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XIV TAX PROPOSALS
Indian Budget 2006-07- Full Text
Full Text of P. Chidambaram, Minister of Finance, Budget Speech(Feb 28, 2006)
DIRECT TAXES
156. I shall now turn to my proposals on direct taxes.
157. The good news is that there will be no change in the rates of personal income tax or corporate income tax.
158. The other piece of good news is that no new taxes are being imposed.
159. The one-by-six scheme under the Income Tax Act obliging certain categories of persons to file returns will stand abolished.
160. I propose to marginally revise certain tax rates in the quest for equity. While the corporate tax rate is 30 per cent, the rate under Minimum Alternate Tax (MAT) is only 7.5 per cent of book profits. I propose to increase the rate to 10 per cent, which is still only one-third of the normal rate. I also propose to include long-term capital gains arising out of securities in calculating book profits. I have already allowed MAT-paying companies to take credit for MAT over five years. I propose to extend the period to seven years as well as adjust MAT credit while calculating interest liability.
161. The rates for the Securities Transaction Tax (STT) were fixed when prices of securities were much lower. Reflecting the increase in implicit capital gains in securities transactions, I propose an increase of 25 per cent, across the board, on all rates of STT.
162. Section 80IA of the Income Tax Act applies to infrastructure facilities. For developing an industrial park the terminal date is March 31, 2006. I propose to extend the period to March 31, 2009. For the power sector, in view of the ultra mega projects, I propose to extend the date to March 31, 2010.
163. Last year, I recast the provisions relating to savings. Fixed deposits were not included. There is a demand that fixed deposits of certain tenure should qualify for tax exemption. I propose to include investments in fixed deposits in scheduled banks for a term of not less than five years in section 80C of the Income Tax Act. I also propose to remove the limit of Rs.10,000 in respect of contribution to certain pension funds in section 80CCC, subject to the overall ceiling of Rs.100,000.
164. I propose to align the definition of open-ended equity-oriented schemes of mutual funds in the Income Tax Act with the definition adopted by SEBI. I also propose to treat open-ended equity-oriented schemes and close-ended equity-oriented schemes on par for the purpose of exemption from dividend distribution tax.
165. I have revisited the exemptions in the Income Tax Act. As a result, I propose to remove the exemption under section 10(23G) which is not relevant when interest rates are moderate.
166. Cooperative banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income Tax Act. However, I propose to exclude all other cooperative banks from the scope of that section.
167. Section 54EC and section 54ED are tax shelters. I propose to restrict the scope of section 54EC to two institutions, viz., NHAI and REC. For NABARD, SIDBI and NHB, which are banks, we have already opened the route of zero coupon bonds to raise low cost funds. Government will, if needed, provide appropriate support to these institutions to enable them to access resources to fulfil their mandate effectively. I also propose to withdraw the benefit of section 54ED, which has become virtually redundant, with effect from April 1, 2006.
168. The Standing Committee on Finance has expressed concern that many charitable institutions misuse the provisions of the Income Tax Act. I propose to focus on one misuse, namely, receiving anonymous or pseudonymous donations. Accordingly, I propose that anonymous or pseudonymous donations to wholly charitable institutions will be taxed at the highest marginal rate. Such donations to partly religious and partly charitable institutions/trusts will be taxed only if the donation is specifically for an educational or medical purpose. However, I make it clear that such donations to wholly religious institutions and religious trusts will not be covered by the new provision.
169. Members of State Legislatures have complained that their constituency allowances are taxed differently from the constituency allowance received by Members of Parliament. I propose to remove the discrimination and treat them equally.
170. The Permanent Account Number (PAN) of the Department of Income Tax is the critical element in capturing incomes and expenditures. Scrutiny of Annual Information Returns (AIR) on high-value transactions reveals that 60 per cent of the transactions are without quoting PAN. Hence, I propose to take the power to issue PAN suo motu in certain cases. I also propose to take the power to direct persons to apply for PAN in certain cases. I propose to notify, in due course, more transactions for which quoting of PAN will be mandatory. I also propose to prescribe a few more transactions to be reported in AIRs.
171. Last year, I introduced two new taxes. The Banking Cash Transaction Tax (BCTT) has turned out to be a boon, not for the modest revenues it brought which was never its purpose, but for the remarkable trails that it has helped establish. To cite just one example, huge cash withdrawals in a bank branch in Chandni Chowk, noticed through the BCTT, led the Department of Income Tax to three entities which were carrying on the business of purchasing demand drafts from traders at a discount and helping the traders to avoid both sales tax and income tax. These entities would deposit the demand drafts in their own accounts and withdraw the cash. In a period of 18 months, they had laundered Rs.1,500 crore. BCTT has also helped the Department to detect bogus bills, accommodation entries, artificial loss claims and dummy firms. I propose to continue the BCTT for some more time until the AIR system is able to capture all significant financial transactions.
172. Fringe Benefit Tax (FBT) was introduced as a revenue raising measure. FBT can be justified on the principles of horizontal equity and vertical equity. Nevertheless, I have reviewed it with an open mind. I have also taken on board the views expressed by the apex chambers of commerce. I propose to make the following changes in chapter XII-H of the Income Tax Act:
• Value the benefit in the form of ‘tour and travel’ at 5 per cent instead of 20 per cent;
• Value the benefit in the form of ‘hospitality’ and ‘use of hotel boarding and lodging facilities’, in the case of airline companies and shipping industry, at 5 per cent instead of 20 per cent;
• Exclude the expenses on free samples of medicines and of medical equipment distributed to doctors;
• Exclude the expenses incurred on brand ambassador and celebrity endorsement; and
• Prescribe a threshold of Rs.100,000 under section 115WB(1)(c) so that only a contribution by an employer to an approved superannuation fund in excess of Rs.100,000 per year per employee will attract FBT. Under section 80C there is already an exemption up to Rs.100,000 for contribution by an employee to an approved superannuation fund. Honourable Members will note that, under these two provisions, there can now be a tax-exempt contribution up to Rs.200,000 per year for the benefit of an employee. This allowance, I believe, is generous enough in the case of an overwhelming majority of employees.
With these changes, I am confident that the debate on FBT will draw to a close. Let me remind everyone concerned once again that FBT is justified on the principle of equity.
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