INDIA BUSINESS WORLD - May 2005
THE MONTH THAT WAS

Several receipts that are not in the nature of income would remain out of the income tax net, with the Taxation Law Amendment Bill expanding the "exclusion" list to cover charitable trusts and approved hospitals which enjoy tax exemption. But, the flip side is that he cannot receive Rs 20,000 each from three friends and escape paying tax. Income tax will have to be paid if the aggregate value of receipts from unrelated parties exceeds Rs 50,000 from April 1, 2006. The provisions for taxing of sums of money received without consideration from unrelated parties had created a situation wherein payments for several items that were not actually income would have been covered as income resulting in an increased tax burden.

The Taxation Laws (Amendment) Bill 2005 seeks to add a few more areas from where the receipts would not classify as income. For example there was no exclusion for capital receipts from the provisions, which meant that if an individual received an insurance claim or received an amount from a loan or they received assistance from a charitable trust then this would technically be called an income and hence an individual will have to pay tax on it.    

The proposed changes say that the payments received from a local authority or from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution under Section10(23C) or a trust or institution registered under Section 12 AA would be excluded from the scope of income and hence would not be liable to tax.   

After the changes were presented in last year's budget there were a number of representations, in this
matter, to the finance ministry. A line of interpretation was that payments received from charitable institutions in the form of assistance would actually be considered as income and taxed in the hands of the beneficiary. The proposed changes will take care of this aspect but chartered accountants say that there were several other points too that have not been covered in the proposed changes.    

The existing section is worded such that apart from specific exclusions everything else would be covered as income. The exclusions include amount received before September 1, 2004, amounts received by way of consideration, amount received from a relative, amount received on the occasion of the marriage of an individual, amount received under a will or by way of inheritance, amount which is received in contemplation of death of the payer and sum not exceeding Rs 25,000.    

There was another doubt on the interpretation front with respect to the Rs 25,000 figure as to whether this was an aggregate amount or a one time limit. The position on this front is also sought to be clarified though this change will come in from April 1, 2006.   

 The exemption limit being raised to Rs 50,000 in the aggregate from all sources would mean that even if there are small amounts that are received as gifts then the aggregate sum should not cross the Rs 50,000 mark otherwise the amount would then be included as income from other sources and then taxes at the normal applicable rates.