Proposed Tax Changes in the 2010-2011 Union Budget

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Mar. 1 – The budget finance bill that Indian Finance Minister Pranab Mukherjee presented on Friday to the India Parliament set out three objectives: move the country back on the path of high GDP growth of 9 percent with the aim of increasing towards double digit growth; consolidate recent gains in making the country’s development more inclusive; and address weaknesses in the government bureaucracy.

Mr. Mukhurjee stood by his commitment to tax reforms and to put in place by April 1, 2011, a new direct tax code. He also committed to introduce the long awaited goods and services tax from April 1, 2011. Below, we look at some of the changes to the tax code.

Tax rates
While there were few changes to direct taxes, corporate income tax remained at 30 percent. The threshold taxable income for individuals in the proposed bill was raised from Rs.150,000 to Rs.160,000 to help combat inflation and leave more income in the hands of lower and middle-class Indians.

In addition to the increase in threshold limits, the finance minister proposed to reduce the surcharge rate on domestic companies from 10 percent to 7.5 percent. An education cess at 3 percent will continue to apply to all tax payers.

Mr. Mukherjee also proposed changes to the Minimum Alternate Tax, increasing the MAT rate from the present 15 percent to 19 percent on book profits.

Non-resident income
The finance bill clarified fees for technical services received by a non-resident from an Indian resident is deemed to be sourced in India. The bill proposes to specifically provide that such income will be taxable when the payer is an Indian resident and the services are utilized in India, even if the non-resident has not rendered the services in India. Therefore, the place of rendering is not relevant. This will be subject to relief under a double tax avoidance treaty.

The finance bill enlarged the scope of anti-avoidance provisions, proposing to extend a current provision of the Income Tax Act that requires any sum of money or property received in excess of Rs.50,000 by an individual be subject to tax in the hands of the recipient as income from other sources.

From June 1, 2010, it was proposed that transactions concerning the transfer of shares of a company either for “inadequate consideration” or “without consideration” to a firm or a company will be taxed in the hands of the recipient as income. This will apply where both the company whose shares are transferred and the recipient company are not companies in which the public is substantially invested.

The peak rate for basic customs duty applicable to most items remains unchanged at 10 percent of the value of the item. However, the median rate for additional duty of customs has been increased from 8 percent to 10 percent.

The changes to the basic customs duty rates are as follows:

For professional advice on tax issues in India please contact Vikas Srivastava of Dezan Shira & Associates at