India Union Budget 2011

Q ua l i ty s e rv ic e is n o t wha t yo u pu t i n to i t i ts wha t th e cl i en t g e ts out of i t

CONTENTS

Foreword ....................................................................................................................... 3 Budget Highlights ........................................................................................................ 5 Direct Taxes .................................................................................................... 5 Indirect Taxes ................................................................................................ 6

Budget Proposals ........................................................................................................ 9 Direct Taxes .................................................................................................... 9 Excise Duty ................................................................................................... 21 Custom Duty................................................................................................. 25 Service Tax ................................................................................................... 29 Sales Tax........................................................................................................ 32 Goods and Service Tax ............................................................................. 34

Budget Impact On Certain Industries ............................................................... 35 Industry Reactions On Budget ............................................................................. 38

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FOREWORD
The Union budget was presented at a time when the macroeconomic backdrop has been challenging with the crude prices hovering at around $110 per barrel, domestic inflation persisting in double digit levels, especially qua food articles, and current account deficit at historically high levels. The key focus expected was therefore fiscal consolidation. The thrust areas to be focused were reducing revenue expenditure, particularly on subsidies and boosting tax revenues rather than relying on the gains from disinvestment. The Economic Survey 2010-11 had the following key messages: o Gross Domestic Product (GDP) estimated to have grown at 8.6 % in 2010-11 in real terms. Economy has shown remarkable resilience. Continued high food prices have been principal concern this year. Consumers denied the benefit of seasonal fall in prices despite improved availability of food items, revealing shortcomings in distribution and marketing systems. Monetary policy measures taken expected to further moderate inflation in coming months. Exports have grown by 29.4 %, while imports have recorded a growth of 17.6 % during April to January 2010-11 over the corresponding period last year. Indian economy expected to grow at 9 % with an outside band of +/- 0.25 % in 2011-12. Average inflation expected lower next year and current account deficit smaller.

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The Budget seeks to advance macroeconomic stability, by reining in the fiscal deficit to a lower than budgeted level, as a share of GDP for the current fiscal and to 4.6% in 2011-12. Public debt as a share of GDP is eight full percentage points lower than that demanded by the path of fiscal rectitude laid down by the 13th Finance Commission. This it manages by cutting overall expenditure as a proportion of GDP: from 15.4% in 2010-11 to 14% in 2011-12. However, capital expenditure by the government is coming down from 13.4% of the total expenditure to 12.7%. So, if growth is to be driven by private sector investment, policy and finance to guide it become even more important. The finance bit is being taken care of, particularly for the infrastructure sector through assorted means: raising FII investment in medium term corporate debt for infrastructure five-fold to $25 billion, enhancement of the foreign investment cap in insurance, extension of tax sops to some more sectors by classifying them as infrastructure (agri storage is straightforward, but fertiliser is a stretch), creation of income-tax-exempt debt funds, tax-free bonds worth Rs. 30,000 crores for infrastructure all this, on top of a 23.3% step-up in the governments plan expenditure. Policy on releasing land remains a hurdle, though.

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Financial sector reform is on, so is major reform of both direct and indirect taxes. The minimum alternate tax on special economic zones and on units operating in them is unsettling from the perspective of stability of announced tax regimes and credibility of policy, but a positive, from the point of view of removing or reducing tax exemptions and moving closer to the ideal of bringing all economic activity under a uniform tax regime. Subsidies are intended to take a hit. While the burden of major subsidies (oil, fertiliser and food) went up 42% from the budgeted level, to nearly Rs. 154,000 crores this fiscal, for the coming year, the government expects this subsidy bill to actually come down 13%. And this cannot be on account of the proposed welcome move to cash transfers in the case of fertiliser, kerosene and cooking gas subsidies, because the framework for such transfers will be ready only by the end of the year. The only way the government can realistically target a lower subsidy outgo is by raising retail petro-fuel prices. This could well happen after the assembly elections of West Bengal, Kerala and Tamil Nadu. Public sector disinvestment is on, and at realistic levels. Farm sector reform also gets some well-deserved attention. The potential for volatility of capital flows created by new liberal openness to portfolio flows is the only major drawback from a macro point of view.

Overall it is a balanced Budget and effective implementation of policies will hold the key. The Budget is extremely positive for the long tem growth of the economy. With DTC knocking on the door, one hopes we have a better platform and understanding of the tax laws of India. Implementation of GST was reiterated as being on track in the budget, but in the absence of any commitment one question remained unanswered: when will GST happen.

28th February 2011

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BUDGET HIGHLIGHTS

Direct Taxes

Slab rates for personal Income Tax are as follows: Up to Rs. 180,000 Rs. 180,001 to Rs. 500,000 Rs. 500,001 to Rs. 800,000 Above Rs. 800,000

The key highlights of Direct Tax proposals are as follows:

: Nil : 10 % : 20 % : 30 %

Exemption limit enhanced and qualifying age reduced for senior citizens. Higher exemption limit for Very Senior Citizens, who are 80 years or above. Additional deduction of Rs. 20,000 for investment in long-term infrastructure bonds proposed to be extended for one more year. Employer contribution towards pension scheme shall be excluded from the limit of 1 lacs provided under Section 80CCE. Specific deduction allowable to the employer on contributions towards the New Pension Scheme upto 10 % of the salary of the employee. Exemption to a notified class or classes of persons (especially salaried tax payer where entire tax liability is discharged by the employer) from furnishing return of income. Due date of filing ROI extended to 30 November for cases involving transfer pricing provisions. No change in the corporate tax rate except for a reduction in the surcharge on tax from 7.5 % to 5 % in case of domestic companies and from 2.5 % to 2 % in case of foreign companies. Rate of Minimum Alternative Tax to be increased from 18 % to 18.5 % of book profits. Dividends received by Indian companies from their foreign subsidiaries during Financial Year 2011-12 to be taxed at a concessional rate of 15 % on a gross basis. Tax incentives extended to attract foreign funds for financing of infrastructure. MAT extended to Limited Liability Partnerships, SEZ Developers and Units operating in SEZ. Dividend Distribution Tax exemption withdrawn for SEZ Developers. Benefit of investment linked deduction extended to business engaged in production of fertilisers. Investment linked deduction to businesses developing affordable housing. Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology to be enhanced to 200 %. Tax holiday for undertakings engaged in the power sector commencement date extended to 31 st March 2012. Income of notified Infrastructure Debt Funds to be exempt from tax. Interest received by nonresidents from such funds to be taxed at a concessional rate of 5 %. System of collection of information from foreign tax jurisdictions to be strengthened. Annual Reporting of activities by Liaison Offices established in India within 60 days from the end of the financial year.

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Indirect Taxes

Excise Duty

Central Excise Duty to be maintained at standard rate of 10 % and lower rate of Duty enhanced from 4 % to 5 %.

Nominal Central Excise Duty of 1 % (without input Cenvat) imposed on 130 items (which were earlier exempted) entering in the tax net.

Scope of exemptions from Excise Duty enlarged to include equipments needed for storage and warehouse facilities on agricultural produce.

Concessional Excise Duty of 5 % on vehicles based on Fuel cell technology. Reduction in Excise Duty on kits used for conversion of fossil fuel vehicles into Hybrid vehicles. Excise Duty on LEDs reduced to 5 %. AED under AED (GSI) removed on sugar, textile and textile products to enable states to levy VAT. Interest rate for delayed payment of duty increased from 13% to 18% with effect from 1 April 2011 and penalty provisions amended. Rule 6(5) of Credit Rules which specified input services for full Cenvat credit availability (unless used exclusively for exempted operations), deleted. Parallel Excise Duty exemption for domestic suppliers producing capital goods needed for expansion of existing mega or ultra mega power projects.

Custom Duty

Peak rate of duty maintained at 10%. Basic Custom Duty reduced for specified agricultural machinery from 5 % to 2.5 %. Basic Custom Duty reduced on micro-irrigation equipment from 7.5 % to 5 %. De-oiled rice bran cake to be fully exempted from basic Custom Duty. Export Duty of 10 % to be levied on its export. Rate of Export Duty for all types of iron ore enhanced and unified at 20 % ad valorem. Full exemption from Export Duty to iron ore pellets. Basic Custom Duty on two critical raw materials of cement industry viz. petcoke and gypsum reduced to 2.5 %. Exemption granted from basic custom duty and special CVD to critical parts/assemblies needed for Hybrid vehicles. Special CVD on LEDs being fully exempted. Exemption from Import Duty for spares and capital goods required for ship repair units extended to import by ship owners.

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Full exemption from basic Customs Duty to bio-asphalt and specified machinery for

application in the construction of national highways.

Time limit for demanding customs duty and claiming refund of duty enhanced from six months to one year for all categories of importers.

Provisions introduced to create first charge on the property of the defaulter for recovery of the customs dues from such defaulter subject to conditions.

Amendments made to allow exports counted towards export obligation under EPCG scheme, to be also simultaneously available for benefits under export incentive schemes. These amendments have been made with retrospective effect.

Goods can be cleared both for import or export on self assessment basis against existing procedure of assessment for every bill of entry or shipping bill by the customs officer.

Service Tax

Standard rate of Service Tax retained at 10 %. Hotel accommodation in excess of Rs. 1,000 per day and service provided by air conditioned restaurants that have license to serve liquor added as new services for levying Service Tax. Tax on all services provided by hospitals with 25 or more beds with facility of central air conditioning. Service Tax on air travel both domestic and international raised. Services provided by life insurance companies in the area of investment and some more legal services proposed to be brought into tax net. All individual and sole proprietor tax payers with a turn over upto Rs. 60 lacs freed from the formalities of audit. Scope of seven existing service categories expanded, including life insurance service, legal service, health service and commercial training and coaching service. Restrictions on Cenvat credit on input services prescribed in the case of works contractors (availing composition scheme). Interest for delayed payment of service tax increased to 18% a year and penalty provisions amended. Point of Taxation Rules, 2011 introduced, deeming the time of provision of service to be the date of provision of service or date of invoice or date of payment, whichever is earlier.

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Definition of input service for Cenvat credit purposes substituted. Services provided for

construction of building or civil structure, outdoor catering, and life / health insurance services not to be considered as input service.

Banking

companies

or

financial

institutions

obligated to pay an amount equal to 50% of Cenvat credit availed. For services related to life insurance or management of ULIP, such amount to be equal to 20% of credit availed.

To encourage voluntary compliance the penal provision for Service Tax are being rationalised. Similar changes being carried out in Central Excise and Custom laws.

Sales Tax

The maximum rate of tax chargeable on intrastate sale of declared goods increased from 4% to 5%

Goods & Service Tax (GST)

Constitutional Amendment Bill to be introduced in budget session of Parliament GST Network (GSTN) to be established to provide IT Infrastructure for introduction of GST

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BUDGET PROPOSALS
This section summarises significant proposals related to direct and indirect taxes announced in the Union Budget 2011. Unless otherwise indicated, the proposed amendments relating to direct taxes are to apply from the assessment year 2012-13 and unless otherwise indicated, the changes relating to Central Excise and Customs Duties come into effect immediately. Changes in Service tax are to come into effect on the enactment of the Finance Bill, 2011 from a date to be notified thereafter. The Finance Bill, 2011 is subject to discussion in the Parliament before enactment.

Direct Taxes
Rates of Income Tax : A. CORPORATE TAX: o o No change in the Corporate Income tax rate of 30%. Minimum Alternative Tax (MAT) on Book profit increased to 18.50% from 18%. The effective MAT rate will increase to 20.01% from 19.9305% at present. Rate of Surcharge reduced to 5% (for income exceeding Rs. 1 Cr) from 7.50 %. Secondary and Higher Education cess of 3% remain unchanged. The effective Corporate Tax rate will be 32.445% as against the present tax rate of 33.2175%. No change in the rate of tax on Short term capital gains on listed securities subject to Securities Transaction Tax of 15%. Effective rate of tax on Short term capital gains will reduce to 16.2225% as against the present rate of 16.609%. No change in the rate of Dividend Distribution Tax (DDT). Effective rate of DDT will reduce to 16.2225% as against the present rate of 16.609%. Rate of Income tax on dividends received by an Indian company from its foreign subsidiary is lowered to 15 % from 30 % at present for FY 2011-12 Rate of Withholding tax on interest payment by notified Infrastructure Debt Funds to Non residents reduced to 5% from 20% at present. Withdrawal of exemption with respect Dividend distribution Tax (DDT) to SEZ Developers

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B. Personal Income Tax Individual or Hindu Undivided Family (In General) Proposed Slab (In Rs.) Upto Rs. 1,80,000 Rs. 1,80,001 to Rs. 5,00,000 Rs. 5,00,001 to Rs. 8,00,000 Above Rs. 8,00,000 Rate of Tax Nil 10 % 20 % 30 %

Individual, being a woman resident in India, and below the age of sixty years Proposed Slab (In Rs.) Upto Rs. 1,90,000 Rs. 1,90,001 to Rs. 5,00,000 Rs. 5,00,001 to Rs. 8,00,000 Above Rs. 8,00,000 Rate of Tax Nil 10 % 20 % 30 %

Senior citizen individual with age 60 years and above but below 80 years Proposed Slab (In Rs.) Upto Rs. 2,50,000 Rs. 2,50,001 to Rs. 5,00,000 Rs. 5,00,001 to Rs. 8,00,000 Above Rs. 8,00,000 Rate of Tax Nil 10 % 20 % 30 %

Senior citizen individual with age 80 years and above Proposed Slab (In Rs.) Upto Rs. 5,00,000 Rs. 5,00,001 to Rs. 8,00,000 Above Rs. 8,00,000 Rate of Tax Nil 20 % 30 %

No surcharge will be levied in the above cases C. Co-operative Societies In the case of co-operative societies, the rates of income-tax will continue to be the same as those specified for assessment year 2011-12. No surcharge will be levied. D. Firms In the case of firms, the rate of income-tax rate will continue to be the same as that specified for assessment year 2011-12. No surcharge will be levied. E. Local authorities The rate of income-tax in the case of every local will continue to be the same as that specified for the assessment year 2011-12. No surcharge will be levied.

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Relaxation to charitable organization for business income The Finance Act, 2008 introduced a provision whereby a charitable organization which was exempt from tax on its income would be denied the exemption on any of its income derived from activities which were construed to be in the nature of trade, commerce or business or any activity rendering any service in relation to any trade, commerce etc. for a fee or consideration. The Finance Bill now enhances the current monetary limit in respect of receipts from the advancement of any other object of general public utility to Rs. 25 Lacs from 10 Lacs at present. This amendment is proposed to take effect from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years.

Exemption of certain perquisites of Chairman and Members of Union Public Service Commission Currently, specified perquisites of the Chief Election Commissioner or Election Commissioner and the judges of the Supreme Court are exempt from taxation consequent to the enabling provisions in the respective Acts governing their service conditions. It is proposed to amend section 10 to extend similar benefit of exemption in respect of specific perquisites and allowances, which will be notified by the Central Government, received by both serving as well as retired Chairmen and Members of the Union Public Service Commission. This amendment is proposed to take effect retrospectively from 1st April, 2008 and will accordingly apply in relation to the assessment year 2008-09 and subsequent years.

Exemption of specified income of Notified Body or Authority or Trust or board or commission It is proposed to insert a new clause in section 10 of the Income-tax Act to provide exemption from income-tax to any specified income of a body, authority, board, trust or commission which is set up or constituted by a Central, State or Provincial Act or constituted by the Central Government or a State Government with the object of regulating or administering an activity for the benefit of the general public, provided(i) it is not engaged in any commercial activity, and (ii) is notified by the Central Government in this behalf. The nature and extent of income to be exempted will also be specified by the Central Government while notifying such entity. A consequential amendment is proposed in section 139 of the Act to provide for filing of the return of income by such notified entity. These amendments are proposed to take effect from 1st June 2011.

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Infrastructure Debt Fund In order to augment long-term, low cost funds from abroad for the infrastructure sector, it is proposed to facilitate setting up of dedicated debt funds and provide the following tax incentives: o Create special vehicles in the form of notified infrastructure debt funds. To amend section 115A to provide that any interest received by a non-resident from notified infrastructure debt fund shall be taxable at the rate of 5 % on the gross amount of interest income. To insert section 194LB to provide that tax shall be deducted at the rate of 5 % by the notified infrastructure debt fund on any interest paid by it to a non-resident To amend section 10 to provide exemption from payment of tax on the income of notified infrastructure debt fund.

These amendments are proposed to take effect from 1st June 2011.

Tax benefits for New Pension System (NPS) Section 80CCD of the Income-tax Act provides, inter alia, a deduction in respect of contributions made by an employee as well as an employer to the New Pension System (NPS) account on behalf of the employee. In view of the provisions of section 80CCE, the aggregate deduction under sections 80C, 80CCC and 80CCD cannot exceed one lac rupees. The allowable deduction under section 80CCD includes both the employees as well the employers contribution to the NPS. It is proposed to amend section 80CCE so as to provide that the contribution made by the Central Government or any other employer to a pension scheme under section 80CCD(2) shall be excluded from the limit of one lac rupees provided under section 80CCE. Currently, the contribution made by an employer towards a recognised provident fund, an approved superannuation fund or an approved gratuity fund is allowable as a 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. It is, therefore, proposed to amend section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD(2) on account of an employee to the extent it does not exceed ten %. of the salary of the employee in the previous year, shall be allowed as deduction in computing the income under the head Profits and gains of business or profession. These amendments are proposed to take effect from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years.

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Provisions relating to Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) in case of Special Economic Zones Under the existing provisions of section 10AA of the Income-tax Act, a deduction of 100 % is allowed in respect of profits and gains derived by a unit located in a Special Economic Zone (SEZ) from the export of articles or things or services for the first five consecutive assessment years; of 50% for further five assessment years; and thereafter, of 50% of the ploughed back export profit for the next five years. Further, under section 80-IAB of the Income-tax Act, a deduction of 100% is allowed in respect of profits and gains derived by an undertaking from the business of development of an SEZ notified on or after 1st April, 2005 from the total income for any ten consecutive assessment years out of fifteen years beginning from the year in which the SEZ is notified by the Central Government. Under the existing provisions of section 115JB (6), an exemption is allowed from payment of minimum alternate tax (MAT) on book profit in respect of the income accrued or arising on or after 1st April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone (SEZ), as the case may be. Further, under the existing provisions of section 115-O(6), an exemption is allowed from payment of tax on distributed profits [Dividend Distribution Tax (DDT)] in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after 1st April, 2005 out of its current income. Such distributed income is also exempt from tax under section 10(34) of the Act. The above provisions were inserted in the Income-tax Act by the Special Economic Zones Act, 2005 (SEZ Act) with effect from 10th February, 2006. Currently, there is no sunset date provided for exemption from MAT in the case of a developer of an SEZ or a unit located in an SEZ. Similarly, there is no sunset date for exemption from DDT in the case of a developer of an SEZ. It is proposed to sunset the availability of exemption from minimum alternate tax in the case of SEZ Developers and units in SEZs in the Income-tax Act as well as the SEZ Act. This amendment to section 115JB of the Income-tax Act will take effect from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years. It is further proposed to discontinue the availability of exemption from dividend distribution tax in the case of SEZ Developers under the Income-tax Act as well as the SEZ Act for dividends declared, distributed or paid on or after 1st June, 2011. This amendment to section 115-O of the Income-tax Act will take effect from 1st June, 2011. It is also proposed to make consequential amendments by omitting Explanation to section 10(34) of the Income-tax Act. This amendment to section 10 will take effect from 1st June, 2011. Consequential amendments have also been proposed in the Second Schedule of the SEZ Act by omitting clause (C) of paragraph (a) [w.e.f. 01.06.2011], paragraph (h) [w.e.f. 01.04.2012] and paragraph (i) [w.e.f. 01.06.2011] of the Second Schedule.

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Transfer Pricing o Standard deduction of variation of 5% on arms length price outdated. New variation to be notified. Applicable from AY 2012-13 onwards. TPO to determine the arms length price of additional international transactions other than those referred by the AO. Additional powers of survey conferred on the TPO. Applicable from 01.06.2011 Filing of Accountants Report in Form No. 3CEB extended to 30 November (w.e.f 01.04.2011) Applicability AY . 2011-12

Weighted deductions for Research & Development Activities The Income Tax Act, 1961 provides for certain deductions for encouraging investment in research and development activities. The Bill proposes to increase the amount of weighted deduction from 175% to 200% for any sum paid to a National Laboratory or to a university or an Indian Institute of Technology with a specific direction that the amount paid will be used for scientific research undertaken under a programme approved by the prescribed authority.

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Due date of return of Income for corporate assesses who are required to file a transfer pricing report in Form 3CEB, extended to 30th November: Section 139 of the Income-tax Act stipulates 30th September of the assessment year as the due date for filing of return of income in case of corporate assessees. In addition to filing a return of income, assessees who have undertaken international transactions are also required (under the provisions of section 92E) to prepare and file a transfer pricing report in Form 3CEB before the due date for filing of return of income. Corporate assessees face practical difficulties in accessing contemporary comparable data before 30th September in order to furnish a report in respect of their international transactions. It is, therefore, proposed to amend section 139 to extend the due date for filing of return of income by such corporate assessees to 30th November of the assessment year. This amendment is proposed to take effect from 1st April 2011.

Taxation of certain foreign dividends at a reduced rate Under the existing provisions of the Income-tax Act, dividend received from foreign companies is taxable in the hands of the resident shareholder at applicable marginal rate of tax. Therefore, in case of Indian companies which receive foreign dividend, such dividend is taxable at the rate of 30% (and applicable surcharge and cess). It is proposed to insert a new section 115BBD to provide that where total income of an Indian company for the previous year relevant to the assessment year 2012-13 includes any income by way of dividends received from a foreign subsidiary company, then such dividends shall be taxable at the rate of 15% (and applicable surcharge and cess) on the gross amount of dividends. No expenditure in respect of such dividends shall be allowed under the Act. This amendment is proposed to take effect from 1st April, 2012 and will accordingly, apply in relation to the assessment year 2012-13.

Minimum Alternate Tax Under the existing provisions of section 115JB(1), a company is required to pay a minimum alternate tax (MAT) on its book profit, if the income-tax payable on the total income, as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after 1st April, 2011, is less than the MAT. The amount of tax paid under the said section is allowed to be carried forward and set off against tax payable up to the tenth assessment year immediately succeeding the assessment year in which the tax credit becomes allowable under the provisions of section 115JAA. It is proposed to amend this section to increase the rate of MAT to 18.5 % from the existing rate of 18 % of such book profit. This amendment will take effect from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years.

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Toolbox of counter measures in respect of transactions with persons located in a notified jurisdictional area In order to discourage transactions by a resident assessee with persons located in any country or jurisdiction which does not effectively exchange information with India, anti-avoidance measures have been proposed in the Income-tax Act. It is proposed to insert a new section 94A in the Act to specifically deal with transactions undertaken with persons located in such country or area. The proposed section provides 1) an enabling power to the Central Government to notify any country or territory outside India, having regard to the lack of effective exchange of information by it with India, as a notified jurisdictional area; 2) that if an assessee enters into a transaction, where one of the parties to the transaction is a person located in a notified jurisdictional area, then all the parties to the transaction shall be deemed to be associated enterprises and the transaction shall be deemed to be an international transaction and accordingly, transfer pricing regulations shall apply to such transactions; 3) that no deduction in respect of any payment made to any financial institution shall be allowed unless the assessee furnishes an authorization, in the prescribed form, authorizing the Board or any other income-tax authority acting on its behalf, to seek relevant information from the said financial institution; 4) that no deduction in respect of any other expenditure or allowance (including depreciation) arising from the transaction with a person located in a notified jurisdictional area shall be allowed under any provision of the Act unless the assessee maintains such other documents and furnishes the information as may be prescribed; 5) that if any sum is received from a person located in the notified jurisdictional area, then, the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall be deemed to be the income of the assessee; 6) that any payment made to a person located in the notified jurisdictional area shall be liable to deduction of tax at the higher of the rates specified in the relevant provision of the Act or rate or rates in force or a rate of 30 %. This amendment is proposed to take effect from 1st June, 2011.

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Alternate Minimum Tax for Limited Liability Partnership (LLP) The Limited Liability Partnership Act, 2008 (LLP) has come into effect in 2009. The LLP has features of both a body corporate as well as a traditional partnership. The Income-tax Act provides for the same taxation regime for a limited liability partnership as is applicable to a partnership firm. It also provides tax neutrality (subject to fulfilment of certain conditions) to conversion of a private limited company or an unlisted public company into an LLP. An LLP being treated as a firm for taxation, has the following tax advantages over a company under the Income-tax Act:i) it is not subject to Minimum Alternate Tax; ii) it is not subject to Dividend Distribution Tax (DDT); and iii) it is not subject to surcharge. In order to preserve the tax base vis--vis profit-linked deductions, it is proposed to insert a new Chapter XII-BA in the Income-tax Act containing special provisions relating to certain limited liability partnerships. Under the proposed amendment, where the regular income-tax payable for a previous year by a limited liability partnership is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of such limited liability partnership and it shall be liable to pay income-tax on such total income at the rate of 18.5%. For the purpose of the above, (i) adjusted total income shall be the total income before giving effect to this newly inserted Chapter XII-BA as increased by the deductions claimed under any section included in Chapter VIA under the heading C Deductions in respect of certain incomes and deduction claimed under section 10AA; alternate minimum tax shall be the amount of tax computed on adjusted total income at a rate of 18.5 %; and regular income-tax shall be the income-tax payable for a previous year by a limited liability partnership on its total income in accordance with the provisions of the Act other than the provisions of this newly inserted Chapter XII-BA.

(ii) (iii)

It is further provided that the credit for tax (tax credit) paid by a limited liability partnership under this newly inserted Chapter XII-BA shall be allowed to the extent of the excess of the alternate minimum tax paid over the regular income-tax. This tax credit shall be allowed to be carried forward up to the tenth assessment year immediately succeeding the assessment year for which such credit becomes allowable. It shall be allowed to be set off for an assessment year in which the regular income-tax exceeds the alternate minimum tax to the extent of the excess of the regular income-tax over the alternate minimum tax. This amendment is proposed to take effect from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years.

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Exemption to a class or classes of persons from furnishing a return of income In order to reduce the compliance burden on small tax payer, it is proposed to insert sub-section (1C) 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 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. These amendments will take effect from 1st June, 2011.

Modification in the conditions for filing an application before the Settlement Commission The existing provisions contained in the proviso to section 245C (1) allow an application to be made before the Settlement Commission if, (i) the proceedings have been initiated against the applicant under section 153A or under section 153C as a result of search or a 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 lac rupees; (ii) in other cases, if the additional amount of income-tax payable on the income disclosed in the application exceeds ten lacs rupees. It is proposed to expand the criteria for filing an application for settlement by a tax payer in whose case proceedings have been initiated as a result of search or requisition of books of account. It is, therefore, proposed to insert a new clause (ia) in the proviso to section 245C(1). This stipulates that an application can also be made, where the applicant (a) is related to the person [referred to in (i) above] in whose case proceedings have been initiated as a result of search and who has filed an application; and (b) is a person in whose case proceedings have also been initiated as a result of search, the additional amount of income-tax payable on the income disclosed in his application exceeds ten lacs rupees. As a consequence, a tax payer who is the subject matter of a search would be allowed to file an application for settlement if additional income-tax payable on the income disclosed in the application exceeds fifty lacs rupees. Entities related to such a tax payer, who are also the subject matter of search, would now be allowed to file an application for settlement, if additional income-tax payable in their application exceeds ten lacs rupees. The relationship between the person who makes an application under clause (ia) of the proviso to section 245C(1) and the person mentioned in clause (i) of the proviso is defined by inserting an Explanation in the section. This amendment will take effect from 1st June, 2011.

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Power of the Settlement Commission to rectify its orders The existing provisions of section 245D(4) of the Income-tax Act provide that the Settlement Commission may pass an order, as it thinks fit, on the matters covered by the applications received by it, after giving an opportunity of being heard to the applicant and to the Commissioner. Further, under section 245F(1), the Settlement Commission has been conferred all the powers which are vested in an income-tax authority under the Act. An income-tax authority has the power (under section 154) to amend any order passed by it for the purpose of rectifying any mistake apparent from the record. It is proposed to insert a new sub-section (6B) in section 245D so as to specifically provide that the Settlement Commission may, at any time within a period of six months from the date of its order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under section 245D(4). It is further provided that a rectification which has the effect of modifying the liability of the applicant shall not be made unless the Settlement Commission has given notice to the applicant and the Commissioner of its intention to do so and has allowed the applicant and the Commissioner an opportunity of being heard. Consequential amendments on similar lines are proposed to be made to section 22D of the Wealth Tax Act. These amendments will take effect from 1st June, 2011

Terminal date for setting up power project u/s. 80-IA extended till March 31st 2012 The terminal date for setting up for the generation and distribution of power, laying any network of new transmission or distribution lines, undertaking substantial renovation and modernization of existing network of transmission or distribution lines for availment of deduction under section 80-IA is extended till March 31st 2012 from March 31st 2011 at present.

Rationalization of Tax on Income Distributed to Unit holders The Bill proposes to amend section 115R(2) to provide that the Mutual Fund shall be liable to pay additional income tax on the amount of income distributed to its unit holders at the rate of: o 25% if the recipient is an individual or HUF in case of distribution by a money market mutual fund or a liquid fund; 30% (as against the rate of tax of 25%) if the recipient is any other person in case of distribution by a money market mutual fund or a liquid fund; 12.50% 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; 30% (as against the rate of tax of 20%) 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 Distribution of income by an equity oriented fund shall continue to be exempt from tax

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Investment linked deduction to Fertilizer Sector and Housing Sector The IT Act currently provides investment linked deduction (other than on land, goodwill and financial instrument) incurred wholly and exclusively for the purpose of certain specified bu sinesses (being setting up and operating cold chain facilities, warehousing facilities for storage of agriculture produce and laying and operating a cross country natural gas/crude/petroleum oil pipeline network, building and operating a new two star or a higher category hotel anywhere in India). With a view to give boost to production in the agricultural sector and considering the importance of housing, the Finance Bill proposes to: o Extend the benefit of investment linked to a new plant or newly installed capacity in existing plant for production of fertilizer; and Allow investment linked deduction to those businesses which develops and builds a housing project under a scheme for affordable housing framed by the Central Government or a State Government, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed.

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Excise Duty
Amendments are effective from 1st March 2011

No change in effective general excise duty rate of 10.3% for non-petroleum products. Basic excise duty rate increased to 5 % from 4 % on few products. Some products on which duty of 5 % levied which were earlier exempt. Out of these, the option of payment of excise duty at 1 % without claiming Cenvat credit on around 130 specified items has been provided. Readymade garments and articles made up of textile, sold under brand name, made subject to mandatory duty of 10%. General SSI scheme also extended to such goods. Refund of 20 % of excise duty paid on vehicles (other than three wheeler motor vehicles) carrying up to 13 persons (including the driver) registered as a taxi allowed. Factory built ambulances duly fitted with all fitments, furniture and accessories will now be subjected to a concessional duty rate of 10%. Concessional duty rate of 5 % extended to specified parts of hybrid motor vehicles till 31 March 2013 like battery packs and battery chargers. Concessional duty rate of 10 % extended to hydrogen vehicles based upon fuel cell technology. Exemption expanded to cover equipments required for setting up ultra mega power projects. Exemption extended to specified goods supplied for expansion of existing mega power projects subject to certain conditions. Exemption from excise duty on software (other than those where no retail sale price is declared) allowed on the portion representing transfer of right to use provided the registration under service tax is taken. Reference to Standards of Weights & Measurements Act, 1976 under Section 4A of Central Excise Act, 1944 to identify products under MRP based levy has been replaced by the Legal Metrology Act, 2009. Principal manufacturer where such principal manufacturer engages job workers for manufacture of such goods Liability to pay Excise duty under Chapters 61 to 63 which include articles of apparel and clothing accessories shall devolve upon the principal manufacturer where such principal manufacturer engages job workers for manufacture of such goods. Alternatively, the principal manufacturer may authorize the job workers to obtain registration and comply with other formalities including the payment of duty on their behalf. Credit reversal on writing off inputs and capital goods extended to cases where value of such inputs and capital goods is partially written off in the books of accounts. Other amendments in excise tariff at a glance: Items Earlier Cement manufactured in a mini plant: Cleared in packaged form a) For Retail Sale Price does not exceed Rs. 190 per 50 kg bag or Rs. 3,800 per tonne b) For Retail Sale Price exceed Rs. 190 per Rs. 185 per tonne 10% ad valorem Basic Duty Rates Revised

Rs. 315 per tonne

10% ad valorem plus Rs.

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Items Earlier 50 kg bag or Rs. 3,800 per tonne Cleared other than in packaged form

Basic Duty Rates Revised 30 per tonne 10% ad valorem

Rs. 215 per tonne

Cement manufactured other than in a mini plant: Cleared in packaged form a) Where RSP does not exceed Rs. 190 per 50 kg bag or Rs. 3,800 per tonne b) Where RSP exceeds Rs. 190 per 50 kg bag or Rs. 3,800 per tonne Cleared other than in packaged form

Rs. 290 per tonne

10% ad valorem plus Rs. 80 per tonne 10% ad valorem plus Rs. 160 per tonne 10% ad valorem

10% of RSP

Higher of 10% or Rs. 290 per tonne

Cement Clinker

Rs. 375 per tonne

10% ad valorem plus Rs. 200 per tonne Rs. 200 per 10 gram

Gold bars, other than tola bars, bearing manufacturers engraved serial number and weight expressed in metric units

Rs. 280 per 10 gram

Microprocessor (other than motherboards), floppy disc drive, CD drives, DVD drives/ DVD writers etc, when meant for external use with a computer or laptop as a plug in device

Nil meant for fitment inside the CPU housing/ laptop body 4% - for all other uses

5% for all uses

Biscuits, sugar confectionery, wafer biscuits, pastries and cakes etc.

4%

5%

Medicaments (excluding those used in ayurvedic, unani, siddha, homeopathic or biochemic systems)

Nil

1% (without credit); or 5%

Telephone sets and other transmission apparatus a) Mobile handsets, radio trunking terminals b) Wireless data modems cards

Nil

1% (without credit); or 5%

Storage devices a) CDs, VCDs, DVDs b) Sound / video recorded magnetic tapes,

Nil

1% (without credit); or 5%

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Items Earlier cassettes, discs c) Smart cards Coffee or tea premixes Nil

Basic Duty Rates Revised

1% (without credit); or 5% Nil

Colour unexposed cinematographic film (in jumbo rolls of 400 feet and 1000 feet)

10%

Conveyor belt system used for specified purposes

10%

Nil

Hybrid kits for conversion of fossil fuel vehicles to hybrid vehicles.

10%

5%

Parts of Specified Textile Machinery

10%

5%

Sanitary Napkins, baby and clinical diapers and adult diapers

10%

1% (with no Cenvat credit)

Amendments are effective from 1st April 2011 o Definition of input changed and shall include goods used in the factory of manufacturer of final product, accessories and goods used for providing free warranty for final products the value of which is included in the value of final product, goods used for generation of

electricity/ steam for captive consumption but the same shall exclude goods used for construction of building or civil structure, goods used for laying of foundation or making structure for support of capital goods, capital goods other than those used as parts or components in the manufacture of the final product, goods which are used primarily for personal use or consumption by employees, goods with no relationship with the manufacture of final product. o Definition of capital goods amended to include capital goods used outside the factory for generation of electricity for captive consumption. o Denial of Cenvat credit on inputs and input services used in relation to manufacture of exempted goods extended to inputs and input services which are used in relation to such exempted goods after clearance up to their place of removal.

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Interest rate for non- payment, short payment, delayed payment, etc of duty increased from 13% to 18 %.

Amendments effective from the date of enactment of Finance Bill, 2011) o Where during an audit, investigation or

verification, it is noticed that relevant transactions has been duly entered in the specified records but duty has not been levied, short-levied, not paid, short-paid or erroneously refunded, penalty will be levied at 50 % of duty . o Where a person liable to pay excise duty pays such duty in full or part along with interest before issue of show cause notice, the applicable penalty shall stand reduced to 1 % per month. Maximum Penalty should not exceed 25 % of the duty amount. o A new provision has introduced for creation of first charge in favour of Excise on the property of the defaulter subject to certain conditions. o Additional Duties of Excise under additional duties of Excise (Goods of Special Importance), Act, has removed on Sugar, textile & textile Product to enable State Governments to levy VAT on these products.

Deemed Manufacture

Following specified processes in relation to certain goods deemed to be manufacture by way of insertion of Chapter Notes in respective headings
o Repacking from bulk to retail packs, labeling or re-labeling of containers or adoption of any other process to render the product marketable in Beverages, spirits and vinegar o o o o Conversion of ores into concentrates Galvanisation process in Iron and Steel Refining of gold ore bars into Precious metals/metals clad with precious metals Affixing a brand name on the product, labeling or re-labeling of containers or repacking from bulk packs to retail packs or adoption of any other treatment to render the product marketable in Textile articles, worn clothes and worn textile articles etc.

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Custom Duty

Amendments in Rate

Customs duty rates remain unchanged. However, the effective rate may vary depending upon change in excise (CVD) and ADC rate. BCD rates of 2 %, 2.5 % and 3 % aligned to an average rate of 2.5 %.

Amendments (effective 1 March 2011) o All clearances from SEZ into DTA exempted from ADC if not exempted from State Value Added tax (included traded goods). Earlier goods produced or manufactured were only exempted from ADC. o Full exemption from customs duty for tunnel boring machines and related parts for construction of roads. o Full exemption from customs duty for water pumping station and water storage facility (reservoir). o Concessional rate of 5 % BCD and CVD and nil ADC for parts and components for manufacture of specified high voltage transmission equipments. o Concessional rate of 5 % CVD and nil ADC for LEDs used for manufacture of LED lights and fixtures. o o Concessional rate of 5 % BCD and nil ADC on solar lanterns or lamps. Full exemption from BCD for toughened glass and silver paste for manufacture of solar cells or solar modules. o Exemption from CVD and ADC (up to 31 March 2012) to parts and components for manufacture of PC connectivity cables and sub parts for manufacture of parts and components of battery chargers, hands free headphones and PC connectivity cables. Existing ADC exemption on parts and components for manufacture of mobile phones and its sub parts and components extended upto 31 March 2012. o Exemption from ADC extended to patent and proprietary medicines, parts of inkjets and laser jet printers, parts of DVD drives or writers, combo drives, CDROM drives, polypropylene stainless steel strips and capillary tubes required for manufacture of syringes and needles. o o BCD of 2.5 % imposed on import of aircrafts for non-scheduled operations. Exemption from Education and Secondary and Higher Education cess withdrawn on import of aircrafts. o Exemption from CVD on import of software (other than those where no retail sale price is declared) on the portion representing transfer of right to use provided registration under service tax is taken.

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BCD on petroleum coke and gypsum reduced from 5 % to 2.5 %.

Increase in export duty on some products (e.g. for iron ore from 5 % to 20 %, for de-oiled rice bran oil cakes from nil to 10 %, etc.).

Completely Knocked Down unit has been defined to exclude kit containing a pre- assembled engine, gearbox, transmission mechanism, chassis or body assembly of vehicle on which any of the components or sub assembly is installed.

Amendments made to allow exports counted towards export obligation under EPCG scheme, to be also simultaneously available for benefits under export incentive schemes. These amendments have been made with retrospective effect at the specified date.

Amendments (Effective from the Date of enactment of Finance Bill, 2011) Customs Act, 1962 o Existing procedure provides for assessment of every bill of entry or shipping bill by the customs officer before removal from port of import. Goods will now be allowed to be cleared both for import or export on self assessment basis. Consequently, regulations for audit procedures shall be prescribed. o Time limit for demanding customs duty and claiming refund of duty enhanced from six months to one year for all categories of importers. o Provisions introduced to create first charge on the property of the defaulter for recovery of the customs dues from such defaulter subject to certain conditions. o Interest would be payable from first day of the month succeeding the month in which the duty is payable. o o Interest on delayed payment of customs duties enhanced to 18%. Presently, the power to release seized goods vests with the Commissioner of Customs. Now the adjudicating authority will be empowered to release seized goods. o Presently, SCN is required to be issued with prior approval of the Deputy Commissioner of Customs. Now, such power has been given to the Assistant Commissioner of Customs. o Drawback provision to be amended to provide for instances where drawback will not be recovered on non-realization of export proceeds. o In line with National Litigation Policy, Central Board of Excise and Customs empowered to issue instruction for non filing of appeal in certain cases retrospectively with effect from 20 October 2010.

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Customs Tariff Act, 1975 o Reference to Standards of Weight and Measurement Act, 1976 changed to Legal Metrology Act, 2009 with effect from 1 March 2011. o The first schedule of CTA amended to include changes in HSN in certain chapters, which would be effective from 1January 2012. o The second schedule of the CTA to be amended so as to align the entries of HSN and introduce a new entry for deoiled rice bran cake. o Provisions to enable the Government to reduce the antidumping duty on an article or an importer where such importer proves to the satisfaction of the Government that he has paid anti-dumping duty in excess of his actual margin of dumping. o Definitive safeguard duty imposed retrospectively on imports of caustic soda lye during the period from 4 December 2009 to 3 March 2010. o Existing procedure provides for assessment of every bill of entry or shipping bill by the customs officer before removal from port of import. Goods will now be allowed to be cleared both for import or export on self assessment basis. Consequently, regulations for audit procedures shall be prescribed. o Time limit for demanding customs duty and claiming refund of duty enhanced from six months to one year for all categories of importers. o Provisions introduced to create first charge on the property of the defaulter for recovery of the customs dues from such defaulter subject to certain conditions. o Interest would be payable from first day of the month succeeding the month in which the duty is payable. o o Interest on delayed payment of customs duties enhanced to 18%. Presently, the power to release seized goods vests with the Commissioner of Customs. Now the adjudicating authority will be empowered to release seized goods. o Presently, SCN is required to be issued with prior approval of the Deputy Commissioner of Customs. Now, such power has been given to the Assistant Commissioner of Customs. o The first schedule of CTA amended to include changes in HSN in certain chapters, which would be effective from 1st January 2012. o The second schedule of the CTA to be amended so as to align the entries of HSN and introduce a new entry for de-oiled rice bran cake. o Provisions to enable the Government to reduce the antidumping duty on an article or an importer where such importer proves to the satisfaction of the Government that he has paid antidumping duty in excess of his actual margin of dumping.

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Definitive safeguard duty imposed retrospectively on imports of caustic soda lye during the period from 4 December 2009 to 3 March 2010.

Drawback provision to be amended to provide for instanc es where drawback will not be recovered on non-realization of export proceeds.

In line with National Litigation Policy, Central Board of Excise and Customs empowered to issue instruction for non filing of appeal in certain cases retrospectively with effect from 20 October 2010.

Reference to Standards of Weight and Measurement Act, 1976 changed to Legal Metrology Act, 2009 with effect from 1 March 2011.

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Service Tax
Service Tax Rate Effective Service tax rate remains unchanged at 10.3 %.

New Taxable Services o Services provided by air conditioned restaurants with licenses to serve liquor. (70% abatement to be prescribed) Services provided by hotels, guest houses, etc. with respect to providing accommodation. (50% abatement to be prescribed)

Effective date to be notified upon Enactment of Finance Bill

Amendments in Existing Services Authorised Service Station Services Definition of service provider has been expanded from the existing authorised service station to any person. The scope of type of motor vehicles has been substituted from motor car, light motor vehicle or two wheeled motor vehicle to any motor vehicles other than motor vehicles meant for goods carriage or three wheeler scooter auto rickshaw Commercial Training or Coaching Services The scope has been expanded to cover all courses that are not recognised by law even if the institute provides any other course recognised by law. Club or Association Services The scope has been expanded to cover services provided to non-members as well. Health services (50% abatement to be prescribed) Currently, the levy covers health services provided in relation to health check-ups or preventive care to an employee of a business entity or health check-ups or treatment of a person covered by a health insurance scheme under certain specific circumstances. This has been substituted by the following: o Service provided by hospitals, maternity/nursing home, dispensary, clinic, etc. with central airconditioning and more than 25 beds o Diagnostic services with the aid of a laboratory or medical equipment o Services provided by doctors from the premises of such hospitals, maternity/ nursing homes, dispensaries, clinics, etc. who are not employees of such establishments Establishments owned or controlled by the Government or Local Authority have been kept out of the purview of this service.

Page 29

Legal Services The scope has now been expanded to cover: o Services provided by business entities to Individuals o Representational services before any Court, Tribunal or an authority, to be provided by any person to a business entity o Services provided by arbitrators to business entities. Life Insurance Services The scope of this service has been expanded from the existing risk coverage in life insurance to all types of services including services in relation to the management of investments. (principles for valuation to be prescribed). Support Services of Business or Commerce The scope has been expanded to include operational or administrative assistance in any manner as compared to the existing phrase operational assistance for marketing

Effective date to be notified upon enactment of Finance Bill 2011

Exemptions from Service Tax Services rendered to exhibitors participating in an exhibition outside India have been exempted from service tax. Works contract services rendered within a port, or other port or airport have been exempted from service tax (earlier the exemption was limited to services provided in relation to the construction of ports) An abatement of 25 % from the taxable value has been provided in respect of services rendered in relation to the transport of coastal goods and goods transported through national waterways or inland water (without claiming Cenvat credit)

Effective date 1 March 2011

Amendments to Existing Exemptions The limits for the maximum amount/ rate at which service tax can be levied on air travel services have been revised. Rate of Service Tax revised for Domestic (economy) from Rs100 to Rs150, for International (economy) from Rs 500 to Rs 750 & for Domestic (other than economy) from Rs 100 to 10 % of service value. Effective date 1 April 2011

Point of Taxation Rules The Point of Taxation Rules has been introduced to determine the point of time when the services shall be deemed to be provided (rate effective on the date when these services are provided would be applicable). As a general rule, the time of provision of service will be the earliest of the following dates: o Date on which service is provided or to be provided o Date of invoice o Date of payment. Consequently, provisions allowing adjustment of tax when the service is not finally provided have also been introduced.

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Effective date 1 April 2011

Amendments in Export Rules o Performance based criteria for determining export of credit rating agency services, market research agency services, technical testing and analysis services, transport of goods by air/ road/ rail services and opinion poll services will be changed to location of recipient of service.
o

Location of recipient of service criteria for determining export of health ser vices and rail travel agent services will be changed to performance based criteria.

Location of recipient of service criteria for determining export of preferential location services by builders will be changed to location of immovable property.

Corresponding changes have been made in import criteria as well.

Amendments in Service Tax Rules o A new rule, 5B, has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided. o Limit of self adjustment of service tax has been raised from Rs 1,00,000 to Rs 2,00,000.

Effective from 1st April 2011

Amendments in the Credit Rules Definition of exempt services has been amended to include services that are partially exempt and trading activities with the condition of no Cenvat credit availment.

Following amendments have been made in the definition of input services: o o o Expression activities relating to business has been deleted from the definition of Input services. Certain services meant for personal consumption by employees have been specifically excluded. Certain services used in building construction and laying down foundation for support of capital goods like construction of complex services and works contract services have been specifically excluded except under specific circumstances. o Certain services used in relation to motor vehicles like authorised service stations; general insurance services, etc. have been specifically excluded except under specific circumstances.

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The following amendments have been made in Rule 6 of the Credit Rules: o Rule 6(5), which allowed full credit of some specified services, have been deleted. o Option to maintain separate accounts only in respect of inputs (and not for input services) has been given and consequential changes in credit reversal formula have been made. o the amount payable under ad hoc payment/ reversal scheme in respect of services has been reduced to 5 % from 6 % of exempt turnover. o for the purpose of applying the formula under rule 6(3A), the value of trading services as well as value of services covered by composition schemes has been specifically included. o A banking company or a financial institution would be required to pay an amount equal to 50 % of the credit availed. In case of services relating to life insurance or management of ULIPs, prescribed percentage is 20. They cannot opt for other methods prescribed under Rule 6. o It has now been specifically provided that credit of services on which tax has been paid under Section 66A of the Finance Act would be available. Effective date 1 April 2011

Amendments in SEZ Following key changes has made in the SEZ refund scheme with the: o o Criteria for the determination of wholly consumed services have been specifically prescribed. No service tax is required to be paid if the services are meant to be wholly consumed within SEZ. o Refund for the remaining services (which are not wholly consumed) would be available on pro rata basis, i.e. ratio of SEZ turnover to total turnover. Changes have been made in the Credit Rules to provide that no credit would need to be reversed if the services have been provided to SEZ unit for its authorized operations. Effective from 1 March 2011

Other Amendments Maximum penalty for delay in filing of returns has been increased from Rs. 2,000 to Rs. 20,000. Penalty for failure to pay service tax has been reduced to higher of 1 % per month or Rs. 100 per day (up to 50 % of the tax amount).

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Maximum penalty for contravention of any other provisions has been increased from Rs. 5000 to Rs. 10000. Penalty for suppressing value of taxable services: Where taxpayer has not captured the true and complete information in the specified records penalty has been reduced from an amount up to twice the amount of tax to an amount equal to the tax and where taxpayer has captured the true and

complete information in the specified records penalty has been prescribed at 50 % of the tax amount. Provision of the first charge on the property of assessee has been inserted in respect of amounts due. Interest rate for delayed payment of service has been increased from 13 % to 18 % per annum (effective from 1st April 2011). Changes have been made in the Valuation Rules to provide that in case of telecommunication services, wherein it has been clarified that the taxable value of service would be the amount paid by end customers for availing this service and not the amount received by the service provider from the distributors (effective from 1st March 2011). A new sub-rule has been added in rule 3 in the Works Contract Composition Scheme in terms of which availment of Cenvat credit has been restricted to a limit of 40 % of the tax paid on services relating to erection, commissioning and installation; commercial or industrial construction; and construction of residential complexes, if tax has been paid without availing exemption notification 1/2006-ST dated 1 March 2006 (effective from 1st March 2011). Composition rate for services provided in relation to sale or purchase of foreign currency has been reduced from 0.25 % to 0.1 %. Further, the option to pay service tax on billed amount instead of paying service tax at composition rate has been withdrawn (effective from 1 st April 2011). Assessee with a turnover of up to Rs 60,00,000 have been given various concessions such as: In respect of individuals and propriety firms, they shall not be subjected to audit and Interest rate for delayed payment of service tax would be 15 % instead of 18 % & the Period for making payment in order to avail the benefit of reduced penalty under the second proviso to section 78 shall be 90 days for assessee mentioned above. Prosecution provisions reintroduced for specific defaults such as provision of services without issue of invoice, availment and utilization of credit without actual receipt of inputs or input services, maintaining false books of accounts or failure to supply any information or submitting false statements and non-payment of amount as service tax within six months of collection. There shall be no power of arrest and the prosecution can be launched only with the approval of Chief Commissioner.

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A scheme has proposed for the refund of tax paid on services used for export of goods on the lines of drawback of duties which would be simplified and processed in an expeditious manner. The following changes will take effect from a retrospective date: o Membership fee collected by an association or chamber representing commerce or industry for the period 16 June 2005 to 31 March 2008 will be exempt from levy of service tax. o Inter state or intra state transportation of passengers, (excluding tourism) in a vehicle bearing contract carriage and tourist vehicle permit for the period 1 April 2000 to 6 July 2009 will be exempt from levy of service tax.

Sales Tax

No change in CST rate other than in declared goods. CST rate (against form C) of 2% to be continued. Maximum rate to be levied on declared goods (coal, cotton, cotton yarn, crude oil, hides and skins, iron and steel, jute, LPG for domestic use and oil seeds, etc.) will be enhanced from 4 % to 5 % from the date of enactment of Finance Bill 2011. Based on this, the States would be empowered to increase the VAT rate of declared goods.

Goods and Service Tax

No date for implementation of GST announced. Constitutional Amendment Bill for introduction of GST to be tabled in the Present session of Parliament. Status of other initiatives: o Drafting of model legislation for Central GST and State GST underway. o Significant progress on establishment of IT infrastructure for GST [i.e. GST Network (GSTN)] with key business processes of registration, returns and payments being finalised. o National Securities Depository Limited (NSDL) has been selected as technology partner for establishing and operating the IT infrastructure for GST. o Prior to pan India GST roll out, National Securities Depository Limited expected to set up a pilot portal in collaboration with 11 States, by June 2011

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BUDGET IMPACT ON CERTAIN INDUSTRIES

Infrastructure and Real Estate

Allocation of Rs. 2,14,000 crores for infrastructure which is an increase of 23.3 % over 2010-11 Tax free bonds of Rs. 30,000 crores proposed to be issued by various Government undertakings, to boost infrastructure development. FII limit in corporate bonds in Infra is being raised to USD 25 bn from USD 5 bn Parallel Excise Duty exemption for domestic suppliers producing capital goods needed for expansion of existing mega or ultra mega power projects Grant of 1 % interest subvention on housing loan upto Rs. 15 lacs, where the cost of the house does not exceed Rs. 25 lacs. Upped priority home loan limit to Rs. 25 Lacs vs Rs. 20 Lacs Increase in allocations to social and development programs aimed for rural India like Indira Gandhi Vikas Yojana, MGNREGA, Bharat Nirman (Rs. 58,000 crores allocated), Indira Awas Yojana and Rastriya Krishi Vikas Yojana (Rs. 7,860 crores allocated)

Banking, Financial Services and Insurance

SEBI registered mutual funds are permitted to accept subscription from foreign investors who meet KYC requirements for equity schemes. Rs. 6,000 crores to be provided during 2011-12 to enable public sector banks to maintain a minimum of Tier I CRAR of 8 %. Rs. 5,000 crores to be provided to SIDBI for refinancing incremental lending by banks to SME enterprises. Rs. 3,000 crores to be provided to NABARD to provide support to handloom weaver cooperative societies which have become financially unviable. Existing scheme of interest subvention of 1 % on housing loan further liberalized for housing loan upto Rs. 15 lacs. Existing housing loan limit enhanced to Rs. 25 lacs for dwelling units under priority sector lending. To enhance credit worthiness of economically weaker sections and LIG households, a Mortgage Risk Guarantee Fund to be created under Rajiv Awas Yojana. Scope of this service for Service Tax has been expanded from the existing risk coverage in life insurance to all types of services.

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 Fertilisers

FMCG

Government actively considering extension of NBS regime to cover urea Move towards direct transfer of cash subsidy in phased manner for better delivery of fertilizers Include capital investment in fertilizer production as an infrastructure sub sector Extend the benefit of investment linked deduction to business engaged in the production of fertilizers

Metals & Mining

Raised the rate of export duty for all types of iron ore at 20 % ad valorem from 15 % in the case of lumps and 5 % in the case of fines. Continued thrust on rural and urban development with focus on infrastructure amounting to Rs. 2,14,000 crores. Full exemption from export duty to iron ore pellets

Auto & Auto Ancillary

No hikes in excise duties Weighted deduction on R&D from 175% to 200%. Incentives to electric, hybrid vehicles in the form of concession on excise duty of 5%.

Textiles
Reduce basic customs duty on certain specified inputs for manufacture of certain technical fibre and yarn from 7.5 % to 5 % 10% excise duty on branded garments

Hotel & Restaurants

Hotel's having tariffs in excess of Rs. 1,000 per day, service provided by air conditioned restaurants that have license to serve liquor added as new services for levying Service Tax.

No hike in Excise duty on Cigarettes Reduction in central excise duty on sanitary napkins, baby and adult diapers from 10% to 1%.

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 Pharmaceuticals & Health Care Services

Weighted deduction on R&D from 175% to 200%. Health allocation increased by 20% to Rs. 26,760 cr. Tax on all services provided by hospitals with 25 or more beds with facility of central air conditioning.

Telecom

Increased allocation on various schemes under Bharat Nirman including Rural Telephony by Rs.10,000 Crores, Plan to provide Rural Broadband Connectivity to all 250,000 panchayats of India in three years.

Information & Technology

New scheme to be introduced by which units in SEZs will be able to ob tain tax-free receipt of services wholly consumed within the zone and get their refunds in a much easier manner. The National Securities Depository Limited (NSDL) has been selected as technology partner for incubating the National Information Utility that will establish and operate the IT backbone for GST. Levy of MAT on units in SEZs and developers of SEZs. Non extension of the sunset clause under section 10A and 10B STPI tax benefit

Media & Entertainment

Exempt jumbo rolls of 400 feet and 1000 feet from CVD through full exemption from excise duty.

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INDUSTRY REACTIONS ON BUDGET

The budget has a slew of positives. Overall, the Budget is consistent with the vision of transforming India into a major global economic player with equitable growth.

Kumar Mangalam Birla Chairman, Aditya Birla Group

Its a growth oriented Budget that seeks to build on Indias strengths. The budget recognizes the long term growth drivers for the economy and seeks to strengthen them further. Overall, the Budget focuses on areas requiring significant investments, while seeking to take forward the process of fiscal consolidation. Chanda Kochar MD & CEO, ICICI Bank

The FMs commitment to prevent leakages from public programmes and correcting the drift in governance and public accountability through a strong IT infrastructure, direct electronic transfers of subsidy payments, selfassessment in customs, service tax audit exemptions for smaller units, strengthening enforcement and legislative reforms are good measures. Mukesh Ambani CMD, Reliance Industries Ltd.

Sunil Mittal Chairman, Bharti Group

Budget 2011-12 is clearly high on intent to maintain the growth momentum in the economy. From the point of view of industry, though the MAT has gone up marginally, reduction in surcharge on corporate tax is a good step. The proposal to introduce direct transfer of cash subsidy will help plug the massive leakages that the PDS system suffers from.

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The Budget has ensured that we are now ready to deal with the problems of efficiencies in production, distribution and processing of agricultural produce. One major segment of urban poor which accounts for 20 % of India has been neglected. The Budget is a serious blow for the apparel industry. Converting optional levy on branded garments into mandatory levy at 0 % comes after a 50 % in its input costs. Kishore Biyani Chairman, Future Group

Venu Srinivasan CMD, TVS Motors

Only services would not be able to sustain the momentum in the economy, manufacturing would have to play an increasingly important role over time. Industrial competitiveness is important for creating the 100 million jobs; the government has in mind, over the next five years. The only way to counter inflation is to resolve supply side constraints. On the whole, it is a balanced and good budget.

The Finance Minister has done a brilliant job of balancing the challenges confronting the economy and the opportunities that can ignite faster growth and progress of the country.

Y C Deveshwar Chairman, ITC

A M Naik Chairman, L&T

The Budget came at a critical juncture amidst high inflation, tight liquidity, elevated fiscal and current account deficits and issues on governance. Overall, the Budget is growth oriented with emphasis on rural development and inclusiveness. The highlight of the Budget was the fiscal deficit/GDP ratio of 4.6 % for FY12.

Higher export duty on iron ore has been a long pending demand of the steel industry and the budget has taken care of the issue by increasing the export duty to 20 %. This should ensure higher availability of iron ore for the Indian steel industry. C.S. Verma Chairman, SAIL
Note: The above quotes represent only the abstract of the comments given

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DISCLAIMER

This publication contains information in summary form and is therefore intended for general guidance of clients and associates and is meant for private circulation only. We shall not accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

This document has been compiled based upon documents and information available in public domain and the sources believed to be true and reliable and include in-house comments of Baker Tilly Singhi Consultants Pvt. Ltd. on the Budget. However, no representation is made that it is accurate and complete.

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