Measure to promote Infrastructure development, Industrialisation and encourage Economic Growth

Business re-organisation made tax neutral

The Business and economic environment of the country has thrown up the need for rationalisation of laws relating to business reorganisation for restructuring of production system and better utilisation of resources which have become necessary with a view to enable the Indian industry to rearrange itself to become globally competitive. It was in this background that tax concessions to conversion of firms into companies or proprietary concerns into companies were provided for in Finance (No.2) Act, 1998 which were widely welcomed. With the same end in view, a number of provisions relating to amalgamation of companies and new provisions relating to demerger of companies and sale or transfer of business as a going concern through slump sale.

2.There are a number of provisions in the Income-tax Act having bearing on amalgamations. Demerger is relatively a new phenomenon in the Indian corporate sector. While there are no specified provisions under the Companies Act governing demergers, some transactions of this nature do take place through schemes of compromise or arrangement under sections 391 to 394 of the Companies Act. In a slump sale, an undertaking is transferred from one person to another for a lumpsum consideration without values being assigned to the individual assets and liabilities transferred.

3.With a view to recognise demergers, slump sales and to rationalise the existing provisions of amalgamation, a number of amendments have been proposed on the basis of the following broad principles :-

(a)Demergers should be tax neutral and should not attract any additional liability to tax.

(b)In demergers, tax benefits and concessions available to any undertaking should be available to the said undertaking on its transfer to the resulting company.

(c)Tax benefits to such business reorganisations should be limited to the transfer of business as a going concern and not to the transfer of specific assets which would amount to sale of assets and not a business reorganisation.

(d)The accumulated losses not unabsorbed depreciation, in a demerger, should be allowed to be carried forward by the resulting company if these are directly relatable to the undertaking proposed to be transferred. Where it is not possible to relate these to the undertaking, such losses and depreciation shall be apportioned between the demerged company and the resulting company in proportion of the assets coming to the share of each as a result of demerger.

(e)The Central Government, if it considers necessary, may prescribe certain guidelines or conditions to ensure that demergers are made for genuine business purposes.

(f)In amalgamation, the existing conditions under section 72A for the carry forward and set off a accumulated losses and unabsorbed depreciation are too stringent to really offer any meaningful incentive for the revival of business. These are, therefore, proposed to be relaxed to provide that such benefits would be available to the amalgamated company if seventy five percent in value of the assets are retained by the amalgamated company for at least five years from the date of amalgamation. The Central Government may prescribe such other conditions as it considers necessary to ensure the revival of business or to prevent the misuse of the concession.

(g)In the cases of slump sales, law should have clarity that the gains arising from such sales would be taxed under the head "capital gains" and there should be no ambiguity with regard to the mode of computation of such profits and gains.

4.The benefits available for demergers are also proposed to be extended a Authorities or Board set up by Central or State Governments. This may help unbundling of State Electricity Boards and such other authorities and help them in corporatisation.

5.The condition regarding continuity of the same business for the allowability of loss to an assessee under section 72 of the Act is proposed to be dispensed with.

6.The amendments giving effect to various proposals outlined above will take effect from the 1st day of April, 2000 and will accordingly apply to assessment year 2000-2001 and subsequent years

Tax holiday benefits to cold chains

Under the existing provisions of section 80-IA, a five year tax holiday in respect of profits and gains of an assessee operating a cold storage in an industrially backward State or in an industrially backward district, if it begins to operate the cold storage plant before the 31st March, 2000, is allowed with a further deduction of 25% of profits of such business (30% in the case of companies) for the next five years.

The complex food chain from the producer to the consumer, involves intermediarles for handling and processing. The loss and wastage of perishable agricultural produce, vegetables and similar commodities continues to be high. In order to minimise such loss and to ensure smooth and uniform distribution of agricultural and processed products, it is proposed to provide 100% tax holiday for a period of five years and 25% (30% in case of companies) deduction from profits derived from operating a cold chain facility which starts operating after the 1st day of April, 1999 is proposed to be allowed for a further period of live years.

The proposed amendment will take effect from the 1st day of April, 2000 and will accordingly apply in relation to assessment year 2000-2001 and subsequent years.

Liberalisation of tax holiday provisions for infrastructure

Under the existing provisions of section 80-IA, roads, highways, bridges, airports, ports and rail systems are regarded as infrastructure facilities and the undertakings engaged in providing or maintaining such infrastructure facilities are entitled to a tax holiday for five years and a deduction of 30% of profits for the next five years. These companies have the choice of availing such benefits in any ten consecutive years out of initial twelve years from the year in which these commence operation.

Keeping in view the capital intensive nature and higher allowance of depreciation in the initial years in such enterprise, it is proposed to make the existing fiscal concessions more meaningful, by providing that such undertakings may avail of the benefits in any ten consecutive years out of initial fifteen years from the year in which these commence operation.

Under the existing provisions of section 80-IA, undertakings generating or generating and distributing power, undertakings developing and operating industrial parks and undertakings engaged in providing telecom services are entitled to a five year tax holiday and a deduction of 25% (30% in the case of companies) of profit in the subsequent five years. As such undertakings are capital intensive and get delayed returns on investments, it is proposed to similarly allow them to avail of the benefits in any ten consecutive years out of first fifteen years from the year in which such undertakings start operating or commence production.

The proposed amendment will take effect from the 1st April, 2000 and will, accordingly apply in relation to the assessment year 2000-2001.

Tax holiday for power generation extended to new transmission networks

Under the provisions of section 80-IA, a five year tax holiday and a deduction of 25% (30% in the case of companies) of profits in the subsequent five years is allowed, inter-alia, to an undertaking engaged in the business of generation, or generation and distribution of power, which commences generation of power on or before 31.3.2003.

To augment the transmission and distribution of power, it is proposed to extend similar benefits for undertakings setting up new transmission lines on or after 1.4.1999, to profits derived therefrom, as are available for generation or generation and distribution of power. The profits thereof shall also be eligible for deduction if the undertaking sets up new transmission or distribution lines on or after 1.1.1999 but before 31.3.2003.

The proposed amendment will take effect from 1st April, 2000 and will, accordingly apply in relation to assessment year 2000-2001 and subsequent years.[Clauses 7 & 50]

Concession for Infrastructure facility and industrial parks may be availed by persons operating and maintaining it.

At present, the provisions of section 80-IA provide that an infrastructure facility developed by an enterprise has to be transferred to the Central, State Government, local authority or statutory body within the stipulated period. To further encourage private sector participation, it is proposed to provide that any person, other than a developer, may also undertake operation and maintenance, if the terms of agreement so provide. The benefits and concession under section 80-IA in such cases, for the remaining period out of the period of ten consecutive years, may be availed by the undertaking operating and maintaining such facility. The new provision also provides that in the case of industrial parks, the developer and operator or the developer or the operator may avail of the benefit in a similar manner.

Modification in the provisions of section 10 (23G)

Clause (23G) of section 10 provides that any income of an infrastructure capital fund or an infrastructure capital company by way of interest, dividends (other than dividends referred to in section 115-D) and long term capital gains from investments made by way of equity or long term finance in an approved enterprise wholly engaged in the business of developing, maintaining and operating an infrastructure facility shall not be included in computing the total income.

The proposed amendment seeks to provide that enterprises wholly engaged in either (I) developing, maintaining and operating or (ii) developing, or (iii) maintaining and operating an infrastructure facility would now be eligible for the benefit. The exemption for investments in infrastructure facilities engaged in projects for generation or generation and distribution of power would now also be extended to enterprises engaged in starting transmission or distribution of power by laying a network of new transmission or distribution lines at any time between 1st April, 1999 and 31st March, 2003.

The scope of the exemption in this clause is proposed to be expanded so as to include within the definition of an infrastructure facility, an undertaking or a project for (I) developing, (ii) developing and operating or (iii) maintaining and operating an industrial park which has been notified by the Central Government under clause (iii) of sub-section (4) of section 80-IA.

In consequence to the amendment in clause (50) of this bill, which substitutes the existing section 80-IA by two new sections namely, 80-IA and 80-IB, it is proposed to amend clause (23G) of section 10 so that it is in conformity with the provisions of the newly inserted sections.

The proposed amendment will take effect from 1st April, 2002, and will accordingly, apply in relation to assessment year 2000-2001 and subsequent years.

Weighted deduction for scientific research and development expenditure.

Under the existing provisions of clause (ii) and (iii) of sub-section (1) of section 35, in the profits and gains of business or profession, full deduction is allowed for any sum paid to any university, college or an institution or a scientific research association for the purposes of scientific, social or statistical research. With a view to induce more investment for research and development activities, the bill proposes to provide for a weighted deduction of 125% for such sums paid. The Bill also proposes to extend the weighted deduction allowable under sub-section (2AB) for expenditure on in-house research & development, upto 31st March, 2005.

The proposed amendments will take effect from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 2002-2001 and subsequent years.

Full deductions to donations to the Fund for Technology Development and Application

Under the existing provisions of section 80G of the Income-tax Act, a deduction of 50% of the donations is allowed in the computation of the income of a donor. However, in respect of donations of certain funds 100% deduction is allowed.

To bring together Research and Development institutions and industry for overall development of technology and its commercial applications, it is proposed to provide hundred percent deduction for donations made to the Fund for Technology Development and Application being operated by the Technology Development Board.

The proposed amendment will take effect from 1st April, 2000 and will, accordingly apply in relation to the assessment year 2000-2001.

Incentives for film industry

The Bill proposes to insert a new provision to provide for deduction to an Indian company from profits and gains in convertible foreign exchange from export or transfer by any means out of India of any film software, TV software, music software and TV news software etc. together with telecast rights.

The deduction under this provision shall be hundred percent of the profits from such earning from exports.

The amendment shall apply with effect from 1.4.2000 and shall apply to assessment year 2000-2001 and subsequent years accordingly.

External commercial borrowings of undertakings to be exempt in certain cases

Clause (15) of section 10 exempts interest payable in certain cases. It is proposed to insert a new Explanation in sub-clause (iv) of this clause so as to extend the exemption available on interest paid by industrial undertakings on specified foreign borrowings to also include hedging transaction charges on account of currency fluctuation.

The amendment shall apply with effect from 1.4.2000 and shall apply to assessment year 2000-2001 and subsequent year accordingly.

Incentives for Investment in Tourism Sector

Under the existing provisions, the income from the business of a hotel, tour operation and travel agency is allowed a deduction, in computing its total income, of an amount equal to :-

(i) 50 per cent of the profits derived from services provided to foreign tourists; and

(ii) so much of the remaining profits as are credited to a reserve fund to be utilised in the manner prescribed.

With a view to further facilitate investment in the tourism sector, it is proposed that the am0unt credited to the reserve fund can also be invested in equity shares of a public company carrying on the business of new hotels or setting up a new facility, as may be notified by the Central Government.

The proposed amendment will take effect from the 1st day of April, 2000 and will accordingly apply in relation to assessment year 2000-2001 and subsequent years.

Incentives for civil aviation

Under clause (15A) of Section 10, income-tax exemption is provided on any payment made by an Indian company engaged in the business of operation of aircraft’s, to acquire an aircraft or an aircraft engine on lease from the Government of a foreign State or a foreign enterprise under an agreement entered into before 1st April, 1997. It is proposed to allow this exemption for agreements entered into on or after 01.04.1999 also.

As a consequence to this amendment, it is proposed to amend clause (6BB) of section 10 of the income-tax Act, so as to restrict the income-tax exemption in respect of tax paid by an Indian company engaged in the business of operation of an aircraft on income derived by the Government of a foreign State or a foreign enterprise as a consideration for acquiring an aircraft or aircraft engine under an agreement entered between 1st April, 1997 and 31st March, 1999.

The proposed amendments will take effect from 1st April, 2000, and will accordingly, apply in relation to assessment year 2000-2001 and subsequent years.

Tax holiday for processing of bio-degradable waste

Under the existing provisions, deduction in respect of profits and gains derived from business of collecting and processing of biodegradable waste was allowed upto a limit of rupees five lakhs. To facilitate and give further impetus to the entry of the non-government sector in waste management, it is proposed that such units irrespective of location, which are collecting, processing or treating biodegradable waste for generating power or producing biofertilizers, biopesticides, biological agents or for producing or making pellets or briquettes for fuel or organic manure be allowed a hundred percent deduction of profits and gains derived from such activities for a period of five years.

The proposed amendment will take effect from the 1st day of April, 2000 and will accordingly apply in relation to assessment year 2000-2001 and subsequent years.