Eighty-four clauses in the Finance Bill 2007 seek to amend various sections in the Income-Tax Act, 1961 to carry forward the process of tax reforms initiated by the Finance Minister, Mr P. Chidambaram, about ten years back. The Finance Minister pointed out in his speech that the current slabs and rates of personal income-tax were introduced only two years ago and constituted a moderate tax regime. As a new I-T code is to be introduced in Parliament this year, it is difficult to appreciate the hurry for carrying out various amendments to the tax law.

Tax rates

The three-tier slabs have been retained with relief of Rs 10,000 for individuals and HUFs. This relief is somewhat offset by the education cess, which has been increased from 2 per cent to 3 per cent. The slab system has been introduced for corporate taxpayers. To encourage small and medium enterprises (SMEs) to invest and grow, Mr Chidambaram has proposed to remove the surcharge on income-tax on all firms and companies with a taxable income of Rs 1 crore or less. This measure, according to the him, will benefit about 1,20,000 firms and companies. There is no indication of the number of individuals and HUFs that will benefit by the enhancement of the basic exemption limit.

The Finance Minister said that he is not altering the tax rate (Para 162 of the Budget Speech). But the enhancement in education cess along with the existing surcharge raises the corporate tax rate. He also pointed that the effective tax rate on companies in India is only 19.1 per cent.

The Budget papers indicate that revenue foregone because of the exemption provisions will equal about 50 per cent of the collections. Of the gross tax collections of Rs 4,23,331 crore for 2006-07, the total revenue foregone is shown as Rs 2,35,191 crore.

Corporate income-tax exemptions accounted for Rs 50,075 crore of the revenue foregone, whereas the revenue lost on account of benefits conferred on individual taxpayers is only Rs 15,512 crore. The one notable amendment brought in is to levy MAT on information technology companies seeking exemption under Sections 10A and 10B of the I-T Act. But there is no reason to exclude companies in SEZs (Special Economic Zones) from the levy.

The dividend distribution tax rate has been enhanced from 12.5 per cent to 15 per cent; on including the surcharge and cess, the tax on additional dividend will work out to about 17 per cent. Companies may be tempted to pay interim dividend immediately to escape the additional 2.5 per cent burden. Money market mutual funds and liquid mutual funds will suffer double the tax at 25 per cent. Thus, the incentive to invest in such funds will be less.

ESOPs have been brought into the umbrella of the fringe benefit tax (FBT). This will particularly hurt the knowledge-based industry, which use ESOPs to retain talent. Software companies are doubly hit, having to pay MAT and bear the burden of FBT on ESOP.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)