Memorandum

MEMORANDUM REGARDING DELEGATED LEGISLATION

Clause 3 of the Bill seeks to amend Explanation 4 to clause (19AA) of section 2 of the Income-tax Act relating to defini­tions.

Clause (19AA) defines "demerger". Explanation 4 clarifies that the splitting up or reconstruction of any authority or body constituted or established under a Central, State or Provincial Act or a local authority or a public sector company into separate authorities or bodies, as the case may be, shall be deemed to be a demerger if such splitting or reconstruction fulfils the condi­tions specified in sub-clauses (i) to (vii) of clause (19AA). Instead of the said conditions, the proposed amendment seeks to empower the Central Government to notify the conditions in the Official Gazette.

Clause 5 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.

Sub-clause (b) seeks to amend clause (15) relating to exclusion of income by way of interest, premium on redemption of certain securities, bonds, annuity certificates, savings certificates, etc. It is proposed to amend clause (15) so as to include a new sub-clause (vii) relating to interest on bonds in that clause. These bonds shall be bonds issued by a local authority. Item (b) of new sub-clause (vii) proposed to be inserted in clause (15) empowers the Central Government to specify, by notification in the Official Gazette, as to the bonds, the interest in respect of which shall become eligible to be excluded from the total income.

Sub-clause (c) seeks to insert a new clause (23EA) so as to exclude income of an Investor Protection Fund set up by recog­nised stock exchanges in India from the total income. This clause empowers the Central Government to specify, by notifica­tion in the Official Gazette, any Investor Protection Fund set up by recognised stock exchanges in India, either jointly or sepa­rately, for the purposes of that clause.

Sub-clause (e) seeks to insert a new clause (23FB) so as to exclude income of a venture capital company or venture capital fund registered with the Securities and Exchange Board of India from the total income. Clauses (a) and (b) of the Explanation to clause (23FB) define "venture capital company" and "venture capital fund" respectively. It is proposed to empower the Secu­rities and Exchange Board of India to specify, by notification in the Official Gazette, with the approval of the Central Govern­ment, the conditions for a venture capital company or a venture capital fund for the purposes of those clauses. Clause (c) of the Explanation to clause (23FB) defines "venture capital under­taking". It is proposed to empower the Securities and Exchange Board of India to specify, by notification in the Official Ga­zette, with the approval of the Central Govern-ment, the list of activities or sectors that a venture capital undertaking may not engage in, for the purpose of clause (23FB).

Clause 20 of the Bill seeks to substitute clause (v) in the Explanation to section 48 relating to mode of computation so as to define the expression "Cost Inflation Index". The proposed clause (v) empowers the Central Government to specify, by notifi­cation in the Official Gazette, the "Cost Inflation Index" for any previous year as per the provisions of the said clause.

Clause 49 of the Bill seeks to insert a new section 115JB relat­ing to special provisions for payment of tax by certain compa­nies in the Income-tax Act. Sub-section (4) of the new section 115JB empowers the Central Board of Direct Taxes to prescribe, by rules, the form in which every company to which the said section applies shall furnish a report of the accountant.

Clause 52 of the Bill seeks to amend section 115R relating to tax on distributed income to unit holders so as to insert a new sub-section (3A). The proposed new sub-section empowers the Central Board of Direct Taxes to prescribe, by rules, the income-tax authorities before whom, the form and the manner in which the statement shall be furnished and the details which may be given in the said statement by the person responsible for making pay­ment of income distributed by the Unit Trust of India or a Mutual Fund and the Unit Trust of India or the Mutual Fund, as the case may be.

Clause 54 of the Bill seeks to insert a new Chapter XII-F relat­ing to special provisions relating to tax on income distributed by venture capital companies and venture capital funds in the Income-tax Act. The new section 115U relating to tax on distrib­uted income to investors is proposed to be inserted. The said new section empowers the Central Board of Direct Taxes to pre­scribe, by rules, the income-tax authority before whom, the form and the manner in which, the statement shall be furnished and details which may be given in the said statement by the person responsible for making payment of the income distributed by the venture capital company or venture capital fund, as the case may be.

Clause 55 of the Bill seeks to insert a new sub-section (1A) in section 139A of the Income-tax Act relating to permanent account number. The proposed new sub-section (1A) empowers the Central Government to specify, by notification in the Official Gazette, any class or classes of persons by whom tax is payable under the Income-tax Act or any tax or duty payable under any other law for the time being in force. This section also empowers the Central Government to specify the time within which such application shall be made to the Assessing Officer for the allotment of a permanent account number.

Clause 59 of the Bill seeks to amend section 245N of the Income-tax Act relating to definitions in relation to advance ruling. Clause (b) of that section defines the expression "applicant". This clause, inter alia, empowers the Central Government to specify, by notification in the Official Gazette, as to the class or category of persons who are residents falling within the purview of the expression "applicant".

Clause 74 of the Bill seeks to amend section 27A of the Customs Act. The amendment proposed by this clause confers powers upon the Central Government to fix rate of interest on delayed re­funds, by notification in the Official Gazette.

Clause 76 of the Bill seeks to amend section 28AA of the Customs Act. The amendment proposed by this clause confers powers upon the Central Government to fix rate of interest on delayed payment of duty, by notification in the Official Gazette.

Clause 77 of the Bill seeks to amend section 28AB of the Customs Act. The amendment proposed by this clause confers powers upon the Central Government to fix the rate of interest on delayed payment of duty in special cases, by notification in the Offi­cial Gazette.

Clause 79 of the Bill seeks to amend sub-section (2) of section 47 of the Customs Act. The amendment proposed by this clause confers powers upon the Central Government to fix the rate of interest on delayed payment of duty where clearance of goods is for home consumption, by notification in the Official Gazette.

Clause 80 of the Bill seeks to amend sub-clause (ii) of clause (b) of sub-section (1) of section 59 of the Customs Act. The amendment proposed by this clause confers powers upon the Central Government to fix the rate of interest on rent and charges as specified in that sub-clause, by notification in the Official Gazette.

Clause 85 of the Bill seeks to amend the Customs Tariff Act. Sub-clause (b) of this clause proposes to insert a new section 9AA in the Customs Tariff Act. Sub-section (2) of the proposed section 9AA confers powers upon the Central Government to make rules, by notification in the Official Gazette, to provide for the manner in which and the time within which the importer may make application for the purpose of sub-section (1) of that section and to authorise the officers of the Central Government to dispose of such application on behalf of the Central Govern­ment and to provide the manner in which the excess duty refund­able shall be determined and refunded. This proposed sub-section also authorises the Central Government to specify, by rules, the time-limit within which such application shall be disposed of.

Clause 89 of the Bill seeks to amend section 3A of the Central Excise Act. Sub-clause (a) of that clause proposes to substitute sub-section (2) of that section by a new sub-section (2). The proposed new sub-section (2) confers powers upon the Central Government to make rules, inter alia, to provide the manner for determination of annual capacity of production of factory, to specify the factor relevant to the production of such goods and the quantity that is deemed to be produced by use of a unit of such factor and also to provide for determination of the annual capacity of production of the factory. Sub-clause (b) proposes to amend sub-section (3) of the said section to confer powers upon the Central Government to specify rates to levy tax under that sub-section, by notification in the Official Gazette.

Clause 90 of the Bill proposes to substitute a section 4 for existing section 4 of the Central Excise Act. Clause (b) of sub-section (1) of the proposed new section confers powers upon the Central Government to prescribe, by rules, the manner by which the value of the goods shall be determined in the case specified in that clause. The proposed amendment by this clause shall come into force on the date to be notified by the Central Government in the Official Gazette.

Clause 94 of the Bill seeks to amend section 11AA of the Cen­tral Excise Act. The amendment proposed by this clause confers powers upon the Central Government to fix the rate of interest on delayed payment of duty, by notification in the Official Gazette.

Clause 95 of the Bill seeks to amend sub-section (1) of section 11AB of the Central Excise Act. The amendment proposed by this clause confers powers upon the Central Government to fix the rate of interest on delayed payment of duty in special circumstances, by notification in the Official Gazette.

Clause 98 of the Bill seeks to amend section 11BB of the Central Excise Act. The amendment proposed by this clause confers powers upon the Central Government to fix the rate of interest on de­layed refunds, by notification in the Official Gazette.

Clause 111 of the Bill seeks to confer powers upon the Central Government to appoint the date, by notification in the Official Gazette, with effect from which the amendments proposed under that clause shall come into force.

The matters in respect of which notifications may be issued or rules may be made in accordance with the aforesaid provisions of the Bill are matters of procedure and detail and it is not prac­ticable to provide for them in the Bill itself.

The delegation of legislative power is, therefore, of a normal character.

MEMORANDUM EXPLAINING THE PROVISIONS IN THE
FINANCE   BILL,  2000

PROVISIONS RELATING TO DIRECT TAXES

The provisions in the Finance Bill, 2000, in the sphere of direct taxes relate to the following matters :—

  (i)  Prescribing the rates of income-tax on incomes liable to tax for the assessment year 2000-2001; the rates at which tax including the surcharge will be deductible at source during the financial year 2000-2001 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, and other categories of income liable to deduction of tax at source under the Income-tax Act; rates for computation of "advance tax", deduction of income-tax from ‘Salaries’ and charging of income-tax on current incomes in certain cases for the financial year 2000-2001.

 (ii)  Amendment of the Income-tax Act, 1961, inter alia, with a view to promoting venture projects and investments therein, housing, providing measures for social welfare, providing incentives for infrastructure development including urban infrastructure, industrialization, shipping industry, entertainment industry, measures for development of capital markets, business reorganization, measures to accelerate economic development, widening of tax base, rationalization and simplification of certain provisions and  taxpayer friendly measures.

(iii)  Amendment of the Wealth-tax Act, 1957.

(iv)  Amendment of the Interest-tax Act, 1974.

 (v)  Amendment of the Finance (No. 2) Act, 1998.

(vi)  Amendment of the Finance Act, 1999.

2. Subject to certain exceptions, which have been indicated while dealing with the relevant provisions, the Bill follows the principle that changes in the provisions of the tax laws, should ordinarily be made operative prospectively in relation to current incomes and not in relation to incomes of past years.  The substance of the main provisions in the Bill relating to direct taxes is explained in the following paragraphs :—

INCOME-TAX

I. Rates of income-tax in respect of incomes liable to tax for the assess-ment year 2000-2001.

In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 2000-2001, the rates of income-tax have been specified in Part I of the First Schedule to the Bill and are the same as those laid down in Part III of the First Schedule to the Finance Act, 1999, for the purposes of computation of "advance tax", deduction of tax at source from "Salaries" and charging of tax payable in certain cases during the financial year 1999-2000.  It is also specified that the tax so computed in the case of all assessees (except non-residents and foreign companies) will be enhanced by a surcharge of ten per cent.  In the case of individuals, Hindu undivided families, association of persons and body of individuals, the surcharge would be payable only by persons having total income above Rs. 60,000.

II. Rates for deduction of income-tax at source during the financial year 2000-2001 from income other than "Salaries".

The rates for deduction of income-tax at source during the financial year 2000-2001  from incomes other than "Salaries", have been specified in Part II of the First Schedule to the Bill. These rates apply to income by way of interest on securities, interest other than "interest on securities",  insurance commission, winnings from lotteries and cross-word puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are broadly the same as those specified in Part II of the First Schedule to the Finance Act, 1999, for the purposes of deduction of income-tax at source during the financial year 1999-2000. It is also specified that the tax so computed for deduction at source in the case of companies,  co-operative societies, firms and local authorities (except foreign companies) will be enhanced by a surcharge of ten per cent. In the case of individuals, Hindu undivided families, association of persons and body of individuals, the surcharge would be payable  at the following rates :—

III. Rates for deduction of income-tax at source from "Salaries",  computation of "advance tax" and charging of income-tax in special cases during the  financial year 2000-2001.

The rates for deduction of income-tax at source from "Salaries" during the financial year 2000-2001 and also for computation of "advance tax" payable during that year in the case of all categories of tax payers have been specified in Part III of the First Schedule to the Bill. These rates are also applicable for charging income-tax during the financial year 2000-2001 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year or assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates specified in the said Part III are indicated in the following paragraphs :—

A. Individuals, Hindu undivided families, etc.       

Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc.

No change is proposed in the rate structure. However, the tax payable would be enhanced by a surcharge for purposes of the Union at the rate of ten per cent of the  tax payable (after allowing rebate under Chapter VIII-A) in cases of persons having total income exceeding  Rs. 60,000 but not exceeding Rs. 1,50,000. The tax payable would be enhanced by a surcharge for purposes of the Union at the rate of fifteen per cent of the  tax payable (after allowing rebate under Chapter VIII-A) in cases of persons having total income exceeding  Rs. 1,50,000. No surcharge would be payable by persons having incomes of Rs. 60,000 or below.   Marginal relief would be provided to ensure that the additional amount of income-tax  payable, including surcharge, on the excess of income over Rs. 60,000 - is limited to the amount by which the income is more than Rs. 60,000. Marginal relief would also be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 1,50,000 is limited to the amount by which the income is more than Rs. 1,50,000.

The Table below gives the income slabs and the rates of income-tax. Column (a) specifies the rates given in Paragraph A of Part I of the First Schedule to the Bill; and column (b) specifies the rates given in Paragraph A of Part III of the First Schedule to the Bill.

TABLE

# Persons  in this slab would be required  to pay ten per cent. surcharge on the total income-tax payable after rebate under Chapter VIII-A.

$ Persons  in this slab would be required to pay fifteen per cent. surcharge on the total income-tax payable after rebate under Chapter VIII-A.

The impact of levy of surcharge in the case of individuals, HUFs, etc. at different income levels would be as under :—

* Marginal  relief  would  be provided to ensure that the additional income-tax payable, including surcharge, on the excess of income over Rs. 60,000 is limited to the amount by which the income is more than Rs. 60,000.

@ Marginal  relief  would  be provided to ensure that the additional income-tax payable, including surcharge, on the excess of income over Rs. 1,50,000 is limited to the amount by which the income is more than Rs.1, 50,000.

B. Co-operative societies

In the case of co-operative societies the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Bill. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.  However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent of tax payable.

C. Firms

In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Bill. This rate remains at 35 per cent. However, the tax payable by resident firms would be enhanced by a surcharge for purposes of the Union at the rate of  ten per cent of  the tax payable.

D. Local authorities

In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Bill.  This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Bill.  However, the tax payable would be enhanced by a surcharge for purposes of the Union at the rate of ten per cent of the tax payable.

E. Companies

In the case of companies, the rate of  income-tax has been specified in Paragraph E of Part III of the First Schedule to the Bill. There is no change in  the existing rates of  35 per cent  for domestic companies and 48 per cent for foreign companies. However, in the case of domestic companies, the tax payable would be enhanced by a surcharge at the rate of ten per cent of the  tax payable.

[Clause 2 & First Schedule]

STIMULUS FOR ECONOMIC GROWTH

Measures for incentives to Venture Capital

It is proposed to insert a new clause (23FB) in section 10 to provide that any income of a venture capital company or a  venture capital fund  from any investments made in a venture capital undertaking will not be included in computing the total income.

The venture capital company or the venture capital fund  would require to be registered under the Securities and Exchange Board of India Act, 1992 and regulations  issued by the Securities and Exchange Board of India (SEBI), with the approval of the Central Government by way of notification in the Official Gazette.

It is proposed to define "venture capital company" to mean a company which has been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 and regulations made thereunder and which fulfils the conditions as may be specified with the approval of the Central Government,  by the SEBI, by a notification in the Official Gazette in this regard.

It is proposed to define "venture capital fund" to mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908, and which has been granted a certificate of registration under  the Securities and Exchange Board of India Act, 1992 and regulations made thereunder and which fulfils the conditions as may be specified, with the approval of the Central Government,  by the SEBI, by a notification in the Official Gazette in this regard.

The  expression "venture capital undertaking"  is proposed to be defined to mean a domestic company whose shares are not listed in a recognised Stock Exchange in India and which is engaged in the business for  providing services, production or manufacture of an article or a thing but does not include such activities or sectors, which are specified, with the approval of the Central Government by the SEBI in the Official Gazette in this regard.

Consequent  to the above amendment, it is proposed to insert a sunset clause in the existing section 10(23FA), so as to provide that the exemption in respect of any income by way of dividends or long term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a venture capital undertaking, shall not be available to any investment made after 31st March, 2000.  Such investment will qualify for exemption under the newly inserted clause (23FB) in section 10.

The proposed amendments  will take effect from 1st April, 2001, and will accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

It is also proposed to introduce a levy at the flat rate of tax at twenty per cent on the income distributed by a venture capital company or  a venture capital fund by inserting a new Chapter XII-F.  This tax, levied under section 115U,  would be the final tax payable by a venture capital company or a venture capital fund.

It is further proposed that a venture capital company or a venture capital fund will be liable to pay income-tax at the rate of twenty per cent in respect of any income which is not distributed to its investors within such period  as may be specified, with  the approval of the Central Government, by the  SEBI,  by a notification in the Official Gazette in this behalf.

It is also proposed to provide that the person responsible for making payment of the income distributed by the  venture capital company or a venture capital fund and the venture capital company or a venture capital fund, as the case may be, shall be liable to file a statement in the prescribed form and manner giving details of income distributed to investors, tax paid thereon and other relevant details.

It is also proposed to insert a new section 115V to provide that if the tax under section 115U is not paid within fourteen days of distribution of the income, then  interest will be charged at the rate of 1.5% per month for the delayed period.

It is also proposed to insert a new section 115W to provide that if any person responsible for making payment of the income distributed by the venture capital company or a venture capital fund and the venture capital company or a venture capital fund, as the case may be, fails to pay the income-tax under section 115U to the credit of the Central Government, then he or it shall be deemed to be an assessee in default in respect of the amount of tax payable and all the provisions of this Act for the collection and recovery of income-tax shall apply.

The proposed amendments will take effect from 1st June, 2000.

Consequential amendment  is also proposed in section 10(33) of the Income-tax Act so as to provide that income from a venture capital company or a venture capital fund  referred to in  the newly inserted Chapter XII-F of the Income-tax Act will not be included while computing the total income of an investor.

The proposed amendment will take effect from the 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[ Clauses 5(d), 5(e),  5(g) and 54]

INCENTIVES FOR INFRASTRUCTURE DEVELOPMENT
AND INDUSTRIALIZATION

Solid Waste Management and Water Treatment Systems provided Tax Holiday for development of Urban Infrastructure

Under the existing provisions of the Income-tax Act, a five year tax holiday and a deduction of 30% in the subsequent five years (within a period of initial fifteen years), is allowed to a company or a consortium of companies, operating and maintaining infrastructure facilities in the nature of roads, highways, bridges, airports, ports, rail system or any other public facility of a similar nature. Water supply projects, irrigation projects, sanitation and sewerage systems also form part of infrastructure facilities  under these provisions. 

The country needs large investments in the areas of urban infrastructure, including public health.  In order to attract commercial enterprises to operate such facilities, the Bill proposes to extend the benefit of tax holiday to other infrastructure facilities, namely, water treatment and solid waste management systems.

The proposed amendment will take effect from the 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause   35 ]

Infrastructure Capital Funds

Clause (23G) of section 10 provides that  any income of an infrastructure capital fund or an infrastructure capital company by way of interest, dividends (other than dividends referred to in section 115-O) and long term capital gains from investments made by way of equity or long-term finance in an approved enterprise wholly engaged in the business of (i) developing, (ii)  maintaining and operating or (iii) developing, maintaining and operating an infrastructure facility shall not be included in computing the total income.

To provide impetus for infrastructure development, the scope of the term ‘infrastructure facility’ as defined in sub-section (4) of section 80-IA is proposed to be enlarged so as to include ‘solid waste management’ and ‘water treatment’ within its scope. As a consequence,  income derived by infrastructure capital fund or infrastructure capital company from investments in any enterprise wholly engaged in the development of these infrastructure facilities would be exempt from tax.

The proposed amendment will take effect from 1st April, 2001, and will accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

The clauses (a) and (b) of the Explanation 1 to the clause 10(23G) have also been proposed to be amended so as to bring the definition of infrastructure capital company and infrastructure capital fund in conformity with the said clause.  These amendments are consequential to the amendment of section 10(23G) by the Finance Act, 1999.

The proposed amendment will take effect retrospectively  from 1st April, 2000, and will accordingly, apply in relation to assessment year 2000-2001 and subsequent years.

[Clause  5(f) ]

Tax exemption to certain  bonds issued by local authorities

The local authorities, such as municipal corporations, municipal authorities, etc. need large amounts of funds to finance urban infrastructure projects such as potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers, urban transport, etc.

Clause (15) of section 10 exempts interest payable in certain cases.  To enable the local authorities to have access to funds for financing urban infrastructure projects, it is proposed to accord a tax-free status to the interest on such bonds issued by such authorities, each year.  These bonds are proposed to be specified by the Central Government, by way of notification in the Official Gazette.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 5(b)]

Charitable Trusts allowed to invest funds in long-term finance for urban infrastructure

Under the existing provisions of clause (ix) of sub-section (5) of section 11,  deposits with or investment in any bonds issued by a public company formed or registered in India, with the main object of carrying on the business of providing long-term finance for construction of houses in India for residential purposes, is included as an eligible investment for trusts.  

It is proposed to insert a new clause in the sub-section so as to provide that investment in public companies formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure would also be specified as one of the eligible modes of investment.

[Clause 8]

Tax holiday in respect of undertakings set up in industrially backward States and industrially backward Districts extended upto 31-3-2002

Under the existing provisions of section 80-IB of the Income-tax Act, 1961, a deduction is allowed, in computing the taxable income, in respect of profits derived from a new industrial undertaking, or a ship or the business of a hotel.

For encouraging industrialization in industrially backward States, the Finance Act, 1993, had provided for a five year tax holiday for industrial undertakings set up in industrially backward States specified in the Eighth Schedule, which started manufacture or production on or after the 1st day of April, 1993.  After the first five years, deduction of 30% in the case of companies (25% in the case of other assessees) is allowed for the subsequent five years.  The undertakings which start  manufacture or production after 31st March, 2000 in industrially backward States shall cease to be entitled to the two-tier benefit.  Similarly, a five year tax holiday is available to undertakings set up in notified industrially backward districts, which begin manufacture or production after 1-10-94 but on or before 31-3-2000.

The Bill proposes to extend the tax holiday to undertakings set up in industrially backward States, as specified in the Eighth Schedule which start manufacture or production even after 31-3-2000 but before 31-3-2002.  It is also proposed to similarly extend the tax holiday to undertakings set up in industrially backward districts upto 31-3-2002.

The proposed amendments will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clauses  36(b) and 36(c)]

Fiscal benefit for new small scale industries

Under the  existing provisions of section 80-IB, the small scale units commencing production between 1st April, 1995, and 31st March, 2000 are allowed a deduction of 25% of the profits (30% for companies) for a period of ten years.  In the wake of liberalization, the small scale sector needs fiscal support so that it can face competition.  The Bill proposes to amend section 80-IB to provide continuance of existing concessions to small scale units commencing production even after 31st of March, 2000.  Units set up on or before 31-3-2002 shall be eligible for the benefit.

This amendment will take effect from 1st April, 2001, and will, accordingly apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause  36(a)]

Incentives for shipping industry

Under the existing provisions of section 33AC, a  Government company or a public company carrying on the business of operation of  ships is allowed deduction of an amount not exceeding 50% of profits derived from the business of operation of ships, subject to certain conditions.

In order to enable the shipping industry to go in for fleet expansion, acquisition and modernization, the Bill proposes to enhance the existing deduction upto whole of the profits derived from such business for a period of five years.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment years 2001-2002 to 2005-2006.

[Clause 14]

MEASURES FOR DEVELOPMENT OF  CAPITAL MARKET

Exemption of income of Investor Protection Fund

The Stock Exchanges are required to set up an Investor Protection Fund (IPF) in accordance with the directives of Ministry of Finance and Securities and Exchange Board of India (SEBI). The Fund is set up exclusively to compensate the investors who may suffer a loss in the event of a broker defaulting in the stock exchange concerned.

Under the existing provisions, section 10(23E) provides that the income of  notified Exchange Risk Administration Fund set up by Public Financial Institutions is  exempt from income-tax.

On similar lines, it is proposed that  income of  Investor Protection Funds  set up by recognised Stock Exchanges of India will not be included while computing the total income.

However, where any amount standing to the credit of the fund and not charged to income-tax during any previous year is shared, wholly or partly with a recognised stock exchange, the amount shared shall be deemed to be the income of the previous year in which such amount is so shared.

The proposed amendment will take effect  from 1st day of April, 2001, and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 5(c)]

Concessional rate of tax on long-term capital gains on securities extended to units of Unit Trust of India and units of Mutual Funds

Under the existing provisions contained in the proviso to sub-section (1) of section 112 of the Income-tax Act, tax on long-term capital gains arising out of transfer of listed securities shall not exceed 10% of the capital gains before allowing adjustment for Cost Inflation Index.  The definition of securities follows the definition given in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956.  The status of units of Unit Trust of India and units of Mutual Funds is  not clear under the above definition.

It is, therefore, proposed to amend the  proviso to sub-section (1) of section 112 to provide that long-term capital gains arising from transfer of units of Unit Trust of India and units of Mutual Funds specified under section 10(23D) of the Income-tax Act along with securities as defined in Securities Contract (Regulation) Act, 1956 shall not exceed 10% of the capital gains before allowing adjustment for Cost Inflation Index.

The proposed amendment will take effect retrospectively from 1^st day of April, 2000.

[Clause 46]

TAX INCENTIVES TO PROMOTE HOUSING

Encouragement for Housing Projects

Under the existing provisions of section 80-IB of the Income-tax Act, 1961, deduction is allowed in computing the taxable income, in respect of profits derived from approved housing projects where the assessee commences development and construction of housing project on or after the 1st day of April, 1998 and completes the same before the 31st day of March, 2001.

To continue imparting  stimulus for building new dwelling units, it is proposed that housing projects which are approved by 31-3-2001 and are  completed before 31-3-2003, shall be able to claim the existing benefit of the provision.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 36(d)]

Extension of scope of section 54F

Section 54F of the Income-tax Act exempts levy of tax on long-term capital gains arising from transfer of any long-term capital asset (not being a residential house), if invested in a residential house.  There is, however, a stipulation that the above exemption cannot be availed of, if there is a house in existence on the date of transfer or if the person goes for a second house within the stipulated period. The above condition stands in the way of a large number of taxpayers from availing of the deduction under section 54F.  The existing house may be a small house or a tenanted house which is difficult to sell in view of the stringent tenancy laws or a house which cannot be sold because of non-availability of buyers or slump in market prices.  Therefore, it is proposed to amend section 54F of the  Income-tax Act to provide that the deduction under this section may be available to an individual or Hindu undivided family as long as he has one and not more than one house existing on the date of transfer.  Other conditions would remain the same.

The proposed amendment will take effect from 1st day of April, 2001 and will, accordingly,  apply to the assessment year 2001-2002 and subsequent years.

[Clause 25]

Extension of the terminal date in respect of the enhanced deduction of interest on loans taken to acquire or construct self-occupied house property

By the Finance Act, 1999, deduction available for interest on capital borrowed for construction or acquisition of a self-occupied house pro-perty was enhanced to Rs. 75,000 if the loan is taken on or after 1-4-1999 and the construction or acquisition of the house in question is completed before 1-4-2001. This terminal date is proposed to be extended to 31-3-2003 to make it co-terminus with the relevant provisions of section 80-IB where tax holiday is being extended to housing projects which are approved till 31-3-2001 and completed by 31-3-2003. 

The proposed amendment will take effect from 1-4-2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clause 11]

Limit of repayment of housing loan qualifying for rebate raised to Rs. 20,000

Under the existing provisions of section 88, contributions made in specified savings are allowed a tax rebate of twenty per cent. on the amount invested or the sum of Rs. 60,000 (or Rs. 70,000 if investment is made in infrastructure bonds), whichever is less. Repayment of loan amount for purchase or construction of a residential house is allowed upto Rs. 10,000

It  is  proposed to raise the limit of repayment, qualifying for rebate,  in sub-section (5) of the provision, from Rs. 10,000 to Rs. 20,000.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 43]

TAX INCENTIVES TO ENTERTAINMENT INDUSTRY

Export benefits extended to non-corporate entities

Under the existing provisions of section 80HHF, corporate assessee engaged in the business of export or transfer of film software, television software, music software and television news software including telecast rights are entitled to a deduction of profits, received in convertible foreign exchange.

It is proposed to extend the benefit by way of retrospective amendment to assessees other than companies.

The proposed amendment will be effective retrospectively from 1st April, 2000 and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years.

[Clause 34]

Increase in the limit for submission of statements by the film producers

Under section 285B, producer  of cinematographic films is obliged to furnish within 30 days from the end of the financial year or from the date of completion of the film, whichever is earlier, a statement containing particulars of all payments over Rs. 25,000 in the aggregate made by him or due from him to each person engaged by him.

In response to the demands from the film industry, the Bill proposes to raise the monetary limit from Rs. 25,000 to Rs. 50,000.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 67]

INCENTIVES FOR DEVELOPMENT OF HUMAN RESOURCES

Deduction in respect of repayment of loan taken by a student for pursuing higher studies

Section 80E of the Income-tax Act provides relief to students taking loan for higher studies. The repayment of the amount of loan taken for graduate or post-graduate courses in any branch of engineering, medicine or management is allowed as a deduction from the gross total income upto a maximum amount of rupees twenty-five thousand in a year.  The first year in which the deduction is available is the year in which the person starts repaying the loan.  The deduction is allowed for a maximum period of eight years or till the principal of such loans together with interest is liquidated.

The Bill proposes to raise the limit of deduction from rupees twenty-five thousand to rupees forty thousand.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clause 27]

Incentives to promote sports and games

Under the existing provisions of section 80G of the Income-tax Act, an assessee is allowed a 100% deduction from his total income in respect of donations made by him to certain funds.

For the development of infrastructure for sports and games in the country and for their sponsorship, it is proposed to provide the benefit of 100% deduction to an assessee, being a company, for  sums  donated to Indian Olympic Association.

The proposed amendment shall take effect from the 1st day of April, 2001 and will,  accordingly, apply to assessment year 2001-2002 and subsequent years.

[Clause 28]

MEASURES TO WIDEN THE TAX BASE

Definition of "agricultural income"

Under the existing provisions of the Income-tax Act, agricultural income is not included in computing the total income as per the provisions of clause (1) of section 10 of the Income tax Act.  The term ‘agricultural income’ has been defined in sub-section (1A) of section 2 of the Income-tax Act.  The provisions of clause (c) of this sub-section include  within the definition of agricultural income, any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land or occupied by the cultivator or the receiver of rent-in-kind, or any land with respect to which or its produce any process is carried out to make the produce marketable, if such building is on or in the immediate vicinity of the land and the building is required by the cultivator or the receiver of the rent-in-kind as a dwelling house or as a store house, or other out-building.

It is proposed to insert an Explanation  in section 2(1A) to clarify that any income from such building or land arising from the use of the building or land for any purpose other than agriculture, shall not be included in the definition of  "agricultural income".  For example, if a person has income from using such building or land for purposes such as letting it out for residential purposes or for the purposes of any business or profession, then, such income shall not be treated as agricultural income.

The proposed amendment shall take effect from the 1st day of April, 2001 and will, accordingly, apply to assessment year 2001-2002 and subsequent years.

[Clause 3(a)]

Power delegated to the Central Government to notify class or classes of persons for whom it will be obligatory to apply for Permanent Account Number (PAN)

Sub-section (1) of section 139A of the Income-tax Act lays down the circumstances where it is mandatory to apply for PAN and also the circumstances where PAN can otherwise be allotted. It is obligatory to apply for PAN under the following circumstances,—

  (i)  persons who have taxable income beyond threshold limit of exemption;

 (ii)  persons carrying on any business or profession where the total sales or turnover or  gross receipts exceed Rs. 5 lakhs in any previous year.

(iii)  any person who is in receipt of income derived from property held under trust as provided under section 139(4A). 

In addition, the Assessing Officer may allot PAN to any other person by whom tax is payable.  Further, any person may apply to the Assessing Officer for allotment of PAN and the same shall be allotted to him.

With a view to progressively making PAN a common business identification number for other departments such as the Central Board of Excise and Customs and the Director General of Foreign Trade,  it is proposed to delegate power to the Central Government to notify class or classes of persons for whom it will be obligatory to apply for PAN, provided tax is payable by them under the Income-tax Act or any tax or duty is payable by them under any other law in force.

The proposed amendment will take effect from the 1^st day of June, 2000.

[Clause 55]

WELFARE MEASURES

Rebate of Income-tax in case of senior citizens

Section 88B of the Income-tax Act provides for a special tax relief in the form of rebate of  an amount equal to hundred per cent of income-tax or an amount of ten thousand rupees, whichever is less, to individual residents in India who attain the age of sixty-five years or more at  any time during the previous year.

The rebate to the senior citizens has been provided to help them in meeting the rising cost of  old age care and medical expenses. 

The Bill proposes to raise the existing tax rebate of rupees ten thousand to rupees fifteen thousand in the case of such  individuals  while retaining the other requirements of the provision.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clause 44]

Tax rebate for women

To encourage women to become financially independent, it is proposed to insert a new section namely, section 88C in the Income-tax  Act.  Under the provision, an assessee being a woman, who has not attained the age of sixty-five in the previous year, shall be entitled to a tax rebate of an amount equal to such income-tax or an amount of rupees five thousand, whichever is less.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

 [Clauses 42 and 45]

TAXPAYER FRIENDLY MEASURES

Exemption of amount received on Voluntary Retirement

Under the existing provisions of clause (10C) of section 10 of the Income-tax Act, any amount received by employees of companies, authorities etc.  at the time of their voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, is exempt from income-tax.

The proposed amendment seeks to enlarge the scope of the exemption by extending it to the employees of a public sector company on the termination of their services under a voluntary separation scheme framed in accordance with the guidelines issued in this regard.

Under the existing provisions, the first proviso of section 10(10C) states that the Scheme in relation to companies (other than public sector companies or co-operative societies)  is required to be approved by the Chief Commissioner or the Director General of Income-tax. To simplify and expedite the procedure relating to exemption of amounts received under a Voluntary Retirement Scheme framed as per the guidelines, it is proposed to dispense with the requirement of such approval.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 5 (a)]

Requirement of continuance of same business for set off of unabsorbed depreciation dispensed with

Under the existing provisions contained in sub-section (2) of section 32, carried forward unabsorbed depreciation is allowed to be set off against the profits and gains of business or profession of the subsequent year, subject to the condition that the business or profession for which depreciation allowance was originally computed continues to be carried on in that year.  Similar condition in section 72 for the purposes of carry forward and set off of unabsorbed business loss was removed last year.

With a view to harmonize the provisions relating to carry forward and set off of unabsorbed depreciation and unabsorbed business loss, the Bill proposes to dispense with the condition of continuance of same business for the purposes of carry forward and set off of unabsorbed depreciation.

The  proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 13]

Charitable Trust not to lose exemption, if funds remain invested for three years in public sector companies on their disinvestment

Under the existing provisions, the income from property held under a trust and used wholly for charitable or religious purposes is exempt from income-tax.  This exemption is confined only to that portion of income which is applied for charitable or religious purposes or is accumulated for applying to such purposes, provided such accumulation is not more than 25% of the total income of the trust.

Provisions of sub-section (2) of section 11 provide  that the money so accumulated or set apart must be  invested or deposited in specified forms or modes, mentioned  in sub-section (5) of section 11.

Under the provisions of clause (vii) of sub-section (5) of section 11, investment or deposit in any public sector company is specified as an eligible mode of investment for charitable  trusts.  The benefit of exemption is not available if a trust holds any shares of a company  other than a public sector company. A public sector company may cease to be a public sector company, after disinvestment by the Government.

It is proposed to amend the provisions of this clause so as to provide that an investment or deposit in a public sector company shall continue to be one of the eligible modes of investment for charitable or religious trusts, for a period of three years (in the case of shares),  and till the date of maturity of other investment or  deposit  from the date a public sector company ceases to be a public sector company.   

The proposed amendment will take effect from 1st April, 2001 and will accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 8]

Charitable Trusts not to lose exemption if educational or medical facilities provided to specified persons

The existing provisions provide that the income of a charitable or religious trust will not be available if any part of such income or any property of the trust is used or applied directly or indirectly for the benefit of any person such as the author of the trust, trustee or any relative of such persons or any concerns in which such persons  have a substantial interest (referred to as a specified person). 

It is proposed to insert a new sub-section in section 13 to provide that  a trust running an educational institution or a medical institution or a hospital shall not lose the benefit of exemption of any income other than the value of benefits of educational or medical facilities provided to the specified persons, solely on the ground that such benefits have been provided to specified persons.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clauses 9 and 10]

Exemption of interest on external commercial borrowings

Under the existing provisions, sub-clause (iv) of clause (15) of section 10 of the Income tax Act provides that certain interest income shall not be included in computing the total income of previous year of any person.

It is proposed that section 10(15)(iv) may  be amended to provide that the interest paid on delayed repayment of loan or default shall not be exempt while computing the total income.  This will deny the benefit of exemption from withholding of tax on interest paid under this sub-clause.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 5(b)]

BUSINESS REORGANISATION

Extensive amendments were carried out in the Finance Act, 1999 relating to demerger, amalgamation and slump sale.  Some of these provisions are proposed to be rationalised for clarity and to remove implementational difficulties.

Written down value to be the basis of adjustment in regard to transfer in a demerger

Under the existing provisions contained in Explanations 2A and 2B in clause (6) to section 43, when the block of assets is transferred by the demerged company to the resulting company, the written down value of the block of assets of the demerged company for the immediately preceding year is reduced by the book value of the assets so transferred.  In Explanation 2B, it is provided that in the corresponding situation, the written down value of block of assets in the case of resulting company shall be the value of assets as appearing in the books of the demerged company immediately before the demerger.  However, if such book value of assets exceeds their written down value, the excess shall be reduced.  The above provision has been found to be  discriminatory to the demerged company  which is denied depreciation on a part of actual cost. 

It is proposed to provide that the written down value of the assets, being transferred, shall be the uniform basis of adjustment in the hands of the demerged company as well as the resulting company.

[Clause 17]

Condition provided for demerger of foreign company holding shares of Indian company made uniform with the similar condition relating to demerger of Indian company

Under the existing provisions contained in sub-clause (a) in clause (vic) of section 47, in the case of demerger of a foreign company holding shares in the Indian company, there shall be no liability of capital gains, if at least seventy-five per cent of shareholders of the demerged foreign company continue to remain as share holders of the resulting foreign company.  The aforesaid conditionality of "at least seventy five per cent of shareholders" is different from similar condition provided in sub-clause (v) of clause (19AA) of section 2 relating to the definition of demerger, which is stipulated as "three-fourths in value of shares".

It is, therefore, proposed to amend sub-clause (a), in clause (vic) of section 47 to provide the identical expression of three-fourths in the value of shares.

[Clause 19]

Clarification regarding value of assets in amalgamation

The existing provisions relating to amalgamation in clause (i) of sub-section (2) of section 72A state that the amalgamated company shall hold continuously for a minimum period of 5 years, at least three-fourths in value of assets of the amalgamating company being acquired in a scheme of amalgamation.  Issues have been raised regarding the exact connotation of ‘value’ and ‘assets’ especially whether the assets would include the current assets, which change from day to day. 

It is, therefore, proposed to provide that the assets referred in this clause shall mean ‘fixed assets’ and the value, ‘book value’.

[Clause 26]

Modification in the definition of "net worth" in case of slump sale

Under the existing provisions contained in sub-section (2) of section 50B of the Income-tax Act, the cost of acquisition and the cost of improvement in relation to capital gains of the undertaking or division transferred by way of slump sale shall be "net worth" of the undertaking or division for the purpose of calculating capital gains.  ‘Net worth’ has been defined as per Sick Industrial Companies (Special Provisions) Act, 1985 in the Explanation to the section.  In Form No. 3CEA notified subsequently, it has been provided that the ‘net worth’ of an undertaking or division shall be derived from the net worth of the transferor company in a proportionate manner on the basis of the fixed assets.  It has been pointed out that the above method of calculating the net worth will not be appropriate in all cases.  Further, it has no application to non-corporate entities effecting slump sale. 

It is, therefore, proposed to substitute the definition of ‘net worth’. It will now be defined as the aggregate of the cost of depreciable assets as reduced from the block of assets of the transferor company in accordance with section 43(6)(c)(i)(C) and the value of other assets transferred as appearing in the books of account, ignoring any revaluation. From this, value of liabilities will be reduced.

[Clause 21]

Units arising out of splitting up or the reconstruction of any authority or a body or a local authority or a public sector company to be covered under demerger subject to separate conditions to be notified

It is already provided in Explanation  4 of section 2(19AA) of the Income-tax Act that the splitting up or reconstruction of any authority or body constituted under a Central, State or Provincial Act or a local authority or a public sector company into separate bodies or authorities shall be deemed to be demerger on fulfilling the conditions specified in sub-clauses (i) to (vii), to the extent applicable.  It has been pointed out that in case of splitting up  of these authorities, bodies or companies, the conditions specified in the section to be fulfilled may not be relevant. 

It is, therefore, proposed that such splitting up or reconstruction shall be subject to conditions as may be specified by the Central Government.

All these proposed amendments relating to business reorganisation shall take effect retrospectively from 1^st day of April, 2000, and will, accordingly, apply in relation to assessment year 2000-2001.

[Clause 3]

RATIONALISATION OF EXEMPTIONS, CONCESSIONS
AND OTHER PROVISIONS

Phasing out of tax concessions in respect of foreign exchange earnings - Sections 10A, 10B, 80HHB, 80HHBA, 80HHC, 80HHD, 80HHE, 80HHF, 80-O, 80R, 80RR and 80RRA.

A large number of fiscal concessions are not compatible with a regime of low tax-rates.  To align  the tax system broadly with tax systems prevailing in most other countries, it is proposed to rationalize provisions relating to deductions in respect of foreign exchange earnings.

Under section 10A of the Income-tax Act, newly established undertakings in free trade zones are entitled to a tax holiday for a ten year period.  Similarly, section 10B of the Income-tax Act provides for a ten year tax holiday in respect of newly established hundred per cent export oriented undertakings. 

Chapter-VIA of the Income-tax Act, provides fiscal concessions for earnings in foreign exchange under different provisions. Under section 80HHB, 80HHBA and 80-O of the Income-tax Act, an assessee, being an Indian company or a person (other than a company) who is  a resident in India and has derived income from the business of a foreign project  or a housing project awarded to it on the basis of a global tender, or for exploitation of patent, copyright etc., is entitled to a deduction of an amount equal to fifty per cent  of the income.

Similarly, under the existing provisions of sections 80HHC, 80HHE and 80HHF of the Income-tax Act, an assessee, being an Indian company or a person (other than a company) who is a resident in India, engaged in the business of exports of goods or merchandise, computer software and export of  films etc., is allowed a deduction of the profits derived by it from such export.

Under section 80HHD of the Income-tax Act, an assessee, being an Indian company or a person (other than a company) who is a resident in India, engaged in the business of a hotel or  of a tour operator or a travel agent is allowed a deduction, in computing its total income, of a sum equal to—

  (i)  fifty per cent of the profits derived from services provided to foreign tourists; and

 (ii)  so much of the profits as are credited to a reserve fund to be utilized in the manner specified in sub-section (4).

Under section 80R of the Income-tax Act, a professor, teacher or research worker rendering service outside India, is entitled to a deduction from the remuneration received from a foreign university, institution, etc., while computing his income chargeable to tax. This deduction is allowable for an amount equal to seventy five per cent of such remuneration.

Under section 80RR, a similar deduction is available to an artist, playwright, musician, actor etc., deriving income from a foreign source, in exercise of his profession. 

A similar deduction is also available under section 80RRA, to persons in receipt of remuneration from a foreign employer for rendering services  outside India.

It is proposed to phase out all the above benefits over a five year period.  This would imply that under the provisions of sections 80HHC, 80HHE and 80HHF, the assessee would be entitled to a deduction of eighty per cent in assessment year 2001-2002, sixty per cent in assessment year 2002-2003, forty  per cent in assessment year 2003-2004, and twenty per cent in assessment year 2004-2005. 

Under sections 80HHB, 80HHBA and 80-O, the assessee would be entitled to a deduction of forty per cent in assessment year 2001-2002, thirty per cent in assessment year 2002-2003, twenty per cent in assessment year 2003-2004 and ten per cent in assessment year 2004-2005.

In those cases where individual assessees are entitled to a deduction of seventy-five per cent the deduction would be sixty per cent in assessment year 2001-2002, forty-five per cent in assessment year 2002-2003, thirty per cent in assessment year 2003-2004 and fifteen per cent in assessment year 2004-2005.  

No deduction shall be available under any of these provisions from the assessment year 2005-2006 and subsequent years.

It is also proposed to limit the exemption under section 10A or 10B of the Income-tax Act,  to units set up in Free Trade Zones or as Export Oriented Units on or before 31-3-2000.  Only  the  units  set up before 1-4-2000 would be entitled to avail the benefit of exemption for the unexpired period.  However, units in Free Trade  Zones or Export Oriented Units set up  on or after 1-4-2000 may avail of benefits available under the modified provisions of section 80HHC or section 80HHE, as the case may be.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clauses  6, 7, 29, 30, 31, 32, 33, 34, 38, 39, 40, 41]

Minimum Alternate Tax on Companies

As the number of zero tax companies and companies paying marginal tax had grown, Minimum Alternate Tax was levied from assessment year 1997-98.  The efficacy of the existing provision has declined in view of  the exclusions of various sectors from the operation of MAT and the credit system. It has also led to legal complications. It is, therefore, proposed to put a sunset clause in the existing provision, so that, it is not applicable after assessment year 2000-2001. 

In its place, it is proposed to insert a new provision which is simpler in application.

The new provisions provide  that all companies having book profits under the Companies Act, prepared in accordance with Part-II and Part-III of  Schedule-VI to the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of 7.5%,  as against the existing  effective rate  of 10.5% of the book profits. These provisions will be applicable to all corporate entities without any exception. However, export profits under sections 80HHC, 80HHE and 80HHF are kept out of the purview of this provision during the  period of phasing out  of deductions available under those provisions.  In view of the changes made in the provisions of sections 10A and 10B, those export oriented units and the units in free  trade zones, which are set up before 1.4.2000, would be out of the purview of new provisions of MAT.

No credit of MAT paid under the new provision will be available. However, the credit for the brought forward MAT paid under the existing provisions will be allowed against the regular tax payable but not against the tax payable under the new provision.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clauses 47,48,49]

Tax on distributed profits of domestic companies

Under the existing provisions of section 115-O, in addition to the income-tax chargeable in respect of the total income of a domestic company, any amount declared, distributed or paid by way of dividends is charged to additional income-tax at the rate of ten per cent.

It is proposed to amend section 115-O of the Income-tax Act to  increase the tax on distributed profits of domestic companies from ten per cent to twenty per cent.

The existing provisions of section 115P of the Income-tax Act, 1961 provide for the levy of simple interest  at the rate of 2% per month or part thereof, if the additional income-tax on dividends is not paid within the time allowed under sub-section (3) of section 115-O. 

In the Finance Bill 1999, rate of interest to be charged under the Income tax Act for various defaults has been reduced from 2% to 1.5%.  Sections 234A and 234B respectively  have been amended  by the Finance Bill, 1999 w.e.f. 1-6-1999 to reduce the interest charged under these sections from two per cent per month to one and a half per cent per month.

In view of the above, it is proposed to bring down the rate of interest to be charged under section 115P from two per cent per month to one and a half per cent per month with effect from 1-6-2000, so that there is uniformity in  the rate of penal interest being charged under the Income-tax Act under different provisions.

These amendments will take effect from the 1st day of June, 2000.

[Clauses 50 and 51]

Tax on income distributed by the Unit Trust of India and Mutual Funds

Under the existing provisions, any amount of income distributed  by the Unit Trust of India or by  Mutual Funds to their unit holders is chargeable to tax and the Unit Trust of India or Mutual Funds are liable to pay tax on such distributed income at the rate of ten per cent. The provisions of section 115R,  which require that the tax at the rate of 10% only is to be paid by the Unit Trust of India and the Mutual Funds on their distributed income from funds other than open ended equity oriented funds, have created a distortion in favour of debt instruments of Unit Trust of India and the Mutual Funds vis-a-vis the bank and company deposits. To lessen the effect of this distortion, the rate of tax is proposed to be increased from 10% to 20%. 

It is also proposed to amend section 115R to provide that the person responsible for making payment of the income distributed by the Unit Trust of India or the Mutual Fund and the Unit Trust of India or the Mutual Fund, as the case may be, shall be liable to file a statement in the prescribed form and manner giving details of income distributed to unit holders, tax paid thereon and other relevant details.  

Under the existing provisions, section 115S of the Income tax Act, 1961 provides for the levy of simple interest  at the rate of 2% per month or part thereof,  if the tax on distributed income is not paid within the time allowed under sub-section (3) of section 115R. 

It is proposed to bring down the rate of interest to be charged under section 115S  from two per cent per month to one and a half per cent per month with effect from 1-6-2000, so that there is uniformity in the rate of penal interest being charged under the Income-tax Act under different provisions.

[Clauses  52 and 53]

Sunset clauses to sections 54EA and 54EB and introduction of a new section 54EC to ensure focused investment of exempted capital gains for rural development and development of highways

Under the existing provisions, sections 54EA and 54EB of the Income-tax Act offer a basket of investment options to absorb taxable capital gains arising from transfer of long-term capital assets. The notified instruments providing the roll-over to capital gains include shares, bonds, units,  deposits in  banks and  various other instruments. The two sections were introduced in 1996 to give incentive to the infrastructure. However, the objective has been diluted in the presence of a large number of varied and diverse instruments. Further, incentives to infrastructure are also available under other sections of the Income-tax Act such as sections 80-IA, 80-IB and 10(23G).  In a regime of low tax rate on long-term capital gains, there is very little justification for having such an omnibus basket of exemptions.  Therefore, it is proposed to insert sunset clauses to sections 54EA and 54EB limiting their application to transfers of long-term capital asset upto 31.3.2000.

In place of sections 54EA and 54EB, being terminated, a new section namely, 54EC, is proposed to be inserted. The new section will allow exemption from tax to long-term capital gains, if invested in select bonds, targeted exclusively on agricultural and rural finance and highway  infrastructure. The instruments in question shall be bonds redeemable after five years issued on or after 1-4-2000 by the National Bank for Agriculture and Rural Development (NABARD) and the National Highways Authority of India (NHAI). The exemption from tax on long-term capital gains shall be to the extent of investment in these bonds.  

These bonds will have a lock-in period of five years.  Any transfer or conversion of bonds into money during the lock-in period will make the amount so converted as deemed capital gains taxable in the year of transfer or conversion.  Such deemed capital gains will also arise, if any loan or advance is taken on the security of these bonds.  Further, any amount invested in these bonds will not be eligible for deduction under section 88 of the Income-tax Act.

The proposed amendment will take effect from 1^st day of April, 2001 and will, accordingly, apply to the assessment year 2001-2002 and subsequent years.

[ Clauses 22, 23 and  24]

Rationalisation of the definition of Cost Inflation Index

Cost Inflation Index has been defined in clause (v) of Explanation to section 48 of the Income-tax Act to be the Index which the Central Government may notify having regard to seventy-five per cent of average rise in Consumer Price Index for urban non-manual employees for that year.  Since the Index has to be notified in the beginning of the year in relation to transfer of assets to be effected during  that year so as to calculate the instalment of advance tax payable,  it has to be in relation to 1^st day of April of that year on the basis of average rise in Index in the preceding previous year. The notifications have been issued all along on this basis. To clarify the issue beyond any doubt, it is proposed to substitute the clause (v) retrospectively to provide that the Cost Inflation Index for any previous year will be such Index as notified by the Central Government having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year.   

The proposed amendment will take effect retrospectively from 1^st day of April, 1993.

[Clause 20]

Income deemed to accrue or arise in India

Under the existing provisions, Section 9 lists the income which is deemed to accrue or arise in India. However, any royalty income in the hands of the non-resident manufacturer received from a resident person or the Government for the transfer of rights in respect of computer software supplied alongwith a computer or computer-based equipment under an approved scheme is excluded from the deeming provisions of Section 9.

The definition of "computer software"  is given in  Explanation 3 of clause (vi) of sub-section (1)  which  provides that the expression "computer software" shall have the meaning assigned to it in clause (b) of the explanation to section 80HHE. This however, refers to computer software which is transmitted from India to a place outside India. 

It is proposed to substitute the said Explanation so as to provide that the expression "computer software" means any computer programme
recorded on any disk, tape, perforated media or other information storage device and includes any such programme or any customised electronic data. The proposed amendment is consequential in nature.

The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

[Clause 4]

Orders passed under section 201 of the Income-tax Act made appealable before the Commissioner (Appeals)

Sub-section (1) of section 201 of the Income-tax Act deems the Principal Officer to be the assessee in default in the event of his failure to either deduct the tax or make payment of tax after deduction as required in the Act.  In the list of orders against which appeal lies before the Commissioner (Appeals) under section 246A, there is no reference to order under section 201 of the Income-tax Act.  In some cases, Appellate Commissioners  have declined to entertain appeal against order under section 201.  It  is proposed  to amend section 246A so as to insert  a reference to order under section 201 and provide that any appeal filed against an order under section  201 on or after 1st October, 1998  but  before 1st June, 2000, shall be deemed to have been filed under this section.  It is further proposed to insert sub-section (2A) in section 249 to provide that  where an order has been  made under section 201 after 1st October, 1998 but before the 1st June, 2000 and the assessee in default has not presented any appeal within the time specified in the sub-section, he may do so before 1st day of July, 2000.

The proposed amendments  will take effect from 1st day of June, 2000. 

[Clauses 62 and 63]

Sunset clauses to sub-sections (1) and (2) of  section 246 of the Income-tax Act

Section 246 of the Income-tax Act,  in sub-sections (1) and (2),   lists out the orders passed by the Assessing Officer against which appeal may be filed before the Deputy Commissioner (Appeals) and the Commissioner (Appeals) respectively. Section 246A providing appeals before the Commissioner (Appeals) was introduced by the Finance (No. 2) Act, 1998 with effect from 1st October, 1998 in respect of the appeals against orders made before or after the appointed day. The appointed day was notified as 1-10-1998. The introduction of a new section was necessitated by the decision to do away with one appellate level at the level of Deputy Commissioner (Appeals).

When section 246A   came into effect from 1-10-1998, no sunset  clauses were provided to sub-section (1) and sub-section (2) of section 246 to take care of the pending matters, if any.  It is proposed to terminate these sub-sections now by making them inapplicable to appeals filed on or after 1-6-2000. It is also being clarified that any appeal made under sub-section (1) of section 246 of the Income-tax Act, on or after 1-10-1998 and before 1-6-2000, shall be deemed to be the appeal filed under sub-section 246A.

The proposed amendments shall take effect from 1^st day of June, 2000.

[Clause 61]

Advisory time limit for the Appellate Tribunal to decide appeals extended to the Departmental appeals

Sub-section (2A) of section 254 provides that the Appellate Tribunal, where it is possible, may hear and decide appeals within a period of four years from the end of the financial year in which the appeal is filed under sub-section (1) of section 253. It refers to appeals filed by the assessee. 

It is proposed to extend the advisory time limit to the appeals filed by the Commissioner under sub-section (2) of section 253.

The proposed amendments will take effect from 1^st day of June, 2000.

[Clause 64]

Insertion of reference to section 246A in several sections in  the Income-tax Act

Appeal lies before the Commissioner (Appeals) under section 246A of the Income-tax Act. Consequential reference to this section is required at several sections in the Income-tax Act.

It is proposed to insert reference to section 246A in sub-section (3) of section 158BFA, sub-section (6) of section 220, section 267 and sub-section (1) of section 275 of the Income-tax Act. 

The proposed amendments will take effect from 1^st day of June, 2000.

[Clauses 56, 58, 65 and 66]

Provisions relating to Authority for Advance Rulings rationalised for resident applicants

The provisions relating to Authority for Advance Rulings were extended to notified categories of resident applicants through amendments carried out by the Finance (No. 2) Act, 1998.  The definition of advance ruling was broadened to include decision on question of law or fact arising out of the order of assessment.  The Central Government has already notified two classes of persons which are public sector companies and persons seeking advance ruling in relation to transaction undertaken or proposed to be undertaken by a resident with a non-resident.

These provisions need to be further streamlined. There is operational difficulty in determining the issue arising out of a transaction proposed to be undertaken by a resident with a non-resident within the existing definitions of applicant and advance ruling. The meaning of advance ruling, defined for the resident applicants, need to be streamlined and broadened to include pre-assessment determination as well as post-assessment decision of issues relating to the computation of total income.

Therefore, it is proposed to amend the meaning of advance ruling and applicant in following terms. Advance ruling shall mean,—

  (i)  a determination of any question of law or fact arising out of a transaction undertaken or proposed to be undertaken by a non-resident, or

 (ii)  a determination of any question of law or fact arising out of a transaction undertaken or proposed to be undertaken by a resident with a non-resident, or

(iii)  a determination or decision of any question of law or fact relating to the computation of total income pending before any income-tax authority or the Appellate Tribunal.

Similarly, an applicant will include a non-resident, a resident in relation to a transaction with a non-resident and a resident falling in class or category of persons notified by the Central Government.

Under the existing provisions contained in the proviso to sub-section (2) of section 245R, it is, inter alia, provided that the authority shall not allow an application if the question raised in the application is pending before the income-tax authority, the Appellate Tribunal or any court.  However, such  exclusion does not apply to resident applicants.

It is proposed to substitute the proviso to provide that the Authority shall not allow the application when the question raised is already pending in the applicant’s case before any income-tax authority, Appellate Tribunal or any court in regard to a non-resident applicant and resident applicant in relation to a transaction with a non-resident.  However, this bar would be operative for the notified category of resident applicants only when the issue is pending in a court.  The existing conditions in clause (b) relating to bar of determination of fair market value of any property will continue.  The existing condition in clause (c) relating to an issue designed prima facie for avoidance of income-tax shall not be applicable to the notified category of resident applicants.

The proposed amendments shall take effect from the 1^st day of June, 2000.

[Clauses 59 and 60]

Taxation of arrears of  rent in the year of receipt

The scheme of taxing the income from house property under the Income-tax Act involves the concept of ‘annual value’.  Annual value has been deemed to be the sum for which the property might reasonably be expected to let from year to year or annual rent received or receivable in excess of annual value.  Therefore, arrears of rent received subsequently do not fall within the ambit of annual value or annual rent. There is difficulty in taxing such income as income from other sources as they retain the character of  income from house property. It is also difficult to include arrears of rent in the relevant years as they were not receivable during those years.

Therefore, it is proposed to insert a new section 25B in the Income-tax Act to provide that if any arrears of rent, other than what has already been taxed under section 23, are received in a subsequent year, the same will be taxed in the year of receipt whether the property is owned by the assessee in the year of receipt or not. A deduction of sum equal to one-fourth of such amount of rent shall be allowed towards  repairs and collection of rent. 

The proposed amendment will take effect from 1-4-2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clause 12]

Amendment of Part III of First Schedule to the Finance Act, 1999

Part III of the First Schedule to the Act specifies the rates at which income-tax is to be deducted at source from "Salaries" and also the rates at which "advance tax" is to be paid and  income-tax is to be calculated or charged in special cases for the financial year 1999-2000.

It is proposed to amend Part III of the First Schedule to the Finance Act, 1999 so as to provide that surcharge shall be charged on the income referred to in section 115ACA, instead of section 115AC. This amendment is  clarificatory in nature.

This amendment will take effect retrospectively from 1st April, 1999

[Clause 118]

Consequential amendments

The Finance Act, 1999 has dispensed with the requirement of approval by the Central Government for the purposes of clause (viii) of sub-section (1) of section 36. As a consequence to this, the Bill proposes to make consequential amendments in sections 10, 11, 35D, 36, 43B, 80L, 88 and 194A of the Income-tax Act.

The proposed amendments will take effect retrospectively from 1st April, 2000 and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years.[Clauses 5, 8, 15, 16, 18, 37, 43 and 57]

Amendments to Kar Vivad Samadhan Scheme, 1998

The provisions of Kar Vivad Samadhan Scheme, 1998, are contained in Chapter IV of the Finance (No. 2) Act, 1998. Under section 90(2) of the Finance (No. 2) Act, 1998, the declarant was required to pay the sum determined by the designated authority within 30 days of the passing of the order.  The above time-limit has created difficulties in a number of cases, where the taxpayers  have interpreted time-limit of 30 days as commencing from the date of receipt of the certificate.  Consequently, the payments have been delayed by a few days in these cases. There have been also cases where these certificates of the designated authority have been served late on the declarants denying them adequate time to make the payment. In some cases of  delayed payments,  the courts have interpreted the  time-limit of 30 days as starting from the date of receipt of the order.

To remove hardship and to give statutory recognition to the judicial opinion, it is proposed to retrospectively amend sub-section (2) of section 90 of the Finance (No. 2) Act, 1998 to clarify that the limitation of  payment within 30 days will commence from the date of receipt of the order of the designated authority determining the sum payable.

Section 88 provides for determination of amount payable for the settlement of tax arrear under various enactments.  Clause (e) of  this section deals with the determination of amount payable for the settlement of tax arrear under the Interest-tax Act, 1974. Sub-clause (i) of clause (e)  provides that, where the tax arrear consists of chargeable interest, the sum payable shall be determined at two per cent of the disputed chargeable interest.  In sub-clause (ii) of clause (e), it is provided that  where the tax arrear includes interest and penalty along with disputed interest, the amount payable will be determined at two per cent of the tax arrear. There is patent anomaly between the two sub-clauses capable of unintended interpretation even though the provisions have been clearly explained as intended in the memorandum explaining the provisions in the Finance (No. 2) Act, 1998. Therefore, it is proposed to amend the relevant provisions retrospectively to remove the anomaly.

The proposed amendments will take effect retrospectively from 1^st day of September, 1998.

[Clause 117]

WEALTH TAX

Sunset clauses to sub-sections (1) and (1A) of section 23 of the Wealth-tax Act

Sub-section (1) and sub-section (1A) of section 23 of the Wealth-tax Act list out the orders passed by the Assessing Officer against which appeal may be filed before the Deputy Commissioner (Appeals) and the Commissioner (Appeals).  With the abolition of appellate level of Deputy Commissioner (Appeals) and introduction of a new section i.e. , section 23A providing appeals before the Commissioner (Appeals) by the Finance (No. 2) Act, 1998, with effect from 1st October, 1998, it is proposed to make these sections inapplicable to appeals filed on or after 1-6-2000.  It is also being clarified that any appeal made under sub-section (1) of section 23 of the Wealth-tax Act on or after 1-10.98 and before 1-6-2000 shall be deemed to be the appeal filed under section 23A.

The proposed amendments will take effect from 1st day of June, 2000.

[Clause 68]

Advisory time limit for the Appellate Tribunal to decide appeals extended to the Department appeals

Sub-section (5A) of section 24 of the Wealth-tax Act is proposed to be amended to provide Advisory time limit to the appeals filed by the Commissioner.

The proposed amendment will take effect from 1st day of June, 2000.

[Clause 69]

Insertion of reference to section 23A in some sections in the Wealth-tax Act

In view of the introduction of  section 23A of the Wealth-tax Act by the Finance (No. 2) Act, 1998, it is proposed to insert reference to this section in sub-sections (2) and (6) of section 31, sub-section (4B) of section 34A and in clause (c) of sub-section (1) of section 35 of the Wealth-tax Act.

The proposed amendments will take effect from 1st June, 2000.

[Clauses 70, 71 & 72]

INTEREST TAX

Withdrawal of Interest-tax

The Interest-tax Act, 1974 is in operation continuously with regard to interest payable on or after the 1^st day of October, 1991. Under the Interest-tax Act, chargeable interest arising to credit institutions meaning the banking companies, public financial institutions, state financial corporations and any other financial company, etc. are subject to interest tax at the rate of 2%. 

There is persistent demand from the banks and the financial institutions to abolish interest-tax in order to make the credit cheaper to the borrowers.  The Reserve Bank of India has also recommended the termination of interest tax.  It is, therefore, proposed to amend section 4 of the Interest-tax Act to provide that the Interest-tax Act shall not be applicable in relation to  interest arising to credit institutions on or after the 1^st day of April, 2000.

The proposed amendment would take effect from the 1^st day of April, 2001 and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.

[Clause 73]