Tuesday, March 1, 2011

Indian Budget 2011 - salient aspects

Economy overview
  • India has made a quick and strong turnaround from the slowdown caused by the global and domestic challenges of recent years. GDP growth for 2010-11 has been estimated at  8.6% during 2010-11, (up from 8% in 2009-10).
  • The GDP growth was fairly broad-based, with agriculture, industry and services growing at 5.4%, 8.1% and 9.6%, respectively, and is set to revert to its pre-crisis trajectory of 9% in FY12
  • The  fiscal deficit for the current FY will fall to 4.8%, against the budgeted 5.5% on account of a number of windfall gains such as the disinvestment proceeds and 3G revenue spectrum auctions. For FY 2011-12, the fiscal deficit is projected at 4.6%of GDP. In the Medium Term Fiscal Policy Statement presented by the Finance Minister today, the rolling targets for fiscal deficit are placed at 4.1% for 2012-13 and 3.5% for 2013-14.
  • Inflation remains an area of concern with average inflation in primary articles being reported at 18% during the period April to December 2010 as compared to 10% during the corresponding period in previous year
  • Exports have grown at 29.4% to reach USD 184.6 billion while the imports bill at USD 273.6 billion grew at 17.6%.  Forex reserves increased from USD 279.6 billion at the end of April 2010 to USD 297.3 billion at the end of December 2010. While this year brought challenges, India is moving ahead steadily with sustained momentum on the path of fiscal consolidation and high economic growth.
Regulatory Measures
  • Further liberalisation of Foreign Direct Investment policy on the anvil.
  • Foreign Investors meeting KYC norms to be allowed to invest in equity schemes of SEBI registered Mutual Funds.
  • FII investment ceiling in corporate bonds of infrastructure companies raised from USD 5 billion to USD 25 billion. FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years (inter-se trading amongst FIIs to be allowed during the lock-in period).
  • Financial Sector Legislative Reforms Commission to submit recommendations within 24 months on streamlining the financial sector laws, rules and regulations. Other proposed legislative reforms in Financial Service sector, include :
  • The Insurance Laws (Amendment) Bill, 2008;
  • The Life Insurance Corporation (Amendment) Bill, 2009;
  • The revised Pension Fund Regulatory and Development Authority Bill, first introduced in 2005;
  • Banking Laws Amendment Bill, 2011;
  • Bill on Factoring and Assignment of Receivables;
  • The State Bank of India (Subsidiary Banks Laws) Amendment Bill, 2009; and
  • Bill to amend RDBFI Act 1993 and SARFAESI Act 2002
  • RBI Guidelines for private banking licenses to be announced by March 31, 2011.
  • Companies Bill 2009 to be introduced in the current Parliament session.
  • Capital investment in the creation of modern storage capacity will be eligible for viability gap funding scheme of the Ministry of Finance.
  • It is also proposed to recognize cold chains, post-harvest storage and fertilizer industry as an infrastructure sub-sector.
  • State Governments to review and enforce a reformed Agriculture Produce Marketing Act to facilitate retailers integrating their enterprises with the farmers.
  • A Group of Ministers set up to consider issues relating to reconciliation of environmental concerns to suggest changes in the existing statutes, rules, regulations and guidelines.
  • States to modernize their stamp and registration administration and roll out e-stamping in the next three years.

Direct Tax Proposals

Corporate Tax  - Rates
  • Corporate Tax rates to remain unchanged.
  • Surcharge on tax to be reduced from 7.5% to 5%, in case of domestic company and 2.5% to 2% in the case of foreign company.
  • The effective Minimum Alternative Tax (‘MAT’) rate to be increased from 19.93% to 20.00% in case of domestic companies and from 19% to 19.44% in case of foreign companies.
  • The dividend received by domestic company from its overseas subsidiary is to be taxed at the rate of 15%. The income shall be computed without any deduction of expenses incurred for earning dividends.
  • Limited Liability Partnerships to pay Alternate Minimum Tax at effective rate of 18.5% with credit available upto 10 years.

Tax holidays
  • Developers of Special Economic Zone (‘SEZ’) and SEZ units to pay MAT effective from FY 2011-12.
  • Developers of SEZ to pay Dividend Distribution Tax (‘DDT’) on dividends declared, distributed or paid on or after June 01, 2011.
  • Tax holiday window extended to units engaged in power generation, distribution, transmission, substantial renovation and modernization till March 31, 2012.
  • No extension of existing tax holiday to STPI or EOU after March 31, 2011.
  • Scope of investment linked deductions to specified businesses widened to include housing projects under notified affordable housing scheme and production of fertilizer in India.
  • Loss from the business of hotel and hospital (eligible for investment linked incentive as specified business) to be set off against income from hotels and hospitals not eligible for incentive.
  • No deduction to commercial production of mineral oil for blocks awarded under NELP -IX or under any law
  • Weighted deduction to be increased from 175% to 200% for contribution to National Laboratory, University, IIT or a specified person.

Infrastructure Debt funds
  • Income of notified 'Infrastructure debt funds' to get exemption.
  • Interest income to a non-resident from 'Infrastructure debt funds' to be taxed at 5% (plus applicable surcharge and Education cess) as against tax rate of 20% applicable on interest income to non-residents. Interest income subject to withholding tax of 5%.

Notified Jurisdictional Area
  • Central Government to notify overseas jurisdiction not cooperating in exchange of effective information.
  • Transfer pricing regulations to apply on transactions with any person located in such area.
  • No deduction of any payment to any financial institution unless assessee authorizes Board or any tax authority to seek information from the financial institution.
  • No deduction for any expenses (including depreciation) arising from the transaction with entities located in notified jurisdictional area unless assessee furnishes prescribed particulars.
  • Receipts from any person located in notified in such jurisdictional area to be deemed as income unless the assessee satisfactorily explains the source.
  • Any payment, chargeable under the Act, made to a person located in notified jurisdictional shall suffer withholding tax rate at the higher of normal tax rate or 30%.

Transfer Pricing Regulations
  • Fixed variation of +-5% presently available to international transactions against the arm’s length price replaced with a percentage as may be prescribed.
  • TPO’s power widened to examine all international transactions whether covered under the reference from the assessing officer or not.
  • Due date for Corporate tax returns involving international transactions extended to November 30th from the present date of September 30th.

Personal Tax
  • No change in the personal tax rates except that the maximum amount not chargeable to tax increased from INR 160,000 to INR 180,000.
  • The age limit for Senior Citizen reduced from 65 years to 60 years.
  • A new category of tax payer introduced-  Very senior citizens (80 years or above). Basic exemption limit for very senior citizen is set at INR 500,000.
  • An additional deduction of INR 20,000 (over and above the existing limit of INR 1 lac) for investment in notified long-term infrastructure bonds extended for one more year.
  • No tax return filing requirement for such class or classes of persons as may be notified by the Central Government subject to fulfillment of specified conditions. The said amendment will take effect from 1st June 2011.
  • Employer contribution towards pension scheme of Central Government has been excluded from the deduction limit of INR 100,000.

  • Definition of charitable purpose amended to increase the monetary limit for advancement of any other object of general public utility from INR 10 Lacs to INR 25 Lacs.
  • In case of money market mutual fund or a liquid funds rate of tax on income distributed to unit holders has been increased from 25% to 30% and from 20% to 30% in case of other debt funds.
  • Settlement Commission scope widened to cover search cases as well.
  • Liaison offices of foreign companies to file annual information with the tax authorities within sixty days from the end of the financial year.
Indirect Tax Proposals

  • No change in peak/standard rate of Customs Duty, Excise Duty and service tax. 
  • Term ‘Input’, ‘Input Services’, ‘Exempted Goods’ and ‘Exempted Services’  re-defined.
  • Point of taxation rules made effective from 1.4.2011.
  • Amendment made in line with National Litigation Policy.
  • Self-assessment in the Customs Act, 1962 both for imported goods and exported goods.
  • Definition of ‘Completely Knocked Down’ added for concessional customs duty under project imports.
  • CVD on packaged software to be levied on media value, where not governed by MRP provisions.
  • BCD @2.5% levied on import of aircraft by non scheduled operators.
  • Exemption from BCD, SAD and CVD @5% on specified parts of hybrid vehicles.
  • All clearances  (manufactured or traded) from SEZ to DTA exempt from SAD provided VAT/CST is not exempt.
  • Exemption from full customs duty on parts, component and accessories for manufacture of PC connectivity cables/battery chargers/hands free headphones of mobile handsets.
  • Time limit for filing of refund claim/issuance of show cause notice extended from 6 months to 1 year.
Central Excise
  • Merit rate of CENVAT for non-petroleum goods has been increased from 4% to 5%.  This would impact items such as medical equipment, drugs and food products.
  • Excise duty exemption on 130 items withdrawn and 1% excise imposed subject to non-availment of CENVAT credit.
  • Full exemption from duty withdrawn on IT products such as micro processors for computers etc. The products will now be subject to 5% excise duty.
  • Duty rates on cement changed from specific rate to ad valorem.
  • Full exemption granted to equipment (air-conditioning/conveyer belt) for used for cold storage.
  • Excise duty on packaged software to be levied on media value, where not governed by MRP provisions.
Service Tax
  • Service tax imposed on following new services with effect from a date to be notified:
  • Services by air-conditioned restaurants having license to serve liquor; and
  • Short-term accommodation in hotels/inns/clubs/guest houses etc.
  • Expansion in scope of existing services, including:
  • Health Services
  • Legal Services
  • Life Insurance Services
  • Business Support Services
  • Point of Taxation Rules, 2011 effective from 1.4.2011 and corresponding alignment in Service Tax Rules.
  • Penalty provisions redefined.
  • Port, Airport and railways related exemptions provided.
  • Provisions relating to prosecution reintroduced.
  • Export & Import of Services Rules amended.
  • Modified scheme introduced to refund service tax to SEZ units and Developers.
Cenvat Credit
  • Definition of inputs and input services has been amended to exclude inputs/input services used for construction of building/civil structure, laying of foundation, etc.
  • Definition of inputs to include goods cleared for free warranty.
  • Definition of input services amended to exclude trading activity.
  • Inputs and inputs services primarily used for personal use or consumption of employees excluded.  
  • Input services such as outdoor catering, health insurance, life insurance, etc. has been specifically excluded.
  • Credit required to be reversed when inputs or capital goods have been partially or fully written off in the books of accounts.
  • Definition of inputs and input services has been amended to exclude inputs/input services  used for construction of building/civil structure, laying of foundation, etc.
  • Rule 6 (5) of the Credit rules has been omitted. Now the manufacturer or service provider is eligible to claim proportionate credit on all services attributable to taxable activity in terms of Rule 6(3A).
  • The amount payable on exempted services (when credit on common inputs/input services has been claimed) has been reduced from 6% to 5%.
  • The restriction on credit under Rule 6 is not applicable in case the taxable services are provided without payment of service tax to SEZ unit/zone/developer.
  • Significant progression towards introduction of GST.
  • Proposal to introduce the constitution amendment bill in the current session of the Parliament.
  • Pruning of exemption a step towards GST.