TaxTMI Updates e-Newsletter
Mar 22,2012

Summary: Budget 2012 provides modest personal tax reliefs-higher exemption and slab limits, tax free savings interest up to a limit, advance tax relief for non business senior citizens, and an increased tax audit threshold-while corporate reliefs are limited. Indirect taxes were tightened: excise and service tax rates increased, cesses retained, and service taxation moved to a negative list regime bringing most services into the tax net, with likely inflationary effects. The budget did not set out a clear GST roadmap.

Summary: The 2012 Budget alters individual taxation by adjusting tax slabs to provide relief in lower and middle brackets while keeping the top marginal rate, preserves higher basic exemption for senior citizens, reintroduces saving bank interest exemption for small taxpayers, treats preventive health check-ups as part of existing medical insurance deduction, proposes a partially deductible equity investment with a three-year lock-in, and removes prior tax incentives for infrastructure bonds, with broader service tax expansion increasing consumer service costs.

Summary: Excise duty now applies to both branded and unbranded precious metal jewellery (silver exempt) and, for unbranded articles, duty is charged on the tariff value equal to thirty percent of the transaction value on the invoice. SSI exemption remains but aggregate clearances for eligibility are computed using tariff value for the period when the tariff rule applies; transitional days require inclusion of thirty percent of transaction value. Job-workers receiving jewellery must register and comply as manufacturers unless the supplying principal follows job-work procedure.

Summary: A new penalty regime for search cases effective 1 July 2012 prescribes reduced penalty where undisclosed income is admitted, an intermediate penalty where income is later declared and paid, and a higher penalty range in other cases, with no separate penalty for concealment or incorrect particulars; concurrent amendments establish an appeal route for persons deducting tax at source to Commissioner of Income-tax (Appeals) and create special courts, summons trials and public prosecutors while raising the prosecution monetary threshold.

Summary: Retrospective amendments expand the Income-tax Act by (i) treating rights in relation to Indian companies as capital asset, (ii) broadening transfer to include indirect and cross-border dispositions, and (iii) deeming offshore shares to be situated in India where their value substantially derives from Indian assets, while reinforcing universal withholding obligations; the changes are retrospective, lack clarity on the timing and meaning of "substantial value," and have raised concerns about investor certainty and FDI impact.

Summary: Life insurance exemption is restricted for policies issued after 1 April 2012 by capping premium relative to the actual capital sum assured, defined to exclude return premiums and bonus-like amounts; VCF/VCC exemption is extended without sector restrictions; charitable organisations lose exemption when receipts from business exceed the statutory threshold; foreign company income from crude sales in Indian currency is excluded from total income subject to conditions; Chapter VIA changes adjust deductions for savings interest, cash donation limits, preventive health checks and lower the senior-citizen age for health-related deductions.

Summary: The proposed amendment to section 56(2) revises the definition of "relative"-explicitly treating any member of an HUF as a relative-and inserts clause (viib) to tax, as income, aggregate consideration for shares issued by closely held companies that exceeds fair market value when shares are issued to residents, subject to a venture capital undertaking exception and valuation determined by prescribed methods or by company substantiation to the Assessing Officer.

Summary: Budget 2012 inserts explanations deeming property to include rights in or in relation to Indian companies, expands transfer to capture indirect or out of India arrangements, and treats offshore shares as situated in India if their value substantially derives from Indian assets, with those clarifications framed as having always applied from the 1960s; the author criticises such retrospective measures as undermining legal certainty, creating taxpayer inequality, and harming investment confidence.

Summary: Amendments broaden Cenvat Credit eligibility by allowing credit on many motor vehicles and their parts, recognising service-tax credits for renting/hiring, insurance and repairs for specified recipients, permitting credit for inputs/capital goods located outside premises with documentation, and extending challan-based credit to all reverse-charge recipients. Export refunds of unutilised credit are calculated by export-to-total turnover ratio without detailed input-service correlation. The payable amount on removal of used capital goods is the higher of adjusted credit-based sum or duty on transaction value. Blocked credit rates for exempt activities are increased, life-insurance credit restriction removed, input service distribution tied to actual use, SAD credit transferability allowed, and interest liability on wrong credits clarified.

Summary: Budget 2012-2013 amends service tax provisions: the effective service tax rate is revised effective April; small service provider exemption wording on aggregate value is changed to align with Point of Taxation rules; eligibility for government assisted common effluent and solid waste facilities is broadened to all clubs or associations effective mid March; air passenger transport exemptions are restructured with partial exemption and levy across classes effective April; rail transport exemption timelines are extended; and the works contract composition rate is increased effective April.

Summary: Amendments to Service Tax Rules, 1994 expand "partnership firm" to include LLPs; extend invoicing periods; provide a small de minimis exception for excess receipts under POT rules with POT remaining the original invoice date; clarify export payment timing and effect of non receipt of foreign exchange within RBI time limits on point of taxation; broaden receipt basis option for individuals and partnership firms subject to a turnover/value cap; revise composition rates for life insurance, money changing and lottery agents; and permit adjustment of excess tax paid without limit or prior intimation.

Summary: Amendments refine the Point of Taxation regime by redefining change in effective rate to include changes in taxable value, expanding continuous supply to include recurrent services with periodic payment obligations, introducing a Date of Payment rule that treats the earlier of book entry or bank credit as decisive unless a change in rate intervenes, tightening invoice timing for advance receipts, and creating a residual rule empowering the Central Excise officer to determine point of taxation after reviewing accounts and evidence.

Summary: The article criticises the use of retrospective amendments to negate judicial victories and alter legal consequences after judgment, arguing such measures undermine settled expectations, enable governmental retribution, and create legal and financial uncertainty; it cites tax examples and urges protection of the basic structure principle to preserve constitutional limits, judicial finality, and the rule of law.

Summary: Amendments revise definitions, enforcement and procedures: importing the concept of inter-connected undertakings, designating serious evasion offences as cognizable while others remain non-cognizable, aligning arrest, bail and investigative jurisdiction with customs and criminal procedure law, and harmonizing search and seizure with the Code of Criminal Procedure. Related rule changes condition reduced-penalty benefits on timely payment, refine Cenvat credit treatment for used capital goods, permit transfer of certain unutilized credits between factories, limit interest on wrongly taken credit to instances of utilization, and expand audit document production powers.

Summary: Assessment time limits are extended for completion and for cases referred to transfer pricing, with similar short term extensions for reassessment, fresh assessment and assessments after search. The exclusion period for requests to foreign tax authorities under DTAAs is increased to one year. Reopening and reassessment windows are lengthened for taxpayers acting as agents of non residents and for income escaping assessment due to assets or financial interests located outside India; parallel Wealth tax amendments are proposed. Revenue need not process returns or grant refunds where a scrutiny assessment has been initiated.

Summary: AMCs are prohibited from conducting trading, unit holder servicing and investment operations outside India and must wind down existing overseas operations within a transitional period. Entry load abolition is preserved while remaining load balances may be used for marketing and distributor commissions subject to an annual cap. NBFCs are barred from taking capital stakes in partnership firms and must unwind existing participations; a separate microfinance category is created. Capital adequacy for off balance sheet items is revised, prior approval is required for overseas investments limited to regulated financial entities, and banks face limits on investments in short term mutual fund debt schemes.

Summary: Budget 2012-13 widens the definition of Inter-connected Undertakings to include more entities, raises the monetary threshold for excise offences in section 9, and treats most excise offences as non-cognizable except those carrying three years' imprisonment or more.

Summary: Agent remuneration and distribution are governed by statutory commission rules under Section 40A(1) of the Insurance Act, 1938, with commission rates for new products requiring regulator approval. LIC reported no mass quitting of agents due to commission reductions or internal guidelines and disclosed agent counts of 1,337,064 for 2010-2011 and 1,305,430 as on 31 January 2012.

Summary: Insurance companies must obtain prior approval from IRDA under the File and Use Guidelines before launching products; presumed clearance windows are 60 days for non-life and 30 days for life, but incomplete filings often delay assessment. Approval time depends on product complexity, pricing, features and terms; IRDA reported approval ranges of 2 to 1708 days and average lags of about 109 days for life, 103 days for general insurance (excluding health) and 176 days for health insurance.

Summary: India urged ratification of the BIPPA (1999) after depositing its instrument of ratification, seeking to facilitate bilateral investment and deepen cooperation in mining, power, railways, ICT, agriculture and capacity building; parallel development-finance engagement included discussion of a Line of Credit for health-sector rehabilitation and a feasibility study by expert consultants.

Summary: The Visionary Leaders for Manufacturing (VLFM) Programme is a structured NMCC initiative comprising four modules for CEOs, senior managers, middle managers and visionary SMEs, delivered by industry and academic partners under international technical cooperation. It focuses on managerial capability, attitudinal change and innovation to achieve cost savings, product and process innovations, and the development of visionary manufacturing leaders, and is being expanded geographically to additional industrial centres.

Summary: Establishment of National Company Law Tribunal and National Company Law Appellate Tribunal is proposed in the Companies Bill, 2011 to create specialized quasi judicial bodies that centralize corporate disputes, reduce pendency and winding up durations, and avoid multiplicity of proceedings. An appellate structure with appeals from NCLT to NCLAT and further limited appeal to the Supreme Court on points of law is designed to streamline appellate review and reduce High Court burden; the Tribunals become operational only after enactment of the Bill.

Summary: The Government designated numerous companies as Defaulting Companies for failure to file balance sheets or annual returns as required under the Companies Act, 1956, and imposed restrictions preventing those companies from filing certain event-based documents with the Registrar of Companies to ensure compliance and strengthen corporate governance; the number of defaulting companies declined materially during the reported period.

Summary: The Ministry of Corporate Affairs deferred implementation of convergence between Indian Accounting Standards and IFRS, adopting a phased approach until stakeholder concerns, including tax-related issues, are resolved; the formal start date will be decided thereafter. Converged Ind AS have been posted on the Ministry's website to enable stakeholder familiarisation and preparatory steps.

Summary: Investigation reports received by the Ministry indicate that companies were prima facie violators of the Indian Penal Code and prosecutions have been sanctioned; a list of such companies is placed at Annexure A and reported in reply to a parliamentary question.

Summary: Multinational audit and consultancy firms operating in India are subject to the regulatory regime governing chartered accountants and professional conduct rules, and there is no bar under company or chartered accountancy law preventing such firms from conducting fraud investigations at clients' specific request.

Summary: The workshop focused on competition issues in public procurement, highlighting bid rigging risks and methods for detection and prevention, and promoted adoption of Competition Compliance Programmes by public sector enterprises; participants also discussed the Draft Public Procurement Bill and comparative procurement law approaches to strengthen competitive procurement processes.

Summary: Negotiations between India and ASEAN on a Trade in Services Agreement are at the stage of reciprocal offers, with the most recent exchange in November 2011. Specific service sectors for cooperation are being negotiated, and the Government stated that the extent of benefits to India will be assessable only after negotiations are completed. The parliamentary disclosure emphasised procedural status and did not announce sectoral commitments or implementation timelines.

Summary: Export of iron ore with high iron content is under a State Trading Regime through MMTC, while the Government is examining a nodal agency interim model to broaden accounting and control over exports. The policy emphasizes end-to-end monitoring and mandatory stakeholder registration and reporting to establish traceability from mining to export. Concurrent fiscal and logistical measures-an increased ad-valorem export duty on lumps and fines and differential railway freight on exported ore-aim to ensure domestic availability and tighten export regulation.

Summary: Mandatory pre-shipment sampling and testing by the Spices Board, instituted from October 2003 for Sudan dyes, Aflotoxin and other toxic elements, is required for consignments to the EU and has been extended to other destinations; only Spices Board-cleared chilli consignments may be exported, and 77,409 samples were tested with 2,253 consignments detained in the last three years.

Summary: Indian tea exports have stagnated with a decline in April-December 2011 due to geopolitical disturbances, payment problems, non tariff barriers and reduced demand; government export targets are set based on production, import, export and domestic consumption projections. A Darjeeling Tea Trade Chain Integrity System has been instituted to ensure authenticity of Darjeeling tea for exports and prevent misuse of the Darjeeling name.

Summary: India's export expansion strategy targets West Asia to reduce the bilateral trade deficit with Iran by promoting sectors such as food items, pharmaceuticals and medical equipment. The Federation of Indian Exporters Organization organised a high-level business delegation to Iran to explore commercial cooperation for non-sanctioned items, but no formal agreements have been finalised; the Minister of State for Commerce and Industry reported this in a written parliamentary reply.

Summary: Online filing of Annexures 2A and 2B is required before filing DVAT/CST returns; for quarterly return filers the Department, under Rule 49A of the DVAT Rules, 2005, extended the last date for online submission of Annexures 2A and 2B for the third quarter of 2011-12 to 26 March 2012, while the statutory last dates for filing DVAT/CST returns and submitting their hard copies remain unchanged. Hard copies of Annexures 2A and 2B need not be filed with hard-copy returns, and monthly return filers must continue to file these annexures online prior to filing returns.

Summary: The circular extends deadlines for online and hard copy filing of VAT/CST returns for the specified tax periods, while expressly maintaining taxpayers' statutory obligation to deposit tax by the due date and preserving applicability of penalties for late tax payment.

Summary: Quarterly dealers must file Annexure 2A and 2B online for each month of the quarter before filing DVAT/CST quarterly returns; hard copies of Annexures need not be submitted, but printed online receipt copies for all three months must be attached to the hard-copy return. Dealers who already filed returns for the third quarter 2011-12 are exempt for that quarter. Thereafter, online e-filing of Annexures for all months of the quarter is a prerequisite for filing quarterly returns for the 2011-12 financial year onwards.

Summary: The authority extended the deadline for online filing of DVAT/CST returns for December 2011 and the third quarter 2011-12 and also extended the deadline for filing hard-copy returns. Notwithstanding these procedural extensions, the obligation to deposit tax for those periods remains governed by the DVAT statutory deposit provision and penalties for late deposit will be imposed as applicable.

Summary: SEBI registered FVCIs may acquire eligible securities of IVCUs and VCFs by private arrangement or third party purchase, and may also purchase on recognized stock exchanges, provided they comply with the applicable FEMA schedule and the FVCI regulatory framework; AD Category I banks must notify customers and regulatory amendments will be separately notified.

Summary: When an Indian company raises the aggregate FII or NRI investment limit to the applicable sectoral or statutory ceiling, it must immediately intimate the Reserve Bank and submit a Company Secretary's Certificate certifying compliance with the Foreign Exchange Management Act and Foreign Direct Policy. The regulator monitors ceilings daily, uses an operational cut-off below the legal limit to caution designated bank branches, requires reporting of proposed purchases by link offices, and grants clearances on a first-come-first-served basis until the limit is reached, after which purchases are stopped and public notice issued.

Summary: Revalidation of Registration Certificates for cotton exports (ITC(HS) 5201 & 5203) requires separate applications for each RC valid on 05.03.2012 to the RA that issued the RC, filed by the prescribed deadline. Applications must state exported quantities with shipping bills, quantities handed to Customs with dates, and quantities yet to be handed with supporting contracts. Prior RCs whose 30-day period had lapsed by 05.03.2012 require submission of export details. DGFT headquarters will scrutinise documents and RAs will revalidate RCs per DGFT instructions; earlier RA revalidation provision is withdrawn.

Summary: Office Memorandum dated 19 March 2012 amends the committee constituted to formulate a Corporate Governance policy document by correcting composition entries: Para 5.2(x) now names Shri Y.M. Deosthali, Chairman, L&T Finance Holdings Ltd.; Para 5.2(xiii) now names Shri Keki Mistry, Vice Chairman & CEO, HDFC; and Para 5.2(xiv) now names Ms. Zia Modi, replacing earlier incorrect entries.