The Indian Budget 1996-97 The Indian Economy Overview

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MEMORANDUM
EXPLAINING THE PROVISIONS
IN
THE FINANCIAL BILL, 1996
(Clauses referred to are clauses in the Bill)

FINANCE (No. 2) BILL, 1996

PROVISIONS RELATING TO DIRECT TAXES

    The provisions in the Finance (No.2) Bill, 1996, in the sphere of direct taxes relate to the following matters:-

  1. Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1996-97; the rates at which tax will be deductible at source during the financial year 1996-97 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, and other categories of income liable to deduction of tax at source under the Income-tax Act; rates for computation of "advance tax", deduction of income-tax from "Salaries" and charging of income-tax on current incomes in certain cases for the financial year 1996-97.

  2. Proposal to reduce the levy of surcharge in the case of a domestic company having total income exceeding seventy-five thousand rupees from 15 per cent. to 7.5 per cent. of the income-tax.

  3. Amendment of the Income-tax Act, 1961, with a view to promoting welfare, providing incentives for infrastructure development, industrialisation and regional co-operation, rationalistion of certain provisions and checking tax evasion and avoidance.

  4. Amendment of the Wealth-tax Act, 1957, for rationalisation of certain provisions.

  5. Subject to certain exceptions, which have been indicated while dealing with the relevant provisions, the Bill follows the principle that changes in the provisions of the tax laws, should ordinarily be made operative prospectively in relation to current incomes and not in relation to incomes of past years. The substance of the main provisions in the Bill relating to direct taxes is explained in the following paragraphs:-

INCOME-TAX
    Rates of Income-tax in respect of incomes liable to tax for the assessment year 1996-97.
  1. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate), liable to tax for the assessment year 1996-97, the rates of income-tax (including surcharge thereon in the case of domestic companies) have been specified in Part I of the First Schedule to the Bill and are the same as those laid down in Part III of the First Schedule to the Finance Act, 1995, for the purposes of computation of "advance tax", deduction of tax at source from "Salaries" and charging of tax payable in certain cases during the financial year 1995-96.

  2. Rates for deduction of income-tax at source during the financial year 1996-97 from income other than "Salaries"

    The rates for deduction of income-tax at source during the financial year 1996-97 from incomes other than "Salaries", have been specified in Part II of the First Schedule to the Bill. These rates apply to income by way of interest on securites, interest other than "interest on securities", dividends, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are the same as those specified in Part II of the First Schedule to the Finance Act, 1995, for the purposes of deduction of income-tax at source during the financial year 1995-96. The amount of income-tax so deducted at source shall be increased in the case of a domestic company, having a total income exceeding seventy-five thousand rupees, by a surcharge calculated at the rate of 7.5 per cent. of such income-tax

  3. Rates for deduction of income-tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1996-97

The rates for deduction of income-tax at source from "Salaries" during the financial year 1996-97 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 Bill. These rates are also applicable for charging income-tax during the financial year 1996-97 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 or where an order has to be passed in a search and seizure case where search was initiated before the 1st day of July, 1995, for calculating the amount of tax on the estimated undisclosed income, etc. The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs:-
  1. Individuals, Hindu undivided families, etc. Paragraph A of Part III of the First Schedule specifies the rate of income tax in the case od Individuals, Hindu undivided families, associoation of persons etc.

    There is no change in the exemption limit which remains at Rs. 40,000. The income slabs and the tax-rates are also the same except that the rate applicable in the first income slab i.e. between Rs. 40,001 and Rs. 60,000 has been reduced from 20 per cent. to 15 per cent.

    The Table below gives the income slabs and the rates of income-tax (a) as specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to the Bill, i.e., the existing slabs and rates; and (b) as specified in Paragraph A of Part III of the First Schedule to the Bill i.e. the proposed slabs and rates:- Income slab Rates specified in Income slab Rates specified in Sub-Paragraph I of Paragraph A of Paragraph A of Part I of Part III of the First the First Schedule to the Schedule to the Bill 
      
        Upto Rs. 40,000           Nil    Upto Rs. 40,000        Nill
	Rs. 40,001 - Rs. 60,000    20% 	  Rs. 40,001 - 60,00     15%
 	Rs. 60,001 - Rs. 1,20,000  30% 	  Rs. 60,001 - 1,20,000  30%
	Above        Rs. 1,20,000  40% 	  Above Rs. 1,20,000     40%
    The impact of reduction of tax rate in the first income slab in the case of individuals, HUFs, etc. at different income levels would be as under:- 
        
Total Income  Existing Tax Liability  New Tax Liability Proposed Relief
   (Rs.)	 (Rs.) 	                 (Rs.)  	Amount (Rs.)Percentage
41,000 	        200 	                 150 	                50 	25 
42,000          400 	                 300 	               100 	25 
43,000    	600 	                 450                   150 	25
44,000     	800 	                 600                   200 	25
45,000        1,000                      750           	       250 	25 
50,000        2,000                    1,500                   500 	25
55,000        3,000                    2,250                   750 	25
60,000        4,000 	               3,000                 1,000 	25
75,000        8,500                    7,500                 1,000 	11.8
1,00,000     16,000                   15,000 	             1,000 	6.3
1,20,000     22,000                   21,000                 1,000 	4.5
1,50,000     34,000 	              33,000                 1,000 	2.9
2,00,000     54,000 	              53,000 	             1,000 	1.9


    There will now be no distinction in the tax rates applicable to specified Hindu undivided families (i.e. those with one or more members having independent total income exceeding the exemption limit) and unspecified Hindu undivided families. The same rates i.e. those specified in Paragraph A of Part III of the First Schedule to the Bill, will apply to all Hindu undivided families.
  2. Co-operative societies In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Bill. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.
  3. Firms In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Bill. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.
  4. Local authorities In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Bill. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.
  5. Companies In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Bill. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.
  6. Surcharge In the case of domestic companies, surcharge has been reduced from the existing rate of 15 per cent. to 7.5 per cent. of the amount of income-tax where the total income exceeds seventy-five thousand rupees. This will have the effect of reducing the tax burden of such companies by 3 per cent. [Clause 2]
WELFARE MEASURES
Income-tax exemption to pension funds set up by the Life Insurance Corporation of India, deduction for contributions and exemption for commuted value
The Life Insurance Corporation of India (LIC) is starting a new personal-cum-family pension scheme. The scheme will offer attractive terms to its contributors and will have a provision for payment of a life time widow's pension in the event of the death of the contributor during the contribution period.

With a view to making the aforesaid pension scheme popular, it is proposed to provide for a deduction of up to ten thousand rupees to an individual in respect of any contribution made towards the scheme. The amount of pension received in the hands of the contributor or the nominees shall be taxable. However, it is proposed to exempt the commuted amount receivable on maturity of the scheme.

Further, in order to enable the LIC to offer attractive terms to the contributors, it is proposed to exempt from income-tax income of such funds which the LIC may set up on or after the 1st October, 1996 under the scheme to which contributions are made by the contributors.

It is also proposed that the pension scheme will be approved by the 'Controller of Insurance'. 'Controller of Insurance' shall mean an officer appointed by the Central Government to perform the duties of the Controller of Insurance under the Insurance Act, 1938 (4 of 1938).

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clauses 4 & 22]
Income-tax exemption to associations of registered trade unions.
Under the existing provisions of clause (24) of section 10, any income of a registered union within the meaning of the Trade Unions Act, 1926 (16 of 1926), under the heads "Income from house property" and "Income from other sources" is exempt from income-tax if such trade union is formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen.The Bill seeks to provide similar exemption to an association of trade unions of the nature specified under the existing provisions of clause (24) of section 10.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 4]
100% deduction to donations made to a fund set up by a State Government for the medical relief of the poor, National or State Blood Transfusion Councils and Defence Services funds for welfare of their personnel
Under section 80G of the Income Tax Act, a deduction from total income is allowed in respect of donations made by an assessee. In most cases the deduction is 50% of the donations. However, in respect of donations to certain funds and for universities, 100% deduction is allowed.

The Bill proposes to amend section 80G to provide for deduction of hundred percent. of donations made by tax payers to the funds established by the State Governments to provide medical care to the poor.

The Bill also proposes to amend section 80G in order to provide for 100% deduction in the case of tax payers who make a donation to the National Council of Blood Transfusion headed by the Additional Secretary (AIDS Control Project) in the Govt. of India, or the State Councils headed by the Secretary, Health of the concerned State Government/Union Territory, to be set up in consultation with the National Council.

The Bill also proposes to amend section 80G in order to provide for 100% deduction to donations made to the following funds of the Armed Forces:
  1. Army Central Welfare Fund,
  2. Indian Naval Benevolent Fund, and
  3. Air Force Central Welfare Fund.
The proposed amendments will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1996-97 and subsequent years. [Clause 25]
Deduction in respect of medical treatment of chronic and protracted diseases and terminal ailments such as AIDS, Thalassemia, etc.
There are some chronic and protracted diseases and terminal ailments, which are either not permanently curable or take a long time to cure.

In some of these ailments, the individuals and their guardians have to spend a substantial amount towards their medical treatment, nursing, training and rehabilitation. The resources of the Government are not adequate to provide for proper medical treatment to persons suffering from chronic ailments, at a subsidised cost.

The Bill proposes to provide for a separate deduction of fifteen thousand rupees in the computation of total income of an individual suffering from chronic and protracted diseases and terminal ailments or to any individual or HUF, on whom such individual is dependant. The diseases in respect of which the deduction would be available shall be notified in the Income-tax Rules. The tax payer shall have to submit a certificate in this regard from a prescribed authority every year along with the return of income.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 24]
Rebate of Income-tax in case of senior citizens.
Section 88 B of the Income-tax Act provides for a special tax relief in the form of an additional rebate of forty per cent from the net tax payable by persons who have attained the age of 65 years and have a gross total income not exceeding one hundred thousand rupees. The maximum tax rebate available is Rs.6,400 at present.

The rebate to the senior citizens has been provided to help them in meeting the rising cost of old age care and medical expenses.

The Bill proposes to extend the existing rebate to individuals of sixty- five years and above whose gross total income does not exceed one hundred and twenty thousand rupees.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years.

[Clause 34]
Raising of standard deduction in the case of low-paid salaried employees
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.

The Bill proposes to enhance the upper limit of standard deduction to eighteen thousand rupees in the case of employees having income upto sixty thousand rupees. In other cases, the existing limit of deduction shall continue.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 7]
Enhancement of deduction in respect of medical insurance premium
Section 80D of the Income-tax Act provides for a deduction upto Rs.6,000/- from the total income of a tax payer, being an individual or a HUF, in respect of any sum paid by cheque, to effect or keep in force an insurance policy on the health of the individual and his family members (including dependant parents).

The available limit of Rs.6,000 under section 80D does not sufficiently cover the cost of medical insurance of an average family including dependant parents.

The Bill, therefore, proposes to raise the monetary limit of deduction under section 80D from its present level of Rs. 6,000 to Rs.10,000. The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years.

[Clause 23]
Raising of monetary limits in respect of rents paid
Under section 80GG of the Income Tax Act, a taxpayer, not in receipt of house rent allowance, is entitled to a deduction of Rs. 1000/- per month or 25% of total income whichever is less, if the house rent paid by him is in excess of 10% of his total income.

In view of the high rents prevailing, the Bill proposes to raise the monetary limit of deduction to Rs. 2000/- without modifying the other ceiling of deduction in terms of percentage of total income, which is 25%.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years.

[Clause 26]
Increase in the limit of deduction allowable for interest payable on borrowed capital in respect of self-occupied house property
Income under the head "income from house property" is calculated after allowing certain specified deductions from the annual value of house property. One of the deductions is the amount of interest payable on borrowed capital used for acquisition, construction, repair, renewal or reconstruction of the house property. In respect of self-occupied house property, the annual value is taken at nil. As no notional income is taken into account in respect of such property, none of the deductions, except on account of interest, is allowed. Interest on borrowed capital in respect of such property is allowed only upto Rs. 10,000.

It has been felt that the deduction of Rs. 10,000 is not adequate to meet the cost of finance. Therefore, in order to provide relief to many middle class tax payers, the Bill proposes to enhance the limit of deduction on account of interest payable on borrowed capital in respect of self- occupied house property from Rs. 10,000 to Rs. 15,000.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years.

[Clause 9]
Extending the deduction on account of interest payable on borrowed capital in respect of house property which is vacant due to employment etc. elsewhere
The annual value of self-occupied house property is taken at nil. Under the provisions of section 23(3), if the property cannot be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such property is also taken at nil provided that such house is not actually let and no other benefit therefrom is derived by the owner.

Deduction on account of interest payable on borrowed capital is allowed upto Rs. 10,000 in case of self-occupied property. No such deduction is, however, available to assessees who are unable to occupy the property by reason of their employment, etc. at a place other than where the property is situated.

The denial of this deduction is a case of genuine hardship. The Bill, therefore, proposes to extend the deduction on account of interest payable on borrowed capital to such class of persons also.

The proposed amendment will take effect retrospectively from 1st April, 1995 and will, accordingly, apply in relation to assessment year 1995-96 and subsequent years.

[Clause 9]
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