In the budget 2012, our Finance Minister Mr Pranab Mukherjee announced a series of proposals which intended to check tax evasion, improve tax compliance and tax collection. The most important among these proposals are: GAAR, TDS on immovable property purchases, Excise duty on gold jewellery etc. Today in the Budget bill discussion in the Parliament, the Finance Minister amended some of the proposals that he announced in the budget day. Here is a synopsis of the original proposals, the changes and the effects of such changes.
General Anti Avoidance Rules (GAAR) were introduced in this budget by the Government to keep a check on the dubious transactions done on the basis of aggressive tax planning. GAAR was intended to make true the importance of substance over form in transactions done to avoid or escape taxes. This was supposed to be introduced in the current Financial Year.
GAAR, though good in intention, was severely criticized for placing the burden of proof on the assessee instead of the IT Department. For example, if an assessee is questioned on a transaction on the basis of GAAR that the assessee’s primary motive is to evade taxes, then the assessee has to prove his innocence that the transaction was not done for illegal tax evasion. Obviously this would have placed a severe burden on the tax payers and foreign investors. The effect was seen by large outflow of investments made by foreign investors in Indian stock market.
Changes: Finance Minsiter today announced that GAAR will be introduced only in the Financial Year that begins April 2013 and not from this year as originally proposed. Moreover, the Finance Minister has transferred the burden of proof on the IT Department and not on the Taxpayer. This means the IT Department is liable to prove that a transaction made by a taxpayer is done with the intention of tax avoidance.
Effect: a) Foreign Investors may start investing again since the GAAR issue has been temporarily settled for now.
b) Taxpayers can heave a sigh of relief since the GAAR is introduced only in the next year. Some people may even complete the dubious transactions this year itself so that they can avoid being scrutinized next year under GAAR.
TDS on immovable property:
Finance Minister originally proposed to check the rampant black money in the real estate deals throughout the country by way of mandating a tax deducted at source on property deal transfers. The TDS rate was proposed at 1% of value of immovable properties( other than agricultural lands) where the value exceeds Rs.50Lacs in urban area and Rs.20lacs elsewhere. The Finance Minister even announced that to ensure tax compliance a single page TDS challan will be introduced.
Change: TDS on immovable property at the time of transfer is withdrawn.
Effect: People who hold black money will continue to play and make more money in shady real estate transactions. The realty sector will not gain much from withdrawal of TDS.
Rollback of excise duty on jewellery:
Originally the finance minister announced that unbranded jewellery will be treated on par with branded jewellery and accordingly an excise duty of 1% will be levied on the jewellery(both branded and unbranded). This was intended to enable gradual transformation to Goods and Service Tax (GST).
Change: After severe criticism from various quarters like jewelers and bullion traders,the Government today rolled back the excise duty proposal on unbranded jewellery.
Effect: Jewellers and Bullion traders will be calmed now and they may not go on strike again (like the one they did for a period of 21 days in March and April 2012).
TCS on jewellery:
In view to check rampant application of black money in jewellery trades and bullion trades, the Finance Minister announced that every seller must collect a tax collected at source (TCS) at 1% for all cash transactions above Rs.2Lacs.
Finance Minister today announced that TCS at 1% will continue to be levied; however, the threshold limit has been enhanced from Rs. 2Lacs to Rs.5 lacs in case of cash purchase of jewellery, whereas the limit for cash purchase for bullion remains unchanged.
This move is neutral in respect to checking black money perspective. However middle class people who purchase jewellery in cash may feel a bit relaxed since their cost of jewellery will not go up due to TCS.
To sum up, the Finance Minister has tried his best to face the pressures from various quarters to go back on some good proposals and in the end, succumbed to the pressure.
The author, CWA K. Srinivas, is a Finance and Tax Consultant based on Chennai and can be reached at A 1/ 5, Cannan Apartments,Krishna Road,New Perungalathur, Chennai – 63, Mobile: 99403 75173.