The Hindu Business Line : Bouquets and brickbats over Budget proposals

Budget 2005 shows some rigidity in reforms relating to electronic administration of tax deduction at source. The Finance (No. 2) Act, 2004 gave a thrust on TDS provisions, particularly by denying deduction for failing to complying with the Chapter XVII-B provisions.

A comparative study of the Finance Bill, 2005 shows that the Finance Minister has preferred to defer the carry forward of TDS reforms by one year.

Section 199, which provided for credit for TDS without production of certificate, now would be applicable only from assessment year (AY) 2006-07. The Finance (No. 2) Act, 2004 provided this facility from AY 2005-06 and now this has been postponed to AY 2006-07. Hence, assessees have to have TDS certificate from the deductors for claming credit under Section 199 in respect of any deductions made up to March 31, 2006.

Section 203(3), which was amended earlier to dispense with the system of paper TDS certificate w.e.f. April 1, 2005, has now been amended to provide that only deductions made on or after April 1, 2006, will be governed by such paperless TDS system.

Section 203AA was inserted to make the income-tax or outsourcing authority to give a statement of tax deductions to every person from whose income the tax was deducted. Now, as the certificate would be issued up to March 31, 2006, the I-T or such other authority also will not have any work relating to intimation of TDS credit to the respective assessees.

Section 206 A, which has been brought back by the Finance Bill, 2005, was omitted earlier by the Finance (No. 2) Act, 1996 w.e.f. October 1, 1996. However, now the new Section 206A provides for quarterly return to be filed by banking companies, co-operative societies or public company meant for housing finance, and so on. As a measure of caution it is provided that any other person paying income to a resident will be asked to file eTDS return for tracking the incomes escaping assessment.

In respect of tax collection at source, too, a certificate must be issued where the tax is collected up to March 31, 2006. Only where the collection is on or after April 1, 2006, the person collecting taxes need not issue certificate. The cut-off date for issue of TCS certificate has been extended from March 31, 2005 to March 31, 2006.

The changes relating to tax deduction/collection provisions show that the Finance Minister has postponed computerisation of deduction/collection work by one year and to that extent has set the clock back.

V. K. Subramani

CA, Erode

Fringe benefit tax

The idea of a new tax on fringe benefits certainly owes its conception to the `innovative' and `creative' minds of the Indian lawmakers.

It may not be out of place to suggest, with the tongue in the `right' place, that if such a tax is considered necessary for the betterment of the country, it would be best to start at the top — the Government. The suggestion, therefore, is that the tax be implemented at the level of Government to start with and cascaded down in the later years based on its productivity.

To aid the lawmaker, the following scheme of tax is set out.

For each joint secretary and above — Rs 2 lakh/annum per person

Any other item that may be prescribed — such percentage as may be notified from time to time

Notes: 1) The Government would not include municipalities and subordinate agencies;

2) The amount of tax base would be reduced by 25 per cent, where the expenses concerned are incurred by any Department dealing with agriculture or rural development and by 50 per cent where it is incurred by the health or education departments.

Since the public at large is accustomed to cringe before the governmental authorities, the tax may be named as `cringe benefit tax'.

V. Ranganathan,

Partner, Ernst & Young

Royalty, MAT

At present, income by way of royalty and fees for technical services in the case of foreign companies are taxed at 20 per cent. It has now been proposed these will be taxed at 10 per cent if such income is received in pursuance of an agreement made on or after June 1, 2005. Thus, for the first time, the withholding tax rates on royalty/technical fees under the domestic law is lower than those under most of the tax treaties (where the tax rate is 15 per cent) the country has entered into.

The system of Minimum Alternative Tax (MAT), without a suitable credit mechanism acts as a deterrent for real capital formation and effectively leads to double-taxation. A survey of certain countries (namely, the US, Argentina, Austria, France and the Philippines) shows that the system of credit goes hand-in-hand with any minimum-tax regime. In view of this, the Finance Minster has proposed to reintroduce the MAT credit mechanism.

K. R. Girish

Partner, RSM

Service tax

The Finance Minister has brought relief to small service providers by announcing a basic limit of annual turnover of service provided, which is up to Rs 4 lakh for services rendered after April 1, 2005. The relief is partial as the benefit of this exemption does not apply to service tax payable by a person other than the service provider as in the case of goods transport agency (GTA) services.

This exclusion of exemption would benefit only a small section of service-providers, as most of them may be liable to pay service tax as service receiver, particularly GTA services. The Finance Minister should have made the exemption limit absolute and also addressed the confusion in the liability to pay service tax on GTA services by the service receiver.

While it was expected that the Finance Minister would set in motion the framing of a comprehensive legislation for excise duty and service tax, the levy has been extend under the present dispensation to nine more services, including cleaning, packaging, membership of clubs or associations and construction of residential complexes having more than twelve residential houses.

From a quick reading of the amendment to Section 67, by substituting for the words "rendered by him", the words "provided or to be provided by him" and amendment to Section 65(105), by including within the scope of taxable service "taxable service to be provided", it appears advance receipts are sought to be made liable to tax.

It has also been provided that that services provided from outside India to a recipient in India shall be treated as `taxable services provided in India'.

A welcome amendment is the extension of the benefit of advance ruling to any existing joint venture in India and empowering the Central Government to notify any class or category of persons to use the benefit of advance ruling.

Not announcing the expected increased levy on more services, including those of lawyers and doctors, seems inexplicable.

S. Sridharan,

CA, Madurai

STT

Last year, the Finance Minister levied a securities transaction tax (STT) for transactions on stock exchanges. The initial levy met with a flurry of protest from the stock exchanges. It is believed that a visit to the Mumbai bourses convinced the Finance Minister that the rates were too high and, hence, they were reduced. In addition, set-off facility was provided to set-off business profits against STT paid.

But a few months down the line, the Finance Minister has announced in the Budget speech that the rates have stabilised and are believed to be low. However, what is worrying is the sentence in the Finance Bill that says that "to raise resources and also to plug the leakage of tax revenue," the STT rates have been revisited.

The new rates are to come into force from June 1, 2005. Therefore, when one buys securities on or after the specified date, STT is to be paid at the new rates. In the case of day-traders, arbitrageurs and derivative traders, who are paying income-tax on business profits, for non-delivery-based and delivery-based transactions, credit for STT will be available against the income-tax payable on business income thereon. It is assumed that this proviso, provided when the Finance Bill 2004 was assented to, would continue.

It is clear that these rates are only indicative and are open to realignment at any time. Taking this argument a little bit further, one could say that the day is not far off when one could expect a "commodity transaction tax" for derivative transactions on the commodities exchange.

Mohan R. Lavi

CA, Hyderabad

Derivatives classification

With the securities market raking in newer and newer products, such as options and futures, there was always the conundrum of how these transactions would be classified for tax purposes. There is Section 43(5) which describes transactions not happening by actual delivery as speculative. With regulation for derivative transactions in place, treating these as speculative will no longer be correct. The Finance Bill, 2005 has, therefore, inserted a new provision treating derivates transactions arising out of recognised stock exchanges as non-speculative. But for these to be classified as non-speculative, some conditions have been imposed.

With these and demat being the basic criteria for derivatives transactions in the stock markets, the budgetary provision is welcome. But surprisingly, the carry-forward benefit of speculative transaction has been reduced from eight to four years, barring the year in which it arises. So, as it is said, to have the cake and eat it too is difficult, especially when it comes to taxes.

Tackling black money and tax avoidance have always been a struggle for every Finance Minister. This time around though, the Finance Minister seems to have done some out-of-the-box thinking. Tax avoidance or accumulation of black money primarily happens through cash transactions. So, Mr Chidambaram ushers in a new Tobin-like tax on each cash transaction by fixing certain parameters. Sections 40A(3) and 269SS/269T were introduced to combat vexatious results arising out of searches. With the new provision, the tax rate, though as low as 0.1 per cent, will be a deterrent on those inclined to deal more in cash through the banking system.

Srivatsan Ranganathan

CA, Chennai

Exemption limit

The basic exemption limit has been raised to Rs 1 lakh. For women, it has been raised to Rs 1.25 lakh and senior citizen, Rs 1.5 lakh. For women and senior citizen the raise is at the cost of rebate. For senior citizens, in particular, the existing rebate is more beneficial than the proposed benefit.

Kalpesh Sanghavi,

Mumbai

Customs

Barring a few items, the peak rate of Customs duty has been reduced from 20 per cent to 15 per cent on non-agricultural commodities. Duty has been reduced to 10 per cent on primary and semi-finished form of metals, ashes and residues of copper and zinc, articles of lead and calcined alumina. Duty is reduced to 5 per cent on lead, oleo pine resin, alpha pinene.

This duty, however, will not be charged on information technology software.

Capital goods: Custom duty on specified textile machinery, raw materials and parts for manufacture of such machinery is reduced from 20 per cent to 10 per cent and duty reduced on specified machinery for leather industry, machinery used in inland container depots/container freight stations.

Baggage: Rate of duty on baggage is reduced from 40 per cent to 35 per cent.

The Finance Bill proposes to amend the Customs Act, 1962 to enable the applicant to obtain an advance ruling in respect of Determination of Rules of Origin and matters relating thereto. Further, the provisions are also being extended to cover existing joint ventures as well as persons notified from time to time.

Review: The Bill proposes to amend the Customs Act, 1962, as per which, the power of review of an order passed by the Commissioner of Customs would now stand vested with a Committee of two Chief Commissioners as notified by the Board. Further, the power of Commissioner to review orders of Commissioner (Appeals) is being vested with a Committee of two Chief Commissioners of Customs.

K. Vaitheeswaran,

Advocate, Chennai

BCTT

The Finance Bill, 2005 has introduced Chapter VII containing the provisions relating banking cash transaction tax (BCTT). This chapter shall come into effect form June 1, 2005. It applies to the whole of India except Jammu and Kashmir. The basic idea behind this move is to check tax evasion through huge withdrawals from bank accounts.

It is proposed that every scheduled bank shall collect the BCTT from every person whose is withdrawing cash or purchasing DD/bankers cheque exceeding Rs 10,000 on a single. This chapter also envisages levy of BCTT in respect of encashment of term deposits whether on maturity or otherwise from the bank exceeding Rs 10,000 on a single day.

However, in case of withdrawal of cash exceeding Rs 10,000 by way of bearer cheque or such other instrument, the levy of BCTT is not applicable, as Clause 8 of Section 94 of the Finance Bill does not provide for the same.

Payment of BCTT: The schedule bank shall collect the BCTT from every person.

The amount so collected in a calendar month shall be paid within 15th of the succeeding month to the credit of Central Government Account.

Interest and penalties: If the bank fails to collect, or partly collects, BCTT, then the bank will be liable to pay the penalty of a sum equal to the amount equal to BCTT that it failed to collect.

If the bank fails to credit the BCTT to the Central Government Account, then the bank will be liable to pay an interest of 1 per cent per month or part of the month, and penalty of Rs 1,000 per day during which such failures continues. However, the penalty amount shall not exceed the amount of BCTT that it failed to pay.

T. N. Manoharan,

CA, Chennai

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