Budget 2012-13 Impact on Financial Services Sector

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Union Budget 2012-13:Impact on the Financial Services sector



Union Budget 2012-13 | Impact on the Financial Services sector 2

Contents03 | An overview

04 | Key expectations

05 | Key policy initiatives

07 | Direct tax proposals

09 | Indirect tax proposals

12 | Our offices




An overview

The financial market performance is often considered as a

barometer of the economy. The Banking system is the

dominant life-line of the financial market. The watchful eyes

of the regulators such as Securities and Exchange Board of

India ('SEBI') and Reserve Bank of India ('RBI') have ensured

that the financial markets are stable and are not destabilised by

the global financial turmoil. The Indian economy inspite of

global financial turmoil is showing a steady GDP growth of 6.90%.

To further augment the financial markets various steps are

proposed to be taken for deepening the reforms in the Capital

markets, including simplified process of Initial Public Offer

('IPO'), allowing Qualified Foreign Investors ('QFIs') to access

Indian Bond Market, etc.

Further, possibility of creating a financial holding company toraise resources to meet the capital requirements of Public

Sector Banks is under examination.

To encourage flow of savings in financial instruments and

improve the depth of domestic capital market, it is proposedto introduce a new scheme called Rajiv Gandhi Equity SavingsScheme. The scheme would allow for income tax deduction of

50 % to new retail investors, who invest up to Rs 50,000directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of 3 years.

The details of the scheme will be announced in due course

During the current fiscal year the government has proposed tobring in force amendments in various legislations viz. thePension Fund Regulatory and Development Authority Bill

2011, the Banking Laws (Amendment) Bill 2011, the InsuranceLaw (Amendment) Bill 2008, Bill of Factoring and Assignmentof Receivables, SARFAESI Act 2002, etc

While the sector has reached a stage where new age reforms

are required, it looks at the Government to enable it to reachthe next level of growth




Key expectations

Insurance

• Clarification with respect to non – applicability of provisionsof Minimum Alternate Tax ('MAT') to Insurance Companies

• Clarification with respect to taxability of Life InsuranceBusiness

• No change in the tax rate for the Life insurance Business

• Clarification under Chapter VI with respect to set-off andcarry forward of losses in case of Insurance Companies

• Increase in Foreign Direct Investment ('FDI') limit from

26% to 49%

Banks/FIIs/Mutual Funds/VCF

• Extension of the provisions as applicable to taxation of Foreign Institutional Investors ('FIIs') to taxation of QFIs

• Clarity on characterization of income earned by FIIs i.e.business income vis-à-vis capital gains

• Commodity Transaction Tax to be introduced oncommodity trades

• Banks to get full deduction in respect of provisions for bad

loans as against 7.5% of total income

• All investments by Venture Capital Funds ('VCFs') to qualify for “pass through status” as against restricting it toinvestment in specific sectors




Key policy initiatives

The key policy initiatives taken by the government inpreceding 12 months (including the initiatives proposed in this

budget) are as under :

Banks/FIIs/Mutual Funds/VCF

• SEBI has allowed FII's to invest in primary issues of Non-

Convertible Debentures ('NCDs')/ bonds only if listing isdone within 15 days of such investment

• Authorised Dealer Category-I (AD Category-I) banks tocertify the leverage ratio (i.e. outside liabilities/owned funds)

of Infrastructure Finance Companies ('IFCs') desirous of availing External Commercial Borrowings ('ECBs') underthe approval route

• Micro Finance Institutions ('MFIs') and Non-GovernmentOrganizations ('NGOs') engaged in micro finance activities

permitted to raise ECB up to US$10 million or equivalentduring a financial year for permitted end-uses, under theautomatic route, subject to certain conditions

• FIIs allowed to invest in NCDs / bonds issued by Non-Banking Financial Companies ('NBFC') categorized as IFCs

by the RBI within the overall limit of US$25 billion

• Limit of FII investment NCDs/bonds issued by Indiancompanies in the infrastructure sector (as defined underECB regulations) enhanced from US$5 billion to US$25

billion, subject to following conditions:- such instruments shall have a residual maturity of 5 years

and above

- investments would have a lock-in period of 3 years (1 year

up to US$5 billion)

• Investment on repatriation basis by eligible non-residentinvestors subject to certain conditions allowed in:

- rupee and foreign currency denominated bonds issued by the Infrastructure Debt Funds ('IDFs') set up as an Indian

company and registered as NBFC with RBI; and

- rupee denominated units issued by IDFs set up as SEBIregistered domestic Mutual Funds ('MFs')




Key policy initiatives

• To liberalize portfolio Investment route, it has beenproposed to permit MFs to accept subscription from

foreign investors meeting KYC requirement for equity schemes

• A new class of foreign investors viz. QFIs introduced witha view to widen the class of investors, attract more foreign

funds, reduce market volatility and to deepen the Indiancapital market. QFIs can invest in equity shares of listedIndian companies and equity and debt schemes of mutual

funds, subject to specified limits

• Limit of US$100 million placed for swap transactions on

the AD Category I banks removed

Insurance

• Insurance Regulatory And Development Authority ('IRDA') has laid down the draft guidelines on IPO of Life

Insurance Companies. The guidelines mentions that the life

insurance companies in India wishing to go public must

have spent at least 10 years in the business

• IRDA has clarified that the insurer may invest in any

venture fund registered under the SEBI regulation which

include venture funds investing in Micro, Small and

Medium Enterprises, subject to certain conditions

• IRDA in continuation with the guidelines on outsourcing

of activities by insurance companies has laid down the

disclosure requirement with reference to the agreement/MOU entered into with the third party for rendering

certain services to the insurance companies

• IRDA had appointed Government Actuary’s Department,

UK to evaluate the liabilities of the Indian Motor ThirdParty Insurance Pool under the Insurance Act, 1938 inorder the assess the adequacy of the reserves which are to

be calculated as per the IRDA regulations. On the basis of the analysis IRDA has stated as under:

- dismantling of existing Indian Motor Third Party Pool with effect from 31.03.2012; and

- setting up the framework for Indian Motor Third party declined Risk Insurance pool for commercial vehicles




Direct tax proposals

• Sectoral restriction on business of Venture CapitalUndertaking ('VCU') to claim exemption from income by

VCF or Venture Capital Company ('VCC') have been doneaway with

• Income accruing to VCF/VCC shall be taxable in the handsof the investor on accrual basis with no deferral

• Exemption from TDS provisions on income credited orpaid by VCF/VCC to investors shall be withdrawn

• Any sum received under life insurance policy issued on orafter 01 April 2012 will be exempt provided premium

payable for any of the years during the term of the policy does not exceed 10% (presently 20%) of the actual capitalsum assured

• Deduction under section 80C of the Income tax Act, 1961(the Act) in respect of premium paid on life insurance policy issued on or after 01 April 2012 will be restricted to the

amount of premium not exceeding maximum of 10%(presently 20% ) of actual capital sum assured

* the rate is excluding surcharge and education cess, as applicable

• MAT provisions applicable to Insurance and Banking companies w.e.f. Assessment Year 2013-14. MAT rateremains unchanged @ 18.5%*

• Reduction of Securities Transaction Tax ('STT') in CashDelivery segment from the existing 0.125% to 0.1% fordelivery based purchase/sale of equity shares in a

company/units of an equity oriented fund entered intothrough a recognised stock exchange in India w.e.f. 01 July 2012

• No tax is required to be deducted at source on payment of interest on any debenture (listed or not) to a residentindividual or Hindu Undivided Family (HUF) if theaggregate amount of such interest paid during the financial

year does not exceed Rs 5,000 and the payment is made by account payee cheque

• Deduction up to Rs 10,000 allowed to an individual or HUF

in respect of interest on deposits (not being time deposit) ina savings account with a banking company, co-operativesociety engaged in banking business and post office




Direct tax proposals

• Deduction under Section 80D of the Act extended toinclude any sum paid upto Rs 5,000 in any mode (including

cash) on preventive health check-up of self, spouse,dependent children or parent(s)

• Tax Residency Certificate containing prescribed particularsto be obtained by non-resident to avail tax treaty benefits.

However, this is not a sufficient condition to avail thebenefits.

• Cascading effect of Dividend Distribution Tax in multiple

corporate structure removed




Indirect tax proposals

Serv ice tax

• Increase in rate of Service tax from 10% to 12%

• Introduction of the “negative list” concept resulting in

wider coverage of services

• Under “negative list” approach, the following financialservices are proposed to be exempted from Service tax :

- services of extending deposits, loans and advancesfor which consideration is either interest ordiscount

- inter-se sales or purchase of foreign currency

- the services of business facilitators andcorrespondents to banks and insurance companiesin rural areas

• Procedural simplification in the form of simplified returns

• Compounding rate for service of currency exchange hasbeen revised from 0.1% to 0.12%

• Time period within which invoice is to be issued has beenextended to 45 days for banking and financial services (30days for others)



10Union Budget 2012-13 | Impact on the Financial Services sector

The changes in the tax andregulatory environmentconstantly challenge large andgrowing businesses,

particularly those operatinginternationally.

How your business meets thischallenge can have asignificant impact on yourbottom line. The more your

business grows, the morecomplex tax requirements canbecome.

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and highlight the risks presented by constantly evolving andincreasingly complex legislation.

Drawing on our knowledge and understanding of taxregimes in India and around the world, we offer timely information and independent advice.

Through legitimate planning, we consider issues that arise within specific types of tax, as well as the tax implications

of a new project, or a change to the business.

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strategies suitable for your specific business structure, andour solution-oriented approach is designed to help youunderstand and minimise the tax challenges your business

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A comprehensive suite of tax and regulatory services

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Di rec t Tax and Regula tory Services

• direct tax and regulatory advisory & statutory compliances

• representation & litigation support

• international tax advisory & planning

• regulatory advice and support under

- Foreign Exchange Management Act(FEMA)

- Foreign Direct Investment (FDI)guidelines

- Reserve Bank of India (RBI)

-Securities and Exchange Board of India(SEBI)

- Companies Act

• inbound investment advisory & entity set-up

• outbound investment & cross-border

transaction advisory

• tax diagnostic reviews

• tax due diligence

• expatriate tax advisory & compliance services

Ind i rec t Tax Serv ices

• advisory & strategic consulting in relation toCustoms, Central excise, Service Tax, Value

Added Tax (VAT), Sales Tax/ Central Sales Tax, Foreign Trade Policy, Special Economic

Zones and other allied legislations

• compliance assistance

• representation & litigation support• review/ health check/ VAT audit

• tax due diligence

Transfer Pr ic ing Services

• local documentation studies (including issuance of an Accountants Report)

- functions & risk analysis

- comparability analysis

• multi-jurisdictional documentation studies

• planning study (margins reviews forbudgeting, new transaction planning)

• supply chain re-structuring

• representation & litigation support (including

controversy management)

• review of agreements from a transfer pricing perspective

• structuring cost sharing arrangements for

inter-company transactions

Transact ion Tax

• merger & acquisition advisory services

• transaction structuring & management(including corporate re-organisation &

financial structuring advisory)

• transaction implementation assistance

(including post-implementation assistance)

US Tax Services

• US inbound services

• transaction related services

• entity taxation services

• individual taxation services

Compl iance & Outsourc ing

• maintenance of books of accounts• payroll processing, including withholding tax

• computation and deposit of withholding tax with the Government Treasury as well as

filing associated returns

• accounts payable/ receivable processing

• banking support

• preparation of Final Accounts

• audit support

• secretarial support

A comprehensive suite of tax and regulatory services

For more details, please writeto us at [email protected]

www.wcgt.in




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Budget 2012-13 Impact on Financial Services Sector