Direct Tax Impact on Budget 2011

The following are the major Highlights of the Union Budget 2011-12 presented by the Hon’ble Finance Minister Mr. Pranab Mukherjee in the Parliament on Monday (i.e. Feb. 28^th 2011)

DIRECT TAXES

The proposals made in the Finance Bill 2011 (Bill) are as follows:

1.The Direct Tax Code (DTC) is proposed to be introduced from April 1^st 2012. As a consequence, no DTC provisions have been incorporated in the Budget proposals. The proposals/initiatives that require urgent attention and made in the Finance Bill- 2011 are as follows:

2. The Tax Rates

A.   CORPORATE TAX:

• No change in the Corporate Income tax rate of 30%.

• Minimum Alternative Tax (MAT) on Book profit increased to 18.50% from 18%. The effective MAT rate will increase to 20.01% from 19.9305% at present

• Rate of Surcharge reduced to 5.00 (for income exceeding Rs.1 Cr) from 7.50 percent

• Secondary and Higher Education cess of 3% remain unchanged.

• The effective Corporate Tax rate will be 32.445% as against the present tax rate of 33.2175%

• No change in the rate of tax on Short term capital gains on listed securities subject to Securities Transaction Tax of 15%. Effective rate of tax on Short term capital gains will reduce to 16.2225% as against the present rate of 16.609%

• No change in the rate of Dividend Distribution Tax (DDT). Effective rate of DDT will reduce to 16.2225% as against the present rate of 16.609%.

• Rate of Income tax on dividends received by an Indian company from its foreign subsidiary is lowered to 15 percent from 30 percent at present for FY 2011-12

• Rate of Withholding tax on interest payment by notified Infrastructure Debt Funds to Non residents reduced to 5% from 20% at present.

• Withdrawal of exemption with respect  Dividend distribution Tax (DDT) to SEZ Developers

B.   Personal income tax

• Basic Exemption limit enhanced to Rs. 1,80,000/- from Rs. 1,60,000/- at present.

• Basic Exemption Limit in the case of Senior Citizen (above 60 years) enhanced to Rs. 2,50,000/- from Rs. 2,40,000/-. Further, the qualifying age for Senior Citizen reduced to 60 years from 65 years at present.

• Basic Exemption limit for very Senior Citizen (80 years and above) will be Rs. 5,00,000/-

• The tax rate applicable to different income slab has been widened and are given below:

• No Surcharge on Personal income tax

• Secondary and Higher Education cess of 3% remain unchanged. Thus the effective Tax Saving on income exceeding Rs. 1,80,000/- will be Rs. 2060/-.

• The deduction under section 80CCF (over and above the existing limit of INR 1,00,000 u/s. 80-C) with respect to investment upto an amount of Rs. 20,000 invested in Long term Infrastructure Bonds is extended for one more year (i.e. FY 2011-12).

C. Limited Liability Partnership Firm (LLP)

• Levy of MAT at the rate of 18.50 percent as against Nil at present on LLP where the tax payable on total income less than 18.50%.

3.  Terminal date for setting up power project u/s. 80-IA extended till March 31^st 2012

The terminal date for setting up for the generation and distribution of power, laying any network of new transmission or distribution lines, undertaking substantial renovation and modernization of existing network of transmission or distribution lines for availment of deduction under section 80-IA is extended till March 31^st 2012 from March 31^st 2011 at present.

4.   Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT)

• MAT rate increased to 18.50% from 18.00% at present

• Effective rate of MAT will increase to 20.01% from 19.9305% at present

• Levy of MAT introduced on developers of Special Economic Zones (SEZS) as well as units operating in SEZs.

• Withdrawal of exemption under section 115-0 with respect to DDT on dividend decaled, distributed or paid by SEZ developers on or after June 1st 2011.

• Levy of MAT at the rate of 18.50 % on the adjusted total income of Limited Liability Partnership firm (LLP) where the tax payable on the Total income are lower than 18.50%.Adjusted total income shall be the total income as increased by deductions claimed, if any, under any section included in Chapter VI-A. Further, the amount of MAT paid shall be available as Tax credit and shall be adjusted against the amount of regular tax payable in subsequent 10 assessment years

5.  Withholding tax on interest on foreign funds provided to notified Infrastructure Funds

With a view to augment long term, low cost funds from abroad for the infrastructure sector, it is proposed to facilitate setting up of dedicated debt funds and provide the following tax incentives:

• Create special vehicles in the form of notified infrastructure debt funds;

• To amend section 115A to provide that any interest received by a non-resident from notified infrastructure debt fund shall be taxable at the rate of five percent on the gross amount of interest income

• To insert section 194LB to provide that tax shall be deducted at the rate of Five percent by the notified infrastructure debt fund on any interest paid by it to a non-resident

• To amend section 10 to provide exemption from payment of tax on the income of notified infrastructure debt fund.

6.  Income tax rate on foreign Dividends

With a view to allow the flow of funds to India by way of foreign dividends, the Finance Bill has proposed to lower the rate of Income tax to 15 % from 30% on the gross amount of dividends received by an Indian company from its foreign subsidiary.  Further, it is provided that no expenditure in respect of such dividends shall be allowed under any provisions of the Act.

7.  Rationalization of Tax on Income Distributed to Unit holders

The Bill proposes to amend section 115R(2) to provide that the Mutual Fund shall be liable to pay additional income tax n the amount of income distributed to its unit holders at the rate of:

• 25% if the recipient is an individual or HUF in case of distribution by a money market mutual fund or a liquid fund;

• 30% (as against the rate of tax of 25%) if the recipient is any other person in case of distribution by a money market mutual fund or a liquid fund;

• 12.50% if the recipient is an individual or HUF in case of distribution by a debt fund other than a money market mutual fund or a liquid fund;

• 30% (as against the rate of tax of 20%) if the recipient is any other person in case of distribution by debt fund other than a money market mutual fund or a liquid fund

• Distribution of income by an equity oriented fund shall continue to be exempt from tax

8.  Investment linked deduction to Fertilizer Sector and Housing Sector

The IT Act currently provides investment linked deduction (other than on land, goodwill and financial instrument) incurred wholly and exclusively for the purpose of certain ‘specified businesses’ (being setting up and operating cold chain facilities, warehousing facilities for storage of agriculture produce and laying and operating a cross country natural gas/crude/petroleum oil pipeline network, building and operating a new two star or a higher category hotel anywhere in India). With a view to give boost to production in the agricultural sector and considering the importance of housing, the Finance Bill proposes to:

• Extend the benefit of investment linked to a new plant or newly installed capacity I n existing plant for production of fertilizer; and 

• Allow investment linked deduction to those businesses which develops and builds a housing project under a scheme for affordable housing framed by the Central Gov’t or a State Gov’t, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed.

Further, under section 73A any loss of a specified business is allowed set off against profit and gains of any other specified business. Therefore, it is proposed to remove the word ‘new’ from the definition of specified business in the case of hotels and hospital under section 35AD (8)(c)

9.  Exemption of specified Income of Notified Body or Authority or trust or Board or commission

The Bill proposes to insert a new cause 46 in section 10 to provide exemption from income-tax to any income arising to a body or authority or Board or Trust, by whatever name called which:

• Has been established or constituted by o under a Central, State or Provincial Act or constituted by the Central Gov’t or a State Gov’t with the object of regulating or administering an activity for the benefit of the general public, provided:

• Is not engaged in any commercial activity; and

• Is notified by the Central Gov’t in the Official Gazette.

The nature and extent of income to be exempted will also be specified by the Central Gov’t while notifying such entity. This amendment will come into effect from June 1^st 2011

10. Tax Benefits for New pension System (NPS)

Section 80CCD of the IT Act provides a deduction in respect of contributors made by an employee as well as an employer to the New Pension System (NPS) account on behalf of the employee. Currently, the aggregate amount of deduction under sections 80C, 80CCC and 80CCD cannot exceed Rupees One Lac. Further, the employers are not allowed any deduction under section 36.

It is proposed to amend section 80CCE so as to provide tat the contribution made by the employee to a pension scheme u/s.80CCD shall be exclude from the limit of Rupees One Lac provided under section80CCE.

It is further proposed to amend section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension scheme as referred to in section 80CCD on account of an employee to the extent it does not exceed 10 percent of the salary of the employee shall be allowed as deduction in computing Business income.

11.  Weighted deductions for Research & Development Activities

The Income Tax Act, 1961 provides for certain deductions for encouraging investment in research and development activities. The Bill proposes to increase the amount of weighted deduction from 175% to 200% for any sum paid to a National Laboratory or to a university or an Indian Institute of Technology with a specific direction that the amount paid will be used for scientific research undertaken under a programme approved by the prescribed authority.

12. Toolbox of counter measures in respect of transactions with persons located in a notified jurisdictional area

  In order to discourage transactions by a resident assessee with persons located in any country or jurisdiction which does not effectively exchange information with India, anti-avoidance measures have been proposed by inserting a new section 94A to specifically deal with transactions undertake with persons locate in such country or area. The proposed section 94A provides:

• An enabling power to the Central Gov’t to notify any country or territory outside India, having regard to the lack of effective exchange of information by it with India, as a notified jurisdictional area;

• That if an assessee enters into a transaction, where one of the parties to the transaction is a person located in a notified jurisdictional area, then all the parties to the transaction shall be deemed to be associated enterprises within the meaning of section 92A and any transaction in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any of the transaction having a bearing on the profits, income, losses or asses of the assessee including a mutual agreement or arrangement for allocation or apportionment of or any contribution to any cost or expenses incurred or to be incurred in connection with a benefit, service or facility provided or to be provided by or to the assessee shall be deemed to be an international transaction and accordingly, transfer pricing regulations shall apply to such transactions;

• That no deduction in respect of any payment made to any financial institution shall be allowed unless the assessee furnishes an authorization, in the prescribed form authorizing the Board or any other income tax authority acting on its behalf, to seek relevant information from the said financial institution;

• That no deduction in respect of any other expenditure or allowance (including depreciation) rising from the transaction with a person located in a notified jurisdictional area be allowed under any provision of the Act unless the assessee maintains such other documents and furnishes the information as may be prescribed;

• That if any sum is received from a person located in the notified jurisdictional area, the, the onus is on the assessee to satisfactorily explains the source of money in the hands of such person or in the hands of the beneficial owner and in case of his failure to do so, the amount shall be deemed to be the income of the assessee;

• That any payment made to a person located in he notified jurisdictional area shall be liable to deduction of tax at the higher of the rates specified in the relevant provision of the Act or rate or rates in force or a rate of 30 percent

• The amendment is proposed to come into effect from June 1^st 2011

13. Collection of information on request received from tax authorities outside India

With a view to facilitate prompt collection of information on requests received from tax authorities outside in relation to an agreement for exchange of information under sections 90 or section 90A of the Act, it is proposed to insert a new sub section (2) in section 131 to provide that for the purpose of making an enquiry or investigation in respect of any person or class of persons in relation to an agreement referred to in section 90 or section 90A, it shall be competent for any Income tax authority above ACIT, as notified by the CBDT to exercise the powers currently conferred on income tax authorities under section 131 (1). The authority so notified by the CBDT shall be able to exercise the powers u/s. 131(1) notwithstanding that no proceedings with respect to such person or class of persons are pending before it or any other income tax authority. Further, such an authority is embowered to impound and retain any books of account and other documents produced before it in any proceeding under the Act.

Similar amendments have also proposed in section 133 of the Act.

14 Rationalization of provisions relating to Transfer Pricing

The following amendments are proposed:

• Section 92C (2) which currently allow that no adjustment will e made where the difference is 5% between actual price and Arms’ Length Price (ALP) is proposed to be amended to provide that instead of a variation of 5%, the allowable variation will be such percentage as may be notified by the Central Gov’t in this behalf.

• Section 92AC which currently provide that the Transfer Pricing Officer (TPO) can determine the ALP in relation to an international transaction which has been referred to TPO by the Assessing Officer is proposed to be amended to provide that the jurisdiction of the TPO shall extend to the determination of the ALP in respect of other international transactions which are noticed by him subsequently in the course of proceedings before him and these international transactions would be in addition to the international transactions referred to the Toby the Assessing Officer.

• Section 92CA(7) which currently provides that for the purpose of determining the ALP, the TPO can exercise powers available to an assessing offer u/s. 131(1) and 133(6) and in order to enable the TPO to conduct on-the spot enquiry and verification, it is proposed to amended the section so as to enable the TPO to also exercise the power of survey conferred upon an income tax authority under section 133A of the Act.

• Section 139 is proposed to be amended to extend the due date for filing of return of income to November 30^th in the case of those assesses who have undertaken international transactions and are also required as per section 92E to prepare and file a transfer pricing report in Form 3CEB before the due date for filing of return of income so as to enable them to have access to the contemporary comparable data in

15. Relaxation to charitable organization for business income

The Finance Act, 2008 introduced a provision whereby a charitable organization which was exempt from tax on its income would be denied the exemption on any of its income derived from activities which were construed to be in the nature of trade, commerce or business or any activity rendering any service in relation to any trade, commerce etc. for a fee or consideration. The Finance Bill now enhances the current monetary limit in respect of receipts from the advancement of any other object of general public utility to Rs. 25 Lacs from 10 Lacs at present.

16.  Improving Governance

• The Gov’t has taken some important measures for improving governance.

• UID Mission: So far 20 lakh Aadhaar numbers have been given and from 1st October 2011, ten lakh numbers will be generated per day.

• IT Initiatives: Various IT initiatives taken for efficient tax administration. These include:

•  The on-line preparation and e-filing of income tax returns,
  

e-payment of taxes through 32 agency banks, ECS facility for electronic clearing of refunds directly in taxpayers’ bank accounts and electronic filing of TDS returns are now available throughout the country.

• The Centralized Processing Centre (CPC) at Bengaluru has increased its daily processing capacity from 20,000 to 1.5 lakh returns in 2010-11.  Two more CPCs will become operational in Manesar and Pune by May 2011 and a fourth CPC will come up in Kolkata in 2011-12. 

• The electronic filing of Tax Deduction at Source (TDS) statements has stabilized.

•  The CBDT shall soon notify a category of salaried taxpayers who will not be required to file a return of income as their tax liability has been discharged by their employer through deduction at source. 

• CBDT will provide a separate web-based facility to enable a direct, stand-alone interface for taxpayers with the Income Tax Department so that they can report and track the resolution of their refunds and credit for prepaid taxes.