Does not meet a single tax expectation

For companies and partnership firms, there is a marginal relief from this 10 per cent surcharge, inasmuch as it will be payable only if the taxable income exceeds Rs 1 crore.

Under section 115-O, which provides for levy of additional income tax on dividends declared by the companies, the rate of tax is proposed to be increased from 12.5 per cent to 15 per cent. With two surcharges, it will work out to 17 per cent effectively. Likewise with the additional tax payable by mutual funds under Section 115R on the amount of income distributed by them from money market schemes or liquid schemes. The rate of tax has been raised to 25 per cent, which, with surcharges, will work out to 28.3 per cent effectively.

The rationale for increasing the rate of additional tax on mutual fund distribution is to plug arbitrage opportunities that corporates availed of by parking the funds in money market/liquid schemes just prior to declaration of dividend by the mutual fund, thereby reducing the quantum of tax from 30 per cent to 20 per cent.

The unfortunate part of the amendments in Sections 115-O and 115-R is that they are proposed to be effective April 1, 2007, that is, for assessment year 2008-09. Normally, provisions of this nature in the past have always come into force from June 1 of the relevant year to provide for the time in passage of Finance Bill into Finance Act duly passed by the parliament and assented to by the President.

Another unfortunate proposal is to bring Minimum Alternative Tax (MAT) under section 115JB the items of income which earlier were exempt under Sections 10A and 10B.

Fringe Benefit Tax (FBT) not only has not gone away but has been widened to include the value of ESOP granted by the companies to their employees. A marginal relief by way of samples etc, has been granted by taking them out of the purview of FBT.

No wonder investors in companies have not liked it.