The fine print: Jaitley stays tightfisted

The finance minister should have given the tax benefits with a big heart. What he gives with one hand to some sections, he takes away from other sections of the society. Standard income tax deductions should have been better than partial deductions. The corporate tax reduction is also partial despite having a roadmap for reduction to 255 from 30% for all companies.

The Finance Bill, 2017 contains 86 clauses in relation to income-tax, which doesn’t speak well for the stability of the tax regime. Many of the amended provisions were brought in last year which means enough thought has not gone into framing of those provisions.

Some of these were referred to in the finance minister’s speech, but there are, of course, many more.

Dividend

Section 115BBDA was introduced just last year and provided that if an individual HUF or a firm (or an LLP) were to receive dividend in excess of Rs10 lakh from a domestic company or companies, then a tax of 10% would be levied on the amount in excess of Rs 10 lakh. This is now being amended “with a view to ensure horizontal equity among all categories of taxpayers deriving income from dividend”. Hereafter, all Resident assesses, including any AOP or BOI or co-operative society or other such entity would have to pay this tax. However, domestic companies, Charitable Trusts and Universities or other such institutions as specified in Section 10(23C) are exempted.

TDS on rent

A new Section 194-IB is being introduced to provide that any individual or HUF responsible for paying to a resident person, rent exceeding Rs 50,000 in a month or part of a month shall deduct tax at 5% of such income, even if such payer is not subject to Tax Audit and therefore does not fall within the scope of Section 194-I. This deduction shall be made in the last month of the year or the last month of the occupation.

For example, if an individual pays rent of Rs.1 lakh per month for nine months and vacates in December of the year, then on that amount of Rs 9 lakh he would have to deduct tax of Rs 45,000, which will be done in the last month.

The deductor shall be liable to deduct tax only once in a financial year. The deductor will not be required to obtain a TAN Number.

Holding period of 24 months for property

At present, immovable property held as a capital asset will be treated as a long term asset only if it is so held for more than 36 months. Section 2(42A) is now being amended to provide that it will be a long term capital asset if it is held for more than 24 months.

This will help assesses a great deal, and coupled with the shifting of the base year from 1981 to 2001 can reduce the amount of tax substantially.

Shifting of base year from 1981 to 2001

Sections 48 and 55 are now being amended to provide that if a capital asset has been acquired before 1.4.2001, then the value as on 1.4.2001 shall be taken as the base cost for the purpose of capital gains and this together with capital expenditure incurred after that date for improvement, shall be indexed. This would greatly help owners of real estate and other assets such as closely held shares, and jewellery.

For instance, in many cases of immovable property in South Mumbai, the value as on 1.4.1981 was about Rs 1,000 per sq ft in 1981. In 2001, the value would be perhaps Rs.20,000/- per sq.ft.

Housing projects

Section 80-IBA was introduced just last year to provide for deductions in respect of profits from a housing project. This is now being amended. The changes will be:-

A unit had to be of up to 30 sq metre or 60 sq metre of built-up area, depending on the location. This is being changed to “carpet area”.

Another amendment relates to the location of the project. If the project is within one of the four major metros, then each unit can be up to 30 sq m of carpet area. If the project is outside the four major metros, then each unit can be up to 60 sq m of carpet area.

The project may now be completed within five years, instead of three years in order to get the benefit of the exemption.

The new Capital of Amaravati is being developed on the basis of a Pooling Scheme amongst land owners rather than by acquisition from land owners.

A new Clause 37A is being inserted into Section 10 to provide that a transfer of the capital asset being land or building or both under a Land Pooling Scheme shall not be subject to tax. The sale Land Pooling Ownership Certificates (LPOCs) or reconstituted plot of land within 2 years shall not be subject to tax. This amendment is being made with retrospective effect from assessment year 2015-16.

In the case where a reconstituted plot of land received under the Pooling Scheme is transferred after the expiry of two years from the end of the financial year in which the possession of such plot was handed over to the assessee, the cost of acquisition of such reconstituted plot shall be deemed to be the stamp duty value on the date of expiry of two years from the end of the financial year.

This is a very good provision and while it presently applies only to Andhra Pradesh, it is likely that this kind of pooling arrangement will now be adopted in other States and then specific amendments will have to be made for each such State.

Capital gains in case of joint Development Agreement

At present, if a land owner enters into a Development Agreement and hands over possession, he becomes liable to pay tax, even though he has not received the full consideration, as he is to get his revenue as the project proceeds or upon the completion of the project. This creates a great hardship and is one of the factors deterring land owners from allowing lands to be developed.

Now it will be provided that the land owner shall be liable to tax only in the year in which the Certificate of Completion for the whole or part of the project is issued by the Competent Authority. However, another part of the amendment is that the stamp duty value of the Owner’s share shall be determined in the year of Completion Certificate rather than the year in which he entered into the Development Agreement. This may result in a higher obligation of tax on him.

Long-term bonds under Section 54EC

In addition to investment under REC or NHAI to the extent of Rs 50 lakh on account of a long-term capital gain, an assessee may invest in such other Bonds redeemable after three years which has been notified by the central government in this behalf.

Notional income from house property

Certain decisions of the courts have held that if a Builder has been unable to sell his stock of completed premises, he will be taxed under Section 23. This has been under litigation for some years now. Section 23 is now to be amended to provide that for one year from the end of the year in which the Completion Certificate is obtained, the developer need not offer any notional income for tax.

The I-T department may use this to contend now an exemption is being given, it must be presumed the tax was payable for the period before amendment.

The writer is partner at D.M. Harish & Co