FINANCE ACT, 2011

1.1 The Finance Minister, Shri Pranab Mukherjee, presented the third Budget of UPA-II Government in the Parliament on 28-2-2011. The Finance Act, 2011, has now been passed by both Houses of the Parliament on 24-3-2011, without any discussion. It has received the assent of the President on 8-4- 2011. There are only 35 sections in the Finance Act amending some of the provisions of the Income tax and Wealth tax Act. This year’s amendments in our Direct Tax Laws are very few, probably because the Direct Taxes Code Bill, 2010 (DTC), introduced in the Parliament is under discussion and will replace the existing Income tax Act and Wealth tax Act hopefully from 1-4-2012.

1.2 Part ‘B’ of the Budget Speech deals with proposals relating the Direct Taxes, Excise Duty, Customs Duty and Service tax. In para 139 and 140 of his Budget Speech the Finance Minister has stated as under:

“139. In the formulation of these (tax) proposals, my priorities are directed towards making taxes moderate, payments simple for taxpayers and collection of taxes easy for the tax collector.”

“140. As Government’s policy on direct taxes has been outlined in the DTC which is before the Parliament, I have limited my proposals to initiatives that require urgent attention.”

After presenting his budget proposals, he has concluded his speech as under:

“197. As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities. With oneness of heart, let us all build an India, which in not too distant a future, will enter the comity of developed nations.”

1.3 The various important amendments made in the Income tax Act and Wealth tax Act can be briefly stated as under:

(i) Slabs for tax payable by Individuals/HUF/ AoP/ BoI have been revised and the tax burden on these assessees have been reduced to some extent.

(ii) MAT on Corporate Bodies has been marginally raised and surcharge on income of companies is reduced.

(iii) Alternate Minimum Tax (AMT) will be levied on Limited Liability Partnership (LLP).

(iv) Certain exemption and deduction provisions have been relaxed.

(v) Provisions relating to taxation of international transactions have been made more strict.

(vi) Scope of cases which can be referred to the Settlement Commission has been widened.

(vii) Some procedural changes have been made.

1.4 In this article some of the important amendments made in rates of taxes and in some of the provisions of the Income tax and Wealth tax Acts have been discussed.

2. Rates of taxes, surcharge and education cess:

2.1 Rates of Income tax:

(i) For Individuals, HUF, AoP, BoI and Artificial Juridical Persons the threshold limit of basic exemption has been revised upwards for A.Y. 2012-13. Age limit for resident senior citizens has been lowered to 60 years from the present limit of 65 years. Further, a new category of ‘VERY SENIOR CITIZEN’ who is a resident and 80 years and above has been created. The revised tax rates for A.Y. 2012-13 as compared to A.Y. 2011-12 are as under:

(a) Rates in A.Y. 2011-12
(Accounting Year ending 31-3-2011):

Note: There is no surcharge but Education cess at 3% (2 + 1) of tax is payable.
(b) Rates in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

Note: No surcharge is payable but Education cess @ 3% (2 +1) of tax is payable.
(ii) The impact of these changes can be noticed from the following charts.

(a) Tax payable in A.Y. 2011-12 (Accounting Year ending 31-3-2011):

The above tax is to be increased by 3% of tax for Education cess.

(b) Tax payable in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

The above tax is to be increased by 3% of tax for Education cess.

(iii) Other assessees: There are no changes in the rates of taxes so far as other assessees are concerned. Therefore, they will have to pay taxes in A.Y. 2012-13 at the same rates as applicable in A.Y. 2011-12.

(iv) Rate of tax u/s.115JB (MAT): The rate of tax on book profits u/s.115JB i.e., MAT has been increased from 18% in A.Y. 2011-12 to 18.5% in A.Y. 2012-13. This is to be increased by surcharge of 5% of tax if the Book Profit is more than Rs.1 cr. Education cess at 3% of tax is also payable.

(v) Rate of tax on dividends from foreign companies:
A new section 115BBD is inserted for A.Y. 2012- 13. This section provides for concessional rate of tax payable by an Indian company on dividend received by it from any Foreign company in which the Indian company holds 26% or more of the equity capital. The rate of tax on such dividend income will be 15% plus applicable surcharge and education cess. This concessional rate of tax on foreign dividend income is applicable only for one year i.e., dividend received during the year ending 31-3-2012 (A.Y. 2012-13). It is also provided in this section that no expenditure shall be allowed against this dividend income. Therefore, an Indian company which controls a Foreign company by holding 26% or more of equity capital in such a company can consider repatriation of profits accumulated in the foreign company to avail of this concessional rate of tax during the current year before 31-3-2012.

(vi) Rate of Alternate Minimum Tax on LLP (AMT):
Limited Liability Partnership (LLP) will now have to pay Alternative Minimum Tax (AMT) at the rate of 18.5% on its gross total income as computed under new section 115JC. No surcharge is payable, but education cess is payable @ 3% of tax. This is discussed in para 8 below.

2.2 Surcharge on Income tax:
(i) No surcharge is payable by non-corporate assessees i.e., Individuals, HUF, Juridical person, AoP, BoI, Firm, LLP, Co-operative Society and Local Authority. In the case of a company, if the total income is more than Rs.1 cr. the surcharge on tax payable in A.Y. 2011-12 is 7.5%. This is now reduced to 5% for A.Y. 2012-13. Similarly, rate of surcharge on tax payable by a company u/s.115JB (MAT) is also reduced to 5% for A.Y. 2012-13 if the Book Profits amount is more than Rs.1 cr. So far as Dividend Distribution and Income Distribution Tax payable u/s.115O and u/s.115R by companies and Mutual Funds is concerned the rate of surcharge on tax is reduced from 7.5% to 5% w.e.f. 1-4-2011.

(ii) In the case of a Foreign company the rate of surcharge on tax is also reduced from 2.5% to 2% w.e.f. A.Y. 2012-13 if the taxable income of such a company is more than Rs.1 cr. Similarly, for deduction of tax at source u/s.195 from the income of a foreign company the Income tax has to be increased by surcharge at the rate of 2% (instead of 2.5%) w.e.f. 1-4-2011 if the income from which tax is deducted at source is more than Rs.1 cr.

(iii) It may be noted that no surcharge on tax is required to be charged on tax deducted at source from payments to resident assessees.

2.3 Education cess:
As in earlier years, Education cess of 3% (including 1% for higher education cess) of Income tax and Surcharge (if applicable) is payable by all assessees (Residents and Non-residents). No Education cess is to be deducted or collected from TDS or TCS from payments to all resident assessees, including companies. However, if the tax is deducted from payments made to (a) Foreign companies, (b) Non- Residents or (c) on Salary payments, Education cess at 3% of tax and surcharge (if applicable) is to be applied.

2.4 TDS on interest:
New s