UNION BUDGET 2012-2013 Presented by India Law Offices LEA REDWAY LIMITED (Albright) – Corporate Profile Presented by Gautam Khurana & Abhishek Hans / India Law Offices

Union Budget: 2012 -2013 Content 1.

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Introduction Key Policy Announcement Direct Taxation DTC and GST Sector Analysis Service Tax Notes 2 3 4 16 17 25 26

Union Budget – 2012-2013 1

Introduction Foreword

The Union Budget 2012 – 2013 was presented by the Finance Minister in the Parliament on 16 th 2012.

March’ The Year 2011 – 2012 was described as the year of recovery, interrupted.” GDP achieved of 6.9% was low as compared to that of previous years (8.4 percent), comparatively it still put India in the top five economies of the world. The growth in next fiscal is expected to be 7.6 percent and 8.6 percent in next two fiscal years.

Twelfth Five Year Plan to be launched with the aim of “faster, sustainable and more inclusive growth”.

On a regulatory front, efforts to arrive at consensus in respect of decision to allow FDI in multi-brand retail up to 51 per cent and a proposal to allow foreign airlines to participate up to 49 per cent in the equity of an air transport undertaking under active consideration of the government.

Absence of a proposal for reduction in a corporate tax rate may be a disappointment but a budget proposes number of measures to promote investment in specified sectors.

Peak rate of excise duty and service tax has been increased from 10% to 12% and widened the service tax base introduction of a negative list.

Retrospective amendment on fundamental principal of determination of tax on Indian assets transferred and which have an adverse effect on stability of Indian Income Tax & a recent judicial decisions.

General Anti Avoidance Rule (GAAR) proposed to be introduced to curb aggressive tax planning and an announcement of Advance Pricing Arrangement (APA) regime under Transfer Pricing to give certainty to taxpayers.

2 Union Budget – 2012-2013

Key Policy Announcement Key Policy Announcement

External Commercial Borrowing (ECB): Considering the specific need of industries, ECB has been allowed for: Capital expenditure on maintenance and operation of toll system for road and highways, if they are part of original project Working capital requirement of aviation industry for a period of one (1) year, subject to a total limit of USD 1 billion Financing the rupee debt of existing power project Low Cost housing projects In order to deepen the capital market reform, the government will simplify the IPO processes and allow Qualifies Foreign Investor (QFI) to access the Indian Bond market.

Mandatory for companies to issue IPOs of INR 100 Million and above in electronic form through nationwide broker network of stock exchanges.

Permitting two-way fungibility in Indian Depository Receipts subject to a ceiling with the objective of encouraging greater foreign participation in Indian capital market.

Government to table a White Paper on Black Money, in this Parliament session.

Tax free bonds amounting to INR 600 billion proposed to be issued for infrastructure projects.

India Opportunities Venture Fund of INR 50 billion to be set up with SIDBI.

3 Union Budget – 2012-2013

Direct Taxation Rate of Direct Taxation

Personal Tax Rates

Existing

Income (INR) 0 – 180,000 180,001 – 500,000 500,001 – 800,000 800,001 – Above % 0 10 20 30 Income (INR) 0 – 200,000

Proposed

200,000 – 500,000 500,001 – 1,000,000 1,000,000 – Above % 0 10 20 30

In the case of a resident individual of the age of sixty years or above but below eighty years, the basic exemption limit is INR 250,000 In the case of a resident individual of the age of eighty years or above, the basic exemption limit is INR 500,000 Surcharge is not applicable Education cess is applicable @ 3 percent on income-tax 4 Union Budget – 2012-2013

Direct Taxation Rate of Direct Taxation

Corporate Tax Rate (CTR)

CTR (including surcharge and education cess) has been remain unchanged for both domestic and foreign company.

Corporate Tax Rate (including surcharge and education cess) Domestic Company

Total income equal or less than INR 10 Million Total income more than INR 10 Million

Foreign Company

30.9 percent 32.445 percent Total income equal or less than INR 10 Million Total income more than INR 10 Million 41.2 percent 42.024 percent

The rate of Security Transaction Tax (STT) will be reduced to 0.1 percent from 0.125 percent in respect of sale and purchase of equity shares / units of equity oriented funds through a Stock Exchange in India.

5 Union Budget – 2012-2013

Direct Taxation Dividend Distribution Tax (DDT) and Dividend from Foreign Company

Dividend distributed by a Domestic Company is exempt from income-tax in the hands of all shareholders.

The Domestic Company is liable to pay DDT at 16.223 percent (inclusive of applicable surcharge and education cess) on such dividends.

If dividend distributed by a subsidiary company has been subject to DDT, there will be no further DDT in the hands of holding company while further distributing the said dividend in the same year.

Dividends earned by an Indian company from a foreign Company in which it holds 26 percent or more equity shares shall be taxable at the rate of 15 percent (plus applicable surcharge and education cess) on gross amount of such dividends.

Union Budget – 2012-2013 6

Direct Taxation General Anti Avoidance Rule (GAAR)

General Anti Avoidance Rule has been introduced under Income Tax to counter aggressive tax avoidance scheme.

Conditions – GAAR: Where the following conditions are fulfilled, an arrangement is declared as ‘impermissible avoidance arrangement’: The taxpayer enter into an arrangement, the main purpose or one of the main purpose is to obtain tax benefit, and Any of the following criteria: it satisfies prescribed conditions such as disproportionate rights or obligations, any misuse or abuse of domestic tax provisions, lack of commercial substance or done for non-bonafide business purposes.

Provisions may be applied to any step in or part of arrangement and onus on Taxpayers to prove that obtaining tax benefit is not the main purpose.

Wide powers granted to Tax Authorities when GAAR is invoked for an “impermissible avoidance arrangement”.

7 Union Budget – 2012-2013

Direct Taxation Transfer Pricing

Advance Pricing Agreements (APA): The new provisions relating to APA to be introduced from 1 July 2012 with the following key salient feature An agreement between a taxpayer & the revenue authorities for specifying the manner in which the arm’s length price is to be determined in relation to an international transaction and binding on both taxpayer and the revenue authorities.

The arm’s length price shall be determined on the basis of prescribed methods or any other method APA would be valid for such financial years as mentioned in the APA and will not exceed five consecutive years unless there is a change in the provisions or the facts having a bearing on the international transaction In the case an APA covering a particular year is obtained after filing the return of income, a modified return to be filed based on the APA and assessment or reassessment to be completed based on such modified return An APA to be declared void ab initio if obtained by fraud or misrepresentation of facts.

8 Union Budget – 2012-2013

Direct Taxation Transfer Pricing

Amendment in definition of ‘International Transaction’ With retrospective effect from 1 April 2002, international transaction clarified to include the following: the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; the purchase, sale, transfer, lease or use of intangible property such as copyrights, brand, customer lists, design or any other business or commercial rights similar nature; capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; provision of services; a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date.

Scope of Transfer Pricing Regulation – Domestic Transaction

The scope of Transfer Pricing regulation has been expanded to include Specified Domestic Transaction between resident taxpayers / undertakings of the tax payers, where aggregate of value of transaction exceed INR 50 Million.

9 Union Budget – 2012-2013

Direct Taxation Transfer Pricing

Specified Domestic Transaction includes: Expenses or payments made to domestic related persons as specified in Section 40A(2)(b) of Income Tax Act.

Transactions between undertakings of the same taxpayer or transactions by a taxpayer with closely connected persons for the purpose of Chapter VI-A (deductions in respect of certain tax holidays) and Section 10AA of the Act (tax holiday for SEZ units).

Arm Length Price – Variation Restricted

Allowable variation between Arm Length Price and Transfer Price Rate that can be notified by government shall not to exceed 3 percent.

The provision relating to allowable variation between Arm Length Price and Transfer Price has been revised and clarified that the revised provision shall apply to all proceedings pending before tax authority as on 1st October’ 2009.

Retrospective clarification with effect from 1 April 2002 that allowable variation of 5 percent to arm’s length price is not in the nature of standard deduction.

10 Union Budget – 2012-2013

Direct Taxation Indirect Transfer – To be Taxed in India

The scope of income deemed to accrue or arise in India to non-residents on directly or indirectly through the transfer of a capital asset situated in India has been expanded retrospectively from 1 April 1962 to include tax on indirect transfer of shares in an Indian Company.

It has been clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

The scope of ‘transfer’ in such cases widened to include disposition of share of company registered / incorporated outside India where it relates to such asset.

Retrospective explanation has been introduced in respect to chargeability which shall operate notwithstanding any judgment, decree or order of any Court or Tribunal or any Authority.

The scope of withholding tax provision on any payment of income to non-resident expressly extended to all persons, resident or non-residents irrespective of them having a residence or place of business or business connection or any other presence in India.

11 Union Budget – 2012-2013

Direct Taxation Non Resident - Other

The scope of Royalty income for non-residents deemed to accrue or arise in India and taxable on gross basis expanded retrospectively from 1 June 1976 to include within its ambit: Payments for the use or right to use of computer software (including granting of a license), payment of any right, property or information irrespective of its control or possession, use or location and the term ‘process’ clarified to include transmission by satellite (including up-linking, amplification, conversion or down-linking of signals), cable, optic fibre or any other such technology With effect from 1 July 2012, any interest income of non-residents from Specified Companies in respect of borrowing foreign currency loans given from outside India between 1 July 2012 and 1 July 2015 under an agreement approved by the Central Government to be taxed at lower rate of 5 percent (plus surcharge and education cess) and payer to withheld tax accordingly. Specified company” means an Indian company engaged in the business of— generation or distribution or transmission of power; or operation of aircraft; or manufacture or production of fertilizers; or construction of road including toll road or bridge, port including inland port, ships in a shipyard or dam; or developing and building a specified housing projects 12 Union Budget – 2012-2013

Direct Taxation Income Tax Treaty Between India and Other Countries

Any term used in tax treaty not defined therein or in the domestic income-tax provisions to have the same meaning as assigned to it through any notification and will have effect from date of coming into force of the tax treaty . The above amendment will be effective retrospectively from 1 st October’ 2009.

Tax Residency Certificate

Relief under DTAA will available only if the tax residency certificate contains prescribed particulars (of the taxpayer being a resident in any country or specified territory outside India) and is to be obtained from the Government of that country or specified territory.

In Finance Bill 2012, it has been announced that obtaining of Tax Residency Certificate mandated but may not be regarded as a sufficient evidence for tax treaty benefit.

13 Union Budget – 2012-2013

Direct Taxation Exemption of Income and Incentives

Presently, income of a VCF / VCC registered with a SEBI from investment in a VCU engaged in a specified sectors is exempted from income tax but now such exemption has been extended to VCF/ VCC without any sectoral restriction.

Deduction towards premium paid for life insurance policies issued on or after 1 April 2012, available only up to 10 percent of the actual capital sum assured ( Earlier 20 percent for policies issued up to 31 March 2012).

With retrospective from 1 st April’ 2012, any income received in India in Indian currency by a foreign company on account of sale of crude oil to any person in India subject to specified conditions.

The sunset date for tax holiday for power sector extended to 31 March 2013 from 31 March 2012 for undertakings which start generation or distribution or transmission of power or undertake substantial renovation / modernization of an existing network of transmission or distribution lines during that period.

Taxpayer building hotel of two-star or above category to remain eligible for the investment-linked deduction even if they transfers the operation of such hotel to another person. This amendment to be effective from AY 2011-12.

Taxpayers engaged in the business of generation or generation and distribution of power to be eligible for an additional depreciation of 20 per cent on investments made in new machinery or plant.

14 Union Budget – 2012-2013

Direct Taxation Exemption of Income and Incentives - Provision

The benefit of a weighted average deduction of 200 percent in relation to expenditure incurred on scientific research on in-house research and development facility of any specified article or thing is extended by 5 years until 31 March 2017.

Investment-linked incentives providing deduction in respect of specified capital expenditure extended to setting up and operating an inland container depot or a container freight station or warehousing facility for storage of sugar and Bee-keeping and production of honey and beeswax The weighted deduction of 150 percent extended to the business commencing after 1 April 2012 of setting up / operating a cold chain facility, setting up and operating a warehousing facility for storage of agricultural produce, building and operating, anywhere in India, a hospital with at least one hundred beds for patients, developing and building a housing project under the affordable housing scheme; and production of fertiliser in India.

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DTC and GST Direct Tax Code and Goods & Service Tax

Direct Tax Code (DTC)

The Proposed DTC was envisages to replace the existing Income Tax Act and Wealth Tax Act with effect from 1 st April 2012.

Revised DTC was presented before the Parliament on August 2010 and subsequent referred to Parliamentary Standing Committee on September 2010.

Standing Committee has presented its report after consultation with stakeholders on March 2009.

Finance Minister has been announced that DTC to be enacted expeditiously taking into account the Report of the Parliamentary Standing Committee.

Goods and Service Tax (GST)

Drafting of model legislation for the Centre and State GST in concert with States is under progress.

GST network to be set up as a National Information Utility and to become operational by August 2012.

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Sector Analysis Aviation

Key Policy

ECB to be permitted for working capital requirement of airline industry for a period of one year, subject to a total ceiling of USD1bn.

Proposal for allowing 49% equity participation by foreign airlines under active consideration but not announced in the budget.

Excise Duty

Exemption extended to parts and testing equipment for maintenance, repair and overhaul of aircraft, tyres used in aircraft subject to specified conditions.

Custom Duty

Exemption from custom duty on new and retreated aircraft tyres.

Exemption from custom on parts and testing equipment by a third party maintenance repair and overhauling facility for aircraft.

17 Union Budget – 2012-2013

Sector Analysis Power

Key Policy

ECB has been permitted for financing the rupee debt of existing power project

Custom Duty

Exemption from BCD for Liquefied Natural Gas and Natural Gas, if imported by a power generating company Exemption from BCD extended to coalmining projects Exemption from ADC on all items of machinery including prime movers, instruments etc. and components required for setting up of a solar thermal power generation project or facility

Direct Tax

Benefit of initial depreciation at the rate of 20 percent in addition to normal depreciation extended to entities engaged in the business of generation or generation and distribution of power Sunset date for being eligible to claim tax holiday by power generating, distributing or transmitting companies extended by one more year to 31 March 2013 With effect from 1 July 2012, any interest income of non-residents company in respect of borrowing foreign currency loans given from outside India between 1 July 2012 and 1 July 2015 under an agreement approved by the Central Government to be taxed at lower rate of 5 percent (plus surcharge and education cess) and payer to withheld tax accordingly.

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Sector Analyze Infrastructure

Key Policy

During Twelfth Plan period, investment in infrastructure to go up to INR 50,000 billion with half of this, expected from private sector.

Government has approved guidelines for establishing joint venture companies by defence PSUs in PPP mode.

Tax free bonds of INR 600 billion to be allowed for financing infrastructure projects in 2012-13.

ECB to be allowed for capital expenditure on maintenance and operation of toll system for road and highways, if they are part of original project.

Direct Taxation

To provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs proposed to be reduced from 20 percent to 5 percent for 3 years for certain sectors.

Removal of cascading impact of DDT.

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Sector Analyze Oil and Gas

Key Policy

All three public sector Oil Marketing Companies have launched LPG transparency portals to improve customer service and reduce leakage.

Direct Taxation

With retrospective effect from AY 2012-13, foreign companies receiving money in India in Indian currency from sale of crude oil (which is imported into India) under an agreement with Central Government or approved / notified by Government not liable to tax in India on their said income provided receipt of such money is the only activity carried out by such foreign company in India.

Custom Duty

Exemption from BCD for Liquefied Natural Gas and Natural Gas, if imported by a power generating company.

Cess Duty

Cess on crude oil increased from INR 2500/MT to INR 4500/MT.

20 Union Budget – 2012-2013

Sector Analysis Pharmaceutical

Custom Duty

Proposed to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to six specified life-saving drugs/vaccines.

Propose to reduce basic customs duty to 2.5 per cent with concessional CVD of 6 per cent on specified parts, components and raw materials for the manufacture of some disposables and instruments.

Full exemption from basic customs duty and CVD is also being extended to specified raw materials for the manufacture of coronary stents and heart valves.

Direct Taxation

The benefit of a weighted average deduction of 200 percent in relation to expenditure incurred on scientific research on in-house research and development facility of any specified article or thing is extended by 5 years until 31 March 2017.

Eligible age for senior citizens for the purpose of deductions towards health insurance payments and medical treatment of specified diseases reduced to 60 years from 65 years.

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Sector Analysis Real Estate

Key Policy

ECB has been allowed for Low Cost housing projects Set up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans

Direct Taxation

Provision to withheld 1 percent (plus surcharge and education cess) has been introduced on consideration paid to resident for transfer of immovable property (other than agricultural land).

No withholding shall be made where consideration paid or payable for the transfer of an immovable property is less than INR 5 Million case such immovable property is situated in a specified area, or is less than INR 2 Million in case such immovable property is situated in any area other than the specified area.

Stamp Duty value to be considered for withholding tax where the consideration for transfer is less than stamp duty value.

22 Union Budget – 2012-2013

Sector Analysis Automobile Excise Duty

Particular

Small cars (length not exceeding four metres) with engine capacity of 1200cc (petrol/ LPG/ CNG)/1500cc (diesel) Other cars with engine capacity not exceeding 1500cc engine capacity exceeding 1500cc

Earlier (percent)

10 22 22 plus INR 15,000 Chassis with engines for specified automobiles 10/22 plus INR 10,000

Proposed (percent)

12 24 27 15 / 25 Union Budget – 2012-2013 23

Automobile Custom Duty

Particular

Large Cars / MUVs / SUVs of specified capacity Lithium Ion Automotive batteries for manufacture of Lithium Ion battery packs supplied to manufacturers of hybrid/electric vehicle

Sector Analysis

Earlier (percent)

60 10

Proposed (percent)

75 Nil Special Parts of Hybrid vehicle 10 Nil Union Budget – 2012-2013 24

Service Tax Service Tax

Effective Tax rate of service tax has been increased from 10.3 percent to 12.36 percent. (Effective from 1 st April 2012) Amendment in composition rate of the following services (Effective from 1 st April 2012) : Life insurance

Services

Purchase and sale of foreign currency

Amendment

3 percent for the first year’s premium and 1.5 percent for the subsequent years premium (earlier 1.5 percent for the year’s premium) existing rate proportionately increased by 20 percent Works contracts rate Distributors or selling agents of lotteries increased from 4 to 4.8 percent increased from INR 6000/ 9000 to INR 7000/ 11000 Widened the scope of service tax by introduction of a negative list.

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Notes

All information provided in this Publication has been compiled from reliable sources. Although reasonable care has been taken to ensure that the information in this Publication is true and accurate, such information is provided ‘as is’, without any warranty, express or implied as to the accuracy or completeness of any such information. India Law Offices shall not be liable for any losses incurred by any person from any use of this publication. This Publication can use as a research tool only. Readers should consult their legal, tax and other advisors before making any investment or other decision with regard to any business in India.

Union Budget – 2012-2013 26

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