Finance Bill, 2010 2

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FINANCE BILL, 2010(Applicable for the Assessment Year 2011-12)

Presentation by : CA. S Ranganath FCA, LLB

Partner

Singhvi, Dev & UnniChartered Accountants

Bangalore

[email protected]

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CONTENTS Key features

Rates of Tax for Individuals

Definition of Charitable Purpose

Income deemed to accrue or arisen in India to a non-resident

Cancellation of Registration obtained u/s 12A

Weighted deduction for scientific research & development

Investment linked deduction for specified business

Expenditure disallowed on account of non-compliance with

TDS provisions

Tax Audit

Limited Liability Partnership

Transactions without adequate consideration

Deductions

Minimum Alternative Tax

TDS

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KEY FEATURES

1. Reduction in individual and HUF tax rates.

2. Increase in Corporate Tax rates.

3. Increase in limits for TDS.

4. Exempting capital gains for conversion of a Company into LLP

subject to fulfilling the specified conditions.

5. Increase in weighted deduction for donation to research and

development industry.

6. Steps to enact GST and DTC.

7. Increase in Excise duty with respect to Petroleum products, Cars,

Cement and Non-smoking cigars.8. Reduction / exemption to those agricultural equipments, Wind

mills and Solar equipments.

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RATES OF TAX-INDIVIDUALS

Taxable Income Rates (in percentage)*

Amount (in Rupees)ResidentSenior Citizen

Resident

WomenOthers

< 160,000 Nil Nil Nil

160,001 to 190,000 Nil Nil 10

190,001 to 240,000 Nil 10 10

240,001 to 500,000 10 10 10

500,001 to 800,000 20 20 20

800,001 and above 30 30 30

* Education Cess shall be levied @ 3 percent on above tax

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MINIMUM ALTERNATIVE TAX

Existing provision Proposed provision Impact/Recommendations

MAT is 15% Proposed to 18% Higher corporate tax burden

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RATES OF TAX- OTHERSDescription Existing Rate (%) Proposed Rate (%)

A) Domestic Company

Regular tax

MAT 16.995(of book profits) 19.931(of book profits)

DDT 16.995 16.609

B) Foreign company

Regular tax 42.23 42.23

C) Firm and LLP&

Regular tax 30.90 30.90

Corporate Surcharge reduced from 10% to 7.5%

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RATES OF TAX LIBERALISED

*For Resident women below 65 yrs =Rs. 1.9 Lakhs and for senior citizens =Rs. 2.4 Lakhs

Total

Income

Tax liability as per existing

rates and slabs

Tax liability as per

revised slabs

Tax Savings as per

revised slabs

1,60,000 Nil Nil Nil

2,00,000 4,000 4,000 Nil

3,00,000 14,000 14,000 Nil

4,00,000 34,000 24,000 10,000

5,00,000 54,000 34,000 20,000

6,00,000 84,000 54,000 30,000

7,00,000 1,14,000 74,000 40,000

8,00,000 1,44,000 94,000 50,000

9,00,000 1,74,000 1,24,000 50,000

10,00,000 2,04,000 1,54,000 50,000

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RATES OF TAX COMMENTS

*For Resident women below 65 yrs =Rs. 1.9 Lakhs and for senior citizens =Rs. 2.4 Lakhs

No tax relief for taxpayers whose total income isless than Rs. 3,00,000 and presently in the 10% taxslab

Thus, the only relief to individuals earning incomeof less than Rs. 3,00,000 is the deduction they canget by investing upto Rs. 20,000 in notified long-term infrastructure bonds and this would save taxto the tune of upto Rs. 2,000 for those in 10% slab,

upto Rs. 4,000 in 20% slab and upto Rs. 6,000 forthose in 30% slab

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Definition of Charitable Purpose

Existing

provision

Proposed provision Impact/Recommendations

As per Section2(15) -Theadvancement ofany other object

of general publicutility to becharitablepurpose

The advancement of anyother object of generalpublic utility to becharitable purpose even if

it involves carrying on of anyactivity in the nature oftrade, commerce orbusiness provided that thereceipts from such activitiesdo not exceed Rs.10 lakh in

the year. This amendment isproposed to take effectretrospectively from01.04.2009.

To mitigate hardship to the

organizations which receive

sundry considerations from

such activities.

Clarification is required as to

whether receipts of Rs.10

lakhs is to be reckoned as per

the method of accountingfollowed by assessee-trust or

whether it is receipts in

ordinary sense of the term.

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INCOME DEEMED TO ACCRUE OR ARISE IN INDIA TO

A NON-RESIDENT

Existing provision Proposed provision Impact/RecommendationsSection 9 provided forthe situation whereincome is deemed toaccrue or arise in India

It is proposed to substitutethe existing Explanation toSection 9 with a newExplanation to specificallystate that the income of a

non-resident shall be deemedto accrue or arise in Indiaunder clause (v)/(vi)/(vii) ofSec 9(1) and shall beincluded in his total income,whether or not;

(a) the non-resident has aresidence or place ofbusiness or businessconnection in India; or

(b) the non-resident hasrendered services in India.

This amendment is proposed totake effect retrospectively from1st June, 1976 and will,accordingly, apply in relation tothe assessment year 1977-78

and subsequent years. By thisamendment the situs ruleprevails over the source rule.

Judgements Nullified

Ishikawajima-Harima HeavyIndustries Ltd., Vs DIT (2007)

(SC); and Jindal Thermal PowerCompany Ltd. vs DCIT (TDS),[2009] (Kar)

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CANCELLATION OF REGISTRATION GRANTED U/S 12A


The Commissionerdoes not have thepower to cancel theregistration which wasobtained earlier byany trust or institution

under provisions ofsection 12A as it is notspecifically mentionedin section 12AA.

Commissionerempowered to cancelthe registration u/s 12AAw.e.f 01.06.2010

Registration of trust wasgoverned by Section 12A ofthe Act prior to theintroduction of Section -12AA vide Finance Act,2007.

However, the provision issilent for cancellation ofregistration, where theregistration is granted u/s.12A. This was unintendedomission of powers of the

CIT to cancel registration andaccordingly amendmentshave been proposed toenabling the CIT to cancelregistration even in caseswhere the original

registration is granted u/s.12A of the Act.

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WEIGHTED DEDUCTION FOR SCIENTIFIC RESEARCH AND

DEVELOPMENT

Existing provision Proposed provision Impact/Recommendationsthe words scientificresearch association

the words researchassociation shall besubstituted

Scope Widened

Payment made toan approvedassociation engagedin research in socialsciences or statisticalresearch, is not

covered by section 35and shall be subjectto tax

Such approvedresearch associationare to be allowed as aweighted deduction of125 per cent. Theincome of such

approved researchassociation shall beexempt from tax.

Scope Widened

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INCREASE ON QUANTUM OF WEIGHTED DEDUCTION

Sec Expenditure in respect of whichweighted deduction available

Weighted deduction

available under the

extant provisions

Proposed

(Increased) rate

of weighted

deduction (w.e.f.

A.Y.2011-12)

35(2AB) expenditure (not being expenditure in the

nature of cost of any land or building)

incurred on scientific research on an

approved in-house research anddevelopment facility. [deduction available

to companies]

150% of such

expenditure

200% of such

expenditure

35(1)(ii) Contribution to an approved research

association, university, college or other

institution [Research Social Science and

Statistical Research proposed to be added]

125% of such

expenditure

175% of such

expenditure

35(2AA) any sum paid to a 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.

125% of such

expenditure

175% of such

expenditure

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114 - P1 XY, a Partnership firm, commenced production on December 1, 2009.The firm has made the following expenditure on scientific research up to the yearending on March 31, 2008:

1. On December 13, 2007, the firm pays Rs. 90,000 to the Indian statistical Institute,New Delhi, being an approved research institution under section 35 (1) (ii), for the

purpose of carrying out statistical Institute2. On December 21, 2007, the firm pays Rs. 60,000 to the Indian Institute of

Management, Ahmedabad, being an approved institute under section 35 (1) (iii),for the purpose of carrying out scientific research in social or statistical science.

3. On january 10, 2008, the firm pays Rs. 40,000 to an approved NationalLaboratory for carrying out programmes of scientific research.

4. On december 23, 2009, the firm purchases a plot of land for Rs. 2,00,000. Letteron a laboratory building constructed (cost of construction : Rs. 1,70,0000, date ofcompletion of construction : March 1, 2010) to start in-house research.

5. Before the commencement of the production, the firm had made the followingrevenue expeditor for its research laboratory:

Expenditure on salary and perquisite to research personnel and researchmaterial during the 12 months ending on November 30, 2006 : Rs. 20,0000.

Expenditure on salary of research personnel from December 1, 2006 to

November 30, 2009 : Rs. 61,000 9out of which amount certified by theprescribed authority is Rs. 42,000).

Expenditure on providing rent-free flats and club facility to research personnel,

from December 1, 2006 to November 30, 2009 : Rs. 8,000.

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Expenditure on research material from December 1, 2006 to November 30,2009 : Rs. 46,800 (out of which amount certified by the prescribed authorityis Rs. 43,800).

Capital expenditure on scientific research (not certified by the prescribed

authority)

Purchase of land for growing herbals for research

Purchase of equipments for research

Expenditure of capital nature for cultivation of herbals

Determine the amount of deduction available to XY under section 35(1) for theassessment year 2008-09, if the scientific research is (a) related or (b) unrelated to thebusiness of the assessee -firm.

Expenditure

Incurred up to

November 30, 2006

Expenditure

Incurred Between

December 1, 2006 and

November 30, 2009

Rs. Rs.

50,000 60,000

30,000 40,000

2,000 4,600

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SOLUTION: The amount of deduction under section 35 for the assessment year2010 11 will be detrained as under --

Where the scientificresearch is

Unrelated tothe business

Rs.

Related to thebusiness

Rs.

1,12,500

75,000

50,000

1,70,000

1,12,500

75,000

50,000

---

1. Payment of Rs. 90,000 to an approved scientificresearch institution for carrying on research in naturalscience is qualified for a weighted deduction undersection 35 (1) (ii) even if the research is not related tothe business of asessee [ I.e., 90,000 x 1.25]

2. Payment of Rs. 60,000 to and approved institution forcarrying on scientific research in social science isqualified for a weighted deduction section 35(1) (iii) evenif the scientific research is not related to the business ofassessee [I.e., 60,000 x 1.25]

3. Payment of Rs. 40,000 to and approved National

Laboratory is qualified for weighted deduction (even ifscientific research is not related to the business ofassessee) [I.e., 40,000 x 1.25] U/s 35 (2AA)

4. Cost of laboratory building (excluding cost of land)

5. Expenditure on salary (excluding perquisite) to researchpersonnel and expenditure on material for scientific

research incurred within 3 years before commencementof business Is deductible under section 35 Cont

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(1)(i) if the research is related to the business of the assessee ---

Rs. 20,000 being expenditure on salary and perquisites is not deductible

as it is not incurred within 3 years before commencement of business Rs. 42,000 being expenditure on salary to research personnel as

certified by the prescribed authority within 3 years beforecommencement of business is deductible if research is related to thebusiness of assesee

Rs. 8,000 being expenditure on providing perquisites to researchpersonnel before commencement of business is not deductible even if

research is related to the assessees business

Rs. 34,800 being expenditure as certified by the prescribed authority onpurchasing research material within 3 years before commencement ofbusiness is deductible if research is related to the assessees business

Cost of the land purchased for growing herbals (not deductible)

Rs. 40,000 (being the cost equipment) is deductible if research is relatedto the business

Rs. 4,600 being cost of growing herbals is deductible if research isrelated to the business

Amount deductible under section 35 for the assessment year 2008-09

NIL

42,000

NIL

34,800

--

40,000

4,600

5,28,900

NIL

NIL

NIL

NIL

--

--

--

2,37,500

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TAX DEDUCTED AT SOURCE


Section 40 (a) (ia):

If assessee has

deducted TDS under

Sections193/194A/194

C/194H/194-I/194J in

April-February of a

previous year but

failed to deposit within

time allowed by

section 200(1)

no disallowance willbe made if afterdeduction of tax duringthe previous year, thesame has been paid on

or before the due dateof filing of return ofincome specified insub-section (1) ofsection 139, witheffect from 01.04.2010.

the provisions have beenfurther SIMPLIFIED as regardsdepositing TDS deducted toavoid disallowance. Thus,suppose assessee failed to

deposit TDS deducted inFebruary 2010 but during taxaudit under section 44ABconducted in May, 2010, thisnon-deposit is detected, thesame may be deposited on or

before 30-9-2010 to avoiddisallowance

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Provisions illustrated consider the following cases --

Q.3 Interest of 80,000 on company deposit is paid by Z Ltd. On March 10, 2008.Tax is deducted on the same day. Tax is deposited with the government throughinternet banking on August 10, 2008 (i.e., before the due date of submission of

return of income : September 30, 2008), it will be allowed as deducted for theprevious year 2007 08.

Suppose, tax is deposited on October 10, 1008, then by virtue of section 40(a)(ia)it will be allowed as deduction for the previous year 2008 09 (and not for theyear 2007 08.

Q.5 B Ltd. is a subsidiary of an overseas company. It maintains books of accounton the basis of March-February year (Accounting year starts on March 1 and endson February 28/29 of the next calendar year, Income-tax Act does not require thatbooks of account should be maintained on financial year basis). On February 29,2008, it transfers a sum of Rs. 3 lakh as commission to the account of broker in its

books of account. Tax is deducted at source at the rate of 10.3 per cent undersection 194H. Tax is deposited on April 20, 2008 [i.e., within 2 months from the lastdate of the accounting year as permitted by section 200(1) read with rule30(1)(b)(i)(1)].

By virtue of the provisions of section 40(a)(ia), Rs. 3 lakh will be allowed as

deduction for the previous year 2008-09 (and not for the previous year 2007-08

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TAX DEDUCTED AT SOURCEExisting provision Proposed provision Impact/Recommendations

Section 201(1A):

Interest on delay in

remittance of TDS

shall be 1% pm or part

thereof

A person is liable to pay

simple interest at 1% from the date onwhich tax is deductibleto the date of whichsuch tax is deducted

1.5% from the dateon which tax wasdeduced to the date ofwhich such tax isactually paid

W e f 01.07.2010

With a view to discourage the

practice of delaying the depositof tax after deduction, it isproposed to increase the rateof interest for non-payment oftax after deduction

No TDS/TCScertificates arerequired to be issuedby the deductor /collector on or after

01.04.2010

The deductor /collector will continue tofurnish TDS/TCScertificates even after01.01.2010

W r e f 01.04.2010

Considering the fact that theTDS/TCS certificateconstitutes an importantdocument for the deductee /collectee, it is proposed to

retain the existing provision

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TAX AUDIT

Gross turnover criteria for applicability of tax audit u/s 44AB revised as follow:

Nature Existing Proposed Impact/Recommendations

Business 40 Lakh 60 Lakh To reduce compliance burdenof small businesses andprofessionals

Profession 10 Lakh 15 Lakh

Turnover criteria for presumptive taxation u/s 44AD enhancedto Rs. 60 lakh.

Penalty u/s 271B increased from Rs. 1 lacs to Rs. 1.5 lacs

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LIMITED LIABLILITY PARTNERSHIP

LLP to be taxed on par with partnership firm; Accumulated losses and unabsorbed depreciation of a private company or anunlisted public company to be allowed in hands of LLP subject to specifiedconditions. It is proposed that the transfer of assets on conversion of a company into anLLP in accordance with section 56 and section 57 of the Limited LiabilityPartnership Act, 2008 shall not be regarded as a transfer for the purposes ofcapital gains tax under section 45, subject to certain conditions.

It is also proposed that if the conditions stipulated above are not complied with,the benefit availed by the company shall be deemed to be the profits and gains ofthe successor LLP chargeable to tax for the previous year in which therequirements are not complied with.

Carry forward and set-off of business loss and unabsorbed depreciation tosuccessor LLP permitted

Aggregate depreciation allowable to the predecessor company and successorLLP shall not exceed, in any previous year, the depreciation calculated

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LIMITED LIABLILITY PARTNERSHIP

Actual cost of the block of assets in the case of the successor LLP shall beshall be the WDV of the block of assets as in the case of the predecessorcompany on the date of conversion

The cost of acquisition of the capital asset for the successor LLP shall bedeemed to be the cost for which the predecessor company acquired it

No tax credit u/s 115JAA shall be allowed to the successor LLP

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TAXATION OF CERTAIN TRANSACTIONS WITHOUT /

INADEQUATE CONSIDERATION

Existing provision Proposed provision

Section 56, ExplnProperty does not include - bullion

Bullion is included in the meaning ofproperties for the purpose of taxability

of gift in kind u/s 56.

No such provision exists Any shares of a private limitedcompany received by a partnershipfirm or a private limited companywithout consideration or for aninadequate consideration will be taxedas per the provisions of section 56(viia)with effect from 01.06.2010.

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DEDUCTIONS


No such provisionexists

Additional deductionof rupees 20,000 u/s80CCF for investment ininfrastructure bonds.

The words subscription inproposed section 80CCF areimportant. It seems deductionwill be apply only to those whoobtain these bonds byapplication and allotment

process and not to those whoacquire it from an existingholder of these bonds.

No such provisionexists

Section 80 D toinclude contributionmade to CentralGovernment HealthScheme.

The Central GovernmentHealth Scheme (CGHS) is amedical facility available toserving and retiredGovernment servants. Thisfacility is similar to the facilitiesavailable through healthinsurance policies.

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TDS-INCREASE IN THRESHOLD LIMIT

Section Nature of PaymentsExisting

limitProposed

limitImpact

194B

Winning from Lotteries &

Puzzles 5,000 10,000 To adjust forinflation andalso to reduce

the

compliance

burden of

deductors &

taxpayerslimit is

proposed to

increase

194BB Winning from Horse Races 2,500 5,000

194C Payment to Contractors:

-For Single transaction 20,000 30,000

-For aggregate oftransactions during thefinancial year 50,000 75,000

194D Insurance Commission 5,000 20,000

194H Commission/Brokerage 2,500 5,000

194 I

Rent on ImmovableProperty/Machinery/ Plant /Equipment/Furniture, etc 120,000 180,000

194J Fees for Professional /Technical Services 20,000 30,000

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Finance Bill, 2010 2

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