Written in : March 1999

Last week we discussed a few changes in tax laws proposed by the Budget of 99. Here are a few more.

Many companies, more specially software companies, have been offering stock options to their employees as incentives to retain them for longer periods. There are also many instances where employees are offered 'sweat equity' – shares as reward for work done.

In both cases, the employee gets shares in the company either free or at a cost lower than the market value, ie, at a concession. While stock options have a variety, the employee generally is given an option to purchase shares at a discount at some time in future. How tax laws would treat stock options and sweat equity has been unclear. In fact, one opinion says that stock options may not be taxable in employees' hands at all.

The Budget now proposes that stock options and sweat equity would be taxable in the hands of employees. Without going into fine details, the scheme proposed is broadly this:

• Both stock options and sweat equity would be taxable as perquisites in the hands of employees and former employees;
• stock options would be taxable in the hands of employee in the year in which he exercises the option;
• sweat equity would be taxable in the hands of employees in the year they acquire the shares;
• the value of perquisite taxable would be the discount - difference between the market value of shares offered and the price, if any, paid by the employee.

When the employee ultimately sells the shares, the market value of shares (on the date of acquisition or exercising of option) would be considered the cost for calculation of capital gains.

There exists a provision in law which allows for deduction for expenditure incurred for medical treatment of an individual, a dependant or a member of a hindu joint family. This deduction is allowable only for treatment of specified ailments and diseases and the limit is Rs.15,000.

The Budget proposes raising this limit to Rs.40,000 and Rs.60,000 in case of a senior citizen.

The deduction allowable is to be reduced by the amount of claim received from an insurance company.

There also exists a provision where you get a deduction for medical treatment of handicapped dependants and the deduction is limited to Rs.15,000.

Two important changes are proposed: the limit is proposed to be raised to Rs.40,000.

Also, the deduction will be allowed without insisting on evidence of expenditure having been incurred.

Private sector employees receiving leave encashment of salaries at the time of their retirement (on superannuation or otherwise) were entitled to an exemption of upto 8 months salary, subject to conditions. It is now proposed to increase this limit to 10 months salary, effective assessment year 1998-99.

Let us now see some provisions relating to computing business income.

Interest to banks

Interest to banks has been allowable as deduction, till now, only in the year the interest is actually paid, not earlier.

The provision is now being extended to payments to co-operative banks also.

Y2K expenses

You are probably aware that the Y2K bug is likely to cause havoc all over the world unless it is rectified in time – before it strikes on January 1, 2000. This problem needs serious discussion separately.

The Budget now proposes that if a business or profession incurs any expenditure between 1.4.99 and 31.3.2000 on making any computer system Y2K compliant, then such expenditure would be fully allowed as deduction in the year.

The condition is that the expenditure should be incurred for the sole purpose of making a non-Y2K compliant system Y2K-compliant and a chartered accountant should certify it.

This provision would cover what would otherwise be capital expenditure and make it allowable for deduction.

This is a welcome and timely provision.

Presumptive Tax

Small retail traders, transport and civil contractors etc are entitled to pay tax on an presumed income calculated based on their turnover. For instance, retail traders are required to pay tax on 5% of their turnover, this being the income they are presumed to have earned.

If they agree to do so, they would be not required to maintain books of account or go through a scrutiny assessment.

The Budget now proposes, effective assessment year 1998-99, that if such businessmen desire to declare a lower income than the presumed incomes, they may do so provided they maintain required books of account and get them tax-audited by chartered accountants.

A welcome change – both for businessmen and chartered accountants!

We shall cover the rest of the changes to tax laws in the next two or three articles.