Income Tax Amendments by Finance Act, 2011

The following changes have been effected in the Income Tax Act,1961 by way of Finance Act, 2011 :

1.Rates of Income Tax:

Rates under the various categories have changed.

INDIVIDUAL (EXCL. WOMEN) BELOW 65 YEARS OF AGE/HUF/AOP/BOI/AJP :

WOMEN BELOW 65 YEARS OF AGE :

INDIVIDUALS AND WOMEN RESIDENT ABOVE 65 YEARS OF AGE

CO-OPERATIVE SOCIETY

FIRM & LOCAL AUTHORITY – Flat 30%

DOMESTIC COMPANY – 30%

OTHER THAN DOMESTIC COMPANY:

2.      SURCHARGE :

a)      The surcharge leviable is :

b)      In the following cases, the rates of surcharge have been changed:

115A    - Tax on Dividends, Royalties and Technical Service Fees in case of foreign companies

115AB – Tax on income from units purchased in foreign currency or capital gains arising from    their transfer.

115AC – Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.

115ACA – Tax on income from Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.

115AD –Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer

115B – Tax on Profits and Gains of Life Insurance Business

115BB – Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever.

115BBA – Tax on non-resident sportsmen or sports associations

115BBC  - Anonymous donations to be taxed in certain cases.

115E – Tax on investment income and long-term capital gains

115JB – Special Provision for payment if tax by certain companies (MAT)

 In the above mentioned cases, surcharge leviable is:

c)      In the following cases:

115O – Tax on distributed profits of domestic companies (dividends by DC)

115R – Tax on distributed income to unit holders

The surcharge leviable is 5% on income tax calculated as per relevant section.

d)     In the following cases :

194C – Payments to Contractors

194E – Payments to Non-resident sportsmen or sports associations

194EE – Payments in respect of deposits under National Savings Scheme etc.

194F – Payments on account of repurchase of units by Mutual Fund or UTI

194G – Commission etc. on the sale of lottery tickets

194H – Commission or brokerage

194-I - Rent

194J – Fees for professional or technical services

194LA-  Payment of compensation on acquisition of certain immovable property

194LB – Income by way of interest from infrastructure debt fund (Newly inserted section)

196B – Income from units

196C – Income from foreign currency bonds or shares of Indian company

196D – Income of Foreign Institutional Investors from securities

Here, TDS shall be deducted as per relevant section and surcharge would be leviable @ 2% (only for companies other than domestic companies) of such tax, where the income or aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds Rs. 1 crore.

e)      Surcharge on TCS u/s. 206C is now 2% of such tax,(for companies other than domestic companies) , where the amount or aggregate of such amounts collected and subject to such collection exceeds Rs. 1 crore.

f)       Surcharge on Advance Tax computed w.r.t. Sections 115A, 115AB, 115AC, 115ACA, 115AD, 115B, 115BB, 115BBA, 115BBC, 115BBD, 115E, 115JB :

3. Rates for charging Income Tax in certain cases, deducting Income Tax from Income Chargeable under the head ‘Salaries’ and computing ‘Advance tax’

In cases in which  income tax has to be charged under any of the following sections:

172(4) : Shipping Business of Non-residents

174(2): Assessments of persons leaving India

174A: Assessment of AOP/BOI/AJP formed for a particular event or purpose

175 : Assessment of persons likely to transfer property to avoid tax

176(2) : Discontinued Business.

OR

Deducted from/paid on income chargeable under the head ‘Salaries’ u/s. 192

OR

Advance Tax payable under Chapter XVII-C

[not being advance tax in respect of any income chargeable to tax under Chapter XII or Chapter XII-A or income chargeable to tax u/s. 115JB or u/s.115JC or u/s. 161(1A) or u/s. 164 or u/s. 164A or u/s. 167B at the rates as specified in the relevant section/chapter or surcharge, wherever applicable , on such ‘advance tax’ in respect of any income chargeable to tax u/s. 115A / 115AB / 115AC / 115ACA / 115AD / 115B / 115BB / 115BBA / 115BBC / 115BBD / 115E / 115JB / 115JC.)

shall be charged/deducted/computed at following rates:

INDIVIDUAL (EXCL. WOMEN) BELOW 60 YEARS OF AGE/HUF/AOP/BOI/AJP :

WOMEN BELOW 60 YEARS OF AGE :

INDIVIDUALS AND WOMEN RESIDENT ABOVE 60 YEARS OF AGE BUT BELOW 80

INDIVIDUALS AND WOMEN RESIDENT ABOVE 80 YEARS OF AGE

CO-OPERATIVE SOCIETY

FIRM & LOCAL AUTHORITY – Flat 30%

DOMESTIC COMPANY – 30%

OTHER THAN DOMESTIC COMPANY:

The surcharge leviable on above cases as well as on advance tax computed in accordance with provisos to section 111A and 112 is :

4.      Education Cess and Secondary and Higher Education Cess

Same as last AY.

5.      Charitable Purposes Definition amendment

The First Proviso to Section 2(15) provides that ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.

The second proviso prescribes a limit below which the first proviso won’t apply. That limit has been increased from Rs.10,00,000 to Rs. 25,00,000.

However, this amendment is to be effective from 1^st April, 2012. So technically, for the purposes of FY 2011-12, the limit remains Rs. 10,00,000.

6.      Developer/ Entrepreneur of SEZ to pay Dividend Distribution Tax, but such dividends still not includible in total income of person receiving it

Here two amendments carried out by the Finance Act,2011 have to be simultaneously considered. Two sections viz. Sec. 10(34) and Sec. 115-O are of import. Section 115-O(6) provided that Dividend Distribution Tax was not  chargeable in case of interim/final dividends distributed / paid out of current profits by a Developer/Enterprise who is developing and/or operating and/or maintaining a SEZ either in hands of such Developer/Enterprise or the person receiving such dividends.

According to Section 10(34), dividend referred to in Section 115-O (i.e. dividend w.r.t. DDT has been paid) is not to be included in Total Income of person receiving it. Explanation to Section 10(34) said that ‘For removal of doubts, dividend referred to in Section115-O is not includible in total income of Developer/Assessee’.

By  Finance Act  2011, a proviso has been added to Section 115-O whereby 115-O(6) is to cease to have effect from 1^st June, 2011. Also, the Explanation to Section 10(34) has been deleted. The overall effect is that Dividend Distribution Tax would be chargeable on dividends distributed/paid out of current profits by a Developer/Entrepreneur who is developing and/or operating and/or maintaining an SEZ , but such dividends still enjoy the protection granted by Section(34) i.e. it is not taxable in hands of person receiving such dividends if the Developer/Enterprise has paid DDT on such dividends.

7.      Allowances/Perquisites to certain Govt Officials to be non-includible in Total Income

The  Finance Act, 2011 has inserted a new clause (45) in Section 10 [Incomes not be included in Total Income]. According to 10(45) any perquisites notified by Central Govt in Official Gazette, which are paid to Chairman/Retired Chairman /Members /Retired Members of The Union Public Service Commission are not to be included in Total Income. This amendment is inserted with retrospective effect from 1^st April, 2008.

8.      Specified income of certain public authorities  not to be included in Total Income

A new clause (46) has been inserted in Section 10 [Incomes not to be included in Total Income]. Accordingly, ‘specified incomes’ arising to certain public authorities (this term has been used for sake of brevity by the author) are not to be included in Total Income. These public authorities are:

(1)   Body or

(2)   Authority or

(3)   Trust or

(4)   Board or

(5)   Commission..

..and may be called by whatsoever name. These public authorities are further defined as those which have been :

(a)   Established/constituted by/under a Central / State / Provincial Act OR

(b)   Constituted by Central/ State Govt.

For the purposes of Section 10(46), these public authorities should be  constituted/established ( as the case may be) with the object of regulating/administering any activity for the benefit of the general public. Furthermore, the above-mentioned public authorities should not engage in any commercial activity. Only those public authorities are eligible, which have been notified by the Central Government in this regard.

Explanation to Section 10(46) states that here specified incomes means those incomes, of the nature and to the extent arising to the above-mentioned public authorities, as have been notified by the Central Govt in the Official gazette. Section 10(46) is to be inserted from 1^st June,2011.

9.      Income of Infrastructure Debt Fund not to be included in Total Income And other beneficial amendments

According to the new  clause (47) of Section 10, income of an eligible Infrastructure Debt Fund (for sake of brevity : ‘IDF’)  is not to be included in Total income. The eligibility criteria is :

(1)   Such IDF should have been set up according to the prescribed guidelines.

(2)   Such IDF has to be notified by the Central Govt in the Official Gazette.

This new clause is to be inserted from 1^st June, 2011. The Memorandum to the Finance Act,2011 states that setting up of IDF would lead to impetus to overseas borrowing. Hence these beneficial amendments.

Also Section 115A has been amended to provide that any interest received by a non-resident from such notified IDF shall be taxable at the rate of 5% on the gross amount of such interest income.

Section 194LB has been inserted to provide for TDS to be deducted at 5% by such notified IDF on any interest paid by it to a non-resident.

10.  200% deduction for contribution to scientific research by National Laboratory/IIT/University/Specified person

With the amendment in Section 35(2AA) of The Income Tax Act,1961, contribution to a National Laboratory / IIT / University / Specified person, with specific directions that such contribution be used for scientific research under an approved programme is now eligible for 200% weighted deduction. Finance Act, 2010 had increased the above deduction from 125% to 175%. This new amendment is to be effective from 1^st April, 2012. So for the time being, as far as FY 2011-12 is concerned, the deduction is 175%.

11.   Scope  of capital expenditure deduction u/s. 35 AD widened and other amendments.

Section 35AD deals with deduction in respect of capital expenditure incurred by assessee in respect of specified business. Two new clauses have been added to Section 35AD(5). Both will be effective from 1^st April,2012. Newly inserted clause (ad) to Section 35AD(5) states that such deduction is available in case of specified business commencing operations on or after 1^st April,2011 and is in nature of developing/building a housing project under a scheme of affordable housing framed by Central/State Govt and notified by CBDT with prescribed guidelines.

Similarly  the other newly inserted clause viz. clause (ae) states that such deduction is available in case of specified business commencing business on /after 1^st April, 2011 and is in nature of a new plant or a newly installed capacity in an existing plant for production of fertilizer.

For all other cases , meaning those not enumerated in Clauses (a),(aa),(ac), (ad) and (ae), the date of commencement of business is on/after 1^st April, 2009.

Furthermore, the words ‘new’ in respect of hotels and hospitals in Sections 35AD(8)(iv) and (v) respectively have been deleted. This will allow an assessee, per Section 73A, who currently operates a hotel above the category of 2-star or as specified by Central Govt or hospital with minimum 100 beds, to set-off the profits of such business against the losses of any new hotel above 2-star category or as may be specified by Central Govt or new hospital of minimum 100 beds and which commences operations after 1^st April 2010 and is eligible for deduction u/s. 35AD.

12.  New Pension System.

Section 36, as it stands today, does not grant deduction in respect of New Pension System. This anomaly is sought to be corrected by way of amending Section 36 and make contributions by employer to a  pension scheme referred  to in Section 80CCD(2) on account of employee to the extent of 10%, deductible. This is to be effective from 1^st April 2012

Furthermore, Section 80CCE is amended. Till now, 80CCE imposed a ceiling of Rs. 1,00,000 on total deductions u/s. 80C, 80CCC and 80CCD. Consequent to the amendment, contributions made by Central Govt/other employer to a pension scheme referred to in Section 80CCD(2) is to be excluded from the limit of Rs. 1,00,000.

However, the deductions w.r.t. contributions by the employee are very much within the Rs. 1,00,000 limit. This is to be effective from 1^st April, 2012.

Consequently, Section 40A(9) has also been amended (40A deals with expenses not deductible in certain circumstances) to bring it in line with the above amendments.

13. Deduction w.r.t. investment in long term infrastructure bonds.

Section 80CCF has been amended to allow the benefit  of deduction of  investment by individual/HUF in notified long-term infrastructure bonds (limited to Rs. 20,000) in A.Y. 2012-13 also. Earlier, Finance Act 2010 had limited such benefit to A.Y. 2011-12 only.

14. Extension of Sunset Clause for power sector

Section 80IA allows 100% deduction of profits/gains in respect of eligible businesses. 80IA(4) specifies the eligible businesses. The Finance Act,2011 has amended 80IA(4)(iv) which prescribes eligibility criteria for the power sector. The criteria was :

(a) is set up for the generation and distribution of power if it begins to generate power at any time during the period beginning on 1st April, 1993 and ending on 31st March, 2011;

(b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 1st April, 1999 and ending on 31st March, 2011;

(c) undertakes substantial renovation and modernisation of existing network of transmission or distribution lines at any time during the period beginning on 1st April, 2004 and ending on 31st March, 2011.

The Finance Act, 2011 has replaced the terminal date of 31^st March, 2011 with 31^st March,2012, thereby allowing the sunset clause to be extended for one more year.

15. Withdrawal of deduction for certain undertakings engaged in commercial production of mineral oil

A  Proviso has been inserted under Section 80IB(9)(ii). The effect of this proviso is that the deduction available to eligible undertakings engaged in commercial production of mineral oil, has been withdrawn w.e.f. 1^st April,2012. This deduction will be withdrawn in case of blocks licensed under a contract awarded after 31^st march,2011 under New Exploration Licensing Policy announced by the Government of India vide Resolution No.O-19018 / 22/95-ONG.DO.VL., dated February 10^th, 1999 or under any Central/State law.

16. Transfer Pricing

Section 92CA has been amended by Finance Act, 2011. Now, even international transactions which are not referred by Assessing Officer to the TPO, but which are subsequently noticed by him are brought within his jurisdiction.

Additionally, Section 92CA(7) has been added to give the TPO the power of survey as defined u/s. 133A.

Both the above-mentioned amendments are effective from 1^st June 2011.

Additionally, Section 92C is to be amended to do away with the 5% margin protection. Henceforth, actual price will be taken as Arm’s Length Price only if it is within the percentage of margin specified by the Central Govt. This is effective from 1^st April 2012.

Additionally, Section 139 has been amended to extend the date of filing 3CEB to 30^th November. This is to be effective from 1^st April, 2011.

17. Special Measures w.r.t. transactions in Notified Jurisdi -          -ctional Area(NJA) to tackle tax-avoidance.

The Finance Act, 2011 has inserted a new section viz. Section 94A. The Central Govt can now notify a jurisdictional area outside India w.r.t. a transaction entered into by an assessee. Section 94A has over-riding provisions in respect of all other provisions of The Income Tax Act, 1961. If an assessee enters into any transaction with a party in such NJA, all parties would be deemed associate enterprises u/s. 92A and all transactions between them would be deemed international transactions u/s. 92B and the following sections would become applicable:

92  : Computation of income from international transaction having regard to Arms length pricing           

92A : Meaning of Associated enterprise

92B : Meaning of international transaction

92C(EXCEPT SECOND PROVISO TO 92(C)(2)) : Computation of ALP

92CA : Reference to TPO

92CB : Power of CBDT to make safe harbour rules

92D  : Maintainence and keeping of document by person entering into International transactions.

92E : Report from an accountant to be furnished by persons entering into International transactions

92F: Definitions relevant to computation of ALP etc.

No deductions under the Act are allowable w.r.t. such payments made to any financial institution located in NJA, if the assessee does not authorise the CBDT or prescribed authority to seek information on his behalf from the financial institution. Similarly no expenses or allowances (incl. Depreciation) are allowable, unless the requisite information and documents are furnished.

Furthermore, if assessee affords no/unsatisfactory explanation w.r.t. credits/payments from persons in NJA, these are to be deemed as income.

TDS, if applicable, is to be deducted at the highest of :

i)        Rates in force

ii)      30%

iii)    Rates specified in relevant provisions of the Act

18. Tax on certain dividends received from foreign companies

The Finance Act, 2011 has inserted a new section 115BBD. It is to be effective from 1^st April, 2012.

Where total income in P.Y. 2011-12 of Indian Company includes dividends declared/distributed/paid by specified foreign company, income tax will be payable at 15% of such income from dividends. No expenditure/allowance under the Act is to be allowed as deduction in case of such income. Specified Company means foreign company in which the Indian Company holds minimum 26% of nominal equity capital.

However, ‘dividends’, for the purpose of this section carries the same meaning as Section 2(22), but excludes clause (e) of Section 2(22). Hence, any payment by a company, not being a company in which the public is substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits, is not included within the purview of Section 115BBD.

19. Minimum Alternate Tax

Section 115JB, which provides for Minimum Alternate Tax, has prescribed a rate of 18.5%. The amendment is effective from 1^st April, 2012.

The computation mechanism has also undergone changes w.r.t. book profits :

·        reduction allowed w.r.t. profits eligible for deduction u/s. 80HHC

·        reduction allowed w.r.t. profits eligible for deduction u/s. 80HHE

·        reduction allowed w.r.t. profits eligible for deduction u/s. 80HHF,

all the above three reductions have been withdrawn with retrospective effect from 1^st April, 2005.

There was, hitherto, exemption from MAT for income accrued/arising on/after 1^st April, 2005 from any business carried on, or services rendered, by an entrepreneur/developer in a unit/SEZ as the case may be. This exemption will be withdrawn w.r.t. P.Y. 2011-12.

20. Limited Liability Partnerships

A new Chapter XII-BA has been inserted to deal with the taxation of Limited Liability Partnerships.

Section 115JC introduces MAT for LLPs. Accordingly, where regular Income-tax payable is less than MAT, the Adjusted Total Income (ATI) shall be deemed Total Income and taxed at 18.5% .

Adjusted Total Income shall be calculated by adding back deductions claimed under Chapter VI-A and deductions claimed u/s. 10AA.

A certificate  from an accountant certifying the ATI and MAT payable has to be furnished on/before due date of filing return u/s. 139(1).

Tax credit for set-off will be allowed upto 10 years since when such tax credit first becomes available. When regular income tax exceeds MAT, the tax credit shall be allowed to be set-off to the extent of the excess over MAT and any balance tax credit shall be carried forward.

If the regular income tax or MAT is subsequently varied by an order, the variation shall be taken into account in the computation of the tax credit.

Here ‘accountant’ means a practising Chartered Accountant who is eligible to be appointed u/s. 226(2) of The Companies Act, 1956.

21. Tax on Income distributed to unit-holders.

Section 115R(2) has been amended to provide for the following higher additional tax rates that a Mutual Fund shall be liable to pay on income distributed to unit-holders:

(a) 25 per cent. if the recipient is an individual or HUF in case of distribution by a money market mutual fund or a liquid fund;

(b) 30 per cent. if the recipient is any other person in case of distribution by a money market mutual fund or a liquid fund;

(c) 12.5 per cent. if the recipient is an individual or HUF in case of distribution by a debt fund other than a money market mutual fund or a liquid fund; and

(d) 30 per cent. if the recipient is any other person in case of distribution by debt  fund other than a money market mutual fund or a liquid fund.

This amendment will be effective from 1^st June, 2011.

22. Collection of information on requests of tax authorities outside India

A new sub-section (2) has been inserted to Section 131.      The new sub-section provides that for the purpose of making an enquiry or investigation w.r.t. any person/class of persons w.r.t. an agreement referred to in Section 90 (Agreement with foreign countries or specified territories) or Section 90A (Adoption by Central Government of agreements between specified associations for double taxation relief), The Assistant-Commissioner or higher official as notified by CBDT can exercise the same  powers as are vested in a Court  under the Code of  Civil Procedure, 1908 when trying a suit in respect of following matters, namely -

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath;

(c) compelling the production of Books of Accounts and other documents

(d) issuing commissions

He can also, subject to relevant rules, impound and retain books of account/documents produced before him during any proceedings under the Act. However he has to record in writing, the reasons for doing so and take approval of Chief Commissioner/Director General/Commissioner/Director, if he wants to retain the books/documents for more than 15 days (excluding holidays).

Section 133 (Power to call for information etc.) has also been amended to give the authority authorised u/s. 131(2), similar powers as are given to AO u/s. 133.

These amendments would be effective from 1^st June 2011.

23. Due Date for filing return of income

The due date for companies who are required to furnish Form 3CEB u/s. 92E is now 30^th November. For other companies, due date has not changed.

Sub-section (1C) has been inserted in Section 139 which gives the Central Government power to exempt any person/class of persons from the requirement to file a return of income. This has been done to allow the Central Government to exempt Salaried people from filing a return of income in certain circumstances.

Any such notification has to be laid down before Parliament by virtue of amendments to Section 296.

If the total income chargeable to tax before availing Section 10 deductions, w.r.t. to assesses mentioned in 139(4C), is less than the basic exemption levels, then a return has to be furnished as prescribed u/s. 139(4C). This list of assesses u/s. 139(4C) has been amended to include an Infrastructure Debt Fund referred to in Section 10(47), body/authority/trust/board/commission referred to in Section 10(46).

These amendments would be effective from 1^st June 2011.

24. Centralised Processing of Returns

U/s. 143(1A), the CBDT was empowered to issue notifications regarding the processing of returns. However, CBDT could do so only upto 31^st March 2011. However, Section 143(1B) has been amended to extend the time –limit to 31^st March, 2012.

This amendment is to be effective from 1^st April, 2011.

25. Computation of time limits to complete assessments and re- assessments.

Certain time periods are excluded in the computation of limitation for completing assessments/reassessments and are elucidated in Explanation 1 to Section 153. One more item is added to  this Explanation 1. Hence 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  Sections 90 or 90A and ending on the date on which the information is so received by the Commissioner or a period of 6 months, whichever is less, is to be excluded from computation of limitation period for assessment / reassessment.

Similar amendments have been made to Section 153B.

These amendments are effective from 1^st June, 2011.

26. Settlement Commission

Section 245C relating to the Settlement Commission has been amended.

Accordingly, now an application to the Settlement Commission can be made by a person in whose case proceedings have been initiated as a result of search. Application can also be made by person who is related to person (referred to in Clause (i) of Proviso to 245C(1) ) in whose case proceedings have been initiated as a result of a search and who has filed an application.

The additional amount of income tax payable, as disclosed by the application, must exceed 50 lakhs in case of tax payer who is subject-matter of a search and 10 lakhs in case of entities/persons related to him.

Now, the Settlement Commission can also rectify its orders passed u/s. 245D(4) within 6 months of date of order. If the rectification order would result in modification of liability, then the Settlement Commission has to give notice and opportunity of being heard to both of them.

Consequential amendments have been made in Section 22D of Wealth Tax Act.

These amendment is effective from 1^st June,2011

27. End of Document Identification Number

From 1^st April, 2011, the provisions relating to Document Identification Number have been deleted.

28. Submission of statement by a Non-resident having a liaison office

Every person who is a non-resident and has a liaison office in India set-up in accordance with RBI guidelines under FEMA Act, 1999 will have to prepare and deliver/cause to be delivered to the jurisdictional AO a statement in prescribed form and manner, within 60 days of end of relevant Financial Year.

This amendment is effective from 1^st June, 2011.

28. Extension of time limit for obtaining approval from Employees Provident Fund Organisation

Time limit under Rule 4 for according recognition and complying with conditions has been extended to 31^st March, 2012. This amendment is retrospectively applicable from 1^st January 2011.