Budget 2012 abm

BUDGET 2012A presentation on the Direct Tax Amendments announced in the Union Budget 2012

BUDGET 2012 Topics for Discussion PERSONAL TAXATION CORPORATE TAXATION MAT /AMT GAAR NON-RESIDENT TAXATION TRANSFER PRICING Q&A 2

BUDGET 2012Proposal / Amendment – Personal Taxation Income slab Exiting Tax Rate Proposed Tax Tax Saving (Rs) Rate Upto Rs. 1,80,000 Nil Nil Nil Rs. 1,80,000 to Rs. 2,00,000 10% Nil 2,000 Rs. 2,00,000 to Rs. 5,00,000 10% 10% Nil Rs. 5,00,000 to Rs. 8,00,000 20% 20% Nil Rs. 8,00,000 to Rs. 10,00,000/- 30% 20% 20,000 Above Rs. 10,00,000 30% 30% Nil -Education cess of 3% continues. -No differentiation for basic exemption limit for Woman tax payer. -Basic Exemption limit in the case of Senior Citizen (> 60 yrs < 80 yrs) of Rs.2,50,000/- and for very Senior Citizen (> 80 yrs) of Rs.5,00,000/- remain unchanged. 3

BUDGET 2012 Proposal / Amendment – Personal Taxation 80 TTA introduced - Deduction up to Rs.10,000 in respect of Savings Bank Interest Section 80 CCG Introduced - Rajiv Gandhi Equity Savings Scheme Proposed: 50% on the amount deposited upto Rs.50,000/- for the assessee whose income is below Rs. 10 lac. The scheme will have a lock in period of 3 years. The Scheme is yet to be notified. Scope of Section 80D extended to include expenses on preventive health checkup upto Rs.5000, within the overall limit No requirement of filing of return for individual having salary income of Rs. 5,00,000 and interest on saving of Rs. 10,000. Exemption from payment of Advance Tax for Resident Senior Citizens having no income from business source. 4

BUDGET 2012 Proposal / Amendment – Personal Taxation Tax Benefit for Infrastructure Bonds under Section 80CCF discontinued. Benefit u/s 80C for Life Insurance Premium available only if the premium is less than 10% of sum assured (earlier 20%). Similar amendment u/s 10(10D) for maturity proceeds. No 80G / 80GGA deduction for donations in cash above Rs.10,000 New avenue for reinvestment of Long Term Capital Gains from sale of residential property – Section 54GB introduced to allow exemption if invested in equity shares of SMEs. Section 194LAA introduced - TDS on payment for purchase of Property - any purchase of property above Rs.50 lakhs in specified area and Rs.20 lakhs in other areas should deduct TDS @ 1% on sale consideration. No TAN required, tax can be remitted based on the PAN of both parties. TCS @ 1% for purchase of bullion or jewellery in cash in excess of Rs. 2 5 lakhs The threshold limit for deduction of TDS in the case of compensation as well as additional compensation on account of compulsory acquisition of any immovable property under section 194LA enhanced to Rs. 2 Lac from Rs. One Lac at present. 5

BUDGET 2012 Corporate Tax Proposals No Changes in  Corporate Tax Rate of 30%  Minimum Alternative Tax (MAT) on Book profit of 18.50%.  Rate of surcharge of 5% (for income > Rs.1 Cr) and Cess of 3% in all cases.  Rate of STCG of 15%  DDT of 15%  Tax on Dividends from overseas subsidiaries of 15% (upto 31-3-2013)Effective tax rates under normal provisions are as below:–For domestic companies, where income exceeds Rs.1 crore @ 32.445%, where income is less than Rs.1crore @30.6%.–For foreign companies, where income exceeds Rs.1 crore @ 42.024%, where income is less than Rs.1crore @ 41.2%. 6

BUDGET 2012 Corporate Tax ProposalsKey Amendments in Corporate taxation.1. Cascading effect of DDT in a multi tier holding structure removed • A company would be exempt from DDT when paying dividend to its parent company to the extent that the dividend is paid out of the dividend received from its subsidiary which has paid the DDT in the same year.2. Extension of 80IA for setting up power generation, transmission or distribution undertakings by one year to 31st March 2013.3. Extending benefit of Additional depreciation to the power sector • Section 32(1)(iia) amended to provide initial depreciation @ 20% on new machinery or plant for an assessee engaged in the business of generation or generation and distribution of power4. TDS on Directors’ remuneration • Provision of Section 194J are being widened to include payment of any remuneration or fee or commission by whatever name called other than on which tax deductible under Section 192 to a director of a company for a deduction of tax at source at the rate of 10%. This amendment shall be effective from 1st July 2012. 7

BUDGET 2012 Corporate Tax ProposalsKey Amendments in Corporate taxation (Cont….)5. Share Capital, Share Premium and share application to be deemed as Income • A proviso is inserted in section 68 that in the case of a closely held company, the amount credited as share capital /SAM needs to be explained with regard to source of funds. • Further Share premium in excess of the fair market value to be treated as income under Section 56(2)(viib) .6. Turnover Limit for Tax Audit enhanced •The threshold limit of total sales, turnover or gross receipts specified U/s 44AB for getting accounts audited enhanced to Rs. 1 Cr from Rs.60 lac in the case of person carrying on business & to Rs. 25 lac from Rs.15 lac in the case of person carrying on profession7. Extension of time for completion of assessments and reassessments• Time limit for completion of assessment extended by 3 months, from existing deadline of 31st December to 31st March 8

BUDGET 2012 Corporate Tax Proposals8. Others Compulsory filing of income tax return in relation to assets located outside India. The time limit for Re-opening of tax assessments in relation to assets located outside India to be increased to 16 years. Weighted deduction at the rate of 200% for approved in-house scientific research and development. ‘FMV’ to be considered as deemed consideration in certain cases (where consideration is not determinable) for capital gains purposes . TCS @1% on trading in coal, lignite and iron ore. 9

BUDGET 2012 MAT/AMTMinimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT): Section 115JB is amended so as to provide that  Certain Companies insurance, banking or electricity prepares financials as per regulatory Act. For these company financial as per regulatory Act shall be taken as a basis for computing the book profit under MAT.  Gains arising from disposal of ‘revalued asset’ is to be added to profits even if such gains are taken directly to the balance sheet. Alternate Minimum Tax (AMT) on tax payers other than companies: Where the regular income tax is less than the AMT, their Adjusted Total Income (ATI), will be regarded as taxable income and will be taxed at the rate of 18.50%.  Adjusted total income (ATI) shall be the total income as increased by deductions claimed, if any, under any section included in Chapter VI-A or under section 10AA.  This amendment will not be applicable if ATI not exceed Rs.2 million. MAT/AMT paid shall be available as Tax credit and can be adjusted against the amount of regular tax payable in subsequent 10 assessment years. 10

BUDGET 2012 GAARGeneral Anti Avoidance Rules Formulated – w.e.f – April 1, 2013 To tackle aggressive tax planning / sophisticated tax structures, comprehensive GAAR is to be introduced to codify ‘substance’ ‘over form’ principle for tax purposes. It will apply to both Indian residents as well as non-residents. It would apply only to those cases of ‘impermissible avoidance arrangements’ where the main purpose or one of the main purposes of entering into an ‘arrangement’ is to obtain a ‘tax benefit’. The arrangement should satisfies at least one of the following four tests:-  It creates rights and obligations that are normally not created between two parties dealing on arm’s length basis;  It abuses or misuses the provisions of the ITA;  It lacks ‘commercial substance’ or is deemed to lack commercial substance; and  It is carried out in a manner which is normally not employed for bona fide purposes. 11

BUDGET 2012 GAARProcedure for Invoking GAAR• AO shall make a reference to the Commissioner for invoking GAAR• Commissioner shall hear the taxpayer and if he is not satisfied with response, will refer the matter to the Approving Panel• The Panel shall examine and either declare an arrangement to be impermissible or not.• The Panel to dispose of the reference within a period of six months• The (AO) will determine consequences and pass an order accordingly after approval by Commissioner.• The first appeal against such order shall lie to the Appellate Tribunal• The Approving Panel shall be set up by the Board and would comprise of officers of rank of Commissioner and above.• The panel will have a minimum of three members.• CBDT will prescribe a scheme for regulating the condition and manner of application of these provisions 12

NON RESIDENT TAXATION Amendments / Clarifications with Retrospective EffectSl. No. Case Court Ruling Budget Amendments1 Vodafone SC held that transfer of shares Scope of section 9 expanded to cover between two non resident indirect transfers entities not taxable in India2 Azadi Bachao Case Validity of Mauritius Tax Rules Tweaked – ‘ TRC’ necessary but not Residency certificate upheld sufficient. GAAR can override treaty3 Ishikawajima Harima Services can be taxed in India Section 9 amended (in 2007) that services only if rendered in India need not rendered in India to be taxed4 Various rulings on Conflicting judgments across the Clarified that Software is royalty and hence taxability of Software country taxable in India5 New Skies Satellites Transponder Charges is not Clarified that such payments are royalty Royalty6 Four Soft Ltd Hyd Tribunal ruled that Scope of International Transaction Corporate Guarantee is not an extended to include, among others, International Transaction Guarantee7 GE Technology HC ruled that DRP cannot go Power of DRP enhanced retrospectively to beyond the issues in the Draft enhance the variation proposed by AO. Order8 Glaxo Smithkline SC ruled that domestic Specified domestic transactions brought transactions are not under the under the purview of Transfer Pricing. (To purview of Transfer Pricing apply prospectively) 13 Also discuss COCO COLA CASE

BUDGET 2012 Retrospective Amendments Constitutional Validity“In testing whether a retrospective imposition of a tax operates so harshly as to violatefundamental rights under article 19(1)(g), the factors considered relevant include thecontext in which retroactivity was contemplated such as whether the law is one ofvalidation of taxing statute struck-down by courts for certain defects; the period of suchretroactivity, and the decree and extent of any unforeseen or unforeseeable financialburden imposed for the past period etc.”(SC in Sri Prithvi Cotton Mills Ltd vs Broach Borough Municipality 1970 S.C.R. 388)Global PracticeAustralia“Provisions that have a retrospective operation adversely affecting rights or imposingliabilities are to be included only in exceptional circumstances and on explicit policyauthority” UKThere are instances where tax laws have been amended retrospectively on the argumentthat if not done, select tax payers will obtain a windfall at the expense of the generaltaxpayersUSAThere is a specific prohibition against passing retrospective legislations, but proceduralclarifications have been made retrospectively in certain cases 14

NON RESIDENT TAXATION Changes to Basis of Charge• INDIRECT TRANSFER OF CAPITAL ASSET Income taxable in India includes income from transfer of a Capital Asset in India 1. Definition of a Capital Asset – deemed to have always included any rights in relation to an Indian Company, including rights of management or control or any other rights whatsoever. 2. Scope of deemed income expanded to include income from transfer of share or interest in a Company / entity registered / incorporated outside India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. 3. “Property” as defined in Capital Asset includes Management Control, or any rights whatsoever in the Indian Company 4. Transfer includes indirect transfer of shares in an Indian company by way of transfer of shares of a company incorporated outside India. 5. There is an obligation on a non resident to withhold taxes on any payments to another non- resident , if the payment attracts tax in India. * Amendments made retrospectively from 1962 15

NON RESIDENT TAXATION Taxability of Royalties / Link Charges• Taxability of payments towards purchase of Software / Payments for Link Charges • This issue has been subject to extensive litigation • Court rulings have been utterly inconsistent • Definition of royalty amended to specifically cover the use or right to use computer software (including granting of a license). Medium of transfer not relevant for determining taxability. • The term “process” used in the definition of royalty has been clarified to include transmission by satellite, cable, optic fibre or by any other * Amendments made retrospectively from 1976 similar technology, whether or not such process is secret. Effective retrospectively from 01 June 1976. • The above amendment will not settle the controversy as the definition of royalty as per the DTAAs remain unchanged and the prevailing interpretations will stay. 16

NON RESIDENT TAXATION Other Changes• Withholding tax (WHT) on interest on foreign funds provided to a specified company:  The WHT rate on interest paid by a specified Indian company to a non-resident in respect of borrowing made in foreign currency from sources outside India between July 1st 2012 to July 1st 2015 is reduced to 5% from 20%(plus applicable surcharge and cess) at present. • Withholding tax on payment to non-resident sports persons and entertainers / Sports Association(Section 115BBA increased from 10% to 20%• Tax Residence Certificate (TRC) for claiming relief under DTAA • To make submission of TRC by a foreign resident is proposed to be made mandatory but not sufficient for availing the benefits under the concerned tax treaty. • The Indian tax authorities could examine the „substance‟ of the concerned foreign entity who has produced TRC giving prescribed details etc before it is granted benefits of the tax treaty.  Residents having any asset (including financial interest in any entity) located outside India or having signing authority in any account located outside India mandatorily required to file return of income whether or not they earn taxable income  Any meaning assigned through a notification for a term in the DTAA will be effective from the day the treaty came into force 17

TRANSFER PRICING SIGNIFICANT AMENDMENTS - SUMMARY• Definition of International Transaction clarified / expanded• Advance Pricing Arrangement (APA) Introduced• Introduction of Domestic Transfer Pricing to specified transactions• Clarification on applicability of variation to ALP• Changes to the functioning of DRP• Changes to the guidelines for reference of cases to TPO• Certain procedural changes 18

TRANSFER PRICING Definition of International Transaction (Effective April 2002)• International Transaction to include • Purchase / sale, transfer / lease or use of tangible property • Purchase, sale, transfer, lease or use of intangible property. Intangible property explained with an exhaustive list of items covered • Capital financing, any short term / long term borrowings, deferred payments / any debt, guarantee • Provision of any kind of services • Business restructuring, irrespective of whether it has a bearing on the profit. • Intangibles even covers institutional goodwill, personal good will, general business going concern value. 19

TRANSFER PRICING Advance Pricing Arrangement Introduced – From July 2012Finance Bill 2012 proposes to introduce APA, which was proposed in the DTC Bill 2010 as well.• APA is an ahead of time agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology (TPM) for some set of transactions at issue over a fixed period of time• Valid for a maximum of five consecutive years unless there is a change in the provisions or the facts having a bearing on the international transaction• Not clear whether there is an option for Bilateral or Multilateral APAs. 20

TRANSFER PRICING Domestic Transfer Pricing• Specified Domestic Transactions brought under the purview of Transfer Pricing Regulations• Provision applicable if the value exceeds INR 5 Crores Transactions covered for Domestic Transfer Pricing• Expenses or payments made to domestic related persons as specified in Section 40A(2)(b) of the Act. Scope of Section 40A(2)(b) of the Act expanded to include companies having a common parent• Transfer of goods/ services/ business from one unit/ undertaking of the Assesse to another unit/ undertaking of the assesse, claiming benefit under Section 80 IA, under Chapter VI A or 10 AA where the provisions of 80IA are applicable; 21

TRANSFER PRICING Determination of Arms Length Price• Section 92 C provides that where more than one price is determined by application of the most appropriate method, the arithmetic mean of such prices will be the ALP.• Finance Act 2009 clarified that the 5% variance is not a standard deduction but can only be claimed if the ALP is a arithmetic mean of multiple prices.• The budget has clarified that this rule will apply from 2001-02.• From FY 2012-13, the variation %age is reduced to 3% 22

TRANSFER PRICING Other Changes• Functioning of Dispute Resolution Panel•The order of DRP is now appealable by the Assessing Officer to the ITAT with effect from 1st July2012• DRP is empowered to pass directions on any matter arising out of the assessment proceedingsirrespective whether such matter was raised by the eligible assessee or not. This amendmenteffective FY 2008-09•Reference to TPO•TPO can determine Arm’s Length Price of any international transaction entered into by theassesse, not referred to him by the AO, provided that assessee has not reported the same undersection 92E. Amendment retrospectively from 1 June 2002•However, for cases concluded before 1 July 2012, the Assessing officer will not have right to re-open the case only on account of such amendment 23

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Budget 2012 abm

by Manish Agarwal on Jul 04, 2012

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