Union Budget 2012-13: Direct Tax amendments Impact on the Real Estate sector

1. Union Budget 2012-13: Direct Tax amendments Impact on the Real Estate sector

2. Tax rates - Personal • Personal income-tax slabs proposed to be revised as under: • 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

3. 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)

4. 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: • Maintenance and keeping of information and document • Certificate from CA in Form 3CEB

5. 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

6. 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

7. Amendment to Section 35AD – Investment based deduction • Affordable Housing Project • Amendment to section 35AD where weighted deduction of 150% of capital expenditure is proposed in affordable housing • Proposed to be effective from • FY 2012-13 • Hotel owners/ operators • Currently deduction under section 35AD available to hotel owners only if such owner himself operates the same • 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 1April 2011

8. 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

9. Direct tax proposals – Interplay of section 47 and 49 Firm merges with company Third Party Sale of Capital asset @ 175 Company records Capital Asset in its books - Rs. 150 Company 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 Transfer between Firm to Company – Not taxable vide 47(v). Firm COA of Capital Asset is books of Firm - Rs. 100

10. 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

11. 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

12. 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 multi-tier corporate structure • The condition of being “ultimate holding” removed for computing DDT to be paid • Amendment effective from 1July 2012 • However for claiming the benefit the holding company is required to hold more than 50% equity share in subsidiary company

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. Dividend – Rs. 100 DDT – NIL Subsidiary co. Subsidiary co. Dividend – Rs. 100 DDT – Rs. 16.225 Dividend – Rs. 100 DDT – Rs. 16.225 DDT cost for the Group – Rs. 32.45 DDT cost for the Group – Rs. 16.225

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