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Monday, July 6, 2009

Guide To Corporate Tax

Proposal:

Minimum Alternate Tax rate increased to 15% of book profits from existing 10%.

Impact:

This will increase the cash outflow burden for companies that are liable to tax under MAT.

Proposal:

The period allowed to carry forward the tax credit under MAT to be extended to 10 years from 7 years.

Impact:

This should provide some relief to companies that pay MAT for any assessment year 2006-07 onwards, by allowing them to carry forward and utilize the MAT credit up to 10 years.

Proposal:

Fringe Benefit Tax abolished.

Impact:

This should come as a big boost as FBT was perceived as unnecessary. However, such expenses should now be liable as perquisites in the hands of the employees and may result in a higher tax outflow for the employees.

Proposal:

Extension of sunset clause for units operating in free trade zones, export-oriented units and set up for reconstruction or revival of a power-generating unit to assessment year 2011-12.

Impact:

Extension of tax incentives to industries falling under this sector to aid them during the meltdown, thereby reducing the net tax outflow for such companies, and provide stimulus to service exports and the power sector.

Proposal:

100% deduction in respect of capital expenditure (excluding land, goodwill and financing expenditure) for the business of setting up and operating cold chain facility for specified products, warehousing facility for storage of agricultural produce, laying and operating a cross-country natural gas, crude or petroleum oil pipeline network for distribution.

Impact:

Incentive-linked deductions under Section 35AD should provide the much-needed boost to the creation of supply chain infrastructure, rural infrastructure and environment-friendly means of transportation for bulk goods.

Proposal:

Definition of firm under Section 2(23) has been amended to include limited liability partnership (LLP).

Impact:

In certain other countries, such as UK and Singapore, LLP is treated as a pass-through entity and partners are taxed (instead of LLP). However, in India, LLP will be taxed as a corporate entity and will not be a pass-through. It will be treated on a par with the partnership tax mechanism.

Proposal:

Weighted deduction of 150% for in-house research expenditure (except land and building) incurred under Section 35(2AB) for selected industries extended to almost all sectors of the economy.

Impact:

This means weighted deduction for scientific research to any business incurring eligible research and development expenditure. This should promote research and development in all sectors of industry.

Proposal:

Rules for Safe Harbour and Alternative Dispute Resolution mechanism to be provided by CBDT.

Impact:

Safe Harbour Rules shall provide for the circumstances in which the income-tax authorities shall accept the transfer price declared by the tax payer. The Alternative Dispute Resolution mechanism is aimed to reduce prolonged litigation. These measures are intended to showcase India as an investment-friendly country and provide clarity up front to tax payers, and reduce litigation.

Proposal:

Clarificatory amendment in relation to the reassessment proceedings under Section 147 provides that where the case has been reopened after recording rightful reasons, the assessing authorities can assess or reassess other such income, which has escaped assessment and which comes to their notice subsequently in the course of proceedings under this section.

Impact:

This proposal intends to overrule certain judicial precedents, which restricted the reassessment proceedings to issues in respect of which the reasons have been recorded for reopening the assessment. Now, reassessment can be done even for income escaping tax in respect of issues for which reasons had not been recorded at the time of initiating reassessment proceedings. This proposal is intended to have retrospective effect from assessment year 1989-90 onwards.

Proposal:

Chapter VI-A deductions to be allowed only if claimed in the return of income for profits and gains of a company falling under Sections 10A, 10AA, 10B or 10BB (free trade zones, special economic zones, export-oriented undertakings).

Impact:

Absence of claim in the return of income would lead to non-allowance of deduction. Also, introducing this with retrospective effect (assessment year 2003-04), would lead to hardship for the companies.

Proposal:

The rates of TDS in respect of rentals have undergone a welcome revision from the existing 10% (on plant and machinery) and 15%/20% (land, building and furniture) to 2% and 10%, respectively.

Impact:

This would help optimize cash flow in the hands of the recipient.

Proposal:

Donations made to electoral trusts eligible for 100% deductions provided the trust is approved by the prescribed authorities

Impact:

This should help streamline the flow of donations to political parties and thereby result in clear visibility and transparency.

MAT demon haunts India Inc

India Inc got a jolt in the form of a hike in rates for Minimum Alternate Tax (MAT). Companies paying MAT—instead of the regular corporate tax—could soon see a higher outgo under this he ad as the finance minister hiked rates from the earlier 10% to 15% After including the different surcharges, the effective rate would now be nearly 17%, tax experts said.

MAT is the tax that a cor porate compulsorily pays in case its corporate tax outgo—after accounting for all the ex emptions—is below a thresh old limit. In taxman’s parlance it is the tax that a corporate pays on its ‘book profit’, which is different from its profit in ‘the profit & loss’ account.

In India, MAT was intro duced about 15 years ago af ter the government found that despite substantial profits, a large number of corporates were not paying any tax.

Often MAT is criticised as an antithesis to any conces sion or exemption. Even if there is some justification for MAT, in a slowing economy it is more important for a com pany to have immediate cash flow, said Nishith Desai, in ternational tax and corporate law expert. “When more and more developed countries are reducing their tax rates to a level below 30%, a MAT rate of 15% definitely looks high er,’’ Desai added.

In India, a number of IT and infrastructure companies pay MAT instead of the regu lar corporate tax. “These (co mpanies paying MAT now) may end up paying a higher tax now,’’ said Sanjay Kapa dia, executive director , Price Waterhouse Coopers. For the corporates, there’s little cho ice but to accept the higher rates. “There’s nothing much one can do about it except ab sorb it,’’ said Venugopal Dho ot, chairman, Videocon gro up. A case of grin and bear it.

Relater Article: Check If It Smells Right

GUIDE TO PERSONAL TAX

Proposal:

The basic threshold limits for income-tax trigger are proposed to be changed marginally. However, there is no change in the number of slabs or the tax rates for every slab (which remain at 10%, 20% and 30%) or education cess (3%).

Impact:

Now those having taxable income of Rs 1,60,000 (earlier Rs 1,50,000) or less are out of I-T ambit. For women and senior citizens, the basic threshold exemption limit would be at Rs 1,90,000 (earlier Rs 1,80,000) and Rs 2,40,000 (earlier Rs 2,25,000) respectively. This results in an effective tax savings of at least Rs 1,030 (Rs 1,545 for senior citizens) for small and marginal tax payers.

Proposal:

Surcharge at 10% on amount of tax is proposed to be abolished.

Impact:

This means substantial savings for those with high incomes (over Rs 10,00,000).

Proposal:

Deduction for expenditure incurred on medical treatment of dependents with severe disability under Section 80DD up from Rs 75,000 to Rs 1,00,000.

Impact:

The taxpayer would be able to claim a higher deduction of Rs 1,00,000 from his taxable income (irrespective of the amount spent), if he has incurred any expenditure for medical treatment of such dependents or has deposited any sum with prescribed insurance companies.

Proposal:

Investments under the New Pension Scheme (NPS) is also proposed to be covered for deduction from taxable income under Section 80CCD, within the overall limit of Rs 1,00,000.

Impact:

This will also enable selfemployed persons to contribute to the NPS and opens another avenue for investments available for taxpayers. However, the overall cap for investments remains the same. Further, re-investments during the year (ie amounts not actually received) into the NPS also qualify for deduction.

Proposal:

Fringe Benefit Tax (FBT) is proposed to be abolished and fringe benefits are proposed to be taxed in the hands of the employees.

Impact:

This will result in benefits presently liable to FBT being taxed as perquisites in the hands of employees. Accordingly, the employer would be required to deduct tax on such fringe benefits from the employee’s salary, and not pay FBT on the same. The taxable fringe benefits and the valuation mechanism in respect of the stock incentive schemes are expected to be notified in due course.

Proposal:

Definition of higher education for the purpose of deduction of interest on loans borrowed under Section 80E substituted now includes studies in any field (including vocational fields) pursued immediately after schooling.

Impact:

While the present provision covered only specified fields of study (graduate or PG courses in engineering, medicine, etc), the extended scope would enable larger number of taxpayers to avail deduction for interest on loans borrowed for pursuing studies even after schooling (Standard X).

Proposal:

Individuals/ HUFs receiving property (whether immovable or not) exceeding Rs 50,000 in value after October 1, 2009 without any consideration or with inadequate consideration are proposed to be taxed, except when received from relative or on marriage, under will/inheritance, etc.

Impact:

Now all gifts-in-kind would also be liable to income-tax in hands of the recipient. The value to be considered for immovable property is the value as per prevailing stamp duty laws and for other properties, the fair market value would be considered. Even if the transfer document for the immovable property is not registered with a stamp valuation authority, the value assessable for the purpose of payment of stamp duty would need to be considered.

EVERY RUPEE SAVED IS A RUPEE EARNED


Most tax-saving schemes provide both high returns and high security. So, it makes sense to use all the provisions available to save tax while earning money The single most important provision is Section 80c. Under it, one can invest up to Rs 1 lakh in approved schemes and save taxes up to Rs 30,900. The investment of up to Rs 1 lakh is deducted from taxable income and tax liability reduced accordingly.

Public provident fund (PPF):

Investment up to Rs 70,000 allowed. Part of overall limit of Rs 1 lakh under section 80C. The return, fixed every year, is currently at 8%. This is the only instrument which is completely tax free. Lock-in period: 15 years. Effective posttax return for a person who pays tax at the rate of 30% is 15.36%.

Insurance premia:

Investment up to Rs 1 lakh allowed. But annual premium amount should be at least 20% of the sum assured. Lock-in period: 3 years. Returns depend on market. Money received on maturity after three years will be tax free in the case of equity-linked savings schemes (ELSS). But for general insurance schemes, it will be treated as income of that year and taxed accordingly.

Mutual funds:

Investment up to Rs 1 lakh allowed in ELSS. Lock-in period: 3 years. Return from these instruments is completely tax-free. But investors are subject to market risks.

Tuition fee:

Amount of up to Rs 1 lakh paid as tuition fee for education of two children of an assessee can be deducted from total income. Part of overall Rs 1 lakh limit under section 80C.

Repayment of home loan: Repayment of principal up to Rs 1 lakh in a year gets tax benefit under 80C. Amount is deducted from taxable income. Payment up to Rs 1.50 lakh as interest on loan taken to buy house for self-use also exempt from income tax. Along with provision of repayment of principal, a housing loan can enable an assessee to get income
up to Rs 2.50 lakh exempted.

Pension fund:

Investment up to Rs 1 lakh in pension fund of an insurance company can be deducted from taxable income. One can also invest in the new pension scheme to get this benefit. Part of overall limit of Rs 1 lakh under 80C. However, it’s taxable on withdrawal.

Repayment of educational loan:

Interest paid while repaying education loan for own, or kin’s, higher studies exempt from I-T. Repayment of principal does not qualify for exemption. Not part of cap of Rs 1 lakh under Section 80C.

Premium for mediclaim policy:

You can claim deduction of upto Rs 20,000 for the purchase of mediclaim policy for your parents if they are senior citizens or otherwise upto Rs 15,000. This is besides Rs 15,000 deduction you can claim against purchase of mediclaim policy for yourself.

Medical treatment for disabled dependent:

Deduction from taxable income up to Rs 50,000 under section 80DD is allowed for treatment and rehabilitation of one or more dependent with disability. The amount can also be deposited with an approved scheme of an insurance company or UTI for the dependents’ benefit. In case of severe disability, the exception can go up to Rs 1,00,000.

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