K R Sriram & Co
Budget 2004 - Highlights
Budget - An exercise made by the central government to forecast its income and expenditure for the coming year. As the incomes are directly linked to the taxes collected by the Central Government, it has powers to make changes in the various Direct and Indirect Taxes like Income Tax Act, Customs Act, Central Excise Act etc., This power is generally exercised by announcing the Finance Bill (which is part of the Budget Document) every year. This Bill needs the approval of the parliament before it becomes mandatory. Certain specifically stated provisions of this Finance Bill are introduced with immediate effect.
Generally the Finance Bill is placed before the parliament in the month of February and is passed by March to ensure that at the beginning of the year, the tax rules are clear for every person in respect of the ensuring year. However for the year 2004-05 due to general elections in May 2004, the budget was presented in July 2004. The effective implementation dates of these changes coming into force varies.
This Budget has announced a lot of measures to the farm and the agricultural sector by way of announcement of various schemes etc. We believe that to most of us, these announcements should not have any direct effect on our personal finances. Our focus in this bulletin is restricted to the areas of direct impact.
Education Cess (Levy of education cess at 2%)
A cess of 2 % has been imposed on the following taxes and duties:-
This is applicable with immediate effect. For Income Tax the cess is applicable on taxes payable for the year.
Securities Transactions (Changes in taxability of transactions in securities)
- Income Tax
- Service Tax
- Excise Duty
- Customs Duty
The above changes are to be made effective from the date notified by the government in this regard. (No such date notified till date)
Income Tax - Personal
Removal of Long Term Capital Taxation on transactions involving securities sold through recognized stock exchanges in India.
Short Term Capital Gain Taxation on transactions involving securities sold through recognized stock exchanges in India reduced to 10%.
Security Transaction Tax to be levied at 0.15% by the purchaser of the securities.
Income Tax - Business/Profession
In addition to the above changes to the extent they are applicable , there have been certain changes which are applicable specifically to Business/ Profession. They are listed below :
Donee based taxes on gifts: Gifts received after 1st September 2004 from persons except :-
exceeding Rs. 25,000/- will be taxable as Income from Other Sources and will be subject to normal rates of taxes.
Marriage gifts upto Rs. 1,00,000/- are also exempt.
- from relatives out of natural love and affection
- By will or inheritance
- By way of Bonus, gratuity, etc, in recognition of services rendered
- In contemplation of death
Loss from Business or Profession cannot be set-off with Income from salary from the Assessment Year 2005-06 ( i..e., the current financial year)
Introduction of a new pension scheme u/s 80DDB:
For Central Government employees a new pension scheme has been introduced. The main features of the scheme are :-
Employee contribution restricted to 10% of salary will be exempt.
Government Contribution restricted to 10% of salary is also exempt.
Total sum received on termination of the scheme together with Interest taxable.
Modifications to exemption for medical expenses for treatment of self or relative u/s 80DD and 80U.
Inclusion of certain new diseases and ailments
Increase of exemption from Rs.50,000 to Rs.75,000 for certain ailments.
Extension of section 88 rebate in respect of repayment of housing loan :
Loan repayments made to the employer, where the employer is an authority or a board or a corporation or a body established or constituted under a central or a state act is also eligible for rebate.
Tax exemption for Persons with Taxable incomes up to Rs. 1,00,000.
Tightening of provisions relating to Dividend Stripping:
In the current year the period in respect of sale of units has been extended from 9 months to 3 months.
Dividend stripping means a person buys shares/units just before the date of dividend distribution, earns tax-free income by way of dividend and then sells the shares/units just after receiving the dividend.
Loss arising from such purchase transactions as above happening 3 months prior to the date of distribution and sale transactions happening 3 months after the date of distribution would not be considered in calculating the income of the person.
Introduction of Provisions relating to Bonus Stripping :
There were provisions only in respect of Dividend Stripping as above. From this year restrictions have been placed to the effect that units purchased within 3 months of the record date for distribution of bonus units has to be held for a minimum period of 9 months in order to get the benefit of loss there from.
Obligation cast for providing specific information :
In respect of the following transactions exceeding Rs. 50,000/-
an assessee who has entered into the transaction or such other person as is specified will have to report in a prescribed format to the Income Tax authority.
- Transaction of purchase/sale/exchange of goods or property
- Transaction for rendering any prescribed service
- Works contract
- Investment or expenditure made
- Loans or deposits taken or accepted
Income Tax - Non-Residents
With effect from 1st September 2004 Interest earned on NRE Accounts will be taxable.
The rate of service tax increased from 8% to 10% with effect from the enactment of the Finance Bill 2004.
The following additional services are covered under the Service Tax Net :-
Additions to Plant & Machinery resulting in an increase in the Installed capacity by 10% (previously an increase of 25% was required) will be entitled to additional depreciation of 15% (if additions made for full year) and 7.5% (for half year). This is effective from 1st April 2005.
- The following expenses :
would be disallowed in computing business income, if tax has not been deducted at source or deducted but not deposited within the prescribed time as specified.
However the same would be allowed only in the year when such tax deduction has been paid.
- Fees for Professional Services
- Fees for Technical Services
- Amount paid to Contractor/Sub-Contractor
- Tax Deduction at source for contractors/sub-contractors:
With effect from 01.10.2004 tax has to be deducted at source for contractor payments if :
With effect from 1st April 2005, Quarterly TDS Return statements have to be filed for each of the quarters ending on June/September/December/March within the time prescribed for this purpose.
- Each payment made exceeds Rs. 20,000.
- Aggregate payment made or is likely to be made in a year exceeds Rs. 50,000.
- TDS Certificates:
The requirement of issuing TDS Certificates by the persons deducting tax at source has been removed. Such Certificates will now be issued by the Income Tax Department to all assesses.
- Common TDS/TCS Number:
From 1st October 2004 , there will be a common tax deduction cum collection account number.
- Inclusion of certain items in TCS Scheme:
From 1st October 2004, the person granting lease or a licence or enters into a contract or transfers any right or interest in any parking lot/toll plaza /mine/quarry is required to collect tax at source at the following rates :-
- Parking Lot - 2%
- Toll Plaza - 2%
- Mining / Quarrying - 2%
- Business Exhibition Services
- Airport Services
- Goods Transport Agency - By road
- Goods Transport Agency - By air
- Survey and exploration of minerals
- Opinion poll services
- Intellectual property services except copyrights
- Forward Contract Services
- Pandal or shamiana services
- Outdoor Catering
- TV or Radio Programme Production
- Construction Services
- Travel agents ( other than air/rail travel agents)
Scope of Services increased in the following cases :-
The credit for service tax is being extended across goods and services.
There have been changes in the excise tariff and customs duty in respect of certain goods and certain changes regarding the administrative mechanisms in all the areas of taxation. In order to restrict our focus only to significant changes in Income Tax and Service Tax we have not included those changes in the above highlights. However we will be glad to provide the details of any changes whether covered hereinabove or otherwise if you may so require.
We also intend to bring out a detailed analysis of the changes in our quarterly bulletin due by September, by which time we expect that the proposed changes would have been approved by the parliament either in its entirety or otherwise.
- Commission and installation of plant, machinery or equipment to include erection charges
- Stock brokers to include sub - brokers
- Multi System Operators (MSO)
- Business Auxillary Services to include
- Services for procurement of inputs
- Services for production of goods or provision of services
- Financial Services will include Lending
- Issue of Pay order, DD, Cheques, L/Cís, Bills of exchange, Bank guarantee, Overdraft facility, Bill discounting, Safe deposit lockers, Safe vaults and Operation of bank accounts.
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