Budget 2011 - Direct tax Changes

CA Sandesh Mundra

BUDGET – 2011DIRECT TAX PROPOSALS

Budget 2011

Deficit Estimates:

Fiscal Deficit brought down to 5.1 per cent of GDP

Fiscal Deficit estimated at 4.6 per cent of GDP for 2011-12.

Fiscal Deficit to be progressively reduced to 3.5 per cent by 2013-14.“Effective Revenue Deficit” estimated at 2.3 per cent of GDP in Revised Estimates and 1.8 per cent for 2011-12.

Government Borrowing: Net market borrowing in 2011-12 would be Rs 3.43lakh crs

February 2011

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Budget 2011 February 2011

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Budget 2011

It took less than a couple of hours for the stock market to figure out that the projected improvement in the fiscal deficit to 4.6% of gross domestic product (GDP) is unlikely to happen.

February 2011

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Budget 2011

First, consider that growth in total expenditure is projected at 3.4% for 2011-12, compared with 18.7% growth in 2010-11.

Since the budget assumes that nominal GDP will increase by 14% in 2011-12, growth in government expenditure is far below the increase in nominal GDP.

Given the government’s track record, curbing expenditure to such an extent is extremely unlikely. February 2011

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Budget 2011

Right to Food Bill Higher oil Prices – Subsidy The projection of growth in tax

revenue for 2011-12 is 17.9%, well below this fiscal year’s growth of 23.5%.

So lets wait and watch

February 2011

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Next the market were again up A provision for infusion of an additional Rs 6,000-crore

capital in public sector banks also helped improve sentiment. “The government’s conviction of achieving a 9% growth and

containing deficit at 4.6% is a big positive. The rally in oil and gas shares was led by oil marketing

companies, like BPCL, HPCL and IOC which have hiked jet fuel price prompted by soaring crude oil prices in the international market

Cigarette major ITC led the pack, as the company is spared from any hike in excise duty on cigarettes which was contrary market expectations.

Infrastructure and construction companies led by Larsen &Toubro and HCC are expected to benefit from the Budget which made provisions to boost investment in the sector.

February 2011

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Budget 2011

Fiscal Deficit

Difference between the government's total expenditure and its total receipts (excluding borrowing).

The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market, which is mainly from banks).

February 2011

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Budget 2011

Lets see some of the positives from the budget Focus on constitutional amendment required to move to

a GST regime. Proposed direct cash transfer that will replace subsidies

in the case of fuel and fertilizer. The government’s decision to not borrow more from the

market than it did last year . Innovation committee set up under Sam Pitroda The announcement of another committee, to create a

manufacturing policy. Insurance companies to stick to their core business:

providing risk cover. As He has included the investment part of all policies in the service tax net.

Foreigners to invest in mutual funds is a welcome step as long as genuine money comes.

February 2011

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Budget 2011

Budget with the letter S.

‘Sevottam’ – Public Compliant System

‘Sugam’ – Saral Return ‘Swabhiman’ – Financial Inclusion ‘Swavalamban’ – Pension Sceme.

February 2011

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Budget 2011

GST – A dream or a reality

Required a Constitutional Amendment, for which the government needs two-third majority in Lok Sabha and Rajya Sabha. After the amendments are passed, the government can push for GST with the concurrence of half of the states.

Mukherjee said he is prepared to go the extra mile to have a consensus on GST,

but lacks political majority in the Parliament. “As leader of the coalition, we do not have the required numbers.”

February 2011

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Budget 2011 February 2011

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Contents• Personal / Corporate Tax

• Tax incentives / exemptions

• Transfer pricing• Non-cooperative jurisdictions

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• Alternate Minimum Tax on LLP

• Other amendments

• Unfinished Agenda

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Personal / Corporate Tax

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Personal Tax RatesTax

Rates Existing Slab Rates Proposed Slab Rates Proposed Slab Rates in Direct Tax Code

Nil Upto Rs. 1.60 lakhs Upto Rs. 1.80 lakhs Upto Rs. 2 lakhs

10%Rs. 1.60 lakhs to Rs. 5 lakhs

Rs. 1.80 lakhs to Rs. 5 lakhs Rs. 2 lakhs to Rs. 5 lakhs

20% Rs. 5 lakhs to Rs. 8 lakhs Rs. 5 lakhs to Rs. 8 lakhs Rs. 5 lakhs to Rs. 10 lakhs

30% Above Rs. 8 lakhs Above Rs. 8 lakhs Above Rs. 10 lakhs

Special Threshold limit

Resident Women- upto Rs. 1.90 lakhs

Resident Women- upto Rs. 1.90 lakhs

Resident Women - Silent

Resident Senior Citizen (age 65 years)– upto Rs. 2.40 lakhs

Resident Senior Citizen (60 – 79 yrs)– upto Rs. 2.50 lakhs

Resident Senior Citizen (80 yrs & above)– upto Rs. 5 lakhs

Resident Senior Citizen (65 yrs & above) – upto Rs. 2.50 lakhs

Education Cess

Education Cess – 2% SH Education Cess – 1%

Education Cess – 2%SH Education Cess – 1%

Silent

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No change for resident woman tax payers

Effective tax savings of Rs. 2,060

Senior Citizen : 60-79 years : tax savings of Rs. 1,030

: 80 year & above – tax savings of Rs. 26,780/-

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Media – “Assuming you are a male below 60 years of age and have an annual taxable income of more than . 1.8 lakh, you will end up saving Rs 2,060 a year in taxes, which translates into a monthly saving of Rs 171 a month.

“Buy term insurance plan with this saving. This will provide financial support to your family in case of an unforeseen event”. February 2011

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Budget 2011PwC

Personal Tax

80 CCE - For AY 2012-13 Employer contribution towards pension

scheme of Central Government excluded from the deduction limit of 100,000.

Further deduction to employer would also be available u/s 36 which is not allowed presently

This is done to promote the investment in the New Pension Scheme.

February 2011

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80CCF extended for one more year – Infra Bonds – 20,000

Media “The Finance Minister has proposed an allocation of Rs. 2,14,000 crore for infrastructure sector in 2011-2012, which is 23.3% higher than current year. This amounts to 48.5% of the Gross Budgetary support to plan expenditure.

In order to give a boost to infrastructure development in railways, ports, housing and highways development, it has been proposed to allow tax-free bonds of Rs. 30,000 crore to be issued by various government undertakings in the year 2011-12”.

February 2011

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Notified classes of persons exempted from filing Tax Returns – Section 139(1C) – 1st June, 2011

Media – “FM's 'return' gift to cover all taxpayersThe plan to exempt small salaried taxpayers from filing returns is likely to be extended to a large majority, both in government and private jobs. This, however, will be done step-by-step.”

Correction required in Memorandum –

“When there is no other source of income”.

Salaried employees

who have income not more than Rs. 5 Lacs

who declare their other income to their employers

February 2011

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Corporate Tax Minimum Alternative Tax (“MAT”) increased

from 18% to 18.50% - AY 12-13 Effective rate for

(i) Domestic companies - 20.01 per cent (from 19.93 per cent)Media – “Thus MAT for domestic companies at 20.01 per cent would align with the proposed rate of 20 per cent in Direct Tax Code (DTC)”.(ii) branches of foreign companies -19.44 per cent (from 19.53 per cent).

February 2011

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Surcharge on tax reduced – AY 12-13From 7.5% to 5%, in case of domestic company and From 2.5% to 2% in the case of foreign company

February 2011

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Dividend from overseas subsidiary to be taxed at the rate of 15% on gross basis – AY 12-13 – Section 115BBD The Budget proposals also seek to levy a concessional tax at 15%

(plus sur and cess) on a gross basis in respect of dividends received by an Indian company from its foreign subsidiary (effective from fiscal year 2011-12).

Media - “The rational behind introduction of this proposal is to invite Indian capital back in India. This proposal is important especially when Direct Taxes Code (DTC) which is going to be rolled out from April 1, 2012 does not contain similar provision but contains specific anti avoidance rules for Controlled Foreign Company (CFC) and seeks to tax income attributable to CFC in the hands of Indian holding company at normal tax rate. Therefore, the application of this proposal in the year of transition to DTC seems to give an opportunity to Indian companies to bring back money in India which is parked in overseas jurisdictions after paying a lower tax cost.” 

February 2011

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Tax incentives / exemptions

February 2011

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Investment Linked vs Profit Linked

Profit-linked sops are inherently inefficient and regressive.

Could lead to money laundering and shifting of profits to the exempted activity. Huge Turnover and profits with very less investment.

No incentive for investment and upgradation during the period of tax holiday.

Such profit-linked incentives also lead to significant loss of revenue and encourage rent-seeking behaviour.

February 2011

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Tax incentives / exemptions

Investment linked deductions - Section 35 AD Last year we had – Hotel / Hopital / Slum

redevelopment Now after 1.4.11 –

affordable housing scheme and production of fertiliser

New as well as expansion in existing capacity Loss set off against any specified business –

Word New Removed – Retrospective from AY 11-12

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Sunset clause for power sector tax holiday extended by one more year upto 31.03.2012 [s. 80-IA(4)]

No deduction to commercial production of natural gas for blocks awarded under NELP-IX [s. 80-IB(9)]

February 2011

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Tax incentives / exemptions

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No extension of existing tax holiday to STPI /EOU after March 31, 2011

Media – “Industry rues death of STPI scheme

The $76-billion information technology (IT) and IT-enabled services (ITeS) has found itself at the receiving end of the Budget. The finance minister sounded the death knell of the Software Technology Parks of Technology (STPI) scheme by being silent on its extension. The scheme ends on March 31, 2011.”

February 2011

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SEZ units(10AA) / developers to pay MAT effective from AY 2012-13 -115JB(6)

Media – “The commerce department will make a case for roll-back of minimum alternate tax imposed on SEZ.

“The government gave a commitment of no taxes while attracting investments into special economic zones. This is a big negative for foreign investors and another sign of India reneging on commitments.

SEZ developers, taken aback by the imposition of the tax burden, are drafting representations for the Prime Minister’s Office (PMO) and the finance and commerce ministries stating that it amounts to breach of trust.” 

February 2011

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DDT exemption removed for SEZ developers after 1 June 2011 – Section 115-O(6) – After 1st June, 2011

Pranab Pulls the MAT from Under the Industry’s Feet

Developers will not be spared either of the dividend distribution tax of 15% after June 1, this year.

Shows government resolve to end concessions before DTC.

February 2011

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From AY 12-13

Weighted deduction increased from 175% to 200% for contribution to National Laboratory, University, IIT or a specified person [s.35(2AA)]

February 2011

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Transfer Pricing Non-cooperative jurisdictions

February 2011

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Media – “Thankfully, Mukherjee has not announced any scheme to reward tax cheats.

Instead, there are proposals to curb tax evasion and prevent companies from stashing billions of dollars in tax havens.

Any sanction on countries that refuse to share information on suspected tax evaders is an indirect punishment. It will make the cost of doing business in these places more expensive, diminishing their attractiveness.

New transfer pricing rules for multinational companies will ensure that they do not shift profits outside the country. Overall, compliance and collections will improve.”

February 2011

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Transfer Pricing – CUP/PS/TNMM etc.

Sec 92 c - Fixed variation of +/-5% replaced with range to be prescribed for difference with the Mean – AY 12-13

Due date for tax returns by companies subject to Transfer Pricing, extended to November 30 – AY 11-12

What about other entities? TPO’s power widened - 1st June, 2011

Sec 92 ca to examine all international transactions covered under the reference or not

Sec 92 ca (7) power to survey

Overturn the Delhi Tribunal ruling in Amadeus India Pvt. Ltd's case, which restricted the TPO's power to examine only AO referred international transactions.

February 2011

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Media – “Pranab gets tough with tax havens not sharing data

Transactions with entities in ‘non-cooperative' jurisdictions that do not effectively exchange information with India may soon attract TDS (tax deduction at source) of at least 30 per cent. This is one of the several ‘anti-avoidance' measures that the Finance Minister, Mr Pranab Mukherjee, has proposed in Budget 2011-12, to discourage residents from transacting with entities in ‘non-cooperative' jurisdictions”.

February 2011

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Non-cooperative jurisdictions... Memorandum to Finance Bill – New Section 94A – 1st

June, 2011

“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 in the Income-tax Act” Transfer pricing provisions to apply

Deemed “associated enterprises” and “international transaction”

Treatment of receipts Potential taxation of Indian assessee if receipt is

unexplained

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...Non-cooperative jurisdictions

Treatment of payments Disallowance of expenditure/payments

If adequate supporting documentation not maintained (over and above TP documentation?)

Payments to financial institutions unless authorisation provided by resident tax payer to seek information from such financial institution

Higher withholding tax applicable on payments made (30% or higher applicable rate)

February 2011

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13

AMT @ 18.5% on Adjusted Total Income (“ATI”) ATI is total income plus

deductions claimed u/Chapter VIA under heading "Deduction in respect of certain income“, and,

s. 10AA (SEZ) deduction AMT credit allowable

no interest payable on such credit Carry forward for set-off permissible for 10

years

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Other amendments

February 2011

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Liaison offices of foreign companies to file statement with prescribed information – 60 days from end of FY – Sec 285 1st June, 2011

In view of several judicial rulings suggesting liaison offices cannot be treated as permanent establishment as they do not carry business functions in India, liaison offices are not filing tax returns in India.

The tax department is clueless.

Now, the tax department would analyse the actual conduct of a liaison office - whether they would initiate inquiries based on the information obtained or will they do some deeper investigation.

A more challenging tax environment for liaison offices in India.  February 2011

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Money market mutual fund / liquid funds - DDT rate increased from 20 / 25% to 30% - Section 115R(2)

Bring Taxation levels on a par with that of bank fixed deposits (FDs).

“There was some tax arbitrage for corporates if they parked their money in debt schemes, but with this move it will be removed.

However, DDT for retail investors and high net worth individual have been kept at same level.

Leading MF, says, “I don’t think it will have major consequences on the liquid funds as corporates park their money not only for tax benefits but also for decent returns and liquidity.” He added that this move will have more of a psychology impact than otherwise.

February 2011

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From 1st June, 2011 – 115R(2)

Fund Individual / HUF Others

Money Market / Liquid Fund

25% 30% from 25%

Equity Oriented Fund Nil Nil

Other Funds 12.5% 30% from 20%

February 2011

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Income of notified 'Infrastructure debt funds' (“IDF”) to get exemption. Interest income to a non-resident from IDF to be taxed at 5% - 115A.

Media – “Tax Break for Cheaper Foreign Funds Debt funds for financing infrastructure will get tax exemptions.

The government is betting big on cheaper overseas funds, with FII investment cap in corporate bonds of infrastructure firms raised from $5 billion to $25 billion.

NRIs and others investing in infrastructure funds will now enjoy a lower withholding tax of 5%, encouraging them to bring back the money they may be holding on behalf of residents.”

February 2011

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Section 194 LB – For TDS deduction at 5%

However corresponding amendment is required in Section 206AA which presribes TDS at 20% when PAN is not available.

W.e.f 1st June, 2011February 2011

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tax in case of related persons exceeds Rs. 10 Lacs

Section 245D (6B) - SC would be empowered to rectify, within 6 months, any apparent mistake in its orders.

Prospectively reverse the Supreme Court ruling in Brij Lal's case, which held that the SC cannot amend its order.

February 2011

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Settlement commission – 1st June, 2011

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Some more Points….

Tax officers in India empowered to collect information from persons, based on requests received from overseas Tax office, notwithstanding that no proceedings are pending in respect of that person in India. – Section 131(1) – 1st June, 2011

Time lapsed in obtaining information from overseas tax authorities to be excluded from assessment timelines. Section 153 – 1st June, 2011

Time-limit for obtaining exemption from EPFO extended till March 31, 2012.

Ceiling for receipts by charitable institutions from advancement of any other object of general public utility increased to Rs 25,00,000

February 2011

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Some more Points….

Three more Centralised Processing Centres to be set up for faster processing of tax returns

Sec 282 B - Requirement of Document Identification Number dispensed with

Perquisites earned by Chairman and Member of UPSC – From 1/4/08.

Specified Income of a Board / Authority under an Act – 10(46) – Six Years back covered u/s 10(20)

February 2011

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Unfinished Agenda

No mention of IFRSNo Roadmap for FDI in insurance and retail sectorNo clear roadmap / Timeline for GST implementation

February 2011

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Thank You