The Economic Survey indicates that the Indian economy has survived its worst phase and has not been impacted adversely by the global crisis. This is a good omen that the year ahead will be a rewarding one.
The GDP growth for the third quarter of 2009-10 is reported to be a shade lower than the expected level of 6%. The growth rate for the full year is extrapolated to be between 7.2% and 7.5%. If achieved, this will still be one of the highest growth rates in the world. In the current period, Manufacturing Sector has contributed to the growth more than the Services Sector, with Agriculture Sector registering a negative growth of - 0.2%. The challenges continue to be in:
a) Achieving a double digit growth rate
b) Controlling inflation, specially food prices
c) Reducing the overall fiscal deficit
It is in this backdrop, that the Finance Minister, Shri Pranab Mukherjee had presented his Budget proposals on 26th February 2010. The budget proposals focused on strengthening infrastructure, power, alternative and renewable sources of energy, and in providing adequate support to health, social security and food security. Overall, the budget was received well and was applauded as a balanced budget by both the economists and the industry leaders. I believe that the direction of budget proposals are in the growth trajectory. However, the significant allocation of Rs.1900 crores to UIDAI and the emphasis on setting up adequate IT infrastructure and interface across government organisations, the positive difference – relative to prior periods - will be ‘implementation’.
A summary of a few select items in the direct and indirect tax segment, proposed in the Budget follows. Unless mentioned otherwise, the amendments proposed to direct taxes will apply from assessment year 2011-2012
Direct Taxes
The new Direct Tax Code will be made effective from 1st April 2011. This is an important announcement. The summary of the tax amendments is as follows:
- Lower tax burden on individual taxpayers by widening of the tax slabs
- Small companies can convert into Limited Liability Partnerships without attracting capital gains tax liability
- Higher Turnover limits beyond which audit is compulsory, so as to reduce the compliance burden on small business enterprises
- Increased tax-saving investments in Research and Development (R&D) to enhance the competitive ability of the economy
- Tax deduction on investments in long-term infrastructure bonds to encourage savings and for funding infrastructure; and
- Simplification and rationalization of provisions relating to Tax Deduction at Source (TDS).
Personal taxation
Tax rates
The income tax slabs for individual taxpayers to be as follows:
| Income upto Rs 1,60,000 | Nil |
| Income above Rs 1,60,000 and upto Rs. 5,00,000 | 10% |
| Income above Rs.5,00,000 and upto Rs. 8,00,000 | 20% |
| Income above Rs. 8,00,000 | 30% |
The tax slab revisions are moving in the direction of proposal made in the direct tax code. While the amendment in the slab rates last year certainly benefitted higher income group than the medium and lower income group, this years’ slab limit revision is aimed at the middle class. The tax savings would be:
| For an individual with taxable income more than Rs. 3,00,000 and less than Rs. 5,00,000 | Rs.20,000 |
| For taxable income more than Rs. 5,00,000 | Rs. 50,000 |
Deductions
Deduction in respect of long-term infrastructure bonds
A new section 80CCF is being introduced to allow subscription during financial year 2010-11 made to long-term infrastructure bonds to the extent of Rs. 20,000 as deduction in computation of income of individual and HUF. This will be over and above the existing limit of Rs. 1,00,000 under Section 80C, 80 CCC and 80 CCD of the Act. This provision is available only for subscription made during the year 2010-11, and the long-term infrastructure bonds will be notified by the Government in due course.
Deduction in respect of contribution to the Central Government Health Scheme
Under the existing provisions of section 80D, deduction in respect of premium paid towards a health insurance policy up to a maximum of Rs. 15,000 is available for self, spouse and dependent children. A further deduction of Rs. 15,000 is also allowed for buying an insurance policy in respect of dependent parents. For senior citizens of the age of 65 and above, the ceiling level for this deduction is Rs.20,000.
The Central Government Health Scheme (CGHS) is a medical facility available to serving and retired Government servants. This facility is similar to the facilities available through health insurance policies.
Deduction will be allowed in respect of any contribution made to CGHS by including such contribution under the provisions of section 80D. The deduction will be limited to the current aggregate of Rs.15,000 or 20,000 as mentioned.
Tax returns
As promised by the Finance Minister in the last budget speech, SARAL II is making a comeback to do away with ITR, with respect to individuals.
Corporate tax
Tax rates
Surcharge on taxes for domestic companies is reduced from existing 10% to 7.5%. No change in surcharge of foreign companies.
MAT rate increased from existing 15% to 18%. Companies having to pay Minimum Alternate Tax MAT will have an additional outflow 3% on this score, irrespective of the reduction of surcharge to 7.5%.
Definition of charitable purposes
An amendment was introduced in the last budget to exclude from the definition of “charitable purposes”, if its activities involve ‘the carrying on of 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, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity’.
The absolute restriction on any receipt of commercial nature did create hardship to organizations which receive sundry considerations from such activities. To mitigate such difficulties, section 2(15) is amended to provide that “the advancement of any other object of general public utility” shall continue to be a “charitable purpose” if the total receipts from 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 do not exceed Rs.10 lakhs in the previous year.
This is a retrospective amendment to be applied in respect of assessment years 2009-10 onwards.
Income deemed to accrue or arise in India
A new explanation is inserted to specifically state that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,
(a) the non-resident has a residence or place of business or business connection in India; or
(b) the non-resident has rendered services in India.
This amendment is seen to be to neutralize the impact of the decision of Hon’ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007)[288 ITR 408], wherein it was held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. Whereas the intention of the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India.
This interpretation was felt as not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India.
This amendment is proposed to take effect retrospectively from 1st June, 1976 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years
Weighted deduction for scientific research and development
Under the existing provisions of section 35(2AB) of the Income-tax Act, a company is allowed weighted deduction of 150 per cent of the expenditure (not being expenditure in the nature of cost of any land or building) incurred on scientific research on an approved in-house research and development facility.
In order that Corporate Sector is bestowed with inducements to invest in in-house research, it is proposed to increase this weighted deduction from 150 per cent to 200 per cent.
The existing provisions of section 35(1)(ii) of the Income-tax Act provide for a weighted deduction from the business income to the extent of 125 per cent of any sum paid to an approved scientific research association that has the object of undertaking scientific research or to an approved university, college or other institution to be used for scientific research. Further, under section 35(2AA) of the Act, weighted deduction to the extent of 125 per cent is also allowed for 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.
In order to encourage more contributions to such approved entities for the purposes of scientific research, it is proposed to increase this weighted deduction from 125 per cent to 175 per cent.
Also section 35(1)(iii) is amended so as to include an approved research association which has as its object undertaking research in social science or statistical research, to qualify under Section 35(1)(ii). It is also proposed to amend section 10(21) so as to also provide exemption to such associations in respect of their income.
Investment linked deduction for specified business
Section 35AD is amended to include hotel sector, irrespective of location, allowing 100% deduction in respect of whole of any expenditure of capital nature incurred wholly and exclusively for the purposes of the business. It will include entities in the business of building and operating a new hotel of two-star or above category which starts functioning after 1st April 2010.
Disallowance of expenditure on account of non-compliance with TDS provisions
The existing provisions of section 40(a)(ia) of Income-tax Act provide for the disallowance of expenditure like interest, commission, brokerage, professional fees, etc. if tax on such expenditure was not deducted, or after deduction was not paid during the previous year. However, in case the deduction of tax is made during the last month of the previous year, no disallowance is made if the tax is deposited on or before the due date of filing of return.
The said section is amended to provide that no disallowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in sub-section (1) of section 139.
This amendment will be effective for assessment year 2010-11. This provision can be utilized for the tax deductions in respect of financial year 2009-10.
The interest for non-payment of tax deducted at source after deduction will now attract interest at the rate of 18% instead of existing 12%. This amendment will take effect from 1st July 2010.
Upward revision in the turnover or gross receipts thresholds, for purposes of audit of accounts and of presumptive taxation
In order to reduce compliance burden of small businesses and professionals, the threshold limit under section 44AB has been increased from Rs. 40 lakhs to Rs.60 lakhs in the case of persons carrying on business and from Rs. 10 lakhs to Rs. 15 lakhs in the case of persons carrying on profession
In view of the amendment proposed above, the maximum penalty, leviable under section 271B for failure to get accounts audited under section 44AB or to furnish a report of such audit, is increased from Rs. 1 lakh to Rs. 1.5 Lakhs .
For the purpose of presumptive taxation under section 44AD, the threshold limit of total turnover or gross receipts would be increased from Rs. 40 lakhs to Rs.60 lakhs.
Conversion of a private company or an unlisted company into a LLP
The Finance (No. 2) Act, 2009 provided for the taxation of LLPs in the Income-tax Act on the same lines as applicable to partnership firms. Section 56 and section 57 of the Limited Liability Partnership Act, 2008 allow conversion of a private company or an unlisted public company (hereafter referred as company) into an LLP. Under the existing provisions of Income-tax Act, conversion of a company into an LLP has definite tax implications. Transfer of assets on conversion attracts levy of capital gains tax. Similarly, carry forward of losses and of unabsorbed depreciation is not available to the successor LLP.
Now, the transfer of assets on conversion of a company into an LLP in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45, subject to certain conditions. These conditions are as follows:
(i) the total sales, turnover or gross receipts in business of the company do not exceed Rs. 60 lakhs in any of the three preceding previous years;
(ii) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company;
(iii) no consideration other than share in profit and capital contribution in the LLP arises to partners;
(iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent of the profits of the LLP for a period of 5 years from the date of conversion;
(v) all assets and liabilities of the company become the assets and liabilities of the LLP; and
(vi) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion.
· Carry forward and set-off of business loss and unabsorbed depreciation are allowed to the successor LLP which fulfills the above mentioned conditions.
· If the conditions stipulated above are not complied with, the benefit availed by the company shall be deemed to be the profits and gains of the successor LLP chargeable to tax for the previous year in which the requirements are not complied with.
· The aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place.
· The actual cost of the block of assets in the case of the successor LLP shall be the written down value of the block of assets as in the case of the predecessor company on the date of conversion.
· The cost of acquisition of the capital asset for the successor LLP shall be deemed to be the cost for which the predecessor company acquired it.
· Credit in respect of tax paid by a company under section 115JB is allowed only to such company under section 115JAA. It is proposed to clarify that the tax credit under section 115JAA shall not be allowed to the successor LLP.
Taxation of certain transactions without consideration or for inadequate consideration
Section 56(2)(vii) amended to cover transfer of shares by a company to a firm or company without consideration or at a price lower than the fair market value. The value of such shares will be taxed in the hands of the recipients as income. The assessing officer can make reference to the valuation officer for an estimate of the value of the property under section 56(2).
Deduction for developing and building housing projects
Under the existing provisions of section 80-IB(10), 100 per cent deduction is available in respect of profits derived by an undertaking from developing and building housing projects approved by a local authority before 31.3.2008. This benefit is available subject to, inter alia, the following conditions:
a) the project has to be completed within 4 years from the end of the financial year in which the project is approved by the local authority.
b) the built-up area of the shops and other commercial establishments included in the housing project should not exceed 5 per cent of the total built-up area of the housing project or 2,000 sq.ft. whichever is less.
To allow for extraordinary conditions due to the global recession and the resultant slowdown in the housing sector, the period allowed for completion of a housing project in order to qualify for availing the tax benefit under the section, has been increased from the existing 4 years to 5 years from the end of the financial year in which the housing project is approved by the local authority. This extension will be available for housing projects approved on or after 1.4. 2005.
Further, the current norms for built-up area of shops and other commercial establishments in housing projects in order to enable basic facilities for the residents is enhanced. The built-up area of the shops and other commercial establishments included in the housing project is three per cent of the aggregate built-up area of the housing project or 5000 sq. ft., whichever is higher. This benefit will be available to projects approved on or after the 1.4.2005, which are pending for completion, in respect of their income relating to assessment year 2010-11 and subsequent years.
Upward revision in threshold limits for tax deduction at source
Threshold limits for deduction of tax at source has been marginally increased in the following cases:
| Section | Nature of payment | Existing threshold limits | Proposed threshold limits |
| 194B | Winnings from lottery or cross word puzzle | 5,000 | 10,000 |
| 194BB | Winnings from horse races | 2,500 | 5,000 |
| 194C | Payment to contractors | 20,000 (for a single transaction) | 30,000 (for a single transaction) |
| | | 50,000 (for aggregate of transactions) | 75,000 (for aggregate of transactions) |
| 194D | Insurance commission | 5,000 | 20,000 |
| 194H | Commission or brokerage | 2,500 | 5,000 |
| 194I | Rent | 1,20,000 | 1,80,000 |
| 194J | Fees for professional or technical services | 20,000 | 30,000 |
These amendments are with effect from 1st July 2010.
Other highlights
· Cancellation of registration obtained under Section 12A: This is an amendment to make it clear that registration made under Section 12A can also be cancelled by the commissioner vide powers under Section 12AA (3). This amendment takes effect from 1st June 2010.
· Two more centralized centre for processing returns similar to one in Bangalore
· No need to furnish TDS certificates to tax authorities. However, the requirement that deductor should issue Tax Deduction Certificates to deductees, remains undisturbed
· Scope of cases settlement commission expanded to include proceedings related to search and seizures, if additional amount of tax payable exceeds Rs. 50 lakhs.
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