Tax Reforms in India

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As per the tax reforms proposed in the 2011-12 union budget by the Finance Minister Pranab Mukherjee, the tax slabs have been liberalized to a significant extent. It is expected that these decisions will help to reduce the burden on the tax payers and provide them with more disposable income that can be used for other purposes such as savings and investments.

Tax Reforms in Savings and Investments

According to the proposals of Pranab Mukherjee there will be new exemptions for investments in savings instruments such as the Provident Fund. Previously there was no tax in case a PF member withdrew some amount from his account but that will change now. This taxation, however, will not be applicable for withdrawals made prior to March 31, 2011.

Tax Reforms in House Rent Allowance

The new tax reform proposals put forward by Mukherjee do not have any suggestions for housing rent allowances. This means that employees will see an increase in the salary amount that can be subjected to taxes.

Tax Reforms in Residency Rules

The category of Resident but Not Ordinarily Resident will be removed. The resident taxpayers will be provided exemption in case of income made from sources that are outside the country.

But this facility will be extended for two straight fiscals, starting with the year the taxpayer becomes resident and the immediate next year. The latter benefit will be provided in case the taxpayer was a non resident for 9 years till the year he became a resident of the country.

It is expected that this will increase the amount of assessees who can be subjected to taxation in India on the basis of their global incomes.

Tax Reforms for Deductions

As per the proposals in the 2011-12 budget the upper limit of tax exemption for certain investments has been taken up to INR 3 lakhs. The following investments will be eligible for this benefit:

  • Children's education
  • Higher education
  • Health insurance premiums
  • Medical treatment of specified diseases
  • Maintenance of specially abled dependants

Wealth Tax Reforms

The upper limit for wealth taxes have been proposed to be increased to 50 crore rupees. The rate has been determined at 0.25% of net wealth - all assets that are not in the certain exempted assets list will be subjected to taxation as well.

At present assets such as jewelry and urban land are subjected to taxes but once these changes are effected every asset like securities and shares will be included in the purview of taxes.

Corporate Tax Reforms

The new tax rates of 34.78% for the domestic companies and international organizations will bring down the tax expenses for these entities. In case of business income, capital receipts will be treated as normal profits. An example of this is the profits accrued from slump sales or selling business capital assets.

From 2011-12 onwards MAT will be calculated on the basis of gross assets as opposed to book profits. The new rate has been decided at 2%, which will be reduced to 0.25% in case of banking organizations. The following values will be taken into consideration:

  • Gross block of fixed assets
  • Less accumulated depreciation of fixed assets
  • Capital work-in-progress
  • Debit balance of profit and loss account
  • Book value of every other asset
This shift signifies that now even loss making organizations will be subjected to taxes. There are zero provisions for accounting the debts while calculating the gross assets - something that will affect companies that focus on capital intensive projects.

Companies that have several strata of ownership structures will bear the maximum brunt as there will be a tax for every level. There will be no availability of MAT credit, which means that it will effectively become a source of permanent expenditure.

Business organizations will no longer need to pay wealth taxes, which is positive news for them.

Capital Gains Tax Reforms

With regards to capital gains taxes, there will be no differentiation between short and long term gains. This implies greater tax expenditure for investment related transactions.

In case of benefits accrued from fair market value and indexation, the facility will be provided to assets that have been sold within a year of purchase compared to the previous period of 3 years. This is expected to be beneficial for the tax payers. The new fair market value date and indexation base has been changed to April 1, 2000 from April 1, 1981.

Securities and transaction tax will be done away with. Tax exemptions will not be provided for reverse mortgages. This means that selling a capital asset under a reverse mortgage program will be regarded as taxable transfer and will be subjected to capital gains taxes.

Tax Reforms in Housing Loan Interests for Self Occupied Properties

The Union Finance ministry has opted to do away with the allowance granted for interest paid on housing loan that has been taken against a self occupied property. This decision is at par with the government's intentions to provide the least possible tax exemptions.

Reforms in International Taxation

From now on international companies will be regarded as resident even if some part of their management is functioning in India. This means they will be subjected to taxes on their global income as well.

It is expected that Indian subsidiaries of international companies or the multi-national organizations, part of whose management is in India, will face problems. There are possibilities of lawsuits as there is not much clarity regarding what constitutes management and control.

Royalty is included in the newly proposed code. This means that the subscription revenue earned by the international organizations will be subjected to taxes if any part of their management is located in the country.

The new tax rate for FTS and royalties earned by these companies is expected to be taken up to 20 percent on a gross basis. The nature of their PEs in India - present or absent - will not be taken into consideration.

It is expected that this increased tax rate will have an adverse effect on non-resident companies that are earning FTS or royalty from India. Non-residents with PEs in India will now see an increase in tax expenditure as well as the costs incurred in importing services and technology, provided the tax burden is shifted to the customers.

Last Updated on 2/20/2012

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