Finance minister Jaswant Singh needs to be complimented for a job well accomplished as far as the direct tax proposals of the Union Budget 2003 are concerned. For the first time, a great degree of transparency has been built into the budgetary process and the proposals outlined in this budget are, by and large, on expected lines.
The direct tax proposals can be broadly classified under two categories — those relating to tax structure and those relating to tax administration.
On the administration front, there had been frequent criticism of the existing provisions relating to search and seizure particularly on account of long procedural delays in assessment, increase in the number of disputes and litigations.
To address these issues, it is now proposed that the provisions of Chapter XIV B (which govern search and seizure cases) will not apply where a search is initiated under section 132 or books of account or any other asset have been requisitioned under section 132A after May 31, 2003. These will now be governed by new sections 153A, 153B and 153C which provide for a more time-bound and objective procedure to be adopted in search and seizure cases.
Moreover, stock-in-trade found as a result of search shall not be seized but the authorised officer shall make a note or inventory of such stock-in-trade of the business.
The existing system of seizure of stocks was unnecessarily hampering business without any gain to revenue and, therefore, the budgetary proposal needs to be appreciated.
Apart from streamlining of search and seizure operations, the finance minister has also tried to revamp certain key administrative activities pertaining to filing of returns, and clearance of tax refunds. In line with increased emphasis being given to introduction of information technology in all sectors of the economy, the budgetary proposals envisage enabling filing of electronic returns of income, direct crediting of income tax refunds to the bank account of assessee, filing of TDS returns on magnetic media and compilation of a comprehensive database based on annual information returns to be furnished by taxpayers in respect of certain specified transactions. It is a matter of great relief that tax clearance certificates would now not be required to be obtained for certain routine matters like submission of tenders.
Another significant measure being proposed is the abolition of present discretion based system of selection of returns for scrutiny. As a matter of simplification of assessment procedure, only 2 per cent of the returns would now be taken up for scrutiny on the basis of computer generated sampling, thereby making the process more objective.
As far as the structural proposals are concerned, there has not been too much tinkering with the existing system to impart a degree of “stability and continuity”.
The salaried class will now get a higher standard deduction of 40 per cent of salary or Rs 30,000 whichever is less up to an income of Rs 5 lakh. However, people earning higher than Rs 5 lakh will be entitled to a standard deduction of Rs 20,000 only.
Individual taxpayers having an income up to Rs 8.50 lakh will now not be required to pay surcharge on their income tax. This should be some relief to the common man. The brunt on this account seems to have been passed on to the higher income group, i.e persons earning above Rs 8.50 lakh, who will now have to pay an increased surcharge of 10 per cent, which was unexpected and goes against the finance minister’s admitted virtue of long-term stability as it amounts to an increase in the maximum marginal rate.
Among the various tax proposals, the ones which are surely going to be most talked about relate to granting of tax exemption to income from dividends and long-term capital gains on listed shares. While the former proposal was widely expected and needs to be welcomed, the latter is bound to raise a lot of questions. The exemption on long-term capital gain would only be available for listed shares acquired during the period from March 1, 2003 up to February 28, 2004. It indicates that this proposal has been contemplated as a short-term measure only and, therefore, does not reflect favourably on the stability criteria as far as the long-term direct tax policy is concerned. Moreover, it does not create a level playing field in as much as listed equity shares already acquired prior to March 1, 2003 and held for more than 12 months is not eligible for this exemption, which does not seem to be very equitable.
In view of the exemption to be given to dividend income in the hands of investors, dividend distribution tax has been re-introduced in the hands of the dividend paying company.
In addition to paying 35.88 per cent tax on their income, companies would now have to pay an additional 12.81 per cent tax on the profits distributed by them as dividend. Unit Trust of India has, however, been exempted from dividend distribution tax.
Other significant tax proposals include increase of amount of total deduction available under section 80L to Rs 15,000, allowing rebate on education expenses up to Rs 12,000 per child for two children under section 88, granting of income tax relief under the voluntary retirement scheme even in case of payment by installments, and granting of special rebates to senior citizens and physically handicapped persons in the form of higher rebates under section 88 B and section 80 U respectively. Contrary to expectations, the minister has chosen to continue with housing-related tax deductions and he deserves credit for the same.
Notable among the issues left unaddressed is non-availability of MAT credit for set off in future years. Not allowing such set off appears to be anti-growth and the corporate sector in general would feel let down on this account.
Similarly, concerns regarding computation of long-term capital gains in certain cases on the basis of value assessed for the purposes of stamp duty remain unaddressed.
Overall, the finance minister’s direct tax proposals give a clear indication that the Kelkar committee recommendations have been adopted on a piecemeal basis.
Recommendations on structural reforms which could have created a negative feeling — elimination of plethora of exemptions — have been ignored whereas other recommendations relating to administrative and procedural reforms have generally been accepted.