Budget 2009 FOREWORD:

Transcription

1 T A X A TAX UPDATE

2 FOREWORD: In the run-up to the budget proposals, the Finance Minister had to address the Aam admi promises made during the elections in addition to managing the challenging economic climate. FM speaks - the Government recognizes the challenges that this task entails, particularly at a time when the world is still struggling with an unprecedented financial crisis and an economic slowdown that has also affected India. While we are determined to convert our words into deeds, Members would appreciate that a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do so. Yet, it is an important means to share the vision of the Government, particularly as we begin a new term. I propose to do just that for the next hour or so, as I dwell on the challenges and outline the approach of the government in the short term and medium term perspectives. The budget has been characterized with an increased government expenditure of 36% over the budget estimates of and purports to stimulate the growth in the challenging times. The FM has chosen to take the risk of moving away from the Fiscal Responsibility and Budget Management Act (FRBM) targets with a fiscal deficit of 6.8% of the GDP with no clear indication on the time-lines for coming back to fiscal consolidation. On the tax proposals, while the FM has not rolled back any of the earlier stimulus packages, he has indicated that no further stimulus packages are envisaged. His key thrust has been to move towards improving the efficiency and equity of our tax system In this Communique, we take a look at the key proposals signaling the Government s thrust on tax reforms. Page 2 of 52

3 CONTENTS: Budget At a glance: 4 Direct Taxes: 4 Indirect Taxes: 6 Signaling the Tax Reforms 8 Direct Tax Proposals 15 Corporate Tax 15 Limited Liability Partnership 32 Personal Tax 33 Wealth tax 36 Commodity Transaction Tax 36 Indirect Tax Proposals 37 Goods and Services Tax 37 Service Tax 38 Central Excise 43 CENVAT 47 Customs 48 Effective Dates 51 Page 3 of 52

4 BUDGET AT A GLANCE: DIRECT TAXES: Tax Rates for FY No changes in corporate tax rates. Surcharge on tax is removed for individuals, HUF, AOP, BOI and partnership firms. MAT payable by the companies increased to 15% from 10% of book profits with an additional period for carry forward and set off of MAT Credit. The period for set off increased to 10 years from 7 years. Basic exemption limit for personal tax increased. Fringe Benefit Tax abolished and specified fringe benefits are taxed as perquisite. Sweat equity or ESOPs and contribution to super annuation funds to be taxable as perquisites in the hands of the employees. The basic exemption limit under wealth tax increased to Rs. 30 lacs from Rs. 15 lacs. Commodity transaction tax abolished. Exemptions / Deductions / Relief Tax holiday to STPs and EOUs extended for one more year (FY ). Weighted average deduction of 150% of expenditure on in-house scientific research extended to all manufacturers. Advance tax applicable only if the total tax payable for the year is in excess of Rs. 10,000. Ceiling on remuneration paid to partners allowable as deduction increased. Presumptive taxation introduced for businesses with turnover / gross receipts up to Rs. 40 lacs Limit of Rs. 20,000 increased to Rs. 35,000 for transport contracts for disallowance of expenditure if payment is not made by account payee cheque or bank draft. Donations made to electrol trusts to be allowed as deduction. Deduction under section 80DD hiked. Relief under Section 80E (Interest on loan for higher education) extended to vocational studies. Page 4 of 52

5 Tax Deduction at Source Rate of TDS on rent of land and building reduced to 10% and rent of machinery reduced to 2%. Rate of TDS on contract payments rationalized. Higher rate of TDS at 20% applicable if the deductee fails to furnish PAN w.e.f No TDS on payments to transport contractors on furnishing PAN details. Surcharge and Cess not applicable on TDS for non-salary payments. Time limit for completion of TDS assessments introduced. Others New Direct Tax code to be introduced in next 45 days for public comments and to be placed before the Parliament in the winter session. CBDT empowered to make rules for safe harbour provisions under TP regulations. Dispute Resolution Panel to be established to improve tax administration and avoid prolonged uncertainty in tax matters involving foreign companies and transfer pricing. Provisions introduced to mandate quoting of Document Identification Number in all correspondence by the income tax authorities. Provisions introduced to enable serving of documents or orders to the assesses through electronic mode. Provisions relating to taxation LLP introduced provisions applicable to partnership firms to mutatis mutandis apply to LLPs. Page 5 of 52

6 INDIRECT TAXES: GST to be implemented in April 2010 Rates of tax / duty No change in basic rates of customs, central excise or service tax. No change in the rate of CST. Service Tax Legal services brought into service tax net. However, no service tax applicable in case of individuals. Medical services involving cosmetic and plastic surgery brought into service tax net. Services involving transport of goods through national water way subjected to service tax. Production or processing of goods excluded from the category of business auxiliary services only if they are excisable goods. Services provided to installations, structures and vessels in the continental shelf and exclusive economic zone of India exempt. Commission agency services and GTA services received by exporters of goods from exempt. Stock broking services provided by sub-brokers excluded. New simplified scheme introduced for refund of service tax to exporters of goods. Powers of the Commissioner to revise the orders dispensed with. Alternatively, the appeal provisions made applicable subject to certain modifications. Service providers opting for composite scheme for works contracts to pay composite tax on the value of goods involved therein whether or not any consideration is received. The rate of service tax payable by service providers opting not to maintain separate records reduced to 6% on exempt services. Page 6 of 52

7 Central Excise The rate of excise duty payable by manufacturers opting not to maintain separate records reduced to 5% on exempt goods. Duty payable by EOUs manufacturing goods wholly out of indigenous raw materials increased to 4% in case of goods wholly made of cotton and 8% if made of any other textile materials. Transfer or right to use software for commercial exploitation exempted from duty provided that the manufacturer is registered under Service tax. Others The Advance Ruling Authority established under the provisions of Income Tax Act to administer the advance ruling procedures under the Customs, Central Excise and Service Tax matters. Provisions introduced to restrict compounding of offences in certain circumstances / situations under Central Excise and Customs matters. Customs Provisions introduced to facilitate claim of refund in respect of imported goods found to be defective / non-compliant subject to conditions. Page 7 of 52

8 SIGNALING THE TAX REFORMS A LOOK BEYOND In this section, we have outlined the government s tax policy, macro economic indicators on tax, and a perspective on the Indian tax trends and proposals. A Macro Economic Backdrop The year saw a moderate growth of the Indian economy as compared to the previous years. The steep increases in prices of international crude oil and commodity prices in the beginning of the year followed by the global recession stemming from the global financial crisis, in the latter part of the year, resulted in the fall in the growth rate of the Gross Domestic Product. The impact of the global crisis was felt through the channels of capital flows, financial markets and trade. This resulted in growth of real Gross Domestic Product (at factor cost) falling to 6.7 per cent in as against a growth rate averaging 9.4 per cent per annum over the period to It should be noted that India has been more resilient to the global crisis when compared to many other economies. The key economic growth trends indicate that while there is a steep slowdown in growth in industry, the growth slowdown in services sector was moderate. Component wise analysis of the services sector indicates that the decline in growth in trade, hotels, transport and communication, financing, insurance, real estate and business services was cushioned by the significant increase in growth in community, social and personal services. This increased growth is attributed to increase in government expenditure in line with the fiscal policy to mitigate the impact of the global recession on economy. In the above backdrop, the focus in the second half of the financial year shifted to providing growth stimulus. The Government introduced three stimulus packages during this half year. The tax revenue receipts as per provisional accounts for was short by 12.80% of the budgeted estimates. Page 8 of 52

9 Tax Policy of the Government In recent years, tax policy has been guided by the need to increase the tax-gdp ratio and achieve fiscal consolidation. In these years, the tax-gdp ratio improved significantly from 9.2 per cent in to 12.6 per cent in This has been achieved through rationalisation of the tax structure (moderate levels and a fewer rates), widening of the tax base, and reduction in compliance costs through improvement in tax administration. Owing to the policy interventions for inflation management and subsequently for providing a stimulus to growth, Government had to forego substantial revenues from excise and customs duties. Consequently, despite the buoyancy of direct tax revenues and service tax collections, the fiscal consolidation process received a setback. It is expected that a recovery in growth of tax receipts would happen in the later part of and enable a return to the path of fiscal consolidation by moving closer to Fiscal Responsibility and Budget Management Act, 2003 (FRBM) targets. The key policy directions are: while continuing on the path of simplifying and rationalizing the tax structure and improving the tax-gdp ratio, it has been considered necessary to continue (and also enhance in some cases) fiscal support to certain labour intensive and employment oriented sectors, which continue to be beleaguered owing to falling demand in domestic and export markets. It is also proposed to integrate the tax on goods and the tax on services, and finally move to a common Goods and Service Tax (GST). In as much as the policy so far has sought to achieve convergence of rates, this would facilitate the introduction of GST by 1st April, 2010, as already announced by the Government. This shift to GST is expected to significantly improve buoyancy from indirect taxes, owing to the opportunity it provides for further convergence and moderation of rates and a substantial expansion in the tax base Page 9 of 52

10 which would extend beyond manufacturing all the way to retail. During the FRBM period there has been a structural change in the composition of Centre s tax revenue. The share of direct taxes in Centre s tax revenues has also increased to 55.5 per cent in from 41.4 per cent in The medium term strategy for direct taxes is to consolidate the achievements of the past and accelerate this process of change. Tax Performance & Targets With an exception to Central Excise, the RE for the year have shown a positive growth in the collection of taxes by 8.97% over the actuals for the year This growth appears to be curtailed for the year (BE). While the corporate income tax shows a growth by 15.64%, the overall growth in tax revenues is envisaged at a meager 2.09%. Tax Revenue Summary Rs. Crores Revenue (BE) (RE) Corporate Tax 256, ,000 Income Tax - others 112, ,600 Customs 98, ,000 Central Excise 106, ,359 Service Tax 65,000 65,000 Other Taxes 2,027 1,990 Total 641, ,949 The revenue foregone remains high in terms of overall revenue collection. The stimulus packages announced by the Central Government to mitigate the global financial crisis has reflected in the lower gross tax revenue receipts for the FY The gross tax receipts per provisional accounts for are lower by Rs. 78,010 crores when compared to the BE for Page 10 of 52

11 A Look Beyond: Our Perspectives Tax Administration Reforms A good step forward The Government has proposed several encouraging steps for further improving the tax administration. Introduction of the Dispute Resolution Panel for fast-track resolutions of disputes faced by foreign companies and companies with transfer pricing disputes. Initiative to bring about increased transparency in funding of political parties through establishment of electoral trusts. Simplification of compliances for small businessmen by introduction of presumptive taxation. Increased efficiencies in tax administration by re-engineering of key processes coupled with automation e.g. introduction of document identification numbers and recognition of electronic correspondences. New generation industries Government s small steps approach While there is something to cheer about for the new-age industries, the lack of any reforms on the much awaited matters appears to have put them one step back. The positives to be reckoned would be: Transfer of right to use packaged software for further exploitation exempted from central excise duty and countervailing duties is indicative of an attempt to remove the anomalies over possible multiple taxes on software. Weighted average deduction of 150% of the actual amount incurred for inhouse scientific research for all manufacturers signals the focus on innovation. Proposal to introduce safe harbour provision in transfer pricing thereby reducing taxpayer hardships on litigation would improve the tax administration Page 11 of 52

12 The other positives include removal of FBT and reduction in the withholding tax rates However, the impetus extended by the Government appears inadequate vis-à-vis the sector expectations. The extension of tax holiday for STPs and EOUs by one year is much against the expectation of the industry. It is understood that the industry expected an extension by not less than 3 years. Provisions have been made to enable STPs to claim refund of unutilized service tax credits. While the Central Government has introduced provisions and issued various notes and circulars to facilitate speedy processing of such claims, the on-field reality is contrary. Despite repeated representations, the Central Government has chosen not to address the concerns of the trade and industry on these matters. Much against the expectation, the corporate rates have not been reduced. To add to this, the increase in MAT by 50 percentage points is seen as a spoil sport by the exporting community. With the increase in outbound operations of Indian companies, there was an anticipation that the FM would provide for a foreign tax credit regime. Clarity on the foreign tax credit positions and recognition of underlying tax credits for dividends earned would not only improve the competitiveness of the Indian companies in the global market but would also encourage companies to plough back into India, the profits earned from overseas operations. Given India's inherent strengths in information technology, there was anticipation that India would clarify its position on certain tax issues surrounding business models in e-commerce and information technology. Page 12 of 52

13 Missing the Big Bang Tax reforms to stimulate investments While, the FM articulated his belief in introducing investment linked incentives, not much was proposed to encourage circulation of private wealth. In current economic conditions there appears very little for the housing sector. The Government could have considered increased tax reliefs for individuals for payment of housing interest and timely repayment of loans. Given the lack of a tax pass-through status for LLPs; this vehicle may not function to its potential as a strong investment vehicle for high net worth individuals. The anomaly of classifying information technology software as goods or services has not been laid to rest. Despite various representations, the Government has apparently not made any mention or issued any clarifications in this regard. Tax Reforms the road ahead Key Structural Changes in Direct and Indirect Tax from As aptly stated by the Finance Minister: Tax reform, like all reforms, is a process and not an event. The FM has emphatically stated that a new Direct tax code and the GST would be introduced. In the words of the FM: we need a tax system which generates revenues on a sustained basis without use of coercive tax collection methods at the end of each year to meet targets. Both these legislations are expected to provide some key structural changes to levy and administration of the taxes. New Direct Tax Code Expected Soon The FM has committed to releasing the new Direct Taxes Code within the next 45 days. The Direct Taxes Code, along with a Discussion Paper, will be released to the public for debate. Based on the inputs received, the Government will finalise the Direct Taxes Code Bill for introduction in this House during the Winter Session. It is envisaged that the same would be promulgated by Page 13 of 52

14 Goods and Services Tax to be introduced from In indirect taxes the FM purports to accelerate the process for the smooth introduction of the Goods and Services Tax (GST) with effect from 1st April, As per the FM s budget speech the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise and through their collaborative efforts, they have reached an agreement on the basic structure, in keeping with the principles of fiscal federalism enshrined in the Constitution. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. The FM has himself stated that it is his intention to make a modest start in this direction in the current year and ensure that the process is completed in the next four years. The FM speaks - At the end of this process, I hope the Finance Minister can credibly say that our tax collectors are like honey bees collecting nectar from the flowers without disturbing them, but spreading their pollen so that all flowers can thrive and bear fruit. Page 14 of 52

15 DIRECT TAX PROPOSALS CORPORATE TAX Tax Rates For FY Business Profits There are no changes in the normal tax rates, surcharge or cess for the corporate sector. Taxable Income (Rs.) Domestic Company Foreign Company Upto 10,000, % 41.20% Above 10,000, % 42.23% - Marginal relief shall be available in certain cases - The above rates are inclusive of surcharge and cess, as applicable - It excludes cases liable to special rates of tax (such as, non-residents earning interest income, royalty income or fee for technical services). Minimum alternate tax rate increased MAT payable by the companies under Section 115JB is increased from 10% to 15% of book profits. However, as a relief to the taxpayer the time period for carry forward and set-off of the tax credits is extended from 7 years to 10 years. MAT Rate Taxable Income - Upto 10,000,000 - Above 10,000,000 Domestic Company 15.45% % Foreign Company 15.45% 15.84% Further amendments have been made to provide that any amount set as provision for the diminution in the value of assets is to be added back if the same is debited to profit and loss account. This amendment is made retrospectively from the financial year Similar amendment made in Section 115JA (erstwhile MAT provisions) retrospectively from financial year Page 15 of 52

16 Fringe Benefit Tax The provisions of fringe benefit tax have been abolished with effect from FY The Finance Act, 2005 introduced the Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees. This tax has been perceived as imposing considerable compliance burden. Empathising with these sentiments, I propose to abolish the Fringe Benefit Tax Advance Tax FM, Mr. Pranab Mukherjee Rationalization of Withholding Taxes Surcharge and Cess not applicable on TDS in respect of non-salary payments: The surcharge at the rate of 10% of tax and education cess at 3% of the tax shall not be applicable on non salary payments to domestic tax payers / deductees. However, in respect of payments to companies other than domestic companies, surcharge of 2.5% would continue to be applicable where such income exceeds one crore rupees in the relevant year. Further, the education cess at 3% continues to be applicable for payments to non residents. Currently the liability for payment of advance tax during a financial year arises when the total amount of tax payable during that year is Rs. 5,000 or more. It is proposed to raise this threshold limit to Rs. 10,000. The proposed amendment would be effective financial year Page 16 of 52

17 The withholding tax rates in relation to rent payments have been rationalized and the proposed rates are as follows: Nature of Payment Rent of plant, machinery or equipment Rent of land, building or furniture to an individual and HUF Rent of land, building or furniture to a person other than individual and HUF Existing base rate Proposed ( ) 10% 2% 15% 10% 20% 10% The withholding tax provisions in relation to contract payments have been rationalized and effective the rates are as follows: 1% if the payee is Individual or HUF. In the case of other entities, the rate prescribed is 2%. In the case of transport contracts, no TDS is required if the transporter quotes his PAN. Otherwise, TDS rates as prescribed above are applicable. In relation to contract payments on or after the law has clarified that work shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for sale. This will however not apply to a contract which does not entail manufacture or supply of an article or thing (e.g. a construction contract). Further, if the raw material is purchased from such customer then the contract would qualify as for work. It is further proposed to provide that in such a case TDS shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value. Page 17 of 52

18 No TDS in respect of payments to Transport Contractors: No TDS shall be applicable or deducted in respect of payments to transport contractors if they furnish the PAN to the deductor. However, the deductor would be required to intimate the PAN details to the Income Tax Department in the prescribed format. Higher rate of TDS where the details of PAN is not furnished to the deductor: The deductees / payees are required to furnish the details of PAN to the deductors. In the event, the details are not furnished, the rate of TDS applicable on such payments would be at higher of the following irrespective of the nature of payment: 20% of the amount paid / payable Rates as per the other provisions of the Act Rate/s in force for the relevant payment The above would be equally applicable for payments made / to be made to non-residents. Both the deductor and deductee are required to quote the PAN in the correspondences, bills, vouchers and other documents sent to each other. This amendment is applicable with effect from FY The cap on the time limit for passing order for failure to deduct tax at source introduced: In case of default or failure to deduct tax at source, the time limit for passing the order to holding a person to be an assessee in default is capped at 2 years from the end of the financial year in which the statement of TDS is filed and where no statement is filed, such order can be passed within 4 years from the end of the financial year in which the payment is made or credit is given. This cap of 2 years and 4 years would not be applicable in respect of the following: Tax is deducted but not deposited. Employer has failed to pay tax on non monetary perquisite under section 192(1A). The deductee is non resident. In the above case, the order can be passed even after the four years. These provisions are applicable for the orders passed on or after Page 18 of 52

19 Filing of quarterly statements dispensed with: Currently, the withholding tax compliance and administrative provisions require filing of quarterly statements in respect of the tax deducted / collected at source. These provisions are amended to provide that such statements of tax deducted / collected at source to be prepared for such period as may be prescribed. This provision is applicable from Tax Reliefs The sun-set clauses for deduction in respect of export profits under sections 10A and 10B of the Income-tax Act for units operating under software technology parks and export oriented parks scheme respectively, is extended by one more year i.e. upto Deduction in respect of export profits is available under sections 10A and 10B of the Income-tax Act. The deduction under these sections would not be available beyond the financial year In order to tide over the slowdown in exports, I propose to extend the sun-set clauses for these tax holidays by one more year i.e. for the financial year FM, Mr. Pranab Mukherjee Page 19 of 52

20 In relation to units operating from special economic zones, the existing provisions provided that the relief be computed with reference to the total turnover of the taxpayer. This would be discriminatory in so far as those taxpayers who have multiple units in both the SEZ and the domestic tariff area (DTA) vis-avis those taxpayers who are having units in only the SEZ. With a view to remove the anomaly, it is proposed to amend the provisions so as to provide that the deduction shall be computed with reference to the total turnover of the undertaking. This amendment will take effect financial year Section 35(2AB) provides for a weighted average deduction of 150% of the expenditure incurred on in-house scientific research and development for select businesses if approved by the prescribed authority. The scope of businesses entitled to avail of this relief is widened to include all businesses engaged in the manufacture of or production of article or thing except those specified in the Eleventh Schedule (firms producing alcohol, tobacco, cosmetics, toiletries, dental care products and aerated drinks). Hitherto, the benefit was available only to companies engaged in biotechnology or in manufacture of drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the Board. Page 20 of 52

21 Investment linked tax incentives introduced for the following businesses. Setting up and operating of cold chain facility Warehousing facilities for storing agricultural produce Laying and operating cross country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle. Under this method, all capital expenditure, other than expenditure on land, goodwill and financial instruments would be fully allowable as deduction subject to certain conditions. Further any consideration received when such assets are discarded or transfered would be liable to tax as business income. Further, the losses in relation to this business can be carried forward indefinitely to be set off against the profits and gains from such business in future. In case a taxpayer derives income partly in the nature of agricultural income and partly business income, the depreciation is computed as if the entire income is derived from the business. Hence, the depreciation to the extent it relates to agricultural income is deemed to be allowed even though agricultural income is exempt. Tax holiday under section 80-IB(9) of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, to be extended to commercial production or refining of natural gas. This tax benefit would be available if the production or refining is undertaken from oil and gas blocks which are awarded under the NELP-VIII round of bidding. Further, a retrospective amendment is made with effect from FY , to expand the meaning of the term undertaking for the purposes of relief under section 80-IB(9). It will mean all blocks awarded in any single contract. Page 21 of 52

22 Extension of terminal dates for relief claim under Section 80IA The terminal dates for units engaged in the generation or distribution or transmission of power has been extended to from Consequently, the units may commence generation or transmission or distribution at any time prior to to be eligible to claim this relief. This amendment would be applicable retrospectively from The terminal date for units availing deduction in respect of profits and gains derived from commercial production or refining of mineral oil has been extended by three years. Consequently, these units may begin refining of mineral oil before to avail of the tax benefit. The new terminal date will be the same for both the public and the private sector. Distribution of Profits to Partners The present ceiling of remuneration allowable as deduction for the computation of income of a Firm as per the provision of section 40(b)(v) is increased. Further, the distinction between a firm carrying on a profession or any other business is done away with. The limits of remuneration are as follows: Income (Rs.) (Book Profit) Less than Rs. 300,000 or Loss On the Balance Proposed Rates 150,000 90% of the book profit 60% of the book profit Page 22 of 52

23 Presumptive taxation The presumptive taxation scheme was erstwhile restricted to select small businesses such as retail, civil construction or supply of labour for civil construction. It is proposed to expand the scope of presumptive taxation to all businesses with effect from FY The salient features of the proposed presumptive taxation scheme for small business (other than goods carriages business) are as under: The scheme shall be applicable to individuals, HUFs and partnership firms excluding Limited liability Partnership Firms and companies. It shall also not be applicable to an assessee who is availing any tax reliefs (such as deduction under Sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA) The scheme is applicable for any business (excluding a goods carriages business) which has a maximum gross turnover /gross receipts of Rs. 40 lakhs. The presumptive rate of income is prescribed at 8% of gross turnover /gross receipts. An assessee opting for the above scheme shall be exempted from payment of advance tax related to such business. An assessee opting for the above scheme shall be exempted from maintenance of books of accounts and tax audit. In relation to the business of transport operators (i.e. plying, hiring or leasing of goods carriages), the presumptive income limits have been increased. In the case of the heavy goods vehicle, the presumptive income is increased to Rs per month from Rs and in the other cases to Rs per month from Rs. 3,150 per month. This amendment is applicable from the FY Page 23 of 52

24 Transfer pricing Existing provisions in relation to the arm s length price range state that at the option of the taxpayer, the arm s length price may be determined as a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. This provision has been subject to conflicting interpretation by the assessee and the Income Tax Department. The assessee s view is that the arithmetical mean should be adjusted by 5 per cent to arrive at the arm's length price. However, the department s contention is that if the variation between the transfer price and the arithmetical mean is more than 5 per cent of the arithmetical mean, no allowance in the arithmetical mean is required to be made. With a view to resolving this controversy, it is proposed to amend the proviso to Section 92C to provide if the arithmetical mean, so determined, is within five per cent of the transfer price, then the transfer price shall be treated as the arm's length price and no adjustment is required to be made. This amendment will take effect from 1st October, 2009 and shall accordingly apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer (TPO) on or after such date. A new Section inserted to enable CBDT to make Rules with respect to safe harbour provisions. These rules would provide the circumstances in which the income tax authorities shall accept the transfer price declared by the assessee as an arm s length transfer price. Page 24 of 52

25 Dispute Resolution Panel In order to improve tax administration and avoid prolonged uncertainty in tax related matters for foreign companies or transfer pricing matters, it is proposed to introduce an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes in a fast track basis with effect from Prior to finalization of an adverse order, the assessing officer shall need to forward a draft of the proposed order of assessment (draft order) to the above mentioned assessee, who may file his objections to the draft order with the DRP. The DRP shall after due consideration issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. The law provides for the process, powers and time frames for the dispute resolution, besides enabling the CBDT to prescribe further rules for its efficient functioning. Key aspects to note are: The DRP has to provide a conclusive view i.e. it may confirm, reduce or enhance the variations proposed in the draft order. The DRP is not authorized to merely set aside any proposed variation or issue any direction for further enquiry and passing of the assessment order by the AO. Every direction issued by the DRP shall be binding on the Assessing Officer and the same is appellable only with the Appellate Tribunal. No direction shall be issued unless an opportunity of being heard is given to the assessee and the AO on such directions which are prejudicial to the interest of the assessee or the revenue, respectively. The DRP proceeding to be completed within 9 months from the end of the month in which the draft order is forwarded to the eligible assessee. The DRP shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908 (5 of 1908); Page 25 of 52

26 Curbing Revenue Leakage The profit linked deductions under various provisions and Chapter VIA overlap, and the taxpayers, at times, claim multiple deductions for the same profits. With a view to preventing such misuse, it is proposed that: where any deduction is claimed under section 10A or 10B or 10AA or 10BA or under the Chapter VIA in respect of certain income, no deduction is allowed in respect of such profits in any other provision of the Act and in no case deduction shall exceed such profits and gains from such undertaking or unit or enterprises or eligible business as the case may be. no deduction is allowed under section 10A or 10AA or 10B or 10BA or under chapter VIA-C in respect of such profits if the assessee fails to make such claim in the return of income. The above amendments are applicable retrospectively from FY Further from FY , where deduction is claimed under the aforesaid section or chapter and where there is transfer of goods and services between the undertaking and any other business of the assessee or vice versa, the deduction under the aforesaid section is computed as if the transfer had taken place at market value of such goods and services. Section 90 of the Income-tax Act empowers the Central Government to enter into Double Taxation Avoidance Agreement ( DTAA ) with the Government of any other country outside India for granting double-taxation relief and facilitate exchange of information concerning avoidance or evasion of tax. The government now wishes to expand the scope of this cooperation by entering into a DTAA or TIEA (Tax Information Exchange Agreement) with specified territories within foreign countries. The proposed amendment will be effective from Page 26 of 52

27 In respect of profits earned from developing and building housing projects, Section 80- IB(10) provides for 100 per cent deduction of the profits. It is now clarified that the objective of this tax concession is to provide tax benefit to the person undertaking the investment risk i.e. the actual developer. Accordingly, the provisions are amended with effect from FY to provide that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract. Further, given that the objective of the tax benefit for housing projects is to build housing stock for low and middle income households, from FY , conditions have been introduced to ensure that the developer does not sell multiple adjacent units to a single buyer. Other Tax Administration Measures It is proposed to introduce a computer based system of allotment and quoting of Document Identification Number (DIN) in each correspondence sent or received by the department so as to enable tracking of documents. Consequently, if a notice, order, letter or any correspondence issued by any income-tax authority does not bear a DIN, the same shall be treated as invalid and shall be deemed never to have been issued. This amendment will take effect from Page 27 of 52

28 Under the existing provisions a notice or requisition under the Act may be served on the person named therein either by post or as if it were a summons issued by a court. It is proposed to amend the said provisions to provide that the service of notice or summon or requisition or order or any other communication may be made by delivering or transmitting a copy thereof by post or courier service or in such manner as provided in the Code of Civil Procedure, 1908 (5 of 1908) for the purposes of service of summons; or in the form of any electronic record; or by any other means of transmissions as may be provided by rules made by the Board in this behalf. This amendment will take effect from Under the existing provisions of Income-tax Act, an approval is required to be granted by income-tax authority for availing of various incentives by the assessee. While some provisions of Income-tax Act specifically contain provisions for withdrawal of approval, in many cases there are no such specific provisions containing power of withdrawal. In order to provide explicit provisions for power to withdraw of approval, it is proposed to insert a new Section 293C to provide that an approval granting authority shall also have the powers to withdraw the approval at any time. However, such withdrawal can be made only after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned assessee. This amendment will take effect from Page 28 of 52

29 Others An expenditure in respect of which payment is made for a sum exceeding Rs 20,000 gets disallowed if the payment is made otherwise than by way of account payee cheque or account payee bank draft. This limit for payments to transport operators (i.e. engaged in the business of plying, hiring, or leasing goods carriages) is increased to Rs. 35,000. This amendment is effective from As per the existing provisions of Section 115BBC anonymous donation received is taxable in the hands of any institution or charitable trust other than the institution or trust wholly for the religious purpose. It is proposed that such anonymous donations received by institutions / trusts not being established wholly for religious purposes would be exempt upto 5% of the total income of such trusts / institutions or a sum of Rs.1 lakh, whichever is higher. A number of tax concessions under the Income-tax Act are provided for encouraging manufacture of articles or things. However, the term manufacture has not been defined in the statute. To remove disputes and resultant judicial review in a number of cases, it is clarified with effect from FY that manufacture, with all its grammatical variations, shall mean a change in a non-living physical object or article or thing, (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new object or article or thing with a different chemical composition or integral structure. Page 29 of 52

30 With a view to reforming the system of funding of political parties it is proposed to provide that donations to electoral trusts shall be allowed as a 100 percent deduction in the computation of the income of the donor. Consequentially it is proposed to provide that donations to such electoral trusts shall be treated as income of the trusts which will be specifically exempt subject to satisfaction of prescribed conditions. The existing provisions of Income-tax Act provide that income shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon ble Supreme Court, has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. With a view to mitigating the hardship caused to the taxpayer, from the FY it is proposed that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee. Further, it is proposed that the income shall be assessed as income from other sources in the year in which it is received and a deduction for 50% of such income would be provided. New Pension System (NPS) : With a view to ensure that tax treatment of savings under this system is synchronised with the exemptexempt-taxed (EET) method and that there is no incidence of taxation at the accumulation stage, it is proposed to make the NPS Trust a complete pass-through in so far as taxation is concerned. Income of the NPS Trust to be exempted from income tax and any dividend paid to this Trust from Dividend Distribution Tax. All purchase and sale of equity shares and derivatives by the NPS Trust also to be exempt from the Securities Transaction Tax. Self employed persons to be enabled to participate in the NPS and to avail of the tax benefits available thereto. Page 30 of 52

31 The definition of Charitable Purpose defined in section 2(15) shall separately list the preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest so that they would be excluded from the applicability of the prescribed conditions which are applicable to the advancement of any other object of general public utility. Zero Coupon Bond scheme / provisions extended to scheduled banks This space is left blank intentionally Page 31 of 52

32 LIMITED LIABILITY PARTNERSHIP The taxation of the LLP in the Income Tax Act is on the same line of taxation of partnership. The income of LLP will be taxed in the hands of the LLP and will be exempt in the hands of its partners. The LLP Act provides for nomination of designated partners who have been given greater responsibility. It is proposed that the designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return. The conversion from a general partnership to an LLP will have no implication if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of capital gains under Section 45 will apply. In case of liquidation of the LLP, every partner will be jointly and severally liable for payment of tax unless he proves that non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. Page 32 of 52

33 PERSONAL TAX Tax Rates All (except resident women and senior citizens) Income (Rs.) Proposed Rates Existing Rates 0 150,000 Nil Nil 150,001 to 160,000 Nil 10% 160,001 to 300,000 10% 10% 300,001 to 500,000 20% 20% 500,001 and above 30% 30% Notes: 1. In case of resident women below the age of 65 years, the basic exemption limit has been increased to Rs 190,000 from Rs 180, In case of all resident senior citizens (i.e. age of 65 years or more) the basic exemption limit has been increased to Rs 240,000 from Rs 225, Surcharge hitherto applicable at 10% is no longer applicable 4. Cess of 3% is leviable on the above rates 5. Marginal relief shall be available in certain cases Tax Reliefs Scope of relief (under section 80E) for interest payments on education loans extended to cover all fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from a recognized school, board or university. Under the existing provisions, the deduction is available only for pursuing full time studies for specified courses in engineering, medicine, management, applied sciences or pure sciences including mathematics and statistics. Present deduction limit under section 80DD for severe disability has been increased from Rs.75,000 to Rs. 100,000. The limit for ordinary disability remains unchanged at Rs. 50,000. Page 33 of 52

34 Others Consequent to the removal of fringe benefit tax, there is a change in definition of perquisite. Perquisites would now include: value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee. For this purpose, the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares. The fair market value will mean the value determined in accordance with the method as may be prescribed by the Board. The amount of contributions to super annuation funds in excess of Rs 100,000 Any other fringe benefit or amenity as may be prescribed. Where any capital gain arises from the transfer of specified securities or sweat equity shares as specified in Section 17(2)(vi), the cost of acquisition of such securities shall be fair market value which has been taken into account for the purpose of valuation of perquisite. This amendment is applicable from FY Compensation received on voluntary retirement or termination of service under a scheme of voluntary separation: Hitherto, select taxpayers have claimed relief for the compensation received under both, Section 10(10C) and Section 89. Section 10(10C) provides for exemption of a lump sum amount of Rs. 500,000 from the sum received, while Section 89 provides for spreading of the salary for the period of unserved service to arrive at the relief from the tax amount. The new provision sets out that the taxpayer can choose to claim relief only under one of the provisions. Page 34 of 52

35 Consequent to the change in the definition of charitable purpose, donations made to certain organization would not qualify for deduction under Section 80G. In this regard, it is provided that donations made to organizations which received such donations and applied the same funding relief work for floods in Bihar or other public purposes would enjoy the exemption for the FY provided the organizations/trusts were approved for FY Further, the approval granted by the Commissioner for Institutions under 80G(5)(iv) is applicable for five assessment years under the existing provisions. This time period of five years is now removed. This amendment is applicable from Hitherto, an individual or Hindu Undivided Family (HUF) was liable to tax only on money received in excess of Rs 50,000, barring certain circumstances. Effective , it is proposed to tax even transactions involving transfer of other specified properties without any consideration or for an inadequate consideration (i.e. transactions in kind or for money s worth) with an exception to gifts received from relatives or under a will or under prescribed situations. The term property has been defined for this purpose to include immovable properties being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. The provisions also prescribe the basis and method of valuation of such in kind transactions. The valuation principles are based on the stamp duty valuations for immovable property and the fair market values in other cases. Page 35 of 52

36 The existing provisions for valuing consideration while computing capital gains in case of transfer of land or building or both, is based on the value adopted or assessed by the prescribed stamp valuation authority and does not include transactions which are not registered with the authority and executed through an agreement to sell or power of attorney. With a view to preventing the leakage of revenue, it is proposed to include that the valuation could also be based on the value assessable (i.e. would have adopted) by the prescribed authority. This amendment shall apply in relation to transactions undertaken on or after WEALTH TAX The existing threshold limit for applicability of wealth tax has been increased to Rs.30 lakhs from the previous limit of Rs.15 lakhs. This amendment will apply for the valuation of net wealth as on COMMODITY TRANSACTION TAX The Commodity transaction tax has been abolished with effect from FY In concealment penalty proceedings income pertaining to the period prior to search for which the return of income has been filed by the taxpayer but where such income has not been disclosed in the said return, then such income shall be deemed to be concealed income. The amendment is effective retrospectively from Page 36 of 52

37 INDIRECT TAX PROPOSALS GOODS AND SERVICES TAX The Finance Minister reiterated the proclaimed objective of the Central Government to implement GST by April The dual structure of GST formally announced. In the course of preparation of this budget, I have had the opportunity to interact with large number of stakeholders and receive valuable inputs. Most suggestions were for structural changes in the tax system. Tax reform, like all reforms, is a process and not an event. Therefore, I propose to pursue structural changes in indirect taxes by accelerating the process for the smooth introduction of the Goods and Services Tax (GST) with effect from 1st April, This space is left blank intentionally FM, Mr. Pranab Mukherjee Page 37 of 52

38 SERVICE TAX Tax Rate Service tax rate remains unchanged at 10% (effective rate at 10.30%) In respect of service providers engaged in providing taxable and exempt services and opting not to maintain separate records with respect of CENVAT credits, the rate of service tax payable on exempt services is reduced to 6% from 8%. Legal services in the nature of appearance before any Court, Tribunal or Authority shall not be taxable. New Services The following services are proposed to be brought under the service tax net: Services in relation to advice, consultancy or assistance in any branch of law provided by one business entity to another business entity. However, services provided by or to individuals shall not be taxable. Services provided in relation to cosmetic surgery and plastic surgery. Reconstructive surgery undertaken to restore anatomy or body functions affected due to congenital defects, developmental abnormalities, degenerative diseases, injury and trauma are not taxable. Services in relation to transport of costal goods or goods through national water way or inland water. Page 38 of 52

39 Scope Expansions The scope of certain existing taxable services has been enlarged to levy service tax on additional services. Services provided in relation to transport of goods by rail in any manner. Hitherto, the taxability was limited to transportation undertaken by non-government railways in containers by rail. Services in relation to production or processing of goods for or on behalf of a client is taxable under the category of business auxiliary services with a specific exclusion to activities amounting to manufacture under Central Excise laws. This exclusion is now restricted only to such activities which amount to manufacture of excisable goods under the Central Excise Act, Consequently, such activities which result in manufacture of non-excisable goods under the Central Excise Act, 1944 would be liable to service tax. For instance, manufacture of liquor. Exemptions The following would be exempt from service tax: Specified services provided to a goods transport agency were exempt with effect from This exemption is now made applicable with retrospective effect from The validation provisions to give retrospective effect have been inserted. Any taxable services provided to all installations, structures and vessels in the continental shelf and exclusive economic zone of India is wholly exempt from service tax. Hitherto, this exemption was limited to designated areas therein as declared by the Ministry of External Affairs. Services provided by a tour operator having a contract carriage permit for inter-state or intrastate transportation of passengers, excluding tourism, conducted tours, charter or hire service exempt from service tax. Page 39 of 52

40 Services involving purchase and sale of foreign currency provided by one scheduled bank to another scheduled bank is wholly exempt from service tax. The following services provided to exporters of goods are exempt from payment of service tax subject to certain conditions. This exemption is applicable to the exporters liable to discharge service tax under reverse charge mechanism: Exclusions Club or association services provided by export promotion councils are exempt from service tax. This exemption would be applicable upto Services relating to transportation of goods by road from the CFS or the ICD to the port of export Services provided by a commission agent location outside India. The present cap of 10% on the commission agency charges continues to be applicable. Consequently, service tax shall be payable on the amount of commission in excess of 10%. Stock broking services have been amended to exclude the services provided by a sub-broker. Consequently no service tax would be applicable. Only exporters having IEC and registered with any EPCs and Service Tax provisions as recipients are eligible for this exemption Page 40 of 52