The Budget makes some moves to widen the tax base, provide the necessary fillip to infrastructure & investment, incorporate specific tax reforms to settle long disputed matters, and provide more ammunition to the tax officer in taxing international transactions & curbing tax evasions.

DIRECT TAX PROPOSALS

Direct Tax proposals indicate a move towards Direct Tax Code (DTC), by incorporation of provisions for taxation of indirect transfers of assets in India, Advance Pricing Agreements, General Anti Avoidance Rules etc, even though implementation of DTC has been deferred.

The Budget has proposed several tax incentives and reliefs. An investment-based incentive scheme has been extended to new businesses like Inland container depot or a container freight station, production of honey, warehousing facility for sugar. Further, new investments made after April 1, 2012, in setting up and operating a cold chain facility, warehousing facility for storage of agriculture produce, hospitals with at least 100 beds, notified affordable housing projects, and production of fertilisers, shall be eligible for a weighted investment-linked deduction of 150 per cent of capital expenditure on such projects. A weighted tax break of 200 per cent of expenditure incurred on in-house R&D has been extended for another five years, which would now be available up to financial year 2016-2017.

POWER SECTOR

The power sector has been benefited by extension of the sunset date for setting up new power plants, for being eligible for a tax holiday of 100 per cent of profits for 10 years, from March 31, 2012, to March 31, 2013, and by allowing them additional depreciation at 20 per cent of cost of asset in the year of acquisition and installation.

With a view to extend the incentive for attracting repatriation of income to India, provisions relating to taxability of dividend received by an Indian company from a foreign company (in which it has a shareholding of 26 per cent or more), at a lower rate of 15 per cent on gross basis, has been continued for another year.

Tax base has been widened by levying Alternate Minimum Tax on all taxpayers claiming profit-linked incentives. Also, withholding provisions were made applicable on transfer of certain immovable properties and remuneration to directors. Tax collection at source ambit has been widened, by including cash sale of bullion and jewellery, and sale of certain minerals like coal, lignite, and iron ore within its purview.

ANTI-AVOIDANCE RULES

General Anti-Avoidance rules to deal with aggressive tax planning, with the use of sophisticated structures have been proposed to codify the doctrine of “substance over form”. If any arrangement is treated as impermissible, then consequences are severe, which empowers the tax officers to look beyond the transaction and tax accordingly.

Transfer pricing regulations, as currently applicable on international transactions, have been made applicable to certain domestic transactions as well. These regulations have been extended to transactions between domestic-related parties, and transactions between different units of a tax payer for the purpose of allowability of expense and profit-linked incentives, if aggregate amount of domestic transactions exceeds Rs 50 million in a year.

The Budget has attempted to settle a few ongoing tax disputes by proposing a retrospective amendment to existing provisions. One such important amendment is taxing the indirect transfer of assets situated in India, which reverses the Vodafone ruling. Another important change is covering the consideration for the use of computer software in the definition of royalty.

Some relief has been provided to individual tax payers by increasing the minimum exemption limit to Rs 2 lakhs, and increasing the outer slab for the 20 per cent tax rate from Rs 8 lakhs to Rs 10 lakhs.

(The authors are Partner, Tax and Regulatory Services, and Senior Manager, Ernst & Young, respectively.)