Written in : April 2000

In the last article we saw the implications of the Budget in personal taxation. Let us see what are the other changes that are proposed in the tax regime.

There exists a tax holiday for new industrial undertakings in some specified industrially backward states and industrially backward districts. I had discussed this in an earlier article. Two districts in Andhra Pradesh are specified to be industrially backward – Srikakulam and Mahaboobnagar.

When industries are setup in such states or districts, their income is totally exempt for five years and 30% (for companies) or 25% (for others) is exempt for the next five years. Only those units are eligible for this tax holiday which commence production or manufacture before March 31, 2000.

The Budget now proposes that this sunset date be extended to 31.3.2002, that is, by another two years.

So, if you are contemplating setting up industrial units in these backward districts or states, your entire income will be exempt of tax for 5 years if you set up and commence production before 31.3.2002.

A similar, though scaled down, tax holiday is available to small scale units who commence production before 31.3.2000. Such units are eligible to a tax holiday of 30% (for companies) and 25% (for others) for ten years.

Here again, the Budget proposes to extend the sunset date to 31.3.2002. Remember, this benefit is available to all small units, wherever located.

Approved housing projects – large ones – are entitled to a 100% tax holiday if their development and construction is commenced after 1.4.1998 and they are completed before 31.3.2001.

This highly attractive incentive is now proposed to be available to those projects which get completed by 31.3.2003 and not 31.3.2001.

If you had long term capital gains and you made investments in a residential house, you are entitled to exemption proportionate to your investment. This benefit was not allowable if you already had a residential house as of the date of transfer.

This benefit is now being liberalised by allowing the exemption even if you own one (but no more) house at the time of transfer.

This will make it attractive for many people to invest in houses on transfer of assets and save on capital gains tax.

In view of our perennial shortage of foreign exchange, we have always given a special treatment to export. Export incomes have been fully exempt of tax. This included exports of all kinds – goods, software, people (yes), tourism etc.

Now that we are comfortable with foreign exchange reserves and our economy is far stabler, and exports are becoming competitive, government has thought (rightly, I believe) that export incentives should be phased out, if not removed.

TGovernment has now proposed that various tax benefits which are now available be phased out totally within the next five years. This is to be achieved by reducing the benefit equally over five years.

So, if your export earnings are 100% tax free, next year you will pay tax on 20% of the earning, on 40% in the year after that, on 60% on the year thereafter and so on – such that after five years your entire earnings will be tax-free.

There are some benefits which are not 100% tax-free but lesser than that. The phasing out of these benefits is also equally over five years.

The benefits which are to be phased out are under sections 80HHC, 80HHE, 80HHF, 80HHB, 80HHBA, 80O, 80R, 80RR, 80RRA.

You might have heard of, if not noticed, a mad rush for registration of units with STPs (Software Technology Parks) and FTZs (Free Trade Zones). This is because the Budget proposes to limit the complete tax holiday proposed to these units only if they are set up before 31.3.2000. If such units are set up after 31.3.2000, they are not entitled to a 100% exemption but what 80HHC or 80HHE would give in its phase-out scheme.

Governments have always disliked zero-tax companies. These companies find clever means to show profits in the books and declare dividends but ensure that they do not pay any income tax. This is, of course, entirely legal and often does not need any ingenuity. It is because law is like that. For instance, companies may charge depreciation in the books at rates allowed by company law and arrive at good results. However, tax laws provide for higher depreciation and the taxable income may become zero or negative resulting in no tax payment.

Our governments have found this unpalatable. There have, therefore, been many attempts to levy tax on such companies and make them pay some tax.

Minimum Alternate Tax (MAT) was the tax that was last levied on such companies . The last avatar of MAT was rather mild. It allowed for a credit of tax paid as MAT which was allowed to be set off against normal tax payable in future. Companies did not really mind paying MAT.

The law levying MAT is now proposed to be replaced by another law. Under the new proposed law, MAT is to be levied at 7.5% of book profits as the existing effective 10.5%. However, all companies are to bear this and no credit is to be allowed to be carried forward. The only exception is export profits till they are phased out.

This will make more companies pay MAT and government will end up earning more

Dividends are now totally exempt of tax in the hands of shareholders. However, companies which declare the dividends have to pay a 10% dividend tax on the payouts. This is just another way of collecting tax on dividends.

This tax is now proposed to be increased to 20%. That, by any standards, is a stiff increase and perhaps not called for.

We have covered the major amendments to tax laws as provided by the Budget of 2000.