The year 2003-2004 has been a very eventful year. The situation in the middle East was not very conducive for economic growth. The economies of USA, Europe and Japan are all undergoing a period of difficulty after the September 11 attack in the World Trade Centre. In addition, India has faced one of the worst droughts during the year. In the economic survey, it was admitted that the contribution of agriculture to GDP declined by 3.1%. The fiscal deficit is already at an alarming level of 5.6% of GDP and after considering the deficits of states, it may be well over 10% of GDP. Capital markets have not given much reason for optimism either.
In spite of all these adverse factors, GDP has grown by 4.4% during the current year. The interest rate has also gone down substantially on Central Government Securities from 12% to 7% over the couple of years. The aim of the 10th Plan is to promote a balanced and equitable regional development and employment generation of 1 crore people per year along with 8.1% growth in GDP. In this backdrop the Finance Minister has presented the Finance Bill, 2003.
Tax Reforms

We welcome the tax reforms measures as brought in by fiscal consolidation through tax reforms and progressive elimination of budgetary drags, including reform of the additional excise duty, introduction of service tax and introduction of Value Added Tax (VAT) from April 1, 2003 at the State Level.

Direct Taxes: We have the following suggestions on the provisions of the Finance Bill 2003 regarding the amendments proposed to the Income Tax Act, 1961.
The proposed amendment in Section 10 (10D) by clause 6 of the Finance Bill making any sum received under an Insurance Policy in respect of which the premium paid in any of the years during the term of the Policy exceed 20% of the capital sum assured outside the tax free provisions of Section 10 (10D) of the Income Tax Act, 1961, is in fact taxing both the bonuses vested together with one time premia paid on policies like Bima Nivesh received on maturity. The one time premia paid under policy like Bima Nivesh is paid out of sums, which have already been taxed or out of capital. Moreover, a few people have claimed deduction u/s 88 by paying the single premium. Most of such policies have been taken by way of investment with a view to enjoy tax-free assured bonuses.

The Finance Minister while making the speech on the floor of the house has said that such single premium payments were similar to Deposits or Bonds. Capital sum invested in Deposits or Bonds are never taxed on refund and only interest accruing on them is liable for taxation. Hence the following amendments are suggested:

In the proposed sub Clause (c) of Section 10 (10D) at the end of the following may be added “which may be taken on or after the 28th of February, 2003 or any bonus on such policies on or after the 28th February, 2003”. This would ensure that the policy earlier taken in accordance with the earlier law, the capital sum as well as the bonus-vested upto 31st March 2003 is not taxed. In any case at least, the following words be added in sub clause (c) at the end “other than the total sum of the premium paid minus any tax benefit derived u/s. 88 of the Income Tax Act, 1961.” This suggested alternative would cover the loss of revenue, if any, on the benefit of Section 88 availed on such policies.

Taxing the return on the single premia paid would be highly inequitable, unjust and would shake the confidence of the people.
Clause 18 proposes an amendment to Section 43 B whereby in clause (e), the words “term loan” is proposed to be replaced by the words “loan or advances”.

The character of a cash credit/overdraft account, which is in the nature of a current account, is quite different from other loan or advances. It is the running account, in which an assessee deposits and withdraws money from time to time and the bank debits interest quarterly, and for the next quarter, the interest charged in the previous quarter becomes the principal. To avoid litigation it is suggested that the words “other than operative cash credit/overdraft account” be added after the words “loan or advances”
The word “operative “ is suggested because a lot of overdraft/cash credit accounts are dormant or un-operative and the banks still go on debiting interest quarterly in such accounts. The assesses also claim interest debited to such dormant or un-operative accounts as deduction. By putting the word “operative”, as assessee would not be able to claim such deduction.

In clause 37, Section 80 M is proposed to be deleted w.e.f. 1st April 2004. We feel that to avoid regress of double taxation of the dividend in the hands of a recipient domestic company, the present section 80M may be retained, which stipulates that dividend income of a domestic company is exempt to the extent of dividend declared by it before the due date of filing the return.

The proposed insertions of sections 153A, 153B and 153C by clause 59 for assessment after search are welcomed. Proposed provisions are deterrent provisions and not an instrument of perpetuating tax evasion by dishonest assessees as it is at present under Chapter XIVB. However certain amendments are necessary.

Section 153A provides that whenever there is a search, a notice for 6 assessment years to file returns shall be issued by the Assessing Officer, irrespective of the fact that no undisclosed income or indiscriminating material have been found in course of the search. The Chamber feels that only the returns for such assessment years should be called which are not pending and for evidence have been found in respect of undisclosed income. Reopening of 6 assessments without any evidence of undisclosed income would be unjust and harassing and unnecessarily increasing the work load of the Department.

Section 69A, relating to unexplained money and jewellery etc. found in any financial year, deems such assets as the undisclosed income of that financial year. Unlike the provisions of Section 158B, there is no proposed provision to include the part of the financial year in which the search or the Requisition has been made up the to the date of commencement of the search or the requisition, for assessment pursuant to the Search u/s. 153A. Hence the unexplained jewellery or money etc. found during the search could not be assessed under the proposed provisions of Section 153A, 153B & 153C, as the assessment of the financial year of search would be due after the end of the financial year.

This is a serious lacuna as the whole exercise of the search is to find out undisclosed jewellery, valuable articles, money, books of accounts and documents. If the undisclosed valuable articles although deemed to be the income of that financial year in which search has taken place, has to wait for assessment till the close of the Financial year (previous year), then the Assessing Officer would not be able to estimate any undisclosed income and calculate tax thereon, which may be payable on such unexplained seized valuable articles for lack of enabling provision u/s.153A.

The proposed new section 153C departs from the wordings of Section 158BD. The latter starts with the words “where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made u/s 132 or whose books of accounts or other documents or any asset were requisitioned u/s 132A”.
But in the proposed section 153C, the question of undisclosed income does not arise, as these words are missing. In the proposed section 153C, in all cases where the money, bullion, jewellery and other valuable articles or books of accounts and documents are seized belong to other person, even if it does not contain any undisclosed income, the Assessing Officer is bound to handover such money, bullion, jewellery and other valuable articles or books of accounts etc. to the Assessing Officer of such other person. The Assessing Officer of such other person shall have to start proceeding for 6 assessment years u/s. 153A. That means a cascading effect of re-opening of 6 assessment years of whole of family members or Group of Companies or Firms whose books of accounts, jewellery, valuable articles etc. are generally seized under Panchanama of One Person or One Business Entity.

We feel that the intention of the government is not to increase unnecessary workload of the department or to harass the assessees where no undisclosed income or books of accounts relating to undisclosed income have been found in respect of them. Hence it is suggested that Section 153C should provide that if there are undisclosed assets or books of accounts etc. pertaining to undisclosed income of the other person, then only the Assessing Officer shall handover such assets and books of accounts etc. to the Assessing Officer of the other person.
After lapse of 13 years again by clause 80, it is proposed to include in Section 206C the word ‘scrap’ for 10% tax deduction at source from the buyer and issuing a tax deduction certificate mentioning buyer’s PAN. We feel that the word ‘scrap’ has not been defined in the Act. The word ‘scrap’generally means ‘a remnant, a fragmentary portion’.

Every person, firm, company or entity generates scrap by way of torn pieces of paper, or old paper, redundant packing, old materials coming out of repairs or renovations etc. Asking each and every such entity (not being an individual or a HUF) to deduct tax 10% from the buyer and issue him a TDS certificate with his PAN is not only cumbersome, but also quite an impractical and unjust proposition.
 

It is therefore suggested that the word ‘scrap’ may be defined in Section 230 C as under: “For the purpose of this section, scrap means any scrap generated in course of business as defined in Section 2 (13) and /or profession u/s. 2(36) of an assessee to whom this section applies.

The definition of the word “Seller” in the explanation may be amended and in clause (b) towards the end, the words “which is subject to audit under the provisions of this Act” be added.
These two suggestions would take out the purview of Section 206C, the household scrap of small firms and companies.

We also intend to inform the Ministry that a proposal was made by the Finance Bill 1988 proposing to insert a new Section 44AC read with new Section 206C in respect of ‘Scrap’ which was dropped after a representation was made in this respect, after due examination in CBDT and the Ministry.

By clause 84, a new section 234D, is proposed to be added levying interest on excess refund granted. This is an equitable provision. An assessee is liable to pay tax on the interest awarded to him under the provisions of the Act as he paid excess tax on his own Equity, requires that where the assessee has to pay interest for no fault of his own (and which is not of penal nature), the same should be allowed as deduction in his assessment.
Hence it is suggested that the following amendment may be made by insertion of new clause (3). “Notwithstanding any provisions contained in this Act, such interest paid by the assessee would be allowed as deduction u/s. 37 or section 57 in the year in which such interest is levied and/or realized”.

Clause 91 proposes to insert section 258BA, which provides that all assessees, who enter into any financial transaction, as prescribed, shall file an Annual Return of such prescribed financial transaction. The department is proposing one-page Saral Return From and on the other hand, it is proposing to saddle all the assessees with the obligation to file the Annual Return of such prescribed financial transactions. It would be a big harassment and burden on the ordinary assessees.

It is suggested that the section should be made applicable to only such assessees who are required to get their accounts audited under the provisions of this Act. This would eliminate the burden of filing such return by very large number of small assessees who do not have worthwhile prescribed financial transactions.

According to the proposed Amendment of Section 206 (2) as appeared in the Finance Bill 2003, filing of TDS return on computer media would be made compulsory w.e.f.01/06/2003. We feel that since the last/ due date for filing the return is after 1st June, 2003, it gives rise to a few queries as to whether is it necessary to file the return on computer media in the cases of tax deduction made from 1st April, 2002 to 31st March, 2003 i.e. the previous year; whether the return includes all TDS certificates issued to the deductees and one copy to be filed along with the return; whether the corresponding TDS challan in support of the payment of the TDS amount to the authority as deducted; if the return includes the above three then what would be the cases whether the TDS certificates have already been issued to the parties manually.
Such units where documents are stored manually would face a lot of hardship to switch overt the computer media within such a short period. The Chamber feels that clear-cut guidelines should be there as these units form a bulk on the economy.

Deductibility of Tax on usuance interest under letter of credit for import: There is a lot of confusion regarding the recent withdrawal of exemptions U/s 10 (15) (IV) (c) of the IT Act. Earlier, interest payable by an industrial undertaking on money borrowed and debt incurred before the 1st day of June 2001, in a foreign country was not being included as income in computing the total income of payee. With the amendment of the Finance Act 2001, the above assumption was withdrawn. As stipulated, u/s 115A(1) (a) (ii) AND Sec. 115B of the Act, tax is to be deducted at source at 20% surcharge unless the payee (Foreign Suppliers) is in a position to claim the preferential benefits available under Double Taxation Avoidance Agreement (DTAA), entered into by India with several countries u/s 90 of the Act.

The above-cited import is made under “usuance” L/C opened by banks in India favouring foreign suppliers. In case of a deferred payment, the interest is actually a part of purchase price. On the contrary, the authorities consider it as interest and thus income to be included as income under the I.T.Act, and hence no penalty u/s 201 of the IT Act. We feel that this should be taken properly with adequate guidelines. 

Indirect Taxes:
We welcome rationalization of the tax structure and bringing in of the 3-tier excise duty structure of 8%, 16% and 24%.

However we strongly feel that a more comprehensive policy could have been undertaken in this regard. While the peak rate of customs duty has been reduced from 30% to 25% excluding agriculture and dairy products, which would make imports cheaper, the corresponding excise duties of the same in the domestic market are increased. This would clearly make situation ever worse for the domestic manufacturers.

The Chamber feels that the increase in the general service tax rate from 5% to 8%, and bringing in 10 new services in the tax gambit would yield more revenue, but would have an impact on price rise and inflation.

Additional Duties of Excise Act, 1957 is being amended to allow States to levy sales tax on textiles, sugar and tobacco products at a rate not exceeding 4%. The Government has proposed a Constitutional amendment to give the Central Government power to levy service tax and both the Central and the State Governments powers to collect the proceeds. It is proposed to reduce the ceiling rate of CST for inter-State sale between registered dealers to 2%.
We hail the following proposals

• Outstanding non-core activities of the Income Tax Department, such as allotment of PAN, etc.
• Introduction of ECS credit of refunds
• Reducing number of forms used for purposes of tax deduction
• Introduction of a one-page return form for individual taxpayers, having income from salary, house property and interest etc.
• Electronic filing of returns is proposed to be introduced.
• Abolition tax-clearance certificates currently needed by a person leaving India, or any person submitting a tender for a government contract.
• We strongly feel that mere legislation would not help; it should be backed up by strong implementation and stronger vigilance.

We hail the move to raise foreign direct investment (FDI) limits for private and MNC banks from 49% to 74%. This would boost up foreign participation in India’s banking sector.
Also, in a bid to improve the asset quality of banks the government has decided to buyback high cost interest loan portfolio of banks. This would enable banks for higher NPA provisioning.
This is the era of lower and lower PLR. We feel that whatever be the administered deposit rate, the maximum lending rate should be linked with that.
We also feel that banks should be allowed to improve liquidity further, they should be allowed to deploy more funds into the capital market. The RBI should give clear-cut guidelines for margin trading.
Infrastructure:

The Finance Minister announced outlays for modernization of Delhi and Mumbai airports, modernization of JNPT Mumbai port and the Cochi port. For development of roads, he outlined 48 new road projects, over and above the existing PM’s road project. 25% of these roads will be cemented. The Finance Minister also announced a ‘Rail Vikas Yojana’ for development of railways network with a plan outlay envisaged at Rs.80 bn. The total infrastructure outlay of on all these measures is pegged at Rs.600 bn. The focus on the 4 major links to transportation is welcome and a big step towards a ‘connected’ India.

We support the step to identify Infrastructure as a priority area and welcome the wish of the government to spend Rs.60,000 cores for this. However, the Budget provided only Rs.2,000 cores, which the opinion of the Chamber cannot generate investment of Rs.60,000 crores. We strongly feel the budgetary provisions should have been more clearly spelt out.
While the Budget focused heavily on Infrastructure, the hike of excise duty in cement to Rs.400/- per tonne from Rs.350/- per tonne would be counter-productive.
We welcome the development plans for roads, ports, railways and airports. However we were apprehensive about lack of proper direction towards modernization of Kolkata airport, as the city serves to be the gateway of the Eastern and the North-Eastern region.
Agriculture

For the agriculture and rural development, a total outlay of Rs.11,706 cr. has been budgeted. With the hike in urea prices and diesel prices, to what extent the effects would trickle down is doubtful.
We have noted that the loans to agriculture and to small-scale will now be available at maximum 2% above prime lending rate (PLR), but how the banks react is to be seen.
Employment

We feel that contrary to the basic objective of creating employment opportunities in the subsequent plans, nothing has been mentioned regarding employment generation.
While the organized large sectors have reached their saturation points so far as employment generation is concerned, the de-reservation of 75 items in SSI would definitely stand in the way of employment generation.
Housing 

While the Finance Minister stated that to boost housing, exemption under Sec. 80IB would continue till 31st March, 2005, on the other hand Cement price has been increased and exemption under Sec. 10 (15) of I.T. Act, 1961 of interest on ECB borrowing by the Housing Finance Companies has been withdrawn. The Chamber feels that this is a paradoxical situation.
Hotel/ Hospital

Benefits were announced for hotels with 3-star facilities and hospitals having more than 100 beds. Nothing has been mentioned regarding smaller hotels and hospitals, which serve the ordinary masses and create employment opportunities.
Hosiery

We welcome all the positive proposals in the Central Budget 2003-2004 for strengthening the Textile industry like the scheme for revival of the sick units by restructuring debt portfolio, package for power loom sector and weaving sectors.

We, however, express deep concern over the withdrawal of the existing facility of Optional Exemption of Excise Duty as proposed in the Central Budget 2003-2004.
Earlier the system was that the units, who were willing to be in CENVAT chain, were free to do so and those engaged in exports were very much interested to be covered by CENVAT. There were thousands of knit units in the unorganized sector preferred to stay outside the gambit of Excise and they were unable to comply with the formalities. Now, in this year’s Budget, all the units have been proposed to be brought under the excise net.

This, we feel, might lead to extreme chaos in the industry. Besides, the Chamber also feels that the withdrawal of this facility of Optional Exemption of Excise Duty may not serve the purpose of augmenting revenue, as cost of collection would be very high. If the manufacturing units in the unorganized sector were disrupted by Inspectors and other government officials, rampant corruption would prevail, which would have linkage effects on the export sector as well.

Keeping in view the fact that the entire Textile Trade would be brought under the WTO regime by January 2005, this assumes all the more importance, as the export sector of this industry has to be globally competitive. Currently, India’s share in Global Textile Trade is very low at 21.7% as against around 45% of the share of China.
We suggest that the Government could be better served by raising duties at yarn level while continuing the existing facilities of Optional Excise Duty Exemption.
We strongly disapprove withdrawal of reservation from 75 items of laboratory chemicals and reagents, leather and leather products, plastic products, chemicals and chemicals products and paper products.

Under section 80IA and Section 80IB of the Income Tax Act, 1961 a number of benefits were given to newly formed units. Under Section 80IB (3), 30% of total profit and gains derived for a period of 10 consecutive years is exempt from tax. While in the Finance Act 2002, all other exemptions were u/s 80IA and 80IB were extended up to 2004, but the specific exemption for SSI under 80 IB (3) was not extended. This has put the SSI sector in unfavourable situation particularly for those who started their units after 31st March 2002 vis-à-vis those units in the same category who starting their operation before 1st April 2002.
We request the Finance Ministry to kindly look into this.

It has been proposed in the Finance Bill 2003-2004, that the value of exempted goods would be included for calculating the limit of Rs.3 crores for eligibility under SSI exemption w.e.f. 1.4.03. Previously the eligibility limit for SSI exception was without taking into consideration the value of exempted goods for calculating the limit of 3 crores.
We may request the Finance Ministry to restore the previous condition i.e. not including the value of exempted goods for calculating the limit of 3 crores. Otherwise it would be a great loss to SSI units.
Job Work

Job work facility has been extended to the entire textile sector. Here job workers have been given the option of not being under excise registration, if the supplier of the fibre yarn and fabrics undertakes to pay the duty this would come into force from 1st April 2003. The Chamber suggests that this facility may be extended to other commodities as well.
Conclusion

The overall impact of the Budget may not be beneficial to other than those who fall in financially top 20% of the population. More policy announcements are expected to create a conducive environment for growth, in line with objectives of the 10th Plan.
With warm regards,

Yours sincerely,
Santosh Ranjan Saha
President, BNCCI