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B. K. KHARE & CO.CHARTERED ACCOUNTANTS

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B. K. Khare & Co. Chartered Accountants

BUDGET ANALYSIS 2013

This publication is a service to our clients based on a quick appreciation of the budget proposals

and must not be regarded as professional advice, authoritative opinion or the sole basis for your

decisions. This publication does not constitute an offer or solicitation. For Private Circulation only.


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THE INFLATIONARY UNIVERSECan it be a comfort to know

When we deal with the inflationary pressures

On our Economy

That our Universe is also inflating

All the time

As I write and as you read

Be it day or night?

Pain shared is pain diminished

Unlike happiness shared is happiness multiplied

And thus the shopper might feel

His pocket pinch less

As he buys FMCG’s

If only he knew the entire Universe was

Sharing his Inflationary Pain.

Inflation is sometimes a welcome sign

Of an overheated economy

But then too much of anything is

Also not a good thing

And the RBI does some monetary juggling

To bottle up the genie of Inflation.

We are now the Boom and Bust generation

Blasé about the axiom

That wherever there is a Boom

There will be a Bust

Newton’s Fourth Law of Econometrics.

Through the economic downturn

Governments resorted to stimulus spending

Pumping money into the economy

Like a blood transfusion to a

Pale sick patient.

Americans whose debts

Had brought the world economy

Crashing down were encouraged

To go to shopping malls

B. K. Khare & Co.Chartered Accountants

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And spend that extra dollar

As an act of patriotism.

Wages distributed among workers

Has a multiplier effect

Can start a chain reaction

That kick starts the economy

Which then feeds off its own activity.

Keynes even went so far as to

Advocate digging ditches

And then filling them again

As a way to generate employment

And put money in hands which would

Spend them.

So next time you go on a shopping spree

Feel good about the fact

That you are doing an altruistic turn

To the local economy!

Once the regular economy is woken up

From its slumber by the shot of adrenalin

Of stimulus spending

Monetary policy can suck the excess money off

Leaving the healthier lungs of the revived economy

To their own devices.

It may seem that stimulus spending

Increasing Sovereign Debt is Maya

But what is not Maya?

In this world everything is permanently temporary

There is no permanently permanent

Except the Karta of this earth.

Ultimate truth in this mundane world is

Inflation inflates debt and deflates assets.

— B. K. KHARE

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Dear Esteemed Reader,

We are once again with you giving our views and comments on the budget presentation to the Parliament by the Hon’ble Finance Minister Mr. P. C. Chidambaram. He has presented Annual Budgets on eight occasions (including this year’s). On the election of his predecessor Mr. Pranab Mukherjee as the (Hon’ble) President of India, Mr. Chidambaram has staged a come-back as the Finance Minister. In fact, Mr. Chidambaram feels more at home as the Finance Minister than as Home Minister though he has given a creditable performance as Minister of Home Affairs during his brief tenure. The Budget presentation is one of the most important legislative business as a large number of citizens are interested to know the contents of the Budget as it affects their life. The veil of secrecy is kept up and therefore all the more it is desired by one and all to know the meaning of content of the Budget instantly on its presentation, or rather even before it!

We should think so that there is no constitutional or any other provision nor any other enactment prohibiting disclosure of Budget contents before its presentation to the Parliament. Nevertheless, it is a long standing convention and well accepted one in a democratic society. Parliament is very zealous of its sanctity and secrecy. The well known Chancellor of the Exchequer and Authority on Public Finance, Lord Dalton, had to pay a price for his simple remark to a friend of his whom he met across while going to the Parliament House, to the effect that “My friend! From tomorrow your cigarette will become dearer.” The remark may be, as it is, very innocent and innocuous but its consequences were very grave such that he had to resign as Chancellor of the Exchequer. Of course, as you know, that U.K. is a cradle for democracy where democratic conventions are highly respected as if they are part of written constitution.

This time, the veil of secrecy was somewhat loosened as some parts of the budget contents were already known to the public. The Finance Minister, immediately upon his shifting to the North Block, started tackling the fiscal budgetary problem and thundered that he has set for himself certain Lakshman Reka that Budget deficit for the current year i.e. 2012-13 will be no more than 5.3% of the GDP and fiscal deficit for the next year i.e. 2013-14, will be no more than 4.8%; in his own words, these ‘red-lines will not be allowed to be breached’.

Some fiscal measures which come through presentation of the Budget in fact have come and become operational such as increase in diesel prices, petrol price, Cooking Gas price and Rail fares. The Railway Minister has already raised the passenger tariffs and as yet he is not done with it, as it is given to understand that Rail fares may undergo certain changes. The Railway Budget, presented on 26th February 2013 to the Parliament contains only one notable feature viz. rail-freight on goods has been proposed to be uniformly increased by 5.8% effective from 1st April 2013. All these measures have become operational with a view to augmenting the Govt. revenue and reducing the related subsidies. Further glimpses of certain tax/fiscal measures are in evidence.

Hon’ble President, Mr. Pranab Mukherjee’s speech to the Joint Session of Parliament on 2nd February 2013.

For example, following are the important Points covered by President’s Speech (Excerpts):

1. The impact of both Global and domestic factors that dragged down India’s economic growth this year to the slowest in a decade.

2. The country needs more opportunities, greater choices, better infrastructure and enhanced safety and security for people.

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3. Europe is in recession and most emerging markets are growing very slowly. Both global and domestic factors have affected our growth.

4. GDP grew at 5.4% in the first half of the current fiscal and it was lower than the average of 8% in the last decade.

5. The average of around 8% in the last decade of India’s economic growth this fiscal year is expected to fall to 5% from 6.2% in 2011-12.

6. Public concerns about job security, safety of women and children, timely delivery of entitlements and the persisting social and economic inequality.

7. The scheme of direct transfer of benefits such as scholarship pensions and maternity benefits to the recipient’s bank accounts will in due course be enlarged to cover wages and subsidies on food and LPG as well and these will help better targeting of beneficiaries.

8. Food Security Bill which seeks to provide subsidies grains to poor as a matter of legal right.

Bills to be passed

The Prime Minister also took the opportunity to point out the following bills to be passed by the Parliament.

Sought co-operation of all to push through the key economic bills including those of Land Acquisition for Projects, pension, insurance.

Steps to boost economy and investor confidence.

Fiscal consolidation and contain the fiscal deficit at 5.3% of the GDP this fiscal year and 4.8% of GDP in 2013-14.

Share of manufacturing in the economy will be raised to 25%. 100 Million jobs will be created within a decade and steps to cut the country’s import dependence on crude oil.

ECONOMIC SURVEY 2012-13

Pulse of the Economy

2009-10 20010-11 2011-12 2012-13 2013-14

GDP Growth Rate % 8.6 9.6 (2R)

8.9 (1R)

7.6 (AE)

6.1 to 6.7#

Inflation WIP (average) % change 3.8 9.6 8.9 7.6 6.2 to 6.6#

Gross Fiscal Deficit (% of GDP) 6.5 4.8 5.7 5.1 (BE)

—

Foodgrain Production (Million tonnes) 218.1 244.5 259.3 250.1 —

AE: Advance Estimates

1R: 1st Revised Estimates

2R: 2nd Revised Estimates

# Projected

Inflation WIP: 2012-13 (April-January)

Fiscal indicators for 2011-12 are based on the provisional actual (unaudited)

BE: Budget Estimates

Foodgrain Production: Second Advance Estimates

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YY Survey wants priority for reining in surging inflation.

YY Calls for widening the tax base and prioritizing expenditure to bridge fiscal deficit.

YY Pushes for curbing gold imports to cut current account deficit.

YY Feels Aadhaar-based direct cash transfer scheme can help plug leakages in subsidies.

YY Pitches for hike in prices of diesel and LPG to cut subsidy burden.

YY Sees infrastructure bottlenecks affecting industrial sector performance.

The Finance Minister has very cleverly said that discussions are going on about taxing the super-rich more, reviving the estate duty for which “I have not expressed my opinion but I continue to believe that stable tax regime results into increased tax collections”, as he expects 20% annual growth in the revenue to the Government by the efficient tax administration. Yet, at some difficult times, the super-rich may be made to pay more taxes. It has already been announced that the GAAR provisions in the Income-tax Act will be active from the assessment year say, 2016-17 indefinitely as one cannot allow ingenuity induced tax evasion. He also expressed the opinion that too much tax benefits which are capable of being taken advantage of by the people may require modifications in times of difficulty, “which We may not describe as emergency.” He again assuaged the hurt feeling particularly of the foreign investors by promising to moderate the retrospective amendments by which certain transactions were taxed even though the Supreme Court reversed the decision of the Bombay High Court in the case of Vodafone on the ground that the transaction which took place, had no territorial nexus with

India. Yet such transactions could be taxed, as per Government view, on the ground that the underlying assets were in India, as represented by the transfer of shares and therefore such transactions are liable to be taxed under the Capital Tax Gains provisions. Otherwise, such transactions would have gone untaxed. In other words, the transaction would have gone completely scot-free from the tax net and therefore the Govt. of India thought that the Supreme Court decision may be reversed by giving retrospective effect to the amendment to the Income-tax Act whereby tax could be garnered by the jurisdiction in which the underlying assets are represented by the transfer of shares “as were in India”.

Another disturbing factor of the economy is Current Account Deficit (CAD). It is fluctuating between 3 and 6% of the GDP. In this inflationary phase, though it helps to augment supply side, it adversely affects inflationary pressures. Besides, fiscal deficit worsens and rupee suffers erosion. Some of the shares of PSUs are disinvested for augmenting the Government revenue which will considerably help to keep the fiscal deficit under control. The finance minister participated in road shows by visiting a few countries like Hong Kong, Singapore, Europe etc. and had open dialogues with the Western captains of industry, trade and finance, persuading them that the basic story of India’s economic growth remains intact. The springs of growth are only suppressed without losing their tensile strength, which will spring back to continue the story of growth which is expected to be 5.8% in the current fiscal year and in a couple of years, India will resume the path of growth at 8 – 9%, and more. For the time being, the growth is stunted as a result of slowing down of world

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growth also. The United States’ economy has of late considerably improved. The European mess will stand corrected and splintering will be avoided in due course. Even though Indian economy does not depend so much upon World’s economic growth of foreign countries, yet, in this integrated world, the economy is bound to be affected by the world forces. The world’s Rating Agencies like Standard and Poor’s have not presently downgraded our economy so as to become unsafe for the foreign capital to come to India. There were capital remittances worth 25 Billion US Dollars in the calendar year 2012.

There are some other source materials from which you could gather glimpses of what could be the budget proposals for the current year such as President’s address to the joint session of Parliament, Railway Budget, Government Economic Survey, Views as reflected in the comments by the Members of the Committee of Economic Advisors attached to the Prime Minister’s office.

A Performance Assessment

Preamble

The Current financial year 2012-13 has been another peculiar year in many ways, compounding further – the existing problems, mainly of ‘slow growth’ and ‘high inflation’. The Global economy has also been displaying tentative, patchy and regionally different, recovery – although the ‘worst’ scenario for US and Euro seems to have been averted.

We propose to review in this Note, the major macro – economic, infrastructural and industrial trends during the current year and assess the economy’s performance and prospects.

The Global Context

In its latest assessment of the World Economy, the IMF has projected a slight upturn for 2013, - arresting the slump observed in 2012. The IMF sees a major strengthening of Growth in 2014, with the ‘Advanced’ as well as ‘Emerging Market and Development Economies’ (EMDEs), - consolidating their growth further. The following table gives details:

Table 1 : World Output/GDP Growth (0%)

Category 2011 2012 (E) (Estimated)

2013 (P) (Projected)

2014 (P) (Projected)

Advanced Economies 1.6 1.3 1.4 2.2— USA 1.8 2.3 2.0 3.0— Euro Area 1.4 (-)0.4 (-)0.2 1.0— Germany 3.1 0.9 0.6 1.4— U.K 0.9 (-)0.2 1.0 1.9— Japan 0.6 2.0 1.2 0.7EMDEs 6.3 5.1 5.5 5.9BRICS— Brazil 2.7 1.0 3.5 4.0— Russia 4.3 3.6 3.7 3.8— INDIA 7.9 4.5 5.9 6.4— China 9.3 7.8 8.2 8.5

(P) - Projected; Source: IMF, WEO Update, January 2013.The Global economic recovery in 2013 & 14 is seen mainly on the strength and resilience of the EMDEs in general and of China in particular.

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Although many experts reckon that the many crises predicted earlier in 2012, such as: “Greece – exit”; “Euro currency break-up” and “US Fiscal Cliff”, have clearly been avoided, the current recovery is far from strong and widespread. Dr. Oliver Blanchard, Chief Economist IMF, has recently pointed out that “– we may have avoided the cliffs, but we still face high mountains---!” He has pointed out to the key challenges – especially faced by the Advanced economies, those of - ‘fiscal consolidation’ ‘Still Weak financial system’ and ‘high – unemployment’.

The OECD in its latest “Going for Growth/2013” report has recommended Reform measures to boost incomes as well as employment, which include: Fiscal consolidation; Restoration of Competitiveness, Active Labour – Market and Social Benefit policies etc.

A Word on World Trade

The World Bank and the IMF expect some revival in the growth of World Trade Volume in 2013 & 2014 – (The Trade Growth which was about 6% in 2011, had slumped to around 3 – 3.5% in 2012). It is projected that World Trade Volume will grow by around 4% in 2013 and to 5.5% in 2014, on the back of the expected recovery of the Global Economy.

In its latest ‘Global Economic Prospects’ (GEP) Report (Jan’13) the World Bank has pointed out significantly, that “----- over the past two decades, the share of developing countries in Global Trade has doubled from 16% to 31.5%---“ (World Bank, GEP, Trade Annex).

Needless to say, the developments in the Global Economy constantly affect the Indian Economic trends. It is in the context of: ‘slow global economic growth,’ ‘weak global banking and financial system,’ ‘volatilities in commodity and oil prices’ and ‘overall subdued investment climate,’ – that the Indian economic situation needs to be analysed and examined.

Indian Economic ‘Performance’ in 2011-12: The Macro-View

GDP ‘Growth’

After a quick recovery in 2009-10 and its further consolidation in 2010-11, the India economy is slipped to just 6% GDP growth in 2011-12, the CSO expects only 5% GDP Growth in the current year 2012-13. The principal feature of the 2012-13 economic ‘activity’ is that all the three principal Sectors: Agriculture, Manufacturing/Industry and Services have significantly slowed down together. The following table portrays the details:

Table 2 : GDP Trends

Category FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 (E)

Agriculture 0.8 7.9 3.6 1.8

Industry 9.2 9.2 3.5 3.1

Manufacturing 11.3 9.7 2.7 1.9

Services 10.5 9.8 8.2 6.6

GDP 8.6 9.3 6.2 5.0

(figures represent percentage)Source : CSO; E-Estimates

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YY It is the precipitous fall in industrial and manufacturing growth from the very high level in ‘09=10 to the present abysmally low level (2012-13), that is widely perceived to be most worrisome. This is likely to affect future investment, employment as well as Indian exports adversely, unless appropriate and timely policy – measures are introduced in and after the Budget.

Consumption, Savings and Investment

Steep declines in Consumption, Savings as well as in Capital Formation/ Investment are another set of worrisome features of the Indian economy. The next 2 tables give the disturbing trends in ‘Private Consumption’ and ‘Fixed Capital Formation’ (Table 3) and the worrisome trends in ‘Savings’ (Table 4).

YY The continuous fall in Consumption, and especially in Private Consumption – which has been the major economic growth-

engine in the last decade, does not augur well, for the rest of the economy, unless (A) Inflation declines significantly and (B) consumer confidence is revived by specific policy/fiscal measures.

YY Equally important, the consistent erosion of ‘Financial Savings’ does not indicate a healthy situation and the increasing trend towards savings in ‘real estate’ and ‘gold’, needs to be diverted to ‘financial’ instruments.

The Inflation Scenario

High inflation, especially that prevalent in the ‘articles of mass consumption,’ including food, has been one of the most important problem facing the Indian economy in recent years, especially after 2010-11. Although, the WPI–based inflation has displayed some moderation in recent days, the CIP – inflation is still in double – digits, and so is the inflation for ‘Food and Primary Articles’ even at the WPI level.

Table 3 : Trends in Consumption at Capital Formation

(% Change)Category 2009-10 2010-11 2011-12 2012-13 (AE)

Consumption 8.2 8.1 8.1 4.1

Pvt. Consumption 7.1 8.6 8.0 4.1

Fixed Capital Formation 7.7 14.0 4.4 2.5

Source : CSO; (AE): Advanced Estimates

Table 4 : Trend in Savings (% to GDP)

Category 2007-08 2010-11 2011-12

Total Savings 36.8 34.0 30.8

— Household Savings 23.6 23.5 22.3

— Financial Savings 11.6 10.4 8.0

— Public Sector Savings 5.0 2.6 1.3

— Pvt. Corporate Savings 9.4 7.9 7.2

Source : CSO

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Table 5 : Trends in Inflation (%)

Category 2010-11 2011-12 2012-13 (E) (A-Jan)

1. WPI (All Commodities) 9.6 8.9 7.5

2. WPI (Food) 15.6 7.3 10.00

3. WPI (Fuel & Power) 12.3 14.0 11.5

4. WPI (Manufactures) 5.7 7.3 5.5

5. CPI (Industrial workers) 10.4 8.4 10.5

6. CPI (IW-Food) 9.9 6.3 10.5

Source: MOSPI; E- Estimated.

Thus, except for “Manufactured Products” the rate of inflation has remained consistently high for all the other categories, and consistently for last 3 years.

During the current year too, the prices across major categories and in all the 10 months of the year (April – January), have been ruling close to double – digit levels, as depicted in the following Table:

Table 6 : Inflation in 2012-13

Inflation (%)

Category July Aug. Sept. Oct. Nov. Dec. Jan. 13

I WPI:

1. Primary Articles 10.5 11.2 9.2 7.8 9.6 10.6 10.3

2. Food Articles 10.2 9.3 8.1 6.7 8.8 11.2 11.9

3. Fuels 8.4 8.7 12.0 11.6 10.0 9.4 7.1

4. Mfg. 5.9 6.4 6.5 4.9 5.4 5.0 4.8

II CPI

1. Food/Beverages 11.6 12.0 11.7 11.4 11.8 13.0 13.2

2. Fuel & Light 7.3 7.5 7.2 7.6 7.4 8.2 8.5

3. Clothing 10.9 10.6 10.3 10.4 11.1 10.7 11.0

4. Housing 10.7 10.8 10.8 10.5 10.4 10.3 10.3

YY ‘High inflation in a slowing economy’ throughout the years 2011-12 and 2012-13, has definitely put the Indian economic performance in reverse gear.

YY While high and rising inflation has eroded consumption, savings as well as real incomes of the people, the interest – rates which were kept high till 2012 by the RBI, have adversely impacted industrial growth and investment – sentiments as well.

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Central Government Finances

Compared to the fiscal scenario prevailing in the first half (April – September), of the current year, the Financial position of the Central Govt. appears much healthier as of end – December 2012. Recent measures of pruning petroleum and other subsidies, coupled with steady improvements in ‘Direct Taxes’ collection and with revival of hopes on meeting the year’s PSU – Disinvestment target – have implied that the Govt. may

perhaps hit quite near the the targeted 5.3% Fiscal Deficit Ratio for 2012-13.

However, the burgeoning subsidy – bill, continuous increase in Non-Plan expenditure and a cut-back in Govt. Capex or Plan Expenditure, – do reveal the ‘structural weaknesses’ of Central Govt. Finances in recent years. Consequently, the Targets of 3% Fiscal Deficit and Zero Revenue Deficit as envisaged by the FRBM Act, look far and distant!

Table 7 : Latest Fiscal Snapshot – April – December FY13 (` Bn,%)

*These are in ` In ‘000 Crores

Category Apr-Dec FY 13*

%YoY Budget Est. FY 13*

0% to Total Budget

a. Revenue receipts 5,705 14.5 9,357 61.0

Net tax revenues 4,842 15.2 7,711 62.8

Non –tax 864 10.6 1,646 52.5

b. Non-debt cap receipts 159 -5.8 417 38.1

c. Total receipts(a+b) 5,864 13.8 9,773 60.0

d. Revenue expenditure 8,686 10.7 12,861 67.5

e. Of which interest 2,019 12.5 3,198 63.1

f. Capital expenditure 1,226 9.6 2,048 59.8

g. Total expenditure(d+f) 9,912 10.6 14,909 66.5

h. Plan Expenditure 2,959 6.9 5,210 56.8

i. Non Plan Expenditure 6,952 12.2 9,699 71.7

j. FiscalDeficit(g-c) 4,048 6.2 5,136 78.8

k. Revenue deficit (d-a) 2,980 4.2 3,504 85.1

l. Primary Deficit (j-e) 2,028 0.6 1,938 104.6

Thus, the above table reveals that by December 2012, the Revenue Deficit is more than 85% of the Budget and Fiscal Deficit stands at 79%.

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The External Sector

Due to the high level of Oil-Prices in the international market, and due to severe economic slowdown in major countries and in the economies of India’s trading partners, our External Sector has come under pressure in 2012-13. The principal features of the troubled external sector include:

YY Unprecedented level of Current Account Deficit;

YY Significant Decline in FDI – Inflows;

YY Rising Trade – Deficit due to falling export – growth;

YY Spurt in oil and other imports.

Table 8 : Latest Trends in Foreign Trade

Category Unit April – Jan.

2012-13

April- Jan.

2011-12

Exports $Bln 240 252

Change % -5 —

Imports $Bln 407 407

Change % 0 —

Oil Imports % 12.3 —

Trade Deficit $ Bln 167 155

Source: Ministry of Commerce, February 2013 Release

YY The Current Account Deficit (CAD) to GDP –ratio for the latest available period (July – September) 2012-13, stands at a very high level of 5.4%. It is estimated that the CAD for the entire 2012-13 will be of about 4.8 to 5.0%, possible due to the likely turnaround in (January – March)

Quarter. (The CAD – ratio was a mere 1.3% in 2007-08, which rose to 2.8% in 2010-11 and deteriorated sharply to 4.2% of GDP in 2011-12).

YY The FDI equity inflows during (April – December) 2012-13, also significantly declined by more than 40%, from $29.3 Bln to $17 Bln.

YY The declining levels of Forex Reserves have implied an Import cover of only 7 months during the current year.

YY The downtrend in the Value of Rupee vis-à-vis the US Dollar (currently in the range of 54-54.5), is also adding to “imported inflation,” especially in oil and other imported items.

YY In a nutshell, India’s Trade and BOP situation remains grim and looks vulnerable since recovery in our major trading partners is still hazy and tentative….

Industrial (Manufacturing) Deceleration…

Industrial Production – growth which had already dropped sharply from 8.2% in 2010-11 to 2.9% in 2011-12, has contracted even more sharply, with virtually a ‘flat level of industrial production’ in (April – December) 2012-13. What has caused even more anxiety, is the fact that the deceleration (or in some cases, even absolute decline!), is virtually all-pervasive: in investment-goods as well as in consumer goods and across several sectors: food-processing, machinery, metals, chemicals-amongst many others.

In many recent months the industrial growth has been negative, including in 2 latest consecutive months November 2012 and December 2012.

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Table 9 : Industrial Production – Detailed Breakdown

Apr.- Dec. (%)

SECTORAL FY 13 FY 12

Manufacturing 0.7 4.0

Mining -1.9 -2.6

Electricity 4.6 9.5

General 0.7 3.7

USE BASED

Basic Goods 2.7 6.2

Capital Goods -10.1 -2.9

Intermediate Goods 1.5 -0.7

Consumer Goods 2.6 5.7

Durables 3.7 5.2

Non-Durables 1.7 6.1

Source: MOS PI, February 2013 Release

The above table clearly indicates that while the growth of ‘Consumer Goods’ in the current year has dropped by more than 50% from last year, the Negative growth in ‘Capital Goods’ sector has already caused a lot of anxiety, as the sector already had a negative growth in 2011-12.

The revival of Industrial and Manufacturing growth has to be accorded the topmost policy-priority, through vigorous “investment climate” reforms, relating to Land; Environment, Consistent Tax Policies, Ease of Doing Business and through efficient Infrastructure…

The MSME Sector, the real backbone of the industrial economy of India, also needs urgent attention from the policy-makers. Their main problems are relating to ‘Availability and Cost of Finance’; ‘Ease of Doing Business’ and ‘Better Infrastructure’.

Infrastructure

Inadequate and poorly managed Infrastructure has always remained the most critical challenge for the Indian Economy and for all its principal components – Agriculture; Manufacturing and Services. The composite index of ‘Infrastructure Industries’ (comprising – Electricity, Coal, Steel, Cement, Oil, Gas and Fertilisers), had attained a high growth of 8.4% in 2006-07, after which there has been a steady deceleration and the growth rate halved to 4.2% in 2011-12.

Even during the current year, the growth of these Core Sector Industries, has dropped further to a mere 3.3% during the (April-December) period, from 4.8% recorded in the previous year.

YY The most crucial issue relating to Infrastructure Development is that of the ‘hurdles’ in the pace of Mega or Major projects- execution. These obstacles take the form of either “Land Acquisition” or, “Forest/Environment”; or “Governance-related”. The Private investors in Infrastructure – whether Domestic or Foreign, have been displaying apprehension in recent years because of these problems associated with Infrastructure. Consequently, sizeable Investments in all critical sectors of Transport and Energy, have either been shelved or deferred or delayed. This has caused further setback to the growth of Industry, Manufacturing and Exports, in an already grim situation.

Summary and Conclusions

From the above survey of the Macro-economy, it can be inferred that the Indian Economy is very delicately poised today and will require all-sided and urgent measures to revive growth and to restore the confidence of all the stake-holders – Consumers, Industries, Investors, Bankers as well as Citizens.

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The principal challenges can be summed up as:

YY The challenge of Revival of GDP growth, coupled with Raising of Savings, Investment and a boost to Private Consumption;

YY Restoring the High Growth of the Manufacturing and Export sectors;

YY Challenge of a significant reduction in the rate of Inflation and especially in the Food-related Inflation;

YY Reining-in, the Fiscal Deficit through, mainly, the Subsidy reforms;

YY Controlling the spiraling Current Account Deficit within a reasonable limit, much lower than the currently prevailing 4.5-5%.

OUR ALTOGETHER DIFFERENT APPROACH

Corporate tax structure should be premised on the principle “do not tax which goes into the corporation but tax what is taken out of it”. The reason is obvious in that, what goes into the corporation is productive whereas which goes out of it is unproductive. Presently, there is a uniform rate of tax which is the maximum and the minimum, irrespective of level of its income. The greatest advantage of corporate business existence is limited liability of the lay shareholders or the promoters unless one gives personal security for the corporate borrowing or standing guarantee for any debt.

The rates of tax in case of all companies and income slabs should be so adjusted to ensure equitable burden which will require lot of consideration. However, the moment income exceeds say, ` 3 crores, there will be uniform tax like any other limited liability company.

This tax system will come handy for some professionals and businessmen and will have the advantage of limited liability.

In our Budget comments from year to year, for the purpose of augmenting revenue and with a view to achieving equity, we have been recommending.

YY Levy of inheritance tax.

YY Taxation on farm income which is presently used as engines for tax evasion by pseudo farmers.

YY Certain restricted choice in selecting the fiscal year (previous year) like 31st March, 31st December.

YY Moderate levy on spot and forward transactions of foreign exchange including derivatives in the shape of contracts of future and options.

YY Eco tax etc.

YY Tax on book profits of corporate as per audited accounts at a uniform rate of say 20 – 25% which can be extended to non-corporate assesses also whose accounts are mandated to be audited as per sec. 44AB.

Unfortunately, it seems time has not come as yet for acceptance of any of the ideas we have been advocating for over nearly more than a decade.

General Anti Avoidance Regulations (GAAR) and Specific Anti Avoidance Regulations (SAAR)

The taxpayer has a legal right to dispose of his capital and income so as to attract upon himself the least amount of tax. Avoidance of tax is not tax evasion, and it carries no

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discomfiture, for it is sound law and, certainly, not bad morality for anyone to so arrange his or her affairs so as to reduce the tax impact to a minimum. In the case of tax payment, “evasion” means to illegally try to avoid paying tax. Therefore, “tax planning” cannot be regarded as tax evasion.

With the increasing globalisation of economies and growth in cross border transactions, many countries have introduced Anti Avoidance Regulation(s) which has empowered the Revenue Authorities to question transaction(s) and arrangement(s) rejecting their tax benefit unless there is any commercial legitimacy of that transaction(s)/arrangement(s). In India, there are ‘Specific Anti-Avoidance Rules’ (SAAR) in the domestic tax laws (transfer pricing, dividend stripping, etc.) as well as ‘Limitation of Benefits’ (LOB) clauses in some tax treaties.

Prior to the enactment of the Direct Taxes Code (DTC) (still it is in bill form and not enacted) any specific arrangement and structuring of colourable devices are put to judicial scrutiny by the Revenue Authorities. Accordingly, anti-avoidance measures were broadly administered by the Revenue Authorities on the basis of judicial precedents. These judicial precedents predominantly respect form-over-substance. In India, some courts in certain circumstances had held that legal form of transactions can be dispensed with and the real substance of transaction can be considered while applying the taxation laws [McDowell (154 ITR 148) (SC)/Nat West Bank (220 ITR 377)(AAR)]; whereas others have held that the form is to be given sanctity [Vodafone International Holdings B.V. v. Union of India & Anr (341 ITR 1), Union of India and Another v. Azadi Bachao Andolan and Another (263 ITR 706)].

In view of the aggressive tax planning with the use of sophisticated structures, it was felt that there is a need for statutory provisions so as to codify the doctrine of “substance over form” where the real intention of the parties and effect of transactions and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure that has been superimposed to camouflage the real intent and purpose.

In the above background, the Finance Act, 2012 introduced the provisions of General Anti Avoidance Regulations (GAAR) by incorporating a new chapter X-A in the Income tax Act to be effective from the financial year 2013-14. The present provisions in relation to GAAR are in line with the DTC. This provision would allow Revenue Authorities to restrict the benefits of taxation only to bona fide arrangements. This provision would enable the Revenue Authorities to examine the real nature of the transaction and would have the right to restrict tax benefits to the genuine taxpayers.

In order to implement GAAR provisions properly, a Committee had been constituted to provide recommendations for formulating the guidelines. The recommendations of the said Committee were perceived to be insufficient or confusing by stakeholders. Subsequently, an Expert Committee under the chairmanship of Dr. Parthasarathi Shome was constituted by the Prime Minister to undertake stakeholder consultations and to finalise the guidelines for GAAR. Based on the stakeholder feedback, the Expert Committee vetted and reworked the guidelines. After examining the responses to the draft report, the Expert Committee submitted its final report on 30th September, 2012, which has

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been made publicly available on 14th January 2013. Amongst others following are the key recommendations accepted by the Finance Minister:

YY An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance arrangement. The current provision prescribing that it should be “the main purpose or one of the main purposes” will be amended accordingly.

YY The assessing officer will be required to issue a show cause notice, containing reasons, to the taxpayer before invoking the provisions of GAAR.

YY The Approving Panel shall consist of a Chairperson who is or has been a Judge of a High Court; one Member of the Indian Revenue Service not below the rank of Chief Commissioner of Income tax; and one Member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.

YY The directions issued by the Approving Panel shall be binding on the taxpayer as well as the Income-tax authorities. The current provision that it shall be binding only on the Income-tax authorities will be modified accordingly.

YY While determining whether an arrangement is an impermissible avoidance arrangement, it will be ensured that the same income is not taxed twice in the hands of the same tax payer in the same year or in different assessment years.

YY Investments made before August 30, 2010, the date of introduction of the Direct Taxes Code, Bill, 2010, will be grandfathered, implying that the GAAR provisions would not be invoked at the time of exit of investments, which were made before the aforesaid date.

YY GAAR will not apply to such FIIs that choose not to take any benefit under the Treaty. GAAR will also not apply to non-resident investors in FIIs.

YY A monetary threshold of ` 3 crores of tax benefit in the arrangement will be provided.

YY Where a part of the arrangement is an impermissible avoidance arrangement, GAAR will be restricted to the tax consequence of that part which is impermissible and not to the whole arrangement.

YY Where GAAR and Specific Anti Avoidance Rules are both in force, only one of them will apply to a given case, and guidelines will be made regarding the applicability of one or the other.

YY Time limits will be provided for action by the various authorities under GAAR.

YY An advance ruling by the Authority for Advance Rulings (AAR) on whether an arrangement is an impermissible avoidance arrangement will be retained and the administration of the AAR will be strengthened.

YY The tax auditor will be required to report any tax avoidance arrangement.

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Further, having considered all the circumstances and relevant factors, the Government has also decided that the provisions of GAAR will come into force with effect from 1st April 2016 (as against the current provision of 1st April, 2014).

Retrospective Amendments relating to indirect transfer

In the case of Vodafone International Holdings B.V. v. Union Of India & Anr (341 ITR 1), the Supreme Court held that the transfer of shares of a foreign company, a special purpose vehicle, which holds underlying assets in India, by a non-resident to another non-resident would not be liable to tax in India. This decision also underlines the doctrine that the situs of shares is where the company is incorporated, where its shares can be transferred and where the register of members is maintained, and not the place where the underlying economic interests of such shares lies.

In order to overcome the above Supreme Court ruling, Section 9(1)(i) has been amended with retrospective effect from AY 1962-63 to clarify that the legislative intent of section 9(1)(i) is to widen the application as it covers incomes, which are accruing or arising directly or indirectly. It has been explained that the Section 9 codifies source rule of taxation wherein the state, where the actual economic nexus of income is situated, has a right to tax the income irrespective of the place of residence of the entity deriving the income. It has been further explained that where the corporate structure is created to route funds, the actual gain or income arises only in consequence of the

investment made in the activity to which such gains are attributable and not the mode through which such gains are realized and internationally this principle is recognized by several countries.

The provisions relating to the validation of demand, etc. have been incorporated in the Income tax Act in certain cases by the Finance Act, 2012. It provides for validation of demands raised under the Income-tax Act in certain cases in respect of income accruing or arising, through or from transfer of a capital asset situate in India, in consequence of the transfer of a share or shares of a company registered or incorporated outside India or in consequence of agreement or otherwise outside India. It has been further provided that any notice sent or purporting to have been sent, taxes levied, demanded, assessed, imposed or collected or recovered during any period prior to coming into force of the validating clause shall be deemed to have been validly made and such notice or levy of tax shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India. The validating clause shall operate notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any Authority.

This retrospective amendment was perceived in negative lights and it led to concerns about certainty and stability of tax laws in India. The Expert Committee was established to examine amendment on taxation of non –resident transfer of assets where underlying asset is in India, in the context of all non – resident taxpayers. The Committee has concluded

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that the retrospective amendments in relation to the indirect transfer are neither clarificatory in nature nor in accordance with the global practice. Further, the Committee has also stated that based on the principles of equity and probity in taxation, such amendments to exceptional cases and to avoid using it to expand the tax is also significant. In addition to the above, the Committee has also examined in detail several aspects of the amendments including the issues surrounding the lack of clarity on the meaning of terms used in the amendments, and has several suggestions in this regard. The Committee has also recommended that interest and penalty should not be levied when there is a tax demand due to such amendments. The report suggests that some of these recommendations will require legislative changes whereas some can be effectuated by way of circulars.

Although the above are mere recommendations made by the Committee based on the public comments, it would be interesting to see how the Government would react to these recommendations. The response of the Government would ultimately determine the fate of other cases including the Tatas and the AV Birla group (which had bought AT&T’s stake in Idea), Sanofi Aventis-Shanta Biotech, SAB Miller’s acquisition of Foster, Vedanta’s deal (to buy a 51 per cent stake in Sesa Goa from Mitsui), General Electric and Cairn Energy.

Transfer Pricing

India is aggressively pursuing tax claims against multinational firms operating in the country as the government seeks

to bridle in its budget deficit, taking particular aim at Information Technology and back-office functions. Transfer pricing assessments in India have generated heated controversies, due to an exponential rise in assessment activity and resulting transfer pricing adjustments. Indian tax authorities seem to be focused on generating huge revenues from transfer pricing adjustments, due to alleged non-adherence to the arm’s length price by related parties in their cross-border dealings. Critics are worried that in view of zealous approach of the tax authorities in making huge transfer pricing adjustments, there could be hindrances to the foreign investment.

At least 1,500 transfer pricing disputes were in litigation in India as of February 2011, compared with fewer than six in the United States and none in Taiwan or Singapore, an Ernst & Young survey showed in August 2012.

Advance Pricing Agreement (APA) mechanism has been introduced by the Finance Act, 2012. The assesses would be absolved from the future litigation and also lot of compliance procedures. The initiatives are welcome; however, its success would be dependent upon its effective implementation by the tax authorities.

There are lots of ambiguities found in the tax department’s approach while determining the arm’s length price. Guidance is required on the valuation of cross-border capital transactions such as subscriptions to share capital, re-organisation, restructuring and share transfers. Valuation rules under different laws like direct tax, indirect tax and exchange

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control regulations should be harmonized to remove conflicts. Recently, the valuation of share transfers within the related parties has created controversy between the tax authorities and taxpayers. A recent case involving Shell India, where the tax authorities proposed an adjustment of USD 2.7 billion (` 15,000 crores) with respect to shares of Shell India subscribed by its parent company, demonstrates the aggressive approach of the Indian tax authorities.

Guidance in terms of determination of arm’s length price in the case of inter-company guarantees and lending transactions should be provided. Tax authorities have taken contradictory views while making adjustments. Indian multinationals are finding difficulties in expanding their foot prints in the global markets in view of contemptuous approach of the tax authorities while determining the arm’s length price in relation to interest free loan and guarantee transactions.

Guidelines with regard to transfer pricing of marketing intangibles are also required. Guidance with respect to what constitutes advertising, marketing and promotion (AMP) expenses, on brand development and the Bright Line Test is needed.

Guidance would also be required as to how to compute economic adjustments like risk, working capital and capacity adjustments, etc., especially in the context of captive transactions amongst the related parties.

Domestic Transfer Pricing

India has transfer pricing regulations in place with regard to cross border transactions within the related parties since financial year

2001-02. The scope of the transfer pricing regulations has now been extended by the Finance Act, 2012 with effect from financial year 2012-13 to cover the transactions entered into by domestic related parties or by resident sister undertakings for the purposes of Section 10AA, 40A, 80A, 80-IA and Chapter VI-A of the Income tax Act. This move is said to be an outcome of Hon’ble Supreme Court of India’s suggestion in the case of CIT v GlaxoSmithKline Asia (P) Ltd. (236 CTR 113) to the Ministry of Finance to make appropriate provisions in law to cover related party domestic transactions in the ambit of transfer pricing provisions. The domestic transfer regulations would be applicable to expenditure incurred by any assessee in respect of which the payment has been made to related parties covered under Section 40A(2)(b) of the Income tax Act and related party transactions providing profit linked deductions to an assessee/undertakings, etc. However, the said regulations would be applicable only if the aggregate amount of all such specified domestic transactions exceeds ` 5 crores. The concept of fair market value has now been replaced with arm’s length price.

The domestic transfer pricing regulations would now empower tax officers to follow systematic approach in ascertaining the reasonableness of expenditure incurred between related parties and the appropriateness of profits earned by the business undertakings claiming tax holidays or deductions.

As per our experience over last 10 months, extending the transfer pricing requirements to domestic related party transactions has put tremendous compliance burden on

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the assessees. We recommend that the domestic transfer pricing regulations should be made applicable only to transactions which erode the tax base and should also provide for correlative adjustments. The threshold limit for complying with transfer pricing provisions should be increased substantially from the existing limit of ` 5 crore. APA should be extended to domestic transfer pricing. The reporting requirements of such domestic transactions are yet to be prescribed. Guidelines should be provided on certain transactions, like, director’s remuneration, capital expenditure, interest-free loans, etc.

HAVOC OF INFLATION

Over the last three years, the persistence of inflation in an environment of falling economic growth has come out as a puzzle. The Reserve Bank of India raised its policy repo rate 13 times between March 2010 and October 2011 by a cumulative 375 basis points. The policy repo rate increased from a low of 4.75 per cent to 8.5 per cent. Still it did not help contain inflation. The critics of the Reserve Bank argue that monetary tightening rather than lowering inflation has slowed growth. Interest rate is a blunt instrument. It first slows growth and then inflation. But the growth slowdown has not been commensurate with inflation control.

Costs of inflation

Inflation, though a nominal variable, imposes real cost on the economy. Firstly, inflation erodes the value of money.

Secondly, high and persistent inflation imposes significant socio-economic costs. Given that

the burden of inflation is disproportionately large on the poor, and considering that India has a large informal sector, high inflation by itself can lead to distributional inequality. Therefore, for a welfare-oriented public policy, low inflation becomes a critical element for ensuring a balanced progress.

Thirdly, high inflation distorts economic incentives by diverting resources away from productive investment to speculative activities. Fixed-income earners and pensioners see a decline in their disposable income and standard of living. Inflation reduces households savings as they try to maintain the real value of their consumption. Consequent fall in overall investment in the economy reduces its potential growth. With a high inflation for over two years, we are already seeing a fall in household savings in financial assets, particularly in bank deposits. At the same time households’ preference for gold has increased. This is putting additional pressure on our balance of payments.

Crude oil and other global commodity price trends as well as exchange rate movements are increasingly playing an important role in defining domestic prices.

Moreover, the Rupee depreciated from an average of 45.7 per US dollar in 2010 to 46.7 in 2011. The depreciation of the Rupee was particularly sharp in 2012 as the Rupee averaged 53.4 per US dollar. Empirical evidence suggests that one percentage point change in the Rupee-dollar exchange rate has 10 basis points impact on inflation. While, during 2010 and 2011, global commodity prices had an adverse impact on domestic

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inflation, the depreciation of the Rupee more than offset the beneficial impact of modest softening of global commodity prices on domestic inflation in 2012.

Finally, while persevering with the steps to increase the depth of the financial market and addressing credit constraints, monetary policy needs to be calibrated to the evolving growth-inflation dynamics so that we move towards our potential growth in a non-inflationary manner. For a country at our stage of development with a vast labour supply, potential growth is not a constant. Only in an environment of price stability, a step up in investment accompanied by productivity improvements could bolster potential growth. Even when the supply side factors dominate the inflationary pressures, given the risks of spill-over into a wider inflationary process, there is need for policy response. While monetary policy action addresses the risk of unhinging of inflation expectations, attending to the structural supply constraints becomes important to ensure that these do not become a binding constraint in the long-run, making the task of inflation management more difficult. By ensuring a low and stable inflation, the Reserve Bank could best contribute to social welfare.

Manufacturing-led Growth and Exports, and the Redress of the Balance of Payment Constraint in India

India’s disappointment with the management of its economy is compounded by its mounting trade and current account deficit leading to further economic hardship as the consequent depreciation of the rupee and the attendant

rising cost of imported commodities impose further strain on the hapless Indian common man. In our open economy, the balance of payments has become a critical constraint to economic growth. India’s imports cannot grow faster than the rate of growth of its exports permanently without incurring a balance of payments crisis. Imports also depend on output growth which means that the balance of payments becomes a recurrent problem if imports outpace exports. Consequently, achieving a higher long-run rate of growth would require India to reduce balance of payments, BOP, constraint through an improved export performance and the production of import substitutes in the open market environment, which would lower the income elasticity of demand for imports.

India, therefore, needs to make its exports more competitive and attractive in global markets, and develop an indigenous supply base if demand is to be expanded without an import-led regime that eventually hits the balance of payment constraint. While capital inflows do provide relief, the alleviation is temporary because eventually exports need to grow sufficiently to cover, not just imports, but also the service of factor payments associated with the capital flows. In other words, the BOP constraint is the fundamental limit to economic growth in emerging economies like India. In a wired and interconnected world the social and political repercussions of imbalanced distribution of economic well-being can spread rapidly and painfully for any large polity like that of India. Our policy makers seem to have failed to comprehend this essential economic truth and its social and political calculus.

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Besides a healthy BOP, a developing country like India needs a growth and development process that is sustainable environmentally and inclusive socially. This in turn requires a transformation of the productive base of the economy, or the generation of high productivity activities, good quality employment, and greater domestic value addition. Disguised unemployment is a highly insidious threat to a developing country like India where improvements in productivity and employment can get concentrated leading to sharp income disparities. Thus, active policy efforts to generate quality employment on a wide scale, and improve productivity in different industrial and agricultural activities would be crucial. Since the classic work of Baumol, there have been serious doubts about the possibilities for services to lead to significantly large increases in productivity, which would lead to serious questions about the Indian service-led development strategy.

Corruption

The Comptroller & Auditor General (CAG) who is the custodian of the Govt. funds has opined that the Govt. of India lost about ` 176,000 crores in the allotment of 2G spectrum at a particular price on the basis of relevant data and evidence. This is hotly denied by the Telecom Ministry, among others, without giving any concrete data which could have given lie to the bona fide estimate of the CAG. So is the case about the observation of the CAG in the case of loss incurred by the Govt. of India while allotting coal mining blocks, which is again controverted by the authorities on the specious plea that coal is underground and it is very much there in the

Mines and, therefore, the presumption of loss is imaginary, as per them, notwithstanding the fact that the right to coal underground in the Mines is lost to the allottees of the coal blocks, conveniently forgetting that the right to the coal is lost the moment the mining blocks are allotted/leased out.

It is constitutionally provided that whatever does not belong to any individual, its ownership vests in the sovereign State. Therefore, the ownership of natural resources like forests, mines, sky, solar energies rivers and others, which give very large revenue to the Govt., vests with the State co-extensive with national boundaries. Whatever the right to exploit the natural resources while allotting to individuals, such dealings are suspect and Govt. has incurred heavy losses. In many cases, it is found that the Government’s acts, in which it is involved, are dubious and these are popularly (notoriously) known as “scams”. Another scam is about Commonwealth Games expenditure.

Let’s now take the other various scams, say, the Helicopter deal of the Defence Ministry, involving secret commission of ` 400 crores approximately in a large deal of purchase of special Helicopters for VVIPs, where the total contracts are estimated to be ` 4000 crores and the highest rulers of this country are suspected – a reminder of that well-known Bofors deal. This is supposed to be only the thin end of the wedge in defence deals and only God knows to what extent. Almost every morning, something new (scam) is appearing on the horizon. Somebody may say had all these revenues found place in the Government treasury, there would not have been any fiscal deficit problem at all.

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CAG audit is not restricted merely to attesting function. He is in fact charged with the sacred duty of ensuring productive utilization of country’s tax and other revenues. He is a very important functionary in the hierarchy of constitutional authorities charged with the meticulous responsibility of ensuring that the Government tax and other revenues are spent in the best interest of the people and for the benefit of the country. His role should be of that of an activist within his own constitutional jurisdiction.

POST BUDGET COMMENTS

On the appointed day, the Finance Minister in the Parliament unlocked his bag containing the Budget proposals for the year 2013-14 from which emerged not nectar nor poison but the realities of the mundane world on the same day.

The quarterly growth numbers for the GDP at 4.5% also released on Thursday, are a grim warning that India could be slipping into a deeper recession. However, the sharp expenditure contraction in a pre-election year was an unrealistic expectation.

His whole attempt from the time he took over Finance, was how to control fiscal deficit and he drew red-lines which he will not cross for the year 2012-13 beyond 5.2% and for the year 2013-14 beyond 4.8% and he wants to rein in 2014-15 and 2015-16 with a dream of ‘nil’ fiscal deficit thereafter.

There was an anxiety on the part of Mr. Chidambaram recently on Rating Institutions like Standard and Poor’s should not degrade the investment worthiness to junk status. Besides if the fiscal target is met

the Finance Minister would have created the space for monetary easing by the RBI as inflation comes under control.

Following are his brief tax proposals (Direct and Indirect).

Mool Mantra – Higher Growth Rate

YY Tax credit for resident individuals of ` 2,000, if total income does not exceed ` 5 lakh. This credit will not be available to HUF, AOP, BOI, etc.

YY An individual, HUF, AOP, BOI, cooperative society, firm, local authority will be subject to surcharge of 10 per cent of income tax, if total income exceeds ` 1 crore.

YY A domestic company having total income exceeding ` 1 crore will continue to pay surcharge at the rate of 5 per cent. However, if income exceeds ` 10 crore, surcharge will be 10 per cent. A foreign company having total income of above ` 10 crore, will pay surcharge at the higher rate of 5 percent. Dividend tax will be subject to surcharge of 10%.

YY An individual taking a loan for his first home from a bank/housing finance corporation upto ` 25 lakh during 2013-14 will be entitled to an additional (one-time) deduction upto ` 1 lakh.

YY A manufacturing company will be entitled for 15 per cent investment allowance in respect of fresh investment (if it is more than ` 100 crore) in new plant and machinery. It will be over and above depreciation.

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YY Provisions of section 80CCG (Rajiv Gandhi Equity Saving Scheme) liberalized.

YY One per cent TDS on transfer of immovable property (other than rural agricultural land) exceeding ` 50 lakh (applicable from June 1, 2013).

YY Royalty/technical fees to non-resident/foreign companies will be subject to tax (TDS will also applicable) at a higher rate of 25 per cent or a rate given in DTA, whichever is lower.

YY GAAR provisions modified and will be applicable from 1st April 2016.

YY Definition of rural agricultural land modified.

YY Provisions of section 50C will apply even in the case of transfer of an asset other than capital asset.

YY Immovable property purchase for inadequate consideration will be subject to tax within the parameters of section 56(2)(vii).

YY Securities transaction tax reduced (equity futures: from 0.017% to 0.01%; MF/ETF redemptions at fund counters; from 0.25% to 0.001%; MF/ETF purchase/sale on exchanges; from 0.1 to 0.001%, only on seller).

YY Commodities transaction tax (CTT) introduced in a limited way, agricultural commodities will be exempt.

YY Service tax voluntary compliance encouragement scheme proposed to motivate defaulters to file service tax returns and pay dues.

YY Two more services included in the negative list for service tax.

YY All air conditioned restaurants to come under service tax net.

YY Relief in excise duty to readymade ferment industry, handmade carpets, ship building industry.

YY Specific duty on cigarettes, cigars, etc. increased.

YY Excise duty on costly mobile phones and SUVs also to go up.

NB: The additional surcharges will be in force for only one year i.e. financial year 2013-14.

Finance Minister’s proposals in brief

Tax revenue is expected to grow because of higher rates. Corporations will pay more, dividends will see higher taxes and the super-rich will pay more tax for a year. In order that the higher taxes don’t hurt investment, the budget proposals compensate for them by giving an investment allowance of 15 per cent for a two-year period. Rationalization of tax laws, such as those relating to royalty, to increase the tax base, have been proposed. It is unbelievable but true that only 42800 people in this country have income exceeding ` 1 crore which only highlights the narrow base available for our tax levy. A level playing field between trading in equities and trading in non-agricultural commodities has been planned. How private choose to allocate labour and capital to trading equities as against commodities should be shaped by market force not by tax considerations, and so this is more in the right direction.

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The finance minister promised a focus on infrastructure, with a number of initiatives to give the sector better access to funding, better regulation, such as in roads, more government projects and spending, and more public-private partnerships, as in coal, which has suffered due to the limited capacity of the public sector Coal India Ltd. The key here will lie in implementation. Will the Cabinet Committee on Investment be able to solve problems? More projects can deliver higher growth only if they actually take off the ground.

The coming year is, however, fraught with risk. The world economy has been losing momentum and acute stresses have started appearing in numerous firms and sectors. As yet, there is no sigh of revival of investment or business cycle conditions. The inflation that matters—CPI inflation—continues to rage at double digit levels, inflicting a substantial inflation tax on households that hold nominal assets. The budget speech represents a basic promise that the government must deliver on to prevent the economy from slipping further. But the struggle between Congress instincts and responsible economics is far from over.

The delicate problem facing the country currently is continued inflation which even today is nearly at 10% as measured by consumer index. It is worth repeating Finance Minister’s speech relevant in this context. In our opinion, the Budget presented by the Finance Minister though a responsible Budget, it is of a lackluster nature.

Finally, the development must be sustainable – economically and ecologically. The development model must have democratic legitimacy and approval.

Looming large over our efforts to stimulate growth is inflation. Some inflation is imported. Supply demand mismatch, for example in oilseeds and pulses, also pushes up inflation. Aggregate demand is another cause of inflation. The battle against inflation must be fought on all fronts. Our efforts in the past few months have brought down headline WPI inflation to about 7.0 percent and core inflation to about 4.2 percent. It is food inflation that is worrying, and we shall take all possible steps to augment the supply side to meet the growing demand for food items.

OUR CONCERNS

Generally, we talk in terms of GDP which could be the indicator of total material wealth without necessarily happiness of the people. Unfortunately, yet there is no instrument available for measuring Gross National Happiness. Happiness does not depend upon only the total material wealth of the country in terms of GDP for more than one reason. The wealth is not distributed equitably and therefore, there is a hiatus between excessive wealth, in some cases bordering on ugly richness and at the other end of the extreme poverty. We understand that in the Society, there cannot be any uniformity and yet, the Society cannot tolerate extreme forms of poverty. In fact, the society cannot be happy unless the people as a whole are not deprived of bare necessities of life. Our country and Society are the unique example where even 30 to 40% of the people do not get adequate meals. They have to travel distances of more than 5 Kms or even more for bringing bare drinking water and live in filthy living

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conditions not conducive to tolerable living. Despite all this, this is a blessed country in that, poor and very poor people can tolerate the wealth of the few!

Every day, we read in the Newspapers which are full of news of newer types of scams. We expect better governance and management of the resources at the disposal of the Government and other authorities entrusted with the task for which Govt. is supposed to give a good account of all the taxes and other levies garnered from the people.

In frustration we have to say that in our democratic country what is prohibited is permitted and what is permitted is prohibited if you have skill to work the system.

Our Society is threatening to become an immoral society. Every day Newspapers are full of news of rapes, molestations, thefts, robbery, murders and what not. One is disgusted to read even the daily newspaper. We think the highest priority of governance in this country is that the whole society is sanitized. Where women are worshipped/respected, the Lord blesses that society.

Our country is bedevilled by all sorts of problems. China and Pakistan will continue to give pinpricks and the country must be prepared to meet any eventuality. It is therefore difficult to cut the outlay on defence in order to balance the economy. The supreme need of the hour is to control, if not, banish the extreme poverty. Its extreme form could one day explode our Society. Already Naxalites are infiltrating into 1/3rd area of the country. Therefore, one has to think what will happen if the outside destructive forces join hands with Naxalites whose

appeal/threat to the poverty-stricken people is ever increasing. Our society generally is heterogeneous in character with communal and fissiparous tendencies. political forms are also asymmetrical with no cohesive thread binding the people. Can we trust God alone for saving the Society without ourselves contributing to its solution?

In our country the sad fact of the matter is that to many people who lack means to access opportunity, what is permitted is as good as prohibited for them. While to those with resources to buck the system, what is prohibited is not only permitted, but used with impunity by gaming the system and making ever unequal the playing field.

The silent killer of opportunities for our citizenry to realize their great potential is corruption. The saddest waste is that of human lives, human resources and human potential. Corruption takes the cup from the lips of people and dashes it to the ground. In fact the recent coal mining scam is a good example of the way resources of the country have been diverted from their rightful use to expand economic progress. Corruption to the economy of the country is like what dark matter is to the universe which physicists calculate by its gravitational force that results in the slowing down of the expansion of the universe (see also our poem for a related thought). Corruption’s malign influence can also be calculated by its dragging down of the growth of the wealth in the hands of our citizens.

India is a land of tremendous problems. But therein also lies opportunity. There is nothing to concentrate the mind like a hanging, and

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so crises can bring out the best in us. Luckily we have in India ample resources of skilled labor and ingenious minds to overcome our problems.

The human potential of our country is Infinite. The arch colonialist Macaulay shrewdly identified three strengths of the country: the depth and breadth of skilled labor in the working class, the scrupulous diligence of the middle class, and the innate sense of virtue that our centuries old traditions have imbued all classes of society with.

We feel optimistic of the future, believing that opportunity is as great as the challenges we face.

The best is yet to come!

Above is our first blush comments on the Budget presented to the Parliament by the Finance Minister.

For an analysis of the direct and indirect tax proposals may we invite your attention to the pages following hereinafter.

We look forward to your response.

With best wishes,

Yours sincerely,

(B. K. KHARE)

2nd March, 2013.

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Budget at a glance(Figures in ` crore)

2011-12 2012-13 2012-13 2013-14 Budget Revised Budget

Actuals@ Estimates Estimates Estimates

1 Revenue Receipts 751437 935685 871828 1056331tax Revenue (net to centre) 629765 771071 742115 884078non-tax Revenue 121672 164614 129713 172252

2 Capital Receipts $ 552928 555241 558998 608967Recoveries of loans 18850 11650 14073 10654Other Receipts 18088 30000 24000 55814Borrowings and other liabilities * 515990 513590 520925 542499

3 Total Receipts (1 + 2) $ 1304365 1490925 1430825 1665297

4 Non-Plan Expenditure 891990 969900 1001638 1109975On Revenue account 812049 865596 919699 992908Of which Interest Payments 273150 319759 316674 370684On capital account 79941 104304 81939 117067

5 Plan Expenditure 412375 521025 429187 555322On Revenue account 333737 420513 343373 443260On capital account 78639 100512 85814 112062

6 Total Expenditure (4 + 5) 1304365 1490925 1430825 1665297Revenue expenditure 1145786 1286109 1263072 1436169Of which, grants for creation of Capital Assets 132582 164672 124275 174656capital expenditure 158580 204816 167753 229129

7 Revenue Deficit 394349 350424 391245 379838 (4.4) (3.4) (3.9) (3.3)

8 Effective Revenue Deficit 261767 185752 266970 205182 (2.9) (1.8) (2.7) (1.8)

9 Fiscal Deficit 515990 513590 520924 542498 (5.7) (5.1) (5.2) (4.8)

10 Primary Deficit 242840 193831 204250 171814 (2.7) (1.9) (2.0) (1.5)

@ actuals for 2011-12 in this document are provisional.$ excluding receipts in respect of Market Stabilisation Scheme.* Includes draw-down of cash balance.

Notes: 1. gdP for Be 2013-2014 has been projected at ` 11371886 crore assuming 13.4% growth over the advance estimates of 2012-2013 (` 10028118 crore) released by cSO.

2. Individual items in this documen may not sum up to the totals due to rounding off.

Source: Budget documents, 2013-14, Budget division, Ministry of Finance, government of India.

29


30


DIRECT TAXES

I. INCOME TAXThe clauses in the Finance Bill, 2013 (the Bill, for short) in so far as they relate to direct taxes, when enacted, will operate prospectively and from assessment year 2014-15 onwards. Where the intention is otherwise, there will be a specific mention of the fact. The readers will notice that when we make our comments on the diverse clauses of the Bill we have indicated the material clauses in bracket.

While introducing the Finance Bill 2012, the then Hon’ble Finance Minister had informed the nation that Direct Tax Code i.e. DTC Bill introduced in August 2010, is deferred pending examination of Report of the Parliamentary Standing Committee tabled on 9th March, 2012 where as Goods and Services Tax i.e. GST Bill introduced in Parliament in March 2011 is awaiting report of the Parliamentary Standing Committee.

This year, update on DTC is that the team in the Ministry of Finance is examining the recommendations and Hon’ble Finance Minister himself now intends to work with the Standing Committee and its Chairman in order to finalise the official amendments and a promise is made that the Bill will be presented before the end of the Budget Session. It is further informed that Draft Bill on GST is now likely to be finalised in the next few months.

Amendment to Tax Rate

As far as income tax rate for all categories of persons are concerned, there are no changes in the income tax rates from that prescribed for the Financial Year 2012-13 except that in case of Individual resident assessee whose total income does not exceed

rupees five lacs, a tax rebate of 100% of tax on the total income or rupees two thousand whichever is lower, shall be allowed u/s 87A, perhaps, a token gesture of concern for the common man.

Surcharge

In case of Individual, HUF, Association of Persons, Body of Individuals, Artificial Juridical Persons having a total income exceeding one crore rupees, surcharge @ 10% will be levied on the income tax.

In case of Co-operative Societies, Firms, Local Authorities having total income exceeding one crore rupees, surcharge at the rate of 10% will be levied on the income tax.

The existing surcharge of five per cent in case of a domestic company shall continue to be levied if the total income of the domestic company exceeds one crore rupees but does not exceed ten crore rupees. Surcharge at the rate of ten percent shall be levied if the total income of the domestic company exceeds ten crore rupees.

In case of companies other than domestic companies, the existing surcharge of two per cent shall continue to be levied if the total income exceeds one crore rupees but does not exceed ten crore rupees. The surcharge at the rate of five percent shall be levied if the total income of the company other than domestic company exceeds ten crore rupees.

In all cases, marginal relief shall be allowed to ensure that additional amount of income tax payable, including surcharge, on the excess of income over rupees one crore / ten crores is restricted to the amount by which the income exceeds rupees one crore / ten crores.

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“Education Cess on income-tax” and “Secondary and Higher Education Cess on income-tax” shall continue to be levied at the rate of two per cent and one per cent respectively, on the amount of tax computed, inclusive of surcharge (wherever applicable), in all cases.

Dividend Distribution Tax (DDT)

For the purpose of DDT levied under sections 115-O, 115QA, 115R or 115TA surcharge shall be levied at the rate of ten percent.

Commodities Transaction Tax (CTT)

A new tax called Commodities Transaction Tax (CTT) shall be levied on transaction of sale of commodity derivatives (other than agricultural commodities) entered into in a recognised association. This tax is proposed to be levied from the date on which Chapter VII of the Finance Bill, 2013 comes into force by way of notification in the Official Gazette by the Central Government.

The term ‘taxable commodities transaction’ shall be defined to mean a transaction of sale of commodity derivatives in respect of commodities, other than agricultural commodities, traded in recognised associations. The tax at the rate of 0.01% shall be levied on sale of commodity derivative undertaken by the seller.

An amount equal to the commodities transaction tax paid by the assessee in respect of the taxable commodities transactions entered into in the course of his business during the previous year shall be allowable as deduction, if the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business or profession”.

[Clauses 105 to 124]

Securities Transaction Tax

Securities Transaction Tax is proposed to be rationalized by reducing the rates in the following taxable securities transactions:

Sr. No.

Nature of taxable securities transactions

Payable by Existing Rates (in %)

Proposed Rates (in %)

1 Delivery based purchase of units of an equity oriented fund entered into in a recognised stock exchange

Purchaser 0.1 Nil

2 Delivery based on sale of units of an equity oriented fund entered into in a recognised stock exchange

Seller 0.1 0.001

3 Sale of a futures in securities Seller 0.017 0.01

4 Sale of a unit of an equity oriented fund to the mutual fund

Seller 0.25 0.001

The proposed amendment will be effective from 1st June, 2013.

[Clause 125]

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Amendments to Definition of Agricultural Land and Capital Asset

Section 2(14) defines the term “Capital Asset”. Presently agricultural land is not considered as a capital asset provided it is not situated within eight kilo meters from Municipality or Cantonment Board or as may be notified in the official Gazette. The requirement of notification in Gazette is being done away with and conditions of location of land are now specified in the section itself as follows:

Agricultural land situated within (distance measured aerially):

(i) two kilometers with population exceeding ten thousand but not more than one lakh; or

(ii) six kilometers and having population exceeding one lakh but not exceeding ten lakh; or

(iii) eight kilometers and having population exceeding ten lakh

shall now be treated as capital asset.

Provisions of Section 2(1A) concerning exemption of agricultural income and definition of “urban land” as per the Wealth Tax Act, 1957 are also proposed to be modified on similar lines.

These amendments shall take effect from 1st April, 2014 and shall apply accordingly to AY 2014-15 onwards.

[Clause 3]

Taxation of Income by way Royalty and Fees for Technical Services

At present, Section 115A of the Income tax Act provides for determination of tax in case of a non-resident taxpayer where the

total income includes any income by way of Royalty and Fees for technical services (FTS) received under an agreement entered after 31st March, 1976 and who are not effectively connected with permanent establishment, if any, of the non-resident in India.

The tax, which is payable on the gross amount of above income, has been substantially reduced over a period of time from 30% to 20% and then to 10%. At present, 10% tax rate is applicable if income by way of royalty or FTS is received in pursuance of an agreement entered on or after 1st June, 2005.

As per the budget speech, the distribution of profits by a subsidiary to a foreign parent company could be in the form of royalty. Besides, the royalty is taxable at a lower rate under the Income tax Act as compared to number of DTAAs. In order to correct this anomaly, the tax rate in case of non-resident taxpayer, in respect of income by way of royalty and FTS as provided under Section 115A, is proposed to be increased from 10% to 25%. This rate of 25% shall be applicable to any income by way of royalty and fees for technical services received by a non-resident, under an agreement entered after 31st March, 1976, which is taxable under Section 115A.

As per our analysis, India has entered into 84 DTAAs so far; but the majority of the DTAAs provide for tax rate in the case of royalty and FTS at 10% or 15%. Therefore, increase in the tax rate to 25% seems to be very high. Hence, the payment in the form of royalty and FTS to a non-resident of a country with which India does not have a DTAA (non-treaty country) would attract 25% tax rate. However, the proposed increase in the tax rate under the Income

33


tax Act may not nullify the provisions of the DTAAs signed by India. Although the budget speech as well as memorandum explaining the provisions justifies the above reasons for the increase in the tax rate in the case of royalty and FTS, it appears that the requirement of producing the TRC for claiming treaty benefits in the case of non-resident may not have been found necessary due to a lower rate of 10% tax as provided in Section 115A of the Income tax Act and hence, that could be one of the reasons for increasing the tax rate in the case of royalty and FTS.

[Clause 25]

Rationalisation of Tax on Distributed Income by the Mutual Funds

Section 115R provides for taxation of income distributed by a specified company or a Mutual Fund to its unit holders. However the rate of tax depends upon nature of fund i.e. Equity Oriented Fund or others as well as nature of the persons to whom it is distributed i.e. Individual, HUF or otherwise. Section presently provides for tax rate of 12.50% in case of distribution made to an individual or a HUF by a fund other than money market mutual fund or liquid fund. It is now proposed to increase this rate to 25%.

Interest payment made by Infrastructure Debt Fund (IDF) set up as a Non-Banking Finance Company (NBFC) to a non-resident investor is taxable at a rate of 5%. However in case of distribution of income by an IDF set up as a Mutual Fund the distribution tax is levied at the higher rate of 12.50% rates described above in the case of a Mutual Fund. It is now proposed to provide tax @ 5% on income distributed to a non-

resident investor by Infrastructure Debt Fund (IDF) whether set up as a IDF-NBFC or IDF-MF. This amendment will take effect from 1st June, 2013.

[Clause 29]

Additional Income Tax on buy back of Shares by the Unlisted Companies

Provisions of Section 2(22) provides definition of ‘dividend’ and clause (e) to Section 2(22) treats payments by way of advance or loan to specified shareholders as ‘deemed dividend’ which is taxable in the hands of recipient shareholder. Section 115-O provides for the levy of tax on distributed dividends i.e. DDT which excludes deemed dividend. Company distributing dividend is liable to pay DDT and corresponding dividend receipts are exempt in the hands of shareholders u/s 10(34).

A company having distributable reserves can either pay dividend in cash or can pay cash to shareholder for buying back its own shares. With effect from Assessment Year 2000-01, payments made by company on purchase of its own shares in accordance with Section 77A of the Companies Act, 1956 were excluded from the scope of definition of ‘deemed dividend’ u/s 2(22)(e). Correspondingly, where shares are bought back by the company, consideration received by the shareholders is taxed under section 46 A as capital gains. In case such gains are in the nature of ‘long term gains’ then the same is taxed at lower base rate of 20% with indexation benefit. Obviously, in case shares are held for fairly long period of time, the effective tax rates could be nil or very low tempting companies to buy back shares rather than declare dividend and pay DDT at much higher rate. This option being exercised by unlisted companies has not found favour and the loophole is plugged

34


by proposing insertion of new Chapter XII-DA under which Section 115QA is inserted. The new section seeks to tax the excess of buy back price over the original share issue price in the hands of the company opting for buy back. The said tax is payable @ 20% (plus applicable surcharge – presently @10%) and the same shall be treated as final tax in line with DDT. Tax is required to be deposited within 14 days of payment of consideration to the shareholder. Consequentially, the consideration received by the shareholders from whom the shares are bought back shall enjoy the exemption from tax u/s 10(34A). These amendments are applicable w.e.f. 1st June, 2013.

[Clauses 4 & 28]

Taxation of Securitisation Trusts

A new regime is proposed to be introduced for taxation of income from the activity of securitisation carried out by securitisation entities, set up as a trust. For this purpose it is proposed to amend Section 10 and also insert a new Chapter XII-EA.

A securitisation trust has been defined with reference to the provisions of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act.

Two new sections – 10(23DA) and 10(35A) are being introduced for this purpose. The former provides that income of a securitisation trust from the activity of securitisation would be exempt from tax. Section 10(35A) provides that income distributed by a securitisation trust would be exempt in the hands of a person being an investor of the said trust.

The new Chapter, consisting of new sections 115TA, 115TB and 115TC, contains provisions to the effect that the securitisation trust will be liable to pay additional income-tax on income distributed by it to its investors, on the lines of distribution tax levied in the case of mutual funds. Additional income-tax is proposed @ 25% of the income distributed in case of distribution being made to investors who are individuals and HUF and @ 30% in other cases. No additional income-tax shall be payable if the income distributed by the securitisation trust is received by a person who is exempt from tax under the Act.

The Chapter apart from defining various relevant terms also contains provisions dealing with time period for payment of this additional income tax (14 days from the date of distribution or payment), filing of details of income distributed (on or before 15th September of each year), payment of interest for defaults and for collection and recovery of such additional tax.

No deduction will be allowed to the securitisation trust under any provisions of the Act in respect of the income which has been charged to income tax under this Chapter.

This amendment will take effect from 1st June, 2013.

[Clauses 4 & 30]

Incentive for Acquisition and Installation of New Plant or Machinery by Manufacturing Company

In order to encourage substantial investment in plant or machinery, it is proposed to insert a new Section 32AC in the Income-tax Act

35


to provide that where an assessee, being a company,—

(a) is engaged in the business of manufacture of an article or thing; and

(b) acquires and installs during the period beginning from 1st April, 2013 and ending on 31st March, 2015, ‘new assets’ the aggregate cost of which exceeds ` 100 crores then, the assessee shall be allowed—

(i) for assessment year 2014-15, a deduction of 15% of the aggregate amount of actual cost of new assets acquired and installed during the financial year 2013-14, if the cost of such assets exceeds ` 100 crores;

(ii) for assessment year 2015-16, a deduction of 15% of aggregate amount of actual cost of new assets, acquired and installed during the period beginning on 1st April, 2013 and ending on 31st March, 2015, as reduced by the deduction allowed, if any, for assessment year 2014-15.

Thus deduction under (i) above will be available only if the investment in the previous year relevant to AY 2014-15 exceeds `100 crores. Eligibility for deduction in AY 2015-16 will be governed by aggregate amount of investment during the period 1st April, 2013 to 31st March, 2015. If the aggregate investment during this period exceeds `100 crores in the previous year relevant to AY 2015-16, no deduction will be allowed in AY 2014-15 but whole of such investment will qualify for deduction in AY 2015-16.

The phrase “new asset” has been defined as new plant or machinery but does not include—

(i) any plant or machinery which before its installation by the assessee was used either within or outside India by any other person; any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; any office appliances including computers or computer software;

(ii) any vehicle;

(iii) ship or aircraft; or

(iv) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

Where the new asset is sold or otherwise transferred within a period of 5 years from the date of its installation it is proposed that the amount of deduction allowed would be deemed to be the income of the year of such sale or transfer (in addition to taxability of gain arising on account of such transfer). It is however proposed that this restriction will not apply to the event of amalgamation or demerger taking place within the said 5 years, but shall continue to apply to the amalgamated company or resulting company, as the case may be, for the balance period.

These provisions are similar to those of the erstwhile provisions dealing with investment allowance granted u/s 32A of the Act.

This deduction is over and above depreciation allowed u/s 32 of the Act and also does not go to reduce the WDV of the assets for

36


the purposes of depreciation of subsequent years.

The words used being ‘acquires and installs’ precondition of ‘user’ is not inbuilt unlike in Section 32. Firstly, both ‘acquisition’ and ‘installation’ must happen during this period. Assets acquired before 1st April, 2013 but installed in this period will not qualify; similarly assets acquired during this period but installed after 31st March, 2015 will also not qualify.

Further, mere installation up to 31st March, 2015 would suffice. But whether merely erecting an item of plant and machinery would suffice, could be a debatable issue. In this context, the word ‘install’ could be interpreted to mean ‘ready to use’. Items of plant and machinery in stock or in transit or under-installation would not qualify for the ` 100 crores criteria.

Though the word ‘owned’ is absent in Section 32AC unlike Section 32, the expression ‘acquires’, would, in the context, suggest the same meaning.

[Clause 5]

Tax Residency Certificate

Central Government is empowered to enter into Double Tax Avoidance Agreements (DTAAs) with different countries and adopt agreements between specified associations for relief of double taxation. The scheme of interplay of treaty and domestic legislation ensures that a taxpayer, who is resident of one of the contracting country to the treaty, is entitled to claim applicability of beneficial provisions either of treaty or of the domestic law. There was an apprehension that in many instances the taxpayers who are not tax resident of a contracting country do claim

benefit under the DTAA entered into by the Government with that country. Thereby, even third party residents claim unintended treaty benefits. Therefore, Sections 90 and 90A were amended by the Finance Act, 2012 to make submission of a tax residency certificate (TRC) necessary for availing benefits of the agreements referred to in these sections.

It is now proposed that the submission of a TRC is necessary; but not a sufficient condition for claiming benefits under the agreements referred to in Sections 90 and 90A.

One may recall the landmark judgement of the Supreme Court in the case of UOI v. Azadi Bachao Andolan and Another (263 ITR 706) wherein the validity of the circular no. 789 dated 13th April, 2000 issued by the CBDT with reference to India-Mauritius DTAA has been confirmed. The circular has clarified that wherever a certificate of residence is issued by the Mauritian Authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA accordingly. However, the proposed amendment tends to hint that the Assessing Officer can go beyond the TRC and verify whether the taxpayer is a tax resident of that country applying the substance theory. This move appears to dilute the sanctity of the above circular and will give leeway to the Assessing Officer for further scrutiny.

This above amendment will take effect retrospectively from AY 2013-14.

The Finance Ministry has however since clarified that income tax authorities will not go beyond the TRC and question his resident status.

[Clauses 21 & 22]

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Computation of Income under the head “Profits and gains of business or profession” for transfer of immovable property in certain cases

Under Section 50C of the Act when a capital asset, land or building, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then the stamp duty value is taken as the full value of consideration. These provisions do not apply to transfer of immovable property held by the transferor as stock-in-trade.

It is proposed to insert a new Section 43CA providing that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business of profession”.

It is further proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not the same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer.

It is however proposed that this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

Provisions of Section 50C(2) and (3) have been made applicable to this section.

This provision will affect real estate sector in a big way and may in fact require effectively re-writing of the books of a developer of real estate for the purposes of computing taxable income. Of course this is a deeming provision applicable only to the seller and does not affect the purchase price actually paid by the buyer.

Whether this will have the effect of reducing the ‘black’ component of consideration only time will tell.

[Clause 8]

Taxability of Immovable Property received for Inadequate Consideration

Existing provisions of sub clause (b) of clause (vii) of sub-section (2) of Section 56 of the Income-tax Act, inter alia, provide that where any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property would be charged to tax in the hands of the individual or HUF as income from other sources.

An amendment is proposed to cover a situation where an immovable property has been received by an individual or HUF for inadequate consideration, in the sense that the consideration is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees.

It is proposed that the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands

38


of the individual or HUF as income from other sources.

It is further proposed that where there is a time gap between the date of agreement and the date of registration, the stamp duty value may be taken as on the date of the agreement, instead of that on the date of registration. It is however proposed that this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

[Clause 9]

Tax Deduction at Source (TDS) on transfer of certain immovable properties (other than agricultural land)

In order to have a reporting mechanism of transactions in the real estate sector and also to collect tax at the earliest point of time, it is proposed to insert a new Section 194-IA to provide that every transferee, at the time of making payment or crediting of any sum as consideration for transfer of immovable property (other than agricultural land) to a resident transferor, shall deduct tax, at the rate of 1% of such sum.

In order to reduce the compliance burden on the small taxpayers, it is further proposed that no deduction of tax under this provision shall be made where the total amount of consideration for the transfer of an immovable property is less than fifty lakh rupees.


These provisions would apply to transfer of immovable property whether held as capital asset or as stock in trade.

A practical problem would arise when the consideration payable to the transferor is by way of an exchange not involving ‘payment’ by cash, cheque etc. This would involve recovery by the transferee from the transferor of the amount of such tax deductible at source (refer Section 194B). Similarly, in cases involving staggered payment of consideration, accrual of right to receive full value of consideration and its recording could create practical difficulties. Ordinarily tax is deductible even when an advance is received in respect of an income that would ultimately be taxable. Transactions in real estate are often known to be cancelled for various reasons and the same piece of property could ultimately get sold to another transferee. In such a situation the first instance of tax withheld would not be matched by any income in the hands of the transferor and could invite explanations from the Department when the matter is captured through the TDS returns. Numerous such issues could come to light once the provisions are enacted.

[Clause 42]

Deduction in respect of interest on housing loans sanctioned during financial year 2013-14

Deduction to the extent of ` 1,50,000 is available on payment of interest on housing loan in case of self-occupied property under Section 24 under the head “Income from House Property”. To support affordable housing, an additional benefit for first-home buyers is being proposed. New Section 80EE is proposed to be introduced to provide additional deduction on payment of interest to the tune of ` 1,00,000, which will be deductible in Assessment Year 2014-15. In case, the limit is not exhausted

39


then the balance amount shall be deductible in Assessment Year 2015-16. This deduction is over and above the existing deduction of ` 1,50,000 under Section 24.

Eligibility for deduction is subject to the following conditions:

(i) The loan should be sanctioned during the financial year 1st April, 2013 to 31st March, 2014.

(ii) The sanctioned loan amount should not exceed ` 25,00,000.

(iii) The value of residential house property should not exceed ` 40,00,000.

(iv) The Assesse should not own any other residential house property on the date of sanction of the loan.

It is also proposed to define the terms “financial institution” and “housing finance company”.

[Clause 13]

Deduction for Contribution to Health Schemes similar to CGHS

Other health schemes of Central and State Governments, which are similar to the CGHS are also proposed to be made eligible under Section 80D. It is proposed to amend Section 80D, so as to allow the benefit of deduction to any payment or contribution made to such other health scheme as may be notified by the Central Government.

[Clause 12]

Enhancement of Limit for Premiums paid on certain Insurance Policies

Premium paid on policy issued after 1st April, 2012 for insuring life of disabled person or person suffering from certain ailments as

referred in Section 80U & Section 80DDB, was eligible for deduction under Sec. 80C. However, the amount eligible for deduction was limited to extent of premium paid which did not exceed 10% of the actual capital sum assured.

With the consequential amendment in amount of exemption of income received from such policies, the limit on deduction as referred in Section 80C(3A) is proposed to be increased. Pursuant to this amendment the deduction under the said section on account of premium paid in respect of above referred policy issued on or after 1st April, 2013 will be allowed to the extent the premium paid does not exceed 15% of the actual capital sum assured.

[Clause 10]

Expansion of Deduction and Eligibility under Section 80CCG

With a view to liberalize the incentive for investment in capital markets by new retail investors, provisions of Section 80CCG are being extended to include investments in listed units of an equity oriented fund. Investments made in ‘equity oriented fund” which are within the definition of Section 10(38), will be eligible for deduction in accordance with the provisions of Section 80CCG.

This deduction shall be allowed for three consecutive assessment years beginning with the assessment year in which the investment was made. This enhanced period has also been extended to erstwhile one-time deduction available to investments in listed equity shares.

The existing eligibility criterion that the gross total income should not exceed ten lakh

40


rupees has now been increased to twelve lakh rupees.

[Clause 11]

100% Deduction for Donation to National Children’s Fund

Donations to Funds which are of national importance have been generally provided a deduction of 100% of the amount donated. The National Children’s Fund is also of national importance and hence it is proposed to allow 100% deduction in respect of donation made to this Fund. Accordingly Section 80G is proposed to be amended to extend the benefit.

[Clause 14]

Prohibition of cash contributions to political party or an electoral trust

Deduction for contribution made to political party or an electoral trust are available under Section 80GGB & Section 80GGC. Currently, there is no provision in these sections specifying the mode of payment of money.

It is proposed to amend Sections 80GGB and 80GGC that no deduction shall be allowed if the donation is paid in cash.

[Clauses 15 & 16]

Extension of Sunset Date for Tax Holiday for Power Sector

Under the existing provisions of Section 80IA(4)(iv) of the Income-tax Act, a deduction from profits and gains is allowed to an undertaking which is setup before 31st March, 2012 (i) for the generation and distribution of power or (ii) starts transmission or

distribution by laying a network of new transmission or distribution lines or (iii) undertakes substantial renovation and modernization of existing network of transmission or distribution lines. It is proposed to amend the above provision to extend the terminal date for a further period of one year, i.e., up to 31st March, 2014.

[Clause 17]

Deduction of Additional Wages in Certain Cases

Tax incentive for employing new regular workmen was available under Section 80JJA for three assessment years for an amount equal to 30% of additional wages paid to such new regular workmen. The incentive was intended for employment of blue collared employees in manufacturing sector. However in practice, it was claimed for all employees in all sectors. It is therefore proposed to amend Section 80JJA so as to provide such deduction to an Indian Company deriving profits from manufacture of goods in the factory. It is also proposed to provide that the deduction shall not be available if the factory is hived off or transferred from another existing entity or acquired as a result of amalgamation with another company.

[Clause 18]

Extension of applicability Section 115BD: Dividend received by Indian Company from Foreign Companies

As per Section 115BD tax is payable @ 15% in respect of dividends declared, distributed or paid by a specified foreign company and included in the total income of an assessee being an Indian Company. This provision was inserted by Finance

41


Act 2011 as an incentive for repatriation of income earned within given time frame by foreign subsidiary. This benefit of lower rate now stands extended by one more year and would be available for Assessment Year 2014-15.

[Clause 26]

Removal of the cascading effect of Dividend Distribution Tax in respect of dividend income received by Indian Company

Section 115O provides for taxation of dividend distributed by domestic company known as Dividend Distribution Tax (DDT). For the purpose of eliminating cascading effect in a multi-tier structure of companies, this section provides that the tax base for DDT be reduced by dividend received by a domestic company from its subsidiary, again a domestic company if such subsidiary has paid DDT on such dividend. It is now proposed to amend Section 115-O so as to remove the cascading effect in respect of dividends received by a domestic company from its foreign subsidiary also on which tax is payable by the domestic company u/s 115BBD. However the same amount of dividend shall not be taken into account for reduction more than once.

[Clause 27]

Clarification for Amount to be Eligible for Deduction as Bad Debts in Case of Banks

In order to clarify the scope and applicability of provisions of clause (vii) (deduction for bad debts), (viia) (provision for bad and

doubtful advances) of sub-section (1) and sub-section (2), it is proposed to insert an Explanation in clause (vii) of Section 36(1) the effect of which is that for an assessee to which clause (viia) of Section 36(1) applies, the amount of deduction in respect of the bad debts actually written off under Section 36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under Section 36(1)(viia) and that such account shall relate to all types of advances including those made by rural branches. The amendment is intended to overcome the effect of certain judicial pronouncements in which it has been held that the proviso to Section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances and no other advances.

[Clause 6]

Disallowance of certain fee, charge, etc. in the case of State Government Undertakings

It is proposed to amend Section 40 of the Income-tax Act to provide that any amount paid by way of royalty, license fee, service fee, privilege fee, service charge, etc., which is levied exclusively on or which is appropriated, directly or indirectly, from a State Government undertaking, by the State Government, shall not be allowed as deduction for the purposes of computation of income of such undertakings under the head “Profits and gains of business or profession”.

This is intended to set at rest a controversy on the subject.

[Clause 7]

42


Raising the limit of percentage of eligible premium for life insurance policies of persons with disability or disease

Under the existing provisions of clause (10D) of Section 10, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, is exempt from tax, subject to the condition that the premium paid for such policy does not exceed 10% (20% for policy issued prior to 1.4.2012) of the ‘actual capital sum assured’. Similarly under sub-section (3A) of Section 80C, deduction under the said section is available in respect of any premium or other payment made on an insurance policy of up to 10% (20% for policy issued prior to 1.4.2012) of the ‘actual capital sum assured’.

In the case of an insurance policy issued on or after 01.04.2013, in the case of following class of persons, it is proposed that the benefit of exemption as the case may be will apply if the premium paid does not exceed 15% (as against 10% under general category) of the ‘actual capital sum assured’ for any of the years during the term of the policy. The class of persons is:

(i) a person with disability or a person with severe disability as referred to in Section 80U, or

(ii) suffering from disease or ailment as specified in the rules made under Section 80DDB,

Similar change is also proposed in Section 80C(3A).

[Clauses 4 & 10]

Exemption to Income of Investor Protection Fund of Depositories

Under the provisions of SEBI (Depositories and Participants) Regulations, 1996, as amended in 2012, depositories are mandatorily required to set up an Investor Protection Fund.

Section 10(23EA) provides that income by way of contributions from a recognised stock exchange received by a Investor Protection Fund set up by the recognised stock exchange shall be exempt from taxation.

The proposed Section 10(23ED) seeks to introduce a similar exemption (subject to fulfilment of similar qualifying and other conditions) to the Investor Protection Fund in respect of income by way of contribution from a depository.

[Clause 4]

Exemption to National Financial Holdings Company Limited

The Specified Undertaking of Unit Trust of India (SUUTI) was created vide the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 as the successor of Unit Trust of India (UTI). Exemption from Income-tax was available to SUUTI in respect of its income up to 31st March, 2014.

SUUTI has been wound up and is succeeded by National Financial Holdings Company Limited (NFHCL) a new company wholly owned by the Central Government. It has been incorporated on 7th June, 2012.

In order to provide exemption on the lines of SUUTI to NFHCL, it is proposed to retrospectively amend Section 10 to grant exemption to National Financial Holdings

43


Company Limited in respect of its income accruing, arising or received on or before 31st March, 2014.

This amendment will take effect retrospectively from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and assessment year 2014-15.

[Clause 4]

Pass through Status to certain Alternative Investment Funds

Section 10(23FB) provides that any income of a Venture Capital Company (VCC) or Venture Capital Fund (VCF) from investment in a Venture Capital Undertaking (VCU) shall be exempt from taxation. Section 115U of the Income-tax Act provides that income accruing or arising or received by a person out of investment made in a VCC or VCF shall be taxable in the same manner as if the person had made direct investment in the VCU.

This pass through status is available only in respect of income which arises to the fund from investment in VCU, being a company which satisfies the conditions provided in SEBI (Venture Capital Fund) Regulations, 1996.

The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF regulations) have replaced the SEBI (Venture Capital Fund) Regulations, 1996 (VCF regulations) from 21st May, 2012.

It is proposed to retrospectively amend Section 10(23FB) to provide similar pass-through status to similar venture capital funds as are registered under the new regulations and subject to similar conditions of investment restrictions in the context of investment in a venture capital undertaking.

Further, conditions among others such as (a) that at least two-thirds of its investible funds are invested in unlisted equity shares or equity linked instruments of venture capital undertaking; (b) no investment has been made by such AIFs in a VCU which is an associate company; (c) units of a trust set up as AIF or shares of a company set up as AIF, are not listed on a recognised stock exchange are also proposed to be stipulated.

This amendment will take effect retrospectively from 1st April, 2013 and will accordingly apply in relation to assessment year 2013-14 and subsequent assessment years.

[Clause 4]

Keyman Insurance Policy

Under clause (10D) of section 10, any sum received under a life insurance policy is exempt from tax. This benefit however does not extend to a Keyman insurance policy. To plug a loophole it is proposed to provide that a Keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a Keyman insurance policy and will accordingly not be entitled to exemption under Section 10(10D) as was presently being claimed in some quarters.

[Clause 4]

Concessional rate of withholding tax on interest in case of certain rupee denominated long-term infrastructure bonds

Section 194LC, which was introduced by Finance Act, 2012 provides for concessional rate of withholding tax @5% on interest payable to a non-resident person on borrowings in

44


foreign currency from a source outside India either under a loan agreement or by way of issue of long-term infrastructure bonds, as approved by the Central Government.

This concessional rate is not applicable to rupee denominated long term infrastructure bonds issued by Indian Companies and subscribed by non-residents. This disparity was increasing the cost of Indian Companies. A proviso is proposed to be inserted after clause (ii) of sub-section (2) of Section 194LC to enable a concessional withholding tax rate where a non-resident deposits foreign currency in a designated bank account and such money as converted in rupees is utilised for subscription to a long-term infrastructure bond issue of an Indian company, then, for the purpose of this section, the borrowing by the company shall be deemed to be in foreign currency.

Explanation is proposed to be inserted to define ‘the designated account’ which is an account of a person in a bank opened solely for the purpose of deposit of money in foreign currency and such money is to be used, after conversion, for subscription to a rupee denominated long-term infrastructure bond issue of an Indian company.


[Clause 43]

Application of Seized Assets under Section 132B

Section 132B allows adjustment of seized assets against any existing liability under the Income-tax Act, Wealth-tax Act, the Expenditure-tax Act, the Gift-tax Act and the Interest-tax Act and the amount of liability determined on completion of assessments

pursuant to search, including penalty levied or interest payable and in respect of which such person is in default or deemed to be in default. The legislative intent behind this provision is to ensure recovery of outstanding tax/interest/penalty and also to provide for recovery of taxes/interest/penalty, which may arise subsequent to the assessment pursuant to search.

Various courts have taken a view that advance tax payable as per Part C of Chapter XVII is ‘existing liability’ under the Act and therefore, seized assets can be adjusted against the advance tax liability. The proposed Explanation 2 to Section 132B seeks to clarify that the ‘existing liability’ does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII.


[Clause 31]

Return of Income Filed Without Payment of Self-Assessment Tax to be Treated as Defective Return

As per sub-section (9) of Section 139, the Assessing Officer may intimate to the assessee a defect in the return filed under Section 139(1) and give him an opportunity to rectify the defect within a period of fifteen days. If the defect is not rectified within the time allowed by the Assessing Officer, the return is treated as an invalid return. Explanation to Section 139(9) lists down conditions in which a return can be a ‘defective return’.

The Department has observed that a large number of assessees are filing returns without payment of self-assessment tax

45


under Section 140A. Self-assessment tax is any tax including interest payable on the basis of the return, after taking into account prepaid taxes.

It is proposed to insert one more condition by amending the aforesaid Explanation so as to provide that the return of income shall be regarded as defective unless the tax together with interest, if any, payable in accordance with the provisions of Section 140A has been paid on or before the due date of furnishing of the return.

E-returns cannot be uploaded without payment of self-assessment tax and without providing details of the same. The proposed amendment would apply to physical returns.


[Clause 32]

Scope of Special Audit under Sub-Section (2A) of Section 142 to be Expanded

Sub-section (2A) of Section 142 provides that at any stage of proceedings before him, the Assessing Officer having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, can with the approval of the Chief Commissioner or Commissioner, direct the assessee to get his accounts audited by a Chartered Accountant and to furnish a report of such audit.

The expression “nature and complexity of the accounts” has been interpreted in a very restrictive manner by various courts.

The above expression is proposed to be widened to provide that if at any stage of the proceedings before him, the Assessing

Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and the interests of the revenue, can with the previous approval of the Chief Commissioner or the Commissioner, direct the assessee to get his accounts audited by an accountant and to furnish a report of such audit. By including criteria such as volume of accounts, multiplicity of transactions in the accounts etc. a free hand would be given to the Assessing Officer to order a special audit. Similarly the phrase ‘doubt about the correctness of the accounts’ is of vague import. Though approval of Commissioner or Chief Commissioner has been built in as a safety measure, this could be a potentially dangerous provision.


[Clause 33]

Extension of Time Limits for Assessments

For the computation of the time limit for the completion of assessment, the bill seeks to exclude the following time periods:

In case audit direction is challenged before a court, the time period till the order setting aside such directions is received by the Commissioner of Income tax (CIT);

In case a reference or first of the references for exchange of information is made, the time period till the information required is last received by the CIT or the period of one year, whichever is less.

[Clause 38]

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Clarification of the term “tax due” for the purposes of recovery in certain cases

Section 167C provides that a partner of limited liability partnership firm is jointly and severally liable for payment of any tax due from the firm unless he proves that the non-recovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. Similar provision exists in Section 179 in case of a director of a private limited company.

The sections are intended to recover outstanding demand under the Act of a limited liability partnership firm from its partners and in case of a private company from the directors of such company. Some courts have interpreted the phrase ‘tax due’ used in section 179 to hold that it does not include penalty, interest and other sum payable under the Act.

In view of the above, it is proposed to insert an Explanation in both the sections to clarify that the expression “tax due” includes penalty, interest or any other sum payable under the Act.

These amendments will take effect from 1st June, 2013.

[Clauses 40 & 41]

Penalty under Section 271FA for non-filing of Annual Information Return (AIR)

Section 285BA mandates furnishing of Annual Information Return (AIR) by the specified persons in respect of specified financial transactions within the time prescribed under sub-section (2) thereof. In case of failure of specified persons to furnish AIR, Section 271FA provides for penalty of one hundred

rupees for every day during which the failure continues. Further sub-section (5) to section 285BA empowers such income tax authority to issue notice if the AIR has not been furnished by the due date. However Section 271FA does not provide for penalty for failure to comply with such notice. In view of this it is now proposed that if such persons fail to furnish the return within the period specified in the notice under sub-section (5) of Section 285BA, penalty will be levied of an amount of five hundred rupees for every day during which the failure continues, beginning from the day immediately following the day on which the time specified in such notice for furnishing the return expires. This amendment will take effect from 1st April, 2014.

[Clause 48]

Extension of time for approval of Provident Fund under Income Tax Act in Part A of the Fourth Schedule to the Income Tax Act, 1961

With a view to grant further time to the EPFO to decide on the pending applications for recognition received from various Provident Funds seeking exemption under Section 17 of the EPF & MP Act, it is proposed to extend the time limit from 31st March, 2013 to 31st March, 2014.

This amendment will take effect retrospectively from 1st April, 2013.

[Clause 50]

General Anti Avoidance Rule

The General Anti Avoidance Rule (GAAR) was introduced in the Income tax Act by the Finance Act, 2012. The substantive provisions relating to GAAR are contained in Chapter X-A and the procedural provisions relating to mechanism for invocation of

47


GAAR and passing of the assessment order in consequence thereof are contained in Section 144BA. These provisions would have come into force with effect from AY 2014-15.

A number of representations were received against the provisions relating to GAAR. An Expert Committee was constituted by the Government with broad terms of reference including consultation with stakeholders and finalising the GAAR guidelines and a road map for implementation. The Expert Committee’s recommendations included suggestions for legislative amendments, formulation of rules and prescribing guidelines for implementation of GAAR. Some of the recommendations of the Expert Committee have been accepted by the Government, with some modifications. In order to give effect to these accepted recommendations, the following amendments are proposed in Chapter X-A and Section 144BA:

YY The provisions of Chapter X-A and Section 144BA will come into force with effect from AY 2016-17 instead of AY 2014-15.

YY An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance arrangement, as against the current provision of Section 96 which provided that it should be “the main purpose or one of the main purposes”.

YY The factors like, period or time for which the arrangement had existed; the fact of payment of taxes by the assessee; and the fact that an exit route was provided by the arrangement, would be relevant but not sufficient to determine whether the arrangement is an impermissible avoidance arrangement. The current provisions of Section 97 which provided that these factors would not be relevant

has been proposed to be amended accordingly.

YY An arrangement shall also be deemed to be lacking commercial substance, if it does not have a significant effect upon the business risks, or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained but for the application of Chapter X-A. The current provisions as contained in Section 97 are proposed to be amended to provide that an arrangement shall also be deemed to lack commercial substance if the condition provided above is satisfied.

YY The Approving Panel shall consist of a Chairperson who is or has been a Judge of a High Court; one Member of the Indian Revenue Service not below the rank of Chief Commissioner of Income tax; and one Member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision of Section 144BA ,that the Approving Panel shall consist of not less than three members being income-tax authorities and an officer of the Indian Legal Service has been proposed to be amended accordingly.

YY The directions issued by the Approving Panel shall be binding on the assessee as well as the income-tax authorities and no appeal against such directions can be made under the provisions of the Act. The current provisions of Section 144BA providing that the direction of the Approving Panel will be binding only on the Assessing Officer have been proposed to be amended accordingly.

48


YY The Central Government may constitute one or more Approving Panels as may be necessary and the term of the Approving Panel shall be ordinarily for one year and may be extended from time to time up to a period of three years.

YY The provisions of Section 144BA have been proposed to be amended accordingly.

YY The two separate definitions in the current provisions of Section 102, namely, “associated person” and “connected person” will be combined and there will be only one inclusive provision defining a ‘connected person’.

YY An advance ruling by the Authority for Advance Rulings (AAR) on whether an arrangement is an impermissible avoidance arrangement has been retained.

YY Consequential amendments in other sections relating to procedural matters are also proposed.

Further, in view of postponement of GAAR provisions, it is proposed that the provisions of GAAR shall apply to a taxpayer with effect from AY 2016-17, even if some of the provisions of such rule are not beneficial to him as compared to those provided in DTAA.

Following important recommendations, which are accepted by the Finance Minister as per the press statement, are not incorporated in the proposed revised GAAR provisions:

YY Where anti-avoidance rules are provided in a tax treaty in the form of limitation of benefit clause etc., GAAR provisions should not apply to override the treaty.

If there is evidence of violations of anti-avoidance provisions in the treaty, such treaty should be revisited, but GAAR should not override the treaty.

YY While determining whether an arrangement is an impermissible avoidance arrangement, it will be ensured that the same income is not taxed twice in the hands of the same tax payer in the same year or in different assessment years.

YY Investments made before 30 August 2010, the date of introduction of the Direct Taxes Code, Bill, 2010, will be grandfathered.

YY GAAR will not apply to such FIIs that choose not to take any benefit under the Treaty. GAAR will also not apply to non- resident investors in FIIs.

YY Monetary threshold of ` 3 crore of tax benefit in the arrangement will be provided.

YY Where a part of the arrangement is an impermissible avoidance arrangement, GAAR will be restricted to the tax consequence of that part which is impermissible and not to the whole arrangement.

YY Where GAAR and Specific Anti Avoidance Rules are both in force, only one of them will apply to a given case, and guidelines will be made regarding the applicability of one or the other.

Considering the fact that GAAR provisions will be implemented from AY 2016-17, we expect that the above valid recommendations, which are not considered in the proposed amendment, would find place by that time in the Income tax Act.

[Clauses 21 to 24, 34 to 39, 44 to 47 and 49]

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II. WEALTH TAX

Definition of Urban Land Modified

As per Section 2(ea)(v) of the Wealth Tax Act urban land is an asset chargeable to Wealth Tax Act. It is now proposed to modify the definition of urban land. It is proposed that the distance from the local limits of any municipality or cantonment board is to be measured aerially. Earlier there was no guidance on the mode of measurement of the distance.

Further, it is also proposed to have different distances from the local limits of municipality or cantonment board having different population as compared to erstwhile standard distance of eight kilometers from the local limits of municipality or cantonment board. Thus as per proposed amendment urban land shall means land situated in any area (measured aerially) within:

YY 2 kilometers from the local limits of municipality or cantonment board having population of more than 10,000 but not exceeding 1,00,000 land

YY 6 kilometers from the local limits of municipality or cantonment board having population of more than 1,00,000 but not exceeding 10,00,000 land

YY 8 kilometers from the local limits of municipality or cantonment board having population of more than exceeding 10,00,000 land

Thus in short the distance from the local limits of municipality or cantonment board

having population less than 10,00,000 is reduced. As a result now the land situated in above jurisdiction within 2/6 kilometers will fall under the definition of urban land and will be chargeable to wealth tax.

[Clause 51]

Documents to be submitted on demand by AO instead of submitting with return of wealth

It is proposed to introduce Section 14A empowering the Board to make rules for giving exemptions to class or classes of persons for not furnishing documents which are otherwise required to be submitted along with the return of wealth. It is also proposed that such documents may be produced on demand by the Assessing Officer.

It is proposed to introduce Section 14B empowering the Board to make rules for mandating certain class or classes of persons to furnish the return in electronic form in the form and manner to be prescribed. Further the proposed section also empowers the board to make rules for giving exemption from not furnishing documents along with return in electronic form and the same shall be required to be produced before Assessing officer on demand.

Similar amendments are also proposed Section 46 and these amendments are effective from 1st June, 2013. The above proposals will reduce the paper work.

[Clauses 52 & 53]

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INDIRECT TAXES

I. GENERAlWith the introduction of the negative list based system of taxation of services in July last year, the base for tax collection has already been widened considerably. Only a few activities which are covered by the negative list remain out of the tax net therefore. The full impact of this broadening of this service tax base by way of revenue gain will be realised only in the next financial year.

In the last few months, quite a few positive developments in respect of Goods and Services Tax (GST), for implementation of which the Finance Minister has laid down a clear road map, have taken place. It is thus hoped that the outstanding issues would be soon resolved as indicated by the recently reached understanding in respect of Central Sales Tax compensation. Let us look forward to the timely bridging of the gap between the existing indirect taxes regime and GST by broadening the tax base, rationalisation of Credit Scheme etc.

Considerations of time and space prevent us from presenting a sectoral analysis of the impact and ramifications in detail of all the proposals of indirect taxes and details of legislative and procedural changes. A summary of salient proposals is being provided hereinafter. We request the readers to carefully study the amendments being effected to Customs Act, Central Excise Act, Finance Act 1994, relevant Rules thereunder as well as he Customs Tariff and Central Excise Tariff Acts, apart from the Notifications issued by the Central Government on 1st March, 2013.

Changes in Customs and Central Excise law and rates of duty have been proposed through the Finance Bill, 2013 (clauses 54 to 77

for Customs and clauses 78 to 92 for Central Excise). In order to prescribe effective rates of duty and to carry out changes in the Rules made under the respective Acts, the following notifications are being issued:

Customs: Notification Nos. Date

Tariff No. 9/2013-Customs to No.15/2013-Customs

1st March, 2013

Non-Tariff No. 25/2013-Customs (NT)

1st March, 2013

Central excise: Notification Nos. Date

Tariff No. 5/2013-CE to No. 12/2013-CE

1st March, 2013

Non-Tariff No. 1/2013-CE (NT) to No. 4/2013-CE (NT)

1st March, 2013

Unless otherwise stated, all changes in rates of duty take effect from the midnight of 28th February/1st March, 2013. A declaration has been made under the Provisional Collection of Taxes Act, 1931 in respect of clauses 76, 77(b), 91 and 92 of the Finance Bill, 2013 so that changes proposed therein also take effect from the midnight of 28th February/ 1st March, 2013. The remaining legislative changes would come into effect only upon the enactment of the Finance Bill, 2013. Retrospective amendments in the provisions of law or notification issued under the respective Acts shall have the force of law only upon the enactment of the Finance Bill, 2013 but with effect from the date indicated in the relevant clause or Schedule. These dates may be carefully noted.

II. CENTRAl EXCISEYY There is no change in normal rate of

duty of 12%.

YY Section 9 provides that an offence case involving evasion in which the duty leviable exceeds thirty lakh rupees

51


shall be punishable with a term of imprisonment extending to seven years with fine. This section is being amended so as to substitute the amount of ` 30 lakhs with ` 50 lakhs [Clause 78]

YY Section 9A is being amended to make an offence cognizable and non-bailable where the duty liability exceeds ` 50 lakh and punishable under clause (b) or clause (bbbb) of sub-section (1) of section 9. [Clause 79]

YY Excise duty on Sports Utility Vehicles (SUVs) is being increased from 27% to 30%. SUVs registered solely for use as taxis will not suffer this additional excise duty. Taxi refund in respect of SUVs is being adjusted accordingly.

YY Excise duty on truck chassis (8706 00 42) is being reduced from 14% to 13%.

YY Full exemption from excise duty is being provided on ships and other vessels. Consequently, there will be no CVD on these ships and vessels when imported.

YY ‘Zero excise duty route’, as existed prior to Budget 2011-12, is being restored in respect of branded readymade garments and made ups. In the case of cotton there will be zero duty at the fibre stage and, in the case of spun yarn of manmade fibres, there will be a duty of 12% at the fibre stage. The ‘Zero excise duty route’ will be in addition to the CENVAT route now available.

YY Branded Ayurvedic medicaments and medicaments of Unani, Siddha, Homeopathic or bio-chemic system are being brought under MRP based assessment with abatement of 35% from MRP.

YY Excise duty on mobile phones of retail sale price exceeding ` 2000 is being increased from 1% to 6%.

YY Excise duty on cigarettes is being increased by about 18% on all cigarettes except cigarettes of length not exceeding 65 mm. Cigars and cigarillos duty is also being similarly raised.

YY Full exemption from excise duty is being provided to intermediate goods manufactured and consumed captively by exempted units under Area Based Exemption Scheme in Himachal Pradesh and Uttarakhand.

III. CuSTomSYY There will be no change in the peak rate

of basic customs duty of 10% for non-agricultural products.

YY Under the existing sub-section (6) of section 104, all offences under the Act are bailable. Sub-section (6) is being substituted with sub-section (6) and (7). Sub-section (6) provides that the following specified offences punishable under section 135 shall be non-bailable, namely:

Yy evasion or attempted evasion of duty exceeding ` 50 lakh;

Yy prohibited goods notified under section 11 which are also notified under sub-clause (C) of clause (i) of sub-section (1) of section 135;

Yy import or export of any goods which have not been declared in accordance with the provisions of this Act and the market price of which exceeds ` 1 crore;

Yy Fraudulently availing of or attempt to avail of drawback or any exemption from duty provided under this Act, if the amount of drawback or exemption from duty exceeds ` 50 lakh.

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Sub-section (7) provides that all other offences except those specified in sub-section (6) shall be bailable.

YY Baggage Rules are being amended to,

Yy raise the duty free allowance in respect of jewellery for an Indian passenger who has been residing abroad for over one year or a person who is transferring his residence to India from ` 10,000 to ` 50,000 in case of a gentleman passenger and from ` 20,000 to ` 1,00,000 in case of a lady passenger.

Yy raise the duty free allowance for crew member of vessel/aircraft from ` 600 to ` 1500.

YY Basic customs duty on new passenger cars and other motor vehicles (high end cars) with CIF value more than US$ 40,000 and/or engine capacity exceeding 3000 cc for petrol run vehicles and exceeding 2500 cc for diesel run vehicles is being increased from 75% to 100%.

YY Basic customs duty on motor cycle with engine capacity of 800 cc or more is being increased from 60% to 75%.

YY Export duty is being levied on ilmenite unprocessed at 10% and on ilmenite, upgraded at 5%.

YY Export duty is being levied on bauxite at 10%.

YY Basic customs duty is being reduced from 10% to 5% on stainless steel wire cloth stripe and from 7.5% to 5% on wash coat for use in the manufacture of catalytic convertors and their parts.

YY Full exemption from export duty is being provided to galvanized steel sheets falling under certain sub-headings, retrospectively w.e.f. 1st March, 2011.

YY Basic customs duty is being reduced from 10% to 2% on pre-forms of precious and semi-precious stones.

YY Basic customs duty is being reduced from 7.5% to 5% on 20 specified machinery for use in leather and footwear industry.

YY Basic Customs Duty on yachts and motor boats is being increased from 10% to 25%.

YY Presently, the basic customs duty exemption is available to parts and testing equipments for maintenance, repair and overhaul of aircrafts. This exemption is now being extended to parts and testing equipments for maintenance, repair and overhaul of aircrafts and parts thereof.

YY Full exemption from basic customs duty is being provided to lithium ion automotive battery for manufacture of lithium ion battery packs for supply to the manufacturers of hybrid and electric vehicles.

YY Time period of exemption (Nil BCD, CVD of 6% and Nil SAD) for the specified parts of electric and hybrid vehicles is being extended by 2 more years up to 31st March, 2015.

YY Basic customs duty on raw silk (not thrown), of all grades is being increased from 5% to 15%.

YY Basic customs duty is being reduced from 7.5% to 5% on textile machinery & parts.

YY Basic customs duty on Set Top Boxes for TV is being increased from 5% to 10%.

YY Withdrawal of exemption from education cess and secondary & higher education cess on aircraft & aircrafts parts, soyabean oil, olive oil etc.

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IV. SERVICE TAXYY There is no change in normal rate of

Service Tax of 12%.

YY Definition of ‘approved vocational education course’ provided in section 65B (11) is being amended so that courses in ‘designated trades’ offered by Industrial Training Institute or Industrial Training Center affiliated to State Council of Vocational Training will also be covered by the negative list;

YY Definition of process amounting to manufacture u/s 65B(40) amended to include processes on which duties of excise are leviable under medicinal & toilet preparations (Excise Duties) Act, 1955.

YY Section 77(1)(a) is amended so that maximum penalty imposable for failure to obtain registration will be ` 10,000 only.

YY Section 78A introduced to make provision for imposing penalty on director, manager, secretary or other officer of a Company, who is in any manner knowingly concerned with specified contraventions.

YY Section 89 is being amended: (i) in the case of an offence specified in clauses (a), (b) and (c) of sub-section (1) where the amount exceeds fifty lakh rupees, punishment shall be for a term which may extend to three years, but shall not, in any case, be less than six months; (ii) in the case of failure to pay service tax collected, to the credit of the Central Government within six months, an offence specified in section 89(1)(d), if such non-payment exceeds ` 50 lakhs, punishment shall be imprisonment for a term which may extend upto seven years but not less than six months;

(iii) in the case of any other offence, the punishment shall be imprisonment for a term which may extend to one year.

YY Section 91 is being introduced to provide for power to arrest. Commissioner of Central Excise is empowered to authorize any officer of Central Excise not below the rank of Superintendent of Central Excise, to arrest a person for specified offences particularly non payment of collected service tax.

YY At present taxable portion for service tax purpose is prescribed as 25% uniformly for constructions where value of land is included in the amount charged from the service recipient. This is being rationalized. Accordingly, where the carpet area of residential unit is up to 2000 square feet. or the amount charged is less than ` 1 crore, in the case of ‘construction of complex, building or civil structure, or a part thereof, intended for sale to a buyer, wholly or partly except where the entire consideration is received after issuance of completion certificate by the competent authority’, taxable portion for service tax purpose will remain as 25%; in all other cases taxable portion for service tax purpose will be 30%. This change will come into effect from the 1st day of March, 2013.

YY Rationalization of exemption limit prescribed for charitable organizations, providing service towards any other object of general public utility. So far, the limit was ` 25 Lakhs per annum. Now, they will be covered by the threshold exemption i.e. ` 10 lakhs. This amendment will take effect from 1st April, 2013.

YY Exemption provided to restaurants other than those having (i) air-conditioning and (ii) license to serve liquor, is being

54


rationalized; condition regarding ‘license to serve liquor’ is being omitted. Therefore, with effect from 1st April, 2013, service tax will be leviable on taxable service provided in restaurants with air-conditioning or central air heating in any part of the establishment at any time during the year.

YY Rationalization of exemption to transport of goods by road and rail/vessel.

Following Exemptions withdrawn:

YY Services provided by an educational institution by way of renting of immovable property.

YY Temporary transfer or permitting the use or enjoyment of a copyright relating to cinematographic films was fully exempt so far; now, this exemption will be restricted to exhibition of cinematograph films in a cinema hall or a cinema theatre.

YY Services by way of vehicle parking to general public.

YY Services provided to Government, a local authority or a governmental authority, by way of repair or maintenance of aircraft.

Amnesty Scheme:

YY To encourage voluntary compliance and broaden the tax base, it is proposed to provide one time amnesty by way of (i) waiver of interest and penalty; and (ii) immunity from prosecution, to the stop filers, non-filers or non-registrants or service providers (who have not disclosed true liability in the returns filed by them during the period from October 2007 to December 2012) who pay the “tax dues”. The scheme will be operational from the date on which the Finance Bill, 2013 receives the assent of the President.

YY Scope of Advance Ruling is being extended to cover resident public limited companies; a notification is being issued for this purpose, under section 96A (b) (iii) of the Finance Act, 1994.

V. oThER SIGNIfICANT PRoPoSAlS:

YY With a view to tiding over challenges not envisaged earlier by the Road Construction sector, the Government has decided to constitute a regulatory authority for the road sector to address bottlenecks, including financial stress, enhanced construction risk and contract management issues.

YY The Cabinet Committee on Investments (CCI), which has already been set up to monitor investment proposals as well as projects under implementation, especially in the manufacturing sector of the industry, will take up a number of oil and gas, power and coal projects shortly.

YY The Rajiv Gandhi Equity Savings Scheme will be liberalised to enable the first time investor to invest in mutual funds as well as listed shares and he can do so, not in one year alone, but in three successive years. The income limit will be raised from ` 10 lakh to ` 12 lakh;

YY In consultation with RBI, instruments that will protect savings from inflation, especially the savings of the poor and middle classes will be issued. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates. The structure and tenor of the instruments will be announced in due course.

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YY To encourage the Micro, Small and Medium enterprises to grow, the benefits or preferences enjoyed by them will stay with them for upto three years after they grow out of the category in which they obtained the benefit.

YY The new Companies Bill obliges companies to spend 2 percent of average net profits under Corporate Social Responsibility (CSR). The Ministry of Corporate Affairs will notify that funds provided to technology incubators located within academic institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.

YY For the sake of adequate capitalisation of public sector banks, a further infusion of ` 14,000 crore will be made in the financial year 2013-14.

YY The first Women’s Bank is proposed to be set up as a public sector bank with a provision of ` 1,000 crore as initial capital.

YY ` 6,000 crore is to be provided to the Rural Housing Fund in the financial year 2013-14 for extending loans for rural housing.

YY It is also proposed to start a Fund for urban housing by providing ` 2000 crore

in the financial year 2013-14 for setting up Urban Housing Fund.

YY All towns of India with a population of 10,000 or more will have an office of LIC and office of at least one public sector general insurance company by 31st March, 2014.

YY Banks will he permitted to act as insurance brokers so that the entire network of bank branches will be utilized to increase penetration.

YY In order to remove the ambiguity that prevails on what is Foreign Direct Investment (FDI) and what is Foreign Institutional Investment (FII), it is proposed to lay down the broad principle that, where an investor has a stake of 10% or less in a company, it will be treated as FII and where the investor has a stake of more than 10%, it will be treated as FDI.

YY The list of eligible securities in which Pension Funds and Provident Funds may invest will be enlarged to include exchange traded funds and asset-backed securities.

YY Allocation for defence is proposed to be increased to ` 2,03,672 crore including ` 86,741 crore for capital expenditure.

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vakils

B. K. KHARE & CO.CHARTERED ACCOUNTANTS

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