financial services post budget analysis

8/6/2019 Financial Services Post Budget Analysis

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Financial Services in IndiaPost Budget 2011 Analysis:Insight at a glance

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The Indian Finance Minister Mr. Pranab Mukherjee

presented the Union Budget 2011 in the Indian

Parliament on February 28, 2011.

The budget announcements as they may impact regu-

lations and taxation relevant to fnancial services sector

entities in India are highlighted hereunder:

Industry Overview

The past year saw banking deposit growth slow-

down, as real interest rates were depressed, especially

compared to returns in other ast-recovering asset

markets (real estate, gold, and stock markets).

The priority is to considerably extend the reach o

banking to. help mobilize more savings, add more

depth, and more efciently intermediate opportuni-

ties, including those in the traditional ‘priority’ sectors.

Also equally important is deepen domestic capital

markets and the role o non-bank institutions, espe-

cially in corporate bond and debt markets.

The Finance Minister has announced many reorms

and changes to policy ramework or deepening o the

market and or inclusive growth o the market.

Key announcements / changes to policy

framework

Tax ReformsThe introduction o the DTC and the proposed GST

will result in moderation o rates, simplifcation o laws

and better compliance.

The Direct Taxes Code Bill was introduced in

Parliament in August, 2010. Ater receiving the

report o the Standing Committee, the Government

will be able to fnalise the Code or its enactment

during 2011-12. This has been a pioneering eort in

participative legislation. The Code is proposed to be

eective rom April 1, 2012 to allow taxpayers, prac-

titioners and administrators to ully understand the

legislation and adjust to the revised procedures.

Unlike DTC, decisions on the GST have to be taken

in concert with the States and considerable progressin the last our years. Areas o divergence have been

narrowed. As a step towards the roll-out o GST,

the Constitution Amendment Bill is proposed to be

introduced in Parliament in this session. Work is also

underway on drating o the model legislation or the

Central and State GST.

Further a strong IT inrastructure is being established

alongwith the NSDL that will establish and operate the

IT backbone or GST.

Regulatory Reforms (During 2010-11)

Draft discussion paper on entry of new banks in

the private sector.

In August 2010, RBI released a discussion paper on

banking licenses to private sector players. The discus-

sion paper outlines the criteria and requirements on

capitalisation, governance, shareholding, priority

sector norms that may be laid down or the banking

aspirants. These include corporate houses, existing

NBFC groups seeking banking license, other fnancialservices players etc.

Core Investment Companies

In August 2010, RBI brought holding companies

within its regulations by notiying them as CICs. With

this regulation, most industrial groups / corporate

houses which held portolio companies under a

holding company would be required to register such



Financial Services in India Post Budget 2011 Analysis: Insight at a glance | 3

holding company as a CIC with RBI. Such CICs would

be governed by the specifed capital adequacy and

leverage ratios and would need to make regular

reporting / disclosures to RBI.

Draft discussion on presence of foreign banks in

India

In January 2011, RBI released a discussion paper onpresence o oreign banks in India. The discussion

paper seems to make a compelling case or Wholly

Owned Subsidiary orm o presence or oreign banks,

both or existing banks as well new banks. RBI has

outlined the possible requirements that may be laid

down or oreign banks as regards capitalisation,

governance, priority sector norms, etc.

Reforms announced in Budget 2011

Foreign Investments in Mutual Fund Schemes

Currently, oreign investments in Mutual Fund Schemes

is allowed only or Foreign Insitutional Investors (FIIs)

and Sub-accounts. It has been decided to permit SEBI

registered Mutual Funds to accept subscriptions rom

oreign investors who meet the KYC requirements

or equity schemes. This would enable Indian Mutual

Funds to have direct access to oreign investors and

widen the class o oreign investors in Indian equity

market.

Banking license to private sector playersPursuant to the release o discussion paper on banking

licenses to private sector players, RBI has proposed

some amendments in the Banking Regulation Act. It

is proposed and suitable amendments may be made

towards the same. It is expected that RBI would issue

the fnal guidelines beore the close o the fnancial

year 2012.

Recapitalisation of Public Sector Banks & Regional

Rural Banks

To enable Public Sector Banks to maintain a minimum

Tier I CRAR at 8 percent, it is proposed to provide a

sum o a sum o Rs 6000 crore or the year 2011-12

towards the same.

Also it is proposed to provide a sum o Rs. 500 croresto enable Regional Rural Banks to maintain a CRAR o

9 % as on March 31, 2012.

Micro Finance Institutions

It is proposed to create “India Microfnance Equity

Fund” with SIDBI with a corpus o Rs 100 crores. This

Fund would be used to provide equity to smaller MFIs

and would help them maintain growth and achieve

scale and efciency in operations.

Further, it is proposed to create a “Womens SHG

Development Fund” with a corpus o Rs 500 crore.

This Fund would be used to empower women and

promote their Sel Help Groups.

The committee set up by RBI to look into issues

relating to micro fnance sector in India has submitted

its report. The Government is considering putting in

place appropriate ramework to protect the interest o

small borrowers.

Financial Sector legislative Initiatives

With a view to continuing the fnancial sector reorms,

it is proposed to take up the ollowing legislations:

(i) The Insurance Laws (Amendment) Bill, 2008

(ii) The Lie Insurance Corporation (Amendment) Bill,

2009



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(iii) The revised Pension Fund Regulatory and

Development Authority Bill, frst introduced in

2005

(iv) Banking Law Amendment Bill, 2011

(v) Bill on actoring and Assignment o Receiveables

(vi) The State Bank o India (Subsidiary Banks Laws)

Amendment Bill, 2009, and

(vii) Bill to amend RDBFI Act 1993 and SARFAESI Act

2002.

Housing Sector Finance

The existing scheme o interest subvention o 1

percent on housing loans is extended to cover housing

loans upto Rs 15 lakhs where the cost o the housedoes not exceed Rs 25 lakh. Further the existing limit

under priority sector lending or housing loan to

dwelling units, has been increased rom Rs 20 lakhs to

Rs 25 lakhs.

Financial Sector Legislative Reforms Commission

The Government had set up a Financial Sector

Legislative Reorms Commission under the Chair o

Justice B. N. Srikrishna. It would rewrite and streamline

the fnancial sector laws, rules and regulations and

bring them in harmony with the requirements o a

modern fnancial sector. The Commission is expected

to complete its work in 24 months.

The Companies Bill introduced in the Parliament

in 2009 has been received rom the Parliamentary

Standing Committee. The proposed bill will be intro-

duced in the Lok Sabha in the current session.

Financial inclusion

In the pursuit o fnancial inclusion, RBI had advised

Banks to provide banking acilities to habitationshaving a population o over 2000, by March 2012.

Banks have identifed about 73,000 such habitations

or providing banking acilities using appropriate tech-

nologies. It is expected that banks will cover around

20,000 villages during 2010-11. The remaining will be

covered during 2011-12.




Proposed Tax Amendments

Direct Tax

The key direct tax changes pertinent to Financial

Services Sector are:

Rate o Tax

There is no change in the basic income-tax

rate applicable to domestic as well as oreigncompanies o 30% and 40% respectively.

The existing surcharge o seven and one-hal per

cent on tax o a domestic company is proposed

to be reduced to ve per cent. In case o

companies other than domestic companies, the

existing surcharge o two and one-hal percent is

proposed to be reduced to two per cent.

Additional surcharge called the Education cess

and Secondary and Higher education cess shall

continue to be levied at the rate o two per cent

and one percent respectively, o income tax

including surcharge, in all cases.

Minimum Alternate Tax (MAT) under Section

115JB

It is proposed to increase the rate o MAT to

eighteen and one – hal per cent rom the

existing eighteen per cent on book prots.

This amendment is proposed to take eect rom

1st April, 2012 and will, accordingly, apply in

relation to the assessment year 2012-13 and

subsequent years.

Alternate Minimum Tax (AMT) made appli-

cable to Limited Liability Partnerships (LLP)

It is proposed that an LLP will be liable to AMT

at the rate o eighteen and one-hal percent

on adjusted total income by introducing a new

Chapter XII- BA (Sections 115JC to 115JF).

Adjusted total income shall be the income beore

giving eect to this Chapter as increased bydeductions, in respect o income, claimed under

Chapter VI-A and section 10AA o the Act. LLP

means a partnership rm ormed and registered

under the Limited Liability Partnership Act 2008.

Our observation:

The long-term capital gains exempt from tax

as per section 10(38) of the Act should not

be included in calculating the adjusted total

income for the purpose of computing the

AMT liability in case of LLP whereas the same

is included for the purpose of computing MAT

liability in case of companies.

Credit in respect o tax paid by LLP under this

Chapter XII-BA (Sections 115JC to 115JF ) shall

be allowed to the extent o the excess o the

AMT paid over the regular income-tax. It shall

be allowed to be carried orward upto ten

assessment years immediately succeeding the

assessment year or which such credit becomesavailable and seto in the assessment year in

which the regular income exceeds the AMT

prots.

These amendments are proposed to take eect

rom 1st April, 2012 and will, accordingly, apply

in relation to the assessment year 2012-13 and

subsequent years.



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Employers’ contribution to new pension

system

At present, employer contribution to the

new pension system (NPS) is not allowable as

deduction and the employers and employees

contribution to the NPS was allowable as a

deduction under section 80CCD subject to

limits under section 80 CCD o 10% o salaryrespectively, within the aggregate limit o Rs.

1,00,000 under section 80 CCE [aggregate limit

o Rs.1,00,000 applies or all deductions under

sections 80C, 80CCC and 80CCD].

The Budget has proposed to insert a new sub-

section in section 36 whereby employers’ contri-

bution to NPS to the extent o 10% o the salary

o the employee will be allowed as a deduction

or the employer. The employees’ contribu-

tion will continue to be taxable as salary under

section 17 (1) (viii) o the Act. The employers’ and

employees’ contribution to the extent o 10% o

salary respectively, will be allowed as a deduction

under section 80CCD. The employers’ contribu-

tion is proposed to be allowed under section

80CCD without any monetary limit as the same

is proposed to be excluded rom the aggregate

ceiling o Rs.1,00,000 under section 80CCE.

Taxation o certain oreign dividends at areduced rate

Under the existing provisions o the Income tax

Act, dividend received rom oreign companies

is taxable in the hands o the resident share-

holder at the applicable marginal rate o tax. It

is proposed that dividend received by the Indian

company rom a oreign subsidiary company

will be taxed at teen percent (plus applicable

surcharge and cess) on the gross amount o

dividend by introducing new section 115BBD.

Subsidiary oreign company’ means a oreign

company in which the Indian company holds

more than hal in nominal value o the equity

share capital o the company.

This amendment is proposed to take eect rom

1st April, 2012 and will, accordingly, apply in

relation to the assessment year 2012-13 and

subsequent years.

Rationalisation o Tax on income distributed

to unit holders

It is proposed to amend section115R(2) to levy

additional income-tax at a higher rate o thirty

percent, on income distributed by debt unds to a

person other than an individual or HUF .

There will be no change in the rate o income-tax

in case o distribution to any individual or HUF.

Distribution o income o an equity oriented und

shall continue to be exempt rom tax.


rom 1st June, 2011.

Inrastructure debt und To acilitate augmenting long term unds or

inrastructure rom overseas, it is proposed

to amend section 10 to enable the Central

Government to notiy such inrastructure debt

und set up in accordance with the prescribed

guidelines. The income o such debt und would

be exempt rom tax under section 10(47) subject

to ling o Return o income in India.




It is urther proposed that the oreign investor

would be liable to tax on the income rom

such inrastructure debt und at the rate o

5% plus applicable surcharge and cess as per

amendment to section 115A o the Act, and

tax is to be deducted at that rate by introducing

new section 194LB.


rom 1st June, 2011.

Reporting o activities o Liaison ofces

A new section 285 is introduced in the Act

which mandates the ling o annual inormation

with the Assessing ocer within sixty days rom

the end o the nancial year, in the prescribed

orm and providing the prescribed details by

non residents having liaison oces in India.

The amendment is proposed to take eect rom

1st June 2011.

Allotment o Document Identifcation

Number – Section 282B- Omitted

Considering the practical diculties due to

non-availability o requisite inrastructure on an

all India basis, the aoresaid section is proposed

to be omitted.

The above section was to come into orce rom

1st July, 2011. This amendment is proposed to

take eect retrospectively rom 1st April, 2011.

Rationalisation o Transer Pricing provisions

a) Revision proposed to +/- 5% variation in

computing arm’s length price

Currently, i the variation between the arm’s

length and the actual price o the transac-

tion is within a range o 5%, then a transer

pricing adjustment to the price is not made.Instead o 5%, the allowable variation will be

such percentage as may be notied by the

Central Government.

b) Enhancement o TPO’s jurisdiction

The Act currently provides that the TPO can

determine the arm’s length price o an inter-

national transaction, only i such transaction

is reerred by the AO.

Eective 01 June 2011, it is proposed, that

the jurisdiction o the TPO shall extend to the

determination o arm’s length price o any

international transaction that comes to his

notice in the course o proceedings.

c) Power o survey conerred on the TPO

The TPO can currently exercise powers

o summoning and calling o details or

the purposes o inquiry or investigation in

determining an arm’s length price. It is

now proposed to grant additional powers

o survey, so as to conduct on-the-spot

enquiry and verication. This amendment isproposed eective 01 June 2011.

d) Extension o time limit or fling return o

income or certain Corporate Assessees

The Act species 30 September as the



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due date or ling o return o income or

corporate assessees. In addition, corporate

assessees having international transactions

are required to le the transer pricing report

in Form 3CEB on or prior to the specied

date.

This ling date is extended to 30 Novemberin view o practical diculties o accessing

contemporaneous comparable data that is

required to le such a transer pricing report.

Counter measures in respect o transactions

with persons in notifed jurisdictional area

Anti avoidance measures have been proposed

to discourage transactions by a taxpayer with

persons located in a country or jurisdiction

which does not eectively exchange inorma-

tion with India. As per the proposed section

94A o the Act, the Central Government will

notiy such country or territory as a notied

jurisdictional area.

All parties to the transaction entered into with

a person located in such area to be deemed

associated enterprises and the transaction to be

deemed international transaction and transer

pricing provisions will apply. No deduction or

payment made to any nancial institution shall

be allowed unless the taxpayer urnishes an

authorization in prescribed orm to seek inor-mation rom the institution. No deduction o

any other expenditure or allowance (including

depreciation) arising rom such transaction to

be allowed unless prescribed documentation

is maintained by the assessee. The onus is on

the assessee to satisy the source o receipt o

money rom such notied area, in the absence

o which the amount shall be deemed to be

income o the assessee. Any payment made to

a person in such notied area shall be liable to

withholding tax at the higher o rate in the Act

or rate in orce or 30 percent.

This amendment is proposed to be eective

rom 01 June 2011.




Indirect Tax

• Followingamendmentshavebeenmade/

proposed with regard to Lie Insurance Service:

- The scope o Lie Insurance Service has been

expanded to cover all services, including in

relation to management o investments. This

change will come into eect rom the date

to be notied ater the enactment o theFinance Bill.

- Ater the enactment o the new levy, it is

proposed to amend the Service Tax Rules to

give the option to pay tax at the standard

rate on that portion o the premium that has

not been invested and is so indicated in any

o the documents given to the policy holder

where such option is presently not available.

- Where the break-up is not indicated in any

document issued to the policy holder, the

optional composition rate o service tax is

proposed to be 1.5% o the gross amount

o premium instead o 1% at present.

• Services provided by an insurer carrying on

General Insurance business to any person

or providing insurance under the Rashtriya

Swasthya Bima Yojana have been exempted

rom the whole o the service tax w.e.. 1

March 2011.

• PointofTaxationRules,2011willbeintro-

duced w.e.. 1 April 2011 which determine

the point in time when the services shall be

deemed to be provided. The general rule will

be that the time o provision o service would

be the earliest o the date on which service

is provided or to be provided, the date o

invoice or the date o payment. Consequential

changes have also been made in the Service

Tax Rules, 1994 to alter the provisions relating

to date o payment o service tax.

• Thescopeofthedenitionof‘inputservices’

has been extensively amended.

• NewmethodofproportionatereversalofCENVAT Credit in case o providing o taxable

and exempted services has been introduced

w.e.. 1 April 2011 with the ollowing

exceptions:

- 50% o the CENVAT credit availed would be

required to be reversed by a Banking and

Financial Institution in case o payment o

service tax under the taxable category o

Banking and Other Financial Services.

- 20% o the CENVAT credit availed would

be required to be reversed by providers o

Lie Insurance Service and Management o

Investment under ULIP Service.

•Rule6(5)oftheCENVATCreditRules,2004

which allows the utilization o the entire

CENVAT credit with regard to specied services

as long as these services are not entirely used

or providing exempted services has been

deleted.

• Provisionswithregardtorefundofservicetax

in case o services provided to SEZ units/ devel-

opers have been amended w.e.. 1 March

2011 as under:

- No service tax is required to be paid i the

same are meant to be ‘wholly consumed’

within SEZ including services liable to tax

under reverse charge mechanism.



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- It has been specied that all services

received by an entity in a SEZ which does

not have any other DTA operations will

constitute services ‘wholly consumed’

within the SEZ.

- The criteria or the determination o

services ‘wholly consumed’ within SEZ hasbeen laid down.

- Reund o the services which are not

wholly consumed shall be available on

pro rata basis, i.e., ratio o SEZ turnover to

total turnover.

• Anewrulehasbeenintroducedinthe

Service Tax (Determination o Value) Rules,

2006 prescribing the value o the Money

Changing Service w.e.. 1 April 2011. The

value shall be determined as under:

- Where one o the currencies is Indian

rupee, the value o the said service will be

the dierence between the buying rate or

the selling rate, as the case may be, and

the RBI reerence rate or that currency or

that day multiplied by units o currency

exchanged.

- I RBI reerence rate is not available, thevalue shall be 1% o the value o money

exchanged in Indian rupees.

- I both the currencies are not Indian

rupees, the value would be 1% o the

lesser o the amounts receivable i the two

currencies are converted at RBI reerence

rate.

• Thecompositionrateofservicetaxappli-

cable in relation to purchase or sale o

oreign currency, including money changing,has been reduced rom 0.25% to 0.1% w.e..

1 April 2011. The option o paying service

tax on billed charges without applying

composition rate has been withdrawn.

• ExportofServiceRules,2005havebeen

amended to change the perormance based

condition or services o credit rating agency

and market research agency to recipient

based condition in order qualiy as export o

service w.e.. 1 April 2011. Corresponding

changes have also been made in the Taxation

o Services (Provided rom Outside India and

Received in India) Rules, 2006.

• Therateofinterestonaccountofdelayin

payment o service tax and collection o

service tax in excess o the requirement has

been increased rom 13% to 18% w.e.. 1

April 2011.

• Prosecutionprovisionsandotherprocedural

changes as regards penalties will be made

applicable rom the date o enactment o the

Finance Bill.




Way forward

The Finance Minister has introduced or will be

introducing major policy changes to the regula-

tions, e.g. conversion o branch o oreign banks

into subsidiaries; conversion o NBFC to banks

requiring hiving o o certain business, etc.,

the tax implications o which have not beenaddressed in the Budget.

There could opportunities to structure Debt

Inrastructure Funds or investment by oreign

investors.

Tax payers beore entering into transactions or

contracts with entities should ascertain whether

they are rom countries with which India has a

DTAA or India has signed TIEA so as to reduce

the disallowance or addition to total income.

In case o existing contracts / transaction with

entities in notied jurisdictional areas, the

taxpayer should obtain proper documentations

to reduce the risk o disallowance / addition to

total income.

India has entered into Tax Inormation Exchange

Agreements (TIEA) with 10 countries, which are:

Argentina, Bahamas, Bermuda, British Virgin

Islands, Cayman Islands, Isle o Man, BritishIsland o Jersey, Marshal Islands, Monaco, and

Saint Kitts and Nevis. Cabinet Approval, we

understand, has been granted in case o 8 o

them.



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Glossary

Abbreviation Long Form

CIC Core Investment Company

RBI Reserve Bank o India

SEBI Securities Exchange Board o India

RDBFI Recovery o Debts due to Banks and FinancialInstitutions

SARFAESI The Securitisation and Reconstruction o Financial

Assets and Enorcement o Security Interests

CRAR Capital Risk Adequacy Ratio

KYC Know Your Client

The Act The Income-tax Act, 1961

DTC The Direct Tax Code

GST Goods and Services Tax

NSDL National Securities Depository Limited

SIDBI Small Industries Development Bank o India

SEZ Special Economic Zones



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