India Budget 2012: Highlights


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India moved to close loopholes in the country’s tax laws with the introduction of General Anti-tax Avoidance Regulations (GARR), rationalizing definitions of international transactions and introduction of many new penalties for tax avoidance, non-compliance, and unaccounted money, in its budget 2012.

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India Budget 2012: Highlights

  1. 1. India Budget 2012: HighlightsIndia moved to close loopholes in the country’s tax laws with the introduction of General Anti-taxAvoidance Regulations (GARR), rationalizing definitions of international transactions and introduction ofmany new penalties for tax avoidance, non-compliance, and unaccounted money, in its budget 2012.In the 14.9 trillion rupee ($298 billion) budget, finance minister Pranab Mukherjee also announcedadditional disclosure requirements for individuals and businesses. Many other provisions similar toIndia’s ambitious Direct Tax Code (DTC) that aims to replace the country’s archaic tax system are alsoannounced.Key HighlightsChanges in Provisions Relating to International Taxation, Amendments Retroactively Effective fromApril 1, 1962 As expected the budget addresses the landmark ruling by the Indian Supreme Court in the Vodafone case where Indian tax authorities lost an appeal to tax Vodafone $2.2 billion for its purchase of 67percent stake in Indias Hutchison Essar Ltd. Read details of the case at The finance minister amended certain definitions such as “transfer,” “capital asset,” etc. in relation to international transactions to ensure all deals like Vodafone – Hutchison are brought under the ambit of Indian tax laws India can now tax any income accruing or arising directly or indirectly through transfer of any capital asset situated in India. The term “through” is clarified to include terms “by means of,” “in consequence of,” or “by reason of”. Similarly, the term “capital asset,” being shares or interest in entity outside India, is now clarified to be “situated in India” if the shares / interest of the said foreign entity derives its value substantially from assets located in India. Scenarios like the Vodafone case, where a non-resident (Hutchison group company) sold interest / shares in non-resident company (holding company of Indian operating company, located outside India) to another non-resident (Vodafone group company) will be clearly under ambit of Indian income tax law if the said interest / shares generate substantial value, directly or indirectly, from asset situated in India. E.g. in the Vodafone case the value was mainly due to operating company located in India. The withholding tax provisions are also rationalized. It is made clear that all persons (payers), resident or non-resident, are required to deduct tax on any income that is subject to
  2. 2. withholding tax in India even though the payer does not have any residence, place of business or any other presence in India. This applies even if the payee is a resident or a non-resident for India tax purposes. These amendments are retroactively effective from April 1, 1962 “It is now critical for foreign businesses to obtain tax advice before entering into any transaction that may give rise to any income in India. Companies may either end up being liable as a tax payer or a party liable to withhold tax in India. The new provisions mean that it is no longer easy to take the taxation risks in India lightly. Foreign investors will need to provision for these risks when planning or expanding their investments in India,” said Dr. Shan Nair, Co-founder of Nair & Co.India: General Anti-Avoidance Rules (GAAR) India has introduced a separate chapter on GAAR to deal with aggressive tax planning. These provisions give Indian tax authorities the right to investigate any arrangements and, if the same is deemed to be for the purposes of tax avoidance, ignore them for tax computation purposes. The basic principle of GAAR is “substance over form”. The tax bill prescribes four tests for deciding an agreement to be “impermissible avoidance agreement”. Satisfying one of the four tests is enough to qualify an agreement to be impermissible. The tests are The arrangement creates rights and obligations, which are not normally created between parties dealing at arm’s length. It results in misuse or abuse of provisions of tax laws. It lacks commercial substance or is deemed to lack commercial substance. Is carried out in a manner, which is normally not employed for bonafide purposeAdvance Pricing Agreements (APA) In a welcome move, India heeded long standing demand from businesses for Advance Pricing Agreements (APAs), which will now be available under the transfer pricing provisions effective from July 1, 2012. The APAs can be made for a period up to five years.Tax Audits The turnover limits for mandatory tax audits is extended from Rs. 6 million to Rs. 10 million for business and from Rs. 1.5 million to Rs. 2.5 million for profession. In addition, the due date of submission of tax audit report is extended to November 30, where the assessee is required to submit prescribed audit report for their international transactions.Extension of R&D Related Deduction The benefit of weighted average deduction of 200 percent for in-house R & D expenditure is extended to March 31, 2017. The benefit was due to expire by March 31, 2012.
  3. 3. Transfer Pricing (TP) Provisions to Apply To Domestic Transactions Transfer Pricing regulations are extended to domestic related parties for transactions exceeding Rs. 50 million in a year.Minimum Alternate Tax (MAT) / Alternate Minimum Tax (AMT) MAT is extended to businesses other than companies and LLPsIndia Tax Rates: Companies Effective tax rates applicable to the current financial year and the next financial year The corporate tax rates remain unchanged at Corporate Tax For Domestic Corporate Tax For Foreign Income Range Companies Companies Financial Year Financial Year Financial Year Financial Year 2011-12# 2012-13# 2011-12# 2012-13# Companies with income 32.445% 32.445% 42.024% 42.024% above INR 10 million* Companies with income up 30.90% 30.90% 41.20% 41.20% to INR 10 million** *The effective tax rate includes applicable surcharge and education cess (3%). ** The effective tax rate includes education cess (3%) # Financial year starting from April 1 and ending on March 31Other Tax Rates Other tax rates applicable to companies like Dividend distribution tax (DDT), Minimum Alternate Tax (MAT) remains unchanged. Certain exemptions are provided to avoid cascading effect of DDT, arising due to multi-tier corporate structure.India Direct Tax - Individuals The India budget proposes to increase the slabs in case of individuals. The effective tax rates will now be: Income slab (INR) Tax Rates (FY2011-12*) Income slab (INR) Tax Rates (FY 2012-13*) 0 – 180,000 NIL 0 – 200,000 NIL 180,001 – 500,000 10.30% 200,001 – 500,000 10.30% 500,001 – 800,000 20.60% 500,001 – 1,000,000 20.60% 800,001 and above 30.90% 1,000,001 and above 30.90% *Financial year starting from April 1 and ending on March 31 Note 1: The first income slab for senior citizens (60 years of age or more) and very senior citizens (80 years of age or more) are Rs. 250,000 and Rs. 500,000 respectively i.e. no tax up to Rs. up to 250,000 for senior citizens and up to 500,000 for very senior citizens.
  4. 4. Note 2: The rates include education cess and secondary education cess totaling to 3 percent on the base tax ratesTax Deductions Individuals are granted the following additional tax deductions Preventive medical checkup expenses for self, spouse, dependent children, parents of up to Rs. 5,000 Interest on savings account (with banks etc.) of up to Rs. 10,000. The deduction in respect of investment in infrastructure bonds is withdrawn.Expats Tax benefit under a tax treaty will not be allowed to a non-resident unless a tax residency certificate in prescribed form is furnished.India Direct Tax – Other Changes Security Transactions Tax (STT) The rate of Security Transactions Tax (STT) is reduced for delivery based on equity shares in company traded through a recognized stock exchange from 0.125% to 0.1% for both seller and buyer. Increase in Penalties for Non-Compliance with Withholding Tax Provisions: Penalties are increased for non-compliance of withholding tax provisionsIndia Indirect Taxation Service Tax The service tax rate is changed to 12 percent, including the cess to 12.36 percent (from 10.30 percent). The same is applicable from April 1, 2012. Instead of present approach of taxing only specified 100+ services, a negative list approach is introduced. All the services will now be taxed except for services under the negative list, proposed under 17 heads. These provisions will significantly affect many service providers in India. A scheme for simpler service tax refunds is announced. Excise Duty The statutory rate applicable to all non-petroleum excisable goods is raised to 12 percent (from 10 percent). Common tax code to be introduced for Excise and Service tax
  5. 5. Goods and Services Tax (GST) By way of a step towards implementation of Goods and Services Tax (GST), the Constitution Amendment Bill was introduced in Parliament during March 2011. The Bill is before the Parliamentary Standing Committee. The structure of GST Network (GSTN) will be set up as a National Information Utility and is expected to become operational by August 2012.India Foreign Investment Efforts are being made for developing a consensus on allowing foreign direct investment (FDI) in multi-brand retail No progress on FDI in aviation sectorGet the latest press releases and updates on international tax, compliance and other legal news at Nair& Co. Industry Alerts.About Nair & Co.Nair & Co. provides you with your one touch outsourced finance, internal audit compliance, HR and legaldepartment for your international operations. If you are expanding abroad for the first time, our turnkeysolution will help you do so with minimal risk, stress and cost. We currently support more than 1000+client operations in over 50 countries and have core offices in U.K., India, China, U.S., Japan andSingapore. Nair & Co. was named among the top 100 outsourcing services providers in the world by theInternational Association of Outsourcing Professionals (IAOP). Learn more at www.nair-co.comRead also on: International financial accounting, International financial reporting