A number of tax deductions on income earned in foreign exchange, including those on royalty income and those earned by professionals for providing services to foreign clients, will go out of the statute books in another couple of days, with the finance ministry not extending the sunset clause to keep them alive.
Those on the chopping block include sections 80-O, 80-RR and 80-RRA of the Income Tax Act, 1961. As a result, the provisions for tax concession for royalties, patents, and designs for which payments are received in foreign exchange, as well as those on income received by a resident for providing professional services to a foreign state or individuals will lapse after March 31.
The situation has arisen because the Finance Act passed by Parliament in February, provided for the continuation of the existing tax treatment for only the existing income tax rates.
Therefore, as per the provision of the Act, for any income earned in the next financial year, 2004-05, as convertible foreign exchange will not earn any tax deduction in the assessment year beginning on April, 1, 2005.
Income tax analysts said while a new government could bring the issues on a retrospective basis into the Act, the process would be difficult. Putting in any new exemption is much more difficult than the continuation of the existing provision.
A decision on the issue of exemptions will in any case have to await the regular Budget, which will be taken up by Parliament only in July.
In the interim Budget, Finance Minister Jaswant Singh had given an assurance in Parliament on sunset clauses was only for tax concessions on equity-based mutual funds and long term capital gains.
Although this falls short of a statutory provision, it was the best alternative under the circumstances. However, tax officials said they were happy with the removal of these provisions, even though it has happened by default.
The ministry has been trying to slim down the size of the Act by ridding it of the plethora of exemptions, especially under section 80, which have bourgeoned over the years through lobbying by vested interests.
