PricewaterhouseCoopers analyses the impact of Budget proposals for 2011-12 on individuals and industry.
DIRECT TAX
A. Personal Tax
1. Tax threshold
Budget Change: The Finance Bill proposes upward revision of the minimum threshold of taxation:
DIRECT TAX
A. Personal Tax
1. Tax threshold
Budget Change: The Finance Bill proposes upward revision of the minimum threshold of taxation:
Budget: What is the real benefit for you?
Impact Analysis: The real benefit of this measure would be for senior citizens between 60 and 64 years who will save Rs 9,270 and persons above 80 years who will save Rs 26,780 p.a. provided they have matching income at that age.
Budget: What is the real benefit for you?
Photographs: Reuters.
2. TAX SAVING INVESTMENTS Budget Change: New Pension Scheme (NPS) - Currently, both employee's and employer's contribution to NPS are considered for overall ceiling of deduction of Rs 100,000 under sections 80C/CCC/CCD for tax saving instruments. It is proposed that employer's contribution to NPS will no longer be a part of the ceiling. Additionally, the employer can claim tax deduction for the contribution up to 10 per cent of employee's salary. Impact Analysis: Employees, whose other contributions do not cover the ceiling of Rs 100,000 would have a larger window for contribution to NPS. Larger contribution by the employer would benefit the employer with higher tax deduction and the employee with tax saving. However, the restriction in section 40A(9) should be removed to enable the employer's tax deduction. Infrastructure bonds - Deduction of Rs 20,000 available in respect of investment in long-term infrastructure extended by one year. Impact Analysis: This proposal would give a tax driven boost to the infrastructure sector.
Budget: What is the real benefit for you?
3. RETURN OF INCOME
Budget Change: The proposals include - (i) exemption for certain specified categories of small taxpayers from furnishing tax returns, (ii) introduction of new simplified return form SUGAM for presumptive taxpayers. Impact Analysis: Filing exemption would benefit salaried taxpayers whose entire tax has been withheld by the employer. It is expected that the exemption would be limited to the lower income group. However, the effective benefit would be limited if persons having other income such as dividend, interest are not included. SUGAM should ensure better compliance and widen tax base.
Budget Change: The proposals include - (i) exemption for certain specified categories of small taxpayers from furnishing tax returns, (ii) introduction of new simplified return form SUGAM for presumptive taxpayers. Impact Analysis: Filing exemption would benefit salaried taxpayers whose entire tax has been withheld by the employer. It is expected that the exemption would be limited to the lower income group. However, the effective benefit would be limited if persons having other income such as dividend, interest are not included. SUGAM should ensure better compliance and widen tax base.
Budget: What is the real benefit for you
B. Corporate Tax
1. SURCHARGE
Budget Change: Surcharge will be reduced - (i) domestic companies from 7.5 per cent to 5 per cent (ii) foreign companies from 2.5 per cent to 2 per cent.
Impact Analysis: These proposals would result in a marginal reduction in the corporate tax rates:
| Particulars | From | To |
| Corporate Tax | ||
| * Domestic companies | 33.23% | 32.45% |
| * Foreign companies | 42.23% | 42.02% |
| Dividend Distribution Tax (DDT) | ||
| * Domestic companies | 16.61% | 16.22% |
...
Budget: What is the real benefit for you?
Photographs: Reuters.
2. MINIMUM ALTERNATE TAX (MAT)
Budget Change: Increase in MAT from 18 per cent to 18.5 per cent with effective rate for (i) Domestic companies - 20.01 per cent (from 19.93 per cent), (ii) branches of foreign companies -19.44 per cent (from 19.53 per cent). Impact Analysis: The additional tax burden would offset reduction in surcharge for MAT paying companies. However, foreign companies would see a marginal reduction. MAT for domestic companies at 20.01 per cent would align with the proposed rate of 20 per cent in Direct Tax Code (DTC).
Budget Change: Increase in MAT from 18 per cent to 18.5 per cent with effective rate for (i) Domestic companies - 20.01 per cent (from 19.93 per cent), (ii) branches of foreign companies -19.44 per cent (from 19.53 per cent). Impact Analysis: The additional tax burden would offset reduction in surcharge for MAT paying companies. However, foreign companies would see a marginal reduction. MAT for domestic companies at 20.01 per cent would align with the proposed rate of 20 per cent in Direct Tax Code (DTC).
Budget: What is the real benefit for you?
Photographs: Reuters.
3. PROFIT-BASED TAX HOLIDAY
STPIs/EOUs No extension of tax holiday u/s 10A/10B.
Mineral oil
No tax holiday for profits from mineral oil blocks awarded after March 31, 2011 under NELP-IX or otherwise. Impact Analysis: These proposals align to the government's policy shift from profit-based incentives. However, this may affect small and medium exporters of services - especially in the IT/ITeS sector. Power sector
Power units commencing power generation, distribution or transmission, or completing substantial renovation and modernisation before March 31, 2012 will be eligible for tax holiday under section 80IA(4). Impact Analysis: This extension would benefit existing investments missing the completion deadline of March 31, 2011 who can enjoy grandfathering of benefits under DTC.
STPIs/EOUs No extension of tax holiday u/s 10A/10B.
Mineral oil
No tax holiday for profits from mineral oil blocks awarded after March 31, 2011 under NELP-IX or otherwise. Impact Analysis: These proposals align to the government's policy shift from profit-based incentives. However, this may affect small and medium exporters of services - especially in the IT/ITeS sector. Power sector
Power units commencing power generation, distribution or transmission, or completing substantial renovation and modernisation before March 31, 2012 will be eligible for tax holiday under section 80IA(4). Impact Analysis: This extension would benefit existing investments missing the completion deadline of March 31, 2011 who can enjoy grandfathering of benefits under DTC.
Budget: What is the real benefit for you?
Photographs: Reuters.
4. INVESTMENT/EXPENDITURE BASED INCENTIVES Budget Change: Housing and fertiliser industry - Businesses such as cold-chain, warehousing facilities, etc enjoy 100 per cent deduction of certain capital expenditure. This benefit would now be extended to notified affordable housing projects and fertiliser units. Scientific research - Contribution to scientific research programmes of national laboratory/university/IITs, etc. would enjoy weighted deduction of 200 per cent (from 175 per cent). Impact Analysis: The proposals are in line with the government's policy shift towards incentivising investments. These benefits would provide impetus to low cost housing and R&D in the country. These benefits should be continued under DTC.
Budget: What is the real benefit for you?
Photographs: Reuters.
5. SPECIAL ECONOMIC ZONES
Budget Change: MAT - SEZ developers and units would pay MAT AT 20.01 per cent DDT - SEZ developers would also pay DDT at 16.22 per cent on dividends distributed from SEZ profits. Impact Analysis: This proposal would advance levy of MAT and DDT on SEZs by a year (from introduction of DTC). It may negatively impact cost of operating in an SEZ and reduce investments in hitherto attractive SEZ Scheme.
Budget Change: MAT - SEZ developers and units would pay MAT AT 20.01 per cent DDT - SEZ developers would also pay DDT at 16.22 per cent on dividends distributed from SEZ profits. Impact Analysis: This proposal would advance levy of MAT and DDT on SEZs by a year (from introduction of DTC). It may negatively impact cost of operating in an SEZ and reduce investments in hitherto attractive SEZ Scheme.
Budget: What is the real benefit for you?
Photographs: Reuters.
6. TRANSFER PRICING (TP)
Budget Change: Allowable variation between mean and transfer price to be notified. Impact Analysis: The government has recognised that a one-size-fits-all variation of 5 per cent does not address the dynamics of industry sectors. Customising such variation to diverse sectors is expected to lean towards an industry-friendly safe harbour regime. Budget Change: TPO's powers are proposed to be extended - (i) to scrutinise international transactions beyond those referred by the AO, (ii) to on-site survey. Impact Analysis: The amendment seeks to 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. On-site surveys will enable the TPO to verify the function-asset-risk analysis given considerable importance in Tribunal rulings and appreciate the comparability analysis better. Budget Change: Due date for filing of tax return extended to November 30 for assessees subject to TP compliance. Impact Analysis: This proposal seeks to facilitate preparation of TP documentation based on contemporaneous comparable data pertaining to the year of the international transaction. The databases would also need to be suitably updated. The proposals do not contain deferral of timeline for Tax Audit Reports.
Budget Change: Allowable variation between mean and transfer price to be notified. Impact Analysis: The government has recognised that a one-size-fits-all variation of 5 per cent does not address the dynamics of industry sectors. Customising such variation to diverse sectors is expected to lean towards an industry-friendly safe harbour regime. Budget Change: TPO's powers are proposed to be extended - (i) to scrutinise international transactions beyond those referred by the AO, (ii) to on-site survey. Impact Analysis: The amendment seeks to 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. On-site surveys will enable the TPO to verify the function-asset-risk analysis given considerable importance in Tribunal rulings and appreciate the comparability analysis better. Budget Change: Due date for filing of tax return extended to November 30 for assessees subject to TP compliance. Impact Analysis: This proposal seeks to facilitate preparation of TP documentation based on contemporaneous comparable data pertaining to the year of the international transaction. The databases would also need to be suitably updated. The proposals do not contain deferral of timeline for Tax Audit Reports.
Budget: What is the real benefit for you?
7. DIVIDEND FROM FOREIGN SUBSIDIARY COMPANY
Budget Change: Dividend received by domestic companies from overseas subsidiaries is proposed to be taxed at 15 per cent on gross basis. Impact Analysis: Taxation of such overseas dividend will be at par with domestic dividends subject to DDT, with no benefit for losses. This would facilitate repatriation of funds to India and taxation thereof in line with proposed Controlled Foreign Corporation regulations under DTC. C. Limited Liability Partnerships (LLPs)
Budget Change: LLPs are proposed to be charged Alternate Minimum Tax (AMT) of 18.5 per cent (effectively 19.06 per cent). The tax will be charged on total income without deductions under Chapter VI-A and that for SEZs. Credit for AMT paid can be carried forward for set-off up to 10 years. Impact Analysis: Whilst liberalisation of FDI in LLP is still awaited, AMT has been introduced. AMT is not on "book profits" but effectively, on gross total income. This charge would affect LLPs having profit from businesses enjoying tax holiday under SEZs. Unlike for companies, adjustment in income under the normal provisions would vary AMT. Provisions for carrying forward AMT needs to be grandfathered under DTC.
Budget Change: Dividend received by domestic companies from overseas subsidiaries is proposed to be taxed at 15 per cent on gross basis. Impact Analysis: Taxation of such overseas dividend will be at par with domestic dividends subject to DDT, with no benefit for losses. This would facilitate repatriation of funds to India and taxation thereof in line with proposed Controlled Foreign Corporation regulations under DTC. C. Limited Liability Partnerships (LLPs)
Budget Change: LLPs are proposed to be charged Alternate Minimum Tax (AMT) of 18.5 per cent (effectively 19.06 per cent). The tax will be charged on total income without deductions under Chapter VI-A and that for SEZs. Credit for AMT paid can be carried forward for set-off up to 10 years. Impact Analysis: Whilst liberalisation of FDI in LLP is still awaited, AMT has been introduced. AMT is not on "book profits" but effectively, on gross total income. This charge would affect LLPs having profit from businesses enjoying tax holiday under SEZs. Unlike for companies, adjustment in income under the normal provisions would vary AMT. Provisions for carrying forward AMT needs to be grandfathered under DTC.
Budget: What is the real benefit for you?
D. Infrastructure debt funds Budget Change: Notified Infrastructure debt funds would be tax exempt. Non-residents receiving interest from such funds would be taxed beneficially at 5 per cent. Impact Analysis: The tax benefits would reduce funding costs for infrastructure development. The government may consider extending the benefit to domestic investors. E. Settlement Commission (SC) Budget Change: Relatives of persons under search cases who have filed application to SC, can also approach SC. SC would be empowered to rectify, within 6 months, any apparent mistake in its orders. Impact Analysis: The relatives of SC applicants in search cases can obtain speedy resolution of disputes. The power of rectification would prospectively reverse the Supreme Court ruling in Brij Lal's case, which held that the SC cannot amend its order. F. Liaison Offices (LO) Budget Change: LOs of foreign companies would need to file annual information reports (of their activities) with income-tax department within sixty days from the end of the financial year.
Budget: What is the real benefit for you?
Impact Analysis: This proposal would help the income-tax department in tracking any income generating activity of LOs. However, the provisions do not contain any measures against non-compliance. G. Anti avoidance measures for transactions with non co-operating countries Budget Change:
A "toolbox of counter-measures" is proposed to be introduced for transactions with (to be) notified countries that do not effectively exchange information with India. Measures include (i) application of TP regulations to all transactions, (ii) restrictions on tax deduction of payments including acceptance to disclose information, (iii) enhanced rate of withholding tax, and (iv) taxation of unexplained receipts.
A "toolbox of counter-measures" is proposed to be introduced for transactions with (to be) notified countries that do not effectively exchange information with India. Measures include (i) application of TP regulations to all transactions, (ii) restrictions on tax deduction of payments including acceptance to disclose information, (iii) enhanced rate of withholding tax, and (iv) taxation of unexplained receipts.
Budget: What is the real benefit for you?
Impact Analysis: These measures would effectively cover limited number of tax havens with whom India does not have a comprehensive or limited treaty for exchange of information. Channelisation of funds from these havens into India would be subject to stricter scrutiny and burden of higher taxation, making them unremunerative. Additionally, through the authorisation for collection of information, the government can unearth unaccounted income. H. Mutual Funds
Budget Change: Tax on income distribution to unit holders other than individual /HUF is proposed to be increased for (i) money market mutual fund or liquid funds from 25 per cent to 30 per cent, (ii) other debt funds from 20 per cent to 30 per cent. Impact Analysis: While tax on income distribution to individuals/HUFs has not been increased, they may be affected unless differential dividends are paid to unit-holders (individuals/HUFs and others).
Budget Change: Tax on income distribution to unit holders other than individual /HUF is proposed to be increased for (i) money market mutual fund or liquid funds from 25 per cent to 30 per cent, (ii) other debt funds from 20 per cent to 30 per cent. Impact Analysis: While tax on income distribution to individuals/HUFs has not been increased, they may be affected unless differential dividends are paid to unit-holders (individuals/HUFs and others).
Budget: What is the real benefit for you?
I. Others
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. Time lapsed in obtaining information from overseas tax authorities to be excluded from assessment timelines. 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 Three more Centralised Processing Centres to be set up for faster processing of tax returns and refunds Requirement of Document Identification Number dispensed with.
Kaushik Mukerjee
(Executive Director) Team members: Anand R Bhat (Associate Director), Pallavi Singhal (Associate Director), Suchint Majmudar (Associate Director), Gaurav Bajoria (Manager), Raghavendra N (Manager),Vikash Dhariwal (Manager)
Kaushik Mukerjee
(Executive Director) Team members: Anand R Bhat (Associate Director), Pallavi Singhal (Associate Director), Suchint Majmudar (Associate Director), Gaurav Bajoria (Manager), Raghavendra N (Manager),Vikash Dhariwal (Manager)
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