INDIAN BUDGET 2013 A SUMMARY OF THE BUDGET PROPOSALS MADE BY THE MINISTER OF FINANCE, GOVERNMENT OF INDIA, 2013

Table of ContentsFew Thoughts .................................................................................... 3

Part I ................................................................................................. 4

Direct Tax ......................................................................................... 4

Part II ............................................................................................. 13

Indirect Tax ..................................................................................... 13

Customs ....................................................................................... 13

Excise .......................................................................................... 19

Service Tax .................................................................................. 21

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Few Thought

Unarguably, world economy has suffered a setback after 2007. Some emerging economies did reflect growth after 2007, but the rate of growth is slow and it appears to be fading like the Cheshire Cat smile. Slow growth is resultant of crumbling of financial institutions like an apple pie. Even though failure of financial institution has occurred in advanced economies, the tremors of crumble are experienced in developing economies as well. To revive economies it is imperative to strengthen the structure that provide finance to corporations. Strengthening solely domestic financing structure would not suffice. It is necessary that along with domestic financing structure, cross border investment and financing modalities should be revived and replenished with trust.

This year, Minister of Finance leaves us with mixed feelings. Enhancement of rate of surcharge, increase in rate of tax of royalties and fee for technical services, continuation of Dividend Distribution Tax and levy of new tax on buy back of shares would result in returns to foreign investors on Foreign Direct Investments in India slighter. Tax relief on Infrastructure Bonds, Securitization Trust, a pass through status to Alternative Investment Fund, relief to investor of Mutual Funds and Infrastructure Bonds (NBFC or Mutual Funds both) reflects commitment and desire to have a strong bond market that would enhance availability of finance to corporations.

Controversial GAAR provisions are put on hold and shall not see the light of the day until April Fool’s Day in 2016. A clarification on tax residency certificate has left many disgruntled. Be that as it may, the restrain on returns on foreign direct investment should be reconsidered.

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This note provides a brief of the proposed changes to the Income Tax Act 1961 that shall impact on corporate (domestic and foreign) that have business in India. Part I summarizes Direct Tax and Part II contains Indirect Tax.

PART – I

Direct Tax

Rate of Tax

The following rates are proposed in respect of business income of the Domestic and the Foreign Companies:

Slabs

Income Tax

(USD)

Domestic

Foreign

0 – 200,000

30.90 (30+3)

41.2 (40+3)

200,000 – 2,000,000

32.45(30+5+3)

42.02( 40+2+3) 2,000,000 – and above

33.9( 30+10+3)

43.26(40+5+3)

The Dividend Distribution Tax (DDT) is levied at the rate of 16.9959(15+10+3)

The Royalties and Fee for Technical Services shall be taxed at the rate of 28.3 (25+10+3)

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Tax on transaction in relation to Commodities Derivatives It is proposed that a new tax on the sale of commodities derivatives is levied at the prescribed rates. This tax shall be levied from the tax year 2013-14 This tax is a deductible expense in accordance with the provisions of Section 36 of the Income Tax Act; This deduction shall apply from the tax year 2013-14. Tax on Income by way of Royalty or Fees for Technical Services Presently, the domestic tax prescribes that the royalties and fee for technical services shall be taxed at a rate of 10%. Whereas the Double taxation Avoidance Agreement (DTAA) with several countries prescribe that the royalties and fee for technical services shall be taxed at a rate which may vary between 10%-25%. As the domestic tax prescribes for a lower rate of taxation, a non resident tax payer that could take benefit of the treaty is taxed at the rate of 10%. It is proposed that the benefit as provided by the present domestic tax shall be withdrawn and the royalties and fee from technical service shall be taxed at the rate of 25%. Please note that the relief provided in terms of the double taxation avoidance agreement shall be available to the tax payer. Incentive for acquisition and installation of new plant or machinery by manufacturing company An investment linked deduction equal to 15% of the aggregate amount of actual cost of new assets acquired and installed shall be provided to the tax payer if such investment is more than USD 20,000,000. To claim the deduction, tax payer shall be restricted from transferring the new assets for a period of 5 years provided that such transfer is not occasion by merger or a demerger of two companies.

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This amendment shall take effect from the tax year 2014-15. Extension of incentives to power sector The deduction provided in terms of the existing provisions of the domestic tax to power generation, distribution and transmission companies were to lapse with the year ending 31, March 2013. These deductions could be availed by the companies engaged in power generation, distribution and transmission for another year i.e until 31, March 2014. Exemption from tax to Investor Protection Fund of depositories The Income by way of contributions from a recognized stock exchange received by a Investor Protection Fund set up by a recognized stock exchange is exempt from taxation. The income by way of contribution from a depository of the Investor Protection Fund shall not be included in total income. The exemptions shall be applicable for tax year 2014-15. Tax on Dividends received from foreign companies Dividends received from foreign company (in which Indian Company holds more than 26% share) by an Indian Company shall be taxed at the rate of 15% if such dividend is included in total income. This lower rate of taxation shall apply for the tax year 2014-15. Dividend Distribution Tax (DDT) It is proposed that in the event a foreign subsidiary of an Indian Holding Company declares dividend to the Indian Holding company and the Indian Holding Company declares a dividend in the same financial year, than the dividend declared by the Foreign Subsidiary to an Indian Holding Company shall not be subjected to DDT. This provision shall become effective from June 1, 2013.

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Tax on Infrastructure bonds The beneficial rate of tax at the rate of 5% on interest payments by an Indian Company to a Non Resident if such Indian Company raises loans or issues long terms Infrastructure Bonds to borrow money in foreign currency is now proposed to be extended to such cases where the non-resident operates a designated bank account and coverts foreign currency into Indian Rupees to subscribe to such Infrastructure Bonds or lend. This amendment shall take effect from June 1, 2013 Taxation of Securitization Trusts A special regime of taxation is proposed for income of trust engaged in Securitization. It is proposed that:

(i) Income of Securitization Trust set up and regulated by SEBI or RBI shall be exempt from tax;

(ii) Income of Securitization Trust distributed to its investors shall be subject to Distribution tax, if income of such investor is chargeable to tax and no tax shall be payable if income of such Investor is not chargeable to tax;

(iii) The Income of Securitization Trust so distributed shall not be subject to tax in the hands of the Investors;

These amendments shall take effect from June 1, 2013. Tax on Alternative Investment Funds An amendment is proposed to the provisions related to tax on income of Venture Capital Company (VCC) and Venture Capital Fund (VCF) from investment in Venture Capital Undertaking (VCU) in light of the recent repeal of SEBI (Venture Capital fund) Regulations 1996 and replacement with SEBI (Alternative Investment Fund) Regulations 2012. In terms of Section 10 (23FB) read with 115U, a pass through status is provide to VCF and VCC as their income is taxable in the hands of their investors. It is proposed to amend Section 10 (23FB) and continue the pass through status in such a manner that:

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(i) The VCF and VCC registered prior to repeal of SEBI (Venture

Capital fund) Regulations 1996 shall avail a pass through status; (ii) The VCC and VCF established in terms of SEBI (Alternative

Investment Fund) Regulations 2012 shall avail pass through status provided certain specified conditions are fulfilled.

Capital Gains on Immovable properties It is proposed to inset a new Section 194 – IA to oblige every buyer to deduct tax at source at the rate of 1% from the consideration payable to the seller of an immovable property. Provided value of such property is not less than 50 lakhs. Tax on buy-back of unlisted shares It is proposed to introduce an additional income tax on buy back of shares at the rate of 20%. The tax is charged on distributed income. The distributed income shall be the difference of the amount received by the Company at the time of issue of such shares and the consideration paid for buy back of shares. The income arising to the shareholder in respect of such buy back by the company would be exempt where the company is liable to pay the additional income tax on the buy-back of shares. The amendments shall take effect from June 1, 2013. Computation of Immovable Property The present domestic tax law provides that the value of immovable property (in case such immovable property is a capital asset) to be considered for determination of tax shall be the value that the relevant state government determines for the purposes of imposing stamp duty at the time of registration of the transfer of the said immovable property. It proposed that a similar provision may be adopted in case the immovable property is a stock in trade for the tax payer and income from transfer is treated as income under the head ‘profit and gains of business and profession’.

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It is also proposed that the consideration of the immovable property to be considered for the purposes of tax shall be the value determined between the parties on the date execute an Agreement to Sell or the value determined by the relevant state government on the date of Agreement to Sell. The consideration of the immovable property on the date of registration of transfer shall not be taken into consideration. The amendment shall take effect from April 1, 2014. Amendment & Extension of GAAR It is proposed that the General Anti Avoidance Rule (GAAR) provisions may be amended to give effect to the recommendation of the Expert Committee appointed by the Government of India (GOI) to review these provisions. It is proposed to consider the following:

(i) The provisions related to GAAR shall come into effect from the tax year 2016 – 17;

(ii) An arrangement to obtain tax benefit would be an impermissible avoidance agreement;

(iii) To determine whether an arrangement is an impermissible arrangement factors such as period, or time for which such arrangement has existed, payment of tax by assessee and the fact that an exit route was provided by the arrangement, would be relevant;

(iv) An arrangement shall deem to lack commercial substance if it does not have an effect on a business risk or net cash flow of any party to the arrangement.

(v) Direction of approval panel shall be binding upon the tax payer and the Income Tax Authorities;

(vi) Definition of ‘associated parties’ and ‘connected parties’ as stated in the provisions of GAAR shall be merged.

These amendments shall take effect from April 1, 2016. Tax on income distributed by the Mutual Funds It is proposed that the rate of taxation in respect of income distributed by the Mutual Funds to its unit holders is different for individual, HUF and

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any other person. It is proposed that this income shall be taxed at uniform rate of 25% in all cases. Interest paid to a non resident investor by an Infrastructure Debt Fund - NBFC or Infrastructure Debt Fund – Mutual Fund is taxed at different rates. It is proposed that in both cases, the interest income to a non-resident shall be taxed at 5%. The amendments shall take effect from June 1, 2013. Amendment in the definition of Capital Asset The agricultural land is not considered to be a capital asset of a tax payer. It is proposed to revise the definition of agricultural land. This amendment shall take effect from April 1, 2014. Scope of Keyman insurance policy The existing domestic tax exempts income received under a life insurance policy provided that such life insurance policy is not a keyman insurance policy. It is proposed that a keyman insurance policy shall remain a keyman insurance policy even if the policy during its term is assigned to employee for whom such policy was taken. In other words, a keyman insurance policy shall be considered as a keyman insurance policy even in case it is assigned to the employee and any income received from such insurance policy shall be subject to tax. The amendment shall come into effect from April 1, 2014. Political Contributions It is proposed to amend the provisions in such a manner that any cash contribution to a political party or an electoral trust shall not be allowed as deduction under the provisions of the domestic tax laws; This amendment shall come into effect from April 1, 2014.

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Clarification of the phrase “tax due” for the purposes of recovery in certain cases It is proposed that the term ‘tax due’ shall include penalty, interest and other sum payable. Therefore, directors of such private company those fail to pay tax on demand shall be liable to pay tax unless the directors could establish that the private company has not failed to pay tax due to his negligence, breach of duty or malfeasance. Incentives for blue collar wages A tax incentive is extended to a manufacturing unit in case it employs blue collared workers. It is proposed that this tax incentive shall not be available in the event factory is hived off or transferred from another existing entity or acquired as a result of amalgamation or merger. The amendment shall take effect from April 1, 2014 Tax Residency Certificate The domestic tax makes a provision for production of a tax residency certificate which provides for the prerequisite information to avail benefits of a double tax avoidance agreement. It is proposed to clarify that the submission of a tax residency certificate is a necessary but not a sufficient conditions for claiming benefits under the Double taxation avoidance agreement.

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Part II INDIRECT TAX This part discusses proposed changes to the prevailing Indirect Taxation regime which consists of duties of customs, duties of excise and service tax. Changes to Indirect Tax are applicable immediately unless stated otherwise. CUSTOMS Amendment to the Customs Act The following amendments are proposed to the Customs Act, 1962 (Customs Act) (i) Section 11 of the Customs Act empowers the GOI to prohibit either

absolutely or conditionally the import and export of any goods for the prescribed purpose. An amendment is proposed to add words “designs and geographical indications” after words ‘the protection of patents, trademarks and copyrights”.

(ii) Section 28BA of the Customs Act provides for provisional

attachment of property with prior approval of the Commissioner of Customs to protect the interest of revenue. It is proposed that the Custom Officers shall have power to provisionally attach the property of the tax payer in case a notice has been served as the duty of custom was levied, short or has not been levied because of collusion or, any willful mis-statement; or suppression of facts;

(iii) Section 28E of the Customs Act provides that an Indian wholly

owned subsidiary of a foreign holding company may apply for advance ruling in the case it proposed to undertake any business activity in India. It is proposed that to expand the scope of this section, the term ‘activity’ shall include any new business of import or export proposed to be undertaken by the existing importer or exporter;

(iv) Section 29 of the Customs Act restrains a person in charge of an

aircraft or vessel to call or land at a customs port or customs

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airport. It is proposed that the Central Board of Central Excise and Customs be empower to permit a vessel and aircraft to land at a place other than customs port or customs airports.

(v) Section 47 of the Customs Act empower a customs officer to clear

goods for home consumption on payment of duty. In case duty is not paid, then it could be paid within five days from the date on which bill of entry are returned. Thereafter the duty shall be paid with interest. It is proposed that the number of five days now be reduced to two days.

(vi) It is proposed to amend Section 49 of the Customs Act to restrict

the period of storage of imported goods clearance of which is pending. Such goods cannot be stored for more than thirty days at a time in either public or private warehouse. The Commissioner of Customs is empowered to extend the days but not more than 30 days at a time.

(vii) Section 69 of the Customs Act provides that any goods could be

exported, if warehoused, without payment of import duty provided certain conditions are met.

(viii) In terms of the Customs Act, offences are classified as bailable

(where criminal court is empowered to grant bail mandatorily). It is proposed that following offences under the Customs Act may be construed as non-bailable (where criminal court has to exercise discretion to grant bail): (a) evasion or attempted evasion of duty exceeding INR

50,00,000; (ii) prohibited goods notified under Section 11; (b) import and export of goods which are not declared and their

market price exceed USD 200,000; (iv) fraudulently availing any exemption from duty that exceeds USD 100,000;

Further it is clarified that all other offences than the offences stated above are bailable.

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Amendment to the Baggage Rules The following amendments are proposed to the Baggage Rules: (i) To raise the duty free allowance in respect to jewellery for an

Indian passenger who was residing abroad for over a period of one year or a person who is transferring his residence to India from INR 10,000 to 50,000 in case of man and in case of woman from INR 20,000 to INR 1,00,000.

(ii) The duty free allowance for a crew member is increased from INR 600 to INR 1,500.

Rate of Custom Duties The following revisions to the duties of customs are proposed:

Sr. No.

Goods

Prevailing

Proposed

1 Dehulled oat grain

30% 15%

2 Hazel nuts

30% 10%.

3 De-Oiled rice bran oil cake

10% Nil

4 New passenger cars and other motor vehicles (high end cars) with cif value more than us$ 40,000 and/or engine capacity exceeding 3000cc for petrol run vehicles and

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exceeding 2500 cc for diesel run vehicles

75%

100%.

5 Motor cycle with engine capacity of 800cc or more

60% 75%

6 Limonite unprocessed

Nil 10%

7 Limonite, upgraded

Nil 5%

8 Bauxite Nil 10%

9 Stainless steel wire cloth stripe for use in the manufacture of catalytic convertors and their parts

10% 5%

10 Stainless steel wire wash coat for use in the manufacture of catalytic convertors and their parts

7.5% 5%

11 Pre-Forms of precious and semi-precious stones.

10% 2%

12 Steam coal (basic)

0 2%

13 Steam coal (cvd) 1% 2%

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14 Bituminous coal (basic)

5% 2%

15 Bituminous coal (cvd)

6% 2%

16 20 specified machinery for use in leather and footwear industry.

7.5% 5%

17 Yachts and motor boats

10% 25%

18 Electric and hybrid vehicles

basic

Nil Nil

cvd

6 6

sad Nil Nil

19 Raw silk (not thrown)

5% 15%

20 Textile machinery & parts

7.5% 5%

21 Set top boxes for tv

5% 10%

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Other Proposals (i) It is proposed to extend the time of consumption of imported

goods by the ship repair units from a period of 3 months to 1 year. Similarly extensions of time are provided to aircrafts as well.

(ii) The exemption granted in respect of education cess and secondary

& higher education cess on aircraft and aircraft parts, soybean oil, olive oil etc. is withdrawn

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EXCISE Amendment to the Excise Act The following amendments are proposed to the Central Excise Act, 1944 (Excise Act) (i) At present Section 9 of the Excise Act provides that an evasion of

duty beyond thirty lakhs attracts imprisonment of seven years with fine. It is proposed to relax this provision by enhancing the limits of duty evasion from USD 50,000 to USD 100,000.

(ii) It is proposed that the Section 9A of the Excise Act be amended to

carve out certain offences such as evasion of excise duty, dealing with goods which under the act are liable for confiscation and categorized them as cognizable and non-bailable (grant of bail in such matter is a discretion of appropriate court where such matters are tried).

(iii) It is proposed to amend Section 11 of the Excise Act in such manner that the recovery of duty could be initiated from the agent of the tax payer;

(iv) It is proposed to amend Section 11 A of the Excise Act to

equate service of statement containing details of duty not paid, short levied or erroneously refunded is a deemed service of notice as prescribed under the Excise Act.

Rate of Custom Duties The following revisions to the duties of customs are proposed:

Sr. No.

Goods

Prevailing

Proposed

1. Tapioca sago (sabudana) and tapioca starch

15% Nil

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2. Henna powder or paste

15%

Nil 3. Sports utility

vehicles

27%

30% 4. Truck chassis

14% 13%

5. Silver manufactured from zinc/lead smelting

Nil 4%

6. Stainless steel "Patta Patti" per machine per month

Rs 30,000

Rs 40,000

7. Ships and other vessels

Exempt

8. On hand made carpets and carpets

Exempt

9. Textile floor coverings of coir Or jute, whether or not handmade

Exempt

10. Mobile phones of retail sale price exceeding Rs 2000

1% 6%

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Other Proposals The following is proposed in addition to the above: (i) It is proposed to clarify that the trimmed or untrimmed sheets or

circles of copper intended for use in manufacture of handicrafts or utensils shall include copper and copper alloys;

(ii) It is proposed that the ‘Zero Excise Duty Route’ in relation to

brnaded readymade garments and made ups is restored. (iii) It is proposed that branded ayurvedic medicaments and

medicaments of Unani, Siddha, Homeopathic or bio-chemic system are being brought under MRP based assessment with abatement of 35% on MRP.

SERVICE TAX Amendment to the Service Tax The following amendments are proposed to the Finance Act, 1994

(Service Tax Act) (i) The scope of Section 65 B (11) of the Service Tax Act is enhanced

by including State Council of Vocational Training. (ii) It is proposed that the term designated trades shall include courses

offered by Industrial Training Institute or Industrial Training Centre affiliated to State Council of Vocational Training. The services rendered by these Industrial Training Institute and Industrial Training Centre shall be part of negative list.

(iii) Section 65B (40) of the Service Tax Act shall be amended to

include processes carried out in terms of Medicinal and Toilet Preparations (Excise Duties) Act, 1955.

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(iv) It is proposed that the testing activities directly related to production of any agricultural produces like soil testing, animal feed testing, testing of samples from plants or animals, for pests and disease causing microbes will be covered by the negative list.

(v) It is proposed to introduce a new section that shall impose penalty

on director, manager, secretary or other office of the company, who is in any manner knowingly concerned with specified contraventions.

(vi) It is proposed to increase the amount of tax payment of which

should be evaded to be liable for punishment for a period of three years. Further failure to pay service tax collected to the credit of central government within 6 months shall attract a jail terms of seven years.

(vii) It is proposed to classify offences under the act as non-cognizable

and bailable offences (viii) It is proposed to grant a retrospective exemption to Indian

Railways on the service tax leviable on various taxable services provided by them prior to July 1, 2012.

(xi) It is proposed that where the carper area of residential unit is upto

2000 sq. ft or the amount charged is less than USD 200,000 in case of construction of complex, intended for sale to a buyer taxable portion for service tax shall be 25%. in all other cases taxable portion for service tax will be 30%.

This change will come into effect from the 1st day of March, 2013. (x) The exemptions limits provided by to the charitable organization to

be eligible for payment of service tax was USD 50,000. From this year this exemption is withdrawn. The charitable organizations shall also be covered by threshold exemption.

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(xi) The service tax shall be levied on taxable service provided in restaurants with air-conditioning or central air heating in any part of the establishment at any time during the year.

(x) It is proposed to withdraw the following exemptions:

(a) Services provided by an educational institution by way of renting of immovable property;

(b) Temporary transfer or permitting the use of enjoyment of a copyright relating to cinematographic films was fully exempt so far, now this exemption will be restricted to exhibition of cinematograph films in a cinema hall or cinema theatre.

(c) Services by way of vehicle parking to general public; (d) Services provided to government, local authority, or a

governmental authority, by way of repair or maintenance of aircraft.

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Aditya Tiwari, Of Counsel, N South

B.Com., Delhi University, LLB, Delhi University; Admitted to Bar in 1999. He is a corporate commercial lawyer with special interest in M&A, partnered and unpartnered cross border investments, corporate commercial contracting and real estate.

Commencing his career as a specialist litigation lawyer, he has transited over the years into performing a strategic corporate role whereby he renders generic client centric guidance, guides the client’s investment initiatives domestically and across borders, establishes the contractual regime for its businesses, manages its compliance regime, maintains a constant vigil over its wider commercial environment especially when strategic and pre-emptive measure are indicated and generally represents a one stop outsourced legal support to a business.

In the infrastructure space, he maintains a quality real estate practice.

He can be contacted at aditya.tiwari@nsouthlaw.com.

Advocates C-62 B, 6th Floor, Super Mart-I, DLF City-IV,

Gurgaon, Haryana-122 009 (India) Telefax: +91-124-4042521, 4042522

E-mail: mail@nsouthlaw.com Website: www.nsouthlaw.com

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