4th March, 2010The Union Budget for 2011-12 was presented against a challenging macroeconomic environmentwith the need to balance several conflicting objectives like tackling inflation without impairinggrowth and emphasising social inclusion at a time when fiscal consolidation is of paramountimportance, reviving investor confidence and market sentiment. The presentation of Budget wasalso amidst the most critical scenario when the Government is loosing confidence of people dueto extensive scams being broke out including those of 2G Scam, Adarsh Scam, etc.This year was also a defining year for Legislative tax Policy in India since the Country is headingtowards the revived law on direct and indirect taxes with the freezed deadline for introduction ofDTC and GST in 2012. In that sense, the present Budget could be the last of the Budget on thepresent legal structure.The budget presented in the parliament today seeks to achieve the following objectives:• To achieve double digit growth in GDP as against the estimated growth rate of 8.6% for the FY 2010-11.• To address the menace of black money• To Enhance growth rate of agriculture sector• To establish good governance in the Government systemWith the kind of Budget introduced by Mr. FM, he appears to aim at withdrawing stimulus in theform of subsidies and wants to advance the infrastructure development to promote nourishedgrowth. Agriculture and social sector. The measures taken by him in the form of technologicaladvancement should make India an striking avenue for foreign investments.The effects of these proposals may have positive impact on the economy in times to come. Wehave tried to analyze the Budget proposals on Direct Taxes as enunciated in the Finance Bill, 2011.The Proposals related to Indirect taxes –service tax, which has substantial and effectiveamendments will be sent to you once the fineprints of the same are analysed.The copy is also available on our website http://www.amcount.com.This material is prepared by Smart Consultants Pvt. Ltd., a Company established under the Indian Companies Act, 1956.While due care has been taken to ensure the accuracy of the information contained herein, no warranty, express or implied, is beingmade, by Smart Consultants Pvt. Ltd. as regards the accuracy and adequacy of the information contained herein. The information inthis material is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. Theinformation is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before makingany decision or taking any action that might affect your personal finances or business, you should consult a qualified professionaladviser. This material is intended only for the use of the entity / person to whom it is addressed and the others authorized to receiveit on their behalf. The recipient is strictly prohibited from further circulation of this material. Smart Consultants Pvt. Ltd. Page 1 of 10
Union Budget 2011-12 FINANCE BILL, 2011 HIGHLIGHTS & COMMENTSThe goals can only be achieved by a considerable increase in national income and our economicpolicy must, therefore, aim at plenty and equitable distribution. We must produce wealth, andthen divide it equitably. How can we have a welfare state without wealth? -- Pandit Jawaharlal Nehru Smart Consultants Pvt. Ltd. Page 2 of 10
index …… Section A- Direct Taxes A1 Business Expense - Contribution to A8 MAT – Companies National Laboratory A2 Business expense - Housing Projects A9 MAT – LLP A3 Business expense - Contribution to A10 Non-Resident – Liaison Pension Scheme Office A4 Deduction - Power Sector A11 Transfer Pricing –ALP A5 Exemption - Charitable Trust A12 Transfer Pricing – Specified International Areas A6 Exemption – Infrastructure Debt Fund A13 Transfer of Pricing – Powers of TPO A7 Income – Foreign Dividend A14 Settlement Commission – Powers Section B – rates of tax on incomeSmart Consultants Pvt. Ltd. Page 4 of 10
direct taxes…… Sr. No. Subject hospitals with 100-beds or more. The deduction A1 Business Expense - Contribution to was earlier granted only in respect of any new National Laboratory hotel or new hospital. Amended Sec. +/- w.e.f. Comments 35(2AA) + 01.04.2012 1. The Govt. has taken note of unprecedented rise in the price of residential housing making itHighlights almost impossible for the common man to own house.The contribution to any National Laboratory or 2. In order to control the price, the Govt. has nowuniversity or IIT for use of scientific research, which introduced a new scheme for development ofwas deductible @ 175% of the sum paid is now housing projects so as to allow the deduction ofenhanced to 200%. any capital expenditure incurred for the purpose of such business.Comments 3. Similar deduction is also introduced for1. The Finance Act, 2010 permitted contribution to increased production of fertilizer by installing newsuch institutions at 175% of the amount paid instead plant or increasing installed capacity of an existingof earlier 125%. plant.2. The deduction is further enhanced to 200% to 4. Such deduction was earlier granted to the newencourage more contribution to such scientific hotels of specified category and new hospitals ofresearch programmes. the specified size. It is now proposed to extend the deduction to the building and operating of any hotel or hospital of these specified types. Sr. No. Subject A2 Business expense - Housing Sr. No. Subject Projects A3 Business expense - Contribution Introduced to Pension Scheme Sec. +/- w.e.f. Introduced 35AD + 01.04.2012 Sec. +/- w.e.f. 36(1)(iv) + 01.04.2012Highlights Highlights1. The deduction on account of capital expenditure Any contribution as an employer towards pensionhas been now extended to the business in the nature scheme on account of employee is proposed to beof developing and building the housing project allowed as deduction.under the scheme framed by the Govt. as well as to anew plant or to a newly installed capacity in an Commentsexisting plant for production of fertilizer. 1. The new amendment seeks to grant deduction2. Similar deduction was also granted to all the of the contribution to employee’s account towardshotels of 2-star category or above as well as to Pension Scheme as referred to in s. 80CCD.
2. However, such deduction is restricted to 10% of permitting the business activity as a part ofthe salary of the employee. charitable purpose if the gross receipt does not exceed Rs.10 lacs. This limit now be enhanced to Sr. No. Subject Rs.25 lacs A4 Deduction - Power Sector 3. This is a welcome provision enabling Amended furtherance of the charitable activity. Sec. +/- w.e.f. 80IA(4) + 01.04.2012 Sr. No. Subject A6 Exemption –Highlights Infrastructure Debt Fund Tax Holiday given to Power Sector is extended Introduced for a period of one year, i.e. upto 31.3.2012. Sec. +/- w.e.f. 10(47)/ 115A/ + 01.06.2011 194LBComments1. Under sec. 80-IA(4)(iv), the deduction is Highlightsavailable to undertaking engaged in generation,distribution and transmission of power till 31.3.2011. 1. In order to boost investment in infrastructure2. The said Tax Holiday is extended for a further sector, the Govt. proposes to introduce dedicatedperiod of one year making them eligible for Infrastructure Debt Fund (IDF) Scheme.deduction upto 31.3.2012. 2. Any income earned by the notified IDF, is3. This will boost the power sector and may be proposed to be exempt under the Act.instrumental in bringing down the cost of electricity 3. Corresponding amendment is also made tofor the needy consumers. seek to tax the interest received by non-resident or a foreign company on investment made in IDF at a Sr. No. Subject reduced tax rate of 5%. A5 Exemption - Charitable Trust 4. Accordingly, IDF shall be liable to withhold Amended tax of 5% on such interest paid. Sec. +/- w.e.f. 2(15) + 01.04.2012 CommentsHighlights 1. This is a welcome provision which can go aThe value of business receipts permitted by a long way to reduce the cost of investment.Charitable Trust is now raised from Rs. 10 Lakhs to 2. It also benefits the foreign entities as they areRs. 25 Lakhs. taxed at a marginal rate of 5% instead of normal rate of 30%.Comments Sr. No. Subject1. Definition of charitable purposes has been a A7 Income – Foreign Dividendmatter of controversy over the period more so Amendedrelating to business activity carried on by the Trust Sec. +/- w.e.f.for the purpose of charitable objects. 115BBD + 01.04.20122. The Finance Act, 2008 restricted the charitablepurpose activity by excluding the business activity Highlightsfrom its definition. However, this brought in lot ofagitation amongst charitable public and therefore a Dividend from foreign subsidiaries to the Indianproviso was introduced by Finance Act, 2010 companies is proposed to be taxed at 15%.
have now been subjected to minimum tax provisions at 18.5%.Comments 2. The credit of MAT paid over and above the1. The dividend from foreign subsidiary normal tax liability is allowed to be carriedcompanies are presently taxed at marginal rate is forward upto 10 years.30% plus surcharge and cess. It is now proposed totax such dividend at 15% plus surcharge and cess. Comments2. It is also proposed that no expenditure in respectof such dividend shall be allowed. 1. The concept of LLP was introduced by the Finance Act, 2010, in order to permit creation of partnership with limited liability. The LLPs were Sr. No. Subject granted status of a partnership firm. A8 MAT - Companies 2. Though, in general, partnership are not liable Amended to MAT, by the proposed amendment, the LLPs Sec. +/- w.e.f. which have been granted the status of partnership 115JB - 01.04.2012 firm are specially made liable to MAT and brought at par with Companies.Highlights 3. One of the main benefits of forming LLP was that they were not subjected to MAT and Dividend1. The tax rate for the purpose of MAT is increased tax. With the proposed amendment, the LLP arefrom 18% to 18.5%. also subjected to MAT which may reduce the2. The exemption from MAT granted to SEZ is attraction of people towards LLP in future.now sought to be withdrawn.Comments Sr. No. Subject A10 Non-Resident – Liaison Office1. The increase in the rate of MAT would certainly Amendedbe an additional burden to the Companies. Sec. +/- w.e.f.2. Moreover, withdrawal of exemption from MAT 285 - 01.06.2011is a very harsh provision on the SEZ units. Earlier,it was declared that the SEZ units would be allowedseveral benefits based on which companies had set Highlightsup the SEZ making the huge investments in it. Thepromises made to them at the time when It is proposed that the non-residents have whoinvestments were made are not fulfilled. This may liaison office (LO) in India are required to file thelead cause dis-satifaction and lack of confidence in annual statement within 60 days from the end ofthe Parliament and on t he promises made by them. the financial year. Comments Sr. No. Subject 1. It is judicially recognized that LO does not A9 MAT - LLP create a permanent establishment and hence are Introduced not required to file the return. Sec. +/- w.e.f. 2. However, with the proposed amendments 115JC / 115JD - 01.04.2012 they are now made liable to file the annual statement very year. 3. This proposal will enable the department toHighlights gather the data to examine whether LO constitutes1. The Limited Liability Partnerships (LLP), a Permanent Establishment in India or not. Thisnewly introduced concept by the Finance Act, 2010,
may also increase long drawn litigations on the issue notified International area if there is lack ofwhether the LO constitutes PE in India. effective exchange of information from them. Stringent rules have been framed to monitor the transactions with parties in the said area. Sr. No. Subject a) Parties in such areas shall be subjected to A11 Transfer Pricing -ALP transfer pricing regulations even if they are not Amended associated or related enterprises. Sec. +/- w.e.f. b) Payment made to Financial Institutions (FI) in 92C + 01.04.2011 such areas is proposed to be disallowed unless CBDT is authorized to seek relevant informationHighlights from such FI.1. Sec. 92C seek determination of income applying c) Expenditure/allowance shall not be allowedtransfer pricing rules permitting the variation of 5% unless the assessee maintains the prescribedbetween ALP determined and the actual price at documents.which the international transactions is undertaken. d) Any sum received from any source stated to be2. The said variation of 5% is now done way in such area shall be treated as income underwithin the proposed amendments thereby granting certain circumstances.power to the Central Govt. to notify the permissible e) Payments to such parties abroad, if chargeablevariance across the business segments. to tax, shall be subjected to TDS at 30%. CommentsComments1. The permissible variance of 5% was an Adhoc 1. The said amendment is introduced as part ofsafe harbour granted to an assessee. Accordingly, if anti tax avoidance provisions in order to tightendifference between the actual value of transaction the hands of non-cooperative countries.and ALP is 5% or less, no adjustments are made to 2. However, tough provisions have beenthe income of the assessee. thrashed upon the present assessee by giving wide2. It is however felt that the pricing factor cannot powers to the department. In the past, this has ledbe freezed at 5% variance since the same vary from to misuse of powers and may lead to long drawnindustry to industry. litigations.3. It is therefore thought appropriate to leave the 3. These provisions may also increasedetermination of the variance on the Central Govt. administrative burden on the assessee as well asdepending upon the business activity. on the department.4. This may help in reducing the litigation at leaston the issues relating to price variance. Sr. No. Subject A13 Transfer of Pricing – Powers Sr. No. Subject of TPO A12 Transfer Pricing – Specified Amended International Areas Sec. +/- w.e.f. Introduced 92CA - 01.4.2011 Sec. +/- w.e.f. 94A - 01.06.2011 HighlightsHighlights 1. Earlier, the Transfer Pricing Officer (TPO) was only empowered to consider the issues referred to1. The new provisions have been introduced to him by the Assessing Officer.empower the Govt. to specify any country as
anomaly since there was lack of clarity as toAs per the proposed amendment, the TPO is now eligibility to file the application by the entities whoempowered to look into any other international were relating to the parties covered under searchtransactions even if is same is not referred to him by but are themselves not subjected to searchAssessing Officer. proceedings. 2. It is therefore clarified that such entities can file the application if the disclosed tax liabilityComments exceeds Rs.10 lacs.1. Earlier TPO was empowered to look intotransactions which are referred to him by theAssessing Officer. It is now proposed that the TPOmay look into any other international transactionswhich he may come across even if the same is notreferred to him by Assessing Officer.2. He has also been granted wide powers to call forinformation, to carry out survey and initiate theproceedings to determine ALP.3. The said powers granted to TPO would increasesubstantial litigation and multiplicity ofproceedings.4. This amendment also seeks to overrule thedecision of Delhi Tribunal in the case of AmadusIndia Pvt. Ltd [2011 TII 22 (ITAT (Del)] which heldthat the TPO merely has power to consider theissues referred to him by the Assessing Officer andcannot go beyond such reference. Sr. No. Subject A14 Settlement Commission – Powers Amended Sec. +/- w.e.f. 245C + 01.06.2011Highlights1. It is proposed to permit the entities (who are notcovered under the search assessments u/s.153A/153C) but are related to such taxpayersundergoing search assessments, to file anapplication for settlement, if the tax liability exceedRs. 10 lacs.2. Settlement commission is also empowered torectify its orders passed u/s. 245D(4).Comments1. Earlier, the entities covered under search wereallowed to file the application for settlement withminimum tax liability of Rs.50 lacs. This created an
rates of tax on income …… The comparative chart showing the tax rates for various levels of income during A.Y. 2011-12 and A.Y. 2012-13 is given below: For Male (below 60 years of age) Slab Rates A.Y. 2011-12 A.Y. 2012-13 Tax SC EC Total Tax SC EC TotalUpto 1,60,000 0 0 0 0 0 0 0 01,60,001 to 1,80,000 10.00 0.00 0.30 10.30 0 0 0 01,80,001 to 5,00,000 10.00 0.00 0.30 10.30 10.00 0.00 0.30 10.305,00,001 to 8,00,000 20.00 0.00 0.60 20.60 20.00 0.00 0.60 20.608,00,001 and above 30.00 0.00 0.90 30.90 30.00 0.00 0.90 30.90 For Female (below 60 years of age) Slab Rates A.Y. 2011-12 A.Y. 2012-13 Tax SC EC Total Tax SC EC TotalUpto 1,90,000 0 0 0 0 0 0 0 01,90,001 to 5,00,000 10.00 0.00 0.30 10.30 10.00 0.00 0.3 10.305,00,001 to 8,00,000 20.00 0.00 0.60 20.60 20.00 0.00 0.60 20.608,00,001 and above 30.00 0.00 0.90 30.90 30.00 0.00 0.90 30.90 For Senior Citizens (Between 60 years and 80 years) Slab Rates A.Y. 2011-12 A.Y. 2012-13 Tax SC EC Total Tax SC EC TotalUpto 2,40,000 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.002,40,001 to 2,50,000 10.00 0.00 0.30 10.30 0.00 0.00 0.00 0.002,50,001 to 5,00,000 10.00 0.00 0.30 10.30 10.00 0.00 0.30 10.305,00,001 to 8,00,000 20.00 0.00 0.60 20.60 20.00 0.00 0.60 20.608,00,001 and above 30.00 0.00 0.90 30.90 30.00 0.00 0.90 30.90 Tax SC EC Total Tax SC EC Total For Senior Citizens (Above 80 years) Slab Rates A.Y. 2011-12 A.Y. 2012-13 Tax SC EC Total Tax SC EC TotalUpto 2,40,000 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.002,40,001 to 5,00,000 10.00 0.00 0.30 10.30 0.00 0.00 0.00 0.005,00,001 to 8,00,000 20.00 0.00 0.60 20.60 20.00 0.00 0.60 20.608,00,001 and above 30.00 0.00 0.90 30.90 30.00 0.00 0.90 30.90 Tax SC EC Total Tax SC EC Total • There are no changes in the corporate rates and rates of tax on partnership firms.