FINANCE BILL, 2008

PROVISIONS RELATING TO DIRECT TAXES

Introduction

The provisions of the Finance Bill, 2008 relating to direct taxes seek to amend the Income-tax Act, inter alia, with a view to,-

(i) restructuring the personal income tax slabs by lowering the burden on the individual taxpayers significantly so as to enhance productivity and revenue contribution through improved compliance;

(ii) streamline tax administration business processes so as to reduce transaction costs and facilitate voluntary compliance by leveraging capabilities of the direct tax administration to identify non-compliance;

(iii) providing impetus for growth in trade, commerce and industry;

(iv) enhancing research and development capacity in the economy through calibrated tax incentives;

(v) providing appropriate incentives to enable self-financing of old age security through the mechanism of reverse mortgage of residential house and health insurance;

(vi) reducing the ex-ante cost of equity capital by lowering the cascading effect of dividend distribution tax;

(vii) rationalising the capital gains tax regime for equity so as to reduce the tax induced bias against distribution of corporate profit; and

(viii) encouraging the growth of the corporate debt market by eliminating TDS on interest on corporate bonds so as to facilitate seamless transactions.

2. The Finance Bill, 2008 seeks to prescribe the rates of income-tax on incomes liable to tax for the assessment year 2008-09,the rates at which tax will be deductible at source during the financial year 2008-09 from interest (including interest on securities), winningsfrom lotteries or cross-word puzzles, winnings from horse races, card games and other categories of income liable to deduction or collection of tax at source under the Income-tax Act; rates for computation of “advance tax”, deduction of income-tax from or payment of tax on ‘Salaries’ and charging of income-tax on current incomes in certain cases for the financial year 2008-09.

3. Subject to certain exceptions, which have been indicated while dealing with the relevant provisions, changes in the provisions of the tax laws are ordinarily proposed to be prospective in their operation.

4. The substance of the main provisions of the Bill relating to direct taxes is explained in the following paragraphs.

INCOME-TAX

RATES OF INCOME-TAX

I. Rates of income-tax in respect of income liable to tax for the assessment year 2008-09.

In respect of income of all categories of assessees liable to tax for the assessment year 2008-2009, the rates of income-tax have been specified in Part I of the First Schedule to the Bill. These are the same as those laid down in Part III of the First Schedule to the Finance Act, 2007, for the purposes of computation of “advance tax”, deduction of tax at source from “Salaries” and charging of tax payable in certain cases.

(1) Surcharge on income-tax-

It has also been specified that in the case of individuals, Hindu undivided families, association of persons and body of individuals having total income exceeding Rs. 10,00,000/-, the tax so computed after rebate under Chapter VIII-A shall be enhanced by a surcharge at the rate of ten per cent. for purposes of the Union.

In the case of artificial juridical person, the tax so computed shall be enhanced by a surcharge of ten per cent. on all levels of income. In the case of local authority and co-operative society, no surcharge shall be levied. In the case of every firm and domestic company, surcharge at the rate of ten per cent. shall be levied only in cases where the total income exceeds one crore rupees. In the case of every company, other than a domestic company, surcharge at the rate of two and one-half per cent. shall be levied only in cases where the total income exceeds one crore rupees.

However, marginal relief shall be allowed in all these cases to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over one crore rupees is limited to the amount by which the income is more than one crore rupees. Also, in the case of every company having total income chargeable to tax under section 115JB of the Income Tax Act and where such income exceeds one crore rupees, marginal relief shall be provided. 

 (2) Surcharge on fringe benefit tax-

In respect of fringe benefits chargeable to tax under section 115WA of the Income Tax Act, surcharge shall be levied as follows-

(a) in the case of every association of persons and body of individuals, at the rate of ten per cent .of the amount of tax, where the fringe benefits exceed ten lakh rupees.

(b) in the case of every firm, artificial juridical person and domestic company, at the rate of ten per cent. of the amount of tax,irrespective of the amount of fringe benefits.

(c) in the case of every company, other than a domestic company, at the rate of two and one-half per cent. of the amount of tax, irrespective of the amount of fringe benefits.

(3) Education cess-

Additional surcharge called the “Education Cess on Income-tax” shall continue to be levied at the rate of two per cent. on the amount of tax and surcharge, if any, in all cases. In addition, the additional surcharge called “Secondary and Higher Education Cess on income-tax” shall also continue to be levied at the rate of one per cent. on the amount of tax and surcharge e, if any, in all cases.No marginal relief shall be available in respect of such Cess.

II. Rates for deduction of income-tax at source during the financial year 2008-09 from certain incomes other than “Salaries”.

The rates for deduction of income-tax at source during the financial year 2008-09 from certain incomes other than “Salaries” have been specified in Part II of the First Schedule to the Bill. The rate at which tax is to be deducted from Income by way of short term capital gain referred to in section 111A has been raised from ten per cent to fifteen per cent. Further, in the case of a person resident in India, other than a company, the rate at which tax is to be deducted from income by way of interest payable on security of the Central or State Government has been specified at ten per cent. In the remaining cases, the rates are the same as those specified in Part II of the First Schedule to the Finance Act, 2007, for the purposes of deduction of income-tax at source during the financial year 2007-08. 

(1) Surcharge-

The amount of tax so deducted shall be increased by a surcharge:-

i) in the case of every individual, Hindu undivided family, association of persons and body of individuals, whether incorporated or not, at the rate of ten per cent., of such tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten lakh rupees;

ii) in case of every artificial juridical person referred to sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, at the rate of ten per cent. of such tax;

iii) in the case of every firm and domestic company, at the rate of ten per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees;

iv) in the case of every company other than a domestic company at the rate of two and one-half per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees.

No surcharge shall be levied in the case of any cooperative society or local authority.

(2) Education Cess-

The additional surcharge, called the “Education Cess on income-tax” shall continue to be levied for the purposes of the Union at the rate of two per cent. of income-tax and surcharge, if any, in all cases. Further, the additional surcharge, called the “Secondary and Higher Education Cess on income-tax” shall continue to be levied for the purposes of the Union at the rate of one per cent. Of income-tax and surcharge, if any, in all cases.

III. Rates for deduction of income-tax at source from “Salaries”, computation of “advance tax” and charging of income-tax in special cases during the financial year 2008-09.

The rates for deduction of income-tax at source from “Salaries” during the financial year 2008-09 and also for computation of “advance tax” payable during the said year in the case of all categories of assessees have been specified in Part III of the First Schedule to the Bill.

These rates are also applicable for charging income-tax during the financial year 2008-09 on current incomes in cases where accelerated assessments have to be made. For instance, provisional assessment of shipping profits arising in India to nonresidents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, assessment of bodies formed for a short duration etc.

The salient features of the rates specified in the said Part III are indicated in the following paragraphs-

A. Individual, Hindu undivided family, association of persons, body of individuals, artificial juridical person

The rates of income-tax in the case of every individual or Hindu undivided family or every association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act (not being a case to which any other Paragraph of Part III applies) have been specified in Paragraph A of Part III.

The basic exemption limit is proposed to be increased from Rs. 1,10,000/- to Rs. 1,50,000/-. Accordingly, the new rates of income tax on total income in such cases shall be as under-

Upto Rs. 1,50,000/- Nil.

Rs. 1,50,001/- to Rs. 3,00,000/- 10 per cent.

Rs. 3,00,001/- to Rs. 5,00,000/- 20 per cent.

Above Rs. 5,00,000/- 30 per cent.

In the case of every individual, being a woman resident in India, and below the age of sixty-five years at any time during the previous year, the exemption limit is proposed to be raised from Rs. 1,45,000/- to Rs. 1,80,000/-. The new rates of income-tax on total income in such cases shall be as under-

Upto Rs. 1,80,000/- Nil.

Rs. 1,80,001/- to Rs. 3,00,000/- 10 per cent.

Rs. 3,00,001/- to Rs. 5,00,000/- 20 per cent.

Above Rs. 5,00,000/- 30 per cent.

In the case of every individual, being a resident in India, who is of the age of sixty-five years or more at any time during the previous year, the exemption limit is proposed to be raised from Rs. 1,95,000/- to Rs. 2,25,000/-. The new rates of income-tax on total income in such cases shall be as under-

Upto Rs. 2,25,000/- Nil.

Rs. 2,25,001/- to Rs. 3,00,000/- 10 per cent.

Rs. 3,00,001/- to Rs. 5,00,000/- 20 per cent.

Above Rs. 5,00,000/- 30 per cent.

The amount of income-tax computed shall, in the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, having total income exceeding ten lakh rupees shall be increased by a surcharge for purposes of the Union calculated at the rate of ten percent of such income-tax. However, the total amount payable as income-tax and surcharge on total income exceeding ten lakh rupees shall not exceed the total amount payable as income-tax on a total income of ten lakh rupees by more than the amount of income that exceeds ten lakh rupees.

In the case of every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, the amount of income-tax computed shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent. of such income-tax.

Further, in the case of every association of persons and body of individuals, surcharge will be levied at the existing rates on tax on fringe benefits, where the fringe benefits exceed ten lakh rupees.

B. Co-operative Societies

In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Bill. These rates will continue to be the same as those specified for assessment year 2008-09. No surcharge shall be levied.

C. Firms

In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Bill. This rate will continue to be the same as that specified for assessment year 2008-09.

Further, the amount of income-tax computed shall, in the case of every firm having total income exceeding one crore rupees, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent. of such income tax. However, marginal relief has also been provided to ensure that the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

Surcharge will be levied at the existing rates on tax on fringe benefits, irrespective of the amount of fringe benefits.

D. Local authorities

The rate of income-tax in the case of every local authority is specified in Paragraph D of Part III of the First Schedule to the Bill. This rate will continue to be the same as that specified for the assessment year 2008-09. No surcharge shall be levied.

E. Companies

The rates of income-tax in the case of companies are specified in Paragraph E of Part III of the First Schedule to the Bill. These rates are the same as those specified for the assessment year 2008-09.

It has further been provided that the amount of income-tax computed shall, in the case of every domestic company having total income exceeding one crore rupees, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent. of such income tax. In the case of every company, other than a domestic company, having total income exceeding one crore rupees, be increased by a surcharge for purposes of the Union calculated at the rate of two and one-half per cent. of such income tax.

However, in such cases, the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

Surcharge will be levied at the existing rates on tax on fringe benefits, irrespective of the amount of fringe benefits.

The additional surcharge, called the “Education Cess on income-tax” for the purposes of the Union, shall continue to be levied at the rate of two per cent. of income-tax and surcharge, if any, in all cases. Further, the additional surcharge, called the “Secondary and Higher Education Cess”, shall also continue to be levied at the rate of one per cent. of income-tax and surcharge, if any, (not including the education cess) in all cases. [Clause 2]

WIDENING OF TAX BASE

Sunset provision for deduction for refining of mineral oil under section 80-IB(9)

Sub-section (9) of section 80-IB provides for a hundred percent deduction of profits and gains derived from commercial production or refining of mineral oil. For the purpose of this section, the term ‘mineral oil’ does not include petroleum and natural gas, unlike in other sections of the Act.

The deduction under this sub-section is available to an undertaking for a period of seven consecutive assessment years including

the initial assessment year –

(i) in which the commercial production under a production sharing contract has first started; or

(ii) in which the refining of mineral oil has begun.

It is proposed to insert a new proviso in sub-section (9) of section 80-IB so as to provide that no deduction under this sub-section shall be allowed to an undertaking engaged in refining of mineral oil if it begins refining on or after the 1st day of April, 2009. This amendment will take effect from the 1st day of April, 2008. [Clause 15 ]

Commodities Transaction Tax

A new tax called Commodities Transaction Tax (CTT) is proposed to be levied on taxable commodities transactions entered in a recognized association.

It is proposed to define ‘Taxable commodities transaction’ to mean a transaction of purchase or sale in a recognized association of –

(i) option in goods; or

(ii) option in commodity derivative; or

(iii) any other commodity derivative.

The tax is proposed to be levied at the rate, given in the Table below, on taxable commodities transactions undertaken by the seller or the purchaser, as the case may be as indicated hereunder:-

S. No. Taxable commodities transaction Rate Payable by

1. Sale of an option in goods or an option in 0.017 per cent on Seller commodity derivative. option premium

2. Sale of an option in goods or an option 0.125 per cent on the Purchaser in commodity derivative, where option is exercised. settlement price of the option.

3. Sale of any other commodity derivative 0.017 per cent of the price at which Seller the commodity derivative is sold.

The provisions with regard to collection and recovery of CTT, furnishing of returns, assessment procedure, power of assessing officer, chargeability of interest, levy of penalty, institution of prosecution, filing of appeal, power to the Central Government, etc. have also been provided.

This tax is proposed to be levied from the date on which Chapter VII of the Finance Bill, 2008 comes into force by way of notification in the Official Gazette by the Central Government.

Further, it is proposed to amend section 36 of the Income-tax Act to provide that any amount of commodities transaction tax paid by the assessee during the year in respect of taxable commodities transactions entered into in the course of business shall be allowed as deduction subject to the condition that such income from taxable commodities transactions is included under the head ‘profits and gains of business or profession’.

This amendment in section 36 of the Income-tax Act will take effect from the 1st day of April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years. [Clauses 7,97 to 116 ]

WELFARE MEASURES

Amendment to give effect to reverse mortgage scheme

The Finance Minister, in paragraph 89 of his speech, while presenting the Union Budget, 2007-08, had announced that the National Housing Bank (NHB) will introduce a reverse mortgage scheme for senior citizens. In pursuance of this announcement, some of the banks have already formulated scheme for reverse mortgage.

In the context of the aforesaid scheme, it was necessary to resolve the tax issues arising therefrom. The first issue is whether mortgage of property for obtaining a loan under the reverse mortgage scheme is transfer within the meaning of the Income-tax Act thereby giving rise to capital gains. Section 2(47) of the Income-tax Act provides an inclusive definition of ‘transfer’. Further, ‘transfer’ within the meaning of the Transfer of Properties Act includes some types of mortgage. Therefore, a mortgage of property, in certain cases, is a transfer within the meaning of section 2(47) of the Income-tax Act. Consequently, any gain arising upon mortgage of a property may give rise to capital gains under section 45 of the Income-tax Act. However, in the context of a reverse mortgage, the intention is to secure a stream of cash flow against the mortgage of a residential house and not to alienate the property. It is therefore proposed to insert a new clause (xa) in section 47 of the Income-tax Act to provide that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be regarded as a transfer and therefore shall not attract capital gains tax.

The second issue is whether the loan, either in lump sum or in instalment, received under a reverse mortgage scheme amounts to income. Receipt of such loan is in the nature of a capital receipt. However with a view to providing certainty in the tax regime to the senior citizen, it is proposed to amend section 10 of the Income tax Act to provide that such loan amounts will be exempt from income tax.

Consequent to these amendments, a borrower, under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.

These amendments will take effect from the 1st day of April, 2008 and will accordingly apply in relation to assessment year 2008-09 and subsequent assessment years. [Clauses 4,11]

Enlargement of the scope of eligible saving instruments under section 80C

Section 80C of the Income-tax Act provides for a deduction of upto rupees one lakh to an individual or a Hindu undivided family (HUF) for,-

(i) making investments in certain saving instruments; or

(ii) incurring expenditure on tuition fee and repayment of housing loan.

With a view to encourage small savings, it is proposed to enlarge the scope of eligible saving instruments by inserting two new clauses in sub-section (2) of section 80C. The following investments made by the assessee, during the previous year, shall be eligible for deduction under section 80C within the overall ceiling of rupees one lakh:-

(i) five year time deposit in an account under Post Office Time Deposit Rules, 1981; and

(ii) deposit in an account under the Senior Citizens Savings Scheme Rules, 2004.

Further, it is also proposed to provide that where any amount is withdrawn by the assessee from such account before the expiry of a period of 5 years from the date of its deposit, the amount so withdrawn shall be deemed to be income of the assessee of the previous year in which the amount is withdrawn. The amount so withdrawn, accordingly, shall be liable to tax in the assessment year relevant to such previous year. The amount liable to tax shall also include that part of the amount withdrawn which represents interest

accrued on the deposit. However if any part of the amount so received or withdrawn (including the amount relating to interest) has suffered taxation in any of the earlier years, such amount shall not be taxed again.

The proposed amendment shall apply to investments, as above, made during the financial year 2007-08 and subsequent years. [Clause 13]

Additional deduction for health insurance premium paid for parents

Section 80D of the Income-tax Act provides for a deduction of up to fifteen thousand rupees to an assessee, being an individual or a Hindu undivided family. The deduction is allowed for making a payment to effect or keep in force an insurance on,-

(a) the health of the assessee or on the health of the wife or husband, dependent parents or dependent children of the assessee where the assessee is an individual;

(b) the health of any member of the family where the assessee is a Hindu undivided family.

In case the assessee or any other member of the family, on whose health the insurance has been effected or kept in force, is a senior citizen, the deduction allowed is up to twenty thousand rupees. The existing provisions also have the requirements that the payment must be through a mode other than cash and should be out of the taxable income of the assessee.

Since health insurance cover for the elderly comes at a relatively higher price, it is necessary to encourage individual assessees to supplement the efforts of their parents in getting themselves medically insured. Accordingly, it is proposed to allow an additional deduction of up to fifteen thousand rupees to an assessee, being an individual, on any payment made to effect or keep in force an insurance on the health of his parent or parents. The existing condition of ‘dependent’ with respect to parents is being dispensed with. This deduction shall be in addition to the existing deduction available to the individual assessee on medical insurance for himself, his spouse and dependent children.

Further, it is proposed that if either of the individual assessee’s parents, who has been medically insured, is a senior citizen, the deduction would be allowed up to twenty thousand rupees.

For example, an individual assessee pays (through any mode other than cash) during the previous year medical insurance premia as under:

(i) Rs 12,000/- to keep in force an insurance policy on his health and on the health of his wife and dependent children;

(ii) Rs 17,000/- to keep in force an insurance policy on the health of his parents.

Under the proposed new provisions he will be allowed a deduction of Rs 27,000/- (Rs. 12,000/- + Rs. 15,000/-) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs 29,000/- (Rs.12,000/- + Rs.17,000/-). Whether the parents are dependent or not, is not a consideration for deciding the deduction under the proposed new section.

Further, in the above example, if cost of insurance on the health of the parents is Rs 30,000/-, out of which Rs 17,000/- is paid( by any non-cash mode) by the son and Rs 13,000/- by the father ( who is a senior citizen), out of their respective taxable income, the son will get a deduction of Rs 17,000/- ( in addition to the deduction of Rs 12,000/- for the medical insurance on self and family) and the father will get a deduction of Rs 13,000/-.

This amendment will take effect from the 1st day of April, 2009 and will accordingly apply in relation to assessment year 2009- 10 and subsequent assessment years. [Clause 14 ]

RATIONALISATION AND SIMPLIFICATION MEASURES

Streamlining the definition of “charitable purpose”

Section 2(15) of the Act defines “charitable purpose” to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. It has been noticed that a number of entities operating on commercial lines are claiming exemption on their income either under section 10(23C) or section 11 of the Act on the ground that they are charitable institutions. This is based on the argument that they are engaged in the “advancement of an object of general public utility” as is included in the fourth limb of the current definition of “charitable purpose”. Such a claim, when made in respect of an activity carried out on commercial lines, is contrary to the intention of the provision.

With a view to limiting the scope of the phrase “advancement of any other object of general public utility”, it is proposed to amend section 2 (15) so as to provide that “the advancement of any other object of general public utility” shall not be a charitable purpose if it involves the carrying on of –

 (a) any activity in the nature of trade, commerce or business or,

(b) any activity of rendering of any service in relation to any trade, commerce or business,

for a fee or cess or any other consideration, irrespective of the nature of use or application of the income from such activity, or the retention of such income, by the concerned entity.

This amendment will take effect from the 1st day of April, 2009 and will accordingly apply in relation to the assessment year 2009-10 and subsequent assessment years. [Clause 3]

Extending the provision of section 35D relating to amortization of preliminary expenses to all undertakings

Section 35D provides for deduction of certain specified preliminary expenses. The deduction is allowed on an amount equal to one fifth of such expenditure for five successive previous years. The preliminary expenses relate either to the period before the commencement of the business or after. However, if preliminary expenses relate to a period after the commencement of the business, such expenses are only allowed if they are in relation to the extension of an industrial undertaking or the setting up of a new industrial unit.

With a view to providing a level playing field to the services sector, it is necessary to extend to the service sector, the same benefit of amortization of specified post-commencement preliminary expenses as is available to the manufacturing sector for the extension of an undertaking or the setting up of a new unit. Therefore, it is proposed to amend section 35D accordingly.

The amendment will take effect from the 1st day of April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years. [Clause 6]

Amendment of provisions relating to dividend distribution tax

Section 115-O relates to tax on distributed profits of domestic companies. Sub-section (1) of the section provides that tax on distributed profits at the rate of fifteen per cent. shall be levied on any amount declared, distributed or paid by a domestic company to its shareholders by way of dividends.

With a view to help domestic companies to efficiently structure their business, it has been decided to mitigate the cascading effect of dividend distribution tax upto one level. Accordingly, it has been proposed that the amount of dividend referred to in sub-section (1) will be reduced by the amount of dividend received by the domestic company from its subsidiary, if

(a) the subsidiary has paid tax under section 115-O on such dividend, and

(b) the domestic company is not a subsidiary of any other company.

It is also provided that the same amount of dividend shall not be taken into account for such reduction, more than once. For the purpose of the section, a company shall be a subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company.

This amendment will take effect from the 1st day of April, 2008. [Clause 21]

RATIONALISATION OF PROVISION OF TAX DEDUCTION AND

COLLECTION AT SOURCE

Enlargement of scope of TDS under section 194C to cover association of persons and body of individuals

Sub-section (1) of section 194C of the Income-tax Act inserted by the Finance Act, 1972 provides for deduction of income-tax at source from any sum credited or paid to a resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government, local authorities, statutory corporations, companies, co-operative societies, statutory authorities engaged in providing housing accommodation, registered societies, trusts, universities,

firms and those individuals/HUFs who are required to get their accounts audited under section 44AB.

A number of Special Purpose Vehicles (SPVs) are being set-up to execute large works contracts Some of these SPVs are structured as Joint Ventures(JVs)/Consortiums in the nature of an Association of Persons (AOP) or Body of Individuals (BOI). Since the provisions of section 194C currently do not specifically require an AOP or BOI to deduct tax at source, there is scope for leakage of revenue. Therefore, the amendment proposes to provide that any association of persons or body of individuals, whether incorporated or not shall be liable to deduct income-tax at source under sub-section (1) of section 194C.

The amendment will take effect from the 1st day of June, 2008. [Clause 40]

Provision for furnishing of information regarding deduction of tax at source under section 195

Sub-section (1) of section 195 requires any person responsible for paying any interest or any other sum chargeable to tax (except dividends and income under the head “salaries”) to a non-resident or to a foreign company, to deduct tax at source at the rates in force. Payments to a non-resident by way of royalty and payments for technical services are examples of sums chargeable to tax on which tax is required to be deducted at source under this section.

Currently, the person making the remittance is required to furnish an undertaking (in duplicate) addressed to the Assessing Officer accompanied by a certificate from an Accountant in a specified format. This undertaking and certificate is submitted to the Reserve Bank of India or its authorized dealers who in turn are required to forward a copy to the Assessing Officer. The purpose of the undertaking and the certificate is to collect taxes at the stage when the remittance is made as it may not be possible to recover the tax at a later stage from the non-residents. There has been substantial increase in foreign remittances, making the manual handling and tracking of certificates difficult. To monitor and track transactions in a timely manner, it is proposed to introduce e-filing of the information in the certificate and undertaking. The amendment therefore, proposes to provide that the person responsible for deduction of income tax shall furnish the information relating to payment of any sum to the non-resident or to a foreign company in a form and manner to be prescribed by the Board.

This amendment will take effect from the 1st day of April, 2008. [Clauses 41,54]

Amendments to the provisions of Dematerialisation of TDS and TCS certificates

A scheme for dematerialisation of Tax Deducted at Source (TDS)/ Tax Collected at Source (TCS) certificates was introduced through the Finance (No. 2) Act, 2004, with effect from 01-04-2005 for any deduction or collection of tax at source made on or after 1-04-2005. The commencement of this scheme was postponed to 1-4-2006 by the Finance Act, 2005 and later to 1-4-2008 by the Finance Act, 2006. Since the national level information technology infrastructure of the Income-tax Department is not yet operational,

it is proposed to extend the commencement of the scheme to 1-04-2010.

The system of allowing credit to the assessee for TDS/TCS needs a certain degree of flexibility considering the ongoing technological and business process changes. Providing rigorous conditions regarding the method of giving credit for TDS/TCS in the Act itself, makes the system difficult to restructure and implement according to the changing technological environment. In view of this, it is proposed to substitute section 199 and section 206C(4) so that the manner in which credit of TDS/TCS is to be given will be governed by Rules to be framed under section 199 & section 206C(4) i.e. the Board may make such rules as may be necessary

for the purpose of giving credit in respect of TDS/TCS or tax paid by employer on perquisite under section 192(1A).

These amendments will take effect from the 1st day of April, 2008. [Clauses 27, 42, 44, 45]

Removal of TDS on Corporate Bonds.

Section 193 of the Income-tax Act provides for deduction of tax at source (TDS) on any income by way of interest on securities payable to a resident.

In order to facilitate development of the corporate bond market for improving the availability of finances for infrastructure development, it is proposed to remove TDS on any interest payable to a resident on any  security issued by a company where such security is in dematerialised form and is listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and any rules made thereunder. This amendment will take effect from the 1st day of June, 2008. [Clause 39]

MEASURES TO PROMOTE SCIENTIFIC RESEARCH AND DEVELOPMENT

Weighted deduction for sum paid to a company to be used by such company for scientific research

Section 35(1)(ii) of the Income-tax Act, provides for weighted deduction to a payer, to the extent of 125 per cent of the sum paid to an approved scientific research association, approved university, college or other institution to be used for scientific research subject to certain other specified conditions.With a view to encouraging outsourcing of scientific research, particularly by small companies which are handicapped in making lumpy investment for building in-house scientific facilities, it is proposed to insert a new clause (iia) in sub-section (1) of section 35 of the Income-tax Act to allow a weighted deduction of 125 per cent of the amount paid by a person to a company to be used for scientific research, if such company -

(i) is registered in India;

(ii) has as its main object the scientific research and development;

(iii) is for the time being approved by the prescribed authority in the prescribed manner; and

(iv) fulfills such other conditions as may be prescribed.

However, with a view to avoid multiple claims for deduction, it is also proposed to provide that a company approved under the provisions of section 35(1)(iia) will not be entitled to claim weighted deduction of 150% under section 35(2AB). However, deduction to the extent of 100% of the sum spent as revenue expenditure on scientific research which is available under section 35(1)(i) will continue to be allowed.

These amendments will take effect from the 1st day of April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years. [Clause 5]

MEASURES TO PROMOTE SOCIO-ECONOMIC DEVELOPMENT

Widening the scope of “agricultural income”

“Agricultural income” is defined in section 2(1A) of the Act to mean, inter-alia, income derived from land which is situated in India and is used for agricultural purposes. Such agricultural income is exempt from tax under section 10(1) of the Income-tax Act, 1961 (‘Act’).

It has been held by judicial authorities that whether income from nursery operations constitutes agricultural income or not, will depend on the facts of each case. If the nursery is maintained by carrying out basic operations on land and subsequent operations are carried out in continuation of the basic operations, then income from such nursery would be agricultural income not liable to tax under section 10. However, if the nursery is maintained independently without resorting to basic operations on land, then income from such nursery would not be agricultural income and would be liable to be included in the total income.

With a view to giving finality to the issue, it is proposed to amend section 2(1A) so as to provide that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been