EXECUTIVE SUMMARY

PRE BUDGET MEMORANDUM 2008 ON DIRECT TAX LAWS

Para No. of Memorandum / Sub para No / A : SUBSTANTIAL AMENDMENTS
1 / Tax on fringe benefits to employees – Ss.115W TO 115WL, 2(7), 2(23A), 17(2)(vi)
1.1 / The first base suggestion is to scrap the levy - if need be, by enhancing the corporate tax rate by 1% instead of burdening the corporate world with additional complexities and compliance.
1.2 / a.  There should be no levy on genuine business expenditure.
b.  There should be no levy on expenses which have no connection with employees
c.  It should be distinctly provided that once there is FBT levy, there will be complete exclusion of income taxation in the assessment of employees.
d.  There is need to introduce a threshold limit upto which no FBT can be levied.
e.  Fringe Benefit Tax paid should be allowed as a deduction from business income and the same should be excluded from the purview of Section 40.
f.  It is suggested that all such ESO plans and Schemes which were formulated before 1-4-2007 should be specifically exempted from the levy of FBT by a suitable clarification.
2 /

Speculative Transactions - S. 43(5) & S. 73 (Taxation of Derivatives)

2.1 /

Derivatives - Exclusion from definition of Speculative Transaction - Section 43(5)

It is suggested that the exemption should also be extended to commodity derivatives entered into on recognized commodity exchanges.
2.2 / Deemed speculation loss in case of companies - Explanation to S. 73
In the light of dematerialization and other measures initiated by SEBI which have brought total transparency in share trading, leaving little scope for manipulation of share trades by transfer of profits/losses from one person to another and also when derivatives which are in the nature of speculative transactions are not considered as speculative transaction, there is least logic to continue deeming fiction of treating the transactions in shares entered by a company as speculative transaction.
It is, therefore, suggested that the aforesaid Explanation to section 73 of the Act ought to be deleted.
3 /

Provisions Relating to Gift : Ss.2(24)(xiii) & 56(2)(v)

The earlier position whereby gifts were not taxed in the hands of the donees unless the said gifts were proved to be bogus should be restored

3.2 /

Measures of Rationalisation: The suggested measures for rationalization

The following receipts should be exempted from the charge:
a) Gift to and from Hindu undivided family by or to a member of the family.
b) Any receipt which is in the nature of damages or accident compensation or which is received on compassionate grounds.
c) Any receipt which is in the nature of prize or reward for performance at state, national or international level.
d) Any receipt, which is not in the nature of a gift.
e) Any compensation received from an insurance company under any insurance policy.
f) Any donation or charity received by a victim of a natural or other calamity or the family members of such a victim from any person or organization. At present, such compensation received from the Central Government is exempted.
4 /

Deemed Dividend - S. 2(22)(e)

In the light of many infirmities, it is submitted that there is a strong case for deletion of the mischievous sub-clause (e). This would also serve the desirable objects of rationalization and simplification.

B : CHARITABLE TRUST EXEMPTION
1 /

Taxation of anonymous Donations – S.s 10(23C), 13(7), 115BBC

All voluntary contributions received by wholly charitable trusts/institutions should be on the same footing as religious cum charitable trusts such that, in all cases, donations which carry no specific direction for university, educational institution, hospital or medical institution run by such trust/institution may remain exempt from tax in similar manner without any discrimination.
2 /

Registration of Charitable Trusts - S. 12A

a. The power to condone delay in filing of application for registration should not be removed.
b. The period of one year from the date of creation of the trust for making application for registration should be retained.
3 /

Anomaly in S. 10AA:

While resolving the formula for computing the quantum of deduction under Section 10AA, the export turnover of SEZ unit is required to be compared with total turnover of the business carried on by the overall business instead of total turnover of particular unit.
Therefore there is a clear anomaly in the section as compared to Section 10A and 10B. This needs to be immediately resolved. It may be noted that the legislature has corrected the mistake in sections 10A and 10B in 2001 but has repeated the same while enacting section 10AA.
C : BUSINESS INCOME
1 /

Interest, Commission, Brokerage, Fees for services, payment to contractors etc. Not to be allowed as deduction unless tax Deducted at Source : S. 40(a)(ia)

1.1 / Deduction of tax from payment to a resident must be distinguished from payment to a non-resident. In case of non-residents, payment is very often to a person whose connections with India are only transient or who may not have any assets in India to discharge the tax liability. This is not the case in respect of the payments to residents. The tax authorities have sufficient powers to recover the tax from the resident receiver of income (Refer Section. 191).
Hence, there is no justification for such provision in case of payments to residents and Section 40(a)(ia) should be deleted.
1.2 / Alternatively, the section should be amended and brought in line with Section 43B whereby, if the TDS is paid on or before the due date for filing the return of income of the payer, then the disallowance should not be made.
1.3 / The section should be amended and it should be provided that the disallowance would only be proportionate to the amount of tax/surcharge/education cess short deducted and not in respect of the entire expenses.
1.4 / Need for corrective action: A suitable amendment to the law should be done without compromising on the avowed objectives of the inculcating TDS discipline so the provisions are implemented pragmatically. As one alternative , power may be given to the commissioners to waive defaults in genuine cases.
1.5 / There being adequate penal provisions in the law which deals with the defaulters of tax , the provisions of sec 40(a)(ia) which can distort the level of assessable income in incredible and unbearable proportion should be discontinued.
2 /

Deduction for Housing Projects : S. 80 IB

2.1 / Limit on the built up area of shops etc. : The limit to get the deduction u/s 80IB which is 5% of the aggregate built up area of the housing project or two thousand square feet, whichever is less it could be replaced with a limit of 10% of the aggregate built up area or the minimum area required by the local authority whichever is higher.
It is also suggested that the limits, if, any be introduced only for the projects that were approved on or after 1 April 2004.In any case, if shop or other commercial establishments are constructed in accordance with the approval of the local authority, then pro-rata deduction commensurate with consumption beyond the permissible limit under this section should be disallowed.
5 /

Tax Audit in case of Partners of Firm

In View of the instances in Mumbai where the tax department has insisted that partner of a tax audit firm should also have his accounts tax audited notwithstanding the fact that the accounts of the Partnership Firm have already been audited u/s 44AB,it is suggested that clarificatory amendment should be made in Section 44AB to provide that for the purpose of applying Section 44AB in the hands of the partners in such cases, the share of profit and/or remuneration/interest received from the Firm shall not be taken into account while determining the amount of threshold limit provided in Section 44AB.
D : CAPITAL GAINS
1 /

STT and Separating Cost in Capital Transactions - S. 88E & S. 48

The whole working of calculating and claiming relief in respect of STT paid on business transactions which generate income under the head “Profits and Gains of business or profession is too cumbersome and prone to different interpretations. Since levy of STT is nominal compared to the overall value of transactions and since with the introduction of screen based trading, there is hardly any scope for undertaking oblique transactions for tax avoidance purposes, there is need to make life of tax payers simple by providing for a strait-jacket rebate of the full amount of STT against tax payable by the assessee in that year, while restricting the upper limit of rebate to the actual tax payable by the assessee.
2 /

Indexation

Since the mark up of inflationary trend is perceived to be higher than the rate of indexation which is computed under section 48, there is need to substitute 1st April 1996 as the base date in section 55(2)(b) of the Act in place of 1st April 1981.
3 /

Exemption from Capital Gains– S. 54EC

We suggest that the limit of Rs. 50 lakhs imposed in the section be removed and that the earlier position be restored.
E : TAX DEDUCTION AT SOURCE
1 /

Exemption from TDS for Regular Assessees

In view of the administrative problems and hardships faced, due to denial of credit for taxes withheld on one pretext or another by the assessees, we suggest that the provisions of TDS should be relieved in case of those payees who are regularly assessees on the department's records.
3 /

No time limit for issuance of certificate u/s. 195(2), 195(3) AND 197:

We request that a time limit of not more than 15 days should be fixed for disposing the applications made for Nil / Lower deduction of tax at source certificates to avoid the sever hardship the assessees are facing
F. TDS ON 8% SAVINGS (TAXABLE) BONDS, 2003 : S. 193
Interest exceeding Rs.10,000 on 8% Savings (Taxable) Bonds, 2003 has been made liable for deduction of tax at source under section 193. We strongly object to this amendment to the extent it is retroactive and affects the investments made prior to the date of amendment. And this provision is mainly affecting the senior citizens who had invested their money in these bonds in order to avoid the hardship of claiming certificates and refunds. The senior citizens now find themselves trapped with their investments blocked for a period of 6 years even when the scheduled banks are offering better rates of return.
It is strongly felt that the Government should not go back on its words and create difficulty for a class of citizens which needs respite from bureaucracy.
It is suggested that the said amendment be made applicable only in respect of fresh investments in 8% Savings (Taxable) Bonds, 2003 after 1st April, 2007.
H. SETTLEMENT OF CASES – CHAPTER XIX
1 / Provisions relating to settlement of cases are proposed to be revamped. The intention of the Government is to virtually shut down or marginalize the institution of settlement commission. But the experience shows that the settlement commission has played a significant role in resolving litigation involving complex factual issues involving group assessees and multiple years. , the wings of the settlement commission should be curtailed only after analysing the implications in right perspective since it achieves finality in assessment and recovery through the process of conciliation. The remedy lies in toning up the institution instead of demolishing it.
2 / Abatement of Settlement Proceeding S. 245HA – Clause 60
The condition to treat the application as abate for not passing settlement order in prescribed time is harsh. If the commission does not pass order in time, even though the applicant has not defaulted or he has cooperated with the commission and furnished all the information and explanations, it is unfair to abate the proceeding and penalize the applicant for the inaction of the settlement commission. Therefore, the proceeding should not be abated if the settlement commission does not pass order in time.