The Hindu : Changes in the Finance Bill, 2003

Online edition of India's National Newspaper
Monday, May 26, 2003

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Changes in the Finance Bill, 2003

QUESTION: What are the important changes made by way of amendment to the original Bill, which have now become law as Finance Act, 2003?

ANSWER: There are many amendments to the draft Bill, significant or otherwise. The more important ones are listed below:

(i) Business connection: More widely defined: Business connection was defined for the first time in the draft Bill to include an agent. This definition excluded any independent agent from the purview of the inference of business connection. It is now `clarified' by way of an Explanation that an agent whether he is a broker, general commission agent or any other agent, would not be excepted, if the non-resident has controlling interest in such agency or even if the agency works mainly for the non-resident. It follows from this amendment that the activities of such agent in India may give rise to taxable income in India for the non-resident, so that it will add to the confusion in non-resident taxation.

(ii) SEZ: Concessions all the way: Undertakings connected with special economic zones receive some handsome concessions in the amendments to the Bill, which have now become law. All industrial undertakings and software producers commencing production on or after April 1, 2003 in a special economic zone will have exemption for their income under Section 10A to the extent of 100 per cent for the first five years, 50 per cent for the next two years and 50 per cent limited to the amount credited to a special reserve in the last three years. The reserve is expected to be used for acquiring plant and machinery within three years of creation of the reserve.

Apart from concessions under Sec. 10A for units in the special economic zone, scheduled banks, other than foreign banks, owning offshore unit in the special economic zone will get 100 per cent exemption on the profits of the unit for the first three years and 50 per cent from the next two years, subject to such profits being received in foreign exchange.

A still another relief is the extension of the benefit of Sec. 80HHC to domestic sales (often described as deemed exports) to units situated in a special economic zone and is eligible for exemption under Sec. 10A.

(iii) Rubber industry is not excluded: Deduction for amounts deposited with NABARD under Sec. 33AB, which was hitherto available for development of tea industry, was proposed to be extended to coffee in the Bill and it gets further extended to rubber in the Finance Act, 2003.

(iv) Shipping industry — Restrictions for relief relaxed: The period for which the shipping industry had to retain the ships acquired by it as a condition for availing deduction under Sec. 33AC has been eight years, but this will stand reduced to three years with the further relaxation that the sale within the period will be excused, if the sale proceeds are reinvested in another ship within a year. These amendments are also parts of the amendments to the draft Bill.

(v)Real estate development gets retrospective relief: Incentive for real estate development for housing projects for plans approved before March 31, 2001 had lapsed, but it was proposed for restoration by extension of relief for plans approved till March 31, 2005. The requirement of the completion before March 31, 2003 was also proposed to be dropped in the draft Bill. Both proposals in the Bill were prospective, so as to be effective only from assessment year 2004-05. The proposals have now been made retrospective from April 1, 2002, so that the concessions even without fulfilling the requirements for completion within a specified period would now be available for AY 2002-03 and AY 2003-04.

(vi) Concessions for capital gains on new shares diluted: Long-term capital gains on sale of listed shares acquired between March 1, 2003 and February 29, 2004 was proposed to be exempted by Sec. 10(36) in the Finance Bill. Due to unnecessary misapprehension of possible abuse of the concession, it is now required that these shares should have been listed in BSE 500 of the Stock Exchange in Mumbai and acquired through a recognised stock broker or it should have been acquired in a public issue of such listed shares during this period.

In either case, the sale should be through a recognised stock broker. Probably, it was overlooked that there is already a more liberal concession in Sec. 54ED for rerolling in public issues of listed shares granting deduction for long term capital gains.

(vii) A shackle for short-term insurance policies lightened: There have been unnecessary restrictions proposed in the Bill in respect of short term insurance policies denying tax rebate on the premium payable, if such premium exceeds 20 per cent of the sum assured.

This proposal will continue to stand. But the consequential proposal that the proceeds of such policy on maturity other than on death made taxable in the Bill is now mercifully relaxed limiting the tax to the policies issued on or after April 1, 2003.

(To be concluded)

S. Rajaratnam

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