Amendment to punish cash transactions - BL

What is the amendment relating to disallowance of cash payment under Sec. 40A(3)?

Sec. 40A(3) disallows 20 per cent of any payment for any expenditure, including purchases by means other than crossed cheque or crossed draft.

This was amended only recently by the Taxation Laws Amendment Act, 2006 substituting the requirement of payment by account payee cheque or account payee draft. Finance Bill, 2007 now substitutes 20 per cent by 100 per cent. Exceptions under the present rules are niggardly covering only a few circumstances.

ESOP FBT to be recovered from Employees - Infosys

With the enhanced FBT regime coming into effect from April this year, Infosys Technologies Ltd has reached out to its employees to exercise the options.

The Union Budget 2007-08 has brought ESOPs under the Fringe Benefit Tax regime. The Finance Ministry though is yet to spell out the norms to tax the gains arising after exercising ESOPs.

"We have been telling our employees about the change in law and encouraging them to exercise their stock options before March 31," said Mr V. Balakrishnan, Chief Financial Officer, Infosys Technologies Ltd, told Business Line.

This was to help employees contain their tax liabilities. Some banks have already come forward to fund the exercise of the options, Mr Balakrishnan said. The company has a total of 12.5 million ESOPs in Indian shares and about 2.8 million American Depository Shares granted to around 5,000 employees.

"While a majority of the ESOPs have been vested, about 500,000 of them are still outstanding," Mr Balakrishnan said. Infosys, credited with introducing the ESOP culture in India, has had a total of three ESOP Plans.

The first stock plan was introduced in 1994 for all eligible employees. In 1998, the company put in place an ADS-linked stock option plan and the third plan in 1999.

The company discontinued issuing ESOPs in recent years. Citing reasons for discontinuing the ESOP Plan, the company's HR chief Mr T.V. Mohandas Pai had told Business Line in July last year, "Our culture and philosophy has been to give ESOPs to everybody. Now it's not possible because we have 53,000 people and it's not a scalable model."

Under the 1998 ESOP Plan, Infosys granted over 12.12 million options to 1,530 employees since 1999, of which a little over 3.03 million options were exercised, as of March 31, 2006. Some 64 employees forfeited about 95,348 options.

Similarly, under the 1999 Plan, about 18,795 employees were granted some 22 million options since 2000 till March 31, 2006.

Close to 30,000 employees exercised 8.8 million options during the period, while 429 employees forfeited 1.66 lakh options.

Service Tax is unconstitutional...No says FM

Service tax on rent is constitutionally valid and is not a surrogate tax on income, reports CNBC-TV18.

The Budget has projected a huge Rs 12,000 crore increase in service tax for this year, much of which, is expected to come from the tax on commercial rent.

Analysts say that it violates the constitutional scheme, as the power to tax immoveable property is vetted in the states, but the Finance Ministry says that the tax has been introduced after due diligence. "We have examined the international experience in respect of rent and find that it is imposed in a number of countries,” says KM Chandrasekhar, Revenue Secretary.

The Finance Ministry officials say that the service tax on commercial rent is not like house tax - a levy on property. They cite the example of professional tax, which is imposed by the states, in addition to which the Centre too taxes services rendered by the same professionals.

Service tax on commercial rent is not income tax by other means they say. "It is meant to be paid by tenants and passed on to them, though it may be collected from property owners,” says R Sekar, Joint Secretary, Finance Ministry.

From the objections raised at post-Budget meetings with industry chambers, this tax is clearly headed for litigation. The Finance Ministry may have got the proposal vetted through the Law Ministry but that will not insulate it from a legal challenge. For example, the attorney general has advised that the call option given to strategic investors in state enterprises sold by the previous NDA government violates the Companies Act - that issue has now gone to the courts. It remains to be seen whether this tax too, is headed in the same direction.

Tax Art Investments

The taxman has suddenly found a new interest — art, or more precisely, the art collector. Having adorned the living rooms of the well-heeled without fear of a cut from the government, works of art will now attract a tax when they are sold as the income received will be treated as a capital gain.

This year’s Budget says sale of art will be taxed at the marginal rate — the income tax rate applicable to the seller — for a period of three years, and at 20 per cent for longer. The Budget does not list all the items that make “art” but mentions drawings, paintings and sculpture.

Until now, art came under person effects and was therefore officially tax-free. But in practice, this was not the case, says Amit Vadehra, of Crayon Capital.

“Typically, a sale worth Rs 10 lakh or more was treated under the trader category and was taxed as income from other sources,” he said. “Some people paid the tax and some didn’t as there was no legal provision. It’s good the rules have been defined.”

Art belonged to the private world of the rich in which its price was secondary to its aesthetic value. But that was till three-four years back. In recent years, trading in paintings and other art stuff has become a lucrative business, making them an investment that collectors hope makes a fast buck.

This, together with huge demand and limited supply, has rapidly raised the price of art, giving the government strong reason to include its sale in the list of taxable income.

“Most art investors could not claim the work to be their personal effect. Even if someone had a genuine personal effect, it was very unlikely that the I-T Department would accept it, especially if the amount it fetched was huge,” says Neville Tuli, of Osian’s Art Gallery.

He is happy that art sale is now under the purview of capital gains and the confusion has been done away with. “The new transparency will help build a systematic industry for cultural artifacts,” Tuli said.

Crayon Capital’s Vadhera says this would also mean reduction in speculative selling, which has been rampant in the industry. “Since capital gains encourages long-term holding, speculative and short-term trading would be discouraged, and the market will become more stable.”

Capital gains parking easier as cap on bonds removed

Investors may not have to scramble to invest their capital gains from property deals in capital gains bonds in the coming fiscal with the government lifting the cap on the amount, which the two issuers, Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI), of such bonds can raise.

From 07-08 onwards, REC and the NHAI will not be hamstrung by a ceiling imposed this fiscal on the quantum of funds they can raise. The finance ministry had capped the amount, which these two entities could raise through such bonds issuance at Rs 9,500 crore in 06-07.

No such limits will hold in the coming fiscal as the ministry has chosen to give up its powers to prescribe a ceiling. This fiscal, after a ceiling was imposed, many investors had to sit out after the bonds were lapped up quickly by the early birds.

Investments in these bonds, popularly known as 54EC bonds, have an average lock-in of three years. Gains from transfer of a capital asset have to be invested in such bonds within six months of their realisation if the investor wants to avoid paying tax.

Otherwise, if an individual or a trust sells a capital asset like immovable property 36 months from the date of acquisition, gains from such sale would be treated as long-term capital gains tax and taxed at 20% with indexation benefits.

Last year, the government signalled its intent to phase out several tax sops. But it has retained the capital gain tax exemption given to investors of 54 EC bonds.

In 2006-07, two issuers, REC and NHAI, were allowed to raise Rs 9,500 crore by issuing 54 EC bonds. REC was allowed to raise up to Rs 8,000 crore and NHAI, Rs 1,500 crore. REC raised Rs 4,500 crore in the first tranche, while it raised Rs 3,500 crore in the second phase.

In the first tranche, investors were allowed the flexibility to invest any amount in these bonds. However, when REC was authorised to raise money in the second tranche, the government set a limit of Rs 50 lakh for each applicant. The cap on the amount that an individual investor can invest has been retained at Rs 50 lakh. This window is open to companies and partnership firms, among others.