India Budget 2011 Confirms Implementation of Direct Tax Code, Reduces Corporate
Tax: Nair & Co
 India’s
federal budget announced on Monday brings a welcome reduction in surcharge on corporation
tax for foreign companies from 2.5 percent to two percent, while domestic companies
were provided marginal relief from 7.5 percent to five percent.
To compensate the decline in surcharge, the
Minimum Alternate Tax (MAT) rate has been increased to 18.5 percent from
the present 18 percent.
The Indian Finance Minister also confirmed that the new Direct Taxes Code (DTC)
which is meant to replace the Income Tax Act of 1961 will be implemented on April
1 2012. The Goods and Services Tax (GST), which is in the process of being reformed,
will also be tabled in the parliament in the current year.
“Once implemented, the DTC will remove many of the India tax charge uncertainties
currently affecting M&A transactions which, though carried out offshore, involve
the transfer of ultimate beneficial ownership from a foreign seller to a foreign
buyer of an India sited business asset either on its own or in conjunction with
assets in other countries,” said Shan Nair, CEO and co-founder of Nair & Co., a
global services firm that helps expanding business
overseas.
“This should have a beneficial effect in stabilizing valuations of India-sited business
assets,” he added.
India Budget 2011: Direct Tax
The effective tax rates applicable to the current financial year and the next financial
year are:
Corporate Tax Rates
Revised Minimum Alternate Tax (MAT) Rates
Dividend Distribution Tax (DDT)
The effective DDT has been reduced from 16.60 percent to 16.22 percent. Dividend
distributed by an Indian Company is exempt from income-tax in the hands of many
shareholders. The Indian Company is liable to pay Dividend Distribution Tax on such
dividends.
India Budget 2011: Transfer Pricing Simplified
Safe Harbor regulations
The Finance Minister has proposed to revisit the five percent margin for Safe Harbor
regulations and prescribe different margins for different sectors. The new margins
will soon be notified and will be effective from April 1, 2012.
“Safe Harbor” regulations, under which the tax authorities accept the transfer price
declared by the assessee without undertaking a detailed scrutiny, has been capped
at five percent in India. Thus, under the current Indian regulations if the variation
between the actual price of an international transaction and the determined Arms
Length Price (ALP) does not exceed five percent of the actual price, no adjustment
will be made to the actual price.
Income Tax Return Deadline
The Income tax return filing deadline has been extended for the corporate assessees
that are required to submit prescribed audit report for their international transactions
(form 3CEB). The new deadline will be November 30 instead of September 30.
India Budget 2011: Non- Resident Having a Liaison Office in India
Effective June 1, 2011, every non-resident person having a liaison office in India
will now have to deliver an Income Tax Return to the concerned Assessing Officer
within 60 days of the end of the financial year.
India Budget 2011: Individual Tax Rates
The India budget 2011 has proposed to increase the first slab from present Rs 160,000
to Rs 180,000 in case of resident male individuals. The effective tax rates are:
Note 1: The first income slab for women and senior citizens (above 60 years of age)
are Rs. 190,000 and Rs. 250,000 respectively i.e. no tax up to Rs. 190,000 for women
and up to 250,000 for senior citizens.
Note 2: Additional incentives to Senior Citizens of 80 years and above – the first
income tax slab for this category is Rs. 500,000 i.e. no tax up to Rs. 500,000.
Note 3: The rates include education cess of three percent on the base tax rates
India Budget 2011: Tax Returns for Individual and Salaried Persons
Effective June 1, 2011, a salaried individual will not be required to file tax returns,
if their entire income tax liabilities are discharged by their employers through
Tax Deduction at Source (TDS). Detailed regulations are awaited.
India Budget 2011: Special Economic Zones (SEZS)
SEZ units would now be liable to Minimum Alternate Tax. The change will take effect
from financial year 2011-12.
India Budget 2011: Taxation of Foreign Dividends at Reduced Rates
Where the total income of an Indian Company in financial year 2011-12 includes income
by way of dividend from a foreign subsidiary, such dividend shall attract a tax
of 15 percent (plus applicable surcharge and education cess) instead of 30 percent.
India Budget 2011: Indirect Taxation
Service Tax
- The service tax rate remains intact at 10 percent (effective 10.3 percent).
- The scope of service tax has been expanded to include many other services.
Excise Duty
- The concessional rate of duty of four percent is being increased to five percent.
- A duty of one percent without the Central Value Added Tax (CENVAT) credit facility
is being imposed on about 130 specified items, which were until now either fully
exempt from excise duty or chargeable to zero excise duty.
Customs Duty
- The general peak rate of 10 percent has been unchanged.
- The basic customs duty rates of two percent, 2.5 percent and three percent are being
unified and a common rate of 2.5 percent is prescribed.
- All clearances from SEZ into Domestic Tariff Area (DTA) are being exempted from
Special Additional Duty (SAD). The exemption applies provided they are not exempt
from the levy of Value Added Tax (VAT).
The budget has also allocated considerable funds to develop infrastructure in India
and has raised the bar for Foreign Institutional Investment (FII), to enhance the
flow of funds to the infrastructure sector.
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