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Amendments to the Finance Bill, 2002 as passed by the Parliament
Synopsis of important amendments
A. Direct Taxes
- Tax Holiday for units located in Special Economic Zones (SEZs).
It is now provided that the tax holiday for an undertakings located in
Special Economic Zones, which begin to manufacture / produce articles
or things or computer software on or after 1 April 2002, will
be allowed to the extent of 100 per cent of the eligible profits for a
period of 5 consecutive years starting from the year in which the undertakings
begin to manufacture / produce. Thereafter, the tax holiday to the
extent of 50 per cent of the eligible profits will be allowed for further
period of 2 years.
- 10A / 10B units can avail tax holiday even after reorganisation
of business
It is now provided that when a firm or sole proprietory concern is succeeded
by a company and as a result, the ownership or beneficial interest in
the undertaking of the firm or the sole proprietory concern is transferred
to the company, the tax holiday under sections 10A and 10B of the eligible
profits of such undertaking will be allowed to the company in the same
manner as would have been allowed to the firm or sole proprietary concern.
However, the shareholding of the partners of the firm or the sole proprietor,
as the case may be, should continue to remain at least 51 per cent of
the total voting power in the company during the period for which the
company is eligible for tax holiday under sections 10A and 10B.
- Exemption of income from property held for charitable or religious
purposes
It is now provided that in order to avail exemption under section 11 at
least 85 per cent of the income derived during the year from the property
held under trust should be applied to charitable or religious purposes
in India. The balance 15 per cent can be accumulated or set apart
for application to such purposes in India.
It was proposed that fees received in cash or in kind under an agreement
for not carrying out any business activity, or for not sharing any know-how,
patent, copyright, trademark, licence, franchise or any other business
or commercial rights of similar nature or information or technique likely
to assist in the manufacture or processing of goods or provision of services,
would be taxable under the head "Business Income".
It is now provided that any sum, whether received or receivable, in cash
or kind, on account of transfer of the right to manufacture, produce or
process any article or thing or right to carry on any business, will not
be taxable under the head "Business Income" but under the head "Capital
Gains":
- Additional depreciation on new
plant and machinery
It was proposed that a new industrial undertaking that acquires and installs
on or after 1 April 2002 new plant and machinery used in the
manufacture or production of any article or thing, is eligible for additional
depreciation of 15 per cent on the actual cost of these assets in the
year of start of manufacture.
It was also proposed that such additional depreciation will not be allowed
in respect of any plant or machinery, the
whole or part of the actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise) from business income of
any one previous year.
It is now provided that the additional depreciation will not be allowed
only if the whole of the
actual cost of the plant or machinery is allowed as a deduction from the
business income of any one previous year.
It was also proposed that the benefit of additional depreciation be also
extended to units existing as at 31 March 2002, which achieve substantial
expansion in any year by way of additional installed capacity of at least
25 per cent. The term 'installed capacity' was defined to mean the production
capacity as existing on the last day of any previous year commencing on
or after 31 March 2002.
The definition of 'installed capacity' has now been modified to mean the
production capacity existing as on 31 March 2002.
- Adjustment to actual cost of imported
assets for gain / loss on exchange fluctuation to be made only when
actually incurred.
It was proposed that in case of imported assets purchased either on deferred
payment terms or out of foreign exchange loans, the impact of foreign
currency movements need to be adjusted in the price of the assets only
at the time of actual settlement of liabilities. Further, foreign currency
movements in respect of interest obligations would also have needed similar
tax treatment.
It is now provided that if, as a result of the foreign currency movements,
the price of the assets was adjusted on an accrual basis under the erstwhile
provisions of section 43A, then the price of the assets at the time of
actual settlement of liabilities should be adjusted in such a manner that
the total amount added to or deducted from the price of the assets is
equal to the increase or reduction in the liabilities arrived at, taking
into account the actual payment.
- Definitions of 'cost of improvement'
and 'cost of acquisition' amended
It is now proposed that the 'cost of improvement' in relation to a capital
asset being the 'right to carry on any business' shall be taken to be
nil. The 'cost of acquisition'
of such asset in case of its purchase from a previous owner, shall be
the actual purchase price.
- Tax holiday for undertakings located
in industrially backward states and districts - Time limit extended
At present, the undertakings located in industrially backward states and
districts are eligible for tax holiday under section 80-IB provided that
such undertakings begin to manufacture / produce articles or things or
to operate the cold storage plant on or before 31 March 2002.
The time limit as now been extended to 31 March 2004.
- Dividend and income from units
of UTI / mutual fund eligible for deduction
Currently, individuals or Hindu Undivided Families are eligible for a
deduction aggregating to Rs. 9,000 in respect of certain categories
of income under section 80L.
Henceforth, dividends from an Indian company and income from the units
of UTI / mutual fund (other than the income arising from the transfer
of such units) will also be eligible for deduction under section 80L.
It is now provided that tax rebate under section 88, which was originally
proposed to be allowed at 10% of the qualifying amount of specified investments,
for taxpayers having income between Rs 1,50,000 and Rs. 5,00,000, will
mow be available at 15% of the qualifying amount. The qualifying amount
has also been increased from Rs 80,000 to Rs. 1,00,000.
- Reference to Transfer Pricing Officer
The provisions of reference to the Transfer Pricing Officer (TPO) have
been introduced. The Assessing Officer, if considered necessary for expedient,
may refer the computation of the arm's length price in relation to any
international transaction to the TPO, with the previous approval of the
Commissioner.
After receipt of the reference, the TPO shall serve a notice on the taxpayer
to produce evidence in support of the taxpayer's computation of arm's
length price in relation to the international transaction referred
The TPO shall, by an order in writing determine the arm's length price
in relation to the international transaction referred to by the AO and
send a copy of his order determining the arm's length price to the AO
and to the taxpayer.
On receipt of the TPO's order, the AO will compute the taxpayer's income
having regard to the arm's length price determined by the TPO.
The powers of rectification of any mistakes apparent from the record have
also been given to the TPO.Consequently, the AO will also have to rectify
the assessment order based on the rectification order of the TPO.
TPO' have also been given powers similar to those given to the AO to issue
summons and call for information.
- Subscription to telephone removed
from the one-by-six scheme of filing the return
Currently, a person, who is a subscriber to a telephone, has to compulsorily
file the return of income irrespective of the amount of his taxable income.
It is now proposed that this provision will apply to a subscriber of the
cellular telephone (not being a wireless in local loop telephone) instead
of telephone subscriber.
- Deduction of Tax at Source from
dividend payments
It is now provided that only dividend payments greater than Rs. 1,000
would be liable for Tax Deduction at Source.
- Deduction of tax at source from
the income of units of UTI and Mutual Fund
It was proposed that UTI or mutual fund will be required to withhold tax
with effect from 1 June 2002 at the rate of 10.5 per cent from
the income distributed to the unit holders.
It is now proposed that no tax is deductible if the aggregate of the amounts
of such income distributed / paid or likely to be distributed / paid during
the financial year does not exceed Rs. 1,000. Further, this limit
of Rs. 1,000 will apply per branch office of the UTI / mutual fund and
per scheme under which the units have been issued.
- Commissioners penalty order can
be appealed before the Tribunal
It is now proposed that an appeal can be filed before the Tribunal against
the Commissioner's penalty order passed under section 271.
B. Indirect Taxes.
Central Sales Tax
- Anomalous situation arising on
account of proposed amendments relating to rate of tax on inter-state
sale between registered dealers has been corrected by adding the words
"whichever is lower". Accordingly, rate of tax on inter-state sale
between registered dealers, against the prescribed statutory declaration
forms, will be 4% or the lower rate of tax applicable in the state
of the seller.
- Inter-state sales to units in SEZ
is proposed to be exempted from tax provided SEZ unit is a registered
dealer and provides a declaration in prescribed form to the selling
dealer.
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The information contained herein is
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the subjects covered here in condensed form. It is intended to provide
a general guide to the subject matter and should not be relied on as a
basis for business decisions.
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