BDO Budget Analysis 2011-12
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BUDGET ANALYSIS2011-12
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Honesty and
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THE BDO MISSION
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1
FOREWORD
The budget presented by the Finance Minister today is a technocratic, IT driven,
modern budget. The Finance Minister has struck a fine equilibrium between
controlling inflation and fiscal imbalances on the one hand and promoting growth
on the other. The budget presented in the parliament today seeks to achieve the
following objectives:
To achieve double digit growth in GDP as against the estimated growth rate
of 8.6% for the FY 2010-11
To address the menace of black money
To Enhance growth rate of agriculture sector
To establish good governance in the Government system
The policy directions that emerge from the budget are:
Liberalisation of foreign direct investment
Substantial allocation to infrastructure, education and social sectors
Introduction to Direct Tax Code and Goods and Service Tax w.e.f 1 st April
2012
Address food inflation and food storage
Scale up the flow of resources to rural areas to give a more inclusive thrust
to the development process
Curb in implementation gaps, leakeages from public programme and the
quality of outcome
Address the increasing drift in governenace and a gap in public
accountability
Roadmap to fiscal consolidation
The budget provides for measures to mop up revenue and plan for expenditure.
Revenue Mop up Measures:
Dis-investment in PSUs to yield `40,000 crore
Gross tax receipts for 2011-12 are estimated at `9,32,440 crores
Increase in MAT from 18% to 18.5%
Levy of MAT on LLPs, SEZ developers and SEZ units
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Inclusion of new services in the service tax net
Raise the corpus of the rural infrastructure development funds XVII to
`18,000 crore from `16,000 crore
Expenditure Plan:
The plan and non-plan expenditure for 2011-12 are estimated at
`4,41,547 crore and `8,16,182 crore respectively.
Allocation of`2,14,000 crores for infrastructure
Allocation of`7,860 crores to Rastriya Kisan Vikas Yojna
Allocation of 1,60,887 crores for the social sectors and `52,057 crores
for education
The Finance Minister aims at withdrawing stimulus in the form of subsidies and
wants to promote sustainable growth through development in the infrastructure,
agriculture, education, and social sector. His emphasis on governance, IT driven
automated functions and efficiency measures should make India an attractive
destination for investment. The long term fiscal policy is in place.
Team
BDO
Place: Mumbai
Date: 28th February, 2011
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BDO
Budget Analysis 2011-12
Para
no.
ParticularsPage
No.
1. ECONOMIC INDICATORS 4
2. DIRECT TAX PROPOSALSa) Corporate Tax
b) Personal Tax
c) Transfer Pricing
d) Exemptions and Deductions
e) Other Major Amendments
8
10
12
15
20
3. INDIRECT TAX PROPOSALSa) Service Tax
b) CENVAT Credit
c) Central Excise Duty
d) Customs Duty
28
43
48
55
4. FEMA AND CORPORATE LAW 62
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4
1. ECONOMIC INDICATORS
GDP growth indicators
The Indian economy has shown strong resilience in the face of uncertain
economic conditions. The GDP growth of 8.6% is commendable in the overall
context as it comes at the back of negative trends at the global level. Mostcountries are still reeling from the after effects of the financial crisis of
2008. Even domestically India seems to have overcome the problems which
had plagued the agriculture sector over the last two years. The growth in
201011 indicates that it is relatively broad based across major sub-sectors
including revival of the agriculture.
The Indian economy seems to have tide over the negative trends in
the global economy as well as overcome the setback it faced in the
agriculture sector over the last two years.
The revival of the agriculture sector, which has been a laggard over
the last two years, indicates strong trends of inclusive growth.
9.5 9.6 9.3
6.8
8.08.6
2005-06 2006-07 2007-08 2008-09 2009-10 2010 - 11
(Advance
Estimates)
GDP growth
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Performance of select major sectors
Agriculture
For India to continue a sustainable path of economic growth it is of critical
importance that the growth is inclusive in nature. In this context the
development of agriculture sector gains prime importance as it accounts for
58% of employment of the country. Additionally it also contributes to vast
sections of industries by providing food, fodder and other raw materials.
While the average GDP growth during 2004-05 to 2010-11 was 8.5%, the
growth of agriculture was a meager 3.4%. The current revival of agricultural
growth to 5.4% is extremely positive as it would help further strengthen the
rural sector.
Industry
The growth of the industrial sector in the current fiscal indicates volatility
with a weakening trend. The growth in the first half of the year was robust
particularly in the manufacturing segment. However the trend weakened
significantly as the growth in Index of Industrial Production (IIP) decelerated
to 2.3% during November. There has been significant volatility in IIP as growth
varying widely between 2% to 16%. The volatility has largely been on account
of capital goods and consumer non-durables segment.
Services
The emergence of the services sector is one of the main reasons forthe dominant position the Indian economy holds at the global level.
The contribution of services sector at 57.3% of the overall economy is
comparable with the developed nations. Within the services segment
the two categories financing, insurance and real estate and transport,
storage and communications have been the biggest drivers of growth. These
segments witnessed a growth of 15% and 9.2% respectively. The hotels
and restaurants segment, one of the major engines of economic growth,
recovered moderately.
Inflation
The financial year 2010-11 started with a headline Wholesale Price Inflation
(WPI) of 11% in April 2010 and continued to be in double digit till July and then
reduced to around 8.2% in January 2011. The major pressure on prices was
emanating from food and energy sectors. The WPI food inflation moderated
to 8.59% in December 2010 from its peak of 20.22% in February 2010. While
the high inflation in food articles is not unique to India but is widespread,
the current growth and inflation trends warrant persistence with an anti-
inflationary monetary stance.
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Capital Markets
After a dismal year for primary issues in the previous year, 2010-11 saw
a surge in the amounts mobilised through public offerings. As many as
40 companies came up with an Initial Public Offering (IPO). The cumulative
IPO and FPO amounts mobilised upto November 2010 stood at USD 10.37
billion. The positive sentiments in the capital markets and the success of
the primary market also led to the benchmark indices BSE Sensex and NSE
Nifty to once again touch record highs to 21,000 and 6,312 respectively.
The FII investment in the Indian equity market and debt segment in 2010-
11 (till December 2010) stood at USD 25.02 billion and `5.50 billion. These
volumes are largely attributable to the strong domestic growth coupled withresurging corporate sector.
Forex
The foreign exchange reserves in the current fiscal has increased by
USD 18 billion to reach USD 297 billion as on December, 2010. This increase
is largely attributed to the valuation gain and the purchase of USD by RBI.
On the exchange rate front, the Rupee appreciated marginally by 0.7% and
1.2% against the dollar and euro respectively.
199
309
252 279297
Foregin Exchange Reserves (USD bn)
2006-07 2007-08 2008-09 2009-10 2010-11
(upto December 2010)
9.4
4.3
6.5
4.8 3.6
8.0
(April -December)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
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Foreign Direct Investment in retail sector
One of the major constraints currently being faced by the Government is
food inflation. The inflation is partly on account of high margin between
farm gate prices and retail prices. India lacks a modern supply chain
management and large participation by companies in the retail sector. The
policy makers are of the opinion that permitting Foreign Direct Investment(FDI) in multi product will bring in the requisite know how as well along with
the investments.
The Government is of the view of creating a road map of allowing foreign
companies to operate in the retail sector. However the Government also
wants to create a balance wherein the interests of small mom and pop
stores are protected and avoid a situation where foreign companies gain a
dominant position in the market. Keeping this in mind the implementation
strategy would be to limit the international companies operations in the
major cities. Further liberalisation of the sector could be reviewed in
the future.
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2. DIRECT TAX PROPOSALS
Corporate Tax
Tax Rate
Corporate tax rates remain unchanged for both domestic as well as foreigncompanies, except for an increase in the effective rate of Minimum
Alternative Tax (MAT) from 18% to 18.5%. The applicable rates of tax are as
under:
Particulars Tax Rate (%) *
Domestic Company1.
Normal Tax RateMinimum Alternative Tax (MAT)
Foreign Company2.Normal Tax Rate
30%18.5%
40%
Currently the surcharge on income tax @7.5% is payable by a domestic
company having total income exceeding one crore rupees. It is proposed to
reduce the surcharge on income-tax from 7.5% to 5%.
The existing surcharge of 7.5% in all other cases (including Section 115JB,
115O, 115R) is proposed to be reduced to 5%.
In case of companies, other than domestic companies, having the income
exceeding one crore rupees, the surcharge on income-tax is 2.5%. It is
proposed to reduce the surcharge on income-tax from 2.5% to 2%.
The marginal relief in tax will continue to be allowed in the cases whereincome is more than one crore rupees.
The Education Cess shall continue to be levied @ 3%.
Minimum Alternate Tax u/s 115JB
Under the existing provisions of Section 115JB, a company is liable to
pay inimum alternate tax on its book profits @ 18% if the tax payable by
company on the total income under the other provisions of the Act is less
than Minimum Alternate Tax. The MAT tax is allowed to be carried forwardand set off against the tax liability arising under the other provisions of the
Act upto the 10th assessment year.
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It has been proposed to increase the tax rate u/s 115JB from 18% to 18.5%.
This amendment will take effect from 1st April, 2012 and will, accordingly,
apply from the assessment year 2012-13.
It is pertinent to note that the proposed Direct Tax Code has provided for
levy of MAT at 20%.
Applicability of Minimum Alternate Tax in case of SEZ
As per the existing provision of Section 115JB, SEZ developers and SEZ units
were exempt from the payment of Minimum Alternate Tax. The said benefit
is proposed to be withdrawn by levying Minimum Alternate Tax of 18.5% on
the book profits of SEZ developers as well as the units operating in SEZ. The
proposed amendment is in line with the Direct Tax Code, 2010 which had
proposed to levy Minimum Alternate Tax on all SEZ developers and SEZ units
at the rate of 20%.
The above amendment is proposed to take effect from 1 st April, 2012 and will,
accordingly, apply in relation to assessment year 2012-13 and subsequent
years.
Extension of Dividend Distribution Tax to SEZ Developers
As per the existing provision of Section 115-O, SEZ developers are exempted
from the payment of dividend distribution tax (DDT). However, SEZ Units
were liable to pay DDT on distribution of dividends. It has now been proposed
to discontinue the exemption to SEZ developers as a result of which they
would be liable to pay DDT on any distribution of dividend. This is in line
with the Direct Tax Code, 2010 which has proposed to extend DDT provision
to SEZ developers.
The above amendment is proposed to take effect from 1 st June, 2011.
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}
}
Personal Tax
Rate of Income-tax at a glance
At present, the income upto `1,60,000/- is exempt in respect of individuals(other than women below the age of sixty-five years and senior citizens),Hindu Undivided Families (HUF), Association of Persons (AOP), Body of
Individuals (BOI) etc. In respect of women below the age of sixty-five yearsand senior citizens resident in India, the income upto `1,90,000/- and upto`2,40,000/- respectively is exempt.
It is proposed to increase the threshold limit of exemption. It is alsoproposed to lower qualifying age of senior-citizen from 65 years to 60 years.The proposed changes have been tabulated below:
Individual Assessee (other than women & senior-citizen) (AssumingIncome of`8,00,000/-)
Existing Limit Proposed Limit Tax Rate (%) Tax Relief
Upto `1,60,000 Upto `1,80,000 NIL
`2,000
` 1,60,001
`5,00,000
` 1,80,001
`5,00,000
10%
`5,00,001 `8,00,000
`5,00,001 `8,00,000
20%
`8,00,001 & above `8,00,001 & above 30%
Effective Tax Rate Savings
11.75% 11.50% 0.25%
Women Assessee below the age of sixty years(Assuming Income of`8,00,000/-)
Existing Limit Proposed Limit Tax Rate (%) Tax Relief
Upto `1,90,000 Upto `1,90,000 NIL
`Nil
`1,90,001 `5,00,000
`1,90,001 `5,00,000
10%
`
5,00,001 `8,00,000
`
5,00,001 `8,00,000
20%
`8,00,001 & above `8,00,001 & above 30%
Effective Tax Rate Savings
11.375% 11.375% Nil
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Senior Citizen between the age of sixty years to eighty years(Assuming Income of`8,00,000/-)
Existing Limit Proposed Limit Tax Rate (%) Tax Relief
Upto `2,40,000 Upto `2,50,000 NIL
`1,000
`2,40,001
`5,00,000
`2,50,001
`5,00,000
10%
`5,00,001 `8,00,000
`5,00,001 `8,00,000
20%
`8,00,001 & above `8,00,001 & above 30%
Effective Tax Rate Savings
10.75% 10.625% 0.125%
Senior Citizen above the age of eighty years(Assuming Income of`8,00,000/-)
Existing Limit Proposed Limit Tax Rate (%) Tax Relief
Upto `2,40,000 Upto `5,00,000 NIL
`26,000
`2,40,001
`5,00,000
NIL
`5,00,001
`8,00,000
`5,00,001
`8,00,000
20%
`8,00,001 & above `8,00,001 & above 30%
Effective Tax Rate Savings
10.75% 7. 50% 3.25%
No surcharge will be levied in case of individuals, HUF, AOP & BOI,
co-operative society, local authority and firms.
The education cess shall continue to be levied at the rate of 3%.
}
}
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Transfer Pricing
Section Existing Provision Proposed
Provision
Effective Date Analysis
92C The second proviso
to the Section
92C(2) providesthat if the
variation between
the actual price of
the international
transaction and
the arms length
price (ALP), does
not exceed 5%
of the actual
price, then, no
adjustment will
be made and the
actual price shall
be treated as the
ALP.
Instead of a
variation of 5%,
the allowablevariation will be
such percentage
as may be notified
by Central
Government.
Applicable from
1st April, 2012 and
shall accordinglyapply in relation
to the assessment
year 2012-13 and
subsequent year.
With the intent
of bringing in
the Direct TaxCode (DTC) by
April 2012, we
believe this is
a step towards
introducing
safe harbor
for different
industries based
on the nature
of international
transactions.
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Section Existing Provision Proposed
Provision
Effective Date Analysis
92CA The existing
provision lays
down that
Transfer Pricing
Officer (TPO) candetermine the
ALP in relation to
an international
transaction, which
has been referred
to the TPO by the
assessing officer
(AO).
Now the
jurisdiction of
the TPO shall
extend to the
determinationof the ALP in
respect of other
international
transactions,
which are
noticed by him
subsequently
in the course
of proceedings
before him.
These transactions
would be in
addition to the
international
transaction
referred to the
TPO by the AO.
Applicable from
1st June, 2011.
In the recently
concluded case
of Amadeus India
Pvt. Ltd. (2011-
TII-22-ITATDEL-TP)it was held that
the TPO cannot
determine the
arms length price
of an international
transaction, which
has not been
referred to him by
the AO.
With a view to
give more power
to the TPO to
effectively
determine the
arms length
price in case
of the newly
identified
international
transactions even
though they havenot been referred
by the AO for
computation of
arms length price.
Thus, overcoming
the existing
administrative
weakness,
the Govt. has
proposed to
introduce sub-
section (2A) of
92CA after sub-
section (2) of
92C.
92CA(7) For the purpose of
determining the
ALP, the TPO can
exercise powers
available to an
AO under Section131(1) & 133(6).
TPO to also
exercise the
power of survey
conferred upon
an income tax
authority underSection 133(A) of
the Act.
Applicable from
1st June, 2011.
With a view to
give additional
powers to the TPO
for conducting
surveys to
effectivelydetermine the
arms length
pricing.
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Section Existing Provision Proposed
Provision
Effective Date Analysis
92E Under the existing
provisions, in
addition to
filing of return
of income,assessees who
have undertaken
international
transaction are
also required to
prepare and file
a transfer pricing
report in FORM
3CEB before the
due date for
filing of return of
income (i.e. 30th
September of the
assessment year).
Extended the due
date offilling of
FORM 3CEB from
September 30th
to November 30th
of the assessment
year.
Applicable from
1st April, 2011.
This revision
mandates that
the data used for
comparability
analysis should becontemporaneous.
Currently one of
the reasons for
using multiple
year data was
unavailability of
data. With the
revision in the
date offiling the
return, not only
contemporaneous
data will have to
be used but also
multiple year data
can also be used
in case there is
cogent relevant
and reliable
evidence to prove
that the data for
preceding twoyears revealed
facts which
could have an
influence on the
determination of
ALP.
In the case of an assesse, being a company, which is required to furnish a
report in form 3CB, the due date for filing the return of income is extended
to 30th November of the assessment year.
This amendment is proposed to take effect from 1 st April, 2011.
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Exemptions and Deductions
Exemption of perquisites of Chairman and Members of Union PublicService Commission
Under the existing provisions, any perquisite or allowance received by an
employee is taxable under the head salary unless it is specifically exempt.It is proposed to provide exemption to any allowance or perquisite, as may
be notified by the Central government in the Official Gazette, paid to the
chairman or the retired Chairman or any other member or retired member
of the Union Public Service Commission.
The above amendment is proposed to take effect retrospectively from
assessment year 2008-09.
Enhancement of weighted deduction for any sum paid to a NationalLaboratory or a University or an Indian Institute of Technology or aspecified person
Under the existing provisions of Section 35 (2AA), a weighted deduction of
175% is allowable for any sum paid to a National Laboratory or a University
or an Indian Institute of Technology or a specified person that undertake
scientific research programme approved in this behalf.
It is now proposed to increase the said weighted deduction from 175% to
200%. This amendment will take effect from 1st April, 2012 i.e., assessmentyear 2012-13 and onwards.
However, it may be noted that under Section 79 read with The Sixteenth
Schedule of the Direct Tax Code, 2010 in its current form which may become
operative from assessment year 2013-14, deduction on such payment is
capped at 175%.
Exemption of specified income of notified body or authority or trust
or board or commissionSection 10 specifies the Incomes which are not included in Total Income.
It is proposed to insert new clause (46) in the said section so as to provide
that any specified income, arising to a body or authority or Board or Trust or
Commission (by whatever name called), which is constituted or established
by or under a Central or State or Provincial Act with the object of regulating
or administrating an activity for the benefit of general public shall be exempt
if it is not engaged in commercial activity and is specified by the Central
Government by notification in the official gazette in this behalf.
Central government to notify the nature and extent of the income which
shall constitute the specified income
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Tax benefits for New Pension System (NPS)
NPS is a defined contribution based pension system launched by Government
of India with effect from 1 January, 2004. It was extended for all citizens
on May 1, 2009. The Finance minister has proposed to amend the provisions
related to NPS to give a boost to its usage as a saving mechanism.
Section 80CCE of the Act provides that aggregate amount of deductions
under section 80C, Section 80CCC and Section 80CCD shall not, in any case,
exceed one lakh rupees.
Section 80CCD provides, inter alia, a deduction in respect of contributions
made by an employee as well as an employer to the New Pension Scheme
(NPS) account on behalf of the employee.
It is proposed that contribution made by the employer to the NPS under
Section 80CCD(2) shall be excluded from the limit of one lakh rupees.
Currently, the contribution made by an employer by way of contribution
towards a recognised provident fund or an approved superannuation fund
is allowed as deduction from business income under section 36, subject to
certain limits. However, the contribution made by an employer to the NPS is
not allowed as a deduction
Consequential to above amendment in Section 80CCE, It is proposed to
amend Section 36 to provide that any sum paid by an employer by way ofcontribution towards a pension scheme as referred to in Section 80CCD(2),
on account of employee to the extent it does not exceed 10 per cent of the
salary in the previous year, shall be allowed as deduction in computing the
income under the head profits and gains of business and profession.
These amendments will take effect from 1st April 2012 and will, accordingly,
apply in relation to the assessment year 2012-13 and subsequent years.
Deduction in respect of long-term infrastructure bondsUnder the existing provisions of Section 80CCF, subscription made by an
individual or a Hindu Undivided Family in notified long term infrastructure
bonds during the financial year 2010-11 is allowed as a deduction upto
a sum of`20,000/-. The above deduction is over and above the limit of
`1 lakh available under Section 80CCE for tax savings. It is proposed to extend
the benefit of deduction for one more year. Accordingly, the deduction of
upto `20,000/- for such investment will be allowed for the year 2011-12
(assessment year 2012-13) also.
This amendment will take effect from 1st April, 2012 and will, accordingly,
apply in relation to the assessment year 2012-13.
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Extension of sunset clause for Power Sector
As per the existing provisions of Section 80-IA(4)(iv), deduction of profits is
allowed to an undertaking which
Is set up for the generation and distribution of power if it begins to generate
power at any time between 1st April 1993 and 31st March 2011;
Starts transmission or distribution by laying a network of new transmission or
distribution lines at any time between 1st April, 1993 and 31st March, 2011;
Undertakes substantial renovation and modernisation of existing network
of transmission or distribution lines between 1st April, 2004 and 31st March,
2011.
It is proposed to extend the terminal date by one more year i.e. upto 31st March,
2012.The above amendment is proposed to be effective for assessment year 2012-13.
Sunset clause of tax holiday for certain undertakings engaged incommercial production of mineral oil
Section 80IB(9) deals with seven-year profit-linked deduction of 100% to
an undertaking engaged in commercial production of mineral oil, if such
undertaking fulfils any of the conditions stipulated therein. One of the
conditions require that such undertaking is located in any part of India and
is engaged in commercial production of mineral oil and has begun or beginscommercial production of mineral oil at any time after 1 April 1997. No
sunset clause has been provided for such business.
In order to provide clarification on the sunset clause, proviso to the above
condition is been inserted, which provides that the aforesaid deduction will
not be available for blocks licensed under a contract awarded after 31 March
2011.
This amendment will take effect from 1 April 2012 and will, accordingly,apply in relation to the assessment year 2012-13 and subsequent year.
Infrastructure Debt Fund
In order to meet the funding requirement of infrastructure sector at lower
rate from abroad, it is proposed to set up dedicated debt funds, which would
meet debt requirements of infrastructure projects.
It is proposed to amend Section 10 to bestow the Central Government with
powers to notify any infrastructure debt fund which is set up in accordancewith prescribed guidelines. Such notified infrastructure debt fund would
be exempt from tax. However, the fund would be required to file return of
income.
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It is usual practice in external borrowings wherein borrower is bound to meet
the withholding tax cost of borrowing which increases the cost of funding for
infrastructure projects. In order to reduce the cost of funds raised overseas,
it is proposed to amend Section 115A of the Act to provide that any interest
received by a non-resident from such notified infrastructure debt fund shall
be taxable at the rate of 5% instead of 20% which is applicable for other
types of external borrowings.
In order to provide withholding tax on the same, it is proposed to insert a
new Section 194LB to provide that tax shall be deducted at the rate of 5%.
These amendments are proposed to take effect from 1 st June, 2011.
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Other Major Amendments
Taxation of certain foreign dividend at reduced rate
Under the existing provisions, dividend received by a resident from an Indian
Company is exempt u/s. 10(34). However, dividends received by a resident
from a Foreign Company are taxable at the applicable marginal rate of tax.Therefore, in cases of Indian Companies, dividend received from foreign
companies is taxable at the rate of thirty percent plus applicable surcharge
and cess.
Representations were made by various corporate that taxation of foreign
dividends in the hands of resident taxpayers at full rate is a disincentive for
their repatriation to India and they continue to remain invested abroad. In
view of this, it is proposed to insert a new Section 115BBD.
It is proposed to provide that where total income of an Indian Company
includes any income by way of dividends from a foreign subsidiary company,
then such dividends shall be taxable at the rate of fifteen percent plus
applicable surcharge and cess.
It is further proposed to provide that no deduction in respect of expenditure or
allowance shall be allowed in computing the income by way of dividends.
This amendment is proposed to take effect from 1st of April 2012 and, will,
accordingly apply in relation to the assessment year 2012-13.
Extension of time limit for assessments in case of exchange ofinformation
At present, where in the case of an assessee, information is required to be
obtained from outside India, time taken for obtaining such information is
not excluded from the time limit prescribed for framing assessment under
regular assessment or re-assessment or in search assessment.
It is now proposed to exclude the time taken in obtaining such information.It is proposed to provide that the period commencing from the date on which
a reference for exchange of information is made by an authority competent
under an agreement referred to in Section 90 or 90A and the date on which
such information is received by the Commissioner or a period of six months,
whichever is less shall also be excluded.
This amendment will take effect from 1 st June, 2011.
Anti-Avoidance measures to combat lack of exchange informationIt is proposed to insert a new Section 94A to specifically deal with transactions
undertaken with persons located in any country or jurisdiction which does
not effectively exchange information with India.
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The proposed section provides for:
The Central Government to notify any country or territory, having regards
to lack of effective exchange of information by it with India, as notified
jurisdictional area.
Any transaction with the person located in the said notified jurisdiction area,
then all such parties to the transaction will be deemed to be associated
enterprises and such transaction will be deemed to be an international
transaction and correspondingly transfer pricing provisions will apply to such
transaction.
To disallow any payment made to any financial institute located in the
notified jurisdiction area unless the assessee furnishes prescribed details to
the Income-tax Authorities.
No deduction of any other expenditure or allowance (including the
depreciation) arising from the transaction with the person located in notified
jurisdiction shall be allowed unless the assessee maintains and furnishes
prescribed information.
If any sum is received to the assessee from the person located in such
notified jurisdictional area, then the onus is on the assessee to explain the
source of such money in the hands of such person. In case, the assessee fails
to discharge such onus, then such amount will be income of the assessee.
The payments made to persons located in notified jurisdiction area, will be
subject to deduction of tax at source at the higher of the following rates:
rate or rates in force;
rates specified;
at the rate of 30%.
To define the certain expressions for the purpose of this section, as
follows:
person located in a notified jurisdictional area shall include:
a person who is resident of the notified jurisdictional area;
a person, not being an individual, which is established in the
notified jurisdictional area; or
a permanent establishment of a person not falling above, in the
notified jurisdictional area. permanent establishment shall have the same meaning as defined in
the IT Act.
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transaction shall have the meaning as defined in the IT Act.
This Section will be effective from 1 st June, 2011.
Alternate Minimum Tax for Limited Liability Partnership (LLP)
The limited liability partnership (LLP) is a hybrid entity which comprises
the feature of a company as well as a partnership. It was introduced in I.T.Act vide Finance Act, 2009. As per Act, there are no separate provisions for
taxation of LLP and it is governed by income tax provisions applicable to a
partnership firm.
Due to application of tax regime of partnership firm; a LLP was enjoying
following tax benefits:-
No Dividend Distribution Tax;
No Minimum Alternate Tax;
No Surcharge on income-tax.
All these are applicable in respect of a company and entail LLP tax edge
over a company. In order to preserve the tax base vis-a vis profit linked
investment, it is proposed to provide special provisions relating to certain
limited liability partnerships.
It is proposed to insert a new Section 115JC which is akin to Section 115JB-Book Profit with a deviation in computation of adjusted total income. The
adjusted total income would be computed in the following way:-
Total income of LLP before giving effect to this chapter, as increased by
Deduction claimed, if any, under Chapter-VIA;
Deduction claimed, if any, under section 10AA.
On this adjusted total income, alternate minimum tax would be computedat the rate of 18.5% (which is also MAT rate for Companies).
With non-obstante clause, it is provided that where regular income tax
payable for a previous year is less than the alternate minimum tax, the
alternate minimum tax shall be deemed to be the total tax liability of the
LLP.
In order to provide the credit of minimum alternate tax paid against the
tax paid under the normal provisions, it is proposed to insert a new Section115JD which is akin to Section 115JAA.
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As per newly inserted section, tax credit shall be the excess of alternate
minimum tax over the regular income tax payable for that year. No interest
would be available on this credit balance being carried forward.
The credit of minimum alternate tax shall be available for a consecutive
period of 10 succeeding year.
The credit available against the normal tax payable shall not exceed the
difference between the tax payable under normal provisions and tax payable
under the minimum alternate tax.
This amendment is proposed to take effect from 1st April, 2012 and will
accordingly, apply from the assessment year 2012-13.
Rationalisation of Tax on Income distributed to unit holders
Section 115R(2) deals with additional income-tax chargeable to the specifiedcompany or a mutual fund on distribution of income to its unit holder.
Currently additional income-tax at 25% is chargeable on income distributed
by a money market mutual fund or a liquid fund in case of all recipients.
This is now proposed to increase to 30% in case of recipient other than
Individual or HUF. In other words, additional income-tax at 25% continues
to be chargeable in the case of recipient, being an Individual or a Hindu
Undivided Family. However, additional income-tax at 30% will be chargeable
in case of the recipients, other than Individuals or HUFs.
Further, on income distributed by debt fund other than a money market
mutual fund or a liquid fund, additional income-tax will be chargeable at
30% instead of 20%.
The above is tabulated as under:
Distributed by Current Rate Proposed rate Remark
Money marketmutual fund or a
liquid fund
25% - in case ofall recipient
25% - in the caseof Individual and
HUF recipient
30% - In case
of any other
recipient other
than Individual
and HUF
5% increasein additional
income-tax
chargeable
where recipient
is a person
other than an
Individual or HUF
MF other than amoney market
MF or a liquid
fund
12.5% - in caseof Individual and
HUF recipient
Same as current Neutral
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Fund other than
a money market
MF or a liquid
fund
20% - if case of
any recipient
other than
Individual or HUF
30% 10% increase
in additional
income- tax
chargeable
where recipient
is a personother than an
Individual or HUF
Distribution of income by an equity-oriented fund shall continue to be
exempt from tax.
This amendment is proposed to take effect from 1 st June, 2011.
Collection of information on requests received from tax authorities
Under the existing provisions of Section 131, certain Income-tax authoritieshave been conferred the powers of Civil Court, in respect of discovery,
inspection, enforcing the attendance of any person, compelling production
of books of accounts, etc.
It is proposed to facilitate prompt collection on requests received from
tax authorities outside India in relation to an agreement for exchange of
information under Section 90 or Section 90A. Accordingly, it is proposed to
provide that for the purpose of making an inquiry or investigation in respect
of any person(s) in relation to an agreement referred to in Section 90 orSection 90A, it shall be competent for any Income-tax authority not below
the rank of Assistant Commissioner of Income Tax, as notified by the Board,
to exercise the powers conferred under Sec 131(1). Such powers will be
exercisable notwithstanding that no proceedings with respect to such person
or class of persons are pending before it or any other income tax authority.
It is further proposed to amend Sec 131(3), so as to empower the aforesaid
authority, to impound and retain books of accounts, etc. produced before it
in any proceeding under the Act.
This amendment is proposed to take effect from 1 st June, 2011.
Exemption from filing return of income u/s 139(1c)
Under the existing provisions contained in Section 139(1), every person, if
his total income during the previous year exceeds the maximum amount
which is not chargeable to income tax, is required to furnish a return of his
income.
A new sub-section (1C) is proposed to be inserted in Section 139. This
provision empowers the Central Government to exempt, by notification in
the Official Gazette , any class or classes of persons from the requirement
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of furnishing a return of income, having regard to such conditions as may be
specified in that notification.
Consequential amendments are also proposed to be made to the provisions
of Section 296 to provide that any notification issued under section 139(1C)
shall be laid before Parliament.
The above amendments are proposed to reduce the compliance burden on
small tax payer. In the case of salaried tax payer, entire tax liability is
discharged by the employer through deduction of tax at source. Therefore,
in cases where there is no other source of income, filing of a return is a
duplication of existing information.
Notification for processing of returns in Centralised ProcessingCentres
With effect from 1 st April, 2008, a new Section 143(1A) was introduced,
which authorised CBDT to notify scheme for centralised processing of
returns for expeditious determination of tax liability or refund due to the
assessee.
Provision of sub-section 143(1B) also authorised Central Government to
notify for applicability or non-applicability with or without exceptions of
any provision of Income tax Act. However, no such notification is issued
by the Central Government under this section. Therefore to allow Central
Government to issue such notifications, this deadline of 31st March, 2011 hasbeen extended up to 31st March, 2012.
In his budget speech, Honble Finance Minister has announced to open such
Centralised Processing Centre in Manesar, Pune and Kolkata. At present,
there is only one Centralised Processing Centre functioning in Bengaluru.
This amendment will take effect retrospectively from 1 st April, 2011.
Modifications in the conditions for filing applications beforesettlement commission under section 245C(1)
Under the existing provisions, an application can be made to the Settlement
Commission, if-
the proceedings have been initiated against the applicant under section
153A or under section 153C as a result of search or requisition of books
of account, as the case may be, and the additional amount of income-
tax payable on the income disclosed in the application exceeds fifty
lakh rupees,
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in any other case, if the additional amount of income-tax payable on
the income disclosed in the application exceeds ten lakh rupees,
Clause (ia) has been inserted in proviso to section 245C(1) wherein the
criteria for filing application in cases where proceedings have been initiated
as a result of search or requisition of books of accounts has been expanded.
This provision stipulates that an application can also be made, where theapplicant-
is related to the person in whose case proceedings have been initiated
as a result of search and who has filed an application; and
is a person in whose case assessment and reassessment proceedings
have also been initiated under section 153A or 153C,
the additional amount of income-tax payable on the income disclosed in his
application exceeds ten lakh rupees.
For the purposes of new clause (ia), the definition of related person and
person having substantial interest have been given in Explanation to
section 245C.
This amendment will take effect from 1 st June, 2011.
Power of settlement commission to rectify its order u/s 245D
Settlement Commission was conferred all the powers of the Assessing Officer
except for passing the order rectifying any mistake which was apparent from
record.
Section 154 empowers any authority to rectify the mistake apparent from
the record but this section does not apply to orders passed by Settlement
Commission. There was no remedy available to the assessee/settlement
commission if the order was passed by Settlement Commission & there was
mistake apparent from record. Therefore, the assessee had no option but to
file an appeal.
In order to avoid this hardship, sub section 6B is proposed to be inserted in
Section 245D which will empower settlement commission to rectify its own
order where the mistake is apparent from record.
Any such order has to be passed within 6 months of passing the original order
by settlement commission after giving opportunity of being heard to the
applicant & Commissioner.
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Similar amendment is introduced in Wealth tax Act, by inserting sub-section
6B to Section 22D of Wealth Tax Act, 1957.
This amendment is effective from 1st June, 2011.
Omission of requirement of quoting of Document Identification
NumberUnder the existing provisions of Section 282B, every income tax authority
shall, on or after 1st July, 2011, allot a computer generated Document
Identification Number (DIN) in respect of every order, notice, letter or
any correspondence issued by him. Due to non-availability of requisite
infrastructure on an all India basis, the same is now dispensed with the
proposed omission of Section 282B.
This amendment will take effect retrospectively from 1st April, 2011.
Reporting of activities of Liaison Office
A non-resident does not file a return of income with regard to its liaison
office in India on the ground that no business activity is allowed to be carried
out in India. In order to seek information from non-residents in respect of
the activities of their liaison office in India in a financial year, it is proposed
to insert a new Section 285, mandating the filing of annual information,
within sixty days from the end of the financial year, in prescribed form and
providing prescribed details.
This amendment will take effect from 1 st June, 2011.
Recognition to Provident Funds Extension of time limit
As per the existing provisions, where recognition has been accorded to any
provident fund on or before 31st March, 2006, the same shall be withdrawn,
if such fund does not satisfy, on or before 31st December, 2010, certain
specified conditions.
It is proposed to extend the said time limit to 31 st March, 2012.
This amendment will take effect retrospectively from 1 st January, 2011.
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3. INDIRECT TAX PROPOSALS
Service Tax
New Taxable Services (Effective on passing of Finance Bill, 2011)
Taxable Service Air-conditioned restaurants having license to serve
liquor
Section 65(105)(zzzzv)
Service Provider
Service recipient
Any restaurant having the facility of air-conditioning
in any part of the establishment (at any time during
the financial year) which has license to serve alcoholic
beverages
Any person receiving the service
BDO Comments The primary reason to introduce Service Tax on such
restaurants is due to the fact that the conditions and
ambience are provided by these restaurants in such
a way that services (predominantly relating to use of
restaurant space and furniture, air-conditioning,
well-trained waiters, linen, cutlery and crockery,
music, dance floor etc.) assume predominance over
the food in most situations. Service Tax is purported
to be levied only on the value of services in the
composite contract and not on meal/food part; 70%
abatement (considered as attributable to meals and
beverages) announced on this service.
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Taxable Service Short term accommodation in hotels/inns/clubs/guest
houses etc.
Section 65(105)(zzzzw)
Service Provider
Service Recipient
Any hotel, inn, guest house, club or campsite
Any person receiving the serviceBDO Comments The levy would apply to hotels, inns, guest house,
club or campsite where the continuous period of stay
is less than 3 months. The levy would be restricted
to accommodation with declared tariff of`1,000 per
day or higher irrespective of actual amount charged
from the customer; 50% abatement announced on this
service.
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Amendments in existing taxable service:
Sr. No. Taxable Service Classification Amendment
1. Authorised
Service Station
Service
Section
65(105)(zo)
Service Tax would be applicable
to any person providing the
said service irrespective ofwhether it is an authorised
service station or not (the
definition of authorised service
station under the Act has been
deleted).
Decoration of motor vehicle
also included within the ambit
of taxable services in addition
to repair, re-conditioning or
restoration.
Services provided in relation to
goods transport vehicles and
three-wheeler scooter auto-
rickshaws excluded from the
levy.
2. Life Insurance
Service
Section
65(105)(zx)
Services of management of
investments provided by life
insurance companies to attract
Service Tax.
Tax to be levied @ 10% of
premium amount allocated to
expenses for management ofinvestment like commission and
other administration expenses
etc. (if disclosed separately to
the policy holders) or @ 1.5%
of gross premium amount (if
not disclosed separately to the
policy holders).
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Sr. No. Taxable Service Classification Amendment
3. Commercial
Training or
Coaching
Service
Section
65(105)(zzc)
The term of commercial
training or coaching centre to
include in its scope any pre-
school coaching and training
centre and centres providing
coaching or training relating
to educational qualifications
recognised by law.
Suitable exemption to be
granted post enactment of the
Finance Bill, 2011 to pre-school
coaching and training and to
coaching and training related
to educational qualifications
recognised by law.
4. Club or
Association
Service
Section
65(105)(zzze)
Service tax to be charged
on services provided to non-
members as well as members
of other affiliated clubs.5. Business
Support Services
Section
65(105)(zzzq)
The definition of services
expanded to levy Service
Tax on operational or
administrative assistance of
any manner.
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Sr. No. Taxable Service Classification Amendment
6. Legal
Consultancy
Service
Section
65(105)
(zzzzm)
Service Tax will also be levied on
the following services:
Advisory, Consultancy orassistance service provided
by a business entity to any
person;
Representational Serviceprovided by any person to a
business entity;
Services provided by anarbitral tribunal to business
entities in relation to
arbitration.
It appears that such servicesprovided by an individual to
other individual would be
excluded from the levy.
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Sr. No. Taxable Service Classification Amendment
7. Health Service Section
65(105)
(zzzzo)
Service Tax to be levied on the
following services:
Services provided by aclinical establishment having
the facility of central air-
conditioning in whole or any
part of the establishment
and more than 25 beds for
in-patient treatment at any
time of the year;
Services provided by a
clinical establishment or
any other entity in relation
to diagnostic tests of any
kind or investigative services
with the help of a laboratory
or medical equipment;
Service provided by doctorsfrom the premises of aclinical establishment,
in a capacity other than
as an employee of such
establishment.
The term clinical establishment
has been defined as hospitals,
maternity homes, nursing homes,
dispensary, clinics, sanatorium or
any other institution by whatever
name called.
Services provided by clinical
establishments owned or controlled
by the Government or local
authority not to be included in the
purview of Service Tax.
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Exemptions from Service Tax
Sr. No. Taxable Service Notification No. Services Exempt
1. Transport of
passengers by
Air Service(Effective from
1st April, 2011)
Notification No.
04/2011-S.T,
dated1st March, 2011
amending
Notification No.
26/2010-S.T,
dated
22nd June, 2010
Service Tax in excess of
10% of gross value of ticket;
or`150 (Domestic travel in
economy class) or
`750 (International travel in
economy class);
whichever is lower.
2. Business
Exhibition
Service
(Effective from
1st March, 2011)
Notification
No. 05/2011
S.T., dated 1st
March, 2011
Services rendered to an
exhibitor participating in an
exhibition held outside India.
3. Works Contract
Service
(Effective from
1st March, 2011)
Notification No.
06/2011 S.T.,
dated
1st March, 2011
Services rendered for
construction or completion
and finishing of new
residential complex or partthereof under Jawaharlal
Nehru National Urban
Renewal Mission and Rajiv
Awaas Yojana.
Notification No.
10/2011 S.T.,
dated
1st March, 2011
Services for execution of
works contract provided
wholly within an airport
and classifiable as Airport
Services.
Notification No.
11/2011 S.T.,
dated
1st March, 2011
Services for execution of
works contract provided
wholly within the port or
other port, for construction,
repair, alteration and
renovation of wharves,
quays, docks, stages, jetties,
piers and railways.
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Sr. No. Taxable Service Notification No. Services Exempt
4. General
Insurance
Service
(Effective from
1st March, 2011)
Notification No.
07/2011 S.T.,
dated
1st March, 2011
General insurance provided
under the Rashtriya Swasthya
Bima Yojana.
5. Transport of
Goods By Air
Service
(Effective from
1st April, 2011)
Notification No.
08/2011 S.T.,
dated
1st March, 2011
Services provided to person
in India for goods transported
(by air) from a place outside
India to a final destination
which is also outside India.Notification No.
09/2011 S.T.,
dated
1st March, 2011
Exemption of Service Tax on
so much of the value as is
equal to the amount of air
freight determined under
section 14 of the Customs
Act, 1962 or the rules made
thereunder for the purpose
of charging customs duties
included in the taxable value.
6. Transport of
Goods By Road
Service
(Effective from
1st April, 2011)
Notification No.
08/2011 S.T.,
dated
1st March, 2011
Services provided to person
in India for goods transported
(by road) from a place
outside India to a final
destination which is also
outside India.7. Transport of
Goods By Rail
Service
(Effective from
1st April, 2011)
Notification No.
08/2011 S.T.,
dated
1st March, 2011
Services provided to person
in India for goods transported
(by rail) from a place outside
India to a final destination
which is also outside India.
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Sr. No. Taxable Service Notification No. Services Exempt
8. Transportation
of Coastal
Goods
and Goods
transported
through
National
Waterways and
Inland Water
Service
(Effective from
1st March, 2011)
Notification No.
16/2011 dated
1st March, 2011
Abatement of Service Tax of
25% of the value of taxable
service; accordingly, 75% of
the value of taxable service
liable to Service Tax.
Amendments in Export of Service Rules, 2005 and Taxation ofServices (Provided from Outside India and Received in India) Rules,2006 [Effective from 1st April, 2011]:
The category of following taxable services changed under Export ofService Rules, 2005 and Taxation of Services (Provided from OutsideIndia and Received in India) Rules, 2006:
Sr. No. Classification of Service Existing Rule Proposed Rule
1. Provision of preferential
location or external or
internal development of
complexes
Rule 3(1)(iii)
Taxable based
on location of
recipient of
the service.
Rule 3(1)(i)
Taxable based on location
of immovable property.
2. Rail Travel Agents
Service
Rule 3(1)(iii)
Taxable based
on location of
recipient of
the service.
Rule 3(1)(ii)
Taxable based on
performance of the
service.
3. Health Check-up and
Treatment Services
Rule 3(1)(iii)
Taxable based
on location of
recipient ofthe service.
Rule 3(1)(ii)
Taxable based on
performance of the
service.
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Sr. No. Classification of Service Existing Rule Proposed Rule
4. Credit Rating Agencys
Services
Rule 3(1)(ii)
Taxable
based on
performance
of the service.
Rule 3(1)(iii)
Taxable based on location
of recipient of the service.
5. Market Research Agency
Service
Rule 3(1)(ii)
Taxable
based on
performance
of the service.
Rule 3(1)(iii)
Taxable based on location
of recipient of the service.
6. Technical Testing and
Analysis Service
Rule 3(1)(ii)
Taxablebased on
performance
of the service.
Rule 3(1)(iii)
Taxable based on locationof recipient of the service.
7. Transport of Goods by Air
Service
Rule 3(1)(ii)
Taxable
based on
performance
of the service.
Rule 3(1)(iii)
Taxable based on location
of recipient of the service.
8. Transport of Goods by
Road Service
Rule 3(1)(ii)
Taxable
based on
performance
of the service.
Rule 3(1)(iii)
Taxable based on location
of recipient of the service.
9. Opinion Poll Service Rule 3(1)(ii)
Taxablebased on
performance
of the service.
Rule 3(1)(iii)
Taxable based on locationof recipient of the service.
10. Transport of Goods by
Rail Service
Rule 3(1)(ii)
Taxable
based on
performance
of the service.
Rule 3(1)(iii)
Taxable based on location
of recipient of the service.
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CHANGE IN MECHANISM TO LEVY AND CHARGE SERVICE TAX
Point of Taxation Rules, 2011
A new legislation viz, Point of Taxation Rules, 2011 is proposed to be incepted
with effect from 1st April, 2011. The rules are framed to determine the point of
time when the services would be deemed to be provided. As per the said Rules,
the time of provision of service would be the earliest of the following:
Date on which service is provided or to be provided
Date of invoice
Date of receipt of payment
The above provisions would also squarely apply on payment of Service Tax under
reverse charge mechanism.
Further, the Rules also contains provisions for determination of point of taxation
in cases of change of rate of tax, continuous supply of service, associated
enterprises, copyrights, payment of tax in case of new services etc.
Other legislative Amendment Proposals
The Works Contract (Composition Scheme for Payment of Service Tax)
Rules, 2007 have been amended to provide for restriction in availment of
CENVAT credit to 40% of service tax paid on services relating to erection,
commissioning and installation services, commercial or industrial construction
services and construction of residential complex services in case service tax
has been paid, without availing the abatement benefit under notification
1/2006-S.T. dated 1st March, 2006, on full value of services after availing
CENVAT credit on inputs. This is primarily to ensure that CENVAT credit of
inputs (not admissible for payment of service tax on works contract service
under composite scheme) is not availed indirectly. [Effective from 1st March,
2011]
Amendment in Service Tax valuation provisions under the Service Tax
(Determination of Value) Rules, 2006.
Money changing services [Effective from 1st April, 2011]
A new rule (2B) has been introduced in the Service Tax (Determination
of Value) Rules, 2006 providing for determination of value as under:
The difference between the buying rate or the selling rate, as
the case may be, and the RBI reference rate for that currency for
that day multiplied by units of currency exchanged;
If RBI reference rate is not available, the value shall be 1% of the
value of money exchanged in Indian rupees;
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When both the currencies are not Indian rupees, 1% of the lesser
of the amounts receivable if the two currencies are converted at
RBI reference rate.
Telecommunication services [Effective from 1st March, 2011]
The valuation for the purpose of Service Tax would be the gross amountpaid by the person to whom telecommunication service is rendered
by the telegraph authority. Accordingly, in case of services provided
by way of recharge coupons or prepaid cards or the like, the value
would be the gross amount charged from the subscriber or ultimate
user of the service and not the amount paid by the distributor or other
intermediary to the telegraph authority.
Amendments made in Service Tax Rules, 1994 to align the provisions
consequent to the introduction of Point of Taxation Rules, 2011 (effectivefrom 1st April, 2011) as under:
New rule 5B has been introduced to provide that the applicable rate of
Service Tax should be the rate applicable at the time when the services
are deemed to have been provided (determined as per the Point of
Taxation Rules, 2011);
Rule 6(1) amended to provide for payment of Service Tax upon deemed
provision of services under the Point of Taxation Rules, 2011 (as againstreceipt of payment towards taxable services) by due dates (viz 5 th or
6th of the month immediately following the calendar month in which
services are so deemed to be provided, except for the month of March
where the due date would be March 31).
Rule 6(3) has been amended to provide that when an invoice has been
issued or a payment is received for a service which is not subsequently
provided, the service provider could take the credit of the Service Tax
paid earlier (pursuant to Point of Taxation Rules, 2011) provided the
amount (including Service Tax) has been refunded to the recipient of
service or a credit note is issued for the value of service not so provided
to the service recipient.
The maximum amount admissible for adjustment of excess Service Tax
under rule 6(4B)(iii) has been increased to `2 lakhs from 1 lakh.
Rule 6(6A) has been introduced to provide for recovery of amount of
Service Tax self assessed but not paid together with interest as per
Section 87 of the Finance Act, 1994. Accordingly, requirement to resortto Section 73 for recovery of self assessed amounts of Service Tax would
not be required.
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Rule 6(7B) has been amended where the composition rate applicable
in relation to purchase or sale of foreign currency, including money
changing, has been reduced from 0.25% to 0.1%; also, the option to
pay Service Tax on billed charges in relation to these services has been
withdrawn.
Interest rate on delay in payment of service tax (under Section 75) and amountscollected in excess (under section 73B) increased from 13% to 18% [Effective from
1st April, 2011]
Exemption to services to SEZ Developer/Unit by way of refund (Service Tax
notification 9/2009-ST withdrawn); an option is available to not charge
Service Tax ab-initio if the services are meant to be wholly consumed
within SEZ (including services liable to Service Tax on reverse charge basis
under Section 66A). For this purpose, the criterion/principle for determining
what constitutes whole consumption of services within SEZ has beenborrowed from the Export of Services Rules, 2005. Further, it has also been
specified that all services received by SEZ Developer/Unit, which does
not have any other DTA operations, would constitute as services wholly
consumed within SEZ.
The maximum penalty for delay in filing Service Tax return under Section 70
is proposed to be enhanced from `2,000 to `20,000; the existing rate of
penalty under rule 7C of the Service Tax Rules, 1994 to be retained.
The revised position relating to penalties and their mitigation or waiver is
tabulated in summarised form in the table below:
Situation Position inrecords
Penalty &Provision
Mitigation CompleteWaiver
No fraud,
suppression
etc.
Captured 1% of tax or
`100 per day
upto
50% of taxamount: Sec 76
Totally
mitigated if
tax and
interest paidbefore issue
of
notice:
Section 73(3)
On showing
reasonable
cause under
Section 80
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Cases of
fraud,
suppression
etc.
Captured
true &
complete
position in
records
50% of tax
amount: Proviso
to Section 78
(a) 1% per
month; max
of
25% if all
dues paid
beforenotice: Sec
73(4A);
(b) 25% of tax
if all dues
paid within
30 days (90
days
for small
assesses):Provisos
to Section 78
On showing
reasonable
cause under
section 80
Not so
captured
Equal amount:
Section 78
No mitigation
at all
Not possible
Small scale sector benefits
Individual and sole proprietor assessees with a turnover upto
`60 lakhs not to be subject to audit;
Interest rates for assessees (including firms and corporates) upto a
turnover of`60 lakhs to be 3% less than prescribed rate;
The period of making the payment in order to avail the benefit of
reduced penalty under the second proviso to Section 78 to be 90
days for assessees (including firms and corporates) upto a turnover of
`60 lakhs.
Retrospective exemptions have been given by the Finance Bill, 2011 to the
following services:
To an association or chamber representing commerce or industry in respect
of membership fee under the Club orAssociation Services for the period from
16th June, 2005 to 31st March, 2008.
To an inter-state or intra-state transportation of passengers, in a
vehicle bearing contract and tourist vehicle permit for the period from1st April, 2000 to 6th July, 2009.
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Refund should be granted on all Service Tax which has been collected on
these services during the relevant period (discussed above) provided the
claim for refund is filed within six months from the date on which the Finance
Bill, 2011 receives the assent of the President.
Other provisions on search, prosecution, arrest etc.
Power to issue search warrant is proposed at the level of Joint
Commissioner and the execution of search warrant at the level of
Superintendent.
Provisions relating to prosecution are proposed to be re-introduced and
would apply in the following situations:
Provision of service without issue of invoices;
Availment and utilisation of CENVAT credit without actual receiptof inputs or input services;
Maintaining false books of accounts or failure to supply any
information or submitting false information;
Non-payment of amount collected as Service Tax for a period of
more than six months.
No power of arrest; the prosecution can be launched only with theapproval of Chief Commissioner.
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CENVAT Credit
Definition of Exempted Service amended
Notification No. 3/2011
CE(NT) dated 01-03-2011
Effective date:01-04-2011
A clarificatory Explanation has been inserted under definition
of exempted services whereby it is clarified that exempted
services includes trading.
It appears that this is a clarificatory amendment and could have
retrospective effect.
Definition of Input amended
Notification No. 3/2011
CE(NT) dated 01-03-2011
Effective date:
01-04-2011
The definition of input amended as under:
Input means:
All goods used in factory by the manufacturer of the finalproducts
All goods including accessories, cleared along with the finalproduct, the value of which is included in the value of final
product and goods used for providing free warranty for finalproducts
All goods used for generation of electricity or steam forcaptive use
All goods used for providing any output serviceExclusions:
Light Diesel Oil (LDO)
High Speed Diesel Oil (HSD)
Motor Sprits (Petrol)
Any goods used for construction of: Building or a civil structure of a part thereof
Laying of foundations or making of structures for supportof capital goods except for provisions of any taxable
service as under:
Port Services
Other Port Services
Airport Services
Commercial or Industrial Construction Services
Construction of Complex Services Works Contract Service
Capital goods except when used as parts or components inthe manufacture of a final product
Motor Vehicles
Any goods such as food items, goods used in guest house,residential colony, club or a recreation facility, clinical
establishment when such goods are used primarily for
personal use or consumption of any employee
Any goods which have no relationship whatsoever with the
manufacture with the manufacture of a final product
Free Warranty means a warranty provided by the manufacturer,
the value of which is included in the price of the final product
and is not charged separately from the customer.
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Definition of Input Service amended
Notification No. 3/2011
CE(NT) dated 01-03-2011
Effective date: 01-04-
2011
The definition of input service amended as under:
Input Service means:
Used by a provider of taxable service for providing an outputservice
Used by a manufacturer whether directly or indirectly inor in relation to the manufacture of final products andclearance of final products upto the place of removal
Inclusions:
Services used in relation to:
modernisation, renovation or repairs of a factory, premisesof provider of output service or an office relating to suchfactory or premises
advertisement or sales promotion market research storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment quality control coaching and training computer networking credit rating share registry security
business exhibition
legal services inward transportation of inputs or capital goods and outward
transportation upto the place of removal
Exclusions:
The requirement of input services being used in relation tobusiness activity has been deleted
Architect Services, Port Services, Other Port Services, AirportServices, Construction of Complex Services, Works Contract
Services in so far they are used for:
Construction of a building or civil structure or a partthereof
Laying of foundation or making of structures for support ofcapital goods
General Insurance Service, Rent a Cab Services, AuthorisedService Station, Supply of Tangible Goods Services in so far
they relate to a motor vehicle except when used for the
provision of taxable services for which the credit on motor
vehicle is available as capital goods
Outdoor Catering Services, Beauty Treatment Services,Health Services, Cosmetic and Plastic Surgery Services, Club
and Membership Services, Health and Fitness Services, LifeInsurance Services and travel benefits extended to employees
on vacation such as Leave or Home Travel Concession
when such services are used primarily for personal use or
consumption of any employee
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Definition of Manufacturer or Producer amended
Notification No. 3/2011 CE(NT)
dated 01-03-2011
Effective date: 01-03-2011
Manufacturer or Producer:
In relation to articles of jewellery falling under
heading 7113 of the First Schedule to the Excise Tariff
Act, includes a person who is liable to pay duty of
excise leviable on such goods under sub-rule (1) ofrule 12AA of the Central Excise Rules, 2002.
In relation to goods falling under Chapters 61, 62 or 63
of the First Schedule to the Excise Tariff Act, includes
a person who is liable to pay duty of excise leviable on
such goods under sub-rule (1A) of rule 4 of the Central
Excise Rules, 2002.
CENVAT Credit of Service Tax paid under Section 66A of Finance Act 1994 (import of services)
is permissible
Notification No. 3/2011
CE(NT) dated 01-03-2011
Rule 3 is being amended retrospectively with effect from
18
th
April, 2006 to provide that the credit of Service Tax paidunder Section 66A of the Finance Act, 1994 shall also be
permissible.
Rule 3 and Rule 4 amended to disallow certain CENVAT Credit
Notification No. 3/2011
CE(NT) dated 01-03-2011
Effective date: 01-03-
2011
Rule 3 and 4 are being amended to disallow utilisation of credit
for paying duty on concessional goods (in respect of which an
exemption, other than full exemption, is availed subject to the
condition that no CENVAT credit of inputs and input services is
taken).
Reference to provide for reversal of CENVAT Credit
Notification No. 3/2011
CE(NT) dated 01-03-2011
Rule 4 (7) is being amended to provide for reversal of CENVAT
credit in case any payment made towards an invoice of input
service is received back.
Reference to CENVAT Credit by ship breaking units
Notification No. 3/2011
CE(NT) dated 01-03-2011
The availment of CENVAT credit by ship breaking units is being
restricted to 85% of the additional duty of customs (CVD) paid at
the time of importation of ships for breaking.
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Reference to amendment in Rule 6 of CENVAT Credit Rules 2004
Notification No. 3/2011
CE(NT) dated 01-03-2011
Rule 6 is being amended as under:
Reduce the requirement of payment of 6% of the value of
exempted services to 5%;
Provide an option to maintain separate accounts for inputs
alone and reverse the amount of input services credit as perthe allocation formula in rule 6 (3A).
Provide that a payment made under this rule shall be treated
as credit not availed for the purpose of an applicable
exemption;
Clarify the value of services in cases where the same is not
clearly defined and tax is collected on a compounding or
specific principle.
Rule 6(5) Deleted
Notification No. 3/2011
CE(NT) dated 01-03-2011
Rule 6(5) of the CENVAT Credit Rules, 2004 which allowed 100%
availment of CENVAT Credit of 16 specified services is nowdeleted.
Reversal of CENVAT Credit for provider of Banking and other Financial Services
Notification No. 3/2011
CE(NT) dated 01-03-2011
Rule 6(3B) is being introduced to provide that only 50% of the
CENVAT Credit availed will be available for utilisation towards
payment of Service Tax under Banking and other financial
services by a banking company and financial institution including
non-banking financial company.
This rule of reversal of CENVAT Credit is applicable for following:
Banking Company
Financial Institution including Non-Banking Financial Company
(NBFC)
No such reversal of CENVAT Credit availed on capital goods is
required.
Reversal of CENVAT Credit for providers of Life Insurance Service Provider and
Management of investment under ULIP Services
Notification No. 3/2011
CE(NT) dated 01-03-2011
Rule 6(3C) is being introduced to provide that only 80% of the
CENVAT credit availed will be available for utilisation towardspayment of Service Tax by the providers of life insurance service
and management of investment under ULIP.
In effect, 20% of CENVAT Credit will have to be reversed
voluntarily on tax paid on inputs and input services.
No such reversal of CENVAT Credit availed on capital goods is
required.
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New Rule 6(6A) for SEZ unit or Developer without payment of Service Tax
Notification No. 3/2011
CE(NT) dated 01-03-2011
New rule 6(6A) is being inserted to provide that the provisions
of sub-rule (1), (2), (3) and (4) of the said Rule shall not apply
to taxable services provided to SEZ Unit or Developer without
payment of Service Tax.
CENVAT Return for manufacturer
Notification No. 3/2011
CE(NT) dated 01-03-2011
Effective from 01-03-2011
The time limit for filing of monthly CENVAT Credit Return has
been reduced to 10 days from 20 days
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Central Excise
Legislative including procedural amendments in Central Excise Act,1944
Reference for Retail Sales Price (RSP) valuation aligned with the Legal Metrology Act, 2009
Budget Proposal
Effective Date: 01-03-2011Notification No. 5/2011-CE(NT)
dated 01-03-2011
The Central Government of India has notified the Legal
Metrology Act, 2009 replacing the Standard Weights &Measures Act, 1976.
Section 4A of the Central Excise Act, 1944 which provides
for valuation based on Retail Sales Price (RSP) drew
reference from the Standard Weights & Measures Act,
1976 whereby excisable goods covered by the said Act
were to be valued as per RSP method.
In line with the replacement of Act, the Section 4A for
RSP valuation of excisable goods is being amended to
substitute the reference with Legal Metrology Act, 2009with effect from 01-03-2011.
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Provisions of recovery of Central Excise duty amended & simplified
Budget Proposal
Effective Date: 01-04-2011
Notification No. 5/2011-CE(NT)
dated 01-03-2011
Provisions of Section 11A are amended as under:
(i) A separate category has been carved out from
cases involving extended period of limitation (fraud,
collusion, willful mis-statement etc.) wherein a lower
mandatory penalty of 50% of the duty (rather than 100%
of the duty) would apply. These would cover cases whereit is noticed during an audit, investigation or verification
that duty has not been levied, short levied, not paid or
short paid or erroneously refunded but the transactions
to which such duty relates are entered in the specified
records.
(ii) While a provision has been made for issuance of
show cause notice invoking the extended period for
recovery of duty with interest under section 11AC and
penalty equivalent to 50% of the duty, it has also been
specifically provided that even in caseswhere show cause notice has been issued involving
extended period of limitation (fraud, collusion,
willful mis-statement etc.) with penalty equal to
the duty, the penalty can be remitted to 50% if the
Central Excise officer is of the opinion that the details of
the transactions in respect of which the demand notice
has been issued have been duly recorded by the person
charged with duty in the specified records.
(iii)The provisions of the existing sub-section (1A)
of Section 11 have been omitted. The facility ofcompounding the penalty amount has been confined only
to the new category and if the person chargeable with
duty (for an extended period) pays the duty in full or
part along with interest
Before the issuance of a show cause notice, the
penalty shall stand reduced to 1% per month but
not exceeding 25% of the duty.However if the duty
alongwith interest is paid within thirty days of the
issuance of adjudication order, the penalty would be 25%
of the duty.
11AA, 11AB and 11AC are being redrafted so as to make
them more lucid and coherent. A new category of cases
is being carved out in respect of which the period of
limitation would be five years but which would attract
general penalty of 50% of the duty. 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 show cause notice in such cases.
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Interest rate increased to 18% from existing 13%
Budget Proposal
Effective Date: 01-04-2011
Notification No. 6/2011-CE(NT)
dated 01-03-2011
Rate of interest has been revised to 18% per annum from
13% per annum to be effective from 1st April, 2011.
Central Excise Act shall have a First Charge on the property of the defaulter for recoveryof Central Excise dues
Budget Proposal New Section 11E is being inserted so as to create first
charge on the property of the defaulter for recovery
of Central Excise dues from such defaulter subject to
provisions of Section 529A of the Companies Act, the
Recovery of Debt due to Bank and Financial Institution
Act, 1993 and Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,
2002.
The implication of the same is that in case of any owingunder these provisions, the dues under the Central Excise
Act, 1944 shall have a First Charge.
Joint Commissioner/Additional Commissioner of Central Excise empowered to carry out the
search of any premises
Budget Proposal Section 12F is being inserted to empower the Joint
Commissioner or the Additional Commissioner of the
Central Excise to himself search or authorize a central
excise officer to carry out the search of any premises.
CBEC empowered to issue instructions as per National Litigation Policy
Budget Proposal A new Section 35R is being inserted retrospectively with
effect from 20th October, 2010 so as to empower CBEC
to issue instructions relating to non-filing of appeal in
certain cases in line with National Litigation Policy.
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Legislative amendments in Central Excise Tariff Act, 1985
Changes in tariff rate of 5%
Budget Proposal A tariff rate of 5% is being prescribed for specified items,
which are being subjected to an effective rate of 1%
excise duty without CENVAT credit facility.
Chapter Note inserted in Chapter 22 for labeling, relabeling, packing and/or repacking
Budget Proposal A Chapter Note is being inserted in Chapter 22
Beverages, Spirits and Vinegars.
The said Chapter Note provides that in relation to
products of this Chapter, labelling or re-labelling of
containers or packing or repacking from bulk packs to
retail packs or the adoption of any treatment to render
the product marketable to the consumer, shall amount to
manufacture.
Chapter Note inserted in Chapter 26 for process of converting ores into concentrates
Budget Proposal A Chapter Note is being insert