Budget 2012 -Service & Income Tax Provisions

Ashish Rustagi, FCA
Anshuma Rustagi, FCA, DISA

Foreword – Honorable Finance Minster Shri Pranab Mukherjee has presented the Union Budget for Financial year 2012-13 in the Parliament on 16th March,2012. The thrust in the budget has been to increase revenue through increase in indirect taxes rather than direct taxes.

The Finance Minister has taken much more than what he has given to tax payers. The direct tax proposals will result in a net revenue loss in 4500 crore but increase in Indirect taxes because of hike in service tax and excise duty will generate revenue of Rs. 45940 crores.

The proposed Excise Duty & Service Tax hikes will add to inflationary pressure, high fiscal deficits and high market borrowings will affect banks negatively.

Reforms are need of the hour, but the Finance Minister has failed to deliver. Apart from some brief mention of GST there were no bold steps.

Service Tax negative list is finally here. Service now includes all activities under the sun for which consideration has been received except for 17 defined exceptions. The actual situation is not so deplorable… number of exemptions over and above the negative list have been granted vide notifications.

Scope of “reverse charge mechanism” in service tax whereby onus of primary liability of paying service tax is shifted to the service receiver has been expanded. This might be source of major confusions and litigations unless data is efficiently shared between the service receiver and provider.

A detailed study has been conducted by us on the changes in respect of Service Tax Law a synopsis of which is enclosed.

In the guise of implementing anti tax avoidance measures, the Departmental authorities have been granted wide powers of estimation and jurisdiction on a number of issues like GAAR, Transfer Pricing etc. Will this not function as further fuel to the corruption fire which is already blazing in our country?

 INCOME TAX

TAX STRUCTURE

Assessment Year 2013-14

Individuals/ HUF

Income Slab	Rate of Tax
Total Income <= 2,00,000	Nil
Total Income > 2,00,000 and <= 5,00,000	10%
Total Income > 5,00,000 and <= 10,00,000	Rs. 30,000 + 20%
Total Income > 10,00,000	Rs. 1,30,000 + 30%

 Women

(Below 60 years)

Income Slab	Rate of Tax
Total Income <= 2,00,000	Nil
Total Income > 2,00,000 and <= 5,00,000	10%
Total Income > 5,00,000 and <= 10,00,000	Rs. 30,000 + 20%
Total Income > 10,00,000	Rs. 1,30,000 + 30%

 Senior Citizens

(Above 60 years But below 80 years)

Income Slab	Rate of Tax
Total Income <= 2,50,000	Nil
Total Income > 2,50,000 and <= 5,00,000	10%
Total Income > 5,00,000 and <= 10,00,000	Rs. 25,000 + 20%
Total Income > 10,00,000	Rs. 1,25,000 + 30%

 Very Senior Citizens

(Above 80 years)

Income Slab	Rate of Tax
Total Income <= 5,00,000	Nil
Total Income > 5,00,000 and <= 10,00,000	20%
Total Income > 10,00,000	50,000 + 30%

• Threshold Income Tax exemption

• For Individual/ HUF assesses raised to Rs. 2.00 lakhs from Rs. 1.80 lakhs
• For Women Resident below the age of 60 years raised to Rs. 2.00 lakhs from Rs. 1.90 lakhs
• No change for senior citizen and very senior citizen
• No separate slab for Women anymore
• The slab for tax bracket of 20% has been increased to Rs. 5-10 lakhs from Rs. 5-8 lakhs earlier. So if an individual earns an income of Rs. 10 lakhs there will be tax saving of Rs. 22000
• Surcharge, Marginal Relief shall continue as before. No surcharge shall be levied on Individuals, HUF, Firms, Co-Operative Societies and Local Authorities.

Companies

• Marginal relief available for Companies for Income Tax and Surcharge on income above Rs. 1 crore:

Example- If the total income of the Company is Rs. 101 lakhs, then

Tax on above                                                               =          Rs. 30,30,000

Surcharge @ 5%                                                         =          Rs.     15,150

Total Tax                                                                     =          Rs. 31,81,500

 Tax, if income would have been Rs. 1 crore              =          Rs. 30,00,000/-

Extra Income Tax and Surcharge payable on Income of Rs. 1 lakh above Rs. 1 crore is Rs. 1,81,500.

As per the new provisions of Marginal Relief, this tax and surcharge would be limited to the income above Rs. 1 crore i.e., Rs. 1,00,000.

• Corporate Tax Rate, Surcharge, MAT, Cess is same as in the Assessment Year 2012-13.

GIFT TO HUF BY MEMBERS OF HUF

• Definition of Relative for the purpose of Gift expanded to include members of HUF as relatives of HUF
• Effective Date: Retrospectively from 1^st October, 2009

• Thus, any amount of gift by the members to its HUF is not taxable.
  

SHARES OF PRIVATE LIMITED COMPANY/ CLOSELY HELD COMPANIES  ISSUED OVER FAIR MARKET VALUE

• Share Premium in excess of fair market value of shares to be treated as income in the case of closely held company.
• Fair Market Value shall be higher of the two:

ü In accordance with the prescribed method

ü On the basis of the value of the asset, including intangible asset on the date of issue of shares of the company to the satisfaction of Assessing Officer.

• Effective Date: Assessment Year 2013-14
  

• Thus, private limited companies will now have to pay tax on excess amount of share issue price if shares are issued over and above the fair market value.

ALTERNATE MINIMUM TAX

• AMT proposed to be applicable to all Assessee other than a Company  who has:

ü  claimed any income based deduction under chapter VI A

ü  Deduction under Section 10AA

• Computation: Amount to be computed on the Adjusted Total Income
• Rate: 18.5%
• AMT Credit: 10 Subsequent Assessment Years

 ADJUSTED TOTAL INCOME:

Total income computed as per the provisions                                                                                          *** 

• of the Income Tax Act 

Add:        Income based deductions under Part III of Chapter VI A                                                   *** 

Add:        Deduction under 10AA  (SEZ Unit Profit)                                                                                      ***  

                                                                             Adjusted Total Income                                                        ***     

•  Not applicable to Individual or a HUF or AOP or BOT or an Artificial judicial Person  if Adjusted Total Income does not exceed Rs. 20 lakhs
• Income based Deduction under chapter VI A includes Deductions under Sections- 80HHA, 80IA, 80IB, 80RRB etc.
• It is important to note that AMT is applicable only in case deduction u/s 10AA, 80HHC, 80IA, 80IB etc is claimed by the assessee.
• While Computing Adjusted total income Assessee need not add popular deductions like deduction u/s. 80C, 80D, 80E, 80CCF in his income ad these are not covered under PART III of Chapter VIA.
  

 SECURITIES TRANSACTION TAX

• Reduced from 0.125% to 0.1%
• Effective Date: 1st July, 2012
  

TAX DEDUCTION AT SOURCE

Transfer of all Immovable Property – (Other than Agricultural Land)

• Section 194 LAA ( New Insertion)
• Transferee to deduct TDS at the time of makingpayment or crediting any sum by way of consideration
• Rate: 1% of the full consideration
• Threshold Limit  :

ü  Rs. 50 lakhs for urban property

ü  Rs. 20 lakhs for others

• Effective Date: 1st October, 2012
  

• Consideration to be taken at stamp value if actual consideration is less than stamp value.
• Transferee not required to obtain TAN or to furnish TDS statement
• 13 cities only to fall under urban area , Rest of India –Rs 20 lakhs limit is applicable

Fees for Professional Charges

• Payment to Director
• TDS is required to be deducted on that part ofdirector’s remuneration which is not in the nature of salary.

For Example- Sitting Fees

• Rate: 10%
• Section 194J
•     Threshold Limit: Rs 30,000/- annually
•     Effective Date: 1st July, 2012
  

• Thus, payment to directors need to be segregated into two parts. The payment in nature of salary shall be subject to TDS u/s 192. Other payments shall now fall under ambit of Section 194J and subject to TDS thereunder.

Interest on Debentures

• The threshold limit for interest on debentures has been raised from Rs. 2500 to Rs. 5000 for deducting TDS

• Applicable to Individual and HUF
• Effective Date: 1^st July, 2012

Interest to a Non-Resident

– Not Being a Company or to a Foreign Company

• Section 194 LC (New Insertion)
• Rate: 5%
• Threshold Limit: None
• Effective Date: Assessment Year 2013-14
  

Meaning of Interest: Interest in respect of monies borrowed on or after 1^st July, 2012 but before 1^st July, 2015 in foreign currency, from a source outside India under a loan agreement approved by CG.

Relief from Disallowance of Expense

(In case TDS has not been deducted on the same)

• Expense not to be disallowed if the payee has paid tax on the income related to the expense on which TDS has not been deducted

• Effective Date: 1^st July, 2012

Fines & Penalty

• Fine:

ü  Rs. 200 per day if a person fails to file the TDS return within the prescribed time

ü  Effective Date: 1^st July, 2012

• Penalty:

ü   Payable for a sum not less than Rs. 10000   and upto Rs. 1 lakh.

ü   No penalty to be charged if TDS Return is

filed within one year from due date

ü   Effective Date: 1^st July, 2012

 TAX COLLECTION AT SOURCE

TCS on Sale of Bullion or Jewellery

• Consideration in cash collected from the buyerexceeds Rs.  2 lakhs

• Seller has to collect tax at source
• Rate of Tax: 1% of the consideration received incash

• Effective date: 1^st July, 2012

TCS on Sale of Minerals

• Items covered: Coal, Lignite or Iron ore
• Rate of Tax: 1% of consideration
• If purchased for personal purpose then no TCS
• Effective Date: 1^st July, 2012
  

DEDUCTIONS

Insurance Premium

• Sum received from insurance policy issued after 1^st April, 2012 not exempt under section 10(10D) if premium amount exceeds 10% of capital sum assured

• Also no deduction for such premium under section 80C
• Effective Date: Assessment Year 2013-14
  

Interest on Saving Deposit

• Section 80 TTA
• Available to Individual/ HUF
• Threshold limit- Rs. 10,000/–
• Effective Date:  Assessment Year 2013-14
  

Preventive Health Check Up

•    Section 80D
• Health check up of the assessee or the family.
• Deduction of Rs. 5000/-
• Payment can be made in Cash.
• Age for senior citizen now reduced to 60 years for Section 80D.
• Effective Date:  Assessment Year 2013-14

Cash Donation

• No deduction for donation of more than Rs. 10000 if paid in cash under section 80G or 80GGA
  

• Effective Date: Assessment Year 2013-14
  

Rajiv Gandhi Equity Savings Scheme

• Income Tax Deduction of 50% to New Retail Investors
• For Investment upto Rs. 50,000/- directly in Equities
• Annual Income Should Be Less Than Rs. 10 Lakh.
• Lock in period of 3 Years

NEW BENEFITS

Power Sector

• Additional Depreciation:
• Available for assessee engaged in the business of generation or  generation and distribution of power
• On actual cost of new machinery or plant (other than ships and aircrafts) acquired and installed in a previous year.
• Rate of Depreciation: 20%
• Effective date: Assessment Year 2013-14

Weighted Deduction

 

• Weighted Deduction @ 200% on approved in House Research & Development Facilities extended for further period of 5 years i.e. upto 31st March, 2017

Tax Holiday

Tax Holiday under section 80-IA extended further for 1 year till 31^st March, 2013.

CAPITAL GAIN

Sale of Agricultural Land in Urban Area

• The  benefit of Section 54B (exemption in case of sale of agricultural land in urban area) has been extended to HUF also.
• Effective Date: Assessment Year 2013-14
  

Sale of Residential Property

Capital Gain from transfer of a Long Term Capital Asset being a Residential Property is proposed to be exempted if the following conditions are satisfied

• Net consideration to be utilized for subscription in the equity shares of an SME company

• SME company is a company which qualifies under the  Micro, Small and Medium Enterprise Act, 2006

• Net consideration and not Capital Gain has to be utilized

• Assessee must hold more than 50% share capital inthe SME company

• Assessee must invest before the return filing date
• SME must purchase new Plant and Machinery within1 year from the date of subscription of shares by assessee.

• Lock in period – 5 Years
• Effective Date:  Financial Year: 2012-13
  

TAX AUDIT LIMIT RAISED

•   The threshold limit for Tax Audit raised to:

ü  For Business      –       From Rs. 60 lakhs to Rs 1 crore

ü  For Profession –         From Rs. 15 lakhs to Rs 25 lakhs

•   Effective Date: Assessment Year 2013-14

 PRESUMPTIVE TAXATION

•   Section 44AD on Presumptive Tax not to apply to following:

I.   Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy, Interior Decoration

II.  Person earning Commission or Brokerage

III.Agency Business

•   Effective Date: Assessment Year 2012-13
•   The threshold limit increased to Rs. 1 crore from Rs. 60 lakhs w.e.f. Assessment Year 2013-14

 ADVANCE TAX

Senior Citizens (above 60 Years) not having income under the head Profits    And Gains from Business and Profession, not required to pay Advance Tax.

SEARCH

Where a search has been initiated under section 132 after 1^st July 2012, the following penalty shall be levied-

• 10% of the undisclosed income, if undisclosed income is admitted during the course of search, the assessee pay the tax and interest on such income and declare such income in the return.
• 20% of the undisclosed income, if undisclosed income is not admitted during the course of search, but the assessee declares such income in the return and pays the tax and interest thereon.
• 30% to 90% of the undisclosed income if not covered under above two clauses.

FILING OF RETURN

Compulsory filing of Income Tax Return if assessee has an asset (including financial interest in any entity) located outside India or signing authority in any account located outside India even if no taxable income.

EXTENSION OF TIME FOR COMPLETION OF ASSESSMENTS AND REASSESSMENTS

• The existing period and the new extended period for completion of pending proceedings and subsequent proceedings under these provisions is given below:

• The time limit for issue of notice for re-opening an assessment, where the income has escaped assessment in relation to any asset (including financial interest in an entity) located outside India increased from 6 years to 16 years.
• Effective Date: 1^st July, 2012

CASH CREDITS AND UNEXPLAINED INVESTMENTS

• Cash credits, unexplained money, unexplained investments etc.

ü  To be taxed flat @ 30%

ü  Tax at normal rates on balance normal income

ü  No deduction in respect of any expenditure will be allowed in respect of these income

• Nature and Source of any sum credited, as Share Capital, Share Premium etc., in the books of a closely held company shall be treated as explained only if source of funds is explained by the company in the hands of the residential shareholder.
• Assessment Year 2013-14
  

CHARITABLE TRUST

• The limit of gross receipts from business for a charitable Trust has been  increased from Rs.10,00,000/- to Rs.25,00,000/-
• Effective date: Retrospectively from 1^st April, 2009

TRANSFER PRICING

• Specified Domestic Transactions brought under the purview of Transfer Pricing Regulations.
• Computation of value of Specified Domestic transactions will be as per Arm’s Length Provisions under Transfer Pricing Regulations.
• Applicable if the value of Specified Domestic transactions in aggregate exceeds Rs. 5 Crore
• The Specified   Domestic Transactions for the purposes  of application of Transfer Pricing provisions would be as follows:

ü  Expenses/payments transactions between related persons covered U/s. 40 A(2)(b);

ü  Transfer of goods/services/business from one unit/ undertaking of the Assessee to another unit/ undertaking  of the assessee, claiming benefit under Section 80 1A, 10AA etc.

GENERAL ANTI-AVOIDANCE RULE (GAAR)

• An arrangement entered into by an assessee may be declared to be an impermissible  avoidance  arrangement
• An arrangement would be   declared as an impermissible avoidance arrangement if the main purpose or one of the purposes is to obtain a tax benefit and satisfies certain other conditions. This is applicable for existing tax treaties to prevent treaty abuse and bring certain cross border transactions under taxation.

The conditions are:

ü  Results in misuse of provisions of Tax

ü  Lacks commercial substance

ü  Carried out in a manner not normally employed for bonafide purpose

• An arrangement will be deemed to lack commercial substance if:

ü  The substance of the arrangement is inconsistent with, or differs  significantly from, the form of its individual steps or parts ;or

ü  It involves round tripping financing  or elements that have effect or offsetting each other or includes an accommodating  party or a transactions which disguises the value, location, source, ownership or control  of fund ;or

ü  It involves a location of an asset or transactions or place of residence of any party which has been so place of residence of any party which has been so located only for the purpose of obtaining tax benefits.

• When an arrangement is held to be an impermissible avoidance agreement  then the tax authorities may:

ü  Disregard the arrangement  or part thereof,

ü  Disregarding any corporate structure,

ü  Recharacterise location, source, ownership or control  of fund etc.

• The onus to prove that the main purpose of the arrangement is not to obtain the tax benefits would be on the tax payer.

 SERVICE TAX

The service tax law is now proposed to be completely revamped. Presently, there is a list of services which is under the service tax net. Only if a particular transaction falls under that list, it is taxable. The Finance Bill, 2012 introduces the negative list concept whereby all services under the sun shall be subject to service tax except as those listed under the Negative List which is as follows:

NEGATIVE LIST

• Services provided by the Government
• Services provided by R.B.I
• Services provided by Foreign Diplomatic Mission
• Agricultural Services
• Selling of space or time slots for advertisements
• Toll charges
• Betting, Gambling or Lottery
• Entertainment & Amusements
• Transmissions & Distribution of Electricity
• Educational services comprising :

ü Qualifications recognized by any law

ü Approved Vocational Courses

ü Pre- school upto Higher Secondary

• Renting of Residential Property
• Interest on Loan and Purchase/ Sale of Foreign Exchange
• Passenger Transportation/ Goods Transportation
• Funeral, burial, crematorium services

The  following is a list of exceptions to the negative list. Thus, the following services even though they fall under the negative list shall be taxable service.

Exceptions to the Negative List

• Speed post services
• Express parcel post
• Business support services provided by the Government
• Advertisement on Radio or Television
• First Class and AC Train Fare
• Goods Transport Agency
• Courier Agency
  

SMALL SCALE SERVICE PROVIDER

• Presently, for small scale exemption the first clearance of Rs. 10 lakhs was calculated on the basis “Payments Received”. Now it will be on the basis of the “Invoices Issued”.

• Effective Date: 1^st April, 201

OTHER MAJOR CHANGES

	Current	Proposed	Effective Date
Rate of Service Tax	10.3%	12.36% (12% plus cess @ 3% )	1st April , 2012
Works Contract rate	4.12%	4.944% (4.8% plus cess @ 3% )	1st April , 2012
CENVAT reversal for exempt services	5%	6%	1st April , 2012
Time limit for issue of invoice	14 Days from date of completion of services	A) 30 days from date of completion of services B) 45 days for Banking  Co., Financial Institutions, NBFC, any other persons providing banking or financial services	1st April , 2012
Relief from payment of Service Tax on Bills/Accrual basis	Available only to individuals /firms covered under the following services: Engineer Architect Interior Decorator Chartered Accountant Cost Accountant Company Secretary Lawyer Scientific/ Technical Consultancy	Available to all individuals / firms having turnover less than 50 lakhs in previous Financial Year.   All concerns which were presently paying Service Tax Liability on payment basis will now have to pay the same on accrual basis if the aggregate turnover exceeds 50 Lakhs.	1st April , 2012
Adjustment of excess amount of Service Tax	Intimation was required to be given to the Supritendent of Central Excise. Monetary limit  of Rs.2,00,000 existed	The monetary limit and the requirement for intimation have been removed.

 

CHANGES IN TAXABLE PORTIONS OF SERVICE COMPONENT

Services	Taxable Percentage
	Earlier	Proposed
Supply of Food or drink at the Restaurant	30%	40%
Supply of foods or drink as outdoor catering services	50%	60%
Rail Transport (passengers)	Nil	30%
Convention center or mandap with catering	60%	70%
Air Transport (passengers)	Lesser of 10% or Rs. 150/ Rs 750	40%
Renting of Hotels, Guest house etc	50%	60%
Coastal Shipping	75%	50%

 

CHANGES IN RESPECT TO APPEALS

REVERSE CHARGE MECHANISM

Primary Liability to pay service tax lies on the service provider. The service provider collects the service tax from the service receiver and is liable to take registration with the Service Tax Department and complete all the formalities in respect of deposit and filing return of service tax.

The Budget 2012 proposes to shift this liability in certain cases to the service receiver.

Presently, the service receiver has to discharge service tax liability only in a couple of case like import of services and goods transport agency.

However, it is now proposed to shift the liability to the service receiver in a number of other cases also. The proposals are enumerated below:

Authored by
Ashish Rustagi, FCA
Anshuma Rustagi, FCA, DISA
Rustagi & Co, Chartered Accountants
ashish@rustagi.co.in
anshuma@rustagi.co.in