budget update 2009- Indirect Taxes

The Finance Minister has confirmed the introduction of the Goods and Services Tax (GST) by the targeted date of 1 April 2010. It will be a dual GST comprising of a Central GST and a State GST, whereby the Centre and the respective States will legislate, levy and administer the same. Another significant proposal is the role of the Authority for Advance Rulings (AAR) constituted under the Income Tax Act, 1961 to also act as an Authority for the purposes of Customs, Central Excise and Service Tax.

SERVICE TAX

  • Legal advice, consultancy or assistance (other than appearance in courts) provided by any entity (not being an individual) to be included in the list of services chargeable to service tax.
  • Cosmetic and plastic surgery services to be included in the list of services chargeable to service tax.
  • Services provided in relation to transport of goods by rail and transport of (i) coastal goods; and (ii) goods through inland water including national waterways to be included in the list of services chargeable to service tax.
  • “Business and auxiliary service” definition to be amended to provide exemption from services provided in relation to ‘excisable goods’ under excise, thus resulting in elimination of double taxation of such services.
  • Definition of “stock broker” to be amended to exclude sub-brokers.
  • Service providers who provide services that are taxable and are exempt and do not maintain separate accounts of inputs, to be required to pay an amount equal to 6% of the value of exempted services (reduced from 8%).
  • Exemption from service tax to be provided to inter-bank purchase and sale of foreign currency between scheduled banks.
  • Two of the taxable services, namely, “Transport of goods through road” and “Commission paid to foreign agents” to be exempted from the levy of service tax, if the exporter is liable to pay service tax on reverse charge basis. Thus, an exporter will not be required to first pay the tax and later claim refund in respect of these services. However, as the present cap of 10% on commission agency charges has been retained, the exporter will have to pay service tax on the amount of commission which is in excess of 10%.

CUSTOMS/ IMPORT DUTY

  • On packaged or canned software, an exemption of Additional or Countervailing Duty of Customs (CVD) to be provided on the portion of the value which represents the consideration for transfer of the right to use such value which represents the consideration for transfer of the right to use such software, subject to specified conditions.
  • A new section, section 26(A) to be introduced to the Customs Act, 1962, to provide for refund of import duty paid, on goods which are defective or not as per agreed specifications and which are returned by the buyer.
  • Provisions to be made for a High Court to condone delays in filing an appeal and filing cross objections beyond the prescribed period.
  • Section 9 of the Customs Tariff Act, 1975, to be amended retrospectively so as to extend the machinery provisions of the Customs Act, 1962, to CVD levied under this section.

CENTRAL EXCISE DUTY

  • The excise duty rate on items currently attracting 4% duty to be increased to 8% with certain exceptions such as specified food items, drugs and pharmaceutical products, medical equipment, etc.
  • High Courts to be empowered to condone delays for filing of appeals and memorandum of cross objections.
  • A manufacturer of both dutiable and exempted goods, who does not maintain separate accounts of inputs, to pay an amount equal to 5% of the total price of exempted goods (earlier 10%).
  • Chartered Accountants are now eligible for special audit as prescribed by section 14 A & 14AA

Contributed by Ca. Vinay Bhushan Sharma

Budget update 2009- Direct Tax

Budget Update by CA. Sudha Gupta and CA. Vinay Bhushan

Here are the salient features of the Budget 2009

DIRECT TAX

  • Exemption of threshold limit for personal income tax raised by
  • For senior Citizens Rs.15,000 from Rs.2.25 lakh to Rs.2.40 lakh
  • For women tax payers by Rs.10,000 from Rs.1.80 lakh to Rs.1.90 lakh
  • Other categories of individual taxpayers by Rs.10,000 from Rs.1.50 lakh to Rs.1.60 lakh for all

Surcharge of 10% on personal income tax removed.[not for corporate entities ]

  • Threshold limit for payment of wealth tax to be increased from INR 1.5 million to INR 3 million.
  • Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees to be abolished
  • Deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability being raised from the present limit of Rs.75,000/- to Rs.1,00,000/-
  • Deduction under section 80E of the Income-tax Act allowed in respect of interest on loans taken for higher education by an individual extends to any course of study pursued after passing senior secondary examination or its equivalent
  • Section 10 A and Section 10 B [deduction in respect of export profits] extended by one more year i.e. for the financial year 2010-11.
  • Minimum Alternate Tax (MAT) to be increased to 15 % of book profits from 10 %. The period allowed carrying forward the tax credit under MAT to be extended from seven years to ten years.
  • Scope of provisions relating to weighted deduction of 150% on expenditure incurred on in-house R&D to all manufacturing businesses being extended except for a small negative list.
  • Changes in the Rates of Tax Deducted at Source [w.e.f 1st Oct 2009]
Section Nature of Payment Type of Deductee Old Rate New Rate
194 I Rent of plant, machinery or equipment Any 10% 2%
Rent of land building or furniture Individual and HUF 15% 10%
Rent of Land, building or furniture Other than Individual and HUF 20% 10%
194C Payment to contractors Individual or HUF 2% 1%
Payment to contractors Other than Individual or HUF sub contractor 1% 2%
For advertising Other than individual/HUF contractor/sub Contractor 1% 2%
Sub contractor / contractor in transport business Any 1% / 2% nil
  • Commodity Transaction Tax (CTT) to be abolished.
  • Donations to electoral trusts to be allowed as a 100 percent deduction in the computation of the income of the donor.
  • Anonymous donations received by charitable organizations to the extent of 5 percent of their total income or a sum of Rs.1 lakh, whichever is higher, not to be taxed.
  • Presumptive taxation scope to be extended to all small businesses with a turnover upto Rs. 40 lakh. All such taxpayers to have option to declare their income from business at the rate of 8 percent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts. As a procedural simplification, they are also to be exempted from advance tax and allowed to pay their entire tax liability from business at the time of filing their return. This new scheme to come into effect from the financial year 2010-11.
  • Tax holiday under section 80-IB(9) of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, to be extended to natural gas. This tax benefit to be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the NELP-VIII round of bidding. The section to be retrospectively amended to provide that “undertaking” for the purposes of section 80-IB(9) will mean all blocks awarded in any single contract.
  • No change in corporate tax rates.
  • LLPs to be taxed in the same manner as general partnerships. Conversion of general partnership to LLP to have no tax implications if rights and obligations remain same and there is no transfer of any asset or liability.
  • Arm’s length price to be the arithmetical mean in cases where more than one price is determined by the most appropriate method. However, if such arithmetical mean is within 5% of the transfer price, then the transfer price declared will be deemed to be the arm’s length price.
  • Weighted deduction of 150% allowed under Section 35 for R&D to be extended to all manufacturers other than those engaged in items specified in the Eleventh Schedule of the Income Tax Act, 1961.
  • Tax holiday under section 80-IB(9) to be extended to natural gas from blocks awarded under the NELP-VIII round of bidding. Definition of “undertaking” to be inserted with retrospective effect from 1 April 2000, to mean all blocks awarded in any single contract by the Government of India in case of mineral oil and natural gas.
  • Taxation of gifts received in excess of INR 50,000 (without consideration or for inadequate consideration) to be extended to immovable property (land and/or building), shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. Stamp duty value in case of immovable property and fair market value in case of movable property to be computed.

Tax Provision on Limited Liability Partnership propsed in Budget 2009

The Budget 2009-10 has introduced the provisions regarding taxation aspect of the newly introduced form of business Limited Liability Partnership.

As per the Budget 2009-10, LLP will be treated as Partnership firms for the purpose of Income Tax and will be taxed like a partnership firm.

Change in Definition of Firm, Partner & Partnership

The Budget 2009-10 has amended the definition of Firm and Partners in the following manner:

  1. Firms shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability Partnership as defined in the Limited Liability Partnership Act 2008.
  2. Partner shall have the meaning assigned ot it in the Indian Partnership Act 1932 and sall include:
    • Any person, being a minor, has been admitted to the benefits of partnership ; and
    • A partner of a limited liability partnership as defined in the Limited Liability Partnership Act 2008.
  3. Partnership shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability partnership as defined in the Limited Liability Partnership Act 2008.

Taxation aspect of Limited Liability Partnership

Tax rate:

  • 30% flat tax rate + 3% education cess
  • No Minimum Alternate Tax & Dividend Distribution Tax

Eligibility (section 184):

In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria

  • The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
  • The individual shares of the partners are very clearly specified in the deed.
  • A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed.
  • If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.
  • There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.


LLP can claim the following deductions:-

  • Interest paid to partners, provided such interest is authorised by the LLP Agreement.
  • Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.
  • The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits

When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration is allowed. This is the mandate of the section 185.

Steps for Computation of taxable income of a LLP:-

  • Find out the firms income under the different heads of income, ignoring the prescribed exemptions. The heads of income are:-
    • Income from House Property
    • Profits and Gains of Business or Profession
    • Capital Gains
    • Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc. (‘Salary’ income head is not included)
  • The payment of remuneration and interest to partners is deductible if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied. Any salary, bonus, commission or remuneration which is due to or received by partners is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of partners.
  • Make adjustments on account of brought forward losses/ disallowances of interests, salary, etc paid by firm to its partners. The total income so obtained is the “gross total income”.
  • From the “gross total income”, make the prescribed deductions and the balancing amount is the “net income” of the firm.

Assessment of Partners of LLP

  • Exemption of partner’s share income from LLP :

Section 10(2A) Section 10(2A) exempts the share income from the LLP in the hands of the partner. The share of a partner in the total income of a LLP separately assessed as such shall, be an amount which bears to the total income of the LLP the same proportion as the amount of his share in the profits of the LLP in accordance with the LLP Agreement bears to such profits.

The share of the partner in the income of the LLP is not included in computing his total income i.e. his share in the total income of the LLP shall be exempt from tax.

  • If conditions of Section 184 and 40(b) of the Act are satisfied, then any interest, salary, bonus, commission or remuneration paid/payable by the LLP to the partners is taxable in the hands of partners (to the extent these are allowed as deduction in the hands of the LLP).
  • The points to be noted are :-
    • Remuneration to partner not to be treated as salary income : Explanation 2 to section 15

      This Explanation provides that the salary, bonus or commission received by a partner from his LLP will not be treated as salary. This Explanation implies that the provision of tax deduction at source for salary (section 192) will not be attracted to the remuneration received by the partner from the LLP.

    • Treatment of remuneration and interest to a partner as business income : Clause (v) of section 28

Section 28(v) provides that interest and remuneration received by a partner from his LLP shall be chargeable to income-tax as profits and gains of business. The proviso clarifies that where the remuneration, interest, etc., is in excess of the ceiling fixed under the new section 40(b) and is disallowed in part for that reason then the income under the head referred to in section 28(v) shall be adjusted to the extent of the amount not so allowed to be deducted.

Any expenditure incurred in order to earn such income can be claimed as a deduction from such income. For example, if a partner borrows money to make his capital contribution to the LLP and he is paid interest on his capital contribution, the amount of such interest will be taxed under the head “Profits and gains of business or profession”, but the interest paid by him on the borrowed money will have to allowed as a deduction. If the whole or a part of salary/interest is not allowed as deduction in the hands of the LLP, than the whole or that part of salary/ interest is not taxable in the hands of the partners. In other words, in the hands of partners the entire remuneration/ interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act) is chargeable to tax.

  • Ceiling as to remuneration payable to working partners and interest to partners : Section 40(b)

    Section 40(b) is a disallowance provision and disallows remuneration, interest, etc., received by the partners from the firm provided the same exceeds the ceiling prescribed in the same provision. It also specifies as to how the matter of deductibility of interest and remuneration is to be dealt with where a partner is a partner in representative capacity.

The Explanation 3 defines the term “book profit” which is relevant for computing the upper ceiling of remuneration payable to all the working partners put together. The Explanation 4 defines “working partners” who alone are made entitled to remuneration if the deductibility of the related amount in the hands of the LLP is not to be barred by section 40(b).


Limits of Remuneration to Partners:

The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of LLP, the limits of remuneration as proposed by budget are outlined below:

On First Rs 3,00,000 of book profit or in case of loss Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more
On the balance of book profit at the rate of 60%
  • Signing of Income tax Return:
  • The designated partner shall be responsible for signing the income tax return of LLP, where for unavoidable reasons, such designated partner is not able to sign the same or where there is no designated partner, any partner will sign the return.
  • No capital gain on conversion
  • LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gain will apply.