1. Live with the Retro Effect
The 2012 Budget
introduced retrospective amendments to tax indirect transfers and
income of software and satellite companies. Foreign companies earning
revenues from software licences and satellite services that were wrapped
in a cocoon of double taxation
avoidance treaties were not hurt. But may were not so lucky. This
year's Budget was expected to remove this dreaded "retrospectivity"
element, keeping in mind the global sentiment.
But that hasn't
happened. What could happen is companies unprotected by treaties would
challenge these amendments on the grounds that they are arbitrary,
unreasonable and violate Article 14 of Constitution. It could be argued
that these amendments were not "clarificatory" as made out to be during
their introduction. Rather, a new tax was introduced retrospectively
under the garb of clarifications. The ball is in the court of the
courts.
2. Royalty gets Costlier
So
far, foreign companies that provide royalty or technical support to
Indian businesses were taxed at the maximum rate of 10%. This year's
Budget has increased this to 25%. But foreign companies are likely to
pass the tax liability to the recipient of the service and so the cost
of availing royalty/technical support will be more painful for Indian
companies.
Assuming a 15% rate in tax treaties with the US, the
UK and Australia , the additional tax cost could rise by 6.53% if the
Indian company was to bear the tax. This might force businesses to
explore entering into such agreements in favourable jurisdictions where
the treaty rate is 10%.
3. Setback for Buyback
By now, you know that high-end phones and SUVs will be costlier. But Budget 2013
will also be remembered for making shopping of a different kind more
expensive -buyback of shares. The FM has proposed to tax the income of
shareholders who buy back shares of unlisted domestic companies.
Significantly, the scope of the tax has been transferred from
shareholders to the company distributing profits through buyback.
The rate is pegged at a radically high 20%, payable on the difference
between the price on share buyback and the initial issue price. The levy
can be compared to tax on dividends distributed by domestic companies
at present. The impact on foreign investors based out of countries
having a favourable tax treaty with India seems significant because the
free repatriation of surplus would no longer be possible. The move to
tax the company would deny benefits of a treaty to most investors.
4. You "Super-rich"? Ouch!
The Budget ended up taxing the "super-rich", as was widely expected.
The surcharge on the "super-rich" — those with an income of Rs 1 crore —
borrows a page from other developed countries like the US and France.
The effective tax rate for such individuals is due to be increased to
33.99% from 30.9%.
Further, by increasing the duty on items
like SUVs, the government has revealed its intention to tax the wealthy.
Yet, the government might rethink the Rs 1 crore income limit simply
because it is too low a limit. The income limit might be raised to Rs 5
crore and the surcharge reduced to 5% from 10%.
5. There are Free Lunches. Really!
The Budget
was expected to be populist thanks to the approaching elections. You
could have been forgiven for expecting an increase in the exemption
limit and incentives to reduce the tax burden. Nothing of the sort
happened. The Budget provided only a marginal relief in the form of a
rebate of up to Rs 2,000 to individuals whose total income does not
exceed Rs 5 lakh.
The rebate will be equal to the amount of income tax
payable on the total income or an amount of Rs 2,000, whichever is
less. For a family, this is equivalent to a couple of meals in a budget
restaurant. Given the soaring food prices, the finance minister should
increase the exemption limit to Rs 3 lakh.
6. Dream House? Dream on
Those looking to buy a spacious apartment, which was already beyond the
reach of the common man, has received another jolt from the finance
minister. The budget has raised the service tax
cost for a residential property under construction. Currently, service
tax was levied on 25% of the value of an apartment under construction.
From March 1 onwards, service tax would apply on 30% of the value of
the property and services availed for its construction. That means all
such properties that cost Rs 1 crore or more or have a carpet area of
more than 2,000 square feet would become more costlier. In real terms,
the cost of service tax for a Rs 1-crore property will increase by Rs
61,800. This move is targeted at high-end construction where the
component of 'service' is greater.
7. Eating Out? Pay (a Little Bit) More
The FM has been looking for new pastures to collect more revenue. He
knows that you are increasingly eating out. He also realised that try as
you might, you will still go to a restaurant or a cafe. There, now it's
going to cost you. Starting from April 1, serving food at any
restaurant, food joint and eatery that has installed an air-conditioner
will be subject to service tax. This levy, introduced in 2011, applied
to only those AC restaurants that also served alcohol so far.
Service tax would be levied on the total amount billed minus the
abatement of 60% allowed in the law. This means that 40% of the total
bill would be treated as a service provided to you by the restaurants.
So an average bill of Rs 1,000 will now cost Rs 49.44 more. Question is
will that stop you from eating out. The FM
8. Shop More for Branded Clothes...
Good news
for all brand-conscious shoppers. Manufacturers of branded readymade
garments that are not availing the Cenvat credit facility have been
exempted from payment of central excise duty. This duty was levied in
2011. This relief is expected to boost the sales of branded garments as
manufacturers will surely pass on the benefit to end buyers. The
exemption from duty is applicable from March 1. Happy shopping!.
9. But Forget the Luxury Car, Bike or Yacht
As we said, the FM's target this year was clearly the super-rich. His
rationale: they won't mind paying more. So he raised the import duties
on high-end motor cars having CIF (Cost, Insurance and Freight —
contracts involving international transport) value of more than $40,000
or having an engine capacity of more than 3,000cc for a petrol engine or
more than 2,500cc for a diesel engine to 100% from 75%. But note: the
increased duty rates apply only vehicles imported other than in CKD
(fully disassembled) form.
It means the FM wants more
automobile companies to establish manufacturing facilities in India. He
has also raised the import duties on yachts or motorboats or canoes or
similar vessels to 25% from 10%. This is besides raising the rate of excise duty
on SUVs (that have ground clearance exceeding 170 mm) from 27% to 30%.
It is another matter that higher ground clearance was necessary due to
Indian road conditions. Today, it has become a tax condition.
10. More Gold in Your Bag
His mind on galloping gold prices,
the FM has increased the duty-free limit of bringing jewellery into
India by five times. That means from March 1, an individual who was
residing overseas for over a year and is coming to India can bring more
gold jewellery duty free. For men, the duty-free limit has been
increased for jewellery worth Rs 50,000.
For women, the limit
has been increased to Rs 100,000. The FM has effectively ended an
archaic rule. The previous import limits for gold jewellery were fixed
in 1991. Needless to say, this was out of sync with the current market
prices of gold. NRIs will cheer the move.
for the fourth consecutive session. The S&P BSE Sensex wrapped
trade at 19,683.23, up by 269.69 points while the NSE Nifty rose 82.40
points to settle at 5,945.70.