Budget 2011 Booklet

1

An Analysis of

Direct Tax Provisions in

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major change brought

jurisdictions where effective exchange of information is not present.

weighted deduction for payment for outside research is also a welcome step. This will

encourage much needed research investment in country.

Other major steps are exemptions to infrastructure debt funds which is expected to bring

funds into infrastructure from non

infrastructure bonds has also been extended for one more year, these bonds are stil

pre-mature face. It is expected that by next year, these should be able to attract more

funds. A major set

Document Identification Number (DIN)

A lot was expected from the finance bi

big ticket changes for coming Direct Tax Code.

This booklet is an attempt to analyze the Direct Tax Provisions in some details. We have

tried our best to present the information in best possible manner, w

refer legal document for further details.

We welcome your criticism and suggestions, these are our strengths

From everyone at CA Pariwar

The Finance Bill, 2011 was presented in parliament today as part of

The Union Budget 2011. Besides relaxing tax slabs,

in respect of Direct Tax Provisions. The finance bill fails to give any

direction to direct tax laws. We still need to see how businesses

react to introduction of MAT for LLPs. LLP

very less by the businesses. It might lose its attraction further. A

major change brought by the finance bill is anti-avoidance measures for

jurisdictions where effective exchange of information is not present.


encourage much needed research investment in country.


funds into infrastructure from non-residents. The deduction u/s 80CCF in respect of

infrastructure bonds has also been extended for one more year, these bonds are stil

mature face. It is expected that by next year, these should be able to attract more

funds. A major set-back from the finance bill is rolling back the provisions related to

Document Identification Number (DIN)

A lot was expected from the finance bill, but probably finance minister is saving all the

big ticket changes for coming Direct Tax Code.


tried our best to present the information in best possible manner, w

refer legal document for further details.

We welcome your criticism and suggestions, these are our strengths.

CA Pariwar, wish you a wonderful new financial year ahead….

[email protected]

Foreword

The Finance Bill, 2011 was presented in parliament today as part of

The Union Budget 2011. Besides relaxing tax slabs, there was little

in respect of Direct Tax Provisions. The finance bill fails to give any

o direct tax laws. We still need to see how businesses

LLP is a vehicle still used

lose its attraction further. A

avoidance measures for transaction with

jurisdictions where effective exchange of information is not present. The increased



residents. The deduction u/s 80CCF in respect of

infrastructure bonds has also been extended for one more year, these bonds are still in

mature face. It is expected that by next year, these should be able to attract more

back from the finance bill is rolling back the provisions related to

ll, but probably finance minister is saving all the


tried our best to present the information in best possible manner, we still suggest you to

wish you a wonderful new financial year ahead….

CA. Gaurav Sangtani

[email protected]

3

1. Relaxation in Individual Tax Rates:

This finance bill has relaxed the tax rates in the form of slight increase in tax slabs except

for women. The basic exemption limit has been revised from existing ` 1,60,000 to `

1,80,000. This will provide the relief of ` 2,060 in tax to everyone. The basic exemption

limit for women has not been altered. It will remain at existing level of ` 1,90,000. The

basic exemption limit for Senior Citizens has been increased from current ` 2,40,000 to `

2,50,000.

There is further change in age limits for status of Senior Citizen. Earlier a person above

the age of 65 years or more was considered Senior Citizen for Income Tax Purposes, this

has been reduced to 60 years. This is very close to retirement age for Government

Employees i.e. 58 years. So people between the age of 60 years and 65 years will get tax

benefit of ` 7,210 due to this change in addition to ` 2,060 tax relief to all.

There is another category of individuals introduced. It is termed as Very Senior Citizen.

People above the age of 80 years will be covered under this category. The exemption limit

for this category has been set at ` 5,00,000. This is big relaxation, but will not serve much

purpose. As it will cover very few individuals.

2. Changes in Corporate Tax

In current finance bill the surcharge on corporate tax has been reduced. Earlier it was

7.5% for domestic companies having total income above Rs. One crores and 2.5% for

other companies having total income above Rs. One crores. This has been reduced to 5%

to domestic companies and 2% for other companies.

The Minimum Alternate Tax (MAT) has been increased from current 18% to 18.5%. The

increase is very less and might have been brought to compensate the decrease in

surcharge.

Ex. For A domestic company paying MAT and having total income above Rs. One

Crores, the net impact of both these provisions will be:

Earlier: 18% (Tax) + 7.5% (Surcharge on Tax) + 3% (Cess on Tax + Surcharge) =

19.93%

Now: 18.5% (Tax) + 5% (Surcharge on Tax) + 3% (Cess on Tax + Surcharge) = 20 %

So the net impact is not beneficial for the company, its fine print.

An A

nalysis of Direct Tax Provisions in

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The Finance Bill, 201



The Finance Bill, 201 11 11

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3. Introduction of Alternate Minimum Tax (AMT) for

Limited Liability Partnerships (LLPs)

A new form of business entities were introduced in India in form

of LLPs. It was promised that this form will have dual benefits of

corporate form and partnership firms. Currently these are being

treated at par with partnership firms for the purpose of income tax.

This means these are not subject to MAT, Dividend Tax and

Surcharge. This finance bill has made changes to this by

introducing AMT (Alternate Minimum Tax) for the LLPs. This is at par with MAT for

companies. The rate has been fixed at 18.5% at par with MAT for companies. The

mechanism for MAT Credit has also been introduced with carry forward for 10 years.

The difference between taxable income and profit for calculating AMT are ‘Deductions in

respect of certain incomes’ under heading C of Chapter VIA and ‘Deduction under section 10AA’.

The limited liability partnerships have not been a success and this move will further push

businesses away from it.

4. Relaxation for Charitable Organizations

An organization is not considered charitable if it is engaged in ‘the advancement of any other

object of general public utility’ and it is involved in carrying on of any activity in the nature of

trade, commerce or business or any other activity of rendering any service in relation to

any trade, commerce or business, for a cess or fee or any other consideration, irrespective

of the nature of use or application, or retention. But there is a relaxation, that if such

income does not exceed ten lakh rupees in the previous year, the organization shall retain

its charitable status. This finance bill has increased this limit to twenty five lakhs rupees.

5. Measures to boost Infrastructure

This finance bill tries to boost investment in infrastructure. Two measures have been

taken for this:

(a) Section 80CCF which allowed a deduction of Rs. 20,000 for investment in

long term infrastructure bonds notified by Central Government, above limit

of Rs. 1,00,000 under section 80CCE, was applicable for A. Y. 2011-12 has

been extended to A. Y. 2012-13.

(b) To boost investment in infrastructure, a new concept of Infrastructure Debt

Funds (IDF) has been introduced. The fund will be used to collect moneys

from public including foreign nationals in form of debt. The moneys collected

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from investors will earn an interest from the fund. The fund will be used for

investment in infrastructure. Although all the modalities are yet to be

announced, following tax incentive measures have been announced for these

funds:

i. Section 10 has been amended to provide clause (47) for exempting

all the incomes of such infrastructure debt funds setup in

accordance with guidelines issued by the central government.

ii. Section 115A has been amended to provide that any interest

income received by a non-resident from investment in such

infrastructure debt fund shall be taxable at the rate of 5% of gross

interest income

iii. A new section 194LB for deducting tax on this interest payment

to non-resident has been inserted to provide deduction of 5%

TDS.

iv. Section 139(4C) has been amended to provide that such

Infrastructure Debt Fund (IDF) shall be required to file a return

of income.

6. Sunset Clause for Exemptions to Special Economic

Zones (SEZs)

Government viewed Special Economic Zones (SEZs) as a measure to boost

industrialization and export environment in India. For this, Special Economic Zones Act,

2005 brought certain incentives into Income Tax Act for developers developing SEZs

and units operating in SEZs. Following incentives were brought with effect from 10th

Febraury, 2006:

i. Section 10AA was introduced to exempt profits of units operating in SEZs as:

a. 100% of profits from export for first five years

b. 50% of profits from export for next five years

c. 50% of the amount transferred SEZ Reinvestment Reserve a/c to be used

in next three years for specified purposes.

ii. Section 80-IAB was introduced to exempt profits of developers of SEZs as:

100% of profits from development of notified SEZs for any ten

consecutive out of first fifteen years from notification of SEZ.

iii. Section 115JB(6) was inserted to exempt Minimum Alternate Tax (MAT)

payable by:

Any business carried on, or services rendered, by an entrepreneur or a

Developer, in a Unit or Special Economic Zone (SEZ).

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iv. Section 115-O(6) was inserted to exempt Dividend Distribution Tax (DDT)

on dividend distributed by:

An undertaking or enterprise engaged in:

a. Developing or

b. Developing and Operating or

c. Developing, Operating and Maintaining

A Special Economic Zone

All these exemptions were available from 1st April 2005. You must have noticed that in

case of deductions 10AA and 80-IAB there is limit of claiming deduction, time period is

specified upto which these deductions can be claimed.

But in case of exemption from MAT and DDT, there is no limit or sunset clause. This

finance bill puts sunset clause into these exemptions:

Exemption from MAT shall not be available from A.Y. 2012-13, which means coming

financial year i.e. 2011-12 will be last year to claim this.

Exemption from DDT shall not be available for any dividend declared, distributed or

paid from 1st June 2011 onwards, which means only one quarter left for this exemption.

7. Continuous encouragement for investment in research

In the last finance act, the finance minister increased the weighted deduction on research

expenditure:

i. On payment for outside research u/s 35(2AA) from 125% to 175%

ii. On in-house research u/s 35(2AB) from 150% to 200%

In this finance bill, payment for outside research u/s 35(2AA) has been treated at par

with in-house research and weighted deduction has been increased further from 175% to

200%.

Now Section 35(2AA) will provide weighted deduction of 200% of payment made to

National Laboratory or a university or an Indian Institute of Technology (IIT) or a

specified person for the purpose of an approved scientific research programme.

8. Investment linked deduction for Housing and

Fertilizers Manufacturing

Two new businesses have been included in specified businesses under section 35AD,

which allows hundred per cent deduction in respect of any capital expenditure excluding

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that on land, goodwill and financial instrument in year of expenditure or year of

commencement if expenditure is incurred prior to commencement of operations. Two

new businesses are:

i. Developing and building a housing project under a scheme for affordable

housing framed by Govt. and notified by CBDT, on or after 1st April 2011.

ii. New Plant or newly installed capacity in an existing plant for production of

fertilizers, on or after 1st April 2011.

For business specified u/s 35AD, the loss can be set-off against profits and gains of any

other specified business. The definition of ‘specified business’ has been modified to make

it clear that the loss of assessee from ‘specified business’ claiming deduction u/s 35AD

can be set-off against profits of another ‘specified business’ whether or not that another

‘specified business’ is claiming deduction u/s 35AD.

9. Changes related to New Pension Scheme

Section 80CCD provides deduction from total income in respect of contribution to New

Pension Scheme by the any person upto:

i. If he is employed, upto 10% of Salary

ii. If he is self employed, upto 10% of gross total income

For employees, a further deduction of contribution made by his employer to his

pension account shall be allowed subject to 10% of Salary

Section 80CCE provides a limit of maximum deduction of Rs. 1,00,000 for investment

u/s 80C, 80CCC and 80CCD.

This finance bill makes changes to Section 80CCE to provide that contribution by

employer shall not be taken while calculating the limit of Rs. 1,00,000. This contribution

shall be allowed as deduction in excess of Rs. 1,00,000.

Further section 36 has been amended to provide that an employer shall get deduction

from business income for contribution made to pension account of employee subject

10% of salary.

10.Changes in Transfer Pricing Laws (a) Allowed variation from Arithmetical Mean

As per transfer pricing law, an international transaction shall be done at ‘Arm’s Length

Price (ALP)’. There are various methods provided in law to determining the ALP. If there

are more than one ALP from a given method, the arithmetical mean shall be taken to be

ALP. Law also provides that if the difference between arithmetical mean and actual price

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is upto 5% of actual price, the actual price may be accepted as ALP. So the allowed

variation between arithmetical mean and actual price is 5%.

This finance bill provides that this allowed variation shall be different for different

industries and segments. The central government shall notify such list.

(b) More Powers to Transfer Pricing Officers

Transfer Pricing Officers (TPOs) are specialized in determining Arm’s Length Price. The

finance bill provides them more powers for assessment in cases of international

transactions. TPOs have been given following powers:

TPO determines the ALP in respect to international transaction referred to him by the

assessing officer. Now the TPO shall be empowered to determine ALP in respect of any

other international transaction though not referred to him by assessing officer, but

noticed by him in course of proceedings before him.

Currently TPOs have powers of summoning or calling for details for the purpose of

inquiry or investigation into the matter. Another major power has been given to TPOs, of

survey. Now TPOs will have power of survey conferred upon an income tax authority

under section 133A of the Income Tax Act. This can have big implications. Now if a case

is pending before assessing officer which involves international transactions, there are

chances that TPO may survey assessee’s place to find documents and on-the-spot enquiry

and verification.

(c) Extension of Due Date for filing of return

In case of companies which are required for furnish a transfer pricing report in Form

3CEB u/s 92E of Income Tax Act 1961, the due date of filing of return u/s 139(1) has

been extended to 30th November of relevant assessment year. It is done in order to give

more time to companies to prepare this report. Now these will get two more months for

this.

11. Anti-Avoidance Measures

There are certain countries or territories which do not

effectively exchange information with India. In order to

discourage transactions with persons located in those areas,

certain anti-avoidance measures have been introduced in this

finance bill. A new section 94A has been inserted to provide

provisions which will render transactions with persons located

in these areas, as tough and more regulated. The section

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imposes certain liabilities on assessee if he enters into such transactions and safeguards

the interest revenue by providing higher withholding and certain assumption. The burden

has been shifted on assessee to prove genuineness of transaction in such cases. The brief

highlights of the section are:

i. Central Government has been empowered to notify such country or territory

as ‘Notified Jurisdictional Area (NJA)’ which does not effectively exchange

information with India.

ii. If the assessee enters into any transaction where one of the parties is located

in such Notified Jurisdictional Area, all the parties shall be deemed to be

associated enterprises and provisions of transfer pricing shall be applicable.

iii. If assessee makes payment to any financial institution located in a Notified

Jurisdictional Area, the deduction shall not be allowed unless assessee

authorizes department to seek relevant information from the financial

institution on behalf of assessee.

iv. In order to get deduction for any expenditure including depreciation, arising

from transaction with person in such NJA, the assessee should maintain and

furnish prescribed information and documents.

v. If assessee receives any sum from any person located in NJA, it shall be

deemed to be his income unless he is able to furnish an explanation regarding

its source or explanation offered is not upto satisfaction of Assessing Officer.

vi. If any payment is made by assessee to any person located in NJA which is

subject to TDS, the applicable rate of TDS shall be higher of normal TDS

rates or 30%.

12.Changes in Tax on Income Distribution by Mutual

Funds

A Mutual Fund other than Equity Oriented Fund, is subjected to additional income tax

on the amount of income distributed to its unit holders. The finance bill makes certain

changes in rate of taxes; the amended rates are as follows:

Recipient Type of Mutual Fund

An Individual or HUF Other than Individual or HUF

Money Market Mutual Fund or Liquid Fund

25% 30%

Debt Fund 12.5%

13.Proposal to provide exemption from filing of return to

Salaried Class

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The finance bill empowers Central Government to notify classes of persons who shall be

exempt from the requirement of furnishing the return of income even if their income is

above taxable limit. Such notification shall be laid before parliament. The provision is

targeted to relax salaried class who do not have any other income as their data is already

submitted to government through TDS returns submitted by employers.

14.Extending the scope of Settlement Commission

Currently in following cases an application can be made before the settlement

commission:

i. Where proceedings have been started against the applicant as a result of

search or requisition of books and additional amount of income tax payable

on income disclosed in application exceeds fifty lakh rupees

ii. In any other case, if the additional amount of income tax payable on income

disclosed in application exceeds ten lakh rupees

The finance bill has provided one more situation where application can be moved before

the settlement commission:

Where proceedings have been started against the applicant as a result of search of

another person, applicant is related to that another person and that another

person has also filed application before settlement commission and income tax

payable on income disclosed in application by applicant exceeds ten lakh rupees.

To for application to settlement commission under this clause, following conditions need

to be satisfied:

a. The amount of additional tax payable exceeds ten lakh rupees

b. Proceedings have started against the applicant as a result of search

c. Search is conducted on someone else

d. The applicant is related to that another person on whom search has been

conducted

e. That another person has also filed application before settlement commission

The relationship between applicant and person on whom search has been conducted, is

defined in law.

15.Calling off the provisions relating to Document

Identification Number

Finance act, 2009 introduced the provisions relating to Document Identification Number.

It was provided that every income tax authority shall allot a computer generated

Document Identification Number in respect of every notice, order, letter or any

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correspondence issued by him to any other income-tax authority or assessee or any other

person and such number shall be quoted thereon. It was also provided that where the

notice, order, letter or any correspondence issued by any income-tax authority does not

bear a Document Identification Number, such notice, order, letter or any correspondence

shall be treated as invalid and shall be deemed never to have been issued.

It was also proposed that every document, letter or any correspondence, received by an income-tax authority or on behalf of such authority, shall be accepted only after allotting and quoting of a computer generated Document Identification Number and where the document, letter or any correspondence received by any income-tax authority or on behalf of such authority does not bear Document Identification Number, such document, letter or any correspondence shall be treated as invalid and shall be deemed never to have been received. The finance act, 2009 provided that these provisions shall be applicable from 1st Oct 2010. Last finance act deferred this by 1st July 2011. The doubts were being expressed from very beginning about the feasibility of the project and capability of the department to implement this. This finance bill rolled back the provisions and specifically provided that it was not possible to implement considering the practical difficulties due to non-availability of requisite infrastructure on an all India basis. After new TDS procedures, this is second thing which government has rolled back due to non-availability of requisite infrastructure. This leaves wrong impression on department’s capabilities to meet its commitments. Both the provisions i.e. New TDS provisions and DIN, will have to be implemented sooner or later for better administration.

16.Other Small Changes 1. Serving and Retiring Chairmen and Members of the Union Public Service Commission have been given tax exemption in respect of specific perquisites and allowances.

2. The income of a body, authority, board, trust or commission which is set up or constituted by government which is not engaged in any commercial activity and is formed with object of an activity for the benefit of the general public, will be exempt.

3. Sunset clause for deduction u/s 80-IA(4)(iv) for power generation and distribution undertakings, has been extended by one year from 31st March 2011 to 31st March 2012.

4. Sunset clause has been provided for deduction u/s 80-IB(9) to undertakings involved in commercial production of mineral oil.

5. New Section 115BBD has been inserted to provide that dividend received by an Indian company from foreign subsidiary company shall be taxable at the rate of fifteen per cent on gross dividend without allowing any expenditure.

6. The cases where information is sought tax authorities in jurisdiction situated outside India, under an agreement u/s 90 & 90A, the time taken to get this information shall be excluded while calculating time limit for completion of assessment and reassessment.

7. Settlement Commission has been given specific power to rectify any mistake apparent from the record in its order, within a period of six months from the date of such order after giving opportunity of being heard if tax liability is affected from this rectification.

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8. It has been provided that a liaison office in India of a non resident shall be required to file annual information in prescribed form within sixty days from the end of financial year.

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© 2011, CA Pariwar

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