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QUESTIONS & ANSWERS

What is the incidence of removal of Fringe Benefit Tax?

Fringe benefit tax (FBT) is proposed to be removed from AY 2010-11. The immediate consequence is that the income of employees under the Employees Stock Option Scheme (ESOP) would now be taxable with effect from 2010-11. Sec. 17 is amended accordingly. Perquisite value will be estimated on the basis of fair market value under the rules to be prescribed. The value adopted for such perquisites will be cost at the time of sale as stipulated under the new provision under Sec. 59(2AAA) of the Act. There has been representation against the tax on the date of exercise of option. Postponement of liability till the date of sale is requested, since adoption of perquisite value at the time of acquisition of shares is only notional. There is a promise to consider the representation.

Rule 3 prior to FBT is back so that tax liability of the employees under the pre-existing rule will stand restored.

There have been many favourable amendments rationalising the provisions. Surcharge and cesses will not be applicable for tax to be deducted. Tax on contract receipts by individuals and Hindu Undivided Families (HUFs) will be liable for tax deduction at source uniformly at one per cent. However, sub-contractors other than individuals and HUFs will be liable at 2 per cent. In transport business, contractors and sub-contractors will not be liable, if they are individuals or HUFs, if PAN is available.

If PAN of contractor is not available, tax deduction will continue at 2 per cent enhanced to 20 per cent from April 1, 2010. Incidentally, the limit of Rs. 20,000 for cash payment up to Rs. 20,000 is relaxed to Rs. 35,000 under Sec. 40A(3A) for payments to transporters.

In cases where goods made to order are supplied, the controversy as to whether it is a works contract or sale is now resolved by redefining work in Explanation (e) to Sec. 194C to include manufacturing or supplying a product according to the requirement or specification of a customer by using the material supplied by such customer, but does not include manufacturing or supplying a product according to the requirement of a customer by using material purchased from a person other than such customer.

Tax deduction in the case of sub-contract manufacturers will be on the invoice price after exclusion of the amount charged for materials, if the invoice shows material and other part separately.

There is a drastic reduction proposed in the rate of tax deduction at source for hiring plant and machinery under Sec. 194-I at 2 per cent from 10 per cent and for land and buildings uniformly for all at 10 per cent reduced from 15-20 per cent. The rate of deduction will, however, be 20 per cent, if PAN is not quoted after April 1, 2010.

Sec. 201A provides for electronic processing of TDS returns.

Time limit for initiation of proceedings for levy of interest or penalty under Sec. 201 will now be two years from the date of TDS return prescribed under Sec. 200, four years from the date on which tax has been paid or credited, subject to the time limit for completion of assessment under Sec. 153(3). As a transitional provision, time limit for defaults before April 1, 2007 will close on March 31, 2011.

Mutual funds set up by scheduled banks will also be eligible for exemption under Sec. 10(23D). Banks can also issue zero coupon bonds vide Sec. 2(48) read with Sec. 36(1)(iiia) and 194A(3)(x). National Housing Bank would be eligible for deduction under Sec. 36(1)(viii) for re-financing for development of housing. New Pension Scheme will be eligible for exemption under Sec. 10(44) apart from obligations from tax deduction at source and for Securities Transaction Tax. Liability under Sec. 115-O is now relaxed in respect of dividends from subsidiaries distributed by the holding company so as to spare double taxation.

Sec. 80GGB and 80GGC already allowed political contributions, which would now be required to be routed through an electoral trust as defined under Sec. 2(22AAA) under a scheme framed by the Central Government and approved by the Board.

Incentive deductions, which were to lapse from AY 2009-10 are now extended by another year. Such reliefs are Sec. 10A, 10AA, 10B, 80IA(4) and (5). Weighted deduction for research under Sec. 35(2AB) will also get extended. New activities like cross-country distribution network for natural gas is added for relief under Sec. 80IA(1). Capital expenditure is allowed for Indian companies approved by the Petroleum and Natural Gas Regulatory Board meant for those laying pipelines for natural gas. This will be in lieu of deductions in Chapter VI-A. Such capital expenditure, which is deductible, will, however, not include payment for land or goodwill. Other specified business, which will otherwise qualify for deduction of capital expenditure under Sec. 35AD will include setting up and operating of cold chain facility and warehouse facility for storage of agricultural produce.

Consequently, any sale of such asset would become taxable as provided under Sec. 28(vii) as income and under Explanations to Sec. 32 and 43(1) for consequential adjustment for eligibility for depreciation.

Relief under Sec. 80IC is restricted to items under Schedule XIII. Relief under Sec. 80IB(10) is available for developers of housing projects, subject to sale of residential unit to a single purchase.

Manufacture as defined under Sec. 2(29BA) would expect that a different product should emerge as a result of manufacturing process.

Any assessment validly reopened under Sec. 147 can deal with issues other than those for which satisfaction for issue of notice was not recorded.

Period of stay of provisional attachment under Sec. 281B has to be excluded for the purpose of maximum period for which it can be in force.

Presumptive tax for all businesses with turnover not exceeding Rs. 40 lakh at 8 per cent of such turnover under the proposed Sec. 44AD is innovative and should be welcome. This provision will not apply for transporters governed by a separate section. It is also not applicable to professions.

A new number as Documentation Identification Number (DIN) to link correspondence with the file is a proposal which is difficult to understand in the context of PAN.

Explanation 5A to Sec. 271(1)(c), which was inserted by the Finance Act, 2008, in place of total immunity under Explanation 5 for concealment admitted during the course of search, had provided for concessional penalty of 10 per cent only for those years for which the return had not become due. An amendment proposed would now also cover years for which returns had been filed so as to make this provision applicable for all concealed income discovered during search and admitted by the assessee.

(To be concluded)

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