The Indian Budget 1996-97 The Indian Economy Overview

INDIAN FISCAL BUDGET ONLINE


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MEASURES TO CHECK TAX EVASION AND AVOIDANCE
Modification of provisions relating to profits chargeable to tax
Under the existing provisions of the Income-tax Act, where an allowance or a deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained or the value of benefit accruing to him shall be deemed to be the profits, and accordingly chargeable to income-tax as income of that previous year, whether the business or profession in respect of which the allowance or deduction was made is in existence in that year or not. There is a similar provision in the case of successor in business in regard to any amount in respect of which loss or expenditure, etc. was incurred by the predecessor.

It has been noticed that courts are holding that taxpayers would not be liable to tax on the amount of trading liability written-off unilaterally credited to the profit and loss account. The recovery of debt in such cases may have become barred by limitation and also where there is no likelihood of the liability being enforced. The courts' decisions revolve on the view that a debtor, by his unilateral action, cannot bring about remission or cessation of his liability. It is proposed to tax the remission or cessation of liability in the hands of the taxpayer and for this purpose the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof", shall be defined to include the remission or cessation of any liability by any unilateral act.

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 15]

PROVISIONS RELATING TO TAX DEDUCTED/COLLECTED AT SOURCE
Enlarging the scope of credit for tax deducted at source
Under the existing provisions of the Income-tax Act, credit for tax deducted at source is given to each co-owner in cases of jointly owned security or share in a company, in the same proportion in which the interest on such security or dividend on such share is assessable as income of each of such owners.

It is proposed to enlarge the scope of the aforesaid provision so as to cover other situations also in which income which is subjected to deduction of tax at source is assessable in the hands of two or more persons. For this purpose, the scope of the existing provision shall be extended to allow credit for tax deducted at source in cases of income derived from any jointly owned property or jointly owned deposits or jointly owned units apart from jointly owned security or share in a company.

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 48]

Raising the limit for tax deduction at source in the case of housing finance companies under section 194A of the Income-tax Act
Under the existing provisions, no deduction of tax is required to be made by a person responsible for paying interest where the aggregate amount of interest likely to be credited or paid during a financial year to a payee does not exceed Rs. 2,500.

In the case of banking companies and cooperative societies, the provisions have been further relaxed and they are required to deduct tax only if the aggregate amount of interest on time deposits payable by a branch of such company or society to a payee in a year exceeds Rs.10,000, as against the aforesaid general limit of Rs. 2500. Similarly, the Unit Trust of India and the specified Mutual Funds are also required to deduct tax only if the aggregate amount of income payable by a branch of the Trust or the Fund under a particular scheme to a payee during a financial year exceeds Rs. 10,000.

Housing finance companies, which compete with banks and mutual funds to mobilise savings from the house-hold sector, do not have the advantage of the higher limit for tax deduction at source available to the latter. In their case, the limit continues to remain at Rs.2,500.

It is, therefore, proposed to provide that the limit for tax deduction at source in the case of housing finance companies which are approved for the purpose of clause (viii) of sub-section (1) of section 36 shall also be Rs. 10,000.

The proposed amendment will take effect from 1st October, 1996. [Clause 46]

Reduction in the rate of collection of tax at source
Under the existing provisions of the Income-tax Act, sellers of certain goods are required to collect tax from a buyer at the specified rates.

The specified percentage of collection of tax at source in the case of sale of alcoholic liquor and tendu leaves, at the rate of 15% is high. Collection of tax at a rate higher than the approximate tax liability affects the cash flow position of the traders and the government also has to refund the extra tax along with interest.

It is, therefore, proposed to reduce the rate of collection at source from fifteen per cent. to ten per cent. in the cases of sale of goods comprising alcoholic liquor for human consumption (other than Indian-made foreign liquor) and tendu leaves.

The proposed amendment will take effect from 1st October, 1996. [Clause 50]

Omission of sections 206A and 206B of the Income-tax Act
Sections 206A and 206B of the Income-tax Act deal with furnishing of prescribed returns in respect of interest and dividend paid without deduction of tax at source in accordance with the provisions of the proviso to sub- section (1) of section 194A and the first proviso to section 194 respectively. However, sections 194A and 194 have been amended in the past and the said provisos have been omitted. Conseqently, sections 206A and 206B have been rendered redundant. Section 197A now contains the procedure for obtaining payment of, inter alia, dividend and interest without deduction of tax at source.

It is, therefore, proposed to omit sections 206A and 206B from the Income-tax Act . It is also proposed to omit the reference to sections 206A and 206B from section 272A which prescribes penalty for failure to file returns, statements, etc.

The proposed amendments will take effect from 1st October, 1996. [Clause 49]

WEALTH-TAX

Clarificatory amendment regarding assessment in cases of diversion of property, or of income from property, held under trust for public charitable or religious purposes
Under the provisions of clause (i) of section 5 of the Wealth-tax Act, wealth-tax shall not be payable by an assessee in respect of any property held by him under trust or other legal obligation for any public purpose of a charitable or religious nature in India. Section 21A provides three exceptions to this general rule of non-payment of wealth-tax, in the following circumstances, namely:-

  1. where any part of such property or any income of such trust is used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3) of section 13 of the Income-tax Act, or
  2. where any part of the income of such trust enures, directly or indirectly, for the benefit of any person referred to in sub-section (3) of section 13 of the Income-tax Act, or
  3. where any funds of the trust or investment or deposit, or any shares in a company are held by the trust in contravention of provision of clause (d) of sub-section (1) of section 13 of the Income-tax Act.
Clause (i) of section 5 is a general section, dealing with non-payment of wealth-tax in respect of the assets held under a trust or other legal obligation, while section 21A carves out three exceptions to this general rule. Therefore, under the rules of construction of statutes, provisions contained in section 21A will override the provisions contained in clause (i) of section 5. Section 21A, as it stood prior to its amendment by the Finance Act, 1992, applicable with effect from 1.4.1993, contained a non-obstante clause, embodying the aforesaid principle of the construction. This clause was omitted by the amendment. It is, therefore, proposed to expressly state the aforesaid position of law by restoring the non-obstante clause.

The proposed amendment will take effect retrospectively from 1st April, 1993 and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Clause 56]

Amendment of the term "assets"
The term "assets", on which tax is to be levied, is defined in clause (ea) of section 2. This definition includes any guest house and any residential house (including a farm house situated within 25 kms of the local limits of any municipality) for levy of tax, except the exclusions made in items (1) and (2) of sub-clause (i) of this clause. If residential houses have been taken as assets, there seems to be no reason why commercial properties, other than those used by the assessees wholly and exclusively in his business or profession, should also be not taken as assets. It is, therefore, proposed to tax commercial buildings, which are not used by the assessee in his business or profession, other than the business of letting out of properties.

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 54]

Amendment of provisions regarding inclusion of certain assets in the net wealth
Under the Wealth-tax Act, specified assets are includible in the wealth of a legal owner. An exception to this general rule is in cases where a building or a part thereof is allotted or leased to a member of a Co-operative Housing Society under a house building scheme of the society. The member is deemed to be the owner of such building or part thereof. The corresponding provisions, dealing with similar situations, in the Income-tax Act, are found in clause (iii), clause (iiia) and clause (iiib) of section 27 of that Act. These clauses deem the beneficial owner to be the owner for the purpose of taxation in the following situations:-

  1. a member of a co-operative society or a company or any association of persons, to whom a building or part thereof is allotted or leased under a house building scheme of the society or the company or the association, as the case may be,
  2. a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882,
  3. a person who acquires any rights, excluding any rights by way of a lease from month to month or for a period not exceeding one year, in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Income-tax Act.
In order to bring harmony in the provisions under the Income-tax Act and Wealth-tax Act, any building or part thereof should be taxed in the hands of the beneficial owner of such building, as understood under clause (iii) or clause (iiia) or clause (iiib) of section 27 of the Income-tax Act. This amendment, therefore, seeks to amend section 4 so as to tax the aforesaid assets in the hands of beneficial owners, in the same manner in which they are taxed under the Income-tax Act. The amount payable to the co-operative society or company by the assessee in relation to such property shall be allowed as a debt.

This provision shall come into force with effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 55]

MISCELLANEOUS The Central Sales Tax Act, 1956
Article 286 of the Constitution of India prohibits the State Governments from levying any tax on purchase or sale taking place in the course of import into or export outside the territory of India. The Central Sales Tax Act was enacted in 1956 in order to define among other things as to when a sale or purchase of goods is said to take place in the course of import or export. The provisions in this regard are contained in section 5 of the Central Sales Tax Act which exempts exports as well as last sale or purchase connected with such export. However, rice export is not getting the desired benefit of exemption from tax. While export of rice is exempted, paddy out of which such rice is milled is taxed on the ground that rice and paddy are classified as different commodities under the Central Sales Tax Act and it is rice which is eventually exported not paddy. This amounts to indirectly taxing rice export eroding the competitiveness of Indian rice in the international market.

The Bill, therefore, in the interest of encouraging export of rice, seeks to amend section 15 of the CST Act 1956 by inserting a new provision to treat paddy and rice as single commodity provided rice procured out of such paddy is exported out of India. [Clause 85]

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