BDO Budget Analysis 2011-12

8/7/2019 BDO Budget Analysis 2011-12

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BUDGET ANALYSIS2011-12


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THE BDO MISSION

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FOREWORD

The budget presented by the Finance Minister today is a technocratic, IT driven,

modern budget. The Finance Minister has struck a fine equilibrium between

controlling inflation and fiscal imbalances on the one hand and promoting growth

on the other. The budget presented in the parliament today seeks to achieve the

following objectives:

To achieve double digit growth in GDP as against the estimated growth rate

of 8.6% for the FY 2010-11

To address the menace of black money

To Enhance growth rate of agriculture sector

To establish good governance in the Government system

The policy directions that emerge from the budget are:

Liberalisation of foreign direct investment

Substantial allocation to infrastructure, education and social sectors

Introduction to Direct Tax Code and Goods and Service Tax w.e.f 1 st April

2012

Address food inflation and food storage

Scale up the flow of resources to rural areas to give a more inclusive thrust

to the development process

Curb in implementation gaps, leakeages from public programme and the

quality of outcome

Address the increasing drift in governenace and a gap in public

accountability

Roadmap to fiscal consolidation

The budget provides for measures to mop up revenue and plan for expenditure.

Revenue Mop up Measures:

Dis-investment in PSUs to yield `40,000 crore

Gross tax receipts for 2011-12 are estimated at `9,32,440 crores

Increase in MAT from 18% to 18.5%

Levy of MAT on LLPs, SEZ developers and SEZ units


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Inclusion of new services in the service tax net

Raise the corpus of the rural infrastructure development funds XVII to

`18,000 crore from `16,000 crore

Expenditure Plan:

The plan and non-plan expenditure for 2011-12 are estimated at

`4,41,547 crore and `8,16,182 crore respectively.

Allocation of`2,14,000 crores for infrastructure

Allocation of`7,860 crores to Rastriya Kisan Vikas Yojna

Allocation of 1,60,887 crores for the social sectors and `52,057 crores

for education

The Finance Minister aims at withdrawing stimulus in the form of subsidies and

wants to promote sustainable growth through development in the infrastructure,

agriculture, education, and social sector. His emphasis on governance, IT driven

automated functions and efficiency measures should make India an attractive

destination for investment. The long term fiscal policy is in place.

Team

BDO

Place: Mumbai

Date: 28th February, 2011


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BDO

Budget Analysis 2011-12

Para

no.

ParticularsPage

No.

1. ECONOMIC INDICATORS 4

2. DIRECT TAX PROPOSALSa) Corporate Tax

b) Personal Tax

c) Transfer Pricing

d) Exemptions and Deductions

e) Other Major Amendments

8

10

12

15

20

3. INDIRECT TAX PROPOSALSa) Service Tax

b) CENVAT Credit

c) Central Excise Duty

d) Customs Duty

28

43

48

55

4. FEMA AND CORPORATE LAW 62


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1. ECONOMIC INDICATORS

GDP growth indicators

The Indian economy has shown strong resilience in the face of uncertain

economic conditions. The GDP growth of 8.6% is commendable in the overall

context as it comes at the back of negative trends at the global level. Mostcountries are still reeling from the after effects of the financial crisis of

2008. Even domestically India seems to have overcome the problems which

had plagued the agriculture sector over the last two years. The growth in

201011 indicates that it is relatively broad based across major sub-sectors

including revival of the agriculture.

The Indian economy seems to have tide over the negative trends in

the global economy as well as overcome the setback it faced in the

agriculture sector over the last two years.

The revival of the agriculture sector, which has been a laggard over

the last two years, indicates strong trends of inclusive growth.

9.5 9.6 9.3

6.8

8.08.6

2005-06 2006-07 2007-08 2008-09 2009-10 2010 - 11

(Advance

Estimates)

GDP growth


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Performance of select major sectors

Agriculture

For India to continue a sustainable path of economic growth it is of critical

importance that the growth is inclusive in nature. In this context the

development of agriculture sector gains prime importance as it accounts for

58% of employment of the country. Additionally it also contributes to vast

sections of industries by providing food, fodder and other raw materials.

While the average GDP growth during 2004-05 to 2010-11 was 8.5%, the

growth of agriculture was a meager 3.4%. The current revival of agricultural

growth to 5.4% is extremely positive as it would help further strengthen the

rural sector.

Industry

The growth of the industrial sector in the current fiscal indicates volatility

with a weakening trend. The growth in the first half of the year was robust

particularly in the manufacturing segment. However the trend weakened

significantly as the growth in Index of Industrial Production (IIP) decelerated

to 2.3% during November. There has been significant volatility in IIP as growth

varying widely between 2% to 16%. The volatility has largely been on account

of capital goods and consumer non-durables segment.

Services

The emergence of the services sector is one of the main reasons forthe dominant position the Indian economy holds at the global level.

The contribution of services sector at 57.3% of the overall economy is

comparable with the developed nations. Within the services segment

the two categories financing, insurance and real estate and transport,

storage and communications have been the biggest drivers of growth. These

segments witnessed a growth of 15% and 9.2% respectively. The hotels

and restaurants segment, one of the major engines of economic growth,

recovered moderately.

Inflation

The financial year 2010-11 started with a headline Wholesale Price Inflation

(WPI) of 11% in April 2010 and continued to be in double digit till July and then

reduced to around 8.2% in January 2011. The major pressure on prices was

emanating from food and energy sectors. The WPI food inflation moderated

to 8.59% in December 2010 from its peak of 20.22% in February 2010. While

the high inflation in food articles is not unique to India but is widespread,

the current growth and inflation trends warrant persistence with an anti-

inflationary monetary stance.


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Capital Markets

After a dismal year for primary issues in the previous year, 2010-11 saw

a surge in the amounts mobilised through public offerings. As many as

40 companies came up with an Initial Public Offering (IPO). The cumulative

IPO and FPO amounts mobilised upto November 2010 stood at USD 10.37

billion. The positive sentiments in the capital markets and the success of

the primary market also led to the benchmark indices BSE Sensex and NSE

Nifty to once again touch record highs to 21,000 and 6,312 respectively.

The FII investment in the Indian equity market and debt segment in 2010-

11 (till December 2010) stood at USD 25.02 billion and `5.50 billion. These

volumes are largely attributable to the strong domestic growth coupled withresurging corporate sector.

Forex

The foreign exchange reserves in the current fiscal has increased by

USD 18 billion to reach USD 297 billion as on December, 2010. This increase

is largely attributed to the valuation gain and the purchase of USD by RBI.

On the exchange rate front, the Rupee appreciated marginally by 0.7% and

1.2% against the dollar and euro respectively.

199

309

252 279297

Foregin Exchange Reserves (USD bn)

2006-07 2007-08 2008-09 2009-10 2010-11

(upto December 2010)

9.4

4.3

6.5

4.8 3.6

8.0

(April -December)

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11


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Foreign Direct Investment in retail sector

One of the major constraints currently being faced by the Government is

food inflation. The inflation is partly on account of high margin between

farm gate prices and retail prices. India lacks a modern supply chain

management and large participation by companies in the retail sector. The

policy makers are of the opinion that permitting Foreign Direct Investment(FDI) in multi product will bring in the requisite know how as well along with

the investments.

The Government is of the view of creating a road map of allowing foreign

companies to operate in the retail sector. However the Government also

wants to create a balance wherein the interests of small mom and pop

stores are protected and avoid a situation where foreign companies gain a

dominant position in the market. Keeping this in mind the implementation

strategy would be to limit the international companies operations in the

major cities. Further liberalisation of the sector could be reviewed in

the future.


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2. DIRECT TAX PROPOSALS

Corporate Tax

Tax Rate

Corporate tax rates remain unchanged for both domestic as well as foreigncompanies, except for an increase in the effective rate of Minimum

Alternative Tax (MAT) from 18% to 18.5%. The applicable rates of tax are as

under:

Particulars Tax Rate (%) *

Domestic Company1.

Normal Tax RateMinimum Alternative Tax (MAT)

Foreign Company2.Normal Tax Rate

30%18.5%

40%

Currently the surcharge on income tax @7.5% is payable by a domestic

company having total income exceeding one crore rupees. It is proposed to

reduce the surcharge on income-tax from 7.5% to 5%.

The existing surcharge of 7.5% in all other cases (including Section 115JB,

115O, 115R) is proposed to be reduced to 5%.

In case of companies, other than domestic companies, having the income

exceeding one crore rupees, the surcharge on income-tax is 2.5%. It is

proposed to reduce the surcharge on income-tax from 2.5% to 2%.

The marginal relief in tax will continue to be allowed in the cases whereincome is more than one crore rupees.

The Education Cess shall continue to be levied @ 3%.

Minimum Alternate Tax u/s 115JB

Under the existing provisions of Section 115JB, a company is liable to

pay inimum alternate tax on its book profits @ 18% if the tax payable by

company on the total income under the other provisions of the Act is less

than Minimum Alternate Tax. The MAT tax is allowed to be carried forwardand set off against the tax liability arising under the other provisions of the

Act upto the 10th assessment year.


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It has been proposed to increase the tax rate u/s 115JB from 18% to 18.5%.

This amendment will take effect from 1st April, 2012 and will, accordingly,

apply from the assessment year 2012-13.

It is pertinent to note that the proposed Direct Tax Code has provided for

levy of MAT at 20%.

Applicability of Minimum Alternate Tax in case of SEZ

As per the existing provision of Section 115JB, SEZ developers and SEZ units

were exempt from the payment of Minimum Alternate Tax. The said benefit

is proposed to be withdrawn by levying Minimum Alternate Tax of 18.5% on

the book profits of SEZ developers as well as the units operating in SEZ. The

proposed amendment is in line with the Direct Tax Code, 2010 which had

proposed to levy Minimum Alternate Tax on all SEZ developers and SEZ units

at the rate of 20%.

The above amendment is proposed to take effect from 1 st April, 2012 and will,

accordingly, apply in relation to assessment year 2012-13 and subsequent

years.

Extension of Dividend Distribution Tax to SEZ Developers

As per the existing provision of Section 115-O, SEZ developers are exempted

from the payment of dividend distribution tax (DDT). However, SEZ Units

were liable to pay DDT on distribution of dividends. It has now been proposed

to discontinue the exemption to SEZ developers as a result of which they

would be liable to pay DDT on any distribution of dividend. This is in line

with the Direct Tax Code, 2010 which has proposed to extend DDT provision

to SEZ developers.

The above amendment is proposed to take effect from 1 st June, 2011.


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}

}

Personal Tax

Rate of Income-tax at a glance

At present, the income upto `1,60,000/- is exempt in respect of individuals(other than women below the age of sixty-five years and senior citizens),Hindu Undivided Families (HUF), Association of Persons (AOP), Body of

Individuals (BOI) etc. In respect of women below the age of sixty-five yearsand senior citizens resident in India, the income upto `1,90,000/- and upto`2,40,000/- respectively is exempt.

It is proposed to increase the threshold limit of exemption. It is alsoproposed to lower qualifying age of senior-citizen from 65 years to 60 years.The proposed changes have been tabulated below:

Individual Assessee (other than women & senior-citizen) (AssumingIncome of`8,00,000/-)

Existing Limit Proposed Limit Tax Rate (%) Tax Relief

Upto `1,60,000 Upto `1,80,000 NIL

`2,000

` 1,60,001

`5,00,000

` 1,80,001

`5,00,000

10%

`5,00,001 `8,00,000

`5,00,001 `8,00,000

20%

`8,00,001 & above `8,00,001 & above 30%

Effective Tax Rate Savings

11.75% 11.50% 0.25%

Women Assessee below the age of sixty years(Assuming Income of`8,00,000/-)


Upto `1,90,000 Upto `1,90,000 NIL

`Nil

`1,90,001 `5,00,000

`1,90,001 `5,00,000

10%

`

5,00,001 `8,00,000

`

5,00,001 `8,00,000

20%

`8,00,001 & above `8,00,001 & above 30%


11.375% 11.375% Nil


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Senior Citizen between the age of sixty years to eighty years(Assuming Income of`8,00,000/-)


Upto `2,40,000 Upto `2,50,000 NIL

`1,000

`2,40,001

`5,00,000

`2,50,001

`5,00,000

10%

`5,00,001 `8,00,000

`5,00,001 `8,00,000

20%

`8,00,001 & above `8,00,001 & above 30%


10.75% 10.625% 0.125%

Senior Citizen above the age of eighty years(Assuming Income of`8,00,000/-)


Upto `2,40,000 Upto `5,00,000 NIL

`26,000

`2,40,001

`5,00,000

NIL

`5,00,001

`8,00,000

`5,00,001

`8,00,000

20%

`8,00,001 & above `8,00,001 & above 30%


10.75% 7. 50% 3.25%

No surcharge will be levied in case of individuals, HUF, AOP & BOI,

co-operative society, local authority and firms.

The education cess shall continue to be levied at the rate of 3%.

}

}


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Transfer Pricing

Section Existing Provision Proposed

Provision

Effective Date Analysis

92C The second proviso

to the Section

92C(2) providesthat if the

variation between

the actual price of

the international

transaction and

the arms length

price (ALP), does

not exceed 5%

of the actual

price, then, no

adjustment will

be made and the

actual price shall

be treated as the

ALP.

Instead of a

variation of 5%,

the allowablevariation will be

such percentage

as may be notified

by Central

Government.

Applicable from

1st April, 2012 and

shall accordinglyapply in relation

to the assessment

year 2012-13 and

subsequent year.

With the intent

of bringing in

the Direct TaxCode (DTC) by

April 2012, we

believe this is

a step towards

introducing

safe harbor

for different

industries based

on the nature

of international

transactions.


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Provision


92CA The existing

provision lays

down that

Transfer Pricing

Officer (TPO) candetermine the

ALP in relation to

an international

transaction, which

has been referred

to the TPO by the

assessing officer

(AO).

Now the

jurisdiction of

the TPO shall

extend to the

determinationof the ALP in

respect of other

international

transactions,

which are

noticed by him

subsequently

in the course

of proceedings

before him.

These transactions

would be in

addition to the

international

transaction

referred to the

TPO by the AO.

Applicable from

1st June, 2011.

In the recently

concluded case

of Amadeus India

Pvt. Ltd. (2011-

TII-22-ITATDEL-TP)it was held that

the TPO cannot

determine the

arms length price

of an international

transaction, which

has not been

referred to him by

the AO.

With a view to

give more power

to the TPO to

effectively

determine the

arms length

price in case

of the newly

identified

international

transactions even

though they havenot been referred

by the AO for

computation of

arms length price.

Thus, overcoming

the existing

administrative

weakness,

the Govt. has

proposed to

introduce sub-

section (2A) of

92CA after sub-

section (2) of

92C.

92CA(7) For the purpose of

determining the

ALP, the TPO can

exercise powers

available to an

AO under Section131(1) & 133(6).

TPO to also

exercise the

power of survey

conferred upon

an income tax

authority underSection 133(A) of

the Act.

Applicable from

1st June, 2011.

With a view to

give additional

powers to the TPO

for conducting

surveys to

effectivelydetermine the

arms length

pricing.


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Provision


92E Under the existing

provisions, in

addition to

filing of return

of income,assessees who

have undertaken

international

transaction are

also required to

prepare and file

a transfer pricing

report in FORM

3CEB before the

due date for

filing of return of

income (i.e. 30th

September of the

assessment year).

Extended the due

date offilling of

FORM 3CEB from

September 30th

to November 30th

of the assessment

year.

Applicable from

1st April, 2011.

This revision

mandates that

the data used for

comparability

analysis should becontemporaneous.

Currently one of

the reasons for

using multiple

year data was

unavailability of

data. With the

revision in the

date offiling the

return, not only

contemporaneous

data will have to

be used but also

multiple year data

can also be used

in case there is

cogent relevant

and reliable

evidence to prove

that the data for

preceding twoyears revealed

facts which

could have an

influence on the

determination of

ALP.

In the case of an assesse, being a company, which is required to furnish a

report in form 3CB, the due date for filing the return of income is extended

to 30th November of the assessment year.

This amendment is proposed to take effect from 1 st April, 2011.


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Exemptions and Deductions

Exemption of perquisites of Chairman and Members of Union PublicService Commission

Under the existing provisions, any perquisite or allowance received by an

employee is taxable under the head salary unless it is specifically exempt.It is proposed to provide exemption to any allowance or perquisite, as may

be notified by the Central government in the Official Gazette, paid to the

chairman or the retired Chairman or any other member or retired member

of the Union Public Service Commission.

The above amendment is proposed to take effect retrospectively from

assessment year 2008-09.

Enhancement of weighted deduction for any sum paid to a NationalLaboratory or a University or an Indian Institute of Technology or aspecified person

Under the existing provisions of Section 35 (2AA), a weighted deduction of

175% is allowable for any sum paid to a National Laboratory or a University

or an Indian Institute of Technology or a specified person that undertake

scientific research programme approved in this behalf.

It is now proposed to increase the said weighted deduction from 175% to

200%. This amendment will take effect from 1st April, 2012 i.e., assessmentyear 2012-13 and onwards.

However, it may be noted that under Section 79 read with The Sixteenth

Schedule of the Direct Tax Code, 2010 in its current form which may become

operative from assessment year 2013-14, deduction on such payment is

capped at 175%.

Exemption of specified income of notified body or authority or trust

or board or commissionSection 10 specifies the Incomes which are not included in Total Income.

It is proposed to insert new clause (46) in the said section so as to provide

that any specified income, arising to a body or authority or Board or Trust or

Commission (by whatever name called), which is constituted or established

by or under a Central or State or Provincial Act with the object of regulating

or administrating an activity for the benefit of general public shall be exempt

if it is not engaged in commercial activity and is specified by the Central

Government by notification in the official gazette in this behalf.

Central government to notify the nature and extent of the income which

shall constitute the specified income


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Tax benefits for New Pension System (NPS)

NPS is a defined contribution based pension system launched by Government

of India with effect from 1 January, 2004. It was extended for all citizens

on May 1, 2009. The Finance minister has proposed to amend the provisions

related to NPS to give a boost to its usage as a saving mechanism.

Section 80CCE of the Act provides that aggregate amount of deductions

under section 80C, Section 80CCC and Section 80CCD shall not, in any case,

exceed one lakh rupees.

Section 80CCD provides, inter alia, a deduction in respect of contributions

made by an employee as well as an employer to the New Pension Scheme

(NPS) account on behalf of the employee.

It is proposed that contribution made by the employer to the NPS under

Section 80CCD(2) shall be excluded from the limit of one lakh rupees.

Currently, the contribution made by an employer by way of contribution

towards a recognised provident fund or an approved superannuation fund

is allowed as 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

Consequential to above amendment in Section 80CCE, It is proposed to

amend Section 36 to provide that any sum paid by an employer by way ofcontribution towards a pension scheme as referred to in Section 80CCD(2),

on account of employee to the extent it does not exceed 10 per cent of the

salary in the previous year, shall be allowed as deduction in computing the

income under the head profits and gains of business and profession.

These amendments will take effect from 1st April 2012 and will, accordingly,

apply in relation to the assessment year 2012-13 and subsequent years.

Deduction in respect of long-term infrastructure bondsUnder the existing provisions of Section 80CCF, subscription made by an

individual or a Hindu Undivided Family in notified long term infrastructure

bonds during the financial year 2010-11 is allowed as a deduction upto

a sum of`20,000/-. The above deduction is over and above the limit of

`1 lakh available under Section 80CCE for tax savings. It is proposed to extend

the benefit of deduction for one more year. Accordingly, the deduction of

upto `20,000/- for such investment will be allowed for the year 2011-12

(assessment year 2012-13) also.

This amendment will take effect from 1st April, 2012 and will, accordingly,

apply in relation to the assessment year 2012-13.


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Extension of sunset clause for Power Sector

As per the existing provisions of Section 80-IA(4)(iv), deduction of profits is

allowed to an undertaking which

Is set up for the generation and distribution of power if it begins to generate

power at any time between 1st April 1993 and 31st March 2011;

Starts transmission or distribution by laying a network of new transmission or

distribution lines at any time between 1st April, 1993 and 31st March, 2011;

Undertakes substantial renovation and modernisation of existing network

of transmission or distribution lines between 1st April, 2004 and 31st March,

2011.

It is proposed to extend the terminal date by one more year i.e. upto 31st March,

2012.The above amendment is proposed to be effective for assessment year 2012-13.

Sunset clause of tax holiday for certain undertakings engaged incommercial production of mineral oil

Section 80IB(9) deals with seven-year profit-linked deduction of 100% to

an undertaking engaged in commercial production of mineral oil, if such

undertaking fulfils any of the conditions stipulated therein. One of the

conditions require that such undertaking is located in any part of India and

is engaged in commercial production of mineral oil and has begun or beginscommercial production of mineral oil at any time after 1 April 1997. No

sunset clause has been provided for such business.

In order to provide clarification on the sunset clause, proviso to the above

condition is been inserted, which provides that the aforesaid deduction will

not be available for blocks licensed under a contract awarded after 31 March

2011.

This amendment will take effect from 1 April 2012 and will, accordingly,apply in relation to the assessment year 2012-13 and subsequent year.

Infrastructure Debt Fund

In order to meet the funding requirement of infrastructure sector at lower

rate from abroad, it is proposed to set up dedicated debt funds, which would

meet debt requirements of infrastructure projects.

It is proposed to amend Section 10 to bestow the Central Government with

powers to notify any infrastructure debt fund which is set up in accordancewith prescribed guidelines. Such notified infrastructure debt fund would

be exempt from tax. However, the fund would be required to file return of

income.


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It is usual practice in external borrowings wherein borrower is bound to meet

the withholding tax cost of borrowing which increases the cost of funding for

infrastructure projects. In order to reduce the cost of funds raised overseas,

it is proposed to amend Section 115A of the Act to provide that any interest

received by a non-resident from such notified infrastructure debt fund shall

be taxable at the rate of 5% instead of 20% which is applicable for other

types of external borrowings.

In order to provide withholding tax on the same, it is proposed to insert a

new Section 194LB to provide that tax shall be deducted at the rate of 5%.

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


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Other Major Amendments

Taxation of certain foreign dividend at reduced rate

Under the existing provisions, dividend received by a resident from an Indian

Company is exempt u/s. 10(34). However, dividends received by a resident

from a Foreign Company are taxable at the applicable marginal rate of tax.Therefore, in cases of Indian Companies, dividend received from foreign

companies is taxable at the rate of thirty percent plus applicable surcharge

and cess.

Representations were made by various corporate that taxation of foreign

dividends in the hands of resident taxpayers at full rate is a disincentive for

their repatriation to India and they continue to remain invested abroad. In

view of this, it is proposed to insert a new Section 115BBD.

It is proposed to provide that where total income of an Indian Company

includes any income by way of dividends from a foreign subsidiary company,

then such dividends shall be taxable at the rate of fifteen percent plus

applicable surcharge and cess.

It is further proposed to provide that no deduction in respect of expenditure or

allowance shall be allowed in computing the income by way of dividends.

This amendment is proposed to take effect from 1st of April 2012 and, will,

accordingly apply in relation to the assessment year 2012-13.

Extension of time limit for assessments in case of exchange ofinformation

At present, where in the case of an assessee, information is required to be

obtained from outside India, time taken for obtaining such information is

not excluded from the time limit prescribed for framing assessment under

regular assessment or re-assessment or in search assessment.

It is now proposed to exclude the time taken in obtaining such information.It is proposed to provide that the period commencing from the date on which

a reference for exchange of information is made by an authority competent

under an agreement referred to in Section 90 or 90A and the date on which

such information is received by the Commissioner or a period of six months,

whichever is less shall also be excluded.

This amendment will take effect from 1 st June, 2011.

Anti-Avoidance measures to combat lack of exchange informationIt is proposed to insert a new Section 94A to specifically deal with transactions

undertaken with persons located in any country or jurisdiction which does

not effectively exchange information with India.


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The proposed section provides for:

The Central Government to notify any country or territory, having regards

to lack of effective exchange of information by it with India, as notified

jurisdictional area.

Any transaction with the person located in the said notified jurisdiction area,

then all such parties to the transaction will be deemed to be associated

enterprises and such transaction will be deemed to be an international

transaction and correspondingly transfer pricing provisions will apply to such

transaction.

To disallow any payment made to any financial institute located in the

notified jurisdiction area unless the assessee furnishes prescribed details to

the Income-tax Authorities.

No deduction of any other expenditure or allowance (including the

depreciation) arising from the transaction with the person located in notified

jurisdiction shall be allowed unless the assessee maintains and furnishes

prescribed information.

If any sum is received to the assessee from the person located in such

notified jurisdictional area, then the onus is on the assessee to explain the

source of such money in the hands of such person. In case, the assessee fails

to discharge such onus, then such amount will be income of the assessee.

The payments made to persons located in notified jurisdiction area, will be

subject to deduction of tax at source at the higher of the following rates:

rate or rates in force;

rates specified;

at the rate of 30%.

To define the certain expressions for the purpose of this section, as

follows:

person located in a notified jurisdictional area shall include:

a person who is resident of the notified jurisdictional area;

a person, not being an individual, which is established in the

notified jurisdictional area; or

a permanent establishment of a person not falling above, in the

notified jurisdictional area. permanent establishment shall have the same meaning as defined in

the IT Act.


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transaction shall have the meaning as defined in the IT Act.

This Section will be effective from 1 st June, 2011.

Alternate Minimum Tax for Limited Liability Partnership (LLP)

The limited liability partnership (LLP) is a hybrid entity which comprises

the feature of a company as well as a partnership. It was introduced in I.T.Act vide Finance Act, 2009. As per Act, there are no separate provisions for

taxation of LLP and it is governed by income tax provisions applicable to a

partnership firm.

Due to application of tax regime of partnership firm; a LLP was enjoying

following tax benefits:-

No Dividend Distribution Tax;

No Minimum Alternate Tax;

No Surcharge on income-tax.

All these are applicable in respect of a company and entail LLP tax edge

over a company. In order to preserve the tax base vis-a vis profit linked

investment, it is proposed to provide special provisions relating to certain

limited liability partnerships.

It is proposed to insert a new Section 115JC which is akin to Section 115JB-Book Profit with a deviation in computation of adjusted total income. The

adjusted total income would be computed in the following way:-

Total income of LLP before giving effect to this chapter, as increased by

Deduction claimed, if any, under Chapter-VIA;

Deduction claimed, if any, under section 10AA.

On this adjusted total income, alternate minimum tax would be computedat the rate of 18.5% (which is also MAT rate for Companies).

With non-obstante clause, it is provided that where regular income tax

payable for a previous year is less than the alternate minimum tax, the

alternate minimum tax shall be deemed to be the total tax liability of the

LLP.

In order to provide the credit of minimum alternate tax paid against the

tax paid under the normal provisions, it is proposed to insert a new Section115JD which is akin to Section 115JAA.


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As per newly inserted section, tax credit shall be the excess of alternate

minimum tax over the regular income tax payable for that year. No interest

would be available on this credit balance being carried forward.

The credit of minimum alternate tax shall be available for a consecutive

period of 10 succeeding year.

The credit available against the normal tax payable shall not exceed the

difference between the tax payable under normal provisions and tax payable

under the minimum alternate tax.

This amendment is proposed to take effect from 1st April, 2012 and will

accordingly, apply from the assessment year 2012-13.

Rationalisation of Tax on Income distributed to unit holders

Section 115R(2) deals with additional income-tax chargeable to the specifiedcompany or a mutual fund on distribution of income to its unit holder.

Currently additional income-tax at 25% is chargeable on income distributed

by a money market mutual fund or a liquid fund in case of all recipients.

This is now proposed to increase to 30% in case of recipient other than

Individual or HUF. In other words, additional income-tax at 25% continues

to be chargeable in the case of recipient, being an Individual or a Hindu

Undivided Family. However, additional income-tax at 30% will be chargeable

in case of the recipients, other than Individuals or HUFs.

Further, on income distributed by debt fund other than a money market

mutual fund or a liquid fund, additional income-tax will be chargeable at

30% instead of 20%.

The above is tabulated as under:

Distributed by Current Rate Proposed rate Remark

Money marketmutual fund or a

liquid fund

25% - in case ofall recipient

25% - in the caseof Individual and

HUF recipient

30% - In case

of any other

recipient other

than Individual

and HUF

5% increasein additional

income-tax

chargeable

where recipient

is a person

other than an

Individual or HUF

MF other than amoney market

MF or a liquid

fund

12.5% - in caseof Individual and

HUF recipient

Same as current Neutral


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Fund other than

a money market

MF or a liquid

fund

20% - if case of

any recipient

other than

Individual or HUF

30% 10% increase

in additional

income- tax

chargeable

where recipient

is a personother than an

Individual or HUF

Distribution of income by an equity-oriented fund shall continue to be

exempt from tax.

This amendment is proposed to take effect from 1 st June, 2011.

Collection of information on requests received from tax authorities

Under the existing provisions of Section 131, certain Income-tax authoritieshave been conferred the powers of Civil Court, in respect of discovery,

inspection, enforcing the attendance of any person, compelling production

of books of accounts, etc.

It is proposed to facilitate prompt collection on requests received from

tax authorities outside India in relation to an agreement for exchange of

information under Section 90 or Section 90A. Accordingly, it is proposed to

provide that for the purpose of making an inquiry or investigation in respect

of any person(s) in relation to an agreement referred to in Section 90 orSection 90A, it shall be competent for any Income-tax authority not below

the rank of Assistant Commissioner of Income Tax, as notified by the Board,

to exercise the powers conferred under Sec 131(1). Such powers will be

exercisable notwithstanding that no proceedings with respect to such person

or class of persons are pending before it or any other income tax authority.

It is further proposed to amend Sec 131(3), so as to empower the aforesaid

authority, to impound and retain books of accounts, etc. produced before it

in any proceeding under the Act.

This amendment is proposed to take effect from 1 st June, 2011.

Exemption from filing return of income u/s 139(1c)

Under the existing provisions contained in Section 139(1), every person, if

his total income during the previous year exceeds the maximum amount

which is not chargeable to income tax, is required to furnish a return of his

income.

A new sub-section (1C) is proposed to be inserted 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


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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.

The above amendments are proposed to reduce the compliance burden on

small tax payer. In the case of salaried tax payer, entire tax liability is

discharged by the employer through deduction of tax at source. Therefore,

in cases where there is no other source of income, filing of a return is a

duplication of existing information.

Notification for processing of returns in Centralised ProcessingCentres

With effect from 1 st April, 2008, a new Section 143(1A) was introduced,

which authorised CBDT to notify scheme for centralised processing of

returns for expeditious determination of tax liability or refund due to the

assessee.

Provision of sub-section 143(1B) also authorised Central Government to

notify for applicability or non-applicability with or without exceptions of

any provision of Income tax Act. However, no such notification is issued

by the Central Government under this section. Therefore to allow Central

Government to issue such notifications, this deadline of 31st March, 2011 hasbeen extended up to 31st March, 2012.

In his budget speech, Honble Finance Minister has announced to open such

Centralised Processing Centre in Manesar, Pune and Kolkata. At present,

there is only one Centralised Processing Centre functioning in Bengaluru.

This amendment will take effect retrospectively from 1 st April, 2011.

Modifications in the conditions for filing applications beforesettlement commission under section 245C(1)

Under the existing provisions, an application can be made to the Settlement

Commission, if-

the proceedings have been initiated against the applicant under section

153A or under section 153C as a result of search or 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

lakh rupees,


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in any other case, if the additional amount of income-tax payable on

the income disclosed in the application exceeds ten lakh rupees,

Clause (ia) has been inserted in proviso to section 245C(1) wherein the

criteria for filing application in cases where proceedings have been initiated

as a result of search or requisition of books of accounts has been expanded.

This provision stipulates that an application can also be made, where theapplicant-

is related to the person in whose case proceedings have been initiated

as a result of search and who has filed an application; and

is a person in whose case assessment and reassessment proceedings

have also been initiated under section 153A or 153C,

the additional amount of income-tax payable on the income disclosed in his

application exceeds ten lakh rupees.

For the purposes of new clause (ia), the definition of related person and

person having substantial interest have been given in Explanation to

section 245C.


Power of settlement commission to rectify its order u/s 245D

Settlement Commission was conferred all the powers of the Assessing Officer

except for passing the order rectifying any mistake which was apparent from

record.

Section 154 empowers any authority to rectify the mistake apparent from

the record but this section does not apply to orders passed by Settlement

Commission. There was no remedy available to the assessee/settlement

commission if the order was passed by Settlement Commission & there was

mistake apparent from record. Therefore, the assessee had no option but to

file an appeal.

In order to avoid this hardship, sub section 6B is proposed to be inserted in

Section 245D which will empower settlement commission to rectify its own

order where the mistake is apparent from record.

Any such order has to be passed within 6 months of passing the original order

by settlement commission after giving opportunity of being heard to the

applicant & Commissioner.


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Similar amendment is introduced in Wealth tax Act, by inserting sub-section

6B to Section 22D of Wealth Tax Act, 1957.

This amendment is effective from 1st June, 2011.

Omission of requirement of quoting of Document Identification

NumberUnder the existing provisions of Section 282B, every income tax authority

shall, on or after 1st July, 2011, allot a computer generated Document

Identification Number (DIN) in respect of every order, notice, letter or

any correspondence issued by him. Due to non-availability of requisite

infrastructure on an all India basis, the same is now dispensed with the

proposed omission of Section 282B.

This amendment will take effect retrospectively from 1st April, 2011.

Reporting of activities of Liaison Office

A non-resident does not file a return of income with regard to its liaison

office in India on the ground that no business activity is allowed to be carried

out in India. In order to seek information from non-residents in respect of

the activities of their liaison office in India in a financial year, it is proposed

to insert a new Section 285, mandating the filing of annual information,

within sixty days from the end of the financial year, in prescribed form and

providing prescribed details.


Recognition to Provident Funds Extension of time limit

As per the existing provisions, where recognition has been accorded to any

provident fund on or before 31st March, 2006, the same shall be withdrawn,

if such fund does not satisfy, on or before 31st December, 2010, certain

specified conditions.

It is proposed to extend the said time limit to 31 st March, 2012.

This amendment will take effect retrospectively from 1 st January, 2011.


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3. INDIRECT TAX PROPOSALS

Service Tax

New Taxable Services (Effective on passing of Finance Bill, 2011)

Taxable Service Air-conditioned restaurants having license to serve

liquor

Section 65(105)(zzzzv)

Service Provider

Service recipient

Any restaurant having the facility of air-conditioning

in any part of the establishment (at any time during

the financial year) which has license to serve alcoholic

beverages

Any person receiving the service

BDO Comments The primary reason to introduce Service Tax on such

restaurants is due to the fact that the conditions and

ambience are provided by these restaurants in such

a way that services (predominantly relating to use of

restaurant space and furniture, air-conditioning,

well-trained waiters, linen, cutlery and crockery,

music, dance floor etc.) assume predominance over

the food in most situations. Service Tax is purported

to be levied only on the value of services in the

composite contract and not on meal/food part; 70%

abatement (considered as attributable to meals and

beverages) announced on this service.


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Taxable Service Short term accommodation in hotels/inns/clubs/guest

houses etc.

Section 65(105)(zzzzw)

Service Provider

Service Recipient

Any hotel, inn, guest house, club or campsite

Any person receiving the serviceBDO Comments The levy would apply to hotels, inns, guest house,

club or campsite where the continuous period of stay

is less than 3 months. The levy would be restricted

to accommodation with declared tariff of`1,000 per

day or higher irrespective of actual amount charged

from the customer; 50% abatement announced on this

service.


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Amendments in existing taxable service:

Sr. No. Taxable Service Classification Amendment

1. Authorised

Service Station

Service

Section

65(105)(zo)

Service Tax would be applicable

to any person providing the

said service irrespective ofwhether it is an authorised

service station or not (the

definition of authorised service

station under the Act has been

deleted).

Decoration of motor vehicle

also included within the ambit

of taxable services in addition

to repair, re-conditioning or

restoration.

Services provided in relation to

goods transport vehicles and

three-wheeler scooter auto-

rickshaws excluded from the

levy.

2. Life Insurance

Service

Section

65(105)(zx)

Services of management of

investments provided by life

insurance companies to attract

Service Tax.

Tax to be levied @ 10% of

premium amount allocated to

expenses for management ofinvestment like commission and

other administration expenses

etc. (if disclosed separately to

the policy holders) or @ 1.5%

of gross premium amount (if

not disclosed separately to the

policy holders).


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3. Commercial

Training or

Coaching

Service

Section

65(105)(zzc)

The term of commercial

training or coaching centre to

include in its scope any pre-

school coaching and training

centre and centres providing

coaching or training relating

to educational qualifications

recognised by law.

Suitable exemption to be

granted post enactment of the

Finance Bill, 2011 to pre-school

coaching and training and to

coaching and training related

to educational qualifications

recognised by law.

4. Club or

Association

Service

Section

65(105)(zzze)

Service tax to be charged

on services provided to non-

members as well as members

of other affiliated clubs.5. Business

Support Services

Section

65(105)(zzzq)

The definition of services

expanded to levy Service

Tax on operational or

administrative assistance of

any manner.


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6. Legal

Consultancy

Service

Section

65(105)

(zzzzm)

Service Tax will also be levied on

the following services:

Advisory, Consultancy orassistance service provided

by a business entity to any

person;

Representational Serviceprovided by any person to a

business entity;

Services provided by anarbitral tribunal to business

entities in relation to

arbitration.

It appears that such servicesprovided by an individual to

other individual would be

excluded from the levy.


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7. Health Service Section

65(105)

(zzzzo)

Service Tax to be levied on the

following services:

Services provided by aclinical establishment having

the facility of central air-

conditioning in whole or any

part of the establishment

and more than 25 beds for

in-patient treatment at any

time of the year;

Services provided by a

clinical establishment or

any other entity in relation

to diagnostic tests of any

kind or investigative services

with the help of a laboratory

or medical equipment;

Service provided by doctorsfrom the premises of aclinical establishment,

in a capacity other than

as an employee of such

establishment.

The term clinical establishment

has been defined as hospitals,

maternity homes, nursing homes,

dispensary, clinics, sanatorium or

any other institution by whatever

name called.

Services provided by clinical

establishments owned or controlled

by the Government or local

authority not to be included in the

purview of Service Tax.


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Exemptions from Service Tax

Sr. No. Taxable Service Notification No. Services Exempt

1. Transport of

passengers by

Air Service(Effective from

1st April, 2011)

Notification No.

04/2011-S.T,

dated1st March, 2011

amending

Notification No.

26/2010-S.T,

dated

22nd June, 2010

Service Tax in excess of

10% of gross value of ticket;

or`150 (Domestic travel in

economy class) or

`750 (International travel in

economy class);

whichever is lower.

2. Business

Exhibition

Service

(Effective from

1st March, 2011)

Notification

No. 05/2011

S.T., dated 1st

March, 2011

Services rendered to an

exhibitor participating in an

exhibition held outside India.

3. Works Contract

Service

(Effective from

1st March, 2011)

Notification No.

06/2011 S.T.,

dated

1st March, 2011

Services rendered for

construction or completion

and finishing of new

residential complex or partthereof under Jawaharlal

Nehru National Urban

Renewal Mission and Rajiv

Awaas Yojana.

Notification No.

10/2011 S.T.,

dated

1st March, 2011

Services for execution of

works contract provided

wholly within an airport

and classifiable as Airport

Services.

Notification No.

11/2011 S.T.,

dated

1st March, 2011

Services for execution of

works contract provided

wholly within the port or

other port, for construction,

repair, alteration and

renovation of wharves,

quays, docks, stages, jetties,

piers and railways.


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4. General

Insurance

Service

(Effective from

1st March, 2011)

Notification No.

07/2011 S.T.,

dated

1st March, 2011

General insurance provided

under the Rashtriya Swasthya

Bima Yojana.

5. Transport of

Goods By Air

Service

(Effective from

1st April, 2011)

Notification No.

08/2011 S.T.,

dated

1st March, 2011

Services provided to person

in India for goods transported

(by air) from a place outside

India to a final destination

which is also outside India.Notification No.

09/2011 S.T.,

dated

1st March, 2011

Exemption of Service Tax on

so much of the value as is

equal to the amount of air

freight determined under

section 14 of the Customs

Act, 1962 or the rules made

thereunder for the purpose

of charging customs duties

included in the taxable value.

6. Transport of

Goods By Road

Service

(Effective from

1st April, 2011)

Notification No.

08/2011 S.T.,

dated

1st March, 2011



(by road) from a place

outside India to a final

destination which is also

outside India.7. Transport of

Goods By Rail

Service

(Effective from

1st April, 2011)

Notification No.

08/2011 S.T.,

dated

1st March, 2011



(by rail) from a place outside

India to a final destination

which is also outside India.


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8. Transportation

of Coastal

Goods

and Goods

transported

through

National

Waterways and

Inland Water

Service

(Effective from

1st March, 2011)

Notification No.

16/2011 dated

1st March, 2011

Abatement of Service Tax of

25% of the value of taxable

service; accordingly, 75% of

the value of taxable service

liable to Service Tax.

Amendments in Export of Service Rules, 2005 and Taxation ofServices (Provided from Outside India and Received in India) Rules,2006 [Effective from 1st April, 2011]:

The category of following taxable services changed under Export ofService Rules, 2005 and Taxation of Services (Provided from OutsideIndia and Received in India) Rules, 2006:

Sr. No. Classification of Service Existing Rule Proposed Rule

1. Provision of preferential

location or external or

internal development of

complexes

Rule 3(1)(iii)

Taxable based

on location of

recipient of

the service.

Rule 3(1)(i)

Taxable based on location

of immovable property.

2. Rail Travel Agents

Service

Rule 3(1)(iii)

Taxable based

on location of

recipient of

the service.

Rule 3(1)(ii)

Taxable based on

performance of the

service.

3. Health Check-up and

Treatment Services

Rule 3(1)(iii)

Taxable based

on location of

recipient ofthe service.

Rule 3(1)(ii)

Taxable based on

performance of the

service.


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Sr. No. Classification of Service Existing Rule Proposed Rule

4. Credit Rating Agencys

Services

Rule 3(1)(ii)

Taxable

based on

performance

of the service.

Rule 3(1)(iii)


of recipient of the service.

5. Market Research Agency

Service

Rule 3(1)(ii)

Taxable

based on

performance

of the service.

Rule 3(1)(iii)



6. Technical Testing and

Analysis Service

Rule 3(1)(ii)

Taxablebased on

performance

of the service.

Rule 3(1)(iii)

Taxable based on locationof recipient of the service.

7. Transport of Goods by Air

Service

Rule 3(1)(ii)

Taxable

based on

performance

of the service.

Rule 3(1)(iii)



8. Transport of Goods by

Road Service

Rule 3(1)(ii)

Taxable

based on

performance

of the service.

Rule 3(1)(iii)



9. Opinion Poll Service Rule 3(1)(ii)

Taxablebased on

performance

of the service.

Rule 3(1)(iii)

Taxable based on locationof recipient of the service.

10. Transport of Goods by

Rail Service

Rule 3(1)(ii)

Taxable

based on

performance

of the service.

Rule 3(1)(iii)




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CHANGE IN MECHANISM TO LEVY AND CHARGE SERVICE TAX

Point of Taxation Rules, 2011

A new legislation viz, Point of Taxation Rules, 2011 is proposed to be incepted

with effect from 1st April, 2011. The rules are framed to determine the point of

time when the services would be deemed to be provided. As per the said Rules,

the time of provision of service would be the earliest of the following:

Date on which service is provided or to be provided

Date of invoice

Date of receipt of payment

The above provisions would also squarely apply on payment of Service Tax under

reverse charge mechanism.

Further, the Rules also contains provisions for determination of point of taxation

in cases of change of rate of tax, continuous supply of service, associated

enterprises, copyrights, payment of tax in case of new services etc.

Other legislative Amendment Proposals

The Works Contract (Composition Scheme for Payment of Service Tax)

Rules, 2007 have been amended to provide for restriction in availment of

CENVAT credit to 40% of service tax paid on services relating to erection,

commissioning and installation services, commercial or industrial construction

services and construction of residential complex services in case service tax

has been paid, without availing the abatement benefit under notification

1/2006-S.T. dated 1st March, 2006, on full value of services after availing

CENVAT credit on inputs. This is primarily to ensure that CENVAT credit of

inputs (not admissible for payment of service tax on works contract service

under composite scheme) is not availed indirectly. [Effective from 1st March,

2011]

Amendment in Service Tax valuation provisions under the Service Tax

(Determination of Value) Rules, 2006.

Money changing services [Effective from 1st April, 2011]

A new rule (2B) has been introduced in the Service Tax (Determination

of Value) Rules, 2006 providing for determination of value as under:

The difference between the buying rate or the selling rate, as

the case may be, and the RBI reference rate for that currency for

that day multiplied by units of currency exchanged;

If RBI reference rate is not available, the value shall be 1% of the

value of money exchanged in Indian rupees;


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When both the currencies are not Indian rupees, 1% of the lesser

of the amounts receivable if the two currencies are converted at

RBI reference rate.

Telecommunication services [Effective from 1st March, 2011]

The valuation for the purpose of Service Tax would be the gross amountpaid by the person to whom telecommunication service is rendered

by the telegraph authority. Accordingly, in case of services provided

by way of recharge coupons or prepaid cards or the like, the value

would be the gross amount charged from the subscriber or ultimate

user of the service and not the amount paid by the distributor or other

intermediary to the telegraph authority.

Amendments made in Service Tax Rules, 1994 to align the provisions

consequent to the introduction of Point of Taxation Rules, 2011 (effectivefrom 1st April, 2011) as under:

New rule 5B has been introduced to provide that the applicable rate of

Service Tax should be the rate applicable at the time when the services

are deemed to have been provided (determined as per the Point of

Taxation Rules, 2011);

Rule 6(1) amended to provide for payment of Service Tax upon deemed

provision of services under the Point of Taxation Rules, 2011 (as againstreceipt of payment towards taxable services) by due dates (viz 5 th or

6th of the month immediately following the calendar month in which

services are so deemed to be provided, except for the month of March

where the due date would be March 31).

Rule 6(3) has been amended to provide that when an invoice has been

issued or a payment is received for a service which is not subsequently

provided, the service provider could take the credit of the Service Tax

paid earlier (pursuant to Point of Taxation Rules, 2011) provided the

amount (including Service Tax) has been refunded to the recipient of

service or a credit note is issued for the value of service not so provided

to the service recipient.

The maximum amount admissible for adjustment of excess Service Tax

under rule 6(4B)(iii) has been increased to `2 lakhs from 1 lakh.

Rule 6(6A) has been introduced to provide for recovery of amount of

Service Tax self assessed but not paid together with interest as per

Section 87 of the Finance Act, 1994. Accordingly, requirement to resortto Section 73 for recovery of self assessed amounts of Service Tax would

not be required.


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Rule 6(7B) has been amended where the composition rate applicable

in relation to purchase or sale of foreign currency, including money

changing, has been reduced from 0.25% to 0.1%; also, the option to

pay Service Tax on billed charges in relation to these services has been

withdrawn.

Interest rate on delay in payment of service tax (under Section 75) and amountscollected in excess (under section 73B) increased from 13% to 18% [Effective from

1st April, 2011]

Exemption to services to SEZ Developer/Unit by way of refund (Service Tax

notification 9/2009-ST withdrawn); an option is available to not charge

Service Tax ab-initio if the services are meant to be wholly consumed

within SEZ (including services liable to Service Tax on reverse charge basis

under Section 66A). For this purpose, the criterion/principle for determining

what constitutes whole consumption of services within SEZ has beenborrowed from the Export of Services Rules, 2005. Further, it has also been

specified that all services received by SEZ Developer/Unit, which does

not have any other DTA operations, would constitute as services wholly

consumed within SEZ.

The maximum penalty for delay in filing Service Tax return under Section 70

is proposed to be enhanced from `2,000 to `20,000; the existing rate of

penalty under rule 7C of the Service Tax Rules, 1994 to be retained.

The revised position relating to penalties and their mitigation or waiver is

tabulated in summarised form in the table below:

Situation Position inrecords

Penalty &Provision

Mitigation CompleteWaiver

No fraud,

suppression

etc.

Captured 1% of tax or

`100 per day

upto

50% of taxamount: Sec 76

Totally

mitigated if

tax and

interest paidbefore issue

of

notice:

Section 73(3)

On showing

reasonable

cause under

Section 80


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Cases of

fraud,

suppression

etc.

Captured

true &

complete

position in

records

50% of tax

amount: Proviso

to Section 78

(a) 1% per

month; max

of

25% if all

dues paid

beforenotice: Sec

73(4A);

(b) 25% of tax

if all dues

paid within

30 days (90

days

for small

assesses):Provisos

to Section 78

On showing

reasonable

cause under

section 80

Not so

captured

Equal amount:

Section 78

No mitigation

at all

Not possible

Small scale sector benefits

Individual and sole proprietor assessees with a turnover upto

`60 lakhs not to be subject to audit;

Interest rates for assessees (including firms and corporates) upto a

turnover of`60 lakhs to be 3% less than prescribed rate;

The period of making the payment in order to avail the benefit of

reduced penalty under the second proviso to Section 78 to be 90

days for assessees (including firms and corporates) upto a turnover of

`60 lakhs.

Retrospective exemptions have been given by the Finance Bill, 2011 to the

following services:

To an association or chamber representing commerce or industry in respect

of membership fee under the Club orAssociation Services for the period from

16th June, 2005 to 31st March, 2008.

To an inter-state or intra-state transportation of passengers, in a

vehicle bearing contract and tourist vehicle permit for the period from1st April, 2000 to 6th July, 2009.


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Refund should be granted on all Service Tax which has been collected on

these services during the relevant period (discussed above) provided the

claim for refund is filed within six months from the date on which the Finance

Bill, 2011 receives the assent of the President.

Other provisions on search, prosecution, arrest etc.

Power to issue search warrant is proposed at the level of Joint

Commissioner and the execution of search warrant at the level of

Superintendent.

Provisions relating to prosecution are proposed to be re-introduced and

would apply in the following situations:

Provision of service without issue of invoices;

Availment and utilisation of CENVAT credit without actual receiptof inputs or input services;

Maintaining false books of accounts or failure to supply any

information or submitting false information;

Non-payment of amount collected as Service Tax for a period of

more than six months.

No power of arrest; the prosecution can be launched only with theapproval of Chief Commissioner.


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CENVAT Credit

Definition of Exempted Service amended

Notification No. 3/2011

CE(NT) dated 01-03-2011

Effective date:01-04-2011

A clarificatory Explanation has been inserted under definition

of exempted services whereby it is clarified that exempted

services includes trading.

It appears that this is a clarificatory amendment and could have

retrospective effect.

Definition of Input amended


CE(NT) dated 01-03-2011

Effective date:

01-04-2011

The definition of input amended as under:

Input means:

All goods used in factory by the manufacturer of the finalproducts

All goods including accessories, cleared along with the finalproduct, the value of which is included in the value of final

product and goods used for providing free warranty for finalproducts

All goods used for generation of electricity or steam forcaptive use

All goods used for providing any output serviceExclusions:

Light Diesel Oil (LDO)

High Speed Diesel Oil (HSD)

Motor Sprits (Petrol)

Any goods used for construction of: Building or a civil structure of a part thereof

Laying of foundations or making of structures for supportof capital goods except for provisions of any taxable

service as under:

Port Services

Other Port Services

Airport Services

Commercial or Industrial Construction Services

Construction of Complex Services Works Contract Service

Capital goods except when used as parts or components inthe manufacture of a final product

Motor Vehicles

Any goods such as food items, goods used in guest house,residential colony, club or a recreation facility, clinical

establishment when such goods are used primarily for

personal use or consumption of any employee

Any goods which have no relationship whatsoever with the

manufacture with the manufacture of a final product

Free Warranty means a warranty provided by the manufacturer,

the value of which is included in the price of the final product

and is not charged separately from the customer.


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Definition of Input Service amended


CE(NT) dated 01-03-2011

Effective date: 01-04-

2011

The definition of input service amended as under:

Input Service means:

Used by a provider of taxable service for providing an outputservice

Used by a manufacturer whether directly or indirectly inor in relation to the manufacture of final products andclearance of final products upto the place of removal

Inclusions:

Services used in relation to:

modernisation, renovation or repairs of a factory, premisesof provider of output service or an office relating to suchfactory or premises

advertisement or sales promotion market research storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment quality control coaching and training computer networking credit rating share registry security

business exhibition

legal services inward transportation of inputs or capital goods and outward

transportation upto the place of removal

Exclusions:

The requirement of input services being used in relation tobusiness activity has been deleted

Architect Services, Port Services, Other Port Services, AirportServices, Construction of Complex Services, Works Contract

Services in so far they are used for:

Construction of a building or civil structure or a partthereof

Laying of foundation or making of structures for support ofcapital goods

General Insurance Service, Rent a Cab Services, AuthorisedService Station, Supply of Tangible Goods Services in so far

they relate to a motor vehicle except when used for the

provision of taxable services for which the credit on motor

vehicle is available as capital goods

Outdoor Catering Services, Beauty Treatment Services,Health Services, Cosmetic and Plastic Surgery Services, Club

and Membership Services, Health and Fitness Services, LifeInsurance Services and travel benefits extended to employees

on vacation such as Leave or Home Travel Concession

when such services are used primarily for personal use or

consumption of any employee


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Definition of Manufacturer or Producer amended

Notification No. 3/2011 CE(NT)

dated 01-03-2011

Effective date: 01-03-2011

Manufacturer or Producer:

In relation to articles of jewellery falling under

heading 7113 of the First Schedule to the Excise Tariff

Act, includes a person who is liable to pay duty of

excise leviable on such goods under sub-rule (1) ofrule 12AA of the Central Excise Rules, 2002.

In relation to goods falling under Chapters 61, 62 or 63

of the First Schedule to the Excise Tariff Act, includes

a person who is liable to pay duty of excise leviable on

such goods under sub-rule (1A) of rule 4 of the Central

Excise Rules, 2002.

CENVAT Credit of Service Tax paid under Section 66A of Finance Act 1994 (import of services)

is permissible


CE(NT) dated 01-03-2011

Rule 3 is being amended retrospectively with effect from

18

th

April, 2006 to provide that the credit of Service Tax paidunder Section 66A of the Finance Act, 1994 shall also be

permissible.

Rule 3 and Rule 4 amended to disallow certain CENVAT Credit


CE(NT) dated 01-03-2011

Effective date: 01-03-

2011

Rule 3 and 4 are being amended to disallow utilisation of credit

for paying duty on concessional goods (in respect of which an

exemption, other than full exemption, is availed subject to the

condition that no CENVAT credit of inputs and input services is

taken).

Reference to provide for reversal of CENVAT Credit


CE(NT) dated 01-03-2011

Rule 4 (7) is being amended to provide for reversal of CENVAT

credit in case any payment made towards an invoice of input

service is received back.

Reference to CENVAT Credit by ship breaking units


CE(NT) dated 01-03-2011

The availment of CENVAT credit by ship breaking units is being

restricted to 85% of the additional duty of customs (CVD) paid at

the time of importation of ships for breaking.


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Reference to amendment in Rule 6 of CENVAT Credit Rules 2004


CE(NT) dated 01-03-2011

Rule 6 is being amended as under:

Reduce the requirement of payment of 6% of the value of

exempted services to 5%;

Provide an option to maintain separate accounts for inputs

alone and reverse the amount of input services credit as perthe allocation formula in rule 6 (3A).

Provide that a payment made under this rule shall be treated

as credit not availed for the purpose of an applicable

exemption;

Clarify the value of services in cases where the same is not

clearly defined and tax is collected on a compounding or

specific principle.

Rule 6(5) Deleted


CE(NT) dated 01-03-2011

Rule 6(5) of the CENVAT Credit Rules, 2004 which allowed 100%

availment of CENVAT Credit of 16 specified services is nowdeleted.

Reversal of CENVAT Credit for provider of Banking and other Financial Services


CE(NT) dated 01-03-2011

Rule 6(3B) is being introduced to provide that only 50% of the

CENVAT Credit availed will be available for utilisation towards

payment of Service Tax under Banking and other financial

services by a banking company and financial institution including

non-banking financial company.

This rule of reversal of CENVAT Credit is applicable for following:

Banking Company

Financial Institution including Non-Banking Financial Company

(NBFC)

No such reversal of CENVAT Credit availed on capital goods is

required.

Reversal of CENVAT Credit for providers of Life Insurance Service Provider and

Management of investment under ULIP Services


CE(NT) dated 01-03-2011

Rule 6(3C) is being introduced to provide that only 80% of the

CENVAT credit availed will be available for utilisation towardspayment of Service Tax by the providers of life insurance service

and management of investment under ULIP.

In effect, 20% of CENVAT Credit will have to be reversed

voluntarily on tax paid on inputs and input services.

No such reversal of CENVAT Credit availed on capital goods is

required.


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New Rule 6(6A) for SEZ unit or Developer without payment of Service Tax


CE(NT) dated 01-03-2011

New rule 6(6A) is being inserted to provide that the provisions

of sub-rule (1), (2), (3) and (4) of the said Rule shall not apply

to taxable services provided to SEZ Unit or Developer without

payment of Service Tax.

CENVAT Return for manufacturer


CE(NT) dated 01-03-2011

Effective from 01-03-2011

The time limit for filing of monthly CENVAT Credit Return has

been reduced to 10 days from 20 days


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Central Excise

Legislative including procedural amendments in Central Excise Act,1944

Reference for Retail Sales Price (RSP) valuation aligned with the Legal Metrology Act, 2009

Budget Proposal

Effective Date: 01-03-2011Notification No. 5/2011-CE(NT)

dated 01-03-2011

The Central Government of India has notified the Legal

Metrology Act, 2009 replacing the Standard Weights &Measures Act, 1976.

Section 4A of the Central Excise Act, 1944 which provides

for valuation based on Retail Sales Price (RSP) drew

reference from the Standard Weights & Measures Act,

1976 whereby excisable goods covered by the said Act

were to be valued as per RSP method.

In line with the replacement of Act, the Section 4A for

RSP valuation of excisable goods is being amended to

substitute the reference with Legal Metrology Act, 2009with effect from 01-03-2011.


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Provisions of recovery of Central Excise duty amended & simplified

Budget Proposal

Effective Date: 01-04-2011

Notification No. 5/2011-CE(NT)

dated 01-03-2011

Provisions of Section 11A are amended as under:

(i) A separate category has been carved out from

cases involving extended period of limitation (fraud,

collusion, willful mis-statement etc.) wherein a lower

mandatory penalty of 50% of the duty (rather than 100%

of the duty) would apply. These would cover cases whereit is noticed during an audit, investigation or verification

that duty has not been levied, short levied, not paid or

short paid or erroneously refunded but the transactions

to which such duty relates are entered in the specified

records.

(ii) While a provision has been made for issuance of

show cause notice invoking the extended period for

recovery of duty with interest under section 11AC and

penalty equivalent to 50% of the duty, it has also been

specifically provided that even in caseswhere show cause notice has been issued involving

extended period of limitation (fraud, collusion,

willful mis-statement etc.) with penalty equal to

the duty, the penalty can be remitted to 50% if the

Central Excise officer is of the opinion that the details of

the transactions in respect of which the demand notice

has been issued have been duly recorded by the person

charged with duty in the specified records.

(iii)The provisions of the existing sub-section (1A)

of Section 11 have been omitted. The facility ofcompounding the penalty amount has been confined only

to the new category and if the person chargeable with

duty (for an extended period) pays the duty in full or

part along with interest

Before the issuance of a show cause notice, the

penalty shall stand reduced to 1% per month but

not exceeding 25% of the duty.However if the duty

alongwith interest is paid within thirty days of the

issuance of adjudication order, the penalty would be 25%

of the duty.

11AA, 11AB and 11AC are being redrafted so as to make

them more lucid and coherent. A new category of cases

is being carved out in respect of which the period of

limitation would be five years but which would attract

general penalty of 50% of the duty. Waiver of show cause

notice and conclusion of proceedings would be available

if the duty along with interest and specified penalty is

paid before the issue of show cause notice in such cases.


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Interest rate increased to 18% from existing 13%

Budget Proposal

Effective Date: 01-04-2011

Notification No. 6/2011-CE(NT)

dated 01-03-2011

Rate of interest has been revised to 18% per annum from

13% per annum to be effective from 1st April, 2011.

Central Excise Act shall have a First Charge on the property of the defaulter for recoveryof Central Excise dues

Budget Proposal New Section 11E is being inserted so as to create first

charge on the property of the defaulter for recovery

of Central Excise dues from such defaulter subject to

provisions of Section 529A of the Companies Act, the

Recovery of Debt due to Bank and Financial Institution

Act, 1993 and Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Act,

2002.

The implication of the same is that in case of any owingunder these provisions, the dues under the Central Excise

Act, 1944 shall have a First Charge.

Joint Commissioner/Additional Commissioner of Central Excise empowered to carry out the

search of any premises

Budget Proposal Section 12F is being inserted to empower the Joint

Commissioner or the Additional Commissioner of the

Central Excise to himself search or authorize a central

excise officer to carry out the search of any premises.

CBEC empowered to issue instructions as per National Litigation Policy

Budget Proposal A new Section 35R is being inserted retrospectively with

effect from 20th October, 2010 so as to empower CBEC

to issue instructions relating to non-filing of appeal in

certain cases in line with National Litigation Policy.


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Legislative amendments in Central Excise Tariff Act, 1985

Changes in tariff rate of 5%

Budget Proposal A tariff rate of 5% is being prescribed for specified items,

which are being subjected to an effective rate of 1%

excise duty without CENVAT credit facility.

Chapter Note inserted in Chapter 22 for labeling, relabeling, packing and/or repacking

Budget Proposal A Chapter Note is being inserted in Chapter 22

Beverages, Spirits and Vinegars.

The said Chapter Note provides that in relation to

products of this Chapter, labelling or re-labelling of

containers or packing or repacking from bulk packs to

retail packs or the adoption of any treatment to render

the product marketable to the consumer, shall amount to

manufacture.

Chapter Note inserted in Chapter 26 for process of converting ores into concentrates

Budget Proposal A Chapter Note is being insert

Documents

BDO Budget Analysis 2011-12