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Budget: What you missed

July 31, 2004 13:45 IST

The Budget has been announced a while ago. Let us discuss issues which have received less attention in the media compared to turnover tax and capital gains applicability, etc., but nonetheless are equally important.

TDS on compulsory acquisition

Proposed: Applicable from FY 04-05. A new provision has been inserted requiring TDS at 10 per cent on the amount of compensation received on sale of land and residential buildings acquired by various agencies including government agencies and other local authorities, unless the immovable property is agricultural land whether situated within municipal limits or not and where the compensation is less than Rs 1 lakh.

De-materialisation of TDS and TCS certificates

Proposed: Applicable from FY 04-05. Returns of income are to be accompanied by TDS/TCS certificates for claiming credit of tax deducted or collected.

Also every person deducting or collecting tax shall be required to furnish quarterly statements to the prescribed income tax authority who will in turn furnish an annual statement of the tax deducted or collected to the assessee. Penalty shall be levied in case quarterly statements are not furnished in time.

TDS on acquisition of immovable property

Proposed: Applicable from FY 04-05. These days large areas of land and many residential buildings are acquired by various agencies from the owners who are compensated. Under a new Section 194LA, TDS shall be applied at 10 per cent on the amount of compensation.

Enforcing TDS compliance
Present: U/s 40(ai), failure to make deduction at source from payment of interest, royalty, fees or technical services or any other sum which is payable outside India, or in India to a non-resident or foreign company or failure to make payment to the account of the Central Government, attracts disallowance of such payments in the hands of the payer.

However, deduction of such sum is allowed in the computation of income if tax is deducted, or after deduction, paid in the subsequent year in computing the income of that year.

Proposed: Applicable from FY 04-05. This provision is extended to payments of interest, commission or brokerage, fees for professional services or fees for technical services to residents, and payments to a resident contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the expiry of the time prescribed.

Service tax

When FA94 introduced it for the first time the levy of service tax at 5 per cent of the value of taxable services was slapped only on three services in the organised sector -- telephone, general insurance and stockbroking.

At that time I had a premonition that the authorities, in their greed to collect more and more taxes, would extend the scope to other services and raise the rate of tax slowly, surely and steadily. I was proved right. FA96 roped in three more sectors -- advertising, pagers and courier services.

FA97 roped in 12, FA98 dropped three but added 12, FA01 added 14, FA02 added 10 more services into the service tax net. The list of taxable services has now grown to 71 now and rate has been raised to 10 per cent.

I am afraid that a time will come when all of us will have to pay this additional tax. I strongly feel that they should have increased the income tax rates directly instead of collecting the same indirectly. Unfortunately this indirect road goes through another 'Inspector Raj' of Sales Tax Department. All this is indeed scary.

This tax is payable on the turnover and not on income. And when you put it down in cold numbers, the full enormity of it strikes you. Let us take a basic back of the envelope calculation. Say a service provider charges you Rs 100 while his expenses are Rs 70. He pays tax of 33 per cent on his income of Rs 30, which works out at Rs 10.

Now, he also pays the service tax of 10 per cent on Rs 100 which works out to Rs 10. So what we have is a total tax of Rs 20 on an income of Rs 30! This is 66.67 per cent! Add the education cess and the rate climbs to over 68 per cent.

Service tax on life insurance

Service tax will be imposed only on 'risk cover' portion of the premium.

Comments: The risk cover is dependent upon the type of policy, the term of policy and the period elapsed. In other words, the insurance companies will have to work out the risk premium for each and every policy issued in the past but which is in force. I hope the companies, particularly LIC, has the wherewithal to undertake this huge exercise.

The full brunt of 10 per cent of the premium will be suffered by the 'term insurance' policies which are sans investment element.

The following is a list of miscellaneous issues dealing with service tax:

  • Rule 6 of Service Tax Credit Rules has been amended. If the input service supplier has not paid service tax, the service tax credit cannot be recovered from the person availing the credit if he had taken reasonable steps to do so
  • The present rate of interest of 15 per cent p.a., on delayed payment of service tax is being replaced by a range, from 10 per cent to 36 per cent p.a. The central government will have the power to notify the rate of interest on delayed payment of service tax within this range.
  • Section. 67 of FA94 has been amended to provide that where the gross amount charged or received by a service provider is inclusive of service tax payable, the value of taxable service shall be such amount as with the addition of service tax payable thereon, is equal to the gross amount charges or received.
  • Section 71 and Section 72 of FA94 relating to verification of assessment and best judgement assessment are being omitted.
  • The provisions of Section 73 of FA94 relating to recovery of service tax short levied or short paid or erroneously refunded are being redrafted on the lines of Section 11A of the Central Excise Act. Consequent changes are also being made in Section 74 (relating to rectification of orders), Section 76 (which provides for penalty in case of fraud, misstatement etc.) and Section 85 (relating to appeals before Commissioner (Appeals)).
  • Penalty provisions u/s 75A and u/s 79 of FA94 are being omitted. The provisions u/s 77 (which provides penalty for non-filing of returns) are being modified to provide for penalty for committing any contravention of rules and procedures.
  • In case payment is received in advance, service tax will be payable on pro rata basis.

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  • A N Shanbhag