SALIENT FEATURES OF  THE FINANCE BILL, 2011

Direct Taxes

Ved Jain

A. TAX RATES

1. Increase in Threshold Limit 

The threshold limit for every individual, HUF, Association of Persons, Body of Individuals and Artificial Juridical Persons is being increased from Rs.1,60,000 to Rs.1,80,000.  

The new tax rates are as under:

 

The threshold limit for woman resident in India will continue to be Rs.1,90,000.  No surcharge is applicable.  However, educational cess and higher education cess at the rate of 2% and 1% respectively shall be payable.  Accordingly the benefit of increase in threshold limit by Rs.20,000 shall be available to male assessees only.  The limit of 65 years for being eligible as senior citizen is being reduced from 65 years to 60 years.  Such resident citizen need not pay any tax on income up to Rs.2,50,000 and an increase of Rs.10,000 only as against general increase of Rs.20,000.  A new category of very senior citizen above 80 years is being created.  A resident very senior citizen need not pay tax on income up to Rs.5,00,000.

2. Surcharge on Corporate being reduced from 7.5% to 5%

Surcharge applicable to a domestic company having income above Rs.1 Crore is being reduced from 7.5% to 5% and in the case of companies other than domestic companies i.e. foreign companies, the surcharge is being reduced from 2.5% to 2%.

3. Minimum Alternate Tax being increased to 18.5%

To offset the loss arising consequent to reduction of surcharge from 7.5% to 5% rate of Minimum Alternate Tax is being increased from 18% to 18.5%.  The Finance Bill proposes to enhance the Minimum Alternate Tax (MAT) rate from 18% to 18.5%.

4. Minimum Alternate Tax to be applicable to the units in Special Economic Zone (SEZ)  

The exemption available to income arising from any business carried on or services rendered by an entrepreneur or a Developer in a unit or Special Economic Zones from minimum alternate tax and dividend distribution tax is being withdrawn from assessment year 2012-13.  Profit and gains derived from such units located in SEZ will not be deducted while computing book profit for the purposes of levy of Minimum Alternate Tax.

Similarly, the exemption available from Dividend Distribution Tax under section 115-O.  In respect of income of SEZ shall not be available in respect of dividend declared, distributed or paid on or after 1st June, 2011.  Accordingly, it will be advisable for all such SEZ units to distribute the accumulated profit available for distribution before 1st June, 2011 to avoid levy of dividend distribution tax.

5. Scope of Minimum Alternate Tax being widened 

Minimum Alternate Tax in the new name of Alternate Minimum Tax shall be applicable on Limited Liability Partnerships (LLP).  For this new sections 115 JC to 115 JF are being introduced.  The mode of levy of this Alternate Minimum Tax is different from that applicable on Companies.  In the case of LLP, it is not the book profit but the taxable income computed as per provisions of the Act which will be the basis.  To this exempt income under Chapter VI-A i.e. mainly exemption under Section 80-1A, 80-1AB, 80-1B and 80-1C, 80-IC, 80-1D, 80-1E and exemption available under Section 10 AA in respect of Special Economic Zones (SEZ) will be added.  The applicable tax rate will be 18.5 per cent on such income. This has been done to discourage companies getting converted to LLP to avoid MAT.  Credit of tax so paid shall be allowed to be set off over a period of next ten years in respect of tax payable over and above the Alternate Minimum Tax of that year.  As in the case of a company, every such LLP shall be required to obtain a report from a Chartered Accountant and furnish the same before the due date of filing the return. 

6. Tax rate increase on Distribution of Income by Mutual Fund

The rate of tax under Section 115R(2) in respect of income distributed by the money market mutual fund or liquid fund is being increased from 25% to 30% in respect of any person other than an individual or HUF.  However, in respect of individual or HUF the rate of tax on income distributed by a money market mutual fund or a liquid fund shall continue to be 25%.  Similarly rate of tax on income distributed to any person other than individual or HUF by a fund other than a money market fund or a liquid fund is being increased from 20% to 30%.  This will cover all debt funds on which tax rate applicable at present is 20 per cent.  The tax rate on debt fund in respect of individual or HUF shall continue to be 12.5%.  This amendment shall be applicable from 1st June, 2011.  It may accordingly be advisable for such mutual funds to distribute its income of debt fund before 1st June, 2011 so as to avail lower rate of tax.

B. CHARITABLE TRUSTS / INSTITUTIONS  

1. Receipt of commercial nature upto Rs. 25 lakhs not to affect charitable purpose

The Finance Bill, 2011 proposes to further address the hardship by the amendments made by the Finance Act, 2008 in the definition of charitable purpose under section 2(15) of the Act whereby an absolute restriction was placed in respect of receipts if it involves carrying on of any act in the nature of trade/commerce or business or any act of rendering any service for a cess or a fee or any other consideration. This has caused a lot of hardship to all NGOs which have been providing valuable service to the society.  The Finance Act, 2010 provided that such an organization will be charitable if the total receipts of such nature do not exceed Rs. 10 lakhs in a year.  The Finance Bill, 2011 proposes to increase this amount to Rs.25 lakhs.

2. Exemption to Central Government / State Government Authority, Trust, etc.

The Finance Bill, 2011 proposes to exempt income of Authority, Board or Trust or Commission which has been set up or constituted under an Act by the Central Government or State Government with the object of regulating or administering any activity for the benefit of the general public and is not engaged in any commercial activity.  This exemption shall be available to such Authority, Board, Trust or Commission as may be notified and in respect of such income as may be specified in the notification issued by the Central Government. Such Board, etc. shall be required to file a Return of Income and this amendment shall be effective from 1st June, 2011.   This amendment is being made to address the issue, which has arisen consequent to withdrawal of exemption available under various sections to such Authority or Board, etc.  Many of such Authority, Board, etc. were engaged in public in administering public utility and were being taxed.  Now under the provision each of such authorities shall be required to make an application to the Central Government for seeking exemption and justify that it has been constituted with the object of regulating or administering activity for the benefit of the general public and it is not engaged in any commercial activity.

3. The Finance Bill, 2011 proposes to insert a new sub-section (47) in Section 10 exempting income of infrastructure debt fund notified by the government to augment long term low cost funds from abroad for the infrastructure sector.  Further interest received from such infrastructure fund in the hands of non-resident shall be taxable at the rate of 5% on the gross amount of such interest under Section 115A(BA).  This income shall be liable for tax deduction under section 194LB.  This amendment shall be effective from 1st June, 2011.

C.  BENEFIT OF EXEMPTION FOR SETTING UP POWER GENERATION, TRANSMISSIONS OR DISTRIBUTION UNDERTAKINGS BEING EXTENDED BY ANOTHER ONE YEAR

1. The Finance Bill, 2011 proposes to extend terminal date by one year for claiming exemption under Section 80-IA(iv) in respect of undertakings for the generation and distribution of power or which starts transmission or distribution or which undertakes substantial renovation and modernization of existing network of transmissions or distribution upto 31st March, 2012.  This exemption earlier was available upto 31st March, 2011.  Once the undertaking becomes eligible it will be able to claim exemption for ten consecutive assessment years out of 15 years.

2. Exemption in respect of following shall come to an end on 31st March, 2011 and hence income shall be taxable from 1st April, 2011:-

 -  Undertakings in Free Trade Zone under Section 10A

 - Export oriented units under Section 10B

 - Housing Projects under Section 80 IB(10)

D. CLARIFICATORY AMENDMENT IN RESPECT OF DEDUCTION UNDER SECTION 80CCD FOR CONTRIBUTION TO NEW PENSION SCHEME

Presently under Section 80CCD contribution to pension scheme is allowed as deduction in respect of employees contribution while computing income of the employee.  Further under section 80CCE there is an overall ceiling of Rs.1 lakh in respect of exemption under Section 80C i.e. on account of life insurance premium, provident fund, etc. under section 80CC i.e. on account of any annuity plan of Life Insurance Corporation or any other insurance and under section 80CCD on account of contribution to pension scheme, Section 80 CCD refers to both employees as well as employer contribution.  To remove confusion in respect of the contribution of the employer to the new pension scheme, the Finance Bill, 2011 proposes to amend the provision of Section 80CCE clarifying that this limit of Rs.1 lakh shall be exclusive of contribution made by the employer to new pension scheme.   This amendment is being made effective from assessment year 2012-13 with the result that dispute in respect of contribution of the employer for earlier assessment year shall continue though the intention was never to include employer contribution to new pension scheme for the purpose of limit of Rs.1 lakh.

E. BUSINESS INCOME 

1. Contribution towards new pension scheme to be allowed as deduction

Section 36 is being amended by inserting clause (iva) to provide deduction of amount paid by an assessee as the employer by way of contribution towards a pension scheme on account of employee to the extent such contribution does not exceed 10% of the salary of the employee in the previous year, as deduction while computing its business income.  Accordingly contribution up to 10% of salary will be eligible deduction and beyond that will be disallowed.

2. Higher deduction for contribution to scientific research 

The Finance Minister, in line with his last year budget has proposed in this Finance Bill, 2011 enhanced weighted deduction to 200 per cent under section 35 (2A) while computing business income in respect of contribution to a National Laboratory or to a University or Indian Institute of Technology to be used for an approved scientific research programme.  The Finance Act, 2010 had increased the weighted deduction in respect of such contribution from 125% to 175%.

3. Scope of investment linked deduction under Section 35AD being widened

The Finance Bill, 2011 proposes to widen the scope of investment linked deduction available under Section 35AD of the Act to include 2 new businesses that of developing and building a housing project under a scheme for affordable housing framed by the Central or State Government and notified by CBDT and also to production of fertilizer in India.  The benefit of this shall be available for a new plant or for a newly installed capacity in an existing plant on or after 1st April, 2011.  As per this provision of Section 35AD, the whole of the capital expenditure other than that incurred on land, goodwill and financial investments is allowed as deduction in the year in which the business is commenced.

4 Further a clarificatory amendment is being made to delete the word new in respect of hotel and hospital so as to allow the benefit of loss of a specified business against the profit of another specified business whether or not such profit is eligible for deduction under section 35AD.  Hotels and hospitals were included in the Finance Act, 2010 in the list of eligible specified business.  With this amendment an assessee who currently operates a hospital or a hotel would be able to set off the profit of such business against the losses if any of a new hospital or a new hotel which begins to operate after 1st April, 2010 and is eligible for deduction under section 35AD.

5. Dividend received from foreign subsidiary to be taxed at the concessional rate of 15%

The Finance Bill, 2011 proposes to insert a new section 115BBD to provide that in the case of an Indian company where its income includes any income by way of dividends from a foreign subsidiary company, then such dividend shall be taxable at the rate of 15% with applicable surcharge and cess on the gross amount of dividends without any deduction of any expenditure.  Subsidiary foreign company has been defined to mean a foreign company in which an Indian company holds more than half the nominal value of the equity share capital of the company.  The Finance Minister in his Budget speech has stated that this provision is being introduced to encourage Indian companies to receive more dividends so as to bring more funds in India rather than holding it outside.  However, this benefit has been limited only to the foreign subsidiary company.  There may be many foreign companies where Indian companies had made investment but the holding in these companies may not be more than 50%.  Looking to the objective explained by the Finance Minister in the budget speech, it would have been more appropriate had the concessional rate of tax of 15 per cent be applicable in respect of dividends received from any foreign company without condition of being a subsidiary company. 

F. TRANSFER PRICING

Provisions relating to transfer pricing are being proposed to be amended by the Finance Bill, 2011.    

1. Safe harbour of 5 per cent to be revisited and notified by the Central Government

The Finance Bill, 2011 proposes to amend section 92C of the Income Tax Act whereby a safe harbour of 5% between the actual price of the transaction and the arms length price is allowed and no adjustment is made to the actual price if the variation is within 5%.  Now 5% variation will not be allowed across all segments of the business activity.  The variation instead shall be such as may be notified by the Central government in this behalf.  This may lead to more complexity in transfer pricing regime which is otherwise too complex as Central government may notify different variations for different segments of business activity at different point of time. 

2. Transfer Pricing Officer to have power to survey

The provision of Section 92CA(7) is being widened to empower not only the Transfer Pricing Officer to carry out a survey under section 133A of the Act for on the spot enquiry and verification in addition to the existing power of calling information under Section 133(6) or issuing summon under Section 131(1).  The determination of the arms length price by the Transfer Pricing Officer is an exercise of determination of arms length price and he has to evaluate the data available in public domain. Carrying out the survey at the premises of the person for whom the arms length price is being determined will lead to more complexity.  

3. The Transfer Pricing Officer to have power beyond the reference made by the Assessing Officer  

The scope of Section 92CA is being widened to empower the Transfer Pricing Officer to not only determine the arms length price in respect of the international transactions referred to him by the assessing officer but also such other international transactions which are noticed by him subsequently in the course of the proceedings before him.  Thus, the Transfer Pricing Officer shall not only be determining the arms length price of the international transactions referred to him but can find out other international transactions requiring determination of the arms length prices.  This provision assumes that determination of the arms length prices by the Transfer Pricing Officer for each international transaction is mandatory ignoring the fact Transfer Pricing Officer is to assist the assessing officer in respect of such international transactions as the Assessing Officer may deem fit.  There may be instances where the Assessing Officer may be satisfied about the arms length price in respect of other transactions declared by the assessee and may not require assistance of the Transfer Pricing Officer.  

4. Due date of filing return for Corporate assessee having international transaction to be 30th November

The Finance Bill, 2011 in view of the extra time required for carrying out the transfer pricing study and determination of the arms length prices proposes to extend the due date for filing of return of income from 30th September to 30th November each year.  This new due date shall be applicable to Corporate assessees only who have international transactions and are required to file Transfer Pricing Audit Report. This provision shall be effective from 1st April, 2011.  Accordingly return for assessment year 2011-12 in such cases can be filed upto 30th November, 2011.  It may be noted that this extended period upto 30th November is only for the companies and for an assessee other than a company the due date shall continue to be 30th September despite such assessees having international transactions.

G. NO TAX HOLIDAY FOR UNDERTAKING ENGAGED IN COMMERCIAL PRODUCTION OF MINERAL OIL LICENSED AFTER 31ST MARCH, 2011

The scope of section 80IB(9) is being limited to by a sunset clause whereby tax holidays for undertakings engaged in commercial production of mineral oil will not be available for blocks licensed under a contract awarded after 31st March, 2011 under the new exploration licensing policy.  By this amendment the existing undertakings which has obtained a licence before 31st March, 2011 will continue to avail the benefit for a period of 7 years as provided under Section 80IB(A) and no new undertakings after 31st March, 2011 shall be eligible.

H. SETTLEMENT COMMISSION

1. The condition of additional tax for filing the application for settlement of tax disputes in the case of search before the Settlement Commission is being relaxed.  The Finance Act, 2010 has allowed an application to be made before the Settlement Commission if the proceedings have been initiated against the applicant under Section 153A or under section 153C as a result of search under section 132 or requisition of books of accounts under section 132A of the Act with a condition that the additional amount of income tax payable on the income disclosed in the application should exceed Rs.50 lakhs.  This has created a practical problem whereby each of the applicant covered in the search was required to disclose income with additional tax liability of Rs.50 lakhs.  The Finance Bill, 2011 proposes to relax this condition whereby only one applicant in such case need to declare income with an additional tax liability exceeding Rs.50 lakhs and other person related to such person can file application declaring income with an additional tax liability exceeding Rs.10 lakhs only instead of Rs.50 lakhs at present.  This provision shall be effective from 1st June, 2011.  With this amendment after 1st June, 2011 in the case of a search only one person will be requiring to pay additional tax exceeding Rs.50 lakhs and other related person will be eligible to file the application by paying additional tax of Rs.10 lakhs only.    The definition of the related person is quite exhaustive and by and large covers all connected cases which may get covered either under section 153A or section 153C.  This will include company, firm, HUF, directors, partners, persons having more than 20% interest in such entities and relatives of such person.  This is a positive move for settlement of the tax disputes which normally arise post-search in view of the complexities.  It could have been more appropriate that an alternative option would have also been provided whereby the entire group covered in a search can file an application and the condition of additional tax payable is fixed with reference to the entire group rather than for each of the individual since in a group search there may be certain entities which will not be having additional income with tax liability of more than Rs.10 lakhs but for settlement of dispute inclusion of such entities may be required.

2. Settlement Commission to have power for rectification

The Finance Bill, 2011 proposes to make an amendment whereby it shall have the power to rectify a mistake apparent from the record to amend its order within a period of six months from the date of its order.  This amendment shall be effective from 1st June, 2011 and consequential amendment is also being made under the Wealth Tax Act.  This amendment is being proposed in view of the judgment of the Supreme Court in the case of Brij Lal & Ors. Vs. Commissioner of Income Tax (2010) 235 CTR (SC) 417 : (2010 46 DTR 153 whereby it has been held that the Settlement Commission does not have the power to rectify its order.  The interesting feature to be noted here is that the time limitation to rectify its mistake has been restricted to only six months from the date of its order as against 4 years available to income tax authorities under section 154 and to Income Tax Appellate Tribunal  under section 254(2) of the Act.

3. The Settlement Commission to have more Benches

The Finance Minister in his Budget speech has proposed 3 more Benches of the Income Tax Settlement Commission to expedite the settlement of the tax disputes.    This is a welcome move.  However, to make the Settlement Commission a more effective body, it will be better if selection of members of the Settlement Commission is restricted to Revenue Officers only but is made more broad based by including professionals with proven integrity and expertise.

4. Liaison Offices of Foreign entities to submit Annual Information Return

At present the liaison offices of foreign companies, firms, association of individuals are not required to file their return of income with regard to its liaison offices since these liaison offices do not carry out any business activity in India.  In order to bring them within the network information the Finance Bill, 2011, proposes to insert Section 285 making it obligatory for every non-resident having a liaison office in India to file an annual information return providing such information may be prescribed.  This information is to be filed within a period of 60 days from the end of such financial year.  This amendment is being made effective from 1st June, 2011.  Since the period of 60 days shall stand expired as on 1st June, 2011 this amendment shall be applicable in respect of financial year 2011-12 and all liaison offices accordingly will be required to file the information by 30th May from next year onward.

I. MEASURES TO COUNTER TAX EVASION 

The Finance Bill, 2011 proposes many amendments to provide tool box to counter tax evasion in respect of foreign transactions.  

(i) A new section 94A is being introduced to provide tool box to discourage transaction by a resident assessee with persons located in any country or jurisdiction which does not effectively exchange information with India.  As per this provision where an assessee enters into such transaction, then such transaction shall be deemed to be an international transaction with associated enterprises and transfer pricing regulation shall be applicable to such transaction. 

(ii) No deduction in respect of any payment made to any financial institution shall be allowed unless the assessee authorizes the tax authorities to seek relevant information about it from such financial institutions.  

(iii) No deduction in respect of any expenditure arising from the transaction with a person located in such jurisdictional area shall be allowed unless the assessee maintains the prescribed document and the information in respect thereof.  

(iv) Further if any money is received from such person located in such area then it will be the onus of the assessee to explain the source of such money in the hands of the person and in case of his failure to do so the amount so received shall be deemed to be the income of the assessee.  

(v) Any payment made to a person, on which tax is deductible at source, located in such jurisdictional area, the deduction of tax at source shall be made at the rate prescribed under the Act or at the rate of 30% whichever is higher.  

The above provisions shall be applicable from 1st June, 2011 and this will empower the Central Government to notify a country or territory outside India in relation to which the above provision shall be applicable.  Accordingly the transaction with tax heaven countries will get covered under this provision and onus to prove the genuineness of such transaction shall vest with the assessee in all such cases.  

J. ENABLING PROVISIONS TO COLLECT INFORMATION FOR TAX AUTHORITIES OUTSIDE INDIA

1. The scope of section 131 is being widened by inserting a new sub-clause (2) authorizing income tax authorities not below the rank of an Assistant Commissioner of Income Tax as may be notified by the Board in this behalf to exercise the power of issuing summons under Section 131(1)(i) notwithstanding that no proceeding with respect to such person or class of persons are pending before any income tax authorities.  Such authority shall also have the power to impound and retain any books of accounts and other documents produced before it.

Such authority shall also have the power for calling information under section 133 of the Act.   This power shall be limited to in relation to those countries with whom India has entered into tax treaty under section 90 or 90A of the Act.  This provision shall be applicable from 1st June, 2011.  With the introduction of the provision of receipt of a request for investigation from any country with whom India has entered into a tax treaty the tax authorities will be in a position to call for information or summon such person so as to provide information to tax authorities of such other countries.  

2. Time taken for obtaining information from tax authorities outside India to be excluded for the purpose of limitation under Section 153

At present under section 153 and 153B the time limit has been prescribed for completion of assessment and reassement.  An assessment has to be completed within a period of 21 months from the end of the assessment year and an assessment is to be completed within a period of 9 months from the end of the year in which notice for reassement is served.  Similarly under section 153B of the Act an assessment or reassessment in the case of a search is to be completed within a period of 21 months from the end of the financial year in which the last of authorization for search was executed.  In order to provide additional time in cases where the information from countries outside India is sought by the assessing officer it is being proposed to exclude the time taken for computing period of limitation.   The period to be excluded shall be the period commencing from the date on which a reference for exchange of information is made by an authority competent under the tax treaty and ending on the date on which the information so requested is received by the Commissioner or a period of six months whichever is less.   Thus the outer limit for exclusion is limited to six months only.  This amendment shall be effective from 1st June, 2011 and accordingly will be applicable to all assessments pending on 1st June, 2011.

K. CENTRAL PROCESSING OF RETURNS

As was done in the Finance Act, 2010 in view of the delay in setting up of the Central Processing Center by the Board for setting up of this Center, the date under Section 143(1B) is being extended from 31st March, 2011 to 31st March, 2012.

L. DOCUMENT IDENTIFICATION NUMBER BEING DELETED

The Finance (No.2) Act, 2009 had made it mandatory to allot document identification number to every document, letter, and correspondence, notice issued or received by the department or on after 1st October, 2010. The Finance Act, 2010, in view of the practical difficulty has extended this period to 1st July, 2011.  In view of this practical impossibility of introducing this mechanism the Finance Bill, 2011 proposes to delete this provision in Section 282B of the Act. 

M. ALLOWANCE OR PERQUISITES OF UNION PUBLIC SERVICE COMMISSION CHAIRMAN AND MEMBERS TO BE TAX FREE

The Finance Bill is proposing to make an interesting amendment empowering the Central government to notify allowances or perquisites to be tax free of the Chairman and Members of the Union Public Service Commission.

N. SALARIED EMPLOYEES BEING EXEMPTED 

Persons having only salary income need not file return.  The Finance Bill, 2011 proposes to empower central government to exempt persons from the requirement of furnishing return of income having regard to such condition as may be specified.  The Finance Minister in his budget speech has indicated to exempt persons having salary income only.  This is a welcome move as tax on salary income gets deducted at source and get reported in TDS return.  Further in order to make this provision really effective the exemption should be given to salary income and also from other sources such as interest, rental income, etc. if the same is reported by the employee to the employer.  For this a form can be notified which every employee need to submit to the employer with verification to the true and full disclosure of the income.  Based on this the employer can deduct tax at source by including this income with the salary income and report the same in the TDS return.  In the absence of such exclusive provision, the provision may be ineffective as every employee may have some income by way of interest on saving bank account or fixed deposit.