1. Budget PLUS 2013
EY Tax Alert - Financial Services
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Budget PLUS 2013
2. Introduction Capital markets
This alert summarizes certain significant tax Various proposals relating to capital markets
proposals contained in the Finance Bill, 2013 have been finalized in consultation with the
(Bill) and policy announcements, made by the Securities and Exchange Board of India (SEBI)
Finance Minister, Mr P Chidambaram during as follows:
the Budget 2013-14 speech relevant to the
financial services sector. The policy ► Depository participants will be eligible to
pronouncements made by the Finance Minister register different classes of portfolio
are expected to be implemented by the investors, subject to compliance with
Government through legislative Know Your Customer (KYC) guidelines.
announcements in the ensuing months. The
Bill will be discussed in the Parliament before it ► SEBI to simplify procedures and prescribe
is enacted and is subject to any amendments uniform registration and other norms for
that may be made pursuant to these entry of foreign portfolio investors.
discussions.
► SEBI to converge different KYC norms and
The direct tax proposals discussed in this adopt a risk-based approach to KYC to
memorandum are effective from the tax year make it easier for foreign investors such
commencing on 1 April 2013, unless otherwise as central banks, sovereign wealth funds,
specified. university funds, pension funds etc to
invest in India.
Key Policy Initiatives ► Foreign Direct Investment (FDI) and
investment under the Foreign Institutional
Some of the key initiatives announced by the
Investor (FII) route to be distinguished
Finance Minister as a part of his budget speech
based on the following criteria:
are summarized below:
► Investment of 10% or less in a company to
Financial sector
be regarded as investment by a FII;
► Investment of more than 10% to be treated
Initiatives proposed to streamline the financial
as FDI.
sector laws, rules and regulations as follows:
A committee will be constituted to
► It has been proposed to constitute a
examine the application of the above
Standing Council of Experts to analyse the
principle and to work out details
international competitiveness of the
expeditiously.
Indian financial sector.
► FIIs will be permitted to participate in the
► Recommendations provided in the report
exchange traded currency derivative
presented by the Financial Sector
segment to the extent of their Indian
Legislative Reforms Commission will be
rupee exposure in India.
examined to ensure that the financial
sector is well-regulated, efficient and
► FIIs will be permitted to use their
internationally competitive.
investment in corporate bonds and
Government securities as collateral to
meet their margin requirements.
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3. ► SEBI to prescribe requirements for angel ► The Insurance Laws (Amendment) Bill,
investor pools by which they can be 2008;
recognised as Category I Alternative ► The Pension Fund Regulatory and
Investment Fund Venture Capital Funds. Development Authority Bill, 2011.
► Stock exchanges will be allowed to ► To increase penetration of insurance, life
introduce a dedicated debt segment on and general, the following key proposals
the exchanges. Insurance companies, have been finalised in consultation with
provident funds and pension funds will be the Insurance Regulatory and
permitted to trade directly in the debt Development Authority (IRDA):
segment with the approval of the sectoral
regulator. ► Insurance companies empowered to open
branches in Tier II cities and below without
► Mutual fund distributors will be allowed to prior approval of IRDA;
become members in the mutual fund ► All towns of India with a population of
segment of stock exchanges to leverage 10,000 or more to have an office of Life
on the stock exchange network to improve Insurance Corporation of India and an
their reach and distribution. office of at least one public sector general
insurance company;
► The list of eligible securities in which ► Banking correspondents to be allowed to
Pension Funds and Provident Funds may sell micro-insurance products;
invest will be enlarged to include exchange ► Banks to be permitted to act as insurance
traded funds, debt mutual funds and asset brokers.
backed securities.
Tax reforms
Banking
► The Direct Taxes Code (DTC) to be a new
► Public sector banks will be further code and not an amended version of the
capitalised by an amount of approximately Income-tax Act, 1961 (Act) but be based
` 265 billion to be infused by 31 March on best international practices. The DTC
2014. Steps will also be taken to ensure Bill is proposed to be brought back before
that they meet the Basel III Regulations. the Parliament in the current
Parliamentary session.
► Measures will be adopted to bring all
banks on the core banking solution and on ► Rules for safe harbours to be issued after
electronic payment systems (NEFT and examining the last report of the
RTGS) by 31 December 2013. Rangachary Committee, expected in
March 2013.
► It has been proposed to set up India’s first
Women’s Bank with an initial capital of ` ► Tax Administration Reform Commission
10 billion as a public sector bank by proposed to be set up to review the
October 2013. The bank will lend mostly application of tax policies and tax laws.
to women and women-run businesses and
predominantly employ women employees. Other key initiatives
Insurance ► To ensure that ‘Doing business in India’ is
viewed as being easy, friendly and
► Endeavour to pass the following bills in mutually beneficial, communication of
the current session of the Parliament: policies to be improved to remove any
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4. apprehension or distrust in the minds of ► In case of corporate taxpayers, the
investors, including fears about undue current surcharge rate of 2% (for foreign
regulatory burden or application of tax companies) and 5% (for domestic
laws. companies) remains unchanged where
income exceeds ` 10 million but does not
► Various steps taken/ proposed to be taken exceed ` 100 million. Where the income
to increase investment in the exceeds ` 100 million, the surcharge rates
infrastructure sector. are proposed to be increased to 5% (for
foreign companies) and 10% (for domestic
DIRECT TAXES companies).
Surcharge rate on DDT, distribution tax on
Tax rates ►
income payable by mutual funds,
Basic tax rates distribution tax on buy-back of shares
(proposed by the Bill), distribution tax on
The basic rates for corporate tax, minimum income distributed by securitisation trusts
alternative tax and dividend distribution tax (proposed by the Bill) to be levied at a
(DDT) remain unchanged for both domestic uniform rate of 10% (on the rate),
and foreign companies. irrespective of the category of the
investor.
Special rates
Education cess
The Bill proposes to substitute the tax rate on
Education cess to continue to be levied at the
the income in the nature of Royalty and Fees
rate of 3% on the amount of tax computed,
for Technical Services arising in the hands of a inclusive of surcharge, in all cases.
non-resident from the applicable rates [10%
applies to agreements entered after 1 June Mutual funds
2005; a higher rate for earlier agreements]
with 25%. Where the non-resident is eligible to The Bill proposes to increase the tax rate on
income distributed by mutual funds to an
claim benefits under the double taxation
individual or a Hindu Undivided Family (HUF)
avoidance agreement (DTAA) between India from 12.5% or 25% (depending upon the
and country of which the recipient is a nature of fund) to a uniform rate of 25% for all
resident, the lower rate, if any, under the DTAA funds other than equity oriented mutual funds.
would apply.
Particulars Money Other Funds
Surcharge Market (not being
Mutual equity
► No surcharge is leviable where the income Funds/ Liquid oriented
does not exceed ` 10 million irrespective Funds fund)
of the category and residential status of Current rates
the taxpayer.
Individuals /HUFs 27.038% 13.519%
► In case of non-corporate taxpayers
Others 32.445% 32.445%
(whether resident or not), a surcharge of
10% is proposed where the income 1 April 2013 – 31 May 2013
exceeds ` 10 million. (Currently, no
surcharge is payable by non-corporate Individuals /HUFs 28.325% 14.163%
taxpayers.)
Others 33.99% 33.99%
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5. From 1 June 2013 derivate (other than agricultural commodities),
entered on a recognized association.
Individuals /HUFs 28.325% 28.325%
Others 33.99% 33.99% Securitisation Trusts
The Bill proposes to introduce special
The Bill proposes a tax rate on income provisions relating to taxation of income of
distributed by a mutual fund under an securitisation entities, set up as trusts and
Infrastructure Debt Fund scheme to a non- distribution of income by them to the
resident investor of 5.665%. This rate will be investors. Securitisation trusts have been
effective from 1 June 2013. defined to mean a trust being a:
Securities Transaction Tax (STT) ► ‘Specified purpose distinct entity’
regulated under the SEBI (Public Offer and
The Bill proposes to reduce STT1 in taxable listing of Securitized Debt Instruments)
securities transactions. The revised rates are Regulations, 2008; and
as follows:
► ‘Special Purpose Vehicle’ regulated by the
Nature of Payable Existing Proposed guidelines on securitsation of standard
taxable by rate Rate assets issued by the Reserve Bank of
securities India.
transaction
Delivery based Purchaser 0.1% Nil Taxability of securitisation trusts and investors
purchase of units therein
of an equity
oriented fund ► The Bill proposes that the income of a
entered on a securitisation trust from the activity of
recognised stock securitisation shall be exempt from tax.
exchange Further, it is also proposed that the
Delivery based Seller 0.1% 0.001% income received by the investors from the
sale of units of an securitisation trust shall be exempt from
equity oriented tax provided that taxes have been paid by
fund entered on a the securitisation trust on such distributed
recognised stock income.
exchange
Sale of a futures Seller 0.017% 0.01% Taxability in respect of income distributed by
in securities securitisation trusts
Sale of a unit of Seller 0.25% 0.001%
an equity ► The Bill proposes to levy an additional tax
oriented fund to on the income distributed by
the mutual fund securitisation trusts at the rate of 25% for
distribution made to individuals and HUFs
Commodity Transaction Tax (CTT) and at the rate of 30% in other cases. The
above rates will be increased by surcharge
The Bill proposes to introduce a new tax called of 10% and education cess of 3%.
CTT. CTT at the rate of 0.01% is proposed to However, no additional income-tax would
be levied on the seller on sale of commodity be payable where the income of the
investor is not chargeable to tax.
1
This amendment will take effect from 1 June 2013
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6. ► The aforesaid amendment is proposed to ► Further, a deduction of ` 100,000 is
be applicable in respect of income available for premium paid on life
distributed by securitisation trusts on or insurance policies (other than a deferred
after 1 June 2013. annuity scheme) issued on or after
1 April 2012 to the extent of 10% of the
actual capital sum assured (subject to the
Taxation of Alternative above cap).
Investment Funds (AIF)
► The Bill proposes to increase the limit
► SEBI had issued SEBI (AIF) Regulations, from the existing 10% to 15% in respect of
2012 on 21 May 2012 which replaced the insurance policies issued on or after
existing SEBI (Venture Capital Funds) 1 April 2013 for the insurance on the life
Regulations, 1996. of any person with disability or severe
disability (as prescribed) or suffering from
► The Bill proposes to grant a ‘pass through’ specified diseases or ailments.
status to a Category I AIF, provided the
following conditions are satisfied:
Clarification on keyman
► Atleast 2/3rd of the investible funds are insurance policy
invested in unlisted equity shares or equity
linked instruments of venture capital ► Currently, unlike any sum received under
undertakings (VCU); a conventional life insurance policy, any
► No investment is made by an AIF in a VCU sum received under a keyman insurance
which is an associate company; policy does not enjoy exemption from the
► Units/ shares of an AIF are not listed on a levy of income-tax.
recognized stock exchange.
► The Bill proposes that a keyman insurance
► The existing venture capital funds or policy assigned to any person during the
venture capital companies which are term of the policy, with or without any
regulated by SEBI (Venture Capital Funds) consideration shall continue to be treated
Regulations, 1996 will continue to avail as a keyman insurance policy to prevent
pass through status. the taxpayers from misusing the
exemption available in respect of any sum
► This amendment is proposed to take effect received under a conventional life
retrospectively from 1 April 2012. insurance policy.
Increase in percentage limit Deduction for bad debts
of eligible premium for life
► Currently, banks are entitled to deduction
insurance policies for provision for bad and doubtful debts at
the rate of 7.5% (5% in the case of foreign
► Presently, an exemption is available for banks) of the gross total income and 10%
any sum received under a life insurance of the aggregate average advances made
policy issued on or after 1 April 2012, in by the rural branches. Further, banks are
respect of which premium payable for any also entitled to deduction for actual bad
of the years during the term of the policy debts written off to the extent it is in
does not exceed 10% of the actual capital excess of the credit balance in the
sum assured. provision for bad and doubtful debts
account.
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7. ► Recently, the Supreme Court of India had have been accepted by the Government, some
held that if the actual write off of debt of which have resulted in the following key
relates to urban advances, then it should changes in GAAR:
not be set off against the provision for
bad and doubtful debts made for rural Deferral of the applicability of GAAR
branches.
► Applicability of GAAR has been deferred
► The Bill clarifies that only one account is to financial year 2015-16.
made in respect of the provision for bad
and doubtful debts and such account Impermissible avoidance arrangement
relates to all types of advances including
advances made by rural branches. ► Presently, an arrangement is considered
Therefore, the amount of deduction in as an ‘Impermissible avoidance
respect of the bad debts actually written arrangement’ if the main purpose or one
off shall be limited to the amount by which of its main purposes is to obtain a tax
such bad debts exceeds the credit balance benefit.
in the provision for bad and doubtful debts
account without any distinction between ► As per the Bill it is proposed that, an
rural advances and other advances. arrangement, the main purpose of which
is to obtain a tax benefit will be
considered as an ‘Impermissible avoidance
Tax residency certificate arrangement’.
► Presently, benefits available under a DTAA
Definition of the term ‘tax benefit’
entered into by the Central Government
and the Government of any country or
Currently, the term ‘tax benefit’ is defined in an
specified territory can be claimed by a
exhaustive manner to mean:
taxpayer only where a tax residency
certificate containing the prescribed
► A reduction or avoidance or deferral of tax
particulars, is obtained by a taxpayer.
or other amount payable under the Act,
including as a result of a DTAA; or
► The Bill proposes that the tax residency
► An increase in a refund of tax and other
certificate obtained by the taxpayer would
amount under the Act or as a result of a
be a necessary condition but not a
DTAA; or
sufficient condition to avail of the benefits
► A reduction in total income, including
under a DTAA.
increase in loss.
► This amendment is proposed to take effect
retrospectively from 1 April 2012. The Bill proposes to modify the exhaustive
definition to an inclusive one without any
specific change in the present criteria.
General Anti Avoidance Rule
(GAAR) Certain factors for determining commercial
substance
GAAR was introduced by the Finance Act,
2012 to be effective from the financial year ► Under the Act, while determining whether
2013-14. Based on the representations or not an arrangement lacks commercial
received, an Expert Committee was substance, the period or time for which
constituted by the Government. Certain the arrangement (including operations
recommendations of the Expert Committee
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8. therein) exists, payment of taxes and ► A chairperson, who is or has been a Judge
provisions of exit are not considered. of a High Court
► One member of the Indian Revenue
► The Bill proposes to clarify that the above Service not below the rank of Chief
factors may be relevant, but shall not be Commissioner of Income-tax
sufficient for determining whether or not ► One member, who shall be an academician
the arrangement lacks commercial or scholar having special knowledge of
substance. matters such as direct taxes, business
accounts and international trade practices
► Further, the Bill proposes that an
arrangement, which does not have a Binding nature of directions issued by the
significant effect upon business risks or Approving Panel
net cash flows of any party, apart from a
tax benefit, shall be deemed to lack ► Under the Act, the directions of the
commercial substance. Approving Panel are binding only on the
Assessing Officer.
Onus on the taxpayer
► As per the Bill it is proposed that the
► Under the Act, an arrangement which directions of the Approving Panel shall be
results in any tax benefit shall be binding on the taxpayer as well.
presumed to have been entered into, or
carried out, for the main purpose of ► Also, appeal against an order passed
obtaining a tax benefit. pursuant to the directions of the
Approving Panel shall lie to the Tribunal.
► The Bill proposes to put the onus on the
taxpayer for demonstrating that the Accepted recommendations of the Expert
arrangement is not entered into only for Committee not addressed by the Bill
deriving tax benefit.
Some of the key recommendations of the
Constitution/ Powers of the Approving Panel Expert Committee which were accepted by the
Government in January 2013 but have not
► The Central Government may constitute been formally proposed by the Bill are as
one or more Approving Panel(s) as may be follows:
necessary from time to time.
► Grandfathering of investments made
► Under the Act, the Approving Panel (which before 30 August 2010.
decides whether an arrangement is
impermissible or otherwise) comprises of ► The same income not to be taxed twice in
a minimum of three members being: the hands of the same taxpayer in the
same year or in different assessment
► Income-tax authorities not below the rank years.
of Commissioner; and
► An officer of the Indian legal service not ► A monetary threshold (` 30 million of tax
below the rank of Joint Secretary to the benefit) in order to attract the provisions
Government of India. of GAAR.
► The Bill proposes that the Approving Panel ► Only one of GAAR and Specific Anti
will comprise of three members being: Avoidance Rules to apply when both of
them are in force.
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9. It is expected that some of these changes taxable at a concessional rate of 5% (plus
could be implemented by way of guidelines to applicable surcharge and education cess).
the GAAR provisions.
► In order to facilitate subscription by a non-
resident in long term infrastructure bonds
Tax on distributed income issued by an Indian company (rupee
for buy-back of unlisted denominated bonds), the Bill proposes to
shares extend the benefit of the concessional
rate where:
► Gains arising to a shareholder on buy-back
► the non-resident deposits foreign currency
of shares, ordinarily qualifies as capital
in a designated bank account; and
gains (where shares are held as capital
► such money, after conversion, is used for
assets). Where the shareholder is a
subscription to a rupee denominated long
resident of a country with which India has
term infrastructure bond issue of an Indian
a DTAA (such as India-Mauritius DTAA),
company.
such gains could be exempt from tax in
India.
► This amendment will take effect from
► The Bill proposes to levy an additional 1 June 2013.
income-tax on buy-back of shares (of
unlisted companies) at the rate of 20% Concessional rate for
(plus surcharge of 10% and education cess
of 3%) on the distributed income (i.e. dividends received from
consideration paid by the company on foreign subsidiary
buy-back of shares as reduced by the
amount received by the company for issue ► Currently, any amount received by an
of such shares). Indian company in respect of dividends
declared, distributed or paid by a specified
► Where the company is liable to pay the foreign company during the financial year
said distribution tax on buy-back of 2011-12 and 2012-13 is subject to tax at
shares, income arising to the shareholders the rate of 15% in the hands of the Indian
in respect of such buy-back would be company. Specified foreign company
exempt from tax. means a foreign company in which the
Indian company holds 26% or more of
► This amendment will take effect from equity share capital of the former
1 June 2013. company.
► The Bill proposes to extend the
Interest income from long applicability of the aforesaid provision in
term infrastructure bonds respect of dividends declared, distributed
or paid for the financial year 2013-14.
► Presently, interest paid by an Indian
company to a non-resident, in respect of
approved borrowings made (during the
Removal of the cascading
period 1 July 2012 to 30 June 2015) in effect of DDT
foreign currency from sources outside
India (under a loan agreement or on issue ► In order to encourage remittances of
of long term infrastructure bonds) is dividends to a domestic company by its
foreign subsidiary, the Bill proposes that
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10. no DDT will be payable on the dividend shall stand vacated, if the appeal is not
distributed by the domestic company to its disposed off within the total period of 365
shareholders during the financial year (i.e. days.
financial year 2013-14) to the extent of
dividend, received during the same ► New provision to prescribe penalty on
financial year, from the foreign subsidiary directors and officials for specified wilful
in respect of which tax is payable by the actions up to ` 100,000.
domestic company at the rate of 15%.
► Power granted to Commissioner to order
► For this purpose, a company is a the arrest for specified offences.
subsidiary of another company if such
other company holds more than 50% of
the equity share capital of the former
Customs
company.
► Peak rate of basic customs duty remains
unchanged.
► This amendment is proposed to take effect
from 1 June 2013 and will only be
► Powers granted to customs officers for
applicable for financial year 2013-14.
recovery of outstanding duties of a
defaulter from any other person including
INDIRECT TAXES banks / insurance companies who holds
money on behalf of the defaulter.
Service tax
Excise
► No change in effective service tax rate of
12.36%.
► No change in the basic excise duty rate of
12%.
► Minimum changes made to the levy and
procedural provisions.
► A 20% increase in value liable to service
tax for construction of specified
properties.
► Service Tax Voluntary Compliance
Encouragement Scheme, 2013, an
amnesty scheme, is introduced to
encourage voluntary compliance by
taxpayers.
► Provisions of Advance ruling extended to
resident public limited companies.
► More stringent penalties to apply for
offences liable for prosecution.
► Appellate Tribunal may extend the period
of stay order not exceeding 185 days
where the delay in disposing of the appeal
is not attributable to appellant. Stay order
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11. Comments
While the Budget has proposed a
number of favorable policy
initiatives and forward looking ideas
for the financial services sector,
contrary to the expectations, the Bill
has not addressed some of the
following key areas:
• Implementation of the
recommendations of the Expert
Committee constituted to
examine the ‘indirect transfer’
provisions;
• Availability of concessional rate
of 10% (introduced by the
Finance Act, 2012) on long term
capital gains earned by non-
resident investors arising on
transfer of securities issued by
private companies;
• Grandfathering of the
investments made before 30
August 2010 from GAAR
provisions, as was announced by
the Finance Minister.
Presumably, some of these may get
clarified through circulars,
guidelines, in due course as and
when internal consultations are
concluded.
Budget PLUS 2013
