GT Budget Flash-Finance Bill 2012

Overview of the Union Budget 2012-13
Contents
1 2 3 4 5 6 7 Foreword Key policy announcements Fiscal and economic review Snapshots of tax proposals Direct tax proposals Indirect tax proposals Contact us
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Foreword
Foreword
Key policy announcements
Despite the crisis in Euro zone, slow recovery in the United States, political instability in the Middle East and subsequent rise in crude oil prices, the resilience of Indias domestic economy is once again evident with this years GDP growth estimate of over 6.5%. However, this consumption-driven growth may not be sustainable in the long run unless it is accompanied with an investment-driven growth. Against this backdrop, growth and stability remained central to the Budget this year. By setting the fiscal deficit target of 5.1% for 2012-13 and expressing its intentions to keep central subsidies under 2% of GDP in 2012-13, and further bring them down to 1.75% of GDP in the next 3 years, the government has steered clear of populist measures. The Budget endeavours to shore up investment in infrastructure with proposals to make more sectors eligible for Viability Gap Funding under PPP scheme and other measures including tax free bonds of Rs 60,000 crore for financing infrastructure projects in 2012-13 alone.
Fiscal and economic review
The Budget seemed more benign than it is. While most of the amendments were anticipated such as tinkering of personal tax rates, small exemptions for the middle income group and widening the net of service tax and taking the rate up, the fine print has wider ramifications. Retrospective amendments to address Vodafone like situations, bringing domestic related party transactions under the ambit of transfer pricing are a case in point. Measures announced to boost infrastructure, agriculture, aviation and power industries is very heartening." Pallavi J Bakhru Partner & Practice Leader Tax & Regulatory Services Walker, Chandiok & Co
Snapshot of tax proposals
Direct tax proposals
Indirect tax proposals
Nevertheless, the common man, hard-pressed by inflation, also has some reasons to cheer while the Budget proposes revisions in income tax exemption limit for the general category and brings forth the provision for allowing External Commercial Borrowing (ECB) to promote low cost housing. However, an upward revision in service tax and other indirect taxes is likely to affect purchasing power of aam admi, on the other hand. Overall the Budget attempts to do a balancing act with a focus on structural reforms. We have developed this report in view of providing you a comprehensive overview of the Budget and we hope that you find it useful.
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Tax & Regulatory Services Team Grant Thornton India LLP
Subsidies
Rationalisation of key policies
Foreword
Attempt to keep subsidies below 2% of Gross Domestic Product ('GDP') during Financial Year ('FY') 2012-13 Subsidies fully provided for effective administration of the proposed Food Security Legislation Nation-wide roll out of mobile-based Fertilizer Management System to provide complete information on movement of fertilisers and subsidies
Budget Estimates
Gross Tax Receipts estimated at Rs 1,077,612 crores for FY 2012-13 Total expenditures budgeted at Rs 1,490,925 crores for FY 2012-13
Disinvestments
For FY 2012-13, while 51% ownership and management control to remain with the Government, disinvestments target have been set at Rs 30,000 crores
Amendment to the Fiscal Responsibility and Budget Management ('FRBM') Act key features being concepts of: - Effective revenue deficit difference between revenue deficits and grants for creation of capital assets - Medium-term expenditure framework statement to set forth a 3-year rolling target for expenditure indicators Goods and Service tax ('GST') network to be set-up as National Information Utility and operational by August 2012 20 crore people enrolled under UID-Aadhaar mission. Adequate funds allocated for further enrolment of 40 crores White Paper on Black Money to be presented in Parliament in the Budget session National Food Security Bill, 2011 is presently before Parliamentary Standing Committee Bill regarding Public Procurement Legislation to be introduced in Parliament to combat corruption
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Financial Sector
Textile Sector
Foreword
Introduction of Rajiv Gandhi Equity Saving Scheme which allows income tax deduction of 50% to new retail investors investing upto Rs 50,000 in equities Rs 15,888 crores proposed for capitalisation of public sector banks and financial institutions Central KYC depository to be developed in FY 2012-13
Infrastructure Sector
Financial stimulus of Rs 3,884 crores for waiver of loans of handloom weavers

Power and Coal Sector
ECB to part finance Rupee debt of existing power projects

Transport Sector
Government to establish joint venture companies in PPP mode by defence PSUs Tax free bonds of Rs 60,000 crores for financing infrastructure projects in FY 2012-13 Introduction of National Manufacturing Policy to raise share of manufacturing in GDP to 25% creating 10 crore jobs External Commercial Borrowings ('ECB') allowed for low cost housing projects Rural Infrastructure Development Fund allocation enhanced to Rs 20,000 crores out of which Rs 5,000 crores has been assigned towards creating warehousing facilities
Road Transport and Highways Ministry allocation enhanced by 14% to Rs 25,360 crores ECB proposed for capital expenditures for road toll systems Direct import of Aviation Turbine Fuel for Indian carriers permitted Equity participation of foreign airlines in an airport undertaking upto 49% is under consideration ECB with a ceiling of US$1 billion to be permitted for 1 year in respect of working capital requirements of airline industry
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Agriculture
Employment
Foreword
Target for agriculture credit flow to increase by Rs 1,00,000 crores to Rs 5,75,000 crores in FY 2012-13 Interest subvention scheme to continue in FY 2012-13 Additional subvention of 3% available for prompt payments Regional Rural Bank credit refinance fund set-up for disbursing short-term crop loans Allocation for Accelerated Irrigation Benefit Program enhanced by 13% to Rs 14,242 crores Irrigation and Water Resource Finance Company to be operationalized to mobilise large resources to fund projects
Micro, Small and Medium Enterprises
Allocation for National Rural Livelihood Mission increased by 34% to Rs 3,915 crores Prime Minister's Employment Generation Programme allocation enhanced by 23% to Rs 1,276 crores in FY 2012-13 Allocation of Rs 1,000 crores for National Skill Development Fund in FY 2012-13
Social Security
Allocation under National Social Assistance Program enhanced by 37% to Rs 8,447 crores in FY 2012-13
Defence
India Opportunities Venture Fund of Rs 5,000 crores to be set up with Small Industries Development Bank of India
Healthcare
Provision of Rs 1,93,407 crores made for defence services of which Rs 79,579 crores is towards capital expenditure
Education
No case of polio reported in the last one year Allocation for National Rural Health Mission to Rs 20,882 crores in FY 2012-13 National Urban Health Mission to be launched in FY 2012-13 to meet the health needs of the urban poor
Allocation for Sarva Shiksha Abhiyan enhanced by 21.7% to Rs 25,555 crores in FY 2012-13
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Indirect Tax
Foreword
This year's Union Budget has proposed certain key amendments to the structure of Indirect Taxation in India
The exact date and rate of GST has not been announced and the target date of 1 April 2012 for implementation has clearly been missed Central Sales Tax has not been abolished
The commitment to implement GST (Goods and Services Tax) has been reiterated. Though there is no appointed date, the Finance Minister has given all indications for its early implementation The Constitutional Amendment Bill required to implement GST had been introduced in the Parliament and referred to the Parliamentary Standing Committee in March 2011. The recommendations of the Committee are still awaited The Empowered Committee of State Finance Ministers has approved the basic structure of the proposed GST The intention to merge the Service Tax and Central Excise legislation into one Common Tax Code has been announced. The levy of Service Tax has been extended to all services with a short negative list The above developments are a clear precursor to GST
The Budget 2012-13 is a painful pill with Service Tax being extended to all services (without the credits of GST) and a sharp 2% hike in the Service Tax and Central Excise rates. This will lead to price rises across the board. But the compass is set on Indirect Tax reforms and the various steps taken to lead to an early implementation of GST are welcome. Amrita Mitra Partner Indirect Tax Grant Thornton India LLP
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Overview of the Union Financial Budget 2012-13
Economic Growth
Foreword
10.00
GDP trends 8.4 8.4 6.9 7.6
GDP growth rate during FY 2011-12 is estimated to be 6.9% as compared to 8.4% during previous two FYs. Global economic slack and oil price rise triggered this fall in GDP growth During FY 2011-12, the services sector is expected to grow at 9.4% as against 9.3% last year. Its contribution to GDP is estimated at 59% However, Manufacturing sector's growth has been lacklustre. It has seen a steep fall from 9% during AprilDecember 2010 to 3.9% during April-December 2011 Growth in exports reduced from 40.5% during FY 2010-11 to 23.5% during FY 2011-12 with insignificant change in the rate of growth in imports Inflation remained a major concern during FY 2011-12 due to upsurge in global commodity prices and crude oil though Wholesale Price Index moderated from 9% during AprilNovember 2011 to 7% in February 2012 Foreign exchange reserves augmented by US$ 6.7 billion from US$ 304.8 billion at end of March 2011 to US$ 311.5 billion at end of September 2011
8.00 %age 6.00 4.00 2.00 0.00 2009-10
2010-11 2011-12 Financial Years
2012-13AE
Sectoral Composition of GDP Financial Years 2010 11 2011 12AE Agriculture 14.5 13.9 Industry 27.8 27.0 Services 57.7 59.0
%age
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12.00 10.00 8.00 6.00 4.00 2.00 0.00
Headline Inflation 9.6 8.1 3.8 9.1
2008-09
2009-10 2010-11 Financial Years
2011-12AE
Overview of the Union Financial Budget 2012-13
Fiscal Deficit
Foreword
Gross Fiscal Deficit
Increase in fiscal deficit from 4.8% in FY 2010-11 to estimated 5.9% of GDP during FY 2011-12. It is expected to drop to 5.1% of GDP during FY 2012-13
%age Key Initiatives
7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
6.5 5.9 4.8 5.1
Pradhan Mantri Gram Sadak Yojana (Bharat Nirman) proposes to connect 54,648 habitations involving construction of 146,184 km of rural roads Draft National Policy on Electronics (released on 03 October 2011) envisions creating a globally competitive electronics system design and manufacturing industry Draft National Policy on Information Technology 2011 focuses on deployment of information communication technology in all sectors of the economy Additional budgetary support of Rs 91,800 crores to enhance productivity and resilience of agriculture 'Green India' mission proposes additional afforestation of 10 million hectares of forest lands, wastelands and community lands with projected expenditure of Rs 46,000 crores
2009-10
2010-11 2011-12AE Financial Years
2012-13AE
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Foreword
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No change in Corporate tax rate, Minimum Alternate Tax, Surcharge and Education Cess Minimum Alternate Tax to be applicable to Insurance, Banking and Companies engaged in the generation or supply of electricity, etc Scope for Alternate Minimum Tax extended to all tax payers (other than companies) claiming specified deduction Concessional rate of taxation of dividends from foreign subsidiaries @ 15% extended by 1 year Cascading effect of Dividend Distribution Tax in multi-tier structure removed Weighted deduction introduced for expenditure on Notified Agriculture Projects and Skill Development Projects in manufacturing sector Weighted deduction for in-house research extended by 5 years Investment linked deduction extended coupled with weighted deduction for specified businesses Power companies to get additional depreciation as well as extension in terminal date for availing tax holiday 'Pass through' status accorded for all investments by Venture Capital Funds / Companies Deeming provisions introduced to treat share premium received in excess of fair market value as income in the hands of closely held investee company Share capital, share premium etc in the books of closely held company treated as explained only if source is proved
Submission of Tax Residency Certificate made a necessary (but not the sole) condition for availing tax treaty benefits Indirect transfer of capital asset proposed to be taxed in India. Clause introduced to validate all actions of the tax officer notwithstanding anything contained in any judgement, decree or order. (Vodafone decision reversed) General Anti Avoidance Rules provisions introduced Consideration for computer software (even off the shelf) proposed to be treated as royalty Reduced withholding tax rate of 5% applicable on foreign borrowings by companies engaged in specified businesses Personal income tax slabs widened Filing of income tax return made mandatory for residents having any assets outside India or having signing authority in any account outside India Tax Officer permitted to appeal against Dispute Resolution Panel order
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Transfer pricing
Foreword
Advance pricing agreement introduced in transfer pricing (prospective)

Definition of international transaction and intangible property clarified (retrospective) International transaction includes business restructuring or reorganization, covered; whether or not it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date (retrospective) Transfer Pricing Regulations apply to specified domestic transactions between domestic related parties (prospective) Tax authorities can appeal against the order incorporating the DRP directions (prospective) Currently, the arms length range is based on a uniform tolerance band of 5% around the transfer price. The 5% band has been replaced with 3% (prospectively) Amendments propose to eliminate viewing of this 5% range as a standard deduction and also clarifies that the new provision disabling the standard deduction will be applicable for all assessment proceedings pending before the Assessing Officer as on 1 October 2009. However, the proposed amendment limits the tax authorities ability to re-open or rectify assessments concluded before 1 October 2009
While the DTC has been deferred, the Union Budget has brought in some key provisions of the DTC in the Bill like the anticipated general anti avoidance rules (GAAR) and the advance pricing agreements (APA). The most glaring thing that comes out of the amendments is the introduction of key provisions retrospectively to overrule recent judgments in the area of international tax and transfer pricing. This would surely not boost the confidence of the foreign investor. A welcome amendment is the APA regime introduced to provide a progressive mode of dispute resolution in the area of transfer pricing. Of course the APA scheme should also practically turn out to be a favorable and unbiased platform for the multinationals and not be construed as another round of aggressive transfer pricing audit. On the other hand by bringing domestic transactions in the ambit of transfer pricing, the compliance burdens on the tax payer is going to increase multifold. Karishma R. Phatarphekar Partner - Transfer Pricing Grant Thornton India LLP
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Foreword
Roadmap to GST laid out Rates increase for manufacture and services
There are clear indications that GST will be implemented within a short time span The Constitutional Amendment Bill was introduced in the Parliament in March 2011 and is before the Parliamentary Standing Committee for recommendations The Empowered Committee of State Finance Ministers have approved the basic structure. The IT enabled GST Network (GSTN) has been approved and will become operational by August 2012. A common PAN-based registration, return and payment processing platform for all states will check tax evasion The drafting of legislation for Centre and State GST is under progress The Government has extended the levy of Service Tax on all services with a short negative list The provisions of Central Excise and Service Tax are proposed to be merged into a Common Tax Code
The rate of Service Tax has been increased from 10% to 12% The standard rate of Central Excise Duty has been increased from 10% to 12% The merit rate of Central Excise duty has been increased from 5% to 6% The lower merit rate of Central Excise Duty on specified 130 products has increased from 1% to 2% The Basic Custom Duty (BCD) rate remains the same at 10%
Effective Dates
The Central Excise rates will be effective from midnight of 16 March 2012 The Service Tax rate will be effective from 1 April 2012
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Common registration and return provisions have been proposed. The CENVAT Credit Rules are already common
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Foreword
Service Tax
Excise
Proposal to tax all services except those in the negative list comprising of 17 heads
Duty increased to more than 12% in few cases such as automobile and cement Duty evasion of amount more than Rs 30 lakh is a cognizable offence where person can be arrested without warrant Benefit of reduced penalty, i.e. 25% of the penalty amount is available only if penalty along with duty and interest paid within 30 days Interest is not payable on credit wrongly taken unless the same is utilized The rate for CENVAT reversal for exempt services/ goods under Rule 6(3) of CENVAT Credit Rules is revised from 5% to 6%
Customs
Alignment made to harmonize Central Excise and Service Tax into a Common Tax Code. A common simplified registration form and a common return comprising of one page proposed in this direction Place of Supply Rules for determining the location of service and consumption to be put in public domain for stakeholders comments Point of Taxation Rules to be rationalized to be in line with the other proposed changes CENVAT Credit permitted on number of services to reduce cascading of taxes
New Scheme announced for simplification of refunds Revision Application Authority and Settlement Commission being introduced in Service Tax for dispute resolution
The peak rate of customs duty on non-agricultural goods remains at 10%
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Foreword
Exemption given to the following sectors: Agriculture Fuel for power Machinery for mining Protective warning systems for railways Specific road construction Aircraft machineries New leases of aircrafts Iron ore plants Steel coating material Textile machinery Specific medical devices like stents LED and LCD TV Mobiles Life saving drugs, etc Export duty on chromium ore is enhanced from Rs 3,000 per tonne to 30% ad valorem Method of computation of education cess and secondary & higher education cess is simplified to avoid computation of such cesses twice
Transfer of unutilized credit of Additional duty ('SAD') lying in balance at the end of each quarter to another factory of the manufacturer is permitted The duty free allowance under Baggage Rules is increased from Rs 25,000 to Rs 35,000 for person of Indian origin and Rs 12,000 to Rs 15,000 for children upto 10 years of age Exemption from Countervailing Duty ('CVD') is provided retrospectively to foreign going vessels from 1 March 2011 to 16 March 12
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Rates of income - taxes
Foreword
Personal tax Corporate tax
Personal income-tax slabs proposed to be revised as under:

Key policy announcements Existing Slab (Rs)
Upto 180,000
Revised Slab (Rs)

Upto 200,000 200,001 to 500,000 500,001 to 1,000,000 Above 1,000,000
Tax rate (%)

NIL 10 20 30
180,001 to 500,000 500,001 to 800,000 Above 800,000
Minimum exemption limit for women changed from Rs 190,000 to Rs 200,000 (the category of women below the age of 60 years has been removed) Limits remain unchanged for senior citizens (age of 60 years and above but less than 80 years) at Rs 250,000 Limits remain unchanged for very senior citizen (age of 80 years and above) at Rs 500,000 Education Cess and Secondary and Higher Education Cess at 2% and 1% respectively to continue
No change in corporate tax rate No change in Minimum Alternate Tax ('MAT') rate (18.5%) No change in surcharge for domestic companies (5%) No change in surcharge on foreign companies (2%) Marginal relief provisions to continue Education Cess and Secondary and Higher Education Cess at 2% and 1%, respectively to continue No change with respect to excluding Education Cess and Secondary and Higher Cess on tax deducted or collected at source, in case of domestic companies and other resident persons Concessional rate of 15% for dividend received from foreign subsidiary has been extended by 1 more year
Securities Transaction Tax ('STT')
STT payable by purchaser and seller in respect of delivery based transaction for equity shares in company / units of equity oriented fund entered into through a recognised stock exchange reduced from 0.125% to 0.1%
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MAT
Foreword
Alternate Minimum Tax ('AMT') to be levied on all persons, other than companies
It is proposed to widen the scope of MAT provision and levy MAT to companies which prepare their profit and loss accounts in accordance with provisions of the Act governing such companies such as Insurance companies, Banking companies or Companies engaged in the generation or supply of electricity, etc It is also proposed that 'Book profit' is to be increased by the amount standing in the revaluation reserve relating to the revalued asset which has been retired or disposed, if the same is not credited to the profit and loss account This amendment will take effect from Assessment Year ('AY') 2013-14 (FY 2012-13)
It is proposed to widen the scope of AMT and include all class of assesses (other than companies) under the ambit of AMT provisions who are claiming deductions vide chapter VI-A under the heading 'C-deduction in respect of certain incomes' (i.e. Sections 80H to 80RRA, other than Section 80P) or under Section 10AA of the Income Tax Act, 1961 ('IT Act') The proposed provisions shall not apply to an individual or a Hindu Undivided Family ('HUF') or an association of persons ('AOP') or a body of individuals ('BOI') (whether incorporated or not) or an artificial juridical person if the adjusted total income (i.e. total income as increased by the deduction under chapter VI-A, as mentioned above and Section 10AA) of such person does not exceed Rs 2 million Tax credit in respect of AMT paid would continue to be available for a period of subsequent 10 AYs This amendment will take effect from AY 2013-14 (FY 201213)
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Foreword
Removal of cascading effect of Dividend Distribution Tax ('DDT')
Expenditure on skill development project
To remove the cascading effect of DDT in multi-tier corporate structure, it is proposed that a company (holding company) receiving dividend from it Indian subsidiary where: - such Indian subsidiary has paid DDT on the dividend paid to the holding company; - can take credit of the DDT that the Indian subsidiary has paid while distributing dividend in the same year - additional condition that the holding company should not be a subsidiary of any other company has been removed. The proposed amendment will take effect from 1 July 2012
Expenditure on Notified Agricultural extension projects
A new provision (Section 35CCD) is proposed to be introduced in the IT Act to allow weighted deduction of 150% of the expenses (not being expenditure in the nature of cost of any land or building) incurred on skill development projects in manufacturing sector The eligible projects for this weighted deduction shall be notified by the Board in accordance with the prescribed guidelines This amendment will take effect from AY 2013-14 (FY 201213)
Weighted deduction to in- house scientific research
A new provision (Section 35CCC) is proposed to be introduced in the IT Act to allow weighted deduction of 150% of the expenditure incurred on notified agricultural extension projects The eligible projects for this weighted deduction shall be notified by the Board in accordance with the prescribed guidelines This amendment will take effect from AY 2013-14 (FY 201213)
Under Section 35(2AB), weighted deduction of 200% for expenditure (not being in the nature of cost of any land or building) incurred on in-house research and development facilities, have been extended for a further period of 5 years i.e. up to 31 March 2017 This will take effect from AY 2013-14 (FY 2012-13)
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Investment linked incentives
Foreword
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Investment linked deductions proposed to be extended to the following businesses commencing operations on or after 1 April 2012: - setting up and operating of an inland container depot - a container freight station - bee-keeping and production of honey and beeswax - setting up and operating a warehousing facility for storage of sugar Weighted deduction of 150% of the capital expenditures (as against current 100% deduction) proposed to be allowed to the following businesses commencing operations on or after 1 April 2012: - setting up and operating a cold chain facility - setting up and operating a warehousing facility for storage of agricultural produce - building and operating a hospital with at least one hundred beds for patients - developing and building a housing project under a scheme for affordable housing - production of fertilizers This amendment will take effect from AY 2013-14 (FY 201213) Investment linked deduction would continue to be available to hotel owners where it owns the hotel but the operation of such hotel is transferred to another person. This amendment will take effect retrospectively from AY 2011-12 (FY 2010-11)
Exemption in respect of income received by certain foreign companies
Exemption is provided to foreign companies in respect of any income received by it in India in Indian currency on account of sale of crude oil to any person in India subject to specified conditions
Extension of sunset clause - power companies
The terminal date of availing deduction for the undertaking engaged in business of generation and distribution of power, transmission and distribution of power by laying network of transmission and distribution lines, undertaking renovation or modernization of existing distribution lines is extended from 31 March 2012 to 31 March 2013
Additional depreciation to power companies
It is proposed to extend the benefit of additional depreciation to taxpayers engaged in the business of generation or generation and distribution of power This amendment will take effect from AY 2013-14 (FY 201213)
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Computation of tonnage income
Thresholds for tax audit
Foreword
The following amendment has been proposed for calculation of tonnage income of a qualifying ship and will take effect from AY 2013-14 (FY 2012-13)
Key policy announcements Qualifying ship having net tonnage
up to 1,000 exceeding 1,000 but not more than 10,000 exceeding 10,000 but not more than 25,000
Threshold for tax audit is proposed to be revised as under, from AY 2013-14 (FY 2012-13)
Audit under Existing threshold (Rs)
6 million 1.5 million
Revised threshold (Rs)

10 million 2.5 million
Existing amount of daily tonnage income

Rs 46 for each 100 tons Rs 460 plus Rs 35 for each 100 tons exceeding 1,000 tons Rs 3,610 plus Rs 28 for each 100 tons exceeding 10,000 tons Rs 7,810 plus Rs 19 for each 100 tons exceeding 25,000 tons
Proposed amount of daily tonnage income

Rs 70 for each 100 tons Rs 700 plus Rs 53 for each 100 tons exceeding 1,000 tons Rs 5,470 plus Rs 42 for each 100 tons exceeding 10,000 tons Rs 11,770 plus Rs 29 for each 100 tons exceeding 25,000 tons.
44AB - Tax audit for persons carrying on business 44AB - Tax audit for persons carrying on profession
The due date for furnishing the tax audit report is aligned with the due date for filing the tax return
Thresholds for applicability of tax on presumptive basis
exceeding 25,000
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For the purpose of presumptive taxation under Section 44AD, threshold limit of total turnover or gross receipts is proposed to be increased from Rs 6 million to Rs 10 million This amendment will take effect from AY 2013-14 (FY 2012-13) Further, the following persons are proposed to be carved out of presumptive taxation : - professionals covered under Section 44AA - persons earning income in the nature of commission or brokerage - persons carrying on agency business This amendment will take effect retrospectively from AY 201112 (FY 2010-11)
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Foreword
Clarification in relation to amalgamation and demerger involving subsidiary
Share premium in excess of Fair Market Value ('FMV') to be treated as income
Even where a subsidiary company amalgamates with its holding company, in order to obtain a tax neutral treatment of the amalgamation in the hands of such shareholder (i.e. holding company), there was a requirement to issues of shares to shareholders of the amalgamating company (i.e. the subsidiary), which was impossible to achieve as the holding company could not issue shares to itself. This requirement has been dispensed with. Similarly, in case of a demerger, where demerged company is a subsidiary company and the resulting company itself is the holding company, the requirement relating to issues of shares by such resulting company (i.e. holding company) to the demerged company (i.e. subsidiary company) has been dispensed with This amendment will take effect from AY 2013-14 (FY 201213)
Provisions relating to Venture Capital Fund ('VCF') or Venture Capital Company ('VCC')
It is proposed to insert a new provision (Section 56(2)(viib)) where any consideration received for issue of shares is in excess of face value of shares, then the consideration exceeding FMV of the shares shall be chargeable to income tax under the head 'Income from other sources The FMV shall be higher of the following: FMV, as per the prescribed guidelines; or FMV as may be substantiated by the issuing company This provision is proposed to be applicable only for companies in which public are not substantially interested (i.e. closely held companies). Further, this provision is not applicable to venture capital undertaking, with respect to shares issued to venture capital company / fund This will take effect from AY 2013-14 (FY 2012-13)
Exemption of any sum or property received by an HUF from its members
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Sectoral restrictions on business of Venture Capital Undertaking ('VCU') to claim exemption from income by VCF or VCC have been done away with i.e. 'pass through' status is accorded for all investments by VCF or VCC It is also proposed that income accruing to VCF or VCC shall be taxable in the hands of investor or accrual basis with no deferral This amendment will take effect from AY 2013-14 (FY 201213)
It is proposed to exclude any sum or property received by an HUF from its members without consideration or inadequate consideration, from taxation The proposed new provision will take effect retrospectively from 1 October 2009
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Foreword
Clarification in connection with 'cost to previous owner'
Relief from long term capital gains tax to an individual or an HUF on sale of a residential property
It is proposed that in the following transactions the cost of capital assets in the hands of the recipient would be equal to the cost of such assets in the hands of the previous owner (transferor): - transfer of capital assets in course of demutualisation/ corporatisation of a recognised stock exchange as a result of which AOP/BOI (previous owner) is converted into a company (recipient) - transfer of capital assets/ intangible assets on conversion of sole proprietary concern / firm (previous owner) into a company (recipient) This amendment will take effect retrospectively from AY 1999-00 (FY 1998-99)
FMV to be considered as 'full value of consideration'
A new provision (Section 54GB) is proposed to be introduced to allow relief from long term capital gains on sale of residential property (house or a plot of land) whereby the sale consideration is reinvested in the equity of a Small Enterprise (as per the Micro, Small and Medium Enterprises Act, 2006) and which is utilised by such company for the purchase of new plant and machinery The above relief is available subject to fulfillment of certain prescribed conditions such as lock in period for 5 years for investment and assets purchased, minimum shareholding requirement, time frame for utlisation of subscription amount by the company, etc The said exemption applies to any transfer of a residential property made before 31 March 2017 This amendment will take effect from AY 2013-14 (FY 201213)
Reference to Valuation Officer
A new provision is proposed to be inserted (Section 50D) under which FMV of capital asset (on the date of transfer) is to be considered as 'full value of consideration' for transactions where sales consideration is not ascertainable or cannot be determined This amendment will take effect from AY 2013-14 (FY 201213)
The powers of Assessing officer has been widened with respect to cases to be referred to a Valuation Officer. As per the amended provisions, the Assessing officer could now refer a case to Valuation Officer even when FMV is lower than stated by the tax payer (as against earlier provisions where the reference could only be made if FMV was higher) The proposed provision will take effect from 1 July 2012
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Transfer of capital assets not situated in India
Transfer of capital assets not situated in India
Foreword
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It is proposed to tax indirect transfer of capital assets in India by inserting the following deeming / clarificatory amendments: definition of 'capital asset' to include controlling interest in an Indian company. It states that any rights in or in relation to Indian company, including rights of management of control or any other rights whatsoever will deemed to be regarded as 'capital asset' definition of 'transfer' to specifically include disposition or parting with any interest directly or indirectly irrespective of whether such transfer is effected or dependent upon or flowing from transfer of shares of company registered or incorporated outside India. the term 'through' under in Section 9(1)(i) to mean and include 'by means of', 'in consequence of' or 'by reason of' any share or interest in a company or entity registered or incorporated outside India is deemed to be situated in India if the share or interest derives, directly or indirectly its value substantially from the assets located in India withholding tax provisions under Section 195 applies /to be applicable to non-residents irrespective of whether non-resident has a residence or place of business or business connection in India or any other presence in India This amendment will take effect retrospectively from AY 1962-63 (FY 1961-62)
A validation clause has been introduced whereby any notice sent or purported to have been sent, taxes levied, demanded, assessed, etc with regard to such transfers is deemed to have been valid notwithstanding anything contained in any judgement, decree or order.
Reassessment of income in relation to any asset located outside India
To reassess the income in relation to any asset located outside India (including financial interest in any entity), which has escaped assessment, the following amendments are proposed: time limit for issue of notice for reopening of an assessment to be increased to 16 years income shall be deemed to have escaped assessment where a person is found to have any asset (including financial interest in any entity) located outside India the reassessment provisions are procedural in nature and will take effect from 1 July 2012 for enabling reopening of proceedings for an AY prior to this date. It is further proposed that the extended period of 16 years for initiating reassessment will also apply to any AY beginning on or before 1 April 2012
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General Anti-Avoidance Rules ('GAAR')
Foreword
GAAR (under Chapter X-A) is a broad set of provisions which seek to tax an 'impermissible avoidance arrangement'(which may be a step, a part or whole of an arrangement and hereinafter referred to as 'Transaction') whose main purpose is to obtain a tax benefit and: creates rights or obligation which wouldn't arise between persons dealing at arm's length; or results in the misuse or abuse of the provisions of the Act in any way; or lacks commercial substance either wholly or in part; or is entered or carried out in a manner which would not be employed for bonafide purposes Specific provisions are inserted which describes the circumstances under which transaction is deemed to lack 'commercial substance' Onus lies with the tax payer to prove that the main purpose of the arrangement was not to obtain tax benefit
Where GAAR is triggered, the consequences could be as follows: disregarding or combining any step of the arrangement ignoring the arrangement for the purpose of taxation law disregarding or combining any party to the arrangement reallocating expenses and income between the parties to the arrangement relocating place of residence of a party, or location of a transaction or situs of an asset to a place other than provided in the arrangement considering or looking through the arrangement by disregarding any corporate structure re-characterizing equity into debt, capital into revenue etc. It is also provided that a scheme for regulating the condition and the manner of application of GAAR provisions would be prescribed This will take effect from AY 2013-14 (FY 2012-13)
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Tax treaty related amendments
Expansion of definition of 'Royalties'
Foreword
The following amendments are proposed in relation to applicability of provisions under Double Taxation Avoidance Agreement or an agreement with Government of foreign country or specified territory outside India (together referred to as 'treaty') submission of Tax Residency Certificate ('TRC'), containing prescribed particulars, made a necessary condition for availing treaty benefits. Treaty benefits cannot be availed where provisions of Chapter-X A i.e. GAAR are invoked This amendment will take effect from AY 2013-14 (FY 201213) Further any meaning assigned, through notification, to a term used in a treaty but not defined (in the IT Act or the said treaty ) is proposed to be effective from the date on which the relevant treaty came into force This amendment will take effect retrospectively from 1 October 2009 (for Section 90) and 1 June 2006 (for Section 90A)
The definition of 'royalty' has now been amended to clarify and include the transfer of any 'right for use' or 'right to use' a computer software (including granting of a licence), irrespective of the medium through which such right is transferred Further, 'royalty' would also cover consideration in respect of any right, property or information whether or not: possession or control of such right, property or information is with the payer; such right, property or information is used directly by the payer; and the right, property or information is located in India. The term 'process' which has now been specifically defined to include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. The above clarifications have been introduced with retrospective effect from 1 June 1976
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Tax Deduction at Source ('TDS')
Foreword
Section
Proposed Amendment
TDS shall not be required on any interest payable:
Section 193 of the IT Act- TDS from payment of interest on debentures
a) b) c)
to an individual or a HUF, who is resident in India on any debenture issued by a company in which the public are substantially interested where the aggregate amount of interest paid during a FY does not exceed Rs 5,000 and the interest is paid by account payee cheque.
This amendment will take effect from 1 July 2012.
Section 194E of the IT Act TDS from payment to nonresident entertainer
Payments made to 'entertainer' is subject to TDS. The rate of TDS for all payments covered under Section 194E of the IT Act is proposed to be increased to 20% This amendment will take effect from 1 July 2012. Any remuneration or fees or commission payable to a director of a company, other than those on which tax is deductible under Section 192, shall be liable for TDS under the provisions of Section 194J This amendment will take effect from 1 July 2012.
Section 194J of the IT Act TDS from payment to director
Section 194LA of the IT Act Exemption on enhanced compensation
Increase in exemption limit from Rs 100,000 to Rs 200,000 This amendment will take effect from 1 July 2012 Any person responsible for paying any sum to a resident transferor by way of consideration for transfer of any immovable property (other than agricultural land), shall deduct an amount equal to 1% of such sum as incometax thereon. The requirement to deduct TDS applies only where the consideration exceeds the prescribed threshold. Also, withholding tax proof is made a pre-condition for the registering office to register the property. This amendment will take effect from 1 October 2012
Section 194LAA TDS from payment for immovable property in certain cases
Section 194LC- TDS from payment of interest to a nonresident by an Indian company
Tax shall be charged at the rate of 5% on any income of a non-resident (not being a company) or a foreign company by way of interest on foreign current borrowings from sources outside India between 1 July 2012 and 1 July 2015 by specified companies. This amendment will take effect from 1 July 2012
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Tax collection at source ('TCS')
Foreword
TCS proposed to be introduced on the following:

TCS on TCS Rate (%)
1 1
Cases where tax is not deducted at source due to bonafide reasons
Sale of certain minerals Cash sale of bullion and jewellery - if sale consideration exceeds Rs 0.2 million
The proposed new provision will take effect from 1 July 2012
Liability to pay advance tax in case of non deduction of tax
It is proposed that where a person receives any income without TDS or TCS, he shall be liable to pay advance tax with respect to such income. This amendment will take effect retrospectively from AY 2012-13 (FY 2011-12)
It is proposed to dilute the responsibility of the 'assessee in default' by providing that a person, who fails to deduct tax on the sum paid to a resident shall not be deemed to be an 'assessee in default' in respect of such tax if such resident: has duly furnished his return of income has taken into account such sum for computing income in such return of income; and has paid the tax due on the income declared by him in such return of income Further, the person is required to furnish a certificate to this effect from a Chartered Accountant in the prescribed form Similar changes are also introduced in relation to TCS The proposed provision will take effect from 1 July 2012 It is also proposed that where the payer fails to deduct the whole or any part of the tax on the payment made to a resident and he is not deemed to be an 'assessee in default' (where the payee has paid the tax on such payment as explained above), such payment will be allowed as a deduction. This will take effect from AY 2013-14 (FY 201213)
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Foreword
Deductions under Chapter VIA for individual and HUF Effective from AY 2013-14 (FY 2012-13) Deduction for life insurance premium
Deductions under Chapter VIA in relation to donation payment
Deduction in respect of premium paid on life insurance policy issued on or after 1 April 2012 is proposed to be allowed provided premium payable for any of the years does not exceed 10% (presently 20%) of actual capital sum assured (Section 80C). Corresponding amendment brought in Section 10D
Deduction for preventive health check-up
Deduction in respect donation (Section 80G and 80GGA) in excess of Rs 10,000 is proposed to be allowed only if such sum is paid by any mode other than cash
Eligibility conditions for exempt life insurance policies
Under Section 80D, a deduction of Rs 5,000 is allowed for expenditure incurred during the year by a tax payer on account of preventive health check-up of self, spouse, dependent children or parents The above deduction to be within the overall limits of Rs 15,000 / Rs 20,000 prescribed under the said Section of the Act
Deduction for interest on savings account
Any sum received under life insurance policy issued on or after 1 April 2012 will be exempt provided premium payable for any of the years during the term of the policy does not exceed 10% (presently 20%) of the actual capital sum assured
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Deduction upto Rs 10,000 proposed to be allowed in respect of interest on deposits (not being time deposit) in a savings account with a banking company, co-operative society engaged in banking business and post office (Section 80TTA)
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Foreword
Filing of income tax return in relation to assets located outside India
Dispute Resolution Panel ('DRP')
It is proposed to make it compulsorily for a resident taxpayer to file a return of income (even if his taxable income is below the basic exemption limit) if any one of the following is triggered: - the taxpayer has any asset located outside India, including any financial interest in any entity outside India; or - the taxpayer has signing authority in any account located outside India This amendment will take effect retrospectively from AY 2012-13 (FY 2011-12)
The Assessing Officer shall now have the right to appeal to the Appellate Tribunal against the order passed in pursuance of directions of the DRP in respect of an objection filed on or after 1 July 2012 It is further clarified that the power of the DRP to enhance the variation shall include and shall always be deemed to have included the power to consider any matter arising out of the assessment proceedings relating to the draft assessment order. This power to consider any issue would be not withstanding that such matter was raised by the eligible assessee or not. This amendment will take effect retrospectively from AY 2009-10 (FY 2008-09)
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Extension of time for completion of assessments and reassessments
Foreword
Proceedings under Section
143 Scrutiny Assessment 143 & 92CA Scrutiny Assessment & Transfer Pricing Assessment 148 Income Escaping Assessment 148 & 92CA - Income Escaping Assessment & Transfer Pricing Assessment
Current time frame

21 months from end of AY 33 months from end of AY
Proposed time frame

24 months from end of AY 36 months from end of AY
9 months from end of FY in which notice issued 21 months from the end of FY in which notice issued 9 months from end of FY in which notice issued
12 months from end of FY in which notice issued 24 months from end of FY in which notice issued
250 Appellate Proceedings 254 Appellate Tribunal 263 Revision of orders prejudicial to revenue 250 Appellate Proceedings 254 Appellate Tribunal 263 Revision of orders prejudicial to revenue 92CA Transfer Pricing
12 months from end of FY in which notice issued
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Penalties
Foreword
Section
Explanation 7 to Section 271 Failure to furnish returns , comply with notices, concealment of income (wef FY 2012-13) Section 271 AA - Failure to keep and maintain information and document in respect of international transaction (wef 1 July 2012)
Existing Provisions
Proposed Amendment
Specified domestic transaction will be covered. Consequent amendment to be made to Section 271G and Section 271AA also
Covers 'international transaction' only
Provides penalty only if there is a failure to keep and maintain any information and document as required by Section 92D(1) and 92D(2) The provision covers the cases of search which have been initiated under Section 132 on or after 1 June 2007
Additionally, penalty shall be levied : if any person fails to report the international transaction or specified domestic transaction, or maintains or furnishes an incorrect information or document
Section 271 AAA- undisclosed income in the case of search
This penalty is applicable upto 1 July 2012. A new Section 271AAB has been proposed hereinafter Penalty shall be imposable, where search has been initiated on or after 1 July 2012: (a) at the rate of 10% of the 'undisclosed income' of the specified previous year, if taxpayer admits during the course of search the undisclosed income (b) at the rate of 20 % of the 'undisclosed income' of the specified previous year , if taxpayer does not admit the undisclosed income at the time of search but at the time of filing return after search (c) in other cases penalty may range from 30% to 90% of undisclosed income

Provides to charge penalty at the rate of 10% of the undisclosed income of the specified previous year
Section 271 AAB (New Section)
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Penalties - contd
Foreword Section Existing Provisions Proposed Amendment

A person shall be liable to pay a sum between Rs 0.01 million to Rs 0.1 million if he fails to deliver or delivers an incorrect information under Section 200(3) or 206C(3) of the IT Act Section 271 H- Penalty for failure to furnish TDS/TCS returns (New Section wef 1 July 2012) However, no penalty shall be levied if the person proves that he had delivered the required statement within one year of the period prescribed under the said Sections Similar amendment shall also be made to Section 273B
Section 272 A - Penalty for failure to answer questions, furnish statements , etc. (wef 1 July 2012)
Section 272A (2)(k) provides for the penalty of Rs 100 per day to be levied in case a person fails to deliver the statement (i.e. TDS and TCS returns) within the time prescribed in Section 200(3) or 206C(3)
A proviso is proposed to be inserted after Section 272A(2)(k) to provide that no penalty shall be levied under this Section for late filing of TDS /TCS returns
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Unexplained cash credits
Foreword
It is proposed to amend the existing provisions with respect to unexplained cash credits to provide that any explaination offered by a closely held company with regard to credit of share application money, share capital, share premium or any such amount shall be deemed to be non-satisfactory unless: the resident person whose name credit has been recorded offers explanation about nature and source of such credit; and tax authorities find such explanation to be satisfactory This will take effect from AY 2013-14 (FY 2012-13)
Assessment of charitable organization in case commercial receipts exceed the specified threshold
It is proposed to provide that any charitable trust or institution registered under Section 12AA and 10(23C) will not get benefit of tax exemption in the year in which it's receipts from commercial activities exceed the threshold whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded. This will take effect retrospectively from AY 2009-10 (FY 2008-09)
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Transfer pricing
Foreword
Introduction of advance pricing agreement (wef 1 July 2012)
An APA is an agreement between the taxpayer and the taxing authority It will enable determination of the arms length price or specify the manner/ methodology in which arms length price shall be determined The agreement is . - valid for not more than five years available to all taxpayers falling within the ambit of Indian TP legislation The APA enabling provisions are imported from the DTC and detailed rules and forms are expected to be issued by the Government shortly APAs to be entered by the CBDT with the approval of Central Government
- The APA has binding force only on the taxpayer with whom it is signed and in respect of the relevant international transaction vis--vis the jurisdictional commissioner of income-tax - The APA shall not be binding/annulled in the following instances: Change in Law If the taxpayer has signed the APA with the CBDT based on misrepresentation of facts. CBDT will annul in this case by way of an order - On conclusion of APA, the taxpayer is required to file revised return(s) with the Assessing Officer who has to complete the assessment/reassessment within one year from the end of the FY in which the revised return is filed
- Ability to use any method other than one of the prescribed 5 methods available
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Foreword
International transactions (retrospective effect from 1 April 2002)
Intangibles (retrospective effect from 1 April 2002)
The definition of international transactions has been amended to :

Intangible property has been specifically explained. Other than marketing, technical, artistic, data processing, engineering related intangibles it includes intangibles related to: - customers like customer lists, open purchase orders; - human capital like trained & organized work force; - location like leasehold interests and also mentions and lastly it also has an open item to include - any item that derives its value from intellect content rather than its physical attributes This kind of a broad definition leaves the tax authority to construe significant items as intangibles and this could have a major impact on the characterization of entities when conducting a function, asset and risk analysis of the international transaction
- elaborate on tangible, intangible property, services, financing transactions; and - include transactions of business restructuring or reorganization, covered; whether or not it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date
Specified domestic transactions (wef 1 April 2013)
Specified domestic transactions broadly comprise transactions entered into by domestic related parties or by an undertaking with other undertakings of the same entity for the purposes of section 40A, Chapter VI-A, section 10AA and which exceed a monetary threshold of Rupees 5 crore during a FY
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Foreword
Reduction in 5% variation and disenabling standard deduction
Power of the transfer pricing officer ('TPO')
Currently, the arms length range is based on a uniform tolerance band of 5% around the transfer price. However, the Government had amended proviso to sub section (2) of section 92C in the Finance Act, 2011, whereby the Government was to notify an allowable variation for different business activities and types of transactions. The current 5% band has been replaced with 3% There were two litigation issues around the 5% range. One was that it was not allowed as a standard deduction by the tax authorities and the other was that new proviso of the variation was being applied retrospectively for AYs prior to the amendment date of 1 October 2009 Major tribunals for both these issues had ruled in favour of the tax payer. However, the proposed amendments overturn these tribunal decisions and do not permit the 5% range as a standard deduction and also clarifies that the new provision disabling the standard deduction will be applicable for all assessment proceedings pending before the AO as on 1 October 2009. This would mean that even for AYs prior to 2010-11 pending before the AO as on 1 October 2009 the new provisions of the variation would prevail and thereby standard deduction not permitted to the tax payers. However, the proposed amendment limits the tax authorities ability to re-open or rectify assessments concluded before 1 October 2009
The TPO is empowered to determine Arms Length Price of an international transaction noticed by him in the course of proceedings before him, even if the said transaction was not referred to him by the Assessing Officer. Although this amendment takes effect retrospectively from 1st June 2002, reopening of any proceeding would not be done only on account of such an amendment. The proposed changes could have ramifications where taxpayer has entered in to free of cost transactions (i.e. loan guarantee or extended short term liquidity to its associated enterprises) and has not charged any price for such services and consequently not reporting it as international transactions in its disclosure The Assessing Officer cannot under section 147 or section 154 enhance the assessment or reduce a refund in respect of completed proceedings
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Foreword
Stringent penalties for non reporting international transactions or specified domestic transaction
Section 271AA has been amended to levy penalty at the rate of 2% of the value of the international transaction or specified domestic transaction, if the taxpayer fails to maintain prescribed documents or information or;
- fails to report such transaction which is required to be reported, or; - maintains or furnishes any incorrect information or documents This would be in addition to penalties in section 271BA and 271G. This amendment will take effect from 1 July, 2012
Filing of accountants report
Filing of Form 3CEB under section 92E for non-corporate taxpayer revised to 30 November
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Service Tax
Foreword
Rate change effective 1 April 2012
The rate of service tax is being restored to the statutory rate of 12%. This is aligned to the excise duty rate. The earlier notification reducing the rate to 10% has been rescinded. Consequent changes have also been made in composition rates such as works contract services
Taxation of Services based on negative list approach effective from a date to be notified
- Betting, gambling or lottery - Entry to Entertainment Events and Access to Amusement Facilities - Transmission or distribution of electricity - Specified services relating to education - Services by way of renting of residential dwelling for use as residence - Financial sector - Service relating to transportation of passengers - Service relating to transportation of goods - Funeral, burial, crematorium or mortuary services including transportation of the deceased Presently the word service has not been defined. The Finance Bill 2012 proposes to is specifically define the word service. Service shall also include certain activities that have been specified as declared services. If an activity meets the characteristics of a service it is taxable unless specified in the negative list or otherwise exempted by a notification. Most of 88 exemptions to be rescinded or merged in a mega exemption notification. Proposed exemptions under Mega Notifications shall include services provided to specified organisations, temporary transfer of copyrights in cinematographic films, etc. A new charging section is proposed to be introduced to levy service tax on all services, other than those in the negative list, provided or agreed to be provided in the taxable territory by one person to another.
There is paradigm shift in the way services are proposed to be taxed in future. Taxation will be based on what is popularly known as Negative List of Services. Negative list of services covers specified 17 services as under:
Services provided by Government or local authority Services provided by Reserve Bank of India Services by a foreign diplomatic mission located in India Services relating to agriculture Trading of goods Processes amounting to manufacture or production of goods - Selling of space or time slots for advertisements other than advertisements broadcast by radio or television - Access to a road or a bridge on payment of toll charges
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Foreword
The existing provisions and charging sections will cease to apply after the new provisions become effective but will remain relevant in respect of services provided prior to the applicability of the new provisions
Other changes proposed consequent to negative list approach effective from a date to be notified CENVAT Credit Rules
Service Tax Rules
With the proposed introduction of the Place of Provision of Services Rules, 2012 and the proposed omission of the Export of Services Rules, 2005 (as amended) a transaction will qualify as export when it meets following requirements: - the service provider is located in Taxable territory - service recipient is located outside India - service provided is a service other than in the negative list - the place of provision of the service is outside India and - the payment is received in convertible foreign exchange
Place of Provision of Services Rules, 2012
In the light of negative list it is proposed that the servicespecific references in the CENVAT Credit Rules will be replaced by broad descriptions retaining the essence of the existing provisions The definition of output service shall include exports of service where payment is not received within the period specified under the RBI requirements. Thus the benefit of not reversing the input tax credits for exports without treating them exempt will continue for the period specified for realizing export proceeds In terms of the proposed amendment to the valuation rules services shall exclude interest on (a) deposits; and (b) delayed payment of any consideration for the provisions made (services/goods). This will keep such amounts outside the value and thus not be relevant for reversal of credits under CENVAT Credit Rules Interest on loans and advances will now be an exempt income. This will require reversal of credits used for earning such income. Specified provisions have been proposed for such reversal
The Finance Bill 2012 proposes to introduce the Place of Provision of Services Rules, 2012. The draft rules have been released for comments and feedback for the time being. The essence is that a service should be taxed in the jurisdiction of consumption It is proposed that these Rules will replace the existing Export of Services Rules, 2005 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006
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Valuation Rules
Foreword
Negative list will require some reformulations away from service-specific provisions. The abatements available for certain taxable services and composition rate for works contract services will undergo change Presently for works contract services, value of services is equal to the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose. If the value is not so deduced, it is proposed that an ad-hoc percentage of the total value as would be allowed as deduction towards goods. The input tax credit on goods forming part of the property on which VAT is payable shall not be available as they are not used in the provision of service. However taxes paid on capital goods and input services will be available The taxable portion for services involved in supply of food and drinks in a restaurant or as outdoor catering is being raised. The abatement available is being adjusted to allow the industry to utilize credit on capital goods, specified inputs (other than foods and beverages) and input services Value of service shall include any amount realized as demurrage, or by any other name, for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service. It shall also include accidental damages due to unforeseen actions not relatable to the provision of service
Value of service shall exclude interest on (a) deposits; and (b) delayed payment of any consideration for the provisions made (services/goods)
Abatements
With the introduction of the negative list approach, changes are proposed in the abatements available for services involving both goods and services. It is proposed to increase the taxable portion of value and liberalise the input tax credits. Though the taxable portion of services may appear on a higher side, but the availability of credits will lead to reduction in costs and hence prices for the consumers. This will result in neutrality of taxes i.e. the burden of taxes will not raise the cost per se but passed on to the point of consumption
SEZ changes
There are no changes proposed in the present Budget. However it is proposed that service-specific criterion for determination of services provided exclusively within the SEZ shall be taken care at the time of introducing negative list Prior to 1 March 2011 services provided to SEZs were treated as exempt services and CENVAT credit had to be reversed under CENVAT Credit Rules. The amendment introduced with effect from 1 March 2011 has now been made effective from 10 February 2006. This will neutralize the investigations or demands for reversal of credits in respect of services provided to SEZs for the past
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Reverse charge provisions
Foreword
The term taxable territory has been defined and only services provided in taxable territory will be liable to tax. Any service provided in the State of Jammu & Kashmir will not be liable to tax. The Place of Supply Rules, 2012 will determine whether a service is being provided in Jammu & Kashmir Where the service provider is located in Jammu & Kashmir but the services are provided in taxable territory, the tax will be collected from the service receiver A new scheme is proposed to be introduced to ensure proper collection. For the services of hiring of a motor vehicle designed to carry passengers, supply of manpower for any purpose and works contract both the service provider and service receiver will be considered as persons liable to pay the tax on a predetermined percentage. The scheme can be given effect on enactment; however it is proposed to time it with Negative List approach as a part of the comprehensive reform
Rules of interpretation
Rules have to been amended to provide that the date of payment shall be the earlier of, the dates of entry into books of accounts or actual credit in the bank account. When there is change in effective rate of tax or an introduction of new levy between the date of entry in books or actual credit in bank, the date of payment shall be the date of actual credit in the bank account, if the amount is credited through a banking instrument more than four working days after the date of such change Best judgement provisions have been introduced where the tax-payer is unable to furnish one or more of the details needed i.e. date of payment or date of invoice or both to determine point of taxation
CENVAT changes effective 1 April 2012
Separate principles are proposed to be introduced for interpretation of specified description of services and bundled services
Point of Taxation Rules effective 1 April 2012
A simplified scheme for refunds is being introduced by substituting the earlier provisions under CENVAT Credit Rules. The new scheme does not require correlation between exports and input services used in such exports. Any goods or services that qualify as inputs or input services will be entitled to be refunded in the ratio of the export turnover to total turnover. The notification prescribing the detailed manner and safeguards will be issued shortly Credit on motor vehicles is liberalised and will be allowed other than those falling under tariff heading 8702, 8703, 8704, 8711 and their chassis. The credit of service tax paid on their hiring, insurance and repair will also be allowed
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Continuous supply of service has been redefined to bring out concept with better clarity, namely recurrent nature of services and the obligation for payment periodically or from time-to-time
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Foreword
Credit on goods can now availed without bringing them into premises subject to due documentation regarding their delivery and location Credit of tax paid by all service receivers on reverse charge is allowed on the tax payment challan Rules relating to distribution of credits of input services by an input service distributer have been amended to ensure scientific allocation to only such units where they have been put to use based on proportion of turnover The rate for CENVAT reversal for taxable/ exempt services/ goods has been revised from 5% to 6%
The restrictions of Rs 2 lakh limiting the use of excess service tax paid are being omitted allowing unlimited amount of permissible adjustments effective 1 April 2012 A common simplified registration format for Central Excise and Service Tax is being placed for public comments, together with further liberalization in registration requirements, particularly centralized registrations will come into force after inviting comments from stakeholders A new simplified one page common return with Central Excise: to be called Excise & Service Tax Return (EST for short) is being introduced. It is also being proposed that the cycles for the payment service tax and filing of return should coincide. Assessees paying tax of Rs25 lakh or more in previous year and new assessees other than individuals and firms would be required to make monthly payments and file monthly returns. The periodicity for others would be quarterly will come into force after inviting comments from stakeholders
Exemption given retrospective effective - effect when the Bill receives the Presidential assent
Service Tax Rules effective 1 April 2012
Service providers may issue invoice within 30 days from the date completion of taxable service or receipt of any payment towards value of taxable services whichever is earlier. Banking or financial institutions may issue an invoice with 45 days of such event Presently individuals and firms are allowed to pay service tax on the basis of date of payment for eight specified services. The said facility has been extended to all services up to a turnover of Rs 50 lakh in a financial year provided the taxable turnover did not exceed Rs 50 lakh in the previous financial year. The above limits shall be computed taking into account the turnover of the entity as a whole and not any single registration
Exemption provided for the setting up of common facilities for treatment and recycling of effluents and solid wastes is made applicable effective 16 June 2005 as against 25 July 2011 Exemption relating to repair of roads is extended for the earlier period commencing from 16 June 2005 as against 27 July 2009
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Foreword
Service tax exemption is granted with retrospective effect on management, maintenance or repair service in relation to noncommercial Government buildings from 16 June 2005 till the coming into force of the negative list when such repair will be exempted by the new mega notification
Penalty waiver for Renting of Immovable Property Service - effect when the Bill receives the Presidential assent
It is proposed to introduce Special Audit Provisions separately under the Finance Act, 1994 to give comprehensive powers for such audit relevant for service tax purposes. Presently the same are made available and applicable through the Central Excise Act The period for issue of demands in normal situations is being raised from 12 months to 18 months Provisions relating to Settlement Commission under Central Excise Act are made applicable to Service Tax. On the date of the enactment of the Finance Bill, notification containing Service Tax (Settlement of Cases) Rules, 2007 along the lines of Central Excise (Settlement of Cases) Rules, 2007, will come into effect. This should encourage quick settlement of disputes and save the business from the worries of prosecution in certain situations The periods for filing appeals in service tax are being aligned with Central Excise. New limitations will apply to decisions or orders passed after the date on which Finance Bill, 2012 receives the assent of the President At present in service tax, appeals against the order of Commissioner (Appeals) lie before the Tribunal; whereas in Central Excise, a revision mechanism is available to hear certain specified matters. It is proposed to introduce revision mechanism for service tax, to the extent applicable Prosecution for non-issue of invoice within time specified would be invoked only if the same is done knowingly with the intent to evade payment of service tax
The taxability of Renting of Immovable Property Services had been a subject of litigation. In the matter of Retailers Assn. of India v/s Union of India, Honourable Supreme Court, had ruled in October 2011, that litigants should pay 50% of the arrears within six months in three equated instalments and for the balance, solvent surety should be furnished to the satisfaction of the Jurisdictional Commissioner. It is proposed that penalty may be waived for those taxpayers who pay the service tax due as on the 6 March 2012, in full along with interest within six months
Other legislative changes - effect when the Bill receives the Presidential assent (unless specified otherwise)
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The small scale exemption notification has been amended in line with Point of Taxation Rules stating that the threshold exemption from service tax would be value of taxable services charged in the first consecutive invoices valuing up to Rs 10 lakh. Presently the threshold is linked to sum total of first consecutive receipts effective 1 April 2012
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Central Excise
Foreword
Rate
Rate of excise duty on non petroleum products is increased from 10% to 12% Merit rate of excise duty is increased from 5% to 6% 1% excise duty on 130 items is increased to 2% with few exceptions being coal, mobile handsets and cellular phones, articles of jewellery, fertilizers
Important legislative changes
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Definition of 'inter-connected undertaking' is amended to incorporate with the definition given under the Monopolies and Restrictive Trade Practices Act, 1969 which is more conservative and has a wider scope Amount of duty evasion resulting in imprisonment of 7 years has been increased from Rs 1 lakh to Rs 30 lakh Duty evasion punishable with imprisonment of 3 years or more would a cognizable offence. In all other cases, it would be a non-cognizable offence Order of stay from any court would not be included to calculate the period of 1 year or 5 years for issuance of show cause notice Benefit of reduced penalty of 25% is available only if the penalty is also paid within 30 days. Earlier only tax and interest amount was required to be paid Bail would not be granted in case of offences resulting in imprisonment of more than 3 years without giving the public prosecutor an opportunity to present his case
For units undertaking substantial expansion in the state of Jammu and Kashmir, the exemption period of 10 years would be computed from the date of commencement of commercial production from the expanded capacity. This amendment has a retrospective effect Packing, repacking, labeling or relabeling of containers, including declaration or alteration of Retail Sale Price on cigarettes would be deemed to be 'manufacture'. Tariff value for jewellery other than silver is fixed at 30% of invoice value. However, this would not be applicable in case of jewellery manufactured from precious metal or old jewellery provided by retail customer Manufacturer receiving goods under Notification no. 34/ 2001- CE(NT) dated 21 June 2001 i.e. goods received under concessional or without payment of duty, are required to file quarterly returns instead of monthly Tariff value of articles of apparel (tariff heading 6201) is reduced from 45% to 30% of Retail Sale price Optional payment in case of manufacturer of exempted goods or provider of exempted is services increased from 5% to 6% Manufacturer having more than one manufacturing unit would be allowed to transfer additional duty of customs under section 3(5) of the Customs Tariff Act paid on inputs to its other unit on quarterly basis Form of excise return is amended to include details of interunit transfer of CENVAT Credit The above would come into effect from the date of enactment of Finance Bill, 2012
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Central Excise
Exemption from excise duty
Foreword
Changes in CENVAT Credit Rules, 2004
In case of removal of capital goods after use, higher of the following would be payable Per quarter reduction of 2.5% (other than computer and peripherals) Duty payable @ 12% on the transaction value Earlier, transaction value was applicable only if capital goods were sold as scrap Excise duty paid on motor vehicles including parts, other than used for transportation of persons, would be eligible for CENVAT credit by the manufacturers Transfer of unutilized credit of SAD lying as closing balance at the end of each quarter to another factory of the manufacturer is permitted The Hon'ble Supreme Court observed that interest would be applicable from the date of incorrect availment of cenvat credit and date of utilization would be irrelevant. Now the words 'availed or utilized' has been changed to 'availed and utilized' thus making utilization as the basis to charge interest on wrong availment. Retrospective amendment is made to Rule 14 of the CENVAT Credit rules, 2004 to nullify the effect of above decision. In other words, interest is not payable on credit wrongly taken unless the same is utilized
Footwear, whether imported or domestic, with RSP not exceeding Rs 500 is fully exempted from duty subject to condition that RSP indelibly marked/embossed on footwear itself. Exemption to branded silver jewellery continues. Gold coins are (purity 99.5% & above)/Silver coins (purity 99.9% & above) exempt subject to condition that manufactured from gold or silver on which appropriate duty paid. Exemption is granted to intraocular lens ( levied last year vide Notification No 1/2011-CE) Benefit of concessional rate of Rs 30 per square metre under Notification No 4/2006 CE is extended to polished marble slabs. Exemption to pipes used for water supply projects is extended to pipes executed in river bed with zero energy consumption, provided these are integral part of project. Exemption applicable to cigarettes having length not exceeding 60 mm is now applicable to length not exceeding 65 mm
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Foreword
Increased rate of duty

Key policy announcements Product/ Description Cement Packaged Cement manufactured in mini cement plant Packaged cement manufactured in plant other than mini plant Cement not cleared in packaged form Motor vehicles (length not exceeding 4 meters) Engine capacity not exceeding 1200cc (petrol, LPG or CNG) Engine capacity not exceeding 1500cc (diesel) Motor vehicle (other than above) having engine capacity not exceeding 1500cc Engine capacity exceeding 1500cc Chassis for automobiles Existing rate Proposed rate
10% ad valorem 10% ad valorem + specific amount 10% ad valorem 10% ad valorem 10% ad valorem 22% ad valorem 22% + Rs 15,000 ad valorem
6% ad valorem + Rs 120 12% ad valorem + Rs 120 12% ad valorem 12% ad valorem 12% ad valorem 24% ad valorem 27% ad valorem
10% / 22% ad valorem + Rs 10,000 10% ad valorem or Rs 1,227 per thousand
15% /25% ad valorem
Cigars, cheroots and cigarillos
12% ad valorem or Rs 1,370 per thousand
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Foreword
Increased rate of duty

Key policy announcements Product/ Description Unbranded precious metal jewellery (except silver jewellery). Fiscal and economic review Pan masala, gutkha, chewing tobacco, zarda, scented tobacco NIL Existing rate 1% Proposed rate
The rate of duty under the compounded levy scheme is increased
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Foreword
Reduced rate of duty

Key policy announcements Product/ Description Batteries of electrically operated vehicles supplied to manufacturers Iodine Fiscal and economic review LED lamps Processed food products of soya Snapshot of tax proposals Matches manufactured by semi mechanized units Parts of blood pressure monitors and blood glucose monitoring systems on actual user basis Direct tax proposals 10% 10% 10% 10% 10% 10% Existing rate Proposed rate Concessional rate of duty of 6% 6% 6% 6% 6% 6%
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CUSTOM
Foreword
The peak rate of customs duty on non-agricultural goods remains at 10%

Increase in rates BCD/CVD
Full BCD exemption is provided to shuttle less looms, parts/components of shuttle less loom by actual users for manufacturing specified silk machinery. The exemption is available to only new machinery Concessional 5% duty rate available to specified textile machinery is restricted to new textile machinery Relief measures in terms of full exemption from BCD is provided to certain items as under Initial setting up and substantial expansion of fertiliser project upto 31 March 2015 Steam coal - along with reduction of CVD from 5% to 1% upto 31 March 2014 Natural gas/LNG imported for power generation by a power generation company Uranium concentrate, sintered natural uranium dioxide, sintered uranium dioxide pellets for generation of nuclear power Steel tube and wire, cobalt chromium tube, Hayness alloy 25 and polypropylene mesh for manufacture of coronary stents / coronary stent systems and artificial heart valves subject to actual user condition Equipment imported for road construction projects awarded by Metropolitan Development Authorities along with Nil CVD and Nil SAD Tunnel excavation and specified lining equipment along with Nil CVD and Nil SAD
Products Fiscal and economic review
Completely built Units of large cars/ MUVs / SUVs permitted for import without type approval (value exceeding US$40,000 and engine capacity exceeding 3000cc for petrol and 2500cc for diesel) Boric acid Digital Still Cameras of certain specifications
Pre Post budget budget rates rates (%) (%) 60% 75%
5% Nil 5% 2% 5% 1% Nil 10% 10%
7.50% 10% 7.50% 4% 10% 2% 2% 30% 20%
Flat rolled products (HR and CR) of non alloy steel Standard gold bars and platinum bars Non standard gold
Gold ore/concentrate and ore bars for refining (CVD) Cut and polished coloured gemstones Bicycles Parts of bicycles
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Foreword
Coal mining projects New and retreaded aircraft tyres along with Nil CVD Part of aircraft and testing equipment for maintenance and repair of air craft imported by third party MRO Units Tunnel boring machines for hydel and road projects for all infrastructure projects and parts required for assembly of such machines Tri band phosphor Waster paper Lithium ion batteries for the manufacture of battery packs for supply to electric or hybrid vehicle manufacturers along with 6% CVD and Nil SAD Relief measures in terms of reduction of BCD is provided to certain agriculture and agro-processing items, prescribed items in textile industry, railway safety equipment and railway track laying machines, machinery and instruments for surveying and prospecting of mines, certain fertilisers, certain life saving drugs / vaccines, capital goods & plants imported for setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants, coffee brewing and vending machines of commercial type The new rates come into effect from 17 March 2012
Method of computation of Education Cess and Secondary & Higher Education Cess is simplified to exempt the cesses as leviable on CVD portion of customs duty and avoid computation of such cesses twice In the notification exempting SAD, a condition is inserted requiring the importer of the specified goods to declare the State of destination where the goods are intended to be sold for the first time on payment of VAT after import and declaration of importers VAT registration number in that State CENVAT Credit Rules are amended to permit transfer of unutilised credit of SAD lying in balance at the end of each quarter to other registered premises of same manufacturer The duty free allowance under Baggage Rules is increased from Rs 25,000 to Rs 35,000 for adult passenger of Indian origin and Rs 12,000 to Rs 15,000 for children upto 10 years of age Project import status as available to installation of mechanized handling systems and pallet racking systems in mandis / warehouses for food grains and sugar is extended to such systems installed for handling horticultural produce Project import status with 5% BCD is granted to green houses set up for protected cultivation of horticulture and floriculture produce
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Legislative Amendments
Foreword
Section 2 and Section 7 of the Customs Act is amended to include air-freight stations resulting into empowering Central Board of Excise and Customs to appoint air freight stations for uploading of import cargo and loading of export cargo as in case of Inland Container Depots Section 28AAA of the Customs Act is introduced to provide for recovery of duties from the person to whom the duty credit scrips were issued and such scrips were obtained by means of collusion or wilful misstatement or suppression of facts. Such person and such recovery shall be without prejudice to any action that may be taken against the importer. Also provisions related to provisional attachment of property are made applicable to Section 28AAA Section 47 of the Customs Act is amended to insert a new proviso to provide that the Central Government may specify the classes of importers who shall pay customs duty electronically Section 104 of the Customs Act is amended to provide that all offences (except an offence punishable with term of imprisonment of 3 years of more) shall be non-cognizable and bailable and all offences punishable with term of imprisonment of 3 years of more shall be cognizable.
Section 104A of the Customs Act is inserted to provide that bail in case of offences punishable with a term of imprisonment of 3 years of more shall not be granted by a Court or Magistrate without opportunity being given to Public Prosecutor to present his case Monetary limits for adjudication of cases involving confiscation of goods and imposition of penalty has been enhanced Exemption from CVD is provided retrospectively to foreign going vessels from 1 March 2011 to 16 March 12 Export duty on chromium ore is enhanced from Rs 3,000 per tonne to 30% ad valorem The above would come into effect from the date of enactment of Finance Bill, 2012
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Foreword
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Overview of the Union Budget 2012-13

Grant Thornton India LLP. All rights reserved.

Overview of the Union Budget 2012-13

Key policy announcements

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

Indirect tax proposals

Tax & Regulatory Services Team Grant Thornton India LLP

Overview of the Union Budget 2012-13

Rationalisation of key policies

Key policy announcements

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

Indirect tax proposals

Overview of the Union Budget 2012-13

Key policy announcements

Financial stimulus of Rs 3,884 crores for waiver of loans of handloom weavers

ECB to part finance Rupee debt of existing power projects

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

Indirect tax proposals

Overview of the Union Budget 2012-13

Key policy announcements

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

Indirect tax proposals

Overview of the Union Budget 2012-13

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

Indirect tax proposals

Overview of the Union Financial Budget 2012-13

GDP trends 8.4 8.4 6.9 7.6

Key policy announcements

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

8.00 %age 6.00 4.00 2.00 0.00 2009-10

2010-11 2011-12 Financial Years

Indirect tax proposals

12.00 10.00 8.00 6.00 4.00 2.00 0.00

Headline Inflation 9.6 8.1 3.8 9.1

2009-10 2010-11 Financial Years

Overview of the Union Financial Budget 2012-13

Gross Fiscal Deficit

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

6.5 5.9 4.8 5.1

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

2010-11 2011-12AE Financial Years

Indirect tax proposals

Overview of the Union Budget 2012-13

Direct tax proposals

Key policy announcements

Fiscal and economic review

Snapshot of tax proposals

Direct tax proposals

Indirect tax proposals