BUDGET 2011

A BDO India Snapshot

February 2011

BDO Budget 2011

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 BUDGET 2011- KEY FEATURES (GENERAL)
• Indian Economy Overview:
› Economy - Gross Domestic Product estimated to have grown at 8.6% in 2010-11
› Exports grown by 29.4% and Imports grown by 17.6%. Further expected to grow at 9%

• Tax Reforms:
› Direct tax code (DTC) to be effective from 1st April, 2012
› Goods and Service Tax been narrowed

• Investment Environment:
› Liberalize FDI policy in various sectors under discussion. This area is still not addressed. A real drawback.
› Direct investment in Indian Mutual Funds by any foreigner. This is a big positive
› MFs allowed to raise money from foreign investors. This is a big positive
› Reforms in Housing Sector Finance Introduced

• Black Money:
› Five fold strategy to be put in operation to deal with problem of generation and circulation of black money
› Tax Information Exchange Agreements ((‘TIEA’)
TIEA ) and Double Taxation Avoidance Agreements concluded.
concluded
› (Recently TIEA was done with British Virgin Islands, Isle of Man, Bermuda , Cayman island, Gibraltar, Guernsey, Jersey, Macau
etc)
› GAAR under DTC is based on similar lines.

• Improving
I i G Governance:
› UID Mission (under the leadership of Nandan Nilekani). Likely generation of 10 Lac Aadhar numbers per day

BDO Budget 2011

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 DIRECT TAX – AT A GLANCE
• Direct Tax Code - to be implemented from 01 April 2012.
• Salaried tax payers exempted from filing return of income, subject to fulfilment of certain conditions
• Personal tax Exemption
p limit enhanced.
• Senior Citizens: Exemption limit enhanced and qualifying age reduced
• New Category introduced: Very Senior Citizens, exceeding 80 years or above.
• Current surcharge of 7.5 percent on domestic companies proposed to be reduced to 5 per cent.
• Rate of Minimum Alternative Tax proposed to be increased from 18 per cent to 18.5 per cent of book profits.
• Tax incentives extended to attract foreign funds for financing of infrastructure.
• Additional deduction of INR 20,000 for investment in long-term infrastructure bonds proposed to be extended for one
more year.
• Lower rate of 15 per cent tax on dividends received by an Indian company from its foreign subsidiary.
• Benefit of investment linked deduction extended to businesses engaged in setting up of fertilizers unit and developing
g
affordable housing.
• No extension of current tax benefits under for SEZ units
• SEZ Units and SEZ developers are liable to MAT and DDT. LLPs liable to MAT
• Powers of transfer pricing officers enhanced. Due date of filing TP reports to be 30th November.
• System of collection of information from foreign tax jurisdictions to be strengthened.

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 PROPOSED DIRECT TAX AMENDMENTS IN BRIEF
TAX RATES – INDIVIDUALS
• Basic exemption limit raised to INR 180,000.
• Women - Basic exemption limit raised to INR 190,000. (No change.)
• Senior Citizen - Basic exemption limit raised to INR 250,000. Qualifying age reduced from 65 to 60 yrs
• Very Senior Citizen (> 80 yrs) - Basic exemption limit raised to INR 500,000.
500 000
• Other tax slabs remain the same
TAX RATES – CORPORATE
g – For domestic companies
• Surcharge p reduced from 7.5% to 5%. For non-domestic cos,, reduced from 2.5% to 2%. Basic tax are the
same.

MINIMUM ALTERNATE TAX (‘MAT’) AND DIVIDEND DISTRIBUTION TAX (‘DDT’)

• MAT rate proposed to be increased to 18
18.5%
5% on book profits
profits.
• Proposed to introduce sunset clause in the existing MAT exemption in the case of SEZ Developers and units in SEZ. MAT to be
applicable to such units w.e.f AY 2012-13.
• MAT made applicable to Limited Liability Partnerships. Set off of MAT tax available against tax payable under normal provisions
subject to certain conditions.
conditions
• Proposal to discontinue exemption from DDT in the case of SEZ Developers and units in SEZ w.e.f 01.06.2011.

INVESTMENT LINKED DEDUCTION UNDER SECTION 35AD

• Removal of term “new” from existing definition of specified businesses (only hotel and hospital) claiming 100% deduction under
section 35AD. Thus losses under section 73A for such businesses to be freely allowed to be set off. Applicable from AY 2011-2012
• 2 additional businesses – “affordable housing projects”, “production of fertilizers” eligible for investment linked deduction (100%)
under section 35AD. Applicable from AY 2012-2013.

BDO Budget 2011

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 PROPOSED DIRECT TAX AMENDMENTS IN BRIEF
SUNSET CLAUSES FOR SECTION 80-IA/IB
80 IA/IB PROVISIONS (PROFIT LINKED) / SECTION 10
• Terminal period for claiming deduction under section 80-IA, for any entity engaged in “generation and distribution of power,
transmission or distribution of network lines”, extended to 31 March 2012.
• In case of commercial production of mineral oil – 7 years profit linked deduction to continue except for contracts awarded under
a government
g t off IIndia
di scheme.
h
• Section 10B – No extension has been granted for the existing STPI units

TRANSFER PRICING
• Standard deduction of variation of 5% on arm’s length price outdated. New variation to be notified. Applicable from AY 2012-13
onwards.
• TPO to determine the arm’s length price of additional international transactions other than those referred by the AO.
• Additional powers of survey conferred on the TPO.
TPO Applicable from 01
01.06.2011
06 2011
• Filing of Accountant’s Report in Form No. 3CEB extended to 30 November. (w.e.f 01.04.2011) Applicable to AY . 2011-12

SETTLEMENT COMMISSION
• Entities on whom search is initiated can file an application before the settlement commission if additional tax payable on
disclosed income exceeds INR 50 Lacs.
• Entities related (to be defined) to a tax payer on whom the search is initiated would be allowed to file an application before the
settlement commission if additional tax payable on disclosed income exceeds INR 10 Lacs. Such entities should also be subject to
searchh proceedings.
di

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 PROPOSED DIRECT TAX AMENDMENTS IN BRIEF
OTHERS
• Salaried tax payers exempted from filing return of income, subject to fulfilment of certain conditions
• Contribution made under section 80CCE (New Pension Scheme) to be excluded from the limit of INR 1 Lac. Further deduction of
such amount applicable to the employer. (restricted to 10% of the employee’s salary)
• Existing monetary limit of INR 10 Lacs enhanced to INR 25 Lacs for entities to be treated as not involved in charitable activity
under section 2(15)
• Section 10 amended to include tax exemption to an income earned by an entity engaged in any activity for the benefit of general
public excluding commercial activity
• Income earned by an infrastructure debt fund will be fully exempt
• Section 35(2AA) amended to increase the weighted average deduction from 175% to 200% towards any sum paid for approved
scientific research programme
• Anti avoidance measures: New Section 94A introduced w.e.f 01.06.2011 to deal with transactions undertaken with persons
located in any country or jurisdiction which does not effectively exchange information with India
• Currently dividend received from foreign subsidiary company is taxed at maximum marginal rate. This rate is amended now to be
taxed at 15 percent (plus surcharge as applicable). Applicable w.e.f AY 2012-2013
• New measures introduced to facilitate prompt collection of information on requests received from tax authorities outside India
• The p
proposal
p for p
providing
g document identification number for anyy correspondence
p made byy the tax officer to be implemented
p
w.e.f 01.07.2011 is done away with
• Liaison offices to file annual information report within 60 days of end of financial year. Applicable from 01.06.2011
• Mutual Funds to be liable to pay additional income tax on distributed income
-25
25 percent for an individual and 30 percent for others.
others (money market fund or liquid fund)
-12.5 percent for an individual and 30 percent for others. (debt fund)
-Equity oriented funds continue to enjoy the tax exemption

BDO Budget 2011

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INDIRECT TAX – AT A GLANCE
• Constitutional Amendment Bill to be introduced in budget session of Parliament
• GST Network (GSTN) to be established to provide IT Infrastructure for introduction of GST
• P liti l scenarios
Political i and
d differences
diff i States,
in St t roll
ll outt off GST by
b 2012 seems difficult
diffi lt
• Rate of Service Tax retained at 10% to create foundation for GST
• Service Tax Refund / Exemption to SEZ Units rationalized & clarified
• 2 New services introduced:
• Services by air-conditioned restaurants having license to serve liquor; and
• Short-term accommodation in hotels / inns / clubs / guest houses etc
• Point of Service Tax Rules, 2011 introduced to determine the point of time when the services shall be
deemed to be provided to determine rate of Service Tax
• Exempted services definition amended to include trading
• Definition of “inputs” and “input services” amended
• Banking Company & NBFC to reverse 50% of CENVAT Credit
• Life Insurance Company to reverse 20% of CENVAT Credit
• Self Assessment concept introduced in Customs law

BDO Budget 2011

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 PROPOSED INDIRECT TAX AMENDMENTS IN BRIEF
GOODS AND SERVICE TAX
• Constit tional Amendment Bill to be introduced
Constitutional introd ced in budget
b dget session of Parliament
• GST Network (GSTN) to be established to provide IT Infrastructure for introduction of GST
• Political scenarios and differences in States, roll out of GST by 2012 seems difficult

SERVICE TAX
• Rate of Service Tax retained at 10% to create foundation for GST
• Service Tax Refund / Exemption to SEZ Units rationalized & clarified
• 2 New services introduced:
• Services by air-conditioned restaurants having license to serve liquor; and
• Short-term accommodation in hotels / inns / clubs / guest houses etc
• Scope of following existing services expanded:
• Authorized Service Station service: To cover all persons and all motor vehicles other than those meant for
goods carriage or three wheeler auto rickshaw
• Life Insurance Services: Services provided by Life Insurance Companies in the area of investment also brought
within the ambit of SService Tax
• Commercial Training or Coaching Services: Scope expanded to include all coaching and training that is not
recognized by law
• Club or Association Services: Services provided to non-members covered
• Business Support Services: Scope expanded to include operational and administrative assistance of any kind
• Legal Consultancy Services: Services provided to individuals covered and representation services provided by any
person to business entities covered under Service Tax net
• Health Services: Scope of health services expanded in respect of clinical establishment having central air-
conditioning facility in any part of the establishment and more than 25 beds for in-patient treatment

BDO Budget 2011

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 PROPOSED INDIRECT TAX AMENDMENTS IN BRIEF
SERVICE TAX
• Point of Service Tax Rules, 2011 introduced to determine the point of time when the services shall be deemed to be
provided to determine rate of Service Tax
• Individual and sole proprietors provided relief from Service Tax audit by Department subject to having turnover less than
INR60 lakhs
• Penal provisions rationalized to encourage voluntary compliance

CENVAT / CENTRAL EXCISE

• Reference for Retail Sales Price (RSP) valuation changed to Legal Metrology Act, 2009
• Penalty provisions revamped & waiver of show cause notice and conclusion of proceedings would be available if the duty
along-with interest and specified penalty is paid before the issue of SCN
• Central Excise dutyy rate maintained at 10%
• Exemptions in Central Excise duty rate structure reduced
• Lower rate of Central Excise duty enhanced from 4% to 5%
• Optional levy on branded garments or made up proposed to be converted into a mandatory levy at unified rate of 10%
• Reference for Retail Sales Price (RSP) valuation changed to Legal Metrology Act, 2009
• Penalty provisions revamped & waiver of show cause notice and conclusion of proceedings would be available if the duty
along-with interest and specified penalty is paid before the issue of SCN
• Central Excise duty rare maintained at 10%
• Exemptions in Central Excise duty rate structure reduced
• Lower rate of Central Excise duty enhanced from 4% to 5%
• Optional levy on branded garments or made up proposed to be converted into a mandatory levy at unified rate of 10%

BDO Budget 2011

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 PROPOSED INDIRECT TAX AMENDMENTS IN BRIEF
CUSTOMS
• Self Assessment system being introduced in Customs duty payment and assessment
• All clearances from SEZ into DTA are being exempted from SAD provided they are not exempt from the levy of VAT /
Sales in DTA
• Time Limit for claiming refund of duty & interest reduced from one year to six months
• E-filing of entry of imported goods and exported goods introduced and Commissioner of Customs to allow filing of entry in
any other manner when it is infeasible to present electronically
• Multiple duty rates of 2%, 2.5% and 3% are being unified at median rate of 2.5%
• Amendment introduced in the Customs Tariff Act to reduce the anti
anti-dumping
dumping duty imposed on a article or an importer

CENVAT CREDIT
• Following important definitions amended in CENVAT Credit Rules, 2004:
• Input: Defined to include, inter alia, all goods used in a factory by the manufacturer and goods used for providing
any output services. Specific exclusions also provided which do not qualify as “Input” to avail Credit
• Input Service: Definition aligned with “Inputs” such that goods that do not qualify as “input” do not qualify as
“input service”. Expression “activities relating to business” has been deleted which will have major impact in
t
terms off restrictive
t i ti availment
il t off CENVAT Credit
C dit

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BDO Budget 2011

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