An Overview Key Key policy Direct Tax Indirect Tax Our Offices

Expectations initiatives Proposals Proposals

Union Budget 2011-12:

2011 12:
Impact on Financial Services Sector

© Grant Thornton India. All rights reserved. 1

An Overview Key Key policy Direct Tax Indirect Tax Our Offices
Expectations initiatives Proposals Proposals

An overview

A financial system
y which is inherentlyy strong,
g functionallyy A major
j financial inclusion initiative was recentlyy launched,
competent and flexible is a vital cog in the wheel of a “Swabhimaan”, which aims at providing banking facilities
developing country like India. The banking system is by through the use of technology. Banks shall provide basic
far the most dominant segment of the financial sector. services using the services of Business Correspondents (Banks
Indian banks, largely unaffected by global turmoil, Saathi). The said initiative enables Government subsidies and
continue to build on their strengths, thanks to the social security benefits to be directly credited to the
regulator's watchful eye beneficiaries' accounts, enabling them to draw the money from
the business correspondents in their village itself
In continuation to financial reforms agenda,
g , various
legislations relating to banking and insurance are While the sector has reached a stage where new age reforms are
proposed to be introduced. The policy initiatives cover required, it looks at the Government to enable it to reach the
not only the foreign investors and Foreign Institutional next level of growth
Investors (FIIs), but also take into consideration public
sector banks, regional rural banks, micro finance
institutions, Housing Sector Finance, etc. As step
forward, Financial Sector Legislative Reforms
Commission is proposed to be set up to rewrite and
streamline
l theh ffinanciall sector llaws, rules
l and
d regulations
l

© Grant Thornton India. All rights reserved. 2

An Overview Key Key policy Direct Tax Indirect Tax Our Offices
Expectations initiatives Proposals Proposals

Key expectations

• Clarityy on characterization of income earned byy FIIs • Grant of loans exceedingg 51% of the book value of the total
i.e. ‘business income’ vis-à-vis ‘capital gains assets of the borrower to be exempted from Transfer Pricing
regulations
• Initiative from the Government to promote mobile
technology to drive the next leg of the banking sector • Increase in FDI limit in insurance sector from 26% to 49%
growth and support financial inclusion
• Allow Government owned insurance companies to enter
• Banks to get full tax deduction in respect of provisions capital market
for bad loans
loans, as against 7.5%
7 5% of total income
• Increase in period for carry forward of losses from 8 years
• Full tax deduction for interest earned by banks on long for insurance sector, considering the long gestation period
term advances for infrastructure projects
• Additional tax deduction of Rs 50,000 for life insurance
• All investments by Venture Capital Funds to qualify for premium
‘pass through status’, as against restricting it to
investment in certain specific sectors

• Reduction in the current lock in period of 5 years of

specified bank fixed deposits for availing tax deduction

© Grant Thornton India. All rights reserved. 3

An Overview Key Key policy
Expectations initiatives
Key policy initiatives
• Financial Sector Legislative
g Reforms Commission set
up to rewrite and streamline the financial sector laws,
rules and regulations – to be completed in 24 months
• Measures to be taken by Reserve Bank of India (RBI)
to further moderate inflation in the near future
• Securities Exchange Board of India (SEBI) registered
Mutual Funds permitted to accept subscriptions for
equity schemes from foreign investors who meet
"Know your customer (KYC)" requirements
• FII limit
li i for
f investment
i in
i corporate bonds,
b d with
ih
residual maturity of over 5 years, issued by
infrastructure companies increased to US$ 25 billion
• FIIs permitted to invest in unlisted bonds (with a
minimum lock in period of 3 years) issued by
infrastructure companies; FIIs allowed to trade
amongst themselves during the lock in period
© Grant Thornton India. All rights reserved.
Direct Tax Indirect Tax Our Offices
Proposals Proposals
• Introduction of new legislations
g proposed
p p in the financial
sector to provide impetus for reforms in such sector. These
legislations mainly relate to banking and insurance
• Government to set up appropriate regulatory framework to
protect the interest of small borrowers and look into issues
relating to Micro Finance sector
• Existing scheme of interest subvention of 1% on housing
loan further liberalised by extending it to housing loan upto
Rs 15 lakhs (present limit of Rs 10 lakhs) where the cost of
house does not exceed Rs 25 lakhs (present limit of Rs 20
lakhs)
• Existing housing loan limit enhanced to Rs 25 lakhs for
dwelling units under priority sector lending
• Setting up of Central Electronic Registry to prevent frauds
involving multiple lending by different banks on the same
immovable property to become operational by 31 March
2011
4
An Overview Key Key policy Direct Tax Indirect Tax Our Offices
Expectations initiatives Proposals Proposals

Key policy initiatives

• RBI to issue gguidelines before 31 March 2011 for grant

g • Benefit of Government contribution to be extended from 3
of banking licenses to private sector
• Exit norms under co-contributory pension scheme
“Swavalamban”
Swavalamban to be relaxed, whereby a subscriber will
be allowed exit at the age of 50 years instead of 60
years, or a minimum tenure of 20 years, whichever is
later
years to 5 years for all subscribers of Swavalamban who
enroll during 2010-11 and 2011-12
• Eligibility for pension under Indira Gandhi National Old
Age Pension Scheme for beneficiaries Below Poverty Line
(BPL) reduced from 65 years to 60 years. Those above 80
years to get pension of Rs 500 per month, instead of Rs 200
at present
p

Fund allocation
Particulars Amount
(Rs in crore)
Public sector banks to maintain a minimum Tier 1 Capital to Capital to Risk Weighted Asset ratio (CRAR) at 8% 6,000
Regional Rural Banks to maintain CRAR of atleast 9% as on March 31, 2012 500
India Microfinance Equity Fund with State Industrial Development Bank of India (SIDBI) 100
W
Women's
' Self
S lf Help
H l GGroups Development
D l tFFund
d 500
Rural Infrastructure Development Fund XVII 18,000
Refinancing incremental lending by SIDBI 5,000
Rural Housing Fund 3,000

© Grant Thornton India. All rights reserved. 5

An Overview Key Key policy Direct Tax Indirect Tax Our Offices
Expectations initiatives Proposals Proposals

Direct Tax Proposals

• Moneyy market mutual fund, liquid

q fund and debt fund • Increase in Minimum Alternate Tax ((MAT)) rate from 18%*
liable to pay additional income tax on income to 18.5%*
distributed to its unit holders, being other than
individual and HUF, at 30%* (as against the present • Surcharge rate reduced from 7.5% to 5% for domestic
rate of 25%*)
companies and from 2.5%
2 5% to 2% for foreign companies
having a turnover of more than `1 crore
• Income of certain notified Infrastructure Debt Funds
to be exempt. However, such funds will be required to
• Dividends received from a foreign subsidiary proposed to be
file a return of income
t d att 15%* in th
taxed the h
hands
nd off rresident
id nt corporate
rp r t ttaxpayers.
p r
Expenditure in relation to such income is not allowed to be
• Interest payment to non-resident investors by the deducted
notified Infrastructure Debt Funds subject to tax of
5%* and similar withholding tax (at 5%*)
5% 5% ) by such funds

• The above amendments with respect to Infrastructure

Debt Funds to take effect from 1 June 2011

* This rate is excluding surcharge and education cess (as applicable)

© Grant Thornton India. All rights reserved. 6

An Overview Key Key policy Direct Tax Indirect Tax Our Offices
Expectations initiatives Proposals Proposals

Indirect tax proposals

Banking companies and Financial institutions Insurance Sector

• The CENVAT Credit Rules have been amended
whereby banking companies and financial institutions
would be able to utilize only 50% of the available
CENVAT credit. Thus, they would be obligated to pay
an
n amount
m nt equal
q l tot 50% off the
th CENVAT credit
r dit availed
il d
Money changing services
• New valuation rules have been introduced for
determining the value of taxable service for payment
of service tax
• For payment of service tax under the composition
scheme rate of composition has been reduced from
0.25% to 0.1% of the gross amount of money
exchanged
• The option to pay service tax on the billed amount has
been withdrawn and the assessee will either have the
option to pay tax under the composition scheme at
0 1% of the gross amount exchanged or the value
0.1%
determined as per the new valuation rules
© Grant Thornton India. All rights reserved.
• Life insurance services relating to managing investment for
the policy holders is being brought into the tax net. Option
has been given to pay tax at the standard rate on portion of
premium that has not been invested and is so indicated in any
off the
th documents
d t given
i to
t policy
li holder.
h ld The
Th composition
iti
rate is also being increased from 1% to 1.5%.
• The CENVAT Credit Rules have been amended whereby the
provider of Life Insurance service and investment under
ULIP will be allowed to utilize only 80% of the CENVAT
credit availed for payment of service tax.
Others
• It is important to note that the definition of Business
Support services has been amended to include any kind of
operational
p and administrative assistance. Since the w
words
operational and administrative assistance have a wide
connotation they can also cover services already taxed under
the aforesaid categories.
The major change in the current budget has been the
restriction of CENVAT credit on input services for both the
sectors. This will increase the cost of services. 7
An Overview Key Key policy Direct Tax Indirect Tax Our Offices
Expectations initiatives Proposals Proposals

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