BRIEF ON

DIRECT TAX PROPOSALS 2011

BY

S.K.AGRAWAL & CO. Chartered Accountants

DIRECT TAX PROPOSALS 2011

1. 1.

CHANGES PROPOSED IN AREA OF TAX INCENTIVES CHANGES PROPOSED IN AREA OF TAX INCENTIVES BUSINESS INCOME BUSINESS INCOME

1.1

MAT on SEZ Developer & SEZ Unit

Presently income earned by SEZ developers or units in a SEZ is not considered as part of book profit for MAT purposes.

Particulars

Section

Exemption available present 100% profits 50% profits

No. of Years at First 5 years Further 5 years

MAT Applicability at present Not applicable; hence tax liability is nil during tax holiday period

Unit located 10AA in SEZ

50% of ploughed Next 5 years back export profit SEZ Developer 80-IAB 100% profits 10 consecutive Not applicable; years hence tax liability is nil during tax holiday period

It is proposed that exemption from MAT available to SEZ Developers & units operating in SEZ will be discontinued from AY 2012-13. Therefore their income will become taxable for MAT.

1.2 Dividend Distribution Tax on SEZ Developer & SEZ Unit

At present, Dividend Distribution Tax (DDT) is not levied on declaration, distribution or payment of profits, by way of dividends (whether interim

Page 1 of 12

DIRECT TAX PROPOSALS 2011

or otherwise) out of total income of a SEZ developer or a unit operating in SEZ. The person receiving such dividend is also exempted from tax DDT is proposed to be levied on declaration, distribution or payment of profits, by way of dividends, by SEZ Developers or a unit operating in SEZ on or after 1st June 2011. Such dividend will continue to be exempted from tax in the hands of recipient.

1.3 Investment Linked Deduction in respect of Specified Business

Sec 35AD provides investment linked deductions as follows: i. 100% deduction of capital expenditure (other than on land, goodwill, financial instruments) ii. At present, business in respect of which deduction is allowed is as follows: cold chain facility warehousing facility for storage of agricultural produce laying & operating natural gas, petroleum oil pipeline building & operating 2 star hotel building & operating hospital with at least 100 beds developing housing project for slum development

It is proposed to include the following activities eligible for capital deduction under above section i.e. developing and building a housing project under scheme for affordable housing framed by Central/ State Government and notified by the Board
Page 2 of 12

DIRECT TAX PROPOSALS 2011

production of fertiliser

Applicability: From AY 2012-13 and subsequent years Remarks:

i. Loss arising to an assessee on account of specified business claiming deduction u/s sec 35AD, as stated above, will be eligible for set off against the profit of another specified business already in operation and not claiming deduction u/s 35AD. It would mean that u/s 73A, an assessee who currently operates a hospital/ hotel which is not eligible for deduction of capital expenses u/s 35AD; would be able to set off the profits of such business against losses, if any, of a new hospital/ hotel which he begins to operate after 1st April 2010 and which is eligible for deduction of expenditure under sec 35AD. The aforesaid set off is effective from AY 2011-12.

1.4 Extension of Sunset Clause for Power Sector

It is proposed to extend the terminal date for tax holiday of power sector from 31st March 2011 to 31st March 2012. Therefore undertaking which begins to generate power at any time during period from 1st April 1993 to 31st March 2012 starts transmission or distribution at any time during period from 1st April 1999 to 31st March 2012 undertakes substantial renovation and modernization of existing transmission/ distribution lines at any time during period from 1st April 2004 to 31st March 2012 shall be eligible for tax holiday u/s 80-IA (4)(iv)

Applicability: From AY 2012-13 and subsequent years

Page 3 of 12

DIRECT TAX PROPOSALS 2011

2. 2.

CHANGES PROPOSED IN RESPECT OF INTERNATIONAL CHANGES PROPOSED IN RESPECT OF INTERNATIONAL TRANSACTIONS TRANSACTIONS

2.1 Transfer Pricing Regulations

Variation between Arms Length Price & Actual Price:
A standard variation of 5% between the actual price of an international transaction and the Arms Length Price (ALP) of such transaction determined as per provisions of Income Tax Act is allowed at present. In such cases no adjustment is made to the actual price at which international transaction is carried upon. However it is proposed that instead of standard variation of 5%, the allowable variation for different segments of business activity shall be notified by the Central Government.

Applicability: From AY 2012-13 and subsequent years

Extension of jurisdiction & power of TPO: The jurisdiction of a Transfer Pricing Officer (TPO) is proposed to be extended i.e. in addition to the international transactions referred to the TPO by the Assessing Officer, TPO can also determined Arms Length Price in respect of other international transactions noticed by him in course of his proceedings of matter referred to him by the Assessing Officer. With effect from 1st June 2011, it is proposed to provide power of survey to TPO in order to enable him to conduct on spot enquiry and verification.

Page 4 of 12

DIRECT TAX PROPOSALS 2011

2.2 Anti Avoidance Measures

It covers transactions carried on by a resident assessee with persons located in any country or jurisdiction which does not effectively exchange information with India. Such country or territory located outside India will be notified by the Central Government Remarks: Such country or territory may be those areas which are either considered as Tax Havens or with which India does not have Double Taxation Avoidance Agreements Following are the anti-avoidance measures in respect of aforesaid transactions carried on by an assessee resident in India: S.N. Nature 1. of Activity/ Impact/ Declaration/ Requisitions i. All the parties shall be deemed to be associated enterprises ii. Transactions (as defined in the note 1 below) will be considered international transaction iii. Transfer pricing regulations will apply Note 1: Nature of transactions covered above are as follows: a. b. c. d. Purchase, sale or lease of tangible or intangible property Provision of service or lending or borrowing money Any other transaction having effect on profits, income, losses or assets of the assessee A mutual agreement or arrangement for allocation or apportionment of / contribution to , any cost or expense incurred/ to be incurred in connection with a benefit, service or facility provided or to be provided by or to the assessee.

Transaction Where assessee enters into a transaction and one of the parties to the transaction is located in a notified jurisdictional area

Page 5 of 12

DIRECT TAX PROPOSALS 2011

2. Payment made to any Assessee shall furnish authorization to the seek relevant information from the financial institution otherwise no deduction will be financial institution located Board or any other income-tax authority to in notified area

allowed to the assessee in respect of such payment ; For e.g. interest payments
3. Any other expenditure/ Assessee shall

maintain

such

other

allowance

(including documents and furnishes the information as

depreciation) arising from may be prescribed, otherwise no deduction transaction with a person in respect of the same will be allowed located in notified area Note 2: In case prescribed information is not maintained, even depreciation will not be allowed. This would mean that even purchase of capital goods, in respect

of which depreciation is eligible, is also covered under the said provisions.

4. Any sum is received by i. Onus is on the assessee to satisfactorily explain the source of money in hands of giver/ beneficial owner ii. In case of failure to give satisfactory explanation, amount shall be deemed to be income of assessee Note 3: Since any sum received by the assessee is covered in point 4 above, it may become applicable to even gifts received by an individual from his/ her relatives residing in notified area 5. Any sum/ income/ amount Tax shall be deducted at rate highest of on which tax is deductible, the following: is to be received by any person located in notified a. Rate specified in relevant provision of area IT Act b. Rates in force c. 30%

assessee from / credited to his name by any person

located in notified area

Page 6 of 12

DIRECT TAX PROPOSALS 2011

2.3 Tax on Dividends Subsidiaries

received from Foreign

Presently, foreign dividends received by Indian companies are taxable at 30% plus applicable surcharge & cess It is proposed that, during FY 2011-12, if an Indian company has any income received from a foreign subsidiary company, such dividends shall be taxed @ 15% plus applicable surcharge & cess on gross amount of dividend. No expenditure in respect of such dividend shall be allowed under the Act.

3. 3.

TAXATION OF LLPS IN SPECIFIC CASES TAXATION OF LLPS IN SPECIFIC CASES

Presently LLP is being treated as a firm for taxation purposes and therefore has following tax advantages over a company: i. Minimum Alternate Tax is not applicable ii. Dividend Distribution Tax is not applicable iii. Surcharge is not applicable It is proposed to insert following new provisions for taxation of LLPs in certain cases: Where an LLP avails profit linked deductions in respect of certain income under Chapter VI-A of IT Act (details of deduction is enlisted in Annexure 1); or any deduction under sec 10AA as units operating in Special Economic Zones, tax liability of such LLP will be ascertained as higher of the following:

a)

Regular income tax determined on total income of LLP (i.e. after availing deduction under Chapter VI-A or sec 10AA, as the case may be)

Page 7 of 12

DIRECT TAX PROPOSALS 2011

b) Alternate Minimum Tax i.e. 18.5% X Total income of LLP before availing deduction under Chapter VI-A or sec 10AA, as the case may be) Remarks i. Aforesaid LLPs will have to pay tax of at least 18.5% on profits earned from activities eligible for deduction under Chapter VI-A/ sec 10AA ii. Credit will be available in respect of excess of alternate minimum tax paid over regular income tax iii. Such credit will be adjusted in the year in which regular income tax is more than alternate minimum tax and adjustment for that year shall be restricted to the difference between the two figures. Balance amount of credit will be carried forward iv. Credit on account of Alternate Minimum Tax will be allowed to be carried forward and set off upto 10 assessment years

Applicability: From AY 2012-13 and subsequent years

4. 4.

OTHER CHANGES FOR CORPORATE ASSESSEES OTHER CHANGES FOR CORPORATE ASSESSEES

4.1 Tax Rates

MAT has increased to 18.5% from current rate of 18%

Surcharge of 7.5% on a domestic company is proposed to be reduced to 5%

Corporate tax rates including surcharge and education cess have been summarized below:

Page 8 of 12

DIRECT TAX PROPOSALS 2011

Description Domestic Company Regular tax Tax under MAT DDT

Rate

32.45% 20.00% 16.22%

Foreign Company - Regular Tax 42.02%

Where the gross total income of a company does not exceed Rs. 1 crore, income tax rates will be: Domestic Company Foreign Company - 30.9% - 41.2%

4.2 Filing Return of Income

Sec 139 of IT Act is proposed to be amended to extend the due date of filing return of income to 30th November for those corporate assesses who are required to furnish a transfer pricing report in Form 3CEB u/s 92E of IT Act.

Applicability: From 1st April 2011

5. 5.

CHARITABLE ACTIVITIES CHARITABLE ACTIVITIES

5..11 Defiiniitiion of Chariitablle Purpose 5 Def n t on of Char tab e Purpose

Charitable Purpose includes any activity in the nature of trade, commerce
or business, or any activity of rendering any service in relation to any trade,
commerce or business if the aggregate value of receipts from these activities

do not exceed Rs.10 lakhs in the previous year.

Page 9 of 12

DIRECT TAX PROPOSALS 2011

It has been proposed to increase the aforesaid monetary limit in respect of receipts from these activities from Rs. 10 lacs to Rs. 25 lacs

Applicability: From AY 2012-13 and subsequent years

6. 6.

MISCLLANEOUS CHANGES PROPOSED MISCLLANEOUS CHANGES PROPOSED

6..11 Taxatiion for Indiiviidualls 6 Taxat on for Ind v dua s

With effect from 1st June 2011, it is proposed to exempt certain classes of persons from filing return of income subject to compliance of some conditions which will be notified by the Central Government.

The basic exemption limit has been revised and is as follows: Exemption Individuals Woman Limit & Tax (Other than Resident Rates Woman) Senior citizen Senior citizen (>= 60 yrs but (>= 80 yrs) at <80 yrs) at anytime during anytime during the year the year Basic exemption 1,80,000 1,90,000 2,50,000 5,00,000

10%

1,80,001 upto 5,00,000

1,90,001 upto 5,00,000

2,50,001 upto 5,00,000

------

20% 30%

5,00,001 upto 8,00,000 Above Rs. 8,00,000

Page 10 of 12

DIRECT TAX PROPOSALS 2011

Annexure 11 ((Deductiion iin respect of certaiin iincome Annexure Deduct on n respect of certa n ncome under Chapter VI-A of IT Act)) under Chapter VI-A of IT Act
Provision 80HH Title Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas Deduction in respect of profits and gains from newly established small-scale industrial undertakings in certain areas Deduction in respect of profits and gains from projects outside India Deduction in respect of profits and gains from housing projects in certain cases Deduction in respect of profits retained for export business Deduction in respect of earnings in convertible foreign exchange Deduction in respect of profits from export of computer software, etc. Deduction in respect of profits and gains from export or transfer of film software, etc. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings Special provisions in respect of certain undertakings or enterprises in certain special category States

80HHA

80HHB 80HHBA

80HHC 80HHD 80HHE 80HHF

80I

80IA

80IAB

80IB

80IC

Page 11 of 12

DIRECT TAX PROPOSALS 2011

80ID Deduction in respect of profits and gains from business of hotels and convention centres in specified area Special provisions in respect of certain undertakings in North-Eastern States Deduction in respect of profits and gains from business of collecting and processing of bio-degradable waste Deduction in respect of employment of new workmen Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre Deduction in respect of royalties, etc., from certain foreign enterprises Deduction in respect of income of co-operative societies Deduction in respect of profits and gains from the business of publication of books Deduction in respect of professional income of authors of text books in Indian languages Deduction in respect of royalty income, etc., of authors of certain books other than text-books Deduction in respect of remuneration from certain foreign sources in the case of professors, teachers, etc. Deduction in respect of professional income from foreign sources in certain cases Deduction in respect of remuneration received for services rendered outside India Deduction in respect of royalty on patents

80IE 80JJA

80JJAA 80LA

80O 80P 80Q

80QQA

80QQB

80R

80RR 80RRA

80RRB

Page 12 of 12