Union Budget 2012-13 aimed to boost growth while reducing the fiscal deficit. Key measures included increasing indirect tax rates to pave way for GST, introducing GAAR to curb tax avoidance, and relaxing ECB norms to support infrastructure and other sectors. However, the proposed retrospective amendment to tax indirect transfer of Indian assets could face legal challenges and impact investment. Overall the budget focused on fiscal consolidation and growth, but timely implementation will determine its effectiveness.

1. UNION BUDGET (2012-13)
INVESTMENT ENVIRONMENT & TAX ASPECTS
16/03/2012

2. INTRODUCTION
The Hon’ble Finance Minister Shri Pranab Mukherjee on 16.03.2012 presented the
Union Budget 2012. During the Year, as the Growth moderated and fiscal deficit
widened; the Minister admitted that the overall performance has been disappointing but
also attributed part of it to the Global crisis, domestic inflationary pressures and weak
industrial growth. It is maintained that pace of reforms needs acceleration and tough
steps needs to be taken for improving macroeconomic environment and strengthen
domestic growth drivers. The 12th Five Year Plan aims addressing the following-
Domestic Growth, Private investment, Removal of supply bottlenecks in Agriculture,
Energy & Transport, Malnutrition problem and better Governance and tackling problem
of Black Money and corruption.
The Budget 2012 proposed certain limited amendments in Direct Tax Laws. However,
increase in Indirect Taxes has been made to pave way for the big legislation of Goods
and Services Tax (GST) convergence and also for reducing the Fiscal deficit. Some
steps like introduction of GAAR have been taken in direction of movement towards DTC
and eradication of Black Money and some serious retrospective amendments have also
been proposed by this Budget.
BUDGET ESTIMATES (2012-13)
Union Budget 2012 has estimated India’s GDP growth at 6.9% in real terms after
Growth of 8.4% in the preceding 2 years. This slowdown is primarily due to deceleration
in Industrial growth.
Fiscal Deficit is estimated at 5.9% compared to budgeted 4.6%. This steep rise in deficit
is mainly due to shortfall Direct Taxes revenue and Increased Subsidy burden.
Monetary and Fiscal policy during these 2 years was aimed at taming domestic
Inflationary pressure which has resulted in Inflation stabling now and Indicators suggest
that economy is turning around as core sectors and manufacturing show signs of
recovery. Accordingly, GDP for 2012-13 is now expected at 7.6% and Fiscal Deficit
at 5.1% with endeavor to keep central subsidies under 2% of GDP in 2012-13.
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3. The key Investment environment and Tax aspects proposed in Budget 2012 are
summarized below.
1. CORPORATE TAXATION
1.1. CORPORATE TAX RATES
1.1.1. For Domestic Companies
 Tax rates have been kept same,
1.1.2. For Foreign Companies
 Tax rates have been kept same,
1.2. MAT
 Rate of MAT have been kept same
1.3. DIVIDEND DISTRIBUTION TAX
 Rates unchanged
 Cascading effect on DDT in case of Multilayer Subsidiaries removed to
give ease to the Corporate Structure
1.4. SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TO BE TREATED
AS INCOME UNDER OTHER SOURCES
 New Insertion under Section 56(2) applicable in case of a closely held
Company where a Company receives consideration for Issue of
Shares. FMV to be substantiated in accordance with method as may
be prescribed. This Provision may Invite Litigations and Valuation
Rules should be adequately framed in this respect.
2. FIRM TAXATION (INCLUDING LIMITED LIABILITY PARTNERSHIP)
 For Partnership Firms (including Limited Liability Partnerships)
o Tax rates have been kept
 AMT
o It is proposed to extend levy of Alternate Minimum Tax (AMT) to all
persons other than companies claiming profit linked deductions under
Chapter VI-A or under Section 10AA.
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4. 3. INDIVIDUAL TAXATION
3.1. For Individual Tax Payers
Total Income Tax Rate
For GENERAL Tax Payers (Male/Female)
Income upto ` 2.0 Lakhs NIL
Income above ` 2.0 Lakh and upto ` 5 Lakhs 10%
Income above ` 5 Lakhs and upto ` 10 Lakhs 20%
Income above ` 10 Lakhs 30%
For SENIOR CITIZENS
Income upto ` 2.5 Lakhs NIL
Income above ` 2.5 Lakh and upto ` 5 Lakhs 10%
Income above ` 5 Lakhs and upto ` 10 Lakhs 20%
Income above ` 10 Lakhs 30%
Note 1. For Individual Taxpayers, exemption on Saving Bank Interest upto `
10,000 has been provided. This would now provide relief to small assesses
having Salary income of less than ` 5 lacs as there would be no need to file
the ROI.
Note 2. In case of Senior Citizens not having any Business Income,
requirement of paying Advance Tax exempted.
Note 3. Proposal to allow deduction of upto ` 5,000 for preventive Health
check up has also been provided.
Note 4. The segregation in tax slabs of Male/Female has been done away
with
Note 5. For all purposes of the Income Tax Act, Age of Senior Citizens
harmonized to 60 years.
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5. 3.2. INVESTMENT LINKED DEDUCTIONS/SUNSET CLAUSES
 EXTENTION OF SUNSET CLAUSE FOR TAX HOLIDAY FOR POWER
SECTOR
o Section 80-IA(4)(iv) has been proposed to be amended to extend the
terminal date for further period of one year i.e. upto March 31, 2013
3.3. TAXATION OF CERTAIN FOREIGN DIVIDENDS AT REDUCED RATE
 Lower tax of 15% on dividends received by an Indian company from its
foreign subsidiary in which it has shareholding of 26% or more gets
extended by 1 more year upto 31.03.2013.
3.4. REGULATORY CHANGES IN INVESTMENT ENVIRONMENT
 FOREIGN DIRECT INVESTMENT (FDI)
o FDI in Multi-Brand Retail UPTO 51% and Aviation UPTO 49% are
under active consideration of Government.
 EDUCATION
o Allocation of ` 25555 Crores provided representing 21.7% increase
o 6000 schools proposed to be set up as Model Schools
 HEALTH
o Existing Vaccine units to be modenised and new units to set up in
Chennai
o Allocation for NRHM increased to ` 20,822 crores
 MICRO SMALL & MEDIUM ENTERPRISES
o Turnover limit for Tax Audit and Presumptive Taxation of SME’s
increased from ` 60 Lacs to ` 1 crores.
o Capital Gains Exemption is provided to Individual/HUF on sale of
residential property if sale consideration is used for subscription in
Equity of a Manufacturing SME for purchase of Plant & Machinery.
o ` 5000 crores Indian Opportunity Venture Fund to be set up with SIDBI
o Policy requiring ministries and CPSEs to make a minimum of 20% of
their Annual purchases from MSE’s approved. Of this 4% earmarked for
procurement from MSE’s owned by SC/ST entrepreneurs.
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6.  AGRICULTURE
o Plan outlay increased by 18%
o Allocation for Green Revolution increased to ` 10,000 crores in 2012-13
from ` 400 crores in 2011-12
o Interest subvention scheme for short term loans to farmers at 7% p.a. to
continue for 2012-13. Additional subvention of 3% for prompt paying
farmers.
o ` 200 crores to be set aside for incentivizing research with rewards.
o Structural changes in Accelerated Irrigation Benefit Programme being
made to maximize flow of benefit from Investment in Irrigation projects.
 HOUSING SECTOR
o Various proposals addressing shortage of housing for Low Income
groups in major cities including allowing ECB’s.
 INFRASTRUCTURE
o Withholding rates on interest payment on ECB’s reduced from 20% to
5% for 3 years for certain sectors.
o During 12th 5 Year plan, Investment in Infrastructure to go upto ` 50
Lakh crores under PPP.
o Tax Free Bonds of ` 60,000 crores to be allowed for financing
Infrastructure projects in 2012-13
 NATIONAL MANUFACTURING POLICY
o National Manufacturing Policy announced to increase the share of
Manufacturing in GDP to 25% in next decade and create 10 crore jobs.
 POWER & COAL
o External Commercial Borrowings (ECB) to be allowed to part finance
rupee debt of existing Power projects
 TRANSPORT- ROADS & CIVIL AVIATION
o Allocation enhanced by 14% to ` 25,360 crores
o ECB proposed for capital expenditure allowed if part of original project
o ECB permitted for working capital of Airline Industry for 1 year period
subject to total ceiling of US $ 1 Billion
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7.  FERTILISERS
o Government finalizing pricing and Investment policies for Urea to
reduce India’s import dependence in Urea
 TEXTILES
o Financial package of ` 3884 crores introduced for waiver of handloom
weavers loans and their co-operative societies
 INCLUSION
o National Food Security Bill, 2011 is before Parliamentary Standing
Committee
o Maternal and Child malnutrition in selected 200 high burden districts
being rolled out
o Allocation made for ` 15850 crores for Integrated Child Development
Service representing 58% increase and ` 11937 crore for national
Programme of Mid Day Meals in Schools
o Allocation for Rural Drinking water and sanitation increased to ` 14000
crores representing 27% increase.
 SOCIAL SECURITY
o Provision of ` 193407 crores made for Defence services including `
79579 crores fro capital expenditure.
o Scheme for National Population Register to complete within next 2
years
 GOVERNANCE
o UID-Aadhaar
 Adequate Funds to be allocated for enrolment of another 40 crore
persons
o Black Money Prevention Measures
 White Paper on Black Money to be laid in Parliament
 Proposal to introduce GAAR (existing in DTC) to counter Tax
Avoidance
 Measures proposed to deter generation & use of unaccounted
Money
 Retrospectively, W.e.f. 1st April, 2011- Compulsory Reporting for
Foreign Assets held by Indians through filing ROI, whether
Taxable or not.
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8.  Reassessment of Income in relation to Foreign Assets may take
place upto 16 Years
 W.e.f. 1st July, 2012- TCS provisions extended to Sale
consideration of Bullion & Jewellery exceeding ` 2 Lacs in cash
@1%
 W.e.f. 1st October, 2012- Withholding Taxes @1% on Immovable
Property exceeding the following thresholds as follows-
• ` 50 Lacs in case of Urban Property
• ` 25 Lacs in other cases
o Procurement Legislature
 Legislative measures for strengthening Anti-Corruption
framework in various stages of enactment
 Income of Foreign Company received in India in Indian currency on
account of sale of crude oil to any person in India has been made exempt
subject to conditions.
 Restriction of Venture Capital Funds to invest only in 9 specified sectors
removed.
 Investment linked deduction of capital expenditure for certain businesses
provided @ enhanced rate of 150% and also weighted deduction of 200%
for R&D expenditure for In-house facility extended for further period of 5
years beyond March 2012.
 INTERNATIONAL TAXATION PROVISIONS
o Sec 9(1)(i) of IT Act, 1961 “INCOME ACCRUING OR ARISING
THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATED IN
INDIA” has been proposed to be RETROSPECTIVELY AMENDED
FROM 1962-63 TO RESTATE THE LEGISLATIVE INTENT TO
COVER THE INDIRECT TRANSFER OF SHARES OF FOREIGN
COMPANY HOLDING SHARES IN INDIA.
 This is against the recent order of the Supreme Court which held
in favour of Vodafone that the transfer of shares of Non
Resident Company based in Cayman Islands could not be put
to Tax in India and certainly would face much debate and
challenge to get through. This move of Government to make up
its fiscal deficit does not seem to be in interest of the Global
Investors and has opened the Pandora box challenging the
settled law.
 Tax Residency Certificates also proposed to be amended as a
necessary but not sufficient condition
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9. o Advance Pricing Agreements proposed to be introduced for
rationalization of Transfer Pricing provisions
o Transfer Pricing provisions to apply even to Domestic
transactions exceeding monetary threshold of ` 5 crores in a year.
o General Anti-Avoidance Rule (GAAR) introduced
 GAAR would codify “substance over form” where intent is
looked at over the structure f transaction
 The provision was part of the DTC and has been picked from
there.
 GAAR applicable if the Transaction meets one of the 4 tests-
• Not done at Arms Length Price
• Misuse/Abuse of Tax law
• Lacks commercial substance
• Not for Bonafide Purpose
 Commissioners and Approving Panel to decide the fate of such
cases
 CAPITAL MARKETS
o Various steps being taken for reforms in capital market including
simplifying IPO process, allowing QFI’s to access Indian Bond Markets
etc.
o Reduction in Securities Transaction Tax (STT) by 20% on Cash
Delivery Transactions w.e.f. 1st July,2012.
o E-IPO Concept for all IPO’s exceeding ` 10 crores for wider
participation in smaller towns
 WEALTH TAX
o Exemption provided for Residential house allotted to employee of a
company for levying Wealth Tax by increasing Gross Salary threshold
from ` 5 Lacs to ` 10 Lacs.
3.5. INDIRECT TAXES
 SERVICE TAX
o New concept of Negative List Introduced- 17 Heads defined
o Widened Tax Base
o Rate increased from 10% to 12% to pave way for GST
o Provisions of Central Excise & Service Tax harmonized- Simple
Registration form and 1 Page Return form proposed
o Settlement Commission introduced for dispute resolution
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10. o Utilization of Input Tax credit permitted to remove cascading effect
o Possibility for common Tax code for Excise and Service Tax to be
studied and Place of Supply Rules for determining location of services
to be put in public domain
 EXCISE
o Standard Rate increased from 10% to 12%, Merit Rate from 5% to 6%
and Lower Merit Rate from 1% to 2% with few exceptions
o Excise Duty on Large Cars proposed to be enhanced
 CUSTOMS
o No change in peak rate of custom duty of 10% on Non Agricultural
goods
-Our Comments-
Though the Budget 2012-13 has not tried to make any big reforms but at the same time, it
has shifted focus from controlling Inflation to ensuring Growth with Fiscal consolidation.
Few Important steps in this direction have been taken in both Direct and Indirect Tax
sphere by introducing provisions of GAAR(existing in DTC) early to curb Direct Tax
avoidance and by increasing the Service Tax/Excise Duty rates and bring Service Tax
under Negative list to align it with proposed GST and make things easy. Impetus has also
been given to Capital Markets by reducing STT by 20% and by bringing the E-IPO concept
for wider participation in smaller towns. Relaxation in ECB norms would provide some
support to the Corporate Sectors mainly Infrastructure, Housing, Power & Coal and
Transport and hopes of FDI in Aviation and Multi-Brand Retail would keep these sectors
optimistic. To conclude, how much out of this gets delivered in timely manner is actually
what would decide the fate of the Government and India Inc.
However in our view, the Retrospective amendments to Section 9(1)(i) for Taxing Indirect
Transfer of Assets in India would see a lot of further litigation, more so as it recently got
settled by the Supreme Court in Vodafone matter and if enacted, as such it may impact
the Investment climate in India.
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