KPMG Budget 2012

Navigating Economic Challenges
Union Budget 2012
kpmg.com/in
Foreword
The Honourable Finance Minister presented the Union Budget 2012 under the shadow of his fiscal calculations going away for the Financial Year 2011-12. The expectation that GDP growth would revert to the pre-global financial crisis level at around 9 percent was dashed as the economy disappointedly grew only by 6.9 percent, mainly due to deceleration in industrial growth. GDP growth was salvaged by the services sector which grew at 9.4 percent and is now about 56 percent of Indias GDP Indian industry struggled under the twin . burdens of persistent high inflation which escalated input costs and rising interest rates due to tightening of monetary policy by the Reserve Bank of India. Expectedly, even as Corporate Tax Collections and a feeble disinvestment program could not match the budgeted numbers on the Revenue side, the higher crude oil import prices resulted in much larger than anticipated subsidies on fuel, food and fertilisers on the Expenditure side. A peculiar feature of the year gone by was the perception that the pace of economic reforms in the country had slackened as a consequence of increased awareness of high-profile corruption scandals, resulting in cautious inaction among civil servants and the inability of Government to push through any changes in policies chiefly due to coalition politics and federal considerations. Given this backdrop the Finance Minister identified five objectives in framing his Budget for 2012-13: Focus on domestic demand growth recovery Create conditions for rapid revival of high growth in private investment Address supply bottlenecks in agriculture, energy and transport sectors, particularly in coal, power, national highways, railways and civil aviation Intervene decisively to address the problem of malnutrition 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 At first glance, Direct Taxes Proposals seem pleasantly benign with a token widening of personal tax rates for individuals. Corporates are spared any tax hikes, are bestowed tax sops to borrow overseas and are given relief from cascading Dividend Distribution Tax in a multi-tier structure. Additionally weighted deductions for specified businesses and extension of the sunset clause for the power sector are also proposed. Removal of the list of permitted sectors for investments by Venture Capital Funds is a welcome move. However, AMT at 18.5 percent is extended to all non-company taxpayers claiming profit linked deductions. In a sadly surprising move the Finance Bill seeks to retrospectively overcome many judicial decisions, notably the Supreme Court decision with regard to Vodafone and seeks to tax offshore transfers of shares or interest in a company outside India, if its value is derived substantially from assets located in India. Similarly tax provisions are sought to recharacterise all payments made for computer software and amounts received for transmission of signals by satellite to bring them within the ambit of Royalty and thus subject these to source rule taxation in India. While announcement of an Advance Pricing Agreement regime to give certainty to taxpayers under the Transfer
Pricing regulations seems a step in the right direction, inclusion of almost all related party domestic transactions in the ambit of Transfer Pricing will cast the onerous compliance burden far and wide among Indian taxpayers. Further, continuing in the vein of overruling favourable court decisions, retrospective amendments in Transfer Pricing provisions will now deny the benefit of the 5 percent variation as a standard deduction and will considerably widen the ambit of transactions that need to satisfy Indias narrow arms length standard of arithmetic mean. In an attempt to deter the generation and use of unaccounted money, the Finance Bill proposes a number of new provisions i.e. compulsory reporting of assets held abroad, allowing for re-opening of assessments up to 16 years in relation to assets held abroad, tax collection at source for cash purchases of bullion and jewellery and trading in coal, lignite and iron ore, taxation of unexplained money, credits, investments and expenditures at the highest rate of 30 percent. Far reaching General Anti Avoidance Rules (GAAR) have been proposed, albeit with oversight by a Panel of Commissioners as a counter to aggressive tax planning. It remains to be seen how these are implemented in practice. A bare reading of GAAR as proposed seems to strengthen the apprehension that these could be invoked in most, if not all, cases where there is a disagreement between tax collectors and taxpayers on what could otherwise constitute legitimate tax planning. There is no announcement on the Direct Taxes Code, save an expressed intention to take steps for its enactment at the earliest. On the Indirect Taxes front, the overriding need for fiscal consolidation seems to have driven the decision to increase the Excise and Service tax rates from 10 to 12 percent, which has not gone down too well with industry. The fate of the Goods and Service tax (GST) continues to hang in the balance, with clarity on the date of implementation still remaining elusive. However, the proposed implementation of GST Network from August 2012 provides some direction. There has been a significant emphasis on expansion of the tax base, with proposed implementation of a Negative List regime under Service tax, which would have wide ramifications for the industry. The harmonisation between Central Excise and Service tax sought to be made through the introduction of a common simplified registration form and return for Central Excise and Service tax is encouraging. An attempt has been made to streamline the dispute resolution by making the forum of Settlement Commission available to Service tax taxpayers and rationalisation of a few other provisions under the Point of Taxation Rules, self adjustment of excess tax paid etc. Overall, while lack of a definitive direction on GST implementation comes as a disappointment, many other steps seem to be in the right direction To sum up, while the Governments resolve to bring more fiscal discipline is welcome, its stance on overruling favourable judicial pronouncements through retrospective amendments in the law and its penchant to bring in more draconian anti avoidance provisions for both domestic and foreign taxpayers does little to increase confidence in the economic environment in the county.
2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Table of Contents
Economic Indicators
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Budget Highlights
Direct Tax Indirect Tax
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10 11
Budget Proposals
Policy Proposals Tax Rates Direct Tax Indirect Tax
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14 15 19 24
Recent Policy and Legislative Developments
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Glossary
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Economic Indicators
Despite positive triggers, Indian economy in slow lane

The Indian economy started fiscal 2011-12 on a positive note with growth recovering sharply from the global crisis levels of 6.8 percent noticed in 2008-09 to 8.4 percent in each of the two successive years. On the back of optimism drawn from the strong rebound in growth, the Economic Survey 2010-11 forecasted that GDP will grow by 9 percent during 2011-12. However, as a spill over of growth, the economy came under inflationary pressures that compelled the central bank to adopt a strict approach to liquidity management. Reduced liquidity in the economic system has further led to slowing economic activity. Illustratively, the recently released numbers by the CSO estimated GDP growth at 6.1 percent during the December quarter; the lowest in almost three years. This slump has further heightened fears of growth dipping below 7 percent during the fiscal period ending March 2012. The following paragraphs discuss movements in key indicators that constitute conditions in India, which lays down the context of the Budget 2012.
Focus on containing price pressures: the cause

Declining growth has been a constant in fiscal 2011-12. Though, the opening quarter of the fiscal period saw only a marginal decline in growth from 7 percent in the last quarter of FY11 to 7 percent in the first quarter of FY12, domestic and external .8 .7 pressures pulled growth further down. Illustratively, GDP growth slipped to 6.9 percent in Q2, FY12 and 6.1 percent in Q3, FY12; the lowest in almost three years. From a sectoral perspective, all three sectors i.e. agriculture, industry and services have witnessed a decline in growth with industry suffering the most. Industry growth dipped from 6.1 percent in Q4, FY11 to 2.6 percent in Q3, FY 12. The IIP another , indicator of industrial activity, also declined, posting a negative growth rate of -4.9 percent in October 2011 the lowest since March 2009. Within industry, manufacturing and mining have particularly been responsible for the downfall.
Quarterly GDP Growth (Y-o-Y, %)
Quarterly Sectoral Growth (Y-o-Y, %)
Source: Office of the Economic Adviser
Agriculture and industry also suffered a setback with agricultural growth declining from 7 percent during Q4, FY11 to 2.7 .5 percent in Q3, FY12 and that of services falling from 10 percent in Q1, FY12 to 8.9 percent in Q3, FY12. However, the services sector (on a quarterly average basis) still posted a robust growth of 9.4 percent during the first three quarters of FY12, higher than the growth for the same period last year. Declining economic activity in the economy has primarily been driven by mounting price pressures and consequent interest rate hikes to contain the inflation by the RBI. The Indian economy entered this fiscal period with inflation at over 9 percent, which remained over 9 percent until November, 2011. Containing inflation driven by demand-supply mismatches, emerged as the most significant area of concern and focus of this fiscal period for economists and policy makers.
WPI Growth (Y-o-Y, %)
IIP Growth (Y-o-Y, %)
Source: Office of the Economic Adviser 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
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| Economic Indicators
This compelled the RBI to adopt a tight liquidity regime, accompanied by rising interest rates 13 times in a row. Inflation, this fiscal period, has largely proved to be sticky with some relief witnessed only around December 2011 and in the beginning of 2012. Inflation eased to 7 percent in December 2011 and further to 6.6 percent in January, 2012. While inflation .5 has decelerated, it is important to note that some of this has been on account of the base effect and a seasonal fall in some of the food commodities prices. Inflation is expected to moderate by March. However, the pace of moderation will depend on the degree to which any negative movement in the exchange rate and the impact of the rise in global crude prices is passed on to domestic prices. Overall, moderation in growth has been reflective of mounting domestic challenges including lack of fiscal and monetary prudence and policy paralysis. This coupled with the ongoing global uncertainty has accentuated the downside risks to growth that India faces this fiscal period. Illustratively, while many agencies opened the year with announcements of higher expectations of growth, recent conditions have compelled them to moderate their growth forecasts. Agency Earlier Projection Real GDP Growth (percent), 2011-12 CSO EAC NCAER RBI 7.1 8.3 7.6 Feb-12 Jul-11 Oct-11 Month Latest Projection Real GDP Growth (percent) 2011-12 6.9 8.2 7.9 7.0 Month Feb -12 July- 11 Oct-11 Jan-12
This resulted in discouraged investment and consumption...

The liquidity tightening measures by the RBI pulled down consumption and investment drastically during the current fiscal period. Illustratively, investment growth during the first three quarters dipped below the double digit growth posted during the corresponding quarters of the last fiscal period. Furthermore, investment growth dipped to -2.7 percent in Q2, FY12, which was the lowest in two years. Similarly, private consumption, an important demand side driver of growth (which accounts for around three fifths of the GDP), feeling the heat of inflation and rate hikes by the RBI, dipped in line with other economic indicators. However, the December quarter has shown an improvement in both investment and consumption growth, with inflation easing and the RBI loosening its grip. Quarterly Investment Growth (Y-o-Y, %) Quarterly Private Consumption Growth (Y-o-Y, %)
Source: Calculations based on CSO data
... along with increasing global pressures that led to an outflow of FII, a weaker currency
Coupled with domestic factors, which led to a slowdown in economic activity in the Indian economy, global factors such as the intensification of the euro zone crisis and fears of a double dip recession in leading economies have contributed to the downward trend. Global uncertainty triggered a flight to safety amongst global investors, which led to an outflow of FII that touched a three year high in August 2011 (USD -1.77 billion). The rush towards the US Dollar translated into the Rupee weakening, which touched an all time low of INR 54.30/USD in mid December 2011, before the RBI stepped in aggressively with administrative measures. However, the Rupee weakening was in line with the currencies of other emerging market economies. Domestically, high inflation with respect to industrialised nations over the last year and a half also contributed to the Rupees fall. However, from December 2011, both indicators (FII and the exchange rate) have shown improvement as domestic pressures have started easing.
06
FII Inflow (USD billion)
Exchange Rate - INR/USD
Source: SEBI and Oanda
... and slowing export growth that translated into an expanding current account deficit
Indias growth journey this fiscal period has been marked by a struggle against the twin deficit syndrome an expanding current account and fiscal deficit. Both deficits by nature exert pressure on the Rupee. The Indian economy started fiscal 2011-12 with a comfortable current account status. In fact, in the first half of this fiscal period export growth largely exceeded import growth. However, during the latter period of the fiscal period, the spiralling decline of advanced economies hurt export growth, leading to a widening current account deficit. Illustratively, while exports registered a growth of 10.1 percent, imports grew at a staggering 20.3 percent in January 2012. Particularly, the economic tension in the euro zone and other economic and political upheavals in the oil producing nations have driven the deficit to touch uncomfortable levels. Trade deficit according to the RBI, which stood at around USD 131 billion last fiscal period, is estimated to touch around USD 177 billion this fiscal period. Additionally, the current account deficit is expected to touch 3.6 percent of GDP as compared to 2.6 percent of GDP last year. A ballooning deficit is expected to further add to the pressure on the Rupee. Any improvement in global conditions is however expected to play a role in easing current account deficit conditions.
Merchandise Trade Growth (Y-o-Y, %)
Source: RBI
07
Overall, slowing economic growth has resulted in a higher fiscal deficit than estimated
Government finances have come under severe strain in 2011-12. Drawn on strong growth expectations of 9 percent for the current fiscal period, the government budgeted a fiscal deficit at 4.6 percent of GDP for 2011-2012 (lower than last years fiscal deficit of 4.9 percent of GDP). However, decelerating growth momentum and weak market conditions have disturbed government calculations. As a consequence of falling tax revenues, a miss in achieving disinvestment targets, inefficiency in public expenditure, and a rising subsidy bill, the fiscal deficit for 2011 -2012 touched 5.9 percent of GDP . Government finances at a glance
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Budget Highlights
Direct Tax Highlights

No change in corporate tax rates Basic exemption limit marginally increased for individual tax payers AMT applicable to LLP extended to all persons other than companies (like Partnership Firms, Association of Persons, HUF , etc.) claiming profit linked deductions Benefit of initial depreciation at the rate of 20 percent in addition to normal depreciation extended to entities engaged in the business of generation or generation and distribution of power The interest income earned by a non-resident is liable to be taxed at reduced rate of 5 percent (plus applicable surcharge and cess) where the relevant borrowings in foreign currency has been approved by Goverment and taken during the period 1 July 2012 to 1 July 2015 by companies engaged in specified infrastructure businesses such as construction of dam, port, road, toll roads, bridge, affordable housing Dividends received from specified foreign companies (shareholding of 26 percent or more) to be taxed at a lower rate of 15 percent for one more year i.e. financial year 2012-13 If dividend distributed by a subsidiary company has been subject to DDT, there will be no further DDT in the hands of holding company while further distributing the said dividend in the same year Revaluation reserve relating to revalued asset which has been retired or disposed off, if not credited to the Profit and loss account shall be added to the Book Profit for purpose of MAT Income deemed to be accruing or arising to non-residents directly or indirectly through the transfer of a capital asset situated in India is to be taxed in India with retrospective effect from 1 April 1962 Withholding tax obligation on payment of income to non-residents clarified to be applicable to non-residents in all scenarios and notwithstanding they having no formal taxable presence in India Royalty income for non-residents to include computer software include transmission by satellite, cable, optic fibre or any other such technology with retrospective effect from 1 June 1976 APA provisions under transfer pricing introduced Transfer Pricing Regulations to apply to certain domestic transactions entered into by domestic related entities Detailed GAAR provisions introduced In case where payer has failed to deduct tax at source, but if resident payee has paid due tax on the said income, payer will not be held as assessee in default. The payer would be eligible for deduction of the underlying expenditure as if he has deducted and paid the tax on the date of furnishing of return by the resident payee If Sale consideration on transfer of a capital asset is not ascertainable, then FMV of the said asset to be considered as full value of consideration Obtaining of TRC mandated but may not be regarded as a sufficient evidence for tax treaty benefits Compulsory filing of income tax return by every resident in relation to assets located outside India Time limit for reopening assessments in case of income from assets located outside India escaping assessment, increased from 6 years to 16 years With effect from 1 April 2009, the enhancement powers of DRP to include any matter arising out of the draft assessment order. The CIT / AO can now file an appeal to the Tribunal against an order passed pursuance to the directions of DRP as stipulated Closely held companies to explain source of funds of shareholders to avoid taxability of share capital, share premium, etc. as unexplained income Share premium in excess of the fair market value received by a private company from a resident shall be treated as income except in case of share consideration received by a venture capital undertaking from a venture capital company or a venture capital fund Sunset date for being eligible to claim tax holiday by power generating, distributing or transmitting companies extended by one more year to 31 March 2013 The benefit of a weighted deduction of 200 percent in relation to expenditure incurred on scientific research on in-house research and development facility of any specified article or thing is extended for five years from 31 March 2012 to 31 March 2017 Liability to pay advance tax introduced even if the income is subject to tax withholding and where no tax has been withheld by the payer Scope of investment-linked incentives providing deduction in respect of specified capital expenditure expanded and weighted deduction specified for certain sectors.
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| Budget Highlights
Indirect Tax Highlights

Peak rate for Excise and Service tax increased from 10 percent to 12 percent Excise duty rate of 1 percent/ 5 percent increased to 2 percent/ 6 percent respectively Peak rate for Customs duty retained at current level No new date announced for implementation of GST. GST Network to be implemented by August 2012 Taxation of services based upon negative list of services proposed to be introduced Negative List to include specified services in relation to agriculture, education, trading of goods, services by the Government or local authority, residential renting, interest or discount on deposits, loans or advances, etc. Certain services proposed to be exempted by way of Mega Notification Specified motor vehicles included in the definition of capital goods Retrospective amendment made to allow Cenvat credit where services are rendered to SEZs. Retrospective amendment also made granting exemption from Service tax on repair of roads for the past period Inter-unit transfer of unutilised credit of ADC permitted to manufacturers Condition of physical receipt of goods for availing Cenvat Credit relaxed for service providers Excise duty rate on automobiles increased Cess on crude petroleum increased from INR 2,500 per metric tonne to INR 4,500 per metric tonne Excise duty regime on cement and cigarettes restructured Customs duty exemption granted on LNG/CNG used in generation of electricity Exemption from additional duty of customs granted on import of equipment for setting up solar thermal projects Certain existing Customs duty exemptions broad based, for example, exemption granted on import of tunnel boring machine irrespective of project, specified equipment for construction of road projects awarded by the Metropolitan Development Authority.
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Budget Proposals
Policy Proposals
DTC to be enacted expeditiously taking into account the Report of the Parliamentary Standing Committee Implementation of the advance pricing mechanism introduced to reduce tax litigation in respect of transactions between related parties No specific roll out dates for GST. Drafting of model legislation for the Centre and State GST underway. GST network to be set up as a National Information Utility and to be operational by August 2012 Continued disinvestment in PSUs. INR 30,000 crore targeted to be raised through disinvestment in fiscal 2012-13 Tax free bonds of INR 60,000 crores proposed to be issued for infrastructure projects India Opportunities Venture Fund of INR 5,000 crores to be set up with SIDBI FDI up to 51 percent in multi-brand retail trade and 49 percent in Indian aviation companies by foreign airlines being considered External Commercial Borrowings norms to be liberalised to part-finance Rupee debt of existing power projects, capital expenditure on the maintenance and operation of toll systems, working capital requirements of airlines for one year, and low cost affordable housing projects Reforms for Indian capital markets outlined; namely The Indian corporate bond market can be accessed by Qualified Foreign Investors, the IPO process has been simplified, and two-way fungibility in Indian Depository Receipts Rajiv Gandhi Equity Savings Scheme proposed to provide income tax deduction of 50 percent for investments up to INR 50,000 made by retail investors (with annual income below INR 10 lakhs) with a lock-in period of three years National Manufacturing Policy announced to raise the share in GDP of the manufacturing sector to 25 percent and to create 10 crore jobs within a decade Allocation of INR 25,360 crores to the National Highway Development Programme, INR 20,000 crores to the Rural Infrastructure Development Fund and INR 1,93,407 crores to Defence services Government to table a White Paper on Black Money, in this Parliament session Enactment of various legislations underway for strengthening the anti-corruption framework, namely The Prevention of Money Laundering (Amendment) Bill, 2011, Benami Transactions (Prohibition) Bill, 2011 and National Drugs and Psychotropic Substances (Amendment) Bill, 2011 Amendments to the Fiscal Responsibility and Budget Management Act, 2003 introduced in the direction of expenditure reforms Legislative reforms in the financial sector on cards, namely The Pension Fund Regulatory and Development Authority Bill, 2011, The Banking Laws (Amendment) Bill, 2011, The Insurance Laws (Amendment) Bill, 2008, The Micro Finance Institutions (Development and Regulation) Bill, 2012, The National Housing Bank (Amendment) Bill, 2012, The Small Industries Development Bank of India (Amendment), Bill, 2012, National Bank for Agriculture and Rural Development (Amendment) Bill, 2012, Regional Rural Banks (Amendment) Bill, 2012, Indian Stamp (Amendment) Bill, 2012, Public Debt Management Agency of India Bill, 2012, The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011.
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| Budget Proposals
Budget 2012 - Tax Rate Card

These rates are subject to enactment of the Finance Bill 2012. The rates are for the Financial Year 2012-13. 1. Income Tax Rates 1.1 For Individuals, Hindu Undivided Families, Association of Persons and Body of Individuals Total Income Up to INR 200,000 (a) (b) INR 200,001 to INR 500,000 INR 500,001 to INR 1,000,000 INR 1,000,001 and above Tax Rates (c) (d) NIL 10% 20% 30% 1.5 For Domestic Companies Domestic companies are taxable @ 30 percent Special method for computation of total income of insurance companies. The rate of tax on profits from life insurance business is 12.5 percent Surcharge is applicable @ 5 percent if the total income is in excess of INR 10,000,000. Marginal relief may be available. Education cess is applicable @ 3 percent on income tax (inclusive of surcharge, if any) 1.6 For Foreign Companies Foreign companies are taxable @ 40 percent. Surcharge is applicable @ 2 percent if the total income is in excess of INR 10,000,000. Marginal relief may be available. Education cess is applicable @ 3 percent on income tax (inclusive of surcharge, if any).
(a) In the case of a resident individual of the age of sixty years or above but below eighty years, the basic exemption limit is INR 250,000 (b) In the case of a resident individual of the age of eighty years or above, the basic exemption limit is INR 500,000 (c) Surcharge is not applicable (d) Education cess is applicable @ 3 percent on income-tax
2. Minimum Alternate Tax (a) Companies MAT is levied @ 18.5 percent of the adjusted book profits in the case of those companies where income-tax payable on the taxable income according to the normal provisions of the Act), is less than 18.5 percent of the adjusted book profit MAT credit is available for ten years Surcharge is applicable @ 5 percent in the case of domestic companies if the adjusted book profits are in excess of INR 10,000,000. Marginal relief may be available Education cess is applicable @ 3 percent on income-tax (inclusive of surcharge, if any) (b) Persons Other than a Company AMT is applicable to persons other than a Company AMT is levied @ 18.5 percent of the adjusted total Income in case of persons other than a Company where incometax payable on the taxable income according to the normal provisions of the Act is less than 18.5 percent of the adjusted total Income AMT will not apply to an Individual, HUF AOP BOI or an , , Artificial Judicial Person if the adjusted total income of such person does not exceed INR 2,000,000 AMT credit is available for ten years Education cess is applicable @ 3 percent on incometax.
1.2 For Co-operative Societies Total Income Up to INR 10,000 INR 10,001 to INR 20,000 INR 20,001 and above (a) Surcharge is not applicable (b) Education cess is applicable @ 3 percent on income-tax 1.3 For Local Authorities Local Authorities are taxable @ 30 percent. Surcharge is not applicable Education cess is applicable @ 3 percent on income-tax. 1.4 For Firms [including LLP] Firms (including LLP) are taxable @ 30 percent. Surcharge is not applicable Education cess is applicable @ 3 percent on income tax. Tax Rates 10% 20% 30%
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3. Securities Transaction Tax STT is levied on the value of taxable securities transactions as follows: Total Income Purchase/Sale of equity shares, units of equity oriented mutual fund (delivery based) Rates 0.1% (a) Payable By Purchaser / Seller
Furthermore, dividend paid to any person for and on behalf of a New Pension System Trust will also be reduced Income received by unit holders from a Mutual Fund is exempt from income tax. The Mutual Fund (other than an equity oriented Mutual Fund) will pay income distribution tax of: 27 .038 percent (inclusive of applicable surcharge and education cess) on income distributed to any person being an individual or a HUF by a money market Mutual Fund or a liquid fund 32.445 percent (inclusive of applicable surcharge and education cess) on income distributed to any other person by a money market Mutual Fund or a liquid fund 13.519 percent (inclusive of applicable surcharge and education cess) on income distributed to any person being an individual or a HUF by a debt fund other than a money market mutual fund or a liquid fund; and 32.445 percent (inclusive of applicable surcharge and education cess) on income distributed to any other person by a debt fund other than a money market mutual fund or a liquid fund.
Sale of equity shares, units of equity oriented mutual fund (non-delivery 0.025% based) Sale of an option in securities Sale of an option in securities, where option is exercised Sale of a futures in securities Sale of a futures in securities 0.017% 0.125% 0.017% 0.25%
Seller Seller Purchaser Seller Seller
(a) Upto 30 June 2012 @ 0.125 percent 4. Wealth Tax Wealth tax is imposed @ 1 percent on the value of specified assets held by the taxpayer on the valuation date (31 March) in excess of the basic exemption of INR 3,000,000.
7. Special Rates for Non-Residents (1) The following incomes in the case of non-resident are taxed at special rates on a gross basis: Nature of Income Dividend (c) Interest received on loans given in foreign currency to Indian concern or Government of India Interest received on notified Infrastructure debt fund Income received in respect of units purchased in foreign currency of specified Mutual Funds / UTI Royalty or fees for technical services (d) Rate (a) (b) 20%
5. Dividends Earned by an Indian Company Dividends earned by an Indian company from a foreign Company in which it holds 26 percent or more equity shares shall be taxable at the rate of 15 percent (plus applicable surcharge and education cess) on gross amount of such dividends.
20% (e)
5%
20% For Agreements entered into: After 31 March 1976 but before 31 May 1997 - @ 30% After 31 May 1997 but before 1 June 2005 - @ 20% On or after 1 June 2005 - @ 10% 10%
6. Dividend Distribution Tax Dividend distributed by a Domestic Company is exempt from income-tax in the hands of all shareholders. The Domestic Company is liable to pay DDT @ 16.223 percent (inclusive of applicable surcharge and education cess) on such dividends. For computation of DDT, the amount of dividend declared by the Domestic Company will be reduced by the amount of dividend, if any, received by it during the financial year if such dividend is received from its subsidiary (i.e. in which it holds more than 50 percent of equity shares); the subsidiary has paid DDT on such dividend; and the Domestic Company is not a subsidiary of any other Company
Interest on FCCB, FCEB /dividends on GDRs(c)
With effect from 1 July 2012 the above conditions will be substituted by the following the dividend is received from its subsidiary; (i.e. in which it holds more than 50 percent of equity shares); the subsidiary has paid DDT which is payable under section 115-O of the Act.
(a) Surcharge is applicable at 2 percent (b) Education cess is applicable at 3 percent on income tax (inclusive of surcharge, if any) (c) Other than dividends on which DDT has been paid (d) In the case of PE in India and the royalty/fees for technical services paid is effectively connected with such PE, tax is @ 40 percent (plus surcharge and education cess) on net basis (e) 5 percent (plus applicable surcharge and cess) where the relevant borrowings in foreign currency has been approved by Goverment and taken during the period 1 July 2012 to 1 July 2015 by companies engaged in specified infrastructure businesses such as construction of dam, port, road, toll roads, bridge, affordable housing.
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| Budget Proposals
8. Capital Gains Short-term capital gains tax rates (a) 15% Long-term capital gains tax rates (a)
9. Presumptive Taxation (1) In the case of a non-resident taxpayer Business (i) Shipping (b) Nil (ii) Exploration of mineral oil (b) (c) (iii) Operations of Aircraft (b) Progressive slab rates 30% 30% 40% (corporate) 30% (noncorporate) 30% 40% 30% Progressive slab rates 20% / 10%
(b)
Particulars
Rate at which income is presumed 7.5% of gross receipts 10% of gross receipts 5% of gross receipts 10% of gross receipts
Sale transactions of equity shares / unit of an equity oriented fund which attract STT Sale transaction other than mentioned above: Individuals (resident and nonresidents) Firms including LLP (resident and non-resident) Resident Companies
(iv) Turnkey power projects (b) (c) (2) All resident taxpayers Business (i) Small Business [excluding (ii)] (a)
(b) (c) (d) (e)
20% / 10% (b)
Rate at which income is presumed 8% of gross turnover/receipts INR 5,000 per month/part of month for each heavy goods vehicle. INR 4,500 per month/part of month for each goods vehicle other than heavy goods vehicles
Overseas financial organisations specified in section 115AB FIIs Other Foreign Companies Local authority Co-operative Society
10%
10% 20% / 10%
(ii) Plying, hiring or leasing goods carriages (person should not own over ten goods carriages at any time during the previous year) (b) (c)
(a) The gross receipts of the taxpayer do not exceed INR 10,000,000 (b) All deductions/expenses (including depreciation) shall be deemed to have been allowed (c) The taxpayer can claim lower profits, if he keeps and maintains specified books of account and obtains a tax audit report (d) Applicable to Individuals, Hindu Undivided Families and Firm excludes LLP tax payer availing deduction under Section 10AA or , Chapter VI-A(C) of the Act (e) Specifically excludes person carrying on specified profession, person earning commission or brokerage income and person carrying on any agency business (3) Special code of tonnage tax on income earned by domestic shipping companies.
(a) These rates will further increased by applicable surcharge and education cess @ 3 percent on income-tax (inclusive of surcharge, if any) (b) 20 percent with indexation and 10 percent without indexation (for units/ zero coupon bonds)
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10. Personal Tax Scenarios - Current vs Proposed Individual (Other than covered in other tables) Current Tax Proposed Tax Effective Tax Savings Effective Tax Savings (%) Income Level 500,000 32,960 30,900 2,060 6.25 1,000,000 156,560 133,900 22,660 14.47 1,500,000 311,060 288,400 22,660 7.28 Resident senior citizen (age of 60 years or more but below 80 years) Current Tax Proposed Tax Effective Tax Savings Effective Tax Savings (%) Income Level 500,000 25,750 25,750 0 0 1,000,000 149,350 128,750 20,600 13.79 1,500,000 303,850 283,250 20,600 6.78
Income Level Resident Women 500,000 Current Tax Proposed Tax Effective Tax Savings Effective Tax Savings (%) 31,930 30,900 1,030 3.23 1,000,000 155,530 133,900 21,630 13.91 1,500,000 310,030 288,400 21,630 6.98
Resident very senior citizen at the age of 80 years or above Current Tax Proposed Tax Effective Tax Savings Effective Tax Savings (%)
Income Level 500,000 0 0 0 0 1,000,000 123,600 103,000 20,600 16.67 1,500,000 278,100 257,500 20,600 7.41
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| Budget Proposals
Direct Tax
1. Corporate Tax

The corporate tax rate remains unchanged The lower taxation at 15 percent of dividends received by an Indian Company from specified foreign companies (Shareholding of 26 percent or more) extended by one year and to apply to financial year 2012-13 Any deemed incomes in the nature of unexplained credits, moneys, investments, expenditure, etc to be taxed at 30 percent without deduction for any expenditure or allowance The MAT on book profit for insurance, banking and electricity companies to be computed as per their Profit and Loss Account drawn in accordance with their respective governing statute The book profit for the purpose of levy of MAT to include any amount standing in the Revaluation Reserve pertaining to revalued assets which are retired or disposed, if the same is not credited to the profit and loss account Any dividends declared by holding company (even if subsidiary of another company) from dividend received from its subsidiary which has paid DDT thereon shall not be subjected to DDT to that extent The daily rate of tonnage income in respect of qualifying shipping companies opting for tonnage tax regime have been revised upwards.
2. Tax Incentives

Taxpayers engaged in the business of generation or generation and distribution of power to be eligible for an additional depreciation of 20 per cent on investments made in new machinery or plant The benefit of a weighted average deduction of 200 percent in relation to expenditure incurred on scientific research on inhouse research and development facility of any specified article or thing is extended by 5 years until 31 March 2017 Investment-linked incentives providing deduction in respect of specified capital expenditure extended to setting up and operating an inland container depot or a container freight station or warehousing facility for storage of sugar and Bee-keeping and production of honey and beeswax The weighted deduction of 150 percent extended to the business commencing after 1 April 2012 of setting up / operating a cold chain facility, setting up and operating a warehousing facility for storage of agricultural produce, building and operating, anywhere in India, a hospital with at least one hundred beds for patients, developing and building a housing project under the affordable housing scheme; and production of fertiliser in India Taxpayer building hotel of two-star or above category to remain eligible for the investment-linked deduction even if they transfers the operation of such hotel to another person. This amendment to be effective from AY 2011-12 The 150 percent weighted deduction extended for expenditure on agricultural extension project and expenditure on any skill development project notified by the Board Sectoral restrictions removed and VCF / VCC registered with SEBI and RBI eligible for complete pass-through status so that investors are directly taxable on the income on accrual basis. Undistributed income deemed to have been credited to the account of the VCF / VCC on the last day of the previous year. Corresponding withholding tax obligation imposed on VCUs New investment by taxpayer engaged in generation or generation and distribution of power to be eligible for an initial additional depreciation at the rate of 20 percent of actual cost of new machinery or plant (other than ships and aircraft) acquired or installed in the year The sunset date for tax holiday for power sector extended to 31 March 2013 from 31 March 2012 for undertakings which start generation or distribution or transmission of power or undertake substantial renovation / modernization of an existing network of transmission or distribution lines during that period In the case of exempt transfers on conversion of a sole proprietorship or firm into a company, the cost of acquisition of assets in the hands of the company would be the same as that in the hands of the sole proprietary concern or the firm. This amendment is applicable with retrospective effect from AY 1999-2000 In the case of amalgamation, to the extent where the amalgamated company itself is the shareholder in the amalgamating company, it shall not be necessary for the amalgamated company to issue shares. A similar relaxation to apply to cases of demerger as well The long-term capital gains tax arising to an individual or an HUF on sale of a residential property (house or a plot of land) would be exempt if he re-invests the sale consideration in the equity of a new start-up SME company in the manufacturing sector and the said company utilizes the purchase of new plant and machinery within a stipulated period and in the prescribed manner.
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3. Non-resident related provisions

Scope of income deemed to accrue or arise in India to non-residents directly or indirectly through the transfer of a capital asset situated in India expanded retrospectively from 1 April 1962 to tax indirect transfer of shares in an Indian Company. The expression through is clarified to always mean by means of or in consequence of or by reason ofThe share or interest . in an overseas company or entity clarified to be situated in India if they directly or indirectly derive value substantially from assets located in India. The term property clarified to include rights in or in relation to an Indian company including rights of management or control or any other such rights. The ambit of transfer in such cases widened to include disposition of share of company registered / incorporated outside India where it relates to such property A validation clause introduced with respect to demands raised on non-residents under above retrospective provisions to protect against any question that tax was not chargeable on such transactions on any ground and which shall operate notwithstanding any judgment, decree or order of any Court or Tribunal or any Authority The scope of Royalty income for non-residents deemed to accrue or arise in India and taxable on gross basis expanded retrospectively from 1 June 1976 to include within its ambit:

Payments for the use or right to use of computer software (including granting of a license), payment of any right, property or information irrespective of its control or possession, use or location and the term process clarified to include transmission by satellite (including up-linking, amplification, conversion or downlinking of signals), cable, optic fibre or any other such technology
The scope of withholding tax obligation on payment of income to non-resident expressly extended to all persons including non-residents irrespective of them having a residence or place of business or business connection or any other presence in India From 1 July 2012, interest income of non-residents from specified companies on foreign currency loans given from outside India between 1 July 2012 and 1 July 2015 under an agreement approved by the Central Government to be taxed at lower rate of 5 percent and payer to withheld tax accordingly Income received by an entertainer, being a non-resident and who is not a citizen of India, from his performance in India, to be taxed on gross basis at the rate of 20 percent. On the same analogy, the income received by a sportsman, being a nonresident and who is not a citizen of India, and a non-resident sports association or institution, to be taxable on gross basis at 20 percent as against the current rate of 10 percent Any term used in tax treaty not defined therein or in the domestic income-tax provisions to have the same meaning as assigned to it through any notification and will have effect from date of coming into force of the tax treaty Obtaining of TRC mandated but may not be regarded as a sufficient evidence for tax treaty benefits With retrospective effect from AY 2012-13, foreign companies receiving money in India in Indian currency from sale of crude oil (which is imported into India) under an agreement with Central Government or approved / notified by Government not liable to tax in India on their said income provided receipt of such money is the only activity carried out by such foreign company in India Effective 1 July 2012, payment to non-residents by specified persons or in specified cases (to be notified) to require an application to be made to the Tax Officer for determination of withholding tax, irrespective of whether such payment is taxable in India or not The time limit for issue of notice in case of person who is treated as an agent of non-resident has been enhanced to 6 years instead of 2 years and being procedural would also apply to fiscal year 2011-12 or any year before that period.
4. Transfer Pricing
Scope of Transfer Pricing Regulations Expanded The scope of transfer pricing regulations expanded to include Specified Domestic Transactions as outline below if the aggregate value of such transactions exceeds INR 5 crores during the year:
Expenses or payments made to domestic related persons as specified in Section 40A(2)(b) of the Act. Scope of Section 40A(2)(b) of the Act expanded to include companies having a common parent Transactions between undertakings of the same taxpayer or transactions by a taxpayer with closely connected persons for the purpose of Chapter VI-A (deductions in respect of certain tax holidays) and Section 10AA of the Act (tax holiday for SEZ units).
Definition of International Transaction With retrospective effect from 1 April 2002, international transaction clarified to include the following:

Guarantees Any debt arising during course of business (e.g. credit period on outstanding receivables) Business reorganisations or restructuring irrespective of whether the same has an impact on current years profits, income, losses or assets Intangible properties including marketing intangibles, human assets, technology related intangibles, etc.
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Benefit of Variation from Arms Length Price Restricted Rate of variation to arms length price that can be notified by government not to exceed 3 percent

Retrospective clarification with effect from 1 April 2002 that the tolerance band of 5 percent to arms length price is not in the nature of standard deduction. However, reopening not permissible on this point for assessments completed before 1 October 2009.
Powers of the TPO Scope Expanded The TPO can examine international transactions not reported in the Accountants Report furnished by the taxpayer and identified during assessment proceedings - Retrospective with effect from 1 June 2002. However, reopening not permissible in case the assessment proceedings are completed before 1 July 2012. Advance Pricing Agreements The APA provisions to be introduced from 1 July 2012 with the following key salient feature

An agreement between a taxpayer and the tax authorities for specifying the manner in which the arms length price is to be determined in relation to an international transaction The arms length price shall be determined on the basis of prescribed methods or any other method Valid for a maximum of five consecutive years unless there is a change in the provisions or the facts having a bearing on the international transaction In the case an APA covering a particular year is obtained after filing the return of income, a modified return to be filed based on the APA and assessment or reassessment to be completed based on such modified return An APA to be declared void ab initio if obtained by fraud or misrepresentation of facts.
Penalties Penalty equal to 2 percent of the value of international transactions expanded to include non-reporting of international transaction or furnishing of incorrect information or documents. This is in addition to the existing penalty of INR 1 lac for nonfiling of an Accountants report. Due date for filing Return Due date for filing Return of Income extended to 30 November even for non-corporate taxpayers, who are required to furnish transfer pricing report.
5. GAAR

GAAR proposed to be introduced ahead of the DTC to curb sophisticated tax avoidance and provide for declaring any arrangement as impermissible avoidance arrangement if the main purpose of the arrangement is to obtain tax benefit and it satisfies prescribed conditions such as disproportionate rights or obligations, any misuse or abuse of domestic tax provisions, lack of commercial substance or done for non-bonafide business purposes The main purpose of any arrangement would be presumed to be obtaining tax benefit unless proved otherwise by the taxpayer An arrangement will be deemed to lack commercial substance if its substance / effect is inconsistent with its form, involves round trip financing, an accommodating party and elements that have the effect of cancelling each other and disguised transactions or asset location or transaction place or residence is only for obtaining tax treaty benefit. Factors like period of holding, payment of taxes (directly or indirectly) and exit route are not relevant to determine commercial substance Wide powers granted to Tax Authorities when GAAR is invoked for an impermissible avoidance arrangement which include denial of tax treaty benefits, disregarding or recharacterising steps or the transactions or the accommodating party or other persons or reallocating income or expenditure or revising the place of residence of any party or situs of an asset in any transactions, looking through corporate structure, recharacterising equity or debt or accrual of receipts or expenditure, etc. The Tax Officer to make a reference to the CIT for invoking GAAR and make determination of a transaction as an impermissible avoidance arrangement. If objections of taxpayer received and not construed as tenable, the CIT to refer the matter to an Approving Panel post hearing the taxpayer in a time bound manner (six months as stipulated) The Approving Panel to comprise of minimum three officers of the rank of commissioners and above The Approving Panel shall either declare an arrangement to be impermissible or declare it not to be so after examining material and making further inquiry as may be required If the Approving Panel approves the invocation of GAAR and holds the arrangement as impermissible avoidance arrangement then the Tax Officer to determine the consequences and pass final order after the approval of the CIT. , Thereafter, the first appeal against such order shall lie directly with the Tribunal The period taken by the proceedings before the CIT and Approving Panel shall be excluded from the time limitation for completion of assessment.
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6. Personal Tax

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No changes in personal tax rates Basic annual exemption limit and income slabs have been altered as follows: Current Slabs (INR) Up to 180,000* 180,001 to 500,000 500,001 to 800,000 Above 800,000 Proposed Slabs (INR)* Up to 200,000* 200,001 to 500,000 500,001 to 10,00,000 Above 10,00,000 Rate of tax NIL 10 percent 20 percent 30 percent
(*) Notes:
Basic annual exemption limit for women below 60 years of age raised to INR 200,000 (as applicable to men below 60 years of age) from INR 190,000; Basic exemption limits for senior citizens and very senior citizens remain unchanged at INR 250,000 and INR 500,000 respectively.
Deduction towards premium paid for life insurance policies issued on or after 1 April 2012, available only up to 10 percent (20 percent for policies issued up to 31 March 2012) of the actual capital sum assured Maturity proceeds from life insurance policies issued on or after 1 April 2012 exempt only if premium does not exceed 10 percent (20 percent for policies issued up to 31 March 2012) of the actual capital sum assured No extension of deduction of INR 20,000 per annum towards subscription to specified long-term infrastructure bonds Payment made up to INR 5,000 per annum (including cash payment) towards preventive health check-ups for self, spouse, dependent children, parent(s) included within the current overall deduction limits for health insurance premium/contribution payments Eligible age for senior citizens for the purpose of deductions towards health insurance payments and medical treatment of specified diseases reduced to 60 years from 65 years Deduction towards donations made to specified funds, charitable institutions, scientific research or rural development institutions, in excess of INR 10,000, to be allowed only if the donation is made otherwise than in cash Additional deduction up to INR 10,000 per annum towards interest on deposits (excluding time deposits) in a savings account with specified banks, co-operative societies and post offices, for individuals/HUFs Residential house allotted by a company to an employee/officer/ whole time director, not included as an asset for wealth tax purposes of the company, if the gross annual salary of such individual is less than INR 10,00,000 per annum (current limit INR 500,000 per annum) Resident senior citizens (60 years or more in age) are exempted from paying advance tax provided they do not have income chargeable under the head profits and gains of business or profession Additional deduction up to INR 10,000 per annum towards interest on deposits (excluding time deposits) in a savings account with specified banks, co-operative societies and post offices, for individuals/HUFs.
7. Other Tax Proposals

The levy of AMT hitherto applicable only to LLP extended to persons other than a Company (Sole proprietor, AOP Partnership , firm, etc) who are claiming profit linked tax deductions (e.g. undertaking engaged in infrastructure projects or unit in SEZ). AMT is a levy at 18.5 percent on adjusted total income i.e. total income as increased by specified deductions in case the same is higher than regular income-tax payable. AMT will not apply to an Individual, AOP BOI or an Artificial Judicial Person if , the adjusted total income of such person does not exceed INR 20 lacs A Taxpayer who fails to deduct whole or any part of tax on payments made to a resident will not deemed to be an assessee in default (though interest would be liable) if the payee has furnished his return of income after taking into account the underlying sum and paid tax due thereon and the Payer furnishing an Accountant certificate to that effect in prescribed form. On the same analogy, the payer would be eligible for deduction of the underlying expenditure as if he has deducted and paid the tax on the date of furnishing of return by the resident payee The nature and source of any sum credited, as share application money, share capital, share premium etc., in the books of a closely held company shall be treated as unexplained unless the source of shareholders fund explained. These provisions will not apply if the shareholder is a well regulated entity From 1 July 2012, the intimation issued after processing of TDS statement would be deemed to be a Notice of Demand and can be subject to rectification or an appeal before the CIT(A) If the consideration received or accrued on transfer of a capital asset is not ascertainable or cannot be determined, then the fair market value of the said asset as on the date of transfer will be deemed to be the full market value of consideration for computing capital gains.
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The share premium received from resident shareholders on issue of shares by a company in which the public are not substantially interested in excess of its fair market value will be treated as income from other sources. For this purpose, the fair market value of shares will mean the higher of the value as determined as per method that may be prescribed or the value as may be substantiated by the company based on the value of its assets including intangible assets on the date of issue of shares Any sum of money, immovable property or other property received by an HUF from any of its members without consideration or for a consideration which is less than the fair market value will not be treated as income from other sources. This amendment will take effect retrospectively from 1 October 2009 The total income of the charitable institutions shall not be exempt only in the previous year where the aggregate value of receipts from commercial activities exceeds INR 25 lacs. This amendment is applicable with retrospective effect from AY 2009-2010 Residents having any asset (including financial interest in any entity) located outside India or having signing authority in any account located outside India mandatorily required to file return of income whether or not they earn taxable income The processing of returns for issue of intimation would not be necessary if an assessment notice is issued. The time limit for completion of all kinds of assessment including reassessment and wealth tax assessment proceedings extended by three months. In case of search or requisition, assessment can only for one or more relevant years as compared to mandatory six years under current provisions With effect from 1 April 2009, the powers of DRP to enhance variation clarified to include any matter arising out of the assessment proceedings relating to the draft assessment order. Further, from 1 October 2009, assessment in case of search and requisition can be referred to DRP The CIT / AO can now file an appeal to the Tribunal against an order passed pursuance . to the directions of DRP as stipulated The time limit for issue of notice for reopening an assessment increased to 16 years as against 6 years from the end of the relevant assessment years if the income in relation to any asset (including any financial interest in any entity) located outside India. A similar amendment has been made in wealth tax assessment provisions Interest charged on refund granted to taxpayer and later revoked made expressly applicable to assessment years commencing before 1 June 2003 provided the assessment proceedings are completed after 1 June 2003 Penalty provisions widened in ambit and levy with respect to TDS / TCS returns / filings, transfer pricing matters, search cases, etc. The time limit for passing an order holding a person to be assessee in default in respect of failure to deduct tax is increased from four years to six years with retrospective effect from AY 2010-11 The TCS provisions widened to cover minerals such as coal, lignite, iron ore and bulling and jewellery (exceeding INR 200,000) and TCS at rate of one percent to be collected by the seller from the buyer Advance tax liability applicable for all assesses in cases where tax was deductible/collectible but was not so deducted/ collected A person carrying out legal, medical, engineering activity or engaged in architectural/accountancy professional, technical consultancy, interior decoration, earning commission or brokerage income, or agency business shall not be subject to presumptive basis of taxation The threshold limit for the purpose of tax audit enhanced as under:

In the case of a business if sales/turnover/gross receipts exceed INR 1 crore; and In the case of a professional if gross receipts exceed INR 25 lacs.
The due date for filing of a Tax Audit Report aligned with the due date for filing of tax return Cash credts, unexplained money investments etc. deemed as unexplained income to be taxed @ 30 percent (plus surcharge and cess) without any deduction for expenditure or allowance.
Provision relating to withholding tax:

Effective 1 July 2012, no tax to be withheld from payment of interest on any debenture (whether listed or not) issued by a company in which the public are substantially interested, to a resident individual or HUF to the extent of INR 5000 p.a. paid , by account payee cheque Effective 1 July 2012, tax to be withheld at 10 percent from any remuneration, fees or commission, not in the nature of salary, paid to a director by a company Effective 1 July 2012, the threshold limit for non-withholding of tax from consideration payable for compulsory acquisition of immovable property (other than agricultural land) enhanced from INR 1 lakh to INR 2 lakh Effective 1 October 2012, consideration payable to any resident of INR 50 lakh or more in specified area and INR 20 lakh or more in other area, towards acquisition of any immovable property (other than agricultural land) subject to withholding tax rate at the rate of 1 percent. In case the consideration is less than the stamp duty valuation, then such stamp duty value to be considered for the purpose of withholding tax. The registering officer not to register the transfer of such immovable property, unless the transferee furnishes the proof of withholding tax and payment thereof With effect from 1 July 2012, the age limit for non deduction of tax under several sections in the case of an individual resident in India has been reduced from sixty five to sixty years.
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Indirect Tax
1. Service Tax
Rate Changes with effect from 1 April 2012 Service tax rate enhanced from 10 to 12 percent

Change in composition rates proposed for the following:
Life insurance: 3 percent for the first years premium and 1.5 percent for the subsequent years premium (earlier the rate was a flat 1.5) Money changing: existing rate proportionately increased by 20 percent Distributors or selling agents of lotteries: increased from INR 6000/ 9000 to INR 7000/ 11000; and Works contracts rate: increased from 4 to 4.8 percent
Amendments under the Finance Act, 1994 (effective from the date of enactment of the Finance Bill 2012) A new Section 67(A) inserted specifying that the rate of Service tax or value of a taxable service and rate of exchange shall be such rate/value applicable at the time when the taxable service has been provided or agreed to be provided (as determined under the Point of Taxation Rules, 2011)

A proviso to Section 68(2) governing reverse charge mechanism inserted to provide that both the service provider and service receiver will be considered as persons liable to pay tax on notified taxable services and to the extent specified against each one of them. Initially this scheme is proposed to be made applicable (from a date to be notified after the enactment of the Finance Bill 2012) where the service provider is an individual, firm or LLP and the service recipient is a body corporate Limitation period for issuing notice under section 73 to be extended from one year to 18 months Section 80 amended to provide for penalty waiver on Service tax payable on renting of immovable property as on 6 March 2012, subject to the condition that Service tax and interest are paid in full within a period of six months from the date of enactment of the Finance Bill Provisions pertaining to Settlement Commission for Central Excise Act, 1944 proposed to be extended to Service tax Limitation period for filing appeals amended as follows:

Appeals to Commissioner Appeals reduced from three months to two months Appeals to Tribunal increased from three months to four months (for Departments)
Section 89 amended to make prosecution provisions applicable in the case of evasion of payment of Service tax instead of non-issue of an invoice
Retrospective amendments under the Finance Act, 1994 (effective from the date of enactment of the Finance Bill 2012) Rule 6(6A) of the Cenvat Credit Rules, 2004, providing exemption from reversal of credits in respect of services provided to SEZs, given effect from 10 February 2006

Exemption provided for setting up of common facilities for treatment and recycling of effluents and solid wastes retrospectively applicable effective from 16 June 2005 Repair and maintenance of roads retrospectively exempted from 16 June 2005 to 27 July 2009; and Retrospective exemption also provided on management, maintenance or repair service of non-commercial Government buildings from 16 June 2005
Amendments to Service tax Rules, 1994 (effective from 1 April 2012) Partnership redefined to include LLP

Time period provided in Rule 4A for issue of invoices increased from 14 to 30 days (45 days for banks and financial institutions). Point of taxation on an invoice basis to be accordingly determined Rule 6(4A) amended to allow permissible adjustments, without any limit Option of discharging Service tax liability on a payment basis allowed for all individuals and partnership firms (including LLP) up to a taxable turnover of INR 50 lakhs, subject to specified conditions
Amendments to Point of Taxation Rules, 2011 (effective from 1 April 2012) Continuous supply of service amended to include any service provided or to be provided on a recurrent basis, for a period exceeding three months with the obligation for payment periodically or from time to time

Rule 6, in respect of continuous supply of service omitted and merged with Rules 3, 4 and 5, which deal with situations covering a change in the effective rate of tax and taxation of new services.
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Rule 2A inserted to define the date of payment as the earlier of the dates on which the payment is

entered in the books of accounts or credited to the bank account of the person liable to pay tax except in certain specified cases
A new Rule 8A inserted as a residual rule, to ascertain the point of taxation by way of best judgement where the taxpayer is unable to submit the details regarding the date of payment or date of invoice or both.
Other Amendments (effective from 1 April 2012) The dual tax structure for air transportation replaced with a uniform ad-valorem levy at a standard rate with an abatement of 60 percent on all sectors and all classes (the abatement will be subject to restriction of credit on inputs and capital goods)

Exemption from Service tax on transportation of goods by rail services provided by Government and other related exemptions extended until 30 June 2012
Amendments to Cenvat Credit Rules, 2004 (effective from 1 April 2012) Motor vehicles (except those of heading nos. 8702, 8703, 8704, 8711 and their chassis, which are only allowed in certain services) included in the definition of capital goods

Rule 4 amended to allow a service provider to take credit of inputs or capital goods on delivery of these, irrespective of whether they are brought to the premises of the output service provider or not Simplified scheme for refunds introduced for service exporters, not requiring any correlation between exports and input services used in such exports. Refund to be granted in the ratio of export turnover to total turnover Payment under Rule 6(3) on account of provision of exempt services, where separate books of accounts are not maintained, increased from 5 to 6 percent 20 percent credit restriction removed in the case of life insurance service and management of investment under ULIP Service Rule 7 for input service distributors amended to provide that

credit of Service tax attributable to service used wholly in a unit shall be distributed only to that unit and credit of Service tax attributable to service used in more than one unit shall be distributed pro-rata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates
Rule 9(1)(e) amended to allow availment of credit on tax payment challan in the case of payment of Service tax by the service receiver under the reverse charge mechanism Rule 14 amended to provide that penalty shall be imposed only where credit has been taken and utilized wrongly (effective from 17 March 2012)
Introduction of Negative List of Services (effective from a date to be notified after the enactment of the Finance Bill 2012) Introduction of Negative List of Services (effective from a date to be notified after the enactment of the Finance Bill 2012)

Section 65 (definition), Section 65A (classification), Section 66 (Charging Section) and Section 66A (services provided by a non-resident) of the Finance Act, 1994 will cease to apply New Section 65B to be inserted giving out definitions relevant under the Negative List regime A new charging Section 66B to be introduced Principles would be laid down in section 66F of the Act for interpretation wherever services have to be treated differently for any reason and also for determining the taxability of bundled services
The entire concept, including the key to understanding the various dimensions of the new taxation, together with answers to possible questions, has been provided in a detailed draft Guidance Paper Proposed Negative List

Negative list of services proposed to include:

trading of goods, any process amounting to manufacture or production of goods (whether under the Centralised Act or any State Act), sale of space or time slots for advertisements other than advertisements broadcast by radio or television. This would include sale of space for advertisements in bill boards, public places, buildings, conveyances, cell phones, automated teller machines, internet, etc. admission to entertainment events or access to amusement facilities, transmission or distribution of electricity by an electricity transmission or distribution utility, pre-school and higher education including education as a part of an approved vocational education course, services by way of renting for residential purposes,
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all modes of transportation by rail (such as metro, mono-rail, etc) other than first class and air-conditioned coaches, (including metered cabs, radio taxis or auto rickshaws, etc.), transport by road (except a goods transport agency or courier agency), toll charges, services by the Government or a local authority excluding certain specified services services by the RBI services by a foreign diplomatic mission located in India specified services in relation to agriculture betting, gambling or lotteries, service by way of extending deposits or loans in so far as consideration is by way of interest/discount and sale and purchase of foreign currency between banks, and funeral, burial, crematorium or mortuary services including transportation of the deceased.
Proposed Declared Services

To remove ambiguity, certain activities have been specifically defined by description as services and referred as Declared Services under Section 66E, namely:

renting of immovable property, construction of a complex, building or civil structure, including those intended for sale to a buyer, temporary transfer or permitting the use or enjoyment of any intellectual property right, development, design, programming, customisation, adaptation, upgrading, enhancement or implementation of information technology software (sale of pre-packaged or canned software is proposed to be treated as sale of goods), agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act, transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods (this entry would cover only activities representing the financing transaction in relation to delivery of goods on hire purchase or on installment and not actual delivery), activities in relation to delivery of goods on hire purchase or any system of payment by installments, service portion in the execution of a works contract, and service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.
Specific Abatements Proposed

Changes proposed to be introduced in the abatements along with the Negative List: S. No. 1 2 3 4 5 6 Service Convention centre or mandap with catering Pandal or shamiana with catering Coastal shipping Accommodation in a hotel etc. Railways: goods Railways: passengers Existing taxable portion (in percent) 60 70 75 50 30 New levy Proposed taxable portion (in percent) 70 70 50 60 30 30 Cenvat credit All credit, except on inputs, of chapter 1 to 22, will now be available
No credit as at present Credit on input services allowed All credit will be allowed -do-
Proposed changes to Service tax Rules, 1994 and Cenvat Credit Rules, 2004

Changes proposed in the Service tax Rules, 1994 and Cenvat Credit Rules, 2004 upon transition to the Negative List regime are as follows:
Proposed Valuation Rules

Specific Valuation Rules to be introduced to determine the valuation of services in specific cases such as works contracts, supply of food and drinks in a restaurant or outdoor catering, etc. Furthermore, certain specific inclusions/exclusions in the value of taxable services also to be introduced under such rules
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Proposed Place of Supply Rules

A new Section 66C which empowers the Central Government to make rules for determination of the place of provision of service to be introduced as Place of Supply Rules, 2012 Export of Service Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 proposed to be replaced by Place of Supply Rules Criteria to determine the place of provision of service proposed to be classified under the following heads:

Location of the service receiver Place of performance of services (primarily involving services related to any goods) Location of immovable property Place the where event is held (in the case of event related services)
Where both the service provider as well as the recipient are located within the taxable territory then notwithstanding any of the above criteria, the place of provision of service is to be the location of the recipient of service Special Rules proposed in respect of the following services:
Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders Telecommunication services provided to subscribers Online information and database access or retrieval services Intermediary services Service consisting of hiring of means of transport, up to a period of one month Goods transportation service Passenger transportation service Services provided on board a conveyance Excise
2. Excise
General Peak rate of excise duty for non-petroleum products increased from 10 percent to 12 percent

Concessional rate of 5 percent increased to 6 percent Concessional rate of 1 percent imposed on 130 items in last Budget increased to 2 percent (except on coal, fertilisers, jewellery and mobile handsets) The aforesaid rate changes are effective from 17 March 2012
Amendments (effective from 17 March 2012) Specified processes in relation to certain goods deemed to be manufactured, by way of insertion of Chapter Notes in the relevant Chapters, including the following: S. No. 1 2 3 Specified Processes Matching, batching and charging of batteries or the making of battery packs Cutting, slitting and printing Oiling and pickling Goods Lithium ion batteries Aluminium foil Specified flat rolled products of iron or non-alloy steel
For cigarettes the activity of packing, repacking, labeling, relabeling including declaration or alteration of RSP shall be deemed to be manufacture
Amendments (effective 1 from April 2012) Inter-unit quarterly transfer of unutilised credit of ADC permitted to manufacturers
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Amendments (effective from the date of enactment of the Finance Bill, 2012) Benefit of reduced penalty available, only where this is also paid with excise duty and interest, within a period of 30 days

Penal, search and seizure provisions aligned with Customs laws. The threshold of excise duty liability for imprisonment for offences under excise laws increased from INR 1 lac to INR 3 lac Offences punishable with imprisonment of three years or more to be cognisable Search to be carried out according to the procedures laid down under the Code of Criminal Procedure
Rate changes (effective from 17 March 2012) Rates of automobiles/chassis increased as follows:
Small cars (length not exceeding four metres) with engine capacity of 1200cc (petrol/ LPG/ CNG)/1500cc (diesel) increased from 10 percent to 12 percent Other cars with engine capacity not exceeding 1500cc increased from 22 percent to 24 percent and for those with engine capacity exceeding 1500cc from 22 percent plus INR 15,000 to 27 percent Duty rate of chassis with engines for specified automobiles increased from 10/22 percent plus INR 10,000 to 15/ 25 percent
Duty structure on cement has been restructured as follows:
Packaged cement manufactured from mini cement plants/other than mini cement plants liable to 6/ 12 percent plus INR 120 per tonne Unpackaged cement and cement clinker liable to 12 percent Specified cement (e.g. Portland) also notified for RSP based assessment with 30 percent abatement
Rate of footwear rationalised into two bands (instead of three bands previously):

Footwear of RSP up to INR 500 exempted (threshold was INR 250 previously) Footwear exceeding RSP of INR 500 liable to 12 percent (previously footwear with RSP between INR 250 to INR 750 and footwear with RSP exceeding INR 750 attracted duty of 5 percent and 10 percent respectively)
Duty rate increased from 10 to 12 percent on ready-made garments and textile articles with corresponding increase in abatement from 55 to 70 percent Exemption granted to specified food preparations containing fruits and vegetables which are prepared and served in hotels, restaurants, retail outlets etc. (irrespective of where they are consumed) Exemption extended to parts and testing equipment for maintenance, repair and overhaul of aircraft, tyres used in aircraft subject to specified conditions Duty rate reduced from 10 to 6 percent on LED lamps, processed food products of soya, specified parts of hybrid vehicles etc. Concessional duty rate of 2 percent (without Cenvat credit) extended to parts and accessories (namely memory cards, PC cables, battery chargers, and headphones) of mobile phones (other than those cleared to a manufacturer of mobile phones) Duty structure on tobacco products restructured. Now, cigarettes have been notified for RSP based assessment with 50 percent abatement, in addition to the existing specific rates. Furthermore, the rate of duty under the compounded levy scheme on pan masala, chewing tobacco, guthka etc. increased Cess on crude petroleum (levied as duty of Excise) increased from INR 2,500 per metric tonne to INR 4,500 per metric tonne
Others Exemption period of ten years for units undertaking substantial expansion in Jammu and Kashmir to be computed from the date of commercial production utilising such expanded capacity (amendment made retrospectively)
3. Customs
General Peak BCD rates remain unchanged

Excise duty increase from 10 to 12 percent increases the corresponding CVD on imports Exemption from Education Cess and Secondary and Higher Education Cess on CVD provided In view of the above, the general effective customs duty rate increases from 23.89 percent (capital goods)/26.85 percent (other goods) to 25.85 percent (capital goods)/28.85 percent (other goods)
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| Budget Proposals
Amendments (effective from 17 March 2012) Exemption from BCD for Liquefied Natural Gas and Natural Gas, if imported by a power generating company

Exemption from ADC on all items of machinery including prime movers, instruments etc. and components required for setting up of a solar thermal power generation project or facility Exemption from customs duty on pneumatic tyres (new or retreaded) for aircraft Concessional rate of 5 percent BCD for raw materials, intermediates required for manufacture of parts of blades for rotors of wind operated generators Exemption from customs duty on tunnel boring machines and parts, and components for assembly of the above Exemption from customs duty on specified equipment such as tunnel excavation and lining equipment for construction of roads Exemption from customs duty extended to equipment used for road projects awarded by the Metropolitan Development Authority Exemption from customs duty extended to parts, components and sub-parts of parts and components for manufacture of memory cards for mobile phones. However, exemption from ADC is available until 31 March 2013 Existing ADC exemption on parts and components for manufacture of mobile phones, PC connectivity cables, etc. and sub-parts and components for manufacture of such parts extended up to 31 March 2013 Exemption from ADC extended to LEDs for manufacture of LED lamps Exemption from BCD extended to LCD and LED TV panels of 20 inches and above Exemption from BCD limited to digital still image video cameras of specified features/capabilities Exemption from BCD and ADC and concessional CVD of 6 percent on Lithium Ion Automotive batteries for manufacture of Lithium Ion battery packs supplied to manufacturers of hybrid/electric vehicle Exemption from BCD and ADC and concessional CVD of 6 percent on specified parts of hybrid vehicles Concessional rate of 7 percent BCD on train protection and warning systems .5 BCD on Completely Built Units of large cars/MUVs/SUVs permitted for import without type approval (value exceeding USD 40,000 and engine capacity exceeding 3000 CC for petrol and 2500 CC diesel) increased from 60 to 75 percent Complete exemption from customs duty on import of parts and testing equipment by a third party MRO facility for aircraft CVD for dredgers imported on a lease and contractual basis rationalised and complete exemption from ADC extended Complete exemption from BCD for coal mining projects Duty free allowance under Baggage Rules increased from INR 25,000 to INR 35,000 for passengers of Indian origin and from INR 12,000 to INR 15,000 for children up to ten years of age
Many of the above exemptions/concessions are subject to prescribed conditions. Amendments (effective from 1 May 2012) For claiming exemption of ADC (under Notification No 21/2012-Cus dated 17 March 2012) on imported:

pre-packaged goods intended for retail sale; mobile phones; patent and propriety medicine; and ready-made garments and watches,
The state of destination where such goods are intended to be sold for the first time and VAT registration number of that State needs to be declared by the importer. Amendments (effective from the date of enactment of the Finance Bill, 2012) Customs Act, 1962 Provisions introduced for recovery of duties from a person who has fraudulently obtained instruments (such as scrips, licenses, etc.) under Foreign Trade Policy, including provisional attachment of property

Central Government to specify class or classes of importer required to pay customs duty electronically Offences under the Customs Act, 1962 made non-cognisable and bailable (except an offence punishable with imprisonment of three years or more) Monetary limits for adjudication of cases at specified levels involving confiscation of goods and imposition of penalty increased Exemption from CVD granted retrospectively to foreign going vessels for the period prior to 1 March 2011 to 16 March 2012
| Budget Proposals
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Customs Tariff Act, 1975 The Central Government empowered to continue levy of safeguard duty on imports from China, irrespective of the amount of import
4. Goods and Services Tax

No date for implementation for GST announced Drafting of model legislation for the Centre and State GST in consultation with States underway GST Network (GSTN), IT portal for GST to become operational by August 2012
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Recent policy and legislative developments
Foreign Direct Investment Policy and Foreign Exchange Management Act, 1999
1. FDI Policy Key amendments
The Government of India has introduced a series of measures to further liberalise the FDI policy, aimed at increasing FDI inflows and making the policy transparent and investor friendly. Some of these key policy and sectoral changes are summarised below: FDI in Single Brand Retail Trade The DIPP issued a Press Note permitting up to 100 percent FDI in SBT under the Government Approval Route, with the following pre-conditions:

Products to be sold should be of a single brand only, and should be sold under the same brand internationally; Products should be branded during manufacturing; The foreign investor should be the owner of the brand; and For proposals involving FDI beyond 51 percent, mandatory sourcing of at least 30 percent of the value of products sold should be undertaken from Indian small industries (units having total investment in plant and machinery not exceeding USD 1 million).
FDI in Limited Liability Partnerships The DIPP issued the much awaited Press Note permitting up to 100 percent FDI in LLPs under the Government Approval Route. FDI has been allowed in LLPs engaged in sectors/activities where 100 percent FDI is allowed through the automatic route and there are no FDI-linked performance related conditions. LLPs with FDI will not be allowed to operate in agricultural, plantation, print media and real estate or undertake any downstream investments. Foreign capital contribution in LLPs would need to be through inward remittances through normal banking channels/debit to a NRE/FCNR bank account in India. Foreign Institutional Investors and Foreign Venture Capital Investors are not permitted to invest in LLPs. Conversion of an existing Company with FDI into an LLP will be allowed, subject to satisfaction of prescribed conditions, with prior Government approval. Key changes in sectoral policy Agriculture - 100 percent FDI permitted in Apiculture under defined controlled conditions; Terrestrial Broadcasting FM (FM Radio)- FDI limit has been increased to 26 percent from 20 percent; Construction and development activities- FDI in the Education sector and old-age homes exempted from conditions relating to minimum built-up area/capitalisation and lock-in period; Industrial Parks - Definition of industrial activity enlarged to include Research and Development in biotechnology, pharmaceuticals and life sciences; Pharmaceutical Sector FDI in brownfield projects (i.e. investment in existing companies) would now fall under the Government Approval Route. FDI up to 100 percent under the automatic route would continue to be permitted for greenfield investments. Issue of shares for consideration other than cash The DIPP introduced changes in the FDI Policy that permits issue of equity/equity convertible instruments against import of capital goods/machinery/equipment (including second-hand machinery) and pre-operative/pre-incorporation expenses, under the Government Approval Route. The approval would be granted subject to satisfaction of prescribed conditions, including compliance with pricing guidelines and other reporting requirements. FDI in existing Joint Ventures/technical collaborations The FDI policy has done away with the requirement to obtain prior Government Approval for new ventures/technical collaborations by non-residents with existing joint ventures/technical collaboration in the same field as of 12 January 2005. Furthermore, for ventures/technical collaboration after 12 January 2005, the requirement for incorporating a conflict of interest clause in the Joint Venture Agreement has also been done away with. Qualified Foreign Investors allowed to directly invest in equity market The Government of India has permitted QFIs to invest in the Indian equity market subject to certain operational and procedural guidelines. Under the earlier regime, QFIs were permitted to directly invest only in Indian Mutual Fund schemes. Both the market and banking regulators have issued detailed Circulars for operation of this Scheme.
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| Recent policy and legislative developments
2. Procedural and administrative relaxations

The RBI issued a series of circulars/instructions liberalising reporting/compliance and other norms, and some of these key changes are as follows: Opening of Escrow Accounts for FDI transactions For providing operational flexibility, the RBI has permitted Authorised Dealers to open and maintain a non-interest bearing Escrow Account (in Indian rupees) on behalf of a resident/ non-resident towards payment of share purchase consideration, subject to satisfaction of certain conditions. SEBI authorised depository participants have also been authorised to open and maintain an Escrow Account for securities, subject to certain conditions. The above facility has been extended to both fresh issue of shares to non-residents as well as transfer of shares from/to a non-resident. The Escrow Account shall remain operational for a maximum period of six months, and specific permission from the RBI would be required for any extension. Pledge of shares of an Indian Company by a non-resident RBI has permitted Authorised Dealers to allow the pledge of shares of an Indian Company held by non-residents in favour of Indian/overseas banks, subject to certain conditions. Shares can be pledged in favour of Indian banks to secure credit facilities for the Investee Company for bona fide business purposes. Shares may be pledged in favour of an overseas bank to secure credit facilities for a non-resident/its group company for genuine business purposes overseas and not for any investments directly or indirectly in India. Relaxation in norms for transfer of shares It has been provided that RBI approval for transfer of shares of Indian companies shall no longer be required in the following cases:

Transfer between a non-resident to a resident or vice-versa in the case the pricing norms under FEMA are not satisfied, provided the original/resultant investments are otherwise compliant with the extant FDI policy/FEMA and pricing for transaction is compliant with specific/explicit, extant and relevant SEBI regulations/guidelines. Transfer of shares by a resident to a non-resident
In the case the transfer requires prior approval of the FIPB, subject to obtaining the FIPB approval and compliance with stipulated pricing and documentation guidelines prescribed by the RBI; In the case of transfer of shares attracting SEBI (SAST) guidelines, subject to the adherence to pricing/documentation guidelines specified by the RBI; and In cases where the investee company is in the financial sector, subject to obtaining a no-objection certificate from the respective financial sector regulators of the investee company/transferor and transferee entities and compliance with applicant requirements of the FDI policy and FEMA.
Overseas Direct Investment Regulations To provide operational flexibility to Indian Corporates with ODI, the RBI introduced the following key changes:

In relation to Performance guarantees issued by the Indian party to/on behalf of the Overseas JV/WOS, only 50 percent of the amount of such guarantees would be reckoned for computing financial commitment; The RBI has permitted Indian parties to write-off up to 25 percent of investments in the JV (holding at least a 51 percent stake)/WOS under the Automatic Route (for listed Indian parties) and the Approval Route (for unlisted Indian parties); and The RBI has permitted the Indian parties to extend a corporate guarantee on behalf of their first generation step down operating company under the Automatic Route irrespective of whether the direct subsidiary is an operating company or Special Purpose Vehicle.
External Commercial Borrowings Considering the specific needs of the industry, especially the infrastructure sector, the RBI has liberalised extant ECB policy by issuing a series of Circulars. The key changes are as follows:

Infrastructure Sector
Indian Companies have been permitted to utilise 25 percent of fresh ECB proceeds towards refinancing of Rupee loan/s availed from the domestic banking system under the Approval Route, subject to certain conditions. Indian Companies have been permitted to import capital goods by availing short term credit (including buyers/ suppliers credit) in the nature of bridge finance with prior RBI approval, subject to certain conditions. IDC would be considered as a permissible end-use, subject to the IDC being capitalised and part of the project cost. Indian Companies have been permitted to avail ECBs in Chinese Currency Renminbi (RMB), under the Approval Route, subject certain conditions with an annual cap of USD one billion (to be further reviewed by the RBI).
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Other relaxations/amendments:
Enhanced limits for ECB under the Automatic Route: Eligible Borrowers Real Estate Sector Corporate(s) in specified services, namely Hotels, Hospitals and Software Current Limit (per financial year) USD 500 million or equivalent USD 100 million or equivalent Enhanced Limit (per financial year) USD 750 million or equivalent USD 200 million or equivalent
A few other procedural changes have been introduced in relation to draw down of ECB from foreign equity holders (both direct and indirect) and Group companies, and the definition of the terms debt-equity ratio and free reserves for the purpose of ECB norms.
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Direct Taxes
1. Tax enforcement measures
India has shown definitive signs of increasing the information flows for tightening tax compliance and plugging the loops on tax colourable devices being used. To this end, India has signed agreements for information exchange and also increased reporting measures, as follows: Tax Information Exchange Agreements India has notified tax information exchange agreements with the Isle of Man, Bahamas, British Virgin Island and Cayman Islands. These agreements are expected to facilitate smooth exchange of information on tax matters. Multilateral Agreements India has signed a multilateral convention on Mutual Administrative Assistance for mutual assistance in tax matters. There are 32 signatories to this convention including Australia, the UK, USA, Germany, Japan etc., which aims to develop a broader multilateral approach to improve the effectiveness of exchange of information, co-operation between the countries in the assessment and collection of taxes, with a view to combating tax avoidance and evasion. Report of activities of Liaison Offices to the Income tax department The CBDT notified Form 49C via which non-residents having Liaison Offices in India are required to submit prescribed annual statements in respect of their activities to the tax authorities within 60 days from the end of the financial year. Thus the CBDT has mandated the verification of the statements by a Chartered Accountant or authorised signatory of the non-resident entity. Furthermore, Form 49C has to be submitted in electronic form along with a digital signature.
2. Widening of treaty network

India has shown a focus on entering into tax and social security agreements to equalise the burden on tax and social security payments for corporates and individuals, which is a welcome measure. Double Taxation Avoidance Agreements (tax treaties) During the year India signed tax treaties with Ethiopia, Tanzania, Mozambique, Lithuania, Georgia, Uruguay and Taipei. India also amended protocols to the tax treaties with Singapore and Australia. Social Security Agreements The Government of India has entered into Social Security Agreements entered with the Republic of Korea, Switzerland, Denmark, Luxembourg, France, the Netherlands and Germany. These agreements are expected to avoid double payment of social security contributions in the home and the host country. This will result in substantial cost saving in respect of deputation arrangement of employees leading to increase in economic activities between the countries. Furthermore, signing of the Korean treaty seems to indicate opening up of the Asian Sector, which should benefit sectors like Auto and Technology where there is a significant movement of Employees from and to India.
3. Procedural and administrative measures

The Government has notified certain measures which indicate an ABC approach in scrutiny and increase in tools to get information on hand before such scrutiny. Additionally, the measures also include procedural changes.
4. Information and scrutiny

Submission of Permanent Account Numberfor certain specified transactions There is an increase in number of transactions for which PAN has to be specified with effect from 1 July 2011. For instance, an application made for issue of a debit card, purchase of bullion or jewellery for a bill value of INR 5 lakhs or more are covered transactions. Procedure for processing of returns filed under the Central Processing of Returns Scheme, 2011 The CBDT notified guidelines and clarifications on the manner in which tax returns filed electronically by taxpayers would be processed and clarified other related matters. The notification is effective form 4 January 2012. New PAN application The CBDT notified the introduction of separate PAN applications for different categories of applicants with effect from 1 November 2011. According to the amended rules, it is mandatory to provide the KYC details in Form 49AA which is the new PAN application for individuals not being a Citizen of India, LLP Companies, Firms, Trusts, Associations of Persons, Bodies of , Individuals, formed or registered outside India.
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5. Withholding taxes
Procedure for regulating refund claims for the period up to 31 March 2010 The new procedure has been prescribed for regulating refund of excess amount of tax withheld on residents on amounts covered under various withholding provisions (Section 192 to Section 194LA of the Act), for the period up to 31 March 2010. The Circular restricts the period for claim up to two years from the end of the financial year in which tax was deductible at source. Issue of TDS Certificates and option to authenticate the same by way of digital signature The CBDT issued a circular amending the mode of issue of TDS certificates in order to eliminate mismatches between Form 16A and Form 26AS. The circular, which came into effect on 13 May 2011, mandates certain categories of deductors, such as banks, to issue Forms 16A which are generated by the central TIN system. However, other categories of deductors have only been granted an option in this regard. Furthermore, the system generated TDS certificates can be authenticated either by digital signature or manual signature. However, non-system generated Forms 16A would mandatorily require manual authentication. Grant of withholding tax credit to persons other than deductees The CBDT has amended the due date for filing withholding tax statements for Government deductors and mandated submission of particulars in cases of non-deduction of TDS on account of receipt of NIL tax liability declaration from the payees. Furthermore, the notification effective from 1 November 2011, confirmed the availability of TDS credit to the person in whose hands income was assessable and not the deductee.
6. Other developments
Tax Accounting Standards on construction contracts and Government Grants The Ministry of Finance issued a discussion paper on the draft TAS on construction contracts and Government grants. The key highlights discussed in the draft are as follows:

Construction Contracts:
It mandates the use of the percentage of completion method for revenue recognition on construction contracts. Accordingly, use of the completed contract method may no longer be permitted for tax purposes; It does not provide for recognition of expected losses on onerous construction contracts; It precludes any incidental income in the nature of interest, dividend or capital gains from being reduced from the contract cost. However, incidental income, other than interest, dividend or capital gains can be reduced from the costs, if such income is not a part of the contract revenue.
Government Grants:
It does not permit the capital approach for recording government grants. Accordingly, the current practice of recording grants in the nature of promoters contribution or grants related to non-depreciable assets, directly in shareholders funds as a capital reserve will not be permitted under the TAS; Under the TAS, all grants will either be reduced from the cost of the asset; or recorded over a period as income; or recorded as income immediately; depending on the nature of the grant; and Unlike AS 12, the TAS provides that the initial recognition of the grant cannot be postponed beyond the date of actual receipt. AS 12 specifically provides that mere receipt of a grant is not necessarily conclusive evidence that conditions related to the grant will be fulfilled.
Special provisions for payment of tax by Limited Liability Partnerships The CBDT notified the report of the accountant which would have to be furnished by a LLP as a certification for the computed adjusted total income and alternate minimum tax. The report in Form 29C would be effective from 1 April 2012. Tax exemption on revised interest of 9.5 percent earned on Provident Fund accounts The Ministry of Finance issued a notification fixing the rate at 9.5 percent for exemption of interest earned by an employee participating in a Recognised Provident Fund. The notified rate is retrospectively effective from 1 September 2010. The notification issued superseded the earlier notification dated 26 August 2010, wherein the interest rate was 8.5 percent.
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Companies Act
1. The Companies Bill 2011
The Companies Bill, 2011, presented in the Lok Sabha on 14 December 2011, proposed significant changes to the existing corporate law provisions. The Government had undertaken consultations with various bodies and had considered recommendations of the J J Irani Committee for finalising the revamped law. Some of the salient features of the Bill are as follows: Incorporation & incidental matters The maximum number of members in the case of a private company is increased from the existing 50 to 200

The Financial Year of any company can only end on 31 March and only companies that are a holding/subsidiary of a foreign entity can have a different financial year with the approval of a Tribunal The new concept of a One Person Company, small companies and dormant companies has been introduced in the Companies Bill 2011 with relaxations with regard to compliances.
Audit & Auditor Every individual or a firm appointed as auditors of a company shall hold office for five years. In the case of listed companies and certain other classes of companies as may be prescribed, compulsory rotation of individual auditors in every five years and of audit firms every ten years has been provided

In addition to accounting standards, auditing standards have also been made mandatory Companies having subsidiaries are required to prepare consolidated financial statements of the company and all the subsidiaries, to be presented at the AGM.
Mergers & Acquisitions Mergers and amalgamation with a foreign company (incorporated in a notified jurisdiction) is now permissible subject to rules prescribed by the Central Government in consultation with the RBI. Subject to prior approval of the RBI, a foreign company may merge or amalgamate into a company registered under this Act or vice versa

Mergers and amalgamation between two small companies or between holding company and its wholly owned subsidiary or prescribed class of companies have now been modified without the requirement of the Court process Objection to the compromise or arrangement shall only be made by persons holding at least 10 percent of the shareholding or having outstanding debt of at least 5 percent of the total outstanding debt as per the latest audited financials.
Directors Every company shall have at least one director resident in India for at least one hundred and eighty two days. In prescribed class or classes of companies, there should be at least one woman director

The maximum limit of directors in the Company has been increased to 15 from 12, as provided in the Companies Act, 1956 A person cannot become a director in more than 20 companies, instead of 15 as provided in the Companies Act, 1956 and out of this 20, he/she cannot be director of more than ten public companies Concept of independent directors has been introduced for the first time in Company Law. At least one-third (33 percent) of the Board should comprise independent directors An independent director shall be entitled to only a sitting fee, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members. Independent directors shall not be entitled to any stock options
Dividends The Companies Bill dispenses with the requirement for transfer of a fixed percent of profits to reserves before declaring dividends every year and leaves the discretion in the hands of the company declaring dividends. Deposits The deposits accepted before the commencement of this act shall be repaid along with interest thereon within a period of one year. Extension of time for repayment may be granted by the Tribunal on an application made in this regard.
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Board Meetings Participation of directors at Board Meetings has been permitted through video-conferencing or other electronic means subject to fulfillment of other requirements

Besides the Audit Committee, the constitution of Nomination and Remuneration Committee has also been made mandatory in the case of listed companies and such other class or description of companies as may be prescribed.
General Meeting The first AGM of the Company shall be held within the period of nine months from closure of its first financial year instead of 18 months from the date of the incorporation, as provided in the Companies Act, 1956

The provisions of the Postal Ballot shall be applicable to all the companies whether listed or unlisted, on all such matters which shall be prescribed by the Central Government To encourage wider participation of shareholders at General Meetings, the members have been permitted to exercise their vote at meetings by electronic means.
Corporate Social Responsibility Every company having net worth or turnover or a net profit of rupees five hundred crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board

Every company shall spend at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in every financial year in pursuance of its Corporate Social Responsibility Policy.
Others The concept of class action suits has been introduced in the Companies Bill to protect the interest of the members, depositors and creditors

Companies may now issue a Global Depository Receipt by passing a special resolution and subject to such conditions as may be prescribed The concept of Secretarial Standards has now been introduced in the Companies Bill requiring every company to observe such Secretarial Standards as may be prescribed In the case of a change in number of shares held by promoters and top ten shareholders in a listed company, then such company is required to file a return within 15 days with the Registrar informing about such change.
2. Other Developments
Service of Document by Companies to its members A company will have complied with Section 53 of the Companies Act, 1956 if the service of document has been made through an electronic mode. Companies (Passing of Resolution by Postal Ballot) Rules, 2011 (New Rules) The Central Government has issued a new set of rules for passing resolutions by Postal Ballot which will supersede the Principal Rules. The new rules provide for definition of voting by an electronic mode. It also specifies electronic mail as a mode of sending notice. Preferential Allotment Rules for Unlisted Companies The Amendment to Preferential Allotment Rules for Unlisted Companies does not replace the former Rules of 2003 but makes a few significant additions. The definition now specifically includes allotment of convertible instruments including hybrid instruments convertible into shares

A special resolution is required to issue a convertible instrument including hybrid instruments convertible into shares The offer for preferential allotment cannot be made to more than 49 persons The application money should be kept in a separate bank account and should not be utilised prior to allotment Allotment of securities should be completed within 60 days from the receipt of application money. If not so allotted, the company should repay application money within 15 days thereafter, failing which it should be repaid along with interest at 12 percent per annum.
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Indirect Taxes
1. Customs
Enhanced concessions in trade with various countries Effective from 1 January 2012, various Free Trade Agreements have been amended to provide lower customs duties for specified imports from Malaysia, Sri Lanka, Pakistan and Korea. Imports from Philippines will also get the benefit of concessional customs duty under the agreement with ASEAN. The agreement with Japan signed in February 2011, was made effective from 1 August 2012 to provide gradual phasing out of customs duties over a period of ten years. Changes to give effect to the concept of Self Assessment The Union Budget 2011 introduced the concept of Self- Assessment for imports/exports in place of assessment by Customs authorities. The objective of this amendment was to move towards trust based compliance in the case of a majority of imports/exports. As a further step towards transition to the self assessment scheme, certain existing regulations were replaced and new regulations were introduced. These changes are summarised below:

On-Site Post Clearance Audit Earlier, Customs officers followed a transaction based post audit which was conducted at the Customs port. Now, verification of the declarations/assessments will be undertaken by Customs authorities at the premises of the importer/ exporter. Bill of Entry and Shipping Bill Regulations To give effect to the concept of Self Assessment the Bill of Entry (Electronic Declaration) Regulations, 2011 and Shipping Bill (Electronic Declaration) Regulations, 2011 are introduced. Provisional Duty Assessment Regulations Similarly, the Customs (Provisional Duty Assessment) Regulations, 2011 are introduced to extend the facility of provisional assessment to cases where the importer/exporter is unable to make self assessment. Customs Manual Customs Manual on Self Assessment 2011 was issued to guide the importers/exporters on the concept of Self Assessment.
Introduction of Authorised Economic Operator Scheme In order to ensure security in the global supply chain of the movement of goods, the AEO Scheme was notified. The AEO Scheme, adopted by various countries across the globe, traces its origins from the Standards to Secure and Facilitate Global Trade or SAFE Framework adopted by World Customs Organisation to secure and facilitate global trade. Under the AEO Scheme, benefits such as simplified clearance procedures and reduced Customs intervention in relation to clearances of goods are extended. New Drawback schedule notified The Central Government notified a new schedule of Duty Drawback rates in October 2011. Items covered under the earlier DEPB scheme are also covered in the new Drawback Schedule.
2. Foreign Trade Policy

Introduction of Special Bonus Benefit Scheme This new post-export benefit scheme has been introduced to provide special assistance to engineering, pharmaceutical and chemical sectors, for exports made between the period 1 October 2011 and 31 March 2012. Duty Credit under SBBS was available at the rate of 1 percent of FOB value of exports. Introduction of Special Focus Market Scheme This new scheme aims to increase the competitiveness of exports with a geographical target. SFMS provides additional credit of 1 percent when exports are made to specified countries.
3. Excise
Cenvat credit on input services may be availed immediately on receipt of the invoice Rule 4 of Cenvat Credit Rules, 2004 was amended with effect from 1 April 2011 to provide for claim of Cenvat credit on the input services immediately on receipt of the invoice/bills from the input service providers, provided the payment to the service provider is made within three months. In the case the payment is not made to the input service provider within three months, the Cenvat credit availed is required to be reversed, which may be availed again when the payment is made. This facility is not available in cases of liability under the reverse charge mechanism and in the case of import of services where the Cenvat credit can be availed only after making payment to the service providers towards the value of services and the payment of service tax thereon.
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Mandatory levy of excise duty is not applicable to certain branded garments The CBEC has clarified that the mandatory levy of excise duty is not applicable to garments manufactured for supply to schools, private security guards, companies, hotels, airlines etc., in the case such garments bear the name or logo of such schools, private security guards, companies, hotels, airlines etc. It has also been clarified that mere affixing of the name of the tailor or manufacturer would not constitute a brand name. Electronic filing of central excise returns made mandatory for all taxpayers The Central Excise Rules, 2002 and the Cenvat Credit Rules, 2004 were amended to provide for mandatory electronic filing of central excise returns with effect from 1 October 2011, irrespective of the amount of payment of duty/turnover.
4. Service Tax
Point of Taxation Rules The Point of Taxation Rules, 2011 introduced with effect from 1 April 2011 shifted the point of taxation of services (the point in time when service tax becomes payable) to the issue of invoice or completion of service or receipt of payment. Separate rules have been framed for continuous service (where services provided under an agreement are for a period more than three months), import and export of services and services received from foreign associated enterprises. Concept Papers on Taxation of Services based on Negative List While presenting the Union Budget 2011, the Finance Minister had proposed to tax services based on a small negative list. It was also proposed to initiate a public debate on this subject to finalise the approach to GST. Accordingly, two Concept papers (August 2011 and another revised concept paper in November 2011) for taxation of services based on a negative list were released in the public domain for consultation, debate and to seek views and feedback of all stakeholders .It is widely expected that the Central Government will introduce taxation of services on the basis of a negative list in the Budget 2012. Construction and Infrastructure

Service Tax-Under different Construction Model In view of the various business models and complex nature of transactions in the real estate and construction sector, CBEC came out with clarifications vide a Circular clarifying applicability of Service Tax on various construction models. Amongst other Models, it was clarified that in the case of Joint Development Arrangements, the joint venture/the new entity formed for development (new entity) would be treated as a separate person for the purpose of provision and receipt services. Accordingly, the transactions between the new entity and the landowner and the builder/developer would be a taxable service. A beneficial clarification was in respect of redevelopment projects, where it has been clarified that transactions should not attract service tax when properties are allowed to the existing owners/society. Service Tax on Renting of Immovable Property Service
After the retrospective amendment in the definition of renting of immovable property to tax renting per se vide Budget 2010, various High Courts including Orissa, Bombay and Gujarat upheld the validity of levy of Service Tax and the validity of retrospective amendment The Division Bench of Delhi High Court referred the Home Solutions Case of 2010 to a Larger Bench, which over ruled the decision in the case of Home Solution Retail India Ltd & Ors rendered by the Division Bench and concurred with the findings of the above High Courts and held that both the levy and the retrospective amendment is valid In October 2011, the Supreme Court, in the case of Retailers Association and others ruled that Service Tax on commercial rentals for retailers would be applicable with retrospective effect from April 2007 and the petitioners will have to pay half of their liabilities within six months in three installments. The Apex Court will take a decision regarding the balance liabilities after final hearing on the matter.
Constitutional validity of Service Tax on construction of buildings through the concept of deemed service Recently, the Bombay High Court, in the decision of Maharashtra Chamber of Housing Industry and others dismissed various writs filed by Maharashtra Chamber of Housing Industry and various Builders challenging the constitutional validity of levy of Service Tax on construction of buildings through the concept of deemed service. The Court held that the levy is not a tax on land/immovable property and is within the legislative competence of the Parliament.
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Glossary
ADC- Additional Duty of Customs AEO - Authorised Economic Operator AGM Annual General Meeting AMT - Alternate Minimum Tax AO Assessing Officer AOP Association of Person APA Advance Pricing Agreements AS Accounting Standards ASEAN Association of South East Asian Nations AY Assessment Year BCD - Basic Customs Duty BOI Body of Individuals CBDT Central Board of Direct Taxes CBEC Central Board of Excise and Customs CENVAT- Central Value Added Tax CIT - Commissioner of Income tax CIT(A) Commissioner of Income-tax (Appeals) CNG-Compressed Natural Gas CSO - Central Statistical Organisation CVD- Countervailing Duty DDT Dividend Distribution Tax DEPB - Duty Entitlement Pass Book DIPP Department of Industrial Policy and Promotions DRP Dispute Resolution Panel DTC Direct Taxes Code, 2010
ECB - External Commercial Borrowings FCCB- Foreign Currency Convertible Bonds FCEB- Foreign Currency Exchangeable Bonds FCNR Foreign Currency Non-Resident FDI Foreign Direct Investment FEMA Foreign Exchange Management Act, 1999 FII-Foreign Institutional Investors FIPB - Foreign Investment Promotion Board FMV-Fair Market Value FOB Free on Board GAAR General Anti-avoidance Rules GDP-Gross Domestic Product GST - Goods and Service tax HUF Hindu Undivided Family IDC Interest during construction IIP-Industrial Production IPO-Initial Public Offer JV Joint Venture KYC Know Your Customer LLP Limited Liability Partnership LNG Liquefied Natural Gas MAT Minimum Alternate Tax MRO- Maintenance Repair and Overhauling NCAER-National Council of Applied Economic Research NRE - Non Resident External
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ODI - Overseas Direct Investment PAN - Permanent Account Number PE Permanent Establishment PSU- Public Service Undertakings QFIs - Qualified Foreign Investors RBI Reserve Bank of India RSP- Retail Sale Price SBBS - Special Bonus Benefit Scheme SBT - Single Brand Retail Trade SEBI Securities and Exchange Board of India SEZ Special Economic Zone SIDBI-Small Industries Development Bank of India SFMS - Special Focus Market Scheme SME Small and Medium Enterprises STT-Securities Transaction Tax
TAS - Tax Accounting Standards TCS Tax Collected at Source TDS Tax Deducted at Source TIN Tax Information Network The Act Income-tax Act, 1961 TPO Transfer Pricing Officer TRC- Tax Residency Certificate ULIP- Unit Liked Insurance Plan UTI- Unit Trust of India VAT- Value Added Tax VCC Venture Capital Company VCF Venture Capital Fund VCU Venture Capital Undertaking WOS - Wholly-owned subsidiary
KPMG in India
Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F Palal Towers , M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block EP & GP Sector V , Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3058 5764/65 Fax: +91 20 3058 5775
Contact us
Dinesh Kanabar Deputy CEO & Chairman Tax T: + 91 22 3090 1661 E: dkanabar@kpmg.com Uday Ved Head of Tax T: + 91 22 3090 2130 E: uved@kpmg.com
kpmg.com/in
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Printed in India.

KPMG Budget 2012

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KPMG Budget 2012

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Navigating Economic Challenges

Union Budget 2012

Recent Policy and Legislative Developments

Despite positive triggers, Indian economy in slow lane

Focus on containing price pressures: the cause

Quarterly GDP Growth (Y-o-Y, %)

Quarterly Sectoral Growth (Y-o-Y, %)

Source: Office of the Economic Adviser

WPI Growth (Y-o-Y, %)

IIP Growth (Y-o-Y, %)

This resulted in discouraged investment and consumption...

Source: Calculations based on CSO data

FII Inflow (USD billion)

Exchange Rate - INR/USD

Source: SEBI and Oanda

Merchandise Trade Growth (Y-o-Y, %)

Direct Tax Highlights

Indirect Tax Highlights

Budget 2012 - Tax Rate Card

Seller Seller Purchaser Seller Seller

Interest on FCCB, FCEB /dividends on GDRs(c)

20% / 10% (b)

10% 20% / 10%

3. Non-resident related provisions

7. Other Tax Proposals

Provision relating to withholding tax:

Change in composition rates proposed for the following:

Negative list of services proposed to include:

Proposed Declared Services

Specific Abatements Proposed

Proposed Valuation Rules

Proposed Place of Supply Rules

Duty structure on cement has been restructured as follows:

4. Goods and Services Tax

Recent policy and legislative developments

| Recent policy and legislative developments

2. Procedural and administrative relaxations

| Recent policy and legislative developments

| Recent policy and legislative developments

2. Widening of treaty network

3. Procedural and administrative measures

4. Information and scrutiny

| Recent policy and legislative developments

| Recent policy and legislative developments

| Recent policy and legislative developments

| Recent policy and legislative developments

2. Foreign Trade Policy

| Recent policy and legislative developments

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