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Wednesday, Mar 01, 2006


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Tepid changes to corporate tax

R. Anand

In a regime where service tax has been expanded to cover various services, the list now nearing 100, the levy on hire purchase and leasing has been revisited, with the Budget specifically clarifying that the finance charges/interest portion relating to hire purchase and leasing will be outside the scope of service tax.

Notification 4/2006 provides for abatement of up to 90 per cent of the interest component of hire purchase/leasing transactions. However, for the banking sector, the abatement of interest is in entirety and not restricted to 90 per cent. This differentiation appears ill-founded and inexplicable.

A much-needed watering down of Fringe Benefit Tax (FBT) has taken place. First, contribution to approved superannuation fund was exigible to FBT on the entire amount at 33.66 per cent. Now, contribution by a company in respect of employee up to Rs 1 lakh will not be liable to FBT. Only the excess portion over Rs 1 lakh will be subject to the tax. This has effectively laid to rest the criticism that superannuation, being a social security measure, should not be subject to FBT.

Further, some dilution has taken place in respect of free samples of medicines/equipment and celebrity endorsements. The plea of industry to scrap FBT and raise corporate tax rate instead has been ignored.

The manner of computing interest payable by an assessee under Sections 234A, 234B and 234C were creating complications, with litigation on whether taxes paid in other countries and MAT credit can be set off against the tax liability for calculating advance tax.

It has now been clarified that both these items can be reckoned in arriving at the advance tax payable. Hopefully, the pending controversies on this issue will be resolved.

On the whole, there are no major path-breaking changes in corporate taxation. All the amendments discussed are prospective in nature.

(The author is a Chennai-based chartered accountant.)

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