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BUDGET-2010

 

 

 

AN OVERVIEW OF IMPORTANT DIRECT TAX PROPOSALS-

 

CA SUDHIR HALAKHANDI

 

 

 

 

The union finance Minister Mr. Pranab Mukharjee has presented the Budger-2010-11 on 26th Feb and as per his statement the Budget is totally dedicated to the “Common man” – Aam Aadmi.  Let us see the concluding remarks of Finance Minister –

 

 

188.     This Budget belongs to 'Aam Aadmi'.  It belongs to the farmer, the agriculturist, the entrepreneur and the investor. The opportunity is great. The time is right. I have placed my faith in the hands of the people who, I know, can be depended upon to rise to any occasion in national interest. I have placed my faith in the collective conscience of the nation that can be touched to scale undreamt of heights in the coming year.

 

 

The theme of the Budget is “Common Man” and dear friends you can imagine a common man from “RK Laxman” TOI cartoons or any common man near you and Now let us discuss how this budget belongs to “common Man” and at the end you will realize that this Budget is really dedicated to the “Common man” with the innovative idea of taxing him so that “Common man” can also share the burden of taxes and give his contribution to nation Building.

 

Let us start our discussion with Taxation – Direct tax provisions and see the following changes are proposed in the Budget –

 

1.

 

RATE OF TAX

 

There is no change in the exemption limit for any person though for Individual tax payers the slab rats have been revised as follows: - up to Rs. 5 Lakhs 10% (From 1.60 Lakhs to Rs. 5 Lakhs) , Rs. 5 to Rs. 8 Lakhs – 20% and over Rs. 8 Lakhs 30% and see how this revision of slabs will affect the taxpayers :-

 

 

 

 

 

TAXABLE INCOME

(IN RS.)

EXISTING

PROPOSED

SAVINGS IN TAX

1,60,000.00

NIL

NIL

NIL

3,00,000.00

14,000.00

14,000.00

NIL

5,00,000.00

54000.00

34,000.00

20,000.00

8,00,000.00

1,44,000.00

94,000.00

50000.00

 

 

The initial Limits of taxation for Woman assessees and the Senior citizens will remain the same on Rs.1.90 Lakhs and 2.40 Lakhs respectively.

 

See here the lowest taxpayer getting the benefit is the person who has income more than Rs. 3.00 Lakhs and see the person having income of Rs. 5.00 Lakhs will get a relief of Rs. 20000.00 and person having Income of Rs. 8.00 Lakhs per year will get a relief of Rs. 50000.00 but the persons having income of Rs.3.00 or less will not get any benefit from this change of slab. It is relevant to mention here that this Budget is dedicated to the 'Aam Aadmi' and see concessions from direct taxes specially the change of slab will cost a sum of Rs. 21000 crores but common man will get nothing out of it.

 

 

 

2.

 

SURCHAGRE ON DOMESTIC COMPANIES

 

The surcharge for the Domestic companies will be 7.5% as against the existing rate of 10% and this is a move of the FM to abolish the surcharge totally from direct taxes.

 

3.

 

THE MAT RATE

 

The rate of MAT has been increased to 18% from 15% - This is rather shocking for the trade and industry since it was expected that the FM will reduce this rate to 12% or 10%. In post Budget interviews most of trade leaders have expressed their displeasure on this increase.

 

The effective rate of MAT after taking the effect of surcharge and education cess will be

19.9305% as against the existing rate of 16.995%.

 

Effective Assessment year- 2011-12

 

 

 

                                     

4.

 

 

 

WEIGHTED DEDUCTION FOR SCIENTIFIC RESEARCH

 

Weighted deduction under section 35 for scientific research has been increased from 150 % to 200% and from 125% to 175%. Now the table for deduction under section 35 as applicable for assessment year 2011-12 is as under:-

 

NATURE OF EXPENDITURE

 SECTION

EXISTING WEIGHTED DEDUCTION

PROPOSED WEIGHTED DEDUCTION

Contribution to approved research association , university , college or other institution (to this list Research social science is proposed to  be added)

35(1)(ii)

125%

175%

Payment to a National Laboratory, University, IIT or specified persons for scientific research

35(2AA)

125%

175%

In house research by a person engaged in the Business of bio-technology or any business of manufacturing of an article or things other schedule XIth

35(2AB)

150%

200%

 

 

 

 

 

 

 

 

 

 

 

 

                                                                       

5.

 

LIMIT FOR TAX AUDIT

 

The Monetary limit of Tax audit has been enhanced to Rs.60 Lakhs from Rs. 40 Lakhs and I have seen some the remarks on various finance groups regarding this hike but see it is all part of the profession – Incidentally when Tax audit provisions were introduced in the Income tax Act, 1961 in 1984 Mr. Pranab Mukharjee was the Finance Minister and since then the inflation has been increased manifold. As far as I remembered at that time I was a student and the initial Limit was proposed at Rs.20 Lakhs. I am narrating you what was the real budget proposal in 1984-85 Budget-

 

71. In all cases where the annual turnover exceeds Rs.20 Lakhs or where the gross receipts from a profession exceed Rs.10 Lakhs, I am providing for a compulsory audit of accounts. This is intended to ensure that the books of account and other records are properly maintained and faithfully reflect the true income of the taxpayer.

 

The limit while final enactment was made was enhanced to Rs. 40 Lakhs in the year of introduction itself and there was a growing demand since last several year of making it Rs. 100 Lakhs hence my dear friends we should accept it in right spirit.

 

Presently, if the person fails to get his accounts audited then penalty of ½% of the total sales or Rs. 1, 00,000, whichever is less, is imposed. Thereby, maximum penalty of Rs. 1, 00,000 is provided. Now it is proposed to increase the ceiling to Rs. Rs. 1, 50,000 in place of Rs. 1, 00,000.

 

 

 

6.

 

PRESUMPTIVE TAXATION LIMIT

 

The Monetary Limit for presumptive Taxation under section 44AD is also proposed to be increased to Rs.60 Lakhs and now the taxpayers having turnover up to Rs. 60 Lakhs will be eligible for the presumptive scheme of paying tax on profit calculated @ 8%.

 

The existing limit is Rs. 40 Lakhs.

 

Effective date – 1-04-2011

 

Assessment year- 2011-12

 

 

7.

 

ADDITIONAL DEDUCTION U/S 80 CCF

 

Additional deduction of Rs. 20000.00 will be available on the infrastructure bonds under section 80CCF and this is in addition to Rs. 1 Lakhs deduction as available under section 80C.

 

Now see the Magic of this deduction for “Common man” having income up to Rs. 5 Lakhs and if he/ she invest Rs.20000.00 in infrastructure bond he will get a tax relief of Rs. 2000.00 since his rate of tax is 10% but if this investment of the same amount is made by a taxpayer having income over Rs. 5 Lakhs then he will get a tax relief of Rs. 4000.00 and over Rs. 8.00 Lakhs tax payers the relief will be Rs. 6000.00??. Simply the Budget is dedicated to “Aam Aadmi”.

 

These bonds will be notified by the central Government. This will boost the saving habits and will be useful for the social security system based on compulsory.

 

Effective date – 1-04-2011

 

Assessment year- 2011-12

 

 

8.

 

TAX DEDUCTION AT SOURCE

 

(i). LIMITS FOR TDS

 

The Limits for TDS from various source of Income has been revised upward and here is the list which I am narrating you with special reference of the date on which exiting limits have been fixed and see that some of these limits have been fixed 24 years back and others were also fixed long time back and then analyse the increase yourself and you will realize that no proper justice have been given to the taxpayers by enhancement of this long overdue requirement for the benefit of the taxpayers.

 

SECTION

PAYMENT HEAD

EXISTING LIMIT

PROPOSED LIMIT

EFFECTIVE DATE(LIMIT WAS LAST FIXED ON)

194B

Winning from Lottery and cross world puzzles

5,000.00

10,000.00

01-07-2010(1-06-1986- 24 Years Back)

194BB

Winning from Horse race

2,500.00

5,000.00

01-07-2010 (1-10-1991 – 19 Years)

194C

Payment to contractors- Single Transactions

20,000.00

30,000.00

01-07-2010 ( 1-07-1995- 15 Years)

194C

Payment to contractors- Single Transactions

50,000.00

75,000.00

01-07-2010

194D

Insurance Commission

5,000.00

20,000.00

01-07-2010(1-06-1987- 23 Years)

194H

Commission or Brokerage

2,500.00

5,000.00

01-07-2010( 1-06-2001) 8 Years)

194I

Rent

1,20,000.00

1,80,000.00

01-07-2010( 1-06-1994 – 15 Years)

194J

Fees for professional services

20,000.00

30,000.00

01-07-2010 (7-07-1995- 15 Years)

 

The limit for TDS on Interest other than interest on securities and Bank interest under section 194A have not been raised and the common man has to go with form 15G / 15H to the person to whom the deposit has been made by him in the interest is more than Rs. 5000.00 or to the Bank if the Interest is more than Rs. 10000.00.

See the difficulty of “Common man” here and the question is that the common man is not paying the payments to contractors or sub –contractors, not getting as much of rent liable to TDS and other receipts for which TDS is deducted but most of persons out of this category are getting interest out of their savings in private parties and from Banks – and see the Limit has not been increased??

The enhanced limits will be applicable from 1-07-2010.

 

(ii)INTEREST ON DELAYED DEPOSIT OF TDS

 

The rate of delayed payment of TDS is 1% per month or part of a Months and as per existing provision under 201(1A) it is payable from the date on which such tax is deductible to the date on which such tax is actually paid.

 

Now it is proposed w.e.f. 1st July 2010 to bifurcate the period in two parts to charge the higher interest on retailed TDS i.e. the TDS deducted but not deposited and in case of retained TDS the rate of Interest will be 1.5% PM or part thereof. Let us try to understand the proposed provision:-

 

Period for which interest is payable

Rate of Interest

From the due date of deduction to the date of actual deduction

1% PM or part thereof

From the  date of actual  deduction to the date of actual deposit

1.5% PM or part thereof

 

Effective Date- 1-07-2010

 

(iii).TDS AND TCS CERTIFICATES

 

Section 203(3) of the Income tax Act which is introduced to bring the paper less regime in TDS segments and the section is being reproduced herewith :-

 

-         Where the tax has been deducted or paid in accordance with the foregoing provisions of this chapter on or after the 1st day of April 2010, there shall no requirement to furnish a certificate referred to in sub-section (1) or, as the case may be, by sub-section (2).

 

See here that first in this section the period after which the TDS certificates are not required to be given by the deductor to the deductee after 2005 (as introduced by Finance (No.2) Act, 2004 then the time was extended to 2006 by Finance act, 2005, then the time was extended to 2008 by Finance Act, 2006 and by Finance act 2008 it was extended to 2010.

 

Now see the fun , By the Finance act , 2010 (through Finance Bill 2010) , our law makers wants to withdraw this section and making the delivery of TDS/TCS certificates from  deductor / collector to deductee/collectee compulsory again from 1-04-2010.

 

Is this the result of overestimation of IT capacity of the department or outsourcing agencies or the total failure of the system before its implementation?

 

Section 203(3) is an indication of the fact that our law makers are working on trial and error method and they can do anything, take back anything on their whims.

 

The section 203(3) was introduced in 2005 and after that it was not made effective and finally it is being withdrawn.

 

 

 

9.

TAXABILITY OF GIFTS

Section 56 (2) (vii) – the taxability of Gifts received from the “unrelated persons” has always been described by our law makers as an “anti abusive” provision to plug the loopholes and secure the revenue on these transactions. It was introduced by Finance (No.2) Act 2004 in the form of Section 56(2) (v)  (applicable from 1-09-2004 to 31st. March 2006) then it was modified by Taxation law amendments Act, 2006- applicable from 1st. April 2006 to 30th Sept 2009 in the form of section 56(2) (vi), then it was again modified by the Finance (No.2) Act, 2009 applicable from 1-10-2009 in the form of Section 56(2) (vii).

What is going on?? This is called trial and error method in search of excellence!!!!

See here that every time the law makers make this section “water tight”, after sometime they realized that something is still missing.  This shows the quality of our law makers to make law specially the taxation law.  They know and realized that they have to “plug a hole” and they don’t know how to do it and they are working on “trial and error method” and surely with each amendment the law makers are getting more information about the possible abuse and then they make another amendment!! The process will continue till one day they will find that whole exercise is futile exercise then ------??

Now in section 56(2) (viii) the FM has proposed the following amendments- some of them are retrospectively also:-

(i). GIFT OF IMMOVABLE PROPERTY

Previous year w.e.f. 1-10-2009 the Section 56(2) (viii) was amended  to bring the immovable property under the scope of this section and in this respect Immovable property which is received “without consideration” having stamp duty value exceeding Rs. 50000.00, the stamp duty value of the same shall be the income of the recipient. There is no change is proposed in this provision.

Previous year ALSO w.e.f. 1-10-2009 the Section 56(2) (viii) was  amended  bring the immovable property under the scope of this section which has been received for a consideration which is “less than the stamp duty value” of the property and the difference is more than Rs. 50000.00 then whole the amount of difference between the consideration and stamp duty value shall be the income of the purchaser. 

It is proposed to delete this provision retrospectively (since its inception) w.e.f. 1-10-2009.

So the immovable property which is received without consideration is only covered under this section and there will be no inclusion if the consideration is paid but the same is less than the stamp duty valuation.

See here that the section 50C is also taking the stamp duty value as the consideration if the consideration is less than the Stamp duty value and see this is not the real taxation but due to the fiction of the law it is imposed and is a notional tax. It is demanded since long back that his “notional taxation” should be withdrawn but last year instead of giving any ear to this demand the purchaser was also covered under this fiction and this notional and unreal taxation as imposed by the Finance (No.2) Act, 2009 and this was tantamount to double taxation on a single transaction.

In case of getting property without consideration then it is a “Gift” in the hands of recipient hence as per the provisions of Section 47 it is out of the scope of capital gain hence it is continue to be taxed here in the hands of recipient under Section 56.

(ii). STOCK IN TRADE, RAW MATERIAL ETC.

In case of transfer of property where property transferred is not a capital assets in the hand of recipient then naturally if the value is NIL or less than the fair market value (for immovable property) then he will pay tax on whole the sale price when the property is sold, if he treats it as the stock –in- trade instead of capital assets. If at the time of receipt of such property it is charged to section 56(2) (vii) then again on sale the recipient have to pay tax on same amount as his business profit. To avoid this anomaly now it is proposed that if the transferred property is not a capital assets in the hands of assessee then it will not be covered under section 56(2) (vii).

Further transfer of  raw material , stock –in- trade are covered under normal business transactions hence nobody can compel earn profit on each and every business transaction hence the scope of the tax has been made limited to the “capital assets” only.

This is also effective from 1-10-2009 i.e. the date of introduction of this provision.

(iii).BULLION IS ADDED IN THE LIST OF PROPERTY

In the last year since property has been included under the cover of section 56(2) (vii), a list of property has also been inserted in the section which was an exhaustive list and it includes Immovable property, shares and securities, jwellery, archeological collections, drawings, paintings, sculptures and work of art but “Bullion” was not included hence now it is proposed to include bullion under the definition of property.

This amendment is proposed to take effect from 1st. June 2010.

Now friends still the list is AGAIN exhaustive hence be ready to search some more items out of this list but you can use them only till next budget because the law makers has the power to rectify their mistakes “each year and  every year” !!!

(iv). SHARES TO COMPANY AND FIRM

Section 56(2) (vii) is applicable only if the recipient is Individual and HUF and to prevent the practice of transferring the shares of unlisted companies in which public is not substantially interested to the Firm or a company (in which public is not substantially interested) without consideration and for inadequate consideration section 56(2) (viiia) will be applicable and the same shall be taxable in the hands of recipient. Though transfer in case of business reorganization, amalgamation and demerger have been kept out of scope of this section.

 This amendment is proposed to take effect from 1st. June 2010.

 

10.

CONVERSION OF SMALL COMPANIES IN LLP

 LLP is not the format of business structure and it was introduced by the Finance (No.2) Act 2009 LLP taxation will be done on the same line as applicable to the Firms. See the Limited Liability Act permit the conversion of private limited companies and unlisted public complies into LLP – as per section 56 and 57 of the LLP act, 2008. See such transfer has the capital gain tax effect and further there is a question of carry forward of unabsorbed losses and unabsorbed depreciation.  Now to avoid these hardships to small companies which are converting into LLP, a relief on these matters has been given from capital gain tax and to give the right with respect to successive. Let us see which type of companies can take this benefit:-

(i). the companies should not have more than 60 Lakhs of turnover in any of the three preceding previous years.

(ii). the share holders of the company should become partners in the LLP in the proportion of their share holding.

(iii). No other consideration besides share in profit and capital contribution arises to these partners.

(IV). The existing shareholders of the company should continue to share the 50% or more profit in LLP from the date of conversion of LLP.

(V). All the assets and Liabilities of the company become the assets and liabilities of the LLP.

(vi). No amount is paid directly or indirectly to any partner of the LLP out of the accumulated profit of the company for a period of 3 years from the date of conversion.

(vii). If these conditions are broken in any previous year then the benefits which have been availed due to this amendment shall be treated as the income of the previous year in which any of such condition is broken.

(viii). The cost of WDV of the assets shall be the same as it is in hands of predecessor company on the date of conversion and the cost of acquisition of  the capital asset shall also be the same as in the hands of predecessor company.

(ix). The credit of tax paid under section 115JB (MAT) shall not be allowed to the succeeding LLP.

 

These amendments are effective from 1st. April 2011 hence will be applicable from assessment year 2011-12.

 

 

These are the IMPORTANT PROVISIONS of the Budget-2010 as far as the Direct taxes are concerned.

 

 

 

The study is going so please suggest the shortcomings/mistakes/area of improvement.

-CA SUDHIR HALAKHANDI

 

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