Analysis Beyond Consensus - Budget 2012 - Direct Taxes: Edelweiss PDF link

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We present the key changes in the proposed direct tax regime in the Union Budget which may have implication on India Inc.

·       Transfer pricing regulations to apply on certain domestic transactions: This may lead to increase in effective tax rate of corporate currently benefiting from units in the SEZ/ tax exempted zones and engaged in significant related party transactions.

·       Introduction of General Anti Avoidance Rule: The proposal will have a significant implication for companies operating out of tax havens, on transactions which lack in commercial substance.

·       Reduction in cascading impact of dividend distribution tax in multi-layered corporate structure

·       Introduction of minimum alternate tax on entities other than companies and LLPs: This will adversely impact the cash flow and in some case the profitability of companies who operate through the partnership structures in SEZ/ tax free zones.

·       Deemed income on transfer of shares/interest in companies incorporated outside India, deriving substantial value from assets situated in India, retrospectively from April 1, 1962: This will increase the tax liability on acquisition of such holding companies.

·       Expanding the scope of royalty on import of software for development/ distribution retrospectively w.e.f. June 1, 1976: This will prospectively lead to an increase in the input cost for domestic companies engaged in such transactions. Retrospective applicability may lead to an increase in tax demand/liability. 

·       Reduction of withholding tax on foreign currency borrowing by certain sectors from 20% to 5%: This will not only have significant positive cash flow impact, but also be EPS accretive since the effective borrowing cost on such loans will dip.

·       Reduction of securities transaction tax: This will have a positive impact on companies linked with capital markets.

·       Deduction on capital expenditure in respect of specified business: The increase in deduction on capital expenditure from 100% to 150% will positively impact the agricultural, hospital, housing and fertilizer sector.

Analysis Beyond Consensus - Budget 2012 – Direct Taxes

Regards,