2013 budget summary

INDIAN BUDGET 2013
A SUMMARY OF THE BUDGET PROPOSALS MADE BY THE MINISTER
OF FINANCE, GOVERNMENT OF INDIA, 2013

Table of Contents
Few Thoughts .................................................................................... 3
Part I ................................................................................................. 4
Direct Tax ......................................................................................... 4
Part II ............................................................................................. 13
Indirect Tax ..................................................................................... 13
Customs ....................................................................................... 13
Excise .......................................................................................... 19
Service Tax .................................................................................. 21

1

Few Thought

Unarguably, world economy has suffered a setback after 2007. Some
emerging economies did reflect growth after 2007, but the rate of growth is
slow and it appears to be fading like the Cheshire Cat smile. Slow growth is
resultant of crumbling of financial institutions like an apple pie. Even though failure of
financial institution has occurred in advanced economies, the tremors of crumble are
experienced in developing economies as well. To revive economies it is imperative to
strengthen the structure that provide finance to corporations. Strengthening solely
domestic financing structure would not suffice. It is necessary that along with
domestic financing structure, cross border investment and financing modalities
should be revived and replenished with trust.

This year, Minister of Finance leaves us with mixed feelings. Enhancement of
rate of surcharge, increase in rate of tax of royalties and fee for technical services,
continuation of Dividend Distribution Tax and levy of new tax on buy back of shares
would result in returns to foreign investors on Foreign Direct Investments in India
slighter. Tax relief on Infrastructure Bonds, Securitization Trust, a pass through status
to Alternative Investment Fund, relief to investor of Mutual Funds and Infrastructure
Bonds (NBFC or Mutual Funds both) reflects commitment and desire to have a strong
bond market that would enhance availability of finance to corporations.

Controversial GAAR provisions are put on hold and shall not see the light of the day
until April Fool’s Day in 2016. A clarification on tax residency certificate has left many
disgruntled. Be that as it may, the restrain on returns on foreign direct investment
should be reconsidered.

2

This note provides a brief of the proposed changes to the Income Tax Act
1961 that shall impact on corporate (domestic and foreign) that have
business in India. Part I summarizes Direct Tax and Part II contains
Indirect Tax.

PART – I

Direct Tax

Rate of Tax

The following rates are proposed in respect of business income of the
Domestic and the Foreign Companies:

Slabs Income Tax

(USD) Domestic Foreign

0 – 200,000 30.90 (30+3) 41.2 (40+3)

200,000 – 2,000,000 32.45(30+5+3) 42.02( 40+2+3)

2,000,000 – and
above 33.9( 30+10+3) 43.26(40+5+3)

The Dividend Distribution Tax (DDT) is levied at the rate of
16.9959(15+10+3)

The Royalties and Fee for Technical Services shall be taxed at the rate of
28.3 (25+10+3)

3

Tax on transaction in relation to Commodities Derivatives

It is proposed that a new tax on the sale of commodities derivatives is
levied at the prescribed rates.

This tax shall be levied from the tax year 2013-14

This tax is a deductible expense in accordance with the provisions of
Section 36 of the Income Tax Act;

This deduction shall apply from the tax year 2013-14.

Tax on Income by way of Royalty or Fees for Technical Services

Presently, the domestic tax prescribes that the royalties and fee for
technical services shall be taxed at a rate of 10%. Whereas the Double
taxation Avoidance Agreement (DTAA) with several countries prescribe
that the royalties and fee for technical services shall be taxed at a rate
which may vary between 10%-25%. As the domestic tax prescribes for a
lower rate of taxation, a non resident tax payer that could take benefit of
the treaty is taxed at the rate of 10%.

It is proposed that the benefit as provided by the present domestic tax
shall be withdrawn and the royalties and fee from technical service shall
be taxed at the rate of 25%. Please note that the relief provided in terms
of the double taxation avoidance agreement shall be available to the tax
payer.

Incentive for acquisition and installation of new plant or
machinery by manufacturing company

An investment linked deduction equal to 15% of the aggregate amount of
actual cost of new assets acquired and installed shall be provided to the
tax payer if such investment is more than USD 20,000,000.

To claim the deduction, tax payer shall be restricted from transferring the
new assets for a period of 5 years provided that such transfer is not
occasion by merger or a demerger of two companies.

4

This amendment shall take effect from the tax year 2014-15.

Extension of incentives to power sector

The deduction provided in terms of the existing provisions of the domestic
tax to power generation, distribution and transmission companies were to
lapse with the year ending 31, March 2013. These deductions could be
availed by the companies engaged in power generation, distribution and
transmission for another year i.e until 31, March 2014.

Exemption from tax to Investor Protection Fund of depositories

The Income by way of contributions from a recognized stock exchange
received by a Investor Protection Fund set up by a recognized stock
exchange is exempt from taxation.

The income by way of contribution from a depository of the Investor
Protection Fund shall not be included in total income.

The exemptions shall be applicable for tax year 2014-15.

Tax on Dividends received from foreign companies

Dividends received from foreign company (in which Indian Company holds
more than 26% share) by an Indian Company shall be taxed at the rate of
15% if such dividend is included in total income.

This lower rate of taxation shall apply for the tax year 2014-15.

Dividend Distribution Tax (DDT)

It is proposed that in the event a foreign subsidiary of an Indian Holding
Company declares dividend to the Indian Holding company and the Indian
Holding Company declares a dividend in the same financial year, than the
dividend declared by the Foreign Subsidiary to an Indian Holding
Company shall not be subjected to DDT.

This provision shall become effective from June 1, 2013.

5

Tax on Infrastructure bonds

The beneficial rate of tax at the rate of 5% on interest payments by an
Indian Company to a Non Resident if such Indian Company raises loans or
issues long terms Infrastructure Bonds to borrow money in foreign
currency is now proposed to be extended to such cases where the non-
resident operates a designated bank account and coverts foreign currency
into Indian Rupees to subscribe to such Infrastructure Bonds or lend.

This amendment shall take effect from June 1, 2013

Taxation of Securitization Trusts

A special regime of taxation is proposed for income of trust engaged in
Securitization. It is proposed that:
(i) Income of Securitization Trust set up and regulated by SEBI or
RBI shall be exempt from tax;
(ii) Income of Securitization Trust distributed to its investors shall
be subject to Distribution tax, if income of such investor is
chargeable to tax and no tax shall be payable if income of such
Investor is not chargeable to tax;
(iii) The Income of Securitization Trust so distributed shall not be
subject to tax in the hands of the Investors;

These amendments shall take effect from June 1, 2013.

Tax on Alternative Investment Funds

An amendment is proposed to the provisions related to tax on income of
Venture Capital Company (VCC) and Venture Capital Fund (VCF) from
investment in Venture Capital Undertaking (VCU) in light of the recent
repeal of SEBI (Venture Capital fund) Regulations 1996 and replacement
with SEBI (Alternative Investment Fund) Regulations 2012. In terms of
Section 10 (23FB) read with 115U, a pass through status is provide to VCF
and VCC as their income is taxable in the hands of their investors.

It is proposed to amend Section 10 (23FB) and continue the pass through
status in such a manner that:

6

(i) The VCF and VCC registered prior to repeal of SEBI (Venture
Capital fund) Regulations 1996 shall avail a pass through status;
(ii) The VCC and VCF established in terms of SEBI (Alternative
Investment Fund) Regulations 2012 shall avail pass through status
provided certain specified conditions are fulfilled.

Capital Gains on Immovable properties

It is proposed to inset a new Section 194 – IA to oblige every buyer to
deduct tax at source at the rate of 1% from the consideration payable to
the seller of an immovable property. Provided value of such property is
not less than 50 lakhs.

Tax on buy-back of unlisted shares

It is proposed to introduce an additional income tax on buy back of shares
at the rate of 20%. The tax is charged on distributed income. The
distributed income shall be the difference of the amount received by the
Company at the time of issue of such shares and the consideration paid
for buy back of shares.

The income arising to the shareholder in respect of such buy back by the
company would be exempt where the company is liable to pay the
additional income tax on the buy-back of shares.

The amendments shall take effect from June 1, 2013.

Computation of Immovable Property

The present domestic tax law provides that the value of immovable
property (in case such immovable property is a capital asset) to be
considered for determination of tax shall be the value that the relevant
state government determines for the purposes of imposing stamp duty at
the time of registration of the transfer of the said immovable property. It
proposed that a similar provision may be adopted in case the immovable
property is a stock in trade for the tax payer and income from transfer is
treated as income under the head ‘profit and gains of business and
profession’.

7

It is also proposed that the consideration of the immovable property to be
considered for the purposes of tax shall be the value determined between
the parties on the date execute an Agreement to Sell or the value
determined by the relevant state government on the date of Agreement to
Sell. The consideration of the immovable property on the date of
registration of transfer shall not be taken into consideration.

The amendment shall take effect from April 1, 2014.

Amendment & Extension of GAAR

It is proposed that the General Anti Avoidance Rule (GAAR) provisions
may be amended to give effect to the recommendation of the Expert
Committee appointed by the Government of India (GOI) to review these
provisions. It is proposed to consider the following:

(i) The provisions related to GAAR shall come into effect from the
tax year 2016 – 17;
(ii) An arrangement to obtain tax benefit would be an impermissible
avoidance agreement;
(iii) To determine whether an arrangement is an impermissible
arrangement factors such as period, or time for which such
arrangement has existed, payment of tax by assessee and the
fact that an exit route was provided by the arrangement, would
be relevant;
(iv) An arrangement shall deem to lack commercial substance if it
does not have an effect on a business risk or net cash flow of
any party to the arrangement.
(v) Direction of approval panel shall be binding upon the tax payer
and the Income Tax Authorities;
(vi) Definition of ‘associated parties’ and ‘connected parties’ as
stated in the provisions of GAAR shall be merged.

These amendments shall take effect from April 1, 2016.

Tax on income distributed by the Mutual Funds

It is proposed that the rate of taxation in respect of income distributed by
the Mutual Funds to its unit holders is different for individual, HUF and

8

any other person. It is proposed that this income shall be taxed at uniform
rate of 25% in all cases.

Interest paid to a non resident investor by an Infrastructure Debt Fund -
NBFC or Infrastructure Debt Fund – Mutual Fund is taxed at different
rates. It is proposed that in both cases, the interest income to a non-
resident shall be taxed at 5%.

The amendments shall take effect from June 1, 2013.

Amendment in the definition of Capital Asset

The agricultural land is not considered to be a capital asset of a tax payer.
It is proposed to revise the definition of agricultural land.

This amendment shall take effect from April 1, 2014.

Scope of Keyman insurance policy

The existing domestic tax exempts income received under a life insurance
policy provided that such life insurance policy is not a keyman insurance
policy. It is proposed that a keyman insurance policy shall remain a
keyman insurance policy even if the policy during its term is assigned to
employee for whom such policy was taken. In other words, a keyman
insurance policy shall be considered as a keyman insurance policy even in
case it is assigned to the employee and any income received from such
insurance policy shall be subject to tax.

The amendment shall come into effect from April 1, 2014.

Political Contributions

It is proposed to amend the provisions in such a manner that any cash
contribution to a political party or an electoral trust shall not be allowed as
deduction under the provisions of the domestic tax laws;

This amendment shall come into effect from April 1, 2014.

9

Clarification of the phrase “tax due” for the purposes of recovery
in certain cases

It is proposed that the term ‘tax due’ shall include penalty, interest and
other sum payable.

Therefore, directors of such private company those fail to pay tax on
demand shall be liable to pay tax unless the directors could establish that
the private company has not failed to pay tax due to his negligence,
breach of duty or malfeasance.

Incentives for blue collar wages

A tax incentive is extended to a manufacturing unit in case it employs blue
collared workers. It is proposed that this tax incentive shall not be
available in the event factory is hived off or transferred from another
existing entity or acquired as a result of amalgamation or merger.

The amendment shall take effect from April 1, 2014

Tax Residency Certificate

The domestic tax makes a provision for production of a tax residency
certificate which provides for the prerequisite information to avail benefits
of a double tax avoidance agreement. It is proposed to clarify that the
submission of a tax residency certificate is a necessary but not a sufficient
conditions for claiming benefits under the Double taxation avoidance
agreement.

10

Part II
INDIRECT TAX
This part discusses proposed changes to the prevailing Indirect Taxation
regime which consists of duties of customs, duties of excise and service
tax. Changes to Indirect Tax are applicable immediately unless stated
otherwise.

CUSTOMS

Amendment to the Customs Act

The following amendments are proposed to the Customs Act, 1962
(Customs Act)

(i) Section 11 of the Customs Act empowers the GOI to prohibit either
absolutely or conditionally the import and export of any goods for
the prescribed purpose. An amendment is proposed to add words
“designs and geographical indications” after words ‘the protection
of patents, trademarks and copyrights”.

(ii) Section 28BA of the Customs Act provides for provisional
attachment of property with prior approval of the Commissioner of
Customs to protect the interest of revenue. It is proposed that the
Custom Officers shall have power to provisionally attach the
property of the tax payer in case a notice has been served as the
duty of custom was levied, short or has not been levied because of
collusion or, any willful mis-statement; or suppression of facts;

(iii) Section 28E of the Customs Act provides that an Indian wholly
owned subsidiary of a foreign holding company may apply for
advance ruling in the case it proposed to undertake any business
activity in India. It is proposed that to expand the scope of this
section, the term ‘activity’ shall include any new business of import
or export proposed to be undertaken by the existing importer or
exporter;

(iv) Section 29 of the Customs Act restrains a person in charge of an
aircraft or vessel to call or land at a customs port or customs

11

airport. It is proposed that the Central Board of Central Excise and
Customs be empower to permit a vessel and aircraft to land at a
place other than customs port or customs airports.

(v) Section 47 of the Customs Act empower a customs officer to clear
goods for home consumption on payment of duty. In case duty is
not paid, then it could be paid within five days from the date on
which bill of entry are returned. Thereafter the duty shall be paid
with interest. It is proposed that the number of five days now be
reduced to two days.

(vi) It is proposed to amend Section 49 of the Customs Act to restrict
the period of storage of imported goods clearance of which is
pending. Such goods cannot be stored for more than thirty days at
a time in either public or private warehouse. The Commissioner of
Customs is empowered to extend the days but not more than 30
days at a time.

(vii) Section 69 of the Customs Act provides that any goods could be
exported, if warehoused, without payment of import duty provided
certain conditions are met.

(viii) In terms of the Customs Act, offences are classified as bailable
(where criminal court is empowered to grant bail mandatorily). It is
proposed that following offences under the Customs Act may be
construed as non-bailable (where criminal court has to exercise
discretion to grant bail):
(a) evasion or attempted evasion of duty exceeding INR
50,00,000; (ii) prohibited goods notified under Section 11;
(b) import and export of goods which are not declared and their
market price exceed USD 200,000; (iv) fraudulently availing
any exemption from duty that exceeds USD 100,000;

Further it is clarified that all other offences than the offences stated
above are bailable.

12

Amendment to the Baggage Rules

The following amendments are proposed to the Baggage Rules:

(i) To raise the duty free allowance in respect to jewellery for an
Indian passenger who was residing abroad for over a period of one
year or a person who is transferring his residence to India from INR
10,000 to 50,000 in case of man and in case of woman from INR
20,000 to INR 1,00,000.

(ii) The duty free allowance for a crew member is increased from INR
600 to INR 1,500.

Rate of Custom Duties

The following revisions to the duties of customs are proposed:

Sr. Goods Prevailing Proposed
No.
1 Dehulled oat grain 30% 15%

2 Hazel nuts 30% 10%.

3 De-Oiled rice bran 10% Nil
oil cake

4 New passenger
cars and other
motor vehicles
(high end cars)
with cif value
more than us$
40,000 and/or
engine capacity
exceeding 3000cc
for petrol run
vehicles and

13

exceeding 2500 cc
for diesel run
vehicles 75% 100%.

5 Motor cycle with 60% 75%
engine capacity of
800cc or more

6 Limonite Nil 10%
unprocessed

7 Limonite, Nil 5%
upgraded

8 Bauxite Nil 10%

9 Stainless steel 10% 5%
wire cloth stripe
for use in the
manufacture of
catalytic
convertors and
their parts

10 Stainless steel 7.5% 5%
wire wash coat for
use in the
manufacture of
catalytic
convertors and
their parts

11 Pre-Forms of 10% 2%
precious and semi-
precious stones.

12 Steam coal (basic) 0 2%

13 Steam coal (cvd) 1% 2%

14

14 Bituminous coal 5% 2%
(basic)

15 Bituminous coal 6% 2%
(cvd)

16 20 specified 7.5% 5%
machinery for use
in leather and
footwear industry.

17 Yachts and motor 10% 25%
boats

18 Electric and hybrid
vehicles

basic Nil Nil

cvd 6 6

sad Nil Nil

19 Raw silk (not 5% 15%
thrown)

20 Textile machinery 7.5% 5%
& parts

21 Set top boxes for 5% 10%
tv

15

Other Proposals

(i) It is proposed to extend the time of consumption of imported
goods by the ship repair units from a period of 3 months to 1 year.
Similarly extensions of time are provided to aircrafts as well.

(ii) The exemption granted in respect of education cess and secondary
& higher education cess on aircraft and aircraft parts, soybean oil,
olive oil etc. is withdrawn

16

EXCISE

Amendment to the Excise Act

The following amendments are proposed to the Central Excise Act, 1944
(Excise Act)

(i) At present Section 9 of the Excise Act provides that an evasion of
duty beyond thirty lakhs attracts imprisonment of seven years with
fine. It is proposed to relax this provision by enhancing the limits of
duty evasion from USD 50,000 to USD 100,000.

(ii) It is proposed that the Section 9A of the Excise Act be amended to
carve out certain offences such as evasion of excise duty, dealing
with goods which under the act are liable for confiscation and
categorized them as cognizable and non-bailable (grant of bail in
such matter is a discretion of appropriate court where such matters
are tried).

(iii) It is proposed to amend Section 11 of the Excise Act in such
manner that the recovery of duty could be initiated from the
agent of the tax payer;

(iv) It is proposed to amend Section 11 A of the Excise Act to
equate service of statement containing details of duty not paid,
short levied or erroneously refunded is a deemed service of
notice as prescribed under the Excise Act.

Rate of Custom Duties

The following revisions to the duties of customs are proposed:

Sr. Goods Prevailing Proposed
No.
1. Tapioca sago 15% Nil
(sabudana) and
tapioca starch

17

2. Henna powder or
paste
15% Nil
3. Sports utility
vehicles
27% 30%
4. Truck chassis 14% 13%

5. Silver Nil 4%
manufactured
from zinc/lead
smelting
6. Stainless steel
"Patta Patti" per
machine per
month Rs 30,000 Rs 40,000

7. Ships and other Exempt
vessels

8. On hand made
carpets and
carpets Exempt

9. Textile floor
coverings of coir
Or jute, whether Exempt
or not handmade

10. Mobile phones of 1% 6%
retail sale price
exceeding Rs 2000

18

Other Proposals

The following is proposed in addition to the above:

(i) It is proposed to clarify that the trimmed or untrimmed sheets or
circles of copper intended for use in manufacture of handicrafts or
utensils shall include copper and copper alloys;

(ii) It is proposed that the ‘Zero Excise Duty Route’ in relation to
brnaded readymade garments and made ups is restored.

(iii) It is proposed that branded ayurvedic medicaments and
medicaments of Unani, Siddha, Homeopathic or bio-chemic system
are being brought under MRP based assessment with abatement of
35% on MRP.

SERVICE TAX

Amendment to the Service Tax

The following amendments are proposed to the Finance Act, 1994
(Service Tax Act)

(i) The scope of Section 65 B (11) of the Service Tax Act is enhanced
by including State Council of Vocational Training.

(ii) It is proposed that the term designated trades shall include courses
offered by Industrial Training Institute or Industrial Training Centre
affiliated to State Council of Vocational Training. The services
rendered by these Industrial Training Institute and Industrial
Training Centre shall be part of negative list.

(iii) Section 65B (40) of the Service Tax Act shall be amended to
include processes carried out in terms of Medicinal and Toilet
Preparations (Excise Duties) Act, 1955.

19

(iv) It is proposed that the testing activities directly related to
production of any agricultural produces like soil testing, animal feed
testing, testing of samples from plants or animals, for pests and
disease causing microbes will be covered by the negative list.

(v) It is proposed to introduce a new section that shall impose penalty
on director, manager, secretary or other office of the company,
who is in any manner knowingly concerned with specified
contraventions.

(vi) It is proposed to increase the amount of tax payment of which
should be evaded to be liable for punishment for a period of three
years. Further failure to pay service tax collected to the credit of
central government within 6 months shall attract a jail terms of
seven years.

(vii) It is proposed to classify offences under the act as non-cognizable
and bailable offences

(viii) It is proposed to grant a retrospective exemption to Indian
Railways on the service tax leviable on various taxable services
provided by them prior to July 1, 2012.

(xi) It is proposed that where the carper area of residential unit is upto
2000 sq. ft or the amount charged is less than USD 200,000 in case
of construction of complex, intended for sale to a buyer taxable
portion for service tax shall be 25%. in all other cases taxable
portion for service tax will be 30%.

This change will come into effect from the 1st day of March, 2013.

(x) The exemptions limits provided by to the charitable organization to
be eligible for payment of service tax was USD 50,000. From this
year this exemption is withdrawn. The charitable organizations shall
also be covered by threshold exemption.

20

(xi) The service tax shall be levied on taxable service provided in
restaurants with air-conditioning or central air heating in any part
of the establishment at any time during the year.

(x) It is proposed to withdraw the following exemptions:

(a) Services provided by an educational institution by way of
renting of immovable property;
(b) Temporary transfer or permitting the use of enjoyment of a
copyright relating to cinematographic films was fully exempt
so far, now this exemption will be restricted to exhibition of
cinematograph films in a cinema hall or cinema theatre.
(c) Services by way of vehicle parking to general public;
(d) Services provided to government, local authority, or a
governmental authority, by way of repair or maintenance of
aircraft.

21

Aditya Tiwari, Of Counsel, N South

B.Com., Delhi University, LLB, Delhi University; Admitted to Bar in 1999. He is a corporate commercial lawyer with
special interest in M&A, partnered and unpartnered cross border investments, corporate commercial contracting and real
estate.

Commencing his career as a specialist litigation lawyer, he has transited over the years into performing a strategic
corporate role whereby he renders generic client centric guidance, guides the client’s investment initiatives domestically
and across borders, establishes the contractual regime for its businesses, manages its compliance regime, maintains a
constant vigil over its wider commercial environment especially when strategic and pre-emptive measure are indicated
and generally represents a one stop outsourced legal support to a business.

In the infrastructure space, he maintains a quality real estate practice.

He can be contacted at aditya.tiwari@nsouthlaw.com.

Advocates
th
C-62 B, 6 Floor, Super Mart-I, DLF City-IV,
Gurgaon, Haryana-122 009 (India)
Telefax: +91-124-4042521, 4042522
E-mail: mail@nsouthlaw.com
Website: www.nsouthlaw.com

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2013 budget summary

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2013 budget summary