Tax Guru

Due Date of Tax Audit Preponed to 30th September. No change in ceiling of Rs. 40 Lacs under section 44AB

DIRECT TAXES

No change in corporate income tax rate.

Income Tax exemption rates raised from 1.1 lakhs to 1.5 lakhs across the board. Exemption limit for women raised to 1.8 lakhs and for senior citizen raised to 2.25 Lakh.

Fresh Facilities, Encouragement To Sports And Guest Houses Exempted From Fringe Benefit Tax.

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Income generated from the business of stock-lending and sale-repurchase of shares by a borrower will be taxable. 

The Central Board of Direct Taxes (CBDT) has exempted stock lending/borrowing from the purview of securities transaction tax (STT) and capital gains tax Borrowers will make some payment to lenders of shares by way of interest or fees that will be income in the hands of the lender While selling the shares, borrower will not be paying any tax as the gain from such sale is not known.

However, the Central Board of Direct Taxes (CBDT) has exempted stock lending/borrowing from the purview of securities transaction tax (STT) and capital gains tax. CBDT has issued a circular in this regard to the income tax field formations.

Borrowers will make some payment to lenders of shares by way of interest or fees that will be income in the hands of the lender.

“It will be treated as income from business of lending/borrowing or income from other sources of income and will be taxable at applicable rates,” said a finance ministry official.

While selling the shares, borrower will not be paying any tax as the gain from such sale is not known. But when a borrower repurchases shares to return to the lender, the margin between sale and re-purchase will be treated as profit from business or capital gains depending on the tax treatment of shares as per CBDT rules, the official said.

If the shares transacted are treated as capital assets, then short term capital gains tax will be levied at the rate of 10 per cent. If they are treated as trading asset, the tax rate could be as high as 30 per cent.

Another big issue likely to come up is – whether stock lending and borrowing will be treated as a speculative activity. According to sources, the income tax assessing officers can treat the stock lending/borrowing as speculative transaction.

That means, losses on speculative business will not be allowed to be set off against income from normal business for claiming tax refund or reducing tax liability.

According to the government official, there were two issues before the CBDT – (i) whether lending/borrowing of securities under securities lending and borrowing scheme will amount to “transfer” under clause 47 of the Income Tax Act, in the hands of lender?

(ii) Whether lending/borrowing of securities will be subjected to securities transaction tax?

Both the issues have been taken care of in the circular.

INCOME TAX CIRCULAR NO-2/2008, Dt: February 22, 2008 

Securities lending/borrowing Scheme of Securities and Exchange Board of India.

Securities and Exchange Board of India (SEBI) vide circular No.-MRD/DoP/SE/Dep/ Cir14/2007 dated 20/12/2007, has decided to permit all classes of investors (individuals, institutional, etc.) to short sell. Further, with a view to provide a mechanism for borrowing of securities to enable settlement of securities sold short, SEBI has also decided to put in place a full-fledged Securities Lending and Borrowing (SLB) Scheme for all market participants in the Indian securities market under the overall framework of “Securities Lending Scheme”, 1997″ of SEBI (Circular No.SMD/Policy/ SL/CIR-09/ 97 dated May 07, 1997).

2. In this context, the following taxation issues have arisen in respect of transactions under the Scheme of Securities Lending:

(i) Whether the lending/borrowing of securities under the Securities Lending Scheme will amount to “transfer” under clause (47) of section 2 of the Income-tax Act (Act) in the hands of the lender?

(ii) Whether lending/borrowings of the securities will be subjected to securities transaction tax (STT)?

3. The Lending and Borrowing of Securities under the new scheme notified by SEBI vide circular No.- MRD/DoP/SE/Dep/ Cir-14/2007 dated 20/12/2007 is in accordance with the overall framework of the Securities lending Scheme of 1997. Accordingly, the provisions of Section 47(xv) of the Act will be equally applicable in respect of the transactions under the new Scheme.

4. Securities Transaction Tax (STT) is levied on purchase or sale of an equity share, unit and derivative, under such circumstances as specified in section 98 of the Finance (No.2) Act, 2004. The transactions in the nature of lending and borrowing under the new Scheme do not fall within the scope of section 98 to the Finance (No.2) Act, 2004. Therefore, the transactions of lending and borrowing are not liable to securities transaction tax (STT).

5. The contents of this circular may be brought to the notice of all the officers in your region.

F.No.153/82/ 2007-TPL

(Sambit Tripathy)
Under Secretary (TPL-IV)

INSTRUCTION NO-2/2008, Dated: February 22, 2008 

‘Benign Assessment Procedure’ for assessees engaged in diamond manufacturing and/or trading.

The undersigned is directed to state that the ‘Benign Assessment Procedure’, in the case of assessees engaged in diamond business as announced by Hon’ble Finance Minister in his Budget Speech on 28.2.2007 shall be as under:–

A. The procedure will apply to assessees engaged in the business of manufacturing and/or trading of diamonds (referred to below as such business).

B. If an assessee has shown a sum equal to or higher than 6% of his total turnover from such business as his income under the head ‘profits and gains of business or profession’ for a particular assessment year, the Assessing Officer shall accept his trading results.

C. (i) The assessee shall be required to maintain separate books of accounts of such business.

(iii) Acceptance of profit at 6% or above as per para (B) for a particular assessment year will not be a precedent for that assessee or for any other assessee.

D. The procedure shall not apply to an assessee for an assessment year -

(iv) Where assessment is being made pursuant to a -

i. search and seizure action under section 132; or

ii requisition made under section 132A; or

iii survey action 133A.

(v) where 50 per cent or more of the income from such business of an assessee is claimed as deduction under Chapter-III or under Chapter VI-A of the Income-tax Act.

(vi) where there is information regarding escapement of income.

E. The rate of profit as a percentage of turnover would be reviewed annually on the basis of revenue generation and results of scrutiny assessments, searches and surveys made during the year.

2. The above instruction is issued under section 119(1) of the Income-tax Act, 1961 and would be applicable for assessments made during Financial Year 2008-09. The instruction may be brought to the notice of all concerned in your Region.

F.No.153/7/2007- TPL(Pt.1)

(Pankaj Jindal)
Under Secretary to the Government of India

The Income Tax Department has sought clarity from the Central Board of Direct Taxes (CBDT) on non-compete fee, which at present remains mostly outside the tax net. Non-compete fee is a compensation for not sharing knowhow, patent, copyright, trademark, licence, franchise or any other business or commercial right or information or technique used in manufacturing or processing of goods or provision for services. 

According to income tax officials, Section 55(2) of the I-T Act estimates the cost of right to carry on any business as nil. However, non-compete compensation received by a person carrying on a reputed business is not explicitly covered in the clause �right to carry on any business� and is claimed as capital receipt. The department has favoured an amendment to Section 28 of the I-T Act to exclude such compensation from the list of capital transactions. The non-compete fee is shown as capital receipt and thus gets exemption.

Besides, growth in the knowledge-based industry in India has led the department to propose taxation of new items like intellectual property and activities in e-commerce.

Officials say there has been a sudden increase in intellectual property transactions like consultation and creation of art and software, which could be taxed by including them under the purview of tax deducted at source (TDS).

A similar view has been taken for e-commerce. Most of these activities, including online booking of tickets, online trading of shares, transactions involving electronic downloading of music, films, technical knowhow, fund transfer and software are currently out of the tax net.

Sources said these could not be taxed since a suitable definition of place of control and management could not be established in such cases. Thus, these items could also be bought under TDS, sources added. The growing garments and cloth material business also seems to have caught the attention of the tax authorities. Officials say a large part of such materials are outsourced from small-scale industries (SSIs) and then labelled for retail sale.

Tax officials have suggested that these retailers should deduct tax at source and pay these SSIs to check the problem of non-payment of dues.