HTT Audit Limited presents a synopsis of the recently drafted Indian Union Budget, which was prepared by our firm‟s associate Mr. Sundar Sundarraman. Mr. Sundarraman is a fellow member of the Institute of Chartered Accountants of India and a graduate in Commerce and a Partner of M/s. S. Venkatram & Co., Chennai. In practice in India from the year 1992 and presently heads the International Tax and consultancy division of M/s. S.Venkatram & Co., and the Management Consultancy division of M/s. N. Rajan Associates, Singapore. He is actively involved with the Technical Directorate of the Institute of Chartered Accountants of India in its publications and presently a Co-opted member of the Editorial Board of the Institute of Chartered Accountants of India and also for the years 2005, 2006, 2008, 2011. Was a Special Invitee of the Internal Audit Standards Board of the Institute of Chartered Accountants of India for the year 2010. Was the Chairman of the International Fiscal Association, India Branch (Southern Region) and has presented many a paper/been a team leader in conferences/seminars relating to audit of banks, insurance companies, taxation, accounting / auditing standards, company law. He is also directly involved in activities of the many public bodies.

M/s. S. VENKATRAM & CO. is a firm of Chartered Accountants was started in the year 1943 and firm presently has 10 partners. Its core office strength consists of around 125 Staff members including Chartered Accountants and Senior Audit/Tax Assistants. In early years, the firm focused on taxation, conveyancing and other related matters, (these being the main areas practiced by its founding partners) but the firm has grown steadily into a multi-disciplinary practice with a client base of over 2,000.

IMPLICATIONS OF THE UNION BUDGET OF INDIA 2012

The Honorable Finance Minister of India presented the Union Budget 2012 on the 16th of March 2012. The Budget was presented under the shadow of (a) his political party in a low ebb having faced a string of electoral defeats with the elections to the Central Government to happen anytime before mid-2014- which means this is his penultimate chance to appease his voters; (b) fiscal calculations going awry due to slippages in direct tax revenue and increased subsidies on fuel, food and fertilizers; (c) decline in economic growth by 6.9 % (mainly due to deceleration in industrial growth) as against an expectation of 9% growth; (d) burdens of persistent high inflation; (e) rising interest rates due to tightening of monetary policy by the Central Bank; (f) higher crude oil import prices; (g) a current account deficit at 3.6% of GDP for 2011-12 mainly due to reduced net capital inflow which in turn put pressure on exchange rate; and finally (h) a perceptible reduced pace of economic reforms mainly as a consequence of mammoth corruption scandals which the government is presently facing.

STATISTICS:

1. During the year 2011-12 the main sectors of the economy showed substantial decline in growth- agriculture (7.5% to 2.5%), industry (from 6.1% to 2.6%) and services (10% to 8%). The period also witnessed mounting prices (inflation at over 9%), driven by demand-supply mismatches, constant increases in interest rate by the Central Bank. Further, the decline of major markets hurt export growth, leading to a widening current account deficit and is expected at 3.6% of GDP.
2. The fiscal deficit was 4.7% for 2010-11 and was budgeted at 4.6% for 2011-12, but in reality the Fiscal Deficit was at 5.9% mainly because of increased subsidies. The fiscal deficit for the year 2012-13 is set at 5.1% of GDP with projections at 4.5% for 2013-14 and 3.9% for 2013-14. In this regard the government plans to cap the subsidies at 2% of the GDP in 2012-13 and bring it down to 1.75% in the next 3 years.
3. The gross tax revenue is expected to register a growth of 19.5% in 2012-13 with the gross tax revenue as a percentage of GDP will be 10.6% in 2012-13 as against the 10.1% in 2011-12.
4. As of September 2011, total public debt of India was at 62.43% of GDP, which is significantly larger among emerging economies. It is expected by the government that with increased fiscal and legislative measures the Debt-to-GDP ratio will come down to 45.5% in 2012-13.
5. In line with the upcoming 12th 5 Year Plan the Budget 2012 focuses on infrastructure (During the 12th plan period, investment in infrastructure will go up to Rs. 50 trillion out of which 50% is expected from the private sector), industrial development, improving fiscal situation, revival of private investment, addressing supply bottlenecks, providing enabling environment for infrastructure, addressing social sector problems, improving service delivery systems and with increased emphasis on agriculture and governance, the Finance Minister expects that India‟s GDP growth in 2012-13 to be 7.6% and the headline inflation rates would both reduce and stabilize to tolerable levels during the year 2012-13;

TAX RATES:

1. CORPORATE TAX RATES: No change has been proposed in the tax rates for corporate, partnership firms, local authorities and co-operative societies. The basic tax rates have been retained at the rate of 30% (effective tax rate being 32.445%) in case of domestic companies and 40 percent (effective tax rate being 42.02%) in case of foreign companies.
2. DIVIDEND DISTRIBUTION TAX (“DDT”): No change has been proposed, however, provisions have been amended to eliminate the cascading effect of taxes in multi tier corporate structures.
3. MINIMUM ALTERNATE TAX (MAT): There is no change in the MAT rate (18.50%).
4. ALTERNATE MINIMUM TAX (AMT): The Applicability of AMT is extended to all non-corporate persons provided the adjusted total income of such person does not exceed INR 2 million. Further, the tax credit for AMT paid will be available for a period of 10 years.
5. TONNAGE TAX SCHEME: Substantial enhancements have been made in the rates of daily tonnage income.
6. DIVIDEND RECEIVED FROM OVERSEAS SUBSIDIARIES: The lower tax rate of 15% on gross basis for the repatriation of dividends by Indian shareholders from their overseas subsidiaries under section 115DDB has retained for another year.
7. Securities Transaction Tax (STT) has been reduced by 20% from 0.125% to 0.1% on delivery based purchase /sale of equity shares in a company /units of an equity oriented fund entered into through a recognized stock exchange in India with effect from July 1, 2012.
8. EXCISE and SERVICE TAX: Peak rates under excise and service tax have increased from 10% to 12%. Lower rates of excise duty have also increased from 5% to 6% and from 1% to 2%. Service Tax, henceforth, would be chargeable on all service transactions (instead of specific notified transactions) excepting those specifically excluded.
9. CUSTOMS DUTY: No change in the peak rate of customs duty (10%) with rationalization of customs duty calculation to avoid double levy of Education Cess;
10. CENTRAL SALES TAX: No change in the rate of Central Sales Tax.

The above rates would be increased by applicable surcharges (maximum of 10%) and a flat Educational Cess of 3%.

FISCAL AND TAX MEASURES STRENGTHENING INVESTMENT ENVIRONMENT:

1. Amendments to Fiscal Responsibility and Budget Management Act have introduced reflecting the commitment of the Government to achieve the fiscal consolidation. The amendments set the new goal post to achieve the fiscal consolidation at March 31 2015.
2. Foreign Direct Investment: Efforts to arrive at a broadbased consensus in consultation with the State Governments in respect of decision to allow FDI in (a) multi-brand retail upto 51%; and (b) commercial airlines upto 49%.
3. Capitalization of Banks and Financial Holding Company: To protect the financial health of Public Sector (PSU) Banks and Financial Institutions, Rs. 159 Billion is proposed to be provided for capitalization and the government is exploring the possibility of creating a financial holding company to raise resources to meet the capital requirements of PSU Banks.
4. Relaxation in the end-use restrictions for External Commercial Borrowings (ECBs) in the case of power projects who would be now able to part finance their rupee debts, road projects who would be to borrow for capital expenditure on the maintenance and operations of toll systems and airlines who would be to finance their working capital requirements (upto US $ 1 billion) and in the case of low cost housing projects and setting up of a credit guarantee trust fund.
5. Interest on foreign currency loans payable to non-residents to by Indian companies which are engaged in the business of power, aircrafts, roads or toll bridges, specified housing projects, fertilizers and dams will be subject to tax withholding at the rate of 5% provided the loan agreement and rate of interest is approved by the Central Government.
6. Extension of “Pass Through Benefit” to Venture Capital Companies (registered in India) in respect of income from investments in all domestic companies by removing the specific sector benefit. The income from such VCF will be taxable in the hands of the investors on a concurrent basis i.e. in the year in which the income accrues to the VCF regardless of its distribution.
7. Following businesses are proposed to be included for investment linked deductions of capital expenditure (@ 200% of the investment in specified assets) if such businesses commence operations on or after April 1, 2012: (a) Setting up and operating an inland container depot or a container freight notified or approved under the Customs Act, 1962; (b) Beekeeping and production of honey and beeswax; and (c) Setting up and operating a warehousing facility for storage of sugar.
8. Capital gains arising out of the sale of residential property (on fulfillment of certain conditions) if the sale consideration is invested for subscription to the equity shares of a Small and Medium Enterprise engaged in manufacturing and the company utilizes the said subscribed amount for the purchase of a new plant and machinery.
9. Income tax deduction of 50 per cent to resident retail investors, who directly invest up to INR 50,000 in equities and whose annual income is below Rs. 1,000,000.
10. A GST Network (GSTN) will be set up as a National Information Utility and will become operational by August 2012. The GSTN would have a common PAN based registrations, return filing and payment processing for all States on a shared platform.

TAX MEASURES TO PREVENT GENERATION AND CIRCULATION OF UNACCOUNTED MONEY:

1. Provisions have been introduced to tax “Share Premium” received by a company from residents on issue of shares if the shares are issued at a value which is in excess of the fair market value of the shares.
2. General Anti-Avoidance Rule (GAAR): If an arrangement (a) creates rights and obligations not normally created between parties dealing at arm‟s length or; (b) results in misuse or abuse of provisions of tax laws or; (c) lacks commercial substance or is deemed to lack commercial substance or; (d) is carried out in a manner, which is normally not employed for bonafide purpose, then such an arrangement would not be recognized and consequently (a) treaty benefits would be denied to the arrangement; (b) any step/party/arrangement would be disregarded, combined, re-characterized or re-arranged; (b) expenses/income can be reallocated between the parties to the arrangement; (c) the place of residence of a party or location of a transaction or situs of an asset can be relocated to a place other than provided in the arrangement. Special procedural provisions have been proposed for invocation of GAAR including an approval by a Panel.
3. Specified domestic transactions have been brought under the ambit of Transfer Pricing if aggregate value of domestic transactions exceeds Rs 50 million for a tax year.
4. Notices issued, demand raised/collected, would be validated retrospectively irrespective of whether the income was chargeable to tax or not or whether the tax is in relation to capital gains arising out of transactions which have taken place outside India.

CHANGES IN INTERNATIONAL TAX LAW:

1. With a view to negate the effect of the Supreme Court ruling in the case of Vodafone, the Budget 2012 has proposed amendments in (a) the term “Capital Asset” to include all rights in or related to an Indian company, including rights of management or control or any other rights whatsoever; (b) the term 'Transfer' to include disposition of/parting with an asset or any interest in an asset including rights incidental to ownership of shares in a company registered or incorporated outside India, in any form or manner whatsoever; (c) share or other interest in a company or entity registered / incorporated outside India will be deemed to be situated in India, if a substantial value of the share or unit depends primarily on assets in India; (d) explanation to clarify that the expression 'through' shall mean and includes 'by means of', 'in consequence of' or 'by reason of'. The aforesaid amendments have been proposed retrospectively with effect from April 1, 1961 (the date of the commencement of the present Income Tax Act, 1961. Thus the amendment seeks to give legistative approval of taxing offshore transfers in relation to underlying Indian investments within the Indian tax net.
2. The Budget has also sought to retrospectively amend (from June 1, 1976) so as to include (a) transfer of all or any right to use computer software (including grant of license) irrespective of the medium of transfer (b) consideration in respect of any right, property or information irrespective of possession or control or direct use by the payer or location of such right, property or information; and (c) process (whether or not it is secret) would include transmission by satellite (including uplinking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology as 'royalty' thus giving a right of taxation in India for purchase of software from overseas companies.
3. Every resident person having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India is mandatorily required to file a return of income irrespective of whether or not the taxpayer has taxable income. Income shall be deemed to have escaped assessment where a person is found to have any asset located outside India and the assessment proceedings can be reopened within a period of 16 years.
4. An “International Transaction” has been clarified to include business restructuring (even if there is no bearing on income, profits, losses or assets (at the time of the transaction or at any future date), capital financing, guarantees, purchase/sale/lease/use of intangible property, inter-companies receivables /payables etc. Similarly Intangible Property” would include marketing and customer related intangibles, technology and data processing related intangible assets, customer relationships, customer lists, human capital related intangibles including trained work force, employment agreements, leasehold interests, commercial rights, studies, forecasts, surveys and others.
5. If the consideration received upon transfer of a capital asset is unascertainable, then the consideration shall be deemed to be the fair market value of the asset on the date of transfer.
6. In order to claim relief under Double Taxation Avoidance Agreements non-residents would need to obtain a Tax Residency Certificate (“TRC”) from their home governments, containing such particulars as may be prescribed by the Indian Government.
7. Withholding tax provisions will apply to residents and non-residents, irrespective of whether the non-resident has a residence or place of business /business connection/ any other presence in India.
8. The Central Board of Direct Taxes (“CBDT”) would have the power to notify a class of persons or cases where the person responsible for paying a non-resident would be required to make an application to the Assessing Officer to determine the appropriate portion of sum chargeable and to deduct taxes in respect of the same.
9. An Advance Pricing Agreement (“APA”) mechanism has been introduced with a view to reduce tax disputes. The APAs would be valid for a maximum period of 5 years and would be binding on taxpayers and tax authorities.

CONCLUSION:

This Union Budget 2012 of India seeks to extend a balance between fiscal consolidations and strengthening macroeconomic fundamentals. However, looking from a taxation perspective, the Budget with its enormous and far reaching amendments particularly in the field of International Taxation would have great impact in the way business is done in India and also with India.