INDIA: What are the proposals of interest in personal taxation?

CHENNAI (The Hindu - Business), March 3, 2008: TAX FORUM: QUESTIONS & ANSWERS Amendments proposed in the Finance Bill, 2008 What are the proposals of interest in personal taxation? Exemption limit has been raised for individuals and Hindu Undivided Families (HUFs) by Rs. 40,000, so that the limit for assessment year (AY) 2009-10 would be Rs. 1.50 lakh. The increase in the limit for women and senior citizens is not corresponding to the general limit, in that, it has been raised by Rs. 35,000 and Rs. 30,000 for women and senior citizens respectively, so that the revised limit will be Rs. 1.80 lakh and Rs. 2.25 lakh respectively. Slab rates have also since been revised, so that the rate of 10 per cent would now be applicable for the lowest slab of Rs. 1.5 lakh to Rs. 3 lakh, 20 per cent for Rs. 3 lakh to Rs. 5 lakh and 30 per cent for incomes above Rs. 5 lakh. There would be a tax benefit of Rs. 4,000 for those covered by the present change. In the light of the fact that there is no change in the rate of taxation for other entities like firms and companies, this change should be welcome from the point of view of personal taxation. Th area covered by Sec. 80C is now expanded to include Five Year Post Office Time Deposits and deposits under Senior Citizens Savings Scheme, subject to the amount being taxable in the year of withdrawal, if it is withdrawn before the expiry of five years. However, there is no increase in the over all limit of Rs. 1 lakh under Sec. 80C. Contribution to medical insurance under Sec. 80D is also liberalised again from AY 2009-10. Where senior citizen is a beneficiary in respect of such policy, whether subscribed by him or for his benefit, the limit is increased to Rs. 20,000. The requirement that it would be available to an individual only if the senior citizen is dependent on such individual is no longer a condition from AY 2009-10. Notes on Clauses would understand the substituted section to mean that an additional deduction of Rs. 15,000 and in case where the beneficiary is a senior citizen, the deduction of Rs. 20,000 would be available, so that it is possible for the parent and the individual to get the deduction. In case both of them make independent contributions, deduction gets enhanced to Rs. 35,000, where the beneficiary is a senior citizen and Rs. 30,000 otherwise with Rs. 15,000 for his family and Rs. 15,000-20,000 for his parents. This has been explained in Explanatory Memorandum with an example as under: "For example, an individual assessee pays (through any mode other than cash) during the previous year medical insurance premia as under: (i) Rs. 12,000 to keep in force an insurance policy on his health and on the health of his wife and dependent children; (ii) Rs. 17,000 to keep in force an insurance policy on the health of his parents. Under the proposed new provisions, he will be allowed a deduction of Rs. 27,000 (Rs. 12,000 plus Rs. 15,000) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs. 29,000 (Rs. 12,000 plus Rs. 17,000). Whether the parents are dependent or not, is not a consideration for deciding the deduction under the proposed new section. Further, in the above example, if the cost of insurance on the health of the parents is Rs. 30,000, out of which Rs. 17,000 is paid (by any non-cash mode) by the son and Rs. 13,000 by the father (who is a senior citizen), out of their respective taxable income, the son will get a deduction of Rs. 17,000 (in addition to the deduction of Rs. 12,000 for the medical insurance on self and family) and the father will get a deduction of Rs. 13,000. What is the effect of change in the definition of charitable purpose? The provision is now substituted by a proviso under Sec. 2(15) defining "charitable propose" as under: "Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity". The provision is best understood in the context of the recent decision of the Supreme Court in CIT v Gujarat Maritime Board (2007) 295 ITR 561 (SC), where the expression "the object of general public utility", it was held, would justify the activity of development and maintenance of minor ports to be such object, so as to be eligible for exemption as the beneficiaries were public at large. The Supreme Court pointed out that it has already taken such a view in CIT v Andhra Pradesh Road Transport Corporation (1986) 159 ITR 1 (SC) and CIT v Andhra Chamber of Commerce (1965) 55 ITR 722 (SC). The effect of the proposed amendment is that all these decisions would no longer be good law, since the newly inserted proviso would rule out exemption for any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to such trade, commerce or business from AY 2009-10. However, such surplus from activities in the nature of business relating to relief of the poor, education and medical relief would continue to be not taxable. What are the exemptions which are now extended by this Finance Bill, 2008? Residents of Sikkim would be eligible for exemption excluding however non-Sikkimese spouse of a Sikkimese. This retrospective benefit is conferred with effect from April 1, 1990. Coir Board will be exempt prospectively from AY 2009-10. Another important exemption relates to any lump sum or instalments received in a transaction of a reverse mortgage. Reverse mortgage should conform to the scheme notified by the Central Government. Broadly, it represents the amount received from a lending institution by the owner of a house property ordinarily used for his residence with such mortgage loan becoming enforceable on the death of the owner. Mortgage itself is a charge and does not involve transfer, though it relates to an interest in real property. Besides, the amount received being a loan, whether received in lump sum or instalment, should not be taxable even otherwise. However, the law makes this position clear by exempting such transaction from the purview of taxation under Sec. 47(xvi) and making it doubly clear by exempting the receipts under Sec. 10(43) of the Act. S. Rajaratnam Copyright © 2008, The Hindu