Direct tax proposals in Finance Bill 2011 at a Glance

Budget Speech of the Finance Minister relating to Direct taxes is cozy to the taxpayers but changes as found in fine print show that the tax administration has neither changed its mind set nor its approach with regard to tinkering of tax provisions at regular intervals. The Budget 2011 exhibits lack of vision on the part of the lawmakers to reform and carry forward the provisions of law in tune with the present day requirements.

The further proviso to section 2(15) inserted by the Finance Act, 2010 prescribed the limit for aggregate receipts of an entity falling in the category of ‘advancement of any other object of general public utility’. The limit under section 2(15) was fixed at Rs.10 lakhs in the last budget. Now in Budget 2011 it has been increased to Rs.25 lakhs for the financial year 2011-12. This shows perhaps the lawmakers are not clear, whether to tax those entities or to leave them with a leeway.

A better option would have been to omit the further proviso and impose tax at 5% in respect of those entities. Anyway in DTC these entities are chargeable to tax and when the law is synchronized with the DTC in every Finance Bill, imposition of tax on such entities at a negligible 5% would have been a better proposition.

The rate of tax in respect of book profits has been increased by 0.5% i.e. from 18% to 18.5%. The corporate tax rate has been retained. However surcharge for corporates has been reduced to 5% in the case of domestic companies and 2% for other companies.

These cosmetic changes in tax rate do not seem to reflect any great thought process, rationale or philosophy as such. Instead of levying surcharge and cess, it is better to fix the corporate tax rate without fractions.

Only in the Budget 2010, the deduction for contribution made for approved scientific research programme was enhanced to 175%. Now in the Budget, i.e. Budget 2011 it has been enhanced to 200%.

How much of such contributions have positively persuaded the lawmakers to hike again the quantum of deduction percentage deserves an answer. Such frequent changes in giving tax incentives do not augur well for stable tax policy.

Two more activities have been added as ‘specified business’ for giving tax fillip to them. They are (i) housing project under a scheme framed by the Central or State Government; and (ii) the activity of production of fertilizer in India.

These activities are eligible for investment linked deduction contained section 35AD. The incentive for housing project is subject to a condition that it is under a scheme for affordable housing framed by the Central or a State Government and notified by the Board. This seems to be prompted more by political considerations (with an eye on forthcoming elections to various states) than sheer tax policy.

The extra deduction of Rs.20,000 in respect of long term infrastructure bonds under section 80 CCF is proposed to be continued for one more year. If the Government is serious about the infrastructure development commensurate to industrial and general economic development, this deduction must be retained for a longer term instead of extension being given on yearly basis.

For power sector, section 80-IA provides tax incentive only in respect of undertakings which begin before 31st March 2011. In the Budget 2011, the sunset clause is proposed to be extended by yet another year i.e. upto 31.03.2012.

Considering the fact that our country is reeling under power shortage due to expanding industries and populist measures like provision of free electricity to farmers, it is imperative that the power sector is given such tax relief or incentive for a longer duration of time instead of extension of sunset clause on adhoc basis.

Perhaps it has dawned suddenly on the lawmakers that some incentive is to be given to Indian companies receiving dividend from foreign countries. As a trial, dividend received from foreign subsidiary company is liable for concessional rate of tax at 15% (plus surcharge and cess) as against the present rate of tax of 30% plus surcharge and cess.

The benefit of reduction in tax rate is however restricted to Indian companies only in respect of dividend received from their foreign subsidiary.

Even before the limited liability partnerships have evolved fully in India, the lawmakers have made a hurried comparison of the benefits available to the LLP vis a vis the corporates. To block any such benefit accruing to LLPs, book profit tax regime is proposed in the Finance Bill, 2011. The tax rate on such book profit is also at 18.5% with tax credit available for 10 succeeding assessment years.

Where the tax liability is discharged by the employer by deduction of tax at source out of salary income of employee and complete details of such employee are reported by the employer through TDS statements, the salaried taxpayer is relieved from filing return of income.

This is a long pending demand and it is curious to note that in pursuit of increasing the taxpayers base, the department was following up such kind of assessees only a few years ago. The law however has to specify in clear terms the responsibility with regard to completeness of such income being reported. It has to be fixed either on the employee or the employer, so that a benefit so given is not abused by them.

As per existing provisions in respect of assessees in whose case proceedings were initiated as a result of search on some other person, the additional amount of income tax payable had to exceed Rs.50 lakhs for filing the application with the Settlement Commission.

In the Finance Bill, 2011 it is proposed to reduce the additional income-tax liability to Rs.10 lakhs instead of Rs.50 lakhs. It may be noted that the change is applicable only in respect of a person who is related to a person against whom a search was made.

In the Finance Bill, 2011 the difficulty and non-availability of requisite infrastructure has prompted the lawmakers to admit and justify the giving up of the concept of allotting a computer generated Document Identification Number (DIN) which was to operate originally from 01.07.2011. The DIN facilitated by section 282B is omitted w.e.f. 01.04.2011.

On the one hand it is claimed by the law administrators that the DTC is the final solution to the plethora of ambiguities, inconsistencies and difficulties in the present dispensation and on the other hand, the present law is further complicated in the interregnum by changing the tax provisions, now and then.

If the Government is definite and committed to bringing DTC from 01.04.2012 the changes made in the Finance Bill, 2011 being cosmetic could have been kept in abeyance. At best these could have been implemented along with DTC by inserting the same. The annual ritual of changing the provisions of tax law has been done this time also but luckily no serious damage is done to the taxpayers at large. It could also be thought that a great opportunity for fine tuning the tax provisions with realistic changes was missed out in the Budget 2011.