All-round reduction in tax rates

QUESTION: What are the changes that are made in respect of rates for income-tax in the Finance Bill, 2001?

ANSWER: The surcharge at 10 per cent for domestic companies had been increased by one per cent on January 4 and further by 2 per cent on February 3, so that the surcharge for assessment year 2001-02 for companies was 13 per cent. For assessment year 2002- 03, it will be substituted by 2 per cent which would go to the Calamity Fund. But the major reduction is in additional tax on distributed dividend from 20 to 10 per cent. Foreign companies were not and will not be liable for surcharge.

Firms that are liable to tax at the same rate as companies for assessment year 2001-02 at 35 per cent and surcharge at 12 per cent for AY 2001-02 will now have a reduced surcharge rate for assessment year 2002-03 at 2 per cent as for others.

Individuals and Hindu Undivided Families liable for surcharge at 10 per cent and 15 per cent respectively for incomes - Rs. 60,000-Rs.1.50 lakhs and above Rs. 1.50 lakhs will now pay a uniform rate reduced to 2 per cent.

Co-operative societies hitherto treated on a par with companies will be a separate class for tax rates at the 10 per cent slab, where the income does not exceed Rs. 10,000, 20 per cent for income between Rs. 10,000 and Rs. 20,000 and 30 per cent for income exceeding Rs. 20,000 with uniform liability for surcharge at 2 per cent.

Another significant difference is the rate of tax for winnings from lotteries, crossword puzzles, card games and other games of any sort reduced from 40 to 30 per cent consistent with the reduction in tax rates from time to time, since 40 per cent was fixed when the general rate was much higher.

But the reduction is coupled with the insertion of Explanation to clause (24) of Sec. 2 defining lottery as any winnings by draw of lots or by chance or in any other manner whatsoever under any scheme or arrangement by whatever name called, while card game and other game of any sort will include any game show and entertainment programme on telephone or electronic mode in which people compete to win prizes or any other similar game. The effect of the Explanation is to clear the persisting doubt as to the liability for tax in respect of games of skill, which could not be lightly treated on par with lotteries and card games.

All these changes will apply only from AY 2002-03, that is, relevant accounting year being the financial year starting from April 1, 2001 to March 31, 2002.

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TDS gets more tedious

Q: What are the changes as regards tax deduction at source?

A: Tax rates for deduction of tax at source are the same as those for direct assessment in the case of salaries and winnings from lotteries (at 30 per cent). For all other items, it is the same rate as last year subject only to the change in surcharge to 2 per cent. Surcharge at 2 per cent will be applicable for all payments other than those to foreign companies.

Greater responsibility is placed on the employer to ensure correct tax deduction at source in respect of perquisites by requiring a "statement giving correct and complete particulars of perquisites or profits in lieu of salary provided to him and the value thereof in such form and manner as may be prescribed." Attempt to ensure that fringe benefits do not escape tax is buttressed by amendment to Sec. 17 defining perquisite to include "the value of any other fringe benefit or amenity as may be prescribed" enabling the Government to prescribe the value of such benefit.

There is an indication in the Finance Minister's speech that the value that will be prescribed will be the cost to the employer. It has been made clear by the Finance Minister that the perquisite implied in housing accommodation and use of vehicles will not be subject to this method of evaluation, so that concessional value of these two perquisites should continue.

The limit for TDS from interest that was increased from Rs. 2,500 to Rs. 5,000 by the Finance Act, 2000 only from June 1, 2000 now reverts back to Rs. 2,500 from June 1, 2001. The logic for this abrupt reversal is not understandable. Even more glaring is the omission of the proviso applicable to banking companies hitherto eligible for the enhanced limit of Rs. 10,000, so that banks also will be required to deduct tax at source on all payment of interest on time deposits exceeding Rs. 2,500. Are the banks geared for this enormous additional burden, especially since the board has clarified that TDS is on the aggregate payment of interest on all time deposits in the same branch and not merely with reference to each deposit?

Even as it is, tax deduction on the part of the banks has been most erratic with the departmental supervision on correct tax deduction leaving much to be desired. With VRS for the bank, this is a totally impracticable and academic approach, likely to send a wrong message to taxpayers that this measure is intended to lock deducted tax on which refunds are not claimed. No doubt, filing of Form 15H should avoid tax deduction. But here again experience has been that the institutions not excepting the banks are unable to send timely advance notice to depositors and even where the depositors do send such forms of their own accord, they are not always honoured.

Major extension in respect of TDS is the restoration of Sec. 194H requiring deduction of tax at source at 10 per cent on brokerage and commission. Sec. 194H was introduced by the Finance (No. 2) Act, l992 with effect from October 1, 1991, but it was short- lived having been suspended with effect from June 1, 1992 itself and the provision itself was omitted from the statute by the Finance Act, 1999 with effect from April 1, 2000 only to be restored now with effect from June 1, 2001 indicating thus the swift changes in our tax policies. This provision will not be applicable for individuals and HUFs, so that the proprietary businesses will not be liable. The responsibility for tax deduction at source in respect of this and many other payments will not be confined merely to actual payment but even for credit not only to the account of the payee but even to any account, whether suspense account or in any other name.

Sec. 201 enabling charge of interest and penalty for omission of tax deduction is amended to cover not only failure to deduct tax but even for short deduction by adding the words "the whole or any part of the tax" after the words "does not deduct" in Sec. 201(1) and (1A). Obviously, this amendment was considered necessary to clarify that interest which is mandatory and penalty where there is no reasonable cause will be applicable not only for omission, but even for short-deduction.

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More concessions for scientific research

Q: What are the concessions for scientific research?

A: The scope of deduction for scientific research under section 35 allowing capital expenditure gets enlarged by including persons to be notified as the specified persons, payment to whom, would qualify for deduction.

Business of bio-technology is added to the list of industries which would qualify for weighted deduction for scientific research under section 35(2AB).

Scientific research in drugs and pharmaceutical industries will include expenditure incurred on clinical drug trial on an application of patent and approval from regulatory authority.

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Salary sector: Fringe benefits targeted

Q: What has the budget for salary sector?

A: The salary sector will share the benefit of substitution of surcharge for the existing rates at 10/15 per cent by 2 per cent.

Those drawing a salary not exceeding Rs. 1 lakh (before deducting standard deduction) and the income chargeable under the head "salaries" (after deduction of standard deduction) falls less than 90 per cent of the gross total income will be eligible for tax rebate under Sec. 88 on specified investments at 30 per cent as against 20 per cent now available. Such instances of complex reliefs are much in character with our law.

There is relaxation in that the exemption for perquisites in kind for specified employees under Sec. 17(2)(iii)(c) now available for those drawing salary up to Rs. 24,000 is proposed to cover those who draw an annual salary not exceeding Rs. 50,000. This is a long overdue revision in view of the fall in value of money, as the limit was raised from Rs. 18,000 to Rs. 24,000 from April 1, 1986. The limit of income for this purpose will not include any allowance, benefit or other perquisite. It should largely benefit the workforce among the employees and those in the lesser income bracket. This was a concession that was worthy of being mentioned in the Budget speech itself.

The concessional rate of 10 per cent available under Sec. 115ACA for dividends and long term capital gains from global depository receipts (GDRs) of an Indian company in information technology and software and information technology services will now get extended to employees of those companies for entertainment service, pharmaceutical, bio-technology and other industrial services as may be notified by the Central Government.

The Government's intention to ensure that all fringe benefits or amenities are brought to tax is evident from the power taken under the newly inserted clause (viii) under Sec. 17(2) to value any fringe benefit or amenity. As only power has been taken, the Finance Act does not indicate how it is to be done. It is understood from the budget speech that the cost to the employer will be taken as the value of the benefit. But in view of the assurance in the speech, the concessional valuation of housing and use of vehicles will remain untouched.

A loophole that is sought to be covered is to bring to tax an amount to procure the service paid well before salary agreement as pre-employment, relocation or option amount as well as severance pay after leaving his service. In either case, the payments were claimed to be unconnected with service. Though the present law is adequate to cover such a situation, an amendment to bring them to tax as salary is introduced in sub-clause (iii) in Sec. 17(3).

A hurdle is now placed on the concession given for employees under the stock option scheme under a proviso proposed under Sec. 17(2)(iii) stipulating the condition that such scheme should comply with the guidelines issued by the Securities and Exchange Board of India (SEBI). As not all companies and not all schemes may come within the direct purview of SEBI, it stands to reason that the guidelines now available for those companies that are required to comply with the same, will be applied for any stock option scheme. This restriction will apply from assessment year 2002-03, that is, those who avail themselves of such scheme on or after April 1, 2001.

Sec. 192 requiring tax deduction at source will now have to comply with a new sub-Sec. (2C) requiring the employer to furnish to the employee a statement giving correct and complete particulars of perquisites or profits in lieu of salary along with the value thereof in the prescribed manner placing great responsibility on the employer to ensure correct tax collection as well as information regarding all the perquisites made available by the employer to the employee during the year.

These are the steps to tackle evasion of tax by the salary sector by under-valuation or omission of fringe benefits, believed to be widely practised.

S. Rajaratnam

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