Grant thornton budget 2012

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Overview of the Union Budget 2012-13

Contents

1 Foreword

2 Key policy announcements

3 Fiscal and economic review

4 Snapshots of tax proposals

5 Direct tax proposals

6 Indirect tax proposals

7 Contact us

Overview of the Union Budget 2012-13 2

Key policy announcements

Snapshot of tax proposals

Direct tax proposals

Indirect tax proposals

Foreword

Fiscal and economic review

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Foreword Despite the crisis in Euro zone, slow recovery in the United States, political instability in the Middle East and subsequent rise in crude oil prices, the resilience of India’s domestic economy is once again evident with this year’s GDP growth estimate of over 6.5%. However, this consumption-driven growth may not be sustainable in the long run unless it is accompanied with an investment-driven growth. Against this backdrop, growth and stability remained central to the Budget this year. By setting the fiscal deficit target of 5.1% for 2012-13 and expressing its intentions to keep central subsidies under 2% of GDP in 2012-13, and further bring them down to 1.75% of GDP in the next 3 years, the government has steered clear of populist measures. The Budget endeavours to shore up investment in infrastructure with proposals to make more sectors eligible for Viability Gap Funding under PPP scheme and other measures including tax free bonds of Rs 60,000 crore for financing infrastructure projects in 2012-13 alone. Nevertheless, the common man, hard-pressed by inflation, also has some reasons to cheer while the Budget proposes revisions in income tax exemption limit for the general category and brings forth the provision for allowing External Commercial Borrowing (ECB) to promote low cost housing. However, an upward revision in service tax and other indirect taxes is likely to affect purchasing power of aam admi, on the other hand. Overall the Budget attempts to do a balancing act with a focus on structural reforms. We have developed this report in view of providing you a comprehensive overview of the Budget and we hope that you find it useful. Tax & Regulatory Services Team Grant Thornton India LLP

“The Budget seemed more benign than it is. While most of the amendments were anticipated such as tinkering of personal tax rates, small exemptions for the middle income group and widening the net of service tax and taking the rate up, the fine print has wider ramifications. Retrospective amendments to address Vodafone like situations, bringing domestic related party transactions under the ambit of transfer pricing are a case in point. Measures announced to boost infrastructure, agriculture, aviation and power industries is very heartening." Pallavi J Bakhru Partner & Practice Leader Tax & Regulatory Services Walker, Chandiok & Co


Subsidies • Attempt to keep subsidies below 2% of Gross Domestic

Product ('GDP') during Financial Year ('FY') 2012-13 • Subsidies fully provided for effective administration of the

proposed Food Security Legislation • Nation-wide roll out of mobile-based Fertilizer Management

System to provide complete information on movement of fertilisers and subsidies

Budget Estimates • Gross Tax Receipts estimated at Rs 1,077,612 crores for FY

2012-13 • Total expenditures budgeted at Rs 1,490,925 crores for FY

2012-13

Disinvestments • For FY 2012-13, while 51% ownership and management

control to remain with the Government, disinvestments target have been set at Rs 30,000 crores





Foreword


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Rationalisation of key policies

• Amendment to the Fiscal Responsibility and Budget

Management ('FRBM') Act – key features being concepts of: - Effective revenue deficit – difference between revenue

deficits and grants for creation of capital assets - Medium-term expenditure framework

statement – to set forth a 3-year rolling target for expenditure indicators

• Goods and Service tax ('GST') network to be set-up as National Information Utility and operational by August 2012

• 20 crore people enrolled under UID-Aadhaar mission. Adequate funds allocated for further enrolment of 40 crores

• White Paper on Black Money to be presented in Parliament in the Budget session

• National Food Security Bill, 2011 is presently before Parliamentary Standing Committee

• Bill regarding Public Procurement Legislation to be introduced in Parliament to combat corruption






Foreword


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Financial Sector • Introduction of Rajiv Gandhi Equity Saving Scheme which

allows income tax deduction of 50% to new retail investors investing upto Rs 50,000 in equities

• Rs 15,888 crores proposed for capitalisation of public sector banks and financial institutions

• Central KYC depository to be developed in FY 2012-13

Infrastructure Sector

• Government to establish joint venture companies in PPP mode by defence PSUs

• Tax free bonds of Rs 60,000 crores for financing infrastructure projects in FY 2012-13

• Introduction of National Manufacturing Policy to raise share of manufacturing in GDP to 25% creating 10 crore jobs

• External Commercial Borrowings ('ECB') allowed for low cost housing projects

• Rural Infrastructure Development Fund allocation enhanced to Rs 20,000 crores out of which Rs 5,000 crores has been assigned towards creating warehousing facilities

Textile Sector

• Financial stimulus of Rs 3,884 crores for waiver of loans of handloom weavers

Power and Coal Sector • ECB to part finance Rupee debt of existing power projects

Transport Sector • Road Transport and Highways Ministry allocation

enhanced by 14% to Rs 25,360 crores • ECB proposed for capital expenditures for road toll systems • Direct import of Aviation Turbine Fuel for Indian carriers

permitted • Equity participation of foreign airlines in an airport

undertaking upto 49% is under consideration • ECB with a ceiling of US$1 billion to be permitted for 1 year

in respect of working capital requirements of airline industry





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Employment • Allocation for National Rural Livelihood Mission

increased by 34% to Rs 3,915 crores • Prime Minister's Employment Generation Programme

allocation enhanced by 23% to Rs 1,276 crores in FY 2012-13 • Allocation of Rs 1,000 crores for National Skill

Development Fund in FY 2012-13 Social Security • Allocation under National Social Assistance Program

enhanced by 37% to Rs 8,447 crores in FY 2012-13 Defence

• Provision of Rs 1,93,407 crores made for defence services of

which Rs 79,579 crores is towards capital expenditure Education • Allocation for Sarva Shiksha Abhiyan enhanced by 21.7%

to Rs 25,555 crores in FY 2012-13

Agriculture • Target for agriculture credit flow to increase by

Rs 1,00,000 crores to Rs 5,75,000 crores in FY 2012-13 • Interest subvention scheme to continue in FY 2012-13 • Additional subvention of 3% available for prompt payments • Regional Rural Bank credit refinance fund set-up for

disbursing short-term crop loans • Allocation for Accelerated Irrigation Benefit Program

enhanced by 13% to Rs 14,242 crores • Irrigation and Water Resource Finance Company to be

operationalized to mobilise large resources to fund projects Micro, Small and Medium Enterprises • India Opportunities Venture Fund of Rs 5,000 crores to

be set up with Small Industries Development Bank of India Healthcare • No case of polio reported in the last one year • Allocation for National Rural Health Mission to Rs 20,882

crores in FY 2012-13 • National Urban Health Mission to be launched in FY

2012-13 to meet the health needs of the urban poor







Foreword

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Indirect Tax • This year's Union Budget has proposed certain key

amendments to the structure of Indirect Taxation in India • The commitment to implement GST (Goods and Services

Tax) has been reiterated. Though there is no appointed date, the Finance Minister has given all indications for its early implementation

• The Constitutional Amendment Bill required to implement

GST had been introduced in the Parliament and referred to the Parliamentary Standing Committee in March 2011. The recommendations of the Committee are still awaited

• The Empowered Committee of State Finance Ministers has approved the basic structure of the proposed GST

• The intention to merge the Service Tax and Central Excise legislation into one Common Tax Code has been announced.

• The levy of Service Tax has been extended to all services with a short negative list

• The above developments are a clear precursor to GST

• The exact date and rate of GST has not been announced and

the target date of 1 April 2012 for implementation has clearly been missed

• Central Sales Tax has not been abolished “The Budget 2012-13 is a painful pill with Service

Tax being extended to all services (without the credits of GST) and a sharp 2% hike in the Service Tax and Central Excise rates. This will lead to price rises across the board. But the compass is set on Indirect Tax reforms and the various steps taken to lead to an early implementation of GST are welcome.” Amrita Mitra Partner – Indirect Tax Grant Thornton India LLP

Overview of the Union Financial Budget 2012-13 7





Foreword


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Economic Growth

• GDP growth rate during FY 2011-12 is estimated to be 6.9% as compared to 8.4% during previous two FYs. Global economic slack and oil price rise triggered this fall in GDP growth

• During FY 2011-12, the services sector is expected to grow at 9.4% as against 9.3% last year. Its contribution to GDP is estimated at 59%

• However, Manufacturing sector's growth has been lacklustre. It has seen a steep fall from 9% during April-December 2010 to 3.9% during April-December 2011

• Growth in exports reduced from 40.5% during FY 2010-11 to 23.5% during FY 2011-12 with insignificant change in the rate of growth in imports

• Inflation remained a major concern during FY 2011-12 due to upsurge in global commodity prices and crude oil though Wholesale Price Index moderated from 9% during April-November 2011 to 7% in February 2012

• Foreign exchange reserves augmented by US$ 6.7 billion from US$ 304.8 billion at end of March 2011 to US$ 311.5 billion at end of September 2011

8.4 8.4 6.9

7.6

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2.00

4.00

6.00

8.00

10.00

2009-10 2010-11 2011-12 2012-13AE

%ag

e

Financial Years

GDP trends

8.1

3.8

9.6 9.1

0.002.004.006.008.00

10.0012.00

2008-09 2009-10 2010-11 2011-12AE%

age

Financial Years

Headline Inflation

Financial Years Agriculture Industry Services

2010 – 11 14.5 27.8 57.7

2011 – 12AE 13.9 27.0 59.0

Sectoral Composition of GDP

Overview of the Union Financial Budget 2012-13 8





Foreword


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Fiscal Deficit

• Increase in fiscal deficit from 4.8% in FY 2010-11 to estimated 5.9% of GDP during FY 2011-12. It is expected to drop to 5.1% of GDP during FY 2012-13

Key Initiatives

• Pradhan Mantri Gram Sadak Yojana (Bharat Nirman) proposes to connect 54,648 habitations involving construction of 146,184 km of rural roads

• Draft National Policy on Electronics (released on 03 October 2011) envisions creating a globally competitive electronics system design and manufacturing industry

• Draft National Policy on Information Technology 2011 focuses on deployment of information communication technology in all sectors of the economy

• Additional budgetary support of Rs 91,800 crores to enhance productivity and resilience of agriculture

• 'Green India' mission proposes additional afforestation of 10 million hectares of forest lands, wastelands and community lands with projected expenditure of Rs 46,000 crores

6.5

4.8

5.9

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1.00

2.00

3.00

4.00

5.00

6.00

7.00

2009-10 2010-11 2011-12AE 2012-13AE

%ag

e

Financial Years

Gross Fiscal Deficit





Foreword

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• No change in Corporate tax rate, Minimum Alternate Tax, Surcharge and Education Cess

• Minimum Alternate Tax to be applicable to Insurance, Banking and Companies engaged in the generation or supply of electricity, etc

• Scope for Alternate Minimum Tax extended to all tax payers (other than companies) claiming specified deduction

• Concessional rate of taxation of dividends from foreign subsidiaries @ 15% extended by 1 year

• Cascading effect of Dividend Distribution Tax in multi-tier structure removed

• Weighted deduction introduced for expenditure on Notified Agriculture Projects and Skill Development Projects in manufacturing sector

• Weighted deduction for in-house research extended by 5 years

• Investment linked deduction extended coupled with weighted deduction for specified businesses

• Power companies to get additional depreciation as well as extension in terminal date for availing tax holiday

• 'Pass through' status accorded for all investments by Venture Capital Funds / Companies

• Deeming provisions introduced to treat share premium received in excess of fair market value as income in the hands of closely held investee company

• Share capital, share premium etc in the books of closely held company treated as explained only if source is proved

• Submission of Tax Residency Certificate made a necessary

(but not the sole) condition for availing tax treaty benefits • Indirect transfer of capital asset proposed to be taxed in India.

Clause introduced to validate all actions of the tax officer notwithstanding anything contained in any judgement, decree or order. (Vodafone decision reversed)

• General Anti Avoidance Rules provisions introduced • Consideration for computer software (even off the shelf)

proposed to be treated as royalty • Reduced withholding tax rate of 5% applicable on foreign

borrowings by companies engaged in specified businesses • Personal income tax slabs widened • Filing of income tax return made mandatory for residents

having any assets outside India or having signing authority in any account outside India

• Tax Officer permitted to appeal against Dispute Resolution Panel order







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Transfer pricing • Advance pricing agreement introduced in transfer pricing

(prospective)

• Definition of international transaction and intangible property clarified (retrospective)

• International transaction includes business restructuring or reorganization, covered; whether or not it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date (retrospective)

• Transfer Pricing Regulations apply to specified domestic transactions between domestic related parties (prospective)

• Tax authorities can appeal against the order incorporating the DRP directions (prospective)

• Currently, the arm’s length range is based on a uniform tolerance band of 5% around the transfer price. The 5% band has been replaced with 3% (prospectively)

• Amendments propose to eliminate viewing of this 5% range as a standard deduction and also clarifies that the new provision disabling the standard deduction will be applicable for all assessment proceedings pending before the Assessing Officer as on 1 October 2009. However, the proposed amendment limits the tax authorities ability to re-open or rectify assessments concluded before 1 October 2009


“While the DTC has been deferred, the Union Budget has brought in some key provisions of the DTC in the Bill like the anticipated general anti avoidance rules (GAAR) and the advance pricing agreements (APA). The most glaring thing that comes out of the amendments is the introduction of key provisions retrospectively to overrule recent judgments in the area of international tax and transfer pricing. This would surely not boost the confidence of the foreign investor. A welcome amendment is the APA regime introduced to provide a progressive mode of dispute resolution in the area of transfer pricing. Of course the APA scheme should also practically turn out to be a favorable and unbiased platform for the multinationals and not be construed as another round of aggressive transfer pricing audit. On the other hand by bringing domestic transactions in the ambit of transfer pricing, the compliance burdens on the tax payer is going to increase multifold.” Karishma R. Phatarphekar Partner - Transfer Pricing Grant Thornton India LLP






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Roadmap to GST laid out

• There are clear indications that GST will be implemented within a short time span

• The Constitutional Amendment Bill was introduced in the Parliament in March 2011 and is before the Parliamentary Standing Committee for recommendations

• The Empowered Committee of State Finance Ministers have approved the basic structure. The IT enabled GST Network (GSTN) has been approved and will become operational by August 2012. A common PAN-based registration, return and payment processing platform for all states will check tax evasion

• The drafting of legislation for Centre and State GST is under progress

• The Government has extended the levy of Service Tax on all services with a short negative list

• The provisions of Central Excise and Service Tax are proposed to be merged into a Common Tax Code

• Common registration and return provisions have been proposed. The CENVAT Credit Rules are already common

Rates increase for manufacture and services • The rate of Service Tax has been increased from 10% to 12%

• The standard rate of Central Excise Duty has been increased

from 10% to 12%

• The merit rate of Central Excise duty has been increased from 5% to 6%

• The lower merit rate of Central Excise Duty on specified 130 products has increased from 1% to 2%

• The Basic Custom Duty (BCD) rate remains the same at 10% Effective Dates • The Central Excise rates will be effective from midnight of 16

March 2012

• The Service Tax rate will be effective from 1 April 2012







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Service Tax • Proposal to tax all services except those in the negative list

comprising of 17 heads

• Alignment made to harmonize Central Excise and Service Tax into a Common Tax Code.

• A common simplified registration form and a common return comprising of one page proposed in this direction

• Place of Supply Rules for determining the location of service

and consumption to be put in public domain for stakeholder’s comments

• Point of Taxation Rules to be rationalized to be in line with the other proposed changes

• CENVAT Credit permitted on number of services to reduce cascading of taxes

• New Scheme announced for simplification of refunds

• Revision Application Authority and Settlement Commission being introduced in Service Tax for dispute resolution

Excise • Duty increased to more than 12% in few cases such as

automobile and cement • Duty evasion of amount more than Rs 30 lakh is a cognizable

offence where person can be arrested without warrant

• Benefit of reduced penalty, i.e. 25% of the penalty amount is available only if penalty along with duty and interest paid within 30 days

• Interest is not payable on credit wrongly taken unless the same

is utilized

• The rate for CENVAT reversal for exempt services/ goods under Rule 6(3) of CENVAT Credit Rules is revised from 5% to 6%

Customs • The peak rate of customs duty on non-agricultural goods

remains at 10%







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• Exemption given to the following sectors:

• Agriculture • Fuel for power • Machinery for mining • Protective warning systems for railways • Specific road construction • Aircraft machineries • New leases of aircrafts • Iron ore plants • Steel coating material • Textile machinery • Specific medical devices like stents • LED and LCD TV • Mobiles • Life saving drugs, etc

• Export duty on chromium ore is enhanced from Rs 3,000 per

tonne to 30% ad valorem

• Method of computation of education cess and secondary & higher education cess is simplified to avoid computation of such cesses twice

• Transfer of unutilized credit of Additional duty ('SAD') lying in

balance at the end of each quarter to another factory of the manufacturer is permitted

• The duty free allowance under Baggage Rules is increased from Rs 25,000 to Rs 35,000 for person of Indian origin and Rs 12,000 to Rs 15,000 for children upto 10 years of age

• Exemption from Countervailing Duty ('CVD') is provided retrospectively to foreign going vessels from 1 March 2011 to 16 March 12






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Rates of income - taxes Personal tax • Personal income-tax slabs proposed to be revised as under: • Minimum exemption limit for women changed from Rs

190,000 to Rs 200,000 (the category of women below the age of 60 years has been removed)

• Limits remain unchanged for senior citizens (age of 60 years and above but less than 80 years) at Rs 250,000

• Limits remain unchanged for very senior citizen (age of 80 years and above) at Rs 500,000

• Education Cess and Secondary and Higher Education Cess at 2% and 1% respectively to continue

Corporate tax • No change in corporate tax rate • No change in Minimum Alternate Tax ('MAT') rate (18.5%) • No change in surcharge for domestic companies (5%) • No change in surcharge on foreign companies (2%) • Marginal relief provisions to continue • Education Cess and Secondary and Higher Education Cess at

2% and 1%, respectively to continue • No change with respect to excluding Education Cess and

Secondary and Higher Cess on tax deducted or collected at source, in case of domestic companies and other resident persons

• Concessional rate of 15% for dividend received from foreign subsidiary has been extended by 1 more year

Securities Transaction Tax ('STT') • STT payable by purchaser and seller in respect of delivery

based transaction for equity shares in company / units of equity oriented fund entered into through a recognised stock exchange reduced from 0.125% to 0.1%

Existing Slab (Rs)

Revised Slab (Rs) Tax rate (%)

Upto 180,000 Upto 200,000 NIL

180,001 to 500,000 200,001 to 500,000 10

500,001 to 800,000 500,001 to 1,000,000 20

Above 800,000 Above 1,000,000 30






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MAT • It is proposed to widen the scope of MAT provision and levy

MAT to companies which prepare their profit and loss accounts in accordance with provisions of the Act governing such companies such as Insurance companies, Banking companies or Companies engaged in the generation or supply of electricity, etc

• It is also proposed that 'Book profit' is to be increased by the amount standing in the revaluation reserve relating to the revalued asset which has been retired or disposed, if the same is not credited to the profit and loss account

• This amendment will take effect from Assessment Year ('AY') 2013-14 (FY 2012-13)

Alternate Minimum Tax ('AMT') to be levied on all persons, other than companies • It is proposed to widen the scope of AMT and include all

class of assesses (other than companies) under the ambit of AMT provisions who are claiming deductions vide chapter VI-A under the heading 'C-deduction in respect of certain incomes' (i.e. Sections 80H to 80RRA, other than Section 80P) or under Section 10AA of the Income Tax Act, 1961 ('IT Act')

• The proposed provisions shall not apply to an individual or a Hindu Undivided Family ('HUF') or an association of persons ('AOP') or a body of individuals ('BOI') (whether incorporated or not) or an artificial juridical person if the adjusted total income (i.e. total income as increased by the deduction under chapter VI-A, as mentioned above and Section 10AA) of such person does not exceed Rs 2 million

• Tax credit in respect of AMT paid would continue to be available for a period of subsequent 10 AYs

• This amendment will take effect from AY 2013-14 (FY 2012-13)






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Removal of cascading effect of Dividend Distribution Tax ('DDT') • To remove the cascading effect of DDT in multi-tier

corporate structure, it is proposed that a company (holding company) receiving dividend from it Indian subsidiary where:

- such Indian subsidiary has paid DDT on the dividend paid to the holding company;

- can take credit of the DDT that the Indian subsidiary has paid while distributing dividend in the same year

- additional condition that the holding company should not be a subsidiary of any other company has been removed.

• The proposed amendment will take effect from 1 July 2012 Expenditure on Notified Agricultural extension projects • A new provision (Section 35CCC) is proposed to be

introduced in the IT Act to allow weighted deduction of 150% of the expenditure incurred on notified agricultural extension projects

• The eligible projects for this weighted deduction shall be

notified by the Board in accordance with the prescribed guidelines

• This amendment will take effect from AY 2013-14 (FY 2012-

13)

Expenditure on skill development project • A new provision (Section 35CCD) is proposed to be

introduced in the IT Act to allow weighted deduction of 150% of the expenses (not being expenditure in the nature of cost of any land or building) incurred on skill development projects in manufacturing sector

• The eligible projects for this weighted deduction shall be

notified by the Board in accordance with the prescribed guidelines


13)

Weighted deduction to in- house scientific research • Under Section 35(2AB), weighted deduction of 200% for

expenditure (not being in the nature of cost of any land or building) incurred on in-house research and development facilities, have been extended for a further period of 5 years i.e. up to 31 March 2017

• This will take effect from AY 2013-14 (FY 2012-13)






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Investment linked incentives • Investment linked deductions proposed to be extended to the

following businesses commencing operations on or after 1 April 2012:

- setting up and operating of an inland container depot - a container freight station - bee-keeping and production of honey and beeswax - setting up and operating a warehousing facility for

storage of sugar • Weighted deduction of 150% of the capital expenditures (as

against current 100% deduction) proposed to be allowed to the following businesses commencing operations on or after 1 April 2012:

- setting up and operating a cold chain facility - setting up and operating a warehousing facility for

storage of agricultural produce - building and operating a hospital with at least one

hundred beds for patients - developing and building a housing project under a

scheme for affordable housing - production of fertilizers


• Investment linked deduction would continue to be available to hotel owners where it owns the hotel but the operation of such hotel is transferred to another person. This amendment will take effect retrospectively from AY 2011-12 (FY 2010-11)

Exemption in respect of income received by certain foreign companies • Exemption is provided to foreign companies in respect of any

income received by it in India in Indian currency on account of sale of crude oil to any person in India subject to specified conditions

Extension of sunset clause - power companies • The terminal date of availing deduction for the undertaking

engaged in business of generation and distribution of power, transmission and distribution of power by laying network of transmission and distribution lines, undertaking renovation or modernization of existing distribution lines is extended from 31 March 2012 to 31 March 2013

Additional depreciation to power companies • It is proposed to extend the benefit of additional depreciation

to taxpayers engaged in the business of generation or generation and distribution of power


13)


Thresholds for tax audit • Threshold for tax audit is proposed to be revised as under, from

AY 2013-14 (FY 2012-13)

• The due date for furnishing the tax audit report is aligned with the due date for filing the tax return

Thresholds for applicability of tax on presumptive basis • For the purpose of presumptive taxation under Section 44AD,

threshold limit of total turnover or gross receipts is proposed to be increased from Rs 6 million to Rs 10 million

• This amendment will take effect from AY 2013-14 (FY 2012-13) • Further, the following persons are proposed to be carved out of

presumptive taxation : - professionals covered under Section 44AA - persons earning income in the nature of commission or

brokerage - persons carrying on agency business

• This amendment will take effect retrospectively from AY 2011-12 (FY 2010-11)





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Computation of tonnage income • The following amendment has been proposed for calculation

of tonnage income of a qualifying ship and will take effect from AY 2013-14 (FY 2012-13)

Qualifying ship having net tonnage

Existing amount of daily tonnage

income

Proposed amount of daily tonnage income

up to 1,000 Rs 46 for each 100 tons

Rs 70 for each 100 tons

exceeding 1,000 but not more than 10,000

Rs 460 plus Rs 35 for each 100 tons exceeding 1,000 tons

Rs 700 plus Rs 53 for each 100 tons exceeding 1,000 tons

exceeding 10,000 but not more than 25,000

Rs 3,610 plus Rs 28 for each 100 tons exceeding 10,000 tons


exceeding 25,000


Rs 11,770 plus Rs 29 for each 100 tons exceeding 25,000 tons.

Audit under Existing

threshold (Rs)

Revised threshold

(Rs) 44AB - Tax audit for persons

carrying on business 6 million 10 million

44AB - Tax audit for persons carrying on profession 1.5 million 2.5 million






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Clarification in relation to amalgamation and demerger involving subsidiary • Even where a subsidiary company amalgamates with its

holding company, in order to obtain a tax neutral treatment of the amalgamation in the hands of such shareholder (i.e. holding company), there was a requirement to issues of shares to shareholders of the amalgamating company (i.e. the subsidiary), which was impossible to achieve as the holding company could not issue shares to itself. This requirement has been dispensed with.

• Similarly, in case of a demerger, where demerged company is a subsidiary company and the resulting company itself is the holding company, the requirement relating to issues of shares by such resulting company (i.e. holding company) to the demerged company (i.e. subsidiary company) has been dispensed with


Provisions relating to Venture Capital Fund ('VCF') or Venture Capital Company ('VCC')

• Sectoral restrictions on business of Venture Capital Undertaking ('VCU') to claim exemption from income by VCF or VCC have been done away with i.e. 'pass through' status is accorded for all investments by VCF or VCC

• It is also proposed that income accruing to VCF or VCC shall be taxable in the hands of investor or accrual basis with no deferral


Share premium in excess of Fair Market Value ('FMV') to be treated as income • It is proposed to insert a new provision (Section 56(2)(viib))

where any consideration received for issue of shares is in excess of face value of shares, then the consideration exceeding FMV of the shares shall be chargeable to income tax under the head 'Income from other sources

• The FMV shall be higher of the following: – FMV, as per the prescribed guidelines; or – FMV as may be substantiated by the issuing company

• This provision is proposed to be applicable only for companies in which public are not substantially interested (i.e. closely held companies). Further, this provision is not applicable to venture capital undertaking, with respect to shares issued to venture capital company / fund


Exemption of any sum or property received by an HUF from its members • It is proposed to exclude any sum or property received by an

HUF from its members without consideration or inadequate consideration, from taxation

• The proposed new provision will take effect retrospectively from 1 October 2009






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Clarification in connection with 'cost to previous owner' • It is proposed that in the following transactions the cost of

capital assets in the hands of the recipient would be equal to the cost of such assets in the hands of the previous owner (transferor):

- transfer of capital assets in course of demutualisation/ corporatisation of a recognised stock exchange as a result of which AOP/BOI (previous owner) is converted into a company (recipient)

- transfer of capital assets/ intangible assets on conversion of sole proprietary concern / firm (previous owner) into a company (recipient)


FMV to be considered as 'full value of consideration' • A new provision is proposed to be inserted (Section 50D)

under which FMV of capital asset (on the date of transfer) is to be considered as 'full value of consideration' for transactions where sales consideration is not ascertainable or cannot be determined


Relief from long term capital gains tax to an individual or an HUF on sale of a residential property • A new provision (Section 54GB) is proposed to be

introduced to allow relief from long term capital gains on sale of residential property (house or a plot of land) whereby the sale consideration is reinvested in the equity of a Small Enterprise (as per the Micro, Small and Medium Enterprises Act, 2006) and which is utilised by such company for the purchase of new plant and machinery

• The above relief is available subject to fulfillment of certain prescribed conditions such as lock in period for 5 years for investment and assets purchased, minimum shareholding requirement, time frame for utlisation of subscription amount by the company, etc

• The said exemption applies to any transfer of a residential property made before 31 March 2017


Reference to Valuation Officer • The powers of Assessing officer has been widened with

respect to cases to be referred to a Valuation Officer. As per the amended provisions, the Assessing officer could now refer a case to Valuation Officer even when FMV is lower than stated by the tax payer (as against earlier provisions where the reference could only be made if FMV was higher)

• The proposed provision will take effect from 1 July 2012






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Transfer of capital assets not situated in India • It is proposed to tax indirect transfer of capital assets in India

by inserting the following deeming / clarificatory amendments:

– definition of 'capital asset' to include controlling interest in an Indian company. It states that any rights in or in relation to Indian company, including rights of management of control or any other rights whatsoever will deemed to be regarded as 'capital asset'

– definition of 'transfer' to specifically include disposition or parting with any interest directly or indirectly irrespective of whether such transfer is effected or dependent upon or flowing from transfer of shares of company registered or incorporated outside India.

– the term 'through' under in Section 9(1)(i) to mean and include 'by means of', 'in consequence of' or 'by reason of'

– any share or interest in a company or entity registered or incorporated outside India is deemed to be situated in India if the share or interest derives, directly or indirectly its value substantially from the assets located in India

– withholding tax provisions under Section 195 applies /to be applicable to non-residents irrespective of whether non-resident has a residence or place of business or business connection in India or any other presence in India


Transfer of capital assets not situated in India • A validation clause has been introduced whereby any notice

sent or purported to have been sent, taxes levied, demanded, assessed, etc with regard to such transfers is deemed to have been valid notwithstanding anything contained in any judgement, decree or order.

Reassessment of income in relation to any asset located outside India • To reassess the income in relation to any asset located outside

India (including financial interest in any entity), which has escaped assessment, the following amendments are proposed:

– time limit for issue of notice for reopening of an assessment to be increased to 16 years

– income shall be deemed to have escaped assessment where a person is found to have any asset (including financial interest in any entity) located outside India

– the reassessment provisions are procedural in nature and will take effect from 1 July 2012 for enabling reopening of proceedings for an AY prior to this date. It is further proposed that the extended period of 16 years for initiating reassessment will also apply to any AY beginning on or before 1 April 2012






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General Anti-Avoidance Rules ('GAAR') • GAAR (under Chapter X-A) is a broad set of provisions

which seek to tax an 'impermissible avoidance arrangement'(which may be a step, a part or whole of an arrangement and hereinafter referred to as 'Transaction') whose main purpose is to obtain a tax benefit and:

– creates rights or obligation which wouldn't arise between persons dealing at arm's length; or

– results in the misuse or abuse of the provisions of the Act in any way; or

– lacks commercial substance either wholly or in part; or

– is entered or carried out in a manner which would not be employed for bonafide purposes

• Specific provisions are inserted which describes the circumstances under which transaction is deemed to lack 'commercial substance'

• Onus lies with the tax payer to prove that the main purpose of the arrangement was not to obtain tax benefit

• Where GAAR is triggered, the consequences could be as

follows: – disregarding or combining any step of the

arrangement – ignoring the arrangement for the purpose of taxation

law – disregarding or combining any party to the

arrangement – reallocating expenses and income between the parties

to the arrangement – relocating place of residence of a party, or location of

a transaction or situs of an asset to a place other than provided in the arrangement

– considering or looking through the arrangement by disregarding any corporate structure

– re-characterizing equity into debt, capital into revenue etc.

• It is also provided that a scheme for regulating the condition and the manner of application of GAAR provisions would be prescribed







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Tax treaty related amendments • The following amendments are proposed in relation to

applicability of provisions under Double Taxation Avoidance Agreement or an agreement with Government of foreign country or specified territory outside India (together referred to as 'treaty')

• submission of Tax Residency Certificate ('TRC'), containing prescribed particulars, made a necessary condition for availing treaty benefits.

• Treaty benefits cannot be availed where provisions of Chapter-X –A i.e. GAAR are invoked


• Further any meaning assigned, through notification, to a term used in a treaty but not defined (in the IT Act or the said treaty ) is proposed to be effective from the date on which the relevant treaty came into force

• This amendment will take effect retrospectively from 1 October 2009 (for Section 90) and 1 June 2006 (for Section 90A)

Expansion of definition of 'Royalties' • The definition of 'royalty' has now been amended to clarify

and include the transfer of any 'right for use' or 'right to use' a computer software (including granting of a licence), irrespective of the medium through which such right is transferred

• Further, 'royalty' would also cover consideration in respect of any right, property or information whether or not:

– possession or control of such right, property or information is with the payer;

– such right, property or information is used directly by the payer; and

– the right, property or information is located in India. • The term 'process' which has now been specifically defined to

include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

• The above clarifications have been introduced with retrospective effect from 1 June 1976






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Tax Deduction at Source ('TDS')

Section Proposed Amendment

Section 193 of the IT Act- TDS from payment of interest on debentures

TDS shall not be required on any interest payable: a) to an individual or a HUF, who is resident in India b) on any debenture issued by a company in which the public are substantially interested c) where the aggregate amount of interest paid during a FY does not exceed Rs 5,000 and the interest is

paid by account payee cheque. This amendment will take effect from 1 July 2012.

Section 194E of the IT Act - TDS from payment to non- resident entertainer

Payments made to 'entertainer' is subject to TDS. The rate of TDS for all payments covered under Section 194E of the IT Act is proposed to be increased to 20% This amendment will take effect from 1 July 2012.

Section 194J of the IT Act - TDS from payment to director

Any remuneration or fees or commission payable to a director of a company, other than those on which tax is deductible under Section 192, shall be liable for TDS under the provisions of Section 194J This amendment will take effect from 1 July 2012.

Section 194LA of the IT Act - Exemption on enhanced compensation

Increase in exemption limit from Rs 100,000 to Rs 200,000 This amendment will take effect from 1 July 2012

Section 194LAA – TDS from payment for immovable property in certain cases

Any person responsible for paying any sum to a resident transferor by way of consideration for transfer of any immovable property (other than agricultural land), shall deduct an amount equal to 1% of such sum as income-tax thereon. The requirement to deduct TDS applies only where the consideration exceeds the prescribed threshold. Also, withholding tax proof is made a pre-condition for the registering office to register the property. This amendment will take effect from 1 October 2012

Section 194LC- TDS from payment of interest to a non-resident by an Indian company

Tax shall be charged at the rate of 5% on any income of a non-resident (not being a company) or a foreign company by way of interest on foreign current borrowings from sources outside India between 1 July 2012 and 1 July 2015 by specified companies. This amendment will take effect from 1 July 2012






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Tax collection at source ('TCS') • TCS proposed to be introduced on the following:

• The proposed new provision will take effect from 1 July 2012

Liability to pay advance tax in case of non deduction of tax • It is proposed that where a person receives any income

without TDS or TCS, he shall be liable to pay advance tax with respect to such income. This amendment will take effect retrospectively from AY 2012-13 (FY 2011-12)

TCS on TCS Rate (%)

Sale of certain minerals 1

Cash sale of bullion and jewellery - if sale consideration exceeds Rs 0.2 million 1

Cases where tax is not deducted at source due to bonafide reasons • It is proposed to dilute the responsibility of the 'assessee in

default' by providing that a person, who fails to deduct tax on the sum paid to a resident shall not be deemed to be an 'assessee in default' in respect of such tax if such resident:

− has duly furnished his return of income − has taken into account such sum for computing

income in such return of income; and − has paid the tax due on the income declared by him

in such return of income • Further, the person is required to furnish a certificate to this

effect from a Chartered Accountant in the prescribed form • Similar changes are also introduced in relation to TCS • The proposed provision will take effect from 1 July 2012 • It is also proposed that where the payer fails to deduct the

whole or any part of the tax on the payment made to a resident and he is not deemed to be an 'assessee in default' (where the payee has paid the tax on such payment – as explained above), such payment will be allowed as a deduction. This will take effect from AY 2013-14 (FY 2012-13)






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Deductions under Chapter VIA for individual and HUF – Effective from AY 2013-14 (FY 2012-13) Deduction for life insurance premium

• Deduction in respect of premium paid on life insurance policy issued on or after 1 April 2012 is proposed to be allowed provided premium payable for any of the years does not exceed 10% (presently 20%) of actual capital sum assured (Section 80C). Corresponding amendment brought in Section 10D

Deduction for preventive health check-up • Under Section 80D, a deduction of Rs 5,000 is allowed for

expenditure incurred during the year by a tax payer on account of preventive health check-up of self, spouse, dependent children or parents

• The above deduction to be within the overall limits of Rs 15,000 / Rs 20,000 prescribed under the said Section of the Act

Deduction for interest on savings account • Deduction upto Rs 10,000 proposed to be allowed in respect

of interest on deposits (not being time deposit) in a savings account with a banking company, co-operative society engaged in banking business and post office (Section 80TTA)

Deductions under Chapter VIA in relation to donation payment • Deduction in respect donation (Section 80G and 80GGA) in

excess of Rs 10,000 is proposed to be allowed only if such sum is paid by any mode other than cash

Eligibility conditions for exempt life insurance policies • Any sum received under life insurance policy issued on or

after 1 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 capital sum assured






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Filing of income tax return in relation to assets located outside India • It is proposed to make it compulsorily for a resident taxpayer

to file a return of income (even if his taxable income is below the basic exemption limit) if any one of the following is triggered:

- the taxpayer has any asset located outside India, including any financial interest in any entity outside India; or

- the taxpayer has signing authority in any account located outside India


Dispute Resolution Panel ('DRP') • The Assessing Officer shall now have the right to appeal to

the Appellate Tribunal against the order passed in pursuance of directions of the DRP in respect of an objection filed on or after 1 July 2012

• It is further clarified that the power of the DRP to enhance the variation shall include and shall always be deemed to have included the power to consider any matter arising out of the assessment proceedings relating to the draft assessment order. This power to consider any issue would be not withstanding that such matter was raised by the eligible assessee or not. This amendment will take effect retrospectively from AY 2009-10 (FY 2008-09)






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Proceedings under Section Current time frame Proposed time frame 143 – Scrutiny Assessment 21 months from end of AY 24 months from end of AY

143 & 92CA – Scrutiny Assessment & Transfer Pricing Assessment

33 months from end of AY 36 months from end of AY

148 – Income Escaping Assessment 9 months from end of FY in which notice issued 12 months from end of FY in which notice issued

148 & 92CA - Income Escaping Assessment & Transfer Pricing Assessment

21 months from the end of FY in which notice issued

24 months from end of FY in which notice issued

250 – Appellate Proceedings 254 – Appellate Tribunal 263 – Revision of orders prejudicial to revenue

9 months from end of FY in which notice issued 12 months from end of FY in which notice issued

250 – Appellate Proceedings 254 – Appellate Tribunal 263 – Revision of orders prejudicial to revenue 92CA – Transfer Pricing

21 months from end of FY in which notice issued 24 months from end of FY in which notice issued

Extension of time for completion of assessments and reassessments






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Penalties Section Existing Provisions Proposed Amendment

Explanation 7 to Section 271 - Failure to furnish returns , comply with notices, concealment of income (wef FY 2012-13)

Covers 'international transaction' only Specified domestic transaction will be covered. Consequent amendment to be made to Section 271G and Section 271AA also

Section 271 AA - Failure to keep and maintain information and document in respect of international transaction (wef 1 July 2012)

Provides penalty only if there is a failure to keep and maintain any information and document as required by Section 92D(1) and 92D(2)

Additionally, penalty shall be levied : • if any person fails to report the international transaction or specified domestic

transaction, or • maintains or furnishes an incorrect information or document

Section 271 AAA- undisclosed income in the case of search

The provision covers the cases of search which have been initiated under Section 132 on or after 1 June 2007

This penalty is applicable upto 1 July 2012. A new Section 271AAB has been proposed hereinafter

Section 271 AAB (New Section) Provides to charge penalty at the rate of 10% of the undisclosed income of the specified previous year

Penalty shall be imposable, where search has been initiated on or after 1 July 2012: (a) at the rate of 10% of the 'undisclosed income' of the specified previous year, if taxpayer admits during the course of search the undisclosed income (b) at the rate of 20 % of the 'undisclosed income' of the specified previous year , if taxpayer does not admit the undisclosed income at the time of search but at the time of filing return after search (c) in other cases penalty may range from 30% to 90% of undisclosed income






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Penalties - contd

Section Existing Provisions Proposed Amendment

Section 271 H- Penalty for failure to furnish TDS/TCS returns (New Section wef 1 July 2012)

A person shall be liable to pay a sum between Rs 0.01 million to Rs 0.1 million if he fails to deliver or delivers an incorrect information under Section 200(3) or 206C(3) of the IT Act However, no penalty shall be levied if the person proves that he had delivered the required statement within one year of the period prescribed under the said Sections Similar amendment shall also be made to Section 273B

Section 272 A - Penalty for failure to answer questions, furnish statements , etc. (wef 1 July 2012)

Section 272A (2)(k) provides for the penalty of Rs 100 per day to be levied in case a person fails to deliver the statement (i.e. TDS and TCS returns) within the time prescribed in Section 200(3) or 206C(3)

A proviso is proposed to be inserted after Section 272A(2)(k) to provide that no penalty shall be levied under this Section for late filing of TDS /TCS returns






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Unexplained cash credits • It is proposed to amend the existing provisions with respect

to unexplained cash credits to provide that any explaination offered by a closely held company with regard to credit of share application money, share capital, share premium or any such amount shall be deemed to be non-satisfactory unless:

− the resident person whose name credit has been recorded offers explanation about nature and source of such credit; and

− tax authorities find such explanation to be satisfactory


Assessment of charitable organization in case commercial receipts exceed the specified threshold • It is proposed to provide that any charitable trust or

institution registered under Section 12AA and 10(23C) will not get benefit of tax exemption in the year in which it's receipts from commercial activities exceed the threshold whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded.

• This will take effect retrospectively from AY 2009-10 (FY 2008-09)






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Transfer pricing Introduction of advance pricing agreement (wef 1 July 2012)

• An APA is an agreement between the taxpayer and the taxing

authority

• It will enable determination of the arm’s length price or specify the manner/ methodology in which arm’s length price shall be determined

• The agreement is .

- valid for not more than five years

- available to all taxpayers falling within the ambit of Indian TP legislation

- The APA enabling provisions are imported from the DTC

and detailed rules and forms are expected to be issued by the Government shortly

- APAs to be entered by the CBDT with the approval of

Central Government - Ability to use any method other than one of the prescribed

5 methods available

- The APA has binding force only on the taxpayer with

whom it is signed and in respect of the relevant international transaction vis-à-vis the jurisdictional commissioner of income-tax

- The APA shall not be binding/annulled in the following instances:

• Change in Law • If the taxpayer has signed the APA with the

CBDT based on misrepresentation of facts. CBDT will annul in this case by way of an order

- On conclusion of APA, the taxpayer is required to file

revised return(s) with the Assessing Officer who has to complete the assessment/reassessment within one year from the end of the FY in which the revised return is filed






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International transactions (retrospective effect from 1 April 2002) • The definition of international transactions has been amended

to :

- elaborate on tangible, intangible property, services, financing transactions; and

- include transactions of business restructuring or

reorganization, covered; whether or not it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date

Specified domestic transactions (wef 1 April 2013) • Specified domestic transactions’ broadly comprise

transactions entered into by domestic related parties or by an undertaking with other undertakings of the same entity for the purposes of section 40A, Chapter VI-A, section 10AA and which exceed a monetary threshold of Rupees 5 crore during a FY

Intangibles (retrospective effect from 1 April 2002) • Intangible property has been specifically explained. Other

than marketing, technical, artistic, data processing, engineering related intangibles it includes intangibles related to:

- “customers” like customer lists, open purchase orders; - “human capital” like trained & organized work force; - “location” like leasehold interests and also mentions and

lastly it also has an open item to include - “any item that derives its value from intellect content

rather than its physical attributes

• This kind of a broad definition leaves the tax authority to construe significant items as intangibles and this could have a major impact on the characterization of entities when conducting a function, asset and risk analysis of the international transaction






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Reduction in 5% variation and disenabling standard deduction • Currently, the arm’s length range is based on a uniform

tolerance band of 5% around the transfer price. However, the Government had amended proviso to sub section (2) of section 92C in the Finance Act, 2011, whereby the Government was to notify an allowable variation for different business activities and types of transactions. The current 5% band has been replaced with 3%

• There were two litigation issues around the 5% range. One was that it was not allowed as a standard deduction by the tax authorities and the other was that new proviso of the variation was being applied retrospectively for AYs prior to the amendment date of 1 October 2009

• Major tribunals for both these issues had ruled in favour of the tax payer. However, the proposed amendments overturn these tribunal decisions and do not permit the 5% range as a standard deduction and also clarifies that the new provision disabling the standard deduction will be applicable for all assessment proceedings pending before the AO as on 1 October 2009. This would mean that even for AYs prior to 2010-11 pending before the AO as on 1 October 2009 the new provisions of the variation would prevail and thereby standard deduction not permitted to the tax payers. However, the proposed amendment limits the tax authorities ability to re-open or rectify assessments concluded before 1 October 2009

Power of the transfer pricing officer ('TPO') • The TPO is empowered to determine Arm’s Length Price of an

international transaction noticed by him in the course of proceedings before him, even if the said transaction was not referred to him by the Assessing Officer. Although this amendment takes effect retrospectively from 1st June 2002, reopening of any proceeding would not be done only on account of such an amendment. The proposed changes could have ramifications where taxpayer has entered in to free of cost transactions (i.e. loan guarantee or extended short term liquidity to its associated enterprises) and has not charged any price for such services and consequently not reporting it as international transactions in its disclosure

• The Assessing Officer cannot under section 147 or section 154 enhance the assessment or reduce a refund in respect of completed proceedings






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Stringent penalties for non reporting international transactions or specified domestic transaction

• Section 271AA has been amended to levy penalty at the rate

of 2% of the value of the international transaction or specified domestic transaction, if the taxpayer

- fails to maintain prescribed documents or information or;

- fails to report such transaction which is required to be

reported, or;

- maintains or furnishes any incorrect information or documents

- This would be in addition to penalties in section 271BA and 271G. This amendment will take effect from 1 July, 2012

Filing of accountants report

• Filing of Form 3CEB under section 92E for non-corporate

taxpayer revised to 30 November






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Service Tax Rate change – effective 1 April 2012 • The rate of service tax is being restored to the statutory rate

of 12%. This is aligned to the excise duty rate. The earlier notification reducing the rate to 10% has been rescinded.

• Consequent changes have also been made in composition rates such as works contract services

Taxation of Services based on negative list approach – effective from a date to be notified • There is paradigm shift in the way services are proposed to be

taxed in future. Taxation will be based on what is popularly known as ‘Negative List of Services’.

• Negative list of services covers specified 17 services as under:

- Services provided by Government or local authority - Services provided by Reserve Bank of India - Services by a foreign diplomatic mission located in India - Services relating to agriculture - Trading of goods - Processes amounting to manufacture or production of

goods - Selling of space or time slots for advertisements other

than advertisements broadcast by radio or television - Access to a road or a bridge on payment of toll charges

- Betting, gambling or lottery - Entry to Entertainment Events and Access to

Amusement Facilities - Transmission or distribution of electricity - Specified services relating to education - Services by way of renting of residential dwelling for use

as residence - Financial sector - Service relating to transportation of passengers - Service relating to transportation of goods - Funeral, burial, crematorium or mortuary services

including transportation of the deceased • Presently the word ‘service’ has not been defined. The

Finance Bill 2012 proposes to is specifically define the word ‘service’. Service shall also include certain activities that have been specified as declared services.

• If an activity meets the characteristics of a ‘service’ it is taxable unless specified in the negative list or otherwise exempted by a notification.

• Most of 88 exemptions to be rescinded or merged in a mega exemption notification. Proposed exemptions under Mega Notifications shall include services provided to specified organisations, temporary transfer of copyrights in cinematographic films, etc.

• A new charging section is proposed to be introduced to levy service tax on all services, other than those in the negative list, provided or agreed to be provided in the taxable territory by one person to another.






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• The existing provisions and charging sections will cease to apply after the new provisions become effective but will remain relevant in respect of services provided prior to the applicability of the new provisions

Other changes proposed consequent to negative list approach – effective from a date to be notified CENVAT Credit Rules • In the light of negative list it is proposed that the service-

specific references in the CENVAT Credit Rules will be replaced by broad descriptions retaining the essence of the existing provisions

• The definition of output service shall include exports of service where payment is not received within the period specified under the RBI requirements. Thus the benefit of not reversing the input tax credits for exports without treating them exempt will continue for the period specified for realizing export proceeds

• In terms of the proposed amendment to the valuation rules services shall exclude interest on (a) deposits; and (b) delayed payment of any consideration for the provisions made (services/goods). This will keep such amounts outside the value and thus not be relevant for reversal of credits under CENVAT Credit Rules

• Interest on loans and advances will now be an exempt income. This will require reversal of credits used for earning such income. Specified provisions have been proposed for such reversal

Service Tax Rules • With the proposed introduction of the Place of Provision of

Services Rules, 2012 and the proposed omission of the Export of Services Rules, 2005 (as amended) a transaction will qualify as export when it meets following requirements:

- the service provider is located in Taxable territory - service recipient is located outside India - service provided is a service other than in the negative

list - the place of provision of the service is outside India and - the payment is received in convertible foreign exchange

Place of Provision of Services Rules, 2012 • The Finance Bill 2012 proposes to introduce the Place of

Provision of Services Rules, 2012. The draft rules have been released for comments and feedback for the time being. The essence is that a service should be taxed in the jurisdiction of consumption

• It is proposed that these Rules will replace the existing Export

of Services Rules, 2005 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006






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Valuation Rules • Negative list will require some reformulations away from

service-specific provisions. The abatements available for certain taxable services and composition rate for works contract services will undergo change

• Presently for works contract services, value of services is equal to the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose. If the value is not so deduced, it is proposed that an ad-hoc percentage of the total value as would be allowed as deduction towards goods. The input tax credit on goods forming part of the property on which VAT is payable shall not be available as they are not used in the provision of service. However taxes paid on capital goods and input services will be available

• The taxable portion for services involved in supply of food and drinks in a restaurant or as outdoor catering is being raised. The abatement available is being adjusted to allow the industry to utilize credit on capital goods, specified inputs (other than foods and beverages) and input services

• Value of service shall include any amount realized as demurrage, or by any other name, for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service. It shall also include accidental damages due to unforeseen actions not relatable to the provision of service

• Value of service shall exclude interest on (a) deposits; and (b) delayed payment of any consideration for the provisions made (services/goods)

Abatements • With the introduction of the negative list approach, changes

are proposed in the abatements available for services involving both goods and services. It is proposed to increase the taxable portion of value and liberalise the input tax credits. Though the taxable portion of services may appear on a higher side, but the availability of credits will lead to reduction in costs and hence prices for the consumers. This will result in neutrality of taxes i.e. the burden of taxes will not raise the cost per se but passed on to the point of consumption

SEZ changes • There are no changes proposed in the present Budget.

However it is proposed that service-specific criterion for determination of services provided exclusively within the SEZ shall be taken care at the time of introducing negative list

• Prior to 1 March 2011 services provided to SEZs were treated as exempt services and CENVAT credit had to be reversed under CENVAT Credit Rules. The amendment introduced with effect from 1 March 2011 has now been made effective from 10 February 2006. This will neutralize the investigations or demands for reversal of credits in respect of services provided to SEZs for the past






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Reverse charge provisions • The term ‘taxable territory’ has been defined and only services

provided in taxable territory will be liable to tax. Any service provided in the State of Jammu & Kashmir will not be liable to tax. The Place of Supply Rules, 2012 will determine whether a service is being provided in Jammu & Kashmir

• Where the service provider is located in Jammu & Kashmir but the services are provided in taxable territory, the tax will be collected from the service receiver

• A new scheme is proposed to be introduced to ensure proper collection. For the services of hiring of a motor vehicle designed to carry passengers, supply of manpower for any purpose and works contract both the service provider and service receiver will be considered as persons liable to pay the tax on a predetermined percentage. The scheme can be given effect on enactment; however it is proposed to time it with Negative List approach as a part of the comprehensive reform

Rules of interpretation • Separate principles are proposed to be introduced for

interpretation of specified description of services and bundled services

Point of Taxation Rules – effective 1 April 2012 • Continuous supply of service has been redefined to bring out

concept with better clarity, namely recurrent nature of services and the obligation for payment periodically or from time-to-time

• Rules have to been amended to provide that the ‘date of payment’ shall be the earlier of, the dates of entry into books of accounts or actual credit in the bank account. When there is change in effective rate of tax or an introduction of new levy between the date of entry in books or actual credit in bank, the date of payment shall be the date of actual credit in the bank account, if the amount is credited through a banking instrument more than four working days after the date of such change

• Best judgement provisions have been introduced where the tax-payer is unable to furnish one or more of the details needed i.e. date of payment or date of invoice or both to determine point of taxation

CENVAT changes – effective 1 April 2012 • A simplified scheme for refunds is being introduced by

substituting the earlier provisions under CENVAT Credit Rules. The new scheme does not require correlation between exports and input services used in such exports. Any goods or services that qualify as inputs or input services will be entitled to be refunded in the ratio of the export turnover to total turnover. The notification prescribing the detailed manner and safeguards will be issued shortly

• Credit on motor vehicles is liberalised and will be allowed other than those falling under tariff heading 8702, 8703, 8704, 8711 and their chassis. The credit of service tax paid on their hiring, insurance and repair will also be allowed






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• Credit on goods can now availed without bringing them into premises subject to due documentation regarding their delivery and location

• Credit of tax paid by all service receivers on reverse charge is allowed on the tax payment challan

• Rules relating to distribution of credits of input services by an input service distributer have been amended to ensure scientific allocation to only such units where they have been put to use based on proportion of turnover

• The rate for CENVAT reversal for taxable/ exempt services/ goods has been revised from 5% to 6%

Service Tax Rules – effective 1 April 2012 • Service providers may issue invoice within 30 days from the

date completion of taxable service or receipt of any payment towards value of taxable services whichever is earlier. Banking or financial institutions may issue an invoice with 45 days of such event

• Presently individuals and firms are allowed to pay service tax on the basis of date of payment for eight specified services. The said facility has been extended to all services up to a turnover of Rs 50 lakh in a financial year provided the taxable turnover did not exceed Rs 50 lakh in the previous financial year. The above limits shall be computed taking into account the turnover of the entity as a whole and not any single registration

• The restrictions of Rs 2 lakh limiting the use of excess service tax paid are being omitted allowing unlimited amount of permissible adjustments – effective 1 April 2012

• A common simplified registration format for Central Excise and Service Tax is being placed for public comments, together with further liberalization in registration requirements, particularly centralized registrations – will come into force after inviting comments from stakeholders

• A new simplified one page common return with Central Excise: to be called Excise & Service Tax Return (EST for short) is being introduced. It is also being proposed that the cycles for the payment service tax and filing of return should coincide. Assessees paying tax of Rs25 lakh or more in previous year and new assessees other than individuals and firms would be required to make monthly payments and file monthly returns. The periodicity for others would be quarterly – will come into force after inviting comments from stakeholders

Exemption given retrospective effective - effect when the Bill receives the Presidential assent • Exemption provided for the setting up of common facilities

for treatment and recycling of effluents and solid wastes is made applicable effective 16 June 2005 as against 25 July 2011

• Exemption relating to repair of roads is extended for the earlier period commencing from 16 June 2005 as against 27 July 2009






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• Service tax exemption is granted with retrospective effect on management, maintenance or repair service in relation to non-commercial Government buildings from 16 June 2005 till the coming into force of the negative list when such repair will be exempted by the new mega notification

Penalty waiver for Renting of Immovable Property Service - effect when the Bill receives the Presidential assent • The taxability of Renting of Immovable Property Services had

been a subject of litigation. In the matter of Retailers Assn. of India v/s Union of India, Honourable Supreme Court, had ruled in October 2011, that litigants should pay 50% of the arrears within six months in three equated instalments and for the balance, solvent surety should be furnished to the satisfaction of the Jurisdictional Commissioner. It is proposed that penalty may be waived for those taxpayers who pay the service tax due as on the 6 March 2012, in full along with interest within six months

Other legislative changes - effect when the Bill receives the Presidential assent (unless specified otherwise) • The small scale exemption notification has been amended in

line with Point of Taxation Rules stating that the threshold exemption from service tax would be value of taxable services charged in the first consecutive invoices valuing up to Rs 10 lakh. Presently the threshold is linked to sum total of first consecutive receipts – effective 1 April 2012

• It is proposed to introduce Special Audit Provisions separately under the Finance Act, 1994 to give comprehensive powers for such audit relevant for service tax purposes. Presently the same are made available and applicable through the Central Excise Act

• The period for issue of demands in normal situations is being raised from 12 months to 18 months

• Provisions relating to Settlement Commission under Central Excise Act are made applicable to Service Tax. On the date of the enactment of the Finance Bill, notification containing Service Tax (Settlement of Cases) Rules, 2007 along the lines of Central Excise (Settlement of Cases) Rules, 2007, will come into effect. This should encourage quick settlement of disputes and save the business from the worries of prosecution in certain situations

• The periods for filing appeals in service tax are being aligned

with Central Excise. New limitations will apply to decisions or orders passed after the date on which Finance Bill, 2012 receives the assent of the President

• At present in service tax, appeals against the order of

Commissioner (Appeals) lie before the Tribunal; whereas in Central Excise, a revision mechanism is available to hear certain specified matters. It is proposed to introduce revision mechanism for service tax, to the extent applicable

• Prosecution for non-issue of invoice within time specified would be invoked only if the same is done knowingly with the intent to evade payment of service tax






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Central Excise Rate • Rate of excise duty on non petroleum products is increased

from 10% to 12% • Merit rate of excise duty is increased from 5% to 6% • 1% excise duty on 130 items is increased to 2% with few

exceptions being coal, mobile handsets and cellular phones, articles of jewellery, fertilizers

Important legislative changes • Definition of 'inter-connected undertaking' is amended to

incorporate with the definition given under the Monopolies and Restrictive Trade Practices Act, 1969 which is more conservative and has a wider scope

• Amount of duty evasion resulting in imprisonment of 7 years has been increased from Rs 1 lakh to Rs 30 lakh

• Duty evasion punishable with imprisonment of 3 years or more would a cognizable offence. In all other cases, it would be a non-cognizable offence

• Order of stay from any court would not be included to calculate the period of 1 year or 5 years for issuance of show cause notice

• Benefit of reduced penalty of 25% is available only if the penalty is also paid within 30 days. Earlier only tax and interest amount was required to be paid

• Bail would not be granted in case of offences resulting in imprisonment of more than 3 years without giving the public prosecutor an opportunity to present his case

• For units undertaking substantial expansion in the state of Jammu and Kashmir, the exemption period of 10 years would be computed from the date of commencement of commercial production from the expanded capacity. This amendment has a retrospective effect

• Packing, repacking, labeling or relabeling of containers, including declaration or alteration of Retail Sale Price on cigarettes would be deemed to be 'manufacture'.

• Tariff value for jewellery other than silver is fixed at 30% of invoice value. However, this would not be applicable in case of jewellery manufactured from precious metal or old jewellery provided by retail customer

• Manufacturer receiving goods under Notification no. 34/ 2001- CE(NT) dated 21 June 2001 i.e. goods received under concessional or without payment of duty, are required to file quarterly returns instead of monthly

• Tariff value of articles of apparel (tariff heading 6201) is reduced from 45% to 30% of Retail Sale price

• Optional payment in case of manufacturer of exempted goods or provider of exempted is services increased from 5% to 6%

• Manufacturer having more than one manufacturing unit would be allowed to transfer additional duty of customs under section 3(5) of the Customs Tariff Act paid on inputs to its other unit on quarterly basis

• Form of excise return is amended to include details of inter-unit transfer of CENVAT Credit

• The above would come into effect from the date of enactment of Finance Bill, 2012






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Central Excise Changes in CENVAT Credit Rules, 2004 • In case of removal of capital goods after use, higher of the

following would be payable • Per quarter reduction of 2.5% (other than computer

and peripherals) • Duty payable @ 12% on the transaction value

Earlier, transaction value was applicable only if capital goods were sold as scrap

• Excise duty paid on motor vehicles including parts, other than used for transportation of persons, would be eligible for CENVAT credit by the manufacturers

• Transfer of unutilized credit of SAD lying as closing balance at the end of each quarter to another factory of the manufacturer is permitted

• The Hon'ble Supreme Court observed that interest would be applicable from the date of incorrect availment of cenvat credit and date of utilization would be irrelevant. Now the words 'availed or utilized' has been changed to 'availed and utilized' thus making utilization as the basis to charge interest on wrong availment.

Retrospective amendment is made to Rule 14 of the CENVAT Credit rules, 2004 to nullify the effect of above decision. In other words, interest is not payable on credit wrongly taken unless the same is utilized

Exemption from excise duty • Footwear, whether imported or domestic, with RSP not

exceeding Rs 500 is fully exempted from duty subject to condition that RSP indelibly marked/embossed on footwear itself.

• Exemption to branded silver jewellery continues. • Gold coins are (purity 99.5% & above)/Silver coins (purity

99.9% & above) exempt subject to condition that manufactured from gold or silver on which appropriate duty paid.

• Exemption is granted to intraocular lens ( levied last year vide Notification No 1/2011-CE)

• Benefit of concessional rate of Rs 30 per square metre under Notification No 4/2006 – CE is extended to polished marble slabs.

• Exemption to pipes used for water supply projects is extended to pipes executed in river bed with zero energy consumption, provided these are integral part of project.

• Exemption applicable to cigarettes having length not exceeding 60 mm is now applicable to length not exceeding 65 mm






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Product/ Description Existing rate Proposed rate

Cement • Packaged Cement manufactured in mini –

cement plant • Packaged cement manufactured in plant

other than mini plant • Cement not cleared in packaged form

• 10% ad valorem

• 10% ad valorem + specific

amount • 10% ad valorem

• 6% ad valorem + Rs

120 • 12% ad valorem + Rs

120 • 12% ad valorem

Motor vehicles (length not exceeding 4 meters) • Engine capacity not exceeding 1200cc (petrol,

LPG or CNG) • Engine capacity not exceeding 1500cc

(diesel) • Motor vehicle (other than above) having

engine capacity not exceeding 1500cc • Engine capacity exceeding 1500cc

• 10% ad valorem • 10% ad valorem • 22% ad valorem

• 22% + Rs 15,000 ad valorem

• 12% ad valorem • 12% ad valorem • 24% ad valorem

• 27% ad valorem

Chassis for automobiles

10% / 22% ad valorem + Rs 10,000

15% /25% ad valorem

Cigars, cheroots and cigarillos 10% ad valorem or Rs 1,227 per thousand

12% ad valorem or Rs 1,370 per thousand

Increased rate of duty






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Increased rate of duty


Unbranded precious metal jewellery (except silver jewellery).

NIL 1%

Pan masala, gutkha, chewing tobacco, zarda, scented tobacco

The rate of duty under the compounded levy scheme is increased






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Reduced rate of duty


Batteries of electrically operated vehicles supplied to manufacturers

10% Concessional rate of duty of 6%

Iodine 10% 6%

LED lamps 10% 6%

Processed food products of soya 10% 6%

Matches manufactured by ‘semi – mechanized units

10% 6%

Parts of blood pressure monitors and blood glucose monitoring systems on actual user basis

10% 6%






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• Full BCD exemption is provided to shuttle less looms,

parts/components of shuttle less loom by actual users for manufacturing specified silk machinery. The exemption is available to only new machinery

• Concessional 5% duty rate available to specified textile

machinery is restricted to new textile machinery • Relief measures in terms of full exemption from BCD is

provided to certain items as under

• Initial setting up and substantial expansion of fertiliser project – upto 31 March 2015

• Steam coal - along with reduction of CVD from 5% to 1% upto 31 March 2014

• Natural gas/LNG imported for power generation by a power generation company

• Uranium concentrate, sintered natural uranium dioxide, sintered uranium dioxide pellets for generation of nuclear power

• Steel tube and wire, cobalt chromium tube, Hayness alloy – 25 and polypropylene mesh for manufacture of coronary stents / coronary stent systems and artificial heart valves subject to actual user condition

• Equipment imported for road construction projects awarded by Metropolitan Development Authorities along with Nil CVD and Nil SAD

• Tunnel excavation and specified lining equipment along with Nil CVD and Nil SAD

CUSTOM • The peak rate of customs duty on non-agricultural goods remains

at 10% Increase in rates BCD/CVD Products Pre

budget rates (%)

Post budget

rates (%)

Completely built Units of large cars/ MUVs / SUVs permitted for import without type approval (value exceeding US$40,000 and engine capacity exceeding 3000cc for petrol and 2500cc for diesel)

60% 75%

Boric acid 5% 7.50%

Digital Still Cameras of certain specifications Nil 10%

Flat rolled products (HR and CR) of non alloy steel

5% 7.50%

Standard gold bars and platinum bars 2% 4%

Non standard gold 5% 10%

Gold ore/concentrate and ore bars for refining (CVD)

1% 2%

Cut and polished coloured gemstones Nil 2%

Bicycles 10% 30% Parts of bicycles 10% 20%






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• Method of computation of Education Cess and Secondary &

Higher Education Cess is simplified to exempt the cesses as leviable on CVD portion of customs duty and avoid computation of such cesses twice

• In the notification exempting SAD, a condition is inserted requiring the importer of the specified goods to declare the State of destination where the goods are intended to be sold for the first time on payment of VAT after import and declaration of importer’s VAT registration number in that State

• CENVAT Credit Rules are amended to permit transfer of unutilised credit of SAD lying in balance at the end of each quarter to other registered premises of same manufacturer

• The duty free allowance under Baggage Rules is increased from Rs 25,000 to Rs 35,000 for adult passenger of Indian origin and Rs 12,000 to Rs 15,000 for children upto 10 years of age

• Project import status as available to installation of mechanized handling systems and pallet racking systems in mandis / warehouses for food grains and sugar is extended to such systems installed for handling horticultural produce

• Project import status with 5% BCD is granted to green houses set up for protected cultivation of horticulture and floriculture produce

• Coal mining projects • New and retreaded aircraft tyres along with Nil CVD • Part of aircraft and testing equipment for maintenance

and repair of air craft imported by third party MRO Units

• Tunnel boring machines for hydel and road projects for all infrastructure projects and parts required for assembly of such machines

• Tri band phosphor • Waster paper • Lithium ion batteries for the manufacture of battery

packs for supply to electric or hybrid vehicle manufacturers along with 6% CVD and Nil SAD

• Relief measures in terms of reduction of BCD is provided to

certain agriculture and agro-processing items, prescribed items in textile industry, railway safety equipment and railway track laying machines, machinery and instruments for surveying and prospecting of mines, certain fertilisers, certain life saving drugs / vaccines, capital goods & plants imported for setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants, coffee brewing and vending machines of commercial type

• The new rates come into effect from 17 March 2012






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• Section 104A of the Customs Act is inserted to provide that bail in case of offences punishable with a term of imprisonment of 3 years of more shall not be granted by a Court or Magistrate without opportunity being given to Public Prosecutor to present his case

• Monetary limits for adjudication of cases involving confiscation of goods and imposition of penalty has been enhanced

• Exemption from CVD is provided retrospectively to foreign

going vessels from 1 March 2011 to 16 March 12

• Export duty on chromium ore is enhanced from Rs 3,000 per tonne to 30% ad valorem

• The above would come into effect from the date of enactment of Finance Bill, 2012

Legislative Amendments • Section 2 and Section 7 of the Customs Act is amended to

include ‘air-freight stations’ resulting into empowering Central Board of Excise and Customs to appoint air freight stations for uploading of import cargo and loading of export cargo as in case of Inland Container Depots

• Section 28AAA of the Customs Act is introduced to provide for recovery of duties from the person to whom the duty credit scrips were issued and such scrips were obtained by means of collusion or wilful misstatement or suppression of facts. Such person and such recovery shall be without prejudice to any action that may be taken against the importer. Also provisions related to provisional attachment of property are made applicable to Section 28AAA

• Section 47 of the Customs Act is amended to insert a new proviso to provide that the Central Government may specify the classes of importers who shall pay customs duty electronically

• Section 104 of the Customs Act is amended to provide that all offences (except an offence punishable with term of imprisonment of 3 years of more) shall be non-cognizable and bailable and all offences punishable with term of imprisonment of 3 years of more shall be cognizable.






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