Volume 5, Issue 9

6th June, 2012

Tax Alert
Indian Finance Bill 2012 gets enacted into Finance Act, 2012

The Finance Minister (FM) had tabled the Union Budget 2012 in Parliament on March 16, 2012. Thereafter, based on the suggestions and recommendations received both from the members of Parliament and the public at large with respect to the tax proposals, the FM proposed several amendments to the Finance Bill 2012 (Bill). The Parliament of India has now approved the Bill which now stands enacted into the Finance Act, 2012.

The key amendments proposed by the FM to the Bill and as enacted are discussed below.

Direct Tax Proposals

General Anti-Avoidance Rule (GAAR) Provisions

This was one of the most talked about provisions that was introduced in Finance Bill and was proposed to be effective from April 2012. Various stakeholders and most importantly the international investment community as well as Indian Inc had in very strong words intimated their anxiety and fear to the FM about the wide sweeping powers available to tax authorities under these provisions. Several debates were made on media and articles were published in newspaper on how these provisions could cause hardships and harassment to even genuine tax payers. After taking into considerations various representations as well as some of the recommendations of the Standing Committee of Finance on the proposed Direct Tax Code (DTC), the following amendments have been made: 

  • In order to give taxpayers as well as tax administration time to gear up for the new GAAR provisions, implementation of the GAAR legislation has been postponed by one year.  Thus the start date of GAAR provisions would now be 1st April 2013 (i.e. FY 2013-14) instead of 1st April 2012.
  • In the earlier GAAR provisions, the onus of proving that the main purpose of the arrangement or a step in or a part thereof was not to obtain a tax benefit was on the tax payer. This clause has now been deleted and thus the onus now would lie on the tax authorities to prove that the arrangement is an impermissible avoidance arrangement.
  • The GAAR Approving Panel will now include an independent member from Indian Legal Service (atleast of the rank of Joint Secretary to the Government of India) along with two Commissioners of Income Tax instead of the 3 Commissioners of Income Tax as proposed earlier.  However, the demand for a completely independent member (from the trade body, industry or profession) has not been accepted.
  • Both resident as well as non-resident taxpayers can approach the Authority for Advance Ruling to obtain a ruling as to whether an arrangement to be undertaken is permissible under the GAAR provisions.  This provision will provide certainty to the taxpayer and avoid prolonged litigation.

Capital gains

  • The benefit of concessional capital gains tax rate of 10 percent (as opposed to 20%) on long term capital gain arising from sale of unlisted securities has been extended to all non-residents in parity with Foreign Institutional Investors. In such cases, benefit of indexation or adjustments on account of foreign currency conversions would not be available.
  • Sale of long term unlisted securities in an initial public offering prior to listing would now be exempt from capital gains tax. However, a securities transaction tax at the rate of 0.2 percent will be payable on such a transaction. This is with effect from 1st July 2012 and is aimed to encourage the promoter class to go public.

Minimum Alternate Tax (“MAT”)

  • Certain classes of companies such as banking, insurance, electricity, etc are governed by specific laws where a different form of P&L account has been prescribed.  The Bill had provided that these companies would necessarily have to prepare P&L in accordance of specific laws governing them and the same would be regarded for the purposes of computation of MAT. The amendment to Bill now provides that for earlier years such companies have the option to prepare P&L in accordance with the The Companies Act, 1956 or as per specific laws governing them.
  • Tax payers carrying on business of life insurance would be exempt from MAT provisions. This is applicable retrospectively from 1st April 2001.

Conversion of Indian branch of a foreign bank into a subsidiary

  • With a view to promote the scheme of Reserve Bank of India (“RBI”) for subsidiarisation of Indian branches of foreign banks, enabling provisions have been introduced to facilitate tax neutral conversion of Indian branch of foreign bank into an Indian subsidiary where such conversion is carried out in accordance with scheme framed by RBI and subject to other conditions as may be notified by the Government.

Withholding Tax (WHT) provisions

  • The Bill had proposed a lower WHT of 5% on interest on external commercial borrowings (ECB) or foreign currency loans by Indian companies engaged in infrastructure sector. This benefit has been extended to all Indian companies. The lower WHT rate is available in respect of foreign currency borrowing from July 1, 2012 upto June 30, 2015, provided the loan agreement including the interest rate is approved by the Government. 
  • The Bill had proposed to introduce a WHT of 1 percent on transfer of any immovable property by residents exceeding specified limits.  These provisions have however now been withdrawn.
  • The Bill had also proposed to introduce TCS on cash sale of jewellery or bullion in excess of INR 0.2 Million. The rate of TCS had been fixed at 1%. These threshold limits has been increased to INR 0.5 million for jewellery and while retaining the earlier limit for bullion it has been provided that cash purchase of coin or other articles weighing 10 grams or less shall be specifically excluded from these provisions.

Other amendments

  • Exemption from applicability of Dividend Distribution Tax and withholding tax provisions on distribution of income by VCFs which was proposed to be withdrawn has been reinstated.
  • In the Bill, the FM had proposed treating consideration received by a domestic closely held company which is in excess of fair market value at the time of issuance of shares as income and thus subject to tax. Now the amendment to Bill enables Government to exempt class of classes of persons from application of the above provisions. While no such class or classes of persons have been yet notified, it is aimed at providing relied to “angel” investors who invest in start up companies.
  • The new scheme of providing deduction in respect of investments in equity shares by retail investors which was announced by the FM in his budget speech but was missing from the Bill has been now brought in by this amendment. A  new section has now been introduced which would provide one time deduction to a resident individual tax payer, who is a new retail investor and invests in accordance with the scheme to be notified by the Government and whose gross total income is below INR 1 million. The deduction would be restricted to 50% of the amount invested in equity shares (upto a maximum of INR 25,000) subject to lock in of 3 years.

Indirect Tax Proposals

Service tax

Various changes have been introduced in service tax regime. The key changes are highlighted below:

  • The definition of ‘service’ has been amended to exclude activities which qualify as ‘deemed sale’ as per clause 29A of Article 366 of the Constitution. This would have a significant impact on service tax positions in case of ‘lease transactions’ and ‘works contracts’.
  • The definition of works contract has been enlarged to include movable properties also. Under the Bill, contracts solely for “any building or structure on land” were covered under the ambit of ‘works contract’ which has now been extended to movable properties also. Thus, an attempt has been made to align the definition of ‘works contract’ under service tax to State VAT laws probably in order to achieve consistency of tax treatment.
  • The definition of ‘Interest’ has been amended to remove reference to Income Tax Act and to exclude “any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”. Thus, the original definition in the Finance Act 1994 has been reintroduced with a specific exclusion for service fees / charges and unutilised credit facility. This is in line with the intention of keeping interest in the negative list and not any processing fee or like charges which may be charged for banking and financial services.
  • Scope of definition of business entity is enlarged to cover profession within the term business.
  • Section 66D which comprises of negative list covers services by way of transportation of goods by an aircraft or vessel from a place outside India to the first customs station of landing in India. The scope of the entry is expanded from first customs station to the customs station of clearance. Thus, the exemption shall now be available for services rendered till the custom station of clearance, instead of first customs station of landing in India.


  • The rigour of the prosecution provisions originally proposed to be introduced under the Customs Act has been diluted. Now only serious offences under the customs law involving prohibited goods or duty evasion exceeding INR 5 million has been retained as ‘cognizable offences’ as opposed to a broader criterion proposed (viz., any offence punishable for a term of imprisonment of three years or more) under the Bill. Also, all offences under the Customs Act, 1962, have been made bailable.

Central Excise

  • In the face of severe opposition from the relevant industry bodies, the proposed levy of excise duty of 1 percent on unbranded precious metal jewellery has been rolled back with effect from March 17, 2012.
  • Excise Duty rates for - parts of railway or tramway locomotives or rolling stock, fixtures and fittings, and other parts thereof is increased from 6% to 12%.

SKP comments

One of the biggest changes in the Bill has been the deferment of GAAR by a year. The FM appears to have recognized the fact that the provisions needed some control points and that the same were introduced in haste. This deferment by a year provides an opportunity to tax payers to re-arrange their affairs in a manner that would not play foul with the proposed GAAR regulations. A Committee has been constituted under the Chairmanship of the Director General of Income Tax (International Taxation) to give recommendations for formulating the rules and guidelines for implementation of the GAAR provisions and to suggest safeguards so that these provisions are not applied indiscriminately. One would also have to wait and watch for the recommendations of the Committee and also the final rules and guidelines to be notified by the Government in this regard.

The other aspect where the international investor community was expecting some relief is the retrospective amendment to levy capital gains tax on indirect transfer of shares / properties in India. Despite enormous pressure, the FM has not budged an inch here. Similar is the case with enlarging the definition of royalty to include software payments and payments for transmissions by satellites. In these cases, he has only soothed the tax payers and legislators by giving an assurance that the tax authorities would not reopen past cases which have been concluded on the basis of the above retrospective amendment. To give effect to these statements, while the Central Board of Direct Taxes (CBDT) has issued a circular on 29th May providing that the above amendments should not be used to reopen assessments that are closed or have attained finality as on 31st March, 2012, it seems that the said circular provides only partial relief and currently the circular does not mention about cases where the tax payers have defaulted on withholding tax provisions.

The amendments to the transfer pricing regulations stands as they are and therefore, transfer pricing regulations would now apply to specified domestic transactions. Transfer pricing on specified domestic transaction promises to be next big thing for the tax authorities and unless tax payers develop a pricing policy and framework well in advance including maintaining contemporaneous documentation, this would be a major area of concern and tax risk.

On the indirect tax front, one has to wait and watch how the negative list of services works in practice post implementation (from the date of notification) and one would also have to wait for new rules relating to Place of Provision of Service especially for import and export of services related transactions.