Part B - Budget 2012

Part B – Tax Proposals

(CLASS ROOM – for Student)

Direct Taxes

1.      Exemption limits for General Category

a.       `1L80K   ­ to  `2L – Giving Tax relief : `2K

b.      Upper limit of 20% tax slab – from `8L  ­ `10L

c.       For Individual Tax payer – deduction up to `10K in Interest from saving bank A/c

2.      Rate of withholding tax – on interest payment on ECB – to be reduced from 20% ¯ to 5% for 3yrs for certain sectors.

CLASSROOM:

ECB - External Commercial Borrowing

Lower rate of Interest – Longer Maturity Period – ECB regulation by MOF – FEMA 1999

Modes of Raising ECB:

1.      Commercial Bank Loans.

2.      Supplier’s Credit

3.      Buyer’s Credit.

4.      FRN (Floating Rate Loans) & FRB (Fixed Rate Bonds).

5.      Lines of Credit.

6.      Investment by FII in dedicated Debt fund.

7.      Foreign Currency Convertible Bonds.

8.      Non-Convertible / Optionally Convertible / Partially Convertible

Exclusion from ECBs

1.      Investments towards Core Capital of an organization

·         Investment in equity

·         Convertible debenture

·         Convertible preferential Shares (will be FDI)

2.      Equity Capital.

3.      Reinvestment Earing (retained earnings of FDI).

Trade credits

1.      Supplier’s Credit & Buyer’s Credit for three years and above comes under ECB

Note:

Supplier’s Credit	Buyer’s Credit
Credit for import into India extended by overseas supplier	Loan for payment of import into India arranged by bank or financial institutions outside India
Maturity < 3years	Maturity < 3years

2.      All-in-cost ceilings.

Note: LIBOR (London Inter-Bank Offer Rate)

Oct 1984	British Banker’s Association – working parties – standard for Interest rate swap
Dec 1984	Trail period for BBAIRS fixing
Sep 1985	BBAIRS (BBA’s  Interest Rate Swap) – Standard Market practice
Jan 1986	BBA – LIBOR (London Inter-Bank offer Rate)
LIBOR	Calculated & Published by – Thomson Reuter Behalf of – British Banker’s Association (BBA) Every day by 11 AM (London Time)
Thomas Reuter Corporation	Business data provide – create by the purchase of Reuter Group by the Thomas Corporation Founded in: April 2008 Head quarter: 3 Time square, Manhattan, New york Owner: The Woodbridge company(53% shareholder) CEO: Jim Smith Chairman: David Thomson
LIBOR – Rate of Reference for	Pound sterling, US dollar, EURO, Japanese yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krona, New Zealand Dollar

3.      Foreign Currency Convertible Bond (FCCB)

·         Debt instrument issued I different currency with a option to convert them into shares.

·         Option (Call / Put): It’s a Right. Not obligation

Call Option	Put option
The buyer pays a premium which would be a fraction of the price of underlying security. It’s like gambling that the share price will rise above the option price. If this happen immediately he can buy and sell the share for profit	The Right to sell stock at an agreed price at or before a state future time

·         Interest rate 30%-40% less than normal debt paper.

·         FCCB generally listed to improve liquidity. Indian Issuer have listed in Singapore Stock exchange and many case at Luxembourg stock exchange.

·         Two routes to raise – Automatic and Approval Route

Routes to raise ECB:

Automatic Route			Approval Route
Eligible Borrowers
·   Indian Companies except financial Intermediaries. ·   Units of Special Economic Zone (SEZ) ·   Individuals, Trust, NGO – Not allowed.			·   Financial Institutions (FI) – Infrastructure & Export Activities ·   Banks & FI – Textile & Steel Sector ·   NBFC to finance to import Infrastructure equipment – with ECB of Maturity 5years. ·   Corporate – Industrial, Infrastructure, Service. ·   NGO – Micro financing
Recognized Lenders
·   Internationally recognized Sources  (International Banks, Capital market, Equipment suppliers) ·   Foreign Equity Holders Ø ECB < $5m – minimum equity of 25% Ø ECB >$5m – minimum equity of 25% and Debt-equity ratio not exceeding 4:1 (The proposed ECB should not exceed 4 time the direct foreign equity holding)		·   Internationally recognize sources ·   Foreign Equity Holders Ø Directly holding minimum 25% of the equity capital of the borrowing company. In such case where Debt-equity ratio exceeds 4:1 Ø ECBs to NGO involved in Micro financing.
Amount and Maturity
ECB Amount	Maturity	Corporate – additional amount of $250m with average maturity of 10 years Ø  Infrastructure sector -$100m Ø  Industrial Sector - $50m Ø  Service sector - $100m                         ______________                                  $250m
< $20m	3 years
$20m < x< $500m	5 years
Other
Ø Maximum ECB for eligible borrowers = $500m / Financial year. Ø Call / put option – for ECB < $20m and 3 year maturity
All – in – cost ceiling
Expense paid in foreign currency -  Interest and other fees     Expense paid in Indian currency -  Commitment and prepayment fee		Beyond this limits – Requires Approval route

                                                                       

3.      Restriction on Venture capital fund to invest only in 9 sectors ®(Removed)

4.      New sector – Investment Linked deduction.

5.      Weighted deduction:

a.       200% for R&D expenditure in an in house facility (period of 5yrs)

b.      150% Agri-extension service expenditure.

c.       150% expenditure on skill development in manufacture sector.

6.      Turn over limit of Compulsory tax audit of A/c: Raised from `60L ­to `1Cr

7.      Exemption from Capital Gain Tax à sale of residential properties à if sale consideration is used for à subscription in equity of a manuf SME for purchase of new plant &Machinery.

CLASSROOM:

Capital Gain Tax

-   Any profit/gains arising from transfer of a Capital Asset shall be chargeable to tax as Capital Gains and shall deemed to be income of the previous year in which transfer took place. (Income Tax Act – section 45(1)).

-   Profit/Gains arising from receipt of money/Asset from an insurer on account of damage/destruction of Capital Asset shall be deemed to be income.

-  Profit/Gains arising from Conversion of Capital Asset into Stock in Trade.

-  As of 2008, Equities are considered as Long Term Capital if the holding period is one year or more. Long term Capital gains from equities are not taxed if shares are sold through recognized stock exchange and Securities Transaction Tax/STT is paid on the sale.

8.      Reduction in Security transaction tax by 20% on cash delivery transaction

9.      General Anti Avoidance Rule à to counter aggressive tax avoidance scheme.

CLASSROOM:

      Tax Mitigation /Tax Avoidance - is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law.

General Anti Avoidance Rule:

-          Introduced in India due to VODAFONE case ruling in favor of this company by the Supreme Court.

-          This new rule will come into effect from 1^st of April, 2012.

-          This will give power to Income Tax Authority as implementation of GAAR provides tremendous power to deny tax benefit to an entity if a transaction has been carried with the sole intention of tax avoidance.

-          Now FII & FDI money coming to India through Mauritius route will now become taxable.

10.  Net Revenue loss: 4500 Cr à estimated as a result of (Direct tax proposal)

Indirect Tax

1.      Proposal to tax all services except those in Negative list (17 heads)

2.      To raise service tax rate from 10% ­to 12%

3.      Other proposals

a.       Excise duty 10% ­to 12%

b.      Merit rate 5% ­to 6%

c.       Lower merit rate 1% ­to 2%

4.         Agri & Related sector à Basic customs duty reduced

5.         Infrastructure

a.        Full exemption from basic customs duty.

b.      Concessional CVD of 1% for steam coal.

6.         Mining

a.       Full exemption from basic customs duty.

7.         Health & Nutrition

a.       6 specified lifesaving drug/vaccine

                                                        i.      Extended concessional - basic customs duty of 5% with full exemption from excise duty/CVD.

                                                      ii.      Customs & excise duty reduced on

1.      Soya

2.      Iodine

3.      Probiotics

8.         Environment

a.       Solar Thermal Project, Hybrid/Electric Vehicle – Basic Customs & CVD exempted.

b.      Increased customs duty – on import of gold & precious metals

9.         Additional Resource mobilization          

a.       Increase excise duty on “demerit goods” (cigarette, pan masala, bidis, gutka, tobacco,zarda scented tobacco)

b.      Cess on crude petroleum oil produced in india (Revised to `4500/metric tonne)

10.     Rationalization measures

a.       Levy of excise duty 1% on branded metal jewelry  - extended to unbranded

b.      Branded silver jewelry exempted from excise duty

c.       Chassis for building commercial vehicle à charged excise duty – on Ad volerem rate instead of Mixed Rate.

11.     Indirect tax estimated Revenue gain à `45,940Cr

Net Gain  = -Direct tax loss + indirect tax gain

                 = - `4500Cr + `45,940Cr

Net Gain  = `41,440Cr