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A Budget to maintain growing economy - Part I

By Dr. Tejinder Singh Rawal
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The Budget, if not good, was not bad. The Finance Minister abruptly finished his speech thereby leaving the viewers wondering about what was in store for them. The Budget did not give any news nor did it levy any new taxes. There was a marked difference between this Budget and the last year's budget. Last year, the Finance Minister had introduced measures like FBT, which had far reaching effect.

The Finance Minister P Chidambaram decided to adopt a minimalist approach while proposing changes pertaining to Direct Taxes. Correctly so, because when the engines of the economy are running in full steam, fiddling with Tax Provisions just for the sake of changes is certainly not the right approach. The Finance Minister followed the American adage, 'When it ain't broke, why mend it?' Even a cursory look at the report card of the economy proves that just maintaining the status quo in a momentum driven vibrant economy is enough to generate higher revenue. For example the economy grew at an impressive rate of 7.5%, with the manufacturing sector growing at whopping 8.1%. More importantly at current market prices, gross domestic saving increased to 29.1% of GDP and rate of gross capital formation was as high as 30.1% of GDP.

On reading the provisions pertaining to Direct Taxes, one finds that most of the amendments proposed aim at including the structure of the law and removing anomalies and ambiguities rather than raising more revenue. The Finance Minister knows it well by now that since the economy is buoyant and vibrant, it makes no sense to fiddle with the structure which has been delivering impressive results. The Finance Minister did not even touch the provision of section 80C, on which he had spent a considerable amount of time in his previous budget speech, where he had tried to stress the need for introduction of an EET Tax regime in respect of investments.

PROVISION PERTAINING TO MINIMUM ALTERNATE TAX (MAT)

The Existing Provisions

The existing provisions of section 115 JB provides that in case of a company, if the income tax payable on the total income as competent under this Act in respect of any previous year relevant to the assessment year commencing on or after 01,04,2001 is less than 7.5% of its book profits, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee for such previous year shall be 7.5% of such book profit.

The Explanation to sub section (2) of section 115 JB defines 'book profit' to mean the net profit as shown in the profit and loss account for the relevant previous year, prepared in accordance with parts II and III of schedule VI to the Companies Act 1956, and as increased or reduced by certain adjustments as specified in the said Explanation.

Sub section 1 of section 115 JAA provides that any tax paid under section 115 JA by a company for any assessment year, the credit in respect of the tax so paid shall be allowed in accordance with the provisions of the said section 115JAA. Sub-section (1A) of section 115JAA provides for a similar provision with regard to any amount of tax paid under section 115JB for the assessment year commencing on April 1, 2006 and any subsequent year. Sub section (2) of section 115JAA provides that the tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under section 115JA of section 115JB, as the case may be, and the amount of tax payable under the normal provisions of the income tax Act. Sub-section (3) of section 115JAA provides that the amount of credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) of the said section, but such carry forward shall not be allowed beyond the fifth assessment year immediately succeeding the assessment year in which the tax credit become allowable under sub-section (1) of the said section.

THE PROPOSED AMENDMENT

Sub section (1) of section 115JB is proposed to be amended by clause 24 to substitute the figure 10% in place of 7.5%, with the result that if the income tax payable on the total income, as computed under the Income Tax Act, in respect of any previous year, relevant to the assessment year 2007-08 is less than 10% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be 10% of such book profit.

The definition of book profit as provided in Explanation to sub section (2), under clause (f) of the Explanation, provided for adjustment relating to amount of expenditure relatable, inter alia, to section 10(23G). Clause 24 of the Budget proposes to omit the reference to 'other than the provisions contained in clause (23G) thereof ' from clause (f) and clause II of the Explanation to section 115 JB. This proposed amendment is consequential to proposed omission of clause (23G) of section 10, by clause 4 of the Finance Bill.

DEPRECIATION

Clause 24 proposes to amend the definition of 'book profit' has provided an Explanation to section 115 JB by insertion of a new clause (g), which provides that for the purpose of this section, book profit shall be increased by the amount of depreciation debited to the profit and loss account. Further, it is proposed to insert a new clause (iia) in the Explanation so as to provide that the amount of depreciation claimed in the books of account, excluding the claim of depreciation arising on account of revaluation of assets, shall be reduced from the book profit. Read together, the implication of these two proposals is to allow depreciation incurred in the normal course of business and exclude depreciation arising out of revaluation of assets. It is also proposed by way of insertion of a new clause (ii b) in the said Explanation to provide that the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets, shall be reduced from the book profit. This last amendment is proposed with a view to avoid double taxation on this account.

ENHANCED PERIOD FOR CARRY FORWARD OF MAT CREDIT

Clause 23 of the Finance Bill proposes to amend section 115 JAA to provide the amount of Tax credit for MAT paid under section 115JB for the assessment year 2006-07 and later shall be allowed to be carried forward and set off for seven assessment years immediately succeeding the assessment year in which the Tax credit becomes allowable under the said section.

The amendments pertaining to section 115JAA and section 115JB shall take effect from April 1, 2007 and accordingly shall apply in relation to assessment year 2007-08 and subsequent years.

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