By K P C Rao., LLB., FCMA., FCS
Practicing Company Secretary
The Union Budget of India, referred to as the Annual Financial Statement in Article 112 (Part V, Chapter II) of the Constitution of India, is the Annual Budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament. The budget has to be passed by both the Houses of Parliament before it can come into effect on April 1, the start of the financial year. The budget session has started this time on March 12 and the Union Budget 2012-13 has been delayed this time because of elections in five states and presented on March 16, 2012. While the Rail Budget was presented on March 14, the Economic Survey outlining Government's assessment of the economy was tabled on March 15, 2012.
The budget papers tabled in Parliament contain broadly, the budget speech, a breakdown of the detailed spending proposals of each ministry, as well as revenue raising proposals.
How is government expenditure classified in the budget?
There are two different sets of classifications used in the Budget are – Plan versus Non-plan and Capital versus Revenue expenditure.
Expenditure on schemes and projects covered by the five-year Plans. Such plans are developed by the Planning Commission after consulting individual ministries. Each Plan specifies programmes that ministries will fund and develop over the next five years. Plan expenditure can have both revenue and capital components.
Ongoing expenditure by the government not covered by the Plans. These include interest payments on government debt, expenditure on organs of the state such as the judiciary and the police and even expenditure on the maintenance of existing government establishments such as schools and hospitals. Non-plan expenditure too, has revenue and capital components.
Expenditure used to create assets or to reduce liabilities.
Expenditure not used to create assets e.g. expenses on salaries or other administrative costs.
The excess of total government expenditure over total receipts is called the fiscal deficit and is funded by borrowing. The difference between revenue receipts and revenue expenditure is called the revenue deficit.
ü The Union Budget 2012-13 identifies five objectives relating to growth, investment, supply bottlenecks, governance, and removing malnutrition to be addressed effectively in the ensuing fiscal year. It is a status quo budget rather than a reformist budget.
ü GDP growth to be 7.6 per cent (+ 0.25 percent) during 2012-13.
ü Gross Tax Receipts estimated at Rs. 10,77,612 crore.
ü Net Tax to Centre estimated at Rs.7,71,071 crore.
ü Non-tax Revenue Receipts estimated at Rs.1,64,614 crore.
ü Non-debt Capital Receipts estimated at Rs.41,650 crore.
ü Temporary arrangement to use disinvestment proceeds for capital expenditure in social sector schemes extended for one more year.
ü Total expenditure for 2012-13 budgeted at Rs.14,90,925 crore.
ü Amendment to the FRBM Act proposed as part of Finance Bill. New concepts of “Effective Revenue Deficit” and “Medium Term Expenditure Framework” introduced.
ü Central subsidies to be kept under 2 per cent of GDP; to be further brought down to 1.75 per cent of GDP over the next 3 years.
ü Investment in 12th Plan in infrastructure to go up to Rs.50,00,000 crore; half of this is expected from private sector.
ü White Paper on Black Money to be laid in the current session of Parliament. Tax proposals mark progress in the direction of movement towards DTC and GST
ü Total expenditure budgeted at Rs.14,90,925 crore; plan expenditure at Rs.5,21,025 crore – 18 per cent higher than 2011-12 budget; non plan expenditure at Rs. 9,69,900 crore
ü Fiscal deficit targeted at 5.1 per cent of GDP, as against 5.9 per cent in revised estimates for 2011-12
ü Central Government debt at 45.5 per cent of GDP as compared to Thirteenth Finance Commission target of 50.5 per cent
ü Medium-term Expenditure Framework Statement to be introduced; will set forth 3-year rolling target for expenditure indicators.
ü Currrent account deficit is likely to be at 3.6%.
ü Net market borrowing required to finance the deficit to be Rs.4.79 lakh crore in 2012 -13.
ü Effective Revenue Deficit to be 1.8 per cent of GDP in 2012-13.
ü Official amendment to “The Pension Fund Regulatory and Development Authority Bill, 2011”, “The Banking Laws (Amendment) Bill, 2011” and “The Insurance Law (Amendment) Bill, 2008” to be moved in the Budget session itself.
ü Defence services get Rs.1,93,407 crore.
SIGNIFICANT FEATURES OF THE BUDGET
Ø No change in corporate taxes.
Ø Service tax rate raised from 10 per cent to 12 per cent.
Ø Excise duty raised from 10 to 12 per cent.
Ø External commercial borrowing of up to $1 billion permitted for airline sector.
Ø Completion of highway projects 44 per cent higher than in previous fiscal.
DIRECT TAX PROPOSALS
a) Anti-Avoidance Measures
Ø General Anti-Avoidance Rules (GAAR) proposed to be introduced in the Income tax Act, 1961 to check aggressive tax planning. Earlier, the Direct Taxes Code Bill, 2010 had proposed to introduce GAAR.
Ø Transfer pricing provisions proposed to be introduced in respect of specified domestic transactions exceeding the prescribed threshold.
Ø Clarifications in sections 9 and 195 in the context of judicial decisions to tax gains from off-shore transactions where the underlying assets are located in India.
Ø Introduction of compulsory reporting requirement in case of assets held abroad by residents.
Ø Tax Residency Certificate to be submitted by the tax payer in case he wants to claim the benefit of DTAAs under section 90 or 90A. This is a necessary condition but not sufficient for availing the benefits of the DTAA.
b) Measures to prevent generation and use of unaccounted money
Ø Additional onus on closely held companies to explain the source of sum credited as share capital and share premium in their accounts in the hands of the resident shareholder. Otherwise, provisions of section 68 would be attracted in the hands of the company.
Ø The consideration received in excess of fair market value of shares to be treated as income of a closely held company, where consideration received for issue of shares exceeds the face value of shares.
Ø Unexplained money, investment, cash credits to be taxed at the maximum marginal rate of 30%, without allowing basic exemption or allowance for expenditure.
Ø Tax to be collected at source by the seller in respect of sale of jewellery in cash, where the value exceeds Rs. 2 lakh, irrespective of its ultimate use, and in respect of sale of minerals, namely, coal, iron ore and lignite, to be used for trading purposes.
Ø Resident having any asset outside India (including financial interest in any entity) to file return of income compulsorily, even if he does not have taxable income.
Ø Extended period of 16 years for reassessment, in respect of persons whose income in relation to such assets located outside India has escaped assessment.
Ø Undisclosed income found during the course of search and admitted at the stage of search will attract penalty of 10% and if admitted at the stage of filing return, will attract penalty @ 20%. In other cases, penalty would range between 30% to 90% of undisclosed income.
Ø Prosecution mechanism strengthened by providing for constitution of special courts, application of summons trial for offences and provisions for appointment of public prosecutors.
c) Transfer Pricing Provisions
Ø Introduction of Advance Pricing Agreements for determining arm’s length price of international transactions.
Ø Transfer Pricing Officer empowered to examine international transactions not reported by the assessee.
Ø Transfer Pricing regulations to apply to specific transactions entered into by domestic related parties where the aggregate amount of such transactions exceed the monetary threshold of Rs.5 crores during the year.
Ø Due date for filing return of income in case of non corporate payers who are required to file transfer pricing report under 92E also extended to 30th November of the assessment year. Due date for filing tax audit report in all such cases, both corporate and non corporate, is also 30th November of the assessment year.
Ø Definition of international transaction further amplified to clarify the scope of “intangible property” included therein and to include business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, whether or not it has a bearing on the profits, income, losses or assets of such enterprises at the time of the transaction or at any future date.
Ø Amendments relating to DRP like appeal against its directions and its power to enhance variations are proposed to be incorporated.
d) Business Taxation
Ø Alternate Minimum Tax (AMT) levy extended to all persons other than companies, claiming profit linked deduction. However, if the adjusted total income does not exceed Rs. 20 lakh for individuals, HUFs, AOPs, BOIs and Artificial Juridical Persons, the provisions for levy of AMT would not be applicable.
Ø The turnover limit for compulsory tax audit of accounts as well as for presumptive taxation proposed to be raised from ` 60 lakhs to Rs.1 crore.
Ø Expenditure on agricultural extension project and expenditure on skill development project to qualify for weighted deduction @ 150%.
Ø Scope of definition of “specified business” to qualify for investment-linked tax deduction expanded to include setting up and operating an inland container depot or a container freight station, beekeeping and warehousing facility for storage of sugar.
Ø Provision of weighted investment-linked tax deduction for certain specified businesses like setting up and operating a cold chain facility, a warehousing facility for storage of agricultural produce, etc.
Ø Extension of sunset date for tax holiday for power sector by one more year.
Ø Benefit of initial depreciation @ 20% of actual cost of new machinery or plant acquired and installed in the year extended to power sector undertakings.
Ø Weighted deduction for in-house scientific research and development extended for a further period of five years.
Ø Disallowance under section 40(a)(ia) for non-deduction tax at source in respect of certain payments not to be attracted where the assessee is not deemed to be an assessee in default under section 201(1) on account of payment of the taxes by the payee.
Ø Daily tonnage income of Shipping Companies calculated on presumptive basis proposed to be increased.
Ø Net profit as per the relevant statute to be considered for computing book profit for levy of Minimum Alternate Tax in case of Banking, Insurance companies etc which do not maintain accounts as per Schedule VI of the Companies Act, 1956. Further, reference to Part III is proposed to be removed since Revised Schedule VI does not contain Part III.
e) Personal taxation
Ø Personal income-tax rates rationalized. Basic exemption limit to be increased to Rs. 2 lakhs for both women and men, thereby removing gender discrimination. 30% rate to be attracted in respect of income over Rs.10 lakhs.
Ø Deduction of up to Rs.10,000 for interest on savings bank account.
Ø Additional deduction of upto Rs.5,000 for preventive health check-up.
Ø Senior citizens not having business income to be exempted from payment of advance tax.
Ø Age of senior citizen for availing higher deduction for medical insurance premium, medical treatment of a specified disease or ailment, etc. aligned with the reduced age of 60 years for availing higher basic exemption limit.
New Tax Slabs
Individual (other than II and III) and HUF
Up to Rs.2 lakh
Rs.2 lakh - Rs.5 lakh
Rs.5 lakh - Rs.10 lakh
Above Rs.10 lakh
Senior Citizens between 60 and 80 years of age
Upto Rs. 2.50 lakh
Rs. 2.5 lakh to Rs.5 lakh
Rs. 5 lakh to Rs.10 lakh
Above Rs.10 lakh
Very Senior Citizens above 80 years
Upto Rs.5 lakh
Rs. 5 lakh to Rs.10 lakh
Above Rs. 10 lakh
f) Capital Gains
Ø Capital gains tax on sale of residential property to be exempt if the sale consideration is used for subscription in equity of a manufacturing SME company for purchase of new plant and machinery.
Ø Reduction in STT rate for delivery based purchase and sale of equity shares and units of equity oriented fund by 20%.
Ø Benefit of exemption under section 54B in respect of transfer of agricultural land and purchase of new agricultural land extended to HUFs also.
g) Provisions for deduction of tax at source
Ø TDS @ 1% on transfer of certain immovable properties (other than agricultural land) if consideration exceeds specified threshold.
Ø TDS @ 10% on remuneration to a director, which is not in nature of salary.
Ø Threshold for TDS on compensation or consideration for compulsory acquisition to be increased fromRs.1 lakh to Rs.2 lakhs.
Ø Threshold for TDS on payment of interest on debentures increased from Rs. 2,500 to Rs. 5,000 and this limit would be applicable in respect of interest on unlisted debentures also.
h) Tax Exemptions and Benefits
Ø Interest paid by specified company to non-resident in respect of borrowing made in foreign currency from sources outside India to be subject to concessional rate of 5%.
Ø Concessional rate of taxation @ 15% of gross dividends received by an Indian company from specified foreign company to be extended in respect of dividend received in F.Y. 2012-13 also.
Ø Cascading effect of dividend distribution tax (DDT) under section 115-O removed in multi-tier corporate structure also.
Ø Service Tax rate increased from 10% to 12%, with corresponding changes in rates for individual services
Ø Revision Application Authority and Settlement Commission being introduced in Service Tax for dispute resolution and introduction of new scheme announced for simplification of refunds.
Ø All services to be taxed except those in negative list
Ø Standard Rate of excise duty raised from 10 per cent to 12 per cent; Merit Rate from 5 per cent to 6 per cent and Lower Merit Rate from 1 per cent to 2 per cent with few exemptions.
Ø Excise duty on processed food brought down to 6%
Ø Excise duty on hand made and semi mechanized matches reduced from 10% to 6%.
Ø Customs duty on import of parts of aircraft, tyres and testing equipment fully exempted.
Ø Full exemption from basic customs duty for equipment for road and highway construction.
Ø Titanium dioxide customs duty cut to 7.5% from 10%
Ø Full exemption from basic customs duty on natural gas, LNG, uranium for generation of electricity for two years.
Ø Automated shuttle looms exempted from customs duty
Ø Full exemption on imported equipments for road construction projects
Ø Import of equipment for fertilizer plants fully exempted from customs duty for three years
Ø Excise duty on large cars raised from 22 per cent to 24 per cent
Ø Most luxury items, eating out, air travel, leisure activities to cost more
PROBABLE IMPACT ON CONSUMER
What Goes Up
What Goes Down
• Gold jewellery
• Luxury cars
• Air travel
• Telephone bills
• Sport Utility Vehicles
• Handrolled beedis
• Platinum jewellery
• Diamond jewellery
• Branded retail garments
• Eating out at restaurants
• Hotel accommodation
• Hiring a law firm
• Cinema and films
• LCDs and LEDs
• Imported bicycles
• Housing society charges
• Mobile phones
• School education
• Iron ore equipment
• Medicines for treating cancer and HIV Processed food
• Iodised salt
• Match boxes
• Soya products
• Solar power lamps
• LED bulbs
• Natural gas
• Uranium for generation of electricity
The Union budget for 2012-13 seeks to address two primary concerns — the economic slowdown and the unsatisfactory state of government finances Undoubtedly, the fiscal space for stimulating growth, either by way of tax concessions or increased public expenditure, has shrunk. Last year, global factors — such as the ‘eurozone crisis’ — and high inflation in India constrained economic growth. The economy which had grown at a relatively fast rate of 8.4 per cent in each of the two preceding years is expected to clock just 6.9 per cent during the current year, a rate of growth which, however, is still high by contemporary global standards. Drawing inspiration from the Economic Survey, Finance Minister expects growth to be around 7.6 per cent in 2012-13, moving one percentage point higher the following year.
On the tax front, the Finance Minister takes more from the taxpayer than what he has given. The increase in basic exemption limit on personal income tax, though small, is still welcome. Yet the relief is undone by the increase in service tax and excise duty. The abolition of duty on coal imports by power plants for two years is a welcome measure that will provide relief to power companies that have been hit by higher prices due to policy changes in the coal-exporting nations. Allowing power companies and airlines to use external commercial borrowings (ECB) to finance a part of their rupee debt and working capital respectively will help these sectors get back on track.
The decision to increase duties on gold is an interesting one that is aimed at curbing the rising import of the yellow metal which is pushing up the current account deficit. Import of gold and other precious metals has risen by 50 per cent in the first three quarters of this fiscal. The move is obviously to channelise the public money into productive investment avenues that will help the economy. Gold is an idle investment that has no multiplier effect.
(Published in Corporate Secretary, Monthly Journal of ICSI, Hyderabad during April, 2012)
 The Fiscal Responsibility and Budget Management Act, 2003 (notified in July 2004) envisaged an annual 0.3 percentage point reduction in the fiscal deficit and a 0.5 percentage point reduction in the revenue deficit to bring the former down to 3% of GDP and the latter to nil by 2008-09. In reality, the fiscal deficit doubled to 6% of GDP during 2008-09, driven largely by the desire to distribute largesse on the eve of the 2009 general elections, and remains close to 5%. Meanwhile, the revenue deficit is nowhere near being eliminated
 Expenditure on schemes and projects covered by the five-year Plans. Such plans are developed by the Planning Commission after consulting individual ministries. The current Plan is the twelfth, and runs from 2012 to 2017.
 In the recent Vodafone judgment, the Supreme Court held that Section 9 (i) of the IT Act could not be extended to cover indirect transfer of capital assets / property situated in India. Hence, indirect transfer of an asset in India is not taxable under the Income Tax Act. However, experts like Justice A.R. Lakshmanan,(Former Supreme Court Judge), Soli Sorabje (Former Attorney General), PP Rao (Constitutional Expert and Senior Lawyer) says the parliament has the power and jurisdiction to clarify, enact law or bring amendments to a law with retrospective effect to remove the basis or defects in a judgment (See The Hindu dated:19-03-2012). The proposal to amend the Income Tax Act with retrospective effect from 1962 is to assert the Government’s right to levy tax on merger and acquisition (M&A) deals involving overseas companies with business assets in India and to protect the fiscal interest of the country and to avert the chances of crisis.