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Budget Analysis 2012-13

1

FOREWORD

The Finance Minister (FM) was faced with the daunting task of presenting theBudget 2012-13 amidst a background of global economic meltdown, sluggishindustrial growth, spiralling scal decit and continuing inationary pressure.

With expectations of 1.2 billion Indians and millions of foreign investors ridinghigh on him, he expressed his agony in his Budget Speech by stating The life of aFinance Minister is not easy. When everything goes well with the economy, we allshare in the joy. However, when things go wrong, it is the Finance Minister whois called upon to administer the medicine. His speech was an indicator of thebitter medicine he would prescribe through his Budget proposals, to vaccinatethe Indian economy against the global economic crisis epidemic.

The mantra for the upcoming scal year 2012-13 is faster, sustainable and

more inclusive growth. The objective is to achieve a GDP growth of nearly 7.6%as against estimated growth rate of 6.9% in 2011-12 and the FM laid down thefollowing 5-point objective:

X Focus on domestic demand driven growth recovery;

X Create conditions for rapid revival of high growth in private investment;

X Address supply bottlenecks in agriculture, energy and transport sectors,

particularly in coal, power, national highways, railways and civil aviation;

X Intervene decisively to address the problem of malnutrition especially in the

200 high-burden districts; and

X Expedite coordinated implementation of decisions being taken to improve

delivery systems, governance, and transparency; and address the problem of

black money and corruption in public life.

In light of the above 5-point objectives, the following policy directions have

emerged:

X Liberalisation of foreign direct investment & ensuring rapid rise in privateinvestment

X INR 30,000 crore to be raised through disinvestment where atleast 51 percent ownership and management control to remain with Government

X INR 5,000 crore India Opportunities Venture Fund to be set up with SIDBI

X Allocation of INR 25,555 crore for Right to Education Sarva Shiksha Abhiyan

X Tax-free bonds for INR 60,000 crore announced for financing infrastructureprojects

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X External Commercial Borrowings (ECB) allowed to part finance Rupee debtof existing power projects, allowed for working capital requirements of theairline industry for a period of one year (subject to a total ceiling of US Dollar1 billion) and allowed for low cost affordable housing projects

X To curb the menace of black money and proposal to lay white paper on blackmoney in the current session of the Parliament

X To address the menace of tax avoidance and combat sham planning

The Direct tax proposals put forward in this Budget have almost tax neutralimpact on the net revenue, however some amendments to Sections 2, 9 and 195which have retrospectively overruled the landmark Supreme Court decision inthe Vodafone case. Such ip-ops on issues of international importance couldseriously dent the investor condence. There have been over 25 retrospective

amendments in this Budget and this kind of conict between the legislature andjudiciary has raised grave concerns over the certainty of tax laws. On the brighterside, the introduction of General Anti Avoidance Rule (GAAR) would enable tocounter aggressive tax avoidance scheme and Advance Pricing Agreements (APAs)would bring certainty on Transfer Pricing disputes.

The Indirect tax proposals are aimed at widening the service tax base andstrengthening its enforcement by taxing all services except those in the negativelist (17 services). It proposes to hike the service tax & excise duty from 10% to

12%. The Direct & Indirect tax proposals are to result in a net revenue gain of INR41,440 crores.

The FM has emphasized on expenditure reform and management, and has alsolaid emphasis on proper distribution of subsidies to the hands of the farmers. Thismove is aimed at curtailing the scal decit in the long term. The FM believesthat economic policy often demands painful short term policy changes which areadvantageous to the economy in the long run. He quoted Shakespeares wordsin Hamlet - I must be cruel only to be kind; thereby expressing his bonade

intention behind the somewhat cruel Budget proposals.The FM has not promised the impossible he has put forth realistic and directionalproposals. Lets hope that the foreign investors forgive the uncertainty createddue to numerous retrospective amendments this Budget has ushered in and thatPranab Da is remembered for his credible roadmap and implementable proposals,which can enable the country to battle the global crisis.

TeamBDOPlace: MumbaiDate: 16th March, 2012

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BDO


Para

no. Particulars

Page

No.

1. ECONOMIC INDICATORS 4

2. DIRECT TAX PROPOSALSa) Tax ratesb) Widening of tax basec) Measures to prevent generation and circulation of

unaccounted money

d) Tax incentives and reliefse) Rationalisation of tax deduction at source provisionsf) Rationalisation of international taxation provisionsg) Rationalisation of transfer pricing provisionsh) General anti-avoidance rulesi) Other claricationsj) Wealth tax

81013

16262934373950

3. INDIRECT TAX PROPOSALSa) Service Taxb) CENVAT Creditc) Central Excised) Customs

52748086

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1. Economic indicators

GDP growth indicators

The Indian economy found itself in the heart of conicting demands of

managing growth as well as price stability. From advanced estimates of a9% GDP growth for 2011-12 made during the previous economic survey to amid-year analysis of 7.5%, the economy is nally expected to grow at a muchslower rate of 6.9%. Global factors such as crisis in the eurozone, sluggishgrowth in many industrialized countries, hardening international crude oilprices and domestic factors such as tightening of monetary policy haveinuenced the growth rate of the Indian economy. The GDP growth estimatedin 2011-12 has been the lowest in eight years, with the exception of theyear 2008-09 (year of the global economic crisis). However, globally, India

ranks amongst the foremost in terms of economic growth rate (after China).Both agriculture and service sectors have continued to perform well and theslowdown is attributable to the weakening industrial growth.

X The Indian economy growth is at its lowest in the last 6 years (excluding2008-09). Globalisation, while providing new opportunities, alsobrings along new challenges and responsibilities. This has directlyimpacted the Indian economy growth.

X There are some positive indications that the weakness in economicactivity is at its lowest and upswing is imminent.

9.69.3

6.7

8.4 8.4

6.9

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12(Advance Estimates)

GDP growth

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Global GDP composition 2000 Global GDP composition 2010

Global economic inuence

India is no longer only a spectator to the global economy. Changes in the globaleconomy have begun to have a large implication on India. Simultaneously, Indiasinuence on the global economy is also increasing steadily. The global economy is

expected to grow at a rate of 3.3% in 2012, predominantly on account of stagnant/ negative growth in the developed economies and subdued growth (comparedto previous year) in emerging economies and BRIC countries. This lower globalgrowth forecast is attributable to the various economic, social and geopolitical

shocks.

As Indias GDP composition has undergone a signicant change over the past twodecades from a manufacturing to services economy, the global economy has alsoundergone a radical change in terms of its conguration. The composition of large

emerging economies (especially BRIC countries) to the global GDP has increasedfrom 8.4% in 2000 to 18.2% in 2010. The decline in share of developed economiesto the global GDP can be particularly marked to the decline of the EUs share andthe shift of growth from Japan to China. The Chinese economy has grown vefoldto become the second largest economy in the world. Despite a lower growthrate than its neighbor China, Indias growth also has begun to impact the globaleconomy and this is evident from the fact that it is the fourth largest economy inPPP terms.

BRICS.8.4

BRICS.18.2

Adv. Economies79.7

Adv. Economies65.8

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Key indicators of Indian economy

Agricultural sector

The agriculture sector is an important indicator tracked by policy makers as it isa signal of inclusive growth. According to Census 2011 the livelihood of over 58%

of the Indian population is linked to the agriculture sector. However due to thelow growth rates during the Ninth (2.4%) and Tenth (2.3%) ve year plans, theshare of agriculture in the overall economy (14.5%) is in a steady decline. TheGovernment has taken considerable measures to provide a meaningful thrust tothe sector. This has resulted in a higher growth rate for the sector (3.5%) over thelast four years.

Manufacturing sector

The contribution of the manufacturing sector has been relatively stable over the

last few years. The current share of the sector is pegged at 28% of the overallGDP. Over the last decade (199192 to 2011-12) the growth of major industries(6.7%) has kept pace with the GDP growth (6.9%). This highlights a strong co-relation between industry and the overall growth of the Indian economy. TheGovernment of India introduced a revised Index of Industrial Production (IIP)in June 2011. The base of the index has been revised from 1993-94 to 2004-05. The new base is more relevant as it is broad based in nature and reectsthe more recent economic scenario currently prevailing in the country. Theoverall performance of IIP has decelerated over the previous year for the period

April-December. The IIP growth has slipped from 8.3% in 2009-10 to 3.6% in 2010-11 which is largely attributable to the mining sector. The reduction in productionof coal and natural gas has led to mining sector achieving a negative growth of-2.7% in 2011 (April December).

Service sector

The countrys march towards prosperity and economic growth has been largelyfuelled by the services sector. The conventional economic theory states that adeveloping nations share of services is lower than manufacturing in the overall

economic context. However the Indian economy has deed this norm whereby theshare of services is twice that of manufacturing. The growth in services has beenincreasing at a fast clip. The services sector growth over the last six years (10.2%)has outpaced the overall GDP growth (8.6%). According to advance estimates theexpansion of services, excluding construction, in 2011-12 (9.4%) was marginallyhigher than the previous year (9.3%). If the total service basket was expandedto include construction, then the growth rate decreased from 9.2% in 2010-11 to8.8% in 2011-12. The key reason for this is the sharp deceleration in construction

from 8.0% in 2010-11 to 4.8% in 2011-12.Capital markets

The volatility in the global stock markets had a negative effective on the resourcemobilization drive in India. There was a sharp decline in the number of IPOs from

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53 in 2010-11 to 30 in 2011-12 (as on 31st December, 2011). The total resourcesmobilized through equity route also slowed substantial from INR 48,654 croreto INR 9,683 crore. Lack of investor interest also led to lower IPO offerings.The mean IPO size in 2011-12 was INR 168 crore as compared to INR 671 crore in2010-11.

Ination

The Wholesale Price Index (WPI) ination has continued to hover around the 9%mark during most of April December 2011 on account of high global commodityprices and cost push pressures. Two years of tightening monetary policy, favourablebase effect in prices and continued global economic slowdown would moderateination at around 6.5% to 7% by March 2012. The contribution of manufacturedproducts group to WPI ination increased from 35% in 2010-11 to 49% in 2011-12.Sharp rise in fuel costs since December 2008, due to political upheaval, has also

been a contributing factor to the high headline ination over the past two years.

2011-12(April-Dec)

2010-112009-102008-092007-082006-07

6.59

4.74

8.05

3.80

9.55

9.11

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Senior Citizen between the age of sixty years to eighty years(Assuming Income of`10,00,000/-)

Existing Limit Proposed Limit Tax Rate (%) Tax Relief

Upto`2,50,000 Upto`2,50,000 NIL

`20,000

`2,50,001

`5,00,000

`2,50,001

`5,00,000

10%

`5,00,001 `8,00,000

`5,00,001 `10,00,000

20%

`8,00,001 & above `10,00,001 & above 30%

Effective Tax Rate Savings

14.5% 12.5% 2.00%

Senior Citizen above the age of eighty years(Assuming Income of`10,00,000/-)

Existing Limit Proposed Limit Tax Rate (%) Tax Relief Upto`5,00,000 Upto`5,00,000 NIL

`20,000`5,00,001 `8,00,000

`5,00,001 `10,00,000

20%

`8,00,001 & above `10,00,001 & above 30%

Effective Tax Rate

12.00% 10.00% 2.00%

X No surcharge will be levied in case of individuals, HUF, AOP & BOI, co-operative society, local authority and firms.

X The education cess shall continue to be levied at the rate of 2% and Secondaryand Higher education cess @ 1%.

Corporate Tax Rate & Surcharge

X Corporate tax rates remain unchanged for both domestic as well as foreigncompanies. The applicable rates of tax are as under:

Particulars Tax Rate (%)

1. Domestic Company

Normal Tax Rate 30%

Minimum Alternative Tax (MAT) 18.5%

2. Foreign Company

Normal Tax Rate 40%

X Surcharge on Income-tax payable by a domestic company having total incomeexceeding one crore rupees will continue to be levied @ 5% (including Section115JB, 115O, 115R)

X In case of companies, other than domestic companies, having the incomeexceeding one crore rupees, the surcharge on income-tax will continue tobe levied at 2%.

}

}

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X The marginal relief in tax will continue to be allowed in the cases whereincome is more than one crore rupees.

Tax Deduction at Source (TDS)

Rates of TDS for income other than Salaries

X The current rate of TDS will continue to be same, except that in case ofcertain interest payments made to non-residents by a specified Indiancompany engaged in prescribed business of infrastructure development, theTDS would be @ 5% as per new Section 194LC.

X The amount of surcharge will continue to be levied at the current rate of 2%in case of payments to foreign companies if payments exceed`1 crore.

X The education cess and secondary and higher secondary education cess will

continue to be levied at the current rate of 2% and 1% respectively whereapplicable.

b. Widening of tax base

Alternate Minimum Tax (AMT)

X In order to widen the tax base vis-a vis profit linked investment, it isproposed to amend Chapter XII-BA in the Income-tax Act containing specialprovision relating to certain limited liability partnerships to be applicable

to any person (other than company) claiming deduction under chapter VIA under the heading C- Deduction in respect of certain incomes or underSection 10AA

The salient features of the amended Chapter XII-BA are as under:-

X Payment of Alternate Minimum Tax:-

The adjusted total income (ATI) would be computed in the following way:-

z

Total income of any person (other than company) before giving effect tothis chapter, as increased by

Deduction claimed, if any, under Chapter-VIA under the heading C-Deduction in respect of certain incomes (under Section 80 H toSection 80 TT(other than Section 80 P));

Deduction claimed, if any, under Section 10AA.

On this adjusted total income, alternate minimum tax would be computed at the

rate of 18.5% (which is also MAT rate for Companies).

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With non-obstante clause, it is provided that where regular Income-tax payablefor a previous year is less than the alternate minimum tax, the alternate minimumtax shall be deemed to be the total tax liability of such person.

However, AMT would not be applicable to individual, HUF, AOP, BOI or any articialjuridical person if the ATI does not exceed`20 lakhs.

Hence, AMT would be applicable to Firms without any threshold limit as in caseof Limited Liability Partnership.

X Credit of Alternate Minimum Tax:-

The current provisions relating to the credit of alternate minimum tax paidagainst the tax paid under the normal provisions would continue to apply.

The credit of alternate minimum tax shall be available for a consecutive period

of 10 succeeding year.This amendment is proposed to take effect from 1st April, 2013 and willaccordingly, apply from the assessment year 2013-14.

TDS on Transfer of Immovable Property (other than agricultural land)

X In order to collect tax at the earliest point of time and reporting of RealEstate transactions, the Finance Bill propose to introduce new Section 194LAA in the Income-tax Act.

X According to the new section, the tax @1% should be deducted on paymentsrelating to transfer of immovable property, where such considerationexceeds:-

z `50 lakhs in case property situated in urban agglomeration, and

z `20 lakhs in case property situated in other area.

X Where the consideration for transfer of immovable property is less than thevalue adopted or assessed or assessable by Stamp Valuation Authority forpayment of stamp duty, than value so adopted, assessed or assessable shouldbe considered for transfer of immovable property.

X However, the deductor would not be required to obtain Tax DeductionAccount number or to furnish any TDS statement.

X It is further stated that, the registering officer would not register anydocument that is required to be registered for the transfer of the propertyand tax is required to be deducted on such transaction, unless the transferee

submits the proof of deduction and payment of such sum to the credit ofCentral Government in prescribed form.

X This amendment is proposed to take effect from 1st October, 2012.

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TDS on remuneration to a director

X It is proposed to amend the provisions of existing Section 194 J of the Act, toprovide that TDS should be deducted @10% on remuneration not being in thenature of salary to Director.

X This amendment is proposed to take effect from 1st

July, 2012

Tax Collection at Source (TCS)

TCS on cash sale of bullion and jewellery

X In order to reduce the quantum of cash transaction in bullion and jewellerysector and to curb the flow of unaccounted money, the Bill propose to amendthe existing Section 206 C of the Income-tax Act by introducing a new sub-Section (1D) to provide that the seller of bullion and jewellery should collect

tax @1% from buyer in cash the consideration is received in cash and suchamount exceeds`2 lakhs.

X This amendment is proposed to take effect from 1st July, 2012

TCS on sale of certain minerals

X In order to regulate the trading transaction in mining sector, the Bill proposeto amend the existing Section 206 C to provide that the seller of mineralbeing coal, lignite or iron ore should collect tax @1% from the buyer (being

trader).

X This amendment is proposed to take effect from 1st July, 2012

Tonnage Tax Scheme

X The tonnage tax scheme provides for taxation of income of a shippingcompany on presumptive basis. The Bill propose to amend Section 115 VG torevise the rate of daily tonnage income as under:-

Qualifying Ship Having NetTonnage Existing Amount of DailyTonnage Proposed Amount ofDaily Tonnage

(1) (2) (3)

Upto 1,000 `46 for each 100 tons `70 for each 100 tons

1,000-10,000

`460 plus

`35 for each 100 tons

Exceeding 1,000 tons

`700 plus



10,00025,000

`3,610 plus



`5,470 plus



Exceeding 25,000

`7,810 plus



`11,770 plus



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This amendment is proposed to take effect from 1st April, 2013 and willaccordingly, apply from the assessment year 2013-14.

c. Measures To Prevent Generation and Circulation ofUnaccounted Money

Cash credits Additional onus to prove about the Investor

X Under the existing provisions of Section 68 of the Act, if any sum is foundcredited in the books of an assessee and such assessee does not offer anyexplanation about nature and source of money or the explanation is found tobe not satisfactory, such amount can be taxed as income of the assessee. Theonus of genuineness of the transaction is on the assessee company.

X To prevent the pernicious practice of conversion of the unaccounted money in

the classification of share capital of the company, it is proposed that, in thecase of the closely held company, the nature and source of any sum creditedas share capital, share premium etc. in the books of the assessee companyneeds satisfactory explanation about the source of fund in the hands of theinvestors. Therefore the higher onus is placed on the assessee companybesides the general onus to prove the genuineness of the transaction.

X The aforesaid provisions shall not apply, if the shareholder is a well regulatedentity, i.e. a Venture Capital Fund, Venture Capital Company registered with

the Securities Exchange Board of India (SEBI).

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

Taxation of cash credits, unexplained money, investments etc.

X Under the existing provisions of Section 68, Section 69, Section 69A, Section69B, Section 69C and Section 69D the Act, certain unexplained amounts in thenature of unexplained credits, money, investment, expenditure are deemed

as income and taxed at the applicable rate to the assessee. However, in thecase of individual and HUF, if such unexplained money does not exceed thebasic exemption limit, the same is not subject to tax.

X In order to curtail the practice of such unaccounted money not taxed bytaking advantage of basic exemption limit, it is proposed to introduce a newSection 115BBE to tax such unexplained credits at the flat rate of 30% (plusapplicable surcharge and cess).

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

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Compulsory ling of Income-tax return in relation to assets located outsideIndia

X Under the existing provisions of section 139, every person is required tofurnish a return of income if his income during the previous year relevant tothe assessment year exceeds the maximum amount which is not chargeable

to tax.

X It is proposed that every resident having any assets (including financialinterest in any entity) located outside India or signing authority in anyaccount located outside India is mandatorily require to file the tax returnirrespective of the fact whether the resident has taxable income or not.

X This amendment will take retrospective effect from the 1st day of April,2012 and will accordingly apply to assessment year 2012-13 and subsequent

assessment years.

Reassessment of income escaped in relation to any asset located outsideIndia.

X The existing provisions of Section 147 of the Act enable the assessing officerto assess or re-assess income on account of escaping income, after recordingreasons for doing so.

X It is proposed that income shall be deemed to have escaped assessment

where a person is found to have any asset (including financial interest in anyentity) located outside India.

X These amendments will take effect from the 1st day of July, 2012.

Extension of time limit for reopening of assessment in case of incomeescaped in relation to any asset located outside India.

X As per the existing provision of section 149, the time limit for issue of notice

for reopening an assessment on account of income escaping assessment is6 years. It is proposed to extent the time limit for issuance of notice forreopening an assessment to 16 years, where the income chargeable to taxin relation to any asset (including financial interest in any entity) locatedoutside India has escaped assessment.


Penalty on undisclosed income found during the course of search

X Under the existing provisions of section 271AAA of the Income-tax Act, nopenalty is levied if the assessee admits the undisclosed income in a statementrecorded in the course of search and specifies the manner in which suchincome has been derived and pays the tax together with interest, if any, in

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respect of such income. As a result, undisclosed income found during thecourse of search attracts a tax at the rate of 30% and no penalty is leviable.

X In order to strengthen the penal provisions, it is proposed to provide that theprovisions of section 271AAA will not be applicable for searches conducted

on or after 1st July, 2012. The new section 271AAB provides that where thesearch has been initiated on or after 1st July, 2012, the assessee shall beliable to pay penalty as under :

SR where undisclosed incomePenalty Rate

(%)

I - is admitted during the course of search

- substantiate the manner in which the undisclosed

income is derived

- Before the specied date, pay the tax, interestand furnish the return declaring the undisclosedincome

10%

II - Is not admitted during the course of search

- Before the specied date declared such incomein the tax return and pay the taxes and interest

20%

III case not covered under (I) and (II) above (i.e. duringthe course of assessment)

30%-90%

X These amendments will take effect from the 1st day of July, 2012 and will,accordingly, apply to any search and seizure action taken on or after thisdate.

Expediting prosecution proceedings under the Act

X The existing provisions of section 276C (willful attempt to evade tax), 276CC

(failure to furnish return of income), 277 (false statement in verification),277A(falsification of books of accounts or documents, etc.) and section278(abetment of false return) of the Income-tax Act, provides punishableoffences and prosecution which are as follows

Willful attempt to evade tax, penalty or interest Rigorousimprisonment

Exceeds INR 100,000/- 6 months to7 years and with

neDoes not exceeds INR100,000/- 3 months to

3 years and withne

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X It is proposed to increase the limit of amount sought to be evaded and reducethe maximum imprisonment as follows :

Willful attempt to evade tax,penalty or interest

Rigorous imprisonment

Exceeds INR 25,00,000/- 6 months to 7 years and with ne

Does not exceeds INR 25,00,000/- 3 months to 2 years and with ne

X Further, it is also proposed to strengthen the prosecution mechanism (throughnew sections 280A, 280B, 280C and 280D) under the Income-tax Act by

z Providing for constitution of Special Courts for trial of offences.

z Application of summons trial for offences under the Act to expedite

prosecution proceedings as the procedures in a summons trial are simplerand less time consuming.

z Providing for appointment of public prosecutors.


d. Tax incentives and reliefs

Tax Incentive for Funding of certain Infrastructure Sectors

X Under the existing provisions of Section 115A(1)(ii)(B), the interest incomepaid by the Government or an Indian Concern to a non-resident was liable forwithholding tax @20%.

X The Finance Bill 2012 proposes to make an amendment in Section 115A(1)(iia) extending the scope of funding in infrastructure sector. It states that theborrowing to be made by the specified company shall be in foreign currencyfrom sources outside India between 1st July 2012 to 1st July 2015, under anagreement, including the rate of interest payable, approved by the Central

Government.

X The companies engaged in the following businesses shall qualify for theabove scheme:

z construction of Dams,

z Operation of Aircraft,

z Manufacture or Production of Fertilizers,

z Construction of Port including Inland Port,

z Construction of Road, Toll Road or Bridge,

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z Generation, Distribution of Transmission of Power,

z Construction of Ships in a Shipyard or Developing and Building anaffordable housing project as is presently referred to in Section 35AD(8)(c)(vii).

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

X It is also proposed to introduce Section 194LC to withhold the taxes on interestincome paid by such specified company to non-residents at beneficial rateof 5%.

X The said section is proposed to be introduced with effect from 1st July 2012.

Lower Rate of Tax on Dividends Received from Foreign CompaniesX Section 115BBD was introduced in Finance Bill 2011 which provided for

beneficial rate of taxability of dividends received by Indian company from aspecified foreign company at a rate of tax of 15%.

X This provision was introduced to encourage Indian companies havingforeign subsidiaries to repatriate the dividends to India and provided forthis beneficial tax rate for such dividend incomes included in the Return ofIncome for AY 2012-13 only.

X Finance Bill 2012 proposes to continue to provide this beneficial tax rateunder this section for one more year and will be available for the AssessmentYear 2013-14 as well.

Provisions relating to Venture Capital Fund (VCF) or Venture CapitalCompany (VCC)

X Under the existing provisions of Section 115U(1), the income received bya person from investment in Venture Capital Company (VCC) or Venture

Capital Fund (VCF) shall be chargeable in the same manner had it been theinvestment made directly in the Venture Capital Undertaking (VCU).

X As per sub-Section 4, the provision also included that the provisions ofChapter XII-D or Chapter XII-E or Chapter XII-B related to tax deduction atsource will not be applicable to the income paid by the VCC or VCF.

X As per Section 10(23FB), any income of a VCC or VCF from investment in VCUis exempt from tax. The said exemption is available subject to the condition

that the VCC or VCF is registered with SEBI and the VCU is engaged only innine specified businesses as per the sectoral restrictions on the businessesof the VCU.

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X This sectoral restriction is proposed to be removed and the VCU is proposedto be governed by the conditions of SEBI and RBI, thus widening their scopeof business.

X Consequently, Section 10(23FB) and Section 115U(1) and 115U(4) are proposed

to be amended in the following areas:z The sectoral restriction applicable to the VCU is proposed to be removed

and the VCU is to be governed by the provisions of SEBI and RBI.

z There will be no deferral of income to the investors from the VCC or VCFand the same will be taxable on accrual basis.

z The income paid or credited by VCC or VCF to the investors will besubject to the withholding tax provisions.

X The above amendments are proposed to be introduced with effect fromthe 1st April 2013 and will apply in relation to assessment year 2013-14 andsubsequent years.

Removal of Cascading Effect of Dividend Distribution Tax (DDT)

X Under the existing provision of Section 115-O(1A), the amount of dividendspayable by any domestic company shall be reduced by an amount of dividendsreceived, under the following conditions:

z The dividend is received from its subsidiary; and

z The subsidiary has paid tax on such dividends paid to domestic companyThe section provides that such amount of reduction on account ofdividends shall not be made more than once.

X The Finance Bill 2012 proposes to amend sub-clause (c) and the proviso toclause (i) to section 115-O(1A) by extending the scope of adjustments tomulti-tier corporate structures. It is proposed to amend Section 115-O ofthe Act to provide that in case any company receives, during the year, anydividend from any subsidiary and such subsidiary has paid DDT as payableon such dividend, then, dividend distributed by the holding company in thesame year, to that extent, shall not be subject to Dividend Distribution Taxunder Section 115-O of the Act.

X The said amendment is proposed to be made with effect from 1st July, 2012.

Exemption in respect of income received by certain foreign companies

X A mechanism was devised by the Government of India in the national interestwherein for import of crude oil, payments could be made to the foreignexporting company in India, in Indian currency.

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X Under the present provisions, such incomes received by the foreign companyin India were taxable in view of Section 5 which states that income received inIndia by a non-resident is includible in its total income which is chargeable totax in India. Such a law was considered as unjustified as the above mechanismto receive income in India was devised in national interest particularly where

no other income is earned by such foreign company in India.

X Hence, in order to exclude such income received by the foreign companyfrom purview of taxation in India, it is proposed to insert a new clause inSection 10 of the Income-tax Act. Section 10 provides for incomes that arenot included in total income. A new clause (48) is inserted under Section 10which provides for exemption in respect of any income of a foreign companyreceived in India in Indian currency on account of sale of crude oil to anyperson in India subject to the following conditions:

z The receipt of money is under an agreement or an arrangement which iseither entered into by the Central Government or approved by it

z The foreign company, and the arrangement or agreement has beennotified by the Central Government

z The receipt of the money is the only activity carried out by the foreigncompany in India.

X The proposed amendment will take effect retrospectively from 1st April,2012 and will, accordingly, apply to AY 2012-13 and subsequent years oncesuch foreign company, arrangement or agreement is notified.

Extending benet of initial depreciation to the power sector

X The existing provisions of Section 32(1)(iia) provides for the allowance ofinitial depreciation as deduction at the rate of 20% of the actual cost ofmachinery or plant, on purchase of new machinery or plant (other than shipsand aircraft) acquired and installed after 31st March, 2005, in addition to

normal depreciation. The benefit of the said provision was merely availableto an assessee engaged in the business of manufacture and production of anyarticle or thing.

X However, to encourage new investment by the assessee engaged in thebusiness of generation or generation and distribution of power, it is proposedto extend the benefit of the aforesaid provisions to the assessee carrying onsaid business.

X In view of the above proposed amendment, an assessee engaged in thebusiness of generation or generation and distribution of power will also be

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allowed an initial depreciation at the rate of 20% of the actual cost of newmachinery or plant (other than ships and aircraft) acquired and installed ina previous year.

X This amendment is proposed to take effect from 1st of April 2013 and, will,

accordingly apply in relation to the assessment year 2013-14 and subseuestassessment year.

Weighted deduction for scientic research and development

X At Present, weighted deduction under Section 35(2AB), in case of expenditureincurred (excluding cost of land & Building) on approved in-house researchand development facilities is allowable at 200%. No deduction was allowablein respect of expenditure incurred after 31st March 2012.

X

It is proposed to extend this deduction for further period of five years i.e.upto 31st March, 2017.

X The proposed amendment will take effect from 1st April, 2013 and will applyfrom AY 2013-14 to AY 2017-18

Weighted deduction for expenditure incurred on agricultural extensionproject

X A new Section, Section 35CCC, has been introduced with effect from 1st April2013 to allow weighted deduction of 150% of the expenditure incurred onnotified agricultural extention project.

X Furthermore, the section provides that where a deduction under thissection is claimed and allowed for any assessment year in respect of suchexpenditure, deduction shall not be allowed in respect of such expenditureunder any other provisions of the Income-tax Act for the same or any otherassessment year.

X This amendment is proposed to take effect from 1st of April 2013 and, will,

accordingly apply in relation to the assessment year 2013-14 and subsequentyear.

Weighted deduction for expenditure for skill development

X It is proposed to insert a new Section 35CCD to provide weighted deductionof 150% of expenses incurred on skill development project, not beingexpenditure in the nature of cost of any land or building, to incentivizecompanies to invest on skill development projects in the manufacturingsector, which is in consonance with the National Manufacturing Policy.

X Further, the skill development project eligible for this weighted deductionshall be notified by the Board in accordance with the prescribed guidelines.

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X Furthermore, the section provides that where a deduction under thissection is claimed and allowed for any assessment year in respect of suchexpenditure, deduction shall not be allowed in respect of such expenditureunder any other provisions of the Income-tax Act for the same or any otherassessment year.

X This amendment is proposed to take effect from 1st of April 2013 and, will,accordingly apply in relation to the assessment year 2013-14 and subsequentyear.

Turnover or gross receipts for audit of accounts and presumptive taxation

X Under the existing provisions of Section 44AB of the Income-tax Act, themonetary limit for getting the books of accounts audited is `60,00,000/-in the case of a person carrying on business and `15,00,000/- in case of a

person carrying on a profession.

X These limits for the purpose of audit are proposed to be increased to`1,00,00,000/- in the case of a person carrying on business and`25,00,000/-in the case of person carrying on profession

X Such person are required to get the accounts audited under the provisionsof Section 44AB before the due date for furnishing the return of income u/s.139(1)

X The above amendments will take effect from 1st April 2013 and willaccordingly apply to assessment year 2013-14 and subsequent years.

X At present the provisions of presumptive taxation under Section 44AD areapplicable where the total turnover or gross receipts in the previous yeardoes not exceed`60,00,000/-. It is proposed to increase the threshold limitfrom`60,00,000/- to`1,00,00,000/- with effect from 1st April 2013 and willaccordingly apply to assessment year 2013-14 and subsequent years.

X Presumptive taxation on profits and gains of business referred to in Section44AD of the Income-tax Act, 1961 will not be applicable to persons carryingon legal, medical, engineering or architectural profession or the professionof accountancy or technical consultancy or interior decoration or any othernotified profession or in the case of a person earning income in the nature ofcommission or brokerage or a person carrying on any agency business.

X The above amendment will take effect retrospectively from 1st April 2011and will, accordingly apply in relation to the assessment year 2011-12 and

subsequent years.

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Exemption for senior citizens from payment of advance tax

X Under the existing provisions of the Income-tax Act, all assessee having atax liability of more than`10,000/- in the previous year are required to payadvance tax.

X To reduce the compliance burden of senior citizens, it has been proposedthat senior citizens not having any income under the head profits and gainsfrom business or profession shall not be liable to pay advance tax and theycan discharge their tax liability by paying self assessment tax.

X The above amendment will take effect from 1st April 2012. Accordingly, thesenior citizens would not be required to pay advance tax for financial year2012-13 and subsequent financial years.

Relief from long term capital gains tax on transfer of residential property ifinvested in a manufacturing small and medium enterprise

X In order to incentivize investment in the Small and Medium Enterprisemanufacturing sector, it is proposed to insert new Section 54(GB).

X As per the proposed new section, any long term gains arising to an Individualor HUF, from the sale of a residential house property or a plot of land willbe exempt, if the net consideration received on the sale of house propertyor plot of land is invested in equity of a new start up SME company in the

manufacturing sector. The relief would be subject to the following conditions:

z The amount of net consideration is required to be used for subscriptionin the Equity Shares in the SME company in which he holds more than50% share capital or more than 50% voting rights. The net considerationis required to be used before the due date of filing the rerun of incomeunder Section 139(1).

z The amount of subscription as share capital is to be utilized by the SMEcompany for the purchase of new plant and machinery within a period of1 year from the date of subscription in the Equity Shares.

z In case the net consideration subscribed as Equity Shares in the SMEcompany is not utilized by the SME company for the purchase of plantand machinery before the due date of filing of return by the individual orHUF, the unutilized amount is required to be deposited under a depositscheme.

z The amount of net consideration that is used for subscription and the

utilized for purchasing new plant and machinery as well as the amountdeposited under a deposit scheme will be considered as cost of acquisitionof the new asset. In cases, where the amount deposited in the deposit

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account is not utilized within time prescribed, the same would be taxedas capital gains

z Also if the shares of the company or the new assets acquired aretransferred within a period of five years of its acquisition, the capital

gains exempted at the time of sale of residential property would betaxed as capital gains in the year in which the shares or the new assetis transferred.

X The relief would be available in case of transfer of any residential propertymade on or before 31st of March 2017.

X The above amendment will take effect from 1st April 2013 and will,accordingly apply in relation to assessment year 2013-14 and subsequentassessment years.

Reduction in rate of Securities Transaction Tax (STT)

X It is proposed to reduce STT in cash delivery segment from the existing0.125% to 0.1%. The proposed new rates along with details of old rates aregiven below:

Sr. No. Nature of Taxable Securities

transaction

Payable

by

Existing

Rate

Proposed

Rate

1 Delivery based purchase of Equity Shares in a company

/ units of an Equity Oriented

Fund entered into through a

recognized stock exchange in

India

Purchaser 0.125% 0.10%

2 Delivery based sale of Equity

Shares in a company / units

of an Equity Oriented Fund

entered into through a recog-

nized stock exchange in India

Seller 0.125% 0.10%

X The proposed amendment will be effective from 1st July 2012

Deduction in respect of capital expenditure on specied business

X Under the existing provisions of Section 35AD of the Income-tax Act, investmentlinked tax incentives are provided by way of allowing 100% deduction for anycapital expenditure (other than land, goodwill and financial instrument) inthe case of certain specified businesses.

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X It is proposed to include the following three new businesses as specifiedbusiness, namely;

z Setting up and operating an inland container depot or a container freightstation notified or approved under the Customs Act, 1962

z bee keeping and production of honey and beeswax; and

z setting up and operating a warehousing facility for storage of sugar

X It is proposed that the date of commencement of operations for availinginvestment linked deduction in respect of the three new specified businessesshall be on or after 1st April 2012.

X The above amendment will take effect from 1st April 2013 and will,

accordingly, apply in relation to assessment year 2013-14 and subsequentyears.

X It is further proposed that a weighted deduction of 150% of capital expenditureshall be allowed for the following specified businesses under Section 35AD,namely;

z setting up and operating a cold chain facility;

z setting up and operating a warehousing facility for the storage of

agricultural produce;

z building and operating, anywhere in India, a hospital with atleast onehundred beds for patients;

z developing and building a housing project under a scheme for affordablehousing framed by the Central government or a State government; as thecase may be, and notified by the Board in this behalf in accordance withthe guidelines as may be prescribed; and

z production of fertilizers in India

X The above amendment will take effect from 1st April 2013 and will accordinglyapply from assessment year 2013-14 and subsequent years.

X It is further proposed to provide that the hotel owners will continue to beeligible for investment linked deduction under Section 35AD, where theycontinue to own the hotel but transfer the operation of such hotels to otherperson.

X The above amendment will take affect retrospectively from 1st April 2011and will accordingly apply from assessment year 2011-12.

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Extension of sun set date for tax holiday for power sector

X Under the existing provisions of Section 80IA(4)(iv) of the Income-tax Act,deduction from the profits and gains is allowed to an undertaking which, -

z is set up for the generation and distribution of power if it begins to

generate power at any time during the period beginning on 1st April,1993 and ending on 31st March, 2012;

z starts transmission or distribution by laying a network of new transmissionor distribution lines at any time during the period beginning on 1st April,1999 and ending on 31st March 2012;

z Undertakes substantial renovation and modernization of existingnetwork of transmission or distributions lines at any time during the

period beginning on 1st April, 2004 and ending on 31st March, 2012;X It is proposed to extend the terminal date for a further period of one year ie

upto 31st March 2013

X The above amendment will take effect from 1st April 2013 and will,accordingly, apply for assessment year 2013-14 and subsequent assessmentyears.

Reduction of eligible age for senior citizens

X The Finance Act 2011 amended the effective age to be considered as a seniorcitizen from sixty five years to sixty years for the purpose of application ofvarious tax slabs and rates under the Income-tax Act.

X There is, however, inconsistency in other provisions of the Act where the ageto be considered as a senior citizen continued to be at sixty five years e.g.Section 80D, 80DDB, 197A(1C).

X In order to make the effective age of senior citizens uniform across all the

provisions of the Income-tax Act, it is proposed to reduce the age for availingthe benefits to a senior citizen from sixty five years to sixty years.

X The amendment to Section 80D and 80DDB will be effective from 1st April2013 and, will, accordingly apply from assessment year 2013-14.

X The amendment to Section 197A will take effect from 1st July 2012.

Deduction for expenditure on preventive health check up

X

Under the existing provisions of Section 80D, premium paid for healthinsurance of self, spouse and dependent children is allowed as a deductionupto a maximum limit of Rs 15,000/-.An additional deduction of`15,000/- isallowed for the premium paid for parents.

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X It is proposed to include any payment made for preventive healthcheck-up of self, spouse, dependent children or parents within the overalllimit prescribed in Section 80D,subject to a ceiling of`5,000.

X The payment under Section 80D can be made -

z in any mode including cash for preventive health check up

z by any mode other than cash, in all other cases.

X The above amendment will take effect from 1st April 2013 and, will accordingly;apply for the assessment year 2013-14 and subsequent assessment year.

Deduction in respect of interest on deposits in savings accounts

X Under the proposed new Section 80TTA, a deduction to the extent of

`10,000/- will be allowed to an Individual or a Hindu Undivided Family inrespect of interest income earned from savings bank account in any of thefollowing

z a banking company;

z a co-operative society engaged in carrying on the business of banking;

z a post office

X However, where the above income is derived on deposit held by a firm, anassociation of person or body of individuals, no deduction shall be allowed toany partner of the firm or any member of the association or body.

X The above amendment will take effect from 1st April 2013 and will accordinglyapply from assessment year 2013-14.

e. Rationalisation of tax deduction at source

Deemed date of payment of tax by the resident payeeX Presently, a person required to deduct tax is considered to have violated the

TDS rules if no tax is deducted and the payee has not paid tax directly. Ifthe payee has discharged tax liability on his own, the payer is not treated asassessee in default as per Section 201(1) of the Income-tax Act, 1961.

X The payer is liable to pay interest on the amount of non-deduction of taxfrom the date on which the tax was deductible to the date on which payeehas discharged his tax liability directly.

X However, there is lack of clarity as to

z when it can be said that the payee has paid directly; and

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z which date may be considered as date of payment of tax by the payee.

X In order to provide clarity on these issues, it is proposed not to treat thepayer who fails to deduct the whole or any part of tax on the payment madeto a resident payee as assessee in default if the resident payee

z has filed his return of income;

z has considered such receipt in his return of income; and

z has paid the tax on the income declared in such return of income andfurnishes a certificate to this effect from an accountant in such form asmay be prescribed.

X It is further proposed to provide that interest will be payable by the tax

payer on the tax from the date on which such tax was deductible to the dateof filing of return of income by the resident payee.

X The amendment is proposed to take effect from 1st July, 2012.

Disallowance of business expenses on account of non-deduction of tax onpayment to resident payee

X Deduction of certain business expenses like interest, commission, brokerage,professional fees etc is disallowed if tax is not deducted thereon. The

expense is allowed as deduction in the subsequent year if the appropriatetax is deducted in the subsequent year.

X In order to rationalise these provisions, it is proposed to provide that wheretax is liable to be deducted on the expenses in the nature of interest,commission etc. and the payer is not considered as assessee in default as perSection 201(1) of the Income-tax Act, 1961 on account of payment of taxesby the payee, such expenses will not be disallowed and the payer will bedeemed to have complied with the tax deduction rules.

X The amendment is proposed to take effect from 1st April, 2013 and subsequentassessment years.

Fees for delay in furnishing of TDS/TCS statement

X Fees for late furnishing of TDS statement from the due date of furnishingof TDS statement to the date of furnishing TDS certificate is proposed toincrease to ` 200 per day from ` 100 per day of default. However, it isproposed to provide that the amount of fees will not exceed the amount of

tax deductible or collectible.X The provisions are proposed to apply to the TDS/TCS statement to be

furnished in respect of tax deducted or collected on or after 1st July 2012.

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Penalty for delay in furnishing of TDS/TCS statement and for incorrectinformation in TDS/TCS statement

X Penalty for delay in furnishing of TDS/TCS statement if delay exceeds oneyear from the due date of filing the statement

z

Penalty of`10,000/- to`1,00,000/- is proposed to be levied for notfurnishing TDS statement within time limits.

X Penalty for incorrect information in TDS/TCS statement

z Penalty of` 10,000/- to ` 1,00,000/- is proposed to be levied forfurnishing incorrect information in TDS statement.

X The above penalty provisions are proposed to apply to the TDS/TCS statementto be furnished in respect of tax deducted or collected on or after 1st July

2012.

Intimation after processing of TDS statement

X Presently, the intimation generated after processing of TDS statement inaccordance with the provisions of Section 200A of the Income-tax Act, 1961is not subject to rectification application and is not appealable and is alsonot treated as notice of demand.

X In order to reduce the compliance burden of the deductor, it is proposed

to treat the intimation generated after processing of TDS statement asa rectifiable order u/s 154, an appealable order u/s 24A and a notice ofdemand u/s 156 of the Income-tax Act, 1956.


Meaning of the term Person responsible for paying in case of payment byCentral Government or Government of a State

X In order to provide clarity to the meaning of Person responsible for paying

in case of payment by Central Government or a State Government, theDrawing and Disbursing Officer or any other person responsible for makingpayment is proposed to be the Person responsible for paying.


Extension of time for passing an order under Section 201 treating a personto be an assessee in default

X Time limit for passing an order u/s 201 of the Income-tax Act, 1961 treating a

person to be an assessee in default has been extended to six years from fouryears in case where no TDS statement has been filed.

X The amendment is proposed to take retrospective effect from 1st April, 2010.

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Threshold for TDS on compensation or consideration for compulsoryacquisition

X In order to reduce compliance burden of small assessees, it is proposed toincrease the threshold limit for payment of compensation for compulsoryacquisition of immovable property to two lakh rupees from one lakh rupees.


Threshold for TDS on payment of interest on debenture

X In order to reduce compliance burden of small assessees and companies, it isproposed that no deduction of tax should be made from payment of intereston any debenture, listed or unlisted, issued by a company in which publicare substantially interested, to a resident individual or HUF if the aggregateamount of interest does not exceed`5,000/- paid during financial year and

the payment is made by account payee cheque.


f. Rationalisation of international taxation provisions

Amendment in Section 9: Post Outcome of Vodafone Verdict.

X Section 9 of the Income-tax Act entails a deeming fiction, thereby bringingincome of a non resident under the tax net, which otherwise would not be

taxable in India. As per Section 9 any income accruing or arising, whetherdirectly or indirectly, through or from any property in India or through orfrom any asset or source of income in India or through the transfer of acapital asset situated in India are deemed to accrue or arise in India.

X While delivering its judgment on the most debated and controversial issueof the Income-tax history, the Honble Supreme Court held in the case ofVodafone International Holdings BV that source rule as enshrined in Section9 is a deeming fiction. Hence, should be interpreted strictly not purposively

and in the absence of any provisions for indirect transfer in place, incomearising from indirect transfer of share cannot be considered as incomedeemed to accrue or arise in India.

X The Supreme Court further held that under the current provisions of Income-tax, there are no provisions which stipulates for taxation of an indirecttransfer. Such provisions are proposed in Direct Tax Code, but there are nosuch provisions in the existing tax law. Hence, Income-tax department wasinstructed by the court that in order to bring these transactions under the

tax ambit, suitable amendment in the tax law is required.

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X In order to repeal the effects of this ruling, following explanations havebeen inserted after Explanation 3 to clause (i) with effect from the 1st dayof April, 1962 for the words used in the following excerpts of Section 9(1):

X All income accruing or arising, whether directly or indirectly through or from

any business connection in India, or through or from any property in India, orthrough or from any asset or source of income in India or through the transferof a capital asset situated in India.

z Expression through shall mean and include and shall be deemed tohave always meant and included by means of, in consequence of orby reason of.

z An asset or a capital asset being any share or interest in a companyor entity registered or incorporated outside India shall be deemed to beand shall always be deemed to have been situated in India, if the shareor interest derives, directly or indirectly, its value substantially from theassets located in India.

X However, what would constitute substantial value is not provided by theFinance Bill.

X The above amendment will be in force retrospectively from 1st April, 1962.

X In tandem with the above exercise to nullify the effect of Honble SupremeCourt, the following amendments are proposed in the case of definition ofcapital asset and transfer.

Further Clarication on the denition of Capital Asset

X Section 2(14) provides the definition of capital asset wherein the wordcapital asset means property of any kind held by an assessee.

X It is proposed to amend the Section 2(14) to clarify that property includes

and shall be deemed to have always included any rights in or in relation toan Indian company, including rights of management or control or any otherrights whatsoever.

X The above amendment will be applicable with effect from 1st April, 1962.

Amendment in the denition of transfer

X In order to bring indirect transfer of shares/interest of assets situated inIndia within the ambit of definition of transfer, it is now proposed to insert

a new explanation in Section 2(47) expanding the scope of transfer for thepurpose of taxability under capital gain.

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X As per the new explanation, all type of direct or indirect, absolute orconditional, voluntary or involuntary transfer of rights being effectuatedfrom the transfer of shares of a company registered outside India shall bedeemed to have always included in the definition of transfer.

X

The above amendment will be retrospectively applicable with effect from1st April, 1962.

X With the above consequential amendments, the sale of shares of a companyhaving substantial assets in India would be considered as income deemedto accrue or arise. The rights in the assets of underlying company would beconsidered as assets and indirect transfer of ownership would be consideredas transfer. Consequently, resulting capital gain will be taxable in India.

Expansion of denition of Royalty Disposition of unsettled issue

X Section 9(1)(vi) defines the royalty income of non-resident which is deemedto accrue and arise in India and accordingly subject to withholding tax inIndia.

X From its inception, there is spate of contrary judgments on the characterisationof payment otherwise taxable in India i.e. business income or royalty income.The most important issue inter-alia pertains to payment for software.

X In order to weed out these issue; it is proposed to expand the meaning of the

term Royalty.

X With the expanded definition of royalty, following categories of paymentshall be characterized as payment for royalty:-

z Payment for computer software;

z Payment for all type of processes. Further process will also includetransmission of data via satellite or any other medium whether or not

process is secret.X This amendment will take place from June 1, 1976

Extension of Time limit for issuance of notice to Agent

X Under the existing provisions of Section 149, a notice is issued on a personconsidered to be an agent of a non resident person and the assessment,reassessment or recomputation is to be made in response to the notice. Theprescribed time limit to issue such a notice is two years from the end of the

relevant assessment year.X The Finance Bill 2012 has proposed to extend the time limit to six years .This

amendment will take effect from 1st July 2012.

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Amendments in Withholding of Taxes

X As per the existing provisions of Section 195, a person is responsible todeduct tax at the time of making any payment to a non resident, not being acompany, or to a foreign company chargeable under the provisions of the Act.

X It is proposed that the Board, may by notification in the Official Gazette,specify a class of persons or cases, where the person responsible for payingto a non resident not being a company or to a foreign company, any sum,whether or not chargeable under the provisions of this Act, shall makean application to the Assessing Officer to determine, by general order orspecial order, the appropriate proportion of sum chargeable and after suchdetermination by the order, tax shall be deducted on that proportion of thesum which is so chargeable.

X This amendment will take effect from 1st July, 2012.

X Further, it is clarified that obligation to withhold the tax will be appliedregardless of absence of any territorial nexus. This clarificatory explanationis in line with the explanation as provided in Section 9 as substituted byFinance Act, 2010.

X This amendment will take effect from 1st April, 1962.

Validation clause for notice issued for non-withholding of taxes on cross

border transactions

X In the past few years, the government has issued a lot of notices underSection 201 to various companies for cross border transactions whereinthe ownership of Indian companies were indirectly transferred via sale ofshares of intermediate holding company. In this chain, a few big names wereVodafone, AT & T and Aditya Birla Nuvo.

X The most recent and distinguished case is that of the Vodafone which hasbeen termed as the most debated tax issue in India, which has been decidedby the Honble Supreme court in favour of the assesee.

X In order to repeal the effect of this judicial pronouncement of the HonbleSupreme Court, the central government has proposed plethora of changes inthe Finance Bill with retrospective effect from 1st April, 1962.

X Since, a lot of issues are pending on the above subject before various HighCourts and the Honble Supreme Court Therefore, in order to give legislativevalidity to notice u/s 201 issued to all these companies, it is proposed to

insert a validation clause in support of notices issued u/s 201.

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X In order to annul the impact of any judiciary verdict, it is proposed that thisclause shall operate notwithstanding anything contained in any judgment,decree or order of any Court of Tribunal.

X This Validation clause shall take effect after the Finance Bill 2012 comes into

force.Taxation of non-resident entertainer, sports person etc.

X Section 115BBA provides for presumptive taxation of non resident sportspersonincluding athlete who are not citizen of India for their income being derivedfrom the participation of any game or sports in India ( other than taxableu/s 115BB) or advertisement or contribution of article relating to any sportsin print media. Further, income of a non resident sports association arisingin connection with any game being played in India shall also be subject to

presumptive taxation.

X Under this presumptive taxation, tax is levied at the rate of 10% of grossreceipt from above mentioned activities.

X Till date, there is no presumptive tax provision in the Income-tax for thetaxation of non citizen, non resident entertainer for their income beingderived from the events organized in India. Due to absence of any suchpresumptive tax regime, there is a complicated process of determination

of income especially the allocation of expenditure to different eventsperformed in other geography. These complexities result into a prolongedassessment proceeding.

X In order to simplify the assessment, it is proposed to extend the provisions ofthis section to the income of non resident entertainers (who are non citizenalso) derived from the events organised in India.

X Further, it is also proposed to increase the rate of presumptive taxation fromthe existing 10% to 20% of gross receipts.

X The above amendment is proposed to be in effect from 1st April, 2013.

Certain explanatory provisions relating to DTAA

X There are spat of litigations on the interpretations of the terms which are notdefined either in the DTAA or the Act. To mitigate the situation, it is proposedthat central government can provide a meaning to a term used in DTAA bynotification in official gazette.

X DTAA benefits applies to a tax resident of one of the two contracting state,being parties to DTAA. There have been issues about decision making whethera particular person or an assessee is entitled to the benefits of specific DTAAon account of his residency of the particular country or not.

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X The amendment in Section 90 will take effect retrospectively from 1st October2009 and the amendment in Section 90A shall take effect retrospectivelyfrom 1st June 2006.

X The proposed Finance Bill now provides that benefit would be granted to a

person only if he provides tax residency certificate issued by the governmentof other country, which should also contain the particulars as specified by theCBDT.

X It is clarified that production of such tax residency certificate by itself wouldnot be a sufficient condition for availing the benefit. This amendment willtake effect from 1st April 2013.

Extension of time limit for completion of assessment or reassessment whereinformation is sought under the DTAA

X In last few years, Indian government is aggressively tracing the black moneystashed abroad by Indian nationals. In pursuance to this aggressive search,India has so far completed negotiations of 22 new Tax Information ExchangeAgreements with various tax havens. Further, existing double taxationavoidance agreements are being in stage of re-negotiation to incorporateTax Exchange Information provisions.

X As per provisions of Section 153, every type of assessment proceedings

should be completed in prescribed time period only. However, in the case ofassessment proceedings involving the assessment of income stashed aboard,getting the information about a tax errant assessee is a time consumingprocess and poses a bottleneck in completion of assessment proceedings inthe stipulated time period.

X Considering the time involved in getting this information, it was provided inFinance Act, 2011 that time involved in securing information from overseasterritories shall not be reckoned for the purpose of computation of period of

limitation as provided in Section 153 subject to a maximum period of 6 months.X Now, it is proposed to extend this maximum period from 6 months to 12

months. This proposal is based on the recent assessment/reassessmentexperience of Income-tax department wherein information as required wasnot received within the time of 6 months.

X This amendment is proposed to take effect from 1st July 2012.

g. Rationalisation of transfer pricing provisions

Advance price agreement

X The budget has introduced Advance Price Agreement(APA) vide insertingSections 92CC and 92CD under the Income-tax Act, which is applicable from

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1st July, 2012. APA will allow the tax payer to enter into an agreement withthe tax authority and they can mutually agree on the arms length price thatwill be transacted between the two associated enterprises keeping in mindthe regulation in place.

X

With the introduction of APA there will be certainty in minds of the tax payerfor any international transaction with the associated enterprise. Currentlylitigation surrounding TP matters is quite alarming so this will be an effectivetool to reduce the litigation in transfer price.

X The concept of APA is present in all almost all the countries, where theTransfer Pricing Regulations exists.

X The Salient features are;

z The agreement is binding on both that is the Tax authority and theassessee.

z Maximum time limit the agreement can be enforced is 5 years.

z Method of determination of arms length price is based upon the existingmethods or any other method.

z Central Government may declare the agreement as void abinitio incertain circumstances.

z The assessee after entering into an agreement can file a modified returnwithin a period of three months.

z The assessments or reassessments will be completed according to theagreement and within the revised time limit as specified.

X Currently, in absence of the detail rules the various time limits for concludingas well as filing the APA is not known, which will be crucial piece of information.

X These amendments will take effect from 1st July, 2012.

Non Reporting of International Transaction

X Retrospective amendment has been made with effect from 1st June, 2002whereby the Transfer Pricing Officer (TPO) has been empowered to computearms length price of a transaction which come to the notice of the TPOduring the course of proceedings even if such transactions have not beenreferred by the Assessing Officer, meaning thereby if such transaction is not

reflected in Form 3CEB.

X The above amendment was introduced in the last years budget by insertingsub section 2A of Section 92CA.

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X However, in the current proposal, a corresponding amendment has also beenmade u/s 147 where by such kind of unreported transaction can be referredas being escaped from assessment and, hence, can be reopened. Thoughcurrently, even if it is retrospective it will not reopen the old cases. Further,a similar amendment has been brought in the penalty provision u/s 271AA,

whereby a penalty of 2% of the transaction value may be levied.

Arms Length Range

X The range as defined under Section 92C has been lowered from the currentrate of 5% to 3%.

X The method of calculating the range created a lot of controversy in the pastand accordingly an amendment was brought in effective from 1st October,2009 to clarify the intent of the law. Essentially, it means that it is not a

standard deduction has been ruled by many Tribunals in cases like Skoda.

X The current amendment is a retrospective with effect from April 2002,clarifying the same position as amended earlier.

Clarifying the denition of International Transaction

X The amended definition is broad based as well as clarificatory. In thecurrent definition it includes an exhaustive list of intangibles. It becomes animportant for the tax payer to identify during the course of Transfer Pricing

documentation such that it can be reported properly in the Form 3CEB toavoid penalty of non reporting.

X The other big amendment is the transaction of business restructuring orre organisation if any entered between associated enterprises. The saidtransactions need to be reported in the form 3CEB whether or not the samehas any bearing on the profit / loss of the company in the current year.

X The said amendment is again retrospective from April 2002.

Specied Domestic Transactions have been covered under the transfer priceregime

X The nature of such transaction has been defined very specifically, which arecurrently covered under Section 40A, 80A, 80IA of the Act. The thresholdlimit for coverage under this is INR 5 crores.

X Currently under the aforesaid section all such nature of transactions areconsidered to be arms length if the transaction are carried / deemed to carryas per the market value. With this change in law the Market Value has tobe evaluated keeping in mind the existing transfer pricing regulations.

X Return Filing date for non corporate assessee having a transaction which is

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covered under Transfer Pricing regulation has also been extended to 30thNovember, keeping in line with the corporate assessee.

Appeal against the order of DRP-

X Now, the assessing officer can also appeal in ITAT against the order passed

giving effect of the direction of Dispute Resolution Panel.

X In the light of this proposal, the litigation might go up at ITAT.

Power of DRP

X A clarificatory insertion made in the proviso to the DRP that it can go beyondthe issues raised in the draft order against which the DRP has been preferredby the assessee, which means DRP can raise any issue during the proceedings.

X This amendment is from AY 2009-10 and subsequent year.

h. General anti-avoidance rule (GAAR)

X Over past few years, the doctrine of form over substance has been upheldunless there is judicial determination of a fraud or sham. The proposedintroduction of GAAR provisions will legislatively empower the tax authoritiesto intervene in circumstances where they allege that the primary motiveof a particular transaction or arrangement is to obtain a tax advantage.The government felt that in view of aggressive tax planning with the useof sophisticated structure it is imperative to have statutory provisions tocodify the doctrine of substance over form where the real intention ofthe parties and effect of the transactions and purpose of an arrangement istaken into account for determining the tax consequences, irrespective of thelegal structure that has been superimposed to camouflage the real intentand purpose

X The Finance Bill brings into a proposal for Anti Avoidance of Tax which istermed as GAAR. The GAAR provisions provide for any arrangement whichresults in reduction or avoidance of tax as if it has not taken place at all andthe tax will be computed accordingly. The provisions are on the line of whatwas given in the Direct Tax Code (DTC) discussion paper. It also seems thatthe government felt the need to bring in these provisions in view of the ApexCourt decisions in Vodafone.

X Provisions of GAAR are invoked when assessee has entered into animpermissible avoidance arrangement. The main premise of invoking GAARis that any transaction or step in a transaction which has one of its mainpurposes is to the obtain of a tax benefit, should be disregarded or dealtwith in such a manner so as to protect the right of the revenue to taxes. Inaddition to obtaining the tax benefit, the arrangement should:

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z Create rights and obligations, which are not normally created betweenparties dealing cat arms length.

z It results in misuse or abuse of provisions of tax laws.

z It lacks commercial substance or is deemed to lack commercial substance.

z Is carried out in a manner, which is normally not employed for bonafidepurpose.

X The section also gives definition or situation where it will be deemed to lackcommercial substance which are as under:

z the substance or effect of the arrangement as a whole, is inconsistentwith, or differs significantly from, the form of its individual steps or a

part; or

z it involves or includes -

round trip financing;

an accommodating party ;

elements that have effect of offsetting or cancelling each other; or

a transaction which is conducted through one or more persons anddisguises the value, location, source, ownership or control of fundwhich is subject matter of such transaction; or

z it involves the location of an asset or of a transaction or of the placeof residence of any party which would not have been so located for anysubstantial commercial purpose other than obtaining tax benefit for aparty.

X The section also clarifies that certain circumstances like period of existenceof arrangement, taxes arising from arrangement, exit route, shall not betaken into account while determining lack of commercial substance test

for an arrangement.

X If GAAR is invoked the following consequences or any one of them can result:

z Disregarding or combining any step of the arrangement.

z Ignoring the arrangement for the purpose of taxation law.

z Disregarding or combining any party to the arrangement.

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z Reallocating expenses and income between the parties to thearrangement.

z Relocating place of residence of a party, or location of a transaction orsitus of an asset to a place other than provided in the arrangement.

z Considering or looking through the arrangement by disregarding anycorporate structure.

z Re-characterizing equity into debt, capital into revenue etc.

X If the arrangement falls in above category, the Assessing Officer may proposeto invoke the GAAR provisions. To safeguard against the indiscriminate useof this power, the provisions make it necessary for an Assessing officer torefer the matter to Commissioner of Income-tax (CIT) and CIT shall hear the

taxpayer and is of the opinion that provisions of GAAR are to be invoked, heshall refer the matter to collegiums of panel, consisting of three or moreCITs. This collegium will finally approve or disapprove application of GAARprovisions. If GAAR provisions are applied and assessee is aggrieved by it, theappeal shall lie to Income-tax Appellate Tribunal (ITAT).

X The Board shall prescribe a scheme for regulating the condition and mannerof application of these provisions.

X The proposed enactment will be effective from 1st April 2013, and willaccordingly apply in relation to the assessment year 2013-2014 and subsequentassessment years.

i. Other clarications

Extension Of Time Limit For Completion Of Assessments And Reassessments

X Section 153 provides for the time limit of for completion of assessments andreassessments and fresh assessments in a set aside proceedings.

X It is proposed to revise the time limits for completion of assessments andreassessments, and also fresh assessments in set aside proceedings andincrease the same by three months.

X In view of the above, the existing and the extended limit for completion ofthe proceedings are as under:

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Proceedings Existing timelimit

Extended timelimit

Remarks

Assessment underSection 143

21 months fromthe end of theassessment year

(r.w rst proviso)


First proviso now amendedto apply to AYs 2004-05 to AY2009-10. In view of the same,

for assessments for AY 2010-11onwards, the original time limitof two years specied undersubsection 1, clause (a) wouldbe applicable.

Assessment underSection 143 andreference underSection 92CA


(r.w secondproviso)


Second proviso now amended toapply to AY 2005-06 to AY 2008-09. In view of this, for AY 2009-10 onwards the time limit of 36

months would apply.

Assessment underSection 147

9 months fromthe end of thenancial year inwhich notice isissued

(r.w secondproviso)


Second proviso now amended toapply to AY 2005-06 to AY 2010-11. In view of the same for AY2011-12 onwards, the originaltime limit of one year speciedunder subSection 2, clause (a)would be applicable.

Assessment underSection 147 andreference underSection

92CA


(r.w thirdproviso)


Third proviso now amended toapply to AY 2006-07 to AY 2009-10. In view of this, AY 2010-11onwards the time limit of 24months would apply.

Assessment underSection 250, 254,263 and 264

9 months fromthe end of thenancial year inwhich notice isreceived

(r.w second

proviso)

12 months fromthe end of thenancial year inwhich notice isreceived

Second proviso now amended toapply to AY 2005-06 to AY 2010-11. In view of the same for AY2011-12 onwards, the originaltime limit of one year speciedunder subSection 2, clause (a)would be applicable.

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Extended timelimit

Remarks

Assessment underSection 250, 254,263 and 264 and

reference underSection 92CA

21 months fromthe end of thenancial year in

which notice isreceived

(r.w thirdproviso)

24 months fromthe end of thenancial year in

which notice isreceived

Third proviso now amended toapply to AY 2006-07 to AY 2009-10. In view of this, AY 2010-11

onwards the time limit of 24months would apply.

X Further, it is proposed to increase the period that should be excluded fromcomputing the period of limitation under clause viii Explanation 1, where areference for exchange of information is made, from 6 months to one year.

X

Section 153B provides for the time limit of for completion of assessmentsunder Section 153A by the assessing officer.

X It is also proposed to amend the aforesaid section so as to revise the timelimits for completion of assessments, and increase the same by three months.


Extended timelimit

Remarks

Assessment

under Section153A

21 months from

the end of theassessment year

(r.w secondproviso)

24 months from

the end of theassessment year

Second proviso now amended to

apply to AY 2004-05 to AY 2009-10. In view of the same for AY2010-11 onwards, the originaltime limit of two years speciedunder subsection 2, clause (a)would be applicable.

Assessment underSection 153A andreference under

Section 92CA


(r.w thirdproviso)


Third proviso now amended toapply to AY 2005-06 to AY 2008-09. In view of this, AY 2009-10

onwards the time limit of 36moths would apply.

Assessment underSection 153A r.w.Section 153C andreference underSection 92CA


(r.w fourthproviso)


Fourth proviso now amended toapply to AY 2005-06 to AY 2008-09. In view of this, AY 2009-10onwards the time limit of 36months or 24 months wouldapply.

X Further, it is proposed to increase the period that should be excluded fromcomputing the period of limitation under clause viii Explanation 1, where areference for exchange of information is made, from 6 months to one year.

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