The finance minister presented Budget 2011 in the backdrop of the impending enactment of the direct taxes code (DTC). In the run-up to the budget, there were expectations that the amendments in the Income-tax Act, 1961, would be either in the form of rectifying an anomaly requiring immediate intervention or changes that would pave way for DTC. While reiterating that DTC will be introduced as planned on 1 April 2012, several changes have been made, which, in a manner, accelerate the implementation of DTC.
MAT on SEZ developers and units
A change that falls in the latter category is the withdrawal of exemption from the levy of minimum alternate tax (MAT) on developers of special economic zones (SEZs) and units operating there. Currently, the law allows an exemption to developers and units. The budget proposes to withdraw this exemption starting from the next fiscal year. In other words, MAT will be applicable to both SEZ developers and units and be payable on book profits earned for the fiscal year ending March 2012.
This amendment is in line with the proposal in DTC to withdraw the dividend distribution tax (DDT) exemption available to developers. DTC has been referred to the standing committee of Parliament for recommendations on DTC. Industry bodies and chambers of commerce have recommended that MAT should not be levied on SEZ developers and units. If this proposal is enacted, developers and units will be subject to MAT of 20.08% on book profits.
Changes relevant for SEZ developers
Similarly, the DDT exemption for developers of SEZs has been withdrawn. However, the budget proposes to withdraw this benefit with effect from 1 June, and hence, any dividend declared prior to this date will continue to enjoy the exemption.
However, the problem is that many developers have not reached the stage of declaration of dividend, as their projects are at different stages of development. This amendment is also in line with the proposal in DTC to withdraw the DDT exemption available to the developers. If enacted, the developers would also be subject to a levy of about 16.225% on the dividend distributed.
AMT for LLP
The other key change is the levy of alternate minimum tax (AMT) on limited liability partnerships (LLPs), regarded as tax-efficient vehicles for carrying on business, as MAT and DDT were not applicable to it. The LLP law also allowed conversion of a company into an LLP and many companies were considering such a conversion. The LLP was also considered a special purpose vehicle (SPV) in sectors such as real estate, as it would allow project wise partnerships, ease of closure and efficiency in taxes.
The budget proposes to insert a new chapter XII BA with sections 115JC and 115JD of the Act, levying AMT of 18.5% as increased by surcharge and cess on the adjusted total income of the LLP. The adjusted total income is defined as the total income as increased by deductions claimed under chapter VIA and section 10AA of the Act. It may be noted that chapter VIA of the Act provides for a variety of deductions from section 80A to 80U of the Act and section 10AA of the Act deals with the deduction available to SEZ units.
The Budget proposes that AMT would be allowed as a deduction from tax payable by LLP in the year in which the regular income tax is greater than AMT and to the extent of the difference between regular income tax and AMT. AMT credit will be carried forward for a maximum period of 10 years from the year in which such credit arose. No interest would be payable on such carried forward credit.
It is noteworthy that DDT would still not be applicable to profits withdrawn by the partners of the LLP, which retains it status as a tax-efficient vehicle. The shortcoming in the current proposal is that the AMT credit under section 115JD of the Act is not treated as a reduction while computing interest under section 234B or 234C of the Act. This seems to be an unintended anomaly in the proposal, which may be rectified when the Bill is enacted.
Unlike companies, capital gains arising from transfer of listed securities would not be chargeable to tax in the hands of LLPs under the proposed section 115JC of the Act.
The changes made for SEZ developers and units raises a question of promissory estoppel and reflects the current thinking in the government to do away with tax incentives. However, since the SEZ scheme is itself as recent as 2005, and LLPs also being a very recent introduction, it leaves one to wonder whether there is any consistency at all in tax policy that can be expected.
(With inputs from Sriram Seshadri, director, BMR Advisors.)