assessing Officer, and (ii) he shall take due care to preserve the computer media by duplicating, transferring, mastering or storage without loss of data. 52.4 It has also been provided that the information in the returns on magnetic media shall be admitted in evidence in any proceeding under the Income-tax Act. 52.5 These amendments will take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [Section 52] Increasing the exemption limit on the employer's annual contribution to recognised provident funds 53.1 Rule 6 of Part A of the Fourth Schedule to the Income-tax Act provides for conditions relating to exemption of the employer's annual contributions to recognised provident funds, etc. 53.2 The Act increases the exemption limit of eligible contrib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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