India: The Finance Bill 2012 - Key Changes/Proposals

1. DIRECT TAX

1.1. Non-resident / International taxation

1. Retrospective amendment in source rule regime under Section 9 of the Income Tax Act, 1961 to neutralize the impact of Vodafone decision of Supreme Court in case of indirect transfer of controlling interest in an Indian company
2. All notice for show cause /tax assessments already issued in respect of similar transactions have been sought to be validated
3. Definition of 'property' and 'transfer' to be amended to cover direct or indirect transfer of management or controlling rights in an Indian company for levy of capital gains tax
4. Non-resident purchaser to withhold tax in case of non-resident to non-resident transactions whether or not there is a residence or place of business or business connection or any other presence in India
5. Comprehensive amendment in scope of 'royalties' on a retrospective basis to:
   
   
   1. deal with controversies in relation to package software/off-the-shelf software and sale of a 'copyrighted software' versus 'right to use copyright' in the software
   2. include payment for any property whether or not there is any possession or control over such property
   3. include payment for transmission, up-linking, amplification services by satellite whether or not such process is secret
      
      
6. Specific provision for making tax residency certificate a necessary condition for seeking tax treaty benefits
7. Time period for obtaining information for completion of assessment or reassessment from other country under the provisions of DTAA extended to 1 year instead of 6 months
8. Income arising in India to a non-citizen, non-resident entertainer, non-resident sportsmen and non-resident sports association will be taxed at 20% of gross receipts instead of 10%
9. Any meaning assigned to a term used in DTAA but not defined in domestic laws by way of a notification will be effective from the date of coming into force of the DTAA itself
10. Foreign company to enjoy exemption on income received in India in Indian currency on account of sale of crude oil to any person subject to the following conditions:
    
    
    1. Receipt of money is under an agreement or an arrangement which is either entered into by the Central Government or approved by it.
    2. Foreign company and the arrangement or agreement has been notified by the Central Government having regard to the national interest
    3. Receipt of money is the only activity carried out by the foreign company in India
       
       

1.2. General anti-avoidance rule ('GAAR')

1. GAAR was originally conceived for introduction under proposed Direct Tax Code is proposed to be inserted in the extant tax laws to deal with aggressive tax planning
2. An arrangement main purpose of which is to obtain a tax benefit and satisfies at least one of the four prescribed tests can be declared as an "impermissible avoidance arrangement"
3. GAAR can be invoked to re-christen a transaction according to its commercial substance as perceived by the tax department by collapsing any fancy structure or nodes/steps in a financial /strategic investment structure
4. Tax Officer to make a reference to the Commissioner of Income-tax ('the CIT') for invoking GAAR. The CIT will make a reference to an 'Approving Panel' in case he is not satisfied by the explanation given by the taxpayer in respect of the arrangement
5. Approving Panel will make a declaration whether such arrangement is an 'impermissible avoidance arrangement' or not after hearing the taxpayer
6. The Tax Officer will pass an order in terms of such declaration which can be challenged before the Tax Tribunal as the first appellate authority
7. Tax department will constitute an 'Approving Panel' consisting of at least three members of the CIT rank and above

1.3. Transfer Pricing

1. Introduction of advance pricing agreement ('APA') mechanism to offer better assurance, certainty and unanimity of approach in transfer pricing matters
2. Transfer Pricing Officer ('the TPO') empowered to examine an international transaction not reported by the taxpayer even if Tax Officer has not referred such transactions to the TPO
3. Transfer pricing regulations will be applicable even to domestic transactions between related resident parties exceeding a value of INR 50 million in a year. 'Related persons' will include fellow subsidiaries
4. Due date for filing Income-tax return in cases involving transfer pricing issues extended to November 30 for non-corporate taxpayers as well
5. Definition of 'international transaction' will include transactions of business restructuring or reorganization with an associated enterprise whether or not such transactions have a bearing on the profit, income, losses or assets
6. No adjustment to the price where the variation between the arms length price (arithmetic mean of more than one appropriate price) and transaction price does not exceed 3% of the transaction price
7. Penalty of 2% of the value of the international transaction in case the taxpayer fails to maintain prescribed documents, information, fails to report any international transaction required to be reported or furnishes any incorrect information /documents
8. The Tax Officer will also be empowered to file an appeal against the order passed in pursuance of directions from dispute resolution panel ('DRP') in respect of objection filed on or after July 1, 2012
9. DRP will be empowered to enhance the variation and consider any matter or new issues under the draft assessment order whether or not such matter was raised by the taxpayer

1.4. Key transactional tax issues

1. Any excessive consideration (benchmarked to fair market value of share) received by a closely held company from a resident for issue of shares will be taxed as 'income from other sources' in the hands of the company (excessive share premium to be taxable)
2. Capital gains — In case sale consideration in respect of a transfer of an asset is not determinable, capital gains tax liability is not attracted due to failure of computation provisions (machinery provisions). It is now proposed that in such cases fair market of the asset will be taken to be full value of the consideration and capital gains tax liability computed accordingly
3. Amalgamation of a subsidiary company into a holding company will enjoy capital gains tax exemption even if shares cannot be issued by the amalgamated company (holding company) to itself due to cancellation of shares
4. Dividends distribution tax ('DDT') — removal of cascading effect of DDT paid at 16.22% on distribution of profits by an Indian company extended to multi-tier structure instead of only a two-tier structure
5. Taxation of gross dividends received by an Indian company from a foreign group company (with atleast 26% participation in it) at a beneficial rate of 15% extended to one more tax year

1.5. Venture capital

1. Restrictions on SEBI registered venture capital funds to invest only in 9 prescribed sectors for availing pass through status for taxability of income in the hands of investors directly have been removed
2. Income-tax to be withheld by venture capital funds on income attributable to investors
3. Income will be taxable in the hands of investors on accrual basis and there will be no deferral

1.6. Minimum alternate tax ('MAT')

1. Profit and loss account prepared by insurance, banking or electricity companies in accordance with the provisions of their respective regulatory Acts will be taken as a basis for computing the book profits under section 115JB
2. Gains attributable to revaluation of a capital asset will be subject to MAT by adding amount standing in revaluation reserve to book profits

1.7. Alternate minimum tax ('AMT')

1. AMT proposed to be extended to all persons other than a company such as general partnership, individual, HUF, association of person in addition to LLPs with a threshold exemption in case adjusted total income does not exceed INR 2 million
2. AMT will be payable in respect of profit linked deductions including tax holidays for special economic zones undertakings

1.8. Tax withholding / tax deducted at source ('TDS')

1. Transferred to withhold tax at 1% in case consideration for purchase of immovable property (other than agricultural land) exceeds INR 5 million in case of property in urban agglomeration and INR 2 million in case of other area
2. Stamp duty value to be adopted as transaction value
3. Registrar not to register property unless proof of TDS compliance is furnished
4. TDS at 10% on remuneration other than salary to a director (sitting fee)

1.9. Tax collection at source ('TCS')

1. TCS at 1% of sale consideration to be collected by seller of bullion or jewellery in case of cash sale exceeding INR 0.2 million to any buyer
2. TCS at 1% of sale consideration to be collected by the seller from the buyer on sale of minerals such as coal, lignite iron ore
3. TCS will not apply on purchase of minerals for personal consumption

1.10. Black money

1. Share application money received by a closely held company to be taxed in its hands in case the source of such money in the hands of a shareholder cannot be satisfactorily explained
2. Income-tax return will be furnished by any resident having asset outside India including any financial interest in a company or signing authority outside India even if not earning any taxable income otherwise
3. 16 year window to issue notice for re-opening of tax assessment if any income earned from assets located outside India has escaped assessment
4. No tax deduction for any donation for philanthropic purposes in respect of any sum exceeding INR 10,000 paid in cash

1.11. Weighted deductions and investment linked incentives

1. Weighted deduction of 200% of the expenditure incurred on approved in-house research and development facilities extended for a period of 5 years up to March 31, 2017
2. Weighted deduction of 150% of the expenditure incurred on notified agricultural extension projects is proposed
3. Weighted deduction of 150% of the expenditure incurred on notified skill development projects is proposed
4. 100% investment- linked deduction proposed to be extended to following business:
   
   
   1. Setting up an operating an inland container, depot or a notified container freight station
   2. Bee-keeping and production of honey and bees wax
   3. Setting up and operating a warehousing facility for storage of sugar

2. INDIRECT TAX

2.1. Customs

2.1.1. w.e.f. enactment of the Finance Bill, 2012

1. The Customs Act, 1962 ('the Customs Act')

• Section 28AAA inserted to provide for recovery of customs duty from the person who has obtained an instrument, by collusion, mis-statement or suppression of facts under the Customs Act or the Foreign Trade (Development and Regulation) Act, 1992 which provide for duty free import of goods
• The Central Government empowered to specify class or classes of importers for the purpose of payment of duty electronically
• Customs officer empowered to release arrested persons on bail in terms of the Code of Criminal Procedure, 1973
• All offences, except an offence which is punishable with term of imprisonment for three years or more, under the Customs Act, bailable
• Orders or summons or notices under the Customs Act can be sent by courier

2.1.2. w.e.f. March 17, 2012

• Baggage allowance increased from Rs. 25,000 to Rs. 35,000 per passenger and Rs.12, 000 to Rs. 15,000 for children upto 10 years of age of Indian origin
• Education cess and secondary and higher education cess payable on additional customs duty on imported goods, exempt
• Exemptions from special additional duty of customs ('SAD') rationalised and importer to declare the State of destination in which imported goods intended to be sold on payment of VAT and VAT registration number therein

2.2. Central excise

2.2.1. w.e.f. date of enactment of the Finance Bill

1. The Central Excise Act, 1944 ('the Excise Act')

• Exhaustive definition of 'interconnected undertaking' provided in Section 4 of the Excise Act for determination of transaction value in case of transactions involving related parties
• Monetary limit for prosecution under the Excise Act increased from Rs. 1 Lakh to Rs. 30 Lakhs
• Offences provisions under the Excise Act strengthened to provide for offences punishable with imprisonment of three years or more made cognizable
• Powers to arrest incorporated in the Excise Act and the Central Excise Officers, in certain cases take bail of the arrested person
• Now, penalty also required to be paid in addition to duty and interest within 30 days of passing of the order, to be able to avail concession of payment of reduced penalty of 25%

2. The Cenvat Credit Rules, 2004 ('the Credit Rules)

• In case of clearance of capital good after use, as waste/ scrap or otherwise, assessee is now required to reverse Cenvat credit to the extent of applicable duty on transaction value or Cenvat credit reduced by prescribed percentage, whichever is higher
• Transfer of unutilized credit of SAD allowed to another factory of the same manufacturer
• Interest is payable if Cenvat credit is both taken and utilized
• Simplified scheme for refund of Cenvat credit to exporters to be introduced
• In case of common inputs and input services used for excisable goods & exempt goods and taxable & exempt services, amount payable on exempt goods or services hiked from 5% to 6%
• Availment of Cenvat credit on tax payment challans in case of payment of service tax by all service recipient on reverse charge allowed
• Provision relating to input service distributor strengthened to ensure appropriate allocation of Cenvat credit to concerned units
• Cenvat credit of SAD lying unutilized at the end of quarter allowed to be transferred to other registered premises of the same manufacturer

2.2.2. w.e.f. 16th/17th March, 2012

1. The Central Excise Tariff Act, 1985

• Standard rate of excise duty enhanced from 10% to 12%, except for petroleum products
• Merit rate of excise duty for non-petroleum goods hiked from 5% to 6%. Cenvat Credit is available on such goods
• Portland cement notified under section 4A of the Central Excise Act with an abatement of 30% from RSP
• Cigarettes notified under section 4A of the Central Excise Act with an abatement of 50% on RSP for ad valorem rate of duty
• Following processes made deemed manufacture:
• • Affixing or embossing trade name or brand name on articles of jewellery or articles of goldsmiths or silversmiths
  • Oiling and pickling flat rolled, hot rolled, not clad, plated or coated iron or non-alloy steel
  • Matching, batching and charging or making of battery packs of lithium ion batteries
  • Cutting, slitting and printing of aluminium foils
  • Packing or re-packing in a unit container, labelling or re-labelling of containers or adoption of any treatment to render the product marketable in respect of cigars, cheroots, cigarillos

2.3. The Medicinal and Toilet Preparations (Excise Duties) Act, 1955

Rate of duty increased from 10% to 12%

2.4. Service tax

2.4.1. w.e.f. April 1, 2012

1. Key change in service tax rate

• Rate of service tax increased from 10% to 12%
• Composition rates of service tax modified as under:
• • Life Insurance: 3% for first year premium and 1.5% for subsequent years
  • Works Contracts: raised from 4% to 4.8%

2. Transport of Passenger by Air Service: dual tax structure replaced with a uniform standard rate of service tax with abatement of 60%
3. Changes in the Point of Taxation Rules, 2011

• Period for issuance of invoice increased to 30 days and 45 days for banks/ financial institutions
• Provision relating to date of payment in point of taxation ('POT') for eight specified services and export of service deleted
• Provision relating to date of payment in POT made applicable to individuals/ partnership firms in all services up to a turnover of 50 Lakhs in a financial year
• Definition of 'continuous supply of service' amended
• A new provision to provide for 'date of payment' of service inserted

2.4.2. Changes effective from date to be notified after enactment of the Finance Bill

1. Chapter V of the Finance Act, 1994 ('the Finance Act')

• The term 'service' defined to include specified 'declared services'
• Positive definition of taxable services changed to negative list of services comprising 17 category of services prescribed
• Service tax payable on all services except services specified in negative list or exempted by a notification
• 'Taxable Territory' defined and only services provided in taxable category liable to service tax
• Provisions introduced special audit of assesses
• Provision relating to valuation of services amended to provide for relevant date for application for rate of exchange
• Provisions relating to Settlement Commission and revision application made applicable to service tax
• Both service provider and service recipient made liable to pay service tax as per extent prescribed in respect of hiring of means of transport, construction and man power supply service
• One time waiver of penalty in case of payment of service tax within prescribed period under 'Renting of Immoveable Property Service'

2.4.3. Changes proposed to be introduced

1. Proposed amendments in various Rules

• The Place of Provision of Services Rules, 2012 to replace the Export of Services Rules, 2005 and the Taxation of Service (Provided from Outside India and Received in India) Rules, 2006
• A new valuation provision to replace the Works Contract (Composition Scheme for Payment of Service Tax), Rules, 2007
• New provision to be introduced for determination of value of taxable service involved in supply of food and drinks in a restaurant
• The Cenvat Credit Rules to undergo change in view of single definition of 'services' and negative list of services, exemptions, etc.

2. Proposed changes in the Service Tax Rules, 1994

• Common simplified registration form and return for central excise and service tax
• Quarterly payment of service tax except for those assessee who paid service tax of Rs. 25 Lakhs or more in previous financial year and new assesses other than individuals/ partnership firms

3. Other proposed changes

• Current 88 exemption notifications to be rescinded or modified and number of exemption notification to be reduced to 10

2.5. Goods and Service Tax ('GST')

• Drafting of model legislation for Central and State GST in progress
• GST Network being set up as National Information Utility being set up to become operational by August 2012, which will implement common PAN based registration, return filing and payment of taxes on a shared platform

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