The key amendments proposed by the FM to the Finance Bill 2012 in Income Tax laws which have been approved by the Lok Sabha & Rajya Sabha are discussed below:
• Benefit of reduced tax rate of 10 percent on long term capital gain arising from sale of unlisted securities has been extended to all non-residents in parity with Foreign Institutional Investors.
• Benefit of capital gains tax exemption has been extended to sale of unlisted securities in an initial public offering. However, a securities transaction tax at the rate of 0.2 percent will be payable on such a transaction.
Measures to prevent generation and circulation of unaccounted money
• In the Finance Bill 2012, the FM had proposed levying tax on consideration received by a domestic company which is in excess of fair market value of its shares. With a view of address the concerns raised by ‘angel’ investors, exclusion has been granted from levy of such tax to certain notified category of persons.
Venture Capital Funds (“VCF”)
• Exemption from applicability of Dividend Distribution Tax and tax withholding provisions on distribution of income by VCFs has been reinstated.
Return of Income
• The Finance Bill 2012 had proposed that every resident having any asset (including financial asset in any entity) located outside India or signing authority in any account located outside India shall mandatorily file a return of income irrespective of whether or not the taxpayer has taxable income.
• Under the amended Finance Bill 2012 , these provisions shall not be applicable to the individuals who are not ordinarily resident in India.
Minimum Alternate Tax (“MAT”)
• The amended Finance Bill 2012 provides an option to certain companies for preparing their profit and loss account either in accordance with the provisions of the Companies Act, 1956 or in accordance with the provisions of the law governing such company for the purpose of computation of book profits under MAT.
• Tax payers having income from life insurance business would be exempt from MAT provisions.
Tax incentive on 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 to ring fence Indian capital and Indian operations from economic shocks external to the Indian economic scenario, special provisions have been inserted for foreign banks having operations in India.
• No tax will be levied on capital gains arising on conversion of the Indian branch of a foreign company, carrying out banking business in India, to an Indian company in accordance with the scheme framed by RBI and notification issued by the Government in this regard.
• Treatment of unabsorbed depreciation, set off of losses and carry forward and set off of losses, tax credit in respect of taxes paid on deemed income and computation of income of foreign company and Indian subsidiary would apply subject to notification issued by the Government.
• Non-compliance of any of the conditions specified in the scheme or notification to result in denial of benefits granted to the foreign company or the Indian subsidiary.
Provisions relating to withholding of taxes
• With the view to augment long-term low cost funds from abroad for the infrastructure sector, tax withholding rate has been reduced to 5 percent on interest payable on foreign currency borrowing from July 1, 2012 upto June 30, 2015, provided the loan agreement and rate of interest is approved by the Central Government. In his Finance Bill 2012, the FM had earlier proposed a specified list of sectors to which the lower rate would be applicable. In the amendment to Finance Bill 2012, this benefit has been extended to all Indian companies.
• The FM had introduced a tax withholding of 1 percent on consideration paid for transfer of any immovable property. To reduce the additional compliance burden, provision for tax withholding on consideration received on transfer of immovable property has been now withdrawn. However, while this amendment was stated in the FM’s speech, it does not find place in the actual text of the amendment to Finance Bill 2012.
• With the intention to reduce the compliance burden on the jewellery industry, the threshold limit for tax collection liability on cash purchase of jewellery has been increased to INR 0.5 million as compared to the earlier limit of INR 2 Lakh and cash purchase of coin or other articles weighing 10 grams or less have been specifically excluded from these provisions.
General Anti-Avoidance Rule
• In order to give taxpayers as well as tax administration time to gear up for the new General Anti Avoidance Rules (“GAAR”), implementation of the GAAR legislation has been postponed by one year. Apart from the changes described below, the substantial provisions of the GAAR remain unchanged.
• The earlier GAAR provisions required the taxpayer to discharge the heavy burden of proving that the main purpose of the arrangement or a step in or a part thereof was not to obtain a tax benefit. This provision is deleted, thus the Revenue may now have to discharge this onus, based on the rules of natural justice.
• An additional independent member from Indian Legal Service has been added to the Approving Panel to ensure objectivity and transparency. The Approving Panel will now include this independent member alongwith two Commissioners of Income Tax and its role will be to pass directions with respect to taxability of the transaction under the GAAR legislation.
• 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.
• 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. The Committee is expected to submit its recommendations by May 31, 2012.