Salient Features of the Finance Bill, 2005

 

                                                                             Ved Jain

Direct Taxes

1.      Introduction

Budget day is the day of the Finance Minister. It is a day when all eyes are on him. Everybody eagerly awaits the various proposals and announcements which the Finance Minister is to unfold in his budget speech. With the globalization of world trade and India being a potential country for investment the budget evokes interest of the international community as well. This years budget day was not different. The Finance Minister presented the second budget of the present government on 28^th February, 2005. The expectation from the Finance Minister this time was very high, particularly on the tax front as he himself has announced while presenting his last budget, 2004, that next budget, will be a budget of tax reforms.

On the economic front the performance of the countrys economy during the year 2004-05 was excellent. The Indian economy during the year 2004-05 grew by 6.9 per cent. The heartening feature is the growth in the industrial sector from 6.6 per cent in the year 2003-04 to 7.8 per cent in the year 2004-05. The growth would have been more impressive but for the lower growth in the agricultural sector of 1.1 per cent, mainly because of the short-fall in the south-west monsoon which has resulted in the decline of the food grains production by about 3 per cent. The growth of economy by 6.9 per cent has taken the GDP to 28.33 thousand crores.

Looking to the impressive growth consistently for two years the expectations from the budget was high. It was also expected that the budget shall be economically driven rather than politically driven. The impressive growth rate in the GDP and the inflation, revenue and fiscal deficit under control, the expectations were that Finance Minister will go for second generation reforms.

After going through the budget it appears that the budget presented by the Finance Minister is more politically driven rather than economically driven. The budget gives focus to the Rural India. To implement the vision of Bharat Nirman the Finance Minister has proposed a business plan and has announced a gigantic task of irrigating one crore hectares of land, connecting all villages by road, constructing sixty lakh houses for the poor and providing electricity and telephone connectivity to all villages. Though certain issues concerning the industrial growth such as reduction in custom duty, earmarking of funds for infrastructure through Special Purpose Vehicle have been addressed, still the industrial sector has not received that much focus which is required to sustain the impressive growth of more than 8 per cent. India being a country of more than 1000 million people; the ultimate solution to its problem of poverty, unemployment lies in giving strength to the economy rather than distributing the largesse.

On the front of investment, the Finance Minister recognizes that investment is a paramount requirement to consolidate the growth process and has indicated that the government shall enhance public and private investment in the infrastructure required for agriculture and facilitate investment in public goods such as roads, railways, power, seaports and airports but there is no concrete proposal put forward by the Finance Minister. On the issue of foreign direct investment (FDI), the Finance Minister despite referring to the investment of US $ 500 billion in China since it opened its economy in 1980, has not come out with any proposal in the budget and has simply stated that the government will come forward with suitable proposals after due consultations, may be a political compulsion but that confirms the fact that this budget is more politically driven rather than economically driven. Despite the liberal disbursement of money for so many social welfare measures announced by the Finance Minister in the budget, it is soothing that the budget document still shows total commitment of keeping the revenue deficit as well as fiscal deficit under control.

On the revenue front the government has been able to mobilize tax revenue of Rs.3,06,021 crores during the year 2004-05 as against Rs.3,17,731 crores estimated in the Budget 2004. The short-fall in revenue collection is mainly on account of corporation tax and excise duty. The projection for the year 2005-06 has been kept at Rs.3,70,025 crores which includes Rs.1,77,077 crores on account of direct taxes as compared to Revised estimate of Rs.1,34,194 crores for the year 2004-05. An idea of the growth in the direct tax collection can be had from the fact that during the Financial Year 2001-02 the total direct tax collection was of Rs.68,613 crores and in the year 2005-06 it is expected to reach Rs.1,77,077 crores, i.e., more than 2.5 times within a period of four years.

The Finance Minister has put forward various proposals to amend the various provisions of direct and indirect taxes. The Finance Minister has also put on hold many suggestions for amendment to the direct and indirect tax laws. Only those suggestions which were required to be acted upon immediately have been incorporated in the Finance Bill, 2005 and the Finance Minister will be bringing a separate bill for implementing the other suggestions. Thus we all need to wait for another large set of amendments, of course, in the guise of simplification and rationalization. But the past experience and this Finance Bill, 2005 are fairly good indicators, that the amendments proposed for the sake of simplification and rationalization go to make the tax laws even more complicated and difficult for one to interpret and comply the same.

The Finance Bill, 2005 has 124 clauses out of which 64 clauses are for amending the direct tax laws. The implication of these various amendments is being analysed. Unless otherwise stated, all these amendments shall be effective from 1^st April, 2006, (Asstt. Year 2006-07) i.e. income earned during the Financial Year starting from 1^st April, 2005.

 

2.      Personal Tax Rates

The Finance Minister has taken a bold initiative by restructuring the personal tax rates. As per the proposal, the new tax brackets and new tax rates applicable to an individual, Hindu Undivided Family, Association of Persons (AOP) or body of individuals or every artificial juridical person shall be as follows :

                        Upto Rs. 1,00,000                                                                 NIL

                        Rs.1,00,000 to Rs.1,50,000                                                10%

                        Rs.1,50,000 to Rs.2,50,000                                                20%

                        Above Rs.2,50,000                                                               30%

However, in the case of a woman resident in India and below the age of 65 years at any time during the previous year, the new tax rates shall be as follows:

                        Upto Rs.1,25,000                                                                  NIL

                        Rs.1,25,000 to Rs.1,50,000                                                10%

                        Rs.1,50,000 to Rs.2,50,000                                                20%

                        Above Rs.2,50,000                                                               30%

Further, in the case of senior citizens resident in India who is of the age of 65 years or more at any time during the previous year, the new tax rates will be as follows

                        Upto Rs.1,50,000                                                                  NIL

                        Rs.1,50,000 to Rs.2,50,000                                                20%

                        Above Rs.2,50,000                                                               30%

Further, surcharge shall be payable by the individual, Hindu Undivided Family, Association of Persons or Body of Individuals having a total income exceeding Rs.10 lakhs, at the rate of 10 per cent of income tax as reduced by the amount of the rebate available under Chapter VIIIA, i.e., rebate on account of the Security Transaction Tax.

 In the case of an artificial juridical person, a surcharge of 10 per cent shall be applicable on the total tax payable irrespective of the total income and without any rebate of income tax paid under Chapter VIIIA, i.e., Security Transaction Tax. A marginal relief has been provided whereby the total amount payable as income tax and surcharge shall not exceed by more than the amount of the income that exceeds Rs.10 lakhs.

3.      Increase in Threshold Limit for levy of Surcharge from Rs.8.5 lakhs to Rs.10 lakhs.

In the new tax rate structure a surcharge of 10% shall be leviable where the total income exceeds Rs.10 lakhs as against presently payable when income exceeds Rs.8.5 lakhs. Thus there is an increase of Rs.1.50 lakh but effective increase is Rs.2.50 lakh as income upto Rs.11 lakhs shall not be liable for surcharge in case one makes investment in savings of Rs.1 lakh and claim deduction from income under the revived section 80C of the Act. The resultant taxable income in such case will be Rs.10 lakhs. The surcharge shall be leviable on the total tax payable as reduced by the amount of rebate allowable under Chapter VIIIA. As per the provisions of Chapter VIIIA, the rebate under Section 88B to senior citizens, under Section 88C to resident woman taxpayer and under Section 88D to individual and HUF having income upto Rs.1 lakh are being withdrawn. Thus, the only amount to be deducted shall be rebate allowable under Section 88E in respect of Security Transaction Tax.

4.      Senior Citizen, Resident Womens Rebate withdrawn

In view of the above new tax rates, the benefit of rebate in tax of Rs.20,000 to senior citizens under Section 88B and of Rs.5,000 to resident woman under Section 88C are being withdrawn.

5.      Standard Deduction withdrawn

Further the benefit of Standard Deduction available to the salaried taxpayers of Rs.30,000 in case income from salary does not exceed Rs.5 lakhs and Rs.20,000 in case income from the salary exceeds Rs.5 lakhs is also being withdrawn.

6.      Deduction under Section 80L withdrawn

Benefit of deduction under Section 80L of Rs.12,000 in respect of interest from bank, post office etc., and Rs.3,000 on account of interest from government securities is also being withdrawn.

7.      Rebate under Section 88 to be substituted by deduction under Section 80C

As per the new proposal, the rebate in tax under Section 88 in respect of payment towards Life Insurance Premium, contribution towards Provident Fund, Public Provident Fund, National Savings Certificate, expenditure on education of children, repayment of housing loan and investment in eligible issue of capital is being withdrawn and substituted by a new scheme being reintroduced under Section 80C whereby a deduction upto Rs.1 lakh shall be allowed from Gross Total Income to an individual or Hindu Undivided Family, with respect to sums paid or deposited in the previous year out of income chargeable to tax towards life insurance premium, contribution to provident fund, purchase of infrastructure bonds, payment of tuition fees, repayment of housing loans etc. However, there will be no sectoral limit. The assessee shall be free to pay the entire amount towards life insurance premium or to claim benefit of the entire amount in one or more of the eligible investment. The present ceiling of Rs.20,000 in respect of repayment of housing loan and Rs.24,000 in respect of education of children shall not be applicable. The whole of the amount upto Rs.1 lakh if incurred towards education of children or towards repayment of housing loan shall be eligible for deduction. As per the new proposal the whole of the amount upto Rs.1 lakh shall be eligible for deduction from the total income, meaning thereby that the taxable income shall be computed after deduction of the above amount.

It is to be noted that in the proposed amendment a reference has again been made that the amount paid or deposited in the previous year is out of his income chargeable to tax. This may revive the old controversy in case the payment of such sum has been made out of the borrowings or out of the income which is not chargeable to tax. The condition of making this payment out of income chargeable to tax, which used to be earlier in Section 80C as well as in Section 88 was deleted by the Finance Act, 2002.

8.      Taxpayer having income above Rs.5 lakh to get benefit of savings and that too at a higher rate

The new tax rate structure gives benefit of long-term savings under Section 80C upto Rs. 1 lakh to all individuals and HUF irrespective of the income. As such, taxpayers having gross total income of more than Rs.5 lakhs shall also be eligible to claim this benefit. Not only that, the new tax rate structure gives additional benefit to the taxpayers liable for taxation at the higher rate as compared to the present benefit at lower rate in respect of investment in savings of the same amount. As explained above, in the new scheme there will be a deduction of the amount of savings from the total income as against existing scheme where a rebate is given at a fixed percentage of amount invested in the savings. Thus, in the case of a person falling in the tax bracket of 30%, the reduction in tax liability in case the amount invested in savings is Rs.1 lakh shall be Rs.30,000 as against the person who falls in the tax bracket of 10% and 20%, the reduction in tax liability shall be Rs.15,000. This is a revival of the old scheme which was discontinued way back in 1990, on this very ground that for the same amount, the benefit in tax accrues higher to one person as compared to the benefit accruing to another person.

9.      Deduction of Savings to be taxed after switching over to New Model

As per the memorandum attached to the Finance Bill, 2005, it has been stated that the benefit of allowing deduction upto Rs.1 lakh in respect of long-term savings is a transitional provision and it will be switched over to the exempt-exempt-taxed (EET) method whereby as and when the amount is received back by the taxpayer it shall be included in the taxable income. Presently there will be complete exemption. The taxability of the amount deducted shall arise only in respect of the amount invested in subsequent years after the new model is adopted.

10.    Ceiling of Rs.1 lakh to include benefit available under Section 80CCC and Section 80CCD

The benefit under Section 80CCC of Rs.10,000 in respect of contribution to Retirement Pension Plan of an insurance company as well as benefit under Section 80CCD in respect of contribution to the pension scheme of the Central Government are also being aggregated with the total amount of Rs.1 lakh allowable under Section 80C of the Act, meaning thereby that the aggregate amount of deduction under Section 80C, Section 80CCC and Section 80CCD shall not exceed Rs.1 lakh.

11.    Tax benefit due to change in the tax rate structure

            In view of the change in the tax rate structure, certain class of taxpayers shall be benefited. The liability to pay tax in the case of individual, HUF shall get substantially reduced as can be seen from the following analysis:    

i. Change in Tax Liability without Benefit of Long-term Savings[1]

ii. Change in tax liability with Benefit of Long-term Savings[4]

12.    New tax rate structure not beneficial to all

The new tax rate structure proposed by the Finance Minister appears to be attractive. However, the above proposal may not be beneficial to all as can be seen from the following analysis:

a)      Salaried Taxpayers

Presently a person having income from salary is entitled to a standard deduction upto Rs.30,000 besides having exemption of Rs.12,000 under Section 80L in respect of interest income from bank and post office. Further, no tax is payable in case the taxable income does not exceed Rs.1 lakh. Accordingly, if one is having a salary income of Rs.1,30,000, i.e., Rs.10,000 per month and an annual bonus of Rs.10,000 and having interest income from bank of, say, Rs.12,000, presently his taxable income will be Rs.1 lakh and no tax is payable by him as income upto Rs.1 lakh is exempt. Under the new tax rate structure, the taxable income shall be Rs.1,42,000 and there will be a tax liability of Rs.4,284.

 

b)      Senior Citizens.

Presently, for senior citizens there is a rebate in tax of Rs.20,000 under Section 88B of the Act. Senior citizens by and large have got pension income which is eligible for standard deduction. Further, income of interest by way of investment of the money received on retirement is also eligible for deduction under Section 80L of the Act. Take the case where a senior citizens having pension income of Rs.1 lakh and income from interest of Rs.98,000 which includes income from bank interest and government securities. As per the existing provisions, he will be entitled to a standard deduction of Rs.30,000 and deduction under Section 80L of Rs.15,000. Thus, the net taxable income will be Rs.1,53,000 on which tax payable works out to Rs.19,900. Being a senior citizen, he will be entitled to a rebate of upto Rs.20,000 under Section 88B of the Act. As such, there will be no tax liability. However, as per the new tax structure, th