The finance bill makes some minor changes to individual and corporate tax rates while introducing Alternate Minimum Tax for Limited Liability Partnerships. It aims to boost infrastructure investment through exemptions for infrastructure debt funds and extending tax deductions for infrastructure bonds. The bill also introduces sunset clauses eliminating tax exemptions for Special Economic Zones. Other measures include increasing tax deductions for research spending and adding housing and fertilizer manufacturing to specified businesses eligible for tax deductions.
1. A CrAar
p a iw
publication
An Analysis of
Your Professional Pariwar
Direct Tax Provisions in
The Finance Bill, 2011
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www.CAPariwar.com
2. 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
direction to direct tax laws. We still need to see how businesses
o
react to introduction of MAT for LLPs. LLP is a vehicle still used
very less by the businesses. It might lose its attraction further. A
major change brought by the finance bill is anti-avoidance measures for transaction with
avoidance
jurisdictions where effective exchange of information is not present. The increased
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 residents. The deduction u/s 80CCF in respect of
non-residents.
infrastructure bonds has also been extended for one more year, these bonds are stil in
still
pre-mature face. It is expected that by next year, these should be able to attract more
mature
funds. A major set back from the finance bill is rolling back the provisions related to
set-back
Document Identification Number (DIN)
A lot was expected from the finance bill, but probably finance minister is saving all the
bill,
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 still suggest you to
we
refer legal document for further details.
We welcome your criticism and suggestions, these are our strengths
strengths.
From everyone at CA Pariwar wish you a wonderful new financial year ahead….
Pariwar,
CA. Gaurav Sangtani
Contact@GauravSangtani.com 2
3. 2011
The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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.
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4. 2011
The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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.
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(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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The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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
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Developer, in a Unit or Special Economic Zone (SEZ).
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6. 2011
The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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
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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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7. 2011
The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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
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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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8. 2011
The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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
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provisions which will render transactions with persons located
in these areas, as tough and more regulated. The section
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9. The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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 An Individual or HUF Other than Individual
or HUF
Type of Mutual Fund
Money Market Mutual 25%
Fund or Liquid Fund 30%
Debt Fund 12.5%
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13.Proposal to provide exemption from filing of return to
Salaried Class
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10. 2011
The Finance Bill, 2011
An Analysis of Direct Tax Provisions in
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
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Finance act, 2009 introduced the provisions relating to Document Identification Number.
It was provided that every income tax authority shall allot a computer generated
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Document Identification Number in respect of every notice, order, letter or any
11. 2011
The Finance Bill, 2011
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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
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of such order after giving opportunity of being heard if tax liability is affected
from this rectification.
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