Rate structure

Finance (No. 2) Act, 1971

Rates of income-tax for the assessment year 1971-72

3. The rates of income-tax for the assessment year 1971-72 in the case of all categories of taxpayers, corporate as well as non-corporate, are specified in Part I of the First Schedule to the Finance (No. 2) Act, 1971. These rates - summarised in Annexure I to this circular - are the same as were specified in Part III of the First Schedule to the Finance Act, 1970, for the purpose of computation of "advance tax", deduction of tax at source from "salaries" and retirement annuities payable to partners of registered firms engaged in specified professions and computation of the tax payable in certain special cases, during the financial year 1970-71. These rates were already prescribed for the assessment year 1971-72 under the earlier Finance Act, 1971, which applied the relevant provisions of the Finance Act, 1970, to the financial year 1971-72, with certain modifications so as to bring these in line with the current provisions of the Income-tax Act. These modifications, which have been incorporated in the present Finance (No. 2) Act, 1971 are the following :

1. It has been provided in sub-section (3) of section 2 of the Finance (No. 2) Act, 1971 that in cases to which Chapter XII or section 164 applies, the tax chargeable for the assessment year 1971-72 shall be determined as provided in that Chapter or in that section and with reference to the rates imposed under the Finance (No. 2) Act, 1971 for the assessment year 1971-72 or the rates as specified in the said Chapter XII or section 164, as the case may be.

2. An Explanation has been added at the end of Paragraph C of Part I of the First Schedule to make it clear that the rates of income-tax and surcharges prescribed in the case of registered firms for the assessment year 1971-72 will apply also in the case of an unregistered firm assessed as a registered firm under section 183(b).

The modification at (1) has been made in the context of the provision made in section 164 through the Finance Act, 1970, for charging tax on the income of a private discretionary trust at the flat rate of 65 per cent or the higher rate which would be appropriate to the total income of the trust at the rates of tax applicable in the case of an association of persons. The modification at (2) has been made in the context of the amendment of section 183(b) by the Taxation Laws (Amendment) Act, 1970, under which an unregistered firm may be assessed as a registered firm and subjected to the tax chargeable on registered firms at the rates specified in this behalf in the annual Finance Act, and its partners charged to tax on their respective shares in the total income of the firm, where this course is beneficial to the Revenue.

Finance (No. 2) Act, 1971

Rates for deduction of tax at source during the financial year 1971-72 from incomes other than "salaries" and retirement annuities

4. The rates for deduction of tax at source during the financial year 1971-72 from incomes other than "salaries" and retirement annuities payable to partners, of registered firms engaged in specified professions, i.e., interest on securities, other categories of interest, dividends, and other categories of non-salary income of non-residents, are set forth in Part II of the First Schedule to the Finance (No. 2) Act, 1971. These rates differ from the rates specified in Part II of the First Schedule to the Finance Act, 1970, for purposes of deduction of tax at source from such incomes during the financial year 1970-71 in certain respects as explained hereinbelow :

1. Payments to residents other than companies - In the case of income by way of interest on securities (not being interest on a tax-free security) or dividends, payable to resident recipients other than companies during the financial year 1971-72, tax is deductible at the rate of 23 per cent made up of basic income-tax of 20 per cent and surcharge of 3 per cent (being 15 per cent of the income-tax). This is higher than the rate at which tax was deductible in such cases during the financial year 1970-71, by 1 per cent. The increase has been made in the context of the increase in the rate of surcharge on the income-tax in the case of non-corporate taxpayers as explained in paragraph 5 of this circular.

2. Payments of income to non-residents other than companies - In the case of income (other than interest on a tax-free security) payable to non-corporate non-residents during the financial year 1971-72, tax is deductible at the minimum rate of 34.5 per cent, made up of income-tax of 30 per cent and surcharge of 4.5 per cent (being 15 per cent of the income-tax). If the rate of income-tax and surcharge appropriate to the payment at the progressive rates of tax applicable in the case of an individual works out at higher than 34.5 per cent, tax is deductible at such higher rate. In respect of interest on a tax-free security payable to non-corporate non-residents, the rate for deduction will be 17.25 per cent made up of income-tax of 15 per cent and surcharge of 2.25 per cent (being 15 per cent of the income-tax). These increases have also been made in the context of the increase in the rate of surcharge on the income-tax in the case of non-corporate taxpayers as explained in paragraph 5 of this circular.

3. Dividends payable by domestic companies to foreign companies - In the case of dividends payable during the financial year 1971-72 by a domestic company on shares in that company held by a foreign company, tax is deductible at source at the uniform rate of 24.5 per cent. Formerly, a lower rate of 14 per cent was applicable in cases where the dividend was payable to the foreign company by a closely-held Indian company mainly engaged in a priority industry. The special concession in respect of taxation of inter-corporate dividends in such cases has been discontinued by an amendment to section 80M as explained in paragraph 45 of this circular. In the context of this change, the special concessional rate of 14 per cent in respect of dividends of the special category has been discontinued and the uniform rate of 24.5 per cent, which has so far been applicable to other dividend payments to foreign companies by domestic companies, has now been made applicable to all dividend payments by domestic companies to foreign companies.

Finance (No. 2) Act, 1971

Rates for deduction of tax at source from "salaries" and for computation of "advance tax" during the financial year 1971-72

5. The Finance (No. 2) Act, 1971 follows the principle adopted in the Finance Acts of the preceding years that in prescribing the rates of tax and in making new provisions in the taxation laws, measures which have the effect of bringing about a change in the tax liability or which provide a tax incentive or disincentive in any sphere should apply prospectively to current incomes falling due for assessment in the next following assessment year, and not retrospectively to incomes earned in the past, except where there are special circumstances justifying the retrospective operation of any particular provision. In conformity with this principle, changes in the rates of tax which were considered necessary or desirable have been made operative prospectively in relation to incomes of the financial year 1971-72 or other accounting period which would be relevant for the assessment year 1972-73. The rates for deduction of tax at source from "salaries" in the case of individuals during the financial year 1971-72, and for computation of "advance tax" payable during that year in the case of all categories of taxpayers during the said financial year, are specified in Part III of the First Schedule to the Finance (No. 2) Act, 1971 and have been summarised in Annexure II to this circular. These rates apply also for the purpose of deduction of tax at source during the financial year 1971-72 from retirement annuities payable to partners of registered firms engaged in certain professions (chartered accountants, solicitors, lawyers, etc.) and for charging or calculating income-tax in special cases. These special cases are section 132(5), first proviso [calculating income-tax on undisclosed income represented by seized assets in certain cases]; section 172(4) [levy of tax on provisional basis on the income of non-residents from shipping of cargo or passengers from Indian ports]; section 174(2) [assessment of persons leaving India]; section 175 [assessment of persons likely to transfer property to avoid tax]; and section 176(2) [assessment of profits of a discontinued business]. These rates differ from the rates specified in Part I of the First Schedule to the Finance (No. 2) Act, 1971 for the assessment of incomes liable to tax for the assessment year 1971-72 in the following particulars :

1. Individuals, Hindu undivided families, associations of persons, etc. - In these cases, the rate of surcharge of income-tax has been increased from 10 per cent to 15 per cent of the basic income-tax in all cases where the total income exceeds Rs. 15,000. Where the total income is Rs. 15,000 or less, the rate of surcharge continues to be 10 per cent, as formerly. Further in a case where the total income exceeds Rs. 15,000 by a small amount, the surcharge leviable is the lower of the following two quantities :

            a.         15 per cent of the income-tax, or

            b.         the aggregate of (i) the surcharge which would be leviable if the total income were Rs. 15,000 only, and (ii) 40 per cent of the amount by which the total income exceeds Rs. 15,000.

The operation of this marginal relief provision is illustrated in the following examples :

Example I
Total income	Rs. 15,100
Income-tax	Rs. 1,373 (Rs. 1,350 plus 23 per cent of Rs. 100)
Surcharge leviable
Under alternative (a)	Rs. 205.95 (15 per cent of Rs. 1,373)
Under alternative (b)	Rs. 175.00
	(Rs. 135, being 10 per cent of Rs. 1,350 which is the tax on a total income of Rs. 15,000 plus Rs. 40, being 40 per cent of the amount by which total income exceeds Rs. 15,000).

As the surcharge calculated under alternative (b) is lower in amount, the surcharge leviable in this case will be Rs. 175 only.

Example II
Total income	Rs. 15,200
Income-tax on Rs. 15,200	Rs. 1,396 (Rs. 1,350+23 per cent of Rs. 200)
Surcharge leviable :
Under alternative (a)	Rs. 209.40 (15 per cent of Rs. 1,396)
Under alternative (b)	Rs. 215.00 (Rs. 135 plus Rs. 80, being 40 per cent of Rs. 200).

As the surcharge calculated under alternative (a) is lower than that under alternative (b), the surcharge leviable will be that under alternative (a), i.e., Rs. 209.40. The marginal relief provision will not, therefore, apply at this level, or above it.

2. Co-operative societies and local authorities - In these cases, the rate of surcharge on income-tax has been increased from 10 per cent of the basic income-tax to 15 per cent at all levels of income.

3. Registered firms - In the case of registered firms, the rate of special surcharge has been increased from 10 per cent to 15 per cent of the aggregate of the basic income-tax and ordinary surcharge.