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Tax Forum: Questions and Answers
November, 07th 2011

Up to assessment year 2010-11, presumptive tax was applicable at 5 per cent of the turnover for retail traders under Sec. 44AF and not for wholesale traders.

For assessment year 2011-12, Sec. 44AF has been omitted and presumptive tax at 8 per cent has been made applicable to any business under Sec. 44AD. Since same 8 per cent is now applicable for both wholesale and retail traders, the enhancement is very harsh on retail traders. In wholesale business also, margin of 8 per cent is unusual. But wholesalers can manage to have their accounts accepted by keeping accounts and have them audited under Sec. 44AB of the Act, since the wholesale dealers maintain regular accounts. But for retailers keeping accounts and have them audited will be very difficult. The very purpose of Sec. 44AD was in recognition of the difficulties of retail traders.

I request Tax Forum to take up this issue with CBDT.

ANSWER: It is rightly pointed out by the reader R. Raghavendran, Chartered Accountant, Salem, that there is probably an unintended effect of the change in law by fixing liability of the wholesale traders at 8 per cent, which is unusual for most wholesale trade, so they have to continue to keep accounts, subject to audit, so that this provision is hardly helpful. But small traders, whose accounts may not pass the test of a tax audit report are even worse off.

Direct Taxes Code Bill, 2010, has incorporated all the presumptive tax provisions in the Fourteenth Schedule, which carries over the same 8 per cent estimate for all businesses where the turnover does not exceed Rs.1 crore. It is subject to assessee showing lesser income, if the assessee keeps accounts and have it audited under Sec. 88 analogous to Sec. 44AB under the present law. The uneven treatment of retail traders and the unreasonably high rate even for wholesale dealers caused by treating both wholesale and retail sellers on a par in the same provision would, therefore, continue even in the proposed law.

The cause of both the retail and wholesale traders could be more effectively canvassed by the chambers of commerce rather than airing it merely in these columns.

Extension of deduction u/s 80CCD

QUESTION: Sec. 80CCD originally meant for Central Government servants is extended to other pension schemes managed by Life Insurance Corporation of India or any other notified insurer. It allows deduction for contributions made to the pension scheme, subject to a ceiling of 10 per cent of salary or 10 per cent of gross total income in any other case under Sec. 80CCD(1). Employer's contribution, if any, will be includible as part of employee's income, but will be deductible under Sec. 80CCD(2) of the Act, subject to the same limit as employee's contribution. The pension received from such account or any amount received on closure or on opting out of pension scheme would, however, be taxable. Is my above understanding correct?

In view of my understanding, I am requesting my employer to permit me to make a contribution of 10 per cent of my salary to the insurance scheme falling under Sec. 80CCD to which I intend subscribing by making a similar payment to an insurer of his choice. What will be the effect, if there is a break or cessation of the employment? Kindly advise.

ANSWER: The understanding of the reader as to the tax incidence of the pension scheme under Sec. 80CCD is correct as applicable to subscribers other than government servants. So is the presumption that employer's contribution will be includible in employee's hands, though it should be deductible subject to the limits under Sec. 80CCD(2) and the further limit of Rs.1 lakh under Sec. 80CCE. There is definitely an advantage in postponement of liability in respect of the contributions to the years of pension receipts, subject to the limits of deduction, terms of scheme and the circumstances of the subscribers. In case of break or cessation of employment, I believe that the insurance policy will adequately cover such a situation, so that the treatment of employer's contribution, which alone needs to undergo a change would stand suspended for the period or break or after cessation of employment.

A senior citizen's problem

QUESTION: I am a senior citizen. I have

constructed a house in 1976 and retired from services in 1994.

Due to some financial problems created by my son, I wanted to sell the house and keep some amount for us and gift the balance to my grandsons. What are the tax implications?

ANSWER: Sale of the property for whatever reason would attract capital gains liability. It may not even otherwise be advisable for practical reasons. If all that is required is some cash flow, the better option is to avail the reverse mortgage by arrangement with a bank. Receipt is tax exempt under Sec. 10(43), while avoiding tax on capital gains on reverse mortgage under Sec. 47(xvi) of the Act. The amount that is required can be subject matter of negotiation with the bank.


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