Budget 2004-05 Update

Agarwal Shraff & CO. Chartered Accountants

UNION BUDGET 2004-2005 HIGHLIGHTS OF INCOME TAX PROVISIONS RATE OF TAX: There is no change in the rate of tax. However if the taxable income of an individual or an HUF is below Rs.1.00 lakh then a tax rebate will be allowed so that no tax is payable. But this rebate will not be available if income including short-term Capital Gains (STCG) exceeds Rs.1.00 lakh. In this case the tax will be payable at the usual rate on all other income and at 10% on STCG. Taxation of Capital gains on sale of securities by any person:

a)

Long-term Capital Gain from transfer of securities conducted through a recognised stock exchange will not be charged to tax if the date of sale of security is after the coming into force of Securities Transaction Tax; [Section 10(38)]

b)

Short-term Capital Gain from transfer of securities conducted through a recognised stock exchange will be charged to tax @10% if the date of sale of security is after the coming into force of Securities Transaction Tax. [Section 111A]

TAXATION OF GIFTS: Any sum received in cash or by cheque or by an other mode or by way of credit after 1 st September, 2004 by an individual or an HUF from any person in excess of a total of Rs.25,000/- (up to Rs. 1.00 lakhs on the occasion of one's marriage) in an assessment year shall be regarded as the income of the recipient except from relatives out of natural love and affection or under a will or by inheritance. The receipt in question will be treated as ‘Income from Other Sources’. In all cases genuineness of the receipt will have to be proved. [Section 2(24)(xiii)] CHARITABLE TRUSTS: The commissioner shall have the power to cancel the registration of a trust if he is satisfied that the activities of the trust are not genuine or are not in accordance with the object of the trust. This will be effective from, 1st October 2004. [Section 12AA] RELATING TO BUSINESS: a)

An additional depreciation of 15% was allowed to an assessee manufacturer in respect of machinery installed after 31st March, 2002 provided the new installation resulted in enhancing the installed capacity of the unit by at least 25%. This benefit will now be available from the assessment year 2005-2006 even if the capacity increases in excess of 10%. [Section 32]

b)

Approval granted under section 35AC would be withdrawn if a report in the prescribed form were not filed within the prescribed time to the National Committee. This will be effective from 1st October 2004.

c)

Where tax deducted at source on any interest, commission, brokerage fee for professional or technical services or to a contractor is not either deducted or paid during the year or by due date if such date falls in the next year, the entire amount shall be allowed in the year in which the tax deducted or deductible on the sum has been paid. This will apply to the assessment year 2005-2006. [Section 40(ia)

d)

From the assessment year 2005-2006 losses under the head ‘Profits and Gains of Business’ shall not be allowed to be set off against income from Salaries. [Section 71(2A)]

TAX HOLIDAY It is proposed to extend the tax benefit under section 80-IA(4) to an undertaking, which undertakes substantial renovation and modernisation of the existing transmission or distribution lines. “Substantial renovation and modernisation” shall mean an increase in the book value of plant and machinery by fifty per cent. [Section80-IA(4)]

52, WESTON STREET, CALCUTTA – 700012, Phone: 2225 9194, 98300 61359

e-mail: [email protected]

Agarwal Shraff & CO. Chartered Accountants

100% deduction of the profits of an undertaking developing and building housing projects is being allowed if the housing project is approved by a local authority before 31st March, 2005. i)

The undertaking should have commenced development of the housing project after the 1st day of October, 1998,

ii)

the project should be on a size of a plot of land which has a minimum area of one acre, and

iii)

the residential unit should have a maximum built-up area of one thousand square feet where such residential unit is situated in Delhi or Mumbai and one thousand and five hundred square feet at other places.

Following further amendments has been made: I)

The time limit for obtaining approval from the local authority has been extended to 31 st March, 2007.

II)

Time limit for the completion of the housing project is limited to within 4years from the end of the financial year in which the project is approved by the local authority.

III)

Built-up area of the shops and other commercial establishments included in the housing project shall not exceed five per cent. of the aggregate built-up area of the housing project or 2000 sq.ft., whichever is less.

The condition of minimum plot size of one acre has been relaxed in the case of a housing project, carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings and notified by the Board in this behalf. These amendments will apply to the assessment year 2005-2006 and subsequent years. 80-IB(8A) Any company carrying on scientific research and development is allowed a 100% deduction of the profits for a period of ten consecutive assessment years, if such company is approved by the prescribed authority before the 1st April, 2004. The date of approval has been extended to before 1st April, 2005. The proposed amendment will apply to the assessment year 2005-2006 and subsequent years. 80-IB(10) The existing provision of sub-section (11A) allows 100% deduction of profits for 5 years from the initial assessment year and theerafter 25% (30% in the case of a company) for undertakings engaged in handling, transportation and storage of food grains. The benefit has been extended to processing, preservation and packling of fruits and vegetables. 80-IB(11A) (iv) An undertaking operating and maintaining a hospital in a rural area shall be eligible to a 100% deduction of it's profits for a period of 5 consecutive years from the initial assessment year in which it begins to provide medical service if the hospital is constructed between 1st October, 2004 and 31st march, 2008, has at least 100 beds. 80-IB(11A) (vi) DIVIDEND STRIPPING: Presently, if any loss arises in course of selling any securities or unit which have been bought 3 months before the record date and are sold within 3 months after the record date then the amount of loss to the extent of the exempt dividend income on such securities or unit is ignored. The period of holding in the case of units has been increased to 9 months. Moreover where additional units are allotted to a person without payment on the basis of any units acquired within 3 months of the record date; then if any loss is incurred by him on the sale of any of the original units or additional units within the period of 9 months of the record date; then such loss will be ignored and shall be deemed to be the cost of the remaining units. REGARDING ASSESSMENT 52, WESTON STREET, CALCUTTA – 700012, Phone: 2225 9194, 98300 61359

e-mail: [email protected]

Agarwal Shraff & CO. Chartered Accountants

a)

Assessing officer shall be empowered to appoint a valuation officer to estimate the value of investments or bullion or jewelry or other articles for the purpose of making an assessment. The Assessing Officer may take into account the report of the valuation officer after giving the assessee an opportunity. The provisions will apply to assessments pending on 30th September, 2004 or to any reassessments. [Section142A]

b)

The period required to obtain an advance ruling or rejection of application for advance ruling shall be excluded for the purpose of calculating the period of limitation under section 153 for assessment or reassessment or in case of search or requisition. This will be effective from 1 st October 2004.[Section 153B(v)]

RELATING TO TAX DEDUCTED AT SOURCE: a)

If payment is made to a contractor in excess of Rs.50,000/-in an year even if the value of each contract is less than Rs.20,000/- then tax would have to be deducted at source on the entire payment with effective from 1st October, 2004. [Section194C]

b)

The system of TDS certificates will be abolished from the assessment year 2006-2007.

c)

From 1st April 2005 assessee’s shall receive a statement of tax deducted at source from their income. The specified authority will issue this statement.[Section 203AA]

d)

Any person deducting tax at source on or after 1 st April, 2005 shall furnish a quarterly statement as on 30th June, 30th September, 31st December and 31st March after paying the tax deducted by him to the credit of the central government. [Section 200]

e)

Any person responsible for deducting or collecting tax at source who has not already obtained a TAN shall apply for allotment of a TAN by 30 th September 2004. TAN shall be quoted on all challans for payment of tax. This shall also be mentioned on all certificates furnished U/S 203C(5) and in all TDS returns.

f)

Penalty for failure to furnish PAN no. or incorrect number could lead to a penalty of Rs. 10,000/- from 1st April, 2005.

ANNUAL INFORMATION RETURN OF SPECIFIED FINANCIAL TRANSACTION: An assessee as well as prescribed Government authorities, who are responsible for registering or maintaining a record of, or who enter into any specified financial transaction such as shall furnish an annual information return in respect of specified transactions entered into on or after 1 st April, 2004, to the prescribed income-tax authority Specified financial transaction include a transaction of purchase, sale or exchange of goods or property or right or interest in a property, or for rendering any prescribed service, or a works contract, or transaction of investment or of expenditure incurred, or any loan or deposit, where the value or the aggregate value of such transaction during a previous year exceeds fifty thousand rupees or such other higher value as may be prescribed. This amendment will take effect assessment year 2005-2006 and will apply to the financial transactions entered into on or after 1st April 2004. [Section 285BA] Penalty for failure to furnish the annual information return shall be one hundred rupees for every day during which the failure continues. [Section 271FA] CRIMINAL LIABILITY FOR ABETMENT OF TAX FRAUDS: If a person willfully and with an intent to enable another person to evade tax or interest or penalty makes or assists in making false entries or a false statement knowing the entry or the statement to be false or untrue which is useful in any proceeding under this act such person could be punishable with rigorous imprisonment of from 3 months and up to 3 years. And it will be sufficient to allege a general intent to enable evasion of tax on or after 1st October 2004. [Section 277A] OFFENCES BY COMAPNIES

52, WESTON STREET, CALCUTTA – 700012, Phone: 2225 9194, 98300 61359

e-mail: [email protected]

Agarwal Shraff & CO. Chartered Accountants

If an offence is committed by a company through an act of the person in charge, any director, manager, secretary, or any other officer then in addition to the penalty and/or prosecution suffered by the responsible person the company shall be liable a fine too. This is with effect from 1 st October 2004. [Section 278B(3)] MISCELLANEOUS PROVISIONS: a)

A non-resident will also have to intimate his permanent account no. to the person responsible for deduction of tax.

b)

Income from interest on moneys in Non- Resident (External) Account will be chargeable to tax from 1st September, 2004.

c)

Any income from, dividend from an infrastructure capital company from the assessment year 2005-2006 shall be taken into account for computing the book profits and the relating expenses will also be deducted from the book profit.

d)

The tax-free period of Income distributed by open-ended mutual funds has been extended to the year 1-4-2004 provided that debt fund paid tax @ 12.5% on the income distributed to than individuals of HUFs. And @20% in the case of others from 9th July, 2004. ******************** UNION BUDGET 2004-2005 HIGHLIGHTS OF SERVICE TAX PROVISIONS

SERVICE TAX Following amendments will come into effect from the date of enactment of Finance Bill Credit of service tax and excise duty is being extended across goods and services, which means that a manufacturer can avail credit of service tax for payment of excise duty and a service provider can avail credit of excise duty, on goods used in providing service, for payment of service tax. Rate of tax is being raised to 10%. A number of new services have been included. Transport of goods by road by a road transport agency (issuing consignment note) and construction services in respect of commercial or industrial buildings and civil structures are some notable inclusions. The scope of Commissioning & Installation Service has been extended to include erection also. The scope of "Business Auxiliary Services" has been extended to include procurements of inputs, production of goods or provision services on behalf of client. This extended definition means that goods manufactured on job work basis has been included in the scope of service tax. However goods produced on job work will not be subjected to service tax if these are falling within the definition of manufacture under section 2(f) of Central Excise Act. Following amendments will come into effect from 9th July 2004 Exemption from service tax on Commission Agents has been removed. Exemption on Maintenance or repair service of computers has been removed. In case of advance payment received service tax will be payable on pro rata basis. ********************

EDUCATION CESS 2% education cess has been imposed on income tax, excise duty, customs duty and service tax. Credit of education cess on excise duty, customs duty and service tax on input goods and services can be availed for payment of education cess on output goods and services. ********************

52, WESTON STREET, CALCUTTA – 700012, Phone: 2225 9194, 98300 61359

e-mail: [email protected]

Agarwal Shraff & CO. Chartered Accountants

52, WESTON STREET, CALCUTTA – 700012, Phone: 2225 9194, 98300 61359

e-mail: [email protected]