An update on some major I-T Act changes
In an initiative that will have implications for the corporate sector, the Finance Act, 2006 has amended certain provisions of the Income-Tax Act, 1961 (I-T Act) to streamline and simplify the tax laws. Some of the major changes in the I-T Act along include:
Minimum Alternate Tax
Section 115JB of the I-T Act provides that if the tax payable on the total income of an assessee is less than 7.5 per cent of the book profit, then such book profit is deemed to be the total income of the assessee and the tax payable will be 7.5 per cent of such book profit. This minimum tax, which is mandatory for the company to pay is the Minimum Alternate Tax (MAT). The Finance Bill, 2006 (the Bill) has effected the following changes in MAT provisions with effect from April 1, 2007:
The gross MAT rate has been raised from 7.5 per cent to 10 per cent thereby substantially increasing the tax payable by companies covered under MAT.
A significant amendment, increasing the liability of corporates, is the inclusion of Long Term Capital Gains under Section 10(38) of ITA for the purposes of MAT computation which will considerably effect investment in equity shares. Another provision with a retrograde effect is the disallowance of depreciation on the revalued amount of assets which a company may revalue from time to time.
The period for companies availing themselves of the MAT credit is proposed to be increased from five years to seven. However, this proposal will not be effective retrospectively, therefore, it will not be beneficial to companies still to claim MAT credit.
Foreign Tax Deductions
Section 40(a)(ii) of I-T Act specifically disallows deduction of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession from the total income of the assessee. However, in terms of Section 90 and 91 of the Act, if such tax is paid outside India, it is eligible for credit against tax paid in India on the global income of the assessee.
Nevertheless, there have been reservations whether income-tax paid in a foreign country is allowable as deduction in computing profits and gains from business and profession. The amendments under Finance Act 2006 aim to clarify this position by introducing the following Explanations to Section 40(a)(ii) of ITA:
Any sum paid outside India and eligible for relief of tax under Section 90 of ITA or eligible for deduction from the income-tax payable under Section 91 is not allowed as deduction under Section 40 of ITA. However, tax credit will continue to be available with respect to income-tax paid in a foreign country in compliance with provisions of Section 90 and 91 of ITA. This amendment has taken effect from April 1, 2006.
With effect from June 1, 2006, money paid in a foreign country which is eligible for tax relief under Section 90A of ITA will not be allowed as deduction in computation of profits and gains from business and profession.
The amendments, therefore, prevent the tax-payers from claiming the benefit of double deduction, once by way of set-off of foreign tax credit and again by way of deduction from profits computed for income-tax purposes.
Fringe Benefit Tax
Several perquisites, disguised as fringe benefits, escape tax liability as neither employers nor employees pay tax on them. The Finance Act 2006 has rationalised the mechanism of charging the Fringe Benefit Tax through the following changes in Section 115WB and 115WC of ITA with effect from April 1, 2007:
Benefits in the form of tour and travel, hospitality and use of hotel boarding and lodging facilities in the case of airline companies and shipping industry are to be valued at 5 per cent instead of 20 per cent.
Expenditure on distribution of free samples of medicines or of medicinal equipment, to doctors and expenses incurred on brand ambassadors and celebrity endorsements has been excluded from the purview of expenditure on sales promotion including publicity.
The FBT will now be attracted only on yearly contributions by employers to any approved superannuation fund which are in excess of the prescribed ceiling of Rs 1 lakh per employee.
(The authors are with Titus & Co., Advocates.)