pwc analysis - india budget 2012

Reviving the India growth storyUnion Budget 2012

Contents

Introduction

Economic Performance 2011-12

Key Policy Announcements

Budget Financials

Direct Tax Proposals

Indirect Tax Proposals

Abbreviations

Page 04

Page 06

Page 12

Page 14

Page 16

0

Page 44

4 PwC

In the words of the Finance Minister,

The year 2011-12 has been tough with the Indian economy reporting a growth of 6.9%. This is a significant decline as compared to past

few years. Despite the slow down, driven largely by the uncertain global economic scenario, India remains among the frontrunners, globally, in any cross-country comparison. Numerous indicators suggest that the economy is turning around as core sectors as well as manufacturing show signs of recovery. India’s GDP growth in 2012-13 is expected to be 7.6 % approximately.

Introduction

The focus of this year’s Budget is on domestic demand driven growth recovery, revival of high growth in private investment, addressing supply bottlenecks in the agriculture, energy and transport sectors, tackling problems of malnutrition, black money and corruption, while implementing decisions to improve delivery systems, governance and transparency.

The Budget seeks to address structural issues as well as supply-side constraints in the economy. In the past few years, an increased subsidy burden has been the major reason for fiscal imbalance. For 2012-13, the endeavour of the government is to restrict the expenditure of the central subsidies to below 2% of the GDP and bring down the fiscal deficit to 5.1 %. In order to ensure fiscal consolidation , the Budget proposes to provide fully for food subsidies, while all other subsidies would be funded, to the extent possible, by the economy without any adverse implications. The direct transfer and administration of subsidies will be implemented particularly for fertilisers, LPG and kerosene to achieve efficiency in subsidy distribution. On

India Union Budget 2012 5

the revenue front, the Budget proposes various tax reforms which include working towards an early enactment of the DTC Bill, finalising model legislation for centre and state GST, proposals to increase the contribution of service tax and the introduction of the General Anti Avoidance Rule (GAAR) to avoid counter-aggressive tax avoidance schemes.

To strengthen the investment environment in the country, the Budget also proposes measures such as reaching a consensus on allowing FDI in multi-brand retail up to 51% and introducing the Advance Pricing Agreement (APA) in the Finance Bill 2012. In addition, to deepen the domestic capital market, reforms including allowing QFIs to access the Indian corporate bond market, simplifying the process of issuing IPOs and introducing the Rajiv Gandhi Equity Savings Scheme have been proposed. A number of bills will be moved in the upcoming Budget session of the Parliament to move forward with the financial sector legislative reforms.

The Budget seeks to boost key sectors including the following:

InfrastructureTo provide low-cost funds to power, airlines, roads, ports, etc., the rate of withholding tax on interest payments on ECBs is proposed to be reduced. Another focus area is increasing private sector participation in infrastructure investment.

Civil aviationPermitting ECB of up to US$ 1 billion for working capital requirements of the airline industry for a one-year period and allowing direct import of ATF by Indian carriers.

AgricultureA significant increase in plan outlay and agriculture credit targets has been proposed. Substantial emphasis has been given to improvement in irrigation facilities and increasing agricultural productivity.

MSMEA 500 million INR India opportunities venture fund with SIDBI has been set up to enhance availability of equity for the sector.

HousingMeasures to address the shortage of housing for low income groups in major cities and towns have been proposed.

Skill developmentTo address the urgent need of enhancing employment and skill development greater fund allocation has been given to the National Skill Development Council.

On the whole, the Finance Minister has delivered a balanced budget which demonstrates the government’s commitment to bring the country back on the path of sustainable and inclusive growth. Fast-tracking policy decisions and ensuring timely implementation will be key to achieve the reforms envisaged. The proposals put forth will hopefully keep domestic inflationary pressures under control, restore investor confidence and stimulate greater investments in these difficult times with high global uncertainty.

6 PwC

The Economic Survey 2011-12 (Survey), tabled in Parliament by the Finance Minister on 15 March 2012 is a review of the performance of the economy, giving indications of prospects for the coming year.

Global issues have become important in the backdrop of growing linkages between the Indian and global economy. Keeping this in mind, the chief economic advisor expanded the size and scope of the Survey by incorporating chapters on ‘India and the global economy’ and ‘Sustainable development and climate change’.

There is no denying that the year 2011-12 was a challenging year for the economy. India is not insulated from global economic activities which was clearly visible on some of the economic parameters. However, despite the economic and financial troubles in key developed economies, India has remained a front runner in any cross-country comparison. The Survey predicts that with inflation moderating, easing of monetary policy and reforms picking up, the economy would grow at 7.6% in financial year (FY) 2013 and 8.6% in FY 2014.

Economic Performance 2011-12

Overview of the Indian economy

With the gross domestic product (GDP) growth slowing to 6.9% in the current fiscal (FY 2011-12) from 8.4% in the previous two fiscals, India has witnessed a slowdown due to weak industrial activity coupled with a contraction in investments. Factors such as persistent and high inflation, monetary tightening, expansion of trade deficits, weakening of the Rupee, negative global developments and domestic political uncertainty have also contributed to it.

Sector-wise, agriculture and allied activities after growing at a healthy rate of 7.0% last year grew by only 2.5% during the year. Despite good monsoons and a healthy crop, the low growth could be attributable to the base effect. As a result of high inflation and interest rates, industrial growth slowed drastically to a mere 3.9% as compared to 7.6% last year. Restriction on iron ore production, weak coal output and decline in natural gas production during the year led to a contraction in the mining and quarrying industry. The services sector continued to be the


growth driver expanding by 9.4% through the year as compared to 9.3% last year.

The high rates of inflation continued from last year and stayed close to and even beyond 10% for the first half of the current fiscal. The wholesale price index (average from April 2011 to January 2012) was as high as 9.1%. The main drivers were food inflation (primary articles) and global commodities which spiraled onto money wages and other expenses resulting in increased prices of manufactured goods. To curtail the spiraling inflation, the Reserve Bank of India tightened the monetary policy by increasing interest rates leading to deceleration of growth. Further, depreciation of the currency in the latter half of the year further fueled the import prices of necessary items.

A striking point in this year’s Survey is the trade deficit, which stood at US$ 85.8 billion in the first half of the year. A steep rise in the trade deficit was witnessed after an over 40% increase in the merchandise exports in the first half of the year as compared to the first half of last year.

This huge deficit was primarily on account of increase in international commodity prices such as crude, gold and silver and depreciation of the Rupee.

After high fiscal deficits in the previous two years, the Budget for 2011-12 proposed fiscal consolidation and estimated a fiscal deficit target of 4.6% of GDP. The fiscal deficit has ballooned on account of various factors. Slow growth of the industry led to lower tax collections for the government. For the first nine months of the year, gross tax revenue grew at a rate which was 5 percentage points lower than the same period in the previous year. Further, due to spiraling of fuel and fertiliser subsidy, the expenditures of the government swelled. High interest rates led to higher interest payment on external debt and higher borrowing costs. Total expenditures in the first nine months of the year were 13.9% as against the budgeted 4.9% for the entire year.

The foreign exchange reserves fluctuated throughout the year. In the first half of the year, reserves increased by US$ 6.7 billion and

reached an all time high of US$ 322 billion (August 2011). However, due to the Rupee depreciation in the latter half of the year, the RBI intervened to stem the slide which led to a decline in the foreign exchange reserves from US$ 311.5 billion (September 2011) to US$ 292.8 billion (January 2012).

The currency depreciated 12.4% against the US$ on a month-to-month basis and reached at an all time low of Rs. 54.23 in December 2011.

The capital inflows in terms of foreign direct investment rose by US$ 12.3 billion during the first half of the current fiscal as compared to US$ 7 billion in the corresponding period of last year. On the other hand, the portfolio investments (FII’s, ADRs and GDRs) have been extremely volatile throughout the year. They decreased to a mere US$ 1.3 billion in the first half of 2011-12 as compared to US$ 23.8 billion in the first half of last year.

On the expenditure side, the private final consumption expenditure in real terms did not change drastically owing to inherent inelasticity of private consumption and high inflation. Growth in final private consumption expenditure was 6.5% for the year as compared to 8.1% last year.

Savings rate as a percentage of GDP declined from 33.8% (2009-10) to 32.3% (2010-11). The Survey suggests that the reduction was on account of reduced private savings in financial assets and somewhat by corporate saving reduction. Fixed investments as a percentage of GDP also declined to 30.4% (2010-11) as compared to 31.6% (2009-10). The savings investment gap of 2.8% of GDP reflects the need to finance the investment by foreign inflows.

Data categories Units Financial year 2010-11 Financial year 2011-12

GDP (current market prices) crore INR 7,674,148QE 8,912,178AE

Growth rate % 8.4 6.9

Savings rate^ % of GDP 32.3 31.6E

Investment rate^ % of GDP 35.1 35.2E

Index of Industrial Production (growth) % 8.2 3.6a

Inflation (WPI) (52 week average) % change 9.6 9.1b

Inflation (CPI-IW) (average) % change 10.4 8.4b

Export growth (US$) % change 40.5 23.5b

Import growth (US$) % change 28.2 29.4b

Current Account Balance/GDP % (2.7) (3.6)c

Source: Government of India Economic Survey 2011-12, ^ Prime Minister’s Economic Advisory Council Report

QE: quick estimates, AE: advance estimates, a: April to December 2011, b: April 2011 to January 2012, c: April to September 2011

Key Indicators

8 PwC


Policy prescriptions

The Survey prescribes some key action points to address areas of concern in the economy:

AgricultureThe declining per capita availability of food grains has been a matter of major concern. A thrust on horticulture products is required to enhance per capita food availability of food items as well as ensuring nutritional security. Setting up efficient supply chains is imperative to ensure adequate supplies of essential items at reasonable prices and producers get adequately compensated. Finally, the dependency of the Indian farmer on the monsoon needs to be reduced by increasing the irrigation facilities. There is a need to devise insurance schemes linked to indices of various vulnerability parameters.

RetailThe Survey recommends allowing FDI in multi-brand retail (in a phased manner) in the metros with a cap at a lower level coupled with incentivising the existing kirana shops to modernise and compete effectively with the foreign/ domestic retail shops. The growth of modern retail trade would greatly improve agricultural marketing, increase revenues for the government, given that currently sector is largely unorganised and has low tax compliance. FDI in multi-brand retail could also be leveraged to address issues of high rates of food inflation and low prices realised by Indian farmers.

ManufacturingThe National Manufacturing Policy (NMP) envisaged a growth of 14 % pa to boost the share of manufacturing in GDP to 25 % and increase the absorption of labour in this sector. To achieve this, several specific measures are required. These include resolving the issue of availability of land for industrial and infrastructure use and providing specific policy thrust to high

value addition industries such as high-precision machinery, pharmaceuticals, biotechnology, ship building, defence production and the aero-space industry.

Land and labour reformsThe Survey also emphasises the need for reforms in labour laws and land acquisition. The thrust should be on greater freedom to both employers and employees to enter into contracts voluntarily with the involvement of states.

InfrastructureThe Survey mentions that sectors such as irrigation, railways, water supply and sanitation, ports, and power distribution have not attracted the desired level of private investment. Therefore, it is imperative to identify hurdles and weaknesses in regulatory, financing, and incentive structure (both taxation and debt) and project implementation related issues that may be inhibiting private investment into these sectors.

10 PwC

Civil AviationThe Survey suggests significant and continuous investment to manage growth in the civil aviation sector. One of the major challenges of the country’s air traffic industry is the high and growing debt burden of the carriers. Currently, the FDI policy does not permit investment by foreign airlines that denies Indian airline companies them access to potential sources of capital and expertise. The Survey recommends that this should be allowed. Till now, air carriers have also been affected by the high ATF prices due to high incidence of taxes. The Survey predicts that the recent decision to allow import of ATF will hopefully improve operational economics. However in the long run airlines will need to improve their internal accruals, access to domestic and international capital, and their overall operations to remain vibrant and viable.

Balance of payments (BoP)The growing imbalance in BoP, as indicated by trade deficit of more than 8% of GDP and current account deficit of more than 3%, needs to be

corrected by discouraging unproductive imports like gold and consumer goods to restore balance. In the last few years, high volatility of the rupee has impaired investor confidence. Such high volatility has implications on corporate balance sheets and profitability due to high exposure to ECBs when currency is depreciating. Therefore, a more aggressive stance to check Rupee volatility is necessary.

Asset bubblesThe Survey suggests greater attention to be given to asset price bubbles in real estate and stock markets and their implications for the economy and to the strength of the financial system.

BankingCurrently, the infrastructure financing is heavily dependent on banks. The Survey recommends development of the corporate bond market to remove this constraint. Also, pension reform is needed to facilitate the flow of long-term savings and social security in the country. The Survey predicts major challenges in the future to meet financing requirements, especially in

unorganised, the self-employed in the micro and small business sector. Thus, financial inclusion needs to be enhanced and access to financial products needs to be increased by increasing awareness among consumers and reducing transaction costs.

Climate ChangeFor the first time, a chapter on ‘Sustainable development and climate change’ has been introduced in the annual Economic Survey. The emphasis is on the economic pricing of energy and other resources. They are key factors in switching to a more sustainable development path. Also, new technologies will be crucial, mostly in the private sector. But social justice will also require stepped-up public spending on energy access and other elements.


Future expectations

Despite the low growth figure of 6.9%, India remains one of the fastest growing economies in the world as all major countries (including the emerging economies) are witnessing a significant slowdown. The global economic environment turned sharply adverse in the middle of the year owing to the turmoil in the euro-zone countries and questions about the growth prospects of other leading developed economies, reflected in sharp ratings downgrades of sovereign debt in most major advanced countries. While a slowing down of the Indian economy can be largely attributed to global factors, domestic factors also played an important role.

The Survey predicts the economy to grow by 7.6% and 8.6% in the next two years. It also predicts that the weakness in the economic activity might have bottomed out.

The success in garnering private sector investment in infrastructure through the public-private partnerships (PPPs) route during the Plan has laid a solid foundation for increased private-sector funding in coming years. PPPs are expected to augment resource availability as well as improve the efficiency of infrastructure service delivery.

The fiscal situation is expected to remain strained. On the revenue side, slow economic growth, weak industrial activity and decline in investment is likely to keep tax revenue subdued. A sluggish stock market also implies limited scope for raising funds through disinvestment.

On the expenditure side the government faces the two major roadblocks of fertiliser and oil subsidies. By not passing on the higher costs to consumers, the government faces major risk of higher core inflation.

Keeping in view the economic trends of various parameters, inflation is expected to decline in the short term due to the base effect and the global stabilisation in commodity prices. As a result the RBI may opt for an expansionary monetary policy which could provide the necessary fillip to the economy. However, this is likely to be limited unless the investment climate issues such infrastructure, boosting business sentiments, land acquisition and labour laws are addressed.

Inability to implement some of the policy reforms such as allowing FDI in multi-brand retail, pension and insurance funds and lag in policy actions for coal and power have also dampened investor sentiments.

The Indian economy was on the path to recovery after the 2008-09 crises, which was also reflected in the budget estimates last year. The global economic slowdown has impacted the recovery of Indian economy. As the Finance Minister suggests, India should take this as an opportunity to rethink, re-assess and make way for new ideas and policies.

12 PwC

Foreign investment and exchange control

• With regard to the policy for 51% FDI in multi-brand retail trading, efforts are underway to attain broad-based consensus with state governments.

• The government is actively considering allowing foreign airlines to participate in the equity of scheduled and non-scheduled air transport services within the prevalent FDI cap of 49%.

• The ECB policy to be amended will allow the following:

- Part financing of the rupee-debt of existing power projects;

- Capex requirements for maintenance and operations of toll systems for roads and highways, if part of original project;

- Working capital purposes of airline companies for a one-year period (subject to a total ceiling of USD 1 billion);

- Low-cost affordable housing projects.

Key Policy Announcements

Capital markets

• With a view to strengthen capital market reforms, it is proposed that QFIs be allowed to access the Indian corporate bond market.

• Companies will be required to mandatorily issue IPOs of 100 million INR and above, in electronic form, through a nationwide broker network of stock exchanges. This is aimed at simplifying the IPO process, lowering costs and helping companies reach retail investors in small towns.

• Electronic voting will be made mandatory for wider shareholder participation with respect to important decisions. This will be implemented by top listed companies in the first phase.

Financial sector

• Two-way fungibility of IDR will be permitted, subject to ceiling for encouraging greater foreign participation in the Indian capital market.

• Based on the recommendations of the Standing Committee on Finance, the following bills are proposed to be taken up for discussion in the current session of Parliament:

- The PFRDA Bill, 2011

- The Banking Laws (Amendment) Bill, 2011

- The Insurance Laws (Amendment) Bill, 2008

• With the objective of taking forward further reforms in the financial sector, the following legislations are also proposed to be tabled in the ensuing session:

- The MFI (Development and Regulation) Bill, 2012

- The National Housing Bank (Amendment) Bill, 2012


- The SIDBI (Amendment) Bill, 2012

- National Bank for Agriculture and Rural Development (Amendment) Bill, 2012

- RRB (Amendment) Bill, 2012

- Indian Stamp (Amendment) Bill, 2012

- Public Debt Management Agency of India Bill, 2012

• The government is considering the creation of a financial holding company for resource mobilisation of PSU banks for meeting its capital requirements.

Food and agriculture

• Addressing supply bottlenecks in the agriculture sector is one of the five key objectives of the government for the ensuing fiscal year.

• Incentives are proposed for undertaking research and development with an objective to increase productivity in the food and agriculture sector.

• With an objective to make food an entitlement for all, especially the poor and vulnerable segments, the National Food Security Bill, 2011 has been placed before the Parliamentary Standing Committee.

Other reforms

• Viability Gap Funding under the scheme for support to PPP in infrastructure is used for attracting private investments in the sector. It has been decided that irrigation, terminal markets, common infrastructure in agriculture markets, soil testing laboratories, capital investment in the fertiliser sector, oil and gas, fixed network for tele-communication and telecommunication towers are now also eligible for viability gap funding under this scheme.

• To improve the flow of institutional credit for skill development and facilitating the youth to acquire market-oriented skills, a Credit Guarantee Fund is proposed to be set up.

• In order to bring transparency and enhance confidence in the public procurement system, a public procurement legislation bill is proposed to be tabled in the current session of Parliament.

• Legislative measures have been undertaken to strengthen the anti-corruption framework. Some such legislations where amendments are proposed include the prevention of money laundering, benami transactions, etc.

14 PwC

Budget Financials

FY 2010-11 FY 2011-12 FY 2011-12 FY 2012-13

Actuals Budget Estimates Revised Estimates Budget Estimates

1 Revenue Receipts 788,471 789,892 766,989 935,685

2 Capital Receipts 402,428 467,837 576,395 555,240

3 Total Receipts (1 + 2) 1,190,899 1,257,729 1,343,384 1,490,925

4 Non Plan Expenditure 818,299 816,182 892,116 969,900

5 Plan Expenditure 379,029 441,547 426,604 521,025

6 Total Expenditure (4 + 5) 1,197,328 1,257,729 1,318,720 1,490,925

7 Revenue Expenditure 1,040,723 1,097,162 1,161,940 1,286,109

8 Capital Expenditure 156,605 160,567 156,780 204,816

9 Revenue Deficit (7 - 1) 252,252 307,270 394,951 350,424

As a percentage of GDP 3.29% 3.40% 4.43% 3.45%

10 Fiscal Deficit [6 - (1 + Recoveries of Loans + Other Receipts) 373,592 412,817 521,980 513,590


11 Primary Deficit (10 - Interest Payments) 139,569 144,831 246,362 193,831


The following table sets out the Key Budget Financials:

GDP for BE 2012-2013 has been projected at INR 1,01,59,884 crore assuming 14% growth over the Advance Estimates of 2011-2012 (INR 89,12,179 crore) released by CSO.

(INR Crore)


Where the Rupee comes from Where the Rupee goes to

Other Non-Plan Expenditure

Subsidies

Defence

Interest PaymentsCentral Plan

Plan Assistance to State & UT

Non-Plan Assistance to State & UT Govts.

States’ share of taxes & duties

Service tax & Other taxes

Union Excise Duties

Customs

Income-tax

Corporation-tax

Borrowings & Other liabilities

Non- debt

Capital receipts

Non-tax Revenue

16 PwC

While presenting the Budget, the Finance Minister mentioned that for the Indian economy, 2011-12 was a year of recovery interrupted. The actual results for the year turned out to be below expectations on account of the global economic downturn as well as the domestic slowdown. Therefore, there was a need for fiscal discipline, new measures to levy and collect taxes as well as providing for incentives for certain sectors.

Against this backdrop, the FM tabled the direct tax proposals that seek to align the existing provisions with the proposed DTC.

Direct Taxes Code

Although DTC has not been introduced this year, the government intends to legislate it shortly after examining the report of the Parliamentary Standing Committee.

Direct Tax Proposals

Tax rates

• Corporate tax rates remain unchanged at 30% (plus applicable surcharge and education cess) for domestic companies and 40% (plus applicable surcharge and education cess) for foreign companies.

• Rates of both MAT and AMT remain unchanged at 18.5% (plus applicable surcharge and education cess).

- Accounts to be prepared for banking, insurance and electricity companies under respective governing laws for MAT purposes

- AMT currently applies to LLPs. AMT is proposed to be applicable to other taxpayers (other than companies), who are availing of certain profit-linked tax incentives. For certain categories of taxpayers, a threshold limit of INR 20 lakh of adjusted total income has been provided.

• The effective rate of DDT also remains unchanged at 15% (plus applicable surcharge and education cess).

• Marginal increase in income tax slabs for Individuals / HUF / AOP / BOI as follows :

Existing Income slab (INR) Tax rate Proposed Income slab (INR) Tax rate

0-1,80,000* Nil 0 – 2,00,000 Nil

1,80,001*-5,00,000 10% 2,00,001-5,00,000 10%

5,00,001-8,00,000 20% 5,00,001-10,00,000 20%

Above 8,00,000 30% Above 10,00,000 30%

(*INR 1,90,000 in case of resident woman)


Taxing indirect transfer of capital assets

• Amendments are proposed retrospectively from 1 April 1962.

• The Finance Bill provides for amendments that seek to nullify the effect of decision of the SC in the case of Vodafone International B.V. vs. UOI, wherein inter-alia the SC held that:

- Shares held in a company incorporated in India are situated outside India. Therefore, capital gains resulting from the transfer of such shares shall not be taxable under the Act;

- For management right/ control in a company, which is consequent to transfer of shares, no separate consideration may be attributed therefor;

- Payment made by an NR to another NR would not be subject to withholding tax if the NR does not have any presence in India.

• The Bill proposes to tax any capital gains arising from the transfer of shares or interest in a company or entity registered or incorporated outside India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

• Amendment has been proposed in the definition of ‘capital assets’ and the ‘transfer’ of capital assets.

• Further, the Bill seeks to clarify that withholding tax provisions will apply to an NR, whether or not the NR has a residence, place of business, business connection, or any other presence in India.

Enlarging the scope of ‘royalty’

Computer software• The Bill seeks to enlarge the scope of ‘royalty’

by amending the definition w.r.e.f from 1 June 1976, to include transfer of all or any right for use or right to use a computer software (including granting of a licence), irrespective of the medium through which it is transferred.

• Judicial opinion is divided on the taxability of computer software supplied by NR suppliers. The matter is presently sub-judice before the SC. On supply of software that is embedded on hardware supplied from overseas, the Delhi HC has held that consideration for such software is not royalty.

• NR software suppliers may be eligible to claim the benefit under the relevant tax treaty wherein the definition of royalty is narrower than that proposed under the Act.

• The proposal will certainly affect domestic software suppliers, where withholding tax provisions will be attracted if the payment exceeds the specified limit.

Use or right to use• It is proposed to widen the definition of royalty

retrospectively from 1 June 1976, in order to nullify the effect of judicial precedents wherein use or right to use of right or property was held as not tantamount to royalty, in the absence of active use by the payer of such right or property.

18 PwC

• The above proposal seeks to do away with the condition of active use of the right or property by the payer. It intends to cover payments within the purview of royalty, even if the right or property is not in the possession of or not directly used by the payer, or even if it is located outside India.

Foreign satellite companies• It is proposed to extend the definition of

royalty retrospectively from 1 June 1976, to specifically cover therein transmission by satellite (including up-linking, amplification, conversion of down-linking of any signal), cable, optic fibre or by any other similar technology.

• The above proposal seeks to nullify the recent decision of the Delhi HC that held that transmission by satellite is not covered within the purview of royalty.

General Anti Avoidance Rule • In order to codify the doctrine of ‘substance

over form’, it is proposed to incorporate anti-avoidance provisions in the form of GAAR.

This amendment will take effect from FY 2012-13.

Salient features of the proposed GAAR:

• An arrangement whose main purpose is to obtain a tax benefit and which also satisfies at least one of the four additional tests can be declared as an IAA.

- Creates rights and obligations, not normally created between parties dealing at arm’s length

- Results, directly or indirectly, in the misuse, or abuse of provisions of the Act

- Lacks or is deemed to lack commercial substance

- Is entered into or carried out in a manner, normally not employed for bonafide purpose.

• It shall be presumed that obtaining tax benefit is the main purpose, unless rebutted by the taxpayer.

• An arrangement will be deemed to lack

commercial substance if:

- The substance, or effect, of the arrangement as a whole is inconsistent with, or differs significantly from, the form of its individual steps or a part

It includes, or involves:

i. Round trip financing

ii. An accommodating party

iii. Elements that have the effect of offsetting or cancelling each other

iv. A transaction conducted through one or more persons and disguises the value, nature, location, source, ownership, or control, of the fund

It involves the location of an asset or transaction or of the place of residence of any party which would not have been so located for any substantial commercial purpose other than obtaining tax benefit for a party.

It is also proposed that the period of existence


of arrangement, payment of taxes and provision of exit route will not be taken into account while determining ‘lack of commercial substance’.

• Once the arrangement is declared to be an IAA, the consequences thereof will be determined keeping in view the circumstances of the case. Consequences could include the following:

Disregarding, combining or recharacterising any step, part or whole of the IAA

Treating the IAA, as if it had not been entered into or carried out

Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person

Deeming persons who are connected persons in relation to each other to be one and the same

Re-allocating expenses and income between the parties to the arrangement

Treating place of residence of a party, or location of a transaction or situs of an asset to a place other than that provided in the arrangement

Considering or looking through the arrangement by disregarding any corporate structure.

• It is also proposed that GAAR could be used in addition to, or in lieu of, any other provision for determination of tax liability. A limited treaty override is also proposed.

• ‘Tax benefit’ for the purpose of GAAR has been widely defined to mean the following:

- A reduction or avoidance or deferral of tax or other amount payable under this Act

- An increase in a refund of tax or other amount under this Act

- A reduction or avoidance or deferral of tax or other amount payable under this Act, as a result of a tax treaty

- An increase in a tax refund or other amount

under this Act as a result of a tax treaty

- A reduction in total income including increase in loss, in the relevant previous year or any other previous year.

• On the procedural part, it is proposed that the AO shall make a reference to the CIT for invoking GAAR. On receipt of the reference, the CIT shall hear the taxpayer. If the CIT is not satisfied by the reply of the taxpayer and is of the opinion that GAAR provisions are to be invoked, he shall refer the matter to an approving panel. In case, the taxpayer does not object or reply, the CIT is empowered to make the determination as to whether the arrangement is an IAA or not.

• A panel comprising a minimum of three members shall be set up by the CBDT of the rank of CIT and above. The panel would be required to dispose the reference within six months from the end of the month in which the reference was received from the CIT, declaring whether an arrangement is impermissible or not after examining material

20 PwC

and making any further inquiry, if required. The AO would determine consequences of a positive declaration. The final order shall be passed by the AO only after approval by the CIT. The first appeal against such an order would lie with the Tribunal. The period taken by the proceedings before the CIT and the panel would be excluded from the limitation period for completion of the assessment. It is also proposed that the CBDT shall prescribe a scheme for regulating the condition and manner of application of the GAAR provisions.

Exemption to foreign company selling crude oil in India

• The Bill seeks to provide that income received by a foreign company in Indian currency on account of sale of crude oil to any person in India shall be exempt from tax.

• Presently, the receipt of money in India by an NR is taxable in India under the Act. Thus, this proposal seek to provide for relaxation to foreign companies selling crude oil in India

that receives payments in Indian currency in India.

Provisions relating to tax treaties

• The Bill proposes to restrict the treaty benefit to the NR, unless the NR obtains a tax residency certificate from the home country, containing the specified particulars.

• It is also provided that where any term is used in the tax treaty but is not defined in the tax treaty or in the Act, the CBDT may notify a meaning to the term. In such case, meaning so given shall be deemed to be effective from the date when such a tax treaty came into force.

Transfer pricing

• Keeping in view the large-scale litigation in transfer pricing in India, the government has introduced APA with a view to significantly bring down TP litigation and provide tax certainty to foreign investors. APA is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing

methodology for a set of transactions over a fixed period of time in future. The CBDT, with the approval of the Central Government, may enter into an APA with any person, determining the ALP or specifying the manner in which the ALP is to be determined, in relation to an international transaction to be entered into by that person. Such an agreement shall be valid for a period not exceeding five consecutive previous years. CBDT still has to frame detailed rules/ guidelines for the APA in respect of an international transaction which shall be communicated to taxpayers in due course.

• Considering the suggestions made by the SC in Glaxo SmithKline Asia (P) Ltd., the application of transfer pricing regulations has been extended to specified domestic related party transactions as well. Specific domestic transactions include expenditure in respect of which payment has been made or is to be made to domestic related parties. Accordingly, the taxpayer would be required to file Form


3CEB and maintain prescribed documentation for such specified domestic transactions if the aggregate value for these transactions exceeds INR 5 crore. This amendment will take effect from 1 April 2013 and will, accordingly, apply in relation to the AY 2013-14 and subsequent assessment years.

• The TPO has been empowered to determine the ALP of an international transaction noticed by him/ her during the course of proceedings before him/her if such international transaction was not reported by the taxpayer in Form 3CEB. This provision is applicable retrospectively with effect from 1 June 2002. It has also been explained that no reopening of any proceeding would be undertaken only on account of such an amendment.

• An explanation having an inclusive list of transactions has been inserted in definition of international transaction and specifically to cover certain international transactions on which applicability of TP was being questioned by taxpayers such as provision

of guarantee. Further, ‘intangible property’ has been explained to include marketing intangible, customer-related intangible, human capital intangible, location-related intangible, etc. The explanation has been inserted retrospectively and shall have effect from 1 April 2002.

• It has been clarified that the tolerance band of 5% is not a standard deduction for taxpayers in cases where the difference between transfer price and ALP is more than 5%. This is applicable retrospectively with effect from 1 April 2002. However, the amended provision cannot be used to assess or re-assess income for an assessment year for which proceedings have been completed before 1 October 2009.

• It has been specified that the upper limit of the tolerance band would not exceed 3% of the value of an international transaction. As a result, the transaction would be at arm’s length if the difference between the transfer price and the ALP does not exceed the number as notified by the CBDT subject to an upper

limit of 3%. This amendment shall be effective from 1 April 2013 and will apply in relation to the AY 2013-14 and subsequent assessment years. In the preceding year, the government amended TP provisions with effect from 1 April 2012 to provide that with respect to the tolerance band, such percentages for different industries as may be prescribed in the official gazette shall be applied. Incidentally, no such percentage has yet been prescribed for FY 2011-12.

• Penalty in respect of non-reporting of transactions in Form 3CEB has been provided at 2% of the total value of international transactions in order to check those instances where the taxpayer may not report the transactions in Form 3CEB. This penalty would be in addition to the penalties for non maintenance/ non-furnishing of TP documentation. This amendment will take effect from 1 July 2012.

22 PwC

Applying TP regulations to domestic payments

• The Bill seeks to extend TP regulations to the following transactions with related domestic parties if the aggregate value of such transactions exceeds INR 5 crore:

- Any expenditure with respect to which deduction is claimed while computing profits and gains of business or profession

- Any transaction related to businesses eligible for profit-linked tax incentives i.e. infrastructure facilities (section 80-IA) and SEZ units (section 10AA)

- Any other transactions as may be specified.

Incentives for the power sector

• The Bill proposes to allow additional depreciation at the rate of 20% on new plant and machinery to companies engaged in the generation or generation and distribution of power.

• It is proposed that specified power sector companies shall be eligible to claim profit-linked incentive for a further period of one year i.e. the sunset clause has been extended to 31 March 2013 (present up-to 31 March 2012).

Extension of weighted deduction for in-house R&D

• Presently, a weighted deduction of 200% for in-house R&D carried out by companies engaged in the manufacture or production of any article or thing (other than articles or things specified in the Eleventh Schedule) is available till 31 March 2012. It is proposed to extend the above weighted deduction till 31 March 2017.


Deduction Businesses

Weighted deduction of 150% of capital expenditure

• Cold chain facility;

• Warehousing facility for storage of agricultural produce

• Hospital having minimum 100 beds

• Developing and building specified affordable housing project

• Production of fertiliser

100% of capital expenditure • Inland container depot or container freight station

• Bee-keeping and production of honey and beeswax

• Warehousing for sugar

150% weighted deduction of any expenditure • Specified agricultural extension project

150% weighted deduction of any expenditure (other than land or building)

• Specified skill development projects

Infrastructure: Investment based incentives

• The Bill seeks to provide the following incentives to infrastructure businesses that commence operations on or after 1 April 2012:

• It is also proposed that the owner of a two-star hotel or above category shall be deemed eligible to enjoy the 100% deduction towards the capital expenditure even if it transfers the operations of the hotel to any other person. This proposal shall have retrospective effect from 1 April 2011.

24 PwC

Dividend distribution tax

• The cascading effect of the DDT in multi-tier corporate structure is proposed to be removed. The amendment would be effective from 1 July 2012.

Removing the rigor for non deduction of TDS on certain domestic payments

• Any default in withholding tax on specified payments renders the payer as AID. However, the payer shall not be treated as AID where the payee has deposited the tax directly. Such payments made by any person to a resident attracts disallowance in the hands of the payer, if the tax has not been deducted thereon or, after deduction, the tax has not been paid before the due date of filing the tax return by the payer. If the taxes are deposited after this due date, the deduction is available to the payer in the year in which taxes so withheld are deposited.

Particulars Existing provision (INR) Proposed provision (INR)

Company C

Declares dividend 100 100

DDT payable @ 15% 15 15

Company B (holding 100% in Co C)

Income received (declared as dividend) 85 85

DDT payable @ 15% 12 0

Ultimate holding company (Co A)

Income received 73 85


• The payers face difficulties while claiming deduction for expenses where tax on corresponding income has been directly paid by the payee. The Bill seeks to rationalise the provisions and proposes to allow deduction to the payer in the year in which payment is made to the payee, if the payee files its tax return on or before the due date. However, if the payee files its tax return after the due date, the deduction to payee shall be available only in the year in which such return was filed by the payee.

• The above rationalisation has not been extended to payers making payment to NR payees, even if such NR payees have deposited the tax directly or filed tax return in India.

Unexplained cash credits

• The Bill seeks to tighten the net on receipt of share application money, share premium or share capital by closely held companies, stating that any explanation offered by such company shall not be deemed to be

satisfactory, unless following conditions are met:

a. The resident shareholder (other than venture capital fund or venture capital company) offers an explanation about the source of money; and

b. The AO is satisfied with the explanation.

• In such cases, the unexplained amounts shall be taxed at the rate of 30% (plus applicable surcharge and cess).

• This provision seeks to nullify the consistent stand of the judiciary that the AO cannot question the company receiving the funds to explain the source of money in the hands of the applicant/ shareholder.

Capital gains

• In case of transfer of capital asset due to succession of sole proprietorship or firm by a company (not regarded as transfer for capital gains purposes), the cost of acquisition of asset in the hands of the successor company

would be the same as that in the hands of the sole proprietary concern or the firm. This amendment would take retrospective effect from 1 April 1999.

• For computing capital gains in connection with assets acquired on or before 1 April 1981, the AO can make reference to the valuation officer, where he is of view that the value taken by the tax payer is higher than the fair market value of the asset as on 1 April 1981.

• The Bill provides that the condition of issue of shares upon amalgamation or demerger shall not apply in the case of amalgamation or demerger where the amalgamated or resulting company is a shareholder in the amalgamating or demerged company, as the case may be.

• The fair market value of the asset shall be deemed to be the full value of consideration, if actual consideration is not attributable or determinable.

26 PwC

Venture capital fund or venture capital company

• Sectoral restrictions for a venture capital undertaking under the Act are proposed to be removed. The definition is sought to be aligned with SEBI regulations. Furthermore, to avoid deferral of taxation in the hands of investor, income is proposed to be taxed on accrual basis. Also, payment made by the venture capital fund investor has been made subject to withholding tax.

Tax audit

• The Bill seeks to extend the threshold for getting the accounts audited from the present limit of INR 60,00,000 to INR 1,00,00,000 in the case of taxpayers engaged in a business, and from INR 15,00,000 to INR 25,00,000 in the case of taxpayers engaged in a profession. The due date for obtaining tax audit report is proposed to be synchronised with the due date of filing the tax return.

Tonnage tax scheme

• The slab rates for daily tonnage income specified under the Tonnage Tax Scheme proposed to be revised upwards w.e.f FY 2012-13 is as under:

Qualifying ship having net tonnage Existing amount of daily tonnage income

Proposed amount of net tonnage income

Up to 1,000 tonnes INR 46 for each 100 tonnes INR 70 for every 100 tonnes

Exceeding 1,000 tonnes but not more than 10,000 tonnes

INR 460 plus INR 35 for every 100 tonnes exceeding 1,000 tonnes

INR 700 plus INR 53 for every 100 tonnes exceeding 1,000 tonnes

Exceeding 10,000 tonnes but not more than 25,000 tonnes

INR 3,610 plus INR 28 for every 100 tonnes exceeding 10,000 tonnes


Exceeding 25,000 tonnes INR 7,810 plus INR 19 for every 100 tonnes exceeding 25,000 tonnes



Tax withholding provisions

• Any compensation other than by way of salary to a director of a company shall now be subjected to withholding of tax at source at 10%. This amendment shall take effect from 1 July 2012.

• The Bill proposes to raise the exemption limit to INR 2,00,000 for withholding of taxes while making payment of compensations for compulsory acquisition of immovable property. This amendment shall take effect from 1 July 2012.

• Tax rate on interest payments for approved foreign currency loans is proposed to be reduced from 20% to 5% for funding specified infrastructure sectors between 1 July 2012 and 30 June 2015.

• An explanation has been inserted to clarify that the obligation to deduct tax applies to an NR as well, irrespective of whether the NR has a presence in India or not. This explanation has been inserted with retrospective effect from 1 April 1962.

• Also, the CBDT has been empowered to specify the class of persons or transactions (whether chargeable to tax or not), wherein the person responsible for making payments to NR shall have to mandatorily make an application to the AO for determining the appropriate proportion of the sum chargeable to tax.

• Where any person, including the principal officer of a company fails to deduct whole or part of taxes from payment to a resident payee, he shall not be deemed to be an AID, if

a. the payee files a tax return of income,

b. the payee takes into account such sum for computing the income in its return of income,

c. the payee pays taxes due on his income; and

d. the person furnishes a certificate from an accountant to this effect.

However, payer shall be liable to interest up-to the date of furnishing of tax return by the payee.

• The time limit for passing an order to treat the defaulter in withholding tax as AID, where no withholding tax return is filed, has been increased from four years to six years.

• TDS @ 1% to be levied on the transfer of immovable property (other than compulsory acquisition), where the sale consideration exceeds the specified limits. Value for stamp duty purposes is acceptable in cases where sale consideration less than the said value. Registration of the transfer is subject to submission of proof of payment of TDS. This amendment is applicable w.e.f 1 October 2012.

• TDS @ 10% is to be levied on compulsory acquisition of immovable property, where sale consideration exceeds INR 2,00,000. This amendment is applicable w.e.f 1 July 2012.

28 PwC

Advance tax

• Presently, while computing the advance tax payable, income tax on estimated income is reduced by the tax that is deductible/ collectible on the estimated income. It has been proposed that in computing the advance tax payable, credit would be allowed only in respect of tax actually deducted/ collected instead of deductible/ collectible.

Obligations for filing tax return

• A resident tax payer, who has any asset (including financial interest in any entity) located outside India or has signing authority in any account located outside India, is mandatorily required to furnish a return of income. This amendment is proposed to be effective w.r.e.f. FY 2011-12.

• In case of taxpayers having asset outside India, the extant time limits of four and six years for reopening assessment (where income has escaped assessment) has been increased to 16 years.

• In case of a person who is treated as an agent of NR, the time limit for issuing reassessment notice has been extended to six years from two years.

• The time limit for completion of assessment and reassessment is extended by three months.

Fee/ penalty for non-furnishing of TDS/ TCS statement

• A fee of 200 per day would be levied for the late furnishing of TDS/ TCS statement. This will be calculated from the due date till the date of furnishing the statement. Additionally, penalty may be levied ranging from INR 10,000 to INR 100,000 on not furnishing the statement after expiry of a year from the prescribed time or on furnishing incorrect information. This amendment would be effective for statements furnished on or after July 01, 2012.

Appealable orders before Commissioner (Appeals)

• The scope of appealable orders before the Commissioner (Appeals) widened to include the following w.e.f July 01, 2012:

- Intimation issued on processing TDS statements

- Orders passed post APA

- Penalty order post initiation of search under new provision.

Appeals before the Tribunal

• The scope of appealable orders before the Tribunal widened to include the following:

- Assessment orders in case of search/ requisition w.e.f October 01, 2009

- Orders passed post directions from the CIT/ Approving Panel in case the GAAR is invoked w.e.f July 01, 2012.


- Appeal by the department against the assessment order passed under directions from the DRP on objections filed by the taxpayer on or after July 01, 2012.

Special tax provisions for foreign entertainers

• The income of foreign entertainers (who are neither citizens nor residents of India) from performance in India, is proposed to be taxed at 20% on the gross basis as against the earlier taxation on the net basis. Further, existing tax rate of 10% is currently applicable to income of non-citizen, NR sports person and NR sports association. This is proposed to increase to 20%.

Dividend received from foreign companies

• Concessional tax rate of 15% on dividends received by the Indian company from specified foreign companies, which was introduced last year, has been extended for one more year.

Exemptions and deductions for individual and HUF

• Exemption for amount received under life insurance policies issued after April 1, 2012, shall be available where premium paid does not exceed 10% of the capital sum assured, as against the existing limit of 20%. Similarly, deduction for premium paid in such policies after April 01, 2012 shall be available only if the premium paid does not exceed 10% of the capital sum assured.

• Exemption from long-term capital gains tax to individuals or HUF is available on transfer of residential property if receipts from such sale are invested in a new start-up Small or Medium Enterprise company engaged in manufacturing and invested amount is utilised for acquiring plant and machinery.

• Deduction is allowed to individual/ HUF to an extent of INR 10,000 on interest from savings deposits.

30 PwC

Goods and Services tax (GST)

While the Finance Minister did not specify a deadline by which GST would be introduced, he mentioned that the model legislation for the Centre and State GST is being drafted. The Parliamentary Standing Committee is expected to give its comments on the Constitutional Amendment Bill, introduced in Parliament in March 2011.

As a step towards the roll-out of GST, the structure of the GST network (GSTN) has been approved by the Empowered Committee of State Finance Ministers. The GSTN will be set up as a national information utility and will become operational by August 2012. It will enable common PAN-based registration, filing of returns and processing of payments for all states on a shared platform. This will help enhance transparency and check tax evasion.

The Finance Minister has sought to bring the service tax and central excise laws as close as possible this year, with the eventual goal of moving to GST.

Indirect Tax Proposals

Customs Duty

Budget 2012 has maintained the peak rate of basic customs duty (BCD) on non-agricultural products at 10% with few exceptions. It has also simplified the method for computing education cess and secondary and higher education cess on imported goods. Currently, these cesses are first charged on the countervailing duty (CVD) portion of the customs duty and thereafter charged on the aggregate customs duties. The part of cesses leviable on the CVD is being exempted so as to avoid double levy of such cesses.

The Central Government has been empowered to notify the class or classes of importers who will pay customs duty electronically. New provisions have been introduced for the recovery of duties from persons to whom instruments such as duty credit scrips were issued by means of collusion or wilful mis-statement or suppression of facts by such person without prejudice to any action that may be taken against the importer.

Further, courier services have been recognised for the purpose of serving any order, decision, summon or notice by the Commissioner of Customs.

CENVAT

The standard rate of excise duty (CENVAT) for non-petroleum products has been increased from 10 to 12% effective 17 March 2012. The merit rate of excise duty for non-petroleum goods has been increased from 5 to 6%. Similarly, the rate of duty imposed on 130 items in the last Budget has been increased from 1 to 2% with the exception of coal, fertilisers, jewellery and mobile handsets.

Further, the CENVAT Credit Rules have been amended to simplify procedures related to export refunds and transfer of unutilised credit of special addition duty of customs (SAD) and to provide for non-levy of interest where CENVAT credit wrongly availed is reversed before utilisation.


Service Tax

The Budget proposals envisage an increase in service tax rate from 10 to 12%, which indicates a step towards the introduction of GST. Further, the service tax base has been broadened by introducing negative list.

Proposals in Detail

Customs DutyTo avail exemption from SAD, importers of mobile handsets, pre-packed goods intended for retail sale, patent and proprietary medicines, readymade garments and watches are required to declare their VAT registration number and the State in which the goods are intended to be sold for the first time after import. This condition is made effective on goods imported on or after 1 May 2012.

The duty-free allowance under the Baggage Rules has been increased from 25,000 INR to 35,000 INR for passengers of Indian origin and from 12,000 INR to 15,000 INR for children up to 10 years of age.

The Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996, are being amended to further liberalise and simplify the procedure.

The rate changes on specific items are as under. These rate changes are effective from 17 March 2012.

The rate of BCD on the following goods has been reduced to Nil.

• Nickel ore and concentrate

• Steam coal

• Liquefied natural gas and natural gas imported for power generation by power-generating company

• Nickel oxide and hydroxide

• Tunnel-boring machines and parts and components thereof

• Specified machinery for road construction projects such as tunnel excavations

• LCD and LED TV panels of 20 inches and above

• Lithium-ion automotive battery for manufacture of lithium-ion battery packs for manufacture of hybrid and electric vehicles

• Specified parts of hybrid vehicles

• Parts and testing equipment for maintenance, repair and overhauling of aircraft imported by maintenance, repair and overhaul units

• New and retreaded aircraft tyres

The following goods are chargeable to a concessional rate of 5% BCD.

• Six life -saving drugs and vaccines and the bulk drugs used in their manufacture

• Probiotics

• Specified water-soluble and liquid fertilisers

• Super-absorbent polymer for manufacture of adult diapers

• Wool waste

• Wool tops

32 PwC

• Specified raw materials for manufacture of coronary stents and artificial heart valves

The following goods are chargeable to a concessional rate of 2.5% BCD.

• Ammonium metavanadate

• Iodine

• Specified agricultural machinery, such as sugarcane planter, rotary tiller and weeder

• Specified raw materials for manufacture of syringes, needles, etc.

• Blood pressure monitors and glucometers

BCD on following goods has been reduced from 10 to 7.5%.

• Titanium dioxide

• Pipes and tubes for use in manufacture of boilers

• Track machines and parts

• Train protection and warning systems

BCD on the following goods has been reduced from 30%.

• To 10% on soya protein concentrate

• To 5% on artemia

BCD on following goods has been increased.

• From 60 to 75% on completely built units (CBUs) of large cars/MUVs/SUVs permitted for import without type approval (value exceeding 40,000 USD and engine capacity exceeding 3000cc for petrol and 2500cc for diesel)

• From 5 to 7.5% on boric acid

• From 2 to 4% on standard gold bars and platinum bars

• From 5 to 10% on non-standard gold

• From 5 to 7.5% on flat-roller products (HR and CR) of non-alloy steel

• From 10 to 30% on bicycles

• From 10 to 20% on bicycles parts and components

The following goods are fully exempted from customs duty.

• Parts, components and sub-parts of parts and components for manufacture of memory cards of mobile phones

Project import benefit

• Project import status extended to following projects:

- Greenhouses set up for protected cultivation of horticulture and floriculture produce

- Installation of mechanized handling system and pallet-racking systems for horticulture produce

• BCD exempted on initial set up and substantial expansion of fertilizer projects and coal mining projects

• BCD of 2.5% to be levied on iron ore pellet plants and iron ore beneficiation plants


The following goods have been exempted from levy of SAD.

• Super-absorbent polymer (SAP), hydrophilic non-woven and hydrophobic non-woven for manufacture of adult diapers

• Aramid thread, yarn and fabric for manufacture of bullet-proof helmets for defence and police personnel

• LEDs used for manufacture of LED lamps

• Lithium-ion automotive battery for manufacture of lithium-ion battery packs for manufacture of hybrid and electric vehicles

• Specific parts of hybrid vehicles

• Dredgers

• Blood-pressure monitors and glocumeters

The export duty on following goods has been increased.

• From 3000 INR per tonne to 30% ad valorem on chromium ores and concentrates of all sorts

34 PwC

Swings in customs duty rates (illustrative)

Goods on which duty reduced from 10 to 7.5%

Goods Existing Rate (%) New Rate (%)

Track Machines and parts 10 7.5

Train Protection and Warning System 10 7.5

Pipes and Tubes for use in manufacture of boilers 10 7.5

Titanium Dioxide 10 7.5

Goods on which duty reduced from 7.5 to 2.5%


Ammonium metavanadate 7.5 2.5

Specified agriculture machinery 7.5 2.5

Goods on which duty reduced from 10 to 5%


Probiotics 10 5

Six Specified Life Saving Drugs/Vaccines 10 5

Wool waste 10 5

Goods on which duty reduced from 7.5 to 5%


Specified water soluble and liquid fertilizers 7.5 5

Super absorbent polymer for manufacture of adult Diapers 7.5 5




Soya protein concentrate 30 10



Artemia 30 5

Goods on which duty increased


Completely built units (CBUs) of large cars/MUVs/ SUVs permitted for import without type approval (value exceeding US$ 40,000 and engine capacity exceeding 3,000cc for petrol and 2,500 for diesel)

60 75

Standard Gold bars and platinum bars 2 4

Non-standard gold bars 5 10

Flat roller products (HR and CR) of non-alloy steel 5 7.5

Boric Acid 5 7.5

Bicycles 10 30

Bicycle parts and components 10 20

36 PwC

CENVAT

Tariff • Duty structure on cement manufactured

and cleared in packaged form has been rationalised. Duty rate has been increased and brought under the maximum retail price (MRP) based assessment with abatement of 30%.

• Unbranded jewellery of precious metals is subject to 1% duty on 30% of the transaction value declared in the invoice price.

• Duty has been reduced from 10 to 6% on environment-friendly goods such as battery packs and specific parts of hybrid vehicles on end-use condition.

• Duty rates have been reduced from 10 to 2% on parts, components and specified accessories of mobile phones, such as battery charges, PC connectivity cables, memory cards and hands-free headphones, when sold as spares in the domestic market provided no CENVAT credit has been availed.

• Duty has been reduced from 10 to 6% on LED lamps, iodine, parts of BP monitoring and blood glucose monitoring system.

• 10% ad valorem duty has been imposed in addition to the existing specific duty on all slabs of cigarettes other than the filter and non-filter cigarette of length not exceeding 65 mm.

• Duty rate has been increased on other tobacco products such as cigars, cheroots and cigarillos.

• Duty rate on specified parts of hybrid vehicle has been reduced from 10 to 6%.

Non Tariff Central Excise Act, 1944 • Definition of interconnected undertaking as

contained in the Monopolies and Restrictive Trade Practices (MRTP) Act has been inserted in valuation provisions.

• Under Section 9, the applicability of provision related to offences or penalties has been amended to increase the limit from 1 lakh INR to 30 lakh INR.

• Procedural provisions related to arrest, search and seizures, etc. has been amended.

• Third schedule has been amended to include packaging, labelling, etc. of cigarettes as amounting to manufacture.

• Cigarettes have been brought under the MRP based assessment with 50% abatement.

• Abatement has been increased from 55 to 70% on branded readymade garments.

CENVAT Credit Rules, 2004 • Credit Rules are amended to provide duty

payable on the removal of used capital goods. Amount will be payable either on the amount calculated based on CENVAT credit taken at the time of receipt reduced by prescribed percentage or the duty on transaction value whichever is higher. (Provision made effective from 17 March 2012).

• Rule 10A has been inserted to permit transfer of unutilised credit of SAD lying in balance at the end of each quarter to another factory of the manufacturer.


• Rule 14 has been amended so that interest is not payable on credit wrongly taken unless the same is utilised.

• Rule 5 of Credit Rules relating to refund of inputs/ inputs services used in export goods/ services has been amended to provide specific formula for the computation of eligible credit attributable to export goods/ services.

• Rule 6 has been amended to increase the rate of reversal from 5 to 6% of the exempted turnover for both goods and services.

• Rule 7 relating to the input service distributor has been amended to provide service tax attributable to service used wholly in a unit shall be distributed in that unit alone and wherever it is used in more than one unit, the credit is to be distributed on pro-rata basis.

• Definition of capital goods has been amended to include motor vehicles other than falling under the tariff heading 8702, 8703, 8704 and 8711 used in the factory of the manufacturer.

• Restriction on credit has been removed for services procured by automobile manufacturers from authorised station and general insurance company.

(The changes in Credit Rules will be effective from 1 April 2012, unless otherwise specified)

38 PwC

Swings in excise duty rates (illustrative)

Goods on which duty reduced from 10% to NIL


Food preparation containing fruits and vegetables prepared or served in hotels, restaurants or retail outlets

10 NIL

Changes in rate for cars

Existing Rate (%) New Rate (%)

Petrol

Length not exceeding 4,000mm and engine capacity not exceeding 1,200cc 10 12

Length exceeding 4,000mm and engine capacity not exceeding 1,500cc 22 24

Length exceeding 4,000mm and engine capacity exceeding 1,500cc 22 + 15,000 INR 27

Diesel

Length not exceeding 4,000mm and engine capacity not exceeding 1,500cc 10 12

Length exceeding 4,000mm and engine capacity not exceeding 1,500cc 22 24

Length exceeding 4,000mm and engine capacity exceeding 1,500cc 22 + 15,000 INR 27


Changes in rate of cement & clinker


a. In case of mini-cement plant

1. Cement cleared in packaged form

i. Of MRP not exceeding 190 INR per 50kg bag or of per tonne equivalent MRP not exceeding 3800 INR

106 + 120 INR per

MTii. Of MRP exceeding 190 INR per 50kg bag or of per tonne equivalent MRP not exceeding 3800 INR

10 + 30 INR per MT

2. Cement cleared other than in packaged form 10 12

b. Other than mini-cement plant

1. Cement cleared in packaged form

i. Of MRP not exceeding 190 INR per 50kg bag or of per tonne equivalent MRP not exceeding 3800 INR

10 + 80 INR per MT12 + 120 INR

per MTii. Of MRP exceeding 190 INR per 50kg bag or of per tonne equivalent MRP not exceeding 3,800 INR

10 + 80 INR per MT

2. Cement cleared other than in packaged form 10 12

Cement Clinker 10 + 200 INR per MT 12

40 PwC



Footwear of MRP exceeding 250 INR per pair but not exceeding 500 INR per pair

5 NIL



Gold and silver coin of purity 99.5% and above 1 NIL

Miscellaneous


LED lamps 10 6

Increase in Cess Rate


Crude oil under Oil Industries Development Act 2500 per MT 4500 per MT

Cess


Description of service Existing rate/ amount New rate/amount

Life insurance (where entire premium is not for pure risk) 1.5% of the premium 3% of first year premium and 1.5% of subsequent years premium

Transport of passenger by air (economy class travel) 150 INR or 750 INR 12% with abatement of 60%

Works contract service 4% 4.8%

Service Existing taxable portion Proposed taxable portion

Service portion in supply of food or drink at a restaurant 30% 40%

Service portion in supply of food or drink from elsewhere (outdoor catering) 50% 60%

Convention centre or mandap with catering 60% 70%

Coastal shipping 75% 50%

Accommodation in hotel etc. 50% 60%

Railways: travel of passengers in first class or air conditioned coach New levy 30%

Service Tax

A. General Important changes in the composition/ alternate rate of service tax are as follows:

The above changes will be applicable from 1 April 2012.

The above changes are proposed to be introduced along with negative list.

Changes in deemed value of taxable services/abatement rates, subject to specified conditions:

42 PwC

B. Negative list The negative list based taxation system is to be implemented from a date to be notified after the Finance Bill, 2012 is enacted. Pursuant to it, service tax will be levied on all services provided or agreed to be provided in a taxable territory, except the following:

• Services specified in the negative list

• Services specifically exempted by notification

In this context, the following steps have been taken:

• The expression ‘service’ including declared services defined

• The draft Place of Provision of Service Rules, 2012 have been issued for public comments

• Certain exemptions have been given and most existing exemptions have been retained

• Principles for determining the taxability of bundled services have been specified

C. Amendments in the Finance Act • Proviso to section 68 (2) has been introduced

to shift service tax liability partly on service recipient and partly on service provider for three specified services, if

- The service recipient is a body corporate; and

- The service provider is either an individual or a firm or LLP

• Section 65B has been inserted to define several expressions. In particular, the expression ‘India’ has been defined to mean:

- The territory of the union as referred to in the Indian constitution

- Its territorial waters, continental shelf, exclusive economic zone or any other maritime zones as defined in the relevant Act

- The seabed and the subsoil underlying the territorial waters

- The air space above its territory and territorial waters, and

- The installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for prospecting, extraction or production of mineral oil and natural gas and supply thereof

• Section 67A has been inserted to prescribe the relevant date for the application of rate of service tax, value of taxable service and the rate of exchange.

• Section 72A has been inserted on the lines of Central Excise Act to introduce provisions relating to special audit under specific circumstances.

• The period of limitation under section 73 (1) of the Finance Act increased from one year to 18 months.

• Section 80 has been amended to provide relief from penalty if service tax, due on renting of immovable property service (as on 6 March 2012), is paid in full along with the interest within six months of date of enactment of the Finance Bill, 2012.


• Section 83 has been amended to include settlement commission provisions and revision mechanism for the assessee aggrieved by the order of the Commissioner (Appeals), as applicable in central excise.

• Section 85 and Section 86 have been amended to reduce the time limit to file appeal before the Commissioner (Appeals) and revenue appeal before the Tribunal to 60 days to harmonise with the Central Excise provisions.

• Prosecution provision under section 89 has been liberalised by specifying that prosecution for non-issuance of invoice will be done when the assessee ‘knowingly evades payment of service tax’.

The above change will be effective from the date of enactment of the Finance Bill 2012

D. Amendments in Service Tax Rules • The time period for issuance of invoice has

been increased to 30 days from 14 days from the date of completion of service.

• LLPs has been treated as partnership firms for service tax purposes.

• Erstwhile limit of 2 lakh INR for self-adjustment of service tax has been dispensed off permitting unlimited adjustment under Rule 6(4A).

• Benefit of depositing service tax on receipt of consideration by individuals and firms (including LLP) has been extended to all services, provided the turnover did not exceed 50 lakh INR in the previous financial year.

• Benefit of non-payment of service tax on export of services will continue, subject to the condition that payment against service is received in regular or extended period as specified by the RBI.

The above changes will be effective 1 April 2012.

E. Others1. The following draft forms and formats have

been placed for public comments:

- Common simplified registration format for central excise and service tax with scope of liberalisation in registration requirements, particularly centralised registrations

- Simplified one page common monthly return for service tax and excise in form EST-1

2. A new rule has been introduced in the Point of Taxation Rules, 2011 to allow the central excise officer to determine the point of taxation to the best of judgment in situations where point of taxation cannot be determined by these Rules as the date of payment or date of invoice or both are not available.

44 PwC

Abbreviations

AID Assessee in default

ALP Arm’s length price

AMT Alternate Minimum Tax

AO Assessing Officer

AOP Association of Persons

APA Advance Pricing Agreement

AY Assessment Year

Bill The Finance Bill, 2012

BOI Body of Individuals

CBDT Central Board of Direct Taxes

CIT The Commissioner of Income-tax

DDT Dividend Distribution Tax

DRP Dispute Resolution Panel

DTC Direct Taxes Code

ECB External commercial borrowings

ECB External commercial borrowings

FDI Foreign direct investment

FY Financial Year

GAAR General Anti Avoidance Rule

GDP Gross domestic product

GST Goods and Services Tax

HC High Court

HUF Hindu Undivided Family

IAA Impermissible Avoidance Arrangement

IDR Indian depository receipts

INR Indian Rupee

IPO Initial public offering

KYC Know your customer

LLP Limited Liability Partnership

LPG Liquefied petroleum gas

LPG Liquefied petroleum gas

MAT Minimum Alternate Tax

MFI Micro finance institutions

MSME Micro small medium enterprises

NR Non resident


PFRDAPension Fund Regulatory and Development Authority

PGBP Profits and Gains of Business or Profession

PPP Public private partnership

QFI Qualified foreign investors

RRB Regional rural banks

SC Supreme Court

SEBI Securities Exchange Board of India

SEZ Special Economic Zone

SIDBI Small Industries Development Bank of India

Tax Treaty Double Taxation Avoidance Agreement

TCS Tax Collected at Source

TDS Tax Deducted at Source

The Act The Income-tax Act, 1961

TP Transfer Pricing

TPO Transfer Pricing Officer

Tribunal Income Tax Appellate Tribunal

VCF Venture capital funds

w.e.f With effect from

w.r.e.f With retrospective effect from

w.r.e.f With Retrospective Effect From

Note: 1. INR 1 Crore = INR 10 Million 2. INR 1 Lac = INR 0.10 Million The proposed amendments are effective from FY 2012-13 unless specified otherwise.

AhmedabadNikhil Bhatia President Plaza, 1st FloorPlot No. 36, Opposite Muktidham Derasar Thaltej Cross Roads, S G Highway Ahmedabad 380054Phone: +91 79 3091 7000Email: [email protected]

BangaloreIndraneel R Chaudhury 6th Floor, Tower “D” The Millenia1 & 2 Murphy Road, UlsoorBangalore 560 008Phone: +91 80 4079 7000Email: indraneel.r.chaudhury@in. pwc.com

ChennaiK Venkatachalam 32, Khader Nawaz Khan RoadNungambakkamChennai 600 006Phone: +91 44 4228 5000Email: [email protected]

HyderabadR D Hingwala# 8-2-293/82/A/113A Road No.36, Jubilee Hills Hyderabad 500 034Phone: +91 40 6624 6600Email: [email protected]

KolkataSomnath Ballav South City Pinnacle4th Floor, Plot # X1/1Block EP, Sector 5, Salt LakeElectronic Complex, Kolkata 700 091Phone: +91 33 4404 6000Email: [email protected]

MumbaiKetan Dalal PwC House, Plot No.18/A Gurunanak Road (Station Road) Bandra (West), Mumbai 400 050Phone: +91 22 6689 1000Email: [email protected]

New Delhi / Gurgaon Shyamal Mukherjee Building no. 10, 17th Floor Tower -C, DLF Cyber City Gurgaon 122002Phone: +91 124 3306 6000Email: [email protected]

PuneSandip Mukherjee GF-02, Tower C Panchshil Tech Park Don Bosco School RoadYerwada, Pune - 411 006Phone: +91 20 4100 4444Email: [email protected]

Our Offices

About PwC

PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

In India, PwC (www.pwc.com/India) offers a comprehensive portfolio of Advisory and Tax & Regulatory services; each, in turn, presents a basket of finely defined deliverables. Network firms of PwC in India also provide services in Assurance as per the relevant rules and regulations in India.

Providing organisations with the advice they need, wherever they may be located, our highly qualified, experienced professionals, who have sound knowledge of the Indian business environment, listen to different points of view to help organisations solve their business issues and identify and maximise the opportunities they seek. Our industry specialisation allows us to help co-create solutions with our clients for their sector of interest.

We are located in these cities: Ahmedabad, Bangalore, Bhubaneshwar, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune.

pwc.com/indiaThis publication does not constitute professional advice. The information in this publication has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this publication represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.

© 2012 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

NJ 298 March 2011 UnionBudget2012.indd Designed by: PwC Brand and Communications, India

pwc analysis - india budget 2012

Documents