labels: economy - general, governance, union budget 2006
Direct Tax proposals on expected linesnews
03 March 2006

Chartered accountants B K Vatsaraj and Mayur Kishnadwala look into the specifics of the of the exemptions provided in the direct tax proposals for individual investors in the Budget proposals for 2006-07.

The finance minister has not changed much in the area of direct taxes. As in the case of the rest of the budget, the common man seems to have been kept in mind. Perhaps, the FM was heavily influenced by the compulsions of a coalition government.

Just two examples suffice to illustrate this: A new scheme has been introduced to facilitate submissions of returns through Tax Return Preparers (TRP). A TRP will assist persons in furnishing their return of income and shall also affix his signature on it. Similarly, with effect from 1 June 2006, even close-ended equity funds will be spared the axe of dividend distribution tax.

The small investor, therefore, will not have to mull over the tax implications of his investments in equity funds.

Direct taxes: Personal income and corporate tax
Neither has any new direct tax has been introduced nor will there any change in the direct tax rates for the coming financial year. Apart from fine-tuning and petty tinkering with some provisions, no significant changes have been brought about.

Securities Transaction Tax (STT)
The FM. has increased the STT by 25 per cent over the existing rates across the board.

Income Tax
For the sake of convenience, the analysis of the important amendments is presented under broadly three major heads; changes affecting:

  • Individuals and non-business entities
  • Corporates and other business entities
  • Procedural compliance

Changes directly affecting individuals and non-business entities:
Anonymous donations:
A new section 115BBC has been introduced to tax anonymous voluntary contributions (donations) received from April 1, 2006, onwards by universities, certain educational institutions, hospitals, etc, referred to under section (u/s) 10(23C) or to charitable trusts and institutions referred to u/s 11, at a flat rate of tax of 30 per cent.

However, such donations received by wholly religious trusts or trusts for both religious and charitable purpose are exempt from this tax.

Exemption from capital gains:

  • Earlier, an exemption could be claimed, u/s 54EA, by any tax payer on any long- term capital gains (LTCG) earned, if the amount of such capital gains was invested within six months in any of five specified institutions. Effective April 1, 2006, the approved specified institutions have been restricted to the following two only - National Highway Authority of India (NHAI) and Rural Electric Corporation Ltd. (REC).
  • Simultaneously, section 54ED has been deleted, effective from accounting year 2007-08, as it has become almost redundant because LTCG on securities on which STT is paid, are exempt u/s 10(38).

Dividends from equity-oriented funds:
Presently, u/s 115R (2), dividend distribution tax is not payable on incomes distributed by open-ended equity-oriented funds, as defined, to the unit holders. To qualify as an equity-oriented fund, it had to invest at least 50 per cent of its investible funds in equity shares of domestic companies.

Effective June 1, 2006, this concession will be available to all equity-oriented funds. Simultaneously, to align the definition of equity-oriented fund with the SEBI norms, the minimum limit for investment of investible funds by such funds in equity shares of domestic companies has been increased from the erstwhile 50 per cent to 65 per cent.

Hence, to continue to get this concession, equity-oriented funds will have to achieve the minimum cap of 65 per cent, if not already achieved, before June 1, 2006.

Deduction under section 80C:
Presently, section 80C grants a deduction of upto Rs.100,000, to individuals and Hindu Undivided Families (HUF), on investments made in any of the 20 specified securities, investments, deposits, expenses, etc, such as PPF, life insurance premium, tuition fees, repayment of housing loan, NSC, etc.

There are no sectoral caps, except in case of PPF, where the maximum cap is Rs70,000. Hence, taxpayers are free to make investments as per his priorities and preferences. Simultaneously, 80CCC grants a deduction of upto Rs. 10,000 for investments in pension plans. However, this deduction of Rs10,000 is within the overall cap of Rs1,00,000 laid down in section 80C. In other words, the deduction jointly u/s 80C and 80CCC cannot exceed Rs1,00,000 (section 80CCE).

Effective April 1, 2006, the list of specified investment, deposits etc. has one more addition. Now, bank fixed deposits of five years or more with any scheduled banks will also be eligible for deduction u/s 80C. Also, the cap of Rs10,000 on investment in pension plan u/s 80CCC has been removed.
However, we may hasten to add that the overall cap of deduction u/s 80C and 80CCC together continues to be Rs100,000.

Deletion of one-by-six scheme:
The one-by-six scheme was introduced a few years back whereby it laid down that a person fulfilling any of the six expenditure / asset criteria listed therein would need to file his return even if his income is below the thresh hold taxability limits.

This section is being deleted effective April 1, 2006. The deletion is logical, as, with the new provisions regarding Annual Information Return (AIR) being in place for notified transactions for more than a year, the government can track / monitor transactions based on the information received by it from the AIR

Tax return preparers - assistance to tax payers:
A new scheme to facilitate submissions of returns, of the specified class of persons, through Tax Return Preparers (TRP) is being proposed vide section 139B. Such TRP, who will be individuals, will assist the class of persons in furnishing their return of income and shall also affix his signature on it. The persons eligible to act as TRP, as also the detailed scheme will be notified by the Government in due course of time. A Chartered Accountant cannot act as a TRP.

Income of Investor protection fund:
The exemption of incomes received by a notified Investor  protection fund, u/s 10(23EA), is now being restricted to contributions received from the Stock exchanges and its members; incomes received on investments of such contributions will now be taxable effective April 1, 2006.

also see : Changes affecting corporates and business entities
Procedural compliances

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Direct Tax proposals on expected lines