India moved to close loopholes in the country’s tax laws with the introduction of General Anti-tax Avoidance Regulations (GARR), rationalizing definitions of international transactions and introduction of many new penalties for tax avoidance, non-compliance, and unaccounted money, in its budget 2012.

1. India Budget 2012: Highlights
India moved to close loopholes in the country’s tax laws with the introduction of General Anti-tax
Avoidance Regulations (GARR), rationalizing definitions of international transactions and introduction of
many new penalties for tax avoidance, non-compliance, and unaccounted money, in its budget 2012.
In the 14.9 trillion rupee ($298 billion) budget, finance minister Pranab Mukherjee also announced
additional disclosure requirements for individuals and businesses. Many other provisions similar to
India’s ambitious Direct Tax Code (DTC) that aims to replace the country’s archaic tax system are also
announced.
Key Highlights
Changes in Provisions Relating to International Taxation, Amendments Retroactively Effective from
April 1, 1962
As expected the budget addresses the landmark ruling by the Indian Supreme Court in the
Vodafone case where Indian tax authorities lost an appeal to tax Vodafone $2.2 billion for its
purchase of 67percent stake in India's Hutchison Essar Ltd. Read details of the case at
http://www.nair-co.com/vodafone-india-tax2012.aspx
The finance minister amended certain definitions such as “transfer,” “capital asset,” etc. in
relation to international transactions to ensure all deals like Vodafone – Hutchison are brought
under the ambit of Indian tax laws India can now tax any income accruing or arising directly or
indirectly through transfer of any capital asset situated in India. The term “through” is clarified
to include terms “by means of,” “in consequence of,” or “by reason of”. Similarly, the term
“capital asset,” being shares or interest in entity outside India, is now clarified to be “situated in
India” if the shares / interest of the said foreign entity derives its value substantially from assets
located in India.
Scenarios like the Vodafone case, where a non-resident (Hutchison group company) sold
interest / shares in non-resident company (holding company of Indian operating company,
located outside India) to another non-resident (Vodafone group company) will be clearly under
ambit of Indian income tax law if the said interest / shares generate substantial value, directly or
indirectly, from asset situated in India. E.g. in the Vodafone case the value was mainly due to
operating company located in India.
The withholding tax provisions are also rationalized. It is made clear that all persons (payers),
resident or non-resident, are required to deduct tax on any income that is subject to

2. withholding tax in India even though the payer does not have any residence, place of business
or any other presence in India. This applies even if the payee is a resident or a non-resident for
India tax purposes.
These amendments are retroactively effective from April 1, 1962
“It is now critical for foreign businesses to obtain tax advice before entering into any transaction
that may give rise to any income in India. Companies may either end up being liable as a tax
payer or a party liable to withhold tax in India. The new provisions mean that it is no longer easy
to take the taxation risks in India lightly. Foreign investors will need to provision for these risks
when planning or expanding their investments in India,” said Dr. Shan Nair, Co-founder of Nair &
Co.
India: General Anti-Avoidance Rules (GAAR)
India has introduced a separate chapter on GAAR to deal with aggressive tax planning. These
provisions give Indian tax authorities the right to investigate any arrangements and, if the same
is deemed to be for the purposes of tax avoidance, ignore them for tax computation purposes.
The basic principle of GAAR is “substance over form”.
The tax bill prescribes four tests for deciding an agreement to be “impermissible avoidance
agreement”. Satisfying one of the four tests is enough to qualify an agreement to be
impermissible. The tests are
The arrangement creates rights and obligations, which are not normally created
between parties dealing at arm’s length.
It results in misuse or abuse of provisions of tax laws.
It lacks commercial substance or is deemed to lack commercial substance.
Is carried out in a manner, which is normally not employed for bonafide purpose
Advance Pricing Agreements (APA)
In a welcome move, India heeded long standing demand from businesses for Advance Pricing
Agreements (APAs), which will now be available under the transfer pricing provisions effective
from July 1, 2012. The APAs can be made for a period up to five years.
Tax Audits
The turnover limits for mandatory tax audits is extended from Rs. 6 million to Rs. 10 million for
business and from Rs. 1.5 million to Rs. 2.5 million for profession. In addition, the due date of
submission of tax audit report is extended to November 30, where the assessee is required to
submit prescribed audit report for their international transactions.
Extension of R&D Related Deduction
The benefit of weighted average deduction of 200 percent for in-house R & D expenditure is
extended to March 31, 2017. The benefit was due to expire by March 31, 2012.

3. Transfer Pricing (TP) Provisions to Apply To Domestic Transactions
Transfer Pricing regulations are extended to domestic related parties for transactions exceeding
Rs. 50 million in a year.
Minimum Alternate Tax (MAT) / Alternate Minimum Tax (AMT)
MAT is extended to businesses other than companies and LLPs
India Tax Rates: Companies
Effective tax rates applicable to the current financial year and the next financial year
The corporate tax rates remain unchanged at
Corporate Tax For Domestic Corporate Tax For Foreign
Income Range
Companies Companies
Financial Year Financial Year Financial Year Financial Year
2011-12# 2012-13# 2011-12# 2012-13#
Companies with income
32.445% 32.445% 42.024% 42.024%
above INR 10 million*
Companies with income up
30.90% 30.90% 41.20% 41.20%
to INR 10 million**
*The effective tax rate includes applicable surcharge and education cess (3%).
** The effective tax rate includes education cess (3%)
# Financial year starting from April 1 and ending on March 31
Other Tax Rates
Other tax rates applicable to companies like Dividend distribution tax (DDT), Minimum Alternate
Tax (MAT) remains unchanged. Certain exemptions are provided to avoid cascading effect of
DDT, arising due to multi-tier corporate structure.
India Direct Tax - Individuals
The India budget proposes to increase the slabs in case of individuals. The effective tax rates will
now be:
Income slab (INR) Tax Rates (FY2011-12*) Income slab (INR) Tax Rates (FY 2012-13*)
0 – 180,000 NIL 0 – 200,000 NIL
180,001 – 500,000 10.30% 200,001 – 500,000 10.30%
500,001 – 800,000 20.60% 500,001 – 1,000,000 20.60%
800,001 and above 30.90% 1,000,001 and above 30.90%
*Financial year starting from April 1 and ending on March 31
Note 1: The first income slab for senior citizens (60 years of age or more) and very senior citizens
(80 years of age or more) are Rs. 250,000 and Rs. 500,000 respectively i.e. no tax up to Rs. up to
250,000 for senior citizens and up to 500,000 for very senior citizens.

4. Note 2: The rates include education cess and secondary education cess totaling to 3 percent on
the base tax rates
Tax Deductions
Individuals are granted the following additional tax deductions
Preventive medical checkup expenses for self, spouse, dependent children, parents of
up to Rs. 5,000
Interest on savings account (with banks etc.) of up to Rs. 10,000.
The deduction in respect of investment in infrastructure bonds is withdrawn.
Expats
Tax benefit under a tax treaty will not be allowed to a non-resident unless a tax residency
certificate in prescribed form is furnished.
India Direct Tax – Other Changes
Security Transactions Tax (STT)
The rate of Security Transactions Tax (STT) is reduced for delivery based on equity shares in
company traded through a recognized stock exchange from 0.125% to 0.1% for both seller and
buyer.
Increase in Penalties for Non-Compliance with Withholding Tax Provisions: Penalties are
increased for non-compliance of withholding tax provisions
India Indirect Taxation
Service Tax
The service tax rate is changed to 12 percent, including the cess to 12.36 percent (from
10.30 percent). The same is applicable from April 1, 2012.
Instead of present approach of taxing only specified 100+ services, a negative list
approach is introduced. All the services will now be taxed except for services under the
negative list, proposed under 17 heads. These provisions will significantly affect many
service providers in India.
A scheme for simpler service tax refunds is announced.
Excise Duty
The statutory rate applicable to all non-petroleum excisable goods is raised to 12
percent (from 10 percent).
Common tax code to be introduced for Excise and Service tax

5. Goods and Services Tax (GST)
By way of a step towards implementation of Goods and Services Tax (GST), the
Constitution Amendment Bill was introduced in Parliament during March 2011. The Bill
is before the Parliamentary Standing Committee.
The structure of GST Network (GSTN) will be set up as a National Information Utility and
is expected to become operational by August 2012.
India Foreign Investment
Efforts are being made for developing a consensus on allowing foreign direct investment
(FDI) in multi-brand retail
No progress on FDI in aviation sector
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Read also on: International financial accounting, International financial reporting