Direct Tax Proposals 2012 : CORPORATE TAX PROPOSALS & BOOK PROFIT BASED TAXATIONS

                                                 Understanding

Direct Tax

                                                         Proposals

Corporate Tax Proposals

    Power Sector

Present Law	Proposed Changes
Depreciation Benefits (Section 32)
ü Additional  depreciation (in addition to normal depreciation) ü @ 20% of the actual cost on new machinery or plant (other than ships and aircraft) ü  in the business of manufacture or production of any article or thing ü in the year of acquisition and instalment Exception ü Additional Depreciation not available ü on the new machinery or plant ü installed by assessee for ü Generation or generation and distribution of Power	ü Assessee engaged in generation or generation and distribution of power ü shall ‘also’ be allowed ü Additional depreciation @ 20% on ü Actual cost of new machinery or plant ü acquired and installed in a previous year
Extension of Sunset Clause [u/s 80-IA(4)]
ü Deduction should be allowed to an undertaking which – ·          is set up for the generation and distribution of power. ·         Starts transmission or distribution by laying a network of new transmission or distribution lines.. ·         Undertakes substantial renovation and modernization of existing network of transmission or distribution lines..... ü  AND ü  Completes the above projects till 31st March 2012	ü Sunset Clause Extended to 31st March 2013

Comment:

v Finance Minister in his Budget Speech had said that Power sector is very important for economic growth. Memorandum explaining the finance bill also states the same.

v In India, there is an actual demand supply mismatch in Power sector. To give Incentive to Power sector, these amendments have proposed.

v Sunset Clause for 80-IA benefit extended to 31^st March 2013 i.e. Power projects completed till 31-03-2013 will get the tax benefit.

v Additional Depreciation @ 20% for Investment in Plant & Machinary by assessee engaged in Power generation & distribution.

v This is a very good amendment proposed by Finance Bill.

 Extract of Memorandum

    “ In order to encourage new investment by the assessees engaged in the business of generation or generation and distribution of power, it is proposed to amend this section to provide that an assessee engaged in the business of generation or generation and distribution of power shall also be allowed initial depreciation at the rate of 20% of actual cost of new machinery or plant (other than ships and aircraft) acquired and installed in a previous year.”

    Investment Linked Incentives u/s 35 AD

Present Law	Proposed Changes
ü 100% deduction shall be allowed ü on any expenditure of capital nature ü (other than on land, goodwill and financial instrument) ü incurred wholly and exclusively, ü for the purposes of the “specified business” ü during the previous year ü in which such expenditure is incurred. Specified Business are v  setting up and operating a cold chain facility; v  setting up and operating a warehousing facility for storage of agricultural produce; v  laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. v  building and operating, anywhere in India, a new hotel of two-star or above category; v  building and operating, anywhere in India, a new hospital with at least one hundred beds for patients; v  developing and building a housing project under a scheme for slum redevelopment or rehabilitation, v  developing and building a housing project under a scheme for affordable housing framed by Govt.; and v  Production of fertilizer in India	Specified Business will also include v  Setting up and operating an inland container depot or a container freight station as approved as per customs act; v  Bee-keeping and production of honey and beeswax; and v  Setting up and operating a warehousing facility for storage of sugar. Deduction @ 150% will be allowed to Specified business, Commencing operations, on or after 01-04-2012        Setting up and operating a cold chain facility;       Setting up and operating a warehousing facility for storage of agricultural produce;       Building and operating, anywhere in India, a new hospital with at least one hundred beds for patients;       Developing and building a housing project under a scheme for affordable housing framed by Govt.; and       Production of fertilizer in India.
ü 100% deduction shall be allowed to Specified Business being ü Building and operating, anywhere in India, a new hotel of two-star or above category; as classified by CG.	v  Assessee builds a hotel......... and subsequently, v  while continuing to own the hotel, v  transfers the operation thereof to another person, v  the assessee shall be deemed to be carrying on the specified business of building and operating hotel. v  i.e. Still Eligible for Deduction u/s 35AD. v  Retrospective Application w.r.e.f. 01-04-2010 i.e. from AY 2011-12.

Comment:

v This amendment is a welcome move, as the tax incentives now extended to setting up and operation of Inland Container Depot, Bee Keeping – Production of Honey & Warehousing facility for storage of Sugar.

v Additional Benefit i.e. 150% deduction will be available to certain “Specified Business”

v In Hotel Industry, Finance Act 2009 had introduced Investment linked Incentives, if the assessee Owns, Operates & Maintenance” Hotel.  To promote the Investment in “Hotel Industry”, the “Operation” clause has been removed. The same also clarify from the Memorandum as under :

Extract of Amendment:

   “Currently, the investment-linked deduction under section 35AD is allowed to an assessee engaged in the business of building and operating a hotel whereby the deduction can only be granted to the owner of a hotel if he himself operates it. In service industries like hotels, a franchisee business system exists where the hotel owner may get the hotel operated through an outsourcing arrangement.

     Therefore, it is proposed to provide a suitable clarification so that a hotel owner continues to be eligible for the investment-linked deduction under section 35AD if he, while continuing to own the hotel, transfers the operation of such hotel to another person.”

    Weighted Deduction

Present Law	Proposed Changes
Scientific Research (u/s 35(2AB))
ü A company is allowed ü weighted deduction @ 200% ü of expenditure incurred till 31st March, 2012 (not being in the nature of cost of any land or building) ü incurred on ü approved in-house research and development facilities	ü Extended to 5 more years i.e. upto 31st March 2017.
Agricultural Extension Project [ New Section 35CCC]
ü A weighted deduction @ 150%, Will be allowed ü On Expenditure incurred in Agricultural extension project Notified by the Board.
Skill Development :
ü A weighted deduction @ 150% , will be allowed ü On Expenditure (Other than Land & Buildings) ü  incurred in Skill Development Project ü Notified by the Board

Comment:

v This Amendment is a very welcome move by the government to promote Agricultural Sector & to promote ‘In house Scientific Research’

v In order to incentivise the corporate sector to continue to spend on in-house research, it is proposed to amend this section to extend the benefit of the weighted deduction for a further period of five years i.e. up to 31st March, 2017.

v Agricultural extension services play a critical role in enhancing the productivity in the agricultural sector. In order to incentivise the business entities to provide better and effective agriculture extensive services, it is proposed to allow weighted deduction of 150% of the expenditure incurred on agricultural extension project.

v The Department of Industrial Policy & Promotion (DIPP) has notified the National Manufacturing Policy (NMP) vide Press Note dated 4th November, 2011. The notified NMP inter alia propose to provide following direct tax incentive for skill development in manufacturing sector: 

     “ To encourage the private sector to set up their own institutions, the government will provide weighted standard deduction of 150% of the expenditure (other than land or building) incurred on Public Private Partnership (PPP) project for skill development in the ITIs in manufacturing sector in separate facilities in coordination with NSDC.”

    Disallowance u/s 40(a)(ia) vis a vis 201(1)/(1A)

Present Law	Proposed Changes (w.e.f 01-07-2012)
Assessee in Default [u/s 201(1)/(1A)]
»        In case of non-deduction of tax »        Payer will be treated as  »        an assessee in default u/s 201(1) »        in respect of the »        Amount of such non-deduction.	ü Payer who fails to comply TDS provisions ü shall not be deemed to be an assessee in default in respect of such tax ü if such resident payee – ·      has furnished his ROI u/s 139; ·      Offered such income for taxation ·      Paid Requisite Taxes ·      and ·      an accountant ( for e.g. CA etc) certifies the same. The date of payment of taxes by the resident payee shall be deemed to be the date on which return has been furnished by the payer.
v  The payer is liable to pay v   interest u/s 201(1A) v  on the amount of non/short deduction of tax v  from the date on which such tax was deductible v  to the date on which the payee v  Has discharged his tax liability ‘Directly’.	·         Where the payer fails to comply TDS provisions ·         and ‘not’ an assessee in default u/s  201(1) ·         the interest under section 201(1A)(i) ·         shall be payable ·          from the date on ·         which such tax was deductible ·         to the date of ·         Furnishing of ROI by such resident payee.
Disallowance u/s 40(a)(ia)	ü
ü No deduction of expenditures like ü  Interest, commission, Brokerage, professional fees etc.. ü Is allowed to PAYER ü If ü Tax not deducted as per law. ü In case the tax is deducted in subsequent previous year, ü the expenditure shall be allowed ü In that subsequent previous year of deduction.	ü Where an assessee makes these ü to a “Resident Payee” ü without deduction of tax ü and ü is not deemed assessee in default u/s  201(1) ü then, ü for the purpose of allowing deduction of such sum, ü it shall be deemed that the ü assessee has deducted and paid the tax ü on such sum ü on the date of Return filed by the resident payee.

Comment:

v The said amendment is going to reduce the effect of Mumbai ITAT decision in case of ACIT vs. DICGC Ltd in which Hon’ble ITAT had held that even if payees has paid tax, payer is not eligible for deduction and accordingly disallowance u/s 40(a)(ia) should be compulsorily made.

v We can expect a clarification from CBDT or courts can interpret accordingly as done by Kolkata High court in CIT vs. M/s Virgin Creations (ITA 302/2011) by stating that TDS amendments to give extended time for payment is retrospective in nature, though the same was not mentioned in the act.

v As per memorandum explaining finance bill, the said amendment is applicable from AY 2013-14 only. As the same is beneficial in nature, Retrospective effect of the same will reduce pending litigations.

Extract of Memorandum:

“ A related issue to the above is the disallowance under section 40(a)(ia) of certain business expenditure like interest, commission, brokerage, professional fee, etc. due to non-deduction of tax. It has been provided that in case the tax is deducted in subsequent previous year, the expenditure shall be allowed in that subsequent previous year of deduction.

In order to rationalise the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia)”

    Tax Audits (Section 44AB)

Present Law	Proposed Changes
ü Every person carrying on Business / Profession ü Required to get Books of account audited if ü Total Sales, Gross Turnover or gross receipts ü Exceeds INR 60,00,000 for Business / INR 15,00,000 for Profession.	ü Limit for Business increased to INR 1 crore. ü Limit for Profession increased to INR 25,00,000.

Comment:

v In order to reduce the compliance burden on small businesses and on professionals, Govt has proposed to increase the threshold limit of total sales, turnover or gross receipts, specified under section 44AB for getting accounts audited.

v Welcome Move by Government. 

    Presumptive Taxation (44AD)

Present Law	Proposed Changes (w.r.e.f.01-04-11)
ü Threshold limit of total turnover, gross receipts is upto INR 60,00,000.	Clarification regarding Non Applicability on ü Person carrying on profession as per section 44AA(1) ü Person earning commission or brokerage income ü Person carrying agency business
ü Applicable only to a person carrying on business.

    Dividends from Foreign Company (Section  115BBD)

The above provision was introduced as an incentive for attracting repatriation of income earned by residents from investments made abroad with certain conditions to check the misuse of the incentive.

Present Law	Proposed Changes
ü Gross dividends received by an Indian Company from a specified foreign company ü In which it has shareholding of 26% or more ü Shall be taxed @ 15% ü If dividend is included in total income of FY 2011-12 i.e. AY 2012-12.	ü Benefit extended to one more year i.e. for FY 2012-13.

    Removal of Cascading effect of Dividend Distribution Tax [DDT] (Section 115O)

Present Law	Proposed Changes
ü Any amount declared, distributed or paid by way of dividends, ü whether out of current or accumulated profits, ü shall be taxed at the rate of 15% (DDT) ü Dividend liable for DDT in case of a ‘Company’ ü is to be reduced by an amount of dividend received ü from ‘its subsidiary’ after payment of DDT ü if the ‘Company’ ü is not a subsidiary of any other company.	ü Company receives, during the year, ü any dividend from ‘any’ subsidiary,  and ü such subsidiary has paid DDT , then, ü dividend distributed by the holding company ü in the same year, ü to that extent, ü shall not be subject to DDT.

Comment:

v As per memorandum explaining the finance bill that Present Tax structure only removes the cascading effect of DDT only in a two-tier corporate structure.

v The new provision has been inserted to remove the cascading effect of DDT in multi-tier structure.

v This proposed change is a welcome step for Corporate following a complex multi-tier structure.

Book Profit Based Taxations:

    Minimum Alternative Tax (MAT)

Present Law	Proposed Law
ü Company is liable to Pay 18.5% of its Book profit (if it exceeds normal taxation) ü Book profit to be calculated as per profit & loss A/c prepared in accordance with Schedule VI of the companies Act. ü Every Company is required to prepare accounts as per Schedule VI. ü Exception is Insurance, Banking & Electricity Company in which accounts prepared as per respective laws	ü Book Profit for companies in which Schedule VI not applicable, will be calculated as per Profit & Loss A/c of their respective laws.
ü In Certain Cases ü The amount of revaluation reserve is taken directly to general reserve on disposal of a revalued asset. ü Resultant Gains attributable to revaluation of the asset is not subject to MAT liability.	Book Profit for section 115JB shall be increased by ü Revaluation reserve relating to the revalued asset which has been retired or disposed ü If the same is not credited to the profit and loss account.

Comment:

v Hon’ble Mumbai ITAT in Krung Thai Bank PCL vs. JDIT 133 TTJ 436 had held that MAT provisions is not applicable for banking companies as they are governed by Banking regulations Act & schedule VI of companies Act is not at all applicable on them.

v Kerala HC in Kerala State Electricity board vs. DCIT had held that MAT provisions will not be applicable for Electricity companies.

v The same ratio is going to apply in case of Insurance & Electricity companies

v To bring these companies under the purview of MAT, this amendment proposed.

v Mumbai ITAT in DCIT vs. Bombay Diamond Company Ltd. 33 DTR 59: had held that tax authority has the power to alter the net profit entered in the profit & loss A/c, if the same is not in accordance with law. To clarify the intention of law & preventing further litigation, it is proposed that Book profit u/s 115JB shall be increased by revaluation reserve, if the same is not routed through P & L A/c.

v Mumbai ITAT in case of ITO vs. Galaxy Saws 132 ITD 236 had held that no addition can be made to profit & loss a/c when revaluation reserve directly taken to balance sheet.

Extract of Memorandum:

   “ As per the provisions of the Companies Act, 1956, certain companies, e.g. insurance, banking or electricity company, are allowed to prepare their profit and loss account in accordance with the provisions specified in their regulatory Acts. In order to align the provisions of Income-tax Act with the Companies Act, 1956, it is proposed to amend section 115JB to provide that the companies which are not required under section 211 of the Companies Act to prepare their profit and loss account in accordance with the Schedule VI of the Companies Act, 1956, profit and loss account prepared in accordance with the provisions of their regulatory Acts shall be taken as a basis for computing the book profit under section 115JB.”

    

   “ In certain cases, the amount standing in the revaluation reserve is taken directly to general reserve on disposal of a revalued asset. Thus, the gains attributable to revaluation of the asset are not subject to MAT liability.”

    Alternative Minimum Tax (AMT)

Present Law

Proposed Changes

ü Applicable to LLP’s ü Where regular income tax payable by LLP is ü Less than AMT payable for such previous year ü The adjusted total income (ATI) will be deemed to be total income ü Tax payable shall be 18.5% of ATI. ü Tax credit (difference of Normal tax & AMT) shall be carried forward to 10 years. Adjusted Total Income shall be ‘Total Income’  as increased  by ü Deduction under chapter VI-A (heading –C) i.e. section 80HH to 80RRS ü Deduction u/s 10AA.

ü Applicable to assessee other than company ü Where regular income tax payable by Assessee  is ü Less than AMT payable for such previous year ü The adjusted total income (ATI) will be deemed to be total income ü Tax payable shall be 18.5% of ATI. ü Tax credit (difference of Normal tax & AMT )shall be carried forward to 10 years ATI shall be ‘Total Income’  as increased  by ü Deduction under chapter VI-A (heading –C) i.e. section 80HH to 80RRS (except 80P) Deduction u/s 10AA Exemption to ü Individual, HUF, AOP, BOI, Artificial judicial persons ü If ATI does not exceeds ü INR 20,00,000

Comment:

v The AMT provisions now covers all assessee i.e. Individual, HUF, AOP, BOI, Partnership Firm along with LLPs.

v AMT will broaden the tax base, as every assessee, claiming various benefits as provided in Chapter VI-A or section 10AA, will now have to pay atleast 18.5 % of the Book Profit. 

  Extract of Memorandum:

     “ Under the existing provisions of the Income-tax Act, Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) are levied on companies and limited liability partnerships (LLPs) respectively. However, no such tax is levied on the other form of business organisations such as partnership firms, sole proprietorship, association of persons, etc.

      In order to widen the tax base vis-à-vis profit linked deductions, it is proposed to amend provisions regarding AMT contained in Chapter XII-BA in the Income-tax Act to provide that a person other than a company, who has claimed deduction under any section (other than section 80P) included in Chapter VI-A under the heading “C – Deductions in respect of certain incomes” or under section 10AA, shall be liable to pay AMT.”