Venture capital funds can now invest in power and telecom industries

5. Venture Capital Funds & Companies [S.10(23F)]

In the last budget, the finance minister had granted exemptions from tax to Venture Capital funds & Companies (VCF), in case they have dividends or long term capital gains. VCFs are required to invest in undertakings which were engaged in the manufacture of specified goods.

Now undertakings can also be engaged in business of generation or generation and distribution of power, or providing telecommunication services. The scope of activities for which relief is available has thus been widened.

It still however does not include other infrastructure areas like roads, ports, water supply projects, etc. Even these activities could have been covered, so that in case of infrastructure activities, all the persons concerned - builders and operators of the infrastructure facilities, investors, financers, etc. can get benefits under Income Tax Act.

Reliefs for infrastructure are widened

6. Infrastructure

6.1 Infrastructure Capital Funds & Companies [S.10(23G)]

For infrastructure, the finance minister had in the previous budget, announced tax concessions for infrastructure capital funds and companies (ICF). Any income by way of dividend, interest or long term capital gains earned by ICF is exempt from tax. ICFs, have to invest in an enterprise which is in the business of developing, maintaining and operating infrastructure facility. At present, infrastructure facility means a road, bridge, airport, railway system, water supply project, irrigation project, sanitation and sewerage system. Now the activities covered by infrastructure facility also mean generation or generation and distribution of power and telecommunication services.

Tax holiday is proposed for telecom

6.2 Telecommunication Services [S.80-IA]

Telecommunication Services were accorded the status of infrastructure some time ago. Now under the Income Tax Act also tax holiday has been given for persons providing telecommunication services. The person should commence operating such services between 1st April, 1995 and 31st March, 2000. The profits from such business will be exempt from tax for a period five years. Thereafter the profits @ 25% shall be exempted. The relief of 25% will be available for further five years. If the assessee is a company, then the relief will be 30% instead of 25%.

Telecommunication services are however covered by Minimum Alternative Tax Scheme. Infrastructure facilities have been excluded but somehow telecommunication services are covered under MAT.

New Tax Policy will be announced for oil sector

6.3 Oil Exploration

The finance minister in his budget speech has mentioned that oil exploration has also being accorded the status of infrastructure. However in the current budget, there were no proposals in the income tax act for oil exploration. The Government will come out with a complete policy for oil exploration. There will also be a separate tax policy for this sector. For commercial production of mineral oil in the North Eastern Region, tax holiday is proposed (kindly see para 7.3).

Tax holiday has been extended to operation of Industrial Parks

7. Tax Holiday [S.80-IA]

7.1 Operation of Industrial Parks

In India, we are used to maintenance of our residential buildings, industrial estates, by the builder or the co-operative society. There is no concept of professional maintenance. For Industrial parks, persons who provide services of operation of industrial parks, will be granted tax exemptions. The industrial parks and the scheme of operation of the park will be notified separately. The exemption will be available to persons who begin operation of the park between 1st April 1997 and 31st March, 2002. A tax holiday for first five years will be available. For the next five years 25% of the profits will be exempt from tax. If the assessee is a company, then the relief for the next five years will be 30% instead of 25%.

Tax reliefs are proposed for hotels in specific areas

7.2 Hotels

Tax relief will be given to hotels which are set up in a hilly area, or a rural area, or a place of pilgrimage, or any other place which may be notified separately. The hotel should start functioning between 1st April '97 and 31st March 2001. Relief @ 50% of the profits will be available for the first 5 years. Thereafter the relief will be @ 25% for the next 5 years. If the assessee is a company, the relief will be 30% in the next 5 years, instead of 25%.

7.3 Production of Mineral Oil

Tax holiday will be given for commercial production of mineral oil in the North Eastern Region. No time limit has been set for commencement of commercial production. Tax holiday is proposed for a period of first seven years. North Eastern Region means the states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura.

Weighted deduction is proposed for scientific research expenditure

8. Scientific research expenditure [S.35(2AB)]

In case of companies, a weighted deduction will be given for scientific research expenditure.

Companies which are engaged in the business of manufacture of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or other items which may be specified, are eligible for the deduction. For expenditure incurred on scientific research, of capital nature, a deduction equal to 125% of the expenditure is given. However cost of land and building is excluded from such relief.

Standard deduction will be 1/3rd or Rs. 20,000 whichever is lower

9. Individuals

9.1 Salary [S. 16]

A standard deduction at the rate of one-third of the salary, or Rs.20,000 whichever is lower, will be given. The earlier provisions of different amounts of deductions under various situations/persons, are removed, and a flat deduction limit is provided for all salary earners.

Senior residents above 65 years of age are given a rebate of upto Rs.10,000

9.2 Senior resident's relief [S. 88B]

Earlier relief was provided to persons aged 65 years or more, if his income did not exceed Rs.1,00,000/-. If the income exceeded Rs.1,00,000, then the entire relief was lost.

Now relief of upto Rs. 10,000/- will be available by way of a rebate from tax. A person having an income of Rs. 1,00,000/- will be liable to pay tax of Rs. 10,000/- under the new slab rates. He will then get a rebate of Rs. 10,000/-. Thus he will not be liable to pay any tax. If his income exceeds Rs. 1,00,000/-, then only on the excess, he will be liable to pay tax. This is also a welcome provision.

Relief for foreign exchange income is removed for some types of incomes

10. Relief U/s. 80-O

Income tax act provides for relief @ 50% of income, in case income is earned by way of royalty, commission, fees, technical or professional services. The relief has been removed and will now be available in case of consideration for use of any patent, invention, design or registered trademark only. This is quite narrow as compared to the earlier relief.

There was a feeling that this relief was being misused by many residents. Under Chapter VI A, all reliefs are available against net income. At several times, assessees have claimed relief on gross amounts. Government has amended the law several times and yet under some pretext or another, assessees were claiming relief based on gross amounts u/s. 80 O.

Many people have misused the section to claim relief on foreign exchange receipts which would not be covered by this section.

Fed up by such misuse and unnecessary litigation, Government has simply scrapped the section.

It is a clear signal to the people. "If you misbehave, Government does not have the time for litigation. Instead of fighting in courts, the relief will be withdrawn."

In the process, genuine foreign exchange earners have also sufferred.

It is high time when genuine tax payers start directing their anger towards the people who misuse such reliefs.

Artificial disallowances have been removed

11. Artificial disallowances [S.37]

There were limitations on expenses which could be incurred on account of travelling, entertainment, maintenance of guest houses & advertisements. All these sections are deleted. This is a very welcome proposal. A lot of laborious calculation of disallowances will now be done away with. The Finance Minister has perhaps accepted the realities of business and removed all these artificial limitations on genuine business expenses.

Small Retail Traders can avoid all problems of maintaining accounts

12. Simplified scheme of tax for retail traders [S.44AF]

Three years ago, simplified tax system had been introduced in case of assessees engaged in civil construction and truck operators. Now a similar scheme has been introduced for small retail traders.

Those persons who have a business of retail trade of goods and merchandise, can file a return of income by declaring a profit of 5% or more of the turnover. That will be deemed to be the income of the person.

Such persons will also not have to maintain books of accounts or get the accounts audited . Further, if he has any other business also, then turnover pertaining to retail business will be excluded to determine whether a tax audit is required or not. Thus if the assessee has a turnover of say - Rs. 30 lakhs from retail business, and Rs. 30 lakhs from other business, normally he would be liable to tax audit. However, turnover from retail trade business will be excluded. As the balance turnover is less than Rs.40 lakhs, no tax audit will be required.

The turnover from retail trade business itself should be less than Rs. 40 lakhs to be eligible for the simplified tax system. Here however there is a controversy. The earlier schemes clearly provide that if turnover of civil contractors or truck operators from that particular business is less than Rs.40 lakhs, then the simplified scheme applies at least to that business. His turnover from other business put together may exceed Rs.40 lakhs. However in this scheme the words used are that the "assessee's" turnover should not exceed Rs.40 lakhs. Keeping in view the earlier schemes, it appears that the limit should apply to the particular business of retail trade.

As in the earlier schemes, it was proposed that the assessee has an option to declare profits less than 5%. However, then the income tax officer would have to take up the case for scrutiny assessment and income would have been determined accordingly.

At the time of passing the Finance Bill in the parliament, this provisions has been dropped. Hence now profit will be deemed to be 5%. That is the end.

A concession has been given. In case of a partnership firm, partners' salary and interest can be deducted from the profit of 5%. This has been provided for in case of earlier schemes also.

This scheme, as in case of earlier schemes, is not meant for capitalisation of profits. Thus, for example, following entries will not be permitted. A retailer has turnover of Rs.30 lakhs.

He declares income @ 5% - Rs.1,50,000. However, he deposits in the bank account Rs.2,00,000 and invests this amount in business/personal assets. Under this section, normal assessment procedure is by passed and an income will be presumed without assessment. Thereafter, all the normal rules of accounting and taxation will apply.

Upto a turnover of Rs.8,00,000; the retailer's income can be presumed to be Rs.40,000. So no return has to be filed. Between a turnover of Rs.8,00,000 to Rs.40,00,000, the assessee has to simply declare an income. No accounts need be maintained and no audit has to be done. Only when turnover exceeds, the accounts have to be maintained and tax audit is necessary. In all cases, the retailers should maintain a sales register or copies of bills or some records establishing their turnover. What the income tax act provides is that there will be no further questions asked if you declare a profit of 5% or more.

Indexation relief for bonds has been removed

13. Capital Gains

13.1 Indexation relief for bonds & debentures [S.48]

In case of debentures and bonds, indexation relief was being claimed by the assessees on redemption of the same. Normally as the bonds are redeemed at par, indexation relief used to result in a loss, which could be set off against other long term capital gains. Now there will be no indexation relief on bonds and debentures, except for capital indexed bonds issued by the Government.

Inadvertently even convertible bonds are also covered. If the person sells convertible bonds, the entire capital gains will be liable to tax. No indexation relief will be available. Convertible debentures are, to a great extent like shares. They do invite appreciation or depreciation in values. To the extent, they are convertible, indexation should have been allowed.

Transfer of right to produce etc. will now be liable to Capital Gains Tax

13.2 Transfer of right to manufacture, produce or process any article [S.55]

In case of capital assets, the cost of which could not be determined, capital gain was not liable to tax. In the last few years, several capital assets which were normally not liable to tax, have been brought within the purview of tax - Goodwill, loom hours, etc. Now one more item - "right to manufacture, produce or process any article or thing" has been included. A person could have established his reputation as a manufacturer of any particular item - say rubber parts. He can transfer the rights to manufacture the parts. If one can not calculate the "cost" of "right to manufacture", then capital gains are not liable to tax. It is now provided that in such cases the cost will be NIL. Having determined the cost as NIL, the entire sale proceeds will be liable to tax.

Instead of including a few items at a time, it can be provided that for any capital asset for which cost can not be determined, the cost will be NIL. Hence all assets will be covered.

One time exemption from capital gains has been given to convert stock exchange membership into corporate membership

13.3 Corporatisation of stock exchange membership cards [S.47 & 47A]

It has been provided that persons who have membership card of the stock exchange, can transfer the same to a company without paying any tax on capital gains. In exchange of the card, the company should allot shares to the transferor.

If the shares of the company are transferred within a period of 3 years from the date of the transfer of the card, then the gains on transfer of the card will be liable to long term capital gains tax.

14. Minimum Alternative Tax (MAT) [S.115-JA]

In the last budget, Minimum Alternative Tax (MAT) was introduced. As per the MAT scheme, companies which declared NIL income, or loss as per Income Tax Act, but had book profits, were liable to MAT. 30% of the book profits was considered as taxable income, and such income was liable to income tax. Thus the companies had to pay a minimum tax @ 12.9% (43% of 30%). From next year, this tax will be reduced to 10.5% - 35% of 30%.

There was a demand from the entire industry that the MAT should be removed. The finance minister has not heeded to their demand. He has however made some changes in the basic scheme of MAT.

It may be noted that even in U.S.A., Alternative Minimum Tax is being imposed. Tax credit provisions explained in paragraph 14.2 below are also similar to U.S. tax provisions.

Exporters are exempt from MAT

14.1 Exporters

Exporters who can avail of relief U/s. 80HHC, will not be covered by MAT in respect of profits eligible for deduction under Section 80HHC. Similarly, exporters of software will also not be covered by MAT in respect of profits eligible for relief under Section 80HHE. However, their other income not falling under sections 80HHC and 80HHE will be covered. Export oriented units and units in Free Trade Zones were already exempt from MAT. Now all exporters are excluded from MAT provisions.

This relief is not extended to hotels and tour operators - (S.80HHD).

Credit system has been introduced for MAT

14.2 Tax credit for MAT

A system of tax credit for MAT has been introduced. If in any year, MAT has been paid, which is in excess of normal tax, then such excess MAT can be set off against tax of subsequent years.

In subsequent years, the company may pay tax under normal provisions of the law. If the normal tax is higher than the MAT of the subsequent years, the excess MAT of earlier years, can be set off against the normal tax of subsequent years.

The excess MAT can be carried forward for subsequent 5 years. This system is explained by way of an example.

Due to carry forward facility, in this example, the company will NOT pay a single rupee extra. There will only be some "prepayment" of tax

Thus over a period of 6 years, the total tax remains the same (see d & m). If however, the MAT can not be set off, within 5 years, then the same is lost. Thus 1st year's MAT credit can be carried forward upto 6th year. The 2nd year's MAT credit can be carried forward upto 7th year & go on.

In case, there is a continuous expansion by the company where there is large depreciation available every year, then it may be difficult to avail of the credit within 5 years.

15. Voluntary Disclosure Scheme

The Scheme

A new VDS has been introduced

15.1 Finance Minister has announced yet another Voluntary Disclosure Scheme (VDS). The scheme intends to grant relief from penalty and prosecution under Income-tax Act, Wealth-tax Act, Foreign Exchange Regulation Act and Companies Act.

The scheme applies to ANY assessment year.

The date of commencement of the scheme will be specified later. However it will end on 31st December, 1997.

Essentially, this is a repetition of the scheme announced in the year 1975 - with some improvements. All the clarifications sought at that time will have to be again given by separate circulars.

Under Immunity Scheme of 1991, there was no tax on Inward Remittances

15.2 A person can make a declaration of his undisclosed income or wealth for any assessment year. If any income is disclosed, then the wealth represented by such undisclosed income need not be declared again. The same will therefore not be liable to wealth tax.

The tax on disclosed income will be liable to tax at the new rates announced in the budget i.e. Firms and Companies will have to pay tax @ 35% and others will have to pay 30%.

Under Immunity Scheme of 1991, there was no tax on Inward Remittances

This scheme is better than other schemes in the sense that tax and FERA both are covered and announced simultaneously.

This is costlier compared to the 1991-92 Scheme of Inward remittance. Under that scheme, people had to simply bring in, through official banking channels, the black money lying abroad. No tax was payable . Under the present scheme, apart from bringing in the amounts, 30% tax also has to be paid.

In the Finance Bill, it was proposed that a person who has only wealth to disclose will be liable to pay wealth tax @ 1%. This may happen where for example a person may have inherited assets. On inheritance, there is no income tax. However, the value of the assets will be liable to wealth tax. Also in case of under-valuation of assets, a person could have declared true market value & paid only the wealth tax. This provision could have been misused. People could have paid only wealth tax @ 1% and avoided the income tax. Hence this provision has been removed in the final act.

15.3 The immunity has been given only to the extent that the person's declaration shall not be the basis for any penalty or prosecution. However independently, if the investigating agencies find evidence about violation of a law then immunity may not be available. For example, immunity is granted under Foreign Exchange Regulation Act. If independently, the enforcement directorate finds out that a person had done havala transactions, then there will be no immunity.

15.4 Where a partnership firm has made a declaration, the partners need not make an additional declaration.

15.5 The declarant has to pay tax and then make a declaration. He may however choose to pay tax within 3 months of filing the declaration, by paying interest @ 2% per month. If however the tax is not paid, then the declaration filed by him shall be null and void.

15.6 The declarant should take care to see that the voluntarily disclosed income is credited to his account. Further he should intimate the credit to the assessing officer. If these conditions are not satisfied, then the assessing officer may again include the income in the person's assessment.

15.7 The commissioner will grant a certificate showing the amount of disclosed income and tax paid on the same, if the person makes an application for the same.

Immunity is available only under Income Tax, FERA Wealth Tax and Company Law

15.8 The scheme is not open to those who have received a notice to file an income tax return and the person has not yet filed the income tax return. This scheme does not give any immunity against any other law - and specifically against -

(i) Prevention of corruption act,
(ii) Indian Penal Code,
(iii) COFEPOSA,
(iv) Narcotics ... Act,
(v) TADA etc.

15.9 It may also be noted that the amounts declared under the scheme cannot be set off against any assessment year for any assessment or appeal proceedings - whether already started or yet to be started. Following example will explain the scheme :

Mr. A had earned and concealed profits of Rs.10 lakhs in the year 1989. He may now make a declaration. On declaration, he can deposit the black money in bank and use the assets for his business/investments etc.

However, if by any other independent evidence, if the department came to know about the concealment of income, it can start independent proceedings. The declarant will not be able to claim a set off of his declaration against such concealment.

Minors

15.10 This immunity is available only to the declarant and no one else. Under the current tax regime, it may not be advisable to make declarations in the name of minor children.

It has happened in the past that when an immunity scheme was announced, people had rushed in and brought in the money even before notification of the scheme. We clearly advise against any such haste.

15.11 We suggest that people should wait till the scheme is notified. Several clarifications will be required from the department. Let these clarifications be received and understood. Then only a person may make a declaration under the scheme.

VDS always insults an honest man

Other issues

15.12 The Finance Minister has said he has tried to balance the economical & ethical issues & therefore come out with this scheme. However till today, none of the schemes brought in the past have helped to clean up the system. Even this scheme may turn out to be a futile exercise. The government just collects a few hundred crores, insults the honest tax payees and keeps insulting every now and then.

15.13 The rates at which tax has to be paid on undisclosed income is only 30% for individuals. This is lower than the rates prevailing in the years in which income was concealed. Further there is no interest, or penalty.

By bringing such a kind of scheme, an honest person who has been regularly paying his taxes, is insulted. Not only this, during assessment he has been treated as dishonest without proving the same.

This scheme will not help in any manner to bring in the undisclosed income in the economy.