Budget 2010 Snapshot

Specific proposals for Financial Service sector

4Financial Services 4Banking 4Insurance 4Capital Markets & FIIs 4Mutual Funds 4Private Equity & VCFs 4Real Estate 4General

Industry Overview

• Indian economy has shown resilience in 2009 -10 and is expected to

record a growth rate of 7.2% as compared to the growth rate of 6.7%
in 2008-09
• Financial services and real estate sector rose by 9.5% in the first
quarter of 2009-10
• Market value of AUM was higher by 60.91% as on December 31,2009,
as compared to December 31, 2008
• FII net investment of USD 20,991.67 mn during the period April to
December 2009 was the highest ever inflow in the country in a single
year
• BSE – Sensex as on December 31, 2009 – 17464.81 as compared to
9708.50 as on March 31, 2009

Key Developments

• Government planning to ease restriction on foreign investment in

insurance and banking i.e. allow FDI upto 49% from the present 26%
- Bill to give effect for increase in FDI in insurance is pending before
the Rajya Sabha
• LLP Act and Rules notified in 2009
- Clarity of FDI in LLP awaited
• Companies Bill 2009 proposed to be put up before Parliament in the
upcoming monsoon session

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 Budget 2010 Snapshot – Banking Home

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Industry Overview Budget Wish list

Direct Tax
• Number of commercial banks in India - 171
• SCBs aggregate deposits outstanding stood at Rs 42,95,391 crores
• NBFCs to receive interest income without deduction of tax u/s 194A, similar
as of January 2010
to exemption provided to banks
• SCB’s total credit outstanding stood at Rs 30,29,079 crores as of
• NBFCs to be eligible to claim deduction in respect of provision for bad and
January 2010
doubtful debts u/s 36(1)(vii), similar to deduction claimed by banks
• Credit to deposit ratio of SCB’s was 70.52% as on January 2010, as
• NBFCs to be taxed on interest received from non-performing loans only on
against 73.9% in March 2009
receipt basis (in accordance with RBI Guidelines) u/s 43D, similar to the
• Cash to deposit ratio was 6.06% and investments to deposit ratio was
income offered by banks in respect of non-performing loans
32.63% as on January 2010, as compared to 7.3% and 35.7%,
• Specific provisions allowing banks and NBFCs to claim loss on sale / write-
respectively, in March 2009
off of non-performing loans as ‘business loss’
• Clarification on tax treatment of transactions / notional transactions between
Key Developments Indian branches of foreign banks and their head offices or offshore branches

• Guidelines on mobile banking transactions modified Budget- Proposed Amendments

• Initiatives have been undertaken for financial inclusion and to
penetrate the rural places Direct Tax
• Banks required to increase NPA coverage ratio to 70% by September
2010 • No amendments proposed for the banking sector
• Banks to introduce new base rate from April 2010, replacing BPLR in
support of improved and transparent loan pricing structure
General

• RBI considering issuance of banking licence to private sector players and

NBFCs
• Public sector banks to be provided funding up to Rs16,500 crores to meet
required Tier I capital ratio

New Delhi
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 Budget 2010 Snapshot – Insurance Home

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Industry Overview Budget Wish list

• Number of insurance companies in India – 46 (23 life insurance and
23 non- life insurance companies)
• Life insurance industry–
- First year premium collected - Rs. 67,557 crores during the period
April – December 2009 as compared Rs. 52,299 crores during the
same period in previous year, reflecting growth of 29.17%
- Policies sold - Approx 3.38 crores during the period April –
December 2009 as compared to approx 3.05 crores policies in the
same period last year
• Non-life Insurance industry–
- Gross premium collected - Rs. 24,583 crores during the period
April – November 2009 as compared to Rs. 21,646 crores during
the same period in previous year, reflecting growth of 13.57%
- Policies issued - 670.60 lakh during 2008-09 as compared to
572.50 lakh policies in the same period last year
Key Developments
• IRDA allowed insurance companies to offer policies combining both
life and health cover
• Insurance companies to comply with public disclosure norms in
respect of financial statements
• Insurance companies to comply with prescribed corporate governance
guidelines w.e.f. April 1, 2010
• IRDA has mandated an overall cap on charges leviable on ULIP
linked products
• Insurance Laws Amendment Bill is currently placed before the Rajya
Sabha - Amendment will enable insurance companies to raise capital
on the lines of the banking sector in the form of subordinated debt or
through preference shares or perpetual bonds
New Delhi
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Direct Tax
• Exempt foreign reinsurance payments from TDS provisions
• Separate limit for deductions u/s 80C for long term saving instruments like
insurance, pension
• Section 80C and section 80D limit to be revised upwards
• Exemption of principal amount received on annuity products, i.e. tax to be
levied only on the interest component
• Period for carry forward of losses to be extended to 12 years from the
present limit of 8 years
Budget- Proposed Amendments
Direct Tax
• Threshold limit of payment of insurance commission for purpose of deduction
of tax under section 194D is increased from Rs. 5,000 to Rs. 20,000.
• Non-Life insurance companies – Following amendments proposed in Rule 5
of First Schedule
- Realised gains on investments, if not credited to P&L A/c to be added to
total income.
- Similarly, realised losses on investments, even if not debited to P&L A/c,
to be allowed as deduction
- Provision for diminution in value of investments debited to P&L A/c to be
added to total income
Indirect Tax
• ‘Management of Investment under ULIP Service’ - Service tax will be
payable on the value higher of (a) actual amount charged by the insurer for
management of funds under ULIP or (b) Maximum amount of fund
management charges fixed by IRDA
• Service tax to be levied on health services provided under health insurance
schemes offered by insurance companies to the extent of payments made for
check- up / treatment directly made by the organisations/ insurance company
to hospital or medical establishment
3
 Budget 2010 Snapshot – Capital Market & Foreign Institutional Investors Home

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Industry Overview Budget Wish list

• Fund mobilization in primary market during April to December 2009 Direct Tax
- 22 public issues (IPOs + FPOs) – Rs 21,329.86 crores
• Exemption of long term capital gains in respect of equity shares to
- 19 right issues – Rs 3,132.09 crores
continue; STT rate to be retained at existing rates
- 52 QIPs – Rs 38,602.39 crores
• Depreciation claim to be allowed on BSE / NSE membership card
• Market capitalization (Rs in crores)
• Clarification on nature of income for FIIs – Capital gains vs. Business
Income
Stock Exchange March 31, 2009 March 31, 2008
• Clarification on taxability of Participatory notes
BSE 30,86,075.17 51,38,014.13 • FIIs to be given an option to be governed by either Section 115AD (specific
provisions) or the other general provisions of the IT Act
NSE 28,96,194.22 48,58,121.72 • Tax on Interest income in respect of securities to be reduced to 10%

• FIIs registered with SEBI as on December 31, 2009 – 1706

• Sub-accounts registered with SEBI as on December 31, 2009 – 5331
• FIIs invested Rs 1,00,445 crores during April to December 2009
- Investment in equity – Rs 89,575.80 crores
- Investment in debt – Rs 10,869.20 crores
Key Developments
• Simplified debt list agreement for debt securities
• SEBI has permitted stock exchanges to set the trading hours (in cash
and derivative segments) between 9 am to 5 pm subject to specified
conditions
• Portfolio managers to segregate client funds and securities vis a vis own
funds and securities
• Allocation methodology for debt investment limit prescribed for FIIs
• FIIs allowed to trade in interest rate futures within permissible limits
• FIIs allowed to invest in IDRs as per guidelines prescribed by RBI
Budget- Proposed Amendments
Direct Tax
• No change in the taxability of FIIs. Exemption of long term capital gains
u/s 10(38) to continue. No change in STT rates
• Services rendered by Managers / Advisors outside India could be taxable in
India unless protected by tax treaty
• Taxability of Participatory Notes continue to be unclear
• No clarification on characterisation of income for FIIs
• Direct tax code proposed to be effective from April 1, 2011
Indirect Tax
• Service tax to be levied on services provided by Electricity Exchange to any
person in relation to trading, processing, clearing or settlement of spot
contracts, term ahead contracts, seasonal contracts, derivatives or any
other electricity related contracts

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 Budget 2010 Snapshot – Mutual Funds Home

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Industry Overview Budget Wish list

Direct Tax
• Number of registered mutual funds in India – 42
• 79 mutual fund schemes launched during April to December 2009 • Minimum criterion for a fund to be defined as an EOF to be reduced
• Net fund mobilized by mutual funds – Rs 1,41,639.27 crores during the from 65% to 50%
period April to December 2009 as compared to Rs 30,431.99 crores • Real Estate Mutual Funds to be recognized as EOF
redeemed by investors during the same period in previous year • Fund of Funds which invest more than 65% of investible funds in EOF
• Cumulative AUM – 6,65,146.15 crores as on December 2009 should be recognized as an EOF
compared to Rs 4,13,364.51 crores as on December 2008 • STT to be abolished in the hands of investors
- Investors routing their investments in capital market through mutual
Key Developments fund suffer twin level of STT
• Section 80C to cover all type of mutual fund schemes besides ELSS
• AMFI has issued guidelines permitting change of mutual fund as part of investments
distributor
• Mutual funds are permitted to invest in IDRs subject to prescribed SEBI Budget- Proposed Amendments
guidelines
• Abolition of entry load on all mutual fund schemes w.e.f August 1, 2009 Direct Tax
• Permission granted to allow trading of mutual fund units through
registered stock brokers of recognised stock exchanges • Surcharge on tax on distribution of income by a mutual fund, other than
• No distinction among unit holders on amount of subscription while equity oriented fund, proposed to be reduced to 7.5% as against the
charging entry loads current 10%. Pursuant to the proposed reduction, the revised rates are
• New innovative products launched to explore untapped customers i.e. as given below
gold traded funds, capital protection oriented schemes and SIP having
monthly investment as low as Rs 100 Existing Revised

Money market mutual fund or liquid fund 28.33% 27.68%

Other than money market mutual fund
or liquid fund

- Individuals or HUF 14.17% 13.84%

- Others 22.66% 22.15%

New Delhi
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 Budget 2010 Snapshot – Private Equity and Venture Capital Funds Home

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Industry Overview Budget Wish List

• Private equity investments made during 2009 - USD 3.8 bn
- Investment in SME segment – USD 580mn
• Funds raised - USD 3.6 billion in 2009
• Key investment sectors in the recent past – IT & ITES, Energy,
Healthcare and Life Sciences
• The fragile global economic recovery has reaffirmed India’s status as
one of the most preferred destinations for PE investment
Key Developments
• Major PE funds are yet cautiously optimistic in their approach and deal
execution is slow
- PE activity is showing signs of revival with a rise in deal value,
number of deals and deal size
• Rebound of the stock market in 2009 led to an increased number of
exits by PE funds through the public market sale route
• Focus has shifted from the conventional sectors to infrastructure and
domestic consumption driven sectors
Direct Tax
• Clarification regarding eligibility norms to avail treaty benefits for SPVs
located in favourable jurisdiction
• Restoration of pass through status to VCFs investing in all sectors as
compared to current position which restricts the benefits to specified
sectors
• Clarification regarding application of trust taxation principles to
contributory trusts
- Whether trust would be regarded as revocable trust or irrevocable
trust and whether trust would be regarded as a specific trust or
discretionary trust
- Timing of taxation of income: whether on accrual basis or on
distribution?
• Investors in VCFs investing in both, specified sectors and other sectors
would be subject to tax on accrual basis and on distribution- significant
complexities w.r.t. taxation of income in the hands of the investors
Budget- Proposed Amendments
Direct Tax

• Investment linked deduction extended to business of building and

operating a new hotel (2 star and above) with effect from FY 2009-10
• No amendments proposed for the VCF sector

Indirect Tax

• General export criteria of “Provided from India and used Outside India”
omitted – Amendment beneficial to exporter of service i.e. Indian
advisory companies to claim input service tax refund

New Delhi
ajay.kumar@in.pwc.com

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 Budget 2010 Snapshot – Real Estate
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Industry Overview
• Share of real estate in overall FDI increased to 11% in 2009-10 as
compared to 10.2% in 2008-09
• Bank lending to real estate sector increased to 3.5% of the total bank
lending in 2009-10 as compared to 2.8% in 2008-09
• Employment generated – Approx 33 mn people
• Affordable housing – Current theme of the real estate sector
Key Developments
• Clarification on applicability of 3 year lock-in condition for entire foreign
investment and not only minimum capitalization
• Release of Draft Model Real Estate (Regulation of Development) Act
- Set up real estate regulatory authority in each state to control and
promote construction, sale, transfer and management of colonies,
residential buildings, apartments and other similar properties
• Availability of ECB under approval route for corporates engaged in
development of integrated township extended till December 31, 2010
Budget Wish List
Direct Tax
• Re-introduce tax benefit for small housing projects by extending the
cut-off date for getting the projects approved by the local authority
• REMF / REIT structures to be provided suitable tax benefits
• Tax holiday should be allowed to developers who are involved in slum
rehabilitation and re-development programme
• Infrastructure status should be granted to integrated township and
group housing development to facilitate tax benefits
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Budget – Proposed Amendments
Direct Tax
• Tax holiday for developers (retrospective amendment effective FY 2009-
10)
- Increased time limit for completion of housing projects within 5 years
in respect of projects approved on or after April 1, 2005
- Norms for built-up area of shops and other commercial
establishments in housing projects proposed to be relaxed from 5%
of built up area / 2500 sq. ft. whichever is less to 3% of built up area /
5,000 sq. ft. whichever is higher, in respect of projects approved on
or after the April 1, 2005 and pending completion
• Threshold limit for deduction of tax at source on rentals increased to
Rs.180,000 with effect from July 1, 2010
• Extension of the period available for construction and start of functions
by two-star, three-star and four-star hotels located in specified areas
from March 31, 2010 to July 31, 2010 for availing deduction of 100% of
profits for 5 consecutive years
Indirect Tax
• Definition of ‘Renting of Immovable Property services’ retrospectively
amended w.e.f. June 1, 2007 to explicitly include activity of renting itself
• Renting of vacant land, meant for construction of building/ structure for
use in furtherance of business or commerce proposed to be covered
within the ambit of ‘Renting of Immovable Property Services’
• The activity of construction deemed to be taxable service provided by
the builder, unless entire consideration is paid by buyer after issuance
of Completion Certificate by competent authority
• Service tax proposed to be levied on special services (such as
preferential location, power back etc.) provided by builder of residential
/ commercial complex to a buyer
Others
• 1 percent interest subvention on housing loan upto Rs.10 lakhs with
cost of house less than Rs.20 lakhs extended up to March 31, 2011
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 Budget 2010 Snapshot – General Home

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Policy Initiatives Direct Tax Code

• An apex level council to be set up • Proposed to be implemented from April 1, 2011
- to strengthen the mechanism for maintaining financial stability
- to monitor functioning of large financial conglomerates and address Direct Tax Rates – For Corporates
inter-regulatory coordination issues
• No changes proposed in the corporate tax rates. However surcharge on
• Financial Sector Legislative Reforms Commission to be set up to domestic companies proposed to be reduced to 7.5% (from current rate of
revamp rewrite the financial sector laws in line with the requirements 10%)
• Definition of infrastructure under ECB Policy widened
Minimum Alternate Tax (‘MAT’) on corporates increased
• Exchange of Information with other countries
- to enhance the exchange of bank related and other information • Rate of MAT on book profits proposed to be increased to 18% (from current
- to track tax evasion and identify undisclosed assets of resident rate of 15%)
Indians lying abroad
Income deemed to accrue/arise in India to a non-resident
Budget- Proposed Amendments
• Income of non-residents from services rendered outside India also taxable
Direct Tax – For individuals
• Specific clarification with retrospective effect from April 1976
• Income tax slabs enhanced for individual taxpayers
Turnover limits for tax audits enhanced
Tax slabs Rate
• Limits for turnover or gross receipts for the purpose of audit of accounts
Income up to Rs. 1.6 lakhs NIL
enhanced
Income above Rs. 1.6 lakhs and up to Rs. 5 lakhs 10 % – Rs. 60 lakhs (from Rs. 40 lakhs) for persons carrying on business
– Rs. 15 lakhs (from Rs. 10 lakhs) for persons carrying on profession
Income above Rs. 5 lakhs and up to Rs. 8 lakhs 20 %

Income above Rs. 8 lakhs 30 %

Anti-abuse provision for Firms and Companies

• Finance Bill proposes to prevent the practice of transfer of unlisted shares at

• Additional deduction of Rs. 20,000 on tax savings (over and above a price which is below FMV
existing limit of Rs. 1 lakhs under section 80C) for investment in • If a firm/ closely-held company receives shares (FMV > Rs. 50,000) of a
notified long-term infrastructure bonds closely-held company without/ for inadequate consideration, then such FMV/
excess of FMV, as the case may be, will be taxed

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Budget 2010 Snapshot – General Home

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Tax Deduction at Source Conversion of private and unlisted public companies into LLP
• Rationalization of TDS provisions
• Finance Bill, 2010 proposes capital gains tax exemption for such
- Threshold limit for certain payments proposed to be increased w.e.f.
conversion
July 1, 2010
• Exemption subject to conditions, inter alia,
Section Nature of Existing threshold limit Revised threshold - Company’s turnover not to exceed Rs 60 lakhs in each of 3 years before
Payment (Rs) limit (Rs) conversion
20,000 30,000
- Upon conversion, shareholders of company continue to be entitled to
(for a single transaction) (for a single receive at least 50% of LLP’s profit for 5 years
transaction) - Upon conversion, no payment to partners for 3 years out of company’s
194C
Payment to accumulated profits
contractors 50,000 75,000 • Specific provisions proposed to be introduced for successor LLP regarding
(for aggregate of (for aggregate of
- Carry forward and set-off of company’s business loss
transactions during transactions during
- Depreciation allowance
financial year) financial year)
- Cost of depreciable assets
194H Commission or 2,500 5,000 - Cost of acquisition of capital assets
Brokerage • Company’s MAT credit not available to successor LLP
194-I Rent 1,20,000 1,80,000
Indirect Tax
194J Fees for 20,000 30,000
professional or • GST expected to be introduced by 1 April, 2011
technical services
• Rate of excise duty on all goods increased from 8% to 10%
• No change in the general customs duty and service tax rates
- No disallowance of expenses, if TDS on same is paid on or before the
due date of filing of return of income
• Interest charged on tax deducted but not deposited by the specified date
proposed to be increased from 12% to 18% p.a.
• It is proposed that deductor shall continue to furnish TDS certificates to the
deductee

Contacts:
Gautam Mehra Nitin Karve Suresh V Swamy Sunil Gidwani S Madhavan Jairaj Purandare
Executive Director Executive Director Executive Director Executive Director Executive Director Executive Director & FS Industry Leader
gautam.mehra@in.pwc.com Nitin.Karve@in.pwc.com suresh.v.swamy@in.pwc.com Sunil.Gidwani@in.pwc.com s.madhavan@in.pwc.com jairaj.purandare@in.pwc.com
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