Getting To The Core: Budget Analysis

Getting to the core Budget analysis
March 2012 www.deloitte.com/in
Foreword
The Union Budget 2012-13 was presented by the Finance Minister in the wake of a challenging business environment and weak global economic conditions. 2011-12 was described as the year of recovery, interrupted. With a somber global outlook, sustained slowdown in Indian GDP growth, high inflation, elevated deficits and low investor confidence, the current year has been testing for the Indian economy. While the GDP achieved of 6.9% was low as compared to that of previous years, comparatively it still put India in the top five economies of the world. The government had twin objectives of managing growth and containing inflation in 2011-12. The decreasing foreign investments, stagnating manufacturing sector and lack of harmonization of monetary and fiscal policies defeated the achievement of these objectives. While the Finance Minister in his speech acknowledged the need for fiscal consolidation, he made a strong statement of intent to keep subsidies below 2% of GDP. While it needs to be seen whether this target is achieved, part of the fiscal deficit is proposed to be bridged through the disinvestment target of `30,000 crore. It is however worrying that the net market borrowing required still stands substantially high at `4.79 lakh crore. The size of the CAD also continues to be of concern as fluctuating exchange rates and volatility in FII flows may make achievement of the CAD target difficult. The Finance Minister did not announce any significant policy prescriptions though he recognized the need for strengthening the investment environment. He indicated that efforts need to be made to arrive at a broad-based consensus with State Governments on allowing FDI in multi-brand retail upto 51%. Continuing focus on infrastructure development, a debt fund with an initial size of `8,000 crore has been launched. Further, it is expected that investment in infrastructure will go up to `50 lakh crore with 50% of funding expected from the private sector. Tax free bonds of `60,000 crore have also been allowed for financing infrastructure projects in 2012-13. The Finance Minister has announced significant direct tax amendments in the budget. While he reaffirmed that the DTC Bill will be enacted at the earliest after reviewing the report of the Parliamentary Standing Committee, portions of the DTC have been included in the Finance Bill. Provision on anti-avoidance and implementation of advanced pricing agreements has been introduced. Retrospective amendments to dilute tax rulings have further been brought in. The form and manner in which these amendments will be implemented is not yet clear. It is expected that such amendments may give rise to further controversy in the future. On indirect taxes, he indicated that the GST legislation is being drafted in concert with the States. Peak rate of excise duty and service tax has been increased from 10% to 12% while the scope of service tax has been widened by introduction of a negative list. A new simplified scheme for exporters to claim the refund of input credit has also been announced together with measures to remove the cascading effect introduced in CENVAT provisions. It is expected that revenue gain from indirect taxes will partly address the fiscal deficit concerns. Maintaining a CST rate at 2% is also expected to provide stimulus to supply chain restructurings. 16 March 2012
Getting to the core Budget analysis | 3
Contents
Foreword State of the Economy Budget Highlights Budget proposals Direct Taxes Indirect Taxes Policy Proposals Glossary Contacts 3 6 26 30 30 52 68 70 72
State of the economy
State of the Economy

Snapshot of the Economy Against a backdrop of an uncertain global environment, the Indian economy faced twin macroeconomic challenges of managing growth and containing inflation during the fiscal 2011-12. Since the financial crisis in 2008, India has prided itself in being largely insulated from global recessionary shocks. However, as is apparent, macroeconomic indicators in the Indian economy are being affected by global events such as the Eurozone crisis. Much of the rising trend in inflation has been pegged to global events, which has in turn had a bearing on the rising fiscal deficit and moderation in growth. Fluctuating global commodity prices, hardening of international prices of crude oil, stagnation in Japan, etc. are few such events that have influenced the current macroeconomic climate in India. While the fiscal 2011-12 commenced on an optimistic note ushering in an impressive growth in exports and foreign exchange inflows; the economy experienced moderation as the year progressed. Continued monetary tightening in response to the untamed inflationary pressures caused the economy to slow down affecting both investments and private consumption growth. The fiscal outlook of the country declined as well. Waning revenue receipts, particularly tax receipts, underachievement in budgeted disinvestments coupled with increase in revenue expenditure (mainly oil & fertilizer subsidies) worsened the fiscal health of the economy. Against this
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Budget Highlights
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backdrop, it is unlikely that the economy will be able to meets the expected fiscal and current account deficit goals during this financial year. The global macroeconomic outlook has also been rather turbulent during the past year. Increased instability and volatility in financial markets, rapidly changing risk perceptions and appetites have caused significant rebalancing of portfolios in the global economy. The Eurozone faced the sovereign debt crisis, Japan struggled to cope with the economic impact of natural calamities, and the US economy witnessed a second downwardly revision of their third quarter GDP at 1.8 %. In contrast, emerging market economies have generally shown reasonable robustness mainly on account of their domestic drivers and increasing linkages with each other. Nevertheless, a slowdown in advanced economies is a moot point of concern as it impacts the rest of the world through trade, investment and exchange rate channels. A potential Eurozone crisis could adversely affect key sectors of the Indian economy. Eurozone accounts for nearly 15 % of merchandise trade and is the biggest market for the Indian IT/ITeS segment after the US. While Indian exports during the first half of the year have been healthy, a weakening trend is a major point of concern. Despite the growth slowdown in the current fiscal year, the future of Indias growth story will depend on how it manages to overcome macroeconomic challenges and cope with the impediments that continue to affect growth. Proactive steps need to be taken to mitigate fiscal deficit which stands far above target. It
has also become evident that Indias growth story cannot be evaluated in isolation in an increasingly connected globe. Events such as crude oil prices, geo-political stability and pace of global recovery, are critical factors impacting Indias future growth prospects. In this light, we present an analysis of the current state of the Indian economy and its future prospects. GDP Growth Moderates For the first time since the global crisis of 2008, the economys growth rate fell below 7 %. GDP grew at a modest 7.3 % during the first half of the financial year. Subsequently, turbulent global conditions coupled with a weak industrial sector resulted in a slowdown in GDP growth during the second half of the year. Advanced estimates by the
Figure 1: Sector-wise Growth Rate of GDP
Central Statistical Organisation have pegged the growth rate for 2011-12 at 6.9 % considerably below the earlier expectations of 8 % to 8.5 %. With the exception of services, GDP growth and its two main components Agriculture and Industry have recorded lower growth in 2011-12 as compared to the last year. The growth rates of the economy and its various sectors as per the Quick Estimates by the Government are depicted in Figure 1. High interest rate and inflation has led to a decline in demand in most of the interest sensitive sectors. Supply side pressures have impacted industrial production. The largest component of aggregate demand in the economy private final expenditure has witnessed moderation in growth to 5.1 % during April to December 2011 as compared to 8.5 % during the last year. Data also
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Sectoral growth rates (%)
10 9.30 10.30 10.10 8.00 6.80 9.50 7.96 5.40 0.40 2009-10 (QE) 2010-11 8.10 3.90 2.50 2011-12 (BE) 4 2 8 6.90 6
GDP growth rates (%)
80 60 40 20
10.10 9.30
8.60
9.40
5.80 0 2007-08 -20 Agriculture Industry
4.39 (0.10) 2008-09
Glossary
Glossary
Services
GDP
Source: Economic Survey of India, 2011-12 Getting to the core Budget analysis | 7
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Figure 2: Growth in IIP and its Components 20
its components for the period of April11 to January12. After an impressive growth of 7 % in FY 2010-11, the agricultural growth rate has declined to 2.5 %, also contributed by a high base effect. In absolute volume, the agricultural output is expected to reach record levels owing to a good kharif and rabi harvest in the country, as well as strong growth in horticulture and animal husbandry. Despite a weak global economy and a slowing domestic market, the service sector has performed well during the year, proving to be the most resilient sector of the economy. Advanced estimates indicate that the sector has grown at a rate of 9.4 % against 9.3 % in the last fiscal. Within the service sector, Transport, storage & communication and Trade, hotels & restaurants grew at 11.2 %
Growth in IIP and its components (%)
15 10 5 0 -5
Apr'11
May'11
Jun'11
Jul'11
Aug'11
Sep'11
Oct'11
Nov'11
Dec'11
Jan'12
during 2011-12. Financing, insurance, real estate, & business services witnessed a slight decline in growth rate from 10.4 % in the last fiscal to 9.1 % during the current year. There has been renewed effort to streamline data collection methodologies for the sector. The government is also in the process of developing and compiling indices to capture the performance of the service sector. Fiscal Deficit The Indian government today is faced with the twin objective of spurring economic growth and bringing down the level of public debt and hence the level of fiscal deficit. While the government had initiated the process of aggressive fiscal consolidation since FY 2009-10, the slow growth trajectory that the country is on today poses a big threat to attaining the target levels of fiscal deficit in the coming years. As has been the
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-10 Mining Manufacturing Electricity General
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Source: Economic Quick Estimates of IIP, CSO - 12 March, 2012
suggests a contraction in capital goods in recent months which implies significant slowdown in investment and growth. Moderation in growth has mainly been on account of a sharp monetary tightening by the Reserve Bank of India (RBI) to contain rising inflation. For the first time in 27 months, manufacturing growth recorded a negative growth of -5.95 % in October11, though it later reverted back to 6.95 % in November11. The government has revised the IIP index during the current fiscal wherein the weightages of the various segments in the Index has been altered to better capture the performance of the economy. Manufacturing has a weight of 75.5 % in the new series, compared to 79.4 % in the old series. Weightage of the mining segment has increased to 14.15 % from 10.1 % in the old series, while electricitys share has seen a
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marginal rise to 10.3 %, against 10.2 % in the old series. The latest IIP figures indicate that the industrial sector has grown at a rate of 4.06 % during the period April11 to January12 compared to a growth rate of 8.3 % in the corresponding period last year. Performance of the manufacturing sector has been a major factor behind the dip in IIP growth. The mining sector witnessed huge contraction in growth during the fiscal, recording a -2.64 % deceleration in growth. Stringent implementation of environment laws coupled with crackdown on corruption in the mining sector has adversely affected the sector. Electricity, the third component of IIP is the only segment which has shown some improvement over last year. From a 5.26 % growth rate last year, the sectors growth rate has increased to 8.78 % during the current year. Figure 2 depicts the performance of the year-on-year growth in the IIP Index and
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Fiscal decit asas %% of GDP Fiscal decit a a of GDP
case in prior years, when the country is in a state of slowdown with respect to growth, the government has stepped in by offering stimulus packages, subsidies, etc. to curtail the trend. This year is no exception.
Budget Proposals
The process of fiscal consolidation did not pan out as estimated in the previous Budget and fell short of its fiscal deficit target of 4.6 % this year. For the period ending October 2011, Indias fiscal deficit was at `307,009 crores as against the targeted `412,817 crores for the full fiscal year (April-March), which is 74.4 % of the budget estimate. Over-optimism on the disinvestment proceeds and surging global crude prices were primarily responsible for this shortfall. On the revenue front, the tax collections for the year proved to be dismal. The government was able to recover a mere 9.8 % as tax revenue collections as against the target 18.5 %. On the expenditure front, after October, the depreciation in the Rupee increased the fuel subsidy by `66,000 crores. The contribution of non-plan expenditure stood at 75.9 % of GDP as opposed to 73 % last year. The major constituent of non-plan expenditure this year was the surge in subsidies that are expected to surpass the budgeted estimates by nearly 1 lakh crore in 2011-12. As against the estimated growth target of 4.9 % for the whole year, the growth in total expenditure in the first nine months of FY 2011-12 was
Figure 3: Trends in Consolidated Fiscal Decit Figure 3: Trends in Consolidated Fiscal Decit 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Central Central 0.95 0.95 1.82 1.82 3.32 3.32 2006-07 2006-07 State State 0.56 0.56 1.49 1.49 2.55 2.55 2007-08 2007-08 2008-09 2008-09 2009-10 2009-10 2.16 2.16 2.40 2.40 0.22 0.22 3.00 3.00
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0.00 0.00 2.62 2.62
0.14 0.14 2.21 2.21
6.04 6.04
6.39 6.39
5.09 5.09 2010-11 2010-11
5.90 5.90
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2011-12 2011-12
Off-balance sheet items Off-balance sheet items
Source: Planning Commission Source: Planning Commission
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13.9 %, which comprised 15.4 % growth in non-Plan expenditure and 10.8 % growth in Plan expenditure. The government also incurred an additional loss on account of selling diesel, kerosene and domestic cooking-gas at discounted rates. The graph presenting the composition of the fiscal deficit (Centre, State and off-budget items) is given in Figure 3. Fiscal deficit containment continues to be the key focus area of the government. The burgeoning food subsidy bill coupled with low tax revenue collections requires that the Central Government explore alternate sources of financing this deficit. The reduction in the growth projections this year from 8 % to 6.9 % is likely to have an adverse impact on the tax collections in the coming year. Though the government had set a target of approximately `40,000 crore from disinvestment proceeds for the current year, it
did not manage to achieve a quarter of that target. It is increasingly becoming evident that disinvestment may not be the most viable channel of raising revenue. As the Survey has indicated fiscal consolidation is important. Boosting tax revenues and cutting expenditure to bridge the widening fiscal deficit could help the economy return to its previous growth levels. A lower fiscal deficit will also help investments to rebound quickly. Inflation The Indian economy continues to experience high inflation on account of high fuel, metal and mineral prices. High inflation has in turn had ramifications on growth, domestic demand and fiscal consolidation. The Wholesale Price Index (WPI) remained as high as 9 % during the year. 2011-12 started with a headline inflation of 9.7 %, which
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briefly touched double digits in September 2011 before coming down to 6.6 % in January 2012, as seen in Figure 4. Consumer price inflation (CPI) for the major indices declined to below 7 % in December 2011, and fell further in January 2012. Inflation in primary articles declined, falling to 2.25 % by January 2012, after remaining in double digits for almost two years. Further, inflation in fuel has continued to remain high during the last two years. Inflation in manufactured products accelerated since January 2011, remaining range-bound between 7 and 8 % in 2011, due to a surge in metal and chemical prices. Among individual product groups, inflation in food products, beverages, textiles, chemicals, and basic metals remained elevated mainly on account of high global commodity prices and cost push pressures as seen in Figure 5. The major cause for high inflation this year has been the depreciation of the Rupee leading to the increase in import prices of oil, crude and edible oils. Fuel inflation continued to remain high on account of high international prices. A glaring trend in this years growth-inflation tussle was that the policy rate changes effected by the RBI was transmitted to growth but had a lagging effect on inflation. Despite domestic demand growth posting a marked decline in the past two quarters, WPI inflation remained high and stubborn reflecting price stickiness. This trend has been captured in Figure 6, where domestic demand is represented by the sum
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Figure 4: Wholesale Price Index 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 9.40 8.05 9.11
of private final consumption expenditure and gross fixed capital formation. It is evident that inflation is still driven largely by supply-side factors with the increase in global commodity prices having a direct effect. Indian consumers were partly insulated from the rising crude prices as public distribution system (PDS) kerosene, LPG, and diesel continued to be administered by the government. Although the prices of these have been increased by 16.5 %, 15.53 % and 8.49 % respectively, these products continue to remain highly subsidized. While global commodity prices have eased, it has still not come down to desired levels. Crude oil prices for example, continue to remain at elevated levels. Financialisation of commodities has made the future commodity price path uncertain. With incomplete passthrough of the earlier rise in global commodity prices, the favorable impact, arising from the transmission of falling global commodity prices is also likely to be limited. The government has taken measures to contain prices of essential commodities through selective ban on exports and futures trading in food-grains, zero import duty on select food items, distribution of imported pulses and edible oils through the PDS, and release of higher quota of non-levy sugar. While demand-side factors are to be addressed through prudent monetary policy, supply-side factors may need to be addressed through measures such as private-public investment.
4.74 3.80
2007-08 2008-09 2009-10 Source: Economic Survey of India 2011-12
2010-11
2011-12 (BE)
Figure 5: Group-wise Wholesale Price Index (%) 18.41 13.67 7.58 5.46 9.55 9.11
12.24 9.91
Trade, Balance of Payments and Current Account Deficit The growth trajectory experienced by Indian exports in 2010-11 continued its momentum in the current year. Similar to last year, growth in exports was accompanied by the diversification of the export basket. Likewise, imports also registered a steady growth in the current year though there were slight fluctuations in the beginning of the current fiscal. During the period April 2011 to January 2012, the value of exports was USD 242.8 billion as against USD 196.6 billion last year registering a growth of 25.3 % in dollar terms over the corresponding period of the previous year. This high growth rate in exports was spearheaded by engineering goods, petroleum products, gems & jewellery and chemicals. During the period April 2011 to January 2012, the value of imports was USD 391.5 billion registering a growth of 23.5 % in dollar terms. For the period, April to December, 2011, oil imports were at USD 70.3 billion which was 42.4 % higher than the oil imports in the corresponding previous period. Non-oil imports were at USD 163.2 billion which was 28.5 % higher than the level of such imports in the corresponding period of the previous year. The growth in imports was primarily driven by petroleum & oil products, gold & silver, machinery, electronics, organic & inorganic chemicals and coal. Rising crude oil prices along with growth in quantity of oil imports led to a higher oil import bill.
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Ination (%)
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Primary Articles 2010-11 2011-12
Fuel and Power
Manufactured Products
All Commodities
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Source: Economic Survey of India, 2011-12

Figure 6: Domestic Demand versus Ination Figure 6: Domestic Demand versus Ination 10.00 6000000 10.00 6000000 9.00 9.00 5000000 8.00 5000000 8.00 7.00 4000000 7.00 4000000 6.00 6.00 5.00 3000000 5.00 3000000 4.00 4.00 2000000 3.00 2000000 3.00 2.00 1000000 2.00 1000000 1.00 1.00 0 0.00 0.00 2007-08 2008-09 2009-10 2010-11 2011-12 (BE) 0 2007-08 2008-09 2009-10 2010-11 2011-12 (BE) WPI Ination (%) WPI Ination (%) WPI Ination DDG WPI Ination DDG Source: Mid-term Review, Ministry of Finance Source: Mid-term Review, Ministry of Finance
Glossary
Domestic demand growth (`(` crore) Domestic demand growth crore)
Glossary
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accompanied by rising prices of gold and silver also accentuated the rise in value of imports. In spite of the growth in exports, the trade deficit has widened in absolute terms in the current year (Figure 7). The deficit widened by 40.3 % to USD 148.7 billion during April 2011 to January 2012 from USD 106 billion in April 2010 to January 2011. This widening trade deficit is a major concern and in the current year it has been aggravated by the increasing import bill as well as depreciation of Indian Rupee. It is interesting to note that there has been a structural shift in the composition of the export basket from labour-intensive manufacture to higher value added engineering and petroleum products. In the decade of 2000-01 to 2010-11, the export basket has seen major compositional change with an 11 % point fall in the share of manufactures, a 12 % gain in share of
However, it is to be noted that while the oil deficit has always been susceptible to price shocks, the distinctive feature of the recent trade deficits is the resilience of the non-oil trade deficit (especially during September and October 2011). The sharp rise in commodity prices
petroleum crude and products, and a 2 % point fall in share of primary products. As regards the import composition, there are no significant changes during the decade except for the fact the share of capital goods to total imports have shown significant variation. There is also no noteworthy change in the top 15 trading partners for the past couple of years; UAE continues to remain at the helm in 2011-12. In 2010-11, Indias exports to European, African and American regions witnessed a growth of 32.1 %, 60 % and 40 % respectively. Indias exports to Asia & ASEAN region registered a high growth of 46.5 %. Indias imports from Europe, America and Asia & ASEAN registered a growth of 16.7 %, 13.5 % and 19.7 %, respectively. While the Government has taken initiatives for export promotion in the form of Focus Market Scheme (FMS), Focus Product Scheme (FPS) and Duty Entitlement Passbook Scheme (DEPB), exports suffered during the second half of the year given the uncertain global environment. However, services sector exports proved to be largely resilient to global movements. Services exports increased by 38.4 % from USD 96.0 billion in 2009-10 to USD 132.9 billion in 2010-11. The growth in service exports was driven by travel, transportation and insurance. Invisible payments increased by 36.2 % from USD 83.4 billion in 2009-10 to USD 113.6 billion in 2010-11. The growth of 36.2 % in invisible payments outstripped the 21.3 % growth recorded in 2010-11. Increase in invisible payments was mainly attributed
Budget Proposals
to business services, financial services, travel, and investment income. Net invisibles balance (receipts minus payments) recorded a 34.6 % increase to USD 52.9 billion (5.8 % of GDP) in H1 of 2011-12 from USD 39.3 billion (5.1 % of GDP) in H1 of the previous year. At this level, the invisibles surplus financed about 62.0 % of trade deficit during H1 of 2011, as against 57.0 % during the same period a year earlier. While it is interesting to note that the contribution of trade in the GDP has gone up from previous years, this also opens up the Indian economy to uncertain headwinds given the volatile nature of the global economy. With regard to capital flows, its composition changed considerably in the period April to December 2011 with high volatility in portfolio and FDI inflows. Non-debt flows comprising FDI and FIIs, on net basis, decreased by 10.6 % from USD 54.7 billion in 2009-10 to USD 48.9 billion in 2010-11 (Figure 8). Decline in foreign investment was offset by the debt
Figure 8: FDI vs FII Figure 8: FDI vs FII 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 0 0 -5,000 -5,000 -10,000 -10,000 -15,000 -15,000 -20,000 -20,000 FDI/FII in USD million FDI/FII in USD million FDI Inows FDI Inows
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Figure 7: Trade Balance Figure 7: Trade Balance Figure 7: Trade Balance 8 8 5.1 8 5 6 5.1 5 6 5.1 5 6 4 4 4 2 2 2 0 0 Apr-Sep, 0 -2 Apr-Sep, -2 2010-11 Apr-Sep, 2010-11 -2 -4 2010-11 -4 -3.8 -4 -3.8 -6 -6 -3.8 -6.1 -6 -8 -6.1 -8 -6.1 -8 -10 -8.9 -10 -8.9 -10 -8.9 -12 -12 -12 Current Account Balance Goods and Services Balance Current Account Balance Goods and Services Trade Balance Invisibles Balance Balance Current Account Balance Goods and Services Balance Trade Balance Invisibles Balance Net Capital Inows Trade Balance Invisibles Balance Net Capital Inows Net Capital Inows Source: Economic Survey, 2011-2012 Source: Economic Survey, 2011-2012 Source: Economic Survey, 2011-2012 Percentage ofof GDP Percentage GDP Percentage of GDP
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5.8 5.8 5.8
4.5 4.5 4.5
-3.6 -3.6 -3.6
Apr-Sep, Apr-Sep, 2011-12 Apr-Sep, 2011-12 2011-12 -6 -6 -6 -9.4 -9.4 -9.4
Nov'11 Nov'11 Oct'11 Oct'11 Sept'11 Sept'11 Aug'11 Aug'11 July'11 July'11 Jun'11 Jun'11 May'11 May'11 Apr'11 Apr'11 Mar'11 Mar'11 Feb'11 Feb'11 Jan'11 Jan'11 Dec'10 Dec'10 Nov'10 Nov'10 Oct'10 Oct'10 Sep'10 Sep'10 Aug'10 Aug'10 July'10 July'10 June'10 June'10 May'10 May'10 April'10 April'10
Glossary
Glossary
Net FII inow in Capital Market Net FII inow in Capital Market
Source: Securities & Exchange Board of India Source: Securities & Exchange Board of India
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flows component of loans and banking capital which increased by 130.3 % from USD 14.5 billion in 2009-10 to USD 33.4 billion in 201011. According to the Securities Exchange Board of India (SEBI), FDI inflows were USD 24.19 billion during April to December 2011 (USD 16.04 billion in the corresponding period of the preceding year). Net FII Inflow fell sharply to USD 2.75 billion during April to December 2011 from USD 29.46 billion a year earlier mainly reflecting uncertainty and risk in the global economy on account of the Eurozone crisis. At the end March 2011, Indias external debt stock was USD 306.4 billion recording an increase of USD 45.4 billion (17.4 %) over the end March 2010 level of USD 261.0 billion. This increase was primarily on account of higher commercial borrowings and short term
debt, which together contributed over 80 % of the total increase in external debt. Foreign exchange reserves increased by USD 6.7 billion from March 2011 to reach USD 311.5 billion at end September 2011. It is to be noted that the rupee continued exhibiting a two-way movement with an appreciating trend till July 2011, after which it started declining sharply from September 2011. Under the ambit of global risk aversion FIIs reportedly sold shares till Dec 11. Secondly, given the volatility in oil prices, demand for dollar increased as oil importers had to meet their month-end import bills. Moreover, Eurozone debt worries continued to haunt the domestic sentiments with speculation that European banks might unwind their investments in Asia to cover losses from risky holdings. A record widening of trade shortfall to $133 billion in the nine months ended December also hastened the depreciation of the Rupee.
Figure 9: International Capital Markets
2009 YOY growth 100 81 Percentage growth 80 60 40 20 (20) (40) India China Russia Brazil 80 52 83
2010 YOY growth
2011 YOY growth
17
19 1
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(11) (25) (25)
(16)
(18)
Source: Bloomberg
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In order to stimulate capital inflows and stabilize the value of the Rupee, the government has undertaken initiatives to liberalize policies in respect of Trade Credit, External Commercial Borrowings and Foreign Institutional Investors. Financial Markets A slowing global economy continues to have an impact on the Indian Economy. According to the RBI, the world economy may observe a decline in its growth trajectory although it is not slated for another recession. Policy makers are not shy of the impact that the global economy has had on the Indian economy. The Eurozone financial debacle, US slowdown and other global factors have adversely affected investment patterns and the performance of the capital markets. While post crisis growth
in international capital markets remained buoyant in 2009, growth rates moderated in 2010, and turned into negatives in 2011 (Figure 9). Policy Proposals In October 2011, the rupee crossed the `50/ USD mark. During the same period, the rupee has depreciated 10.41% against the Euro, settling at `70.07/Euro. Global spillovers and macroeconomic deterioration resulted in pressures on equity and currency markets. The sharp depreciation of the Rupee during August-December 2011 contributed to the drying up of foreign equity inflows and in turn, further weakened the rupee. The impact was compounded by poor resource mobilization in the primary capital market. The stress in the financial markets was mitigated by policy measures that included infusion of Rupee and
Glossary
Glossary
16
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Figure 10: Monetary Tightening 10.00 Repo/Reverse repo rates (%) 9.00 8.00 7.00 6.00 5.00 4.00
De c-1 0 Jan -11 -11 -11 r-1 1 t-1 1 -11 -11 No v-1 De c-1 1 r-1 1 g-1 1 y-1 1 1 Feb Jun Jul Sep Ma Ap Ma Au Oc
Repo
Reverse Repo
Call Rates
Source: Economic Survey of India, 2011-12
Dollar liquidity. As a result, call money rates largely remained within the interest rate limits and spikes were effectively contained. The performance of the secondary market this year has been dismal. The secondary market performance gave minus 21 % return to the investors. The 20 % fall in the Rupee resulted in the returns of foreign institutional investors to fall to minus 41 %, according to The Associated Chambers of Commerce and Industry of India (ASSOCHAM). The ASSOCHAM study reveals that under the Initial Public Offering (IPO) market during 2011-12, there were only 39 public issues of which 17 were of small size (i.e. below `100 crore) and only 3 were with the size of `1000 crore. This clearly reflects lack of conviction and confidence with the investor community. The ASSOCHAM Study also suggests that the funds
18
raised through the issue of American Depository Receipts (ADRs) were insignificant. Further, there were hardly any major Global Deposit Receipt (GDR) issuances during the year. Credit growth slowed below the indicative projection due to demand as well as supply side factors. Demand for credit weakened in response to slack in real activity. Supply also slowed down with rising risk aversion stemming from deteriorating macroeconomic conditions and rising non-performing loans. In response to the increase in policy rate by the RBI, banks have been raising their deposit and lending rates (Figure 10). An improvement in FII inflows into the domestic market can result in a turnaround in the RBIs monetary policy and consequently improve the liquidity position.
Mergers & Acquisitions Developing and transition economies continued to account for half of global FDI in 2010-11 as their inflows reached a new record high, at an estimated USD 755 billion, driven mainly by robust greenfield investments. Developing economies continued to absorb majority of global FDI inflows in 2010-11 which came as a good year for cross border M&A activity partly due to the deals announced in 2010, executed in the year 2011. Unfortunately, the trend reversed at the end of the year due to uncertainties in the global market. UNCTAD estimates that FDI flows will rise moderately in 2011-12 to around USD 1.6 trillion. However, the prolonged crisis in Europe, weak prospects of the global economy will determine the cross border investment activities in 2012-13. The total FDI equity inflows during the period April to December 2011 was roughly around
2010-11 2010-11
`112,019 crore with a growth of 34 % over the same period last year. The driving source was Mauritius, followed by Singapore, Japan and USA (Figure 11). According to the factsheet of the Department of Industrial Policy & Promotion, the State of Maharashtra witnessed highest equity capital inflow with `239,328 crore followed by New Delhi and Bangalore at `142,706 crore and `42,313 crore, respectively. The M&A deals in the country for 2011-12 remained over USD 15 billion. Deals worth USD 14.75 billion were recorded one month alone the largest for the month in three years. This was primarily due to the major restructuring deal of the Vedanta Group under which Sterlite Industries, Sesa Goa and Vedanta Resources announced merger of Sesa Goa and Sterlite. Growth in M&A activity is expected to increase given the relief granted by the Honourable Supreme Court of India in
2011-12 (April to December) 2011-12 (April to December)
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Figure 11: Share of Top Investing Countries FDI Equity Inflows ` in crores
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36519 36519
31855 31855
38569 38569
38155 38155
5353 5353
Glossary
7730 7063 7730 7063
4189 4189
12670 12670 Others Others
18436 18436
Glossary
Singapore Netherlands Mauritius United States of America Mauritius Singapore Netherlands United States of America Source: Department of Industrial Policy and Promotion Source: Department of Industrial Policy and Promotion
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Figure 12: Top Ten Country-wise Overseas Investments by Indian Companies (Amount in billions USD)
2010-11 2010-11 2011-12 (April-February) 2011-12 (April-February) 1.86 3.99 3.16 3.16
5.04
3.99 5.04
1.86
1.21
2.27 1.21 1.52 1.52 5.08 5.08 0.87 0.87 0.7
2.27
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0.7
the Food Security Act will be fully provided for. All other subsidies would be funded to the extent that they can be borne by the economy without any adverse implications and plan to restrict the expenditure on Central subsidies to under 2 % of GDP in 2012-13. Over the next three years, it would be further brought down to 1.75 % of GDP. Such a step is needed to improve the quality of public spending by better targeting and leakage proof delivery of the subsidies. Challenges Ahead: Time for Cautious Optimism The state of the Indian economy today is characterized by slow growth, primarily owing to the slump in industrial production. Inflation continues to remain high and the concerns on reducing fiscal deficit stills looms large. The ability of the economy to recover onto the trajectory of high growth will depend on
its capacity to rein in the detrimental effects of factors such as fiscal and current account deficit, high inflation, investor confidence, etc. Some of the notable challenges are highlighted below. Fiscal Deficit Sustainability A glaring trend observed this fiscal is the emergence of over-optimistic disinvestment targets, depreciation of the Rupee and growing subsidies on oil due to increase in the global commodity prices. High tax refunds and low tax and non-tax revenue collections have also led to the reduction in revenue receipts. While the gap in the deficit could to some extent be bridged by tax and non-tax revenue collections in the previous fiscal, no such buffer exists this year on account of low GDP, high oil prices and increased subsidies. A reduction of fiscal deficit in the future will
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Singapore Others Mauritius Netherlands United States of America Singapore Mauritius Netherlands United States of America Others Source: RBI Source: RBI
Policy Proposals
the recent case of Vodafone. There has also been an amplified interest from corporate houses in India for outbound investments. According to available data, outward FDI from India was observed to be more than USD 20 billion during April-October 2011 period wherein Singapore and Mauritius were seen to be the preferred overseas investments destinations (Figure 12). Impact of Budget Announcements on Economy In the light of the continuing uncertainty in the global environment, the Finance Minister targets to strike a balance between fiscal consolidation and strengthening macroeconomic fundamentals to create adequate headroom to deal with future shocks. Although he acknowledged the drop in economic growth at the rate of 6.9% on account of global as well as domestic aspects, he termed it as just an interruption in the recovery. Going ahead, the
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growth in 2012-13 is expected to be around 7.6%. Although the target is welcome, how it is achieved remains to be seen. It was also acknowledged in the budget that fiscal balance has deteriorated in 2011-12 due to slippage in direct tax revenue and increased subsidies. The profit margins came under pressure due to higher interest rates and material costs, which impacted growth in corporate taxes and as the price of crude oil in 2011-12 hiked above expectations, it necessitated higher outlay on subsidies than projected. The Finance Minister targets to achieve fiscal consolidation by setting fiscal deficit target of 5.1% for 2012-13 as compared to 5.9% expected in 2011-12. Fiscal consolidation calls for efforts both to raise the tax-GDP ratio and to lower the expenditure. In this context, focusing on subsidies, the Government has decided that from 2012-13 subsidies related to food and for administering
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depend on prudent and calculated spending on social sector, health and education schemes. The budget mentions reduction of food and fertilizer bill, containing the expenditure on big ticket items such as interest payments and major subsidies which form 36.5 % and 32.51 % of the total revenue expenditure, respectively. In so far as food subsidies are concerned, the National Food Security Bill seeks to correct the underconsumption by the poor and other vulnerable sections and might entail some rise in levels of subsidy when operationalized. Although, the central fiscal deficit targets have been set at 4.2 % and 3 % of GDP for the fiscal years 2012-13 and 2013-14, respectively; the roadmap for how these targets are going to be achieved are nebulous. The fiscal deficit target of 5.1 % of GDP in 2012-13 works out to `493,947 crore. The extent of borrowings required to finance this deficit is conservatively estimated to be `4.12 lakh crore for 2012-13. In addition, as per the budget announcements for FY 2012-13, the deficit is proposed to be partly financed by disinvestment (estimated at `30,000 crore) The government has expressed its will to increase revenue from taxation and also regulate subsidies. Tackling the fiscal deficit in the coming year poses two main concerns. Firstly, with the slowdown in economic growth, the prospect of improving collections in the form of tax revenue appears bleak. Secondly, with the introduction of the Food Security Bill, the burden on food subsidies is likely to
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increase. These two factors, together with the continued spending on the education, healthcare and social sectors, further indicate that the government should start exploring alternate sources of revenue. Unless the issues of inflation and rising deficit are addressed in conjunction, the need for the government to borrow from the market to finance the deficit may crowd out private investment at the cost of slowing down growth. Current Account Deficit Sustainability A worryingly high current account deficit (CAD) continued to remain one of the major concerns of the Indian external sector this year. On the trade front, even though export growth remained reasonably strong, robust import demand led to an expansion of the trade deficit. Further, volatility of capital flows (both direct and portfolio) have further aggravated this concern and led to worries that that the current level of CAD is not sustainable. The basis of the concern is two-fold. Firstly, if the commodity prices continue their upward trend in the global market, it will adversely affect the widening deficit. Secondly, financing the deficit with capital inflows would seriously pose a problem if short term capital flows to India are adversely impacted due to faster global recovery which enhances the attractiveness of investment opportunities in the rest of the world. Moreover, the downgrade of the credit rating of some of the European nations and subsequent slowdown in such economies may affect exports adversely. It is to be noted that for an economy which is continuously growing around 7 % per annum
and registering double digit growth rates in exports and imports, a moderate trade deficit and CAD is inevitable. However, the present level of trade deficit around 9.4 % of GDP and net invisible earnings of about 5.8 % of GDP poses a concern (Figure 13). If the present situation persists in the near future, then the extra cushion provided by the services sector for trade balance will not be available. Previously, the current account deficits were largely financed by relatively high capital flows; however, the volatile nature of these flows has brought a concern on sustaining the
Figure 13: India's Trade Balance 50,000 45,000 40,000 35,000
current account deficit. The sustainability of the high deficit would therefore depend on export growth, increase in net invisible surplus and net inflow of capital flows. In order to bring down the CAD to a sustainable level, greater attention needs to be paid to improving the composition of capital flows towards FDI in order to shield the economy from the volatility of FIIs. The attractiveness of India as an investment destination needs to be clearly demonstrated. Also, imports of unproductive goods like
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-25,000
-20,000
Exports/Imports (in USD million)
Trade Balance (in USD million)
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30,000 25,000 20,000 15,000 10,000 5,000
-15,000
-10,000
-5,000
0
April'10 Exports July'10 Imports October'10 January'11 April'11 July'11 October'11 Trade Balance
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Source: Third Quarter Review Bulletin 2011-2012, Reserve Bank of India Getting to the core Budget analysis | 23
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gold and consumer products should be discouraged in order to reduce the import bill. Additionally, Foreign Trade Policy came up with different schemes to encourage diversification of export composition as well as export destinations. Performance of Industry The industrial sector performed poorly this year. With low output, the share of the industry in GDP, which had earlier peaked at 28.7 %, retreated to 27 %. IIP growth rate during the first three quarters of 2011-12 (April to December) was significantly lower at 3.6 % compared to a corresponding growth rate of 8.3 % in the last year confirming a contraction in industrial output. Regulatory hurdles and ban on iron-ore mining in some states have hastened the contraction during the first half of the current fiscal. Weakness in capital goods, intermediate goods and consumer durables sectors have also dragged down the industrial production. This raises concern on the industry sector developing into an engine of growth and being an important driver for employment generation. To optimize on the untapped potential, the economy needs to focus on a clear cut mechanism for the implementation of the National Manufacturing Policy to revive industrial growth. The 12th Plan, which has doubled the projected investment in infrastructure over the five year period 201217 to $1 trillion, taking annual investment in infrastructure from the current level of 6 % of GDP to over 10 %, also presents a
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golden opportunity for the industrial sector. The government has also recognized that a manufacturing thrust is required for the benefit of the economy. Establishment of the National Investment and Manufacturing Zones the green field integrated Industrial Townships or development of Delhi Mumbai Industrial Corridor as a global manufacturing and investment destination are thoughts to stimulate infrastructure growth. Initiatives for upgrading the agricultural productivity & support structure to efficiently market agricultural produce would also be a welcome move. It is however important to note that implementation would remain the key to success. Indias competitive edge in services may only remain for a short period in the future and newer engines of growth need to be discovered. An effective manufacturing policy which is integrated into the rural framework can go a long way in bridging the rural urban divide and unite the economy to grow inclusively as one. Impact of Global Events Since the financial crisis in 2008, India has lauded itself for being largely insulated from global recessionary shocks. However, macroeconomic indicators suggest that the Indian economy is affected by global events such as the Eurozone crisis and the tenuous outlook on the US economy. Much of the rising trend in inflation has been pegged to global events, which has in turn had a bearing on the rising fiscal deficit and moderation in growth. Fluctuating global commodity
prices, hardening of international prices of crude oil, stagnation in Japan, etc. are few such events that have influenced the current macroeconomic climate in India. The momentum of Indias growth in the coming year(s), inter alia, will be determined by the performance and the developments that take place globally. Some of the key developments likely to determine the pace of our growth are: The financial debacle of the Eurozone and the adverse impact of natural calamities on Japan is likely to continue impacting the economic performance of India in the coming year; Weak recovery of the advanced economies could hamper the growth of Indian exports; Given the uncertain geo-political fallout on energy prices, inflation may become structural in 2012-13; The recent outflow of overseas investments should lead policymakers to look deeper into the fundamentals of the Indian economy. There is a possibility of capital moving out of India due to negative perceptions on the domestic front (various scams, high inflationary levels, etc.); The vulnerability of the capital markets to vicissitudes in the flow of FII may lower Indias attractiveness as an investment option if, when the rest of the world revives, other investment options become more attractive.
Though developing countries are increasing their service export with Indias share being 3.3 % and Chinas 4.5 %, the share of high income countries is still 79 %. Indias revenue (17.6 % of GDP) and expenditure (26 % of GDP) are both low compared to most countries but debt (66.8 % of GDP) is the highest among the BRIC nations. To put Indias economic growth in perspective of the broader development objectives, it is important to note that on key human development indicators, India lags behind many advanced and even emerging economies. In the human development rankings that were published by the United Nations Development Program (UNDP) for the year 2011, out of a total of 187 countries, India ranks 134 lagging behind other emerging economies such as Russia (66th Rank), Brazil (84th Rank) and China (101st Rank). Also, in the light of frequent comparisons with the Chinese economy, one needs to be wary of the fact that the Indian economy is about a decade behind the economy of China by GDP figures, while by per capita GDP numbers, it is behind by about fifteen years. The Indian economy has a huge potential to surge ahead provided we are able to meet our key challenges with focused policy measures and building an enabling infrastructure for growth and development going hand in hand.
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Direct Taxes Corporate tax No change in tax rates. Beneficial tax rate of 15% on dividend received from foreign subsidiary. Consideration received for issue of shares in excess of FMV taxable as income. Additional depreciation allowance extended to power sector. Weighted deduction of 200% on in-house scientific research extended for 5 years. Weighted deduction of 150% for capital expenditure in specified business. Investment linked incentives extended to inland container depot, container freight station and other businesses. Profit linked incentive for power sector continues for one more year. MAT on Insurance Company, Banking Company or Electricity Company. Removal of cascading effect in DDT. Transfer Pricing Advance Pricing Agreement provisions introduced. The percentage of variation that could be notified by the GoI cannot be more than 3%. Specified Domestic Transactions in relation to related parties included within Transfer Pricing purview subject to a threshold limit of ` 5 crore. Scope of international transactions clarified. Non-resident Taxation Indirect transfer of a capital assets will be subject to tax.
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Budget Highlights
Budget Highlights
Payment for computer software license, transmission by satellite etc., now considered as royalty payment. Interest payable on foreign currency borrowing by specified infrastructure sector subject to tax @ 5%. Tax residency certificate necessary for claiming tax treaty benefits. GAAR provisions introduced. Personal Taxation Basic exemption limits enhanced. Roll-over relief in respect of long term capital gains from transfer of residential property by investment in a manufacturing SME.
Reduction of the eligible age for senior citizens. Interest on saving bank accounts upto `10,000 eligible for deduction. Other Amendments Tax audit limit for assessee carrying on business increased from `60 lacs to `100 lakh. Return of income required to be compulsorily filed by the resident though no taxable income if assets are held outside India.
Refund may not be processed where scrutiny notice is issued. Time limits for completing assessment and reassessment enhanced. Gift by members to HUF not subject to tax. Indirect Tax Service Tax Changes in Existing Legislation Rate of service tax increased from 10% to 12%. Adjustment of excess service tax paid in specified situations, now permitted without any restrictions. Provisions relating to Settlement Commission made applicable to service tax cases. Limitation period for issuance of Show Cause Notices increased from 12 to 18 months. Commissioner empowered to direct Special Audit by Chartered / Cost Accountant in specified situations. Changes in Proposed Legislation Taxation of services will be based on Negative list as against levy of service tax on specified services. New definition of service and Declared Services proposed under the Negative list. Place of Provision of Services Rules, 2012 proposed to be introduced to determine where a service shall be deemed to be provided. Onus of payment of service tax on reverse charge basis partly on service provider
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State of the Economy State of the economy
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and partly on service receiver on specific services. Several existing exemptions proposed to be clubbed and notified. Common forms proposed for registration and filing of return for excise and service tax. Central Excise General CENVAT rate increased from 10% to 12%. Merit rate of goods attracting duty of 5% enhanced to 6% and those attracting 1% enhanced to 2%. Branded retail garments chargeable to excise duty on RSP will be eligible for abatement of 70%. Excise duty slabs on packaged cement delinked from RSP. Portland cement now covered by RSP valuation. Reduced penalty to be available only on payment within thirty days. Reversal of CENVAT credit wrongly taken but not utilized will not attract interest. Provisions introduced for transfer of unutilized SAD credit of one manufacturing unit to its other units. Customs Duty Peak rate of customs duty for non-agricultural products retained at10% with few exceptions. Duplication of education cess and secondary and higher education cess on imported goods removed.
Glossary
Exemption from BCD and CVD and SAD provided to: Equipment for road construction projects Tunnel boring machines and parts thereof for hydel and road projects for all infrastructure projects. Exemption from BCD provided to: Natural gas / LNG imported for power generation Initial setting up and substantial expansion of fertilizer projects Parts of aircraft and testing equipment. Equipment for coal mining projects For availing exemption from SAD on subsequent sale, importer is required to declare the following: State of destination where the goods are intended to be sold for the first time after import and VAT registration number. BCD at concessional rate of 5% under Project Import Scheme is extended to: Import of goods for setting up of Green House for cultivation of horticulture and floriculture produce. Installation of mechanized handling systems & pallet racking systems for handling horticultural produce. Conditional exemption for import of vessel in India. Certain class of importers required to pay customs duty electronically. Courier services are included in ambit for serving any order / summons / notice.
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Glossary Glossary
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Budget proposals Direct Taxes

Corporate Taxation Dividends from foreign subsidiary For the financial year 2011-12, where the total income of an Indian company includes any dividend declared, distributed or paid by a foreign subsidiary company, such dividend is taxable at 15% (plus applicable surcharge and education cess) on gross basis. It is proposed to continue this provision in the financial year 2012-13. Share subscription money taxable as cash credit Currently, any sum found unexplained in the books of an assessee is taxed as his income if he does not offer any explanation about its nature or source, or, the explanation provided is not satisfactory, in the opinion of the Assessing Officer. It is proposed that an explanation provided by a company (except a company in which the public is substantially interested) in regard to sums credited in respect of share application, share capital, share premium or any such amount will not be regarded as satisfactory, unless: a) the resident person in whose name such credit is recorded offers an explanation about the nature and source of such credit; and b) such explanation is satisfactory in the opinion of the Assessing Officer The provision will not be applicable to a venture capital fund or a venture capital company.
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Budget Highlights
Budget Highlights
The proposed amendment will be applicable from the financial year 2012-13. Consideration received for issue of shares in excess of FMV It is proposed to tax the aggregate consideration in excess of FMV of shares issued to a resident, provided: the company issuing shares is a company in which the public are not substantially interested; the consideration for issue of shares exceeds face value of such shares; The aforesaid provision is not applicable if the consideration is received by venture capital undertaking from a venture capital company or a venture capital fund. The FMV of shares will be determined based on: the prescribed method; or as may be substantiated by the company to the satisfaction of the Assessing Officer, whichever is higher. The proposed amendment will be applicable from financial year 2012-13. Additional depreciation for power sector Currently, additional depreciation at 20% of the actual cost of new plant and machinery is available to an assessee engaged in the business of manufacture or production of any article or thing. It is proposed to extend this benefit to an assessee engaged in the business of
generation or generation and distribution of power. The proposed amendment will be applicable from the financial year 2012-13. Weighted deduction for scientific research Currently, a weighted deduction up to 200% of expenditure incurred in an approved in-house scientific research and
development facility is available up to 31 March 2012. It is proposed to extend this benefit for a further period of five years up to 31 March 2017. Weighted deduction for agricultural extension project It is proposed to allow a weighted deduction of 150% of the expenditure incurred on an agricultural extension project notified by the CBDT in accordance with prescribed guidelines. The proposed amendment will be applicable from the financial year 2012-13. Weighted deduction for expenditure on skill development project It is proposed to allow a weighted deduction of 150% of the expenditure incurred (excluding cost of land or building) on a skill development project notified by the CBDT in accordance with the prescribed guidelines. The proposed amendment will be applicable from the financial year 2012-13. Investment linked incentives Currently, 100% deduction is available in respect of the capital expenditure (other than land, goodwill and financial investment) incurred wholly and exclusively on specified business. It is proposed to include
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Glossary
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three new categories of business in the existing definition of specified business as under. Setting up and operating notified or approved inland container depot or a container freight station; Bee-keeping and production of honey and beeswax; and Setting up and operating a warehousing facility for storage of sugar. It is also proposed to provide the deduction of 150% in respect of capital expenditure incurred in the following specified business which has commenced on or after 1 April 2012. Setting up and operating a cold chain facility; Setting up and operating a warehousing facility for storage of agricultural produce; Building and operating a hospital with atleast 100 beds for patients; Developing and building the affordable housing project as approved by the Government and notified by the Board; and Production of fertilizer in India. The proposed amendments will be applicable from financial year 2012-13. Currently, the specified business includes the building and operating a hotel of two-star or above category. It is now proposed that the owner will be deemed
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to carry on the specified business, if the owner while continuing to own the hotel, transfers operations of such hotel to another person. The proposed amendment will be applicable retrospectively from financial year 2010-11. Extension of sunset clause for power sector undertaking Currently, the deduction @ 100% of profits is available to an undertakings for a period of 10 consecutive years out of 15 years, if the undertaking: begins to generate power by 31 March 2012; starts transmission and distribution by laying new transmission or distribution lines by 31 March 2012; renovates and modernise existing network of transmission by 31 March 2012. It is proposed to extend above terminal date for the further period of one year i.e. upto 31 March 2013. Market value for the purpose of section 80-IA Market value is expanded to mean the arm`s length price of goods or services in a specified domestic transaction as defined in Transfer Pricing legislation. The proposed amendment will be applicable from financial year 2012-13.
Amounts deductible if return of income is filed by the payee Currently, certain expenditures like interest, commission, professional fees, etc. are disallowed due to non-deduction of tax. The expenditure is allowed in a subsequent year in which the tax is deducted and paid. It is proposed that the tax will be deemed to be deducted and paid on such expenditure on the date of furnishing of the return of income by the resident payee provided that the payer is not held as an assessee in default under section 201(1). The proposed amendment will be applicable from the financial year 2012-13. Amendment to MAT provisions MAT on insurance company, banking company or electricity company It is proposed that the companies which are not required to prepare Profit and Loss Account under section 211 of the Companies Act, 1956 should prepare Profit and Loss Account in accordance with the provisions of the Act governing such company. The proposed amendment will be applicable from financial year 2012-13. MAT on balance lying in revaluation reserve account Currently, the provisions of MAT does not cover the amount standing in revaluation reserve account on disposal of revalued assets. It is proposed to provide that the book profit
shall be increased by the amount standing in revaluation reserve relating to revalued asset on the disposal of asset, if such amount is not credited to Profit and Loss Account. The proposed amendment will be applicable from financial year 2012-13. Removal of cascading effect in DDT urrently, one of the condition for claiming credit for DDT is that the dividend recipient should not be a subsidiary of any other company. This condition has now been dispensed with. Tonnage Tax Daily tonnage income of a qualifying ship is proposed to be increased as under: Net tonnage (in Tons) upto 1,000 1,001 10,000 10,001 25,000 25,001 and above Daily tonnage income (in `) (Current) 46 / 100 tons 460 plus `35 / 100 tons exceeding 1,000 tons 3,610 plus `28 / 100 tons exceeding 10,000 tons 7,810 plus `19 / 100 tons exceeding 25,000 tons Daily tonnage income (in `) (Proposed) 70 / 100 tons 70 plus `53 / 100 tons exceeding 1,000 tons 5,470 plus `42 / 100 tons exceeding 10,000 tons 11,770 plus `29 / 100 tons exceeding 25,000 tons
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The proposed amendment will be applicable from the financial year 2012-13. Glossary
Glossary
Budget Highlights
Budget Highlights
Transfer Pricing Advance Pricing Agreement (APA) It is proposed to introduce APAs. APA is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future The proposed key features of APA are: The Board, with the approval of the Central Government may enter into an APA with any person to determine or specify the manner in which the arms length price is to be determined in relation to an international transaction; The arms length price may be determined as per the prescribed methods or any other method, with necessary adjustments or variations; It shall be valid for the period not exceeding 5 consecutive years; APA to be legally binding on the taxpayer and the tax authority for the international transaction to which the APA applies unless there is change in law or facts; APA to be void in case of fraud or misrepresentation of facts. Upon declaring the agreement void the following shall apply: a) All provisions of the Act shall apply as if such agreement has never been entered into; and b) For computing any period of limitation, the period beginning with the date of such APA and ending on the date of the order declaring the APA void, shall be excluded. However, after exclusion
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Glossary
of the aforesaid period, if the period of limitation is less than 60 days then such remaining period shall be extended to 60 days. Where an application is made by a person for entering into an APA the proceedings shall be deemed to be pending in the case of that person for making enquires; Taxpayer to file modified return within 3 months from the end of the month in which APA was entered for applicable fiscal years where return of income has already been filed. The modified return to be in accordance with the APA; In respect of assessments / reassessments of years which have been covered by APA and have been completed before filing modified return, the tax authorities shall reassess or recompute the total income for the said years in accordance with the APA. In such cases, the period for completion of assessment is one year from the end of the financial year in which the modified return is filed. In respect of assessments / reassessments of years which have been covered by APA and have not yet been completed as on date of filing modified return, the tax authorities shall complete it in accordance with the APA. In such cases the period for completion shall be extended by 12 months. Assessments / reassessments shall be deemed to be completed where: a. An assessment or reassessment order has been passed; or
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b. No notice has been issued under subsection (2) of section 143 till expiry of the limitation period provided. Detailed rules, forms and procedure are to be prescribed by the Board The proposed amendments are applicable from 1 July 2012. Specified Domestic Transactions included within Transfer Pricing purview It is proposed that Transfer Pricing Regulations would apply to Specified Domestic Transactions subject to a threshold limit of `500 lakhs. It is proposed that Specified Domestic Transactions would be such transactions as Are not international transactions;
Transactions relating to expenses/ payment transactions between related persons; Transfer of goods/ services/ business by the assessee covered under the beneficial provisions of 80 IA or under Chapter VI A or 10 AA where the provisions of 80 IA are applicable. It is proposed that the following Transfer Pricing provisions would be applicable to Specified Domestic Transactions: Determination of Arms Length Price for any allowance for Expense, Interest or Income; TP Compliance including Maintenance of TP Documentation and Certification; TP Assessment and Appellate proceeding as applicable to International Transactions;
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Penalty consequences for non-maintenance and furnishing of TP Documentation and failure to report transactions, not obtaining TP Certificate. The proposed amendments are applicable from financial year 2012-13, Reduction in the leeway while determining arms length price
It is also proposed that the no completed assessments are reopened only because of the above changes. Notable changes in the DRP procedures It is proposed to empower DRP to include any matter arising out of the assessment proceedings, irrespective whether such matter was raised by the taxpayer or not. The amendment is proposed to be applicable retrospectively from financial year 2008-09. It is proposed to empower the Assessing Officer to file an appeal before the ITAT against the order of the DRP. The amendment is proposed to be applicable from 1 July 2012. It is also proposed that the DRP provisions be extended to the assessments made in case of search and seizure and that the appeal against the final assessment order (pursuant to the DRP order) be referred directly to the ITAT. Clarifying the ambit of the definition of International Transactions It is proposed to clarify the meaning of an international transaction to include: business restructuring or re-organisation irrespective of bearing on profit, income, losses current or future capital financing, lending or guarantee, any type of advance, receivables, etc.
Budget Proposals
It is proposed that the percentage of variation that could be notified by the GoI cannot be more than 3%. The proposed amendment would be applicable from financial year 2012-13. It is proposed to clarify that : The amendment to proviso introduced in 2009, which stated that the transaction price is to be considered at arms length if the difference between the transaction price and the arms length price is not more than 5%, is applicable to all the proceedings pending as on 1 October 2009. This amendment to the variation is not to be interpreted as a standard deduction It is proposed that even where the original 5% proviso was applicable, there also the proviso would be like a tolerance band and not a standard deduction.
provision of services including marketing research, technical service, repairs, legal or accounting, etc. tangible property which is defined to include building, transportation vehicle, machinery, furniture, equipment etc. or commodity or any other article, product or thing intangible property which is defined to include customer list, franchise, marketing channel, brand, etc. or any other business or commercial rights of similar nature or any other similar items that derive value from its intellectual content rather than physical attributes. The proposed amendment will be applicable retrospectively from financial year 2001-02 Empowerment to the TPO It is proposed to enable the TPO to determine ALP of any transaction entered into by the assessee even when if such transaction are not reported by the taxpayer. For cases concluded before 1 July 2012, the assessing officer will not have a right to re-open the assessment only on account of such amendment. The proposed amendment will be applicable retrospectively from 1 June 2002. Consequences of non-reporting It is proposed that a penalty would be levied at the rate of 2% of the international
transaction, for failure in reporting transactions in addition to the existing criteria. The proposed amendment will be applicable from 1 July 2012. It is proposed that if a transaction is not reported, it would be considered as deemed escapement income and lead to re-opening The proposed amendment will be applicable from 1July 2012. Extension of due date for non-corporate taxpayers having international transactions and specified domestic transactions It is proposed that the due date of filing the return for non-corporate assessees has been extended till November 30. The proposed amendment would be applicable from financial year 2011-12.
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Non-resident Taxation Source Rule for Capital Gains Deeming Provisions - scope explained It is proposed to clarify that the expression through used in the deeming provisions shall mean and include, by means of, in consequence of or by reason of. It has been further clarified that any share or interest in a company or entity outside India shall be deemed to be have been situated in India if such share or interest derives, directly or indirectly, its value substantially from the assets located in India.
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Budget Highlights
Budget Highlights
Definition of property and transfer clarified It is proposed to clarify that the term property includes any rights in an Indian company including rights of management or control or any other rights. It is also proposed to clarify that the term transfer includes: i) disposing of or parting with an asset or any interest therein; or ii) creating any interest in any asset, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement, whether entered into in India or outside India. It is immaterial whether the transfer of rights has been effected or dependent upon or flowing from the transfer of shares of a company registered or incorporated outside India. The above amendments will be applicable retrospectively from the financial year 1961-62. Validation of demand It is proposed to provide for validation of demands whereby any notice sent or taxes levied in respect of income accruing or arising, through or from transfer of a capital asset situated in India, in consequence of the transfer of shares of a company registered or incorporated outside India or in consequence of agreement or otherwise outside India, shall be deemed to have been validly made and such notice or levy of tax shall not
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be called in question on the ground that the tax was not chargeable or any other ground. The above amendment will be applicable from coming into force of the Finance Act, 2012. Royalty Clarified It is proposed that the royalty includes consideration for transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. It has been further clarified that the royalty includes consideration in respect of any right, property or information, whether or not:
Budget Proposals
the possession or control of such right, property or information is with the payer; such right, property or information is used directly by the payer; the location of such right, property or information is in India. It is also proposed to clarify that the term process will include transmission by satellite, cable, optic fibre or by any other similar technology, whether or not such process is secret. These amendments will be applicable retrospectively from 1 June 1976. Income of Foreign Company on Supply of Crude Oil It is proposed to provide an exemption to any income received in India in Indian
currency by a foreign company from sale of crude oil to any person in India. The exemption is subject to the following conditions. the receipt of income is pursuant to an agreement or an arrangement entered into by the Central Government or approved by the Central Government; having regard to the national interest, the foreign company and the agreement or arrangement are notified by the Central Government in this behalf; and receipt of the income is the only activity carried on by the foreign company in India. The proposed amendment will be applicable from financial year 2011-12. Special Rates for Foreign Currency Borrowing by Specified Companies It is proposed that income of a non-resident by way of interest from moneys lent in foreign currency to specified companies during 1 July 2012 and 1 July 2015 under an agreement approved by the Central Government will be taxable at the rate of 5% (plus applicable surcharge and education cess). Specified companies means an Indian company engaged in the business of: i) generation or distribution or transmission of power; ii) operation of aircraft; iii) manufacture or production of fertilizers; iv) construction of road including toll road or bridge;
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v)
construction of port including inland port; vi) construction of ships in a shipyard; vii) construction of dam; viii) developing and building a housing project as referred to in sub-clause (vii) of clause (c) of sub-section (8) of section 35AD. The proposed amendment will be applicable from 1 July 2012. Tax on Non-resident Entertainer It is proposed that income arising to a non-resident non-citizen entertainer, from performance in India will be taxable at 20% of gross receipts. Further, tax rate applicable to non-resident non-citizen sportsmen and non-resident sports association will be increased from 10% to 20% of gross receipts. The proposed amendment will be applicable from the financial year 2012-13. Withholding Tax on Payment to Nonresident It has been clarified that the obligation to withhold tax on payments to non-residents always applied to both resident and nonresident payers. The withholding tax obligation of a non-resident payer continues to apply whether or not the non-resident payer has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India.
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The proposed clarification will retrospectively apply from financial year 1961-62. It is proposed to provide that the Board may by notification in Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, any sum, whether or not chargeable under the provisions of the Act shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable. Accordingly, tax will have to be withheld. The proposed amendment will be applicable from 1 July 2012. Tax Treaty Benefits It is proposed that the non-resident taxpayer will be required to submit the tax residency certificate containing prescribed particulars in order to claim the benefits of the tax treaty. The proposed amendment will be applicable from financial year 2012-13. Currently, Central Government is empowered to issue notifications to assign meaning to any term used in the tax treaty, which is not defined in the Act or the tax treaty. It is proposed that the meaning assigned to a term as per the notification will have effect from the date of the tax treaty.
The proposed amendment will be applicable retrospectively from 1 October 2009 (in case of the tax treaty entered by the Central Government) and 1 June 2006 (in case of tax treaty between specified associations, as adopted by the Central Government). GAAR Provisions It is proposed to introduce the GAAR provisions. The provisions propose that an arrangement entered into by a taxpayer may be declared as an impermissible avoidance arrangement and the tax consequence of the said arrangement will be as provided therein. An arrangement is defined to mean any step in, or part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property. An impermissible avoidance arrangement is defined to mean an arrangement whose main purpose or one of the main purposes is to obtain a tax benefit and which satisfies at least one of the following four tests: It creates rights or obligations of the parties which are not at arms length; It results directly or indirectly in misuse or abuse of any provisions of the Act; It lacks commercial substance or is deemed to lack commercial substance; It is entered into or carried out, by means, or in a manner, not for a bona fide purpose.
Glossary
It is proposed that an arrangement that results in a tax benefit will be presumed to be for obtaining tax benefit unless the taxpayer demonstrates that obtaining tax benefit was not the main purpose of the arrangement. It is proposed that irrespective of the main purpose of whole arrangement, it will be presumed to have been entered to obtain a tax benefit, even if the main purpose of a step in, or part of the arrangement is to obtain a tax benefit. It is proposed that in the following instances, the arrangement will be deemed to lack commercial substance, irrespective of the period for which the arrangement exists, direct or indirect payment of taxes, and an exit route is provided therein, if: Substance or effect of the arrangement as a whole, is inconsistent or significantly different from the form of its individual steps or a part; or It involves or includes Round trip financing defined to include transactions involving transfer of funds among the parties and without having any substantial commercial purpose, without having regard to traceability of funds, time, sequence and mode of transfer; Accommodating party i.e. a party (defined to even include permanent establishment) if the main purpose of participation of that party in the arrangement is to obtain direct or indirect tax benefit;
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Elements that have effect of offsetting or cancelling each other; or A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of the funds involved therein. It involves the location of the asset or transaction or place of residence of any party to obtain a tax benefit without any substantial commercial purpose. It is proposed that in determining whether the tax benefit exists, connected persons and accommodating parties may be disregarded or considered as one and the same and arrangement may be considered or looked through by disregarding any corporate structure. It is proposed that the tax consequences of an impermissible avoidance arrangement will be determined in such manner as is deemed appropriate in the circumstances of the case, including inter alia the following: Disregarding or combining or recharacterising any step in or part or whole of, the arrangement; Ignoring the arrangement; Disregarding or combining any accommodating party or other party to the arrangement; Deem the persons who are connected person in relation to each other to be one and the same person; Reallocating amongst the parties to the arrangement any accrual or receipt
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of capital or revenue nature or any expenditure, deduction relief or rebate; Determining the place of residence of a party, or the situs of an asset or transaction other than as provided in the arrangement; and Considering and looking through the arrangement by disregarding any corporate structure. For the above purposes, re-characterizing of expenditure, deduction, relief or rebate, equity into debt, capital into revenue or vice versa is permissible. It is proposed that GAAR provisions will apply in addition to or in lieu of, any other basis for determination of tax liability. It is proposed that CBDT will prescribe additional guidelines / scheme for regulating the GAAR provisions. It is proposed that the tax treaty will be overridden when the GAAR provisions are invoked. The proposed amendment will be applicable from financial year 2012-13. Procedure for Invoking GAAR Provisions It is proposed that the AO will make a reference to the CIT for invoking GAAR. The CIT will give an opportunity to the taxpayer to be heard and make submissions. If the CIT is not satisfied with the submissions and is of the opinion that the GAAR provisions are to be invoked, he shall make a reference to the AP, a panel to be set up by the CBDT comprising of three members of the rank of CIT and above. The AP shall after giving an opportunity of being heard to the taxpayer and the AO, issue suitable directions within 6 months from end of the month in which reference was received by it, declaring the arrangement to be impermissible or not to be so. The AO shall after prior approval of the CIT issue the final order of assessment or reassessment, in accordance with the directions of AP, which shall be binding on the AO. The order of the AO will be appealable to the ITAT. Consequently, the application to DRP cannot be made in cases where the provisions of GAAR are invoked. The proposed amendment will be applicable from financial year 2012-13. Personal Taxation Rate of tax The rates of personal tax will be revised as shown in Table ? Table 1: Tax Rates for Individuals Income Slabs (`) Up to 2,00,000 2,00,001-5,00,000 5,00,001-10,00,000 10,00,001 and above Rate of Tax (%) Nil 10 20 30
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Notes: Females below the age of 60 years have been brought at par with males. For resident senior citizens of 60 years but less than 80 years of age, the basic exemption limit remains unchanged at `250,000. For resident senior citizens of 80 years or more, the basic exemption limit remains unchanged at `500,000. Education Cess will continue to be levied at the rate of 3% of Income Tax.
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Conditions for life insurance premium Currently, life insurance premium qualifies for deduction if such premium does not exceed 20% of the actual capital sum assured. It is proposed to reduce this limit to 10% of the actual capital sum assured. Similarly, it is proposed that any sum received from a life insurance policy including bonus on such policy will be exempt from tax, provided the premium on such policy does not exceed 10% of the actual capital sum assured as against the current limit of 20%. It is also proposed that the limit of 10% of actual sum assured will apply to the minimum of the sum assured in any of the years of the policy. The proposed amendment will be applicable in respect of policy issued on or after 1 April 2012.
The SME company utilizes the share subscription money for purchase of new plant and machinery within a year from the date of subscription; The residential property is sold after 1 April 2012 but before 31 March 2017; and Subject to fulfillment of other specified conditions. The proposed amendment will be applicable from the financial year 2012-13. Reduction of the eligible age for senior citizens It is proposed to reduce qualifying age of a resident senior citizen to 60 years for the following: Deduction up to ` 20,000 for health insurance policy Deduction up to ` 60,000 for Medical treatment of specified disease or ailment Declaration for non-deduction of tax at source in respect of interest, dividends etc. The proposed amendment will be applicable from the financial year 2012-13. Deduction for savings account interest It is proposed to allow a deduction up to ` 10,000 in respect of savings account interest (excluding term deposit) earned from a Bank, Co-operative Bank or Post Office. The proposed amendment will be applicable from the financial year 2012-13.
Other Amendments Amendments in withholding taxes It is proposed that any remuneration or fees or commission by whatever name called, other than those chargeable as salaries payable to director will be considered as fees for professional or technical services. The proposed amendment will be applicable from 1 July 2012. It is proposed that tax will be withheld on compensation or enhanced compensation received in excess of ` 2 lakhs as against existing ` 1 lakhs from compulsory acquisition of immovable property. The proposed amendment will be applicable from 1 July 2012. It is proposed that transferee shall withhold tax @ 1% on the consideration payable on transfer of immovable property being land (other than agricultural land) or any building or part of a building situated in specified area. It is also proposed that where consideration on transfer is less than value adopted for purpose of payment of stamp duty, the value so adopted or assessable shall be deemed as consideration for transfer. It is further proposed that the registering officer shall not register any document, unless the transferee furnishes the proof of deduction of income-tax and payment
to the credit of the Central Government in prescribed form. The proposed amendment will be applicable from 1 October 2012. Assessee not in default for non-deduction of tax: Currently, a person is considered as assessee in default if tax is not deducted at sources in respect of payment made to resident person who has disclosed said income in return of income and paid tax on the same. It is proposed that a person will not be considered as assessee in default if: he recipient resident has furnished t the return of income disclosing such income; he recipient resident has paid tax t thereon. he person responsible for payment t has furnished an accountant certificate in prescribed form. However, it is proposed that interest will be payable for failure to deduct the tax from the date on which tax was deductible till the date of furnishing of return of income. Consequently, it is proposed that for this purpose deduction of expenditure would be allowable. This proposed amendments will be applicable from 1 July 2012
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Roll-over relief for investment in a manufacturing SME It is proposed to provide roll-over relief from long-term capital gains tax to an individual or HUF on transfer of a residential property (a house or a plot of land), provided: The net sale consideration is utilized for subscribing in equity shares of a newly start up SME company in the manufacturing sector; Individual or HUF holds more than 50% of share capital or voting rights in such SME company;
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Glossary
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Time limit for passing order under section 201(3) Currently, the time limit for passing the order in respect of deeming a person to be an assessee in default is 4 years from end of financial year in which payment is made or credit is given. It is proposed that such an order may be passed within the period of 6 years from end of financial year in which payment made or credit given. The proposed amendment will be applicable retrospectively from financial year 2009-10. TCS on sale of certain minerals and jewellery Currently, no tax is collected at source for the sale of minerals and jewellery or bullion It is proposed that, tax @ 1% on the amount received, shall be collected by the seller from the buyer for coal, lignite and iron ore except where the purchase is meant for the personal use or utilized for the purposes of manufacturing, processing or producing articles or things or purchased by a public sector company or Government body. It is further proposed that, tax @ 1% on the sale consideration shall be collected by the seller from every buyer of bullion and jewellery if sale consideration exceeds two lakh rupees and the consideration is paid in cash. This proposed amendments will be applicable from 1 July 2012
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It is proposed that a person will not be considered as assessee in default if: the recipient resident has furnished the return of income disclosing such income; the recipient resident has paid tax thereon. the person responsible for payment has furnished accountant certificate in prescribed form. However, it is proposed that interest will be payable for failure to collect the tax from the date on which tax was collectible till the date of furnishing of return of income. The proposed amendment will be applicable from 1 July 2012 Deduction of TDS while calculating advance tax Currently, the TDS/TCS is deducted in computing the advance tax payable. It is proposed that TDS/TCS will not be considered in computing the advance tax payable when the person responsible for deduction of tax has failed to deduct the tax or collect TCS. The proposed amendment will be applicable from financial year 2012-13. Increase in tax audit limit It is proposed that in case of persons carrying on business the limit for auditing the books of account is increased to `100 lakhs from `60 lakhs. Further, in the case of persons carrying on profession the limit
is proposed to be increased to `25 lakhs from `15 lakhs. It is also proposed that the due date for auditing the accounts would be the due date for filing of return as applicable. The proposed amendments will be applicable from financial year 2012-13. Presumptive basis for tax It is proposed that presumptive basis of computation of profits would not be available for assessees who are required to maintain books of accounts for carrying on specified business or profession, inter alia earning income in the nature of commission or brokerage or carrying on any agency business.
It is further proposed to increase the turnover/gross receipts to `100 lakhs from `60 lakhs. This amendment will be applicable retrospectively from the financial year 2010-11. Income of trust or institution Currently, income of trust or institution established for charitable purposes is exempt subject to fulfillment of certain conditions. It is proposed that income of trust or institutions will not be exempt if the object of the trust or institution involves the carrying on or rendering of any service to any activity in the nature of trade, commerce
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or business or any activity, fees for which exceed `10 lakhs. The proposed amendments will be applicable retrospectively from financial year 2008-09. Set off of tax credit of AMT It is proposed that tax credit of Alternate Minimum Tax (AMT) will be reduced while computing interest under section 234A, 234B and 234C. The proposed amendment will be applicable from the financial year 2012-13. Interest on excess refund It is proposed that interest on excess refund would also be applicable in respect of assessment years commencing before 1 June 2003 for which assessments have been completed after such date. The proposed amendment will be applicable retrospectively from 1 June 2003 ROI by a resident having assets outside India It is proposed that every resident having any asset (including a financial interest in any entity) or a signing authority in any account, located outside India will be required to furnish a return of his income / loss, irrespective of such person having taxable income.
The proposed amendment will be applicable from the financial year 2011-12. No processing of refund where scrutiny notice issued It is proposed that no refund will be processed where a notice for scrutiny assessment has been issued. The proposed amendment will be applicable from 1 July 2012. Reassessment of income in relation to any asset located outside India Currently, the maximum time limit for reassessment is 6 years. It is proposed to increase the time limit to 16 years in cases where income in relation to any asset (including financial interest in any entity) located outside India has escaped assessment. It is further proposed that such income would be deemed to have escaped assessment even if the assessee has made true and full disclosure of all material facts necessary for assessment. The proposed amendment will be applicable from the financial year 2011-12. Scope of income escaping assessment enlarged The cases where income would be deemed to have escaped assessment shall also include:
cases where assessee has failed to furnish a transfer pricing report; cases where a person is found to have any asset (including financial interest in any entity) located outside India. The proposed amendment will be applicable from the financial year 2011-12 Reassessment in case of agents of non-residents The time limit for issuing a notice for Proceedings
reassessment in the case of an agent of a non-resident is increased from 2 years to 6 years from the end of the relevant assessment year. The proposed amendment will be applicable from the financial year 2011-12 Time limits for completing assessments and reassessments The time limit for completing assessment and reassessment are proposed to be amended as under: Current (in months) Proposed (in months)
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Period commencing from
Regular assessment / Block end of the assessment year assessment Regular assessment / Block end of the assessment year assessment if reference to TPO Reassessment Reassessment if reference to TPO Fresh assessment pursuant to directions given in appeal / revision order Fresh assessment pursuant to directions given in appeal / revision order if reference to TPO end of the financial year in which notice is issued end of the financial year in which notice is issued end of the financial year in which order is received end of the financial year in which order is received
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Corresponding amendments have been made in the Wealth Tax Act for increasing the time limit by 3 months for completion of assessment / reassessment proceedings. The proposed amendments will be applicable from 1 July 2012. Table 2: Amendments to penalty provisions Penalty cause Current
The new provisions to apply to all persons other than the company, if: the taxpayer has claimed profit linked deduction (excluding deduction claimed by Co-operative society) contained in Chapter VI-A under the heading C Deduction in respect of certain income; or Proposed `10,000 to `100,000 `10,000 to `100,000. No penalty if TDS/ TCS statement furnished within one year of the prescribed due date after payment of TDS/TCS along with applicable interest and fee Applicable from 1 July 2012 Gift by members to HUF The definition of relative is proposed to be amended to include any member of HUF. Accordingly, any sum of money or property received by HUF from its members will not be considered as income in the hands of HUF. The proposed amendment will be applicable from 1 October 2009. Reference to Valuation Officer Currently, an Assessing Officer may refer the valuation of a capital asset to a Valuation Officer if in his opinion the value of the asset as claimed by the assessee is less than its FMV. It is now proposed that a reference can be made in cases where the value of the capital asset is in variance with its FMV. The proposed amendment will apply from 1 July 2012. Tax on income from undisclosed sources Currently, certain unexplained amounts are deemed as income from undisclosed sources and are taxable at the slab rates applicable to the assessee after considering basic exemption limits. It is proposed that where the total income of an assessee includes any income from undisclosed sources, such income will be taxed on a gross basis at 30% (plus applicable Surcharge and Education Cess). The proposed amendment will be applicable from the financial year 2012-13. Wealth Tax Definition of assets Currently, a house allotted by a company to a whole time employee or director having a gross annual salary of less than `500,000, is excluded from the definition of assets on which wealth tax is levied. It is proposed to increase the aforesaid limit to `10,00,000. The proposed amendment will be applicable from the financial year 2012-13.
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Furnishing of incorrect --information in the TDS/TCS statement Delay in furnishing of TDS/ TCS statement `100 per day of default
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1 July 2012
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Threshold limit for initiating the prosecution proceedings is proposed to increase from `1,000,000 to `2,500,000 with effect from 1 July 2012. Widening of tax base - AMT on person other a Company Currently, the provisions of AMT are applicable to LLP. It is now proposed to expand the scope of AMT to all persons other than company.
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the taxpayer has claimed deduction in respect of its SEZ units. The amendment also provides that the AMT provisions will not apply to individual, HUF, AOP or BOI if their adjusted total income does not exceed `20 lakhs. The proposed amendment will be applicable from financial year 2012-13.
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Budget proposals Indirect Taxes

Service Tax Changes in Existing Legislation Rate of service tax The rate of service tax has been increased from 10% to 12%. Rate of service tax, where certain service providers have an option, is revised as under: New slabs proposed for services in relation to purchase and sale of foreign currency including money changing Service tax on works contract services under the composition scheme to be increased from 4% to 4.8% Services provided by a life insurance service provider in cases where the entire premium is not towards risk cover, in the first year to increase from 1.5% to 3%. The above changes are effective from 1 April 2012. Change in valuation provision for transport of passenger by air service Uniform provisions for valuation introduced for transport of passenger by air whereby service tax at 12% is required to be paid on 40% of the value of services. The current restriction of non availment of CENVAT credit on inputs is extended to capital goods as well. The above changes are effective from 1 April 2012. Amendments made to the Service Tax Rules, 1994 Provisions applicable to Partnership Firms also applicable to Limited Liability Partnership. Invoices for taxable services have to be issued within 30 days of provision of taxable services. In case of banks, financial institutions or any other body corporate, providing banking and other financial services, the time period shall be 45 days. Provisions relating to payment of service tax not applicable in case of exports where consideration is received within specified timelines. Adjustment of excess service tax paid on account of reasons not involving interpretation of law, taxability, classification, valuation or applicability of exemption notification to be allowed without any restriction. The above changes are effective from 1 April 2012. Amendments made to the Point of Taxation Rules, 2011 Amendments made to the definition of continuous supply of services to capture the recurrent nature of services with the obligation for payment periodically or from time to time. Date of payment for determining POT to be the earlier of date on which payment is entered in the books of account or is credited to the bank account of the person liable to pay service tax. Provisions of Best Judgment Assessment introduced in case where the POT cannot be determined in cases where the date of invoice and the date of payment are not available. Individuals and partnership firms were required to pay service tax on receipt basis on specified taxable services. However, the same has been made optional for all taxable services for individuals and firms having a turnover up to ` 50 lakh in previous financial year. The turnover for this purpose shall include the turnover of the whole entity from all the service providing locations. The above changes are effective from 1 April 2012. Other Changes The exchange rate, rate of service tax or value of taxable services will be such rate or value as would be in force or as applicable, at the time when the taxable service has been provided or agreed to be provided. Powers given to Commissioner for conduct of Special Audit under specified circumstances by a chartered accountant or cost accountant. Provisions relating to Settlement Commission made applicable to service tax.
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The period for issuance of show cause notices in normal situations will be increased from 12 months to 18 months. Period for filing of appeals in service tax are being aligned with central excise. New limitations to be applicable only to decisions or orders passed after the date on which the Finance Bill, 2012 receives the assent of the President. Provisions relating to revision of orders aligned with central excise legislation. Prosecution provisions to be invoked in cases where the assessee knowingly evades payment of service tax. Rebate of service tax paid on input services extended to input services used for removal or export of such goods. Waiver of penalty in respect of Service tax payable on renting of immovable property as on 6 March 2012 if tax along with interest is paid within six months from the date of enactment of Finance Bill, 2012. The above changes will be effective from the date on which the Finance Bill, 2012 receives the assent of the President. Proposal to introduce common simplified forms for registration and return filing under central excise and service tax. Periodicity of filing of service tax returns proposed to be based on the turnover of the previous year. The above proposals will be introduced after seeking comments from trade and industry.
Taxation of Services based on Negative List The following changes with respect to taxation of services based on negative list are effective from a date to be notified after the enactment of the Finance Bill, 2012. Concept of negative list Taxation of services will be based on negative list as against levy of service tax on specified services. The new system of taxation of services proposes to impose service tax on all services, other than those specified in the negative list, provided or agreed to be provided in the taxable territory by a person to another. The term service is proposed to be defined as any activity carried out by a person for another for consideration, and includes a declared service, but shall not include the following any activity that constitutes only a transfer of title in goods or immovable property by way of sale, gift or in any other manner a transaction in money or actionable claim any service provided by an employee to the employer in the course of or in relation to employment. fees taken in any court or a tribunal set up under a law for the time being in force The following functions, performed by specified entities are not classifiable as a service
Budget Proposals
Members of various legislative bodies at central, state and local level, who receive any consideration in performing the functions of that office as such member the duties performed by any person who holds any post in pursuance of the provisions of the constitution in that capacity; or Duties performed by any person as a chairperson or a member or a director in a body established by the central government or state governments or local authority and who is not
Glossary
deemed as an employee before the commencement of this section. For interpretation of the term service, the following additional explanations are prescribed An unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; An establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory Declared Services, which are activities carried out by a person for another for consideration, liable to service tax, are listed below: Renting of immovable property Specified services related to construction of a complex, building, civil structure or a part thereof Temporary transfer or permitting the use or enjoyment of any intellectual property right Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act
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Transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods Activities in relation to delivery of goods on hire purchase or any system of payment by instalments Service portion in the execution of a works contract and Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.
Negative list of services covers the following services Services provided by specified persons: y government or a local authority B excluding certain select prescribed services eserve Bank of India R oreign diplomatic mission located F in India. Specified services related to griculture A ducation E inancial services F ransportation of passenger, with or T without accompanied belongings, by specified persons ransport of goods. T
Glossary
Others rading of goods T ny process amounting to manufacA ture or production of goods elling of space or time slots for S advertisements other than advertisements broadcast by radio or television ccess to a road or a bridge on A payment of toll charges etting, gambling or lottery B dmission to entertainment events A or access to amusement facilities ransmission or distribution of elecT tricity by an electricity transmission or distribution utility enting of residential dwelling for R use as residence uneral, burial, crematorium or F mortuary services including transportation of the deceased. The principles of interpretation of specified descriptions of services or bundled services have been prescribed. Reference to a service shall not include reference to a service used for providing main service. Specific description shall be preferred over general description for services capable of differential treatment based on its description. Services bundled in the ordinary course of business to be treated as a single service which gives its essential character. Services not naturally bundled in the ordinary course of business to be treated as a single service which results in highest liability of tax.
Table 3: Category of works contract Category of works contract Execution of original works Value on which service tax is payable 40% of the total amount charged
Other works contracts including completion 60% of the total and finishing services not covered above amount charged Contracts involving construction of complex or building for sale where any part of the consideration is received before the completion of the building CENVAT credit of excise duty on goods in which the property is transferred shall not be available. The value in respect of following services shall be as under: Nature of service Service involved in supply of food or any other article of human consumption or any drink at a restaurant Service involved in supply of food or any other article of human consumption or any drink as outdoor catering service CENVAT Credit of input services, inputs and capital goods would be available except for goods classifiable under Chapter Heading 1 to 22 of the First Schedule to the Central Excise Tariff Act, 1985 meant for human consumption. The STVR shall be applicable only in case the consideration is not ascertainable. Inclusion and exclusions in the value of taxable services under STVR
25% of the total amount charged Budget Proposals
Value subject to service tax 40% of the total amount 60% of the total amount
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Demurrage charges, by whatever name called will be included The exclusion for interest on loans has been substituted with interest on deposits and interest towards delayed payment of any consideration; Exclusion for accidental damages not relatable to provision of service Abatement under new scheme of taxation of services The benefit of paying service tax on specified services on a reduced value similar to existing legislation would be available. This benefit would be subject to fulfilment of specified conditions. Some of these services include Financial leasing services Transport of goods by rail Services provided by Goods Transport Agency Services provided by a tour operator. Exemptions under new scheme of taxation of services Service tax will not be applicable on services included in negative list and those services specifically exempted by a notification. Some of the exemptions, in addition
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to the existing exemptions, introduced in the context of negative list include: Services by an entity registered under Section 12AA of the Income Tax Act by way of charitable activities Services by way of motor vehicle parking to general public Specified services provided to the Government Specified general insurance schemes Intermediate production process as job work in relation to specified activities. Draft Place of Provision of Services Rules, 2012 Place of Provision of Services Rules, 2012 have been proposed to be introduced to determine the place where the service shall be deemed to be provided. These Rules are expected to replace the existing Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. Currently, export of services and taxability of services provided from outside India and received in India is determined on the basis of categorization of the services under one of the following criteria: Location of immovable property
Policy Proposals
Place of performance of the service Location of the recipient of the service. However, in the new scheme of taxation of services based on negative list, the following principles shall be followed for determination of place of provision of services after introduction of these rules. The place of provision of a service shall generally be the location of the service receiver. The exception for the same would be a case where location of the service receiver is not available in the ordinary course of business. In such cases, the place of provision shall be the location of the service provider. In addition, the place of provision of a service would be determined on the basis of categorization of the various services under one of the following criteria: Where the services are actually performed Where the immovable property is located or intended to be located Where the event is actually held Taxable territory where the greatest proportion of the service is provided Description of Service
Location of the service provider Where the goods are destined Where the passenger embarks on the conveyance for a continuous journey Scheduled point of departure of a conveyance for the journey. Where the place of provision of service is prima facie determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration. Reverse charge mechanism Specific cases where service tax is required to be paid on reverse charge basis proposed to include transactions such as services provided by individual advocate or support services by government or local authority. Amendments proposed to put the onus of payment of service tax partly on service provider and partly on service receiver, in specified cases. The said mechanism will be applicable on three specific services as under:
Budget Proposals Policy Proposals
Proportion of service tax payable by service recipient (%) 40
Proportion of service tax payable by service provider (%) 50
Hiring of motor vehicle designed to carry passengers, when no applicable abatement is availed Supply of manpower for any other service Works Contract Service
Glossary
75 50
25 50
Glossary
Budget Highlights
Budget Highlights
Budget Proposals
It has been clarified that in such cases, the liability of service provider and recipient is for respective amounts and is not influenced by compliance or the lack of it by the other person. Service provider is allowed to take CENVAT credit on inputs and input services. Changes in CENVAT Credit Rules CENVAT credit of excise duty paid on motor vehicles (except for motor cars, specially designed motor vehicles like ambulances, motor cycles, buses, etc.) to be available to all service providers and manufacturers, as credit of duty paid on capital goods. Services falling under rent a cab services and supply of tangible goods relating to motor vehicles qualify to be input services (except for specially designed motor vehicles like ambulances, motor cycles, buses, etc.). Services received by an insurance company in respect of motor vehicle insured or reinsured by the company and by motor vehicle manufacturers in relation to insurance, repair, reconditioning, etc. of motor vehicles will be an input service. Reversal of CENVAT credit in respect of removal of used capital goods as such or as waste or scrap by manufacturer or provider of output services to be the
60
higher of transaction value or CENVAT credit relevant to the depreciated value, as prescribed. This change will be effective from 17 March 2012. CENVAT credit of excise duty paid on inputs and capital goods received by output service providers will be available subject to maintenance of documentary evidence of delivery and location of inputs and capital goods. Refund of unutilized CENVAT credit on inputs/input services shall be available in the ratio of export turnover to total turnover and co-relation between exports and the inputs/input services used in such exports will not be required. Amount payable on exempted goods / exempted services, in cases where CENVAT credit on inputs / input services is not reversed, is proposed to be increased to 6% of the value of exempted goods / services. Provisions relating to reversal of CENVAT credit equal to 20% of the credit availed applicable to insurance service providers to be omitted. Provisions relating to distribution of CENVAT credit by an Input Service Distributor have been amended to include
new conditions in respect of the following: Services wholly used in a particular unit Services used in more than one unit, pro-rata allocation prescribed. New provisions introduced for transfer of unutilized CENVAT credit on SAD by one unit of a manufacturer to its other units on quarterly basis. Reversal of CENVAT credit wrongly taken, before utilization of the same, will not attract interest. This change will be effective from 17 March 2012. The above changes, except as specifically mentioned therein, will be effective from 1 April 2012. Central Excise Duty
Increase in CENVAT Rate TABLE 4 Increase in rate (%) Description of goods Maize starch, potato starch, tapioca starch Wafer biscuits Biscuits Pastries and cakes Microprocessor for computer, other than motherboards, floppy disc drive, hard disc drive, CD-ROM drive, DVD drive or DVD writer, flash memory, combo drive Compact fluorescent lamp Decrease in CENVAT Rate TABLE 5 Decrease in rate (%) Upto 16 Effective 17 March 2012 March 2012 5 5 4 5 5 6 6 6 6 6
Budget Proposals
Rate Changes The standard rate of excise duty for nonpetroleum products has increased from 10% to 12%. Merit rate of 5% has increased to 6% for specified goods. Excise duty of 1% on 130 specified items has increased to 2% without availing CENVAT credit. Coal, fertilizers, articles of jewellery and parts of precious metals or of metal clads with precious metals, mobile handsets and cellular phones will continue to attract excise duty @ 1% The above changes will be effective from 17 March 2012.
Policy Proposals
Description of goods Battery packs supplied to manufacturers of electric vehicles for use as spares and OEM Specific parts of hybrid supplied to manufacturers of hybrid vehicles LED lamp Parts of mobile phones used as spares
Upto 16 March 2012 10
Effective 17 March 2012 6
Policy Proposals
10 10 10
6 6 2 (no CENVAT credit)
Glossary
Glossary
Budget Highlights
Budget Highlights
Table 6 Revised duty rates for Cement I Mini cement plant Portland cement cleared in packaged form Upto 16 March 2012 10% ad valorem for RSP not exceeding ` 190 per 50 kg bag or ` 3800 per tonne 10% ad valorem + ` 30 per tonne for RSP exceeding ` 190 per 50 kg bag or `3800 per tonne; II Other than mini cement plant Portland cement cleared in packaged form 10% ad valorem + ` 80 per tonne for RSP not exceeding ` 190 per 50 kg bag or ` 3800 per tonne; 10% ad valorem + ` 160 per tonne for RSP exceeding ` 190 per 50 kg bag or ` 3800 per tonne; III IV Portland cement cleared other than in packaged form Cement clinker 10% ad valorem 10% ad valorem + ` 200 per tonne 12% ad valorem 12% ad valorem 12% ad valorem + ` 120 PMT Effective 17 March 2012 6% ad valorem + ` 120 PMT
Changes in Excise Duty structure on specified automobiles TABLE 7 Decrease in rate (%) Description of goods Motor vehicles of length not exceeding 4000 mm Driven on petrol, LPG and CNG and engine capacity not exceeding 1200 cc Driven on diesel and engine capacity not exceeding 1500 cc Motor vehicles with length exceeding 4000 mm Engine capacity below 1500 cc Engine capacity exceeding 1500 cc Refrigerated motor vehicles Upto 16 March 2012 10% Effective 17 March 2012 12%
The above changes will be effective from 17 March 2012. Excise Duty on precious metals and jewellery Unbranded articles of jewellery (except articles of silver jewellery) earlier exempt will now be subjected to excise duty of 1% ad valorem. Excise duty will be chargeable on articles of jewellery (except articles of silver jewellery) based on tariff value which will be equal to 30% of the transaction value declared on the invoice. Excise duty on gold jewellery sold from EOUs to DTA has been increased from 5% to 10%. The above changes will be effective from 17 March 2012. Exemption from Excise Duty on precious metals and jewellery Gold coins of purity 99.5% and above and silver coins of purity 99.9% and above provided exemption from excise duty, when manufactured from gold or silver on which appropriate duty of customs and excise has been paid. The above changes will be effective from 17 March 2012.
Budget Proposals
10%
12%
Budget Proposals
22% 22%+ ` 15000
24% 27%
Policy Proposals
Portland cement has been notified for valuation with reference to RSP subject to abatement of 30%. Changes in Excise Duty structure on textile goods The excise duty on branded ready-made garments and textile made-ups has been increased from 10% to 12%. The tariff value for these items has been revised and an abatement of 70% compared to 55% earlier has been prescribed. The above changes will be effective from 17 March 2012.
5%
6%
Glossary
Changes in Excise Duty structure on cigarettes The slabs for levy of excise duty on filter and non-filter cigarettes have been modified and the lowest slab will now comprise of cigarettes not exceeding length of 65mm and the next slab will comprise of cigarettes exceeding 65mm but not exceeding 70mm. Cigarettes exceeding the length of 65mm will be subject to an ad valorem duty of 10% in addition to existing specific rates. The ad valorem component of excise duty will now be calculated based on the RSP less an abatement of 50%.
62
Budget Highlights
Budget Highlights
Budget Proposals
Other Relevant changes Exemption from excise duty on clearance of re-made, re-conditioned, repacked branded ready-made garments will now be available even if the same are received in any registered premises of the same brand owner/ manufacturer and will not be restricted to those returned to the factory of manufacture. Cigarettes have been included in the Third Schedule of the Central Excise Act and consequently the activities of packing or repacking in a unit container, labeling or relabeling of containers, etc. will be treated as activities amounting to manufacture. The above changes will be effective from 17 March 2012. Amendment to Central Excise legislation Section 4 of the Central Excise Act has been amended to incorporate a definition of inter-connected undertakings. In respect of offences involving evasion of excise duty punishable with imprisonment, the monetary limit of the duty leviable for such offences has been increased from `100,000 to ` 3,000,000. Offences punishable with imprisonment of three years or more are to be considered as cognizable offences. In computing the limitation period for issuing notice for demand of duty, the period where service of such show cause notice was stayed by an order of a Court or Tribunal is to be excluded. The benefit of reduced penalty will be
64
available only if the duty along with interest and the reduced penalty is paid within a period of 30 days of the communication of the order. Excise duty exemption period for manufacturing units in the State of Jammu and Kashmir who have undertaken substantial expansion, will be computed from the date of commencement of commercial production from the expanded capacity. The above changes will be effective from a date to be specified after the enactment of Finance Bill 2012. Customs Duty Rate Changes Peak rate of customs duty for non-agricultural products retained at 10%, with few expectations Education cess and secondary and higher education cess on CVD component of customs duty has been exempted, which will result in marginal reduction of the total customs duty Full Exemptions / Reduction in Rate Full exemption from BCD, CVD and SAD is extended to: Equipment imported for road construction projects awarded by Metropolitan Development Authorities Tunnel excavation and specified lining equipment Tunnel boring machines and parts
thereof used for hydel and road projects for all infrastructure projects. Full exemption from BCD is extended to: Initial setting up and substantial expansion of fertilizer projects Natural gas/ liquefied natural gas imported for power generation by a power generation company Uranium concentrate, sintered natural uranium dioxide, sintered uranium dioxide pellets for generation of nuclear power Equipment for coal mining projects New and retreaded aircraft tyres Parts of aircraft and testing equipment for maintenance and repair of aircraft imported by third-party MRO units Tri-band phosphor Waster paper Lithium ion batteries for the manufacture of battery packs for supply to electric or hybrid vehicle manufacturers. BCD at concessional rate of 5% under Project Import Scheme is extended to: Import of goods for setting up of Green House for cultivation of horticulture and floriculture produce Installation of mechanized handling systems & pallet racking systems for handling horticultural produce. Exemption from CVD Unconditional exemption of CVD on import of foreign going vessels from 1March 2011 to 17 March 2012 Conditional exemption for import of vessel in India.
Exemption from SAD Specified equipment for setting up of solar thermal projects. For availing exemption from SAD on subsequent sale, importer is required to declare the following:
Budget Proposals
Policy Proposals
Policy Proposals
Glossary
Glossary
Budget Highlights
Budget Highlights
State of destination where the goods are intended to be sold for the first time after import and VAT registration number. Table 8: Decrease in the Basic Customs Duty(%) Description of goods Upto 16 March 2012 Effective 17 March 2012 Table 9: Increase in the Basic Customs Duty (%) Description of goods Upto 16 March 2012 Effective 17 March 2012
The above changes will be effective from 17 March 2012. Changes in the Customs Act, 1962 Offences under customs Act to be non-cognizable. This amendment was prompted by the decision of SC in Om Prakash Vs. Union of India, wherein it was held that offences under customs Act are bailable. Courts to grant bail in respect of specified offences under customs Act only after providing an opportunity to the public prosecutor to present his case. Provisional attachment of property for recovery of duties from the person who obtained instrument such as duty credit scrips, by means of collusion or willful misstatement or suppression of facts. Specified classes of importers required to pay customs duty electronically. Courier services may be used for the purpose of serving any order/decision/ summons/notice by the Commissioner. The above changes will be effective from the date of enactment of Finance Bill 2012.
Changes in the Schedules to the Customs Tariff Act, 1975 The Second Schedule is being amended to enhance the rate of export duty on chromium ore from ` 3000 per ton to 30% ad valorem. The change will be effective from 17 March 2012. Goods and Services Tax Drafting of model legislations for Central and State GST is in progress. Constitution Amendment Bill awaits Parliamentary Standing Committees assent. GST Network which will implement common PAN based registration, return filing and payment processing for states on a shared platform, expected to become operational by August 2012.
Food/Agro Processing Agriculture Products Budget Proposals Isolated soya protein and soya protein concentrate Probiotics Specified coffee plantation and processing machinery Coffee brewing and vending machines (commercial type) Specified water soluble fertilizers Specified soluble and liquid fertilizers, other than urea Policy Proposals Capital Goods/Infrastructure Railway safety (Train Protection and Warning System) equipment and railway track laying machines Machinery and instruments for surveying and prospecting of mines Titanium dioxide Medical/Health Sector Glossary Six specified life saving drugs/ vaccines and their bulk drugs 10 7.5 30 10 7.5 10 7.5 5 10 5 5 5 5 2.5
Automobile Completely Built Units (CBUs) of large cars/ MUVs/ SUVs Metals Gold ores & concentrates for use in mfg of gold Gold dore bars Gold bars, other than tola bars Non-standard gold Platinum Cut and polished coloured gemstones Flat rolled products of non-alloy steel Others Boric acid Digital still cameras 5 NIL 7.5 10 1 1 2 5 2 NIL 10 5 2 2 4 10 4 2 7.5 7.5 60 75
Budget Proposals Policy Proposals
10
7.5
10 10
7.5 7.5
Glossary
66
Policy Proposals
Indirect Taxes Drafting of model legislation for the Centre and State GST in concert with States is under progress. GST network to be set up as a National Information Utility and to become operational by August 2012. Direct Taxes DTC Bill to be enacted at the earliest after expeditious examination of the report of the Parliamentary Standing Committee. Proposal to lay a White Paper on Black Money in current session of Parliament. Infrastructure During Twelfth Plan period, investment in infrastructure to go up to `50 lakh crore with half of this, expected from private sector. More sectors added as eligible sectors for Viability Gap Funding under the scheme Support to PPP in infrastructure. Government has approved guidelines for establishing joint venture companies by defence PSUs in PPP mode. First Infrastructure Debt Fund with an initial size of `8,000 crore launched earlier this month. Tax free bonds of `60,000 crore to be allowed for financing infrastructure projects in 2012-13. A harmonised master list of infrastructure sector approved by the Government. IIFCL has put in place a structure for credit enhancement and take-out finance for
68
Budget Highlights
Budget Highlights
easing access of credit to infrastructure projects. Agriculture Allocation to the Initiative of Bringing Green Revolution to Eastern India scheme has increased to `1,000 crore in 2012-13 from `400 crore in 2011-12. Short-term RRB credit refinance fund being set up to enhance the capacity of RRBs to disburse short term crop loans to small and marginal farmers. Kisan Credit Card (KCC) Scheme to be modified to make KCC a smart card which could be used at ATMs. Structural changes in Accelerated Irrigation Benefit Programme being made to maximise flow of benefit from investments in irrigation projects. A new centrally sponsored scheme titled National Mission on Food Processing to be started in 2012-13 in co-operation with State Governments. Steps taken to create additional food grain storage capacity in the country. Manufacturing National Manufacturing Policy announced with the objective of raising, within a decade, the share of manufacturing in GDP to 25% and creating of 10 crore jobs. Banking and Financial Various bills proposed to be moved in the Budget session of the Parliament to take forward the process of financial sector legislative reforms.
A central Know Your Customer depository to be developed in 2012-13 to avoid multiplicity of registration and data upkeep. Education 6,000 schools proposed to be set up at block level as model schools in Twelfth Plan. To ensure better flow of credit to students, a Credit Guarantee Fund proposed to be set up. Environment and Climate Change Concessions and exemptions proposed for encouraging the consumption of energysaving devices, plant and equipment needed for solar thermal projects. Concession from basic customs duty and special CVD being extended to certain items imported for manufacture for hybrid or electric vehicle and battery packs for such vehicles. Housing Various proposals to address the shortage of housing for low income groups in major cities and towns including allowing ECB for low cost housing projects and setting up of a credit guarantee trust fund, etc.
Health Scope of Accredited Social Health Activist ASHA is being enlarged. This will also enhance their remuneration. National Urban Health Mission is being launched. Other Proposals For 2012-13, `30,000 crore to be raised through disinvestment. At least 51% ownership and management control to remain with Government. National Food Security Bill, 2011 is before Parliamentary Standing Committee. To enhance access under SWAVALAMBAN scheme, LIC appointed as an Aggregator and all Public Sector Banks appointed as Points of Presence and Aggregators.
Budget Proposals
Budget Proposals
Policy Proposals
Policy Proposals
Glossary
Glossary
Glossary
AMT AO AOP AP APA BCD BOI CAD CBDT Alternate Minimum Tax Assessing Officer Association of Persons Approving Panel Advance Pricing Agreement Basic Customs Duty Body of Individuals Current Account Deficit Central Boar of Direct Taxes Cubic Centimeter Compact Disc Central Value Added Tax Commissioner of Income Tax Compressed Natural Gas Countervailing Duty Dividend Distribution Tax Dispute Resolution Panel Domestic Tariff Area Direct Taxes Code Digital Versatile Disc External Commercial Borrowings Export Oriented Unit Foreign Institutional Investor Fair Market Value General Anti Avoidance Rule Gross Domestic Product Government of India Goods and Services Tax Hindu Undivided Family MUV OEM PMT POT ROI RSP SAD SC SEZ SME STVR SUV TCS TDS TP TPO VAT KCC LED LIC LLP LPG MAT MM MRO ITAT Income Tax Appeallate Tribunal Kisan Credit Card Light Emitting Diode Life Insurance Corporation Limited Liability Partnership Liquefied Petroleum Gas Minimum Alternate Tax Millimeter Maintenance, Repair and Overhaul Multi Utility Vehicle Original Equipment Manufacturer Per Metric Tonne Point of Taxation Return of Income Retail Sale Price Special Additional Duty
Budget Highlights
Budget Highlights
Budget Proposals
Budget Proposals
CC CD CENVAT CIT CNG CVD DDT DRP DTA DTC DVD ECB EOU FII FMV GAAR GDP GOI GST HUF
Policy Proposals
Policy Proposals
The Supreme Court of India Special Economic Zone Small or Medium Enterprise Service Tax (Determination of Value) Rules, 2006 Sports Utility Vehicle Tax collected at source Tax deducted at source Transfer Pricing Transfer Pricing Officer Value Added Tax
Glossary
Glossary
70
Contacts
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Getting To The Core: Budget Analysis

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Getting To The Core: Budget Analysis

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Getting to the core Budget analysis

March 2012 www.deloitte.com/in

Getting to the core Budget analysis | 5

State of the economy

State of the economy

State of the Economy

5.80 0 2007-08 -20 Agriculture Industry

4.39 (0.10) 2008-09

State of the economy

State of the economy

Figure 2: Growth in IIP and its Components 20

Growth in IIP and its components (%)

-10 Mining Manufacturing Electricity General

Source: Economic Quick Estimates of IIP, CSO - 12 March, 2012

State of the economy

State of the economy

Fiscal decit asas %% of GDP Fiscal decit a a of GDP

0.00 0.00 2.62 2.62

0.14 0.14 2.21 2.21

5.09 5.09 2010-11 2010-11

Off-balance sheet items Off-balance sheet items

Source: Planning Commission Source: Planning Commission

State of the economy

State of the economy

2007-08 2008-09 2009-10 Source: Economic Survey of India 2011-12

Primary Articles 2010-11 2011-12

Fuel and Power

Source: Economic Survey of India, 2011-12

Domestic demand growth (`(` crore) Domestic demand growth crore)

Getting to the core Budget analysis | 13

State of the economy

State of the economy

5.8 5.8 5.8

4.5 4.5 4.5

-3.6 -3.6 -3.6

Apr-Sep, Apr-Sep, 2011-12 Apr-Sep, 2011-12 2011-12 -6 -6 -6 -9.4 -9.4 -9.4

State of the economy

State of the economy

Figure 9: International Capital Markets

2010 YOY growth

2011 YOY growth

(11) (25) (25)

State of the economy

State of the economy

Source: Economic Survey of India, 2011-12

7730 7063 7730 7063

12670 12670 Others Others

Getting to the core Budget analysis | 19

State of the economy

State of the economy

2.27 1.21 1.52 1.52 5.08 5.08 0.87 0.87 0.7

State of the economy

State of the economy

Exports/Imports (in USD million)

Trade Balance (in USD million)

30,000 25,000 20,000 15,000 10,000 5,000

State of the economy

State of the economy

State of the economy

State of the economy

State of the Economy State of the economy

State of the economy