Union Budget 2012-13: Direct Tax amendments Impact on the Real Estate sector © Walker, Chandiok & Co. All rights reserved. Union Budget 2012-13 | Impact on the Real Estate sector 2 Tax rates - Personal • Personal income-tax slabs proposed to be revised as under: Existing Slab (Rs) Revised Slab (Rs) Tax rate (%) Upto 180,000 Upto 200,000 NIL 180,001 to 500,000 200,001 to 500,000 10 500,001 to 800,000 500,001 to 1,000,000 20 Above 800,000 Above 1,000,000 30 • Minimum exemption limit for women changed from Rs 190,000 to Rs 200,000 (the category of women below the age of 60 years has been removed) • Limits remain unchanged for senior citizens (age of 60 years and above but less than 80 years) at Rs 250,000 • Limits remain unchanged for very senior citizen (age of 80 years and above) at Rs 500,000 • Education Cess and Secondary and Higher Education Cess at 2% and 1% respectively to continue Union Budget 2012-13 | Impact on the Real Estate sector Corporate Tax rates & GAAR • No change in corporate tax rate • No change in Minimum Alternate Tax ('MAT') rate (18.5%) • No change in surcharge for domestic companies (5%) • No change in surcharge on foreign companies (2%) • Education Cess and Secondary and Higher Education Cess at 2% and 1%, respectively to continue • Concessional rate of 15% for dividend received from foreign subsidiary has been extended by 1 more year General Anti-Avoidance Rule (GAAR) introduced • 'Impermissible avoidance arrangement' whose main purpose is to obtain a tax benefit • Onus lies with the tax payer to prove that the main purpose of the arrangement was not to obtain tax benefit • This will take effect from AY 2013-14 (FY 2012-13) 3 Union Budget 2012-13 | Impact on the Real Estate sector Transfer Pricing provisions on domestic transactions • Transfer Pricing guidelines proposed on "specified domestic transaction" • Concept of "specified domestic transaction" proposed vide section 92BA • Transfer Pricing applicable only when aggregate of "specified domestic transactions" exceeds Rs 5 crores in the previous year • Specified domestic transactions will be required to adhere to arms length price • Following additional compliance will be required: 1. Maintenance and keeping of information and document 2. Certificate from CA in Form 3CEB 4 Union Budget 2012-13 | Impact on the Real Estate sector Fair Market Value to be considered as “full value of consideration” • A new section 50D proposed to be inserted under capital gains provision • Transactions where sales consideration is not ascertainable/indeterminate – Fair Market Value (FMV) of capital asset on the date of transfer considered as “full value of consideration” • Transactions that may be effected • Exchange • Collaboration with land owners 5 Union Budget 2012-13 | Impact on the Real Estate sector Transfer of certain immovable properties under Tax Deducted at Source (TDS) net • New section 194LAA is proposed – To deduct tax by way of TDS @ 1% on consideration for transfer of immovable property (other than agricultural land) • Provision applicable (from 1 Oct 12) to any person transacting with resident transferor • Higher of actual consideration paid or stamp duty valuation would form the basis for TDS • TDS would get triggered where the consideration exceeds- - Rs 50 lakhs if the property is situated in specified areas - Rs 20 lakhs in case of other areas 6 Union Budget 2012-13 | Impact on the Real Estate sector 7 Amendment to Section 35AD – Investment based deduction Affordable Housing Project Hotel owners/ operators • Amendment to section 35AD where weighted deduction of 150% of capital expenditure is proposed in affordable housing • Currently deduction under section 35AD available to hotel owners only if such owner himself operates the same • Proposed to be effective from FY 2012-13 • Now proposed that hotel owners of two star and above categories, will get deduction of capital expenditure even if such hotel owner transfers the operations of hotel to franchisee/hotel operator • Amendment inserted retrospectively with effect from 1 April 2011 Union Budget 2012-13 | Impact on the Real Estate sector Clarification in connection with 'cost to previous owner' • Amendment in Section 49 to define the cost of assets (“COA”) • COA to company will be the cost to previous owner in the following cases: Conversion of sole proprietor into company Conversion of Firm into company • Amendment to take effect retrospectively from assessment year 1999- 2000 8 Union Budget 2012-13 | Impact on the Real Estate sector 9 Direct tax proposals – Interplay of section 47 and 49 Firm merges with company Third Party Company records Capital Asset in its books - Rs. 150 Sale of Capital asset @ 175 Company Transfer between Firm to Company – Not taxable vide 47(v). Firm COA of Capital Asset is books of Firm - Rs. 100 Capital Gain computation in the hands of Company for sale of Capital Asset Sale consideration – Rs. 175 Less: COA (section 49) – Rs. 100 Capital Gain Rs. 75 Union Budget 2012-13 | Impact on the Real Estate sector Beneficial tax rate for funding affordable housing projects • Foreign currency loan to an Indian company - in the business of developing and building a notified affordable housing project - loan taken between 1 July of 2012 and 2015 • TDS on interest at the beneficial rate of 5% (plus applicable surcharge and cess) • ECB to be allowed for funding notified affordable housing projects 10 Union Budget 2012-13 | Impact on the Real Estate sector Clarification in relation to amalgamation and demerger involving subsidiary • Merger of subsidiary company into holding company - For tax neutrality, consideration shares have to be issued to shareholders of the amalgamating company • Demerger of subsidiary company into holding company - Similarly for demerger to be tax neutral, resultant entity has to issue shares to the shareholders of the demerging entity • The above conditions are impossible to achieve as the holding company could not issue shares to itself • The condition to issue shares in the above circumstances have been dispensed with amendments proposed in Finance Bill 2012 11 Union Budget 2012-13 | Impact on the Real Estate sector Removal of cascading effect of Dividend Distribution Tax (DDT) in multi-tier structure • Amendment to Section 115-O to remove the cascading effect of DDT in multitier corporate structure • The condition of being “ultimate holding” removed for computing DDT to be paid • Amendment effective from 1 July 2012 • However for claiming the benefit the holding company is required to hold more than 50% equity share in subsidiary company 12 Union Budget 2012-13 | Impact on the Real Estate sector 13 Removal of cascading effect of DDT in multi-tier structure Present situation Proposed situation Holding co. Holding co. Intermediate co. Dividend – Rs. 100 DDT – Rs. 16.225 Intermediate co. Subsidiary co. Dividend – Rs. 100 DDT – Rs. 16.225 Subsidiary co. DDT cost for the Group – Rs. 32.45 DDT cost for the Group – Rs. 16.225 Dividend – Rs. 100 DDT – NIL Dividend – Rs. 100 DDT – Rs. 16.225 Union Budget 2012-13 | Impact on the Real Estate sector 14 Thank you Our offices: NEW DELHI National Office Outer Circle L 41 Connaught Circus New Delhi 110 001 T +91 11 4278 7070 CHENNAI Arihant Nitco Park, 6th floor No.90, Dr. Radhakrishnan Salai Mylapore Chennai 600 004 T +91 44 4294 0000 MUMBAI 16th floor, Indiabulls Finance Centre Elphinstone Mill Compound 612/ 613, Senapati Bapat Marg Elphinstone Road, Mumbai 400013 T +91 22 6626 2600 BENGALURU “Wings”, First Floor 16/1 Cambridge Road Halasuru Bangalore 560 008 T +91 80 4243 0700 GURGAON 21st Floor, DLF Square Jacaranda Marg DLF Phase II Gurgaon 122 002 T +91 124 462 8000 CHANDIGARH SCO 17 2nd Floor Sector 17 E Chandigarh 160 017 T +91 172 4338 000 HYDERABAD 7th Floor, Block III White House, Kundan Bagh Begumpet Hyderabad 500 016 T +91 40 6630 8200 PUNE 401 Century Arcade Narangi Baug Road Off Boat Club Road Pune 411 001 T +91 20 4105 7000 © Walker, Chandiok & Co. 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