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A raw deal for India Inc?
March, 15th 2008

If tax returns of companies are to be filed on or before September 30, they will have to hold the AGMs a little earlier.

India Inc. does not seem too pleased with the Finance Bill. Tax rates have not been lowered and surcharge and cess continue to remain in the statute. The expected extension of the sun-set clauses covering units established in special economic zones (SEZs), software technology parks (STPs) and free trade zones (FTZs) did not happen.

The concessional treatment granted under Sections 10A and 10B of the Income-Tax Act, 1961 will expire by March 31, 2009.

The exemption granted under Chapter VIA for export houses has already been withdrawn. There was a glimmer of expectation that the fringe benefit tax (FBT) would go.

Corporate houses were demanding that in lieu of FBT, corporate tax could be raised to 31 per cent. The Finance Minister has, however, not relented. He chose to moderate and modify the FBT.

Henceforth, FBT paid by employers on employee stock option plans (ESOPs) and recovered from the employee would be treated as tax paid by the employee.

This change in tax treatment may benefit expatriate employees working in India. Non-resident employees will hereafter get credit for FBT recovered from them against tax payable, if any, in their home country under the relevant Double Taxation Avoidance Agreement (DTAA).

Filing of returns

An important matter of procedure concerns the due date for the filing of returns by companies. Both for corporate tax and FBT, the due date has been advanced from October 31 to September 30.

Last year, the time-barring date for completing the assessments was shifted from March 31 of the financial year to the earlier December 31. This meant the easing of pressure on assessing officers (AOs) in the last quarter of the financial year for completing assessment. This also meant that the AOs could concentrate on collection work.

The present amendment advancing the due date for filing of returns by companies is in line with the time-barring date for completion of assessments. There can be some problems in this regard. Company accounts have to be approved at the annual general meeting (AGM) of the shareholders. Company law permits the holding of such AGMs by September 30.

The accounts approved at the AGM will form the basis for computation of minimum alternate tax (MAT).

This is what the Supreme Court decided in the Apollo Tyre case. If tax returns of companies are to be filed on or before September 30, companies will have to hold the AGMs a little earlier. Otherwise, the returns will have to be filed on the same date as that of the AGM.

Tax audit report

Section 44AB mandates that the company should obtain the tax audit report from the chartered accountant before the specified date. The Explanation to Section 44AB defines specified date as October 31 of the assessment year. Clause 27 of the Finance Bill seeks to amend Section 139 of the Act and advances the due date for filing of the return September 30.

There is no corresponding amendment to the definition of the specified date under Section 44AB. This means that returns can be filed by September 30 even without the tax audit report. Nothing wrong with that, but the I-T department has all along been disputing this position.

When one compares the tax treatment given to companies vis--vis partnership firms, a lot of discrimination can be found. Apparently, the profits of firms and companies are taxed at the same rates. However, companies have to suffer MAT and dividend distribution tax (DDT). The post-tax profits will vary substantially when MAT, FBT and DDT are considered.

The thinking that the form of the business organisation should not matter and there should be neutrality in the application of the tax rate to business entities led to corporate tax rate being brought down from 35 per cent to 30 per cent. Unfortunately, corporate tax law has changed radically and additional taxes are being levied on companies. This is not so with respect to partnership firms.

The Finance Bill, 2008 has now extended the provisions for amortisation of preliminary expenses under Section 35D to the services sector.

The Memorandum explains that the idea is to provide a level-playing field to the services sector which gets the benefit of amortisation of specified post-commencement preliminary expenses, a benefit enjoyed by the manufacturing sector in setting up a new unit or in extending an existing undertaking.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)
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