SUPPLEMENTARY
MEMORANDUM EXPLAINING THE OFFICIAL AMENDMENTS MOVED IN THE FINANCE BILL, 2012
AS REFLECTED IN THE FINANCE ACT, 2012
CIRCULAR
NO. 3/2012, DATED 12-6-2012
FINANCE ACT, 2012 - PROVISIONS
RELATING TO DIRECT TAXES
The Finance Bill, 2012 was introduced in
Parliament on 16-3-2012. Certain official amendments have been carried out
during the passage of the Bill in Parliament. A gist of the official amendments
to the Finance Bill, 2012 as reflected in the Finance Act, 2012 (Act No. 23 of 2012) enacted on 28-5-2012, are as under.
The clauses of the Finance Bill, 2012 have been renumbered during the passage
of the Finance Act, 2012 in Parliament. The clauses referred to in this
document, unless otherwise stated, are those as they appear in the Finance Act,
2012.
Exemption to Prasar
Bharati (Broadcasting Corporation of India)
A specific exemption from income tax to the
Prasar Bharati (Broadcasting Corporation of India) has been provided by
inserting a new clause (23BBH) in section 10 of
the Act.
This amendment will take effect
from 1st April, 2013 and will, accordingly, apply in relation to the assessment
year 2013-14 and subsequent assessment years.
[Clause 5]
General
Anti-Avoidance Rule (GAAR)
In the Finance Bill, 2012, as introduced in
the Lok Sabha, General Anti-Avoidance Rules (GAAR) were proposed in the
Income-tax Act (Act) by way of insertion of a new Chapter X-A. Further, a
procedural section (144BA of the Act) was also proposed, providing, inter alia, for a GAAR Approving Panel
comprising of officers of the rank of Commissioner of Income-tax and above.
GAAR provisions were first
proposed in the Direct Taxes Code Bill, 2010 (DTC) introduced in the Parliament
in August 2010. The Report of the Parliamentary Standing Committee on Finance
on the DTC Bill was received on 9-3-2012 after the finalization of the proposals
of the Finance Bill, 2012. After examining the recommendations of the Standing
Committee regarding GAAR provisions as proposed in the DTC Bill, the following
amendments to the GAAR provisions proposed in the Finance Bill, 2012 have been
carried out in the Finance Act, 2012:-
(i) The
onus on the taxpayer as regards the presumption that obtaining the tax benefit
was not the main purpose of the arrangement has been omitted. Thus, the onus of
proof will be on the Revenue for any action to be initiated under GAAR,
[Section 96(2) of the Act, as introduced in the Finance Bill, 2012 has
therefore been deleted].
(ii) To
introduce an independent member in the GAAR approving panel, one member of the
approving panel would be an officer of the level of Joint Secretary or above
from the Ministry of Law.
(iii) Any
taxpayer (resident or non-resident) can approach the Authority for Advance
Ruling (AAR) for a ruling as to whether an arrangement to be undertaken by him
is an impermissible avoidance arrangement under the GAAR provisions. The reference
can be filed on any date on or after 1-4-2013 to seek an advance ruling
regarding an arrangement to be undertaken.
(iv) In
order to provide more time to both taxpayers and the tax administration to
address the issues arising from GAAR provisions so that there is clarity and
certainty in the matter, it is proposed to defer the applicability of the GAAR
provisions, proposed in Chapter X-A and section 144BA of the Act, by one year
so that they would now apply to income chargeable to tax in respect of assessment
year 2014-15 and subsequent years.
[Clauses 41, 62, 94
and 95]
Venture Capital
Companies (VCC) and Venture Capital Fund (VCF)
Under the provisions of the Act,
payment made by a VCC or a VCF to its investors out of income received from a
Venture Capital Undertaking (VCU) is exempt from the tax deduction at source
(TDS). Also no Dividend Distribution Tax (DDT) or tax on distributed income is
levied on payment by the VCC/VCF to the investor. While rationalizing the
provisions relating to VCCs and VCFs, such as doing away with sectoral
investment restrictions under the Act, it was proposed in the Finance Bill,
2012 (clause 54) to withdraw these exemptions. Considering the representations
received and in order to minimize compliance burden, the Finance Act, 2012
continues with the exemption from TDS, DDT and tax on distributed income on the
payments made by the VCC or VCF to its investors in respect of the income
arising from the investments made by such VCC or VCF in a Venture Capital
Undertaking. Consequently, the proposed amendment in Finance Bill, 2012 insofar
as it relates to the withdrawal of exemption from TDS, DDT and tax on
distributed income is concerned, is withdrawn and the earlier position as
provided in the Act continues.
[Clause 57]
Lower withholding at
the rate of 5% for external borrowings under ECB or by way of issue of long
term infra-bonds
It had been proposed in the
Finance Bill, 2012 (by way of insertion of a new section 194LC in the Act) to
provide for lower rate of withholding tax at the rate of 5% (instead of 20%) on
payment by way of interest paid by an Indian company to a non-resident
(including a foreign company) in respect of borrowing made in foreign currency
from sources outside India between 1st July, 2012 and 1st July, 2015, under a
loan agreement approved by Central Government, if the Indian company was
engaged in one of the eight specified businesses. In order to attract low cost
borrowings from abroad, this incentive has been extended in the Finance Act,
2012 to all businesses instead of restricting it to the eight specified
sectors. Further, this lower rate of withholding tax is proposed to be also
available for funds raised in foreign currency outside India by the Indian
company through long term infrastructure bonds as approved by the Central
Government besides borrowing under a loan agreement.
These amendments will take effect
from 1st July, 2012.
[Clause 76]
Concessional rate of
taxation on long term capital gain in case of non-resident investors
Currently, under the Income-tax
Act, a long term capital gain arising from sale of unlisted securities in the
case of Foreign Institutional Investors (FIIs) is taxed at the rate of 10%
without giving benefit of indexation or of currency fluctuation. In the case of
other non-resident investors, including Private Equity investors, such capital
gains are taxable at the rate of 20% with the benefit of currency fluctuation
but without indexation. In order to give parity to such non-resident investors,
the Finance Act reduces the rate of tax on long term capital gains arising from
transfer of unlisted securities from 20% to 10% on the gains computed without
giving benefit of currency fluctuations and indexation by amending section 112
of the Income-tax Act.
This amendment will take effect
from 1st April, 2013 and will, accordingly, apply in relation to the assessment
year 2013-14 and subsequent assessment years.
Consequential amendments to
provide for tax deduction at source have also been made in the First Schedule
and will be effective from 1st April, 2012.
[Clause 43 &
First Schedule]
Share premium in
excess of fair market value to be treated as income
In the Finance Bill, 2012, it had been
proposed [section 56(2), as sub-clause [(viib)]
that in case of a company, not being a company in which the public are
substantially interested, which receives, in any previous year, from any person
being a resident, any consideration for issue of shares and the consideration
received for issue of such shares exceeds the face value of such shares, then
the aggregate consideration received for such shares as exceeds the fair market
value of the shares shall be chargeable to income tax. An exemption was
provided in a case where the consideration for issue of shares is received by a
venture capital undertaking from a venture capital company or a venture capital
fund.
(i) It has
now been further provided that such excess share premium is included in the
definition of "income" under sub-clause (xvi)
of clause (24) of section 2.
(ii)
Considering that the proposed amendment may cause avoidable difficulty to
investors who invest in start-ups where the fair market value may not be
determined accurately, it is proposed to provide an exemption to any other
class of investors as may be notified by the Central Government.
These amendments will take effect
from 1st April, 2013 and will, accordingly, apply in relation to the assessment
year 2013-14 and subsequent assessment years.
[Clauses 21, 3]
New deduction in
respect of investment in equity shares
It was announced in the Budget
Speech for 2012-13 that a new scheme is proposed to encourage flow of savings
in financial instruments and improve the depth of domestic capital market.
Accordingly, a new clause has been introduced in the Finance Act, 2012 to
insert a new section 80CCG in the Income-tax Act. The provision provides for a
one-time deduction of 50 per cent of the amount invested in listed equities by
a new retail investor, being a resident individual whose annual income is below
Rs. 10 lakh. The aggregate deduction shall be subject to a limit of Rs. 25,000
(corresponding to an investment limit of Rs. 50,000) and the investment shall
have a lock-in period of 3 years. The modalities of this provision shall be in
accordance with a scheme to be notified by the Central Government in this
behalf.
This amendment will take effect
from 1st April, 2013 and will, accordingly, apply in relation to the assessment
year 2013-14 and subsequent assessment years.
[Clause 25]
Recognition to
provident funds - Extension of time limit for obtaining exemption from EPFO
Rule 4 (in Part A) of the Fourth Schedule to
the Income-tax Act provides for the conditions to be satisfied by a Provident
Fund for receiving or retaining recognition under the Income-tax Act. One of
the requirements of rule 4 [clause (ea)] is that
the establishment shall obtain exemption under section 17 of the Employees'
Provident Funds and Miscellaneous Provisions Act, 1952 (EPF & MP Act).
The first proviso to sub-rule (1) of rule 3
(in Part A) of the Fourth Schedule, inter alia, specifies
that in a case where recognition has been accorded to any provident fund on or
before 31st March, 2006, and such provident fund does not satisfy the
conditions set out in rule 4 [clause (ea)], the
recognition to such fund shall be withdrawn if such fund does not satisfy such
conditions on or before 31st March, 2012.
In order to provide further time
to Employees' Provident Fund Organization (EPFO) to process the applications
made by establishments seeking exemption under the EPF & MP Act, the proviso
has been amended to extend the time limit from 31st March, 2012 to 31st March,
2013.
This amendment will take effect
retrospectively from 1st April, 2012.
[Clause 114]
Tax Collection at
Source (TCS) on cash sale of bullion and jewellery
The Finance Bill, 2012, proposed
to provide that the seller of bullion or jewellery shall collect tax at source
(TCS) at the rate of 1 per cent of sale consideration from every buyer of
bullion and jewellery in cash if the sale consideration exceeds Rs. 2 lakh. In
order to reduce the compliance burden, the threshold limit for TCS on cash
purchase of jewellery has been increased to Rs. 5 lakh from the proposed Rs. 2
lakh. The threshold limit for TCS on cash purchase of bullion is retained at
Rs. 2 lakh. Further, it has also been provided that bullion shall not include
any coin or any other article weighing 10 grams or less.
This amendment will take effect
from 1st July, 2012.
[Clause 81]
TCS on sale of
certain minerals
The Finance Bill, 2012, proposed
to provide that tax at the rate of 1% shall be collected by the seller from the
buyer of the following minerals:
(a) coal;
(b)
lignite; and
(c) iron
ore.
Under the existing provisions of
the sub-section (1A) of section 206C the seller of these minerals is not
required to collect tax if the buyer declares that these minerals are to be
utilized for the purposes of manufacturing, processing or producing articles or
things. As some of these minerals can also be used for generation of power and
the existing provisions do not allow the buyer to file a declaration to this
effect, the section has been amended to also provide that the seller of these
minerals shall not collect tax if the buyer declares that these minerals are to
be utilized for the purposes of generation of power.
This amendment will take effect
from 1st July, 2012.
[Clause 81]
Minimum Alternate Tax
(MAT)
I. Under section 115JB, every company is
required to prepare its accounts as per Schedule VI of the Companies Act, 1956.
However, as per the provisions of the Companies Act, 1956, certain companies, e.g.
insurance, banking or electricity companies, are allowed to prepare their
profit and loss account in accordance with the provisions specified in their
Regulatory Acts. In order to align the provisions of the Income-tax Act with
the Companies Act, 1956, the Finance Bill, 2012 proposed to amend section 115JB
to provide that in the case of companies which are not required under section
211 of the Companies Act, 1956 to prepare their profit and loss account in
accordance with Schedule VI of the Companies Act, 1956, the profit and loss
account prepared in accordance with the provisions of their respective
Regulatory Acts shall be taken as a basis for computing the book profit for the
purpose of section 115JB. This amendment was proposed to be made effective from
assessment year beginning on or after 1st April, 2013.
However, as the provisions of section 115JB
are applicable to an insurance company or a banking company or an electricity
company for prior assessment years also, it has been clarified in the Finance
Act by way of an Explanation that
for the assessment year beginning on or before 1st April 2012, an insurance
company or a banking company or an electricity company has an option, for the
purpose of MAT, to prepare its profit and loss account either in accordance
with the provisions of Schedule VI to the Companies Act, 1956 or in accordance
with the provisions of its governing Act.
II. Further, under section 115B
of the Act, profits and gains of an insurance company from life insurance
business are already subject to tax at a specific rate based on actuarial valuation.
It has therefore been provided that the provisions of section 115JB of the Act
shall not apply to any income accruing or arising to a company from life
insurance business referred to in section 115B. This amendment will take effect
retrospectively from 1st April, 2001 and will, accordingly, apply in relation
to the assessment year 2001-02 and subsequent assessment years.
[Clause 48]
Rationalisation of
TDS Provisions
I. Under the existing provisions
of Chapter XVII-B of the Act, tax is required to be deducted (TDS) from certain
payments. There are situations where collection of tax by way of TDS may cause
genuine hardship to the deductee. In order to reduce the hardship and
compliance burden in these cases, it has been provided that no deduction of tax
shall be made from such specified payment to such institution, association or
body or class of institutions, associations or bodies as may be notified by the
Central Government in the Official Gazette.
This amendment will take effect
from 1st July, 2012.
[Clause 78]
II. The Finance Bill, 2012
proposed to provide that the intimation generated after processing of TDS
statement under sub-section (1) of section 200A shall be deemed as a notice of
demand under section 156 of the Act. Consequently, failure to pay the tax
specified in the intimation shall attract levy of interest under section 220 of
the Act. However, sub-section (1A) of section 201 already contains provisions
for levy of interest for non-payment of tax specified in the intimation issued
under sub-section (1) of section 200A. It has therefore been further provided
that where interest is charged for any period under sub-section (1A) of section
201 on the tax amount specified in the intimation issued under sub-section (1)
of section 200A, then, no interest shall be charged under sub-section (2) of
section 220 on the same amount for the same period.
This amendment will take effect
from 1st July, 2012.
[Clause 84]
Withdrawal of TDS on
transfer of certain immovable properties
The Finance Bill, 2012 (clause 73
of the Finance Bill) proposed to provide for deduction of tax at the rate of 1%
of the amount paid or payable for transfer of certain immovable properties. The
proposed provision of tax deduction on transfer of immovable properties was for
collecting tax at first point and also tracking transactions in real estate
sector. However, considering the additional compliance burden on the
transferee, the proposed provision of tax deduction on transfer of immovable
properties has been withdrawn in the Finance Act, 2012 by dropping this clause
from the Finance Bill, 2012.
Compulsory filing of
income tax returns by residents in relation to assets located outside India
Under section 139 of the
Income-tax Act, every resident is required to file a return of income if his
income exceeds the maximum amount which is not chargeable to tax. The Finance
Bill, 2012 had proposed to make it mandatory for every resident, to file a
return of income, if he has assets (including any financial interest in any
entity) located outside India or signing authority in any account located
outside India, irrespective of the fact whether his income exceeds the
exemption limit or not. The intention is to have information available
regarding global assets of a resident since the income from such assets is
taxable in India.
As a category of residents are
called "not ordinarily resident" and the income of a "not
ordinarily resident" individual from assets located outside India is not
taxable in India, it has been clarified that the provision for compulsory
filing of income tax return in relation to assets located outside India would
not apply to a person, who is "not ordinarily resident".
This amendment will take effect
retrospectively from 1st April, 2012 and will, accordingly apply in relation to
assessment year 2012-13 and subsequent assessment years.
[Clause 59]
Securities
Transaction Tax (STT) on unlisted equity sold as part of an initial public
offer and exemption from long-term capital gains
Securities Transaction Tax (STT)
is levied, among others, on sale or purchase of an equity share which is
entered through a recognized stock exchange. STT therefore applies to listed
securities. Income arising from long term capital gain on sale of an equity
share in a listed company which is chargeable to STT is exempt from tax under
section 10(38) of the Income-tax Act.
Through an amendment in the
Finance Act, 2012, the benefit of tax exemption of long term capital gains has
been extended to an investor who off-loads his shareholding as part of an
initial public offer before listing of the company subject to payment of STT at
the rate of 0.2 per cent on the transaction. For this purpose, the Finance Bill
has been amended so as to provide for levy of STT on the sale of unlisted equity
shares under an offer for sale as part of an initial public offer and shares of
the company are subsequently listed on the stock exchange.
This amendment will take effect
from 1st July, 2012 and will accordingly apply to any transaction made on or after
that date.
[Clause 153]
Further
clarifications to the Finance Bill, 2012
The following clarifications are
with regard to the Memorandum Explaining the Provisions in the Finance Bill,
2012:-
I. A clarificatory amendment was
proposed in the Finance Bill, 2012 [clause 63] by inserting the following
explanation after sub-section (8) of section 144C, which shall be deemed to
have been inserted w.e.f. 1st April, 2009, namely:-
"Explanation-
For the removal of doubts, it is hereby declared that the power of the Dispute
Resolution Panel to enhance the variation shall include and shall be deemed
always to have included the power to consider any matter arising out of the
assessment proceedings relating to the draft order, notwithstanding that such
matter was raised or not by the eligible assessee."
The date of effectivity of the provision
mentioned in clause 63 of the Finance Bill, 2012 and the Notes on Clauses
[clause 60] thereof is 1st April, 2009, i.e., the provision would apply to all cases filed
before the DRP on or after 1st April, 2009, irrespective of the assessment
year. In the Explanatory Memorandum issued with the Finance Bill ["G.
Rationalization of Transfer Pricing Provisions (sub-heading "Power
of the DRP to enhance variations")], the
effectivity has been incorrectly mentioned as applying to assessment year
2009-10 and subsequent years. This being a procedural provision, the correct
position is as stated in the Notes on Clauses, i.e., it
would apply to any proceeding before the DRP as on 1st April, 2009 and may be
read accordingly.
[Clause 63]
II. An amendment was proposed in the Finance
Bill, 2012 [clause 77]. It has been explained in the Memorandum Explaining the
Provisions in the Finance Bill, 2012 ["E. Rationalization of Tax Deduction at Source
(TDS) and Tax Collection at Source (TCS) Provisions" (sub-heading"I.
Deemed date of payment of tax by the resident payee")]. The word 'payer' has been used
instead of the word 'payee' in two instances therein. The relevant extracts may
be correctly read as follows:-
(a) Para
3:-
"The
payer is liable to pay interest under section 201(1A) on the amount of
non/short deduction of tax from the date on which such tax was deductible to
the date on which the payee has discharged his tax liability directly. As there
is no one-to-one correlation between the tax to be deducted by the payer and
the tax paid by the payee, there is lack of clarity as to when it can be said
that payee has paid the taxes directly. Also, there is no clarity on the issue
of the cut-off date, i.e. the date on which it can be said that the payee
has discharged his tax liability."
(b) Para
5:-
"The date of payment of
taxes by the resident payee shall be deemed to be the date on which return has
been furnished by the payee."
[Clause 79]
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