Finance Bill 2009

Finance Bill 2009 Direct Tax Proposals

By H’ble Finance Minister Mr. Pranab Mukharjee

On August 2009

OBJECT/SCOPE

To deliberate upon proposals of Finance Bill 2009.

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Proposals at a glance

• New Direct Tax Code within next 45 days from budget day – to be implemented after public debate in Winter Session.

• Corporate Tax Rate Remained Unchanged .

• TDS Provisions Renovated .

• LLP Tax Status Equivalent to General Partnership Firm.

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Proposals at a glance

• Personal Income Tax- Basic Tax Exemption Limit (in INR- Lacs) No Surcharge on Personal Income Tax.

(persons covered: Firm and Local Authority also) (AY 2010-2011)

Assessee Earlier (AY 2009-10) Changed (AY 2010-11)

Sr Citizen 2.25 2.40

Women 1.80 1.90

Others 1.50 1.60 4

The Form 16 will contain any other deductions provided from salary such as:

• Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills.

• Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free. No bills are required for this amount.

• Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax.

• House rent allowance: the least of the following is available as deduction- 1)Actual HRA received 2)50%/40%(metro/non-metro) of 'salary' 3) Rent paid minus 10% of 'salary'. • Income from salary is net of all the above deductions.

Income from Salary

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Income From House Property

• By Taking Annual Value:-• Rent received• Municipal Valuation• Fair Rent.• Deduction

Self occupied House-Nil More than one Self Occupied House- Deduct- Municipal Tax, you’ll get Net Annual Value.

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Income from Business or Profession

• Provisions contained in sections 30 to 43D.• Classification Are As Follows:-1) Deductible Expenses - Sections 30 to 38 [except 37(2)].2) Inadmissible Expenses - Sections 37(2), 40, 40A, 43B &

44-C.3) Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A,

35ABB & 41.4) Special Provisions - Sections 42 & 43D5) Self-Coded Computations - Sections 44, 44A, 44AD,

44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 44-D & 44-DA.7

Income from Other Sources

• Income by way of Dividends• Income from horse races• Income from winning of lotteries• Income from winning bull races• Any amount received from key man insurance policy.# Key Man Insurance is an insurance policy taken out by

a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy.

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Income Exempt from Tax

• Sikkim is the only state of India where citizens do not pay income tax.• Agricultural firms.• Dividends-(15% dist tax + 3% surcharge)• Liquid and Money Market funds pay 25% dividend distribution tax.• Money received from an Insurance company as proceeds of an

insurance policy is generally exempt.1) any sum received under sub-section (3) of section 80DD or sub-section

(3) of section 80DDA ;or2) any sum received under a Keyman insurance policy; or3) any sum received under policies issued on or after 1 April 2003 where

premium paid is greater than 1/5th the sum assured.9

DeductionSection 80C Deductions

• The total limit = Rs. 100,000 (Rupees One lakh)1) Contribution to Provident Fund or Public Provident Fund,2) Payment of life insurance premium,3) Investment in pension Plans,4) Investment in specified government infrastructure bonds,5) Investment in National Savings Certificates,6) Payments towards principal repayment of housing loans.Also any

registration fee or stamp duty paid,7) Payments towards tuition fees for children to any school or college

or university.(Only for 2 children)8) Post office investments -The investment can be from any source

and not necessarily from income chargeable to tax.

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Section 80D: Medical Insurance Premiums

• Medical insurance, popularly known as Mediclaim Policies.

• Provide deduction up to Rs 30,000 .This deduction is additional to Rs.1,00,000 savings.

• For senior citizens, the deduction up to Rs. 20,000 is allowable. This deduction is available for premium paid on medical insurance for oneself, spouse, parents and children.

• It is also applicabe to the cheques paid by proprietor firms.

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Interest on Housing Loans

• For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax.

• However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999.

• For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction.

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Tax Rates

• No income tax is applicable on all income up to Rs. 1,60,000 per year. (Rs. 1,90,000 for women and Rs. 2,40,000 for senior citizens)

• From 1,60,001 to 3,00,000 : 10% of amount greater than Rs. 1,60,000 (Lower limit changes appropriately for women and senior citizens)

• From 3,00,001 to 5,00,000 : 20% of amount greater than Rs. 3,00,000 + 14,000 (slightly less for women and further less for senior citizens)

• Above 5,00,000 : 30% of amount greater than Rs. 5,00,000 + 54,000 (slightly less for women and further less for senior citizens)

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Surcharge

• 10% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 1 crore (Rs. 10 million)

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Education Cess

• All taxes in India are subject to an education cess, which is 2% of the total tax payable. With effect from assessment year 2008-09, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of taxable income.

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Corporate Income tax

• Income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million).

• Foreign companies pay 40%.An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies.

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Fringe Benefit Tax

• This tax is paid as 33.99% of the benefit, which is only a percentage of the actual amount paid.

Fringe Benefit Taxable percentage Effective Tax Rate

Medical reimbursements 20% 6.8%

Telephone bills 20% 6.8%

Employee Stock Options (Difference between market value and purchase price on vesting date)

100% 33.99%

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Clause by Clause Analysis

• Section 80E – Deduction in respect of loan taken for higher education (clause 32) –

Applicable from AY 2010-2011

Particular Earlier Status Amendment proposed

Compass of Higher Education

Only covered full time studies in graduate and post graduate course in specified subjects

Now extended to all fields of studies including vocational studies after Sr. Sec.Exams

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Clause by Clause Analysis

• Section 208 – Advance Tax Payment Threshold Applicable from FY 2009-2010 (clause 70)

Particular Earlier limit Amendment proposed

Advance Tax Payable, if estimated tax Above.

INR 5000 INR 10,000

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Clause by Clause Analysis

• Wealth Tax : Basic Exemption Limit (clause 82) on all wealth holdings(e.g. Cash,Bank Deposit, Money Funds, Insurance,

Pension Plans, Corporate Tax etc.)

Particular Earlier limit Amendment proposed

Wealth Tax Payable, if Net Wealth Above

INR 15 Lac INR 30 Lac

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Clause by Clause Analysis

• Section 40A (3A): Disallowance for expense paid otherwise by a/c payee cheque/draft above INR 20,000:

Relief to Transporters (clause 16) From 1/10/2009

Particular Earlier limit Amendment proposed

For Transporter to curb practical hardship

INR 20,000 INR 35,000

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Clause by Clause Analysis

• Section 10 (23C): Time limit for filing tax exemption application u/s 10(23C) (clause 4)

FROM FY 2008-2009 ONWARDS

Particular Earlier limit Amendment proposed

Time limit for above

Within financial year (where Receipts exceeded INR 1 Cr)

Within 30 Sep of next succeeding year

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• Section 2(15) : Scope of Charitable Purpose : Expanded (clause 3) FROM AY 2009-2010 ONWARDS

Particular Earlier limit Amendment proposed

Activities covered

Education; Medical; Relief to Poor; - & General Public Utility being Subject to non commercial

Specific insertion for:environment & monuments preservation etc activities to protect from any impact of Finance Act, 2008 amendment

Clause by Clause Analysis

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• Section 40(b)(v) : Remuneration to Partner’s Limit Increased (clause 15) .

FROM AY 2010-2011.Particular Earlier limit Amendment proposedSlab for payment of remuneration to working partner changed & alligned

Different for professional firms and others

Same for Both

In first 300,000 book profit or loss cases- INR 150,000 or 90% whichever is higher On balance= @ 60%

Clause by Clause Analysis

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• Section 115BBC: Anonymous Donations : Tax Relief in certain cases (clause 42).

FROM AY 2010-2011Particular Earlier limit Amendment proposed

Exemption for Anonymous Donations to certain limit

Zero/Nil Anonymous donations exempt Upto 5% of Total Income of trust or INR 100,000 whichever is more.

Clause by Clause Analysis

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• Section 80G : Number of Years for which Approval u/s 80G(5)(vi) shall be applicable (clause 33).

Particular Earlier Scope Amendment proposed

Maximum Time Span in terms of Asst Years for which Approval could be given

Five Asst Years For approval expiring after 1/10/2009 u/s 80G(5), approval will be in perpetuity – unless withdrawn by concerned CIT etc – For which expired before 1/10- once granted – perpetual force

Clause by Clause Analysis

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Clause by Clause Analysis

Tax Deduction at Source – TDS Law – Overhauled -a) TDS Rates – 194I- Rental (in case PAN of deductee is not there- TDS 20% applicable w.e.f 1/4/2010)

Particular Existing Rate Amendment/Proposal w.e.f 1/10/2009

Plant & Machinery 10% 2%

Land & Building- Individual/HUF Payee- Other Payee

15%

20%

10%

10% 27

Clause by Clause Analysis

Tax Deduction at Source – TDS Law – Overhauled -a) TDS Rates – 194C- Contract (in case PAN of deductee is not there- TDS 20% applicable, non transport)

Particular Existing Rate Amendment/Proposal 1/10/2009

Individual HUF Contractor/Sub Contractor

Contractor – 2% Sub Contractor -1%

SAME FOR BOTH 1%(No separate rate for advertisement)

Other than above Contractor – 2% Sub Contractor -1%

2%

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In TDS – On Non Salary Payments – No need to factor Surcharge and Edu Cess (resident taxpayers)

Section 201(3) – Time limit for passing orders in case of resident deductee –

Particular Time Limit

Where Statement u/s 200 is filed

Within 2 yrs from end of relevant financial year – in which statement is filed

Other cases /Non Statement(Delhi High Court ruling in NHK Case- approved)

Within 4 Yrs from end of financial year in which tax deduction is made

Clause by Clause Analysis

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Definition of Work u/s 194C clarified- TDS on outsourcing contract Excluded where product made under specification of customer –

raw material purchased from other person. However, Included Contract where raw material is supplied by

customer Value for TDS- In case invoice separately reflects raw material value – TDS on amount excluded Raw Material Value otherwise TDS on Full Invoice Amount.

PAN MUST - Section 206AA inserted : PAN to be mandatorily by tax deductee) :

Failure Outcome : 20% TDS

Clause by Clause Analysis

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Section 44AE: (CLAUSE : 21)

Increase in Income/Truck.

Particular Earlier Changed

Heavy GoodsCarriage

3500/month/carriage

5000/month/carriage

Other GoodsCarriage

3150/month/carriage

4500/month/carriage

Clause by Clause Analysis

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Rule in SEZ Unit Deduction u/s 10AA removed (Parity in Numerator and Denominator) from AY 2010- 2011

Earlier FormulaeFor Deduction Computation

Profits of business of Unit* Export Turnover of Unit/Total Turnover of Business of Assessee

Proposed LawFor Deduction Computation

Profits of business of Unit* Export Turnover of Unit/Total Turnover of Business of undertaking/unit

Clause by Clause Analysis

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Section 56(2)(vi) Transaction without consideration/inadequate consideration (for transactions on/after 1/10/2009)- clause 26

Provided that Property recd without consideration will be included (which in turn will include immovable property; share/securities/ jewellery etc)

In case of immovable property without consideration: if stamp duty value exceeds INR 50,000 : WHOLE STAMP VALUE TAXABLE.

For Movable Property recd without consideration: Fair Market Value shall be base of taxation (Method to be prescribed)

Clause by Clause Analysis

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Introduction of Document Identification Number/DIN and facility of electronic communication

With effect from 1/10/2010

Section 282B : Every Income tax authority bound to allot a computer generated DIN for every document issued/recd by them

Document issued/recd without DIN shall be invalid

Provision for service of notice by electronic mode u/s 282 & courier service provided w.ef 1/10/2009 (for electronic service – rules to be made by CBDT)- CLAUSE 76; 77

Clause by Clause Analysis

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Presented by

Nirankar Singh35