S. S. Jhunjhunwala & Co. Chartered Accountants

Transcription

1 .. S. S. Jhunjhunwala & Co. Chartered Accountants 306, Akruti Arcade, J.P. Road, Opp. Wadia High School, Andheri (West), Mumbai Ph: / Fax : ssjco@bom5.vsnl.net.in (For Private circulation only) 1

2 Dear Madam/Sir, 2 nd March, 2010 Indian economy and for that matter, why only Indian Economy, the world economy was facing grave uncertainties. Growth had started decelerating and business sentiment was weak. We are fortunate that Indian Economy is now in better position than it was in last year. But challenges are not yet over. Our Hon ble Finance Minister Shri Pranab Mukherjee identified three major challenges: To quickly revert to high GDP growth path of 9%. To harness economic growth to consolidate the recent gains in making development more inclusive. The thrust imparted to the development of infrastructure in rural areas has to be pursued to achieve the desired objectives within a fixed time frame. To address the weaknesses in government systems, structures and institutions at different levels of governance. Making an attempt to meet the challenges, the Hon ble FM presented the Budget proposals on 26 th February, How far he was successful will largely depend on proper implementation of these proposals. However, as on date the experts have all the praise for the Budget 2010 as it can be seen from Excerpts from Experts. We are also grateful to Hon ble Finance Minister for lesser proposals for amendments in the Bill because in the year to come, we professionals as well as business community also have additional four challenges to face Direct Tax Code, 2009 Companies Bill, 2009 Goods and Service Tax (GST) International Financial Reporting Standard (IFRS) We all need to devote time, energy and focus to learn, understand and implement the above new acts and standards. 2

3 Like all these years, this year also we have made an attempt to appraise our esteemed clients of the important amendments as proposed by the finance bill especially in the arena of Income tax Act, An attempt is made to cover other areas also by broadly outlining major proposals thereof. We have included a Bird s eye view of above new acts and standard in the Chapter Challenges Ahead. This study note of ours titled The Finance Bill, 2010 Ek Samiksha is enclosed herewith. After you had an opportunity to go through the same, we may discuss this further at your convenience. With regards, Yours truly, Team - S.S.Jhunjhunwala & Co. Encl: As above 3

4 C O N T E N T S Particulars Page Nos. Budget at a Glance 6 Tax Receipts 7 Excerpts from Experts 8 Finance Bill, 2010 an Introduction 10 Income Tax Provisions: 1) Effective Dates 11 2) Rates of Taxes 11 3) Surcharge and Education Cess 12 4) Tax rates over the generations for individuals 14 5) Rate of Tax Deduction at Source 15 6) Definition of Charitable purpose [Section 2(15)] 17 7) Income Deemed to Accrue or arise in India [Section 9] 17 8) Computation of Exempted Profits in case of Units in SEZ 20 [Section 10AA] 9) Cancellation of Registration obtained under section 12A [Section 12AA(3)] 20 10) Weighted Deduction for Scientific Research and 21 Development [Section 35] 11) Incentive for Specified Business [Sections 35AD, 80A] 22 12) Disallowance of Expenditure on account of Non- 24 Compliance with TDS Provisions [Sections 40(a)(ia), 201(1A)] 13) Applicability of Tax Audit [Section 44AB, 44AD, 271B] 25 14) Income of a non-resident providing services or facilities in 27 connection with prospecting for, or extraction or production of, mineral oil [Section 44BB, 44DA] 15) Conversion of Private Limited Company into Limited 28 Liability Partnership [Sections 47(xiiib), 32, 35DDA, 43] 16) Taxation of Gifts [Section 56(2)] 32 17) Deduction in Respect of Long Term Infrastructure Bonds 34 [Section 80CCF] 18) Deduction in respect of contribution to the Central 35 Government Health Scheme [Section 80D] 19) Deduction for Developing and Building Housing Projects 35 [Section 80IB(10)] 20) Deduction of Profits of a Hotel or a Convention Centre in 36 the National Capital Territory [Sections 80-ID] 21) Minimum Alternate Tax (MAT) [Section 115-JB]: 37 22) Centralized Processing of Returns [Sections 115WE, (1B)] 23) Provisions relating to Tax Deducted at Source [Sections B, 194BB, 194C, 194D, 194H, 194I, 194J] 24) Certificate of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) [Sections 203, 206C] 38 4

5 25) Settlement Commission [Sections 245A, 245C, 245D] 39 [Sections 22A, 22C of the Wealth Tax Act] 26) Power of the High Court to Condone Delay in Filing of 40 Appeals [Sections 256, 260A] [Section 27 and 27A of the Wealth Tax Act] 27) Document Identification Number [Section 282B] 40 28) Taxation of Income of non-life insurance business [Rule 5 40 of First Schedule] 29) Proposed Amendments to Wealth Tax Act, ) Other Proposals 42 Service Tax Provisions 43 Central Excise Provisions 48 Custom Duty Provisions 55 Central Sales Tax Provisions 60 Challenges Ahead 62 Gup Shup o Income Tax 71 o Taxation of Cross Boarder Transactions 76 o Other Bullet Points 79 In this note an attempt has been made to summaries various proposals of Finance Bill, Specific guidance may be obtained before acting on the proposals and provisions. It should be noted that the Finance Bill, 2010 will be discussed in the Parliament and is subject to any amendments that may be made pursuant to such discussion. 5

6 BUDGET AT A GLANCE Budget Estimates (In Crore of Rupees) Revised Estimates Budget Estimates 1. Revenue Receipts Tax Revenue (net to Centre) Non-tax Revenue Capital Receipts (5+6+7) $ Recoveries of Loans Other Receipts Borrowings and other Liabilities * Total Receipts (1+4) $ Non-plan Expenditure On Revenue Account of which, Interest Payments On Capital Account Plan Expenditure On Revenue Account On Capital Account Total Expenditure (9+13) Revenue Expenditure (10+14) Capital Expenditure (12+15) Revenue Deficit (17-1) (4.5) (4.8) (5.3) (4.0) 20. Fiscal Deficit {16-(1+5+6)} (6.0) (6.8) (6.7) (5.5) 21. Primary Deficit (20-11) Actuals for are provisional (3.0) $ Does not include receipts in respect of Market Stabilization Scheme. * Includes draw-down of Cash Balance (3.2) (1.9) Notes: GDP for BE has been projected at Rs crore assuming 12.5% growth over the advance estimates of (Rs crore) released by CSO. 6

7 TAX RECIEPTS The Statement below summarizes, by broad categories, the estimates of tax revenue receipts over a period. The estimates include the effect of Budget proposals. Profile of central gross tax revenues (Rs. Cr.) (R.E.) (R.E.) (B.E.) (R.E.) (B.E.) DIRECT * Income Corporation Wealth Tax & Others INDIRECT Excise Customs Service Other Taxes TOTAL DIRECT (%) Service Tax to total (%) B.E.: Budget Estimates; R.E: Revised Estimates * Includes Wealth Tax, Securities Transaction Tax and Banking Cash Transaction Tax in RE ; and Wealth Tax and Securities Transaction Tax BE The Hon ble Finance Minister has stated in his Speech that: My proposals on Direct Taxes are estimated to result in a revenue loss of Rs.26,000 crore for the year. Proposals relating to Indirect Taxes are estimated to result in a net revenue gain of Rs.46,500 crore for the year. Taking into account the concessions being given in my tax proposals and measures taken to mobilise additional resources, the net revenue gain is estimated to be Rs.20,500 crore for the year. 7

8 EXCERPTS FROM EXPERTS 1. C. Rang Rajan (Chairman Prime Minister s Economic Advisory Council) The F M has achieved the first step (towards GST) by bringing the rate of Taxation on Goods & Services at one level. 2. N. Chandrasekaran : CEO & MD - Tata Consultancy Services Ltd. The F M has given us a pragmatic forward looking budget that focuses on fiscal prudence & investing for the future. 3. N. R. Narayana Murthy : Chief Mentor Infosys Allocation for school education has increased substantially & the social sector is well targeted, especially health sector Overall, the F M could have announced bold initiative for job creation & higher education. This is the only way to escape poverty. 4. Sunil Mittal: Chairman Bharti Enterprises. This year s budget is remarkable for the simple reason that F M has managed to reconcile two seemingly conflicting objectives with unusual case, achieving the economy s overall fiscal discipline objectives without compromising on growth in any significant manner. The F M has surprised most taxpayer with aggressive rationalisation of the Income Tax slabs. This is a very positive step towards driving the consumption power of the Middle class. 5. Aziz Premji : Chairman WIPRO. I would like to highlight five aspects of the budget that stood out from my perspective. First: Second: Third: Fourth: Fifth: F M sees the role of the Government as an enabler rather than as an actor. The renewed focus on agriculture. Continued thrust on infrastructure. Focus of the Government in the area of sustainability. The onus on education. But perhaps The F M is betting on the Growth Momentum in Indian economy for this. And Lord Indra, of course! 8

9 6. Mark Mobius : Chairman Templeton Asset Management Globally deficits have moved higher due to stimulus programmes, but India has been running a relatively high deficit for a while.. Indian authorities are still well aware of the need for fiscal consolidation, as it will play an important role in determining the strength and sustainability of future economic growth. 7. O P Bhatt Chairman, State Bank of India India Inc can rest assured that interest rates will not rise in a hurry. The govt s market borrowing in FY11 can be managed comfortably without impacting liquidity. 8. Uday Kotak Vice Chairman & MD Kotak Mahindra Bank The finance minister has done a wonderful job of managing expectations before the Budget and delivering better than those expectations! I consider the budget very positive for the Indian economy and positive for the long-term development of Indian financial markets. 9. Mukesh Ambani Chairman & MD, Reliance Industries The Union Budget 2010 is a statement of enhanced economic aspirations with expansive social development. It is, in essence, a celebration of the intrinsic India. India has come out of the global economic crises relatively unscathed and quickly, thus highlighting the inherent strengths of the Indian economy. This Budget attempts to reinforce these strengths and address the weaknesses so that the fruits of the growth can positively impact larger section of our population. This budget has also attempted to focus public spending towards improving the productivity of the economy. 10. Chanda Kochar MD & CEO, ICICI Bank The Budget presents a balance approach towards long term economic planning and short-term considerations of sustaining and broad-basing the momentum in economic recovery. 11. AM Naik Chairman, L&T The budget reflects the great story of the Indian economy. The stance has been reformist. 12. Pawan Munjal MD & CEO, Hero Honda The budget is a positive and pragmatic one and continuous focus on inclusive growth while simultaneously addressing fiscal consideration. 13. Gautam Adani : Chairman- Adani Group The thrust on SEZ Schemes will lead to accelerated investments in the SEZ and help generate employment and I proving infrastructure with SEZs. will 9

10 FINANCE BILL, 2010 AN INTRODUCTION 1. Finance Bill The proposal of government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through this bill. It is the key document as far as taxes are concerned. 2. The provisions of Finance Bill, 2010, in the sphere of direct taxes relate to the following matters:- (i) Prescribing the rates of tax for financial year relevant to assessment year for the purposes of tax deduction at source and for the purpose of computation of advance tax (ii) Amendment of the Income-tax Act, inter-alia, with a view to provide Lower the tax burden on individual taxpayers by widening the tax slabs; Allow small companies to convert into Limited Liability Partnerships without attracting capital gains tax liability; Reduce the compliance burden on small business enterprises by raising the turnover limits beyond which audit is compulsory; Promote investment in Research and Development (R&D) to enhance the competitive ability of the economy. Encourage savings for funding infrastructure by providing a tax deduction on investment in long-term infrastructure bonds; and Simplify and rationalize the provisions relating to Tax Deduction at Source (TDS). 10

11 INCOME TAX PROVISIONS In this chapter, we have dealt with the proposed amendments to Income Tax Act, 1961 by Finance Bill, 2010 (hereinafter referred to as Bill). We have made references from Notes on Clauses and Memorandum explaining the provisions of the Bill. The amendments proposed are many and, therefore, we have made an attempt to put related amendments under one topic head. 1. Effective Dates: Generally, The amendments in income tax provisions are proposed to be effective from 1 st April, 2011 relevant to the assessment year unless otherwise specified. The amendments proposed in procedural section are effective for the proceedings taken on or after the date as specified. The amendments made in substantive sections are effective from the first day of the assessment year from which it is proposed to be effective. 2. Rates of Taxes: There is no increase in basic exemption limit in the case of individuals, Hindu Undivided Family, association of persons and body of individuals. The tax slabs are proposed to be revised and the revised tax table is as under: For senior citizens resident in India. Existing Proposed Taxable income Rate of tax Taxable income Rate of tax Upto 2,40,000 NIL Upto 2,40,000 NIL 2,40,001 to 10% on amount 2,40,001 to 10% on amount 3,00,000 exceeding 2,40,000 5,00,000 exceeding 2,40,000 3,00,001 to Rs. 6,000/- + 20% 5,00,001 to Rs. 26,000/- + 20% 5,00,000 on amount 8,00,000 on amount exceeding 3,00,000 exceeding 5,00,000 5,00,001 and Rs. 46,000/- + 30% 8,00,001 and Rs. 86,000/- + 30% above on amount above on amount exceeding 5,00,000 exceeding 8,00,000 11

12 Women assessee (below age of 65), resident in India Existing Proposed Taxable income Rate of tax Taxable income Rate of tax Upto 1,90,000 NIL Upto 1,90,000 NIL 1,90,001 to 10% on amount 1,90,001 to 10% on amount 3,00,000 exceeding 1,90,000 5,00,000 exceeding 1,90,000 3,00,001 to Rs. 11,000/- + 20% 5,00,001 to Rs. 31,000/- + 20% 5,00,000 on amount 8,00,000 on amount exceeding 3,00,000 exceeding 5,00,000 5,00,001 and Rs. 51,000/- + 30% 8,00,001 and Rs. 91,000/- + 30% above on amount above on amount exceeding 5,00,000 exceeding 8,00,000 Other individuals, HUF, AOP, BOI: Existing Proposed Taxable income Rate of tax Taxable income Rate of tax Upto 1,60,000 NIL Upto 1,60,000 NIL 1,60,001 to 10% on amount 1,60,001 to 10% on amount 3,00,000 exceeding 1,60,000 5,00,000 exceeding 1,60,000 3,00,001 to Rs. 14,000/- + 20% 5,00,001 to Rs. 34,000/- + 20% 5,00,000 on amount 8,00,000 on amount exceeding 3,00,000 exceeding 5,00,000 5,00,001 and Rs. 54,000/- + 30% 8,00,001 and Rs. 94,000/- + 30% above on amount above on amount exceeding 5,00,000 exceeding 8,00, Surcharge and Education Cess: The surcharge on assessees other than companies continues to be NIL. The surcharge on domestic company is reduced and on foreign company it is continued at same rate and subject to same conditions as was applicable for earlier year. The details are as under: Type of assessee Existing Amount above which surcharge will be levied Rs. Rate of surcharge Proposed Amount above which surcharge will be levied Rs. Rate of surcharge Domestic company 100 Lacs 10% 100 Lacs 7.50% Company other than domestic company 100 Lacs 2.50% 100 Lacs 2.50% 12

13 Proposed effective rate of tax for Firms, Company domestic and Company foreign for A.Y and onwards would be as under: Income Surcharge Education Total tax cess % % % % Firm (including LLP) For income upto Rs. 100 Lacs 30 Nil For income exceeding Rs. 100 Lacs 30 Nil Domestic Company For income upto Rs. 100 Lacs 30 Nil For income exceeding Rs. 100 Lacs Company Foreign For income upto Rs. 100 Lacs 40 Nil For income exceeding Rs. 100 Lacs The existing surcharge of 10% in all cases including under sections 115JB, 115O, 115R, etc. is proposed to be reduced to 7.50%. The effective rates under sections 115JB, 115O and 115R would be as under: Particular Section Basic Rate Minimum Alternate Tax 115-JB Surcharge Cess Effective Rate Domestic Company For income upto Rs. 100 Lacs 18% Nil 3% 18.54% For income exceeding Rs. 100 Lacs 18% 7.5% 3% 19.93% Company Foreign For income upto Rs. 100 Lacs 18% Nil 3% 18.54% For income exceeding Rs. 100 Lacs 18% 2.5% 3% 19% 13

14 Particular Section Basic Rate Surcharge Cess Effective Rate Dividend Distribution Tax: On Shares 115-O 15% 7.50% 3% 16.61% On Mutual Funds: 115-R Equity Oriented Nil Nil Nil Nil Money Market or Liquid Fund 25% 7.50% 3% 27.69% Others: Unit Holder is Individual/ HUF Unit Holder is any other person 12.50% 7.50% 3% 13.84% 20% 7.50% 3% 22.15% For Financial Year , the existing cess of 3% continues to remain the same. 4. Tax rates over the generations for individuals: Year Exemption Limit Number of Rates 14 Entry Rate (%) Peak Rate (%) Income At Which Peak Rate Applies , , , ,00, , ,00, , ,00, , ,00, , ,20, , ,50, , ,50, , ,50, , ,50, , ,50, , ,50, , ,50, ,00, ,00, ,10, ,00, ,50, ,00, ,60, ,00, Proposed 1,60, ,00,000 (Source: Times of India)

15 5. Rate of Tax Deduction at Source: 5.1) There is no change in rate of tax deducted at source and the rates as applicable for financial year will continue to apply for financial year ) In case of payment to a company other than domestic company, the amount of tax so deducted shall be increased by a surcharge at the rate of two and one-half percent and education cess of 3% on the amount of tax deducted at source and surcharge. 5.3) In the case of a resident assessee including a domestic company no surcharge and education cess would be levied on the amount of tax deducted at source. However, education cess of 3% would continue to apply on tax deducted at source in the case salary payments. 5.4) The basic threshold limit for deductibility is proposed to be increased w.e.f. 1 st July, 2010 in certain cases, details of which are as under: Sr. No. Section Nature of Payment Existing threshold limit of payment (Rs.) Proposed threshold limit of payment (Rs.) B Winnings from lottery or crossword puzzle 5,000 10, BB Winnings from horse race 2,500 5, C Payment to contractors 20,000 30,000 (for a single (for a single transaction) transaction) 50,000 75,000 (for aggregate (for aggregate of transaction of transaction during financial during financial year) year D Insurance commission 5,000 20, H Commission or brokerage 2,500 5, I Rent 1,20,000 1,80, J Fees for professional or technical services 20,000 30,000 15

16 Table of personal taxation All Individuals other than resident senior citizen and female assessee Pre- Post Savings in Resident Women Assessee other than senior citizen Pre- Post Savings in Taxable Resident Senior Citizen Income Pre- Post Savings in Budget Budget Tax Budget Budget Tax Budget Budget Tax (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) 1,60,000 NIL NIL NIL NIL NIL NIL NIL NIL NIL 1,90,000 3,090 3,090 NIL NIL NIL NIL NIL NIL NIL 2,40,000 8,240 8,240 NIL 5,150 5,150 NIL NIL NIL NIL 3,00,000 14,420 14,420 NIL 11,330 11,330 NIL 6,180 6,180 NIL 4,00,000 35,020 24,720 10,300 31,930 21,630 10,300 26,780 16,480 10,300 5,00,000 55,620 35,020 20,600 52,530 31,930 20,600 47,380 26,780 20,600 7,00,000 1,17,420 76,220 41,200 1,14,330 73,130 41,200 1,09,180 67,980 41,200 8,00,000 1,48,320 96,820 51,500 1,45,230 93,730 51,500 1,40,080 88,580 51,500 10,00,000 2,10,120 1,58,620 51,500 2,07,030 1,55,530 51,500 2,01,880 1,50,380 51,500 15,00,000 3,64,620 3,13,120 51,500 3,61,530 3,10,030 51,500 3,56,380 3,04,880 51,500 20,00,000 5,19,120 4,67,620 51,500 5,16,030 4,64,530 51,500 5,10,880 4,59,380 51,500 25,00,000 6,73,620 6,22,120 51,500 6,70,530 6,19,030 51,500 6,65,380 6,13,880 51,500 50,00,000 14,46,120 13,94,620 51,500 14,43,030 13,91,530 51,500 14,37,880 13,86,380 51,500 75,00,000 22,18,620 21,67,120 51,500 22,15,530 21,64,030 51,500 22,10,380 21,58,880 51,500 1,00,00,000 29,91,120 29,39,620 51,500 29,88,030 29,36,530 51,500 29,82,880 29,31,380 51,500

17 6. Definition of Charitable purpose [Section 2(15)]: Existing Provision Charitable purpose includes relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves 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;] Proposed Amendment It is proposed to amend section 2(15) 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. Originally, the amendment was made by the Finance Act, 2008 with effect from Assessment Year It was provided that the advancement of any other object of general public utility is not a charitable purpose, if it involves 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. This amendment had far reaching implication and now to reduce the hardship to smaller trust, the amendment has been proposed. The proposed amendment will be effective from 1 st April, 2009 and will apply to Assessment year and subsequent assessment years. 7. Income Deemed to Accrue or Arise in India [Section 9]: Section 9 provides for situations where income is deemed to accrue or arise in India. Existing Provision Explanation to sub-section (2) provides as under: For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the Proposed Amendment It is proposed to substitute the said Explanation so as to provide 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 subsection (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or

18 total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.] place of business or business connection in India; or (ii) the non-resident has rendered services in India. Vide Finance Act, 1976, a source rule was provided in the said section through insertion of clauses (v), (vi), and (vii) for income from interest, royalty or fees for technical services. It was provided, inter alia, that in case of payments of interest, royalty or fees for technical services received from a resident payer, income would be deemed to accrue or arise in India, except where the interest or royalty or fees for technical services are relatable to a business or profession carried on by the resident payer outside India or for making or earning any income from any source outside India. The intent of the amendments was elaborated in the Explanatory notes on provisions relating to direct taxes for the Finance Act, 1976 issued vide Circular No.202 dated With respect to source rule for royalty income, it was stated as follows: In view of the aforesaid amendment, royalty income consisting of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, will ordinarily become chargeable to tax in India. Thus, the intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services by way of creating a legal fiction in section 9. Since the source rule for interest and fees for technical services is the same as that for royalty income, the principle as elaborated above is equally applicable to interest and fees for technical services. The source rule would mean that irrespective of the situs of the services, the situs of the payer and the situs of the utilisation of services will determine the tax jurisdiction. Further, section 5, which defines scope of total income, is subject to other provisions of the Act, which would include section 9, and the income deemed to accrue or arise in terms of section 9 gets covered under section 5. Income does not have to actually accrue or arise in India to be deemed to accrue or arise in India. Legislative intent for introduction of clauses (v), (vi) and (vii) was to give legal sanctity to the source rule. This source rule is also recognised in India s Double Taxation Avoidance Agreements. Thereafter, Hon ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. reported in 288 ITR 408 has held that despite the deeming fiction in the said section, for any such deemed income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It has been held that where any sum is payable to a non-resident by a resident, the deeming sweep of the said section cannot bring to tax, any income of a non-resident received outside India from Indian concerns for services rendered outside India. In regard to fees for technical services, it has been specifically held that for the fees to be taxable in India, the services have not only to be utilised in a business in India, but also have to be rendered in India. 18

19 To supercede the judgement in Ishikawajima, an Explanation was inserted in section 9 by Finance Act, 2007 to specifically reaffirm the source rule provided in that section, to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) or (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 was made effective retrospectively from 1st June, The drafting of the explanation was not that good and has left room open to argue that the decision in the case of Ishikawajima is still a good law. The Karnataka High Court, in the case of Jindal Thermal Power Company Ltd. vs DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under section 9. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme Court in its judgement in the case of Ishikawajima-Harima Heavy Industries Ltd.(supra) remains untouched and unaffected by the Explanation. Similar view was taken by Bombay High Court in the case of Clifford Chance reported in 318 ITR 237 (Bom). The Authority for Advance Ruling (AAR) in Worley Parsons Services Pty. Ltd. (AAR) reported in 312 ITR 273 observed that Ishikawajima had wrongly referred to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two dealt with different situations. It also noted that the Supreme Court had stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word rendered was not to be found even in the inapplicable clause (c). It also noted that the law was that a decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi though it finally found a way to distinguish Ishikawajima. The Finance Bill 2010 now seeks to substitute the said Explanation by the following Explanation: Explanation. For the removal of doubts, it is hereby declared that for the purposes of this section, 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) and shall be included in the total income of the nonresident, whether or not, (i) (ii) the non-resident has a residence or place of business or business connection in India; or the non-resident has rendered services in India.. This amendment is proposed to take effect, retrospectively, from 1 st June, 1976 and will, accordingly, apply in relation to the assessment year and subsequent years. 19

20 8. Computation of Exempted Profits in case of Units in SEZ [Section 10AA] Section 10AA was inserted in the Income-tax Act by the Special Economic Zone Act, 2005 with effect from Through the Finance (No.2) Act, 2009, section 10AA(7) of the Income-tax Act, 1961 was amended and the words "by the undertaking" were substituted for "by the assessee" with effect from assessment year and subsequent assessment years. This was done as the existing formula was perceived to be discriminatory in so far as those assessees are concerned who have multiple units in both the SEZ and the domestic tariff area (DTA) vis-a-vis those assessees who were having units in only the SEZ. With a view to removing the anomaly, the provisions of sub-section (7) of section 10AA of the Income-tax Act were amended. In order to make the amendment effective for earlier years, it is proposed, by inserting a proviso to sub-section (7), to provide that the provision of sub-section (7), as amended by Finance (No. 2) Act 2009, will apply to the assessment year and subsequent assessment years. 9. Cancellation of Registration obtained under section 12A [Section 12AA(3)]: Existing Provision Under the existing provision contained in sub-section (3) of the aforesaid section, if the activities of the trust or institution referred to in sub-section (1), which has been granted registration under sub-section (1), are not genuine or are not being carried out in accordance with the objects of the trust or institution, the Commissioner shall, after giving a reasonable opportunity of being heard to the said trust or institution, pass an order in writing cancelling the registration granted under clause (b) of sub-section (1). Proposed Amendment It is proposed to amend the said subsection (3) so as to also provide for cancellation of registration where any trust or institution has obtained registration at any time under section 12A before its amendment. Section 12AA provides the procedure relating to registration of a trust or institution engaged in charitable activities. Section 12AA(3) currently provides that if the activities of the trust or institution are found to be non-genuine or its activities are not in accordance with the objects for which such trust or institution was established, the registration granted under section 12AA can be cancelled by the Commissioner after providing the trust or institution an opportunity of being heard. However, the provision is silent for cancellation of registration, where the registration is granted u/s. 12A. This was unintended omission of powers of the CIT to cancel registration and accordingly amendments have been proposed to enabling the CIT to cancel registration even in cases where the original registration is granted u/s 12A of the Act. This amendment is proposed to take effect from 1st June

21 10. Weighted Deduction for Scientific Research and Development [Sections 35, 10(21), 80GGA]: Section 35 of the Income Tax Act, 1961 provides for deduction in respect of expenditure on research and development. It is proposed to increase the scope and quantum of deduction. Increase in quantum of deduction: Contribution to - Nature of Deduction Existing Weighted Deduction Proposed Weighted Deduction Approved scientific research association for scientific research [Section 35(1)(ii)] Approved University, College or other institution for scientific research [Section 35(1)(ii)] Approved national laboratory or a university or Indian Institute of Technology or a specified person for scientific research undertaken under an approved programme [Section 35(2AA)] Expenditure on scientific research on an approved inhouse research and development facility (not being expenditure in the nature of cost of land or building) [Section 35(2AB)] 125% 175% 125% 175% 125% 175% 150% 200% Finance (No. 2) Act, 2009 increased the scope of section 35(2AB) by allowing deduction to all businesses engaged in the manufacturing or production of article or thing except those specified in the Eleventh Schedule [Eleventh Schedule gives list of non-priority articles and things]. Now this Bill proposes to enhance the quantum of deduction from 150% to 200%. This is a clear message for promoting research and development in all sectors of economy. The Hon ble Finance Minister in his speech has stated that The President, in her address to the Parliament in June 2009, had declared this decade as the Decade of Innovation. Last year, I extended the scope of weighted deduction on expenditure incurred on in-house research and development (R & D) to all manufacturing businesses except for a small negative list. To further encourage R & D across all the sectors of the economy, I now propose to enhance the weighted deduction on expenditure incurred on in-house R & D from 150% to 200% 21

22 Increase in scope of deduction Presently, weighted deduction of 125% is available in respect of payments made to a university, college or other institution to be used for research in social science or statistical research. This deduction is now also proposed to be extended to any research association having social science or statistical research as their objects. It also proposes to amend section.10(21) so as to provide exemption to such associations in respect of their income. This exemption will be subject to the conditions under which an approved research association undertaking scientific research is entitled to exemption in respect of such income. An amendment to include allowability of deduction for donations under 80GGA made to such associations is also proposed. These amendments are proposed to take effect from 1 st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. 11. Incentive for Specified Business [Sections 35AD, 80A]: A new section 35AD was inserted by Finance (No. 2) Act, 2009 in respect of expenditure on specified business. The amendment provides that an assessee shall be allowed a deduction in respect of the whole of an expenditure of a capital nature incurred, wholly and exclusively for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. Following three amendments are now proposed in this section: i) Existing Provision Proposed Amendment That the deduction is available to following specified business: (a) setting up and operating cold chain facilities for specified products; (b) setting up and operating warehousing facilities for storage of agricultural produce; It is proposed to extend the benefit of this section to business of building and operating, a new hotel of two star or above category, anywhere in India, which start functioning after 1 st April, (c) laying and operating a crosscountry natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. Such deduction is also subject to the following conditions: a) Such business is not set up by splitting up, or the reconstruction, of a business in already in existence. 22

23 b) Such business is not set up by transfer of machinery or plant previously used for any purpose. However the assessee may use imported second hand plant machinery subject to certain specified conditions. ii) One of the conditions for availing the benefit under section 35AD in the case of laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network, is that the specified business 'has made not less than onethird of its total pipeline capacity available for use on common carrier basis by any person other than the assessee or an associated person'. The Petroleum & Natural Gas Regulatory Board has, by regulations, specified a common carrier capacity condition of 'one-third' for a natural gas pipeline network and 'onefourth' for petroleum product pipeline network. In order to rationalise the existing condition regarding common carrier capacity, it is proposed to amend sub-section (2) of section 35AD to provide that the proportion of the total pipeline capacity to be made available for use on common carrier basis should be as specified by the said regulations. iii) Existing Provision Proposed Amendment The existing provisions contained in Sub-clause (b) proposes to substitute subsection (3) of the aforesaid section so as sub-section (3) of the aforesaid section 35AD provide that the assessee shall not to provide that where a deduction under be allowed any deduction in respect of this section is claimed and allowed in the specified business under the respect of the specified business for any provisions of Chapter VI-A under the assessment year, no deduction shall be heading "C.-Deductions in respect allowed under the provisions of Chapter of certain incomes". VI-A under the heading "C.-Deductions in respect of certain incomes" in relation to such specified business for the same or any other assessment year. The Hon ble Finance Minister in his budget speech has stated that In my Budget Speech last year, I stated that profit linked deductions are inherently inefficient and liable to misuse. To incentivise businesses in priority sectors, I introduced investment linked deduction as an alternative to profit linked deduction. To give a boost to investment in the tourism sector which has high employment potential, I propose to extend the benefit of investment linked deduction under the Act to new hotels of two-star category and above anywhere in India. Amongst others, the following existing provisions of section 35AD needs to be considered while putting up the new hotel project: a) It may be mentioned that Section 35AD introduces the investment linked deductions, wherein, the entire capital expenditure (other than land, goodwill and financial instruments) is eligible for expenditure in the very year in which such expenditure is incurred. The set off of the losses of such businesses are not allowed against any other business. The losses arising in this business is not allowed as set off against income under any other source / head of income 23

24 but is allowed to be carried forward indefinitely for setting off against the profits arising from such business only u/s. 73A of the Act. b) On combined reading of section 35AD and provisions of MAT (Section 115JB) the company assessee in such cases would be liable to pay MAT even though under normal computation he will get 100% of capital expenditure as a deduction. Thus, the company assessee would continue to pay MAT at the rate of 18.54%/19.93%. The similar amendment is proposed in section 80A of the Act. Existing Provision The existing provisions contained in the aforesaid section provide that the aggregate amount of deductions in computing the total income shall not, in any case, exceed the gross total income of the assessee. Proposed Amendment It is proposed to amend the aforesaid section so as to insert a new sub-section (7) to provide that where a deduction under any provision of this Chapter under the heading "C.- Deductions in respect of certain incomes" is claimed and allowed in respect of profits of any of the specified business referred to in clause (c) of sub-section (8) of section 35AD for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year. This amendment is proposed to take effect retrospectively from 1 st April, 2010 and will, accordingly, apply in relation to the assessment year and subsequent years. 12. Disallowance of Expenditure on Account of Non-Compliance with TDS Provisions [Sections 40(a)(ia), 201(1A)]: Existing Provision 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 (any time before March 1 of the previous year) 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. Proposed Amendment It is proposed to amend the said section 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

25 This amendment is proposed to take effect retrospectively from 1 st April, 2010 and will, accordingly, apply in relation to the assessment year and subsequent years. Under the existing provisions of section 201(1A) of the Act, a person is liable to pay simple interest at one percent for every month or part of month in case of failure to deduct tax or payment of tax after deduction. It is now proposed to increase the rate of interest for non-payment of tax after deduction from the present one percent to one and one-half percent for every month or part of month. This amendment is proposed to take effect from 1st July, Thus, if the TDS for any month of the previous year is paid before the due date of filing of the return of income, then there will be no underlying disallowance of the expense. However, the assessee has to pay interest at the increased rate of 1.50% per month or part thereof. However, the rate of interest will remain same at 1% for the cases of non-deduction of taxes. 13. Applicability of Tax Audit [Sections 44AB, 44AD, 271B]: Existing Provision The existing provisions contained in clause (a) of the aforesaid section make it obligatory for every person carrying on business to get his accounts of any previous year relevant to the assessment year audited by an accountant before the specified date if the total sales, turnover or gross receipts in business for the previous year exceeds forty lakh rupees. The existing provisions contained in clause (b) of the aforesaid section make it obligatory for every person carrying on profession to get his accounts of any previous year relevant to the assessment year audited by an accountant before the said specified date if his gross receipts in profession for the previous year exceed ten lakh rupees. Proposed Amendment It is proposed to enhance the said limit from forty lakh rupees to sixty lakh rupees. It is proposed to enhance the said limit from ten lakh rupees to fifteen lakh rupees. The provisions of Tax Audit were introduced by Finance Act, The turnover / gross receipts limits for applicability of tax audit prescribed in 1984 continue till date. It is now proposed to increase the same. 25

26 The following amendment is proposed in penalty proceedings u/s 271B of the Act. Existing Provision The existing provisions contained in the aforesaid section provide that if any person fails to get his accounts audited in respect of any previous year relevant to an assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may impose a penalty equal to one-half percent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or a sum of one lakh rupees, whichever is less. Proposed Amendment It is proposed to enhance the said limit from one lakh rupees to one lakh fifty thousand rupees. The turnover limit for tax audit is increased by 50% and accordingly, penalty is also increased for non compliance by 50%. TDS obligations under following sections are applicable to an individual or HUF whose total sales, gross receipts or turnover from the business or profession carried on by them exceed the monitory limit specified under clause (a) or (b) of section 44AB during the financial year immediately preceding the financial year in which such expense is credited or paid: 194A (interest other than interest on securities) 194C (payment to contractors) 194H (commission or brokerage) 194I (rent) 194J (professional fees) Thus, if a total sales / gross receipts of an individual / HUF exceeds Rs. 40 lakhs / Rs. 10 lakhs in the Financial Year ended 31 st March, 2010, then such individual / HUF will have to comply the TDS obligation for the year ending 31 st March, If the total sales / gross receipts is less than Rs. 60 lakhs / Rs. 15 lakhs in financial year ending 31 st March, 2011, then they will not be required to comply with the TDS obligation in the financial year starting 1 st April, Also an amendment is proposed in Section 44AD of the Act. This section deals with presumptive taxation for an eligible business. The eligible business is defined to mean any business except the business of plying, hiring or leasing goods carriages and whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 40 lakhs. The limit of Rs. 40 lakhs is increased to Rs. 60 lakhs. These amendments are proposed to take effect from 1 st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. 26

27 14. Income of a non-resident providing services or facilities in connection with prospecting for, or extraction or production of, mineral oil [Section 44BB, 44DA]: Existing Provision Income of a non-resident assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils is computed at ten percent of the aggregate of the amounts paid or payable to the assessee or to any person on his behalf, whether in or out of India on account of the provisions of such services and facilities. The proviso to the said subsection provides that the said subsection shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. The existing section 44DA provides the procedure for computing income by way of royalty or fees for technical services, in case the right, property or contract giving rise to such income are effectively connected with the permanent establishment of the nonresident, through which business is carried out in India. Proposed Amendment It is proposed to insert the reference of "section 44DA" in the proviso to the said sub-section (1) so as to clarify that the provisions of section 44BB shall also not apply in case where the provisions of section 44DA become applicable. It is proposed to insert a second proviso to the said section so as to clarify that the provisions of section 44BB shall not apply in respect of income referred to in the aforesaid section 44DA. Under the existing provisions contained in section 44BB(1) of the Income-tax Act, income of a non-resident taxpayer who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils is computed at ten percent of the aggregate of the amounts paid. Section 44DA provides the procedure for computing income of a non-resident, including a foreign company, by way of royalty or fee for technical services, in case the right, property or contract giving rise to such income are effectively connected with the permanent establishment of the said non-resident. This income is computed as per the books of account maintained by the assessee. Section 115A provides the rate of taxation in respect of income of a non-resident, including a foreign company, in the nature of royalty or fee for technical services, 27

28 other than the income referred to in section 44DA i.e., income in the nature of royalty and fee for technical services which is not connected with the permanent establishment of the non-resident. The Advance Ruling Authority in matter of Geofizyka Torun Sp. Zo. O. in Re [AAR no. 813 of 2009] and Seabird Exploration FZ LLC [AAR No. 815 of 2009] and also in other cases has given the ruling that since Sec 44BB is more specific provision it should prevail over section 44DA for the purpose of computation of such Income. The Finance Bill, 2010 with the intent of clarifying the issue, proposes to amend the provisions of both the sections in such a way that when a non-resident has income from Fees for technical services or Royalties and has a PE in India his income shall be computed with respect to the royalty and fees for technical services in accordance with Section 44DA only. The memorandum explains the reasons for the proposed amendment as under: Combined effect of the provisions of sections 44BB, 44DA and 115A is that if the income of a non-resident is in the nature of fee for technical services, it shall be taxable under the provisions of either section 44DA or section 115A irrespective of the business to which it relates. Section 44BB applies only in a case where consideration is for services and other facilities relating to exploration activity, which are not in the nature of technical services. However, owing to judicial pronouncements, doubts have been raised regarding the scope of section 44BB vis-avis section 44DA as to whether fee for technical services relating to the exploration sector would also be covered under the presumptive taxation provisions of section 44BB. In order to remove doubts and clarify the distinct scheme of taxation of income by way of fee for technical services, it is proposed to amend the proviso to section 44BB so as to exclude the applicability of section 44BB to the income which is covered under section 44DA. Similarly, section 44DA is also proposed to be amended to provide that provisions of section 44BB shall not apply to the income covered under section 44DA. This proposed amendment will increase the tax payable by the assessee. Under section 44BB, the 10% of the gross receipts will be treated as income and considering the rate of tax applicable to the foreign company, the effective rate of tax would be 4.22% of the gross amount. However, u/s 115A, it will be taxed at the rate of 10% of the gross receipts. These amendments are proposed to take effect from 1st April 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. 15. Conversion of Private Limited Company into Limited Liability Partnership [Sections 47(xiiib), 32, 35DDA, 43]: The Limited Liability Partnership Act, 2008 has come into effect in The Rules have been notified. 28

29 The Finance (No.2) Act, 2009 enacted the provisions regarding taxation of Limited Liability Partnership (hereinafter referred to as LLP). A LLP and general partnership is accorded the same tax treatment. The Finance Bill, 2010, proposes to enact provisions regarding tax implications on conversion of a Private Limited Company or an unlisted Public Company into LLP. Before we come to tax provisions, let us first study what are provisions under LLP Act in respect of such conversion. A. Provisions under Limited Liability Partnership Act, 2008 : i) Definitions : Private Company Private company as defined in clause (iii) of Sub-section (1) of the section 3 of the Companies Act, 1956 Unlisted Public Company a company which is not a listed company. ii) Eligibility to Convert : A Private Limited Company or Unlisted Company herein after called as Company may apply to convert into LLP if, a) There are no security interest in its assets subsisting or in force at the time of application And b) All the shareholders of the company and no one else are going to be the partners of the LLP. Thus, if a company has given its assets as security for any loan, advance etc, it is not eligible for conversion into a LLP. Also, only shareholders should become the partners and no other person is entitled to become a partner in LLP. iii) Procedure: A Company has to apply in Form 18 for conversion of company into LLP. Following are the attachments, required to be submitted with Form Consent of each of the shareholder in the format given in Form Incorporation Document in Form 2 3. Form 3 Application & Declaration for incorporation of LLP 4. Clearance/No Objection Certificate from Tax Authorities. 5. Statement of Assets and Liabilities of the Company 6. List of all the creditors along with their consent 7. Approval from any other authority 8. Authorization to make declaration 9. Optional attachments (if any) 29

30 iv) Effects of Conversion from Company into LLP: a. Company shall be deemed to be dissolved. b. Removal of name from the register of ROC c. All properties, assets, liabilities, interest, rights, privileges, obligations are transferred to LLP d. Conversion does not affect the existing liabilities, obligations, agreements, contracts & continuation of employment. e. LLP shall replace the company in the following cases: Pending proceedings by /or against the company Any conviction, ruling, judgement or order in favour or against the company Any appointment, authority or power of the company f. If the properties are registered with the concerned authorities, then to inform the authorities in prescribed form. g. If registration for conversion is refused by the registrar, company may file appeal before the Tribunal. h. Any approval, permit or license issued under any written law to the company which is in force before the date of conversion will not be transferred automatically to the LLP. It has to study terms of the license regarding the transfer of the license to the LLP. i. LLP shall ensure that for period of twelve months commencing not later than 14 days after the date of registration, every official correspondence of the LLP bears the following, namely: A statement that it was, as from the date of registration, converted from a company into a limited liability partnership and The name of registration number of the company from which it was converted If contravened, fine shall be levied not less than Rs.10,000/- which may extend to Rs. 1 lakh and further fine shall be levied not less than Rs. 50/- per day which may extend to Rs. 500/- per day for every day after which the default continues. 30

31 B. Proposals under Finance Bill,2010 : A new clause (xiiib) be inserted in Section 47 which provides that any transfer of a capital asset or intangible asset by a company shall not be treated as transfer under section 45 where a private company or unlisted public company (hereafter in this clause referred to as the company) is converted into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, This amendment will take effect from 1 st April, This is subject to compliance with following conditions: a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership; b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion; c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership; d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty percent at any time during the period of five years from the date of conversion; e) the total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. Explanation. For the purposes of this clause, the expressions private company and unlisted public company shall have the meanings respectively assigned to them in the LLP Act, 2008 A new clause (4) be inserted in section 47A to provide that 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. 31

32 It is also proposed to allow carry forward and set-off of business loss and unabsorbed depreciation to the successor LLP, which fulfills the above mentioned conditions. It is also proposed that 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. It is also proposed that provisions relating to the amortization of expenditure incurred under voluntary retirement scheme shall apply to successor limited liability partnership as they would have applied to the predecessor company. It is also proposed that the actual cost of capital assets on which deduction has been allowed under section 35AD to the predecessor company shall be taken as 'nil' in case of the successor limited liability partnership. It is further proposed that 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. It is also provided that 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. It is proposed to clarify that the tax credit under section 115JAA (MAT credit) shall not be allowed to the successor LLP. These amendments are proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. The proposed amendments are workable for conversion of smaller companies into LLP. The reason for this are Condition of total sales, turnover or gross receipts in business of the company shall not exceed Rs. 60 lakhs prescribed under the Income Tax Act; and Condition of no security of assets against any loans or advances prescribed under LLP Act, Taxation of Gifts [Section 56(2)]: Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000/-) by an individual or an HUF is chargeable to income tax in the hands of recipient under the head 'income from other sources'. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision. 32

33 The existing definition of property for the purposes of section 56(2)(vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art. The development of law in this respect is as under: The gift tax was introduced in Finance (No.2) Act, 1998, repealed the Gift Tax Act by providing that no gift tax shall be levied for any gift made on or after 1st day of October, The Finance (No. 2) Act, 2004, brought in taxation on gifts in the hands of donee and new clause (v) in section 56(2) was inserted, which provided for taxation of any sum of money exceeding Rs. 25,000/- received without consideration by individual or HUF from any person on or after 1 st September, The Taxation Laws (Amendment) Act, 2006 inserted new clause (vi) in section 56(2) in place of earlier clause (v). This clause provided for taxation of any some of money exceeding Rs. 50,000/- received without consideration by individual or HUF from any person on or after 1 st September, Finance (No. 2) Act, 2009 substantially changed the scheme of such taxation. This introduced clause (vii) in section 56(2) in place of earlier clause (vi). The newly inserted clause provided that the value of any property received without consideration or for inadequate consideration will also be included in the computation of total income of the recipient. Such properties will include immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. Finance Bill, 2010 is proposing to further enhance the scope of taxation of gifts. Five major amendments are proposed in this regard, which are discussed hereinafter. The proposed amendments are as under: a) Currently these provisions are applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract any taxation. It is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested). Section 2(18) provides the definition of a company in which the public are substantially interested. 33

34 It is also proposed to exclude the transactions undertaken for business reorganization, amalgamation and demerger which are not regarded as transfer under clauses (via), (vic), (vicb), (vid) and (vii) of section 47 of the Act. Consequential amendments are proposed in (i) (ii) section 2(24), to include the value of such shares in the definition of income; section 49, to provide that the cost of acquisition of such shares will be the value which has been taken into account and has been subjected to tax under the provisions of section 56 (2). These amendments are proposed to take effect from 1st June 2010 and will, accordingly, apply in relation to the assessment year and subsequent years. b) It is proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the 'property' which is in the nature of a capital asset of the recipient and, therefore, would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient. c) It is proposed to amend clause (vii) of section 56(2) so as to provide that it would apply only if the immovable property is received without any consideration and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property. These amendments are proposed to take effect retrospectively from 1st October, 2009 and will, accordingly, apply in relation to the assessment year and subsequent years. d) It is proposed to amend the definition of 'property' as provided under section 56 so as to include transactions in respect of 'bullion'. This amendment is proposed to take effect from 1st June, 2010 and will, accordingly, apply in relation to the assessment year and subsequent years. e) It is proposed to amend section 142A(1) to allow the Assessing Officer to make a reference to the Valuation Officer for an estimate of the value of property for the purposes of section 56(2). This amendment is proposed to take effect from 1st July, Deduction in Respect of Long Term Infrastructure Bonds [Section 80CCF]: It is proposed to insert a new section so as to provide that a sum of rupees twenty thousand be allowed as a specific deduction in computing the total income of an assessee being an individual or a Hindu undivided family if such sum is paid or deposited at any time during the previous year relevant to the assessment year 34

35 beginning on 1st April, 2011 as subscription to long-term infrastructure bonds as may be notified by the Central Government. This deduction will be over and above the existing overall limit of tax deduction on savings of upto Rs. 1 lakh under section 80C, 80CCC and 80CCD of the Act. This amendment will take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year Deduction in respect of contribution to the Central Government Health Scheme [Section 80D]: Existing Provision Deduction in respect of premium paid towards a health insurance policy upto 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. The deduction is enhanced to Rs. 20,000 in both cases if the person insured is of age of 65 years or above. Proposed Amendment It is proposed to also allow deduction in respect of any contribution made to CGHS by including such contribution under the provisions of section 80D. 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 and therefore, this amendment is proposed. The deduction will be limited to the current aggregate as mentioned in the section. This amendment is proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. 19. Deduction for Developing and Building Housing Projects [Section 80IB(10)]: Under the existing provisions of section 80-IB(10), 100 percent deduction is available in respect of profits derived by an undertaking from developing and building housing projects approved by a local authority before This benefit is available subject to compliance of certain conditions. The amendment is proposed giving relaxation in respect of these conditions: Existing Provision 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. Proposed Amendment It is proposed to increase period of 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 st April,

36 The built-up area of the shops and other commercial establishments included in the housing project should not exceed 5 percent of the total built-up area of the housing project or 2,000 sq.ft. whichever is less. It is proposed that the built-up area of the shops and other commercial establishments included in the housing project be three percent 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 st April, 2005, which are pending for completion, in respect of their income relating to assessment year and subsequent years. These amendments are proposed to take effect retrospectively from 1st April, 2010 and will, accordingly, apply in relation to the assessment year and subsequent years. 20. Deduction of Profits of a Hotel or a Convention Centre in the National Capital Territory [Sections 80-ID]: Section 80-ID of the Income-tax Act provides for 100 percent deduction for five years, of profits derived by an undertaking from the business of a two-star, three-star or four-star category hotel or from the business of building, owning and operating a convention centre located in the National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad. Deduction is available, provided such hotel has started functioning or such convention centre is constructed during the specified period. It is proposed to give some relaxation in respect of such specified period. Existing Provision The existing clause (i) of sub-section (2) of the aforesaid section provides that the provisions of the said section apply to any undertaking engaged in the business of hotel located in the specified area, if such hotel is constructed and has started or starts functioning at any time during the period beginning on 1st April, 2007 and ending on 31st March, The existing clause (ii) of subsection (2) of the aforesaid section provides that the provisions of the said section apply to any undertaking engaged in the business of building, owning and operating a convention centre, located in the specified area, if such convention Proposed Amendment It is proposed to extend the said period up to 31st July, It is proposed to extend the said period up to 31st July,

37 centre is constructed at any time during the period beginning on 1st April, 2007 and ending on 31st March, To provide some more time for these facilities to be set up in light of the Commonwealth Games in October, 2010, it is proposed to amend clauses (i) and (ii) of section 80-ID to extend the date by which the hotel has to start functioning or the convention centre has to be constructed, from the present 31st March, 2010 to 31st July, This amendment is proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. 21. Minimum Alternate Tax (MAT) [Section 115-JB]: Existing Provision Under the existing provisions contained in subsection (1) of the aforesaid section in case of a company, if the tax payable on the total income as computed under the Income-tax Act in respect of any previous year relevant to the assessment year commencing on or after 1st April, 2010, is less than fifteen percent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be fifteen percent of such book profit. Proposed Amendment It is proposed to amend subsection (1) of section 115JB to increase the MAT rate to eighteen percent from the existing fifteen percent. This amendment is proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. The amount of tax paid under section 115JB is continued to be allowed to be carried forward and set off against tax payable upto the tenth assessment year immediately succeeding the assessment year in which tax credit becomes allowable under the provisions of section 115JAA. The concept of MAT was introduced in fiscal 1998 and thereafter, there has been an increase in the rate of MAT. Period Rate of MAT Tax Upto % % % 2011 (Proposed) 18% The increase in MAT is not found favour in many corners of the industry. 37

38 Impact on the major industries would be as under: Impact of change in MAT Current Corp. Tax (Rs.) Revised Tax Liability (Rs.) Rs. In Cr Difference (Rs.) Reliance Ind. 1, , Bharti Airtel , Infosys 1, , TCS , Reliance infra Idea Cellular Cipla Glenmark Pharma GMR Infracture GVK Powere & Infra Alok Industries (Source The Economic Times, dated 27 th February, 2010) 22. Centralized Processing of Returns [Sections 115WE, 143(1B)]: The limit for issue of notification for giving effect to the scheme of centralize processing of returns extended upto 31 st March, Provisions relating to Tax Deducted at Source [Sections 194B, 194BB, 194C, 194D, 194H, 194I, 194J]: Under the scheme of deduction of tax at source as provided in the Income-tax Act, every person responsible for payment of any specified sum to any person is required to deduct tax at source at the prescribed rate and deposit it with the Central Government within the specified time. However, no deduction is required to be made if the payments do not exceed prescribed threshold limits. It is proposed to raise the threshold limits, details of which are given in Para 5.4 above. It is explained in the memorandum that the amendment is proposed to adjust for inflation and also to reduce the compliance burden of deductors and taxpayers. These amendments are proposed to take effect from 1st July, Certificate of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) [Sections 203, 206C]: The requirement of issuing TDS/TCS certificate to deductee/collectee is continued even after 1 st April,

39 25. Settlement Commission [Sections 245A, 245C, 245D] [Sections 22A, 22C of the Wealth Tax Act]: The conditions for filing of an application before the Settlement Commission and the time for disposal of an application by the Settlement Commission are proposed to be modified. Three sets of amendments are proposed. The proposed amendments are as under: a) Application can now be filed before the settlement commission in cases where the assessment or reassessment proceedings are initiated from search or as a result of requisition of books of account or other documents or any asset. Existing Provision Under the existing provisions contained in clause (b) of the aforesaid section, the expression "case" means any proceeding for assessment of any person in respect of any assessment year or assessment years which may be pending before an Assessing Officer on the date on which an application under sub-section (1) of section 245C is made. It, inter alia, provides that a proceeding of assessment or reassessment for any of the assessment years referred to in clause (b) of sub-section (1) of section 153A and, in clause (b) of sub-section (1) of section 153B, in case of a person referred to in section 153A or section 153C, shall not be a proceeding for assessment for the purposes of this clause. Proposed Amendment It is proposed to omit clauses (ii) and (iii) of the proviso to clause (b) of the aforesaid section so as to include within the definition of "case", a proceeding for assessment or reassessment referred to in clause (b) of subsection (1) of section 153A, and clause (b) of sub-section (1) of section 153B, in case of a person referred to in section 153A or section 153C. b) The limit of the additional amount of income tax payable on the income disclosed in the application to the settlement commission is proposed to be revised as under: Particulars Existing Limit Revised Limit In cases where assessment is initiated as a result of search or as a result of requisition of books of accounts etc N.A. Exceeds Rs. 50 lakhs In any other case Exceeds Rs. 3 lakhs Exceeds Rs. 10 lakhs c) Time limits for passing of order by the Settlement Commission are proposed to be as under: In respect of application made after 1 st July, 2007 but before 1 st June, 2010 Within a period of 12 months from the end of the month in which the application is made In respect of application made after 1st June, 2010 Within a period of 18 months from the end of the month in which the application is made. 39

40 Similar provisions are proposed to be made applicable under the Wealth Tax Act. The above amendments are proposed to be made effective from 1 st June, Power of the High Court to Condone Delay in Filing of Appeals [Sections 256, 260A] [Section 27 and 27A of the Wealth Tax Act]: It is proposed retrospectively insert sub-section (2A) in section 260A of the Incometax Act to specifically empower the High Court to admit an appeal after the expiry of the period of one hundred and twenty days, if it is satisfied that there was sufficient cause for not filing the appeal within such period. Similarly, a new sub-section (2A) in section 256 is proposed to be inserted to empower the High Court to admit an application after the expiry of the period of six months, if it is satisfied that there was sufficient cause for not filing the same within such period. Consequential amendments on similar lines are also proposed to be made in section 27 and 27A of the Wealth Tax Act, The amendments to section 260A of the Income Tax Act, 1961 and section 27A of Wealth Tax Act is proposed to take effect retrospectively from 1 st October, The amendments to section 256 of the Income Tax Act, 1961 and section 27 of Wealth Tax Act is proposed to take effect retrospectively from 1 st June, Document Identification Number [Section 282B] Section 282B (Allotment of Document Identification Number) is a new section inserted by the Finance (No. 2) Act, 2009 in the Income-tax Act with effect from 1st October, Under the provisions of this section, an income-tax authority is required to allot a computer generated Document Identification Number before issue of every notice, order, letter or any correspondence to any other income-tax authority or assessee or any other person and such number shall be quoted thereon. It also provides that every document, letter, correspondence received by an income-tax authority or on behalf of such authority, shall be accepted only after allotting and quoting of a computer generated Document Identification Number. It is proposed to amend the provisions of section 282B so as to provide that Document Identification Number will be required to be issued on or after 1st July, This amendment is proposed to take effect from 1st October, Taxation of Income of non-life insurance business [Rule 5 of First Schedule] Section 44 read with the First Schedule to the Income-tax Act provides the scheme of computation of income of insurance companies. According to Rule 5 of the said Schedule, the income of non-life insurance business is taken as 'profit before tax and appropriations' as per the profit and loss account of the company, prepared in 40

41 accordance with the regulations made by the Insurance Regulatory Development Authority (IRDA), subject to certain adjustments. The Finance (No. 2) Act, 2009 amended the First Schedule to provide that in case of non-life insurance business, appreciation of or gains on realisation of investments taken credit for in the accounts shall be treated as income and be included in the computation of the total income. The appreciation in the value of investments, being in the nature of unrealized gain is not taken into account for determining profit or loss of non-life insurance business as per the IRDA regulations. It is, therefore, proposed that the unrealized gains due to appreciation in the value of investments will not be included in the total income. Similarly, deduction will not be allowed for provision for losses due to diminution in the value of investments as this is not a realized loss. It has also been provided that any gain or loss on realisation of investments shall be added or deducted for the purpose of computation of the total income, if the same is not already credited or debited in the profit and loss account. This amendment is proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent years. 29. Proposed Amendments to Wealth Tax Act, 1956: It is proposed to amend sections 22A and 22D of the Wealth Tax Act, 1957 on the similar lines as amendments to provisions relating to settlement commission under Income Tax Act, It is proposed to amend sections 27 and 27A of the Wealth Tax Act, 1957 on the similar lines as amendments to provisions relating to power of the High Court to condone delay in filing of appeals under Income Tax Act, Other Proposals: The Hon ble Finance Minister in his Budget Speech made announcement for following proposals: a) As a part of Government's initiative to move towards citizen centric governance, the income tax department has introduced "Sevottam", a pilot project at Pune, Kochi and Chandigarh through Aayakar Seva Kendras. These provide a single window system for registration of all applications including those for redressal of grievances as well as paper returns. This year the scheme will be extended to four more cities. b) I mentioned last year, that the income tax return forms should be simple and user friendly. The income tax department is now ready to notify SARAL-II form for individual salaried taxpayers for the coming assessment year. This form will enable individuals to enter relevant details in a simple format in only two pages. 41

42 c) Last year, amendments to the statute enabled Government to enter into tax treaties with specified territories besides sovereign states. We have commenced bi-lateral discussions to enhance the exchange of bank related and other information to effectively track tax evasion and identify undisclosed assets of resident Indians lying abroad. d) We have continued on the path of computerisation in core areas of service delivery in the administration of direct taxes. This will reduce the physical interface between taxpayers and tax administration and speed up procedures and processes. The Centralised Processing Centre at Bengaluru is now fully functional and is processing around 20,000 returns daily. This initiative will be taken forward by setting up two more Centres during the year. 42

43 SERVICE TAX 1. Notification No. 1/2010 dated 19 th February, 2010 has provided that Where an assessee has paid a total service tax of Rs. 10 lakhs or more including the amount paid by utilizations of CENVAT credit, in the preceding financial year- He shall deposit the service tax liable to be paid by him electronically, through internet banking. He shall file the return electronically The above will come in force from 1 st April, The Finance Bill 2010 has proposed following amendments I. SERVICE TAX IS BEING IMPOSED ON THE FOLLOWING SPECIFIED SERVICES: 1) Service of permitting commercial use or exploitation of any event organized by a person or organization. 2) The existing taxable service 'Intellectual Property Right (IPR)' excludes copyright from its scope. Copyrights on (a) cinematographic films and (b) sound recording are being brought under the ambit of service tax. However, copyright on original literary, dramatic, musical and artistic work would continue to remain outside the scope of service tax. 3) Service tax on the following health services: (a) (b) health check up undertaken by hospitals or medical establishments for the employees of business entities; and health services provided under health insurance schemes offered by insurance companies. (The tax on these health services would be payable only if the payment for such health check up or preventive care or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment). 4) Service provided for maintenance of medical records of employees of a business entity. 5) Service provided by Electricity Exchanges. 6) Certain additional services provided by a builder to the prospective buyers such as providing preferential location or external or internal development of complexes on 43

44 extra charges. However, service of providing vehicle-parking space would not be subjected to tax. 7) Service of promoting of a 'brand' of goods, services, events, business entity etc. 8) The promotion, marketing or organizing of games of chance, including lottery, is being introduced as a separate service. Consequently, the Explanation in provision relating to Business Auxiliary Service is being deleted. The above changes will come into effect from a date to be notified, after the enactment of Finance Bill, II. SCOPE OF CERTAIN EXISTING SERVICES IS BEING EXPANDED OR ALTERED AS FOLLOWS: 1) The scope of air passenger transport service is being expanded to include domestic journeys, and international journeys in any class. 2) At present, in the case of Information Technology Software Service the levy of tax is limited only to cases where IT software is used for furtherance of business or commerce. The scope of the taxable service is being expanded to cover all cases irrespective of its use. 3) In the case of 'Commercial training or coaching' service, an Explanation is being added to clarify that the term 'commercial' in the context of this service would mean any training or coaching, which is provided for a consideration, whether or not for profit. This change is being given retrospective effect from ) In the definition of 'Sponsorship Service', the exclusion relating to sponsorship pertaining to sports is being removed. 5) In the 'Construction of complex service', it is being provided that unless the entire consideration for the property is paid after the completion of construction (i.e. after receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly. 6) Amendments are being made in the definition of the 'Renting of immovable property service' to,- (i) (ii) provide explicitly that the activity of 'renting' itself is a taxable service. The change has been given retrospective effect from ; and levy service tax on rent of vacant land where there is an agreement or contract between the lessor and lessee for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease. 44

45 7) Definitions of 'Airport Services, 'Port services' and 'Other port services' are being amended to provide that,- (a) (b) all services provided entirely within the airport/port premises would be classified under these services; and an authorization from the airport/port authority would not be a pre-condition for taxing these services. 8) An explanation is being added in 'Auctioneer's service' to clarify that the phrase 'auction by government' means an auction involving sale of government property and not when the government acts as an auctioneer for sale of the private property. 9) Definition of 'Management of Investment under ULIP Service' is being amended to provide that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by the Insurance Regulatory and Development Authority (IRDA), whichever is higher. The above changes will come into effect from a date to be notified, after the enactment of Finance Bill, III. AMENDMENTS IN ACT: Chapter V of the Finance Act, 1994 is being amended to,- a) insert an explanation in sub-section (3) of Section 73 to clarify that no penalty shall be imposed where service tax along with interest has been paid before issuance of notice by the department under this sub-section. b) provide definition of the term 'business entity' to include an association of persons, body of individuals, company or firm but not an individual. The above changes at (a) will come into effect from a date of enactment of the Finance Bill, 2010 and (b) from a date to be notified after the enactment of Finance Bill, IV. EXEMPTIONS: 1) Statutory taxes charged by the foreign governments are being excluded from taxable value for levy of service tax under the Air passenger transport service. 2) Exemption from service tax is being provided to services relating to 'Erection, Commissioning or Installation' of,- (a) (b) Mechanized Food Grain Handling Systems etc.; Equipment for setting up or substantial expansion of cold storage; and 45

46 (c) Machinery/equipment for initial setting up or substantial expansion of units for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic, marine or meat products. 3) Pre-packaged I.T. software, with the license for right to its use, is being exempted from service tax, subject to specified conditions. 4) At present exemption from service tax is available to transport of fruits, vegetables, eggs or milk by road by a goods transport agency. The scope of exemption is being expanded to include food grains and pulses in the list of exempted goods. 5) Exemption from service tax is being provided to Indian news agencies under 'Online Information and Database Retrieval Service' subject to specified conditions. 6) Exemption from service tax is being provided to the 'Technical Testing and Analysis Service' and 'Technical Inspection and certification service' provided by Central and State seed testing laboratories, and Central and State seed certification agencies. 7) Exemption from service tax is being provided to the transmission of electricity. The above changes will come into effect immediately. V. WITHDRAWAL OR AMENDMENTS OF EXEMPTIONS: 1) Exemption from service tax on 'Service provided in relation to transport of goods by rail' is being withdrawn. The levy will come into effect from ) Exemption from service tax, presently available to Group Personal Accident Insurance Scheme provided by Govt. of Rajasthan to its employees, under General Insurance Service is being withdrawn. 3) The exemption from service tax on 'Commercial training or coaching service' is being restricted to vocational training courses in the designated Trades notified under the Apprentices Act, The above changes, except at S. No.1, will come into effect immediately. VI. AMENDMENTS IN RULES AND NOTIFICATIONS: 1) Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 are being amended so as to move some of the specified taxable services from one category to another. 2) In the Export of Services Rules, 2005, the condition prescribed i.e. 'such service is provided from India and used outside India' is being deleted. 46

47 3) Notification No. 1/2002-ST dated is being superceded by another notification to provide that the construction and operation of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oils and natural gas in the Exclusive Economic Zone and the Continental Shelf of India and for supply of any goods connected with these activities would be within the purview of the provisions of Chapter V of Finance Act, Suitable changes are being made in the Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, ) Notification No. 5/2006-CE (NT) is being amended and given partial retrospective effect to remove the bottlenecks in refund of accumulated credit to the exporters. The above changes will come into effect immediately. 47

48 CENTRAL EXCISE The amendments proposed are summerised as under: Note: Changes come into effect immediately unless otherwise specified. A. General CENVAT Rate for non-petroleum goods: The standard rate of excise duty of 8% on non-petroleum products is being increased to 10% with a few exceptions where exemptions/concessions have been given. B. CEMENT Consequent to enhancement of the standard rate of duty from 8% to 10%, the specific rates of duty on cement and cement clinker is also being revised upwards as follows: Mini cement plant: Cement Present rate Proposed rate 1. Cleared in packaged form,- (i) of retail sale price not exceeding Rs.145 per tonne Rs.185 per tonne Rs. 190 per 50 kg bag or of per tonne equivalent retail sale price not exceeding Rs. 3800; (ii) of retail sale price exceeding Rs. Rs. 250 per tonne Rs.315 per tonne 190 per 50 kg bag or of per tonne equivalent retail sale price exceeding Rs. 3800; 2. Cleared other than in packaged form Rs. 170 per tonne Rs.215 per tonne Other than mini cement plant: Cement Present rate Proposed rate 1. Cleared in packaged form,- (i) of retail sale price not exceeding Rs. 190 per 50 kg bag or of per tonne equivalent retail sale price Rs. 230 per tonne Rs.290 per tonne not exceeding Rs. 3800; (ii) of retail sale price exceeding Rs. 190 per 50 kg bag of per tonne equivalent retail sale price exceeding Rs % of retail sale price 10% of retail sale price 2. Cleared other than in packaged form 8% or Rs. 230 per tonne, whichever is higher 10% or Rs.290 per tonne whichever is higher Cement clinker Rs.300 per tonne Rs. 375 per tonne C. AUTOMOBILE SECTOR Ad-valorem component of excise duty on large cars, Multi Utility Vehicles and Sports Utility Vehicles etc. and chassis thereof is being increased from 20% to 22%. There is no change in the specific component, which will continue to be levied as applicable. 48

49 D. PETROLEUM PRODUCTS The rates of excise duty on Motor Spirit (petrol) and HSD (diesel) are being increased by Re.1 per litre. The revised rates of duty on these items are as under: Description Without Brand Name With Brand Name Motor Spirit *Rs per litre *Rs per litre HSD **Rs.4.60 per litre **Rs.5.75 per litre Note: * Includes Rs.2 Additional Excise Duty and Rs.6 Special Additional Excise Duty. ** Includes Rs.2 Additional Excise Duty. E. TOBACCO PRODUCTS 1) The existing slab of filter cigarettes of length not exceeding 70 mm is being broken up into two slabs: filter cigarettes of length not exceeding 60 mm; and filter cigarettes of length exceeding 60 mm but not exceeding 70 mm. Suitable rates are being prescribed for these slabs. The basic excise duty (BED) on other cigarettes is being revised. 2) At present, cigars, cheroots and cigarillos of tobacco attract ad valorem rate of basic excise duty (BED) of 8% plus Additional Excise Duty (Health Cess) of 1.6%. These rates are now being replaced with a composite rate of "10% or Rs.1227 per thousand, whichever is higher" (BED) and "1.6% or Rs.246 per thousand whichever is higher" (AED). Cigars, cheroots and cigarillos of tobacco substitutes will now attract BED of "10% or Rs.1473/1000" whichever is higher. 3) Basic excise duty on branded unmanufactured tobacco and tobacco refuse is being increased from 42% to 50%. 4) Basic excise duty on branded 'hookah' or 'gudaku' tobacco is being increased from 8% to 10% while that on chewing tobacco, preparations containing chewing tobacco, jarda scented tobacco, snuff and its preparations, tobacco extracts and essences etc. has been increased from 50% to 60%. 5) Basic excise duty on branded homogenised or reconstituted tobacco is also being increased from 50% to 60%. 6) Basic excise duty on items of other smoking tobacco (branded) is being increased from 34% to 40% while the duty on such unbranded tobacco is being increased from 8% to 10%. 7) Basic excise duty on smoking mixtures of pipes and cigarettes is being increased from 300% to 360%. 8) Basic excise duty on cut tobacco is being increased from Rs.50 per kg. to Rs.60 per kg. 9) Excise Duty on Chewing Tobacco and branded unmanufactured Tobacco packed in pouches with the aid of packing machines will now be levied based 49

50 on capacity of production under Section 3A of the Central Excise Act, 1944 (compounded levy). The levy will come into effect on 8 th March, F. CLEAN ENERGY CESS Clean Energy Cess is being imposed on coal, lignite and peat produced in India. This cess would be levied and collected as a duty of excise with effect from a date to be notified after the enactment of the Finance Bill, G. SECTOR SPECIFIC RELIEF MEASURES: I. FOOD/AGRO PROCESSING AND AGRICULTURE SECTOR 1) Full exemption from excise duty presently available to 20 specified equipments for preservation, storage or transport of agricultural produce is being extended to apiary, horticultural, dairy, poultry, aquatic & marine produce and meat as well as processing thereof. 2) Full exemption from excise duty is being extended to self-loading/selfunloading trailers & semi trailers for Agricultural Purposes (tariff item ). II. ENVIRONMENT FRIENDLY AND ENERGY SAVING GOODS 1) A uniform concessional rate of duty of 4% is being prescribed for parts, namely batteries including battery chargers, electric motors and AC or DC motor controllers required for manufacture of all categories of electrical vehicles including cars, two wheelers and three wheelers (like 'Soleckshaw') subject to actual user condition. This concession will be available till Such vehicles will also be charged to excise 4%. 2) Excise duty is being reduced from 8% to 4% on LED lights/lighting fixtures. 3) Full exemption from excise duty is being provided to additional specified raw materials for the manufacture of rotor blades for wind operated electricity generators. III. CAPITAL GOODS Full exemption from central excise duty presently available to goods supplied against International Competitive Bidding is now being extended to goods supplied to mega power projects from which power supply has been tied up through tariff-based competitive bidding. The exemption would also be available where the mega power project has been awarded through tariff-based competitive bidding. 50

51 IV. MSME/ SMALL SCALE SECTOR 1) Changes are being made in the relevant provisions to provide certain facilities to Small Scale Industrial (SSI) units eligible for availing benefit under Notification No. 8/2003-CE as under: a) full Cenvat credit on capital goods in one instalment in the year of receipt of such goods. b) facility of payment of excise duty on quarterly basis. The above changes come into effect from 1 st April, 2010 and will be applicable even if an eligible unit opts not to avail of the SSI exemption. 2) While retaining the system of filing quarterly returns, the due date for filing of Central Excise returns by SSI units is being advanced to the 10th of the month following the quarter. 3) The relaxation from brand name restriction under the general SSI exemption scheme is being extended to plastic bottles and plastic containers used as packing material. V. GOLD AND SILVER 1) Refined serially numbered gold bars made from the ore/concentrate stage will now attract excise duty of Rs.280 per 10 grams (instead of 8% ad valorem) with Cenvat credit facility on inputs and capital goods. 2) Excise duty on DTA clearances of plain gold and silver jewellery manufactured by a 100% EOU is being increased from: (i) and (ii) Rs.500 per 10 gram to Rs.750 per 10 gram for gold jewellery; Rs.1000 per kg to Rs.1500 per kg. for silver jewellery. H. OTHER RELIEF MEASURES 1) Following items are being fully exempted from excise duty: a) Articles of bedding wholly made of quilted textile materials; b) Toy balloons made of natural rubber; c) Betel nut product known as "Supari"; d) Dementholised oil, Deterpenated Mentha oil, Spearmint/ Mentha Piperita oils and all intermediates and by-products of Menthol. 2) Excise duty is being reduced from 8% to 4% on: a) Replaceable kits for all household type water filters (except those operating on RO technology) b) Corrugated boxes/ cartons manufactured by stand- alone manufacturers c) Latex rubber thread. 51

52 3) Excise duty on goods covered under the Medicinal and Toilet Preparations Act is being reduced from 16% to 10% to bring it at par with standard Cenvat rate. I. RATIONALIZATION MEASURES 1) At present, maize starch and tapioca starch are exempt from excise duty while potato starch attracts 8% duty. Excise duty on all these starches is now being unified at 4%. 2) In the last budget, concessional rate of 4% excise duty applicable to the ceramic tiles manufactured in kilns not using electricity was enhanced to 8% without Cenvat credit facility. Since, ceramic tiles in general also attracted 8% excise duty (standard rate) with Cenvat credit, this entry had become redundant. The rate of duty on all ceramic tiles, regardless of the fuel used for firing the kiln, is now being unified at 10% with Cenvat credit facility. 3) Umbrellas currently attract 4% excise duty while umbrella parts attract 8% excise duty and umbrella cloth panels are fully exempt. The rate of excise duty on umbrellas and all umbrella parts is being unified at 4%. 4) Currently, two different rates of excise duty (NIL and 4%) for rough ophthalmic blanks have been prescribed under two different notifications. Redundant entry prescribing 4% is being omitted. J. WITHDRAWAL OF EXEMPTIONS/CONCESSIONS 1) Full exemption from excise duty on following items is being withdrawn. They will now attract excise duty of 4%. a) Mosquito nets impregnated with insecticides; b) Av gas; c) Microprocessor for computers (other than motherboard), Floppy disk drive, Hard disk drive, flash drive, CD/DVD and Combo Drive meant for external use. 2) Full exemption from excise duty on baby & clinical diapers and sanitary napkins is being withdrawn. These items will now attract duty at 10%. 3) Concessional rate of excise duty on open tin sanitary (OTS) cans is being withdrawn. OTS cans will now attract duty at 10%. 4) Concessional rate of excise duty on goggles is being withdrawn except those used for correcting vision. These items will now attract duty at 10%. K. AMENDMENTS IN CENTRAL EXCISE ACT, ) In section 11A (2B), an Explanation is being inserted to clarify that no penalty shall be imposed where duty along with interest has been paid before the issuance of a demand notice by the Department. 52

53 2) Section 32 dealing with Settlement Commission is being amended so as to restore certain provisions as they obtained prior to the enactment of the Finance Bill, Accordingly, the prohibition on filing of applications for the settlement of cases where an assessee admits short-levy for goods in respect of which he has not maintained proper records (i.e. cases of misdeclaration, clandestine removal etc.) is being removed. Similarly, the restriction that an assessee may seek only onetime settlement is also being relaxed. The Commission is being empowered to extend the time limit of nine months for disposal of applications by another three months, for reasons to be recorded in writing. 3) In Section 37, a new clause is being inserted to provide rule-making powers to the Central Government for withdrawal of facilities or imposition of restrictions including restrictions on utilization of Cenvat credit on a manufacturer or exporter or suspension of registration of a dealer for dealing with evasion of duty or misuse of Cenvat credit. The above changes will come into effect on enactment of the Finance Bill. L. AMENDMENTS IN THE FIRST SCHEDULE TO CENTRAL EXCISE TARIFF ACT, ) In heading 2402, a new tariff item covering filter cigarettes of length not exceeding 60 mm has been inserted. Consequential changes have been made to other tariff items in the said heading. 2) In Chapter 27, sub-heading and the tariff items and are being substituted by covering 'Paraffin Wax containing by weight less than 0.75% of oil'. Further, tariff item covering 'Paraffin wax containing by weight 0.75% and more of oil' is being inserted. 3) In chapter 68, Note 3 is being inserted to provide that in relation to goods of headings 6802 and 6810 the process of cutting or sawing or sizing or polishing or any other process for converting stone blocks into slabs or tiles shall amount to "manufacture". 4) In Chapter 76, Note 2 is being inserted to declare the process of drawing or redrawing of aluminium tubes and pipes as amounting to "manufacture'" M. AMENDMENTS IN CENTRAL EXCISE RULES AND CENVAT CREDIT RULES 1) Rule 11 (5) of the Central Excise Rules, 2002 is being deleted so as to dispense with the requirement of pre-authentication of the invoice. 2) The Central Excise Rules, 1944, the Cenvat Credit Rules, 2000, the Cenvat Credit Rules 2001, the Cenvat Credit Rules 2002 and the Cenvat Credit Rules, 2004 are being amended retrospectively w.e.f to (for periods as applicable to respective rules) to provide that where a manufacturer 53

54 avails Modvat/Cenvat credit in respect of any inputs, other than fuel, to manufacture both dutiable and exempted goods, he can opt to reverse credit or pay an amount equivalent to credit attributable to inputs used for manufacture of exempted goods. It is being further provided that such manufacturer shall pay 24% p.a. from the date of clearance till date of reversal of the said credit or payment of equivalent amount. Such option will, however, be available only in such cases where disputes in this regard are pending on the date of enactment. This change will come into effect on the enactment of Finance Bill, ) Rule 3(5) of the Cenvat Credit Rules, 2004 is being amended to provide accelerated depreciation in the case of computers and computer peripherals cleared after use at the same rates as applicable for similar capital goods of EOU/EHTP/STP units under Notification No. 52/2003-Customs. 4) Rule 4(5) (b) of the Cenvat Credit Rules, 2004 is being amended to permit sending of jigs, fixtures, moulds and dies to a vendor for production of goods according to the specifications of the principal manufacturer without reversal of credit. 5) Rule 6 (6) (vii) of the Central Credit Rules, 2004 is being amended so as to allow Cenvat credit on inputs used in the manufacture of goods supplied to such mega power projects from which power has been tied up through tariffbased competitive bidding or the projects awarded through tariff-based competitive bidding. Similar facility available to goods supplied against International Competitive Bidding available at present is also being continued. 6) Rule 15 of the Cenvat Credit Rules, 2004 is being amended to harmonize the penal provisions for incorrect availment of Cenvat credit of duty paid on inputs or capital goods or input services. N. AMENDMENTS IN MEDICINAL AND TOILET PREPARATIONS (EXCISE DUTIES) ACT, 1955 Section 3 of the M&TP Act is being amended to exclude goods manufactured or produced by units in SEZ from excise duty leviable under that Act. This change will come into effect on enactment of the Finance Bill. 54

55 CUSTOMS DUTY The proposed amendments are summerised as under: Note: (a) "Customs Duty" means the customs duty levied under the Customs Act, (b) "CVD" means the Additional Duty of Customs levied under section 3 of the Customs Tariff Act, 1975.Changes come into effect immediately unless otherwise specified. A. PETROLEUM 1) Customs duty on crude petroleum is being increased from Nil to 5%. 2) Customs duty on Motor Spirit (petrol) and HSD (diesel) is being increased from 2.5% to 7.5%. 3) Customs duty on some other specified petroleum products is being increased from 5% to 10%. B. PRECIOUS METALS 1) Customs duty on serially numbered gold bars (other than tola bars) and gold coins is being increased from Rs.200 per 10 gram to Rs.300 per 10 gram. 2) Customs duty on other forms of gold is being increased from Rs.500 per 10 gram to Rs.750 per 10 gram. 3) Customs duty on silver is being increased from Rs.1000 per kg to Rs.1500 per kg. 4) Customs duty on platinum is being increased from Rs.200 per 10 gram to Rs.300 per 10 gram. The above change in rates would also be applicable when gold, silver and platinum (including ornaments) are imported as personal baggage. C. ADDITIONAL DUTY OF CUSTOMS OF 4 % (SPECIAL CVD) Goods imported in pre-packaged form and intended for retail sale and certain specified goods namely, ready-made garments, mobile phones and watches are being provided an outright exemption from additional duty of customs of 4%. In addition, outright exemption from this duty is also being provided to Carbon Black Feedstock, waste paper and paper scrap. The existing exemption by way of refund would continue on other items. D. FOOD/AGRO PROCESSING 1) Project imports status is being granted to the initial setting up or substantial expansion of, a cold storage, cold room (including farm pre-coolers) for preservation or storage or an industrial unit for processing of agricultural, apiary, horticultural, dairy, poultry, 55

56 aquatic & marine produce and meat. These projects would attract concessional rate of basic customs duty of 5%. 2) Project imports status is being granted to installation of Mechanized Handling Systems & Pallet Racking Systems, in mandis or warehouses for food grains and sugar, with concessional rate of basic customs duty of 5%. Such systems are also being exempted from additional duty of customs (CVD) and special additional duty of customs. 3) Truck Refrigeration units for the manufacture of refrigerated vans/trucks are being fully exempted from basic customs duty. Such units are already exempt from excise duty. 4) Basic customs duty is being reduced from 7.5% to 5% on specified agricultural machinery such as paddy transplanter, laser land leveler, cotton picker, reaper-cumbinder, straw or fodder balers, sugarcane harvesters, track used for manufacture of track-type combine harvester etc. E. AGRICULTURE/HORTICULTURE 1) Basic customs duty on long pepper is being reduced from 70% to 30%. 2) Basic customs duty on 'asafoetida' (heeng) is being reduced from 30% to 20%. 3) Full exemption from basic customs duty is being provided to bio-polymer/bioplastics (HS Code ) used for manufacture of bio-degradable agro mulching films, nursery plantation & flower pots. F. CAPITAL GOODS 1) Mono Rail Projects for urban transport are being granted project imports status under Heading No and would accordingly attract concessional rate of 5% basic customs duty. 2) Tunnel Boring machine for hydro-electric power projects is being fully exempted from basic customs duty with Nil CVD. 3) Concessional rate of customs duty of 5% presently available upto on specified machinery for tea, coffee and rubber plantation is being extended upto Excise duty exemption is also being re-introduced on these items upto ) Specified road construction machinery items are presently fully exempt from customs duty subject to specified conditions. Sale or disposal of such machinery items at depreciated value is being allowed on payment of customs duties on depreciated value at the rates applicable at the time of import subject to specified conditions. 56

57 G. CONCESSIONS TO ENVIRONMENT-FRIENDLY ITEMS 1) Full exemption from basic customs duty and special additional duty of customs is being extended to specified parts namely, batteries including battery chargers, electric motors and AC or DC motor controllers imported for manufacturing all categories of electrical vehicles including cars, two wheelers and three wheelers (like Soleckshaw). These parts will attract CVD of 4%. The concession is subject to actual user condition. This concession will be available till ) A concessional rate of basic customs duty of 5% is being provided to machinery items, instruments, appliances required for initial setting up of solar power generation projects or facilities. These items have been exempted from CVD also by way of excise duty exemption provided to them. 3) Ground source heat pump (for geo-thermal energy applications) is being fully exempted from basic customs duty and special additional duty of customs. H. HEALTH SECTOR 1) At present, medical equipments attract varying rates of customs duty and are spread over many lists. This multiplicity of rates is being done away with and now all medical equipments (with some exceptions) will attract 5% basic customs duty, 4% CVD/excise duty and Nil special additional duty of customs [i.e. effective duty of 9.2%]. 2) Parts required for the manufacture and accessories of medical equipment will also attract 5% concessional basic customs duty with Nil special CVD. 3) Concessional customs duty available to spares for the maintenance of medical equipment is being withdrawn except in specified cases. 4) Full exemption from basic customs duty and CVD/excise duty is being retained for specified medical devices (exempt by description) as well as for assistive devices, rehabilitation aids and other goods for disabled (List 41). 5) Cobalt-chrome alloys, special grade stainless steel etc. for the manufacture of orthopaedic implants are being exempted from basic customs duty subject to actual user condition. I. ELECTRONICS HARDWARE 1) Battery chargers and hands-free headphones are the basic accessories of mobile phones. Full exemption from basic customs duty and CVD presently available for parts, components, accessories for manufacturing of mobile handsets including cellular phones and parts thereof is being extended to parts for the manufacture of battery chargers and hands-free headphones also. 2) Full exemption from 4% special additional duty of customs presently available upto on parts, components and accessories for manufacture of 57

58 mobile handsets including cellular phones, parts thereof (except accessories) is being extended to parts of two specified accessories also upto ) Basic customs duty is being reduced from 10% to 5% on magnetrons of upto 1,000 kw for the manufacture of microwave ovens. 4) Full exemption from customs duty is being extended to additional specified capital goods and raw materials for the manufacture of electronic hardware. J. ENTERTAINMENT/MEDIA 1) Films for exhibition are imported on cinematographic films or digital media. Digital masters/stampers of films are also imported for duplication and distribution of CD/DVDs. It is being provided that customs duty would now be charged only on the value of the carrier medium and the customs duty on the balance value will be exempt. 2) Similar tax treatment, as provided to films above, is being extended to music and gaming software (other than pre-packaged form) for retail sale imported on digital media for duplication. Pre-packaged Movies, Music and Games (meant for use with gaming consoles) will continue to be charged to import duties on value determined in terms of the provisions of the Customs Act. 3) Promotional material like trailors, making of films etc. imported free of cost in the form of electronic promotion kits (EPK)/ Betacams are being fully exempted from basic customs duty and CVD. 4) Project imports status is being accorded to 'Setting up of Digital Head End' with 5% concessional basic customs duty and Nil special additional duty of customs. K. GOLD REFINING Gold ore and concentrate are being fully exempted from basic customs duty and special additional duty of customs. They will, however, be chargeable to Rs.140 per 10 gram of gold content. This duty structure is subject to actual user condition. L. EXPORT PROMOTION 1) Basic customs duty on Rhodium is being reduced from 10% to 2%. 2) The current limit of Rs. 1 lakh per annum for duty free import of samples is being enhanced to Rs. 3 lakh per annum 3) At present specified components, raw materials and accessories for the manufacture of sports goods are exempt from basic customs duty. Some additional items are being added to the list of exemption. 58

59 M. ELECTRICAL ENERGY At present, Electrical energy is fully exempt from customs duty. Electrical energy supplied from a Special Economic Zone to the Domestic Tariff Area and non - processing areas of SEZ would now attract duty of 16% ad valorem + Nil Special CVD. This change is being made retrospectively w.e.f. 26 th June, Exemption on supplies or imports of electrical energy, other than the above, would continue. N. AMENDMENTS IN CUSTOMS ACT, 1962 Section 127 dealing with Settlement Commission is being amended so as to restore certain provisions as they obtained prior to the enactment of the Finance Bill, Accordingly, the prohibition on filing of applications for the settlement of cases where an assessee admits short-levy in respect of goods not included in the entry made under the said Act. (i.e. cases of misdeclaration, suppression etc.) is being removed. Similarly, the restriction that an assessee may seek only one-time settlement is also being relaxed. The Commission is being empowered to extend the time limit of nine months for disposal of applications by another three months, for reasons to be recorded in writing. O. AMENDMENTS IN CUSTOMS TARIFF ACT, ) Section 3 of the Customs Tariff Act is being amended to provide that the value of the imported goods for the purpose of charging CVD in respect of goods chargeable to excise duty on the basis of Maximum Retail Sale Price under Medicinal and Toilet Preparations (Excise Duties) Act, 1955 shall be the retail sale price declared on such imported goods less the amount of abatement, if any. This change will come into effect on enactment of the Finance Bill. 2) Consequent upon insertion of a new tariff item covering filter cigarettes of length not exceeding 60 mm and other changes in the schedule to the Central Excise Tariff Act, similar change is being carried out in heading 2402 with the new tariff item attracting customs duty of 30% ad valorem. 3) In Chapter 27, sub-heading and the tariff items and are being substituted by covering 'Paraffin Wax containing by weight less than 0.75% of oil'. Further, tariff item covering 'Paraffin wax containing by weight 0.75% and more of oil' is being inserted. 59

60 CENTRAL SALES TAX ACT The proposed amendments are summerised as under: 1. Branch Transfer: Section 6A of the Central Sales Tax Act, 1956 (hereinafter referred to as CST Act ) provides, that the burden of proof in case of transfer of goods by any dealer to his place of business or place of business of his agent or principal in another state, claimed otherwise than by way of sale is on the dealer. Clause 77 of the Bill now seeks to amend the CST Act, with a view to amend subsection (2) of section 6A of the Central Sales Tax Act, so as to - (i) (ii) provide that for making an order under that sub-section, the assessing officer shall, in addition to satisfying himself about the truthfulness of the particulars furnished by a dealer, shall also satisfy himself that no inter-state sales have been effected and also to provide that the deeming provision as contained therein to the effect that "the movement of goods have not occasioned as a result of sale", shall be subject to the provisions of sub-section (3); and insert a new sub-section (3) so as to specify that nothing contained in subsection (2) shall preclude reassessment by the assessing authority on the basis of new facts discovered or revision by a higher authority on the ground that the findings of the assessing authority are contrary to law, and such reassessment or revision may be done in accordance with the provisions of general sales tax law of the State. As a result of the above insertion, now it is open for authority to reassess or revise any order passed by the assessing authority accepting the Form F. 2. Insertion of New Section 18A regarding Appeal before the highest appellate authority of the State against an order passed under sub-section 6A (2) or (3) of the CST Act. Clause 78 of the Bill proposes to make a provision for appeals to the highest appellate authority of every State against the orders made under sub-section (2) and sub-section (3) of section 6A including incidental issues relating to rate of tax, computation of assessable turnover and penalty and also procedure before such highest appellate authority. 3. Clause 79 of the Bill seeks to amend section 20 of the Central Sales Tax Act, by substituting sub-section (1) thereof to provide that an appeal shall lie to the Authority against any order passed by the highest appellate authority of a State under this Act determining issues relating to stock transfers or consignments of goods, in so far as they involve a dispute of inter-state nature and to omit the thereunder. 4. Powers of the Authority: Amendment to Section 22 (1A): Clause 80 of the Bill seeks to amend section 22 of the Central Sales Tax Act, so as to- 60

61 (a) (b) substitute the word "pre-deposit", wherever it occurs, with the word "deposit"; and to insert a new sub-section (1B) to provide for the authority to issue direction for refund of tax collected by a State. 5. Transfer of Pending Proceedings : Section 25 of CST Act. In view of proposed new appeal provisions allowing appeal directly to highest appellate authority of the State, against the order passed by the assessing authority, the above proviso is proposed to be omitted by the Clause 81 of the finance bill seeks to omit the proviso to sub-section (2) of the section. 6. The above changes will come into effect on enactment of the Finance Bill. 61

62 CHALLENGES AHEAD As stated earlier, we all have to now gear ourselves to face following four challenges: A. Direct Tax Code B. Companies Bill, 2009 C. Goods and Services Tax (GST) D. International Financial Reporting Standard (IFRS) Out of these, the progress in three challenges finds place in Budget Proposals as well. The Hon ble Finance Minister has stated in his speech that I am happy to inform the Honourable Members that the process for building a simple tax system with minimum exemptions and low rates designed to promote voluntary compliance, is now nearing completion. On the Direct Tax Code the wide-ranging discussions with stakeholders have been concluded. I am confident that the Government will be in a position to implement the Direct Tax Code from April 1, On Goods and Services Tax, we have been focusing on generating a wide consensus on its design. In November, 2009 the Empowered Committee of the State Finance Ministers placed the first discussion paper on GST in the public domain. The Thirteenth Finance Commission has also made a number of significant recommendations relating to GST, which will contribute to the ongoing discussions. We are actively engaged with the Empowered Committee to finalise the structure of GST as well as the modalities of its expeditious implementation. It will be my earnest endeavour to introduce GST along with the DTC in April, Improvement in corporate governance and regulation is an important part of the overall investment environment in the country. Government has introduced the Companies Bill, 2009 in the Parliament, which will replace the existing Companies Act, The proposed new bill will address issues related to regulation in corporate sector in the context of the changing business environment. For implementation of IFRS, the necessary amendments will also have to be made in Companies Act. We will now try to give an overview of these subjects and as it progresses, we will interact more and more on these subjects. A. Direct Tax Code 1. The discussion paper and Direct Tax Code Bill was released on 12 th August, 2009 for public debate. 62

63 2. The objective as stated is The Code seeks to consolidate and amend the law relating to all direct taxes, that is, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax GDP ratio. Another objective is to reduce the scope for disputes and minimize litigation 3. Briefly, the salient features of the Code are as under:- (a) (b) (c) (d) (e) (f) (g) Single Code for direct taxes: All the direct taxes have been brought under a single Code and compliance procedures unified. Use of simple language: Each sub-section is a short sentence intended to convey only one point. All directions and mandates, to the extent possible, have been to convey in active voice. Similarly, the provisos and explanations have been eliminated. Extensive use of formula and tables has been made. Reducing the scope for litigation: An attempt has been made to avoid ambiguity in the provisions. Power has also been delegated to the Central Government /Board to avoid protracted litigation on procedural issues. Flexibility: The structure of the statute has been developed in a manner which is capable of accommodating the changes in the structure of a growing economy without resorting to frequent amendments. Therefore, to the extent possible, the essential and general principles have been reflected in the stature and the matters of detail are contained in the rules/schedules. To ensure that the law can be reflected in a Form: For most taxpayers, particularly the small and marginal category, the tax law is reflected in the Form. Therefore, the structure of the tax law has been designed so that it is capable of being logically reproduced in a Form. Consolidation of provisions: In order to enable a better understanding of tax legislation, provisions relating to definitions, incentives, procedure and rates of taxes have been consolidated. Elimination of regulatory functions: However, with regulatory authorities being established in various sectors of the economy, the regulatory function of the taxing statue has been withdrawn. (h) Providing stability: At present, the rates of taxes are stipulated in the Finance Act of the relevant year. Therefore, there is a certain degree of uncertainty and instability in the prevailing rates of taxes. Under the Code, all rates of taxes are proposed to be prescribed in the First to the Fourth Schedule to the Code itself thereby obviating the need for an annual Finance Bill. The change in the rates, if any, will be done through appropriate amendments to the Schedule brought before Parliament in the form of an Amendment Bill. 63

64 4. It is also clear that the Code is not an attempt to amend the Income Tax Act, 1961; nor is it an attempt to improve upon the present Act. In drafting the Code, the Central Board of Direct Taxes (the Board) has, to the extent possible, started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. Hence, while reading the Code, it would be advisable to do so without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Income Tax Act, In this study note, we are not discussing the provisions of the Code for two reasons: It will create confusion when we read it with provisions of Finance Bill, 2010 read with Income Tax Act, There are indications that there will be changes in the provisions of the code. B. Companies Bill, 2009 The FM has given importance for Improvement in corporate governance and regulation in the overall investment environment in the country. The Government has already introduced Companies Bill, 2009 in the Parliament, which will replace the existing Companies Act, The New Companies Bill 2009 is having 426 clauses. The new bill will address issues related to regulation in corporate sector in the context of the changing business environment. 1. The main objectives of the Companies Bill, 2009 are - (a) (b) (c) (d) to revise and modify the Companies Act, 1956 in consonance with the changes in the national and international economy; to bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects; to re-write various provisions of the Act to enable easy interpretation; and to delink the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adaptation to the changing economic and technical environment. 2. The Companies Bill, 2009, inter-alia, provides for: (i) The basic principles for all aspects of internal governance of corporate entities and a framework for their regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive, legal framework administered by the Central Government. In doing so, the Bill also harmonizes the Company law framework with the imperative of specialized sectoral regulation. 64

65 (ii) (iii) (iv) (v) (vi) (vii) Articulation of shareholders democracy with protection of the rights of minority stakeholders, responsible self-regulation with disclosures and accountability, substitution of government control over internal corporate processes and decisions by shareholder control. It also provides for shares with differential voting rights to be done away with and valuation of non-cash considerations for allotment of shares through independent valuers. Easy transition of companies operating under the Companies Act, 1956, to the new framework as also from one type of company to another. A new entity in the form of One-Person Company (OPC) while empowering Government to provide a simpler compliance regime for small companies. Retains the concept of Producer Companies, while providing a more stringent regime for not-for profit companies to check misuse. No restriction proposed on the number of subsidiary companies that a company may have, subject to disclosure in respect of their relationship and transactions/dealings between them. Application of the successful e-governance initiative of the Ministry of Corporate Affairs (MCA-21) to all the processes involved in meeting compliance obligations. Company processes, also to be enabled to be carried out through electronic mode. The proposed e-governance regime is intended to provide for ease of operation for filing and access to corporate data over the internet to all stakeholders, on round the clock basis. Speedy incorporation process, with detailed declarations/ disclosures about the promoters, directors etc. at the time of incorporation itself. Every company director would be required to acquire a unique Directors identification number. Facilitates joint ventures and relaxes restrictions limiting the number of partners in entities such as partnership firms, banking companies etc. to a maximum 100 with no ceiling as to professions regulated by Special Acts. (viii) Duties and liabilities of the directors and for every company to have at least one director resident in India. The Bill also provides for independent directors to be appointed on the Boards of such companies as may be prescribed, along with attributes determining independence. The requirement to appoint independent directors, where applicable, is a minimum of 33% of the total number of directors. (ix) (x) Statutory recognition to audit, remuneration and stakeholders grievances committees of the Board and recognizes the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Company Secretary as Key Managerial Personnel (KMP). Companies not to be allowed to raise deposits from the public except on the basis of permission available to them through other Special Acts. The Bill recognizes insider trading by company directors/kmps as an offence with criminal liability. 65

66 (xi) (xii) Recognition of both accounting and auditing standards. The role, rights and duties of the auditors defined as to maintain integrity and independence of the audit process. Consolidation of financial statements of subsidiaries with those of holding companies is proposed to be made mandatory. A single forum for approval of mergers and acquisitions, along with concept of deemed approval in certain situations. (xiii) A separate framework for enabling fair valuations in companies for various purposes. Appointment of valuers is proposed to be made by audit committees. (xiv) (xv) (xvi) Claim of an investor over a dividend or a security not claimed for more than a period of seven years not being extinguished, and Investor Education and Protection Fund (IEPF) to be administered by a statutory Authority. Shareholders Associations/Group of Shareholders to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and Class Action Suits. A revised framework for regulation of insolvency, including rehabilitation, winding up and liquidation of companies with the process to be completed in a time bound manner. Incorporates international best practices based on the models suggested by the United Nations Commission on International Trade Law (UNCITRAL). (xvii) Consolidation of fora for dealing with rehabilitation of companies, their liquidation and winding up in the single forum of National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. The nature of the Rehabilitation and Revival Fund proposed in the Companies (Second Amendment) Act, 2002 to be replaced by Insolvency Fund with voluntary contributions linked to entitlements to draw money in a situation of insolvency. (xviii) A more effective regime for inspections and investigations of companies while laying down the maximum as well as minimum quantum of penalty for each offence with suitable deterrence for repeat offences. Company is identified as a separate entity for imposition of monetary penalties from the officers in default. In case of fraudulent activities/actions, provisions for recovery and disgorgement have been included. (xix) (xx) Levy of additional fee in a non-discretionary manner for procedural offences, such as late filing of statutory documents, to be enabled through rules. Defaults of procedural nature to be penalized by levy of monetary penalties by the Registrars of Companies. The appeals against such orders of Registrars of Companies to lie with suitably designated higher authorities. Special Courts to deal with offences under the Bill. Company matters such as mergers and amalgamations, reduction of capital, insolvency including 66

67 rehabilitation, liquidations and winding up are proposed to be addressed by the National Company Law Tribunal/ National Company Law Appellate Tribunal. 3. The Companies Bill, 2009, on its enactment, would allow the country to have a modern legislation for growth and regulation of corporate sector in India. The existing statute for regulation of companies in the country, viz the Companies Act, 1956 had been under consideration for quite long for comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally. In view of various reformatory and contemporary provisions proposed in the Companies Bill, 2009 together with omission of existing unwanted and obsolete compliance requirements, the companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner. C. Goods and Services Tax - GST a) In earlier era (i.e. before 2005), the model of Indirect taxation was on production base, i.e. the taxes were levied on manufacturer s and importers. It was also called as First Point Levy of Tax. From , there was a deviation from production base of taxation to Consumption base of taxation i.e. tax to be levied on value addition also. However, this change was limited to the State Taxation i.e. Sales Tax, and tax was called Value Added Tax (VAT). Now it is intended to cover all goods & services to be taxed on Consumer base taxation. This taxation will be called as Goods & Services Tax (GST). This is a universally adopted model of taxation. (GST is collected on the value added at each stage of sale/purchase in the chain of supply.). Government of India has formed Empowered Committee, which includes State Finance Ministers as Members. It is agreed that there will be uniformity in classification of goods, procedures and forms across the states. b) Empowered Committee has come out with its First Discussion Paper on Goods and Services Tax on 10 th November c) Salient features of the same are as under: 1. The system proposed to be applied in India is Dual GST System viz Central Goods & Services Tax (CGST) and State Goods & Services Tax (SGST). 2. There will be levy of tax on Inter State Transactions also. The said levy will be called as Inter State Goods & Services Tax (IGST). 3. No rate of tax is mentioned in the drafts but there is an indication by the FM that rate would be around 10%. 4. Input Tax Credit: It is proposed in the draft paper that Input Tax Credit (ITC) will be allowed to the transaction of Central and State level GST only. Cross 67

68 adjustment of ITC would not be allowed. The following table will show How ITC can be claimed Whether can be utilized for payment of Credits allowed CGST SGST IGST CGST Yes No Yes SGST No Yes Yes IGST Yes Yes Yes 5. Threshold limit: Currently threshold limit for Registration and Levy under Central Excise Act is Rs.1.50 crores, Service Tax Rs.10 lacs and under VAT Act Rs. 5 lacs. The proposed threshold limit are as under: Particulars Liability for Registration Rs. CGST SGST Goods 1.5 Crore 10 Lacs Service Not decided 10 Lacs 6. Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. 7. Following Central taxes will be merged under CGST- a) Central Excise Duty b) Additional Excise Duty c) The Excise Duty levied under Medicinal and Toiletries Preparation Act. d) Service Tax e) Additional Customs Duty, commonly known as Countervailing Duty (CVD) f) Special Additional Duty of Customs: 4% (SAD) g) Surcharges and h) Cess. 8. Following State taxes and levies would be merged. a) VAT / Sales Tax b) Entertainment Tax (Unless it is levied by local bodies) c) Luxury Tax d) Taxes on Lottery, betting and gambling e) States Cesses and Surcharges in so far as they relate to supply of Goods & Services. f) Entry tax in lieu of Ocotroi. 9. Tax on Alcoholic Beverages, Tobacco products, Petroleum products to be kept out of the purview. 10. FM has announced that GST will be implemented from

69 D. International Financial Reporting Standard- IFRS 1. In all the countries, the regulatory body of the respective countries set certain standards to prepare the accounts of the company with a view to hormonise the various accounting policies and practices for the preparation and presentation of financial statements for external users. The various purpose of such framework of standards to assist auditors in forming an opinion as to whether financial statements conform with Accounting Standards; assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with Accounting Standards; However, such accounting standards are different in different countries, depending upon various factors such as economic, political, legal circumstances prevailing in that country. These different circumstances have led to different presentation of items like capital or revenue, in presenting the accounts. 2. The International Accounting Standards Committee (IASC) was formed and is committed to narrowing these differences by seeking to harmonise regulations, accounting standards and procedures relating to the preparation and presentation of financial statements. The Accounting standards framed by IASC is called as International Accounting Standards (IAS) and now the new standards framed by them are called as International Financial Reporting Standards (IFRS). 3. In India, The Institute of Chartered Accountants of India, (ICAI) a regulating body formed under the Parliament Act is responsible to frame such accounting standards and to regulate the entities financial statements through its members. These Accounting Standards are called as Indian Accounting Standards. The then President of ICAI in his message stated that ICAI has committed with the support of Ministry of Corporate Affairs, the convergence of Indian Accounting Standards with IFRS effective from 1 st April, Press release dated 22 nd January 2010 stats that in India, IFRS convergence will be in phase manner. a) Phase I : The following categories of Companies will convert their opening Balance Sheets as at 1 st April 2011 which are - i) Company which are part of NSE Nifty 50 ii) Company which are part of BSE Sensex 30 iii) iv) Company s whose shares are listed in Stock Exchange outside India. Company s (listed or not) have a net worth in excess of Rs.1000 Crores. 69

70 b) Phase II: All Company s (listed or not ) having net worth exceeding Rs.500 Crores but not exceeding Rs.1000 Crores will convert their opening Balances as at 1 st April, c) Phase III: All Listed Companies which have a net worth of Rs.500 Crores or less will convert their opening Balance Sheet as at 1 st April, Wherever the accounting year ends on a date other than 31 st March, the conversion of opening Balance Sheet will be made in relation to the first Balance Sheet which is made on a date after 31 st March. d) Company s which fall in the following categories will not be required to follow IFRS but they can follow it voluntarily, if they so choose. i) Non listed company s having net worth company Rs.500 crore or less and whose shares or other securities are not listed on Stock Exchange outside India. ii) Small & Medium Companies (SMCs) 70

71 GUP SHUP In this chapter, we have compiled some of the development in tax laws in last 8 months and also other points, which one may like to know about. It includes notes from journal published by BCAS. A. Income Tax 1. CBDT has STARTED ISSUING Annual Tax Statement to assessees. The CBDT has started issuing Annual Statement to assessees, a consolidated statement in Form 26AS which gives details for a particular tax year of details of tax deducted by the employer / others and the taxes by way of advance tax/ selfassessment tax during the said tax year. The intention is verification of these details by the tax paper for getting suitable tax credit. The Department would rely on this while processing the returns of assessees. In case there is some discrepancy noticed by the tax payer, they should contact the tax deductior/ relevant bank to sort out the same. Also the Tax Department should be intimated about the errors. 2. Circular 4/2009 on Remittance to Non-Residents under section 195: The revised procedure for furnishing information regarding remittances being made to non-residents w.e.f. 1 st July 2009 is as follows:- (i) (ii) (iii) (iv) (v) The person making the payment (remitter) will obtain a certificate from an accountant (other than employee) in Form 15CB. The remitter will then access the website to electronically upload the remittance details to the Department in Form 15CA (undertaking). The information to be furnished in Form 15CA is to be filled using the information contained in Form 15CB (certificate). The remitter will then take a print out of this filled up Form 15CA (which will bear an acknowledgement number generated by the system) and sign it. Form 15CA (undertaking) can be signed by the person authorised to sign the return of income of the remitter or a person so authorised by him in writing. The duly signed Form 15CA (undertaking) and Form 15CB (certificate), will be submitted in duplicate to the Reserve Bank of India / authorized dealer. The Reserve Bank of India / authorized dealer will in turn forward a copy the certificate and undertaking to the Assessing Officer concerned. A remitter who has obtained a certificate from the Assessing Officer regarding the rate at or amount on which the tax is to be deducted is not required to obtain a certificate from the Accountant in Form 15CB. However, he is required to furnish information in Form 15CA (undertaking) and submit it along with a copy of the certificate from the Assessing Officer as per the procedure mentioned from Sl.No.(i) to (iv) above. 71

72 The Directorate General of Income-tax (Systems) ( shall specify the procedures, formats and standards for running of the scheme as well as instructions for filling up Forms 15CA and 15CB. These forms shall be available for upload and printout at 3. Clarification on remittances of Consulate receipts - Circular No. 9/2009, dated It has been clarified by the Board that for the purpose of remittance of consulate receipts abroad, diplomatic missions in India need to submit only a self certified undertaking in Form No. 15CA to the remitter bank. They are not required to obtain a certificate from an accountant/certificate of Assessing Officer in Form 15CB, since their receipts are tax exempt. 4. Notification No. 67/2009, dated 9 th September, 2009 has notified Cost Inflation index for Financial Year as Dispute Resolution Panel Rules, 2009 Notification No. 84 / 2009 [F. No. 142/22/2009-TPL], dated Alternate Dispute Resolution Mechanism was introduced. by Finance (No.2) Act, 2009 and consequently Section 144C is introduced w.e.f. 1st April, Dispute Resolution Panel Rules, 2009 are introduced. The said Rules provide for the procedure for filing objection, procedure for the hearing by the panel, passing of the assessment order by the panel and rectification thereof and appeal before the ITAT, etc. The Rules also prescribed formats of Form Nos. 35A and 36 B. Further, by separate Clarification: File 142/22/2009/TPL (PL II) 20/01/10, it is clarified that a choice has been given to assessee to go before DRP against the draft Assessment Order or to file an appeal before Commissioner of Income Tax (Appeal) 6. Clarification regarding applicability of Section 194J to Third Party Administrators (TPA) Circular No. 8/2009, dated It has been clarified in this Circular that payments made by TPAs to the hospitals on behalf of the insurance companies are liable to deduct tax at source under Section 194 J of the Act. However, in case, in the past defaults have occurred in this matter, the Board has clarified the following: No proceedings u/s. 201(1) be initiated after expiry of six years from end of financial year of default. No demand u/s 201(1) be enforced if TPAs are able to satisfy the jurisdictional TDS officer that the hospital have duly paid the taxes along with a certificate to this effect from the auditors of hospitals. However, the liability of interest u/s 201(1A) of the Act till payment of taxes by hospitals as well as penalty implications would apply to the TPAs. 72

73 The Karnataka High Court, in a judgement in the case Medi Assist TPA V/s DCIT, had observed that the TPAs were obliged to deduct TDS as they were paying hospitals. The circular goes on to reinforce the point and gives directions for handling past cases of non-deduction. 7. New rules for valuation of perquisites notified Notification NO. 94/2009, dated The new perquisite valuation rules amendments to Rule 3 were recently notified by the CBDT vide Notification No. 94/2009 dated 18 th December CBDT has issued Notification No. 2/2010 dated 12 th January 2010 as a corrigendum to notification No.94 /2009 to rectify the drafting errors in perquisite valuation rules notified earlier. The new rules are more or less similar to earlier provisions (except motor car) applicable prior to introduction of Fringe Benefit Tax. Employers now need to value the perquisites, re-work tax liability and recover the same by March Certificate of lower deduction or non-deduction of tax at source under Section 197 of Income tax Act. Instruction NO.7/2009 dated 22 nd /23 rd December, Prior administrative approval of the Commissioner of Income tax (TDS) shall be taken, where the cumulative amount of tax foregone by non-deduction/ lesser rate of deduction of tax arising out of certificate under Section 197 during a financial year for a particular assessee exceeds Rs.50 lakhs in Delhi, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad and Pune stations and Rs.10 lakh for other stations. Once the CIT (TDS) gives administrative approval of the above, a copy of it has to be endorsed invariably to the jurisdiction CIT also. 9. Due date for filing return extended in case of Pune, Sangli and Kolhapur. Press Note No. 402/92/2006-MC (20 of 2009), dated The due date of filing income tax returns, due by 30 th September, 2009, of taxpayers assessed to income tax in the districts of Pune, Sangli and Kolhapur, has been extended to 31 st October Extension of time limit to file ITR V in case E-return filed without digital signature Press Release dated 27 th January The Central Board of Direct Taxes (CBDT) have decided, in relaxation of the stipulation in Circular No. 3/2009 dated , to extend the time limit for filing ITR-V form relating to income-tax returns filed electronically (without digital signature) on or after 1 st April 2009, up to 31 st March 2010 or within a period 120 days from the date of uploading of the electronic return data, whichever is later. The ITR-V form should continue to be sent by ordinary post to Post Bag No.1, Electronic City Post Office, Bengaluru (Karnataka). However, incases where acknowledgement for ITR-V form is not received by the taxpayer from the CPC Bengaluru, the taxpayer may send another duly signed ITR-v form by speed post to 73

74 Centralized Processing Centre, Electronic City Post Office, Bengaluru, Karnataka TDS U/s 194H on Commission or Brokerage etc. CBDT issued letter no. 275 /70/2009-IT (B) dated 22/12/2009 with a view to circulate the decision of Madras High Court decision in case of Around the world travels and tours (P) Ltd. vs. Union of India reported in 141 Taxman 53 (MAD), regarding deductibility of Tax u/s 194H on amount available to agents being difference between airfare fixed by Airlines and price at which agents are enabled to sell tickets. The above decision of the Madras High Court was further reinforced by the decision of Hon ble High Court of Delhi in the case of CIT v. Singapore Airlines Ltd. & other Airlines dated 13/04/2009 reported in 180 Taxman 128 in which it has been held that commissions and supplementary commissions received by the travel agents from Airline are liable to tax deduction at source u/s 194H and in case of default the mandatory interest u/s 201 (1A) is leviable. 12. Adjustment of Advance FBT against Advance income tax; Circular No. 2/2010 Finance (No.2) Act, 2009 abolished the FBT with effect from Assessment Year (A.Y.) Consequently, benefits given to employees are taxed as perquisites in the hands of employees in terms of amendment to Clause 2 of Section 17 of Income Tax Act, However, during the current Financial Year some assessees have paid advance tax in respect of fringe benefits for Assessment Year In such cases the Board has decided that any installment of advance tax paid in respect of fringe benefit for A.Y shall be treated as Advance Tax paid by assessee concerned for A.Y The assessee can adjust such sum against its advance tax obligation in respect of income for A.Y or in case of loss to claim such payment as refund as advance tax paid in A.Y Section 43(5)(d)(ii) Speculative transactions Notified recognized stock exchange Notification No. 46/2009, dated 22 nd May, 2009 The Central Government notifies MCX Stock Exchange Ltd. as a recognized stock exchange for the purpose of the said clause. MCX Stock Exchange Ltd. shall separately maintain data regarding all transactions registered in the system in which client codes have been allowed to be changed for periodical inspection by the Director-General of Income-tax (Investigation) having jurisdiction over such exchange and provide copies of the relevant information as and when required. 74

75 The Central Government may withdraw the recognition granted to MCX Stock Exchange Ltd. if any of the conditions specified in rule 6DDA of the Income tax Rules, 1962, subject to which the recognition is granted, is violated. This notification shall remain in force until the approval granted by the Securities and Exchange Board of India is withdrawn or expires, or this notification is rescinded by the Central Government as provided in sub-rule (5) of rule 6DDB of the Income tax Rules, New TDS Rules: The Income Tax Dept has finally come out with the TDS Notification No 9 Dated 18 th February, 2010, which broadly has restored the earlier TDS provisions with retrospective effect from 1 st April, Following are some of the major highlights: The Unique Transaction Number (UTN) provision is done away with Form No 17 for online UTN is deleted Form No 24C for TDS Compliance Statement is deleted TDS Certificates Form No 16 / 16A / 16AA have also been more or less restored to earlier format. The TDS Quarterly Returns have also been amended suitably to remove UTN provisions 15. TDS at a higher rate on all transactions not having PAN provision to come into effect from 1 st April, 2010: A new provision relating to tax deduction at source (TDS) under the Income Tax Act 1961 will become applicable with effect from 1 st April Tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available. The law will also apply to all non-residents in respect of payments / remittances liable to TDS. As per the new provisions, certificate for deduction at lower rate or no deduction shall not be given by the assessing officer under section 197, or declaration by deductee under section 197A for non-deduction of TDS on payments shall not be valid, unless the application bears PAN of the applicant / deductee. All deductors are liable to deduct tax at the higher rate in all transactions not having PAN of the deductees on or after 1st April In order that there is no dispute regarding quoting / non-quoting of PAN or accuracy thereof, the law requires all deductees and dedutors to quote PAN of deductees in all correspondences, bills, vouchers and other documents sent to each other. All deductors are, therefore, advised to intimate their deductees to obtain and furnish their PAN so as to avoid TDS at a higher rate. All deductees, including nonresidents having transactions in India liable to TDS, are advised to obtain PAN by 31st March 2010 and communicate the same to their deductors before tax is actually deducted on transactions after that date. 75

76 B. Taxation of Cross Boarder Transactions 1. DOUBLE TAXATION AGREEMENT WITH THE GOVERNMENT OF REPUBLIC OF TAJIKISTAN. The central government vides notification No. 58/2009-FT & TR-II; (F. No. 503/10/95-FT & TR-II dated 16/07/2009 notified that all the provision of the double taxation agreement entered into between the Government of Republic of India and the Government of the Republic of Tajikistan for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes of income will be given effect to in the Union of India with effect from 1 st April, DOUBLE TAXATION AGREEMENT WITH THE UNION OF MYANMAR The central government vide notification No. 49/2009-FT & TR-II; (F. No. 504/10/2004-FT & TR-II) dated notified that all the provision of the double taxation agreement entered into between the Government of Republic of India and the Government of Union of Myanmar for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes of income will be given effect to the Union of India with effect from 1 st April, Social Security Agreement signed with Belgium effective from 1 st September, 2009 The Government of India had signed a Social Security Agreement ( SSA ) with the Government of Belgium on 3 November 2006 to avoid the hardship of double payment of the social security contribution by employees and employers in India and Belgium having cross border operations in both countries. It has now been announced that the SSA shall come into effect from 1 st September Further, the Government has issued a handbook and FAQs, clarifying a few terms / aspects of the SSA. 4. Social Security Agreement with Switzerland The Government of India has signed a Social Security Agreement with the Government of Switzerland on 3 rd September, The said agreement is intended to benefit cross border operations in the two countries by avoiding the hardship of double payment of the social security ( by employer and employee) in India and Switzerland. The same will come into effect after the fulfillment of the necessary requirements in both the countries. 5. Social Security Agreement with Netherlands The Government of India has signed a Social Security Agreement with the Government of Netherlands on

77 6. SC stays HC order on taxation of cross border deal. In a major relief to corporate who regularly make cross-border payments, the Supreme Court has stayed an order by the Karnataka High Court, issued a couple of months ago asking these companies to pay tax on all cross-border payments. The apex court gave the ad-interim order on December 18, 2009 on a special leave petition filed against the high court order in the CIT Vs Samsung Electronics case. The Karnataka High Court s order on 29 th October 2009 stirred a controversy as it held that if the tax payer thought that the nature of payments did not require deduction of tax, he should approach the assessing officer for a certificate to that effect. In short, tax should be deducted from all payments to non-residents if the tax payer did not have a certificate from the department. Amount the parties affected by the Karnataka High Court order include a host of electronic companies like Samsung. The Supreme Court has stayed till further order on all actions by the I.T. department on the basis of the Karnataka High Court Order. The Karnataka High Court had observed that tax payers do not have sufficient expertise to decide whether the nature of the payment to non-resident calls for deduction of tax. The department s view on this issue was that if the tax payer had not deducted tax while making the payment to the non-resident, he is liable for action under section 201 of the Income Tax Act dealing with non-payment of income and interest thereon. 7. DOUBLE TAXATION AGREEMENT WITH GOVERNMENT OF GRAND DUCHY OF LUXEMBOURG The Central Government Vide its Notification No. 78/2009 dated 12 th October, 2009; notifies an agreement and Protocol between the Government of Republic of India and the Government of Grand Duchy of Luxembourg for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital which was signed on 2 nd day of June, The Central Government hereby directs that the all provision of the said agreement and the Protocol shall be given effect in the Union of India with effect from 1st day of April, The date of entry into the force of the said agreement is the 9th day of July, 2009, being the date of the latter of the notification of the completion of procedures as required by the respective laws for entry into the force of the said agreement. 8. DOUBLE TAXATION AGREEMENT WITH GOVERNMENT OF REPUBLIC OF MONTENEGRO The Central Government Vide its Notification NO. 4/2009 dated 7 th January, 2009; notifies Convention between Government of Republic of India and the Council of Ministers of Serbia and Montenegro for the avoidance of double taxation with respect to taxes on income and on capital which was signed on 8 th day of February, The State Union of Serbia and Montenegro was disintegrated into two independent states after Montenegro s formal declaration of independence on3rd June, 2006 and Serbia s formal declaration of independence on 5 th June,

78 The Central Government hereby directs that the all the provision of the said Convention shall be given effect to Union of India. The date of entry into the force of the said Convention is the 23th day of September, 2008, being the date of the latter of the notification of the completion of procedure as required by the respective laws for entry of the force for this Convention. 9. WITHDRAWAL OF INSTRUCTION NO. 1829, DATED W.R.T. GUIDELINES REGARDING TAXABILITY OF NON-RESIDENTS ENGAGED IN THE EXECUTION OF POWER PROJECTS ON TURNKEY BASIS Since assessees in all cases, in all situations, are relying upon the instruction, which was originally intended for only a particular type of turnkey power project, for a given situation, to align their business operations in a manner to avoid payment of taxes in India, the CBDT has withdrawn the above circular with immediate effect. 10. Revised DTAA with Finland signed Press Release No. 402/92/2006-MC (03 of 2010), dated 15 th January, A revised Agreement and Protocol between the Republic of India and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (DTAA) was signed. As per the revised Agreement, withholding tax rates have been reduced on dividends from 15 percent to 10 percent, and on royalties and fees for technical services from 15 or 10 percent to a uniform rate of 10 percent. Lowering of withholding tax will promote greater investments, flow of technology and technical services between the two countries. The revised Agreement also expands the ambit of Article concerning Exchange of Information to provide effective exchange of information in line with current international standards. The Article inter-alia provides that a Contracting State shall not deny furnishing of the requested information solely on the ground that it does not have any domestic interest in that information or such information is held by a bank etc. An Article for Limitation of Benefits to the residents of the contracting countries has also been included to prevent misuse of the DTAA. Other features of the revised Agreement are :- o o Provisions regarding Service PE has been included in the Article concerning PE. Paragraph 2 to Article 9 has been included to increase the scope for relieving double taxation through recourse to Mutual Agreement Procedure (MAP). 78

79 o o A new Article on assistance in collection of taxes has been added to ensure assistance in collection of taxes when such taxes are due under the domestic laws and regulation. The time test for Independent Personal Service has been extended from 90 days or more in the relevant fiscal year to 183 days or more in any period of 12 months commencing or ending in the fiscal year concerned. The revised DTAA will enter into force after completion of internal process in both the countries. 11. Circular No. 7/2009, dated 22 nd October, 2009: The CBDT has now withdrawn the earlier Circular No. 23/1969 dated 23 rd July, 1969 regarding taxability of income accruing or arising through or from business connection in India to a non-resident, under section 9 of the Act. CBDT also withdraws Circular No. 163 dated 29 th May, 1975 and No. 786 dated 7 th February, 2000, which provided clarification in respect of certain provisions of Circular No. 23 dated 23 rd July, C. Other Bullet Points 1. New rates of profession tax prescribed w.e.f in Maharashtra Salary (Rs.) Profession tax (Rs.) 5000 Nil 5001 to per month & above 2500 per annum to be deducted as April to January 200 per month, February 300 and March 200 [BCA Journal August 2009] 2. Business / Employment visa The Ministry of Home Affairs has issued Frequently Asked Questions on workrelated visas issued by India, clarifying the purpose, duration and various scenarios under which Business Visa/Employment Visa may be granted to foreign nationals. These FAQ s are available on [BCA Journal December, 2009] 3. Vodafone deal: Tax burden draws flak The Government s attempt to change its tax laws in order to slap a $ 2 billion tax bill on Vodafone for its roughly $11.1 billion purchase of Hutch Essar in 2007, is meeting with stiff resistance from powerful US investors. Claiming that the move has killed investment appetite in India, US investors have written to the Finance Minister Pranab 79

80 Mukherjee, asking for a review of the Revenue authorities decision to tax crossborder investments with retrospective tax legislation enacted in The strongly worded letter, expressing concerns about India s investment climate has also been sent to principal secretary to PM, T.K.A. Nair, Cabinet Secretary K.M. Chandrasekhar, Deputy Chairman, Planning Commission, Montek Singh Ahluwalia and the Commerce Ministry. The letter has been written by the National Foreign Trade Council (NFTC), an association of 300 US business enterprises engaged in all aspects of international trade and investment. According to the NFTC, any necessary changes made to the laws should be with prospective effect only, rather than through retrospective changes in interpretation of current law or application of withholding tax provisions. The NFTC warns that the move creates an impression among foreign investors that investing in India brings with it a significant risk of tax liabilities arising from unforeseen new interpretations of tax laws and retrospective tax changes. Our members will have limited funds to invest overseas and this new interpretation may cause several of them to reconsider investing in India, looking instead to other countries which have not taken this position and which act in a perceived less arbitrary manner in taxing foreign investors, it added. Pointing out that US based MNCs have history of robust investment in India, NFTC said Indian Revenue authorities have begun to argue that India is entitled to tax certain capital gains on global M&As taking place outside of India. (Source: Internet & Media Reports, ) 4. Foreign investment proposals via Mauritius As per recent press reports, the Foreign Investment Promotion Board (FIPB) has rejected the view of the Tax Authorities to reject foreign direct investment (FDI) proposals where such investments are proposed to be made via Mauritius. The FIPB is said to have taken a policy decision not to overrule such FDI proposals merely because they are proposed to be made from Mauritius. The Tax Authorities are suspecting that Treaty shopping is being done by foreign investors by using Mauritius jurisdiction for investing in India. This question came up before the FIPB while considering a proposal by a Mauritian holding company which wanted to invest a large sum of money in a fund in India (India Value Fund). It is reported that rejecting the Treaty shopping objection of the Department of Revenue, Ministry of Finance (Revenue Department), the FIPB has approved this proposal and the proposal will now be placed for final approval before the Cabinet Committee of Economic Affairs (CCAE) of the Government of India. The Revenue Department was having a generic objection to foreign investment routed through Mauritius, with which India has signed a DTAA. The concern of the Revenue Department is that treaty shopping by a resident of a third country results in loss of tax revenue for the Indian Government by claiming capital gains tax 80

81 exemption in India under the DTAA. It is worth mentioning here that a large portion of FDI in India comes from Mauritius. The view of the FIPB is that since India has signed a DTAA with Mauritius which is inforce, the Revenue Department cannot take a generic objection of Treaty shopping for denying the foreign investment proposed via Mauritius. [It will be pertinent to note here that the Revenue Department has issued a clarification dated 13 April 2000 (Circular No, 789) clarifying that Foreign Institutional Investors (FIIs) and other foreign investors who hold a valid Tax Residency Certificate granted by Mauritius Tax Authorities, will be regarded as residents of Mauritius and also the beneficial owners of shares, etc. for granting of capital gains tax exemption in India as per the India-Mauritius DTAA. The legal validity of this Circular was later approved by the Supreme Court of India in Its landmark ruling in the case of Union of India v. Azadi Bacho Andolan, (2003) 263 ITR 706.] (Source : Business Standard, New Delhi, dated ) 5. India to amend tax treaty with Mauritius. India is planning amendments to the Double Taxation Avoidance Treaty with Mauritius to prevent its misuse for avoiding taxes. Amendments to the Indo- Mauritius DTAC (Double Taxation Avoidance Convention) to prevent its misuse and enhance exchange of information, including banking information, are being pursued..., Minister of State for Finance S S Palanimanickam said in a written reply in the Rajya Sabha. The changes in the treaty are being worked upon through a joint working group constituted for this purpose, he added. Many companies route their investments into India through tax havens to avoid paying taxes. The Organisation for Economic Cooperation and Development (OECD) has said that all countries should permit access to bank information for all tax purposes, so that tax authorities could fully discharge their revenue raising responsibilities, the Minister said (Source: Business Standard, ) 6. Amnesty Scheme in US: 7500 Offshore tax evaders come clean Some 7,500 wealthy Americans turned over information about hidden overseas assets, including some valued at more than $ 100 million, ahead of a tax amnesty program s dead line, the top US tax collector said. Doug Shulman, commissioner of the Internal Revenue Service, said his agency would expand its crackdown on offshore tax evasion and will open new criminal investigation offices in Beijing Panama and Sydney, Australia. The amnesty plan revealed accounts in 70 countries. Under the amnesty program that began in September, tax cheats can declare offshore accounts and income, pay reduced fines and, in general, get immunity from criminal 81

82 prosecution. The program turned up undeclared offshore accounts ranging from $ 10,000 to more than $ 100 million. At the heart of the US offshore tax effort is the government s investigation of UBS AG (UBSN.VX). The giant Swiss bank earlier this year settled a criminal probe by paying $ 780 million and admitting it helped US citizens evade taxes. In August, the bank agreed to turn over 4,450 names of clients with undisclosed offshore accounts to end a related civil lawsuit. Senator Carl Levin, a Democrat and chairman of the Senate Permanent Subcommittee on Investigations, has estimated the US losses $ 100 billion annually from international tax evasion. He questioned how many of the individuals came forward without nudging from banks. (Source: ) 7. Foreign arms of Indian cos under tax net likely Introduction of CFC Rules The forthcoming budget may contain provisions for taxing the undistributed dividends of foreign corporations that are controlled or owned by Indian companies. Controlled Foreign Corporations (CFCs) laws enable the authorities to tax the income of a resident derived from a foreign corporation. This is irrespective of whether the profit/dividend of the foreign entity is transferred to India or not. Countries adopt CFC laws mainly for checking the probable loss of revenue arising from the transfer of profit of foreign corporations to offshore havens, such as the Isle of Man and Cayman Islands. CFC laws are in force in at least 25 countries with varying rules and regulations. In the US, for instance, 50 per of the voting rights or 50 per cent of the value of shares constitutes a CFC. The Indian tax authorities think it is time India had a law that will tax the profits of foreign corporations that are controlled by Indian companies. Since cross-border acquisitions by Indian companies have been on the rise in the recent past, the government may find it difficult to ignore the demand of the tax authorities. (Source: The Economic Times, dated ) 8. Transfer Pricing CBDT panel to formulate safe harbour provisions. The Central Board of Direct Taxes (CBDT) has set up a committee to formulate rules for the safe harbour provisions a set of rules that would enable the income tax (I-T) authorities to accept the transfer pricing returns without scrutiny. Foremost amount the committee s tasks is to set an acceptable margin which would act as benchmark for the industry. For example, if the safe harbour rules stipulate that the margin in a particular industry is 20%, and if the transfer price declared by a company engaged in that industry is not less than the margin, the I-T authorities would accept the return without questions 82

83 The rules, once introduced, will lend an investment friendly image to India. It will also put an end to the requirement of collecting huge amounts of data regarding transfer pricing transactions, thereby saving time and energy. (Source: The Economic Times, dated ) 9. CBDT to monitor Companies advances tax payments. Top advance tax paying companies are set to come under the tax authority s radar, as the income tax department tries to meet its mammoth direct tax collection target for As a means of additional revenue generation, the Central Board of Direct Taxes (CBDT) has decided to monitor advance tax payments of top companies and ensure that they do not defer the payment to next fiscal. CBDT is also planning to ensure that all loss-making companies that have to pay minimum alternate tax do so at the enhanced rate of 15% and do not postpone the payment to [Source: Economic Times, dated 8 th February 2010] 10. Income Tax Department considering publishing the name of tax defaulters. Tax defaulters beware. The income tax department is considering publishing the names of habitual tax defaulters with large tax demands pending. According to official sources, the department is planning to compile a list of all cases, where there is a tax demand of over Rs.1 crore with no pending appeals. The information, along with names of the defaulters, will then be published in newspapers or other media. The defaulters will include both individual as well as corporate assessees. While the proposal is yet to get approved, the Central Board of Direct Taxes (CBDT) is confident of its likely utility. 11. PAN REQUIREMENT FOR TRANSMISSION OF SHARES IN PHYSICAL FORM ( The SEBI has issued Circular No. SEBI/MRD/DoP/SE/RTA/Cir-03/2010 dtd clarify that it shall be mandatory to furnish a copy of PAN in cases of, (a) deletion of name of the deceased shareholder(s), where the shares are held in the name of two or more shareholders, (b) transmission of shares to the legal heir(s), where deceased shareholders was the sole holder of shares, and (c), transposition of shares when there is a change in the order of names in which physical shares are held jointly in the names of two or more shareholders. It is also provided that in case of mismatch in PAN card details as well as difference in maiden name and current name (in case of married women) of the investors, the RTAs can collect the PAN card as submitted by the transferee(s); however, this would be subject to the RTAs verifying the veracity of the claim of such transferee(s) by collecting sufficient documentary evidence in support of the identity of the transferee(s) in terms of SEBI Circulars already issued in the past. 83

84 CHALTE - CHALTE Vishal : Today s headline says Fiscal Health gets a Booster shot!. Pranav : Parvati : Krutika : Radhika : But I think Hon ble FM has given boost to our physical health as well. Why do you say so! Increase in tobacco tax cigarettes and cigars will be dearer. Pranab Da was once a Pipe smoking Bengali Babu. He has quit smoking and now threatens smokers with taxes! Higher allocations of funds to health sector. Lower import duty on medical equipment. So cost of medical care should reduce! Swati : Cost of motor car and two wheelers has gone up but microwaves and oven are cheaper. Sam : Cost of petrol and diesel has gone up. Sonu : So no more traveling in car and start Cycling! Kushal : Good for health good for pocket, Saving resulting because of reduced personal taxation will not be consumed in increased petrol prices. (Source: Times of India: ) Anay : Even opposition became health - conscious and that s why they all walked out!. All : WISER Pranab,!Healthier India!! HA! HA!! HA!!!