PRE-BUDGET MEMORANDUM 2013-2014

PRE-BUDGET
MEMORANDUM
2013-2014
PRE-BUDGET
MEMORANDUM
2013-2014
CONTENTS
I. PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4
Implementation of Reports of key Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Debate on Inheritance Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Dispute resolution measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Taxation of dividends from overseas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Import duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Service Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Goods and Services Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Expanding the tax base and dealing with unaccounted monies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
II. ECONOMIC OVERVIEW AND KEY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9
Output and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Money & Banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Key Issues and Reforms Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
III. SECTORAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-75
CEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
TEXTILE AND APPAREL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
AGRICULTURE AND ALLIED SECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PAPER INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
HEALTHCARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
STEEL AND OTHER FERROUS METALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
NON-FERROUS METALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SOLAR ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
OIL AND GAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(i)
ENVIRONMENT SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
CHEMICALS AND PETROCHEMICALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SHIPPING AND PORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
POWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
CIVIL AVIATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
VEGETABLE OIL & OIL SEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
INFRASTRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
ENTERTAINMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
CIGARETTE/TOBACCO INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
HOUSING AND REAL ESTATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
LIFE SCIENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
MEDICAL EQUIPMENTS AND DEVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ELECTRONICS HARDWARE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
TOURISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
RETAIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
CONSUMER ELECTRONICS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
CHLOR ALKALI INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
IV. DIRECT TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76-181
Tax Rates - Companies/Firms/Limited Liability Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Tax Rates - Individual Taxpayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Surcharge and Education Cess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Minimum Alternate Tax and Alternate Minimum Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
MAT on infrastructure companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Dividend Distribution Tax under Section 115-O . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Rationalization of provisions of Section 14A and Rule 8D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Introduction of Technological Upgradation Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Disallowance under Section 40(a)(i) and 40(a)(ia) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Disallowance of cash payments under Section 40A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
(ii)
Taking/Repayment of Loans and Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Deemed Dividend [Section 2(22)(e)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Carry Backward of Business Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 35D - Amortization of certain preliminary expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Non-Resident related issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Advance Ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Tax Incentives and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
- Profit Linked Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
- Investment Linked Incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Restoration of exemption of income from investment in infrastructure . . . . . . . . . . . . . . . . . . . . . 112
and other projects
Tax Incentives - Weighted deduction under section 35(2AB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Deduction under section 80JJAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Deduction under section 42 for Infructuous or Abortive Exploration Expenses. . . . . . . . . . . . . . . . 116
Deduction for Expenditure on prospecting for certain minerals. . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Deductibility in respect of subscription to long-term infrastructure bonds . . . . . . . . . . . . . . . . . . . 116
Income tax exemption in case of Sale of Carbon Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Amendment to Section 9(1) - Retrospective insertion of Explanations . . . . . . . . . . . . . . . . . . . . . . 127
Amendment to Section 2(14) and Section 2(47) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Insertion of Section 50D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Amendment to Section 68 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Amendment to Section 115JB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Assessment and Procedural Aspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Electronic Filing of income-tax returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Compulsory filing of income tax return in relation to assets located outside India . . . . . . . . . . . . . 147
Assessment Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Reassessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
(iii)
Time limit for completing income-tax proceedings, where matters are . . . . . . . . . . . . . . . . . . . . . . 151
partially set-aside by higher Appellate Authorities
Stay of Demand by the Tribunal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Maintenance of Books of Account in Digital Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Personal Tax related aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Calculation of interest for delay in deposit of taxes withheld - meaning of 'month' . . . . . . . . . . . . 163
Interest payable in case of default in furnishing return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Interest for deferment of advance tax under Section 234C of the Act . . . . . . . . . . . . . . . . . . . . . . 164
Deduction in respect of interest on time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Receipt of amount under Life Insurance Policy - Section 10(10D)(d) . . . . . . . . . . . . . . . . . . . . . . . . 165
Monetary Limit for Accounts Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Relaxation on mandatory requirement of PAN (Section 206AA). . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Tax Deducted at Source (TDS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Retrospective Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Amendment in the definition of 'Charitable Purpose' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Credit in respect of foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
Modification of Definition of Association of Persons (AOP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Corporate Social Responsibility costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Deduction for Road Safety Development Programmes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Inclusive Method of accounting - Section 145A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Enhancement of Limits for TDS under Section 194C for Payment to Contractors . . . . . . . . . . . . . . 179
Wealth Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
V. INDIRECT TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182-247
Service Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
- Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
- Valuation of Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
- Place of Provision of Services Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
- Reverse Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
- Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Central Excise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
(iv)
Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Cenvat Credit Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Structural and Procedural Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
- Structural Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
- Independence of Adjudication Wing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
- Improvement in Dispute Resolution Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
- Expanding the Scope of Authority for Advance Rulings . . . . . . . . . . . . . . . . . . . . . . . . . . 232
- Introduction of Advance Pricing Mechanism in Customs Law in line with . . . . . . . . . . . . 234
Transfer Pricing regulations of Direct Taxes
- Extension of Large Taxpayer Unit (LTU) Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
- Annual Audit of Service Providers by Chartered Accountants. . . . . . . . . . . . . . . . . . . . . . 234
- Common Procedural Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
- Rate of Interest for delayed payment of excise duty or service tax . . . . . . . . . . . . . . . . . 235
- Time limit for disposal of appeals by CESTAT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
- New Benches of CESTAT at Hyderabad, Lucknow, Ranchi etc.. . . . . . . . . . . . . . . . . . . . . . 235
- Expiry of Stay order if appeal is not disposed of within the period of 180 days . . . . . . . . 236
- Issue of multiple notices on same issue for different periods . . . . . . . . . . . . . . . . . . . . . . 236
- Maintenance of scanned copies of documents in lieu of originals . . . . . . . . . . . . . . . . . . 236
- Merger of duties and cesses etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
- Streamlining of Instructions / Circulars by issue of Annual Master Circulars . . . . . . . . . . 237
- Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
- Period of interest free warehousing of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
- Refund of Extra Duty Deposit in case of provisional assessment . . . . . . . . . . . . . . . . . . . 237
- Finalization of provisional assessments within prescribed time lines . . . . . . . . . . . . . . . . 238
- Bank Guarantees to be returned if the assessee wins first appeal . . . . . . . . . . . . . . . . . . 238
- Refund of excess Customs duty paid in case of amendment to Bill of . . . . . . . . . . . . . . . 238
Entry to rectify clerical mistakes
- Import of Commercial Samples / Prototypes / Critical Spare Parts as Baggage . . . . . . . . 239
- Confirmation of Proof of Export . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
- Implementation of the Report of Indian Institute of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
Foreign Trade on Trade Facilitation
(v)
- Central Excise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
- Demand of interest for differential Excise Duty paid due to price increase . . . . . . . . . . . . . . 240
subsequent to removal of goods
- Availability of Credit on Bill of Entry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
- Clearance of goods for captive consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
- Valuation of Goods manufactured by job worker for captive . . . . . . . . . . . . . . . . . . . . . . . . . 241
consumption by the manufacturer
- Export of Excisable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
- End Use Certificate for import of waste paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
- Clarificatory amendment to Rule 8 (3A) of the Central Excise Rules . . . . . . . . . . . . . . . . . . . . 242
- Central Excise valuation - impact of the judgment of the Supreme Court in Fiat case . . . . . . 242
Goods and Services Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
Central Sales Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
(vi)
PRE-BUDGET MEMORANDUM 2013-2014
I. PREAMBLE
The Union Budget to be presented to the Parliament would be in the midst of one of the most challenging times the
world is facing. The USA is dealing with the fiscal cliff, Europe with an all pervasive crisis and the rest of world bracing
for a slowdown. We in India need to come out of the 'perceived policy paralysis' and need to present a Budget which
will continue to inspire investor confidence and help us get back to the 8-9 per cent growth trajectory.
The tax policies that we implement and follow go a long way in impacting foreign investment in the country and are
an integral part thereof. As it happens, some of the recent policy developments have not gone down well with the
investors and have shaken their faith in the efficacy of the judicial system. We at FICCI do believe that the ensuing
Budget offers a platform to communicate to the investing community that we are willing to offer a stable and
consistent tax environment conducive for investment and in conformity with our priorities.
Our detailed memorandum on the various recommendations follows. What we would like to set out in this Preamble
are the key issues which we believe need to be addressed in the forthcoming Budget:
1.1.
Implementation of Reports of key Committees
One of the key positive developments in the recent past has been the setting up of the Shome and Rangachary
Committees to address the various concerns that the taxpaying community has. The Draft Reports of the Shome
Committee on GAAR and on retrospective amendment to Section 9 of the Income Tax Act have been received very
positively by the taxpaying community. It is imperative that the final reports of the Shome Committee are placed in
the public domain and, more important, the recommendations acted upon. Similarly, it is imperative that the
recommendations of the Rangachary Committee are placed in the public domain and acted upon. If this is not done
urgently, there is a danger that the deliberations of these Committees will be perceived as one more symbolic
exercise with little result to show.
FICCI would like to endorse several of the recommendations contained in the Draft Reports of the Shome
Committee. In particular, FICCI supports the view of the Committee that GAAR needs to be implemented after
adequate 3 year notice, the existing investments and structures need to be grand fathered and the subjectivity be
taken out of the implementation process. FICCI also endorses the view of the Committee that Retrospective
amendments to tax laws should be a rare phenomenon only to prevent abuse and not to overcome judicial
pronouncements, that where retrospective amendments are made they should not result in withholding tax
obligations, interest and penalty and the need to curtail the implications of amendment to Section 9 of the Incometax Act by prescribing threshold limits.
The Rangachary Committee has heard at length the IT/ITES industry and has come up with recommendations on
resolution of several disputes. It has also prescribed Safe Harbour Rules. Apart from implementing these
recommendations, it is necessary to ensure that other industries too find a mechanism of dispute resolution.
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PRE-BUDGET MEMORANDUM 2013-2014
1.2.
Debate on Inheritance Tax
The recent invitation by the Hon'ble FM to views on the revival of Inheritance Tax has sparked of a major debate.
Coming at a time when there is a need to generate capital resources to invest in developmental needs, any proposal
to introduce Inheritance Tax would be counterproductive.
A substantial portion of the resources generated in the post liberalization era is in listed entities which have helped
the progress of the country. To impose a tax which could potentially require a promoter to dilute his shareholding in
a Company merely to pay incidence of Inheritance Tax is preposterous. Moreover such a tax could be very onerous
for illiquid assets e. g. self occupied housing where the value of the property may have steeply escalated.
When the Estate Duty was in existence, the fact was that the cost of administering the tax was more that the taxes
garnered. In a country where there are few social security measures, imposition of such a tax would indeed be
counterproductive. It will lead to misuse of the provisions and there would be attempts to find loopholes to avoid
payment of such a tax.
Over a period of time, the Government has cast the net of taxes wide and there are several other avenues to
increase the tax base. FICCI strongly opposes any imposition of Inheritance Tax; in any case, even in an extreme case
if such a tax was to be imposed, there is a need for a wider debate including the need to work out the ambit of the
tax, the exemptions, the rates, etc. Such a tax should not, if at all, be imposed in a hurry and without extensive
debate which must necessarily encompass the societal ramifications as these are likely to be significant.
1.3.
Dispute resolution measures
One of the key concerns of the taxpaying community is the prolonged litigation, the length of time it takes to resolve
a dispute, the need to make on account payments in the interregnum, etc. The Dispute Resolution Panel (DRP) and
the Mutual Agreement Procedure (MAP) in the context of Direct Taxes have not proved effective mechanisms in this
regard. The fact that multiple benches of ITAT/High Courts give differing decisions has not helped the cause of the
taxpaying community.
FICCI strongly recommends that there be a 'conciliation bench' which can be approached by a tax payer to help
'settle' tax disputes. This will ensure that where a tax payer has already got a favourable resolution of a dispute on a
matter, the dispute is not continued in the later years as a matter of routine. Similarly, non-resident tax payers can
focus on quantum of profits attributable to a Permanent Establishment or the adjustment on a Transfer Pricing issue.
Industry has observed that the assessing officers tend to display a revenue bias in adjudicating tax disputes. This
tendency is pronounced in disputes relating to indirect taxes. There is always pressure of maximizing revenue since
yearly targets for collection of duties are assigned to each such officer. This results in show cause notice/demands
getting confirmed even when the same are legally untenable as is evident from the statistics of appeals decided in
favour of the Department or against it. It is suggested that the adjudicating officers should be disengaged from the
duties of revenue collection. Moreover, revenue realizations dependent as they are on the economic activities should
not be a parameter to assess the efficiency or competence of a revenue officer.
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PRE-BUDGET MEMORANDUM 2013-2014
1.4.
Refunds
Tax payers are indeed concerned about the substantial refunds pending at the tax office on account of both Direct
and Indirect taxes. There is a spiral here because there is a higher withholding tax and most often tax payers are
unable to get lower tax withholding certificates because the Departments within the Tax Office who deal with
withholding tax and those dealing with assessments are different and each have their own separate Budgets. The tax
payer is stuck in between.
Once higher taxes are withheld, there is a need for a refund and one finds, in practice, that tax offices make high
pitched assessments to avoid refunds. We thus get into prolonged litigation and a tax payer has major problems
trying to get back funds which are legitimately his. A new internal instruction that refunds will not be issued if a case
is chosen for scrutiny makes a mockery of the whole system and is outrageous. This spiral needs to be broken. There
is a need to issue instructions or guidance for issue of lower or nil withholding certificates. All pending refunds need
to be granted forthwith, even when a case is chosen for scrutiny assessment.
1.5.
Taxation of dividends from overseas
Over the last few years, corporate India has emerged as a fairly active global player and Indian business houses have
made investments and acquisitions which do India proud. The returns from these investments, when brought to
India, suffer tax unlike domestic dividends which are tax free in the hands of the recipients. In the last Budget, the
rate of tax was reduced to 15 per cent. FICCI believes that such dividends received out of tax paid profits overseas
and subjected to withholding taxes in those jurisdictions, should not be subjected to further tax in India on
remittance. Indeed, the US example has shown that when corporates are permitted to repatriate dividends tax free,
there is a significant inflow of funds; inward remittance of forex at this point of time would be a very welcome step
for our economy. FICCI recommends that tax on dividends from overseas be done away with; in the alternative, tax
on such dividends should be treated akin to minimum alternate tax, creditable against the normal tax liability and
payable only if the tax on normal income is less than the tax on such dividends.
1.6.
Import duties
Domestic Industry continues to suffer from cost disadvantages on account of higher local taxes such as VAT, octroi,
entry tax as also due to higher cost of financing and inadequate infrastructure. It deserves a minimal level of
protection to compete with imported goods. FICCI would suggest that generally the basic customs duties should
continue at existing levels till such time a comprehensive Goods and Services Tax is introduced and the cost of
financing is reduced to competitive levels.
1.7.
Service Tax
A comprehensive service tax based on the concept of a negative list of services has been introduced with effect from
1st July, 2012. It is an important step towards introduction of GST. However, it is noticed that while the levy is
universal in its application (barring the negative list and exemptions); there are restrictions on the availment of
Cenvat credit. This dichotomy needs to be resolved urgently.
Further, several doubts have been expressed about the scope of the new levy. Some of the issues requiring
clarification have been listed in the memorandum. The Ministry of Finance should issue clarifications on these issues
at the earliest to avoid litigation.
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PRE-BUDGET MEMORANDUM 2013-2014
1.8.
Goods and Services Tax
The recent move by the Hon'ble Finance Minister in reviving the move to introduce the GST, sooner rather than later,
is indeed welcome. FICCI indeed has strongly supported introduction of GST and believes that this will go a long way
in streamlining the economy and provide impetus to the growth of our GDP. FICCI believes that it is imperative that
this economic reform which is critical to the growth of the country be not a subject of party politics and should be
pushed forward at the soonest possible.
Also, it is important that the framework of GST should encompass the multiple taxes currently levied at the state and
local levels and should subsume all of them.
1.9.
Expanding the tax base and dealing with unaccounted monies
Any system that taxes those who are in the tax net on a progressively higher basis leaving out those who manage to
outside the tax net is regressive and will not achieve the objectives of economic and inclusive growth.
On the subject of funds lying overseas, while being fully sensitive on the Government's rights to appropriately deal
with defaulters, FICCI has strongly recommended that India enters into an agreement with countries like Switzerland
on the lines of similar treaties entered into it by the UK as this will ensure that taxes are collected on such monies,
including future earnings. FICCI would be happy to contribute to this thought process and feels that this move should
not be delayed further.
Finally, on this subject, it is observed that despite persistent efforts in the last few years there is hardly any widening
of the tax base; efforts so far made have yielded dismal results. FICCI sees the need to tax all the sectors which are
presently outside the scope of the tax net albeit at much higher levels of income/wealth. There is no economic
justification to not tax persons who have income above the threshold of maximum marginal rates payable by other
tax payers. Changes needed to the Constitution of India in this regard should be initiated and a debate on this subject
needs to take place.
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PRE-BUDGET MEMORANDUM 2013-2014
II. ECONOMIC OVERVIEW
AND KEY ISSUES
Economic Overview
2.1.
Output and Prices
The RBI in the latest macro-economic and monetary development has revised downwards the growth rate for
current fiscal to 5.8%.
Table 1: Chronology of downward revision of GDP for FY '13
Institution/ month
GDP forecast (in %)
RBI
April 2012
7.3
July 2012
6.5
Oct 2012
5.8
IMF#
July 2012
6.2 (2012), 6.6 (2013)
Oct 2012
4.9 (2012), 6.0 (2013)
FICCI
5.7 (2012-13) 6.5 (2013-14)
Oct 2012
Note: # IMF projections are for calendar year
Source: RBI, IMF, FICCI Research
Latest GDP numbers indicate a growth of 5.5% in Q1 of 2012-13. This growth rate is slightly higher than the 5.3%
growth registered in Q4 of FY12, a consecutive decline for five quarters. Agriculture expanded by 2.9% (vis-à-vis 3.7%
of Q1 FY 12 and 1.7% of Q4 FY 12). This positive growth in agriculture vis-à-vis last quarter is a pleasant surprise.
However, in spite of the agricultural sector clocking close to 3% growth food grain prices may remain elevated owing
to the ripple effect of the lower productivity in the months of June & July due to deficient monsoon
The industry sector recorded a growth of 3.6% which is substantially higher than the 1.9% & 2.5% growth recorded in
Q4 & Q3 FY12 respectively. However, this figure is not in line with the growth figures that have been achieved in FY10
& FY11. The growth in the mining & quarrying sector was 0.1% as compared to 4.3% in the last quarter. The
performance of the manufacturing sector was also not buoyant. The manufacturing sector reported a growth of 0.2%
in Q1FY13, vis-à-vis (-) 0.3% growth in Q4 FY12.
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PRE-BUDGET MEMORANDUM 2013-2014
The construction sector recorded a growth of 10.9% in the first quarter as compared to 4.8% in Q4 FY 12. The sector
has not recorded such a high growth ever since Q2 FY08. This year's good performance could be due to delayed
monsoon which otherwise affects construction activity. Cement dispatch numbers for the quarter have been fairly
decent and may be the delay in the monsoons this year has lent some support to the cement companies.
However, the worrying point was the growth rate in service sector at a low of 6.9% as compared to 10.2% in Q1 FY
12. At a disaggregated level, it was the trade, hotels & restaurants sector which dragged the services growth down.
The trade, hotels & restaurants sector recorded an all-time low growth of 4% in Q1FY13 as compared to 7% in the
last quarter and close to 14% in Q1 FY 12.
Headline inflation came in at 7.81% year on year (YoY) in Sep'12, sharply higher than previous month's print of 7.55%
YoY. The inflation print for the month of September came in at a 10-month high. The July number was revised
upward to 7.52% YoY from provisional estimate of 6.87% YoY.
Primary inflation eased to 8.77% YoY in Sep'12 from 10.4% YoY in July with food price inflation at 7.9% YoY. Within
food, the structural components of inflation in protein rich items witnessed a sharp spike compared to the previous
month. Prices for cereals jumped 14.2% YoY in Sep'12 from 10.7% YoY respectively in August. This can be mainly
owed to the spike in wheat inflation to18.6% YoY from a prior of 12.9% YoY. Meanwhile, the decline in fruits and
vegetables prices by 3.37% month on month (MoM) helped limit the monthly rise in food inflation levels.
Fuel inflation rose sharply to 11.9% YoY from 8.3% YoY, owing to a partial impact of the 13.6% hike in high speed
diesel prices in the month. The fuel inflation is likely to rise higher in October, as the rest of direct impact coupled
with the indirect impact of hike in diesel prices will be witnessed.
Inflation pressures in the manufacturing sector surged to 6.26% YoY in Sep'12 and core printed 5.57% YoY. Both
indices continue to exhibit an upward momentum.
The Central Bank is facing a sharp growth-inflation conundrum with growth continuing to remain weak, while
inflation is likely to increase in the coming months.
Table 2: Inflation rates as on Sep 2012
FY13
September
FY12
Month
YTD*
Year
Year
All Commodities
1.1
4.6
7.8
10.0
Primary Articles
0.5
6.2
8.8
12.2
Food Articles
0.6
7.9
7.9
9.6
Fuel & Power
4
5.9
11.9
14
Manufactured
0.5
3.6
6.3
8
Source: Office of Economic Advisor
* Note: YTD Implies year till date (as of Sept'12)
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PRE-BUDGET MEMORANDUM 2013-2014
2.2.
Money & Banking
The latest data available as on Oct 5'12 indicates a growth of 13.3% in Broad Money (M3). This is lower than the
targeted level of 15.0% for 2011-12. The growth in non-food credit was at 15.5%.
Table 3: Growth in monetary indicators and RBI target
As on Oct 5'12
Year till date
RBI target :
October'12
Year
RBI target
August'12
FY13
Year
(YTD)
M3
7.5
13.3
14.0
15.0
15.0
Non food Credit
4.3
15.5
16.0
17.0
17.0
Deposits
8.5
13.9
15.0
16.0
Source: RBI & FICCI Research
2.3.
Public Finance
The Government has recently submitted a detailed fiscal consolidation roadmap that endeavors to bring down the
fiscal deficit to 3% by FY17. Meanwhile, fiscal deficit trends in the current fiscal reveal a likely slippage in fiscal deficit
for FY13.
Table 4: Fiscal indicators
Fiscal Indicators
FY13:Apr-Sept
(Rs bn)
FY13:Apr-Sept
Budget
FY12:
Apr-Sept
FY11:
Apr-Sept
% to Budget
Receipts
3571.15
9773.35
36.5
37.7
Expenditure
6940.19
14909.25
46.5
47.6
Fiscal Deficit
3369.04
5135.90
65.6
68.0
Rev. Deficit
2632.84
3504.24
75.1
72.2
Primary Deficit
205739
193831
106.1
109.3
Source: CGA
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PRE-BUDGET MEMORANDUM 2013-2014
2.4.
Industry
The IIP print for the month of August was a positive surprise and came in at 2.7% YoY. On the manufacturing PMI
front, the performance has been stable at 52.8 for August as well as September.
The performance on a segmental basis was more encouraging for manufacturing and mining. Mining growth
improved to 2% YoY in August as against -1.6% YoY earlier. However, for the April-August period it continues to
remain in the negative territory at -0.6% YoY. Manufacturing clocked 2.9% YoY in August whereas during Apr-Aug it
has been 0% YoY.
As per the two-industry classification, 13 out of the 22 industry groups displayed positive growth among which were
publishing, printing and radio, TV and communication equipment.
Industries such as office, accounting and computing machinery and motor vehicles and other transport equipment
demonstrated negative growth.
Further, components such as capital goods have started to show reduced volatility and declined by 1.7% YoY as
against the lows of -28.1% YoY seen in June. For April-August capital goods continues to show contraction of -13.8%
YoY. The positive surprise however, ensued from the consumer goods front, which grew by 5% YoY as against 0.5%
YoY earlier. April-August, consumer goods clocked 3.5% YoY.
Table 5: IIP Growth Trend: Apr- Aug'12
Basic
Capital
Intermediate
Consumer
General
Apr- Aug '11
7.6
7.3
0.8
4.4
5.6
Apr- Aug '12
2.8
-13.8
0.6
3.5
0.4
Period
Source: MoSPI
2.5. External Sector
Cumulative trade deficit for FY2013 (April-August) now stands at $71.3 bn as against $76 bn in the same period last
year. Cumulative exports for FY2013 (April-August) now stand at $119 bn - a decline of 6.6% over the corresponding
period last year. Cumulative imports for FY2013 (April-August) now stand at $190 bn - a decline of 6.6% over the
corresponding period last year.
Nevertheless, exports trajectory is expected to improve slightly going ahead owing to the lagged impact of the sharp
Rupee depreciation against the major trading partners in early part of FY2013.
However on the downside, on the imports side, the rise in international crude oil prices in the August-September
period is expected to be reflected in incoming trade data and thereby poses upside risks to quantum of India's trade
deficit.
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PRE-BUDGET MEMORANDUM 2013-2014
Table 6: Exports & Imports: USD billion
2012
Exports
Imports
Apr
23.5
37.1
May
25.7
41.9
June
25.1
35.4
July
22.4
37.9
Aug
22.3
37.9
Sept
23.7
41.8
Source: Ministry of Commerce
Key Issues and Reforms Needed
Though the government has set pace for the reform process, a forward movement on GST, introducing greater
competition in the mining sector (particularly coal), strengthening framework and creating new avenues for
infrastructure financing and improving agri-marketing systems are some areas where the government should now
focus on.
For example, the recent bout of inflation, which has lasted for more than two years, has highlighted a very important
weak spot in our planning process. And this relates to shortage of food products whose demand is already on the
rise. As income levels in the economy increase, the demand for food in general and protein rich items in particular
goes up at a fast pace. We are already witnessing this in India and unless we take appropriate measures to increase
supply of food items such as pulses, milk and milk products, meat, fish and eggs etc, food inflation would become
endemic and derail the growth process. Additionally, steps should be taken to improve marketing and distribution of
food products in the country. And one of the key reforms here is for the states to implement the amended APMC
Acts in letter and spirit.
The Government should also examine the issue of land acquisition keeping the development agenda in mind. At its
present stage of development, India needs industrialisation. A land acquisition policy that could hamper this by
imposing heavy acquisition and relief and rehabilitation costs should be reconsidered. Likewise, Government has to
play a role in acquiring land for large private sector projects, including PPP projects for infrastructure development.
Goods and Services Tax will be a landmark reform once introduced. It will be a permanent stimulus for overall
economic activity and boost GDP growth, exports and employment generation. The central and the state
governments must engage in a positive manner on this issue and ensure that GST is introduced in the country at the
earliest. Estimates suggest that proposed GST structure, if implemented is estimated to increase the potential GDP
by at least 1.7%.
Special stress must also now be laid on policies like National Manufacturing Policy and National Electronics Policy
which has the potential of creating 28 to 100 million jobs in the coming decade. Such policies are particularly
welcome as they will be providing gainful employment to the growing young Indian population. India needs to create
substantial amount of jobs by the year 2025 so as to reap the benefit of the demographic dividend. It is believed that
a chunk of such employment opportunities would be generated from the manufacturing and IT sector.
While we should continue to explore all options for raising resources for infrastructure development, greater
emphasis should be laid on developing the corporate bond market and leveraging insurance and pension funds to
invest in infrastructure sector.
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PRE-BUDGET MEMORANDUM 2013-2014
III. SECTORAL ISSUES
CEMENT
3.1.1. Reduction in the rate of excise duty on Cement
Excise duty is levied on Cement @12% + Rs.120 per MT. These duty rates are one of the highest and other core
industries such as coal and steel attract duty at around 5%. Cement is one of the core infrastructure industries and it
requires large scale investments and capacity additions in view of the expected GDP growth and projected demand
for cement over the medium to long term.
Further, the excise duty structure for both cement as well as cement clinker has become quite complicated in the last
few years. Earlier it was at a specific rate per MT. Now, it has become ad-valorem cum specific duty and is further
also related to the declared MRP of the product.
There is surplus capacity of cement in the country and cement market is on a bearish trend. Therefore excise duty
rate on cement should be significantly reduced for growth of the industry at par with other core and infrastructure
industries.
3.1.2. Levy of Clean Energy Cess on Coal
A clean energy cess has been levied on coal, peat and lignite with effect from 1.7.2010. Energy is one of the major
cost drivers for cement. Though levied as a duty of excise, no cenvat credit is being allowed against this levy. This
cess, along with state VAT etc. is putting further pressure on an industry faced with surplus capacity, falling
realizations and increasing costs.
It is requested that Cenvat credit be allowed on Clean Energy Cess so as to mitigate the impact on costs.
3.1.3. Classifying Cement as “Declared Goods”
Cement is one of the basic and core infrastructure industries. However, unlike other similar industries/goods, cement
is subject to higher rates of taxation. It is requested that Cement be stipulated as “Declared Goods” under Section 14
of Central Sales Tax Act so that it is put on an equal footing with other core sector goods like coal and steel.
3.1.4. Levy of Customs Duty on Cement Imports
Presently, import of cement into India is freely allowed without paying basic customs duty. However, all the major
inputs for manufacturing cement such as limestone, gypsum, pet coke, packing bags etc. attract customs duty. In this
situation, duty free import causes further hardships to the Indian cement industry.
Hence, it is requested that to provide a level playing field, basic customs duty be levied on cement imports into India.
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PRE-BUDGET MEMORANDUM 2013-2014
Alternatively, import duties on goods required for manufacture of cement be abolished and freely allowed without
levy of duty.
3.1.5. Reduction of Customs Duty on Imports under EPCG scheme
The EPCG is meant to encourage exports. Hence, the scheme allows import of capital goods at concessional duty rate
of 3% and export obligation is also attached along with it. Now the normal customs duty is in the range of 5-7.5%
unlike 15-20% earlier. Recognizing this, the Government has already reduced duty to 0% for certain sectors. It is
suggested that this concession should be extended to cement industry as well.
3.1.6. Abolition of import duty on tyre chips
Cement industry is an energy intensive industry and requires huge amounts of energy resources. However, it does
not get adequate supplies of domestic coal and hence has to resort to expensive imported coal. To meet its
requirements, the industry is developing alternative energy sources like tyre chips etc.
It is suggested that tyre chips be allowed to be imported by removing it from the Negative list. Further, the import
duty on the same be reduced to zero.
3.1.7. Customs Duty on Pet Coke
Pet coke is one of the important fuels used by Cement Industry. This is expensive and mostly imported and the
situation is further compounded by the fact that the import duty on pet coke is 5%, whereas on final product
'Cement' there is no basic customs duty.
The Cement Industry, therefore, requests that Customs Duty on pet coke be abolished. This would remove the
aberration in the structure of duties existing in cement imports vis-à-vis its inputs.
3.1.8.
Treatment of Waste Heat Recovery as Renewable Energy Source
Energy cost is a very substantial part of the cost of producing cement. The prices of conventional energy resources
are rising higher and higher and further, greater use of these is adversely affecting the environment. Also, various
Governments are imposing renewable energy obligations on the industry.
Cement industry is putting up Waste Heat Recovery plants so as to derive more energy from the same energy
resource. In a way, this is akin to green energy. All of this requires further capital investments.
To help the industry in its endeavor to produce more such environment friendly energy, it is requested that such
energy generation be treated as Renewable Energy Source.
3.1.9. Incentives for Limestone availability for future growth
As per IBM data the total cement grade limestone reserve available to meet the industry requirements is 89.86
billion tonnes. Based on the expected growth and consumption pattern, the current reserves are expected to last
only for another 35 - 41 years. There is a need to streamline and simplify the procedures related to limestone mining
leases approval / renewal.
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PRE-BUDGET MEMORANDUM 2013-2014
There is a need to provide incentives like lower royalty rate, excise rebate for usage of marginal and low grade
limestone.
In order to ensure systematic mining operation for better recovery, there is need to integrate small mining leases in a
limestone belt.
In order to encourage utilization of limestone deposits located in remote areas, there is a need to offer incentives like
road freight subsidy, lower royalty/excise rates etc. It is to be ensured that the systematic mining is carried out as per
approved mining plan.
3.1.10. Stimulus to the sectors which are major users of Cement
Using cement concrete technology for roads - All new expansions in the national and state highways may be made of
cement concrete as a policy. To begin with, this % could be 30% of total allocations. All existing city roads having
bitumen surface be converted gradually to cement concrete and new ones should preferably be constructed with
cement concrete technology. All connecting roads in villages must be done with cement concrete technology.
TEXTILE AND APPAREL
3.2.1. Indian Textile Industry
The Indian Textiles & Clothing industry has an overwhelming presence in the economic life of the country. It
contributes about 14% to industrial production, 4% to the GDP, and 17% to the country's export earnings. It also
provides direct employment to over 35 million persons which is second only after agriculture. India's total textile and
apparel industry size (domestic + exports) is estimated to be $ 89 billion in 2011 and is projected to grow at a CAGR
of 9.5% to reach $ 223 billion by 2021. The domestic textile and apparel market in India is worth $ 58 billion and has
the potential to grow at a CAGR of 9%, to reach $ 141 billion by 2021.
3.2.2. Challenges to the Textile Industry and National Fibre Policy
•
The present demand of the industry is collectively met by 8 million tons of different fibres in India. It is envisaged
that fibre demand will reach 11.5 million tons by 2015, thereby necessitating an incremental production of 3.5
million tons.
•
The two major category or fibres are cotton and man-made. The current ratio of consumption being 60:40.
•
As per the draft National Fibre Policy (NFP) 2010-11, we need to harness the potential of Man Made Fibres to
catalyse the growth of the textile industry, as globally the fibre ratio is 60% man-made to the total fibre
consumption.
•
Also, the evolving trends in the textile industry have created huge potential for technical textile, used primarily
for specialty applications. Due to wide functional diversity, the growth in this segment would be met by manmade fibres.
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•
Indian man-made fibres textile industry has not been able to create a mark in the global textiles market post
dismantling of textile quotas (2005), whereas the cotton textile industry has witnessed substantial growth.
Indian cotton apparel exports to the world have grown at about 10.7% CAGR, while MMF apparel exports have
witnessed a decline.
•
One major impediment in India is disparity of excise duty that the man-made fibre chain is subjected to.
•
There have been genuine and forceful attempts by the Government towards realizing fibre neutrality when the
excise duty in 2008-09 was reduced to 4% to spur growth of the T&C industry, when the global industry faced
the economic downturn.
•
But in subsequent years, there were gradual increases in excise duty from 4% to present rate of 12%.
Following suggestions may be considered by the Government for the balanced growth of the Indian Textile industry:-
3.2.3. Excise Duty on Man-made Fibres
The excise duty on polyester fibers and yarns has been raised from time to time for the last about 4 years from a
level of 4% in December 2008 to 12% in March 2012. Higher duty on synthetics results in costlier fabrics and
consequently suppresses the demand for garments using polyester fiber and yarns. A higher duty on synthetics not
only acts against the fiber neutral policy of the Government but also impacts the export of value added garments.
In order to reduce the price of synthetic fabrics and to improve the capacity utilization of the fiber/yarn
manufacturers it is requested that the duty structure on fiber and yarns be revisited and duties on polyester fibers /
filament yarn should be brought down to 4%. Such a reduction in duty would help not only the polyester yarn / fiber
manufacturers but also the texturizers, weavers, knitting industry, processors and apparel manufacturers.
A reduction in excise duty as suggested is not likely to affect the revenue collections because of increased volumes of
man-made fibres and yarns
3.2.4. Accumulation of Cenvat Credit
The draw texturized yarn was exempted from the levy of NCCD with effect from 17-05-2003, however, the duty on
the inputs namely POY, for such yarn was continued which has resulted in accumulation of NCCD credit with the DTY
manufacturers. The accumulated credit of manufacturing units needs to be reimbursed back to the units who have
paid this, alternatively same to be credited to Basic Excise duty account of assesses under excise rules.
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3.2.5. Customs Duty on Synthetic Fibres
To encourage investments across the value chain and to make the industry competitive, it is requested that the
following customs duty structure for all fibres / yarn value chains be adopted.
(a) Polyester Value Chain
Item
Customs duty (%)
Tariff No.
Present
Proposal
PTA
2917.36
5
5
MEG
2905.31
5
5
Polyester chips
3907.91
5
7.5
Polyester staple fiber
5503.20
5
10
5
10
Polyester filament yarn
Polyester high tenacity yarn
5402.20
5
10
Polyester tyrecord fabric
5902.20
5
10
Present
Proposal
(b) Nylon Value Chain
Item
Customs duty (%)
Tariff No.
Caprolactam
2933.71
7.5
5
Nylon Chips
3908.10
7.5
7.5
Nylon filament yarn
5402.45
7.5
10
Nylon high tenacity Yarn
5402.10
7.5
10
Nylon tyrecord fabric
5902.10
10
10
APPAREL
3.2.6. Levy of Central Excise Duty on Branded Readymade Garments
Branded Garment industry, as a whole, incurred huge losses earlier when the excise was introduced in 2011. In
Union Budget 2012, the excise levy was increased to 12%. Simultaneously, however, some relief was provided by
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increasing the abatement from 55% to 70%. The increase in abatement, while being a very welcome step, is not,
unfortunately, enough to mitigate the severe cost pressure under which the industry is operating. The slowdown in
the economy with consequential impact on consumer sentiment has resulted in sluggish demand. Most of the
branded garment businesses are incurring losses or earn marginal profits due to high incidence of retail costs,
marketing expenses, VAT, freight and octroi. The Branded Garment Industry provides employment to lakhs of semiskilled women in manufacturing garments in the country. The fall in demand will have an adverse impact on the
employment of these workers from economically backward class who have very limited scope of employability
otherwise. In view of the issues stated above, it is strongly urged that the abatement provided for branded garments
be increased from 70% to 85%. Alternately, excise duty at 1% may be levied without any entitlement for abatement,
in line with similar levy imposed on about 130 items, which were exempt from central excise duty till then, in the
Union Budget of 2011. This will provide much needed relief to industry and go a long way in rebuilding the growth
sentiment.
3.2.7. Sample Movement
In garment industry, development, display and approval of samples is an iterative and fundamental activity involving
manufacture and movement of samples across supply chain - from Brand Owner to Vendor/Job worker, washing
units, value add in form of embellishments etc. and then finally from manufacturer/Brand Owner to the Buyers. To
maintain records for these multiple movements is a cumbersome process and there is no commercial transaction
involving consideration.
To facilitate the business process, it is submitted that necessary clarification be issued to consider regular delivery
challan of concerned parties with an endorsement 'For Sample Purpose. No Commercial Value' as proof and samples
be exempt from Excise Duty. Further to prevent misuse of the facility, such garments may be mutilated in the front.
3.2.8. Import of goods falling under Chapters 51, 52, 54, 55, 58 - Testing of Samples
Goods covered by the above stated chapters attract different specific duties at 8 digit HS code level. The difference in
the product description under various sub -classifications cannot be determined or identified by physical inspection
and requires submission of samples for tests by Textile Committee. This results in inordinate delays in clearance of
goods.
It is recommended that the structure of specific duties applicable to the goods covered by the said chapters be
rationalized to reduce the testing requirements. Further, clarifications/instructions may be issued to field formations
to accept test reports of any accredited testing laboratory after matching the sample fabric affixed on the test report
with the import consignment.
3.2.9. Presence of Azo dyes - Certification by international agencies
Textile goods of Chapters 51 to 62 are required to be accompanied by a certificate from a laboratory accredited by
the government of the exporting country confirming that the goods are free from Azo dyes and other harmful
chemicals. If the goods are not accompanied by such certificate, they are subjected to mandatory testing - as
prescribed vide DGFT's Public Notice No. 12 (RE-2001)/1997-2002 - to ensure that the products imported are free
from Azo dyes and other harmful chemicals. This process leads to delay in clearances and resultant additional costs.
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Internationally, the Institute of the International Association for Research and Testing in the Field of Textile Ecology
accredits mills after carrying out rigorous controls to ensure that they do not use prohibited dyes/chemicals. Once
accredited, the certification remains valid for a specific period and a specific group of products. It is an internationally
accepted practice to accept the accreditations and not insist for consignment wise testing.
It is recommended that the international practice of accepting the accreditation certificate issued by Institute of the
International Association for Research and Testing in the Field of Textile Ecology be adopted in India also.
AGRICULTURE AND ALLIED SECTORS
3.3.1. Background
It is essential that an integrated holistic view of the agriculture value chain is taken towards providing the necessary
fillip to the stagnating agricultural growth. This requires a joint participatory approach from all concerned
stakeholders including the farmers, input vendors, traders, processors and the Government. The Union Budget can
be a very effective catalyst by laying down a comprehensive policy framework and providing a tremendous thrust
through appropriate fiscal benefits and closely monitor action plans.
We believe that an enabling policy framework with attractive fiscal incentives can be provided to attract private
investments in the rural economy. Private investment in agriculture and allied activities can provide the necessary
boost to the already committed Government spends and can have a multiplier effect in the rural economy. The under
noted suggestions and recommendations are being made in the aforesaid context.
3.3.2. Increase Investment in Agriculture and Allied Sectors
In the last budget there was no increase in funding for agriculture research. It is requested that funding to research
institutes like ICAR, state agriculture universities may be increased and a special fund created for fast track
development of high yielding varieties, hybrids and plantlets multiplied through tissue culture and other advanced
technologies under PPP mode. Similarly, a special fund may be created for research and development of high yielding
dairy cattle.
China has come up with a unique scheme where they have given a rebate to companies per unit of
Hybrid/plantlet/min tuber sold domestically for the particular crop that they want to promote. This has encouraged
companies to up production of this type of planting material.
3.3.3. Support Diversification in Captive Fishery through Innovative Financing
In order to realize the unexploited potential in fresh water fish farming, long line shark and tuna fishing, financial
assistance / incentives should be provided under special fund. This financial assistance could be provided through
soft loans, equity, risk covers and insurance, as well as through establishment of integrative farm to fork chains,
information and market intelligence, quality and safety measure.
3.3.4. Weather Stations
Government should announce a separate fund for investing in automatic weather stations in India as the expanded
network would help farmers in mitigating their risk through weather insurance products. Investments in automatic
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PRE-BUDGET MEMORANDUM 2013-2014
weather stations should be eligible for direct tax incentive in the form of 100% tax holiday in respect of the profits
earned from this segment for a period of 10 years.
3.3.5. Model Farms
Companies be encouraged to set up model farms for farmer training and demonstration. New technologies,
equipment etc should get a 25 % subsidy subject to a maximum of Rs 5 Lakhs per farm and this should be disbursed
after at least 1000 farmers have been trained at the farm
3.3.6. Horticulture
Horticulture today accounts for about 28% of value added in the Agriculture sector and 52% of India's agri-exports
but takes up barely 9% of arable land. The Government has rightly identified the National Horticulture Mission as a
key driver of growth and value addition. This sector is also characterized by high wastages - up to 35% in the case of
certain fruits and vegetables. Large scale investments are required in cold chain infrastructure to minimize waste and
improve farmer realizations.
Cold chain infrastructure is not confined to cold storages only, but extends to temperature handling across the value
chain from farms to consumers. The cold chain thus includes farm level pre-coolers, small capacity chill cold storage,
refrigerated trucks, cold storages, food processing plants, refrigerated display cabinets for retail shops and deep
freezers.
In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural
wastage and enhancing shelf-life, it is recommended that customs duty rates on cold chain equipment and their
parts be pegged at 5% or below. Similarly, excise duty rates on cold chain equipment and parts need to be lowered to
5% or below to expand domestic manufacture, which is presently in its infancy.
3.3.7. Income Tax for Dairy Cooperatives
Under the prevailing taxation system, while primary dairy cooperatives at the village level are exempt from paying
income tax, the district and state level cooperatives are taxed at the rate of 35 percent. In 2006-07, the Government
reduced the income tax rate for private dairy companies by 10 percent but did not reduce it for cooperatives. In
order to strengthen the co-operative dairy sector, which occupies 18% of the sector the income tax rate for cooperative sector needs to be brought at par with private dairy companies.
3.3.8. Other fiscal incentives for Cooperatives
Provide fiscal incentives to corporates aiming at increasing crop productivity and developing the entire supply chain
i.e. sorting and grading centres, warehouses, temperature and humidity controlled warehouses, cold storages,
temperature controlled transport up to consumer location. Grant fiscal incentives by way of 100 per cent
depreciation on all investments in physical assets like infrastructure development by the private sector in agriculture
and the entire agri-value chain. They should be given 100% tax holiday in respect of the profits of the undertaking for
a period of at least 10 years and further giving the assessee an option to claim this tax holiday for any 10 consecutive
years out of 15 years.
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PRE-BUDGET MEMORANDUM 2013-2014
3.3.9. Tax exemption to Electronic Spot Exchanges
Electronic spot exchanges are directly connecting farmers to markets through purchase/sale of agricultural
commodities in the country, thereby, helping in evolving National Common Market by providing a Pan-India
alternative market across the country, for enhancement of farmers' price realization by reducing cost of
intermediation. Such an institutional framework merits Government support for full growth, therefore, the
Government may provide tax exemption to these spot exchanges for a period of 5 years.
3.3.10. Weighted Deduction for Water Harvesting, Conversation etc.
Investments made by companies in water harvesting, water conservation, repair and renovation of water bodies,
interlinking of small canals/river lets should be eligible for 150 per cent weighted deduction on expenditure. The
operation and maintenance of the above activities should also be eligible for similar benefits.
3.3.11. Excise duty exemption for Agricultural Machines
Excise duty and VAT exemption for agricultural machinery and equipments.
3.3.12. Service Tax Exemptions for Agriculture sector
Service tax exemption may be granted to the following services:•
In terms of Notification No. 25/2012, S.T. dated 20/06/2012 exemption from service tax has been provided, interalia, to services provided by a goods transport agency by way of transportation of fruits, vegetables, eggs, milk,
food grains or pulses in a goods carriage. It is recommended that the scope of exemption be enhanced to include
all agricultural produce including oil seeds, coffee, tea, spices and staples as well as marine products.
•
As per extant Service Tax laws the agro-sector has been supported by keeping a bulk of services relating to
agriculture or agricultural produce in the Negative List or in the list of exempted services. However, there are
some services like Security Services, Laboratory Testing Services and so on - which are essential to secure storage
of agricultural produce and to determine quality of the produce - are subjected to Service Tax. It is
recommended that all services provided for agricultural produce be kept outside the ambit of taxable services.
3.3.13. Import Duty Exemption
Import duty exemption may be granted to the following items:•
Laser Land Leveler and its components such as transmitter
•
Machines for cleaning, sorting or grading seed, grain or dried leguminous vegetables
•
Harvesting machinery; threshing machinery, root or tuber harvesting machines such as potato diggers and
potato harvesters
•
Machines for cleaning, sorting or grading eggs, fruit or other agricultural produce
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PRE-BUDGET MEMORANDUM 2013-2014
3.3.14. Tea Industry
•
FICCI recommends that Indian Tea Industry be given interest subsidy @ 5% on the applicable rate of interest on
the funds specifically borrowed by the Tea Companies earmarked for the activities under the Special Purpose Tea
Fund i.e. replanting and/or rejuvenation etc ('SPTF').
•
Tea producers are discouraged to take up developmental activities in their estates whether in field or in factories
due to inadequate subsidy component under the various Schemes of Tea Board. It is, therefore, prayed that the
rate of subsidy should be increased to 40% across the board on all the schemes under the aegis of Tea Board,
Ministry of Commerce (from the existing 25%).
•
It is recommended to continue the benefit available under section 33AB of the Act even under the Direct Tax
Code.
•
Orthodox Production Subsidy Scheme be included under the ambit of Section 10(30) of the Income Tax Act,
1961.
•
FICCI recommends to provide financial incentive to encourage organic tea cultivation.
•
Tea Estates are located in the remotest corners of the country and no alternate accommodation is available
locally, the managerial personnel, under force of circumstances, are to be provided with fully furnished
residential accommodation to enable them to attend their routine duties round the clock. It is therefore
suggested that for calculation of perquisites in respect of residential accommodation and for the value of
furniture provided to the employees working in the tea estate, such tea estate should be treated as 'remote
area', like those working at a mining site or an onshore oil exploration site, or a project executive site or an
accommodation provided in an offshore site.
•
FICCI suggests that only 40% of the book profit of tea companies should be subjected to MAT. A suitable
modification in section 115JB of Act be made accordingly.
PAPER INDUSTRY
3.4.1. Customs Duty on Paper/Paperboards
The Indian Paper/Paperboard industry has made significant capital investments to ramp up capacities for meeting
domestic requirements. The Industry has strong backward linkages with the farming community, from whom wood,
which is a raw material, is sourced. A large part of this wood is grown in backward marginal/sub-marginal land, which
is potentially unfit for other use. In India an estimated 5 lakh farmers are engaged in growing plantations of
Eucalyptus/Subabul etc, over an estimated 10 lakh hectares. This has generated significant employment
opportunities for the local community and benefits have been reaped from this source, which are higher than other
commercial crops. It is therefore strategically important and also necessary to keep Paper/Paperboard industry
outside the ambit of FTA's (ASEAN etc) and recognize this Industry as “sensitive” deserving special treatment.
Increased imports from foreign countries are severely impacting the cost competitiveness of many paper mills in
India.
In order to provide a level playing field to the domestic industry it is recommended that:
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PRE-BUDGET MEMORANDUM 2013-2014
(i) the Customs duty for import of Paper and Paperboards should be increased and brought in line with agricultural
products as currently industry is sourcing majority of its raw materials from Agro-forestry - supporting millions of
farmers in creating value on their marginal lands.
(ii) this category to be kept in the Negative List (i.e., no preferential treatment) in bi-lateral and multi-lateral trade
treaties and agreements.
3.4.2. Customs Duty on Import of Pulp
In May 2012 the Government reduced the import duty on pulp from 5% to “Nil”. More than 1,250 thousand MT of
pulp, valued at approximately USD 820 million (about Rs. 4,600 crores) is imported in to the country every year. The
customs duty for these imports is estimated to be about Rs. 230 crores per annum. The break-up of the pulp imports
is as under:
Type of Pulp
Quantity ('000 MT)
Value (Rs. Crores)
Hard Wood Pulp
900
3,200
Soft Wood Pulp
200
840
Bleached Chemi Thermo Mechanical Pulp
(BCTM Pulp)
5402.45
7.5
Total
1,260
4,580
In view of the fact that Soft Wood cannot be grown in the country and in the absence of BCTM technology in India,
requirements of Soft Wood Pulp and BCTM Pulp will have to be met through the import route only. However, in so
far as Hard Wood Pulp is concerned, it would be pertinent to note that the domestic industry is working closely with
the farming community for creating sustainable supply of wood - a key raw material for hard wood pulp - through redevelopment of waste-lands.
Cheaper imports of duty free hardwood pulp would not be in the interest of Indian farmers as the benefit will flow to
farmers in exporting countries like Indonesia and Brazil.
Accordingly, for creation of sustainable sources of fibre required by the pulp and paper industry it is recommended
that:
(i) 5% customs duty on pulp be reinstated only for Hard Wood Pulp; and,
(ii) policy measures put in place to facilitate private sector participation in plantation development programmes.
3.4.3. Reduction of Excise Duty on Poly-coated Paper products - Central Excise Tariff
No. 4811 59 00
Paper and paperboard that is coated / impregnated / covered with plastic is classified under Central Excise Tariff
4811 59 00 with an excise levy of 10% ad valorem - even as a large number of paper / paperboard items covered by
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PRE-BUDGET MEMORANDUM 2013-2014
Central Excise Tariff 4802, 4804, 4805, 4807, 4808 and 4810 are exigible to excise duty only at 6% ad valorem.
Plastic coated paper and paperboard are essentially bio-degradable paperboard and are eco-friendly substitutes for
plastics which do not conform to requisite hygiene and environmental standards. The global trend is to actively
discourage the use of plastics and to replace it with plastic coated paper / paperboard.
In India the major consumers of this type of paper / paperboards are SSI / SME units engaged in manufacture of
paper cups that are increasingly being supplied to institutional customers like the Railways, the FMCG sector and the
household sector.
It is recommended that since SSI / SME units are not in a position to avail cenvat credit the excise duty on plastic
coated paper / paperboards, classifiable under Central Excise Tariff 4811 59 00 be reduced to 6% from 12% - in line
with most other paper / paperboards classifiable under Chapter 48.
3.4.4.
Incentives for investments in environment friendly “Clean” technologies by
paper industry
Today technology stands out as the most critical factor in achieving sustained competitiveness and industry
performance. Indian Paper Industry is a signatory to the Government of India's Charter on Corporate Responsibility
for Environmental Protection (CREP). This calls for substantial investments in green technologies such as introduction
of ECF (Elemental Chlorine Free) pulp manufacture, Ozone bleaching etc. to ensure a positive environmental
footprint.
In order to encourage manufacturers within the industry to adopt environment friendly “clean” technologies that
ensure, inter-alia, reduced carbon footprints, better emission norms, better effluent treatment norms, usage of
renewable sources of raw material and energy, improved waste recycling, etc., appropriate fiscal benefits should be
provided.
It is, therefore, recommended that:
(i) Import of capital goods required by the Paper & Paperboard industry for technological up-gradation - specially
aimed at environmental protection (e.g. Elemental Chlorine Free Technologies) and for compliance with CREP should be permitted at 'Nil' rate of Customs Duty.
(ii) Exports by manufactures who have adopted environmentally friendly technology should be granted additional
incentives in the form of duty credit-scrips etc.
(iii) Additional benefits like entitlement for import of raw materials at a 50% concessional rate of duty, full
exemption from excise and VAT taxes for paper and paperboard produced using clean technology, accelerated
tax depreciation @ 150% of the normal depreciation rates under income tax laws for investments on
environment friendly technology, should be provided to the industry.
These measures will not only promote preservation of ecology, it will also incentivize all players in the Indian Paper
Industry to adopt 'green' technologies, thus aligning domestic industry to international quality norms.
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PRE-BUDGET MEMORANDUM 2013-2014
3.4.5. Plantations for pulp and paper mills on degraded waste lands
Planning Commission intends to bring 33% of land mass of India under tree cover. To achieve this objective nearly 43
million ha of land is to be afforested which includes development of degraded forest lands to the extent of 15 million
ha. This requires investment of more than 10 Billion USD over a period of 10 years.
The Government alone cannot muster required financial resources. Therefore private/public partnership is the way
forward to achieve the above targets. The industry has been making representations to Government to allot about
1.2 million hectare of waste land to meet its raw material requirements on sustainable and continuous basis and to
make it globally competitive.
The above would result in the following benefits:
(i) Employment generation - 77.4 million man days per annum
(ii) Continuous employment generation on a sustained basis
(iii) Pulp wood yield - 14 million metric tonnes per annum - resulting in meeting sustainable fibre requirement of
pulp and paper industry
(iv) Savings of foreign exchange to a tune of US $ 2 Billion per year
(v) Potential for carbon credits to a tune of US $ 36 million
(vi) Increase in forest cover resulting in attendant benefits.
It is recommended that appropriate policy changes are put in place to enable allotment of degraded waste lands to
the pulp, paper and paperboards industry for development through afforestation and watershed programmes.
HEALTHCARE
3.5.1. Infrastructure Status for Healthcare Sector
Though the government is progressively moving away from profit linked tax incentives towards investment linked
incentives, healthcare has never been accorded infrastructure status and thus has not benefitted from the related
provisions.
Infrastructure constraints have to be addressed meaningfully and with an eye on the future with burgeoning disease
burden coupled with a healthy growth rate in population. Immediate need of the hour is therefore to accord
“infrastructure status” to the sector for improvement in investment activity and enabling market forces to partly
address the issues faced. The following benefits should be made available:•
Tax deduction of 100% of the profits and gains derived from operating and maintaining hospitals for a period of
ten consecutive assessment years, beginning with the initial assessment year in any 15 year period starting from
date of operation of hospital facility, anywhere in India. Accordingly, the savings that accrue to hospitals could be
ploughed back to expand hospital beds which would assist them in improvising the health care facility and the
bed to patient ratio.
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PRE-BUDGET MEMORANDUM 2013-2014
•
Healthcare sector should be exempt from Minimum Alternate Tax
•
Any new capital expenditure towards replacement of old machinery / equipment, at any time, be entitled to
100% deduction
•
Healthcare sector should be eligible for loans / financial assistance on a priority basis, at concessional rates, as
provided to the infrastructure sector.
3.5.2. Increase public spending on Healthcare
The proposal by the Planning Commission to increase the spending to 2.5-3% of GDP over the 12th five year plan is
the need of the hour and should be implemented on priority.
3.5.3. PPP Framework
•
Free/concessional land and use of public healthcare facilities for private medical colleges in focus states.
•
Private sector participation to be encouraged in promoting preventive and primary care with appropriate tax
incentives to primary health care chains operating beyond Tier 2 towns; and
•
PPP model for private sector participation in screening and detection programs of the government.
3.5.4. Service Tax waiver on health insurance schemes
There is a pressing need to increase the safety net of health insurance in India. One measure that could help is
withdrawal of service tax on health insurance premiums, thereby leading to a lowering of cost/premium for the
consumer. Healthcare services are already exempt from service tax, and this benefit should be extended to health
insurance premiums.
3.5.5. TDS benefit on health insurance claims
In case of cashless arrangements of health insurance claims, the ultimate beneficiary of such health care services is
the individual. Therefore TDS should not be applicable on payments made towards settlement of claims by the
insurance company to the hospital on behalf of the insured.
3.5.6. R&D support
250% deduction of approved expenditure incurred on R&D activities related to indigenous development of medical
technology should be provided.
3.5.7. Technology Enabled Healthcare Services
250% deduction on approved expenditure incurred on operating technology enabled healthcare services like
telemedicine, remote radiology etc. should be provided.
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3.5.8. Electronic Health Record
To encourage move towards maintenance of EHR (Electronic Health Record), financial incentives/grants should be
provided to willing institutions. 250% deduction on investment made for the implementation of Electronic Health
Record (EHR) should be extended.
3.5.9. Compulsory Health Insurance for Employees
To promote Health insurance penetration in the country, it should be mandated that organizations insure every
employee for a minimum amount of Rs.1 Lakh. The employer should be allowed tax deduction on the premium paid.
Moreover, the employee should have the flexibility to increase this cover; the additional premium so paid should also
be tax exempt. This should be over and above the cover extended under the ESI, CGHS and other government health
insurance schemes.
3.5.10. Deduction for Preventive Health Check-Ups
The amount of tax deduction provided for preventive health check-ups introduced last year should be over and
above the provision of Rs 15,000 towards the health insurance premium paid under section 80D. This will definitely
incentivize people to undergo a preventive health checkup on a regular basis.
STEEL AND OTHER FERROUS METALS
3.6.1. Exemption to Coal used in Iron & Steel industry
Coking coal has been exempted from payment of Customs Duty vide S. No 122 of Notification No 12/2012-Customs
dated 17.03.2012. As per the explanation in the Notification, coking coal has been defined to mean “coal having
mean reflectance of more than 0.60 and Swelling Index or Crucible Swelling Number of 1 and above”
It has been reported that crucible swelling No. and swelling index are too technical and sensitive to test and the
departmental labs are not equipped to test these parameters creating delays and giving rise to litigation. Coals not
meeting the parameters in test but being used for metallurgical purposes in COREX / PCI / FINEX, are being charged
to duty as “Other coals” under sub heading 2701 19 90 at the rate of 5%. This has defeated the well intentioned
objective of the Government to provide relief to steel industry.
Although in the Budget 2012-13, the customs duty benefit of Nil customs duty is allowed to Steam coal (S. No 123 of
Not 12/2012-Customs dated 17.03.2012), there is still a doubt as whether the coal used in the manufacturing of steel
using Corex, Finex or PCI technology is covered under said entry.
It is accordingly requested that to simplify the process of granting exemption, the entry at sl. No. 122 may be
amended in the said notification 12/2012 - Customs to exempt “Coals for use in iron & steel making using any
technology such as Blast Furnace, COREX, PCI or FINEX”.
With the above amendment, all coals used in the manufacturing of Hot Metal / Steel will be brought on par for the
purpose of Custom Duty exemption.
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PRE-BUDGET MEMORANDUM 2013-2014
Customs duty on Anthracite Coal (Heading No. 2701 11 00) and all such reductants should be reduced to Nil since
these are vital inputs for the Ferro Alloy industry as well as the pig iron industry.
3.6.2.
Removal of Steel products from the ambit of Free Trade Agreement (FTA) with
Japan & Korea
There is more than 300% increase in the import of steel in just one year from Japan & Korea. According to the Joint
Plant Committee of the Steel Ministry, imports went up to 2.88 million tonne during April-July of the current fiscal as
against 1.88 million tonne in the same period of last year, representing growth rate of 53%.
Effective rate of Customs Duty (BCD) is levied at 4.2% for Steel products falling under Chapters 7208.10 to 7229.90
for imports from Japan (Sl. No. 430 of Not No. 69/2011-Cus). Similarly, effective rate of Customs Duty (BCD) varies
from 2.2% to 3.125 % for steel imports from Korea (Sl. No. 532 to 540 of Not No. 152/2009-Cus).
In view of the discriminatory treatment for customs duty levy on imports from Japan & Korea owing to the Free
Trade Agreement (FTA) pact, domestic industry is severely affected. It is accordingly requested that urgent steps be
taken to remove steel items under chapter 7208.10 to 7212.60 from the purview of FTA.
3.6.3. Import duty on Graphite Electrodes and Refractory materials
Currently there is an import duty of 7.5% on 30” and 16” graphite electrodes & 5% for refractory materials. As there
is no sufficient domestic capacity for manufacture of these items and these need to be imported, consequently the
cost for the domestic producers is increased. It is accordingly requested that the import duty on electrodes and
refractory material may be reduced to Nil.
3.6.4. Import duty on steel grade limestone and dolomite
For Iron and Steel Industry, limestone availability was 4320 tonnes in 2008-09 (1.9% of total production) and 7664
tonnes in 2009-10 (3.3% of total production). While cement grade limestone reserves are adequate, SMS, BF and
Chemical grade limestone (required by the steel industry) are not and occur in selective areas. Increase in steel
production in the country, has led to rising demand for SMS and BF grade limestone. Limestone imports have been
increasing consistently and in 2009-10, it was imported primarily from Oman (40%), UAE (32%), Thailand (16%) and
Malaysia (5%). As the reserves of SMS and BF grade limestone within the country are scattered and there is a
capacity limitation of the existing limestone mines in various States, it is imperative that Customs duty on steel grade
lime stone (sub heading 2521 00 10) and dolomite (sub heading 2518 10 00) be reduced from 5% to nil as in the case
of coal, coke and steel scrap.
3.6.5. Import duty on HBI / DRI
Domestic Sponge Iron industry faces a threat due to sharp increase in imports of HBI / DRI from 50,000 tonnes in
2011-12 (April - August) to more than 3 lakhs tonnes in 2012-13. Imports are mainly from Middle East countries due
to lower costs because of availability of cheaper natural gas. There is urgent need to protect the investment made by
the domestic Sponge Iron industry by raising the import duty on ferrous products obtained by direct reduction of
iron ore (Heading 7203 10 00) from 5% to 10%.
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PRE-BUDGET MEMORANDUM 2013-2014
3.6.6. Import duty on Manganese ore, Chrome ore etc.
Customs duty on Manganese ore (Heading 2602 00 10 to 2602 00 90), Chrome ore (Heading 2610 00 10 to 2610 00
90) and Molybdenum ore (Heading 2613 10 00 and 2613 90 00) and Vanadium oxides and Hydroxides under Heading
2825 30 and other salts of Oxometallic Acids (Vanadium Oxides Concentrates and Ammonium Meta Vanadate) under
Heading 2841 90 00 may be reduced to Nil from the existing 2.5%.
3.6.7.
Customs duty on Natural gas used in steel manufacturing process
Imported Natural gas is charged to customs duty at the rate of 5%. In the 2011-12 budget exemption from custom
duty is granted to LNG imported for power generation by utilities. In view of the preference for supply of domestic
gas to the fertilizer and power sectors the only option for gas based steel plants is to import gas. The high price of
LNG is making gas based steel manufacturing unviable.
Gas used by Steel Manufacturers as process feedstock for manufacture of steel should be fully exempted from
custom duty so that these facilities remain commercially viable.
3.6.8. Project Imports
Consequent to the reduction in customs duty for the EPCG clearances from 3% to 0%, the project import duty which
was reduced from 7.5% to 5% for all the projects could not serve the intended purpose due to the apparent
advantages of EPCG licence. It is hoped that the project import duty would be reduced to 2% from 5% so that the
unnecessary burden of export obligations through EPCG route can be avoided. This would also encourage EPCG
licence holders to take recourse to the import of capital goods for the setting up of green field projects and
substantial expansions.
3.6.9. Customs duty on stainless steel flat products
There has been a considerable surge in the imports of Stainless Steel Flat products over the last three years (both in
Hot Rolled & Cold Rolled). Today, India is a 3rd largest market for Stainless Steel after China & European Union and
also has the highest growth rate next only to China. The Indian market is expected to grow 10% CAGR over the next 6
years. In order to cater to this growing demand, the domestic industry has put in massive investment towards
capacity enhancement and modernisation. However, China & EU are riddled with huge surplus capacities and
stagnant domestic demand in their respective countries. Therefore, the most expedient way for producers of such
countries is to divert their excess production to growing markets like India.
While domestic industry welcomes healthy competition, the recent surge in imports has been marked by rampant
price undercutting and massive circumvention of anti dumping duties imposed by the Govt. from time to time. The
time has come, the very viability of domestic industry is a question and domestic producers are now facing an
unprecedented challenge in terms of countering this threat.
It is submitted that the Basic Custom Duty (BCD) on Stainless Steel flat products may be increased from the existing
level of 5% to 15% in order to create a level playing field for the domestic stainless steel industry vis-à-vis their
overseas counterparts
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PRE-BUDGET MEMORANDUM 2013-2014
3.6.10. Other duty changes
(i) Ship-building quality (SBQ) plates manufactured in India and used for vessels made in India must get the
deemed export status to match with duty free facility extended to imported SBQ plates
(ii) The refractory materials like mortar, mud gun mass, refractory cement etc. should be levied to import duty at 5%
instead of 7.5% to align with the prevailing 5% customs duty on refractory bricks.
(iii) Excise duty on directly reduced iron (DRI) of Heading 7203 10 00 may be reduced from 12% to 6% since the
rebars made through DRI-EAF/IF route are mainly used for housing for lower and middle class section.
(iv) The Central Excise duty on steam coal should be fully exempted.
3.6.11. Drawback Rate increase
After discontinuation of DEPB Scheme with effect from 01.10.2012 the new drawback rates have been declared. In
respect of the CRCA, Colour coated sheets and pipes, DEPB entitlement was much higher as compared to the
drawback rates now announced. Therefore the drawback rates for these items need to be revised suitably at the
level of earlier DEPB rates.
3.6.12. Shearing/Slitting/Annealing operations to be considered as Manufacturing
activities under Central Excise
In order to service the just in time supply concept being adopted by the automobile industry the Steel manufacturers
have set up state of the art service centres for cutting /slitting of hot rolled/cold rolled/galvanized coils with a huge
investment of more than Rs 500 crores. At present the Shearing / Slitting/Annealing/Cutting operations of the Steel
products are not considered as manufacturing activities under Central Excise. Therefore the domestic producers have
to seek various permissions like Rule 16C from the Commissioner of Central Excise for sending such goods for job
work. Many times such permissions are either delayed or not granted resulting into substantial loss of value addition.
In order to simplify the procedure and at the same time to protect Government revenue, such operations may be
considered as normal manufacturing activities so that the manufacturers have another options to clear the goods on
payment of duties instead of being subjected to discretionary powers of granting permissions.
It is accordingly requested that appropriate amendments may be made for declaring processes such as shearing,
slitting, annealing as processes amounting to manufacture for the purpose of levy of central excise duty.
As an alternative, option to pay duty shall be made available to manufacturers who clear the goods to customers for
further manufacturing. Pickling and Oiling was treated as manufacturing in 2012 Budget.
3.6.13. Classification of Corex under Central Excise Tariff
Existing tariff entry 2705 of Central Excise schedule covers :
“2705: Coal gas, water gas, producer gas & similar gases other than petroleum gases & other gaseous
hydrocarbons.”
Certain doubts have been expressed about classification of Corex Gas under the aforesaid entry of heading 2705.
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PRE-BUDGET MEMORANDUM 2013-2014
Blast Furnace gas is specifically mentioned in the heading 2705 of the HSN. Blast furnace gas & corex gas both
emerge as by-products in the process of manufacture of molten hot iron using, respectively, Blast furnace and Corex.
The manufacturing process involved in the blast furnace technology & corex technology is similar. The by-product
Corex gas is very similar in composition & use to coal gas & blast furnace gas covered under the tariff heading 2705.
However, in the absence of specific mention these gases under tariff entry 2705 a doubt is being created about
coverage of corex gas as 'similar gases 'under the said tariff entry. For removal of this doubt, either a clarification may
be issued or the aforesaid entry in heading 2705 may be amended to specifically include Corex Gas.
3.6.14. Review of Excise Duty Structure on “Patta -Patti”
The unorganised sector (normally referred to as Patta-Patti) in the Stainless Steel Industry currently accounts for
sizable portion of the stainless steel market in India. As per the estimates, the total production of Patta-Patti Sector is
around 1.1 million tons out of total Stainless Steel production of 2.4 million tons in India. This sector operates on the
basis of compounded levy scheme wherein they are exempted from paying excise duty on normal production and
are instead subject to a compounded levy of Rs.30,000 per machine per month. Since, this levy is not dependent on
production quantity and value; there is no compulsion on the Patta-Patti units to maintain production records for this
purpose.
This has resulted in a huge anomaly in Stainless Steel Industry because the organised units face a considerable
competitive disadvantage when compared to the Patta -Patti units. The organised sector is subject to 12.36% excise
duty whereas the Patta-Patti sector gets away with virtually zero duty. Moreover, even the incidence of compounded
levy is considerably diluted because of lack of exhaustive reporting regarding number of operational machines.
Moreover, most of these units don't have emission control equipments installed within their premises.
It is suggested that the duty structure applicable to Patta - patti units should be reviewed in order to create a level
playing field in Stainless Steel Industry.
NON-FERROUS METALS
Aluminum Industry
3.7.1. Increase in Basic Customs Duty on Aluminium Products from 5% at present to
10%
Indian Aluminium industry has been facing pressures from both sides - realizations and costs. Its competitiveness has
been threatened. Imports of Aluminium products have been rising sharply. Data from DGCIS/IBIS shows that average
monthly imports of unwrought aluminium into India have increased from around 15,000 tonnes in FY09 to over
20,000 tonnes per month during April-August 2012. The rising imports are happening at a time when the domestic
industry has been putting up huge investment projects in the country.
To provide a relief to the industry it is requested that the basic customs duty on Aluminium products (Heading Nos.
76.01 to 76.16) may be increased from 5% at present to 10%.
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PRE-BUDGET MEMORANDUM 2013-2014
3.7.2. Bringing Customs Duty on Scrap at par with Aluminium
For all base metals other than Aluminium, the import duty on scrap in India is same as the duty on the metal. It is
only in case of Aluminium that the duty on scrap is Nil, while duty on aluminium products is at 5% at present.
In most of the Aluminium downstream products, scrap and primary aluminium can be used almost interchangeably.
The differential duty structure seems to be, therefore, leading to a substitution of primary aluminium by scrap reflected in a sharp rise in imports of scrap (CH 7602). Between FY09 and FY12, import of aluminium waste and scrap
has increased at a CAGR of 33%.
Scrap imports are causing an immense harm to the Indian aluminium industry due to market diversion.
To prevent the market diversion and adverse implications of rising scrap imports and to bring Aluminium scrap on par
with the scrap for other base metals, it is requested that the basic customs duty on Aluminium Scrap (CH 7602) may
be raised and brought on par with the duty on Aluminium products.
3.7.3. Imposition of Export Duty on Bauxite
India has the sixth largest reserves of bauxite in the world. However, this natural advantage is being negated in the
recent years as many alumina refineries (for whom bauxite is the basic raw material) in India are finding it difficult to
source bauxite of an appropriate quality. Partly, this has been due to delays in mine clearances and the expansion of
alumina refining capacity in India over the recent years.
The problem has been further intensified by the export of bauxite from India. China has been adding alumina
capacities very aggressively over the last few years, leading to increased demand for imported bauxite. In the recent
past, Indonesia - which was a major source of bauxite for China - has imposed restrictions on export of bauxite. With
these developments, exports of bauxite from India have increased sharply. As per DGCIS data, India exported 414
thousand tones of bauxite during Apr-Dec12, which was significantly higher than the export of 101 thousand tones
during FY11.
Consequently, domestic bauxite availability has become challenging. Some refineries have been forced to curtail
production in the recent months due to non-availability of bauxite. Deterioration in quality of bauxite also increases
the conversion cost for refineries.
Bauxite is India's natural advantage and it does not make economic sense to export it without value addition. This is
effectively export of jobs - while endangering the long-term resource security for the domestic aluminium industry
that is putting up huge expansion projects.
To ensure more value addition within India, it is requested to impose export duty on bauxite - in line with the export
duty on iron ore.
3.7.4. Reduction of Excise duty on Aluminum products
Due to high price of aluminum products in the country, the consumption of aluminum has been declining steadily
during the last 5-6 years. Unless aluminum is made available at an affordable price to the common man, other
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PRE-BUDGET MEMORANDUM 2013-2014
substitutes such as plastic, wood etc. would continue to threaten the environment. Under the circumstances, excise
duty on aluminum extrusions be reduced from 12% to 8% in order to encourage the use of aluminum products in
day-to-day life.
3.7.5. Exemption from Excise duty on Aluminum Irrigation Pipes and Tubes
The price of aluminum metal in India is the highest in the world primarily due to the high customs and central excise
duties. The farming community has shifted from aluminum extruded agricultural pipes to the cheaper PVC pipes
though aluminum pipes have longer life and high re-sale value. It is requested that agricultural pipes and tubes used
for irrigation purposes should be exempted from the levy of excise duty to benefit farmers and contribute to the
agricultural production in the country.
3.7.6. Reduction in Duty on Aluminium Fluoride from 7.5% at present to 5%
Aluminium Fluoride (AlF3) is a critical input in manufacturing of aluminium. Considering the expansion projects of
Aluminium producers in India, the requirement of AlF3 is projected to increase from around 35,000 tonnes at
present to over 87,000 tonnes in the next 3-4 years. As against this, the domestic production was only 13,904 tonnes
in FY12.
The duty on AlF3 is higher than the present basic customs duty on Aluminium, leading to a situation of inverted duty
structure.
Considering the inevitability of imports of Aluminium Fluoride in India given the small domestic production base and
to address the inverted duty structure, it is requested to reduce basic customs duty on Aluminium Fluoride (CH
2826.3000) from 7.5% at present to 5%.
3.7.7. Reduction in Duty on Coal Tar Pitch from 10% at present to 5%
Coal Tar Pitch is another critical raw material for producing anodes which are used in the manufacturing process of
Aluminium.
To address the inverted duty structure, it is requested to reduce basic customs duty on Coal Tar Pitch (CH 2708.1010)
from 10% at present to 5%.
Copper Industry
3.7.8. Reduction in Basic Customs Duty on Copper Concentrate from 2.5% at present to
NIL
The sharp reduction in treatment of refining charges - the key value driver of the industry - along with the continued
cost pressures, have affected the viability of the copper smelting industry. Over the years, the duty differential
between refined copper and copper concentrate has been compressed from 30% at the turn of the century to just
2.5%. At present, the duty on refined copper is 5% while the duty on copper concentrate is 2.5%. This tiny
differential, in a conversion business where TCRCs are less than 5% of the turnover, is hardly adequate.
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PRE-BUDGET MEMORANDUM 2013-2014
It may be also noted that copper concentrate is starting point of the value chain for this strategically important
industry, and is not available in India.
Type of Pulp
UOM
Amount
Exchange Rate
Rs/USD
55.8
LBMA
USD/Tz
1660
Refining Charge
USD/Tz
4
CIF Value
USD/Tz
1656
Rs/Kg
2874113
Assessable Value
Rs.
2902854
Customs Duty
%
0
Rs.
0
%
10.3
Rs.
298994
%
4
Rs.
128074
Rs/Kg
427068
CVD
Additional Duty
Total Duty Implication
To sustain the viability of the custom smelting model in Indian refined copper industry, it is requested to exempt
copper concentrate (CH 2603) from basic customs duty.
3.7.9. Exemption of Gold and Silver content in copper concentrate from
Countervailing Duty and Additional Customs Duty
As per the present duty structure, import of Gold and Silver in pure form or as Dore anode, does not suffer
countervailing duty and additional customs duty at the time of import. However, the value of gold and silver content
imported through copper concentrate under chapter no 2603 attracts Countervailing duty @10.3% and additional
customs duty @4%. These duties are revenue neutral as the same are allowed as credit for set off on a later date.
However, there is a financial hardship to the copper smelters as huge money is blocked in the process. At the present
market valuation, the duty incidence is as high as Rs. 427,068/ Kg of Gold (ref. table below)
It is requested to exempt Gold and Silver content in copper concentrate (CH 2603) from Additional Customs Duty and
Countervailing Duty - as a revenue-neutral measure that will ease the financing burden for copper industry.
3.7.10. Technical correction in the notification regarding Exemption of Customs duty for
import of Gold and Silver content in Copper Concentrate
In the Union Budget 2011-12, the Government had exempted gold and silver content in imported copper
concentrate (CH 2603) from basic customs duty to encourage production of precious metals through the copper
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PRE-BUDGET MEMORANDUM 2013-2014
concentrate route. While this was a welcome move, the notification (Notification No. 24/2011) incorporated that the
exemption is “subject to the condition that the importer produces ….. an assay certificate from the mining company
specifying separately, the value of gold and silver content in such copper concentrate.”
It may be mentioned that a significant quantity of copper concentrate is procured from traders or from trading
companies of the miners. This trade route has been inadvertently left out of the notification - which needs to be
corrected.
It is requested to amend the notification regarding exemption of gold and silver content in copper concentrate from
basic customs duty so as to make the assay certificate from the supplier of concentrate as an adequate condition
rather than assay certificate from the mining company. This is a technical modification without changing the intent of
the condition, and will ease the fulfillment of condition for import of copper concentrate for all existing routes.
3.7.11. Reduction in the Duty on Furnace Oil from 5% at present to NIL
Furnace oil is a critical input for Aluminium industry accounting for nearly one-tenth of the input costs. In the recent
past, furnace oil prices have been increasing continuously - in a sharp contrast to the generally declining trend in
international commodity prices and in aluminium. During FY12, furnace oil prices have increased by more than 40%.
This is creating a serious impact on the Aluminium industry, along with the impact on other user industries.
Considering the sharp increase in furnace oil prices and the burden thereof, it is requested that the duty on furnace
oil may be reduced from 5% at present to NIL.
SOLAR ENERGY
3.8.1. Background
The policy framework put forth by the Ministry of New and Renewable Energy (MNRE) through the National Solar
Mission has accelerated the growth of the solar industry in India. However, there are some larger issues before the
developers, manufacturers, Engineering, Procurement and Construction (EPC) system integrators and associated
solar energy stakeholders in India. While MNRE is taking steps to address the technology and on-ground risk
perceptions through knowledge management and sharing, there is a need to provide various fiscal measures to
Indian solar industry to enable development of high quality low cost projects and a strong solar manufacturing base
to develop India as a hub of solar energy of the world.
The FICCI solar energy task force, representing the entire value chain of the solar industry, recommends the following
points to be included in the Union Budget 2013-14.
3.8.2. Financing of Solar Energy Projects
One of the biggest challenges that Indian solar industry faces, be it project developers, manufacturers or EPC
companies, is the availability of funds at competitive interest rates. It is estimated that the difference between the
lending rates of Indian banks and that of foreign lenders is around 10%. This difference puts pressure on the solar
energy industry resulting in increase in the price of indigenously manufactured solar equipment or per unit cost of
solar power generation. In addition to non-availability of low cost funds, availability of readily available funds is also a
challenge. Low cost funds can provide a competitive edge to the Indian solar value chain.
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PRE-BUDGET MEMORANDUM 2013-2014
3.8.3. Bankability-Renewable Energy Sector as an Independent Sector
Considering the necessity for setting up projects on renewable energy source especially solar to meet the Jawaharlal
Nehru National Solar Mission targets, renewable energy should be treated as a separate sector. This will enable to
promote the renewable energy projects as well as establish grid parity.
As per the prevalent banking practice, advances to renewable energy sector are accounted in power sector exposure
limits. Further the power sector needs to grow to achieve the planned growth at an average debt funding
requirement of Rs 2 lakh crores per year in the 12th Five Year Plan (2012-2017). The funds available for power sector
will be inadequate to support renewable energy projects included in power sector. This leads to an extra pressure on
the manufacturer and developer in obtaining project finance from Indian banks as these projects are compared with
other conventional sources.
Being a nascent technology in India, despite favorable policies and support being provided by the Central
government and various State governments, lenders are reluctant to provide financing to solar energy projects.
Taking into account the above consideration, there may not be enough headroom for accommodating renewable
energy sector under power sector exposure ceiling norms, which will affect the debt funding of renewable energy
sector. Thus this necessitates a paradigm shift of banks' treatment of renewable energy sector as a sector different
from power sector having separate exposure ceiling norms.
It is recommended that Renewable Energy projects should be removed from power sector exposure limit and a
separate category for Renewable Energy is created.
3.8.4. Priority Sector lending
Considering the environmental and socio-economic benefits and contribution to energy security, Renewable Energy
Sector should be given priority sector lending status to promote both grid-connected as well as off-grid projects.
3.8.5. Low Cost Finance
In India, the rate of finance is high (13-14%) in comparison to other countries such as China (3-4%) and Germany (56%). Higher cost of debt financing for solar project development or manufacturing has been a deterrent in its growth
and makes them vulnerable to foreign lenders' terms and conditions. The debt from the foreign institutions come
along with riders and force developers to accede to their terms and conditions.
It is suggested that the following steps be taken to make financing attractive for solar projects in India:(a) To create a separate low cost fund. The financing of projects through separate low cost finance would not only
help in reducing the solar power tariff but will also help in eliminating subsidy over time. Low cost funds will also
allow developers to choose their suppliers and thus provide a competitive platform for Indian solar manufacturers to
compete with global counterparts. Low cost finance should be made available to manufacturers of solar power
equipment as well.
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PRE-BUDGET MEMORANDUM 2013-2014
(b) The solar energy sector should also be supported through interest subsidy on the loans and this subsidy could be
provided through the National Clean Energy Fund.
(c) The solar energy sector needs to have access to long term External Commercial Borrowings (ECBs) at reduced
rates. Government intervention is needed to work with banks to create a hedging mechanism. The industry at
present is paying around 5% to hedge foreign exchange risk resulting in additional burden on the cost of the project.
Government and banking sector should work towards developing solutions for hedging. One example could be to
take care of foreign exchange risk by allocating 1% of foreign exchange reserve towards hedging foreign exchange
risks associated with the solar energy sector. This would bring down the cost of solar power from current Rs8-9 to Rs
7-8.
3.8.6. Payment Security
Though the Central government has provided Gross Budgetary Support of Rs. 486 crores towards payment security
mechanism, lenders are still wary about off-taker risk in the event of default including the payment capability of state
electricity boards (SEBs)/Discoms due to their weak financial health.
While considering debt restructuring of discoms, it is requested that debt restructuring be done with the
conditionality of improving Transmission and Distribution losses and directive be given to the concerned authorities
for making reasonable tariff revisions annually.
Considering the technological limitations of the renewable energy sector, a clause for time bound payment may also
be provided to ensure payment security to this sector.
3.8.7. Tax holidays
Solar industry being an industry with strategic significance for not only energy security but also for improving energy
access requires economic and financial support from the government. A long term tax holiday should be extended to
Solar Energy Projects to act as a catalyst for the growth and development of the sector. The following
recommendations may be considered:(a) Tax holiday of 10 years on solar power projects should be announced under section 80 I(A) of Income Tax act.
(b) For taking benefits under Section 80 (I) (A), the projects are required to be completed within the same financial
year. Every year the Government extends it for one more year. Therefore, it effectively leaves less than a year for
an entity to complete the project to avail these benefits. It turns out to be uncertain for the developers who wish
to venture into a long term project.
It is suggested to extend cutoff date for availing the benefits under Section 80IA till year 2017 (end of 12th Plan)
to give a boost to grid connected solar PV projects in the country.
(c) To promote development of solar energy projects, companies engaged in the business of generating power from
grid connected solar PV projects should be exempted from payment of Minimum Alternate Tax under Section
115JB of the Income Tax Act.
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PRE-BUDGET MEMORANDUM 2013-2014
(d) The investments made in solar photovoltaic and solar thermal manufacturing should be given accelerated
depreciation to claim IT benefits as given to the power plants that use the solar panels. The rates of depreciation
under Income Tax Act for solar power generating systems, solar modules and flat plate collector are 80%, but
there is no provision for manufacturing companies involved in solar market. 80% depreciation should be
provided to the manufacturing companies and 100% depreciation benefits should be extended to companies
installing large MW scale solar systems.
(e) Manufacturing cost of the indigenously manufactured solar equipments increases due to Customs and Excise
duties on some of the raw materials used by Solar Photovoltaic industry. It is suggested to remove or reduce the raw
material used in the manufacturing of solar photovoltaic cells and modules. On raw materials used by multiple
industries, an end use certificate may be mandated to avail such benefits by the photovoltaic manufacturing sector.
(f) As Government of India is trying to promote Solar Energy, growth of domestic industry will be very critical to meet
the objectives and success of JNNSM. All forms of tax including CST, VAT & service tax etc should be waived off on the
equipments and machinery used in grid connected and off grid solar energy projects and on input services for a
period of five years specifically during the entire 12th five year plan period.
3.8.8. Provision of Incentive in Personal Income Tax for Implementation of a Solar
Energy System
Provide incentives on the Personal Income Tax payable by individuals who are implementing Solar Photovoltaic or
solar thermal systems for domestic use by either procuring Solar Products such as Lanterns, Solar Water Pumps etc
or implementing solar installations such as Solar Rooftop System, Solar Home Lighting etc. Individuals can have the
option of availing either the subsidy or the deduction of interest on loan from income as it is done in case of housing
loan.
USA and Netherlands have such schemes available wherein the tax payer (individual) can either claim subsidy or tax
incentive for implementing and/or purchase of solar products/ installations. This would help in promoting solar
energy applications across the country.
3.8.9. Technology Up-gradation Schemes for Solar Manufacturing and the Supply
Chain
A special incentive package to upgrade the facilities for substituting costly raw materials with cost effective raw
materials should be introduced. This will help the industry to tide over the constant technology up gradation that is
taking place in the photovoltaic and solar thermal industry and remain cost competitive and avoid obsolescence.
Grants to the tune of 25% of investment should be provided to local manufacturing industry for up gradation of unit
to overcome obsolescence.
OIL AND GAS
3.9.1. Tax Holiday for Exploration and Production activities relating to Natural Gas
including Coal Bed Methane
To avoid uncertainty, it is important Government should clarify that for the availability of tax holiday, the definition of
'mineral oil' includes natural gas retrospectively irrespective of the NELP round and that the benefit would also be
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PRE-BUDGET MEMORANDUM 2013-2014
available to Coal Bed Methane. In other words, it should be explicitly provided that the term 'Mineral Oil' will include
Natural Gas, including to CBM for all past and future rounds of production of Natural Gas.
3.9.2. Scope of “Undertaking” for the purposes of tax holiday
The limitation of the tax holiday for oil & gas to a single undertaking based on a single PSC is regressive and
inconsistent with the construct of tax holidays for other sectors. This should be amended to define an 'undertaking'
(consistent with the judicial decisions) that each distinct field development evidenced by a separate development
plan should be an undertaking eligible for the tax holiday. This is all the more important as the amendment has been
made retrospectively and declaring each block as a single undertaking, that too with retrospective effect, will
adversely affect the profitability of operators.
3.9.3. Extension of benefit under section 80-IB(9) from 7 years to 10 years
Extend the benefit under section 80-IB(9) of the Income Tax Act from 7 years to 10 years to companies engaged in
production of mineral oil and natural gas. It may further be provided that benefit under section 80-IB(9) of the Act
shall not be restricted only to blocks licensed under a contract awarded till March 31, 2011 and the period March 31,
2011 be extended till March 31, 2017.
3.9.4. Section 80-IA be amended to include exploration and refining activities
Definition of infrastructure sector in the explanation to Section 80-IA of the Income Tax Act should be amended to
include exploration and refining activities. Accordingly, exploration and refining undertaking may be allowed
deduction for 10 consecutive assessment years as against 7 years at present out of 15 years period.
3.9.5. Deduction of expenditure covered under section 42 of the Act
It would be appropriate to provide a suitable encouraging weighted deduction of say, 150% of the actual expenses
incurred by the assessee, in respect of drilling and exploration activities etc. covered under section 42 of the Act.
The benefit of infructuous or abortive expenditure should be given in the year of incurrence of expenditure without
any condition of surrender of block as mentioned in section 42(1)(a) of the Act.
The Ministry of Finance in consultation with the Ministry of Petroleum & Natural Gas should amend all PSCs in
respect of Exploratory Blocks to provide that the allowances specified in the PSCs with respect to section 42 of the
Income Tax Act would apply in addition to the allowances provided under the Income Tax Act under other provisions
while computing income tax payable by a Contracting Party under the PSC.
3.9.6. Extension of period under Section 80 IB (9) for refining projects
As the completion of various refinery projects is likely to get delayed, it would be appropriate that the validity of the
deduction be extended from 31.03.2012 to 31.03.2015 in order to ensure that the intended benefit of deduction is
availed for the said projects.
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PRE-BUDGET MEMORANDUM 2013-2014
3.9.7. Allow set off loss under section 35AD against profits of any other business
Under section 35AD of Income Tax Act, 100% deduction in respect of capital expenditure incurred (other than land,
goodwill and financial instrument) prior to commencement of operation of the specified business to the assessee
engaged in laying & operating a cross-country Natural Gas/Crude/Petroleum pipeline network for distribution is
allowed.
Section 70 provides that in case of loss under any head of income (other than Capital gains), assessee is entitled to
set off such loss from any other source of income under the same head. Therefore loss from one business can be set
off from profits of other businesses. However section 73A provides that loss computed under section 35AD will be
set off only against profits & gains of Specified Business and Specified Business inter-alia includes business of laying
and operating a cross-country natural gas (laid after 01.04.2007) or crude or petroleum oil pipeline network for
distribution, including storage facilities being an integral part of such network. This restricts the claim for adjustment
of loss from profits of other income which is allowed otherwise in all other cases. This discrimination needs to be
removed
In the initial 3 to 4 years there may be no profit in Specified Business of an assessee. Therefore section 73A appears
to be restrictive and unfair to the assessee. It is suggested to allow set off of loss under section 35AD against profits
of any other business carried on by the assessee.
3.9.8. Exemption for various services provided to Exploration & Production (E&P)
companies
Oil and Gas exploration & production is a capital intensive industry. The capital expenditure is very significant given
the nature of business. Goods required by E&P Companies are exempt from customs / excise duties, however,
various services availed by the E&P Companies are subject to the levy of a service tax. The service tax so paid is a
cost to the operator, since excise duty on production of oil and gas products is wholly exempted.
This levy of service tax thus increases the cost of exploration activities and reduces the funds available for
exploration. The recent introduction of Negative List based taxation of services has further increased the service tax
burden. Since exploration is a non-revenue generating activity, special incentives should be offered to encourage
exploration initiatives in the country. Accordingly, services provided to companies engaged in Exploration and
Production of oil and gas should be exempted from service tax.
On the same analogy, various services imported by the E&P companies could be considered for exemption. Such
services should be included in the negative list of services.
3.9.9. Customs Duty Exemption for all items required for Oil and Gas Exploration
Currently, Sr.No.356 of notification No. 12/2012-Customs dated 17.03.2012 exempts all items covered by List 13
when imported for petroleum operations. While the notification obviously intends to cover all items critical to carry
out the “petroleum operations”, which would include not only the items required for drilling but also the extraction
of the oil and gas using equipments such as compressors, pumps, processing and refrigerating equipments, etc. some
of these equipments may also be installed in an on- shore terminal and yet essential for the completion of the
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PRE-BUDGET MEMORANDUM 2013-2014
petroleum operation. S. No. 9 of the list 13 currently covers only items required for production, processing and well
platforms. Therefore, items required for petroleum operations and installed on-shore should be specifically covered
in List 13.
It is requested that the entries against S.No.9 of List 13 of Notification No.12/2012-Cus dated 17-03-2012 may be
replaced as follows: “Subsea/Floating /Fixed Process, Production and well platforms and onshore facilities for
storage/production/processing of oil, gas and water injection including items forming part of the
platforms/onshore facilities and equipment/raw materials required like process equipment, turbines,
pumps generations, compressors, prime movers water makers, filters and filtering equipment, all types of
instrumentation items, control systems, electrical equipments/items, oil improvement, construction
equipment, telemetry, telecommunication, tele-control security, access control and other material required
for petroleum operations".
3.9.10. Customs exemption to Rig imported for Oil & Gas Exploration
Currently goods specified in List 13 of notification No.12/2012-Customs dated 17-03-2012 required in connection
with petroleum operations undertaken by ONGC and Oil India Limited (OIL) are exempted under Sr.No.356 when
imported by ONGC/OIL or the contractor of ONGC/OIL. However, in some cases, the contractor may engage a subcontractor to execute some of the work for ONGC/OIL. Since imports by the sub-contractor are not explicitly covered
in the notification (condition 41 of the notification) there may be some objection in extending this exemption to the
sub-contractors though the goods are intended for the notified purpose.
It is accordingly requested that the condition 41 of customs notification No.12/2012 dated 17-03-2012 may be
amended to permit import of the goods either by ONGC/ OIL or contractor of ONGC/ OIL or a sub- contractor of such
contractor subject to fulfilment of the prescribed conditions.
3.9.11. Exemption for onshore Exploration and Production (E&P) activities
An exemption has been provided to the parts and raw materials for manufacture of goods to be supplied in
connection with the purposes of offshore oil exploration or exploitation. Under the above exemption similar benefits
are not provided in relation to the petroleum operation carried out onshore.
This structure was introduced when petroleum operations were at a nascent stage in India. However, the recent
onshore discoveries have highlighted the fact that such an opportunity also exists onshore and benefit should thus
not be restricted to the offshore areas alone.
It is requested that the benefits extended to the offshore oil exploration activities (Sl. No, 357 of the customs
Notification no. 12/2012) should also be extended to the onshore oil exploration activities to provide the operators a
level playing field.
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PRE-BUDGET MEMORANDUM 2013-2014
3.9.12. Levy of Service Tax on Transmission Charges Included in Sale Price of Gas
Presently, Natural gas is sold to the customer including transportation to customer's premises as a bundled activity.
The transmission charges form part of Sale price and VAT is being paid on the component of transportation charges
(forming part of sale price). Accordingly, service tax should therefore not be chargeable on the component of
transmission charges. However, service tax on the component of transmission charges is being demanded by local
officers resulting in double taxation.
As there has been huge litigation in past over taxability on certain services which are as such part of supply of goods
or treated as supply of goods under various state statutes thereby resulting in double taxation of both VAT and
service tax on the same value which could never be the intention of the government.
It is suggested that CBEC may like to consider and issue a suitable clarification that service tax will not be payable on
any activity associated with transaction of sale where the component of value relatable to such activity forms part of
total sale price and attracts VAT/CST under CST/VAST laws.
Alternatively, “any activity integrally connected with transaction of sale wherein the component of value relatable to
such activity forms part of sale price under CST/VAST laws” may be added in the exclusions to the definition of
'service' under sub-section (44) of the new section 65B.
3.9.13. Exemption to LNG from customs duty for use in power sector
Liquefied Natural Gas (LNG) and Natural Gas (NG) imported for generation of power have been exempted from
Customs duties vide notification No 12/2012- Cus Dated 17.03.2012.It may be appreciated that the above exemption
may not result in any real benefit to power generating companies as it stipulates a very harsh condition requiring
them to import LNG/NG directly. R-LNG/Natural Gas is supplied to power generating companies by pipeline
companies like GAIL, GSPC etc. as per their requirement which varies from time to time. The Power generating
companies normally do not have a requirement of the size that they can import a full cargo on their own. Further,
power companies do not have storage facilities in their plant where surplus RLNG/NG could be used at a later date
for generation of power/electrical energy. The above exemption in present form is ineffective and inadequate for
power sector.
In view of above, it is suggested that the custom duty exemption to LNG/Natural Gas may be granted on imports
made by any person subject to its 'end-use' for generation of power with suitable safeguards.
3.9.14. Other
Import duty exemption on LNG should be extended to all sectors & not just power, aligning it with crude petroleum.
Swapping of gas should not attract taxes of any kind, if the swaps are made through the Ministry of Petroleum and
Natural Gas as a part of the policy measure.
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PRE-BUDGET MEMORANDUM 2013-2014
ENVIRONMENT SECTOR
Following proposals may be considered for improving the environment:-
3.10.1. National Clean Energy Fund
1. Develop an effective and efficient funds utilization framework, enabling commercial banks to lend to and invest in
Renewable Energy, Energy Efficiency & Water management/recycling projects.
2. Incentivizing commercial banks to develop and launch fund raising instruments of their own for the purposes of
easing/facilitating environmental project financing.
3.10.2. Municipal Services (Solid Waste and others)
1. Decentralized segregation and organic waste processing should be incentivized. This could be done through
penalties for noncompliance and incentives through municipality purchasing compost at rates attractive to organic
waste processers.
2. Collection and Transportation of Municipal Solid Waste (MSW)
•
Grant should be provided for Solid Waste Equipment like Mini Tippers, Refuse Compactors, Tipper Trucks,
Garbage Bins, Garbage Containers, Power Sweeping Machines, Hook Loaders-Bulk Transportation, Garbage
Compaction Units, as all solid waste management concessionaires have to purchase or import some of them as
well due to lack of a quality product in India. They should be given the status of pollution control equipment
when they are imported/purchased against a work order under MSW Rules 2000 and duties should be levied at
concessional rate / nil rates.
•
Activities related to management of Solid Waste should be exempted from Service Tax (by adding it to the
negative list of the Services)
•
Provision of support in the budget for recycling and process outputs (output based) which will ensure better
Operations and Maintenance of existing processing facilities
3.10.3. Incentives for Processing of Municipal Solid Wastes
•
100 % depreciation in the first year for investment in wastewater recycling, waste recycling, green belt, E-waste
processing plant, advanced pollution control technologies such as flue gas de-sulphurisation, advanced
wastewater treatment such as MBR, ozone treatment, etc;
•
Exemption of VAT for manufacturers and custom duty exemption for importers of advanced pollution control
equipments/systems [like flue gas de-sulphurisation, advanced wastewater treatment such as MBR, ozone
treatment, environmental monitoring instruments for air quality, stack emission, noise monitoring, water
quality, composting process control, compost quality monitoring, etc]; and
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PRE-BUDGET MEMORANDUM 2013-2014
•
Service tax exemptions for Operation and Maintenance of centralized / common wastewater / industrial effluent
treatment plant, MSW sanitary landfill facilities, E-waste processing facilities & transport of industrial waste, Ewaste, other wastes, etc to authorized treatment, recycling or disposal sites.
•
There should be enablers for recycling waste through reasonable “gate fees” for units that would recycle plastics,
paper/cardboard, metals, etc.
•
Composting of Municipal Solid Waste: Marketing support of Rs. 2320 per ton of Fertilizer Control Order (FCO)
compliant city compost in order to provide compost to the farmers at an affordable price and enhance organic
Carbon in the soil to improve productivity.
•
100% of the compost produced through treatment of municipal solid waste should be purchased by the Urban
Local Bodies subject to meeting the quality norms. The purchase price of the compost should recover full costs
like the fixed costs and variable costs including the predetermined profit margins for the developer/operating
agencies. 50% of the purchase costs should be borne by the central government for a period of ten years while
the remaining 50% of the purchase costs should be borne by the state government.
•
The municipal finances in India are in precarious state. The tipping fee in India is very low compared to the rates
in other parts of the world. The Municipal Solid Waste Management industry serves a huge population base and
helps in pollution control - both air and water. Therefore, on the grounds of non availability of indigenous
products in India, the industry seeks a reduction in customs tariff if the equipment is used for projects under
MSW Rules 2000. Also duty concessions and exemptions should be given to cement industry on Waste Heat
Recovery systems and Alternative Fuel and Raw Material Feeding systems.
•
Construction & Demolition (C&D) waste management projects: Excise duty exemption for inputs and products
made from recycled C&D waste (such as the precast products like kerb stones, pavement blocks and tiles made
from the processing of Construction & Demolition waste).
•
Waste to Energy: Electricity tariff support for Waste to Energy projects at Rs. 8/KWH similar to Solar power.
These output oriented supports will greatly help in ensuring processing of municipal waste which in turn will reduce
the indiscriminate dumping of waste.
3.10.4. Sewage Treatment
•
100% of the bulk treated water should be purchased by the Urban Local Bodies subject to meeting the quality
norms. The purchase price should ensure full cost recovery including the predetermined profit margins for the
developer/operating agencies. Union Government should give 25% subsidy on the capital costs and also give
viability of funding for sustained operations.
•
Provision is requested in the Union Budget 2013-14 for financial aid in terms of 50% subsidy, for manufacturing
industries for development of effluent treatment facility by which zero liquid discharge status can be achieved in
line with the concept of 4Rs (Reduce, Recover, Reuse and Recycle). This will be helpful not only in protecting the
environment but also saving scarce valuable natural resource - water.
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PRE-BUDGET MEMORANDUM 2013-2014
3.10.5. Carbon Revenues
To motivate the Corporate Sector to engage further in green house gas (GHG) emissions reduction projects, income
derived from sale of Certified Emission Reductions (CERs) should be exempted from income tax. It should be treated
as Capital Receipt and not charged to Tax, since CERs are generated from huge investment in capital intensive
projects with low return on investment. Moreover, CDM projects receive CERs after deduction of 2% by UNFCCC as
Adaptation fund and another 2% needs to be committed for CSR activities. CERs are export products which are sold
to developed countries to meet their emissions reduction targets and are of no use in the Indian market. Therefore
these carbon credits may be treated accordingly as Export products and accorded similar benefits.
3.10.6. Incentives to promote green environment
Country is facing serious problem on deteriorating environment and it is seen that approximately 30% of municipal
waste comprises of different kinds of packaging waste like plastic, metal, glass, paper etc. which are being used by
different segments of the industry. In order to encourage the user industry to use and promote more and more
packaging materials which are environment friendly and recyclable, the Government should announce schemes to
provide incentives either in the shape of refund of indirect taxes, providing subsidies or Income tax exemption and
also concessional import duties for Capital Goods used to manufacture such packaging materials.
3.10.7. Energy Efficiency
1. Financial incentives should be extended to Demand Side Management (DSM) projects, particularly for Municipal,
Hospital, Infrastructure (i.e. Transportation, Water, etc.). Incentives may be in the form of inclusion in PAT
mechanism, Interest Subsidy, etc.
2. Subsidy/grants should be given for preparation of Detailed Energy Audits and Investment Grade energy Audits.
3. DISCOMS, TRANSCOS and ESCOs may be provided with tax incentives to promote investments in Energy
Efficiency programs.
3.10.8. Particulate Emissions (burning of agricultural residues in fields)
Straw baling units should be financed at concessional rates (perhaps similar to farm loans) as there should be
“enablers” for establishment of Biomass Briquetting units, which would pay for receipt of agricultural residues and
thus ensure that farmers do not economically suffer for collection/transporting agricultural residues instead of
burning them on the fields.
CHEMICALS AND PETROCHEMICALS
3.11.1 Duties on Petrochemical inputs, polymers and articles of plastics
The Petrochemical industry in India is passing through a difficult phase due to adverse fiscal and policy environment.
Demand growth has decelerated and reached a low of 3% during 2011-12. No major investment is forthcoming. It is
expected that demand will pick-up in future, benefits of such growth would accrue to overseas producers in the
absence of supportive policy environment for local investment.
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PRE-BUDGET MEMORANDUM 2013-2014
Some of the fiscal issues that need attention for growth of Indian petrochemical industry are detailed below with
recommendations to address these:
1. Import duty on Polymers like Polyethylene, Polypropylene, Poly Vinyl Chloride and Polystyrene at 5% in India is
one of the lowest in the world. This is even lower than those prevailing in developed nations like USA, EU and
Japan. In most of these countries, including China, the duty level is 6.5% and above.
2. On the other hand we have high duty on inputs resulting in nil to very little duty spread between polymers and
their feedstock. Import duty on naphtha at 5%, reformate (10%), propane (5%), butane (5%) and intermediates
like ethylene (5%), propylene (5%), EDC (2.5%), VCM (2.5%) and styrene (2.5%) have made local production unviable. Some of the feedstock like EDC, VCM and styrene are also not produced locally for domestic sale.
3. Due to FTA with Singapore, which is a large exporter of Polymers (PE, PP & PS), duty on import of Polymers has
further come down to 2.3% when imported from there. This duty would shortly come down to 0%. This has
resulted in an inverted duty of -2.7% now to -5% eventually between Polymers and Ethylene, Propylene as well
as naphtha.
4. Reformate obtained from refinery operations, which is a major input for the aromatic production, attracts 10%
import duty. The primary downstream petrochemicals from reformate, Paraxylene, has 0% import duty making it
one of the worst case of inverted duty.
5. Petrochemical industry is capital intensive. Countries we compete with have higher spreads between import
duty on Polymers and their feedstock. Middle East has added advantage of extremely low feedstock cost.
6. As a result, the petrochemical industry is in financial difficulty with very poor margins. If not corrected urgently,
there would be very little local investment and the industry will become highly import dependent. There is
already large imports and huge outflow of foreign exchange.
7. Also, in view of very low duty differential, the polymer producers are unable to offset the SAD paid on feedstock
imports, leading to large accumulation. This is further impacting on the already low margin spread available for
local producers.
In order to create a level playing field for domestic producers that encourage investment and employment in the
industry it is requested that:
1. Import duty on petrochemical inputs like naphtha, reformate, propane, butane, ethylene, propylene, EDC, VCM
and styrene may be brought down to zero. It may be highlighted here that there is very little production of many
of these items like EDC, VCM and styrene for merchant sale within the country and whatever capacity exists is
essentially for captive use.
2. Import duty on polymers like PE, PP, PVC and PS may be increased from 5% to 7.5% so as to provide a reasonable
duty spread and make local investment viable. This will also bring Indian duty structure closer to developed
economies.
3. Increase import duty on articles of plastics to a higher level or fix a minimum assessable value with import duty
at the new level to arrest undervalued imports.
4. Excise duty on plastic raw materials and plastic products be reduced from 12% to 8%.
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PRE-BUDGET MEMORANDUM 2013-2014
5. In order to address the issue of unutilized SAD credit, it is submitted that SAD may be waived on imports of
feedstock and import of monomers by end-use manufacturers. If this is not feasible, then we would request for a
facility for end use manufacturers to either adjust the SAD against the basic customs duty payable on imports or
obtain refund of such credit balance.
3.11.2 Anomaly arising due to occurrence of Inverted Duty Structure in the chemicals
and petrochemicals industry
Incidence of Inverted Duty faced by the petrochemicals industry and details of current duties on finished,
intermediary and raw materials in the value chain relating to Reformate is given below:[i] Reformate is used for blending with gasoline and; Naphtha and Propane are feedstock for polymer. While these
basic inputs have relatively high level of import duty, duty on downstream products has been one of the lowest in
the world.
Reformate is used for blending with gasoline. While the import duty on Reformate (HS code 27075000 or 27101219)
is 10% or 5% depending on the classification; the duty on its downstream product, Motor Spirit is 2.5%.
Reformate is obtained on processing of naphtha at the refinery and is a blend stock for Motor Spirit. As shown in the
flowchart below, a major case of inverted duty structure is experienced in Reformate.
Crude 0%
Naphtha 5%
Reformate 10% / 5%
Motor Spirit 2.5%
[ii] Naphtha and Propane
Naphtha (HS Code 27101190) and Propane (HS Code 27111200) are primary feedstock for olefins. Cracking Naphtha
and Propane in a petrochemical plant produces building blocks like Ethylene (HS Code 29012100), Propylene (HS
Code 29012200) and downstream chemicals like EDC/Ethylene Dichloride (HS Code 29031500), VCM/Vinyl Chloride
Monomer (HS Code 29032100) and Styrene (HS Code 29025000).
While Naphtha and Propane attract import duty of 5% for petrochemical production, duties on downstream
products are lower. As shown in the flowchart below, EDC, VCM and Styrene have import duty of 2.5% resulting in an
inverted duty structure.
Naphtha 5%
Crude 0%
Propane 5%
44
Ethylene 5%
PE Singapore 2.3%
Propylene 5%
EDC 5% to VCM 2.5%
Other co-products
EB to Styrene 2.5%
PRE-BUDGET MEMORANDUM 2013-2014
The incidence of inverted duty on the imports of Polyethylene (PE) and Polypropylene (PP) would get magnified due
to the India-Singapore Comprehensive Economic Cooperation Agreement (CECA). Ethylene and Propylene obtained
from Naphtha and Propane and are predominantly used for making Polyethylene (PE) and Polypropylene (PP). While
the normal rate of duty on PE and PP is 5%, import from Singapore under the CECA attracts concessional rate of 2.3%
duty. Since the duty on PE and PP would eventually come down to zero under the CECA, the degree of irregularity in
the duty structure would further widen.
[iii] Ethanol & Nonyl Phenol
The table below clearly demonstrates that the import duty on raw materials is more than the import duty on finished
products. This makes domestically manufactured products from imported raw material least competitive as
compared to importing the finished product directly. It is suggested to reduce the import duty on raw material to the
level that its impact on the finished product produced locally is less than the duty impact on imported finished
product and hence promote local manufacturing.
Sl.No.
1.
Feed Stock
Ethanol
Import Duty (%)
Finished Product
Import Duty (%)
7.50%
MONO ETHYLENE
GLYCOLS
290553100
5%
7.5% +antidumping duty
$165/pmt
NONYL PHENOL
ETHOXYLATES
34042000
7.50%
CTH-22071090
2
Nonyl Phenol
CTH-29071300
In order to address the concerns of the chemical and petrochemicals industry, the existing anomaly faced arising out
of such inverted duty structure may be removed.
3.11.3 Antimony Trioxide and Antimony Metal.
It is recommended to have a 5% differential between the Antimony Metal and Antimony Trioxide duties. Presently it
is 2.5% (On Antimony 7.5% and on Antimony metal it is 5%).
3.11.4 Pesticides
Pesticides (medicines for plants) are an important ingredient for agriculture sector along with good seeds and
fertilizers. They need similar treatment for the levy of excise duty, as the fertilizer sector. The excise duty on
pesticides of heading 3808 50 00 and 3808 91 11 to 3808 99 90 needs to be same as that on fertilizers.
SHIPPING AND PORTS
3.12.1. Income from transfer of qualifying asset and income from deployment of
reserves be treated as income from 'core activity'
•
Any profits or gains arising from transfer of a qualifying asset are chargeable to income-tax as capital gains. Such
profits, being not considered as 'core shipping income' are also subjected to MAT. This results in double taxation
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PRE-BUDGET MEMORANDUM 2013-2014
of the same income. Book profit on sale of qualifying assets should be treated as 'core shipping income' and
should be excluded from book profits while computing MAT liability.
•
In order to utilize the reserve account for the purpose of acquisition of ships, Indian tonnage tax companies need
to maintain adequate cash. Income generated through deployment of such cash in short term investments till
the time statutory reserves are utilized for acquisition of ships is not being considered as income from 'core
activity'. The reserves are created as per the requirement under the Act and is out of core and incidental
activities of the tonnage tax company and it is therefore, recommended that aforesaid income should be treated
as income from core activity of a tonnage tax company and should be subjected to tax accordingly.
3.12.2. Other Direct tax Suggestions
•
Port projects should be completely exempt from MAT and from payment of Dividend Distribution Tax.
•
In respect of revenue share or royalty or wharfage or any other revenue payable to the Port Authority, 150%
deduction shall be permitted.
3.12.3. Granting of Infrastructure Status to Shipping Industry
The Indian shipping industry fulfills the characteristics of infrastructure as mentioned in the harmonized Master List
of infrastructure sub-sectors. Granting infrastructure status would mean reduced cost of borrowings to buy
technologically advanced and environment friendly ships leading to increased trade volumes resulting in higher
employment and higher foreign exchange earnings/ savings. As one of the steps to rationalize, strengthen and
provide environment conducive to the growth of Indian shipping sector, it is requested that 'infrastructure' status be
granted to 'ships and other vessels' as defined under the Merchant Shipping Act, 1958.
3.12.4. Creation of a 'shipping modernization fund' for growth of Indian flag shipping
Shipping, being capital intensive, requires huge funds for financing ship acquisitions depending upon the market
conditions. Funds are mobilized largely through external commercial borrowings and internal generations. In the
current depressed shipping scenario, it is uncertain as to how the shipping companies will be able to source the
equity and debt requirement for acquisition of ships. As the shipping industry is in substantial need of funds for
acquiring tonnage, it is essential that the Govt. of India set up a fund to support the national fleet, thereby enabling
access to funds.
3.12.5. Exemption for import of equipment for port projects
Considering importance of modern equipment based on latest technology for efficient port operations, customs duty
for import of port equipment should be waived off.
3.12.6. Customs duty on foreign going vessels
Foreign going vessels are exempted from customs duty vide entry no 462 of the Table to the Notification 12/2012Customs dated 17 March 2012 subject to fulfillment of condition 82 of the said Notification. Earlier to this exemption
foreign going vessels were exempted from CVD provided the vessels had a global trading general licence under
section 406 of the Merchant Shipping Act, 1958. With effect from 17 March 2012, CVD is payable on conversion of
foreign going vessels to coastal vessels as follows:
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PRE-BUDGET MEMORANDUM 2013-2014
–
full lease or contract value, if the import is under a lease agreement or contract
–
1/120th of the applicable duty, for each month or part thereof, of stay in India as coastal vessel
Most international jurisdictions (e.g., European Union, and Canada) do not apply CVD (or equivalent duties) on
vessels used in international transportation business. Even where the tax applies to vessels used in domestic freight,
the tax is fully credited (with a refund for any excess credits) within a few days of the payment, with no net impact
except for a temporary negative cash flow. The amendment would result in customs duty payment every time the
vessel is imported into India and converted to coastal run. There would be a significant compliance burden in having
to pay tax on every conversion, determination of the value for tax, determination of the time period of coastal use,
and making adjustments if the anticipated coastal use differs from the actual. There would be no revenue gain to the
Government as theoretically the tax paid on conversion is fully creditable against the output tax on coastal freight.
It is accordingly requested that customs duty should be exempted on vessels used in international commercial
transportation business.
3.12.7. Withdrawal of excise duty on ships and other vessels
With effect from 1 March 2011, excise duty has been introduced on various types of ships covered under chapters
8901, 8904, 8905 and 8906 9000 at 2% (increased from 1% to 2% with effect from 17 March 2012) if no CENVAT
credit is taken of taxes and duties paid on inputs and input services and 6% in other cases (increased from 5% to 6%
with effect from 17 March 2012). The new levy has created an additional burden to Indian ship yards and adversely
affected their competitiveness
In order to encourage the ship building industry, it is requested that excise duty exemption be granted to ships and
other vessels falling under chapters 8901, 8904, 8905 and 8906 9000 as was available prior to 1 March 2011.
POWER
3.13.1. Import of power under OGL (Open General Licence)
Import of power should be under OGL to tap power generation potential in neighbouring countries. The current nil
import duty on power imported from Nepal should be continued over the duration of the Power Purchased
Agreement (PPA). Cross border transmission links should also be developed.
3.13.2. Mega Power Policy
At present Mega power policy directive is to tie-up power within 3 years from date of issuance of Provisional Mega
certificate. Mega Power policy stipulates up to 85% power tie-up under Power Purchase Agreement. Changes in this
norm are essential on account of uncertainties in coal supply.
Under the Mega power policy, timeline for tie up of power should be three years from the commencement of coal
supply under Fuel Supply Agreements (FSA) instead of 3 years from date of issuance of Provisional Mega certificate.
Further, extent of power capacity tie-up should be limited to domestic coal linkage, not 85% presently prevailing.
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3.13.3. Financial incentives for Hydro power projects
In order to promote development of clean energy, energy security should be improved and challenges faced by fossil
fuel based plants mitigated. Project cost reduction should be encouraged by extending benefits to the Construction
equipment and material. State Governments should provide exemptions from local duties.
3.13.4. Lending capacity of banks to power sector
Power sector is important and needs massive financing requirements. Many public sector banks have reached their
lending limits. This sectoral lending limit of the banks should be relaxed to facilitate fresh lending and Power sector
should be included in priority sector lending. Financing of operational projects by IIFCL should be taken out or such
other agencies should be encouraged to create more lending capacity for banks.
3.13.5. Encouraging Insurance Company Investments in power sector
Under the existing IRDA guidelines insurance company investments flow mostly to State owned institutions. Allowing
insurance company investment to Power sector will enhance market liquidity. The credit rating for investment in debt
paper should be reduced. Insurance companies should be encouraged to invest outside public-sector entities,
specifically in power sector.
3.13.6. Reduction of Macroeconomic risks
Macroeconomic risks arising out of adverse interest rate and exchange rate movements need to be reduced. The
large macro-economic shocks cannot be borne by projects supplying through long-term 25 year contracts. Long term
base rate to be introduced for infrastructure projects which should be delinked from bank base rates in order to
provide stable interest charges for projects. The base lending rates of institutions like Power Finance Corporation
(PFC) may be used for domestic debt. RBI should facilitate creation of a fund to hedge against short term interest rate
fluctuations & maintain the long term rate. Exchange rate variations should also be permitted for ECB/ECA debt.
3.13.7. Extension of Tax Holiday for Power sector
Under section 80IA, an undertaking is eligible for tax holiday only if it begins to generate power by 31.03.2013. There
is an immediate need to augment electricity generation capacity in the country. Industry has to invest large capital in
setting up of power plants to ensure uninterrupted power supply. This sunset clause under section 80IA for power
plants needs to be amended to extend the tax holiday for another period of five years. In other words undertaking
which beings generation of power by 31st March 2017 should be eligible for tax holiday.
3.13.8. Exemption from Dividend Distribution Tax for SPVs
In view of the re-investment needs by the holding company in the power sector, Dividend Distribution Tax should be
levied only at the ultimate parent company level and SPVs be exempted from the DDT.
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3.13.9. Other Tax benefits for Power sector
The following recommendations are also submitted for consideration:•
Removal of MAT and DDT for SEZ Units
•
Service tax exemption to infrastructure projects in the power sector, on the lines of the benefits available for
projects in other infrastructure sectors such as roads, railways and airports. This would reduce the cost of Power
Generation, as Power Generation Companies are not entitled to credits on tax paid on procurements.
•
Removal of withholding tax on External Commercial Borrowings of Infra companies especially Power companies.
•
Issuance of a clarification whether Electricity is goods or not for purposes of claiming Additional Depreciation. It
is urged that the initial depreciation of 20% be allowed in full in the first year as an incentive for investments
irrespective of the number of days of use.
EDUCATION
3.14.1 Infrastructure Status for higher education sector
To infuse more capital in the sector, grant 'infrastructure status' to higher education in order to allow legal and tax
treatment similar to other infrastructure projects.
3.14.2 Establishment of educational institutions as section 25 companies
Allowing all types of institutions to be established as Section 25 companies and permission to convert the existing
trusts and societies to Section 25 companies. This will be a positive step forward to attract private sector to invest in
the sector. Currently, government is allowing only technical institutions to be set up though Section 25 Companies.
3.14.3 Setting up of National Higher Education Finance Corporation (NHEFC)
Top priority to be accorded to the setting up of National Higher Education Finance Corporation (NHEFC) in the 12th
Five Year Plan for creating alternative avenues of revenue generation for higher educational institutions/universities.
NHEFC is an initiative by the Government aimed at fee rationalization, student financing and education financing
mechanism for the higher educational institutions. It provides loans at concessional rates of interest to agencies for
establishment of institutions in educationally backward areas.
3.14.4 National Mission for Faculty Development
•
Shortage of adequately trained faculty is the biggest challenge to the growth of higher education. About 25% of
Faculty positions in Universities remain vacant while 24% of faculty in universities and 57% in colleges are
without PhD degrees. There is a need to promote specific scheme for skill development of university teachers
and for the day to day academic and research activity. Tax relief to the tune of 50% should be provided to
Universities /HEIs which spend on the capacity development and training of their staff.
•
Allocate grants/funds to Universities/organizations/industry associations focusing on faculty development
programmes.
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3.14.5 Income Tax Exemptions
Given that India needs skilled personnel for global requirements, Government should make a provision that:
•
Any person enrolling for a Skills Certification course be eligible for a 20% tax rebate (only applicable for the
tuition fee amount)
•
Any Educational Service Provider opening a Skills Centre in a backward area should be given an incentive like
exemption from income tax for a period of 5 years.
•
Establishment of the proposed Education Finance Corporation for easy access to loans. Parents or Students
allowed to open education specific accounts/purchase bonds where earnings /growth of investments inside the
account accumulate without being taxed. Withdrawal should be tax free as long as it is used for specified higher
education expenses.
CIVIL AVIATION
3.15.1. Exemption from Custom Duty for X-ray baggage inspection system and other
Airport security systems.
X-ray baggage inspection system and parts thereof are eligible for NIL basic customs duty in terms of notification No.
12/2012 - Customs dated 17-03-2012 (S. No. 490) when imported by Government or its authorized persons for antismuggling or by CISF, Police Force, Central Reserve Police Force, National Security Guard (NSG) or Special Protection
Group (SPG) for bomb detection and disposal. Import of x-ray baggage inspection system at Airports is for security
purpose and security is a sovereign function (Reserved Activity) as per State Support Agreement (SSA) with Ministry
of Civil Aviation (MoCA) and import cost is met out of Security Component of Passenger Service Fee. However, since
import is not directly undertaken by the above specified agencies but by respective Airport operators, duty
concession is not available though money is being paid out of funds of Government of India (GoI). Hence, this
condition needs to be amended to expand its scope to cover imports by respective Airport operators subject to
production of a certificate from Ministry of Civil Aviation.
Further this concession should not be limited to x-ray machines alone because there are other machines, which are
used for bomb detection and disposal. The list of goods eligible for exemption be expanded to cover the following
items and parts of Security Systems falling under any chapter of the Customs Tariff.
a) X-ray baggage inspection system
b) Explosive detectors
c) Bomb/suspect luggage containment vessels/units
d) Robots for handling of bombs or suspected baggage
e) Parameter security intrusion system and accessories
f)
Access control system
g) Hydraulic bollards
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h) Boom barriers
i)
Cameras for CCTV
All the above systems are bought as per specifications laid down by Bureau of Civil Aviation Security (BCAS), MoCA,
and GoI.
3.15.2. Concessional Customs Duty on Goods required for development of Airports
It is requested that the following items required for development of airports should be permitted to be imported at a
concessional rate of basic customs duty of 5%
1. Navigational / Communication Aids; 2. Airfield Crash Fire Tenders & other fire fighting vehicles; 3. Elevated
Transport Vehicle; 4. AC Plant of capacity more than 200 TR; 5. T-5 Triphosfor Tube; 6. Flight Inspection System
(Ground & Air); 7. Runway Marking & Pavement testing machine; 8. Baggage Conveyor (handling) system; 9.
Passenger Boarding bridges (Aerobridges) along with associated Visual Guidance Docking Systems; 10. HVAC &
accessories; 11. Travelators / Escalators / Lifts; 12. Structural glazing (glass); 13. Airport ground lighting; 14.
Aluminium (Roof sheeting); 15. False ceiling; 16. Carpet; 17. Fire proof door; 18. Revolving door; 19. LED Light
fittings; 20. Check in counters; 21. Chillers; 22. Ground Power Unit (frequency convertor); 23. Signages; 24. Chairs;
25. Vitrified tiles; 26. Runway Sweepers; 27. Variable speed drives; 28. LCD/ LED Flat Panels
3.15.3. Alternative / Take-out financing
Aviation Finance Corporation (AFC): SPV providing dedicated capital can be set up by the Government to facilitate
lower interest rates and longer maturity of loans.
3.15.4. Liberalization of Infrastructure Bonds
Allow private Airport Operators to issue long term non-taxable infrastructure bonds to raise the required funding
from the market.
3.15.5. Liberalize Sectoral Funding Limits
Ease RBI limits on sectoral funding thereby removing the current compulsion for airport developers to raise required
funds / debt from multiple banks making process time consuming and cumbersome.
3.15.6. Receivables
Special mechanism for easing cash flows issues arising from delayed Receivables from related government entities,
such as Air India / Indian Airlines.
Enhance Plan allocation for Air India and implement robust measures for quick disbursement to affected airport
operators and agencies.
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3.15.7. Issuance of Tax Free Infrastructure Bonds
To facilitate the private airport operators raise funds, it is recommended that they should also be allowed to issue tax
free infrastructure bonds from the public.
3.15.8. Clarificatory amendment in Section 80 IA with regard to upgrading existing
infrastructure
Infrastructure development is a pre requisite for the growth and development of any country. Infrastructure
development is available in two ways i.e.to build altogether new infrastructure or to convert the existing structure by
upgrading it and also enhancing the existing capacity. Both activities entail huge investment and human efforts.
It is recommended that a suitable amendment may be made in the Act to clarify that the up-gradation / extension of
the existing infrastructure facility would also be eligible for the benefit of Section 80IA of the Act.
3.15.9. Support services of airport to be termed as infrastructure
In the airport sector of infrastructure, there are many ancillary/support services required which are essential for
smooth functioning of airports. These include fuel facility, parking, cargo etc. No airport can function in absence of
these facilities as these are life line services for airport.
In the absence of clear definition of 'Airport' under the present section 80-IA of the Act, it leaves an ambiguity
whether these services enjoy benefit of Sec 80-IA of the Act or not. FICCI recommends that benefit under section 80IA of the Act be extended to these services as well. As per the current law, the deduction is available to an enterprise
if it has entered into an agreement with the Central Government or a State Government or authorities prescribed in
the section. FICCI recommends that it should be further clarified that the agreement entered between the subcontractor and the main Concessionaire for carrying out ancillary activities be deemed as an agreement entered by
the sub-contractor with the Central or State Government.
3.15.10. Specific clarification on non-exclusion of security component of passenger
service fee
As part of air ticket, the airline is to collect from each passenger a certain amount of passenger service fee. The
passenger service fee collected from each passenger consists of two parts, namely (1) facilitation component and (2)
security component. The amount of facilitation component is the regular income of airport operator and thus forms
an integral part of its revenue. The amount of security component is held by the airport operator in fiduciary
capacity in an ESCROW account for and on behalf of Central Government and does not form an integral part of
revenue/receipt of airport operator. However, the tax officers while finalising the assessment of the airport operators
are taxing the surplus amount lying in ESCROW account as their income.
It is recommended that a specific clarification may be issued specifying that the amount of security component of
passenger service fee which is held by the airport operator in fiduciary capacity for and on behalf of the Government
should not be made liable to tax in their hands.
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3.15.11. Other Direct Tax issues
•
Section 72A of the Income Tax Act be amended to extend the benefits therein to the entire airline industry and
not only to public sector companies with a view to providing the private airlines operators a level playing field as
well as sustaining the current growth of the civil aviation sector.
•
Section 10(15A) of the Income Tax Act may be Reinstated. This exemption was withdrawn for operating leases
(for aircrafts/engines) which are entered into after 1st April 2007. This has put significant burden on the airline
industry.
•
As per the current provision of the Income Tax Act, airlines have to incur additional costs arising out of
withholding tax on maintenance related payments towards labour charges and fees for technical services and
royalties. These provisions need to be withdrawn and such payments allowed without requiring the tax to be
deducted at source.
•
FICCI strongly recommends for provision of tax incentives for development of Maintenance, Repair and Overhaul
('MRO') facility in India which will help airlines to reduce cost of repairs carried overseas but will also develop
India as a hub for such facility.
VEGETABLE OIL & OIL SEEDS
3.16.1. Review of Customs and Excise duty structure
To bridge the gap between demand and supply, India is compelled to import a large quantity of edible oils. India has
become the largest importer of vegetable oils in the world. During November, 2011 to October, 2012 imports are
likely to be about 97/98 lakh tonnes of edible oil worth Rs 50,000 crores, a huge burden on exchequer next to crude
petroleum products and gold. It is therefore essential to increase the availability of vegetable oils from domestic
resources by encouraging diversification of land from food grains to oilseeds, increasing productivity of oilseeds and
fullest exploitation of non traditional domestic sources. For this, Government may consider the following for the
ensuing Union Budget:
•
Review and withdraw export duty of 10% on deoiled rice bran.
•
Consider revising the tariff value on RBD Palm oil and other oils as is being done for RBD Palmolein on fortnightly
basis to check huge imports of RBD Palm oil on questionable prices.
•
Permit import of Copra cake, Palm Kernel cake and Rice bran at Nil Customs duty to increase supply for domestic
and export purposes.
•
Impose import duty on Crude Palm oil (CPO) at 10% and RBD Palmolein and RBD Palm oil at 20% to protect
soybean and mustard seed farmers.
•
Grant excise exemption to food grade hexane (Heading No.2710 12) used in the processing of oil seed and oil
bearing material.
•
Allocate Rs.1000 crores per year for the next 3 years under the Oil Seed development programme.
•
Grant exemption from the levy of excise duty to refining of vegetable oils and manufacture of Vanaspati so as to
cover by-products of vegetable oil refining industry.
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•
Grant excise duty exemption to refining of rice bran oil and processing of its by-products with a view to
encourage production of value added products during the refining of rice bran oil.
INFRASTRUCTURE
3.17.1. Priority sector lending for infrastructure sector
Infrastructure growth is essential for the overall growth of the Indian economy. 12th Five Year Plan envisages
investment of USD 1000 billion during 2012-2017 for the development of infrastructure in India. Infrastructure
investment has high gestation period and it is highly sensitive to interest rate because of higher proportion of debt
financing (around 70-75%). In today's interest rate environment most of the infrastructure projects are not viable
because of high cost of debt. Government needs to give Infrastructure lending the status of priority sector lending
just like agriculture sector. Cost of debt for infrastructure should be reduced and financial institutions should be
asked to make higher allocation of loan portfolio towards infrastructure sector.
As in the case of financing for exports, banks may be asked to compulsorily provide for certain percentage exposure
to the infrastructure sector. RBI may be requested to provide interest subsidies to banks for their exposure to this
sector.
3.17.2. Permitting 100% refinancing of existing debt in Infrastructure sector by External
Commercial Borrowing (ECB)
In its circular dated 23rd September 2011 on ECB for Infrastructure sector, RBI has allowed up to 25% refinancing of
existing rupee debt through ECB but with the condition that rest of 75% of ECB debt should be utilized for financing
of new projects. This is a step in the right direction and ECB borrowing norms in Infrastructure sector should be
further relaxed by permitting 100% refinancing of existing rupee debt through ECB. Restriction on utilization of 75%
of ECB borrowing for financing of new project will restrict the amount of ECB that can be raised as ECB lenders have
lower appetite of lending for new projects than for refinancing of rupee debt of operational projects. It will also
restrict the flexibility of infrastructure companies as companies should have projects which require 3 times as much
ECB as the refinancing requirement of existing rupee debt.
3.17.3. Exemption of MAT for infrastructure sector during 80IA period
Infrastructure projects get tax holiday under section 80IA for 10 consecutive years during first 15 years of its
operation. However, during this period MAT need to be paid by the companies on Book profit which to a great extent
negates the tax benefit being offered for these projects.
It is suggested that MAT should be exempted for Infrastructure sector during 80IA period.
3.17.4. Specific clarification on applicability of TDS on amount paid to National
Highways Authority of India
The private toll operators are required to pay fixed amount called as additional compensation fees or Negative Grant
to National Highway Authority of India (NHAI) for allowing the site on lease/license to operate Toll plaza and collect
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the toll charges. There is ambiguity on applicability of withholding tax on such payments made by the private
operators to NHAI. It is recommended that either such payments be specifically excluded out of the purview of
withholding tax or the section under which such payments are subject to TDS should be explicitly provided to avoid
any further ambiguity.
3.17.5. Access to Infrastructure Companies to raise capital overseas
Unlisted and listed Indian Infrastructure companies should be allowed to list in overseas capital markets by allowing
them issue direct equity shares.
Unlisted and listed Indian Infrastructure companies should be allowed, as an option, to set up an overseas entity for
raising equity abroad for investing the same in India. The transfer of holding to such an overseas entity from an
Indian entity should be permitted at erstwhile CCI / Book Value as was prevalent till 31st March, 2010.
ENTERTAINMENT
3.18.1. Television and Radio Broadcasting
At present the DTH & Cable TV services are taxed as under:Service Tax:
12.36% of the subscription amount
Entertainment Tax:
on an average 30% of the subscription amount
Customs Duty:
(i) on Set Top Boxes: 5%
(ii) on equipments used in digital head end -ranging from 7.5% to 10%
VAT on STB:
12%
Both DTH services and cable services are at present reeling under the heavy burden of multiple taxation and levies
such as license fee, service tax, entertainment tax, VAT on customer premises equipment (STB, Dish Antenna etc.)
which cumulatively add up to as high as 56%. These levies are acting as an impediment to the growth and
development of these services.
To ensure proper growth and development of this sector, the multiple levies/ taxation structure needs to be
rationalized.
3.18.2. Digitization with addressability
Migration to addressable digital systems calls for large capital investment. This would involve changing/up-grading of
head-ends by MSOs and provision of STBs at the customer premises.
During the migration period there is a need to bring down the prices of imported equipments by reducing basic
custom duty to make it affordable for the consumers and to facilitate smooth migration from analogue to digital. It is
proposed that the Government, as a special measure, should allow reduction of the basic custom duty on the major
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items in digital addressable broadcast distribution i.e. digital head-end equipments and STBs falling under Chapter 85
of the Customs Tariff as per the following list, to zero level to give a boost to conversion of the broadcast distribution
network to digital addressable.
Digital Headend
1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Equipment
Racks for CATV Head End; 7 Video Descrablers; 8 Conditional Access Modules; 9 Video Remultiplexers for CATV; 10
Encoder; 11 EMM Generator; 12 ECM Generator; 13 Integrated Receiver Decoder; 14 QAM modulator; 15
Multiplexer DVB,IVG series; 16 Transmodulator; 17 Encoder with CID
Broadcast Headend for HITS and DTH
1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Video
Descrablers; 7 Conditional Access Modules; 8 Video Remultiplexers for CATV; 9 Encoder; 10 EMM Generator; 11 ECM
Generator; 12 Integrated Receiver Decoder; 13 QAM modulator; 14 Multiplexer DVB,IVG series; 15 Transmodulator;
16 Encoder with CID; 17 Encryptors; 18 Audio Monitor amp 2-vsa; 19 Monitor 10 "; 20 Push Button; 21 Wave From
Monitor; 22 WR - 75 Cross Guide; 23 L Band Router; 24 Up Convertor; 25 Waveguide; 26 Switch Over System; 27
Beacon Tracking Rec,; 28 TWTA; 29 Broadcast Amplifiers; 30 Optical Amplifier; 31 Optical Splitter; 32 Optical
Combiner; 33 Klystrons; 34 NMS (Network Management Sys); 35 Monitoring Remote Services; 36 Generator PSI/SI;
37 Decryptor; 38 TV Cameras; 39 Combiner; 40 Power Divider
Network Distribution
1 Optical Node; 2 EDFA; 3 Optical Transmitters 1310; 4 Optical Transmitters 1550
3.18.3. Entertainment Tax Rationalization
It has been suggested by the Empowered Group of Ministers that the Entertainment Tax be subsumed in GST.
However, pending introduction of GST regime it is suggested that rationalization of rates of Entertainment Tax across
various States at a uniform level should be encouraged by Central Government.
Given that under the Digital Access System (DAS) regime there will be full transparency; there is a need to lower the
percentage/lump sum amount of Entertainment Tax, as the case may be for the DAS areas. The revenue jump on
account of Entertainment Tax is going to be 5 to 7 times because of associated transparency under which the
complete count of subscribers would be available.
Scheme for waiver of entertainment tax by State Governments should be considered for a period of 5 years for cable
networks migrating from analogue to digital so as to incentivize & promote digitalization.
3.18.4. Infrastructure Status to the Cable sector
The Cable sector needs to be given “Infrastructure” status in order to garner domestic funding.
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3.18.5. Rationalization of License Fee for DTH industry
Presently, a License Fee of 10% of the Gross Revenue collected by the DTH service provider is levied on the DTH
industry. It is recommended that the license fee for DTH services be reduced from present 10% to 6%. Since the DTH
industry is a capital intensive industry, this relief would help the industry in a long way.
3.18.6. Inclusion of DTH services in the Negative List of service tax
Cable TV and DTH Service is essentially the transmission of programme (images, audio, video, etc through radio
frequency) which is taxed as “services” by Central Government and the same transmission of programme, is also
considered as 'entertainment' services by the state governments and is also being taxed as a local service tax under a
different nomenclature i.e. “entertainment tax”. It is recommended that the DTH services be included in the negative
list of service tax.
3.18.7. Film Sector
Government should exempt necessary equipment and hardware for film production from the levy of customs duty.
3.18.8. Exemption of service tax on Digital Cinema services
Digital Cinema Solutions Providers had been granted exemption from Service Tax in respect of Services provided in
relation to delivery of the Cinematography Film in digitalized form transmitted directly to cinema theatres for
exhibition through use of Satellite, Micro Wave or Terrestrial Communication lines by virtue of Service tax
notification No. 12/2007 dated 1st March 2007. This exemption was granted to promote this technology as it has
following unique advantages:
•
The technology brings transparency, efficiency and accountability in the media and entertainment business.
•
It eliminates the need for printing films and thereby bring substantially cost saving to the industry.
•
Delivery through digitalized mode through satellite promotes pollution control and eliminates usage of pollutant
film rolls.
•
The technology curbs piracy to a great extent and elimination / reduction in piracy will substantially help the
ailing industry and also bring revenue to the Government as chances of pirated films escaping tax nets are high.
•
The technology has given a great boost to the Indian film trade and is currently the mainstay for many film
industries across India.
Withdrawal of this notification in the new scheme of things has put undue hardship to the film industry particularly
when the intention of the Government is to grant relief to the industry by way of exemption from service tax and
that is why Notification No.12/2012-ST dated 17-03-2012 has proposed exemption from Service Tax in serial No.15 of
the notification for temporary transfer or permitting the use or enjoyment of copy right relating to original literary,
dramatic, musical, artistic works or cinematographic films.
In the absence of satellite delivery the remote locations of India will be starved of content and this will be a great
disservice to these price sensitive markets since they will not be able to afford the increased costs.
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In view of the above it is recommended that the exemption to digital cinema solution providers for the services
rendered in relation to delivery of digital content in movie to cinema theatres through satellite by Notification
12/2007 - ST dated 1-3-2007 should be continued.
3.18.9. Animation, Gaming & VFX Industry
On Animation, Gaming & VFX Industry the following suggestions are for consideration:
•
On the lines of IITs and IIMs, Government should consider setting up Centers of Excellence for the Animation,
Gaming & VFX Industry which also offers opportunities for applied and commercial and others type of arts.
•
10 Years Tax Holiday for Animation, gaming, and Visual Effects Industry.
•
Removal of withholding tax on revenues accruing from sales of mobile games in non India markets as well as
removal of withholding tax on the development contracts given to mobile game developers outside India
•
Removal of withholding tax on payments to expatriates working in India for Indian mobile game development
companies
•
There should be a provision of 50% reimbursable MDA (Market Development Assistance) for travel and
registration fees to international market events. Government to extend support under Market Development
Assistance (MDA) activity for Indian companies to exhibit by setting Indian Pavilions in the world markets. What
is needed is to help bringing local production companies to international markets, collect and disseminate
information and support creating the infrastructure needed for a healthy media market to develop.
•
To promote domestic gaming market, Excise Duty on local manufacture should be brought down from 12.5% to
0% (similar to film and music industry). This will enable CVD to be brought to zero also. The effective reduction in
taxes would be around 15%. Import duty on consoles (Gaming hardware) to be brought down to 0% to increase
the installed base to enable the local developer ecosystem to flourish.
•
Directions should be given to commercial bankers to treat Animation sector on priority and to offer concessional
rate of credit.
•
The Minimum Alternate Tax (MAT) applicability for units undertaking Animation work in SEZ should be
withdrawn to encourage export of animated contents.
•
The government should introduce subsidies like a CNC Fund (in France) to fund animated content co-produced
and developed in India to enable Indian producers to be competitive on the global scale.
3.18.10. Multiplexes
On Multiplexes, Government should consider the following suggestions:
•
Multiplex operators should be exempted from payment of duties on import of cinema exhibition equipments.
•
The Industry should be entitled to take full credit of certain 'input services' which are commonly used for nontaxable as well as taxable activities.
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CIGARETTE/TOBACCO INDUSTRY
3.19.1. Continue with multiple price point, length based specific excise duty structure
This structure is best suited to India as it caters to the country's wide range of income distribution and enables
positioning of brands at convenient and affordable price points. It has proven to be extremely successful over the
years as it has ensured increasing revenue collections in a litigation-free environment with no valuation disputes and
transparent administration. Additionally, it provides for value-addition to achieve international quality standards and
improved farmer earnings through usage of high quality tobaccos and increased exports.
3.19.2. Maintain tax stability in Excise Duty rates
Excise Duty rates should be kept unchanged to leverage the tax efficiency of cigarettes by encouraging shifts from
non-cigarette forms of consumption. This, in turn, will maximize contribution to the Exchequer, even in a shrinking
basket of overall tobacco consumption.
3.19.3. Reduction in the rates of duty on Cigarettes
The duty evaded illegal cigarette market continues to grow unabated and the domestic industry is not able to
counter the same due to high excise duties and steep incidence of VAT on legitimate cigarettes. Measures need to be
taken to enable the legitimate industry to effectively combat this menace and, simultaneously, provide some stability
to farmer livelihoods. Accordingly, it is recommended that the rate of Central Excise duty on the 65 mm filter
cigarette slab be reduced from the existing level of Rs.689 per thousand cigarettes to Rs.200 per thousand cigarettes.
Excise duty on other slabs may also be considered for appropriate reduction to increase the revenue from this
industry.
It is anticipated that this will also have a salutary effect on tobacco tax revenue in addition to aiding the legitimate
domestic industry in achieving the above-stated objectives through viable offers to consumers.
3.19.4. Measures to check evasion of duties
(A) To curb sale of illegal, duty evaded cigarettes implement compulsory licensing under Industries (Development &
Regulation) Act, 1951 for all cigarette manufacture in the country and tracking key inputs of cigarettes through
their respective supply chains. The following measures are recommended in this regard:
(i) Licensing under I(D&R) Act, 1951 should be made compulsory for all Cigarette manufacture in the country,
irrespective of the size and nature of the Units in which such manufacture is undertaken, without any exceptions
and SSI should be included in the ambit of licence.
(ii) In line with the procedural requirements for tobacco exports, buyers of tobacco from auction platforms to file
with the Tobacco Board complete details of sales made to their domestic customers.
(B) Curb contraband cigarette trade to protect revenue collections. Suggested measures in this regard are:
(i) Basic Customs Duty on cigarettes should be increased from the extant 30% to the WTO bound rate of 150%
subject to a minimum duty equivalent to 50% of the prevailing countervailing duty, i.e., length based, specific
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central excise duty applicable on cigarettes manufactured within the country. This will go a long way in resolving
the problem of tax evasion by some unscrupulous importers by under invoicing the value of imported cigarettes.
(ii) Disallowing cigarette manufacture in EOUs and SEZs as this is misused to smuggle cigarettes into Domestic Tariff
Area.
(iii) In line with extant Policy, keep cigarettes, all tobacco and tobacco products, including cigarettes and cigars in the
Negative List in all Trade Treaties, FTAs, etc.
(C) A Chapter Note in Chapter 24 of the Central Excise Tariff should be inserted to clarify what constitutes a Biri and
how the so called “Paper Rolled Biri” is to be classified. It is suggested that for this purpose reliance is placed on
the definition of biri as stated in the Indian Standards (IS) 1925:1992. A suggested draft of the Chapter Note is
given below:
“Biris shall be either conical or cylindrical in shape and only consist of biri tobacco mixture and the wrapper
leaves to hold the contents. Any smoking product comprising of tobacco wrapped in paper, with or without
filter, will be classifiable as cigarette.”
3.19.5. Ban on FDI in manufacture and trade of Cigarettes and other Tobacco products
The Government of India has prohibited FDI in manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco
or of tobacco substitutes and has notified the same in May 2010. However, multinationals set up entities in India for
wholesale trading which serves as a platform for creating demand for their brands which is then met through large
scale contraband/smuggling. This adversely impacts domestic farmer income, employment and revenue interests.
Hence the existing ban on manufacturing must be strengthened by extending the ban end to end to cover FDI in
manufacture as well as wholesale trade in these products.
Moreover, to ensure proper implementation of the Government's tobacco control policies, the extant ban on FDI in
the tobacco sector should be reinforced by appropriate amendments in FEMA to prohibit infusion of funds into the
tobacco sector whether through (a) advances against equity, (b) preference shares and debentures - convertible or
otherwise, (c) loans and other forms of debt by whatever name called, (d) advances, (e) guarantees issued by banks,
corporate entities or any other third party (f) letters of comfort or (g) through any other means. Similar restrictions
should also be extended to entities set up by multinationals in India with the objective of marketing cigarettes and
other tobacco products.
3.19.6. E-Cigarettes
A separate tariff classification under Chapter 24 be introduced under both Excise and Customs Tariffs for e-cigarettes.
Since e-cigarettes can be sold as different parts - to be assembled by the user, length-based excise duty, as applicable
to conventional cigarettes, is impractical for e-cigarettes. Accordingly, the recommendations for duty levy ecigarettes are:
(i) Central Excise Duty at an appropriately high ad-valorem rate for e-cigarettes, its components and all flavours
containing nicotine meant for use in e-cigarettes.
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(ii) Customs Duty at the WTO bound rate of 150% for Chapter 24 goods i.e. all tobacco and tobacco products
Further, e-cigarettes or its part(s), refills should also be removed from OGL and put under Restricted List of import
and e-cigarettes must feature under the Negative List in all Trade Treaties, FTAs etc.
HOUSING AND REAL ESTATE
3.20.1. Industry status to real estate sector
It is requested that Real Estate Sector be granted Industry status for easier availability of funds for this sector for
purposes of availing long term and short term finances.
3.20.2. Extend loan on Stamp Duty / Registration Fee / VAT / Service Tax to buyers
(a) For the first purchase of the house, borrower should be eligible to avail 90% of the costs of purchase as loan.
(b) Second purchase of the house, eligibility to be brought down to 80% insisting on 20% by the borrower margin.
In both the categories, Stamp Duty, Registration, VAT, Service Tax should be included in the cost to bring relief to the
borrower.
3.20.3. Raise the limit for Priority Sector lending
Considering the high prices of dwelling units across country and particularly amongst tier 1 and 2 cities, the home
loan up to Rs.25 lakhs as priority sector classification should be enhanced Rs.35 Lacs for consumer loan.
3.20.4. Technology for Low Cost Housing
Considering the need to provide affordable houses at a very fast pace in the country, new construction technology is
required (such as aluminum formwork or precast technology). Currently most of these technologies are being
imported and have high taxes levied on them. The customs duty/ taxes paid for importing these technologies vary in
the range of 20-25%. This prohibits the use of these technologies and hence the pace of development of affordable
housing. The need of the hour is to reduce these taxes for the development of housing for the EWS/LIG segment.
3.20.5. Deduction of interest paid on borrowed capital
A deduction upto a maximum limit of Rs. 1,50,000/- is currently available from taxable income towards interest on
loan taken for acquisition/construction of self-occupied house property. It is recommended that this exemption
should be harmonized with the rising interest rates and increased to at least INR 2,50,000 per annum.
3.20.6. Raise the limit for deduction for principal repayment
In the case of home loan repayments, the ceiling under tax benefits is capped at Rs.1,00,000/- for principal paid. The
ceiling of Rs.1,00,000/- under Section 80C is less, particularly when home loan principal repayments are clubbed with
other tax saving instruments. Therefore, the deduction for principal repayment of housing loan under Sec 80C should
be either increased from the existing limit of Rs.1 lakh or the principal repayments treated as a separate tax
exemption entity and excluded from benefits under section 80C.
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3.20.7. Infrastructure status to development of integrated townships.
An integrated township involves development of residential, institutional, educational, medical, community and
commercial buildings etc. In the process of development of an integrated township, apart from development and
construction of above establishments, various facilities such as roads, water supply, sewerage system, sanitation,
water treatment, electrification, land scaping, solid waste treatment, horticulture and other civic services are
required to be created/provided. While according approval, the State Government specifically directs that these
development projects including all facilities/services created/provided therein will ultimately be handed over to
respective State Governments/Local Bodies and shall not remain with the developer. These integrated township
projects are therefore in a way at par with the BOT (Built, Operate & Transfer) projects.
In the light of above facts and in order to motivate the genuine Real Estate Companies to come forward and step into
promotion and development of large integrated townships in line with above arrangements to mitigate the huge
shortage of housing to all class of society, it is requested that Integrated township development projects be brought
within the definition of infrastructure.
3.20.8. Deduction for Ground Rent
Deduction for ground rent should be restored while computing the income under the head 'House Property'.
Considering the rising value of land and proportionate ground rent in metros and other big cities, it is recommended
that the deduction for ground rent be separately provided i.e. in addition to the overall statutory deduction of 30%
available within the ambit and scope of section 24 of the Act.
LIFE SCIENCES
3.21.1. Weighted deduction under section 35(2AB) for expenditure outside the
approved R&D facility
A weighted deduction @ 200% is allowed on in-house research & development expenditure incurred by companies
engaged in the business of biotechnology or manufacture or production of specified goods. The pharmaceutical
research and development is very expensive and time consuming as compared to other industrial research, on
account of regulatory requirements of safety, efficacy and quality. The current provisions for deduction u/s 35(2AB)
are restrictive in nature, so as to cover only expenditure incidental to research carried on at the in-house R&D facility.
Some of the activities though directly related to research and development are not eligible for weighted deduction
e.g. clinical trials undertaken on patients in hospitals, since the same are carried outside the approved R&D facility.
All expenditure related to research carried on in the in-house facility i.e. clinical trials, bioequivalence studies,
regulatory and patent approvals should be eligible for weighted deduction, even if these activities are carried outside
the approved R&D facility including overseas expenditure.
3.21.2. Weighted deduction under section 35(2AB) for computing Book profits
Presently, while computing the 'Book Profit' under Section 115JB, the amount of weighted deduction u/s 35(2AB) is
not deducted. In the past, similar adjustment in respect of export profits under Section 80HHC was permitted for
purposes of computation of 'Book Profit' under Section 115JB. Therefore, if the Government is serious about
promoting in-house R&D in India, the amount of weighted deduction u/s 35(2AB) should be deducted while
computing tax under MAT.
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3.21.3. Weighted deduction to an approved R &D company be extended from 125% to
175%
Vide Finance Act 2010, the percentage of weighted deduction allowable u/s 35(2AA) on sponsored scientific research
undertaken through an approved National Laboratory, University, Indian Institute of Technology and other specified
institutions was increased from 125% to 200%. Similarly, the percentage of weighted deduction u/s 35(1)(ii) on
contributions made to approved scientific research associations, University, College or other institutions was also
increased from 125% to 175%. However, similar increase in the percentage of weighted deduction on contributions
made u/s 35(1)(iia) to an exclusive R&D company approved by the specified authority, has not been allowed. It is
therefore, suggested that the aforesaid anomaly should be removed and the percentage of weighted deduction on
contributions made to an exclusive R&D company for carrying research and development should be increased from
125% to 175%.
3.21.4. Other Suggestions for Direct Taxes
1. In order to facilitate and encourage Scientific Research, all expenses of revenue nature incurred prior to
commencement of business, should be allowed as deduction in the year in which business has commenced.
2. Government must create a budget through which 50% of the total income tax paid by a company in the last 10
years can be paid back, or at least as a loan to an R&D organization for 20 years at a nominal rate of interest.
3.21.5. Service Tax on Clinical Trials of Drugs
The following services in relation to Clinical Trials of Drugs are exempted from the levy of service tax vide Sr.No.7 of
Notification 25/2012-ST dated 20-06-2012, namely:“7. Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal
remedies on human participants by a clinical research organization approved to conduct clinical trials by the
Drug Controller General of India.”
As may be observed the exemption is applicable for clinical research organizations (CRO) if the CRO is approved
specifically by the Drug Controller General of India (DCGI). However, the DCGI does not approve any CROs; in fact
there is no mechanism in place for approving a CRO per se by the DCGI.
It is suggested that the aforesaid entry No.7 in the said Notification may be amended so that the service tax
exemption is applicable to the clinical trial process which is approved by the DCGI.
3.21.6. Excise Duty on Bulk Drugs
The rate of Central Excise duty on bulk drugs which is 10% may be brought down at par with drug formulations which
is 5%.
3.21.7. Central Sales Tax
Life saving drugs, life saving medical devices and critical diagnostic kits may be exempted from CST.
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3.21.8. Exemption from Excise Duty for Generic Drugs
At present branded and generic medicines are subjected to the same rate of excise duty. In order to promote generic
medicines, as per Government's policy, it is desirable that medicines sold under the monogram of any
pharmacopoeia (generic -without any brand name) may be exempted from the levy of central excise duty.
MEDICAL EQUIPMENTS AND DEVICES
3.22.1. Background
India's healthcare infrastructure is lagging behind when compared with other developing countries. There exists a
huge gap between demand and supply of healthcare infrastructure facilities available in the country. To achieve a
desired bed density of 2 per 1000 population by 2025, investment to the tune of $86 billion would be required, a
bulk of which has to come from the private sector / FDI going by the current figure of 74% contribution coming from
the non-government sector. Therefore, it is imperative to create an inductive environment for facilitating investments
into the sector.
3.22.2. Medical Technology Parks
Creation of exclusive dedicated Medical Technology Parks where there is a cluster of manufacturers of Medical
Technology products with basic infrastructure to support these and the inclusion of benefits for Customs duty on raw
material, excise duty concessions, VAT holidays, IT holidays, etc. Furthermore, there is a need for R&D grants /
subsidies in the Medical Technology space for promoting Domestic Innovation initiatives.
To ensure that there is thrust in the Research and Development area for design as well as innovation of these
products, special incentives must be offered to get more participants in this. As benefits to the society would be very
significant due to such projects, incentives in the form of Income Tax write-off for up to 250% of the value of
investment for R & D and innovation of Medical Instruments, Diagnostics Instruments, Consumables, Devices, etc.
should be offered.
3.22.3. Lifetime Complete Health Coverage, through Insurance Benefits for Voluntary
Organ Donors
India needs to do 2,00,000 solid organ transplants each year to meet the recipient target, which is grossly
undersupplied due to the shortage of donor pool. Amendments to the Transplant Act, 1994 need to be looked at, to
increase donor pool. Also, taking a cue from the worldwide practice, it is imperative to incentivize and promote
voluntary donors to meet the organ shortage. The donors may be provided lifetime health coverage through
insurance benefits.
3.22.4. Health Coverage
There should not be rejection for health insurance due to age limitations for senior citizens even with noncontinuous / no provision of health insurance coverage. Also, there is a need for restructuring the premium, so that
the monetary burden on the end user reduces as his / her age increases and the ability to contribute decreases. This
innovative premium structuring will help increasing affordability amongst the masses.
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Customs Duty Recommendations
3.22.5. Exemption for Medical / Dental / Surgical Equipments
Medical device technology is driven by innovation and there are tens of thousands of different products and
applications in different surgical streams. Tariff barrier on imports of finished goods impacts healthcare costs
because economies of scale will not permit manufacturing of all products in the country. Therefore, import of
finished goods and raw materials/components should be at low customs rates. Local manufacturing should be
incentivized through better infrastructure rather than through tariff barriers alone. Tariff barrier on finished goods
will only result in late introduction and adoption of new technologies critical for the healthcare sector.
Customs Duty on import of finished products should be prescribed at a very low level while NIL customs duty be
specified for the import of Raw Materials / Parts / Sub-Assemblies required for ultimate local manufacturing of
instruments / Accessories and Consumables.
It is requested that Nil Basic Customs Duty be specified for Medical Equipments, Medical or Surgical Implants,
Medical Devices falling under headings 9018, 9019, 9020, 9022 and 9027. Blood Glucose Monitoring Strips of
heading 3822, Medical, Surgical or Laboratory Sterilisers of heading 8419 and Sterile surgical catgut and similar
sterile suture materials and sterile tissue adhesives for wound closure of heading 3006 should also be exempted
from customs duties.
It is requested that medical products classifiable under headings 9018 to 9022 and parts and accessories thereof
presently levied to 5% basic duty in terms of S.No. 474 of Notification No. 12/12-Cus dt. 17.03.2012, be totally
exempted from import duties. The exemption may also be extended to parts, accessories, consumables or assembly
components, whether required for manufacturing or to be assembled at site of use. This will remove classification
disputes and allow the industry to get the desired exemption. Specifically parts and components of hearing aids
should be exempted from customs duties to provide a level playing field for domestic manufacturers.
To ensure that the spare parts imported to be used for maintenance of life saving devices, are used for the same
purpose, importer may be asked to furnish “End Use Certificate” within a period of 12 months. Procedure for
Consumption Certificate for materials imported as per Customs Notification 21/2010 to be amended to read as
“Importer to submit Self Declaration for having consumed the materials in the process of manufacture of Medical
Equipment”.
The objective of the aforesaid request is to give a fillip to medical device manufacturing in India by making it
attractive to FDI from global majors. It is part of an effort to turn India into a manufacturing hub for supplying the
medical devices to not just India, but globally. Once investment begins, then this will automatically encompass
technology transfer, investment in R&D, development of ancillary industries in addition to financial investment. High
tariff barriers will drive away investment, isolate domestic industry and the opportunity will flow to other countries.
3.22.6. Special CVD 4% in lieu of VAT
For any product that is meant for retail sale, MRP is required to be declared at the point of import. Further, 4%
Special CVD is not levied on products that carry MRP at the time of import. This causes peculiar complications for the
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industry - The industry has tens of thousands of SKUs that are imported. It is not possible to forecast accurately and
get products manufactured that carry India specific labeling and within the required time and cost. As a result,
products are bonded with customs; MRP labels are affixed and then released. This is a logistical nightmare and adds
to the cost of import.
It is requested that a provision be made to exempt Medical Products falling under Chapters 9018, 9019, 9020, 9022,
9027, 3822, 8419 and 3006 from carrying an MRP sticker at the time of import and permission be granted to
importers to affix MRP stickers post importation at their own warehouses
3.22.7. Other Customs Exemptions
1. All life saving medical devices, consumables used with devices in the specific life saving treatment procedure and
their spare parts should be exempted from Customs Duty. It is recommended that the following be included in
the list of Life Saving Products:•
Patient monitoring systems & image guidance systems
•
Pacemakers
•
Image Guided System
•
External Defibrillators
•
NT & ENT Surgery Products including electrical/pneumatic drills & the consumables
•
Deep Brain Stimulation Implanters, drug pumps, lead etc
•
Heart Lung Machine & Oxygenators- During cardiopulmonary
•
Heart valves, Annuloplasty Rings and various Cardiac catheters
•
Respirators and Masks (industrial & healthcare)
•
Dialysis Machines equipments and Devices (Hemo and Peritoneal Dialysis)
•
Peripheral Vascular stents
2. Sterilizers of Heading 8419 20 90 which are presently levied to import duty at 25.85% may be fully exempted
from the levy of customs duties. Plasma sterilizer allows sterilization of all type of surgical instruments and
devices.
3. Topical Skin Adhesive of Heading 3006 10 10 which is presently levied to import duty at 19.567% may be fully
exempted. These are used for wound closure, instead of conventional sutures.
4. Custom Duty waiver for essentially required radiopharmaceuticals used in Diagnostics like Imaging and Scanning
(PET-& SPECT) & Therapy some of which are not manufactured in India like Iodine 131, MIBG 131, Lutetium 177,
Yttrium 90, Ge-68-Ga 68 generator, Cold Kits for Tc 99m, Rubidium 82.
5. Cardiovascular, cancer and neurological surgeries involves Iodophor impregnated drapes (HS 3005) for
prevention of wound infection and Fibrin sealants (HS 300620) for achieving immediate sealing of blood vessels
which are critical for life of the patients. These products currently are levied duties under headings 3005 and
3006 at basic of 10% and a total import duty of 21.78%. It is submitted that these may be included in the Life
Saving category (List 4) and subjected to concessional 5% basic duty and Nil CVD.
6. Polyurethane film (Heading 3926) used for the manufacture of adhesive coated PU film, Medical grade PVC
(Heading 3921 90 99) required for the manufacture of dialysis products, Dextrose Anhydrous USP, for use in
manufacture of Intravenous fluids be exempted from the levy of customs duties.
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7. Medical Stretcher / Wheel Chairs / Medical Beds should be levied to concessional rate of basic customs duty of
5%.
8. Power tools/ drills, surgical blades and burs used in various neurological, orthopedic, spinal, by-pass surgery &
other skeletal surgeries, Endoscopy Camera, accessories & parts should be exempted from customs duty.
9. Integrated Operation Theatre (Consisting of Routers, Booms, Pendants, Lights, Monitors, Camera, and
Connectors etc) should be charged to a reduced duty of 5% basic and Nil CVD.
3.22.8. Procedural Simplification
Any imported item be it raw material or otherwise falling under chapters 28,29, 30 or 35 is allowed import subject to
obtaining No objection certificate (NOC) for each consignment from Asst. Drug Controller (ADC) posted in the Ports.
Current process is that as and when an item falling under any of the above chapters is imported, Customs EDI System
automatically issues a Compulsory Compliance report (CCR) calling for NOC from ADC before permitting the
clearance of the Cargo. Importers in turn register the customs request (CCR) with Drug Authorities and submit all
relevant import Documents for ADC Review. ADC would depute an Officer to either inspect or draw samples from the
imported lot and based on his analysis/examination issues NOC to the importer to clear the cargo. This is applicable
for all items falling under the chapters mentioned above. This procedure is not adding any value and to the contrary
is leading to delays in clearing imported Cargo and also adds up transaction cost like demurrage, Port charges and
unnecessary waste of time. It is suggested that importers should be permitted to obtain prior No Objection
Certificates from Drug Authorities for a prescribed fee with validity of 2 years and same should be used for clearing
the cargo.
3.22.9. Excise Duty Recommendations
It is recommended that the excise duty on medical equipments be reduced significantly and may be prescribed at the
lowest slab to enable the domestic industry to find a foothold.
3.22.10. Service Tax Recommendations
It is requested that the service tax on Service and Maintenance Contracts for medical equipments be either
exempted fully or a minimal rate of tax prescribed for this sector.
In-Vitro Diagnostics (IVD) Sector
3.22.11. Duty Exemption for Antigens / Antibodies used in Diagnostic Kits
The import of raw materials such as antigens/antibodies or any other ingredient corresponding to the manufacture
of diagnostic test kits specified in list 4 put the local manufacturer at disadvantage in comparison to imported
finished diagnostic test kit specified in list 4 which is imported at nil duty. The notification should therefore include:
“Bulk drugs / antigens/antibodies (monoclonal / polyclonal) / raw materials / components used in the manufacture
of Life saving drugs / medicines including their salts and esters and diagnostic test kits”.
•
The following items which were a part of the now abolished List 37 need to be included in List 4 under
notification No.12/2012-Customs, dated 17/03/2012 to allow for a level playing field for both Indian
manufacturers and importers.
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PRE-BUDGET MEMORANDUM 2013-2014
-
AIDS (Acquired Immune Deficiency Syndrome) test kits
-
T.P.H.A kits and AIDS diagnostic kits.
-
Rapid diagnostic kit for detecting infection with malaria parasite / Tuberculosis (TB)
-
Australia antigen/ HBsAg kit.
-
HCV (Hepatitis C Virus) by any technology.
-
Dengue detection systems/kits.
•
Exemptions for components for Elisa Kits to be expanded: The list that provides the benefit of lower duty may be
extended to include antigen or antibody on the solid phase for coating. The other key component is the enzyme
conjugate and their stabilizing buffer / solutions. It is important to put the local ELISA kit manufacturers at par
with the importers because all finished ELISA kits are imported at nil duty as per item no. 36 of List 4.
•
Automated Blood Culture : When a patient shows signs or symptoms of a systemic infection, results from a blood
culture can verify that an infection is present, and they can identify the type (or types) of microorganism that is
responsible for the infection. For example, blood tests can identify the causative organisms in severe pneumonia,
puerperal fever, pelvic inflammatory disease, neonatal epiglottises, sepsis, and fever of unknown origin (FUO).
•
Automated Identification & Antibiotic System: The increasing prevalence of antibiotic resistance is challenging
established empirical treatments, making early identification and susceptibility determination more important.
To avoid time-consuming overnight cultures, the rapid identification and susceptibility testing helps to detect
antibiotic susceptibility and rational use of antibiotics
•
Cases of duty rationalization: With abolishing of List 37, all diagnostic devices are now covered under Chapter 90
(9027). They therefore attract high duty rates and it is recommended that they be charged to NIL duty to
encourage access to newer technologies. Further duty on manufacture or import of diagnostic reagents to be
reduced to encourage manufacturing in India. That apart duty structure of following items should be
rationalized:
-
Excise duty for manufacturing of Diagnostics Reagents may be made NIL from existing 10% to allow cost
benefit to indigenous manufacturer.
-
Diagnostics Reagents may be subjected to same levels of duty as Medical Equipment/Devices under Chapter
9018 as against the existing rate of 26.75%
-
Duty on PCR kits may be made NIL duty as given for ELISA, CLIA Diagnostics kits, etc from existing 26.75% in
order to quantify the load of deadly viruses/bacteria such as Hepatitis C, CMV, H1N1, TB, etc in patients for
subsequent treatment and monitoring
-
All diagnostics equipments including Fully Automated Biochemical Analyzers may be assessed at NIL duty or
with a total duty of 9.63% as sudden reversal and imposing duty of 14.72% makes the cost of these Hi Tech
Instruments significantly expensive
-
Customs duties for Diagnostics kits may be based on criticality of the test rather than the technology.
Duty exemption be based on Test rather than Analyte for critical tests- Customs Tariff for Diagnostics kits is based on
technology rather than the Analyte causing anomalies Eg: ELISA &CLIA kits are exempt from customs duty whereas
IFA(Immuno Florescence) and Bio-chemistry kits are liable for duty under heading 3822 dutiable @ 26.75%. It is
recommended that duty exemption be based on Test rather than Analyte for the following critical tests:
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a. Blood Banking Panel
b. HIV
c.
HBSAG
d. HCV
e. Sepsis Marker
f.
Procalcitonin (PCT)
g. Tests of Auto immune diseases (ANA and ds DNA)
ELECTRONICS HARDWARE
3.23.1. Market Scenario
Demand in the Indian electronics market was USD 45 Billion in 2008-09 and is expected to reach USD 400 Billion by
2020.The domestic production in 2008-09 was USD 20 Billion and at the current rate of growth, the domestic
production can cater to a demand of $100B in 2020.This aggregates to a demand supply gap of nearly USD 300 Billion
by 2020.Government has announced a number of policies to promote local manufacturing & create ecosystem for
electronics manufacturing.
The following suggestions may be considered by the government for promoting electronics & semiconductor
manufacturing:-
3.23.2. Funding
Provide low Interest loans (~3%) to electronic hardware manufacturing units; prevailing interest rates are at the
maximum of 15% and reduction in that shall attract new investments & players in the electronics manufacturing
3.23.3. Tax Holidays
Tax holiday to semiconductor industry in various countries like Taiwan, China, Singapore, Malaysia lower effective
rate to zero or single digit. Taiwan and China each offer five year tax holiday with extensions possible, while
Singapore offers a 15-year tax holiday to qualified “pioneer” companies. It is recommended to allow tax exemption
and R&D grants to semiconductor companies in India.
China levied only 3% VAT on semiconductors made in China but charges 17% VAT on imported semiconductors. China
has created a tax-free environment for new semiconductor plants and Companies were subsidized through tax
incentives whether they make profit or not.
3.23.4. Remove Anomaly in duty structure
The present rates of CVD and SAD increase the cost of a finished computer or laptop that is manufactured in India as
compared to a direct import due to an inverted duty structure. Most components of computers like motherboards,
cabinets, memory modules, graphic cards attract a CVD of 10.3% and a SAD of 4% leading to an effective duty of
14.73% as against 10.3% for finished goods. On some components like microprocessor, hard disc drive, the duty rate
is 5% CVD and nil SAD.
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The total input duty on components is higher than the output duty on the finished product or duty on imported
finished goods as shown in the table below. The higher duty directly leads to a higher cost for manufacturers in
excise exempt zones as such manufacturers cannot claim offset of input tax against output tax. For manufacturers in
DTA areas, there is overflow of input credit due to higher input tax versus output tax which again adds to the cost.
As a result, IT companies that have established large manufacturing facilities in India that manufactures information
technology hardware like desktop and laptops are operating at only fraction of their capacities. The low production
in turn leads to further higher manufacturing cost.
This in turn discourages other component manufacturers who want to set up their manufacturing base in India.
Table: Inverted Duty structure in finished computer or laptop
Weighted
average
duty
Duty Rate
Cost proportion in
BOM cost
HDD
5.20%
7.20%
0.40%
Processor
5.20%
20.20%
1.00%
ODD
Operating System
5.20%
3.60%
0.20%
10.30%
8.60%
0.90%
Memory
14.70%
8.90%
1.30%
Adaptor
14.70%
2.30%
0.30%
Mechanicals
Keyboard
14.70%
3.30%
0.50%
14.70%
1.30%
0.20%
BU
14.70%
38.20%
5.60%
Card
Battery
14.70%
1.00%
0.20%
26.80%
5.40%
1.50%
100.00%
12.00%
Component
Weighted average
duty rate
12.00%
Duty on finished
product
10.30%
It is requested that corrective action may be taken to remove the anomaly in the duty structure.
3.23.5. Power / Utilities
Incentives for Alternate Power Generation - This helps the manufacturing industries to cater their need through the
alternate sources. Providing Incentives for the initiatives would help the industries to contemplate the proposals.
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3.23.6. Logistics/Manpower
Extending 24x7 customs clearance for EOUs.
TOURISM
3.24.1. The Highpoints
1. The total contribution of Travel & Tourism to GDP was INR 5651.0 billion (6.4% of GDP) in 2011.This is expected
to rise by 7% in 2012 and by 7.8% pa to INR 12891.2 billion in 2022
2. In 2011 the total contribution of Travel and Tourism to employment, including jobs indirectly supported by the
industry was 7.8% of total employment (39,352,000 jobs). This is expected to grow by 2.8% in 2012 to
40,450,000 jobs and rise by 1.7% pa to 47,911,000 jobs in 2022 (8% of the total).It is estimated to create 78 jobs
per million rupees of investment compared to 45 jobs in the agriculture sector and only 18 in the manufacturing
sector for similar investment. Along with construction, it is one of the largest sectors of service industry in India.
3. Foreign Exchange Earnings (FEE) in rupee terms during 2011 were Rs.77,591 crores with a growth of 19.6% as
compared to the FEE of Rs.64,889 crores with a growth rate of 18.1% during the year 2010 over 2009.
For an industry which is people intensive with an enormous multiplier effect it is imperative that the following
suggestions are considered by the Government for the growth of Tourism:-
3.24.2. Inclusion of Hotels as infrastructure
It is suggested that like airports, seaports and railways, hotels should be included as an infrastructural facility eligible
for benefits under Section 80 I A of the Income Tax Act. If implemented all new hotel projects will be able to avail the
benefit of deductions of 100% with respect to profits and gains for a period of 10 years. This will lead to many new
hotel projects being set up by companies re-investing their profits in the hotel sector. The country's hotel industry
needs at least Rs 72,000-crore investment in the next four-five years to build another 1.8 lakh rooms across 1- to - 5star categories, In fact under Section 10(23G) of the Income Tax Act, Hotels were added to the infrastructure list so
that interest received by the Financial Institutions and banks for loans extended to hotels were tax exempted.
However the section itself was discontinued with effect from 1.4.2007. Capacity building in Tourism will lead to huge
opportunity for employment.
3.24.3. Export Industry Status
Given quantum Foreign Exchange earnings, this industry should be granted deductions on foreign exchange earnings.
The benefits available under Section 80HHD of Income Tax Act 1956, which was discontinued after 2005-06, should
be revived. An exemption on the foreign exchange earning of tourism industry on the same lines as that given to
other foreign exchange-earning industries would be beneficial for the industry's growth.
3.24.4. Declaration of Tourism as an Industry
Many States of the Union of India have already granted Industry status to tourism i.e. Tamil Nadu, Kerala, Uttar
Pradesh, West Bengal, Arunachal Pradesh, Uttarakhand, Sikkim, J&K, Jharkhand, Haryana and UT of Daman& Diu,
Dadar & Nagar Haveli. It is proposed that tourism should be included in Schedule 1 of the Industries Development
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Act 1951 and that all the remaining State Government of the union of India may be requested to recognize tourism
as an Industry so that Hotels throughout the country will be able to avail of the benefits under the industrial policy of
the respective state government:•
Land banks for budget Hotels
•
Exemption of Duty on Stamp Paper
•
Exemption / Concession in VAT and Sales Tax
•
Property Tax levied as per Industrial rates
•
Electricity rates revised as per Industrial rates
•
Water Charges levied as per Industrial rates
To ease procedural hassles, Single Window clearance be adopted for approval and setting up of new hotel projects
3.24.5. PAN Number for payments in Hotels/Restaurants
As per Rule 114B, every person is required to quote PAN while making payment to hotels and restaurants against bills
for an amount exceeding Rs.25,000/-. Most parties pay by credit card and it becomes a huge problem to collect PAN
in all instances. It may be pointed out that the credit card companies are separately reporting towards payments
made by any person against credit card bills aggregating to Rs.2 lakhs or more per annum on PAN basis as per Rule
114E. The aforesaid limit of Rs.25,000/- for quoting of PAN against payment of hotel/restaurant bills was fixed long
back.
It is recommended that quoting of PAN on payment to hotels/restaurants be only made applicable for cash payments
above Rs.1,00,000.
3.24.6. TDS on Room Charges
Hotel Charges for long stay are currently subject to TDS under section 194-I of the Act. Payment made to hotels are
not in the nature of rent, per-se and hence hotels should be excluded from the purview of section 194-I of the Act
for the purpose of tax deduction at source.
3.24.7. Depreciation for Hotel Buildings
Depreciation on Hotel Buildings under section 32 to be increased to 20% from the present 10% as hotels have to
make huge investment in plant and machinery due to their running on a 24 hour basis.
RETAIL
3.25.1. Policy Reforms
•
A Retail Policy should be considered for promulgation by the Government which will help modern retailing grow
from strength to strength in India. An empowered committee under the Ministry may guide and supervise
implementation of the Retail Policy and take appropriate decisions.
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•
Industry status for the Retail Sector
•
Incentivise States for a model Shops and Establishment Act through amendment in the various provisions of the
Act.
3.25.2. Tax Reforms
•
In order to enable mergers and amalgamations in loss making retail companies, so that the amalgamated entity
is able to carry forward the predecessor losses, section 72A of the Income Tax Act 1961, should be extended to
retail companies, as currently the retail companies do not come under the definition of industrial undertaking,
which is one of the mandatory conditions for carrying forward of losses under section 72A for any M&A.
•
Currently 200% weighted deduction is permissible for in-house approved R&D under section 35 (2AB), however
the same is restricted to manufacturing organization. Retail is not considered as manufacturing, however retail
companies also incur substantial R&D expenditure, which is very much required for growth and survival of the
industry. Hence this benefit should be extended to retail companies.
•
Supply chain investments by retailers help support infrastructure development in logistics across the country and
positively impacts industries like agriculture. Thus supply chain investments need to be incentivized as follows:
•
Exemption for capital imports of supply chain equipment including hand held scanners, fork-lifts, cold chain
equipment etc.
•
Duty and tax exemption on supply chain automation products (Hand-held scanners, Ware-house
management software and associated services)
•
Special tariff loans for warehousing and back-end processing
•
Retail industry depends on the informal sector, private equity and banks for finance. Banks currently treat retail
as trade and the rate of interest is relatively high. In a low margin business, this is unaffordable. Hence, banks
must be encouraged to provide cheaper funding in the form of loans and cash credit lines, with a moratorium on
repayment.
•
Several states have implemented entry tax and octroi. These hamper the free movement of goods and create
additional tax barriers and inefficiencies. While these may not be within the purview of the Union Government,
the Centre may attempt to influence the states which adopt such barriers.
•
Several retail companies incur costs and investments in order to scale up the capability of under educated
Indians in order to facilitate their working in a retail store. These costs and investments which are developmental
in nature should be encouraged by providing suitable tax breaks
•
Review stock limits under Essential Commodities Act
•
Uniform legislation allowing shops to operate 365 days and extended hours.
•
Amendment in APMC Act that would allow the retailers directly procure vegetables and fruits from the farmers,
invest in them to help drive yields, quality of yield, storage and processing capacities.
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CONSUMER ELECTRONICS
3.26.1 Proposals for the Consumer Electronics industry
The following suggestions are submitted for consideration of the Government for encouraging growth of the Indian
consumer electronics industry:•
Reduce customs duty on panels of LCD / LED televisions even for sizes below 19 inches.
•
Increase customs duty on set top boxes from 5% to 10% for the next 2 years to encourage local manufacturers.
•
Exempt magnetron from the whole of customs duty without any conditions, since this component has no use
other than in the manufacturing of microwave ovens.
•
The abatement for assessment of consumer electronic and home appliance products (monitor, air-conditioner,
LCD television, Plasma television, refrigerator, GSM mobile phone) should be increased to 40% from the current
levels of 20% to 35% in view of heavy discounts offered by the industry on the printed MRP as per the prevailing
trade practice.
•
Interest on loans for purchase of consumer durable products should be reduced to 9% to enable lower middle
income groups in the rural sector to purchase such products thus reviving the industry.
CHLOR ALKALI INDUSTRY
3.27.1 Proposals for the Chlor Alkali industry
The Chlor-Alkali Industry in the country produces mainly Caustic Soda, Chlorine and Soda Ash. Industries that have
direct linkages with this sector include Soaps and Detergent Industry, Pulp and Paper Industry, Textile Processing
Industry, Aluminium Smelting, Dyes and Dyestuff Industry, Plastic Polymers, Rayon Grade Pulp, Pharmaceuticals,
Electroplating, Adhesives/Additives. Chlorine is important for manufacturing PVC and is also used in the
pharmaceutical industry. Soda ash is used in the glass industry, silicates and other chemical industries.
The following proposals may be considered for the healthy growth of the chlor-alkali sector:(i) The major input in chlor-alkali industry is power. In case of caustic soda, power constitutes more than 60% of the
cost of production. Measures need to be taken to make available this important input to the industry at
internationally competitive prices. The following suggestions could be considered in this regard:•
In order to increase the availability of coal for captive power plants at reasonable prices, coal mining should
be opened to the private sector. Coal blocks should be allocated on priority basis to power intensive
industries like Chlor-Alkali & Soda Ash through an independent regulatory mechanism.
•
To reduce the input costs, Customs duty of 5% on fuel oils should be abolished for imports by power
intensive chlor-alkali industry.
•
Allocation of natural gas and pricing for such gas used by captive power units feeding power to caustic soda
and soda ash units should be made available under the administrative price mechanism.
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•
As per Electricity Act 2003 the distribution companies are bound to provide network access to large
industries that consume above 1 MW of power and regulators can fix the charges for such wheeling of
power, but the State Governments are not implementing this provision and they impose a huge cross
subsidy charges on consumers buying from open market. This needs to be implemented by the Government
of India on priority basis so that wheeling of power is a reality.
(ii) To reduce the cost of inputs, it is also important that interest rates are reduced and brought at international
level.
(iii) An industry like Caustic Soda & Soda Ash consumes salt to the extent of 50% of the national production. This
provides lot of employment to the salt workers and the transporters. In order to ensure quality salt supply at
reasonable cost Government should provide incentives for R&D work and mechanization of salt industry.
(iv) To secure raw materials like Ethylene & Cl2 for producing Vinyls, investments in PCPIRs may be encouraged.
Indirect import of Chlorine through EDC/VCM/PVC should be avoided by retaining appropriate duty structure on
these products.
(v) Incentives should be provided to chemical industries for pursuing green initiatives like providing star ratings
which could facilitate fast clearances of New Projects.
(vi) R&D for effective use of Hydrogen as green energy like in fuel cells to be encouraged.
(vii) To ban import of chemicals like Caustic Soda, Soda Ash, Hydrogen Peroxide from Pakistan till Pakistan removes it
from their negative list.
(viii) Most of the caustic soda industry is operating on Membrane Cell technology while duty on new plants including
Membrane and parts is 5% (Notification No.12/2012-Cus dated 17-03-2012 Sl. No.417), the spare parts of the
existing plants are subject to customs duty of 10% + CVD etc. Import of spare parts and membranes which are
not manufactured in India may be allowed free of duty.
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IV. DIRECT TAXES
A. Income Tax
4.1. Tax Rates - Companies/Firms/Limited Liability Partnership
Issues
•
All countries around the world need to compete vigorously for international investments and one of the means
is lowering the income tax rates. High corporate tax rates tend to reduce investment, entrepreneurial activity and
economic growth.
•
The Finance Act, 2012 had not made any change in the Corporate Tax rate, which continues to be at 30%
(calculating at 32.45% with surcharge and education cess), despite the global average corporate tax rate having
fallen down to 24.49% in the last year 2012.
•
In the current global economic scenario, Indian corporates need to be competitive. Further, India needs to retain
and foster its title as one of the most attractive foreign investment destination. The current corporate tax rate of
30% for domestic companies is fairly high. Accordingly, there is a strong case for reduction in the current
corporate tax rate for domestic companies from 30 percent to 25 percent.
Recommendations
•
It is therefore submitted that the corporate tax rate for domestic companies be reduced to 25 percent in the
forthcoming Union Budget 2013. This will give India the competitive edge that will foster its growth and ambition
to become one of the largest economies in the world.
•
FICCI believes that we have not yet reached the optimal level of the Laffer Curve. In case, the tax burden is
moderated and brought down to 25% level, it would in ultimate analysis result in larger revenues for the
government as amply demonstrated in past in so far as whenever the tax rates were reduced, the tax revenues
invariably went up.
•
Similarly the income tax rates for Unincorporated bodies i.e. Firm, Limited Liability Partnership, etc., should also
be reduced to 25 percent from the current 30 percent.
4.2. Tax Rates - Individual Taxpayers
Issues
The Finance Act, 2012 had marginally increased the basic exemption limit to Rs. 2 lakhs and also the peak tax rate of
30 per cent is made applicable over an income of INR 10 lakhs for individual taxpayers. However, the income trigger
for peak rate in other countries is significantly higher. Hence, there is a need for further raising the income level on
which the peak rate triggers, to make the same compatible with the international standards.
The Parliamentary Standing Committee on Finance (PSC) in its Report on the Direct Taxes Code Bill 2010 (DTC Bill)
has appropriately recommended the following revised tax slabs for individual taxpayers.
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Slab (lakhs)
0 -3
3-10
10-20
Beyond 20
Tax rate
Nil
10%
20%
30%
FICCI fully shares the views of the Committee and is firmly of the view that if our individuals in the lower income
bracket are left with more disposable incomes, and those at a higher income level have to face lower tax rates, it will
serve the following purposes:•
Incentivize people to come into the tax net;
•
Ensure higher collection from greater compliance;
•
Encourage consumption and savings;
•
Higher exemption limit to minimize compliance and transaction costs of the tax administration; and
•
Enable Income Tax wing to re-orient its resources to focus more on higher income groups - prone to tax
avoidance and evasion, and to plug loopholes and raise more revenues.
FICCI would, therefore, like to urge that the recommendations of the PSC should be implemented expeditiously
during fiscal year 2013-14.
4.3. Surcharge and Education Cess
•
The surcharge on Income-tax was initially levied at a nominal rate of 2.5 percent. It thereafter increased to 10
percent. Subsequent amendments have resulted in varying Surcharge rates for different categories of persons.
The removal of levy of Surcharge for individuals, firms, etc. earlier was a welcome relief. In the Union Budget
2011, the Surcharge for domestic companies was partially reduced to 5 percent from 7.5 percent. Presently, the
Surcharge is 5 percent for domestic companies and 2 percent for foreign companies. With the increase in
collection of Direct Taxes, it would be in fitness of things to remove the surcharge for companies in the
forthcoming Union Budget 2013.
•
Similarly, the object of Education Cess levy was to collect specific revenue for securing funds for educational
needs. With the increase in collection of Direct taxes, a portion of Direct Taxes collections can internally be
apportioned for funding educational projects instead of having a separate levy which also complicates the
effective tax rate computation. It is submitted that the Education Cess be also removed in the ensuing budget.
•
The removal of both Surcharge and Education Cess will be in line with moving towards the DTC regime wherein
both these levies are proposed to be withdrawn.
4.4. Minimum Alternate Tax and Alternate Minimum Tax
Issues
•
Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act, 1961 was introduced to collect tax
from those companies which had adequate book profit as per audited financial statements but nil or less taxable
income. The difference in these two items generally related to tax incentive or depreciation rates and method.
With the change in the economic scenario, tax incentives have and are being phased out and rates of
depreciation have been lowered.
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•
The MAT rate has increased from 7.5 percent in 2007 to 18.5 percent for 2011-12. This increase in rate has
impacted significantly cash flow of Companies who otherwise have low taxable income or have incurred tax
losses. Further, this has also diluted significantly the tax incentives offered under Chapter VI-A of the Income-tax
Act,1961 (the Act) to eligible businesses and Industrial Undertakings as the difference between the corporate tax
rate at 30 percent and MAT at 18.5 percent is not very large.
•
The scope of MAT has been broadened effective AY 2012-13 by bringing Special Economic Zone (SEZ) developers
and units under the ambit of MAT thereby significantly diluting benefits offered under the popular SEZ Scheme.
•
Income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an
equity oriented fund is exempt under Section 10(38) of the Act. The objective of giving such exemption was that
Indian residents should invest in the Capital Market for long term. This benefit is also available to Companies
under the Act however, by including such income in the book profit the benefit is taken back from the
Companies. Taking back such benefit from the Companies is not equitable and therefore the proviso to Section
10(38) should be deleted.
•
Further, an Alternate Minimum Tax (AMT) under Section 115JC of the Act was also introduced on Limited
Liability Partnership's (LLP's) which was to be computed on their taxable income as increased by deductions
eligible under Chapter VI-A and Section 10AA of the Act.
•
The Finance Act, 2012 has extended the applicability of AMT to include other taxpayers i.e. Sole proprietors,
Association of Persons and Partnership firms.
•
Pursuant to above, the Companies / LLPs / Firms who have invested large sums in eligible businesses / industrial
units in the backward areas are also getting penalized as the benefit of such incentive gets reduced due to the
narrow difference between the basic MAT / AMT rate of 18.50 percent and the basic corporate tax rate / LLP tax
rate of 30 percent.
•
The MAT /AMT credit is allowed to be carried forward for 10 years for set-off but this period is generally not
always sufficient. Many companies, particularly investment companies whose core business is investments are
not able to utilize MAT credit efficiently and within prescribed time-limits.
•
Exemption from AMT is provided to certain specified persons if the adjusted total income of such person does
not exceed INR 20 lakhs. The limit of INR 20 lakhs is inadequate considering especially the huge amount of
investments made by the businesses in relation to exports of goods and services and should therefore be raised
to at least INR 50 lakhs.
Recommendations
•
MAT/AMT rates to be reduced substantially over the coming years. The basic rate of MAT / AMT to be fixed at 50
percent of the basic corporate tax rate (currently 30 percent).
•
To attract more industrial and infrastructural investments, MAT/ AMT on SEZ units, SEZ developers and other
eligible businesses/industrial undertaking to be abolished.
•
The MAT/AMT credit is recommended to be allowed as carried forward and set-off without any time limit.
•
Income arising from transfer of a long term capital asset being equity shares and units which are subjected to
Securities Transaction Tax is exempt under Section 10(38) of the Act. As per current provisions of MAT, the tax
exemption under Section 10(38) of the Act needs to be added back to book profits of the Companies. We
recommend that the tax exemption under Section 10(38) of the Act should also be available while computing
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MAT. In other words this exemption should not be added back while computing book profits.
•
The threshold limit from exemption of AMT should be increased from INR 20 lakhs to INR 50 lakhs.
•
The amount of weighted deduction under section 35(2AB) be deducted while computing MAT.
•
Companies be allowed to set-off entire past book losses including unabsorbed depreciation before they are
subjected to MAT.
4.5. MAT on infrastructure companies
Issues
•
Infrastructure Industry in India have been experiencing a rapid growth in its different sectors with the
development of urbanization and increasing involvement of foreign investments.
•
The Indian government has offered various tax incentives benefit under Section 80-IA of the Act to the
infrastructure companies to boost infrastructure.
•
The benefit available to the infrastructure companies and other entities eligible for deduction under heading C of
Chapter VI-A of the Act, gets neutralized since the companies are required to pay MAT on their book profits.
Recommendations
•
To attract more and more investment in infrastructure sector, MAT on infrastructure companies should be
abolished.
4.6. Dividend Distribution Tax under Section 115-O of the Act
Issues
•
The Finance Act, 2011 have also burdened the SEZ developers by including them in the scope of DDT.
•
Further, DDT currently is payable at the basic rate of 15 percent translating into an effective tax rate of 16.223
percent. Since DDT is a sort of surrogate tax on behalf of the shareholders, and if the shareholders were to pay
tax on their dividend receipts, the tax impact thereon is likely to be lesser in most of the cases in comparison to
the DDT tax burden.
•
The earlier DDT rate at 10 percent was lower in line with the withholding tax rate on dividends in most Indian
and international tax treaties. The increased basic DDT rate of 15 percent reduces the dividend distribution
ability of the Indian Company. Further, the uncertainty with respect to its credit in overseas jurisdictions impacts
the non-resident shareholders adversely.
Currently, DDT is also levied on undertakings engaged in infrastructure development which are eligible for tax benefit
under Section 80-IA of the Act. This is detrimental to the growth of the infrastructure sector in the Indian Economy.
The Government needs to look at providing various incentives to boost the development of robust infrastructure in
India.
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Recommendations
•
To attract more investment in the SEZs, DDT on SEZ developers to be abolished.
•
The tax rate of DDT is recommended to be reduced to 10 percent from the current 15 percent.
•
To incentives the investment in infrastructure sector, it is recommended that DDT on industrial undertakings or
enterprises engaged in infrastructure development, eligible for deduction under section 80-IA of the Act be
abolished. It is also recommended that further exemption from DDT be granted to the “infrastructure capital
company/fund” with the condition that it invests the dividend received from its subsidiary in the infrastructure
projects.
Issue
The Finance Act, 2012 amended Section 115-O of the Act to provide that in case any company receives, during the
year any dividend from any subsidiary and such subsidiary has paid DDT as payable on such dividend, then, dividend
distributed by the holding company in the same year, to that extent, shall not be subject to Dividend Distribution Tax.
The removal of additional condition to claim the said benefit i.e. domestic company should not be a subsidiary of any
other company, is a welcome step, insofar as, removes the cascading impact of the DDT. However, continuation of
the condition that the dividend should be received from a subsidiary is still quite restrictive and unrealistic in as
much as a company is stipulated to be a subsidiary of another company, if such other company, holds more than half
in nominal value of the equity share capital of the company. The said condition is unlikely to be fulfilled by majority
of the promoter companies which hold investment in operating companies listed on stock exchanges. Even
shareholders of joint venture companies are impacted by the above restrictions. In both the scenarios, since the
operating / joint venture company i.e. the company declaring the dividend is not a subsidiary of any company, the
first condition i.e. dividend should be received from a subsidiary company is never fulfilled and accordingly when the
promoter company / shareholder of joint venture company declares dividend to their shareholders, it cannot deduct
the dividend so received from the operating / joint venture company for the purpose of payment of DDT.
Recommendations
•
The condition that dividend should be received from the subsidiary company should be removed and provision
similar to erstwhile Section 80M, mentioned above, be re-introduced as per which, if the income of a company
included any dividend received from a domestic company, a deduction was allowed to the recipient company
from the income upto the amount distributed by it to its shareholders. No conditions / restrictions such as (a)
dividend should be received from the subsidiary company and (b) the company declaring the dividend should
not be a subsidiary of any other company existed in the said provisions.
•
In the alternative, the benefit of this section should be extended to a company who is receiving dividend from a
company in which they have significant interest i.e. 10% of the voting power in the company.
•
Besides, it is suggested that proviso to Section 115-O(1A) (which provides that the same amount of dividend
shall not be taken into account for reduction more than once) be deleted so that the cascading effect of DDT in
multi-tier corporate structure, as is intended, can be removed.
•
It also needs to be clarified that in order to claim the benefit under Section 115-O(1A), it is not essential that the
holding company distributes dividend in the same year in which it receives dividend from its subsidiary company.
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•
Further, investment companies which do not necessarily own/have subsidiaries as they invest in various
companies in the open market, be also made eligible for such benefit.
4.7. Rationalization of provisions of Section 14A and Rule 8D
As per Section 14A of the Act, no deduction shall be allowed in respect of expenditure incurred in relation to income
not includible in the total income. Section 14A(2) of the Act provides that the amount of expenditure incurred in
relation to income not includible in the total income shall be determined by the tax authority if he is not satisfied
with the correctness of the claim of the taxpayer in respect of such expenditure in relation to income not includible
in the total income. This satisfaction is to be arrived at by the tax authority having regard to the accounts of the
taxpayer. The determination of the amount of expenditure incurred in relation to the income which is not includible
in the total income of the taxpayer is to be done in accordance with the method prescribed, i.e. Rule 8D of the
Income-tax Rules, 1962 (the rules).
Issue
•
Disallowance of expenditure even if there is no exempt income or restricting the disallowance to the extent of
dividend income earned
Recommendations
•
The way in which the Rule stands drafted providing for disallowance of interest based on the average value of
investment divided by total assets, leads to a conclusion that the disallowance shall happen even if there is no
income or the quantum of disallowance far exceed the income, which is not includible in the total income. This
runs contrary to the intention of Section 14A of the Act.
•
It should be specifically clarified that in the year in which no income which is not includible in the total income
has accrued to the taxpayer, no disallowance in terms of Rule 8D of the Rules shall be made. Further, it should
also be clarified that the disallowance as per the deeming provisions of Rule 8D of the Rules should not exceed
the amount of exempt income earned.
Issue
•
A deeming provision of the administrative expenditure at the rate of 0.5 percent of the average investments,
results in adhoc and excessive disallowance.
Recommendations
•
This Rule is very harsh and by applying the formula under the said Rule, expenditure that has no connection with
the earning of exempt income gets disallowed. A deeming provision of the administrative expenditure at the rate
of 0.5 percent of the average investments, results in adhoc and excessive disallowance. There is even more
hardship when the investments are made only at the end of the accounting year (say 31 March) which are also
subject to disallowance @ 0.5 percent as per the deeming provisions.
•
Rule 8D be amended such that the arbitrary clause i.e. clause (iii) of Rule 8D(2) of the Rules on disallowance of
0.5 percent of the average investments be deleted. Alternatively, the disallowance for administrative expenses
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should be made by estimating the time of the personnel and the resources involved for undertaking the
activities which would earn exempt income. The aforesaid estimation to be done on reasonable basis after
considering the facts of each case and the frequency of such activities.
Issue
•
The disallowance under Section 14A of the Act is required to be made in respect of expenses incurred for
earning exempt income. The provisions are harsh in respect of the investments held as stock-in-trade or strategic
investments made purely for acquiring controlling interest. The provisions are also harsh where the investments
made in the company as per the specific requirement under a statute or contract with government.
Recommendations
•
The strategic investments are generally made with the intention of acquiring controlling interest and
management of the group for the purpose of enhancing the business objective of the group. The investment idea
is therefore business driven and not with the intention of earning dividend income.
•
While making such investment and also in respect of investments held as stock-in-trade, the main intention is to
maximize business income which is taxable and dividend income are purely incidental.
•
Further, in respect of certain businesses like power, infrastructure development etc., the statute / government
requires the taxpayer to execute the project only through a Special Purpose Vehicle (SPV) Company. Accordingly,
making an investment in a Company is a pre-requisite business model for such businesses.
•
It should be specifically clarified that aforesaid investments would not be included for computing disallowance
under Section 14A of the Act
4.8. Introduction of Technological Upgradation Allowance
Issues
•
In the era of fast changing technology, corporates have to upgrade their technologies to minimize their
manufacturing cost with a view to achieving competitive edge, which is absolutely necessary for the survival
•
Need for giving a much-needed boost to jack up investment in the sagging manufacturing sector
•
Sectors such as drugs and biotechnology, identified as having strong potential for growth and other strategic
sectors like capital goods, engineering, electronics etc require huge amount of money for research and
development
•
Need for introduction of allowance for technology upgradation
Recommendations
•
In this perspective, technological upgradation allowance should also be introduced whereby a Company is
permitted to set apart a certain percentage, say, 5-7 percent of their profits, by way of deduction in the
computation of taxable profits, to be exclusively used for upgrading their technologies.
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•
Certain industries like automobile, Information Technology Companies, Pharmaceutical Companies, Banks using
very high-tech technology could also be considered on a specific/ priority basis and be entitled to such benefit.
4.9. Depreciation
Issues
•
Whether depreciation allowable on Goodwill
•
Need for Higher depreciation allowability for plant and machineries used in double/triple shifts.
•
Need for additional depreciation for Service industries.
•
Additional depreciation for Hotel Industry- Hotel buildings constitutes the 'plants' for the hotel industry as their
usage is round the clock for 24 hours. The industry has to make very heavy investments in renovation, upgradation and upkeep of the hotel buildings
•
Depreciation allowability with regard to various items viz. printers, scanners, UPS, router, switches etc. which are
integral part of the computer and cannot be used in isolation
•
Need for restoration of 100% allowance on small items of assets.
Recommendations
•
In line with the recent Supreme Court decision in the case of CIT v. Smifs Securities Ltd. (2012) 24 Taxmann.com
222 a clarificatory amendment should be brought for specific inclusion of Goodwill in the definition of block of
intangible assets. Further, it would be appropriate to provide clarity on allowability of depreciation on self
generated/ purchased goodwill.
•
Further, it is noteworthy that under the Companies Act, extra shift depreciation allowance is available, which is
upto 50 percent more for double shift working and 100 percent more for triple shift working, to be calculated
separately in the proportion which the number of days for which the concern worked double shift or triple shift,
as the case may be, bears to the normal number of working days during the previous year. It is common
knowledge that plant and machineries are generally used for double / triple shift working and it would be in
fitness of things to allow depreciation at least at the rate permissible under the Companies Act in such cases.
•
It is imperative to introduce the concept of 'free depreciation' where an enterprise may choose the quantum of
depreciation and the years of claim so that it is in a position to plan its cash flows in a better manner to optimize
productivity. Since the total depreciation allowed to the enterprise will not exceed the cost of the asset, the
proposal per-se is revenue neutral.
•
Moreover, the Government should extend the initial depreciation under Section 32(1)(iia) of the Act to service
industries as well which is currently available to only manufacturing sector. The steady growth in the
contribution by various service industries to the Country's Gross Domestic Product should be augmented by
incentive in the form of extending the initial depreciation benefit to service industries.
•
Appendix 1 of the rules should be suitably amended to provide that “computer” shall also include printers,
scanners, UPS, routers, switches and other accessories and peripherals which are integral part of computer and
cannot be used independently if not used along with the computer. This clarification will provide needed
certainty to the taxpayers and will put an end to unwarranted litigation on this issue.
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•
Schedule XIV of the Companies Act, 1956 makes it mandatory for companies to charge off asset for value below
Rs. 5,000. It is imperative that first proviso to section 32 of the Act allowing for charge off of small assets for
value not exceeding Rs. 5,000 be reintroduced however, it shall be made applicable to all the assets as against
only plant and machinery in the original provision.
4.10. Disallowance under Section 40(a)(i) and 40(a)(ia) of the Act
Issues
•
Section 40(a)(ia) of the Act provides that specified payments to residents without deduction of tax at source will
result in disallowance of the related expenditure and the payer is considered as a taxpayer in default and is liable
for interest, penalty and prosecution (except in certain cases as stipulated).
•
Further, Section 40(a)(ia) of the Act allows the taxpayer the extended time upto the due date of filing the Return
of Income for depositing the tax deducted at source whereas under Section 40(a)(i) of the Act dealing with
specified payments to non-residents no such benefit is available.
Recommendations
•
FICCI recommends that the disallowance should be restricted to the amount of tax deductible on source on the
payment and not the entire payment.
•
In any case, in cases where a lower rate has been applied for tax deduction, a clarificatory amendment should be
made to Section 40(a)(ia) of the Act to allow expenditure proportionate to the tax paid.
•
It is further recommended that the discrimination between payments to residents and non-residents regarding
extended time line for deposit of TDS should be removed and even under Section 40(a)(i) of the Act the taxpayer
should be given the benefit of extended time for depositing the TDS on payments made to non-residents upto
the due date of filing the Return of Income.
4.11. Disallowance of cash payments under Section 40A of the Act
Section 40A(3) of the Act broadly provides that where a taxpayer makes payment or payments to a person in a day in
respect of an expenditure otherwise than by an account payee cheque or draft, and such payment or payments
exceed INR 20,000 the said expense will be disallowed. In case the payment or payments are made for plying, hiring
or leasing goods carriages, the limit is INR 35,000.
Issue
•
Section 40A(3) of the Act was introduced primarily to discourage cash payments. However the section has
courted controversy. For instance where payment is made directly into the bank account of the recipient, there is
a possibility of disallowance under Section 40A(3) of the Act even though there are judicial precedents to the
contrary. Further, due to technological advancements, there are various modes of payment like internet banking,
credit card payment etc. The trail of payments through online banking channels can be easily traced.
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Recommendations
Considering the above, the following suggestions are made:
•
No disallowance should be made, where payment is made by any mode other than cash.
•
Further the limit of INR 20,000 which was introduced a long time back may be suitably increased to INR 50,000
per transaction per day.
4.12. Taking/Repayment of Loans and Deposits
Section 269SS of the Act requires that acceptance of any loan or deposit exceeding INR 20,000 may be made only by
an account payee cheque or an account payee bank draft.
Further, Section 269T of the Act requires that the repayment of any loan or deposit exceeding INR 20,000 may be
made only by an account payee cheque or an account payee bank draft.
Issue
•
However, in the present scenario many banking transactions take place by way of Net banking facilities that
include Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Electronic Funds Transfer
(EFT) and Electronic Clearing Service (ECS). Use of payment gateways for online transactions as well as credit
cards is also on the rise.
Recommendations
•
It is therefore suggested that mode of transfers like RTGS, NEFT, EFT, ECS etc be included as valid modes of fund
transfers under Section 269SS and 269T of the Act. In the alternative, any mode other cash may be accepted as
valid.
•
Further the limit of INR 20,000 may be suitably increased to INR 50,000.
4.13. Deemed Dividend [Section 2(22)(e) of the Act]
Section 2(22) of the Act defines the term 'dividend' and sub-clause (e) thereof includes, within the meaning of this
term, even an advance or loan, to a shareholder having at least a 10 percent voting-power in a company in which the
public are not substantially interested, to the extent that the company possesses accumulated profits. Thus, a
payment, which is clearly not a dividend as commercially understood, is, by a fiction of law, deemed to be one. Apart
from payment to the shareholder himself, a loan or advance to a firm in which he is a partner with a 20 percent
share, or to an association or body of which he is a member and entitled to 20 percent of its income, is also
considered, to be deemed dividend, and is taxed accordingly. The object clearly is to prevent tax-avoidance by
making an advance or loan (which would not be taxable) instead of distributing the amount as a dividend, which is
subject to income tax.
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4.13.1 Taxability of genuine inter-corporate loans and advances as deemed dividend
Issues
The provision suffers from many inequities:
•
It taxes a loan, though it may be quite a genuine one, which is duly repaid within its scheduled short time.
Moreover, there is no corresponding tax-relieving provision at the time of recovery of the loan.
•
The tax is attracted, notwithstanding that the loan may be advanced at a fair commercial rate of interest and
notwithstanding that preponderant majority of persons owning the concern which received the loan are not
even shareholders of the lending company.
Recommendations
•
In the light of all these infirmities, it is submitted that there is a strong case for deletion of the mischievous subclause (e). This would also serve the desirable objects of rationalization and simplification. At present, no tax is
payable by the shareholder on dividend received from companies and only the company pays dividend
distribution tax @ 15percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the
normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend
distribution tax. If this suggestion is not accepted, then adequate provisions should be made to exclude genuine
transactions from the consequences of these provisions.
•
Illustratively, genuine loans and advances, given on current market rate of interest and which are re-paid during
the year, should be excluded from the scope of deemed dividend as these are not a subterfuge for payment of
dividend. Similarly, where loans or advances are given by the companies to their shareholder employees on
current market rates of interest as per the policy of the company, deemed dividend provisions should not get
triggered as even otherwise the company is meeting its obligation by paying taxes on such interest income. Also,
loans and advances given out of business necessities, needs and exigencies should be excluded.
•
Loan given as part of business transaction and Inter-corporate deposits should be excluded from the application
of Section 2(22)(e) of the Act.
4.13.2. Taxability of deemed dividend in the hands of recipient not being a registered
shareholder
Recommendation
Since the object of sub-clause (e) is to prevent tax-avoidance by making an advance or loan (which would not be
taxable), instead of distributing the amount as a dividend to the shareholder, which is subject to income tax, a loan
or advance to a company / firm / association or body, which is not a shareholder, should not be considered as
deemed dividend. Alternatively, the threshold for substantial interest of the shareholder in the recipient concern
should be increased to 51 percent.
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4.13.3. Tax rate applicable to deemed dividend
Recommendation
At present, no tax is payable by the shareholder on dividend received from companies and only the company pays
dividend distribution tax @ 15 percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the
normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend distribution
tax. Thus, if the above suggestions are not accepted, even deemed dividend under sub-cause (e) should be taxed at
15 percent (i.e. the DDT rate at which the other deemed dividend are taxed).
4.14. Carry Backward of Business Losses
Tax outflow should arise only when taxpayer has earned net income even on cumulative basis. Tax collected from the
taxpayer should be eligible for refund, in case taxpayer suffers losses in subsequent years.
Issues
•
Section 72 of the Act provides for carry forward and set off of business losses suffered by the taxpayer against
future profits upto subsequent 8 years. It is a clear indication that even though income-tax is payable on a year
to year basis, it is not payable till the time the taxpayer has not earned net profit. The tax is payable by the
taxpayer in the years in which all past losses are recovered.
•
Business activities involve lot of uncertainty e.g. change in technology. A profit earning activity may turn into loss
making activity. Best example can be paging companies. Pagers had a very short life as they were soon replaced
by mobiles. Companies paid taxes on pager manufacturing and selling and within 2 years started suffering losses.
There was no revival for such companies.
•
Carry forward facility is necessary for startup entities suffering losses in earlier years and reaping profits
subsequently. However, it does not cover impacts of cyclical changes in business environments. Such changes
require carry back of losses.
•
Taxation laws of a number of countries including Canada, France, Germany, Japan, Netherlands, USA and UK
provide for carry backward of business losses for varying periods, whereas we in India do not have such facility,
which is very much needed.
•
In the wake of opening up of the Indian economy and reduction in import duties and the removal of most of the
import restrictions, the Indian industry is facing stiff global competition. Some companies which could not face
the competition in the transitional phase, became temporarily sick. To assist such companies in their bad times,
it is necessary to provide some temporary financial help by way of providing for carry backward of the business
losses to the preceding 3 to 4 years in our taxing statute.
•
Alternatively, a scheme may be formulated to provide option to the company to create Rehabilitation Reserve in
any given year to be utilized in the year it suffers losses. It is suggested that such reserve should be allowed as a
deduction in computing the total income of the company.
Recommendations
•
Internationally, business losses are allowed to carry backward. Therefore, in line with best international practice,
it would be appropriate to introduce the same in India to allow carry backward of business losses. Further tax
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cap of 8 years should be removed to allow the carry forward of business losses infinitely. Section 72 of the Act
should be suitably amended to allow carry back of the losses and to remove upper cap of 8 years.
•
Alternatively, a new provision be inserted in Chapter IV dealing with “Business Income” to provide deduction for
reserve created for future rehabilitation.
4.15. Section 35D - Amortization of certain preliminary expenses
Issues
•
Section 35D provides deduction to Indian Companies for certain expenditure incurred before the
commencement of business or after the commencement in connection with the extension of the undertaking or
in connection with setting up a new unit. The benefit of deduction under Section 35D is limited to the
expenditure in the nature of legal charges and registration fees etc. incurred for incorporating the Company.
•
Further, the deduction of this expenditure is restricted to 5 percent of the cost of project or capital employed at
the option of the company.
•
However, legitimate expenditure incurred post incorporation for and until setting up of business, which are
neither covered within Section 35D nor can be capitalized to the actual cost of fixed assets, gets permanently
disallowed under any of the provisions of the Act even though they are incurred for the setting up the business
and becomes sunk cost. Some of this expenditure could be office / sales employees' salary, audit fees, ROC filing
fees, advertisement and business promotion expenditure incurred prior to setting up of business, etc.
•
This is more particularly in the case of companies having longer gestation period for setting up their business
such as manufacturing entities, insurance business requiring multiple licenses, etc. This affects the cash flow and
the spending capacity of the company.
Recommendation
•
There is no plausible reason for not allowing these expenses as deduction either as revenue or on a deferred
basis in five equal installments. Therefore, Section 35D of the Act should be suitably amended to include all the
expenses incurred by Companies post incorporation but during the course of setting up of its business as eligible
for deduction.
Even the ceiling of 5 percent should be removed as there is no rationale behind having such ceiling when the actual
expenditure is far higher.
Non-Resident Related Provisions
4.16.1. Tax Neutrality should be provided even in case with Foreign Transferee
company
Issues
•
The provisions of the Act are framed to provide tax neutrality only in cases where the amalgamated company is
an Indian company. Section 47(vii) of the Act provides that a transfer of shares by the shareholder of an
amalgamating company would not be liable to capital gains tax subject to the following conditions:
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•
The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated
company, and
•
The amalgamated company is an Indian company
•
Clearly the above exemption would be allowed only in case a foreign company is merged into an Indian
company. In other words, if an Indian company merges into a foreign company, as proposed to be allowed by the
Companies Amendment Bill, Amalgamating company and the shareholders would be subject to capital gains tax
in India.
•
In the emerging global scenario it is important that the merger of Indian companies into the foreign companies
should be legally recognized and made pari-passu with the foreign companies merging into Indian companies,
particularly for taxation purposes. It is noteworthy that the Companies Bill 2009 currently before Parliament has
now allowed Indian company to merge with Foreign Company, vide its Section 205(2), stipulating inter-alia that
for the payment of consideration to the shareholders of the merging company in cash, or in Indian Depository
Receipts, or partly in cash and partly in Indian Depository Receipts, as the case may be, as per the scheme to be
drawn up for the purpose.
Recommendation
Requirement of Transferee Company to be an Indian Company be removed from Section 47(vi), and (vii) of the Act.
Income deemed to accrue or arise in India
4.16.2. Clarification on definition of software royalty
In Section 9 of the Act, in sub section (1) of clause (vi), an Explanation 4 has been inserted, with effect from the 1
June 1976, clarifying that the transfer of all or any rights in respect of any right, property or information includes and
has always included transfer of all or any right for use or right to use a computer software (including granting of a
licence) irrespective of the medium through which such right is transferred.
Issues
•
Royalty' internationally applies to payments for use of a copyright, patent, trademark or such intellectual
property.
•
As per international commentaries and jurisprudence, any payments for use of a copyrighted article would not
typically get covered under the gamut of the term 'Royalty'.
•
Taxability of the software usage / licensing payments in the hands of non-resident software companies / vendors
would go against the internationally accepted principles of taxation.
•
Expenditure on software is one of the key elements for business today and especially for the IT and ITeS sector.
•
Taxation of such software usage payments in the hands of non-resident software companies / vendors would
result in passing on of the costs to their Indian domestic counterparts as well as other Indian customers
(business as well as personal consumers) causing significant hardship.
•
This will also significantly impact the global competitiveness of Indian Inc
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•
The retrospective application of the amendment is grossly unfair and would further aggravate the situation.
Recommendations
•
It is suggested to roll back the Explanation 4. In view of the international tax practises and mindful of the impact
on Indian Inc, it should be clarified that the payments for use of software made to non-residents would not be
covered under the definition of 'royalty'.
•
At very least, it is suggested that the amendment should not have retrospective application.
4.16.3. Clarification on inclusion of Explanation 5 to section 9(1)(vi) of the Act
In Section 9 of the Act, in sub section (1) of clause (vi), an Explanation 5 has been inserted, clarifying that royalty
includes and has always included consideration in respect of any right, property or information, whether or not—
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
Issues
•
The Explanation 5 conflicts with the existing Explanation 2 to section 9(1)(vi) of the Act in as much as there
cannot be any transfer, right to use or imparting without the possession or control in the right, property or
information vesting with the buyer/payer. Explanation 5 has the effect of taxing the consideration as royalty even
if there is no transfer, right to use or imparting to the payer.
•
The provisions of this explanation are also not in line with the internationally accepted principles.
•
By virtue of the above amendment, the scope of the term Royalty could get expanded to cover payments which
are not even intended and may lead to application of the tax provision which could be detrimental to the
taxpayers at large. The mere fact that a transaction involves use of equipment by a service provider, without the
customer having control/ physical possession of such equipment, payment for such facility / services cannot be
treated as Royalty. For example, where a person boards a bus or train by purchasing the requisite ticket, it
cannot be said that the person is making payment for availing the bus or train on hire as he does not have the
control over such equipment. Rather the customer is merely availing the facility of transportation, the
consideration for which facility is not in the nature of Royalty.
Recommendations
•
Explanation 5 under clause (vi) of Section 9(1) inserted by the Finance Act, 2012 may be omitted altogether, as
this is clearly against the basic principle of the definition of the term Royalty provided under Explanation 2 clause
(iva) and as also understood internationally.
•
In the alternative, in order to avoid ambiguity, the amendment should be modified to objectively provide the
rationale behind the insertion of the Explanation 5 and should list out the specific transactions, which it seeks to
cover.
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•
In the least, such amendment should be made with only prospective effect from April 1, 2013 i.e. from
Assessment Year 2013-14
4.16.4. Clarification on definition of process royalty
In Section 9 of the Act, in sub-section (1) clause (vi), Explanation 6 shall be inserted, with retrospective effect from
the 1 June 1976, clarifying that the expression 'process' includes and shall be deemed to have always included
transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic
fibre or by any other similar technology, whether or not such process is secret.
Issues
•
The amendment may result in inclusion of charges for the use of transponder capacity or connectivity /
bandwidth within the definition of 'Royalty'.
•
Services in the nature of provision of transponder capacity or connectivity / bandwidth are merely facilities
provided. As per international tax practices and supported by the OECD Commentary, payments for such
facilities should not be treated as 'Royalty'.
•
The way Explanation 6 has been currently drafted, even includes payments towards provision of basic telephone
service within the ambit of the term royalty. The business income derived by the telecom providers, if classified
as royalty, will significantly alter the tax consequences on the payer and the receiver of the consideration for the
services provided.
•
Taxation of foreign companies for such facilities and subsequent passing on of the tax cost to India Inc would
entail a significant tax outgo for India Inc, especially companies operating in the field of media and
entertainment (satellite and broadcasting companies), IT and ITeS companies and Telecom.
•
This would also impact their global competitiveness.
•
The retrospective application of the amendment is grossly unfair and would further aggravate the situation.
Recommendations
•
In line with international practises and the OECD Commentary, it is suggested that the terms 'transmission', 'uplinking', 'amplification', 'downlinking' could be specifically defined in the Act to remove ambiguity on its scope/
coverage definition of 'royalty' and the definition of the term 'transmission' should explicitly clarify that
payments for the use of a 'facility' as a service charge, without any control on the process and where the payer is
only interested in the service and not in the use of process, should not be covered within its meaning.
•
A clarification should be provided that basic services such as telephone/mobile charges and broadband/internet
connectivity charges would be outside the ambit of royalty.
•
At very least, it is suggested that the amendment should not have retrospective application
Issues
•
With the insertion of Explanation 4 and Explanation 6 in clause (vi) to sub-section (1) of section 9 of the Act,
there is a ambiguity as to whether subscription charges paid for download of e-content, access to online
database, reports, journals etc. can fall within the purview of “Royalty”.
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It has been held by various Courts that the information that is available in public domain is collated and presented in
a proper form by applying the taxpayer's methodology and the payment for the same is not to be construed as
royalty. It is line with the international standards and supported by the OECD Commentary which provides that data
retrieval or delivery of exclusive or other high value data cannot be characterized as royalty or technical fee.
•
Taxation of foreign companies/publishers for providing access to such online database or in the form of CD as
royalty and subsequent passing on of the tax cost to India Inc would entail a significant tax outgo for India Inc.
and will especially impact the education system in India. While there is no restriction on expansion of Indian tax
base to growing sectors, it is disappointing to see a lack of foresight in relation to a changing economy which is
likely to get more reliant on technology and intangible products by the day.
•
The retrospective application of the amendment is grossly unfair and would further aggravate the situation.
Recommendations
•
It is suggested that the terms 'transmission by satellite, cable, optic fibre or by any other similar technology'
could be specifically defined in the Act to remove ambiguity on its scope/coverage definition of 'royalty' and also
a detailed circular may be issued elucidating the types of payments covered within the purview of the said terms
and thus constituting royalty.
•
It is recommended to suitably exclude the payment for the use/access to online databases, reports, journals etc.
and any other payments made by the payer from the purview of royalty which are essentially made for the use
of a 'facility' as a service charge and where (a) the payer is only interested in the service and not in the use of
process/technology used for transmission (b) does not have any control on the process/technology used for
transmission.
•
At very least, it is suggested that the amendment should not have retrospective application.
4.16.5. Deputation of employees
•
Increasing globalization has resulted in fast growing mobilization of labour across various countries.
•
Typically, the company deputing the personnel initially pays the salary and other costs on behalf of the company
to which such personnel are deputed, which are thereafter reimbursed by the latter company.
Issue
The issue which had cropped up before the Indian tax authorities due to the increasing deputation agreements being
entered cross border was whether such reimbursements made by Indian entity to an overseas entity towards salary
and other costs in relation to the deputed employees should be taxable in India as being payment in the nature of
service fees.
Recommendations
•
Since the employees deputed to the Indian company work under the control and supervision of the Indian
company and hence are essentially 'employees' of the Indian company, the amounts paid by the Indian company
to the foreign company are merely 'cost reimbursements' for the salaries paid on the Indian company's behalf.
•
However, despite various rulings, the issue is still not free from litigation.
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•
In order to put an end to this litigation, a specific clarification may be inserted in the Act to the effect that as long
as the employee reports and works directly for the Indian company and operationally works under the 'control
and supervision' of the Indian company, payments made by the Indian company to the foreign company towards
reimbursement of the salary cost would be treated as 'pure reimbursement' and would not be taxable under the
Act
4.16.6. Amendment to the Explanation inserted after Section 9(2)
•
Section 9 of the Act provides for situations where income is deemed to accrue or arise in India. Vide Finance Act,
1976, a source rule was provided in Section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for
income by way of interest, royalty and Fees for Technical Services (FTS) respectively. It was provided, inter alia,
that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India
to the non-resident under the circumstances specified therein.
•
The intention of introducing the source rule was to bring to tax interest, royalty and FTS, by creating a legal
fiction in Section 9 of the Act, even in cases where services are provided outside India as long as they are utilized
in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs
of the payer and the situs of the utilization of services which will determine the taxability of such services in
India.
•
This was the settled position of law till 2007. However, the Supreme Court, in the case of Ishikawajima-Harima
Heavy Industries Ltd1. held that despite the deeming fiction in Section 9 of the Act, for any such income to be
taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It
further held that for establishing such territorial nexus, the services have to be rendered in India as well as
utilized in India.
•
This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is
not relevant as long as the services are utilized in India. Therefore, to remove doubts regarding the source rule,
an Explanation was inserted below sub-section (2) of Section 9 of the Act with retrospective effect from 1 June
1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in
India under clauses (v), (vi) and (vii) of sub-section (1) of Section 9 of the Act, such income shall be included in
the total income of the non-resident, regardless of whether the non-resident has a residence or place of business
or business connection in India.
•
However, the Karnataka High Court, in a recent judgment in the case of Jindal Thermal Power Company Ltd. v.
DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of
rendering of services in India for any income to be deemed to accrue or arise to a non-resident under Section 9
of the Act. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India
and the utilization of the service in India laid down by the Supreme Court in its judgment in the case of
Ishikawajima-Harima Heavy Industries Ltd. remains untouched and unaffected by the Explanation.
•
With a view to removing any doubt about the legislative intent of the aforesaid source rule, the Finance Act,
2010 substituted the existing Explanation with a new Explanation to specifically state that the income of a nonresident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub-section (1) of Section 9
of the Act and shall be included in his total income, whether or not:
1
Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC)
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•
•
the non-resident has a residence or place of business or business connection in India or
•
the non-resident has rendered services in India.
This was made effective retrospectively from 1 June 1976. This retrospective nature of the amendment is a cause
of concern amongst taxpayers.
Issue
Retrospective amendment would lead to reopening of the past assessments.
Recommendations
•
The relevant provisions of Section 9 of the Act in force since 1976 have been interpreted by the highest court in
India as requiring the taxpayer to also satisfy the condition of 'rendering of service in India' to be taxable in India.
It would therefore be only fair to make this provision only prospectively. This would avert litigation and send the
right messages to the international community on certainty of India's taxation statutes and its respect for judicial
decisions.
•
Alternatively, a provision be inserted to clarify that past transactions would not be re-opened or contested by
the Indian Revenue on the strength of this provision.
4.16.7. Taxation of Foreign Dividends and Capital Gains
With the rapid growth and development of the Indian economy over the last two decade, many Indian entrepreneurs
have expanded their horizons outside India. A large number of Indian Corporate Houses have been making huge
investments abroad to tap the foreign markets. A number of companies have established subsidiaries not only in USA
and Europe but across the globe. While initially it was the Information Technology sector which forayed into the
global markets, over time even other sectors like healthcare, pharmaceuticals, chemicals, Fast Moving Consumer
Goods (FMCG), consumer durables, textiles, automotive, metals and mining etc. have shown interest in global
expansion. The Indian outbound investments have been steadily growing year after year. While some outbound
investments have been made directly, many have been structured through holding companies based in low taxed
jurisdiction.
The returns from these investments, when brought to India, suffer tax unlike domestic dividends which are tax free in
the hands of the recipients. A special tax regime of taxing dividend income from foreign companies at the rate 15
percent was enacted by Finance Act 2011 and which was further extended by one year by Finance Act, 2012,
however has not bolstered the Corporate India’s inclination to repatriate profits back to India. Further, capital gains
tax regime for unlisted companies not being beneficial compared to total exemption on long term capital gains from
sale of shares of companies listed in Indian stock exchange, the gains derived by overseas holding companies from
divesture in overseas operating companies are retained at overseas hold Co level.
Issues
•
Dividend income earned from Indian companies is exempt in the hands of the recipient whereas dividend
income received from foreign companies is taxable in the hands of Indian residents at normal tax rates at the
rate of 32.45 percent even if the same are already taxed in the foreign country.
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•
Long Term Capital gains earned by Indian Holding Company from transfer of shares in foreign companies is
taxable in India at the rate of 20 percent.
•
Capital gains arising pursuant to certain business restructuring overseas (viz. amalgamation of foreign companies
held by Indian company, demerger) are not exempt.
Recommendations
With the signs of weakening economy and liquidity, beneficial tax regime for repatriation of dividend and capital
gains would provide sustainability to India’s growth story.
FICCI recommends that such dividends received out of tax paid profits overseas and subjected to withholding tax in
those jurisdictions, should not be subjected to further tax in India on remittance. Indeed, the US example has shown
that when corporates are permitted to repatriate dividends tax free, there is significant flow of funds. Inward
remittance of forex at this point of time would be a very welcome step for our economy. FICCI strongly recommends
that tax on dividends from overseas be done away with.
In the alternative, tax on such dividends should be treated akin to minimum alternate tax, creditable against the
normal tax liability and payable only if the tax on normal income is less than the tax on such dividends.
Capital Gains
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It is further recommended that capital gains income earned by an Indian resident/ Indian Company should be
fully exempt from income-tax in India provided the Indian resident/Indian Company holds a specified percentage
of shares in the foreign company (say 20 percent).
Overseas Business Restructuring
At times foreign companies in which Indian company has investment either merge with other foreign companies or
demerge a division into a separate company. Though such transactions are generally not taxable in the foreign
country, there are no express provisions under the Act which exempt exchange of shares arising from such merger or
demerger by the Indian parent. Accordingly, the scope of Section 47 of the Act (dealing with the provisions for
transactions excluded from the purview of transfer) should be extended to cover transfer of shares in a foreign
company by a resident or domestic company pursuant to a merger or demerger abroad, provided that such merger
or demerger is exempt from tax under the domestic tax laws of the foreign country in which such merger or
demerger takes place.
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Withholding tax obligation on payments to a non-resident [Section 195 of the Act]
4.16.8. Withholding tax obligations on non-residents who do not have a place of
business in India
The Finance Act, 2012 extended the obligation to withhold taxes to non-residents irrespective of whether the nonresident has—
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.”
The aforesaid amendment was introduced with retrospective effect from 1 April 1962.
Issue
The amendment will result in a significant expansion in the scope of withholding provisions under the Act and will
cover all non-residents, regardless of their presence / connection with India.
Recommendations
•
Applicable rules of statutory interpretation read with Section 1(2) of the Act, indicates that Section 195 of the
Act as currently in force should not apply to non-residents
•
This view found acceptance in the decision of the Supreme Court in the case of Vodafone International Holdings
B.V.2 where it was observed that the provisions of Section 195 of the Act would not apply to payments between
two non-residents situated outside India. The Supreme Court also referred to tax presence as being a relevant
factor in order to determine whether a non-resident has a withholding obligation in India under Section 195 of
the Act.
•
The amendment by the Finance Act, 2012 however seeks to expressly extend the scope of withholding tax
obligations to all persons including non-residents, irrespective of whether they have a residence / place of
business / business connection or any other presence in India.
•
The extension of withholding tax obligation to all non-residents without regard to their presence/connections in
India would place an excessive and unwarranted compliance burden on non-residents. Hence the amendment
should be modified to restrict the applicability of withholding tax provisions to residents and non residents
having a tax presence in India.
•
In the alternative, the amendment should be made effective only prospectively. Making such a provision
applicable with retrospective effect will operate harshly on persons who may have made payments based on the
law prevalent prior to the amendment.
2
Vodafone International Holdings B.V. v. Union of India [2012] 345 ITR 1 (SC)
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4.16.9. Withholding tax from payments to non-residents that have an India branch or a
fixed place Permanent Establishment (PE) in India
Issue
The corporate tax rate for non-resident companies being 42.02 percent on net basis, results in requiring the nonresident company file tax returns to claim refund of excess tax collected. This creates cash flow issues for the nonresident company making operations through an Indian branch unviable, when compared with its Indian
counterparts. This additionally requires the non-resident company to mandatorily approach the Tax Authority to seek
a lower withholding tax order, the process being time-consuming and non-taxpayer friendly. Often, the non-resident
company faces a lot of difficulties justifying its request for a lower withholding tax certificate in the initial years of its
operations, when it has no past India assessments justifying its request for a lower withholding tax certificate. From
the Tax Authority's perspective, this results in excess tax collection by way of Withholding tax only to be refunded
later together with interest in addition to significant administrative burden which may not be commensurate with
the benefits of an efficient tax collection mechanism.
Recommendations
•
For an effective solution to this issue, one may refer to the Vijay Mathur Report on Non-Resident Taxation
(January 2003) which advocates treating non-residents with a branch office at par with residents for the purpose
of Withholding tax payments. Illustratively, it provides as follows:
“4.13.2 Non-residents having Branch Office/Project Office in India and performing work covered u/s 194C
should be considered at par with the residents for withholding tax purposes and as such the same rate of
withholding tax should apply to payments made to them. The Working Group recommends that suitable
amendment should be made for this purpose.”
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In line with the aforesaid principle, it is recommended that payments which are in the nature of business income
of non-residents having an India branch office or 'a place of business within India' under the Companies Act,
1956 as explained earlier should be subject to similar tax withholding requirements as in case of payments to
domestic companies (residents). At the beginning of a tax year, the non-resident taxpayer who has an India
branch office or 'a place of business within India' under the Companies Act (registration with the Companies Act)
should be permitted to admit PE and opt for a Withholding tax mechanism as is applicable to a resident
company. Being treated at par with resident companies would encourage the non-resident to voluntarily obtain
PAN and file the requisite tax and other returns with the Indian Tax Authority. It would also go a long way in
facilitating ease of doing business in India and the Tax Authority would be in a position to better monitor and
regulate such non-resident companies. Further, it would also achieve the stated objective in the Kelkar Report
(December 2002) to abolish the system of approaching the Tax Authority for obtaining certificates for deduction
at lower rates and minimize the interface between the taxpayer and Tax Authorities. Significantly, it would send
positive signals to the global community on the ease of establishing a place of business within India/doing
business in India.
4.16.10. Applicability of Section 195 of the Act to individuals
Issue
•
As per the provisions of Section 195, 'any person' responsible for paying to a non-resident any sum chargeable
under the Act is required to comply with the withholding tax provisions. Thus, even an individual is required to
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comply with the withholding tax provisions vis-à-vis payments made to a non-resident, for e.g. purchase of
property, payment of rent, etc. This creates undue hardship for the individual of compliance i.e. obtaining TAN,
depositing tax with the Government, filing of TDS return, issue of TDS certificate, etc.
Recommendation
•
Hence, it is suggested to exclude individuals from the withholding provisions of Section 195 of the Act.
4.17. Refund of tax withheld under Section 195 of the Act
Issue
•
Currently, for grant of refund of tax withheld under the provisions of Section 195 of the Act to the payer in the
case of net-off tax contracts, one of the conditions to be fulfilled is that the recipient should not have filed a
return of income in India. In this connection, it needs to be appreciated that if the payer has not issued the TDS
certificate to the recipient, the refund of the amount withheld under Section 195 of the Act should be granted to
him irrespective of whether or not the non-resident recipient has filed a return of income in India. This is more
so because the recipient may have earned certain other income(s) from India which are liable to tax in India and
it is in the regard that the non-resident may have filed a return of income in India. In such a scenario, the person
making the payment faces an undue hardship vis-à-vis obtaining refund of the tax withheld under Section 195 of
the Act.
Recommendation
•
The intention of the Legislature appears to be that the non-resident recipient should not have claimed the credit
in respect of the tax withheld under the provisions of Section 195 of the Act. Thus, it is suggested that the
requirement of non-resident having not filed a return of income in India should be done away with in a case
where the payer has not issued any TDS certificate to the payee.
4.18. Mandatory application to AO to determine sum chargeable to tax
Finance Act 2012 has introduced sub-section (7) to Section 195 of the Act under which it is mandatory to make an
application to the AO to determine the appropriate proportion of sum chargeable under the Act
This provision will apply to notified persons/cases and will apply regardless of whether such transaction is chargeable
to tax or not
Issue
•
Requiring compulsory clearance from the Income-tax authorities on notified overseas payments will add to the
compliance burden and can impact legitimate commercial activities
Recommendations
•
The Supreme Court in the case of GE India Technology Centre observed that, there exists no obligation to deduct
tax under Section 195 of the Act unless sum payable to the non-resident is 'chargeable' under Act.
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The sub-section (7) of section 195 of the Act imposes mandatory requirement in the case of notified persons /
cases of making an application to the tax officer for an order determining the taxability of payments being made
to the non residents, irrespective of whether such payment is chargeable to tax in India or not.
•
Considering the volume of international transactions/payments, the imposition of a requirement to obtain
clearance from the tax office would prove very onerous and slow down the pace of commercial transactions. It is
submitted that the present system of reporting together with withholding tax enforcement provisions are
sufficient to ensure appropriate deduction of tax on overseas payments. Hence the section 195(7) should be
deleted
•
In any event, the list of persons/cases to be notified under this provision should be tailored narrowly so as to not
affect genuine commercial transactions
4.19. Obligation to obtain CA certificate for remittance abroad against import of goods
Issue
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As per section 195(6) of the Act read with Rule 37BB of the Rules, a person making remittance to a non-resident
is required to submit Form 15CA electronically on the website designated by the income tax department and is
further required to get a certificate from a Chartered Accountant in Form 15CB in respect of the particulars filled
in Form 15CA. The requirement to obtain an undertaking in Form 15CB even in respect of transactions which are
not chargeable to tax in India like import of goods/raw materials adds to the compliance cost of Indian payers.
Recommendation
•
It is recommended that a specific relaxation be provided to the importer of goods/raw materials from obtaining
a certificate in Form 15CB from a Chartered Accountant and a residuary field may be inserted in Form 15CA for
specifying the purpose of payment. The recommendation if accepted will not affect the working of the revenue
department in identifying such transactions and at the same time will relieve the payers from the unnecessary
burden of obtaining CA certificates.
4.20. Threshold limit for deduction of tax under section 195
Issue
•
Currently, there is no threshold limit prescribed under section 195 of the Act unlike in section 194C, 194J, 194I of
the Act for deducting tax at source. Thus, making payments to non-residents even for a smaller amount triggers
withholding tax and casts an onerous responsibility of various compliances to be made by the payer.
Recommendation
•
It is recommended that a minimum threshold limit for deduction of tax at source under section 195 of the Act
may be prescribed. This will not have much effect on the tax revenues generated from these transactions,
however, will provide immense relief to the small payers/payees.
4.21. Tax Residency Certificate (TRC)
Finance Act 2012 has introduced an amendment in Section 90 of the Act which provides that obtaining a TRC with
prescribed particulars will be mandatory for claiming relief under the tax treaties. The CBDT (vide Notification No.
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S.O. 2188 (E) dated 17 September 2012) has introduced Rule 21AB with effect from 1 April 2013. The CBDT
Notification contains various particulars that a valid TRC should contain.
Issues
•
Every country/jurisdiction may not issue a TRC containing the prescribed particulars and this could result in the
revenue authorities denying the tax treaty benefits due to procedural issues, even though the taxpayer may
otherwise be entitled to avail tax treaty benefits.
•
Depending on the jurisdiction, obtaining a TRC certificate may also be a time consuming/difficult process. TRC
requirement increases the administrative difficulty for non-residents, especially from the perspective of nonresidents having very few/limited transactions connected to India.
•
The TRC format specified in the CBDT notification could increase the compliance requirements and issues for
deductors. For example, the CBDT notification requires a valid TRC to specify the period for which the certificate
is valid. Therefore, while the deductor would like to obtain the TRC at the time of the transaction/deducting the
tax (to ensure that the payee is eligible for the tax treaty benefits), it would pose a hardship to the payee to
obtain a TRC before the end of the relevant financial year. The procedure so cast would pose onerous
responsibility both on the payers/payee resulting in holding of payments by the payer.
•
It is unclear whether the requirement of furnishing TRC to the Indian tax authorities would be effective from
financial year starting from April 1, 2012 or April 1, 2013.
•
As per the new Rule an Indian resident who wishes to obtain TRC from Indian income tax authorities, is required
to make an application in Form No. 10FA to the tax officer, containing prescribed details. However, no time limit
for issue of TRC is specified from the date of application by the assessee. Furthermore, the issue of TRC in Form
No. 10FB has been left to the discretion of satisfaction of the tax officer, without providing a substantive
definition for satisfaction in this regard.
Recommendations
•
At the outset, our suggestion would be to delete the provision in total. At assessment stage, it is anyway
incumbent upon the AO to ascertain complete details before allowing tax treaty benefits. There may be
circumstances wherein the taxpayer who is a bona fide tax resident of the other contracting state is unable to
procure a TRC owing to circumstances outside his control. In such a scenario, even though the AO may otherwise
be satisfied that the tax treaty benefits must be allowed, only owing to the procedural lapse of not obtaining the
TRC which is beyond the tax payer's control, the AO would be compelled to deny tax treaty benefits, which will
cause needless hardship. Therefore, the above provision may be deleted.
•
Without prejudice, even if the provision must stay, it should suffice if the taxpayer obtained a valid TRC from the
concerned authorities without requiring it to comply with any particulars (which are prescribed). It will be
difficult to obtain the TRC as per the format prescribed under the Indian laws from an offshore jurisdiction as the
offshore authorities may not agree with the kind of particulars prescribed. It is also recommended that the
requirement to obtain TRC shall be made mandatory only for cases where the total payment to a non-resident
exceeds Rs. 1 crore in a financial year. This would mitigate hardship in respect of small payments.
•
It is further recommended that the requirement to furnish TRC should be cast upon the payee at the time of the
assessment of the payee and the deductor/payer should not be made liable to collect TRC from the payee at the
time of withholding tax.
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It should be appropriately clarified that the requirement to furnish TRC is effective from financial year 2013-14 as
against assessment year 2013-14 mentioned in section 90 and 90A of the Act.
•
It is recommended that the time limit to issue TRC in Form 10FB should be specified and to further specify that
in case the tax officer refuses to issue a TRC, the application of the assessee should be disposed by the tax officer
by passing a speaking order and clearly specifying the reasons for rejecting the application of assessee.
4.22. Meaning of terms not defined in a tax treaty
Any meaning assigned through notification to a term used in an agreement but not defined in the Act or tax treaty,
shall be effective from the date of coming into force of the tax treaty
(Section 90(3) - Amendment retrospective from 1 October 2009, Section 90A, Explanation 3-- Amendment
retrospective from 1 June 2006)
Issues
•
Any meaning notified will have a retrospective effect from the date when the tax treaty was signed causing
uncertainty and hardship to the taxpayers
•
This provision is also contrary to Government's intent of reviewing retrospective amendments, which have
caused grave concerns to overseas companies over stability in tax policy and considered positions.
Recommendations
As per Article 3 of the UN and OECD Model Convention:
•
“As regards the application of the Convention at any time by a Contracting State, any term not defined therein
shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State
for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that
State prevailing over a meaning given to the term under other laws of that State”.
Further, as per the UN and OECD Model Commentaries on Article 3:
•
In case of terms not defined in the tax treaty, when a conflict arises between the law in force when the
Convention was signed and that in force when the Convention is applied, the latter should prevail. This has now
been expressly codified in the Model Convention.
•
The above approach provides a satisfactory balance between, the need to ensure the permanency of
commitments entered into by Contracting States when signing a convention (since a Contracting State should not
be allowed to make a convention partially inoperative by amending afterwards in its domestic law the scope of
terms not defined in the Convention) and, on the other hand, the need to be able to apply the Convention in a
convenient and practical way over time (the need to refer to outdated concepts should be avoided).
Therefore, the accepted principle is that, generally, the meaning ascribed to a particular term at the time when a tax
treaty is being interpreted should be applied. Based on the proposed explanation, the definition notified under
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Section 90(3) or Section 90A(3) of the Act shall take effect from the date of coming into force of the tax treaty and
not from the date of the notification itself. In other words, the notification of the definition will have a retrospective
effect. Whilst the conventions do recognise the ambulatory approach of interpreting terms not defined in the tax
treaty, making such changes with retrospective effect will lead to needless hardship on the taxpayers and an unfair
expectation to be aware of a definition, which was not in existence when the arrangement / transaction was put into
place. This will lead to uncertainty, re-opening of assessments etc, which can be avoided.
Even pursuant to a notification, there is more liberal interpretation supplied to a particular term, a taxpayer may not
necessarily be able to easily claim refund / credit of taxes paid in earlier years.
It is recommended that any definition notified under Section 90(3) Section 90A(3) of the Act should apply
prospectively.
4.23. Advance Ruling
The Authority for Advance Rulings (AAR) is established to ensure a simple, inexpensive, expeditious and authoritative
procedure for seeking conclusive Rulings on taxation of a non-resident in respect of Indian income-tax implications. It
is seen becoming more and more indispensible as trade and commerce are getting more global and complex.
While the AAR mechanism continues to gain favorable responses in India and is highly looked upon as an alternate
Dispute Resolution mechanism, there remains scope for some clarifications / amendments in the existing provisions
to ensure that the underlying objectives behind setting up of the AAR are purposefully achieved. Towards this, some
suggestions/recommendations are under:
4.23.1. Scope of Advance Ruling for non-resident applicant
Issues
Sub-clause (i) to Clause (a) of Section 245N of the Act defines an Advance Ruling to mean a determination by the
Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident
applicant.
It is seen that the said sub-clause is silent on the nature of determination when compared to sub-clause (ii) of
Section 245N of the Act which specifically refers to determination in relation to the tax liability of non-resident
arising out of a transaction with a resident.
Recommendation
Hence, it is suggested to suitably employ an explicit language to facilitate easy interpretation of the legislature intent
in defining the scope for maintainability of the application before the AAR with respect to non-resident applicant.
4.23.2. Determination of Residential Status for non-resident applicant
Issue
Clause (b) of Section 245N of the Act defines applicant to inter alia include a non-resident. However, the provision
fails to stipulate in specific terms the point of time an applicant is considered to be a non-resident. As it devolves
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from the other provisions of the Act, as also from the Rulings pronounced, the residential status would have to be
determined with reference to a particular year and not with reference to a particular date. Accordingly, it appears
that non-residential status of an applicant has to be determined with respect to the previous year immediately
preceding the financial year in which the application is made, even though as on the date of application the applicant
has become a resident.
Recommendation
In this context, it is suggested that an express mention on the determination of the residential status is hereby
required so that the admission of application is not rejected merely on maintainability.
4.23.3. Time limit for withdrawal of application
Issue
Section 245Q of the Act provides an option to the applicant to withdraw the application within a period of 30 days
from date of making an application. Such a time limit fails to serve any purpose since practically even the first
hearing does not happen within the time span specified. It is however seen that the applicant is not precluded from
withdrawing the application even after the specified time with the permission of AAR.
Recommendation
In such a scenario and keeping in mind the interest of justice, it is hereby suggested that the period should be
suitably extended so as to enable the applicant to withdraw its application anytime before the application is
admitted/heard.
4.23.4. Time limit for Commissioner of Income tax to furnish his observations and
relevant records
Issue
Section 245R of the Act stipulates to provide a copy of the application to the jurisdictional Commissioner of Income
tax (CIT) and if necessary to call for relevant records. Further, the Rule 13(2) of the Authority for Advance Rulings
(Procedure) Rules, 1996 also empowers the AAR to call for relevant records along with comments from the CIT, if any,
on the contents of the application. However, the Section as well as the mentioned Rule is silent on the time frame
within which the CIT is required to furnish the relevant records called and provide his comments, if any, on the
content of the application. It is seen in many cases that the CIT does not reply within a reasonable period of time
which delays the procedure for the admission of the application.
Recommendation
In view of speedy disposal of the matters, it is suggested that a time limit should be introduced and be made
mandatory for the CIT to follow as regards providing his observations and relevant records.
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4.23.5. Satisfaction of conditions mentioned in the Proviso
Issue
First proviso to sub-section (2) of Section 245R of the Act stipulates that the AAR shall not allow an application where
the question (i) is already pending before any Income Tax Authority or the Tribunal or any court, (ii) involves
determination of fair value of any property, and (iii) relates to a transaction or issue that it is prima facie designed to
avoid income-tax. A bare reading of the Section, as also from the Rulings pronounced, it appears that satisfaction of
the conditions has to be examined as on the date of the application. However, the recent Ruling of the AAR has held
that Section 245R of the Act is an integrated section not only dealing with the admission of an application but also its
final disposal and the mere fact that the disabilities are placed at the earlier stage, cannot lead to the position that
the disabilities should be ignored even when they become discernible when the application is taken up for final
disposal.
Recommendation
In such a scenario, it is suggested that the legislature should explicitly mention point of time for allowing the
application. The mentioned conditions need to be satisfied and frame clear guidelines as to what would constitute
'prima facie' tax avoidance circumstances.
4.23.6. Time limit for disposal of Advance Ruling
Issue
Sub-section (6) of Section 245R of the Act stipulates a time limit of six months from the date of application to
pronounce the Advance Ruling. However, as deduced from the Rulings pronounced and reference to handbook
issued by the AAR, it appears that the time limit is flexible and not mandatory to follow.
Recommendation
As the AAR was set-up with an underlying intent to expedite the disposal of income-tax issues, it is hereby suggested
that the time limit so specified should be adhered to and made mandatory.
4.23.7. Binding Nature of the Precedent
Issue
Section 245S of the Act which provides for the binding force of the Ruling pronounced, fails to address whether the
AAR would be bound by an earlier Ruling pronounced by it. With judicial precedents specifying that the Ruling only
has a persuasive value, it is seen that the recent Rulings of AAR taking divergent views from the stand already taken
earlier by the AAR for similar legal and factual situations.
Recommendation
Hence, with a view to establish consistency, correct legal position and to avoid conflicting Rulings on similar facts, it
would be appreciated if the Legislature suitably incorporates provisions giving effect the binding nature of the earlier
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Rulings of the AAR. Alternatively, in case the current bench of the AAR does not agree with a Ruling pronounced
earlier, the matter may be referred to a larger bench as done in the Tribunal. Suitable provisions to the above effect
may be introduced / inserted.
4.23.8. Constitution of additional Benches
Recommendation
It is suggested that in view to speed up the well-established judicial process, another bench of AAR should be
constituted at Mumbai which has a large number of taxpayers or at any other place where the volume of work so
justifies, in addition to the current bench stationed at New Delhi.
4.23.9. AAR mechanism to be extended to all resident applicants
AAR was introduced in India in 1993 as an alternate dispute resolution forum with an underlying objective of
facilitating the non-residents to ascertain their tax liability well in advance and to provide recourse to avoid long
drawn and expensive litigation under the regular course of assessment and appeal procedures. The AAR's jurisdiction
was originally confined to pronouncing rulings in cases of non-residents till it was enlarged to include cases of only
notified residents (i.e. Public Sector Company).
Issues
On conjoint perusal of sub-clause (iii) to clause (a) of Section 245N and sub-clause (iii) to clause (b) of Section 245N
of the Act along with Notification No. So 725(E) dated 3 August 2000, it transpires that the benefit of the Advance
Ruling mechanism is inter-alia available to resident applicant being Public Sector Companies, only if the issue is
relating to computation of total income and the same is pending before any Income Tax Authority or the Income-tax
Appellate Tribunal.
Such a forum is thus not available to (a) all resident applicants; and (b) for their domestic transactions which are
proposed to be entered into with other resident taxpayers, resulting in disparity between the non-resident applicants
and resident applicants.
Recommendations
Hence, it is suggested to suitably amend the provisions of Chapter XIX-B of the Act to extend the benefit of Advance
Ruling mechanism to all resident applicants (including Public Sector Companies) for their domestic transactions
proposed to be entered into with other resident taxpayers.
This would be of great advantage to resident applicants who can pre-empt their income-tax liability arising out of
high value / structuring transactions. Further, such mechanism will lend a degree of decisiveness and certainty,
provide more consistency in the application of the law, minimize controversies and result in good relations between
tax administrators and the taxpayers and thus reduce the litigation before the courts of law.
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4.23.10. Admissions of applications by AAR even where return of income has been
filed
Issues
Recently, it has been seen that the AAR has rejected various applications filed by the applicants on the ground that
the tax return has already been filed before the AAR application has been filed. This is because filing of tax return has
been construed as case pending before an Income Tax Authority and going by the rules governing AAR, the latter
cannot entertain a case which is pending before an Income Tax Authority. This stand of the AAR has also been
affirmed by the Delhi High Court in a recent ruling in the case of Netapp BV3 and Sin Oceanic Shipping ASA. The High
Court has held that if a company files an income tax return, then it would lose the right to seek a Ruling from the
AAR. Since the AO has the right to issue notice after the taxpayer files return, the latter becomes obligated to
disclose the details sought by the AO. Therefore, the issue can be treated as one pending before the AO.
The rationale behind introducing the AAR was to significantly faster dispute resolution process as compared to
normal litigation process and to sort out complex international tax issues which may not be appreciated by lower
level tax authorities. The applicants approach the AAR to seek certainty on taxability of transactions undertaken/to
be undertaken by them and upfront crystallization of tax implications of proposed transactions.
If such a stand is followed by the AAR, the applicants will lose the right to move to the AAR in a large number of cases
and it would cause genuine hardship to the applicants if their right to seek advance ruling is lost merely by filing
income tax return. This may prove to be a deterrent on the mechanism of the AAR and may discourage the
applicants from moving to the AAR.
Recommendations
It should be clarified that filing of income tax return will not be construed as case pending before the Income Tax
Authority and the AAR can still entertain applications where return of income has been filed by the applicant. Till the
time the AO issues the notice initiating the assessment proceedings, the applicant will have the right to apply for
Advance Ruling before the AAR and the same will be admitted by the AAR.
This will help in propagating the mechanism of AAR and will provide an opportunity to a large number of applicants
to seek clarity and certainty on various complex international tax issues faced by them.
4.24. Tax Incentives and benefits
Tax incentives by way of exemptions and deductions are designed to create economic security, promote asset
creation, accelerate the pace of industrial production, enhance exports, provide employment opportunities, remove
regional imbalances and provide social welfare.
The present tax holiday regime has over the years continuously attracted investment into these priority sectors
despite some of them being characterized by long gestation periods and red tapism. Motivation to continue
channelization of investments into these sectors is largely dependent on the tax incentives these industries enjoy.
3
Netapp B.V. v. AAR [2012] 24 taxmann.com 174 (Del)
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Hence it is crucial that the Government consider retaining attractiveness of these sectors by continuing with the
present tax holidays, removing existing ambiguities and extending the benefits to additional sectors as may be
warranted for improvement of the country's infrastructure and economic development.
Profit-Linked Incentives
4.24.1. Phase out of profit-linked incentives for industries
Issues
•
Undertakings engaged in generation, transmission, distribution, modernization of existing network for power are
currently eligible for tax holidays with regard to profits generated from such business. The same has helped
attract investment, both domestic and foreign into the sector. Despite being a priority sector for the Government
and the large investments drawn into the sector for capacity addition, the Governments mission 'Power for all by
2012' appears a distant dream. Greater capacity addition and renewal/ modernization of existing networks will
require substantial investment. Phasing out of the tax incentives for the industry will dampen growth and
investment in the sector.
•
Similarly, tax holiday for industrial parks has been phased out. Tax holiday enjoyed by the sector has pushed
industrialization and resulted in a spurt of industry hubs created such as for information technology,
manufacturing, warehousing, etc, across the country. Large scale developments such as an industrial park
require significant investment, which holds attractiveness on account of the tax benefits enjoyed by the sector.
Withdrawals of the incentives will surely slower investment into the sector owing to the significant upfront
capital commitment required.
Recommendation
The profit-linked incentives currently given for infrastructure and crucial sectors should be continued till the end of
12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's power and industrial sector.
4.24.2. Phase out of profit-linked incentives for industries and replacement by
investment linked incentives
Issues
•
The current provisions of the Act provide profit-linked incentive to infrastructure sectors and other critical
sectors such as telecom, power, etc. The Direct Taxes Code, 2010 (DTC proposed to be) effective from 1 April
2013, intends to substitute all profit-linked incentives with investment linked incentives. Under the proposed
DTC, the infrastructure companies eligible for the tax holiday as on 31 March 2013 under the current provisions
of the Act would be permitted to grandfather the tax holiday under the proposed DTC subject to the prescribed
conditions.
•
The existing profit-based incentives in our country have greatly motivated in channelizing huge investments into
priority sectors of the economy such as infrastructure, exports and energy etc thereby fortifying the country in
attaining high growth rates over the last two decades and putting in on the path of energy security.
•
It is therefore imperative that that these incentives, more importantly for infrastructure development including
power sector, fertilizer sector, hydrocarbon sector, cement industry and export promotion, are not only
continued but strengthened further for maintaining the growth momentum of the country.
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Recommendation
The profit-linked incentives currently given for infrastructure and crucial sectors should be continued as such, even
under the proposed DTC. This is due to the fact that even with the current tax incentive, the IRR (Internal Rate of
Return) achieved by most of the projects in such sectors are not sufficiently attractive for bankers and lenders, and
financing of these projects is proving to be a difficult exercise. Given the huge capital investments and wafer-thin
margins plaguing these sectors, the substitution of profit-linked incentive by investment-linked incentive may lead to
an adverse impact in terms of financial crunch and non-availability of funding.
4.24.3. Phase out of profit-linked incentives for certain undertakings in Special
Category States
Issue
•
The tax benefit under section 80IC for specified under takings in certain special category states was valid till 31st
March, 2012 and has not been extended further. In the context of the difficult economic situation in India and
low growth in the industrial sector, it is necessary to encourage industry to invest in the backward states in the
country. This will address the issue of unequal and lopsided growth, which continues at the present juncture.
Recommendation
•
FICCI recommends that the aforesaid tax benefit be extended for a few more years to bring about balanced
development till the economy gets back to a higher growth trajectory
4.24.4. Substitution of profit linked incentives for specified industries with investment
linked incentives and abolition of Minimum Alternate Tax (MAT) for
infrastructure industry
Issues
•
Budget 2009 introduced Section 35AD of the Act, wherein extending tax incentives to specified industries (cold
chain facilities, 2 star hotels, hospitals, affordable housing, housing projects under a scheme for slum
development or rehabilitation, warehousing for storage of agricultural produce, laying and operating a crosscountry natural gas or crude or petroleum oil pipeline and production of fertilizer in India, inland container
depot, container freight station, bee-keeping and production of honey and bee wax, warehousing for storage of
sugar) with respect to the capital expenditure incurred for set up and operation of such specified business.
Further, once a deduction for the capital expenditure is availed under this Section, no deduction shall be allowed
in respect of such specified business under Chapter VI-A (Deductions in respect of certain incomes).
•
With the introduction of Section 35AD of the Act, the envisaged 'specified businesses' would instead of enjoying
a deduction of the profits earned (as is envisaged under the Chapter VI-A deduction), in addition to depreciation
of the capital investment on creation of the assets, would now be eligible to claim a complete
deduction/weighted deduction for the entire capital expenditure incurred in set up of the specified business. In
effect, the deduction under Section 35AD of the Act is nothing but an alternate form of accelerated deduction
for the capital expenditure in the specified business and no real benefit is being extended to these industries.
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•
Additionally, with investment linked incentives, the cash flows of these capital intensive industries would suffer
on account of levy of MAT. This is because book profits will continue to be higher than taxable profits (given that
deduction for capital expenditure is not taken to the profit and loss account other than in the form of
depreciation) and hence MAT will be paid by the industry during the 'tax holiday period'. While MAT is creditable
against normal taxes in future, the period for recovery of MAT paid could result in being longer than under profit
linked incentives. `Further, given the restriction on the years for carry forward of MAT, it is possible that MAT paid
in initial years may not be recovered, especially for those taxpayer who have a longer period before reaching
break-even.
Recommendations
•
The profit-linked incentives currently given for infrastructure and crucial sectors should be continued till the end
of 12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's infrastructure sector.
•
It should be considered to do away with MAT for the infrastructure industry as levy of the same defeats the very
purpose of extending tax incentives to the industry, especially given the high rate of MAT now.
•
While the same would have some revenue implications, but only from a short-run angle, FICCI is confident that
in the ultimate analysis the Government would continue enlarging its revenues by way of manifold direct and
indirect tax collections arising out of improved competitiveness of manufacturing and services sectors.
Investment-linked Incentive
4.24.5. Tax incentive under Section 73A vis-à-vis incentive as provided under Section
35AD
Issues
•
The concept of investment-linked incentive was introduced vide the Finance (No.2) Act 2009 by inserting Section
35AD of the Act.
•
In terms of the said Section 35AD of the Act, a taxpayer is allowed a deduction in respect of the whole of any
expenditure of capital nature incurred (other than on land, goodwill or financial instruments), wholly and
exclusively, for the purposes of any specified business carried on by him during the previous year in which such
expenditure is incurred by him.
•
For this purpose, 'specified business' means any one or more of the following business, namely:•
setting up and operating a cold chain facility;
•
setting up and operating a warehousing facility for storage of agricultural produce;
•
laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution,
including storage facilities being an integral part of such network;
•
building and operating, anywhere in India, hotels of two-star or above category as classified by the Central
Government;
•
building and operating, anywhere in India, hospital with at least one hundred beds for patients;
•
developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed
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by the Central Government or a State Government, as the case may be, and notified by the Board in this
behalf in accordance with the guidelines as may be prescribed;
•
•
developing and building a housing project under a scheme for affordable housing framed by the Central
Government or a State Government, as the case may be, and notified by the Board in this behalf in
accordance with the guidelines as may be prescribed;
•
production of fertilizer in India;
•
setting up and operating an inland container depot or a container freight station notified or approved under
the Customs Act, 1962;
•
bee-keeping and production of honey and beeswax;
•
setting up and operating a warehousing facility for storage of sugar.
The underlying idea behind allowing the said deduction seems to be intended to enable the taxpayer concerned
to set-off the business losses incurred by this write-off against the taxable profits from their existing businesses
and reduce their tax liability in the year of deduction and thereby to provide part of the resources of investment
required for setting up of the businesses. Unfortunately, however, the incentive so intended cannot be achieved
owing to the insertion of another Section 73A of the Act, which restricts the set-off / carry-forward of losses by
specified business only against the profits and gains, if any, of any other specified business carried on by the
taxpayer in that assessment year and the amount of loss not so set-off can only be carried forward and set-off
against profits from specified business in the subsequent assessment years.
Recommendation
The losses from the specified business under Section 35AD of the Act ought to be made eligible for set-off against
profits from other businesses of the taxpayer, and not restricted to be set-off against only the specified businesses,
as it is not always the case that the taxpayer would only be carrying on the 'specified business'. In light of this,
Section 73A of the Act should therefore be deleted.
4.24.6. Whether the amendment to Section 35AD(3) means that the taxpayer has a
choice to either claim benefit under section 35AD or Chapter VI-A
Issues
•
It appears that the above amendment to Section 35AD(3) of the Act carried by the Finance Act, 2010, seeks to
prevent a taxpayer from claiming dual deduction in respect of the same business.
•
Accordingly, it appears that if a taxpayer carrying on a specified business does not claim deduction under Section
35AD, he can claim deduction under the relevant provisions of Chapter VI-A, if the same exist for such business
and if the exercise of such a choice is more beneficial.
Recommendations
•
A clarification be issued that the taxpayer may exercise a choice (where available to the taxpayer) to avail tax
incentive under section 35AD or Chapter VI-A, depending upon which is more beneficial to the taxpayer and thus
clear the ambiguity as currently existing.
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•
Further, it is suggested that a clarification also be issued that in the event the taxpayer opts for the investment
linked incentive under Section 35AD of the Act and the same is denied/ rejected at time of revenue audit (could
be on account of non-satisfaction of prescribed conditions), in such case the taxpayer is eligible to make an
alternative claim under Chapter VI-A on satisfaction of the conditions provided therein notwithstanding the
requirement stipulated in Section 80A(5) of the Act. This is because, a taxpayer who is otherwise entitled to
deduction in respect of qualifying profits of the specified business would lose such deduction on account of
Section 80A(5) of the Act that mandates a claim for deduction under Chapter VI-A be made in its tax return. As
the taxpayer would not have claimed deduction under provisions of Chapter VI-A in its tax return in view of a
claim being made under Section 35-AD of the Act, such taxpayer would be precluded from claiming deduction in
view of Section 80-A(5) of the Act.
4.24.7. Investment linked tax incentive under Section 35AD
Issues
•
Section 35AD of the Act extended investment linked tax incentive to a taxpayer engaged in building and
operating anywhere in India a 2-star or above category hotel. The same is a restrictive tax incentive to the
industry as only such taxpayers are eligible which are engaged in both building and operating the hotel. Similar
restriction exists for the hospital industry, wherein the tax incentive is available for 'building and operating
anywhere in India a hospital with at least 100 beds for patients.
•
Thereafter, vide Finance Act, 2012 with retrospective effect from 1 April 2011, a new Section 35AD(6A) was
inserted, which extended investment linked tax incentive to a taxpayer engaged only in 'building' hotel (and
transferring the operation to another person). However, similar benefit was not extended for taxpayer engaged
in building hospital.
•
As can be seen from a plain reading of Section 35AD of the Act, it appears that the benefit under the Section
would not be available in case the person building the hospital is different from the person operating the
hospital. This does not seem to be in harmony with the objective, specifically given the typical operating
structure of the industry wherein very often the developer or builder of the hospital is different from the
taxpayer who is operating and managing the hospital. Considering the said anomaly was removed by the Finance
Act, 2012 vide Section 35AD (6A) for hotel industry by granting investment incentive to a builder (thought not
operating the hotel), similar benefit ought to be extended to a hospital industry.
•
Further, if a person does not build the hotel/ hospital, but acquires the same by purchase or rent or otherwise
for purposes of operation and management thereafter, such taxpayer would not be entitled to the benefits of
this section.
•
Accordingly, to accord benefit to the industry, as is the very purpose of extending the tax incentive to the
industry by amendment of Section 35AD of the Act vide the Finance Act, 2010, the benefit should be made
available to the specified business of 'building' or 'operating' or 'building and operating' a hotel of two-star or
above category anywhere in India. Similar amendment should also be considered for case of hospitals.
Recommendations
In view of the above disconnect, a clarification is required and it is suggested that the relevant clause be amended to
read as under:
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“(aa) on or after 1st day of April, 2010, where the specified business is in the nature of building or operating or
building and operating a hotel of two-star or above category as classified by the Central Government.
Similar, amendment to also recommend for the hospital sector and the relevant clause be amended to read as
under:
(ab) on or after 1st day of April 2010, where the specified business is in the nature of building or operating or
building and operating a hospital with at least one hundred beds for patients”
Consequential amendments should also be considered in clause (iv) and (v) of sub-section (8) of Section 35AD of the
Act.
4.24.8. Weighted Deduction in respect of Capital Expenditure on certain Specified
Businesses
Issues
The following specified businesses commencing operation on or after the 1st of April, 2012 has been allowed a
deduction of 150% (as against 100%) of the capital expenditure under section 35AD of the Income-Tax Act, namely:(i) setting up and operating a cold chain facility;
(ii) setting up and operating a warehousing facility for storage of agricultural produce;
(iii) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;
(iv) developing and building a housing project under a scheme for affordable housing framed by the Central
Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance
with the guidelines as may be prescribed; and
(v) production of fertilizer in India.
The same has been welcomed and is an inducement for setting-up of the above businesses. However, investmentlinked incentive by way of 100 per cent deduction of capital expenditure under section 35AD was introduced by The
Finance (No.2) Act, 2009, with effect from 1st April, 2010 to encourage investment in priority areas for which a
specific list (enlarged over the last two years) is contained in the section. The rationale behind the discriminatory tax
treatment in between these specified businesses is not understandable
Recommendation
It is recommended that the weighted deduction of 150% be extended to the entire list in the said section since all
the said businesses are extremely important for the Indian economy like natural gas/crude pipe line distribution,
hotels etc.
4.25. Restoration of exemption of income from investment in infrastructure and other
projects
Section 10(23G) of the Act provided for tax exemption in respect of any income by way of dividends other than
dividends referred to in Section 115-O of the Act, interest or long-term capital gains of an infrastructure capital fund
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or an infrastructure capital company or a cooperative bank from investments made on or after 1 June 1998 by way of
shares or long-term finance in approved eligible businesses including infrastructure projects, developers of Special
Economic Zones (SEZs), hotel projects of not less than three star category, hospital projects with at least one hundred
beds for patients and certain housing projects. The above exemption played a significant role in attracting investment
towards development of infrastructure projects in India. This exemption was withdrawn by the Finance Act, 2006.
Issue
Consideration by the Government to restore the above exemption of income from investment in infrastructure and
other projects
Recommendation
In view of the increasing need for huge investments in infrastructure and other vital projects, we plead for
restoration of the aforesaid exemption with a view to ensuring low cost of raising capital for such thrust project
areas.
4.26. Tax Incentives - Weighted deduction under section 35(2AB)
Issues
Section 35(2AB) of the Act extends deduction of a sum equal to twice the expenditure incurred towards scientific
research on in-house research and development facility as approved by the prescribed authority to companies
engaged in the business of
•
bio-technology; or
•
manufacture or production of any article or thing (other than those specifically excluded for purposes of this tax
incentive).
The Section extends the weighted deduction of expenditure incurred only in respect of “in-house research and
development facility”. India is globally recognized as an attractive jurisdiction for outsourcing owing to its affordable,
skilled and English-speaking manpower. Outsourced R&D work is becoming a key area of growth for the Indian
services sector however there are no specific tax benefits available to units engaged in the business of R&D or
contract manufacturing. There certainly exists a need to provide impetus to such activities in the form of tax and
fiscal benefits.
Further, specifically in the pharma sector, pharmaceutical discovery is a lengthy, risky and expensive proposition. In
this business environment, necessitated by the current business needs, sometimes companies incur expenses
towards scientific research outside their R&D facility.
Another anomaly existing in the current provisions is that any expenditure incurred outside the approved R&D
facility by pharma companies' i.e. towards clinical trials (including those carried out in approved hospitals and
institutions by non-manufacturing firms), bioequivalence studies conducted in overseas CROs and regulatory and
patent approvals, overseas trials, preparations of dossiers, consulting/legal fees for filings in USA for NCE (new
chemicals entities) and ANDA (abbreviated new drug applications) as approved by the DSIR which are directly related
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to the R&D, etc. are currently not covered. Furthermore, Indian companies incur substantial costs in defending their
patent rights and applications in and outside India and these sums are not eligible for deduction.
Recommendations
•
Extend tax benefits to units engaged in the business of R&D or contract manufacturing rather than just for inhouse R&D facilities to provide impetus to R&D in India.
•
Benefits should be provided for units engaged in the business of R&D and contract manufacturing by way of
deduction from profits linked to investments. Benefits in the form of research tax credits which can be used to
offset future tax liability, similar to those given in developed economies can be introduced.
•
As discussed above, in view of the lengthy, risky and expensive conception period for pharmaceutical discovery,
it should be considered for the existing provisions to specifically allow weighted deduction in respect of
expenses incurred outside the R & D facility which are sometimes necessitated by the industry's business needs.
Additionally it could be clarified that where the risk of doing research is assumed by a company, the entire cost
of R&D activities - whether outsourced or undertaken in-house - is eligible for weighted deduction in the hands
of company undertaking the risk.
•
The existing anomaly in the current provisions, i.e. any expenditure incurred outside the approved R&D facility
by pharma companies' although in relation to the R&D activity is not eligible for the weighted deduction should
be removed. This will further help promote in-house R&D in India.
Issues
In order to claim deduction under the section in-house R&D facility has to be approved by the Department of
Scientific & Industrial Research ('DSIR'). Among various conditions, the DSIR guidelines lay down the following
conditions:(a) The company should enter into an agreement with DSIR for 'co-operation' in such research and development
facility.
The word 'co-operation' shall inter-alia, mean that the company shall be willing to undertake projects of national
importance, as may be assigned to it by DSIR, on its own, or in association with laboratories of CSIR, ICAR, ICMR,
DRDO, DBT, MCIT, M/O Environment, DOD, DAE, Department of Space, Universities, Colleges or any other public
funded institutions. The company would be free to exploit the results of such R&D projects, subject however, to any
conditions which may be imposed by Government of India, in view of national security or in public interest
(b) Assets acquired and products, if any emanating out of R&D work done in approved facility, shall not be disposed
of without approval of DSIR.
It cannot be denied that such conditions, as above, are very restrictive in nature and instead of promoting in-house
research and development, hamper the willingness of corporates to carry out in-house research and development.
Recommendation
FICCI recommends that there is a need to relax these conditions to encourage in- house R&D activities by companies.
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Issue
Currently, there seems to be an ambiguity in the office of Department of Scientific and Industrial Research ('DSIR')
with respect to whether a company engaged in the business of development and sale of software or providing IT
services or ITES is eligible for weighted deduction on the R&D expenditure incurred by it.
Recommendation
Explicit provisions should be introduced in the Act, to remove the ambiguity such that DSIR can approve the R&D
facilities of the companies engaged in development and sale of software. It is further recommended that weighted
deduction for R &D to be extended to service sector as well.
4.27. Deduction under section 80JJAA of the Act
Issues
Currently, section 80JJAA of the Act endows incentive to an Indian company which derives profits from an industrial
undertaking engaged in the manufacture or production of an article or thing, by providing a deduction for an amount
of thirty percent of the additional wages paid to the new workmen for a period of three years beginning with the
year in which new workmen is employed. The deduction is available subject to the satisfaction of the conditions
specified in the section.
The section was inserted in the Act with the intent to create more employment opportunities.
•
One of the conditions stipulated by the section is that new workman should be employed for a period of three
hundred days or more during the previous year of employment. In a situation, where workman joined in July and
worked till March of the relevant previous year of employment i.e. worked for less than 300 days in Year 1 but
for full year in Year 2 and Year 3 and assuming all other conditions prescribed in section 80JJAA of the Act are
complied with, the company is still not eligible to claim deduction in any of the years.
As it can be seen that the deduction is not available to companies engaged in the service sector irrespective of the
same being major contributor of the employment in the Indian economy. Such discrimination is unfair.
Recommendations
•
It is recommended that workmen in respect of whom the period of continuous employment of 300 days or more
is attained in the previous year succeeding the previous year in which the workmen is employed, the deduction
under section 80JJAA of the Act be granted from the succeeding previous year.
•
Extend the benefit of deduction under section 80JJAA of the Act to assessees engaged in the business of
providing service. It will provide impetus to the growth of the service industry in India and will also generate
employment opportunities.
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4.28.
Deduction under section 42 of the Act for Infructuous or Abortive Exploration
Expenses
Issue
•
Section 42 of the Act provides that deduction for infructuous or abortive exploration expenses is not allowed
until the surrender of the area, even though the expenses are already charged off in the books of account as per
the company's accounting practices. Typically, the provisions of the Production Sharing Contract do not require
the area to be surrendered as a prerequisite for claiming the deduction of abortive exploration cost. As a result
of the requirement to surrender the area in section 42 of the Act prior to the beginning of commercial
production, the taxpayer is not in a position to avail the deduction, of expenses on account of abortive
exploration in the year when the areas is considered abortive. This results in undue hardship being faced by the
oil exploration companies in claiming the deduction.
Recommendation
It is recommended that the requirement to 'surrender' the area should be deleted from section 42(1)(a) and
deduction should be allowed from the year in which the area is abandoned as abortive.
4.29. Deduction for Expenditure on prospecting for certain minerals
Issue
As per the existing provisions of the Act, the expenditure incurred by an assessee engaged in any operation relating
to prospecting for, or extraction or production of any mineral during the five year period ending with the year of
commercial production is allowed as a deduction from the total income to the extent of one-tenth of the amount of
such expenditure. Section 35E does not cover capital expenditure. The allowability of even revenue expenditure over
a period of 10 years makes the provision quiet restrictive. Thus, instead of promoting the development of mineral
industry in the country, the existing provision acts as detriment to the development of the minerals in India. India has
huge mineral resources which can be exploited for the benefit of the economy but however, huge expenditure is
required for prospecting and developing various mineral resources. It would be in the fitness of things, if the
Legislature makes a suitable amendment in the Act by allowing the entire revenue expenditure in the year of
commercial production
Recommendation
It is recommended that section 35E be amended to provide that the expenditure incurred at any time during the
year of commercial production and during the prior four years be allowed entirely in the year in which the
commercial production starts.
4.30. Deductibility in respect of subscription to long-term infrastructure bonds
Issue
Section 80CCF of the Act provided for a deduction to an individual or HUF in respect of subscription towards long
term infrastructure bonds (as may be notified by the Central Government) to the extent of Rs. 20,000. This benefit of
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deduction was introduced by Finance Act, 2010 and was further extended in respect of aforesaid subscriptions made
during financial year 2011-12. The rationale of providing this deduction was to promote investment in the
infrastructure sector.
Recommendation
It is recommended that benefit of section 80CCF of the Act be restored from financial year 2013-14 and onwards and
further the limit of deduction be extended to Rs. 50,000.
4.31. Income tax exemption in case of Sale of Carbon Credits
Issue
•
Carbon credit is an incentive available to the industries reducing CO2 emission by investing in energy efficient
technology. Considering the 'Global Warming' impacts, it is a very important initiative on the part of industries.
Energy efficient and carbon emission reduction technologies are substantially costly and results in additional
investment for industries. It is very much likely that the income generated from sale of Carbon Credits may or
may not compensate additional outflow laid out for earning the same.
Recommendations
•
Section 10 of the Act should be amended to provide exemption to income from sale of Carbon Credit
entitlements
•
Alternatively, suitable amendment should be made in Section 35 of the Act to allow weighted deduction for
expenditure in relation to infrastructure requirement resulting into earning of Carbon Credit.
Mergers & Acquisitions
4.32.1. Transactions without consideration or for inadequate consideration
Issues
•
The Finance Act, 2010 inserted clause (viia) in sub-section (2) of Section 56 of the Act with a view to curb abusive
transactions.
•
Section 47 of the Act and other provisions of the Act exempts certain transactions from taxation. However,
proviso to Section 56(2)(viia) of the Act excludes only a part of such exempted transactions from its applicability.
Consequently, those transactions which are otherwise exempt under Section 47 of the Act will still be liable to
tax under Section 56(2)(viia) of the Act.
•
The rationale behind this discrimination is not understandable. Therefore, the view is that all transactions which
are specifically exempted from capital gains tax under Section 47 of the Act or other provisions of the Act should
be outside the purview of the said Section 56(2)(viia) of the Act.
•
Section 56(2)(viia) of the Act is applicable to receipt of shares. The provisions are anti-abusive and intended to
curb tax avoidance. Consequently, it should be applicable to transactions liable to tax and not otherwise. Thus
section should be applicable to receipt of shares consequent to transfers which are not covered under section
47, and not otherwise.
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•
Once the section is made applicable to receipt pursuant to transfers as above, issue of shares will clearly be out
of purview of the section, however, for avoiding litigation, it needs to be clarified that the following transactions
are also outside its purview:-
•
Issue of shares including:
i.
right issue
ii.
Preferential allotments
iii. Conversion of financial instruments
iv. Bonus shares
v.
Split/subdivision/ consolidation of shares.
•
Receipt pursuant to stock lending scheme
•
Receipt by trustee company.
•
Buyback of shares
•
By Offshore investors in cases where purchase price is determined by Indian laws in force (e.g. SEBI rules,
FEMA guidelines)
•
Besides, it may be appreciated that transfer of shares of unlisted/private Indian companies for no consideration
or for consideration less than the Fair Market Value, by or between non-residents would result in double
taxation of the same income, once in the hands of the transferor and thereafter again in the hands of the
recipient. For example, share transfer transactions between associated enterprises would be subject to transfer
pricing provisions under the Act and hence income from such transactions would be taxed based on arm's length
price basis in the hands of the transferor, even though the consideration is inadequate or nil. It would therefore
be unfair to once again tax such transactions in the hands of the recipients.
•
Being anti-abuse provision, it should be applicable to transactions between associated concerns and not to other
transactions. The amendment will adversely impact genuine cases where the shares are transferred at a predetermined price for agreed commercial and bonafide considerations, For example:
•
•
Joint venture or investment agreements particularly for unlisted company, frequently make provisions for
put and call options to be exercised at agreed prices which are compliant with all relevant exchange control
and related laws though they may not necessarily be at fair market value. This is, often, to permit Indian
promoters to enjoy some upside benefit if their companies perform better than the rate of return expected
by the investor. To visit such promoters with an income-tax liability on a purely notional unrealized gain
when they acquire shares from the investors at the negotiated price is clearly unwarranted and, possibly,
unintended.
•
Likewise, there may be default forced sale provisions in such agreements that allow a non-defaulting party
to acquire shares from a defaulting party at a price below market value. Again, to tax the non-defaulting
acquirer for the discount would be unfair and possibly, also unintended.
It may thus be seen that the provision is clearly against the interest of the large body of bonafide and high
quality Indian promoters. Abuse of provisions by a small errant minority should not be a reason for the
government to tax the large majority that has engaged in no-wrongdoing. The provision thus needs a re-look,
ideally for withdrawal. However, suggestions are given below to reduce negative impact, if not withdrawn.
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•
As per newly introduced Section 56(2)(viib) of the Act, if shares are issued by a company to a resident person
(other than a domestic VCF) for a consideration higher than the fair market value, then such excess would be
treated as income in the hands of the issuer company. The method for determining fair value is not yet
prescribed. This could adversely affect the ratchet structures agreed with resident promoters wherein they were
required to infuse funds or convert at a substantial premium for the adjustment of shareholding.
•
Further, in the absence of a prescribed formulae and determination left to the tax officer, it is unclear how this
provision would be applied and whether each time a closely held company issues shares at premium, it would
need to suo-motto offer income to tax under this clause
•
There may be instances where the company receives consideration in one tax year but issues shares in the
following tax year or in certain cases does not issue shares but refunds the share application money to the
shareholder, there is lack of clarity in such cases as to the year in which the provision would apply or whether
the provision would apply at all
•
Also, this issue is relevant for the Angel Investment industry investing in start-up ventures, where the immediate
valuation of the entity may not be a benchmark for the investment being made by Angel Investors. The
investment decision is based on the evaluation of the skills of the promoter and other intangible factors, which
may not be adequately captured in any fair value formula. Also, the typical situation for such start-ups ventures
is that the entrepreneur brings in a small amount of capital whereas the Angel Investor provides a larger
amount. Considering that the entrepreneur is the one making the efforts, his stake in the company is
proportionately higher than his capital contribution. Accordingly, levying a tax on the company ignoring this
fundamental reality would result in a big cash drain on such start-up ventures.
•
This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities
premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The
overall principles enunciated under GAAR provisions to treat an arrangement as Impermissible Avoidance
Arrangement should be applied to the share subscription transaction for determining the taxability of securities
premium account in the hands of company.
•
It would be prejudicial to subject the Issuer company to such adverse provisions which did not exist in law when
the transactions were entered into.
Recommendations
•
Primarily, the provisions should be withdrawn.
•
All transactions which are specifically exempted from capital gains tax under Section 47 of the Act or other Act
should be outside the purview of the said Sections 56(2)(viia) of the Act.
•
Section 56(2)(viiia) of the Act should be applicable to receipt of shares pursuant to transfers not covered under
section 47 and not otherwise.
•
Section 56(2)(viia) of the Act shall not be applicable to transactions governed under Transfer Pricing provisions.
•
Section 56(2)(viia) of the Act should not be applicable to non-residents.
•
Section 56(2)(viia) of the Act should be suitably amended to provide that it applies to receipt of shares from
related/connected entities. It must be clear that it is not applicable to genuine business /commercial
transactions.
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•
Section 56(2)(viia) of the Act should be suitably amended to provide that the section should be applicable only if
the share being received by the taxpayer is in existence and held by another person.
•
Similar amendments should also be made in section 56(2)(vii) of the Act and restriction thereof should be
restricted only to shares of companies in which public are not substantially interested.
Rule 11UA of the rules should be suitably amended to value unquoted equity shares on fully diluted basis.
•
The amendment in Section 56(2)(viib) of the Act should be deleted.
•
Without prejudice to the above, the following need consideration:
•
Applicability should be restricted to issue of shares in consideration for cash.
•
The issue of shares pursuant to otherwise exempt transactions such as merger, demerger, etc should be
excluded from the purview of Section 56(2)(viib).
•
The methodology for determining the fair market value of shares should be based on all relevant factors
including future cash flows, profit earnings capacity, asset valuation etc. Intangibles such as industry
experience, specialized skills, etc need to be given due weightage in the valuation to encourage
entrepreneurial activities. Sufficient weightage should also be given to widely held companies which are
business peers of the company, investment by non-resident shareholders, VCF etc.
•
It is recommended that it should be suitably provided for in the section that it would apply only in the year
of issue of shares.
•
It should be suitably clarified to provide that the section does not require every closely held company that
issues shares to a resident to suo-motto offer such income to tax. Further, the tax officer should be
empowered to invoke this section only if at the time of assessment; the tax officer is of the view that
premium charged by the company from the resident shareholder is in excess of the fair market value of
shares issued.
•
The provisions of this section should not be made applicable in case of receipt of consideration for issue of
shares from a resident, in case where shares are issued to both residents as well as non-resident
simultaneously at the same price.
•
The provision should not be made applicable to Angel investors or ratchet transactions entered into with the
promoters.
•
Grand fathering should be provided to the existing arrangement / transactions pursuant to which shares are
issued.
4.32.2. Amalgamation into parent/subsidiary/co-subsidiary
Issues
•
Since 1991, Government started the process of reforms which gave opportunity to companies to dismantle their
complicated structures created over the years and move towards simplified structures to conduct their
businesses in an more open and transparent manner. Government supported companies to do so by enacting
exempting provisions in the Act to ensure that only real gains gets taxed which results from disposal of assets to
outsiders and not the notional gains arising from mere changes in ownership between entities within the same
group.
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•
Section 47 of the Act exempts various transactions from being taxed under the head capital gains by not
regarding such transactions to be 'Transfer' for Section 45 of the Act.
•
Finance Act, 2012 has made amendment in section 47(viii) of the Act by providing that the condition regarding
allotment of shares in the amalgamated company need not be satisfied where the shareholder itself is the
amalgamated company. Section 47(vii) of the Act after amendment states as under:“any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by
him in the amalgamating company, if(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated
company except where shareholder itself is the amalgamated company, and
(b) the amalgamated company is an Indian Company.”
The amendment covers only one type of situation i.e. where the amalgamated company itself holds shares in the
amalgamating company. It however does not take care of the situations listed below:
(i) Company A is a subsidiary of company B, Company B is a subsidiary of Company C. Company A and Company
B gets amalgamated into Company C.
(ii) Company P and Company Q hold shares in each other and one of the companies gets amalgamated into
another.
(iii) Company X, Company Y and Company Z are three companies and each company holds shares in the other
two companies. Any two companies get amalgamated into the third company.
(iv) Company X, Company Y and Company Z are three companies and each company holds shares in the other
two companies. All the three companies get amalgamated into another Company T.
•
Further, section 42 of the Companies Act, 1956 do not allow a subsidiary company to hold shares in the parent
company. Pursuant to such merger, in case where subsidiary was holding shares in Transferor company, the
parent company cannot allot shares to it.
•
Section 2(19AA) of the Act defining Demerger specifies conditions which are conflicting in nature. First condition
requires that at least 75 percent shareholders of transferor should become shareholder of transferee. Second
condition provides that shares should be issued to the shareholders of the transferor company on a
proportionate basis. If one logically reads the two conditions, it means that shares should be issued on a
proportionate basis to the shareholders of demerged company to whom shares are issued under First condition.
However, to avoid litigation, clarity needs to be provided.
•
Section 41 of the Act provides that if certain income, relating to business of predecessor, will be taxable in hands
of successor even though it arises post succession. However, similar provision is not there in Section 43B, 35DD
etc of the Act where expenses need to be claimed post restructuring in hands of successor.
Recommendations
•
Section 47(vii)(a) should be amended to provide exclusion to (a) shareholder of amalgamating company being
subsidiary of Amalgamated Company (b) Amalgamation of direct subsidiary with stepdown subsidiary, (c)
Amalgamation involving amalgamating company holding shares in amalgamated companies.
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•
Section 2(19AA) of the Act be amended to provide that the shares of the transferee company should be issued
on a proportionate basis to the shareholders of demerged company to whom shares are issued under First
condition. It should be clear that proportionate basis does not apply to all the shareholders.
•
A new section be inserted in chapter IV providing that in case of reorganization, deduction in relation (a) to
expenditures incurred in pre-reorganization period but allowable during post-reorganization period and (b)
expenditures incurred during the previous year but allowable on certain criteria for e.g. payment basis under
Section 43B, etc. will be allowed to successor as it would have been allowed to the predecessor.
4.32.3. Conversion of one type of share into other type of share of the same company,
not resulting into any real income
Issues
•
Clause (x) of section 47 of the Act provides that, any transfer by way of debentures, debenture-stock or deposit
certificates in any form, of a company into shares or debentures of that company, will not be treated as a
'transfer' for the purposes of section 45 of the Act. Sub-section (2A) of Section 49 of the Act provides that, where
a share or debenture in a company, became the property of the taxpayer on such conversion, the cost of
acquisition to the taxpayer shall be deemed to be that part of the cost of debenture, debenture-stock or deposit
certificates in relation to which such share or debenture was acquired by the taxpayer.
•
It is noteworthy that while inserting clause (x), the intent of the Legislature was that no taxable capital gains can
arise at the time of conversion of convertible debentures, deposit certificates or shares of the company into
debentures or shares of that company, since it amounts to conversion of an asset held by an taxpayer from one
form to another and there is no other party involved to whom any transfer is made. In fact, clause (x) of section
47 of the Act was further amended by the Finance Act, 1992 to include 'bonds' in the said provision.
•
However, it appears that there has been an inadvertent omission in both the foregoing provisions, i.e.,
conversion of preference shares or warrants into equity shares of a company have not been specifically covered
under the said provisions. Similar to Section 49(2A), Section 55(2) (v) of the Act provides that cost of shares
received on conversion should be cost of the shares which were converted. Thus, there does not seem to be any
difference in taxing of conversion of debenture or share. However, legislature has missed to provide exemption
to conversion of shares.
Recommendations
•
Section 47(x) of the Act should be amended to include cases of conversion of one type of shares or warrants into
shares or other type of shares.
•
Section 2(42A) of the Act should be amended to provide that the period of holding of earlier instrument should
be considered as period of holding for new instrument.
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4.32.4. Carry forward and set off of accumulated loss and unabsorbed depreciation
allowances in amalgamation or merger
Issues
•
Currently, Section 72A/72AA of the Act allows carry forward of loss and accumulated depreciation only in case of
following type of companies:
•
a company owning an industrial undertaking or a ship or a hotel with another company
•
a banking company
•
one or more public sector company or companies engaged in the business of operation of aircraft
•
Apparently, the benefit is not available to all the companies engaged in the business of providing services.
Considering the facts that many multinational companies have entered in the Indian service market and it has
become imperative for the small companies to consolidate their resources to survive, the benefit applicable
under the provision of Section 72A of the Act should be extended to all companies irrespective of their line of
operations. This will encourage the flow of FDI into India as multinationals will be encouraged to invest into
existing businesses promoted and managed by Indian entrepreneurs.
•
There is ambiguity on the availability of benefit to companies engaged in the business of “manufacturing of
computer software”.
•
More so, section 72A(2) of the Act prescribes stringent condition about continuity of holding of assets by the
amalgamating company for at least 2 years prior to transfer and by the amalgamated company for 5 years post
transfer. Similarly it requires that the amalgamating company should be in the business for at least 3 years prior
to the amalgamation. The conditions in the hands of the amalgamated company are sufficient to control misuse
of the provisions and therefore, the conditions applicable to the amalgamating company should be deleted. Also,
holding of assets and continuation of business for 5 years is quite a long period. Same should be reduced to 3
years.
Recommendations
•
Section 72A of the Act should be amended to allow benefit of carry forward of losses, pursuant to
amalgamation, to all Companies irrespective of their line of business especially services business.
•
It should be explicitly clarified that the benefit of section 72 for carry forward of losses, pursuant to
amalgamation should be allowed to the companies engaged in the business of manufacture of computer
software.
•
Section 72(A)(2) of the Act be amended to delete conditions under sub-clause(a) relating to amalgamating
company.
•
Also, section 72A(2)(b) of the Act should be amended to reduce the period of holding assets and carrying on of
business to 3 years.
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4.32.5. Conversion into Limited Liability Partnership under provisions of Chapter X of
the Limited Liability Partnership Act, 2008/conversion of firm- into company
Issues
•
Chapter X of the LLP Act allows following conversions:
•
Partnership Firm (Firm) into LLP (Section 55 of the LLP Act)
•
Private Limited/Unlisted Public Company into LLP (Section 56/57 of the LLP Act)
•
The Finance Act 2010 provided tax neutrality to conversion of Company into LLP under Section56-57 of the LLP
Act. However, there is no provision allowing tax neutrality to conversion of firm into LLP under Section 55 of the
LLP Act. Same should be provided.
•
Section 47(xiiib) of the Act provides tax neutrality to conversion of Company into LLP subject to certain stringent
conditions. Such conditions should be made less stringent or some relaxation should be provided in application
of the same as discussed below:
•
It is available only to a Company having Turnover of less than INR 60 lakhs for 3 years prior to such
conversion. In the current economic scenario, this limit of INR 60 lakhs needs to be removed. There is no
reason, why companies with large turnover, which otherwise qualify, should not be eligible for conversion
with tax neutrality.
•
Another condition is that all the shareholders of the company, immediately before the conversion, should
become partners of the LLP. This condition should be made applicable only in respect of equity shareholders
and not preference shareholders, since preference shares are in the nature quasi equity.
•
Further, it is necessary that that the aggregate of the profit sharing ratio of the shareholders of the company,
in the LLP shall not be less than 50 percent at any time during the period of five years from the date of
conversion. This condition should be applicable only to voluntary transfers and not to all the transfers. Say,
this condition should not apply in case of dilution resulting from death or disqualification of a partner or
amalgamation of a corporate partner.
•
For claiming tax neutrality, it is provided that accumulated profits of the company as on the date of
conversion should not be paid to the partners of the LLP for a period of three years from date of conversion.
Under Income-tax Act LLP is considered akin to a partnership firm and there is no restriction on distribution
of the profits of the partnership firm. Further in case of partnership firm there is no requirement to show
Reserves and Surplus separately but the same is credited to partner's capital account. Thus, there should not
be any restriction on LLP in relation to payment out of profits. Further, the term accumulated profits is not
defined and may include other reserves also.
•
MAT payment under Section 115JB of the Act is prepayment of taxes actually becoming due in subsequent
years under normal provisions of the Act. Consequently, Section 115JAA of the Act allows credit for such
payments in the year the company becomes liable to pay tax under normal provisions of the Act. There is no
reason, why such credit should not be allowed to LLP, which is converted from a company eligible to such
credits, if it is paying taxes under normal provisions of the Act.
•
Section 47(xiii)/(xiiib) and (xiv) requires that the members of the firm/shareholders of the company should
continue to maintain profit sharing/shareholding for 5 years. 5 years is a fairly long time, it should be
restricted to 3 years.
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•
Section 47A(4) of the Act provides that in case of non-compliance of any condition provided in Section
47(xiiib) of the Act, the gains on conversion of company/transfer of shares shall be the profits & gain taxable
in the hands of the LLP/shareholders in the year of such non-compliance. Similarly, proviso to Section
72A(6A) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiiib) of
the Act, the losses/unabsorbed depreciation of the company utilized by the LLP shall be income of the LLP
for the year of such non-compliance.
•
Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section
47(xiii) or (xiv) of the Act, the gains on conversion of partnership or proprietary concern shall be profits &
gains taxable in the hands of the Company in the year of such non-compliance. Similar to section 72A(6A),
72A(6) deals with cases covered under section 47(xiii) and (xiv).
Recommendations
•
Section 47(xiii) of the Act should be suitably amended to include conversion of a Firm into LLP along with
conversion of Firm into a Company.
•
Turnover criteria should be removed from Section 47(xiiib) of the Act.
•
Words “equity shareholder” should substitute the word “shareholder” wherever it appears in Section 47(xiiib) of
the Act.
•
Insert proviso under clause (d) in proviso to Section 47(xiiib) of the Act to provide that it should not be applicable
to a case where a change in profit sharing takes place consequent to death of a partner or pursuant to any other
transaction covered under Section 47 of the Act.
•
Condition of non-payment out of accumulated profits specified in clause (f) to proviso to Section 47(xiiib) of the
Act should be removed. If not removed, term accumulated profit should be appropriately defined.
•
Provisions of Section 115JAA of the Act allowing utilization of MAT credit should be amended to allowed credit
for MAT paid by the Company to the successor LLP.
•
Sections 47(xiii)/(xiiib)/(xiv) should be amended to reduce period of continuing same profit sharing /
shareholding from 5 years to 3 years.
•
Words profits & gains in Section 47A(3)/(4) of the Act should be replaced with the income.
4.32.6. Continuation of deduction under Section 80-IA of the Act in case of reorganization
Issues
•
Section 80-IA of the Act provides deduction in relation to profits of certain undertakings. It was well settled that
in the case of restructuring of any entity owning such undertaking, the benefits of deduction will be available to
entity owning the undertaking post restructuring.
•
Board's Circular vide Letter F.No. 15/5/63-IT (AI), dated 13 December 1963; specifically provided that in the year
of corporate restructuring, the benefit shall be available to transferor entity upto the date of transfer and to the
transferee entity for the remaining period of tax holiday.
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•
Sub-section (12) provided that in the year of restructuring deduction will not be allowable to the Transferor
entity but same will be allowed to the Transferee entity as it would have been allowed, had the restructuring not
taken place. In totality, this will restrict the total period of deduction to not more than the total period for which
the deduction should have been allowed under the provisions of the Act.
•
However, sub-section (12A) was inserted in section 80-IA with effect from 1 April 2008 to provide that nothing
contained in sub-section (12) shall apply to reorganization post 1 April 2007. A view is expressed that post
insertion of sub section (12A), benefit of deduction under Section 80-IA of the Act will not be available to the
Transferee entity.
Recommendations
•
Section 80-IA(12A) of the Act be deleted to enable restructuring of eligible entities.
•
Section 80-IA(12) should be amended to provide for allowing deduction to the Transferor entity for the period till
transfer date and to the transferee entity post transfer.
4.32.7. Definition of Widely held Company
Issues
•
Section 2(18) of the Act defines widely held company. This definition has wide implication on carry forward of
loss, taxability under Section 56(2) of the Act and in various other provisions.
•
It includes a listed company, only if its shares are listed on exchange as on last date of the relevant year. Further
it includes subsidiary of listed company, only if the shares of such subsidiary were held throughout the relevant
year by the listed company. These provisions lead to situations which does not seem intended.
•
Therefore, it stands logical that the conditions of listing, holding of shares etc. should be subject matter of test
on the date of transaction and should not be stretched to be continuing till the end of that financial year.
Recommendation
Section 2(18) of the Act should be suitably amended to provide test of conditions on the date of relevant transaction.
4.32.8. Non-Compliance of conditions applicable to certain reoganisations
Issues
•
Section 47(iv)/(v) of the Act provides exemption to gains arising from transfer of capital assets between a holding
company and its wholly owned subsidiary company. Section 47A(1) of the Act provides that in case holding
company not continuing to hold 100 percent of shares of the subsidiary company or treatment of the transferred
asset as stock-in-trade, within a period of eight years from the date of the transfer of capital asset, the gain
exempted under Section 47(iv) / (v) of the Act shall be taxable in the hands of the transferor company for the
year of transfer. The period of eight years is too long.
•
Further, in any case such income should be taxable in the year of event specified in the section and not in the
year of transfer of capital asset.
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•
Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiii) or
(xiv) of the Act, the gains on conversion of partnership or proprietary concern shall be profits & gains taxable in
the hands of the Company in the year of such non-compliance. The conditions should be complied in the year of
conversion and it should not be required to be complied forever/5years.
Recommendations
•
Section 47A (1) of the Act should be amended to reduce “period of eight years” to “period of two years”.
•
Further, in any case, such income should be taxable in the year of event specified in the section and not in the
year of transfer of capital asset.
•
Section 47A(3) of the Act should made applicable in the year of conversion only or at the most in the year
immediately succeeding that year. Further, words 'profits & gains' in Section 47A(3) of the Act should be replaced
with the words 'income'.
4.32.9. MAT Credit
Issues
•
MAT credit is akin to advance payment of tax.
•
Benefit of MAT credit cannot be denied to successors in case of reorganization.
Recommendation
•
S.115JAA should be amended to provide that successors in case of amalgamation, demerger or any other form of
reorganization should be eligible to claim benefit of MAT Credit.
4.33. Amendment to Section 9(1) of the Act - Retrospective insertion of Explanations
(a) To expand meaning of word “through”
(b) To shift the situs of shares in foreign company/interest in other foreign entity to India, in case the share or
interest in such company / entity derives substantial value from assets in India.
Issues
•
The amendment is retrospective in nature and proposed to be inserted with effect from 1 April 1962. The
amendment would mean that the transactions in past 6 years can be brought to tax. The transactions were
carried out considering the same not to be subject to tax in India. This view has been upheld by the Supreme
Court in the case of Vodafone International BV.
•
Amending the tax laws post judicial pronouncement by the Supreme Court would damage the face of India in
the International market at such a sensitive juncture of the Indian economy.
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Recommendations
•
The amendment should only be prospective.
•
Explanation 5 to section 9(1) of the Act should be amended to provide the following:
-
Explanation should be applicable only for last part of Section 9(1) of the Act relating to “or through the
transfer of a capital asset situate in India”
-
The terms 'value' and 'substantial' needs to be clearly defined.
-
In any case, substantial should mean > 50%
-
Threshold limits in terms of (a) quantum of consideration e.g. exceeding Rs.100 crores, (b) quantum of
shares of the foreign company e.g. exceeding 20% of paid up capital etc. should be provided for applicability
of explanation.
-
The phrase “the share or interest in a company or entity registered or incorporated outside India” in
Explanation 5 should be reworded to mean the share in a company incorporated outside India or ownership
interest in other entity registered outside India. It should be clear that all interest, other than ownership or
controlling interest, should not be contemplated within the ambit of Explanation 5.
4.34. Amendment to Section 2(14) and Section 2(47) of the Act
Section 2(14) - Retrospective insertion of Explanation expanding scope of the definition of capital asset - the term
'property' has been defined to include any rights in relation to an Indian company, including rights of management or
control or any other rights whatsoever.
Section 2(47) - Retrospective insertion of an Explanation to the effect that the term 'transfer' includes disposing or
parting with an asset or any interest therein or creating any interest in any asset, notwithstanding that such transfer
of rights is effected or dependent upon or flowing from transfer of shares of a foreign company.
Issues
•
It is not very clear as to what is meant to be covered by the term 'any rights'. The term is very wide and is
defined in an inclusive manner.
•
The amendment in Section 2(14) read with Section 2(47) of the Act, may even cover unintended consequences.
For example, creation of management or control rights upon equity infusion in an Indian Company could be
treated as transfer.
•
Further, 'the rights in relation to an Indian company' should not include rights of the company. For example,
Company may have its significant asset in the form of certain rights such as hotel license, lease rights, etc.
Acquisition of shares in an Indian Company holding such rights should not be treated as creation of interest in
such assets which is deemed as 'transfer'. Lifting of corporate veil in such a manner could lead to severe
consequences.
Explanation 5 to Section9(1) of the Act seem to be inserted for covering indirect transfer of shares in Indian
Company. However, the amendment may cover all income through or from such shares.
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Recommendations
•
Explanation to Section 2(14) of the Act should be amended as under :
–
•
Rights in an Indian Company' should be restricted to management and contractual rights.
Explanation. to Section 2(47) of the Act should be amended as under :
–
Words “or creating any interest in an asset” should be deleted.
–
The transactions which are otherwise not 'transfer' as per law (for example - gift) or transactions which do
not result in any transfer per se, (for example primary infusion in company for acquisition of shares) should
not be covered in the deeming fiction created by amending Section 2(47) of the Act.
4.35. Insertion of Section 50D in the Act
Section 50D is inserted to provide that in cases involving transfer of assets, if the consideration is not determinable,
fair value of the consideration received or accruing shall be deemed to be consideration
Issues
•
Method of determining fair value is not specified
•
Section overlaps with certain other sections providing similar mechanism for determining consideration. e.g.
section 45(3) of the Act dealing with transfer of a capital asset.
Recommendations
•
Method for determination of fair value should be specified
•
Applicability of the section should be restricted to the transactions not covered under other similar provisions.
4.36. Amendment to Section 68 of the Act made by Finance Act, 2012
Section 68 of the Act is amended to insert a proviso to provide that in case of closely held company share application
money (including share premium) shall be considered as not satisfactorily explained unless the investor provides
necessary explanation to the satisfaction of the Assessing Officer.
Issues
•
This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities
premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The
overall principles enunciated under GAAR provisions to treat an arrangement as Impermissible Avoidance
Arrangement should be applied to the share subscription transaction for determining the taxability of securities
premium account in the hands of company.
•
This amendment may overlap with provisions of Section 56(2)(viib) and may be taxed twice.
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Recommendation
•
This amendment should be deleted.
4.37. Amendment to Section 115JB
S.115JB has been amended to provide that revaluation reserve should be included in book profit at the time of
retirement or disposal of asset
Issues
•
Income tax is on realized profit and not on notional profit
•
On retirement of an asset there is no income and same should not be made liable on the basis of book profit
also.
•
There is no set-off provided that if the reserve is included on retirement same should not be included at the time
of disposal.
Recommendations
•
This section should be deleted.
•
The amendment should not refer to adjustment at the time of retirement of asset.
Capital Gains
4.38.1. Rate of tax applicable to Long Term Capital Gain
Issues
•
Section 112 of the Act provides rate of tax of 20 percent (plus surcharge applicable if any & cess) for Long Term
Capital Gains. However, considering the fact that in computation of capital gains very limited deductions are
allowed, rate of 20 percent seem to be on a higher side. It has been observed that owing to this high taxation
cost on long-term capital gains, there may be a temptation to understate the value of sale consideration. To curb
such adjustment provisions of Section 56(2)(vii) and (viia) of the Act are brought on the statute.
•
For computing the said capital gains, “indexed cost of acquisition” is deductible from the full value of the
consideration. In case of listed shares, Section 112 of the Act provides an option to the taxpayer either to pay 20
percent on post index profit or to pay 10 percent on profit without indexation. Further, there is imposition of
Education cess, Secondary and higher education cess and, Surcharge (if applicable).
•
Deduction under Section 80C to 80U of the Act is not available in respect of short-term capital gains taxable
under Section 111A of the Act and long-term capital gains taxable under Section 112 of the Act.
Recommendations
•
It is suggested that rate of tax on long-term capital gains be reduced to 15 percent.
•
Provisions of Section 56(2)(vii) and (viia) of the Act be removed as they will no longer be required.
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•
Choice of computation of capital gain with index benefit or without should be extended to all assets.
•
Deductions under Section 80C to 80U of the Act are in form of tax incentives hence such deduction should be
available from capital gains taxable under Section 111A and 112 of Act.
4.38.2. Removal of upper cap of INR 50 lakhs under Section 54EC of the Act
Issues
•
Section 54EC of the Act provides tax exemption on capital gains rising from the transfer of a long-term capital
asset if invested in long-term specified assets within a period of six months from the date of such transfer. The
Finance Act, 2007 has provided that the investments in such bonds should not exceed INR 5 million in a financial
year. Currently, huge amounts are required to be deployed in the infrastructure sector and this vehicle could be
used for raising such infrastructure development funds. Moreover, the interest income on such bonds is fully
taxable.
•
Tax exemption is only on capital gains invested in the bonds issued by National Highways Authority of India or by
the Rural Electrification Corporation Limited. There does not seem to be any rationale behind prescribing the
monetary limit of INR 5 million per investor per year and restricting the investment to be made in bonds issued
by National Highways Authority of India or by the Rural Electrification Corporation Limited. Especially in the
context that such funds would in any case be used for meeting the infrastructure requirements. In addition to
the above, there is an ambiguity created by certain judicial precedents, where the taxpayer who has transferred
a capital asset in the second half of a financial year and who has exhausted the exemption limit of INR 5 million
in a financial year, whether can he look to invest a further sum of INR 5 million within 6 months from the date of
transfer even if such period of 6 months spills over into next financial year.
Recommendations
Proviso to Section 54EC(1) of the Act should be deleted which mandates that the investment in such bonds does not
exceeds INR 5 million in a financial year or the limit be substantially increased
With a view to accelerate growth in the infrastructure sector, investment in bonds issued by Infrastructure Capital
Companies/Fund should also be notified for the purposes of section 54EC of the Act.
The abovementioned ambiguity should be removed by clarifying that the amount of investment per financial year is
INR 5 million irrespective of whether the same is used for claiming exemption from sale of one long term capital
asset only.
4.38.3. Cut-off date for ascertaining cost and Index factor for computation of Long Term
Capital Gain
Issues
•
Section 55 (2) of the Act provides that in case of asset acquired before 1 April 1981, taxpayer has an option to
replace cost of such asset by market value thereof.
•
Section 48 of the Act provides that for computation of long term capital gain, “indexed cost of acquisition” is
deductible from the full value of the consideration received from the transfer of the capital asset. Indexed cost
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means cost of acquisition adjusted for inflation index. Again, base for ascertainment of index factor is 1 April
1981. Cost Inflation Index is notified every year having regard to 75 percent of average rise in the Consumer Price
Index for urban, non-manual employees for the immediately preceding previous year to such previous year. It
may thus be seen that such indexation benefit is notional and does not take care of full inflationary impact and
causes inequities to the taxpayers. Thus, the cut-off date for cost replacement and base for index being 30 year
old needs to be revised.
•
Further, in case of taxpayer, acquiring assets through specified modes, period of holding of earlier transferor is
added to period of holding of taxpayer, however, index benefit is allowed only from the date of holding of the
asset by the taxpayer. This seems to be an unintended anomaly and needs to be set right.
Recommendations
•
Cut-off date for cost replacement in Section 55 of the Act and for index factor in Section 48 of the Act be shifted
to 1 April 2001.
•
Index benefit even to the taxpayer acquiring assets through specified modes should commence from the date of
acquisition in the hands of original purchaser.
4.38.4. Rate of Tax applicable to Short-term Capital Gains
Issues
•
Section 111A of the Act provides that short-term capital gains on sale of shares of listed companies or units of
equity oriented fund should be taxed at 15 percent. The rate was 10 percent till 31 March 2009.
•
The difference between normal income and capital gain arising on transfer of assets is well recognized even
under the Act. It is a known fact that owner of an asset incurs a lot of expenditure for maintaining an asset. In
case such asset is used in business, deduction is allowed for such maintenance and other expenses. However, no
such deduction is allowed if such asset is a non-business asset. Thus it makes a strong case that rate of tax in
case of capital gains should be different from the rate applicable to other incomes. This distinction is recognized
to some extent in Section 111A and 112 of the Act. However, in case of short term gain relating to assets other
than listed shares, such difference is not recognized.
•
In case of assets other than listed shares, the period of holding of less than 3 years makes it a short-term capital
asset. According to the 'Cost Inflation Index' in the recent years, the inflation is about 10 percent per annum.
This would result into an inflated cost of about 30 percent in 3 years. Hence, any tax on this inflated 30 percent
would be actually taxing non-real income in hands of the taxpayer and consequently the taxpayer is taxed
without any income in his hands.
Recommendations
•
The rate for listed shares should be restored to 10 percent as was the position till 31 March 2009.
•
Section 111A of the Act should be amended to provide the rate of tax for short term gain on transfer of assets
other than listed shares to be at 20 percent.
Indexation benefit should be given for short-term asset if they are held for a period more than 1 year.
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4.38.5. Abolition of tax on gains arising from transfer of listed securities
Issues
•
The Shome Committee Report on 1 September 2012 on General Anti Avoidance Rules has recommended that
the Government should abolish the tax on gains arising from transfer of listed securities, whether in the nature
of capital gains or business income, to both residents and non-residents. The Government is also considering
increasing the rate of Securities Transaction Tax ('STT') appropriately to make the proposal tax neutral.
•
As per National Stock Exchange, India is one of the costliest destinations to trade. STT, along with other taxes,
and high brokerage structure makes trading in India almost five-six times higher than in advanced countries.
Recommendations
•
The Government should abolish tax on gains arising from listed securities whether in the nature of capital gains
or business income which shall incentivize the investors to have more participation in the Indian Capital Markets.
•
Increasing the STT rate will reduce the liquidity from the system and Government may consider reducing the
same.
•
These are just suggestions of the Expert Committee and the Government may consider reconsidering these
amendments post receiving comments from various stakeholders involved.
Transfer Pricing
4.39.1. Transfer Pricing of Marketing Intangibles
Issue
Marketing intangibles are crucial sources of value and its value is derived from the company's levels of Advertising,
Marketing and Promotion expenditures (AMP) which adds intrinsic value to a company. Tax authorities are
increasingly scrutinizing the cross border transfer, use and further development of intangibles relating to brand and
licenses. The ruling of the Delhi High Court in the case of Maruti Suzuki India, which discusses the creation and
compensation for marketing intangibles only, underlines this trend. Now, in light of the amendment introduced vide
Finance Act 2012 which specifically includes marketing intangibles in the expanded definition of international
transactions, substantiating the arm's length compensation for the transfer price of the intangibles would pose great
challenges without specific guidance relating to these aspects in the Indian transfer pricing regulations.
Recommendation
Accordingly, in line with the Organization for Economic Co-operation and Development (OECD) principles, guidance
should be issued to recognize certain methodologies /approaches for evaluating the arm's length character of
transactions involving marketing intangibles.
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4.39.2. Transfer Pricing of Manufacturing Intangibles
Issue
Compensation for use of manufacturing intangibles has generally been in the form of royalty payouts and is
commonly benchmarked by adopting the aggregated approach further substantiated with external benchmarking
[e.g. limits specified by the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) regulations].
However, this approach is increasingly challenged by the revenue authorities, who adopt transaction-specific
approach, and the taxpayer is required to substantiate the economic and commercial benefits derived from the
royalty payout.
Recommendation
With the recent removal of the above limits as prescribed by the RBI and the FEMA regulations, it is therefore
necessary that guidance be provided to test such transactions particularly in cases of start-up or loss making
companies.
4.39.3. Transfer Pricing of Intra Group Financial Transactions / Management services
Issue
Management services are services where an entity in a multinational group renders shared services in the nature of
legal, administrative, human resources, information technology, finance, sales/ marketing, etc. to its group affiliates.
One of the important issues that draw the attention of the tax authorities is the arm's length nature of the
compensation paid for such intra-group services to related entities. The entire onus to substantiate the arm's length
payment and establish 'cost-benefit' analysis by way of maintaining service agreements, basis of charge out rates,
allocation keys, etc, is upon the taxpayer to establish that only those costs are pooled which have been incurred for
rendering of services by Associated Enterprises (AE).
Recommendations
In the absence of industry benchmarks in public domain for testing management fee payouts, guidance for
maintaining specific documentation outlining the various costs incurred in relation thereto and the related benefits
derived there from, should be highlighted and elaborated upon in the regulations.
4.39.4. Interest on Inter-company loans and Guarantee fees
Issues
Transfer pricing of cross-border financial transactions deals with inter-company loans, debentures, corporate
guarantee charges, cash-pooling arrangements, debtors discounting, etc, and intends to arrive at arm's-length
outcome in a related-party scenario. Typically, interest rates on loan transactions between third parties depend on
factors like borrowers' credit rating, loan tenor, prevailing market conditions, loan seniority, security to lender(s), etc.
The Comparable Uncontrolled Price (CUP) method, which is commonly used for arriving at arm's-length interest rates
for intra-group loan transactions, demands a high degree of comparability and necessitates complex adjustments.
Pricing a guarantee is even more challenging in the absence of comparable data and warrants application of
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sophisticated transfer pricing techniques. In India, lack of guidelines often leads to application of arbitrary methods
for pricing of inter-company financial transactions. Recently, the income-tax tribunals have laid emphasis on the
credit quality of the borrower while holding that inter-company loans should attract arm's-length interest charge.
Further, vide the Finance Act 2012, the definition of international transactions has been expanded to specifically
include capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or
sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt
arising during the course of business which would now give rise to a whole gamut of such financial transactions to be
reported by the taxpayer.
Recommendation
Given the increasing global trend of cross border financing and inter-company lending, it is of paramount importance
to introduce appropriate guidance governing the pricing of inter-company funding.
4.39.5. Transfer Pricing Methods - Profit Split Method (PSM)
Issue
•
PSM is applicable mainly in international transactions involving transfer of unique intangibles or in multiple
international transactions which are so interrelated that they cannot be evaluated separately or the purpose of
determining the arm's length price of any one transaction. The method involves valuation of non routine
intangible, assigning the combined profit or loss according to each party based on allocation keys and using of
projected financials. Lack of clarity on valuation of intangibles and use of complex analysis for splitting the profit
or loss has been experienced as the major reasons for the reluctance in using this method in India, both from a
taxpayer and revenue perspective.
Recommendation
Issuance of guidance for application of this method and valuation norms can bring about clarity to the taxpayer on
usage of this method.
4.39.6. Arithmetic mean v. inter-quartile range
Issue
•
The Indian transfer pricing regulations require the determination of a single arm's-length price. In cases where
multiple comparable prices exist, the Indian transfer pricing laws require the arm's-length price to be determined
as the arithmetic mean of the prices of such comparable uncontrolled transactions. The computation of a single
arm's-length price poses many difficulties, since transfer pricing, is not a mathematical or scientific calculation,
but a subjective commercial analysis.
Recommendation
Under such a scenario, median and/or inter-quartile range would be a better indicator of comparable prices. It is less
sensitive to extreme observations, particularly where the distribution is highly skewed. The TP regulations could
therefore be amended to permit application of the concept of an arm's-length range of prices, similar to provisions
contained in the OECD regulations and those of other developed nations.
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4.39.7. Structural Changes of the Dispute Resolution Panel
Issue
Transfer pricing is a serious issue faced by MNCs. Recognizing this Dispute Resolution Panel (DRP) was established.
Given recent experiences, the government should consider some structural changes to the DRP mechanism.
Recommendations
For the DRP mechanism to be an effective tool of alternate dispute resolution, reforms in the Union Budget 2013
should include:
•
DRP being constituted as an 'independent' judicial board with panelists from economic legal and accounting
background and tax department
•
Affixing personal accountability at each level for appeals filed by tax authorities
•
Constitution of a legal cell to monitor progress of tax cases
•
Limitation period to be prescribed for disposal of appeals and closely monitored and
•
Suo-moto withdrawal of cases which are covered by decisions of courts and which are found without merit.
4.39.8. Stay of Demand
Issue
•
In cases where the DRP is proposing an adverse recommendation to the AO, it is not clear as to whether it has
powers to issue direction to the AO to grant stay of demand if the taxpayer is intending to prefer an appeal to
Tribunal.
Recommendation
Specific provision may be introduced to also provide for such powers to the DRP, so that the DRP process achieves its
stated objective.
4.39.9. Eligible Assessee
Issue
•
Section 144C(15)(b) of the Act defines 'eligible assessee' as (i) any person who has had a TP adjustment; and (ii)
any foreign company. The use of the word 'and' in the definition could lead to an interpretation that the
conditions need to be satisfied cumulatively i.e. the taxpayer has to be a 'foreign company' and should have
suffered a TP adjustment.
Recommendation
It appears that the intention of the amendment is that 'both' the above type of taxpayers should be covered within
the meaning of the phrase 'eligible assessee'. Hence, to reflect correctly the intent and prevent anomalous
interpretation on account of the wording, 'and' should be replaced by 'or'.
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4.39.10. TP Documentation requirement
Issue
•
The documentation requirements are attracted if the aggregate value of the transactions exceeds INR 10 million.
Recommendation
This monetary limit seems to be on lower side especially for software, which has associates in various countries, and
calls for upward revision. Also, documentation requirements should be such as to enable the tax authorities to arrive
at arm's length price without subjecting the concerned parties to undue cost, time and harassment.
4.39.11. Use of Multiple year data / Contemporaneous data
Issues
•
The transfer pricing regulations require taxpayers to maintain documentation on a contemporaneous basis. The
comparability analysis (or choice of appropriate comparables) is required to be based on data relating to the
financial year in which the international transaction has been entered into (current year data). Further, the use
of data from the past two years is permitted where the past data reveals facts which could influence the
determination of transfer prices for the current year. It is worthwhile to note that the taxpayers need to have
their transfer pricing analysis in place at the latest by the due date of filing their income-tax return.
•
The issue of the number of year's data to be considered has been a matter of subjective interpretation to date. It
is generally felt that if data from the relevant financial year is not found in the public databases at the point in
time when the benchmarking exercise is undertaken, then there is sufficient cause for use of prior year's data.
However, the revenue authorities have generally disregarded the use of the same in the course of transfer
pricing audits.
Recommendation
Relevant clarifications could be incorporated in the regulations that clearly permit use of multiple year data for
comparability analysis.
4.39.12. Adjustments for differences in functions and risks
Issues
•
The India transfer pricing regulations provide for making reasonably accurate adjustments to take into account
differences between international transactions and uncontrolled transactions, considering the specific
characteristics relating thereto.
•
However, in practice there is no guidance or clarity on the manner in which these adjustments are to be made.
For example, adjustments in areas such as differences in levels of working capital, differences in risk profile,
differences in volumes, pricing on marginal cost, startup losses or capacity utilization and so on, have generally
not been permitted by the revenue authorities in the course of transfer pricing audits as upheld in certain
Tribunal decisions as well.
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Recommendations
Accordingly, suitable guidance on the manner of carrying out economic and risk adjustments to comparable and
taxpayer's data is necessary.
Further, the Tax Authorities should be encouraged to duly consider in the course of transfer pricing audits, business
strategies and commercial or economic realities such as market entry strategies, market penetration, and nonrecovery of initial set-up costs, unfavorable economic conditions and other legitimate business peculiarities while
determining the arm's length pricing.
4.39.13. Valuation under Customs and Transfer Pricing
Both Customs and Transfer Pricing require taxpayer to establish arm's length principle with respect to transactions
between related parties. Objective under respective laws is to provide safeguard measures to ensure that taxable
values (whether it is import value of goods or reported tax profits) are the correct values on which respective taxes
are levied. The above objective, while established on a common platform has diverse end-results as seen below:
•
To increase Customs duty amounts, the Customs (GATT Valuation) Cell would prefer to increase the import value
of goods
•
To increase tax, the tax department would prefer to reduce purchase price of goods
Issues
The diverse end-results create ambiguity in the manner in which the taxpayer should report values under the
Customs and the Transfer Pricing. We have judicial precedents which favor and contradict the use of custom
valuation in transfer pricing. In the case of Coastal Energy Private Ltd the Chennai Tribunal endorsed the TPO's
decision to apply the customs data for transfer pricing analysis. Similarly in the case of Liberty Agri Products Pvt. Ltd
the Chennai Tribunal again held that arm's length price on imports for transfer pricing purposes is to be determined
using the rate for customs. Contrastingly, a decision from the Delhi Tribunal in the case of Panasonic Limited and
another one from the Mumbai Tribunal in the case of Serdia Pharmaceutical highlighted the distinctive objective of
Customs valuation and the necessity for separate arm's length analysis as per transfer pricing provision.
These contradicting decisions necessitate a greater need for convergence of transfer pricing mechanism under the
Act and the Customs Regulations.
Recommendation
There is a need for a common platform that would provide a 'middle-path' of arms length price that is equally
acceptable under Customs Law and under the Transfer Pricing.
4.39.14. Safe Harbor
Safe harbor has been defined to mean 'circumstances' in which the revenue authorities shall accept the transfer
pricing declared by the taxpayer. Internationally used safe harbors take two forms:
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•
Exclusion of certain classes of transactions based on quantitative limits from Transfer Pricing regulations.
•
Stipulation of margins / thresholds for prescribed classes of transactions / specified industries.
Issue
The Act was specifically amended in 2009 to provide Safe Harbors to be formulated by the CBDT. Even though 3years
have passed since then, no Safe Harbors have been announced yet. The idea of safe harbor is to reduce the impact of
judgmental errors in determining transfer prices in international transactions. Safe harbor eases the compliance
burden for taxpayers, curtails disputes and reduces administrative hassles for taxmen.
Recommendations
While making these rules, the CBDT should consider simplification measures involving Cost Plus Method (CPM) and
CUP method. Safe harbors for interest rates on borrowings and lending, reimbursement and recovery of expenditure,
would be a salutary simplification measure. Such Safe Harbor may benefit large number of taxpayers but revenue
implication may not be significant. Similarly, captive IT/ ITES services can be covered by Safe Harbor provisions. The
Safe Harbor Rules in India can be framed keeping in view the national considerations and the most litigated and
disputed aspects.
Simplification measures might help in reducing the costs of maintaining detailed documentation for the taxpayers
and reduce administrative and litigation costs for both the tax department and the taxpayer. It will also help the tax
department to focus more on the bigger and more risky transactions in the interest of revenue.
4.39.15. Specified Domestic Transaction
Section 92BA has been inserted vide Finance Act 2012 by which the coverage of transfer pricing has been expanded
to include certain 'Specified Domestic Transactions' if the aggregate amount of all such transactions entered by the
assessee in the previous year exceeds Rs. 5 crores in the previous year
Issues
This amendment covers a scenario wherein the payment of remuneration by the company to its director or relative
of such directors is also required to be at arm's length. The same casts an onerous responsibility on the company visà-vis justification of the arm's length nature of such payments.
There could be a situation where by the said adjustment due to non-arm's length nature can lead to double taxation.
For example a payment by a taxable entity to another taxable related entity and in case it is determined that such
payment are not at arm's length the same can lead to tax being paid by the entity making the payment and further
the other entity would also pay tax on the transaction value rather than the arm's length value, as the transfer
pricing regulations as they stand today specifically negate the corresponding adjustment.
The Advance Pricing Agreement (APA) provisions are being made applicable to only international transactions. The
same should also be made applicable to domestic transactions covered by transfer pricing regulations.
The term “specified domestic transaction” has been defined to inter alia mean any expenditure in respect of which
payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A of the
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Act. Such expenditure could possibly include capital expenditure made to such a related person. It should therefore
be clarified that this pertains to revenue expenditure only.
Recommendations
FICCI recommends that the threshold limit for applicability of transfer pricing regulations to specified domestic
transactions be increased from Rs. 5 crores to Rs. 15 crores to avoid undue hardship for small businesses
Necessary guidance for benchmarking in respect of the directors remuneration should be provided.
This amendment seeks to cover a situation wherein there could not be any loss to the exchequer. The same is not in
line with the suggestion provided by the Supreme Court in case of Glaxo Smithkline. The Supreme Court had
provided the situation wherein transfer pricing should be applicable in case of transactions between a profit making
and a loss unit / company. The other scenario which was envisaged by the Supreme Court was transactions between
units / assesses having different tax rates. Other than the scenarios contemplated above, a corresponding
adjustment should be allowed and hence provided for on the statue.
It should be suitably clarified that the transfer pricing provisions would only apply to revenue expenditure referred to
in section 40A(2)(a) of the Act, and not to payments made to persons specified in section 40A(2)(b) of the Act.
'Any other transaction as may be prescribed' covered under section 92BA of the Act may be notified and should be
made applicable from prospective effect to avoid undue hardship to the taxpayers.
The words “close connection” appearing in section 80-IA(10) of the Act needs to be clarified to avoid ambiguity in
the application of provisions of section 92BA of the Act.
4.39.16. Penalty for failure to keep and maintain information and document etc. in
respect of certain transactions
Issues
The Finance Act, 2012 has substituted section 271AA with effect from 1st July 2012 which reads as under:“271AA. Without prejudice to the provisions of section 271 or section 271BA, if any person in respect of an
international transaction or specified domestic transaction(i) fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2)
of section 92D;
(ii) fails to report such transaction which he is required to do so; or
(iii) maintains or furnishes an incorrect information or document,
the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum
equal to two per cent of the value of each international transaction or specified domestic transaction entered into by
such person.”
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While the quantum of addition itself is disputable in transfer pricing assessments, fixing the penalty on the assessed
income would increase the burden of the taxpayer considerably.
Due to retrospective extension of scope of international transaction, the Transfer Pricing Officer (TPO) can ask the
taxpayer to pay penalty under the said section 271AA at the rate of 2 per cent of value of international transaction
due to failure to keep information in addition to another 2 per cent under section 271G for not furnishing the
information besides regular penalty under section 271(1)(c) of the Act. This would result in multiple tax demand on
arbitrary values.
Recommendation
It is, therefore, suggested that penalty should be restricted to tax in dispute and not linked to the value of
transaction.
Financial Services
4.40.1. Expanding the scope of section 10(23FB) to all categories of Alternative
Investment Funds (AIF)
•
Under the AIF Regulations, the AIFs are broadly classified into three categories viz. Category I (e.g. - venture
capital funds, social venture funds, SME funds), Category II (private equity funds, debt funds, etc) and Category
III (hedge funds, etc) based on their eligibility criteria, investment restrictions and the positive effects they would
have on the economy. The AIF regulations provide that Category I AIFs would be construed as Venture Capital
Fund (“VCF”) or Venture Capital Company (“VCC”) as specified under Section 10(23FB) of the Act for the
purposes of claiming the pass through benefits under the Act i.e. income arising to such AIFs would be taxable in
the hands of the investors and not in the hands of the AIFs. However, there is no such tax pass through benefit
accorded to Category II and III AIFs.
Issues
•
The Finance Act, 2012 amended section 10(23FB) of the Act providing tax pass through to a VCF / VCC registered
under SEBI regulations for any income earned from a Venture Capital Undertaking (“VCU”). The beneficiary of a
VCF / VCC is taxed as if it has made the investments directly in the VCU. Before the amendment, VCU was
defined to mean an unlisted Indian company engaged in 9 specified sectors. The Finance Act, 2012 amended the
definition with effect from 1 April 2013 to mean a VCU referred to in the SEBI (VCF) Regulations, 1996 made
under the SEBI Act. The above amendment in section 10(23FB) of the Act read with section 115U has led to the
removal of sectoral restrictions encapsulated under the erstwhile section 10(23FB) of the Act. Therefore, all SEBI
registered VCFs / VCCs enjoyed complete tax pass through status with respect to income earned from any VCU
under section 10(23FB) of the Act.
•
PASS THROUGH STATUS ONLY FOR CATEGORY 1 AIF
•
However, pursuant to the AIF regulations, the above tax pass through status provided in section 10(23FB) of the
Act is now made available to Category I AIFs only. This has created disparity in the treatment accorded inter-se
between the three categories of AIFs. The aforesaid tax pass through benefit is not extended to Category II and
Category III AIFs and hence, the income earned by the AIFs falling under these categories (and if constituted as
trusts) shall be taxed as per the general trust tax provisions, which are quite onerous.
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•
It must be noted that section 10(23FB) read with section 115U of the Act provides only a flexibility to the VCF for
being treated as a tax pass through entity. The Act does not provide any income-tax exemption on the income
earned by the VCF since the investors of the VCF have to pay tax on the same. Further, there is no deferral of tax
as well since the investors pay tax as and when income is accrued to the VCF. In a nutshell, the income is subject
to tax in the hands of the investors (subject to other provisions of the Act) and hence, this mechanism of pass
through only provides flexibility and tax certainty to the VCF.
Recommendation
Complete tax exemption for the all categories of AIF as a specific provision of tax pass through and single level of
taxation would be critical to promote investments in India.
4.40.2. Pass through status for entire income of Venture Capital Fund ('VCF')/ Venture
Capital Company ('VCC')
•
As per section 10(23FB) of the Act, any income earned by a VCF or VCC from a venture capital undertaking
(“VCU”) (i.e.: an unlisted Indian company) would be exempt in the hands of the VCF / VCC and be taxable in the
hands of the investors on a pass through basis. However, the provisions of section 10(23FB) do not extend to
income earned from non-VCUs.
Issues
Under the extant regulatory framework, a SEBI registered VCF / VCC cannot undertake any activity other than
investment activity. A minimum of 66.66 per cent of investible funds of a VCF / VCC must be invested in equity
shares/equity linked instruments of VCUs. Within the 33.33 per cent basket, VCF/ VCCs are permitted to make
certain non-VCU investments, which comprise the following (i) investment into special purpose vehicles (“SPVs”) set
up exclusively for downstream investments into VCUs (ii) preferential allotment by financial weak / sick listed
companies (iii) initial public offerings and (iv) preferential allotments by other listed companies.
At times, it may be commercially expedient for a VCF / VCC to make an investment into a VCU through an SPV. Such
SPVs by themselves are merely investment holding vehicles and, hence, may not qualify as VCUs for the purposes of
the Act. However, in the SPV structure, a VCF / VCC has ultimately invested its capital into the VCU albeit through an
SPV. Clearly, the tax treatment of income arising from a VCU investment made by a VCF / VCC through an SPV for
certain cogent commercial reasons ought not to be different from a direct VCU investment. It is self-evident that
capital flow into any financial weak / sick company ought to be incentivized from rehabilitation perspective etc.
Lastly, allowing VCF / VCC to participate in IPOs and preferential allotment by listed companies facilitates a more
vibrant capital market, provides Indian companies greater access to VC / PE funding and enables VCF / VCCs to
legitimately diversify their portfolio without altering their basic character of being a long term capital provider.
Also, there may be situations wherein a VCF / VCC may invest into an unlisted company, which may get subsequently
listed and the VCF / VCC may exit only post listing; technically, the investee company may not qualify as a VCU at the
time of exit and, therefore, income arising upon exit would not be covered by section 10(23FB) read with section
115U of the Act. Such a consequence seems inequitable and unintentional given that the investment was made at
the stage when the investee company was a VCU.
A VCF / VCC may have two income streams subject to differing tax treatments - income from VCUs would be taxable
under the section 10(23FB) of the Act and section 115U of the Act framework and the balance income would be
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taxable as per general trust tax provisions (for VCFs), which are not tailored to apply to VCFs. Such a duality on mode
of taxability at VCF / VCC level is avoidable.
Recommendation
For the aforementioned reasons (and akin to a mutual fund whose entire income is exempt under section 10(23D) of
the Act), the whole of the income earned by SEBI registered funds ought to be taxable on a pass-through basis under
section 10(23FB) read with section 115U of the Act in the hands of the investors. Preferably, the aforesaid suggestion
should be effected retrospectively with effect from April 1, 2008.
4.40.3. Demarcation between general trust taxation provisions and VCF taxation
provisions
Issues
Part B and Part C of Chapter XV of the Act (primarily Section 160 to Section 164A of the Act) deal inter alia with
general trust taxation. As stated earlier, most VCF's in India are established as trusts. However, the taxation of VCFs
and their beneficiaries is governed by a special set of provisions namely: Section 10(23FB) read with Section 115U of
the Act. The relevant provisions forming part of Part B and Part C of Chapter XV dealing with general trust taxation
would not apply to trustees of a VCF and/or their beneficiaries.
It would be advisable to insert a clarificatory provision to state that nothing contained in Part B and Part C of Chapter
XV of the Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust. This will result in
a clear demarcation between provisions dealing with taxation of VCF trusts and other general trusts.
Recommendation
Clarificatory provision should be inserted, to state that nothing contained in Part B and Part C of Chapter XV of the
Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust.
Assessment and Procedural Aspects
4.41. Dispute Resolution Panel related issues
4.41.1. Dispute Resolution Panel directions - not to be a precedent
Issue
•
The Dispute Resolution Panel (DRP) may, on certain occasions, refrain from passing directions in favour of the
taxpayer due to the apprehension that the same may become a precedent for other taxpayers or for the same
taxpayer in subsequent years.
Recommendation
•
In order to avoid such instances, which may hamper the administration of justice, specific provisions may be
inserted in the Act to clarify that the directions of the DRP are binding only for a particular assessment order and
a particular taxpayer and that the position may not be applicable for other AYs/ other taxpayers. The same may
be framed on similar lines to the provisions of Section 245S of the Act (as applicable to Advance Rulings).
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4.41.2. DRP may be formed as an appellate authority
Issues
•
Vide Finance Act, 2012, the AO has been given a right to file an appeal against the order of the DRP, before the
ITAT. This amendment, has although granted a recourse to the AO against the directions of the DRP, it has not
effectively resolved the practical issue of independence of the DRP. The members of the DRP are actually
revenue officers who have been entrusted with the responsibility of disposing off objections against the orders,
which in many cases are passed by the AO(s) under their own jurisdiction(s).
•
Moreover, currently, there are no restrictions imposed on the appointment of jurisdictional
Commissioners/Directors of Income-tax as a member of the DRP to hear cases falling within the jurisdiction of
the DRP member. In such a scenario, there may be cases of bias, actual or perceived, towards Revenue in issuing
directions in cases falling within the jurisdiction of the DRP member.
Recommendations
The members of the DRP should be independent (such as retired members of the Tribunal) now that the AO has
been entitled to appeal before the Tribunal against the order of DRP, rather than comprising of revenue officials. It is
also recommended that one DRP member should be from outside Government and person of eminence drawn from
the fields of accountancy, economics or business with knowledge of income tax matters.
Alternatively, the DRP may be disbanded and the power to hear the cases be transferred back to the Commissioner
of Income-tax (Appeals) [CIT(A)]. However, in such a case, the appeal procedure would need to be amended to bring
in certain positive features of the DRP mechanism. In particular, stringent provisions may be inserted to ensure the
following:
•
That the CIT(A) should hear the appeal and dispose it off within a period of 12 months from the date of
institution of the appeal; and
•
That no demand should be raised upon the taxpayer till the appeal is disposed off by the CIT(A).
Further, in order to ensure speedy disposal of appeals, more number of CIT(A)s may be appointed and allocation of
appeals to the CIT(A)s be streamlined.
Furthermore, in order to avoid cases of actual or perceived bias and to ensure objectivity in the dealing of cases,
specific provisions may be inserted to restrain a jurisdictional Commissioner/ Director from being appointed as a
member of the DRP hearing cases falling within his/ her jurisdiction. This view was also endorsed by the Uttarakhand
High Court in its recent decision in the case of Hyundai Heavy Industries4 and Mumbai Tribunal in the case of
Huntsman International (India) Limited5 and Lionbridge Technologies Private Limited6.
4
Hyundai Heavy Industries [2011-T11-28-HC-UKHAND-INTL]
Huntsman International (India) Limited 23 taxman.com 52 (Mum)
6
Lionbridge Technologies Private Limited [2012] 51 SOT 40 (Mum)
5
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4.42. Electronic Filing of income-tax returns
4.42.1. Grant of credit for Tax Deducted at Source
Issues
•
•
•
•
•
While e-filing the income-tax return, a taxpayer claims credit for TDS, advance tax and tax paid on selfassessment. As per the CBDT instructions, no supporting documents to the return will be accepted by the tax
officers.
Due to mismatches in the data between TDS Certificates issued by deductors to the taxpayer and the TDS details
uploaded by the deductors on TIN system (i.e. bank payment details, PAN Nos. of the deductees), complete
details of actual TDS deducted is not captured in the system.
In addition, the information furnished by the taxpayers is not appropriately captured in the software due to
processing errors.
As a result, no credit /short credit of TDS is being given while processing of returns, causing undue grievances to
the taxpayer where the default actually lies in the hands of deductors or in the software itself.
As a consequence, the endeavor of the tax department to introduce paperless TDS certificates is yet to achieve
its desired goal.
Recommendations
•
It is suggested that so long as the TIN and TDS systems are not independently reviewed and all bugs are fixed,
TDS Certificates issued by the deductors, advance tax challans and self-assessment tax challans which are
furnished by the deductees in the tax assessment, should be given due cognizance by the AO and credit of such
claims should be allowed within a given time frame to address the taxpayers grievances.
•
It is also suggested that the AO should be made accountable for delay in granting credits when original
documents are furnished by the taxpayer.
4.42.2. Option to insert explanatory notes/ edit fields in the return
Issues
•
Under the income-tax form notified by the income-tax department, there is no provision in the e-format for
giving explanatory notes in respect of any adjustments in the return of income.
•
If on the one hand the taxpayer does not make any adjustments, he will have to forego the claim. On the other
hand, if the taxpayer makes the adjustment and the AO does not agree with the same, he is likely to make
adjustments to the income and also initiate penalty proceedings causing undue hardship to the taxpayer.
•
Further certain fields are locked for editing and values are calculated automatically. (e.g.: In case of a taxpayer
who has not used an asset for the purpose of his business is not eligible to claim depreciation. But as the
taxpayer is required to give details of opening written down value of the asset in the income-tax form,
depreciation is calculated automatically, despite the taxpayer being not eligible to claim such depreciation.)
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Recommendation
It is suggested that the e-format of the income-tax return form be re-devised to provide the taxpayer the option to
edit fields and give explanatory notes which the taxpayer considers necessary in respect of any adjustments carried
out. It will not only safeguard the taxpayer against penalty proceedings but also against reopening of completed
assessments.
4.42.3. Carry forward of business losses in cases of newly setup companies
Issues
•
As per Section 139 of the Act, every company is required to file its income-tax return. As per Section 3 of the Act,
in respect of a business newly set-up in any financial year, the 'previous year' is the period beginning with the
date of setting up of the business and ending with the said financial year.
•
The actual point at which a business can be said to have been set up is at the point when the Company is ready
to commence its operations. As such, provisions relating to computation of income under the head 'profits and
gains of business' would not apply to the companies who are yet to commence its business and would not be
eligible to carry forward any business loss for possible set-off in subsequent assessment years under Section 72
of the Act.
•
However, in the income-tax return form, the computation of income under head 'profits from business' is linked
to the items of profit and loss account entered in the form. As a result business loss is also automatically
calculated, although the taxpayer is not eligible to carry forward any business loss, thereby resulting in incorrect
claims.
Recommendations
•
It is suggested that the e-format of income-tax return form be re-devised to manually edit fields relating to carry
forward of unabsorbed losses and also as suggested earlier, provision be made for providing explanatory notes
for carrying out the edits.
•
As per the provisions of Section 3 of the Act, expenses incurred prior to the date of set-up of business are not
allowed as deduction while computing profits and gains of business. In the current income-tax return form,
there is no separate Section wherein such expenses can be mentioned. Hence, it is suggested to include a
section wherein expenses incurred prior to set-up of business may be disclosed.
4.42.4. Entering of bank account details in case of refund for foreign companies
Issue
•
Foreign companies that have no PE in India and have refunds arising in India are compulsorily required to furnish
Indian bank account details in the income-tax return. Since the foreign companies have no bank accounts in
India, it is causing undue hardship to the companies.
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Recommendation
It is suggested that the e-format of the income-tax return form be re-devised to allow the foreign companies to
provide details of foreign bank accounts in the return form. In this connection, it is also suggested that, since the
cheques issued by the Income-tax department are denominated in Indian Currency which are not accepted by all the
foreign banks, a facility of remitting refunds through wire transfer be introduced.
4.43. Compulsory filing of income tax return in relation to assets located outside India
Finance Act, 2012 has made mandatory for residents (other than not ordinarily resident in India) to file tax return in
India if they have any asset (including any financial interest in any entity) located outside India or signing authority in
any account located outside India irrespective of the fact whether the resident taxpayer has taxable income or not.
Issues
•
There is no minimum threshold prescribed for foreign asset/financial interest reporting. In absence of minimum
threshold, there could be diligent reporting of minimal values of bank account balances etc. defeating the
purpose of data collection, and overburdening the tax department with irrelevant information. On the other
hand, assessees may inadvertently ignore certain details (given the low values), which may trigger a noncompliance which may not be intentional. This could be avoided by prescribing a minimum threshold.
•
The time limit of 16 years prescribed by the Finance Act, 2012 for reopening of cases where any person is found
to have any asset (including financial interest in any entity) located outside India will pose serious hardships for
assessees who have returned to India after staying abroad for long as it is not reasonable to expect them to have
the documentation retained for the past 16 years to explain the bonafide. Hence, this will even cover the
genuine assessees who would have paid tax on the foreign assets while their stay abroad but are unable to prove
their bonafide in absence of any documentation for a such a prior period.
•
The Central Board of Direct taxes (CBDT) has notified the tax forms for AY 2012-13, mandating disclosure of
foreign assets. In the tax return forms, a new section called Foreign Assets has been introduced to disclose
foreign assets. However, there are no guidelines on as to what would come within the purview of 'any asset,
'financial interest in any entity'. In the absence of any guidance the term may have wide connotation leading to
litigation. Clarity would be required on whether assets such life insurance policies, stock options benefits,
overseas social security schemes and pension plans, paintings, works of art, collection items (such as stamp
collection/coin collection) etc. are covered. The reporting requirement could end up to be a meaningless
collection of data if suitable guidelines are not issued.
•
In practical situations, many executives of a company are appointed as authorized signatory of company account
situated outside India while discharging their duty as an employee of that company. Details of such accounts
may not be available with such executives. It has now become mandatory for every resident to report details in
the income tax form if they have signing authority in any account located outside India. Such a requirement
poses hardship for the assessees who are signatory to accounts held by the entities in which they are
employed/directors.
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Recommendations
•
It is strongly recommended that a minimum threshold be prescribed for reporting of foreign assets.
•
The period of 16 years for reopening of cases should be made applicable only for any assessment year beginning
from on or after AY 2012-13.
•
It should be suitably clarified as to what would constitute “any asset”, “financial interest”.
•
It is recommended that an exception be provided to a resident who is a signing authority to a foreign account by
virtue of his employment/directorship.
Assessment Procedure
4.44.1. Standard questionnaires
Issue
•
While issuing notices [e.g. under Section 142(1) of the Act], there is a practice to issue standard questionnaires
to taxpayers without customizing it to the facts and circumstances of the taxpayer concerned, most of the
questions raised are not applicable to the taxpayer and causes unnecessary hardship to the taxpayer, who is
unsure of what action needs to be taken at his end.
Recommendation
It is suggested that the AOs be appropriately instructed to issue customized notices to a taxpayer instead of
dispatching a generic standard form questionnaire to all taxpayers.
4.44.2. Non-consideration of submissions made by taxpayer
Issue
•
During assessment, a taxpayer often provides elaborate submissions in response to questions raised by the AO in
relation to notices issued under Section 142(1) or 143(2) of the Act. However, very often, the AO passes the
assessment order against the taxpayer without stating any reasons for rejecting the submissions made by the
taxpayer. Since the AO functions as a quasi-judicial authority in assessing a taxpayer's income, it is important that
the AO provides appropriate reasons for rejecting the submissions.
Recommendation
It is suggested that appropriate instructions be given to the AOs to issue a well-reasoned assessment order after
considering appropriately a taxpayer's submission.
4.44.3. Collection of demand
Issue
•
Over-pitched assessments, huge demands and coercive methods without any accountability on the part of the
AOs, are a common phenomenon.
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Recommendation
It is suggested that appropriate instructions be given to the AOs to consider applications for stay of demand
favourably for payment of demand by taxpayers especially when the appellate orders are in favour of the taxpayer.
4.44.4. Proceedings under Section 201 of the Act
Issue
•
In respect of Assessee-in-default (AID) proceedings carried out under Section 201 of the Act, it has been the
experience of taxpayers that credits are not granted for taxes paid and demands raised are expected to be
complied within an unreasonably short period of time. Thus, a bonafide taxpayer is not given time to weigh the
option of filing an appeal against the assessment order.
Recommendation
Since these AID proceedings are carried out on a taxpayer in respect of someone else's primary tax liability, it is
essential that the tax authorities provide additional & sufficient time to the taxpayer to collate relevant data.
4.44.5. Training at the AO/Field office level
Issue
•
It has often been observed that AOs at the ground level do not have sufficient knowledge of the transactions and
indulge in roving enquiries and data from a taxpayer. Often, the AOs are prejudiced against the taxpayer and
conduct assessments based on baseless suspicion.
Recommendation
In these situations, it becomes extremely difficult for a taxpayer to submit necessary information to convince the AO
on the genuineness of the transactions. It would therefore be in fitness of things that appropriate training be
provided at the AO /field officer level and a central pool of specialists be put in place for guidance on assessment
(example in respect of non-charitable trust, etc).
4.44.6. Delay in disposing of applications
Issue
•
Delay in timely processing of applications filed under Sections 195(2), 197 and 154 of the Act by the tax authority
results in inordinate delay in carrying out the commercial transactions for a taxpayer and adversely affects the
taxpayer's business.
Recommendation
The current scheme of the Act does not provide any time limit for disposal of application under Section 195(2) and
197 of the Act. Furthermore, the time limit prescribed for the application under section 154 is generally not adhered
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by the Tax Authorities. Hence, it is necessary to provide suitable time limits for disposal of such applications, with inbuilt accountability and strict adherence. The order should be passed within three months from the end of the
month in which the application is made.
4.44.7. Enquiry
Issue
•
During assessment, a taxpayer is often told to provide information along with all supporting documentary
evidence which is voluminous in nature within a very short span of time and sometimes the nature of
information is so large that it causes undue hardship to the taxpayer to collate the information.
Recommendation
It is therefore recommended that tax authority should set a monetary threshold limit which can be used while
enquiring information.
4.44.8. Claim made during the assessment proceedings
Issue
The tax officers reject the claims made by the taxpayers during the course of the assessment proceedings which are
omitted to be claimed by the latter in their return of income. The rejection of claim by the tax officer is made on the
basis of the judgment of the Supreme Court in the case of Goetze India Ltd. Vs. CIT (2006) 284 ITR 323 (SC), The said
Apex Court judgment has been distinguished by various courts in plethora of judgments and also not in consonance
with the Circular No. 14 dated April 11, 1955 issued by CBDT. The genuine claim of the taxpayers not entertained by
the tax officers at the time of assessment causes unnecessary hardship to the taxpayers and leads to protracted
litigation.
Recommendation
It should be suitably clarified in the Act that the tax officer is duty bound to allow the legitimate claim of the taxpayer
made before him during the course of the assessment proceedings and assess the total income/loss after allowing
the said claim.
4.44.9. Initiation of penalty proceedings on question of law
Issue
It has been seen that the tax officers initiates penalty proceedings under section 271(1)(c) of the Act even when
disallowance is being made in the assessment order on a matter of question of law. It is a settled law as has been
held by various Courts that penalty for concealment of income cannot be levied due to addition on account of a
question of law. However, initiation of penalty proceedings in such cases causes undue hardship to the taxpayers
who have to take up unwarranted litigation with the tax department and waste time and resources for filing replies
for dropping of penalty proceedings.
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Recommendation
It is suggested that appropriate instructions be given to the AOs that no penalty under section 271(1)(c) of the Act
should be initiated on addition on account of a question of law.
Reassessment
4.45.1. Reopening of assessment
Issue
•
Under the existing provisions of Section 147 of the Act, the AO can reopen the assessment at any time within a
period of 4 years from the end of the relevant assessment year. In certain cases assessments are being reopened
by the AO on mere change of opinion/ information obtained through roving enquiries, causing undue hardship to
the taxpayer.
Recommendation
It is suggested that, if there are no changes in facts and circumstances of the case and the taxpayer has made full and
true disclosure of all material facts and reassessment is based on mere change of opinion/ information obtained
through roving enquiries made by the AO, opening of reassessment without bringing on record any fresh facts,
evidences or reasoning in support should be deemed to be invalid. It is suggested to insert an Explanation to Section
147 of the Act to make amendment to this effect.
4.45.2. Time Limit for filing return based on notice of reassessment
Issue
•
The Finance (No.2) Act, 1996 amended Section 148 of the Act doing away with the minimum period of 30 days
within which a taxpayer was required to submit his return of income in response to a notice for reassessment.
With this amendment, the period within which the taxpayer is required to submit the return of income for the
purpose of reassessment is left to the discretion of the AO.
Recommendation
It is suggested that time limit of not less than 30 days be provided to the taxpayer for filing return of income from the
date of service of notice upon the taxpayer. It is also suggested that the printed form of notice under Section 148 of
the Act should be amended likewise.
4.46. Time limit for completing income-tax proceedings, where matters are partially
set-aside by higher Appellate Authorities
Issues
•
Over the years, in an attempt to continuously remove the perils faced by the taxpayer, the Legislature has been
shortening the time span within which an assessment must be completed. Toward this, Section 153(2A) of the
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Act was introduced which mandates a specific period (9 months/21 months/24 months) for framing a fresh
assessment in pursuance of an Order of higher Appellate Authorities, setting-aside or cancelling an assessment
in toto.
•
However, for cases falling within the purview of Section 153(3) of the Act, wherein no fresh assessment has been
directed but the higher Appellate Authority directs the AO to reconsider some aspects after proper investigation
or to recompute the income as per the their finding or directions, no time span has been specified under the Act
for their disposal. Hence, if the complete assessment is not set aside but only a few matters are set aside for reexamination, there is no time limit for passing orders to give effect to such direction. Consequently, it is seen
that there is a tendency on the part of AO to defer such assessments resulting into matters pending for an
unduly long period. As a result, refunds due are locked-up for no fault of the taxpayer.
Recommendation
Hence, it is suggested that in the interest of justice and to expedite the speedy disposal of matters concluded by
higher Appellate Authorities, the Legislature should either provide for a mandatory time limit in Section 153(3) of the
Act for matters partially set-aside by higher Appellate Authorities or enlarge the scope of Section 153(2A) of the Act
so as to also encompass such matters which are partially set-aside by higher Appellate Authorities.
4.47. Stay of Demand by the Tribunal
With a view to mitigate undue hardship to the taxpayer arising out of high income-tax demands pursuant to Orders
of lower tax authorities, Section 254(2A) of the Act was introduced and amended from time to time. It inter alia
empowers the Tribunal for granting stay of any proceedings (including granting extension of stay) relating to appeal
filed before it for a period not exceeding 365 days in aggregate. Further, it cast a responsibility on the Tribunal to
dispose of the appeal within such period, failing which the stay granted will stand vacated after the expiry of such
period, irrespective of the delay in disposing the appeal not being attributable to the taxpayer.
However, the Statute fails to provide elaborate/clarificatory provisions with respect to grant of stay, resulting in many
procedural hassles and long drawn litigation on stay applications. In such backdrop and in the interest of justice,
some key recommendations / suggestions that may be considered under Section 254(2A) are as under:
4.47.1. Stay beyond the maximum stipulated period of 365 days
Issue
•
Section 254(2A) of the Act provides for maximum time limit of 365 days, beyond which the stay shall stand
vacated even if the delay in disposing the appeal is not attributable to the taxpayer. However, such automatic
vacation of stay does not envisage a situation where the Tribunal is unable to dispose the appeal within the
maximum stipulated time (365 days), say, complex issue, issue pending before Special Bench, administrative
reasons, etc. Such procedural delay in disposing the appeal has the effect of penalising the taxpayer even for
cases where the delay in disposing the appeal is not attributable to them. Even after specific amendments, there
are judicial decisions which have held that where delay in disposal of appeal is not attributable to taxpayer, the
Tribunal has power to extend stay of demand beyond period of 365 days.
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Recommendation
It is thus suggested to suitably relax the stringent timeframe of 365 days, where delay in disposal of appeal is not
attributable to taxpayer.
4.47.2. Stay of Demand of income-tax v. Stay of Proceedings
Issue
•
Though Section 254(2A) of the Act provides for the Tribunal to grant stay of any proceedings in respect of an
appeal filed before it, Rule 35A of the Income-tax (Appellate Tribunal) Rules, 1963 refers to stay of recovery of
demand of tax, interest, penalty, fine, estate duty or any other sum. In this context, there is a grey area as to
whether the Tribunal can grant stay of proceedings to give effect to the Order of revision under Section 263 of
the Act and penalty proceedings initiated under the Act, pending the disposal of corresponding appeals against
Order made under Section 263 / 143(3) of the Act.
Recommendation
In such scenario, while judicial decisions have upheld the grant of stay of proceedings to give effect to the Order of
revision under Section 263 of the Act and penalty proceedings, it is suggested to suitably clarify the same under the
Act/Rules to avoid further litigation.
Refunds
4.48.1. Interest on delay in grant of refund
Issue
•
Where refund claims are processed and granted, there may be a delay of few months from the date of grant of
such refunds to the date of actual disbursement of the refund amount to the taxpayer. However, interest under
Section 244A of the Act is typically computed on such refunds only till the date of grant of refunds and not till
the date of actual disbursement of the refunds.
Recommendation
It would be ideal to ensure that refunds are disbursed without time lag. Provisions may be inserted to ensure that in
cases where the time lag between the date of grant and the date of disbursement exceeds 30 days, interest under
Section 244A of the Act should be made applicable till the date of disbursement of refund.
4.48.2. Delay in passing of order giving effect to the order of CIT(A)/ Tribunal/ Court
Issue
•
Considerable delay is seen in giving effect to the order of the CIT(A)/Tribunal/Court by the AO, particularly where
relief/refund is allowed by the CIT(A)/ Tribunal /Court. Due to the delay in giving the effect of appellate order,
substantial refund/ relief to be allowed to the taxpayer is withheld by the tax department. Though Section 244A
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of the Act provides for payment of interest for the delay in grant of refund, no time limit has been prescribed
within which the appeal effect is to be given by the AO. As a result, the tax payments made by the taxpayer on
funds borrowed at heavy rate of interest is unnecessarily held up by the tax department.
Recommendation
Provisions may be inserted to require the AO to give effect to the order of CIT(A)/ Tribunal / Court within a
reasonable period, say six months, failing which the taxpayer should be given an option to adjust the amount of
refund (along with interest) while making payment of advance tax for the current year.
4.48.3. No express provision for refund of income-tax, if recovered before the expiry of
time limit to file an appeal before Tribunal or during the pendency of disposal of
stay application
Issue
•
Judicial precedents have held that the taxpayer would be entitled to get refund of income-tax recovered either
before the expiry of time limit to file an appeal before the Tribunal or during the pendency of disposal of stay
application. However, in the absence of express provisions to this effect under the Act, it is seen that in many
cases the Tax Authorities adopting a coercive approach against the taxpayer (recovery proceedings) whereby the
taxpayer is required to pay the income-tax, irrespective of merits of case.
Recommendations
Thus, it is suggested that the Legislature should suitably include an express provision whereby the Income-tax
Authorities are either:
•
restricted to proceed with the income-tax recovery proceedings; or
•
refund the income-tax paid during the recovery proceedings, without adjusting against the income-tax arrears, if
any, before the expiry of time limit to file an appeal before Tribunal or during the pendency of disposal of stay
application in such cases.
4.49. Maintenance of Books of Account in Digital Form
Issue
The present law requires the taxpayers to maintain books of account in physical form thus causing a lot of hardship
to the assessees in the world of digitization and also leading to wastage of valuable resources.
Recommendation
Section 2(12A) of the Income Tax Act needs to be amended to include books maintained in digital form also as 'books
or books of accounts' for the purpose of the Income Tax Act. Major corporate entities manage their books of account
on automated systems only and the proposed amendment would encourage maintenance of accounts in digital form
enabling effective management of cumbersome records.
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Personal Tax
4.50.1. Taxation of Employee Stock Option Plans for migratory employees
Issues
•
Section 17(2)(vi) of the Act, read with Rule 3 of the Rules deal with taxation of Employee Stock Option Plans
(ESOPs). It is provided that the value of any specified security or sweat equity shares allotted or transferred,
directly or indirectly, by the employer, or former employer, free of cost or at concessional rate shall be taxable as
perquisite in the hands of the employee. For this purpose, the value of any specified security or sweat equity
shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the
date on which the option is exercised by the taxpayer as reduced by the amount actually paid by, or recovered
from, the taxpayer in respect of such security or shares.
•
In this connection, what has not been appreciated is that ESOPs shares stand on a different footing because on
the date of exercise, the shares are subject to lock-in condition and cannot be considered to be a benefit and
therefore, ought not to be fictionally treated as benefit and brought under the ambit of perquisites for taxation
purposes. The Supreme Court, in CIT v. Infosys Technologies Ltd., [2008] 2 SCC 272, at page 277, had aptly held:
“During the said period, the said shares had no realisable value, hence, there was no cash inflow to the
employees on account of mere exercise of options. On the date when the options were exercised, it was not
possible for the employees to foresee the future market value of the shares. Therefore, in our view, the benefit, if
any, which arose on the date when the option stood exercised was only a notional benefit whose value was
unascertainable. Therefore, in our view, the Department had erred in treating INR 165 crores as perquisite value
being the difference in the market value of shares on the date of exercise of option and the total amount paid by
the employees consequent upon exercise of the said options.”
•
That apart, it has to be appreciated that if an employee is subjected to tax on the notional benefit as perquisite,
there could be situations where he may suffer double loss, first by way of tax outgo and again as a loss on actual
sale of shares, which may neither be fair nor warranted, especially when such tax out-go are not allowed to be
set-off against capital loss.
Recommendations
•
ESOPs should not be subject to tax on notional perquisite value and taxed only on capital gains arising from the
sale of shares, as was the position till 31 March 2006.
•
It may be mentioned that only when Fringe Benefit Tax (FBT) was introduced by the Finance Act 2005, these
provisions were changed for the purposes of taxation of ESOPs under FBT regime. However, those very provisions
have been brought back by way of insertion in sub-clause (vi) of sub-section (2) of Section 17 of the Act, after the
abolition of FBT, which has caused a lot of anxiety. It is imperative that the earlier tax treatment be restored to
facilitate the employers in retaining talented persons in the organization. Needless to mention that ESOPs have,
over the years, emerged as a critical motivational and retention tool for companies in a highly competitive
market for talents. It proved an effective instrument to motivate employees to perform and excel and thereby a
win-win proposition for the employers / shareholders on one hand and the employees on the other. It is in this
perspective the FICCI pleads for the restoration of earlier position of taxing the ESOPs only by way of capital gains
tax on gains arising to the employee on the actual sale of shares allotted to him.
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Issues
•
Notwithstanding the above, taxation of ESOPs creates an issue in the case of migrating employees, who move
from one country to another, while performing services for the company during the period between the grant
date and the allotment date of the ESOP. The domestic tax law is unsettled on the taxation of such migrating
employees and does not clearly provide for such cases.
•
There was a specific clarification on proportionate taxability of benefits under the erstwhile FBT regime, where
the employee was based in India only for a part of the period between grant and vesting. However, there is no
specific provision in this regard under the amended taxation regime from 1 April 2009.
•
As per Rule 3 of the Rules, the fair market value of share of the company which is not listed on a recognized
stock exchange in India on the date of exercise of ESOP represents the value determined by the merchant banker.
The requirement of obtaining a certificate from the merchant banker in case of shares granted by foreign holding
companies to the employees of Indian companies poses undue hardship on the taxpayers
Recommendations
A specific clarification should be inserted with respect to taxability of only proportionate ESOPs benefit based on
residential status of the individual, where an employee was based in India for only a part of the period between
grant and vesting
It is recommended that the rules should be amended to specifically provide that in case the shares are listed on the
foreign stock exchange, the fair market value of such shares should be the average of opening price and closing price
of the share on the said foreign stock exchange on the date of exercise of the option. This will ease the taxpayers
from the burden of obtaining merchant bankers certificate.
4.50.2. Taxation of Rent Free Accommodation (RFA)/Concessional RFA provided by the
Employer
Issues
Section 17(2) of the Act provides for valuation of perquisite in case of provision of accommodation by the employer
or by way of concession in rent provided by any employer other than the Central Government or State Government.
The rule provides for valuation at specified rate of 15% or 10% or 7.5% of salary based on the size of population as
per 2001 census. However, the above method of determination of the perquisite suffers from various inequities:•
The same employee staying in the same company owned accommodation will have a different perquisite value
with increase in salary and further, different employees with different salaries will have a different perquisite
value in respect of the same accommodation.
•
The determination of the perquisite value of the accommodation based on the salary of the employee
irrespective of the size/fair rental value of the accommodation is completely illogical and unfair.
Recommendation
FICCI recommends that the rule for perquisite valuation of accommodation should be suitably amended to provide
that value should be taken as Fair Rental Value based on Valuation Report obtained from the Municipal Authorities.
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4.50.3. Taxation of Contribution to Superannuation Fund in excess of INR 1 lakh
Issues
•
Section 17(2)(vii) inserted by the Finance (No.2) Act, 2009, provides that the amount of any contribution to any
approved superannuation fund by the employer in excess of INR 1 lakh will be taxable as perquisite in the hands
of the employee.
•
It has to be appreciated that contributions to superannuation fund may or may not result in superannuation
benefits to the employees since there are various conditions to be fulfilled by the employees like serving a
stipulated number of years, reaching a certain age etc. Further, the pension payments are subject to tax at the
time of actual receipt by the employee after his retirement. As such this may lead to partial double taxation for
the employee where the contributions had been taxed earlier.
Recommendation
It is recommended that employer contribution to approved superannuation fund be made fully exempt from tax.
This would also be in line with the Direct Taxes code 2010.
4.50.4. Revival of Standard Deduction
Issues
•
A standard deduction was earlier available to the salaried individuals from their taxable salary income. However
the same was abolished with effect from AY 2006-07. On the other hand, business expenditure continued to
remain as permissible deductions from taxable business income.
•
It has to be appreciated that standard deduction is not a personal allowance and used to be given as a lump sum
for meeting employment related expenditure. In many countries like Malaysia, Indonesia, Germany, France,
Japan, Thailand etc. allowance in the form of standard deduction is available for salaried employees for
expenditure connected with salary income. To illustrate in Thailand the deduction is as high as 40 percent of
income subject to certain limits.
Recommendation
The standard deduction for salaried employees should be reinstated to at least INR 50,000 to ease the tax burden of
the employees. This should also reduce the disparity between salaried and business class with only the latter being
eligible for deduction for expenditure incurred by them for earning their income.
4.50.5. Transportation Allowance
Issues
•
The transport allowance granted by the employer to the employee to meet his expenditure for the purpose of
commuting between the place of his residence and the place of his duty is currently tax exempt up to INR 800
per month in terms of Section 10(14) of the Act read with Rule 2BB of the Rules.
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•
This exemption limit was fixed in 1998 and seems quite nominal considering the ever rising fuel costs and
resultant conveyance costs.
Recommendation
The exemption limit of INR 800 per month needs to be considerably raised upwards, say to minimum of INR 2,000
per month to bring it in line with the rising conveyance costs.
4.50.6. Education Allowance
Issues
The education allowance granted by the employer to the employee to meet the cost of education expenditure upto
two children is currently tax exempt up to INR 100 per month per child in terms of Section 10(14) of the Act read
with Rule 2BB of the Rules.
This exemption limit was fixed in 2000 with retrospective effect from 1 August 1997 and seems quite nominal
considering the ever rising cost of education
Recommendation
The exemption limit of INR 100 per month needs to be considerably raised upwards, say to minimum of INR 1,000
per month to bring it in line with the rising inflation and cost of education.
4.50.7. Reimbursement of Medical Expenditure
Issues
•
Any sum paid by the employer in respect of any expenditure incurred by the employee on the medical treatment
of self/ family is currently exempt from tax, to the extent of INR15,000 per annum.
•
This limit was last revised almost 14 years ago and needs to be revisited in light of the soaring medical and
hospitalization costs especially for private hospitals.
Recommendation
The current tax exemption limit of INR 15,000 per annum needs to be increased to at least INR 50,000 per annum.
This could to some extent help to bring the exemption up to speed with the rising medical costs. Further, this would
also be in line with the limit set in the Direct Taxes Code 2010.
4.50.8. Deduction in respect of Health Insurance Premia under Section 80D
Issues
•
Currently, a deduction up to INR 35,000 (15,000 for self/ family and 15,000 for parents) is available to an
individual under Section 80D of the Act from taxable income, towards health insurance premium paid by him.
The limit for parents is increased to INR 20,000 if the parents are senior citizens.
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•
Unlike many other countries, India does not have a comprehensive health-care system for its citizens. There are
Government hospitals but the facilities available are woefully inadequate while the private hospitals are very
expensive. Also, the penetration and awareness of health insurance in India is very slow. Most individuals buy
insurance only to save taxes.
Recommendations
Therefore, there is a need to raise the above limit to achieve two-fold objective of giving a tax incentive while also
encouraging people to obtain larger healthcare cover in wake of the rising costs.
It will be immensely helpful if, till the Government introduces adequate healthcare systems, the quantum of
deduction under Section 80D of the Act is increased. A reference to General Insurance Corporation to find out how
much they charge as premium for insurance of a family under a comprehensive hospitalization scheme will give an
indication about the reasonable higher limit of the deduction.
4.50.9. Tax Exemption in respect of Leave Travel Concession (LTC)
Issue
Presently, the economy class air fare for going to anywhere in India is tax exempt (twice in block of four years).
However, this exemption is being allowed only for travel within India. Lately, owing to low airfares and package tours,
a number of Indians prefer to avail LTC for going abroad particularly to neighboring countries like Thailand, Malaysia,
Sri Lanka, Mauritius, etc., as the fares thereto are at times less than for traveling to some far away destination within
India.
Recommendations
•
It is therefore recommended to grant tax exemption for economy class airfare for travel abroad also on holidays
so long these are within the overall airfare tax exemption conditions for traveling in India. Under Rule 2B of the
Rules, the amount exempt in respect of LTC by air is to the extent of the economy fare of National Carrier i.e.
Indian Airlines. It is suggested that word “National Carrier” should be deleted from Rule 2B.
•
Moreover, as per the current provisions, Leave Travel Concession/Assistance is eligible for tax relief for 2 calendar
years in a block of 4 calendar years. It is suggested that the concept of calendar year should be replaced with
financial year (April - March) in line with the other provisions of the Income Tax Law and further exemption
should be made available in respect of at least one journey in each financial year.
4.50.10. Taxation of social security contributions in the hands of Expatriates
Issues
•
In respect of an expatriate employee deputed to India, the home employer and employee may be required to
contribute to social security schemes under the local law of country. In most cases, the contributions made to
these schemes may not vest on the employee at the time of making the contributions and thereby do not
provide any immediate benefit to the employee. Further, the employee contributions may also be mandatory
under the law of the home country. Both the employer and employee contributions may be available as a
deduction from taxable income in the home country of the expatriates.
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•
However, currently, there is no provision under the Act, which provides for the taxability or otherwise in respect
of such contributions from the taxable income though there have been several favorable judicial precedents7.
Recommendation
It needs to be clarified under the Act, that employer contributions to such social security schemes should be exempt
in the hands of the individual employee based on the principle of vesting. Further, the employee contributions
should be available as a deduction where the same are mandatory and constitute diversion of income by overriding
title.
4.50.11. Provision of treaty benefits while calculating TDS under Section 192
Issues
•
Currently, there is no provision in the Act, enabling the employer to consider admissible treaty benefits (e.g.
credits for taxes paid in another country/ treaty exclusions of income), while withholding tax under Section 192
of the Act from salary income.
•
This creates cash flow issues for the expatriates who are initially subject to full withholding by their employers
and then are required to claim large refunds on account of treaty benefits at the time of filing their tax return.
Many of these expatriates may complete their assignments and leave India prior to obtaining their tax refunds
which also creates issues with respect to credit of their refund amounts.
Recommendation
Since the credit is otherwise admissible in terms of Section 90/91 of the Act, a suitable amendment may be
incorporated in Section 192 of the Act providing for the employer to consider such credits/exclusions at the time of
deducting taxes.
4.50.12. Threshold limit under Section 80C of the Act
Issues
•
Over the years, investments made in various avenues available under Section 80C of the Act have helped the
Government to raise funds as well as the individuals to save tax.
•
However, with too many investment/ expenditures clubbed into the existing overall limit of INR 1 lakh individuals
sometimes are discouraged from making further investments.
Recommendations
There must be a clear distinction between long-term and short-term savings. So far there has not been any
significant support in tax policy to actively encourage 'long-term savings' which is very much needed. Life insurance
and pensions are the main segments of the financial services that address the needs of individuals in the long-term.
7
CIT v. L.W. Russel [1964] 53 ITR 91 (SC), Gallotti Raoul v. ACIT [1997] 61 ITD 453 (Mum), DCIT v. Mr. Moroux c/o Air France (Delhi) [2008], ITO v.
Lukas Fole (Pune) [2009], CIT v. NHK Japan Broadcasting Corporation [Civil Appeal No. 1712 of 2009 - SC], ACIT v. Scott R. Bayman (Delhi) (May
2009), ACIT v. Harashima Naoki Tashio (Feb 2010) etc
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It would be equally desirable to have many more such tax-exempt investment avenues to mobilize funds for
infrastructural and overall economic development. Therefore, the Government may consider separate exemption
limits for such important avenues.
Further, the Government may look at increasing the overall deduction limit to at least INR 200,000 to boost further
investment and increase tax savings for the individual.
That apart, Term deposits for a period of 5 years or more with a scheduled bank, in accordance with a scheme
framed and notified by the Central Government, by an individual / HUF is eligible for inclusion in gross qualifying
amount for the purpose of deduction under Section 80C of the Act. For other eligible investments viz. bonds and
mutual funds the lock in period is 3 years and hence to ensure parity, the period of term deposits for claiming
deduction under Section 80C of the Act should also be reduced to 3 years from existing 5 years.
4.50.13. Deduction for Educational Expenditure
Issue
•
Education of children these days imposes a heavy burden on the middle class. A good beginning was made in
2003 by providing deduction for tuition fees under Section 80C of the Act. But Section 80C of the Act is
particularly a provision granting incentive for savings and also considering the long list of eligible investments in
this section, there is very little relief to the individual on account of the education fees incurred by him.
Recommendation
It is therefore recommended to de-link deduction for educational expenditure for children from Section 80C and
provide under a separate provision like Section 80D of the Act for medical insurance. A reference to the Ministry of
Education to find out the tuition fee for an average middle class household will give an indication about the limit of
the deduction.
4.50.14. Deduction in respect of rent paid by taxpayers not receiving a House Rent
Allowance (HRA)
Issue
•
Under Section 80GG of the Act, the maximum deduction available to individuals who do not receive an HRA, in
respect of rent paid is only INR 2000 per month. The said limit was last revised in 1998 and is very low in light of
the huge rental costs especially in the metro cities.
Recommendation
The exemption needs to be increased to at least INR 10,000 per month in view of the huge rental escalation. As in
the case of HRA exemption, the Government may also consider introducing separate limits for metro and non-metro
cities.
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4.50.15. Electronic meal card
Issues
•
As per the revised perquisite rules reinstated in December 2009, if food and non-alcoholic beverages are
provided during working hours at office or business premises or through non-transferable paid vouchers usable
only at eating joints, the value of facility to the extent of INR 50 per meal is exempt from the tax. This limit of
Rs.50 is very meager and needs to be revised.
•
Many employers these days provide this facility through electronic meal swipe cards. However, the current rules
expressly provide exemption to paid vouchers and not electronic cards though such cards were expressly
exempted under the erstwhile FBT regime subject to conditions. Accordingly their treatment is not free from
doubt.
Recommendation
The said exemption along with increased limit should be extended to electronic meal vouchers as well.
4.50.16. Deduction for interest on housing loan
Issues
•
A deduction upto a maximum limit of INR 150,000 is currently available from taxable income towards interest on
loan taken for acquisition/construction of self-occupied house property provided such acquisition or
construction is completed within three years from the end of the financial year in which capital was borrowed
and the capital is borrowed on or after 1 April 1999.
•
With the property prices and interest rates rising steeply with each passing year, there is a need to revise this
age-old deduction limit.
Recommendation
It is recommended that this exemption should be harmonized with the rising interest rates and increased to at least
INR 250,000 per annum.
4.50.17. Exemption for payment of Leave Encashment to be raised to INR 1 million
Issue
The exemption limit for leave encashment paid at the time of retirement or otherwise is notified by the CBDT in
accordance with the powers given under section 10(10AA) of the Act. The current limit of INR 3 lakhs is very old
(since 1998) and needs to be raised substantially with immediate effect.
Recommendation
It is suggested that the limit should be raised to INR1 million in line with the increase in the limit of gratuity.
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4.50.18. Income of minors - to increase exemption limits under Section 10(32) of the
Act
Issue
As per section 10(32) of the Act, in case the income of an individual includes the income of his minor child in terms
of Section 64(1A), such individual shall be entitled to exemption of INR 1,500 in respect of each minor child if the
income of such minor as includible under section 64(1A) exceeds that amount. The current limit of INR 1,500 was
fixed by the Finance Act, 1992 and needs to be raised substantially with immediate effect.
Recommendation
The limit should be raised to at least INR10,000/- for each minor child.
Other Direct Tax provisions
4.51.1.
Calculation of interest for delay in deposit of taxes withheld - meaning of
'month'
Issue
•
Interest under Section 201 of the Act is calculated for every month or part of month from the date on which tax
was actually deductible to the date on which tax was actually paid. For instance, where tax was deductible on 30
June and the tax so deducted was remitted on 8 July (one day delay) interest has to be paid for June and July, i.e.
2 months for a one day delay.
Recommendation
In order to mitigate this hardship caused to the taxpayer, it is suggested that 'month' be defined as a period of 30
days to avoid litigation on this issue. This would make the reckoning of period while interpreting the tax law more
meaningful and clear.
4.51.2. Interest payable in case of default in furnishing return
Issue
•
Where return of income is filed after the due date, interest under Section 234A of the Act is leviable from the
due date of filing return till the date of actual filing. Currently while computing the amount on which interest is
payable, self assessment tax paid by the taxpayer is not considered. Consequently the taxpayer has to pay a
higher amount of interest.
Recommendation
Since interest is not a penalty and the reason for levy of interest is only to compensate the revenue in order to avoid
it from being deprived of the payment of tax on the due date, it is suggested that in cases where the tax on selfassessment is paid under Section 140A of the Act before the due date for filing return on income but return has been
filed after the due date, such tax on self-assessment should be considered as item of deduction for the levy of
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interest under Section 234A of the Act. This would be in line with the ruling of the Supreme Court in the case of
Pranoy Roy8
4.51.3. Interest for deferment of advance tax under Section 234C of the Act
Issues
•
Interest under Section 234C of the Act is triggered only if advance tax paid is less than 80 percent of the actual
advance tax due for the first and second quarters, i.e. 12 percent and 36 percent respectively. This flexibility is
not available while discharging advance tax for the third and final quarters. This leaves very little margin for error
for companies while projecting business performance.
•
Further the economic swings which may happen anytime during the financial year, manner of disclosure of
financial information in accordance with accounting standards, etc. may result in deviation of actual results from
projections.
Recommendation
As the above factors are beyond the control of an entrepreneur, provisions relating to trigger of interest under
Section 234C of the Act should be relaxed as below:
Minimum % of tax due to be paid
as advance tax to avoid interest
Installment
Existing
Provisions
Proposed
15 June
15 September
15 December
15 March
12
36
75
100
12
36
67.5
90
This proposal will also align Section 234C with Section 234B of the Act, since interest under the latter Section is
triggered only if advance tax paid is less than 90 percent of assessed tax.
4.52. Deduction in respect of interest on time deposits
Issue
The Finance Act, 2012 provided deduction to the extent of Rs. 10,000 to an individual/HUF in respect of income by
way of interest on deposits (not being time deposits) in a savings account. The provision of such a deduction is a
welcome step, however, the deduction does not apply to interest income on time deposits.
Recommendation
FICCI recommends that the deduction under Section 80TTA of the Act should also be provided on income by way of
interest on time deposits (made for a fixed period of not less than three years) and the limit should be set at least
8
CIT v. Pranoy Roy [2009] 179 Taxman 53 (SC)
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INR 20,000. This would encourage long term savings by the middle class.
4.53. Receipt of amount under Life Insurance Policy - Section 10(10D)(d) of the Act
Issue
As per Sec 10(10D)(d) of the Act, any sum received under an insurance policy in respect of which the annual
premium payable during the term of the policy exceeds ten percent of the actual capital sum assured, is taxable in
the hands of receiver. Thus, whole of maturity/ proceeds of life insurance policy in such case gets taxed under this
Section.
Recommendation
Further, to the extent such amount received is calculated based on premium within specified limit (10 per cent) the
said amount should be exempt. In other words exemption should not be eligible for amount calculated with
reference to premium in excess of 10 per cent of sum assured.
4.54. Monetary Limit for Accounts Audit
Issue
•
Currently the limits for audit of accounts of taxpayers are as under:
Particulars
Existing Limit
(INR Lakhs)
Sales turnover /Gross receipts of business
100
Gross receipts of profession
25
Recommendation
Given the growth in volume of economic activity, the limits need to be revised as under:
Particulars
Existing Limit
(INR Lakhs)
Sales turnover / Gross receipts of business
500
Gross receipts of profession
50
Relaxation on mandatory requirement of PAN (Section 206 AA)
4.55.1. Mandatory Requirement of PAN results in undue burden in certain cases
Issue
•
Section 206AA of the Act provides that if PAN is not furnished by payee, the withholding tax rate would be 20
percent or rate in force, whichever is higher. The provisions further lay down that no certificate under Section
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197 of the Act shall be granted unless the applicant has stated his PAN in the application. It also further lays
down that declaration in Form 15G/15H for Nil deduction of tax would not be valid unless PAN is furnished in
such declaration. Further, it has been specified that where the recipient of the income has furnished invalid/
incorrect PAN, it shall be deemed that such person has not furnished PAN and accordingly, tax would be required
to be deducted at the higher of the specified three rates while making payment to such persons.
Recommendations
•
The mandatory requirement to furnish PAN poses a number of practical problems, for example an overseas
entity is not amenable to comply with any Indian tax compliance such as obtaining PAN, many senior citizens
may not have PAN, as they are within tax exemption limit, so may be the position for many farmers/seed growers
etc.
•
Further, it must be appreciated that many foreign companies enter into a one-off transaction with an Indian
entity for provision of services or goods. Such transaction may not attract any withholding tax implication or a
withholding tax rate of 10-15 percent at the maximum (either under the treaty provisions or under Section 115A
of the Act). As the transaction may be one-off such foreign companies may not have obtained a PAN or are even
unaware of the requirements under the Indian tax laws. Even otherwise, the law also provides relaxation to the
non-residents from filing tax return in India in case of certain payments of the nature specified under section
115A of the Act provided tax is deducted at source on such payments as per the provisions of Chapter XVII-B of
the Act. However, in absence of PAN, payer of the income would not have any resort but to withhold tax at the
rate of 20 percent or even higher as applicable to foreign companies. Such excess withholding may not be
viewed favourably by the foreign companies and even act as a detriment for them in case of future transactions.
•
Alternatively, foreign companies should be exempted from Indian compliances e.g. filing of tax returns, etc. (on
the same lines as relaxation provided under Section 115A).
4.55.2. Whether the provisions of Section 206AA will override the provisions of tax
treaties
Recommendations
A plain reading of the provisions of Section 206AA of the Act suggests that the provision would override the
provision contained in the respective tax treaty resulting in a situation of treaty override. This is because in absence
of PAN of the foreign company, the Indian taxpayer would be required to deduct tax at the rate of 20 percent if such
rate is higher than the rate specified under the applicable tax treaty. This is likely to create hardships for the foreign
company in availing appropriate tax credit in its country of residence for the excess tax deducted over and above the
specified rate in the tax treaty and also protracted litigation in the matter discouraging foreign entities from entering
into transactions with India as also increasing the cost of doing business with India.
These provisions may act detrimental not only to the recipients of income but also may be detrimental to the payer
of such income. A payer may have deducted tax under the specified Section at the specified rates under a bonafide
belief that the PAN furnished by the income recipient is correct. In case the same is found to be invalid/ incorrect, the
payer may have to deduct tax at the rate of 20 percent or higher. In case the payer has already made the payment of
the sum to the receiver, then it would create the problem of recovery of the differential amount from the recipient of
the income.
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Further, considering the uncertainty in the Indian tax systems, practically it is seen that the foreign entities generally
prefer a tax protected agreement wherein the tax liability is to be borne by the payer of the income. In such cases,
the cost to be borne by the payer of the income would escalate by substantial amount as not only the rate of tax
would go up but even such higher rate would be required to be grossed up. This will create liquidity issues for the
payer of income as also increasing substantially his costs of doing business and importing foreign technology.
4.55.3. Undue burden on senior citizens and other persons not having taxable income
Recommendation
The provisions of Section 206AA of the Act are detrimental to the interest of not only foreign companies but also
persons resident in India, especially the senior citizens. One of the conditions under Section 206AA of the Act
specifies that no declaration under Form 15G/ Form 15H is valid unless the person furnishing such declaration has
quoted his PAN on such declaration. The condition of mandatorily furnishing PAN on such declaration is likely to
create many documentary hassles for senior citizens across the country for whom the only source of income is
perhaps interest from deposits with banks. In this regard, reference may be drawn to Section 139A of the Act which
requires a person to obtain a PAN inter alia in case his total income exceeds the maximum exemption limit while
Form 15G/ Form 15H is to be furnished by persons whose tax on total estimated income for the concerned year is
likely to be NIL. Accordingly, the provisions of Section 206AA of the Act seem to be overriding the basic provision laid
down under Sections 139A and 197A of the Act. Even if a person was to comply with the provisions of Section 206AA
of the Act and was to obtain and quote his PAN, he is likely to face various documentary hassles. There is also a fear,
perhaps not without reason, that the Income-tax officers in their zeal to widen the tax net would issue notices to
those people who have obtained PAN but have not been filing their tax returns in spite of their income falling within
the exemption limit. Further, there is apprehension that this would result in more harassment for such senior
citizens. In our country, where an individual is expected to look after their own social security needs, subjecting such
senior citizens to such unnecessary procedural requirements would only reflect very poorly on the Government as
being insensitive to the needs of our senior citizens. Hence, there is an urgent need to carve out exceptions in these
provisions for senior citizens and other persons who do not have taxable income.
4.55.4. Whether tax required to be grossed up in case Section 206AA is applicable
Recommendations
•
At present, there is no clarification as to whether provisions of Section 195A of the Act would apply to Section
206AA i.e. rate at which tax is required to withheld under Section 206AA of the Act is also to be grossed-up
under Section 195A of the Act. This creates uncertainty among the tax payer and may have to bear additional
tax. A withholding tax rate of 20 percent after grossing up would be as high as 25 percent. Hence, it is suggested
that clarification may be introduced to provide that provision of 195A of the Act would not apply in the case
where provisions of Section 206AA of the Act are attracted, since Section 206AA of the Act starts with nonobstante clause.
•
We suggest that quoting of PAN should be made optional for the following category of persons:
•
Individuals, including senior citizens, farmers/seed growers, transporters etc. whose total income do not
exceed the exemption limit or are illiterate and the mandatory requirement to obtain and furnish PAN may
pose practical problems
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•
Foreign companies earning income in India which is not liable to tax in India under the Act or under tax
treaty provisions.
•
Pure business transactions of purchase/sale of goods
• In addition, the onerous responsibility and consequences faced by the payer of the income in case the
recipient furnishes incorrect/ invalid PAN should also be relaxed. It may also be clarified that the provisions of
Section 195A of the Act relating to grossing up of payments do not apply in a case where provisions of Section
206AA of the Act are attracted.
Tax Deducted at Source (TDS)
4.56.1. Exclusion of service tax, Out of pocket expenses and VAT
Issue
•
TDS provisions should be amended to exclude service tax charged on all services. As per CBDT Circular No. 4
/2008 this benefit is given only in respect of rent income even though the reasoning contained therein would
apply to all services.
Recommendations
It is suggested that no tax at source be deducted on service tax component of professional fees and other services.
The benefit for the exclusion of service tax for calculating TDS should be given for other payments also.
Further where out of pocket expenses have been clearly stated in the invoice, tax should not be deducted on such
out of pocket expenses, since these are merely reimbursement of expenses incurred and do not represent income.
4.56.2. TDS on monthly provision entries and year end provision memorandum entries
Issues
•
Most of the companies record provision entries towards various expenditures on a monthly basis to report
performance to their parent entities. These entries are reversed in the subsequent month.
•
The tax officers often take the view that, tax is required to be withheld even on monthly accruals or provisions
which are made just to meet the accounting requirements and are reversed at the start of the following month.
These accruals are made on very broad estimates to unidentified payees. The tax officers have been insisting that
tax be deducted on these provisional entries.
Recommendation
In line with the relief given to banks for similar accruals made on account of interest accrued but not due, similar
relief should be given to other payments that are accrued but are not due to the payee and for which the payees are
not identifiable and represents only a provision made in accordance with accounting policy.
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4.56.3. Rationalisation of TDS provisions
Issue
•
There is a lot of litigation surrounding applicability of TDS provisions on various payments.
Recommendation
In order to reduce litigation on TDS related issues, it is suggested that in the context of the current scenario, the
CBDT should issue a FAQ similar to Circular 715 dated 8 August 1995, clarifying the position on various current issues
in respect of TDS.
4.56.4. TDS credit
Issues
•
The E-TDS system is undergoing issues and there is mismatch of data between TDS Certificates issued by
Deductors, TDS statements uploaded on TIN system and bank payment details, PAN of the deductees. As a result
deductees do not get the full credit for tax deducted. Further, based on the mismatch the tax authority is issuing
orders upon the deductor thereby causing unnecessary adversity to the deductor/taxpayer.
•
The E-TDS system mandates all the deductors of taxes to process TDS Certificates in Form 16A's only through
TIN-NSDL website. The software of the tax department automatically picks up the address of the deductee from
the address appearing in the PAN database maintained by the tax department. As a result, all the TDS certificates
are getting issued at the address declared in the PAN application made by the deductee. This has resulted into
severe hardship for the companies which have a multi locational set up, since, all the TDS certificates gets
dumped at the Registered office of the company (being PAN based address). The accumulation of TDS
certificates at the registered office of the deductee makes it difficult for them to co-relate/reconcile them with
the accounts which are maintained at different locations and also the units are not able to identify whether the
TDS certificate is received from the party or not
Recommendations
·
In view of the above, it is suggested that TDS certificates issued by the deductors, which are furnished by the
deductees in the tax assessment, should be given due cognizance and refund claims based on such TDS
certificates should be processed. Further the tax authority can suitably issue proper notice for the clarification
rather than hurriedly issuing orders to the taxpayer concerned.
·
It is recommended that suitable instructions be issued by the lawmakers providing an option to the deductee to
indicate their TAN in the invoice and further a column/field may be added in the TDS returns asking the payers to
furnish the TAN against each deductee (this should however be an optional column), wherever TAN has been
provided by the deductee, at the time of submission/filing of TDS returns by the payers. At the same time, it is
also recommended that the E-TDS software of the tax department may be amended so that when the TDS
returns are processed to generate the TDS certificates, the address should first be automatically picked from the
TAN database in respect of the deductee maintained by the tax department and in case no TAN is mentioned in
the TDS return, then the address should be picked from the PAN database. This would facilitate generation of the
TDS certificate at the TAN address, wherever TAN is provided by the deductee.
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4.56.5. Intimation under section 200A of the Act
Issues
•
Section 200A of the Act was introduced by the Finance (No. 2) Act, 2009 with effect from 1 April 2010.
•
As per the provisions of this section, TDS Statements filed under Section 200 of the Act are processed to verify
arithmetical errors and incorrect claims. Post such processing, if any arithmetical error or incorrect claim is found
in TDS statement, intimations showing the amount of proposed demand to be levied on the deductor is issued.
Practically, it has been observed that Income-tax department has also issued notice of demand under Section
156 of the Act along with such intimations. In the absence of any provision for rectification and appeal, the said
errors were rectifiable only by filing online correction statement on the website of NSDL. However, at times
some errors could not be rectified by filing correction statements. For such errors it was very much essential that
the tax officer has an authority to rectify the same under Section 154 of the Act or the taxpayer has a right to
appeal under Section 246A of the Act.
It is a welcome move in the Finance Act 2012 that the above mentioned intimations have been made subject to
rectification or appeal. However, the said intimation is subject to rectification and appeal with effect from 1 July
2012.
Recommendations
We suggest that the said amendment should be made applicable with retrospective effect from 1 April 2010.
The reason that all the intimations issued between 1 April 2010 and 1 July 2012 if not rectified or appeals are not
admitted, will have a pending demand without any available course of action to the taxpayer.
4.56.6. Withholding tax on reimbursements
Issues
With increasing cross border transactions, reimbursements of expenditures / costs incurred on behalf of the Indian
Company by the Foreign Parent / Group Company have been subject to scrutiny by the tax authorities. Broadly
reimbursements made to the foreign company could be categorized as follows:
•
Reimbursement/ allocation of expenditure/ costs (shared services/ incidental costs/ third party costs)
•
Reimbursement of salaries / overseas social security contribution/ personnel related cost of deputed employees
Contrary positions have been taken by the judiciary on the issue of withholding tax on reimbursements made by an
Indian Company to its Foreign Parent / Group Company with specific reference to the facts of each case. Further with
respect to recharge of salary costs of seconded employees, there is ambiguity on the applicability of withholding tax
under Section 195 of the Act, notwithstanding the fact that tax has been withheld under Section 192 of the Act upon
payment of salary to such employee.
The consequences of non compliance with withholding tax provisions are manifold for the deductor in the form of
disallowance under Section 40(a)(i) of the Act, interest and penal proceedings
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Recommendation
To reduce litigation on this issue it is recommended that the CBDT issues a circular / FAQ clarifying with illustrations
on the applicability of withholding tax on reimbursements. Specifically, the following need to be addressed:
Query
Clarification
Recharge of salary costs of seconded employees if
tax has been withheld at source in the employees’
hands
No withholding tax on payment of recharge to
foreign company which has made such payment
from perspective of administrative convenience
Reimbursement of third party costs or incidental
expenses or travel costs on cost-to-cost basis
No withholding tax under section 195 where
?
It is not payment for a service rendered, such
as travel cost
?
The underlying third party cost would not
attract withholding tax in India or if paid from
India
?
This relates to expenses incidental to the fee
4.57. Retrospective Amendments
The Indian tax laws have been breeding grounds for protracted litigation between the tax department (i.e. the
Government) and the taxpayers. One of the weapons that is used by the Government is the amendment of
provisions with retrospective effect. These amendments override a law settled by judicial precedence or a legitimate
argument of the taxpayer supported either by an interpretation of law or by any decision of the court. Almost every
Finance Bill has some amendments, which have retrospective effect.
Issues
•
Overriding of a settled law/ existing provision
•
Reopening of assessment based on retrospective amendments
•
Levy of penalty on tax arising due to retrospective amendments
Recommendations
Admittedly, the Parliament is supreme and it should enact laws for the benefit of the economy and the people at
large. Further, in today's constant changing world, it is imperative that the tax laws are amended regularly. However,
this should not be used to override a benefit / argument available to the taxpayer.
The legislature has powers to introduce enactments and amend enacted laws with a retrospective effect; however,
the same is not only subject to the question of competence but is also subject to judicially recognized limitations:
•
Firstly, words used must expressly provide for retrospective operation as it is a settled law that a taxing provision
imposing liability is governed by the normal presumption that is not retrospective.
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•
Secondly, the retrospectively must be reasonable and not excessive otherwise, it runs the risk of being struck
down as unconstitutional.
•
Lastly, it is apposite where the legislation is introduced to overcome a judicial decision. The legislative power
cannot be used to subvert the decision without removing statutory basis of the decision.
It is important that the above principles are adhered to failing which courts will intervene at the taxpayer's behest.
Moreover, it has to be appreciated that the judiciary interprets the law as it is worded and not on the basis of what
would have been the intention of the legislation. In case it has been interpreted in a way which Government thinks
was not intended, it only means that the provisions were not properly drafted. In case some benefit has arisen from
this ambiguity to the taxpayer in the judicial pronouncement, the same should not be negated. It is the cardinal
principle of the jurisprudence that the benefit of doubt should go to the affected person.
Further, even if a retrospective amendment has a tax impact on the taxpayer, he should not be burdened additionally
by way of reopening of assessments and levy of penalty. An appropriate amendment in the tax laws specifying the
above will be a relief to the taxpayer.
4.58. Amendment in the definition of 'Charitable Purpose'
The Finance Act, 2011, has amended Section 2(15) of the Act to provide that 'the advancement of any other object
of general public utility' shall continue to be a 'charitable purpose' if the total receipts from any activity in the nature
of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or
business do not exceed INR 2.5 million in the previous year. This has been done by inserting a proviso to Section
2(15) of the Act to read as under:“Provided further that the first proviso shall not apply if the aggregate value of the receipts from activities
referred to therein is twenty five lakh rupees or less in the previous year;”
The said amendment where the earlier limit of INR 1 million has been increased to INR 2.5 million though a welcome
move to mitigate the problem to some extent of smaller charitable organizations but not adequate enough for bigger
ones.
It may be mentioned that originally the term 'charitable purpose' under the said section was defined to include relief
of the poor, education, medical relief and the advancement of any other object of general public utility. The problem
had arisen because the Finance Act 2008 amended the said definition by inserting a proviso to Section 2(15) of the
Act as under:“Provided that the advancement of any other object of general public utility shall not be a charitable
purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any
activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other
consideration, irrespective of the nature of use or application, or retention, of the income from such activity”
The then Finance Minister Shri P Chidambaram, while replying to the debate in the Lok Sabha on 29 April, 2008,
provided a clarification that:
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“…. I once again assure the House that genuine charitable organizations will not in any way be affected. The
CBDT will, following the usual practice, issue explanatory circular containing guidelines for determining
whether an entity is carrying on any activity in the nature of trade, commerce or business or any activity of
rendering any service in relation to any trade, commerce or business. Whether the purpose is a charitable
purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar
organizations rendering services to their members would not be affected by the amendment and their
activities would continue to be regarded as “advancement of any other object of general public utility”….”.
Issue
•
The aforesaid amendment is vehemently opposed by trade organizations, chambers of commerce, NGOs and
other charitable organizations, as it was felt that it would have wide repercussions on the genuine charitable
organizations which are rendering laudable service in the country. These are not-for-profit organizations and to
be eligible for tax exemption, Sections 11 to 13 of the Act, provide for rigid regulations for charitable institutions
as regards inter-alia, investments, application of income, accumulation of profits, audit, timely filing of returns
with reports from Chartered Accountants, bar against any private benefit etc., and the tax exemption could be
withdrawn for violation of any of such conditions.
Recommendations
We are of the view that the underlying objective of tax exemption for charitable organizations should be the end use
of its income and not the generation of income. In this perspective, it pleaded that the chambers of commerce, trade
organizations, NGOs and other not-for-profit organizations should be explicitly exempted from tax provided the
income generated by them are exclusively utilized for charitable purposes and that they are strictly adhering to the
requirements under the Act.
In the alternative, we would like to suggest that at least aforesaid proposed proviso be substituted to read as under:
“Provided further that the first proviso shall not apply if the aggregate value of the receipts from activities
referred to therein is not more than 49% of the aggregate receipts.”
Issue
•
The dichotomy is in respect of different tax treatment to organizations engaged in carrying out specified
activities for charitable purpose like relief to the poor vis-à-vis organization carrying out any activity of general
public utility though charitable in nature. For instance, the sale proceeds from education material/books by a
Non Government Organization (NGO) working towards the charitable purpose of education may not necessarily
affect its tax exempt status. However, where an NGO engaged in 'any other object of general public utility' say an
old age home earns revenue from sale of books or literature or providing some assistance to its members on
subject matter aligned to their main object may impact its tax exemption status, where value of such sale
proceeds/consideration exceeds 2.5 million.
Recommendation
The law should provide greater clarity on the tax treatment given to organizations falling within the purview of the
residual clause of 'advancement of general public utility'. There is a dire necessity to provide a thumb rule on what
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would constitute 'charitable purpose' under the residual clause. The nature of activity and the application of income
towards the said activity should be the emphasis of grant of tax exemption status rather than the activities from
which income is derived.
Issues
•
The restrictive provisions were inserted with an intention of prohibiting indiscriminate claim of exemption under
the pretext or guise of being engaged in charitable activities. However, this has also impacted the low profile
organizations genuinely working towards the betterment of society as their activities are falling within the
purview of 'advancement of any other object of general public utility'.
•
Even though the Government has provided marginal relief by increasing the limit, such a relief may not be
adequate for the organizations to eventually become self-sustainable. This would result in huge dependence on
external grants and donations for carrying their charitable activities.
Recommendation
The law should suitably be amended and the limit prescribed should be increased to enable the genuine
organizations to become self-sustainable.
Issue
•
The Finance (No.2) Act, 2009 inserted clause (vii) in sub-section (5) of Section 80G of the Act to protect
donations upto 31 March, 2009 if any institution for fund established for charitable purposes, loses exemption
due to the first proviso to Section 2(15) of the Act.
Recommendation
It is suggested that a similar provision be made in Section 80G of the Act to the effect that donation to such
institutions / funds / trusts will continue to be exempt in respect of the donations and the donor will be eligible for
tax deduction benefit under Section 80G of the Act, even if the trust loses exemption owing to its receipts from
commercial activities exceed the monetary limit or the specified percentage of the total receipts as suggested above.
It may also be clarified that these will not lose recognition under Section 12AA of the Act if the receipts exceed the
said specified limits / percentage. In other words, in case of excess receipts, the exemption should not be denied in
relation to other activities.
Issue
Under section 2(15) of the Act, charitable purpose includes relief of the poor, education, medical relief, preservation
of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of
artistic or historic interest and the advancement of any other object of general public utility. Different views are
expressed by various experts with respect to “vocational training activity” as to whether same amounts to education
or not. Some views are expressed that since it is systematic process of learning which enables an individual to earn
his livelihood, therefore it is “education”. However since there is no clear cut jurisprudence on this issue, the tax
authorities take a cautious approach and do not term it as “education”
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Recommendation
FICCI strongly recommends that section 2(15) of the Act be suitably amended to provide that “education” includes
vocation training. This will boost and further provide impetus to the skill development programme undertaken by the
Government of India.
4.59. Credit in respect of foreign taxes
Issues
•
As per existing provisions of the Act dealing with computation and payment of advance tax by an taxpayer,
advance tax payable is to be reduced by the TDS or tax collectible at source (TCS) under any provisions of the Act.
Although the provisions rightfully allow reduction of TDS / TCS while computing advance tax liability, the same is
restricted only to TDS / TCS under provisions of the Act and does not cover TDS in foreign country vis-à-vis
income earned by the taxpayer from such country and offered to tax in the return of income.
•
However, in terms of provisions of Section 90/91 of the Act, the taxpayer is allowed to claim credit of foreign
taxes against its tax liability at the time of filing of its return of income. Further, the interest provisions in Section
234A/234B/234C of the Act for shortfall in payment of advance tax also provide for reduction of foreign taxes
while computing such interest liability.
•
As a consequence of above disconnect, the taxpayer ends up paying excess advance tax, resulting in a refund
situation post claiming of credit of foreign taxes. Further, the cash to this extent gets locked till the time refund is
received.
•
India domestic tax legislation does not contain any guidelines with respect to foreign tax credits with tax treaty
countries. Thus leading to double taxation of a particular stream of income and denial/reduction of foreign tax
credit.
•
As per existing provisions of the Act foreign tax credit is restricted to the tax liability of the taxpayer in India and
in certain cases, the taxpayer is not in a position to claim any foreign tax credit because of losses under the Act
or in some cases he is only able to claim partial tax credit. The provisions under the prevailing tax law does not
allow for carry forward of the unutilized foreign tax credit resulting in permanent loss to the taxpayer in respect
of the foreign tax credit which he is unable to claim.
•
In case of countries like USA, Canada and Switzerland the local governments at the provincial/state level also
levies taxes on income hence taxes on income levied by such jurisdictions also amounts to double taxation of
income, however, the relief of taxes paid is being denied by the tax authorities in India on the ground that such
local taxes are not covered by the applicable tax treaty.
Recommendations
•
Section 209 of the Act dealing with payment of advance tax should be amended to expressly provide that
advance tax liability should be computed after reducing credit for taxes withheld in foreign country as the credit
is otherwise admissible in terms of Section 90/91 of the Act.
•
FICCI recommends that with Indian companies increasingly going global, clear legislation as part of the domestic
law be incorporated which could potentially address, among others, the following aspects: conflict in
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determining source of income, change in characterization of income, varying audit periods, varying basis of
audits and mechanism for allowing full tax credit.
•
A mechanism should be expressly provided in the Act for allowing credit for taxes on income levied by overseas
provincial/local tax jurisdictions by amending section 90 of the Act.
•
A suitable amendment may be made in the Act by inserting a provision which allows carry forward of unutilized
foreign tax credit to be set off against the tax liability of the company as per the Act in the succeeding years.
4.60. Modification of Definition of Association of Persons (AOP)
Issues
•
The term Association of Persons (AOP) has not been defined in the Act. As per section 2(31) of the Act, 'person'
includes, inter-alia, association of persons or body of individuals, whether incorporated or not. Explanation to
section 2(31) of the Act further provides that an AOP shall be deemed to be a person, whether or not such
person or body was formed or established or incorporated with the object of deriving income, profits or gains.
•
Since the definition is not provided by the statute itself, one has to refer to the legal jurisprudence for
understanding the meaning of term 'AOP'. The Supreme Court observed in the case of CIT v. Indira Balkrishna
(39 ITR 546), “The word 'associate' means, according to the Oxford Dictionary, 'to join in common purpose or to
join in an action'”. The essential characteristics of an AOP flowing from the various judicial precedents can be
illustrated as under:
•
Two or more persons join together or associate together;
•
The parties should come together out of their own free will (out of volition);
•
The association should be for common purpose or common action;
•
Mutual rights and obligations;
•
Incurrence of common expenditure;
•
There should be joint execution and / or supervision of the work;
•
Possibility of reassignment of work amongst members;
•
Some kind of scheme for common management.
•
Whether an AOP is constituted or not would have to be decided on a conjoint reading and analysis of the above
factors to the facts and circumstances of the case. No one factor can be said to be decisive of the subject and the
priority of the factors is also not laid down in law.
•
In particular, the issues surrounding the 'Benefit/ profit sharing test' to determine AOP are as follows:
•
Whether mere intention to collaborate without anything more is sufficient to constitute AOP [even without
profit sharing and/or without sharing of common resources/costs]?
•
Whether it is sharing of gross remuneration OR it is the sharing of net profit that is relevant to decide the
existence or not of AOP?
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•
The existing provisions of the Act on whether a particular association constitutes an 'association of persons' for
purposes of Section 2(31) of the Act are thus open to diverse interpretations. While it is recognized that whether
an AOP exists or not is both a question of law and fact, yet in the absence of legislative framework defining an
AOP in the Act, the matter is often litigative thus creating uncertainty and being costly for both the taxpayer and
the exchequer.
Recommendations
The following proviso be inserted to Explanation to section 2(31) of the Act
Existing law
Explanation to Section 2(31) of the Act:
“For the purposes of this clause, an association or persons or body of individuals or a local authority of an artificial
juridical person shall be deemed to be a person, whether or not such person or body or authority or judicial
authority was formed or established or incorporated with the object of deriving income, profits or gains.”
Proposed law
Explanation to section 2(31) of the Act:
“For the purposes of this clause, an association or persons or body of individuals or a local authority of an artificial
juridical person shall be deemed to be a person, whether or not such person or body or authority or judicial
authority was formed or established or incorporated with the object of deriving income, profits or gains.”
Provided however that an association of persons shall not be deemed to be a 'person' for the purposes of this clause
if the members of such association of persons
•
receive gross receipts in their respective separate bank account(s) and
•
incur their respective expenditure or costs from their respective separate bank account(s); and;
•
there is no adjustment inter-se the members to share the (net) profit or loss.
Issue
As per section 86 of the Act, share of the member in the income of an AOP is not includible in total income of the
member. However, such income is not excluded while computing the MAT liability of the member unlike in the case
of a partner of firm whose share in the profits in the firm is exempt in the hands of the partner as per section 10(2A)
of the Act and also no MAT is payable by the partner on such profits under section 115JB of the Act. The reference to
section 86 in section 115JB of the Act is missing. It is unfair to have such a discriminatory tax treatment between a
partner of a firm and a member of an AOP.
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Recommendation
It is recommended that section 115JB of the Act should be amended to specifically provide that the share of income
of a member from an AOP which is otherwise exempt under the provisions of section 86 of the Act should be
excluded while computing the liability of the member under 115JB of the Act
4.61. Corporate Social Responsibility costs
Issue
Corporate are currently involved in various areas of social responsibility/community development as part of nation
building. Suitable tax incentives should be introduced in respect of such Corporate Social Responsibility (CSR) Costs
to accelerate the process and to ensure that the country can reach the goal of being a developed nation in the near
future.
Recommendation
It is recommended that a weighted deduction of 150 percent of the expenditure on community / social development
(both capital and revenue) be introduced, specifically covering critical areas like education, health, animal husbandry,
water management, women's empowerment, poverty alleviation and rural development. Further, even in cases
where a company has its own trust or foundation it should also be eligible for the weighted deduction in respect of
expenditure incurred for CSR activities.
4.62. Deduction for Road Safety Development Programmes
Issue
India has reported the highest number of road fatalities among all countries in the world. Due to such incidents, the
households of road accident victims lose their near and dear ones who are left behind without any support and also
lead to an enormous economic loss. Since this is a huge task and involves large financial outlays, it is of paramount
importance that companies and individuals partnering and contributing towards the Road Safety measures be given
deduction from their income in respect of the contribution/expenditure incurred by them on approved road safety
projects.
Recommendation
FICCI recommends that a provision be inserted in the Act which shall grant deduction to assessees while computing
total income, of an amount equal to the expenditure incurred by them for the purpose of road safety measures
under schemes and programmes approved by the Central Government, the National Highway Authority of India or
the Highway Departments of the State Governments. Such a measure will go a long way towards incentivising wider
participation in the war against road accidents thus saving human lives, reducing the trauma of the families of
accident victims and stemming the unacceptable drain on the economy
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4.63. Inclusive Method of accounting - Section 145A of the Act
Issue
•
The conflict in the provisions of Section 145A of the Act and the Accounting Standards notwithstanding its Nil
impact on the Profit and Loss or taxable income has transformed itself into long drawn and avoidable litigation.
Recommendations
•
It is recommended that provision of Section 145A of the Act be amended to fall in line with the Accounting
Standards.
•
Alternatively, it is recommended that the said provision be deleted, since in ultimate analysis, there is no
revenue implication.
4.64. Enhancement of Limits for TDS under Section 194C for Payment to Contractors
Issue
Currently any payment for contract services rendered which exceeds INR 30,000 at a time or INR 75,000 per annum
requires the persons responsible for making such payments to deduct tax at source under Section 194C. These limits
have been fixed some years ago. The deduction of tax at source on such small amounts involves deployment of
relatively large amount of resources in terms of manpower, systems and other costs at the assessee's end without
any significant benefits to the revenue.
Recommendation
It is recommended that the threshold limit be increased to INR 50,000 for single payment and INR 100,000 for
aggregate annual limit.
B. Wealth Tax
4.65. Wealth Tax
Issues
•
The administration and litigation cost that the government incurs for the collection of wealth tax and in litigative
matters is too high. The government almost spends 40 percent of amount collected as its cost for collecting the
wealth tax. This is a very high cost which does not justify the quantum of collection of wealth tax. The low
collection of wealth tax could be due to lack of law enforcing machinery for collection of wealth tax. If we incur
additional expenditure to strengthen the law enforcing machinery then it would add up to the administrative
expenditure which is currently at 40 percent to 50 percent level.
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Recommendations
•
The government can consider other option of increasing the exemption limit of wealth tax and to include all
taxpayers but it may lead to reduction in the number of wealth taxpayers. Considering the reduction in the
number of taxpayers and cost of collection remaining the same, wealth tax should be abolished.
•
We further suggest that the levy of wealth tax tantamount to double taxation, as wealth is only an accumulated
savings of income over a period of time on which income tax has already been paid.
Issue
•
Motorcars are included in the definition of the 'specified assets' for the charge of wealth tax and are termed as
unproductive items.
Recommendation
With the rise in the standard of living of the people and rise in the development of roadways, motorcar is becoming
the necessity rather than being a luxury item. Hence, the motorcar should be removed from the purview of the
definition of specified assets.
Issue
•
A residential property owned by the company is charged to wealth tax if it is given to its employees drawing
salary exceeding INR 1 million
Recommendation
It is equally important that residential accommodation provided by a company to its employees drawing salary
exceeding INR 1 million should not be brought within its tax net. It has to be appreciated that companies need to
provide accommodation to its employees considering the remote location of its factory/offices and other reasons
like attracting talented persons. Such residential accommodations should not be construed as non productive assets.
Issue
•
Vacant Industrial land held for more than two years from the date of acquisition is considered as non productive
asset and charged to wealth tax.
Recommendations
Vacant industrial land earmarked for future expansion should also be outside its preview even if it is kept vacant after
two years of its acquisition.
Further, considering the changing face of service industry on account of size and infrastructure requirements the
exemption benefit of initial two years should be allowed to land held for all business purposes instead of limiting the
exemption to industrial purposes only.
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Issue
•
Wealth tax does not differentiate between senior citizen and the normal citizen.
Recommendation
It should give benefit to the senior citizens like under the Act. It is therefore suggested that wealth tax should not be
charged on the wealth of senior citizens.
Issue
•
Government companies are charged to wealth tax and not treated at par with statutory bodies which are
exempted from wealth tax.
Recommendation
The bodies incorporated under the Central or State Act is exempted from wealth tax but Government companies are
charged to wealth tax. It is therefore suggested that the Government companies should also not be covered under
wealth tax net.
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V. INDIRECT TAXES
SERVICE TAX
Exemptions
With the introduction of a comprehensive service tax regime with effect from 1st July, 2012, based on the concept of
a Negative List, the coverage of the service tax levy has become broad-based. FICCI has received several
representations requesting for exemptions from the levy of service tax from several sectors. In some case it appears
that the levy was unintended. The services which could be considered for exemptions are specified in the following
paragraphs.
5.1.1. Expanding the scope of services in relation to Agriculture produce under the
negative List
As per Section 66D of the Finance Act, 1994, the Negative List shall comprise of the services specified therein. Clause
(d) of the said section specifies the services relating to agriculture or agricultural produce which shall not be taxable
to service tax. The agro sector has been supported by keeping a bulk of services relating to agriculture or agricultural
produce in the Negative List or in the list of exempted services. However, there are some services such as security
services, laboratory testing services, renting of immovable property services provided in relation to agriculture
produce, etc. which are essential to secure to storage of agri-produce and to determine quality of the agri-produce,
but which are subjected to service tax.
It is recommended that services provided in relation to agriculture produce may be kept outside the ambit of levy of
service tax.
5.1.2. Exemption for Services provided by Tobacco Board, Coffee Board, Tea Board etc.
As per Section 66D of the Finance Act, 1994 the Negative List of Services includes:
“(d)(vii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a
commission agent for sale or purchase of agricultural produce;”
Under Section 65B (6) "Agricultural Produce Marketing Committee or Board" has been defined to mean any
committee or board constituted under a State law for the time being in force for the purpose of regulating the
marketing of agricultural produce.
In this connection it would be pertinent to note that by virtue of it being expedient in public interest, the Union
Government has taken under its control several agri industries and has set up Boards for such industries. The duties
and objectives of such Boards include, inter-alia, regulating the relevant agri commodity and promoting its sale both within the country as well as exports, having due regard to the interests of all the stakeholders like the farmers /
growers, manufacturers, dealers and the government.
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Examples of such Boards include Spices Board of India, Tobacco Board, Coffee Board of India, Coir Board and Tea
Board of India.
In line with the inclusion in the Negative List of services provided by Agricultural Produce Marketing Committees or
Boards, it is recommended that the services provided by Boards set up under Central enactment for similar purposes
are also included under the definition of “Board” under Section 65B of the Finance Act, 2003. This will ensure that
the tax cost of the services are not embedded in the export cost of the agri-products or in the cost of the agriproducts sold in the domestic market, as is the case today.
5.1.3. Exemption from the levy of Service tax on treatment and recycling of effluents
and solid waste
Notification No. 42/2011-ST dated 25-07-2011 as amended by Notification No. 1/2012 dated 17-03-2012 exempts
services provided by an association in relation to common facility set up for treatment and recycling of effluents and
solid waste with financial assistance from Central or State Government under the taxing entry of club or association
services. However, following introduction of the comprehensive service tax regime based on the concept of Negative
List, such services of processing of waste have again been brought under the taxable net. The Central Effluent
Treatment plants are set up to help the micro and small scale industries to treat the effluent of units who cannot
afford to set up their own individual waste treatment plants.
It is requested that the exemption from the levy of service tax on processing of waste / effluent in relation to
common facility set up with financial assistance from the Central or State Government be restored.
5.1.4. Exemption from Service Tax on Membership Subscription of Associations
Trade Associations provide a common forum and help catalyze the Government / Industry dialogue. They also
undertake industry-wise collective bargaining. These non-profit Associations are for the members, by the members
and of the members and are also recognized by the Government and its various bodies who utilize services of the
Trade Associations for interface with the trade and industry.
It is requested that membership subscription to recognized Trade Associations be exempted from the purview of the
Service Tax.
5.1.5. Exemption for Services availed by 100% EOUs
CENVAT Credit Rules, 2004 permit taking of credit of inputs and input services which are used for providing output
services or output goods. In order to zero-rate the exports, Rule 5 of CENVAT Credit Rules, 2004 provides that such
accumulated credit can be refunded to the exporter subject to stipulated conditions. Notification No. 5/2006-CE (NT)
dated 14.03.2006 provides the conditions, safeguards and limitations for obtaining refund of such credit.
At present units are paying service tax liability, taking input credit and then claiming refund. However, despite several
clarifications and exhortations from the Board from time to time getting a refund of accumulated cenvat credit is a
herculean task. The field officers do not take any cognizance of the certificate issued by the statutory auditors. Issues
of “Nexus” in the software industry are not clearly understood by the concerned officers. At a strategic level
predictability is becoming a challenge. Cost of litigations is increasing and working capitals are being blocked
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In this background, it is suggested that complete exemption from service tax be provided for all types of services
availed by 100% EOUs. This would ease the cash flow of the concerned units and save the department its precious
time in processing papers.
Many service providers are captive service centres for their parent companies outside India and are exporting
hundred percent of their services outside India. The total cycle of payment of service tax on the output services and
making a claim for the total service tax paid can be avoided if such assessees are granted exemption from payment of
service tax on input services. This would meet the same objective without going through the full process.
It is suggested that service tax exemption be granted at least to assessees engaged solely in export of taxable
services.
5.1.6. Exemption for intermediary services for exports
The intermediary services of the type as explained in the following example may be considered for exemption from
the levy of service tax:Company A is an Indian agent of Company B, a US company which provides repair services. Company C is a potential
Indian Customer for the repair services provided by Company B. Company A identifies the Customer Company C and
negotiates the scope and value of services to be rendered in a services contract between Company B and Company
C. Company A earns a consideration for its services.
Rule 9 of the Place of Provision of Services Rules, 2012 provides that the place of provision of “Intermediary
Services” shall be the location of the service provider. 'Intermediary' has been defined to mean “a broker, an agent or
any other person, by whatever name called, who arranges or facilitates a provision of service between two or more
persons”. Therefore, services provided by Company A are eligible to be classified as an Intermediary Service. The
place of supply of these services under the current rules will be based on location of Service Provider i.e. Company A
and hence the place of provision of services will be India.
The activities performed by Company A as explained above tantamount to export under the previous Export of
Services Rules, however, these are liable to be taxed under the new service tax regime. The services of the nature
mentioned above qualify as export under the EU Place of Supply Rules also. The fact also remains that the
contractual recipient of the service as well as the beneficial enjoyment of the service, is outside India.
Also in case Company A is helping Company B sell goods to Company C in India, then the services of Company A fall
under Rule 3 of POPS and qualify as exports. Thus, there is no reason why in case of service transactions the service
of Company A should not qualify as exports.
In the circumstances, there is adequate justification for exemption from the levy of service tax on such intermediary
services.
5.1.7. Service tax exemption for services received by power industry
The economic development of the nation is intricately connected with the development of infrastructure.
Recognizing this fact, the Government has provided various incentives to the power industry including incentives by
way of tax reliefs to augment the power industry and reduce power deficiency. Accordingly various indirect tax
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advantages have been provided to certain power generation units such as mega power plants to reduce the cost of
power generation.
The Government however, has not exempted input services consumed in the power generation plants leading to
higher cost of power production. This is because the cenvat credit is not available to the power industry.
All input services received by power producing units should be exempted from service tax.
5.1.8. Exemption from payment of service tax for oil & gas exploration
The Government has consistently encouraged investment in oil exploration to reduce dependence on crude oil
import and to provide energy security to the nation. To achieve this the oil exploration sector has been granted
exemptions from all excise and customs duties so long as the exempted items are used in oil exploration. However, a
similar exemption has not been extended to services consumed by Exploration and Production entities.
This drains away a substantial portion of the funds committed for exploration as the tax is not vatable. Therefore,
service tax incurred by entities end up as 'stranded costs' on which no cenvat credit can be availed.
The service tax payable on services received for exploration activities may be exempted. Alternatively, The
Government should formulate a scheme to refund the service tax on input services consumed by the oil exploration
sector.
5.1.9. Enhancement of value limits for exemption to specified services provided by a
goods transport agency
Services provided by a goods transport agency by way of transportation of the following goods are exempt from the
levy of service tax in terms of Notification No.25/2012-ST dated 20-06-2012 (Sl.No.21):(a) goods where gross amount charged for the transportation of goods on a consignment transported in a single
goods carriage does not exceed one thousand five hundred rupees; or
(b) goods, where gross amount charged for transportation of all such goods for a single consignee in the goods
carriage does not exceed rupees seven hundred fifty;”
The exemption has been provided as a measure of relief to small traders, manufacturers and service providers
outside the cenvat chain who are relieved from observing the compliance formalities for small freight transactions.
The exemption limits of Rs.1500 and Rs.750 were notified for the first time in 2004 vide Notification No.34/2004-ST
dated 03-12-2004. Since then freight costs has risen by 70% to 75% on account of increase in diesel prices by 56%
(from Rs.26.28 to Rs.41.13 per liter), increase in capital costs, increase in interest rate for motor vehicle finance and
other cost increases.
In view of the aforesaid circumstances, with a view to provide genuine relief to small entrepreneurs it is requested
that the exemption limits of Rs.1500 and Rs.750 may be increased to Rs.3000 and Rs.1500 respectively.
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5.1.10. Increase in exemption limit for levy of service tax
The value limit of Rupees Ten Lakhs for exemption from the levy of service tax in a financial year be increased to a
total of Rupees Twenty Lakhs.
5.1.11. Exemption for input services availed by Shipping Companies
Service tax is currently imposed not only on various services availed by the Indian shipping companies domestically
but also on some of the crucial services availed by them outside India. Globally, in major maritime jurisdictions like
UK, Singapore, Netherlands, Greece etc, taxes relating to the shipping industry are either zero rated/exempted,
whether such services are availed domestically or internationally by non-resident or resident ship owner.
The Government has, by introduction of Tonnage Tax, recognized the need to create income tax parity with other
shipping jurisdictions to create competitiveness in this industry. It is essential that this philosophy is also extended to
create a comprehensive zero rating of indirect taxes for the industry.
It is suggested that exemption from service tax should be provided on all input services availed by shipping
companies.
5.1.12. Exemption for Transmission and Distribution of Electricity
Transmission and distribution of electricity by an Electricity Transmission or distribution utility has been included in
the negative list of services. However, by definition, this relief from the levy of service tax on transmission and
distribution of electricity is available only to Central and State notified agencies (CEA, State Electricity Boards etc.).
It is requested that electricity transmission and distribution being an infrastructure input should be kept out of the
service tax net irrespective of the agency involved in this activity.
5.1.13. Exemption of Services Provided by way of Construction of Power Plants
As per entry at S. No. 14 of Notification No. 25/2012-ST dated 20.06.2012, services by way of construction, erection,
commissioning or installation of original works pertaining to airports and services provided by way of construction,
erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of roads
is exempted. Likewise, keeping in mind the public good any services involved in the work undertaken for construction
of Power Plants should also be exempted from service tax.
5.1.14. Exemption from the levy of Service Tax on Maintenance, Repair and Overhaul
(MRO) Services of aircraft
MRO Business in relation to aircrafts has a huge potential to attract foreign investments and earn precious foreign
exchange and at the same time save outflow of foreign exchange from India. It is desirable to exempt the MRO
services as a whole from imposition of service tax in order to promote the industry in India. The exemption is
necessary for promoting the upcoming MRO business which has just begun to grow in India.
It is suggested that MRO services may be included in the negative list of services or may be specifically exempted
from service tax.
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5.1.15. Exemption for services provided in relation to cold storage and warehousing of
goods
Prior to the introduction of the comprehensive Service Tax based on concept of Negative List, services provided in
relation to storage and warehousing of goods by way of cold storage were specifically excluded from the purview of
service tax. In order to reduce the costs of the farm produce and to prolong the shelf life of food products it is
requested that service tax may be exempted on storage and warehousing services necessary for maintenance of cold
chain at least in respect of the food products.
5.1.16 Double Taxation on Rooms and Food and Beverages provided in hotels
In Finance Act 2011 the scope of Service Tax was expanded to levy Service Tax on Room Sale & Food sold in Air
Conditioned Restaurants having liquor license despite the fact that Luxury Tax is already charged on Sale of Room
nights and VAT on Sale of Food & Beverages.
Whilst abatement, in respect of service tax has been provided @ 50% for Rooms and @ 70% for Food & Beverage, on
the balance portion there is an element of double taxation - Service Tax and Luxury Tax in the case of Rooms and
Service Tax and VAT in the case of Food & Beverages.
The total tax outflow for the Guest works out to around 20% on an average. This is a significant deterrent to the
Hospitality Industry, especially the Luxury Hotels. It is recommended that the levy of Service Tax on sale of Room
nights and Food & Beverages be discontinued.
Valuation of Services
5.1.17. Valuation of Works Contract Services
In respect of works contract services where the actual value of goods is not known, it has been prescribed that the
service tax is to be computed with reference to the “total amount” charged for the works contract. Further, it has
been stipulated that the “total amount” will be a sum equal to the gross amount charged plus the fair market value
of all goods and services supplied by the Service Recipient under the same or any other contract less amounts
charged for such goods and services by the Service Recipient.
It is apprehended that in such cases the Department would insist on service tax on value of goods that do not, in any
way, contribute towards the value of service provided and for which there is no transfer of title during the execution
of the works contract. For example, if a service recipient awards a works contract to a service provider for
preparation of foundation and installation of a machine belonging to the service recipient, the Department may
insist that as per valuation rules the cost of the machine has to be included for purposes of computation of service
tax liability.
In order to avoid such untenable situations, it is recommended that either the valuation rules are amended suitably
or appropriate clarifications are provided immediately.
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5.1.18. Value of service portion in case of works contract
As per Rule 2A of the Service (Determination of Value) Rules, 2006, in cases where the actual value of goods is not
known, the value of the service portion of the works contract service is deemed to be a specified percentage. For
different types of works contract the prescribed percentages for determining the deemed value of the service
portion are as under:
Value of the Service portion shall be
Deemed to be
Where works contract is for
(i) execution of original works
40% of the total amount charged for
the works contract
(ii) maintenance or repair or reconditioning or restoration or
servicing of any goods
70% of the total amount charged for
the works contract
(iii) Other works contracts not covered in (i) & (ii), including
maintenance, repair, completion and finishing services such
as glazing, plastering, floor and wall tiling, installation of
electrical fittings of an immovable property
60% of the total amount charged for
the works cont ract
5.1.19. The segregation of works contract services with reference to goods and immovable property and the
different percentages prescribed for determining the deemed value of service portion of a works contract
has the following infirmities
(i) Issues of interpretation on what constitutes “goods” and what constitutes “immovable property.
Under Central Excise there is a plethora of litigation regarding interpretation of what is “goods” and what is
“immovable property”. It is apprehended that the same issues will arise in case of works contract services also,
particularly since the deemed value of service portion in a works contract is to be determined with reference to
prescribed percentages that are different.
In order to avoid litigation in this regard and lock-up of revenue, it is recommended that the segregation of works
contract services on the basis of “goods” and “immovable properties” be done away with and a uniform percentage
prescribed for all works contract services.
(ii) Instances of total tax pay-out (Service Tax plus VAT) on a tax base that is higher than the total value of the works
contract.
The issue with the prescribed percentages - for determination of the deemed value of service portion - is that they
appear to have been prescribed on a stand-alone basis without reference to valuation rules for works contracts
specified in the State VAT Laws.
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As per the State VAT Laws in cases of indivisible works contracts the value of goods is deemed to be a certain
prescribed percentage. For different types of works contracts different percentages have been prescribed.
The deeming provisions come into effect under both Service Tax and State VAT laws in case of indivisible works
contracts. Since neither Service Tax law nor State VAT laws recognize the deeming provision that exist in the other
law, the assessee is forced, in many cases, to pay tax (service tax plus VAT) on a value higher than the total value of
the works contract. Illustrations of such cases are as under:-
Deemed Value
of Service
Portion
Type of Indivisible Works
Contract
(Per Service Tax
Laws) on which
tax payable
Deemed Value
of Goods on
which VAT
payable
(As per VAT
Laws)
Total Value of Works
Contract on which
Service Tax and VAT is
payable
85%
Installation of Plant
& Machinery
40%
(Karnataka VAT
Rules,2005)
125% (40% + 85%)
70%
Civil Works like construction of
Building
40%
(Rajasthan VAT
Rules,2006)
110% (40% + 70%)
75%
Works Contract For Repairs/Not
Specified
60%
(Karnataka VAT
Rules,2005)
135% (60% +75%)
The recently amended Valuation Rules under Service Tax laws clearly lead to an untenable situation whereby
assessees are required to pay tax on a value base that, more often than not, is higher than the total value of service
that is provided.
The Central Government is requested to take up this matter with the Empowered Committee of State Finance
Ministers to find a solution to this problem such that the total tax (service tax plus VAT) to be paid by an assessee is
not computed on a tax base that is higher than the total value of the works contract. Alternatively, Service Tax
(Determination of Value) Rules, 2006 be amended so as to provide a uniform rate, between 10% and 15%, for
arriving at the value of service portion for all kind of works contracts.
5.1.20. Increase in abatement from value for service tax on coastal transportation
services
Services of 'transport of coastal goods and goods transported through national waterways and inland water' are
liable to service tax. In the Budget 2012, the abatement of 25% available for these services was increased to 50%.
Transport of goods by road services are eligible for an unconditional abatement of 75% from the value of taxable
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services i.e. service tax is payable on 25% value. Rail transport is eligible for an abatement of 70% subject to the
condition that no credit of service tax is availed of taxes paid on inputs, input services and capital goods. There is a
similar abatement for transport of goods by road and rail transport services. The present anomaly results in a cost
disadvantage to Indian shipping companies vis-à-vis providers of road transport services and rail transport services.
It is requested to provide an increase in abatement from 50% to 75% for services of 'transport of coastal goods and
goods transported through national waterways and inland water'.
5.1.21. Deduction of reimbursements from the value of service
Under the Service Tax (Determination of Value) Rules, 2006 the taxable value of a service is to be computed inclusive
of cost of any reimbursements made to the service provider. The only exception is in respect of reimbursements
made to a pure agent. Prior to these Rules, cost of reimbursements could be deducted while computing the value of
taxable services provided the invoice showed value of such reimbursements was shown separately on the invoice.
Consider a case where a consultant has been appointed and he, in turn, uses the services of a lawyer in connection
with providing the consultancy service to his client. Under the Valuation Rules the value of the taxable service
provided to the client by the consultant is inclusive of the charges paid by the consultant to the lawyer as legal fees.
Accordingly, service tax is payable by the client even on the legal fees paid to individual counsel by the consultant
though, in terms of Service Tax laws such legal fees are outside the scope of service tax.
It is recommended that the Service Tax laws be amended such that cost of reimbursements in connection with input
services are allowed to be deducted while computing value of taxable services.
Place of Provision of Services Rules
5.1.22. Service tax on outbound transactions provided by an entity in taxable territory
to its office in non-taxable territory
Under the service tax regime as applicable prior to July 1, 2012, the Head Office and Branch Office/ Project Office of
the same legal entity located in two different territories were treated as separate persons for the limited purpose of
import of services. In other words, if an office of a legal entity located in India imported taxable services from
another office of the same legal entity located outside India, then it was deemed as services received by Indian office
from another person and such Indian office was liable to pay service tax under reverse charge, subject to the
conditions prescribed under the law.
With the introduction of service tax regime based on the concept of a negative list, it has been provided vide
Explanation 3 of the definition of 'service' in section 65B that the establishment of a legal entity located in India and
of the establishment of the same legal entity located outside India would be treated as distinct persons. With the
introduction of this explanation, it is apprehended that even the outbound transactions (i.e. services provided by the
office in India to office located abroad) may fall under the service tax net leading to levy of service tax twice.
The issue has arisen with respect to transactions where the Indian Project Owner awards a contract to the Contractor
located outside India and the Contractor sets up a Project Office in India for actual execution of the project. The
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transaction is explained as per the following diagram:-
Contractor
(Head Office)
Payment from HO
to PO for expenses
Payments in
foreign exchange
Indian PO opened
for provision of
services
Contract for construction
of Power Plant in India
Outside India
India
Indian Project Owner
Actual Provision
of services
Project Office of
the Contractor
In the above example, the service tax implication may arise as under:
•
On the main contract between Indian Project Owner and Contractor (located outside India) - Since the
Contractor has an office in India and such office is directly concerned with the provision of services, the liability
to pay service tax would fall on the Project Office of the Contractor in India
•
On the transactions between the Head Office and the Project Office of the Contractor - Since the two would be
treated as two distinct persons, the remittances received by the Project Office from the Head Office to meet the
expenses for execution of the project in India are also likely to be exposed to service tax.
On a strict interpretation of the legal provisions, the Project Office may become liable to pay service tax twice on the
same transaction (one on the services provided under the main contract and second on services provided by Project
Office to Head Office), without any credit eligibility.
Perhaps the intention of the Government is to levy service tax only on the services provided by offshore office to the
office located in taxable territory (i.e. on import of service transactions), however due to the language of explanation
any transaction between offices of same legal entity located in two taxable territories are getting exposed to service
tax, resulting into multiplicity of taxes and adding to the tax cost.
Also, since the state of Jammu and Kashmir is treated as outside the taxable territory for the purposes of service tax,
transaction (inbound or outbound) between office of a legal entity located in Jammu with the office of the same
legal entity located in taxable territory is getting exposed to service tax.
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It is suggested that necessary amendments be made in the text of the explanation to clarify that the establishment
of a legal entity located in taxable territory and another establishment of the same legal entity located outside India
would be treated as distinct persons only for the purpose of transaction of import of services.
Alternatively, it may be clarified that since in the transaction structure provided above, the Foreign Contractor is
providing services to the Indian Project Owner through its Project Office in India, the liability of service tax should be
restricted to the Indian Project Office and the money remittances from the Foreign Contractor to its Project Office
are merely flow of money between two offices of one Company without any underlying transaction and hence
should not be liable to service tax
5.1.23. Place of provision of services in case of transportation of the goods by road
Rule 10 of the Place of Provision of Services Rules, 2012 (POPS Rules) provides that in case of transportation of goods
by road i.e. through Goods Transport Agency (“GTA”), the place of provision is the place where the person liable to
pay service tax is located.
In case of GTA services, the person liable to pay freight to the GTA is liable to pay service tax to the Government,
however Rule 2(1)(d) of Service Tax Rules provides, if the person liable to pay freight to the GTA is located in nontaxable territory, then the GTA becomes liable to pay service tax on transportation services.
On a combined reading of the two provisions it appears that for transportation services provided by GTA, place of
provision shall be outside taxable territory only when the person liable to pay freight to the GTA and GTA both are
located outside the taxable territory. If any of them is located in taxable territory then irrespective for inward or
outward transportation of goods the place of provision shall be taxable territory and hence such services would
become liable to service tax.
It may be pointed out that the above provision is not in line with the provisions related to transportation of goods
through ocean, air or rail. We have provided below a table comparing the provisions related to place of provision for
transportation of goods through road and other transportation modes:
Service tax liability
Scenarios
Transportation of goods from India to outside India
Ocean/ Air
Rail
GTA
No
(exports)
No
(exports)
No
Tax would be paid
by the specified
person. However,
if the specified
person is located in
non-taxable territory,
GTA would be liable
to pay tax
No (as covered Yes
under the
negative list)
Transportation of goods from outside India to India
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Service tax liability
Scenarios
Ocean/ Air
Rail
Transportation of goods within India
(From J&K to a taxable territory)
Yes
Yes
Transportation of goods within India
(from taxable territory to J&K)
No, since the
destination of
goods shall be
a non taxable
territory
No, since
the
destination
of goods
shall be a
non taxable
territory
Transportation of goods within India
(where movement of goods is within J&K)
No
No
GTA
No, Provided that
both service
recipient and GTA
are located in J&K
To elaborate, if an Indian supplier is to supply the goods to its customer located in Nepal or to Jammu and Kashmir,
then if the goods are supplied through rail or air then since the destination of goods is outside India, the place of
provision of services would be outside India, however if he appoints a GTA and pays freight to him for transportation
services, then the place of provision would be where the supplier is located and such services would become liable
to service tax.
It is recommended that the place of provision of service rules for transportation of goods by road services should be
in line with the provision for transportation of goods through air/ sea or rail. In other words, there should not be any
change in the tax implications due to change in modes of transportation.
5.1.24. Place of provision of service in case of
(a) R&D activities conducted using inputs supplied by the service recipient and
(b) testing of software
In terms of the Place of Provision of Service Rules, 2012 ('POPS Rules'), services related to testing of goods (where
the goods are provided for examination) is likely to fall under Rule 4 and be taxable where the services are
performed.
Under the service tax regime effective prior to July 1, 2012, such services used to qualify as export based on the
location of the recipient for whom the research is carried out. In certain cases the goods are returned to the service
recipient and in certain cases the goods get consumed in the process of testing. For example, if some seeds are
supplied by the service recipient abroad for carrying out certain field trials in the area of agriculture and the seeds
get consumed in the process of testing, under the POPS Rules, the service tax liability is likely to fall on the service
provider, whereas the results of the R&D activity are made available to the service recipient abroad on payment of
service charges in foreign exchange.
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Similarly, in the case of software testing services for overseas clients, the testing is performed on the software itself
or on a hardware in which the software is embedded or etched. Some of the testing would be undertaken in labs
located in India. The service provider would provide the test report or an exception report to the service receiver
outside India and receive the consideration in convertible foreign exchange. Rule 4(a) read with the first proviso
there under are not adequate in scope to cover such testing services, as exports.
It is recommended that the POPS Rules should be appropriately amended so that such testing related services should
not fall under Rule 4 and instead should be covered under Rule 3 of the said Rules.
In respect of testing service performed on goods, the place of provision of service should be the place where the test
report or exception report, if any, is required to be delivered.
5.1.25. Treatment of call centre services / BPO services as 'intermediary services'
The term “intermediary” as defined in Rule 2(f) may be erroneously applied to the BPO services performed from
India for clients in countries outside India. Typically, under an outsourcing arrangement, the BPO Units established in
India would follow a set of agreed procedures/ processes and when these are executed electronically, it may be
construed that services have resulted in arranging or facilitating a provision of service between the clients and the
clients' customers / service recipients. Likewise, call centre services make calls to contractual recipients located
outside India which are in the nature of marketing.
There have been doubts whether the above services would qualify under:(i) Rule 3 of POPS Rules (and hence, would qualify as exports, subject to fulfillment of other prescribed conditions,
since place of provision in such a case would be outside India i.e. place of the service recipient);
or
(ii) Rule 9 of the POPS Rules as an 'intermediary service' (and hence, would not qualify as exports since place of
provision of this service would be in India viz. location of service provider).
In this regard, while the Guidance Note, under Para 5.9.6, seeks to generally exclude call centers from the purview of
'intermediary', it does not address the issue of call centers set up specially for marketing the services of its overseas
service recipients (such as those in the financial sector) and other BPO activities executed electronically.
Prior to the “Negative list” regime, such services qualified as 'export' in terms of the erstwhile Export of Services
Rules. Denying export benefit on such transactions would lead to unnecessary burden and would also result in
exporting taxes along with services.
It should be clarified that B2B transactions like marketing services / BPO activities are not covered within Rule 9 of
POPS Rules. The status prior to July 1, 2012 should be continued.
5.1.26. Time charter services - impact of Place of Provision of Services Rules, 2012
In case of time charter services provided by an Indian shipping company to an overseas customer for a period up to
one month, place of provision of services is in India i.e. location of service provider and hence service tax is
applicable. These services do not qualify as export even if the services are performed entirely outside India and
consideration is received in convertible foreign exchange.
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Time charter services provided by an Indian shipping company to a foreign shipping company for a period up to one
month would attract service tax. However, if similar services provided by foreign shipping companies to foreign
customers, service not taxable since place of provision of services is outside India. Time charter services provided by
an Indian shipping company to an Indian customer for up to one month would be liable to service tax. However, if
similar services provided by foreign shipping companies to an Indian customer, service tax would not be applicable
since place of provision of services is outside India.
This results in a disparity in levy of service tax on services provided by Indian shipping companies vis-à-vis foreign
shipping companies.
Services of 'hiring of means of transport for a period up to one month' should be excluded from Rule 9 of the POPS
Rules. If this amendment is made, the place of provision of services for all time charter services irrespective of the
period of hiring would be governed by the location of service recipient as per Rule 3 of the POPS Rules i.e. the
default rule for determining the place of provision of services.
Hence, the disparity in levy of service tax on time charter services provided by Indian shipping companies and by
foreign shipping companies should be removed.
5.1.27. Voyage charter services - impact of Place of Provision of Services ('POPS') Rules,
2012
The negative list of services covers services of 'transportation of goods by vessel from outside India to the first
customs station of landing in India'.
On account of the above, CENVAT credit / refund of taxes paid on inputs, input services and capital goods used for
international transportation of goods from outside India to India is not available. Non eligibility to claim refund of
taxes and duties paid on inputs, input services and capital goods result in high costs relating to transportation of
goods. This has a serious impact on the Shipping industry and is a stumbling block to the development of the
international transportation business. Globally, major maritime jurisdictions like UK, Singapore, Netherlands, Greece
etc, give full credit of taxes paid on inputs used for export and import cargo.
Services of transportation of goods by sea from outside India to a destination in India should be excluded from the
negative list. An amendment should be made in Rule 10 of the POPS Rules stating that for services of transportation
of goods, the place of provision of services would be considered as outside India if either the origin or destination of
goods is outside India. For international transportation of goods to qualify as export, the two conditions i.e. service
recipient located outside India and consideration received in convertible foreign exchange, should not be made
applicable.
Reverse Charge
5.1.28. Reverse Charge Mechanism
Prior to introduction of the Negative List of Services, only two types of services were taxed under the reverse charge
mechanism - services provided by GTA and services provided by persons outside India in case such persons did not
have any establishment in India.
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With the advent of the Negative List of Services a whole host of services have been notified under the reverse charge
mechanism, including services of works contracts, manpower supply and security provided by non-corporate service
providers to corporate bodies. Also, penal provisions that are applicable to service providers have been made
applicable to service recipients as well in case of the services that are under the reverse charge mechanism. The
undesirable consequences of these changes in the service tax laws include:(i) significant increase in complexity and cost of compliance in case of corporate bodies in terms of identification of
status of service provider, maintenance of records, submission of returns, Departmental audits and so on.
(ii) undermining of threshold limits and exemptions prescribed under service tax laws. This is due to the fact that in
case of payment of tax under the reverse charge mechanism threshold limits are not applicable, leading to situations
where the service recipient, being a corporate body, has to pay service tax in respect of specified services provided
by non-corporate service providers even if such service providers are below the prescribed threshold limits.
(iii) chances of short/excess payment of service tax consequent to differences in understanding of service provider
and service recipient on whether a particular service falls under the services notified for taxation under the reverse
charge mechanism.
(iv) scope for dispute and litigation with the Department on interpretation and valuation. For example, whether a
particular service is a manpower supply service (to be taxed under reverse charge mechanism) or not would depend
on the facts of the case and is open for interpretation. Similarly, the laws prescribe that in case of works contract
services it is open to the service provider and the service recipient to follow different options of valuation. It is
apprehended that issues like these will give rise to disputes with Department, resulting in avoidable litigation and
lock-up of revenue.
The enlargement of list of services under the reverse charge mechanism has, in effect, burdened the service recipient
with responsibilities that are rightly those of the Department. In an era of growing transparency and simplicity in tax
laws this is clearly a retrograde step. Accordingly, it is strongly recommended that the list of services under reverse
charge mechanism be restricted to services provided in India by parties outside India and road transportation
services provided by GTA - as was the case prior to introduction of the Negative List of Services.
5.1.29. Exemption of Rs. 10 Lakhs for services subject to tax on reverse charge basis
Notification No. 33/2012 dated 20.06.2012 exempts taxable services of aggregate value not exceeding Rs. 10 lakhs in
any financial year from payment of Service Tax. The said exemption is made applicable to Service Providers. As per
rule 2(r) of the Cenvat Credit Rules, 2004, 'provider of taxable service' includes a person liable for paying Service Tax.
In terms Rule 2(1)(d) of Service Tax Rules read with Notification No.30/2012-ST dated 20.6.2012 there are certain
taxable services notified wherein the recipient of services are liable to discharge service tax (services subjected to tax
under reverse charge mechanism). The liability is on the receiver of services even if the service provider is below the
threshold limit of Rs.10 lakhs. The anomaly should be rectified and the exemption limit of Rs. ten lakhs so granted to
the Service Provider should also be extended to Service Receiver in such cases.
5.1.30. Exemption limits for payment of service tax on partial reverse charge basis
Under the new Service tax regime, for the first time, certain services have been notified for payment of service tax
under partial reverse charge mechanism, partly by service provider and balance by the service receiver. These
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changes have created hardship to industry at large predominantly due to the fact that compliance becomes a major
hurdle and non-service providers like traders also undesirably get subjected to service tax jurisdiction. Lack of clarity
on the terminology adopted for implementing the reverse charge and also valuation for purpose of service tax
computation by both service provider and receiver, if different, could be prone for litigation. Further, Cenvat credit
availed thereon is likely to result in dispute.
It is suggested that the scheme of partial recovery of service tax on reverse charge basis may be withdrawn and the
entire service tax liability should be discharged by the service provider.
In case this suggestion is not acceptable for any reason, the revenue should introduce monetary threshold for the
service recipient to pay service tax under reverse charge. The objective should be to ease the compliance
requirements where the revenue implications are not substantial. We have suggested below the monetary limits for
different services liable to tax under reverse charge, which may be considered by the Revenue:
Nature of services
Reverse charge
applicability
Monetary Limit (in INR)
Goods Transport Agency
100%
20,000 per transporter per month
Sponsorship services
100%
1,00,000 per event
Services by Arbitral Tribunal
100%
20,000 per case
Support services by Government
100%
1,00,000 per annum
Services provided by Directors
100%
1,00,000 per annum
Legal Services
100%
20,000 per contract
Manpower supply/ security services
Partial
20,000 per person per month
Renting of motor vehicle
Partial
20,000 per month
Works contract services
Partial
1,00,000 per contract
Miscellaneous
5.1.31. Amendment of the definition of “Agricultural Produce”
The term agricultural produce has been defined under section 65B as below:
'(5) “agricultural produce” means any produce of agriculture on which either no further processing is done
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or such processing is done as is usually done by a cultivator or producer which does not alter its essential
characters but makes it marketable for primary market;'
Under the erstwhile Service tax regime the following Notification / Circulars are issued by the Government of India
and CBEC which clarifies “Unmanufactured Tobacco” is an “Agricultural Produce” and services provided in relation to
unmanufactured tobacco is “in relation to Agriculture”:(i) Order issued by the Central Government under the power vested under Section 95 of the Finance Act - Order
No.1/2002:
“Agricultural produce means any produce of agriculture on which either no processing is done or such
processing is done as is usually done by a cultivator like tending, pruning, cutting, harvesting, drying which
does not alter the essential characteristics but make it only marketable and includes all cereals, pulses,
fruits, nuts and vegetables, spices, copra, sugarcane, jiggery, raw vegetable fibers such as cotton, flax, jute,
indigo, unmanufactured tobacco, betel leaves, tendu leaves, and similar products but does not include
manufactured products such as sugar, edible oils, processed food and processed tobacco.”
(ii) CBEC Circular No.143/12/2011 - ST, dated 26th May, 2011, F.No.332/37/2010-TRU (Refer Annexure-1)
It is recommended that the definition of “Agricultural Produce” may be appropriately amended to avoid issues
relating to interpretations.
5.1.32. Taxability of part consideration recovered by the employer from employee
The definition of service as provided under section 65B (44) excludes the transaction of service provided by
employee to the employer in relation to his employment.
It is an industry practice that Employers provide certain facilities to employees during the course of employment.
Few of such facilities are mandatory as per provisions of law relating to employment, like Canteen. However in order
to have a participation in the business from the side of employee, a small element of the cost is recovered from the
employee. Such benefits are considered to be provided by the employer to the employee on a concessional rate.
Most of the benefits given by an employer to its employees are procured from outside wherein service provider is
either asked to provide the facility directly to employees or is asked to visit to company's premises to provide such
services. In both the cases, the service provided by service provider is directly consumed by the employees on behalf
of their company and company remains just a conduit to recover some subsidized rates from each of its employees.
In nutshell, in cases of above types of arrangements, it is only one activity which is carried out where service
provider directly provides the services to company / employees. It is also evident from the way such transactions are
recorded in the books of accounts of the company wherein only net cost i.e. service fee charged by service provider
less recoveries from employees is shown as expenses instead of booking expenses with gross amount and showing
recoveries as miscellaneous receipt / service fee. Therefore, it is not fair to break such transactions artificially into
two transactions i.e. service provider provides the services to the company and company, in turn, is providing such
services to its employees.
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Such recovery from the employees should not be construed as a Service provided by the employer due to the fact
that the employer is not in the regular business of providing such service. The concessional benefit provided by the
employer to employee is only under the employment arrangement between the employer and the employee. The
intention of the employer is not to trade services to the employee, the intention is to provide benefits to its
employees in respect of their services. In addition, the service provider would already be charging applicable service
tax in the billing to Employer, and therefore there is no loss of revenue to the Government
Hence, in situations where part consideration is received by the employer from the employee towards the benefit
forming part of the salary of the employee, the same should not be liable to service tax. It also needs to be clarified
that any amount recovered from the employee for breach of contract of employment would be out of the purview of
the Service Tax as the contract itself is out of the scope of the service tax.
5.1.33. Transaction between unincorporated Association of Persons (“AoP”) and its
members
As per Explanation-3 under clause (44) of Section 65B of the Finance Act, 1994, an unincorporated association or
body of persons and a member thereof shall be treated as distinct persons for the levy of service tax. The phrase
'unincorporated association or body of persons' (“AOP”) is not defined under the service tax laws. In the absence of
any definition, clarifying/explaining what constitutes an AOP, significant difficulties are likely to arise for the tax payer
leading to protracted litigation. The examples of such association in its simplest form could be the residents of a
block of residential flats managing the upkeep of their building to a more organized structure where a group of
persons join hands to bid for a project in the name of one of the persons in the group but where each person would
be providing services in its area of specialization. The tax consequences in such cases can be severe unless the
intention is clearly spelt out by defining the term 'unincorporated association or body of persons'.
Given the above, it is recommended that the term 'unincorporated association or body of person' should be
specifically defined under the service tax laws to avoid any unnecessary and unwarranted litigation and hardship to
the tax payer as also the project owner awarding works contract to an AOP.
Alternatively, the concept of AOP may be done away with since in any case the members of the AOP would discharge
their service tax liability. Treating AOP as a distinct person from a service tax perspective would only lead to
ambiguity in law and onerous compliance burden on the assessees without any incremental service tax revenue for
the Government.
In view of the extensive risks and resource requirements associated with exploration and allied activities in oil & gas
industry, it is common for industry players to pool in their resources and form Unincorporated Joint Venture (UJV) to
execute the project. The UJV typically executes a Production Sharing Contract (PSC) with the Government of India to
carry out the exploration and development activities and share the output. In terms of the specific requirements laid
down under the PSC, one of the members of the UJV is required to be nominated as an Operator, and is responsible
for carrying out the requisite activities on behalf of constituents of the UJV. However, all the members of the UJV
continue to be responsible for their obligations or liabilities under the PSC. To fund these operations and manage the
project, the members are required to make their contributions through various modes (e.g. in the form of 'cash calls',
allocation of manpower to the UJV, recovery of project related expenses incurred by members from UJV or viceversa, etc.).
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With the recent changes in service tax laws resulting from implementation of negative list based taxation regime,
certain doubts have arisen regarding the applicability of service tax on financial dealings between such UJVs and their
members.
As may be observed payments made by the members from the UJV towards 'cash calls' are not towards an activity
carried out by UJV for the members, which is a pre-requisite for levy of service tax. Such payments are in essence
pure funding arrangements/ capital contributions made by the members to the UJV. Even with respect to other
payments made by UJV to members towards project related expenses/ charges, there is no intention to provide a
service. Instead, these are necessary for the functioning of the UJV. Therefore, even if the members and UJV are
viewed as separate entities for service tax purposes, the underlying transactions are not towards any service
provided by either party to the other.
While the industry is of the view that service tax is not applicable on such transactions, in view of the broadened
ambit of service tax under the negative list based regime, it is imperative to have absolute clarity and certainty in
terms of tax treatment. Any additional cost to the industry in the form of service tax or litigation cost would translate
into a higher cost of exploration and development, which would not be desirable, given the impetus that the
Government intends to give to the sector.
Therefore, it is submitted that appropriate clarifications/ exemption notifications may be issued to ensure that
transactions between the members and UJV, and inter se between the members, remain outside the purview of
service tax.
5.1.34. Periodicity of Filing Service Tax Return for small Service Providers
Small Service providers classified on the basis of threshold limit of annual turnover upto 50 Lakhs should be given
exemption from half yearly filing of service tax return. Yearly return filing procedure should be made for small service
providers.
5.1.35. Extension of Due Date of Payment of Service Tax
The Service Tax Rules, 1994 have been amended advancing the date of payment of service tax from 25th of the
month following the month in which the service charges are collected to 5th of the following month or 6th if the
payment is made by internet. Further, in case of month of March, the service tax is required to be paid by 31st March
only. The amendment creates practical difficulties in case of organizations having multiple branches / locations over
the country but paying service tax on a centralized basis due to time required in collating and reconciling the
necessary data. Further, in view of non availability of provisions for adjusting service tax liability against subsequent
payment, the amount even if paid on estimated basis will get blocked till the refund, if any, is granted by service tax
authorities.
It is suggested that if it is not possible to restore the earlier provisions of due date for payment of service tax viz.
25th of the following month, the due date for payment should be fixed between 15th-20th day of the succeeding
month for all months including the month of March.
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5.1.36. Rate of Interest for delayed payment of excise duty or service tax
The rate of interest on delayed payment of excise duty has been revised with effect from 1st April 2011 to a uniform
rate of 18% per annum. The rate of interest on delayed payment of taxes has been increased from erstwhile 13% per
annum to 18% per annum.
The rate of interest as has been prescribed for delayed payment of taxes is exorbitantly high as compared to the rate
of interest which the exchequer would have earned if the same would had been deposited with the nationalized
banks. Such high rate of interest is more penal in nature rather than being compensatory. Such high rate of interest is
also detrimental to the overall industry as a whole and especially with regard to assessees' who have paid short tax
or no tax under a bona fide belief.
The rate of interest on delayed payment of taxes should be prescribed at 12% per annum for delayed payment of
excise duty as well as service tax (as is the case for delayed payment of income tax).
5.1.37. Point of Taxation for Construction Activities
The Construction Business is very unique and complex in nature. The execution of huge Projects for reason of
Engineering, Procurement and Logistic support, Client Coordination, follow up with other Agencies, control and
monitoring, etc. need officiating from multiple divisions spread across different geographical location. With this
background the transaction documentation, holding of records / details for measurements and check measurements,
payment receipts and disbursement, maintenance of Books of Accounts and other statutory records, also have to be
decentralized. Therefore, Construction Business has got to be supported by a system of Progressive Billing which is a
continuous activity till the completion of the Project. These Progressive Bills are raised for an adhoc amount which
are considered as “Work in Progress” instead of normal sales as per Accounting Standard (AS7) in the Books of A/c
because of the uncertainty in recognizing the element of Profit in the ongoing Projects.
It will therefore be appropriate only when the incidence of Service Tax is attracted only after due certification of Bills
by the Architects / Engineers instead of imposing Service Tax on every running bill which is always subject to
modification.
5.1.38. Dual Levies on Software-VAT and Service Tax
The definition of the term “service” given under section 65B (44) is wide enough to cover any activity. The definition
excludes sale of goods and other deemed sale transactions as per Article 366(29A) of the Constitution, like for
example transfer of right to use goods. Hence, all transactions which are treated as “sale” shall be outside the ambit
of service tax.
Historically, while packaged software has been treated as 'goods' and customized software has been treated as
'services'.
In this respect, the Central Board of Excise and Customs (“CBEC”) has issued a Guidance Note on “Taxation of
Services - An Education Guide” ('the Guidance Note') which also states that pre-packaged or canned or shrink
wrapped software, when supplied on a media, would qualify as 'goods' and hence would not be liable to Service tax.
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However, the CBEC has issued a Guidance Note on “Taxation of Services - An Education Guide”. Para 6.4.4 of the
guide suggests that download of software shall be liable to service tax.
From the said Para it appears that in case separate consideration is charged for license to use packaged software, the
same may attract Service tax, as license to use software may not fulfill all the conditions of 'transfer of right to use
goods'. However, it is a settled position under the VAT laws of all the States that providing right to use the license/
copyright in software is to be construed as a deemed sale transaction and therefore is to be levied with VAT at the
applicable rates.
The Guidance Note further appears to suggest that Service tax shall be applicable on software that has been
downloaded electronically by end customers. The said view appears to have been formed based on the
understanding that the Supreme Court judgment in the case of Tata Consultancy Services (“the TCS Judgment”)1 can
be applied only to transactions of sale of software on media. Therefore, the Guidance Note suggests that conclusion
of the TCS Judgment cannot be made applicable where software is not sold on media, and therefore no VAT is
payable on the same (thereby implying that Service tax shall be payable).
However, the payment of VAT on sale of software supplied electronically has been a settled position, for the reason
that software is treated as “goods” for the purpose of VAT, having all the attributes of the term “goods” as laid out by
the TCS Judgment (even when supplied electronically). Pertinently, the term “goods” for VAT purposes is wide
enough to cover tangible and intangible goods and software supplied electronically also qualifies as “goods”.
As software is treated as “goods”, even when supplied electronically, and VAT is being discharged on the same, the
question of treating the same as a “service” does not arise.
Even otherwise, no Service tax should apply on copyright in packaged/canned software, whether sold on media or
otherwise, due to a specific exemption provided under the Mega Exemption Notification No 25/2012-Service Tax
dated June 20th, 2012 (“Mega Exemption Notification”). The reason for the same is explained as below.
(i)
Section 66E of the Service tax law, as amended by the Finance Act, 2012, prescribes nine types of activities as
declared services (“deemed services” for service taxation).
(ii)
One of the declared services refers to temporary transfer or permitting the use or enjoyment of any intellectual
property right.
(iii) The Mega Exemption Notification exempts temporary transfer or permitting the use of copyright covered under
clauses (a) or (b) of sub-section (1) of Section 13 of the Copyright Act, 1957 (“the Copyright Act”). The said
clauses include, inter alia, original literary work within its purview.
(iv) As per Section 2(o) of the Copyright Act, literary work includes computer programmes, tables and compilations
including computer databases. Hence, copyright in packaged/canned software, whether sold on media or
otherwise, would get covered under the said category and hence would be exempt from Service tax.
Given the above, observation in the Guidance Note with respect to licensing of software creates a contradiction visà-vis exemption granted under the Mega Exemption Notification in respect of copyright in computer programmes.
1
Tata Consultancy Services v. State of Andhra Pradesh [2002(178)ELT22(SC)]
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In the interest of smooth functioning of trade and industry and in the interest of certainty, it is recommended that
CBEC clarify the position that provision of standard software, including license to use such software, whether
electronically or on a media, would not be liable to Service tax.
Applicability of VAT, Service Tax and Tax Deducted at Source on Software makes it very difficult for the Product
companies to do business in India, especially where tax rates are high and margins are low or negligible. If necessary,
an exemption may be granted to remove any doubts on the issue.
5.1.39. Service Tax on Insurance Charges for Export Shipments
Service Tax is charged on the insurance premium if insurance is done for export shipments on FOB basis. However, no
service tax is payable if insurance is done for export shipments till delivery along with freight i.e. on CIF basis. It is a
well known fact that duties and levies should not be exported. It is accordingly requested that no Service Tax be
levied on Insurance Premium paid on export shipments whether the export is made on FOB basis or CIF basis.
Sometimes, the Importers abroad ask the exporters in India to pay for destination terminal handling charges (DTHC)
in the importing country. Service Tax @12.5% is being charged from exporters who pay this DTHC.
It is requested that the Service Tax should not be levied on Terminal Handling Charges levied at the importer's end.
5.1.40. Payment of service tax on accrual basis
The Service Tax Point of Taxation Rules have been amended with effect from 01-07-2011 to make service tax liability
payable on billing basis and not on receipted basis i.e. on accrual basis and not cash basis
The amendment needs reconsideration as the service tax payers are caused unnecessary hardship. The service
providers are investing the funds for providing services and asking them to pay service tax on accrual basis even if
the payment for the same is not received will cause unnecessary burden on the Service Tax payers.
It is accordingly requested that the payment of service tax should be demanded only on receipt of the charges for
services rendered.
5.1.41. Cenvat Credit of Service Tax on freight for transportation of Goods from ICDs to
Port of Export
Notification 31/2012-ST exempts the service provided to an exporter of goods in relation to transport of the said
goods by goods transport agency in a goods carriage directly from their place of removal, to an inland container
depot, a container freight station, a port or airport, as the case may be.
The exemption recognizes the fact that the taxes ought not to be exported and simultaneously does not debar an
exporter to avail CENVAT credit of the Service Tax payable instead of going in for the Exemption. However, certain
Commissionerates are disputing the availment of Credits and insisting on opting for the Exemption. The conditions
laid down in the Notification for claiming exemption are cumbersome.
It is suggested that suitable clarification/ amendments may be issued to enable an Exporter to avail the CENVAT
credit of Service Tax paid on the above referred services instead of mandatorily going in for the Exemption route.
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5.1.42. Service tax on input services consumed in shipping industry
While input services consumed by the shipping industry are taxable, these services consumed in sea transportation
to a place outside India though in the nature of export of service are not eligible for credit. This leads to an
anomalous situation where services used for export get taxed and this tax gets exported as they add to the
transaction cost. Obviously this is an unintended consequence and needs to be remedied by zero rating the input
services.
Inputs services consumed by the shipping industry in export of goods should be exempted from service tax.
5.1.43. Prosecution under the Service Tax law
Prosecution provisions were introduced in Service Tax in 1994 by way of Section 89 of the Finance Act, 1994. This
section was omitted in 1998 and at that time the then Finance Minister in his Budget Speech had mentioned:“176. I am conscious of the fact that there is strong resentment against the procedures and legal obligations
relating to service tax. I have removed a number of obnoxious and deterrent provisions in law. I also propose
to abolish several of the redundant and irritating Central Excise Rules very shortly.”
Section 89 of Finance Act, 1994 has been reintroduced in Finance Act, 2011 and clause (1) (a) has been further
amended, to widen the scope, in Finance Act, 2012. If these provisions were perceived to be “obnoxious and
deterrent”, there is no reason why it should not viewed to be the same today.
It is suggested that the prosecution provisions of law should be removed, in view of the potential for misuse by the
tax administrators / field formations.
5.1.44. Penal provisions when complete details are available from the records of the
assessee
Section 73 (4A) of the Finance Act,1994 provides that where during the course of any audit, investigation or
verification, it is found that any service tax has not been levied or paid or has been short levied or short paid or
erroneously refunded, but the true and complete details of transactions are available in the specified records, the
person chargeable to service tax or to whom erroneous refund has been made, may pay service tax in full or in part
along with interest and penalty up to a maximum of 25% of the tax amount before service of notice.
It is submitted that in the event the complete details of the transaction are available in specified records of the
assessee then it would be incorrect to presume that there is any intention to evade duty or tax. The non-payment or
short-payment of tax in such cases would normally arise out of bona-fide belief that the tax is not payable or due to
genuine human error.
Penalty should be imposed only where there is an intention to evade payment of duty by the assessee. In cases
illustrated above where the records are available to the Department for scrutiny and audit at any time, an assessee
should not be asked to pay penalty - more so in cases where duty is deposited suo-moto, even if such deposit is
made pursuant to the error being brought to the notice of the assessee during the course of audit or investigation or
verification.
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Service Tax Law should be amended to do away with penal provisions when complete details are available from the
records of the assessee. Similar amendment should be made in Central Excise Act.
CENTRAL EXCISE
5.2.1. Reduction of Excise Duty on Soy Processed Products
Excise Duty on certain Soy Processed Products was rationalized during Budget 2012-13, however, many Value Added
Products are still under the umbrella of Excise Duty varying between 4 to 8%. According to the recommendations of
WHO, 14 gm of Soy Protein per day (565 Kcal) can meet nutrition needs of our citizens thereby reducing the
expenses on Health Care by minimum Rs.20,000 crores per annum. This will improve the health and physical
development of our citizens.
It is suggested that Excise Duty on the entire range of Soy Processed Food Products be exempted.
5.2.2. Excise duty on carton boxes, notebook etc.
Carton boxes, register, notebooks, labels etc. are classified under heading 4819, 4820 and 4821 of the Central Excise
tariff and are leviable to duty at the rate of 12%. The basic raw materials required for production of these items are
paper and paper board which attract an excise duty of 6% only. Similarly, carton boxes of corrugated paper or paper
board of heading 4819 10 attract a duty of 6%. It is accordingly requested that the differential duty structure on
various types of boxes may be done away with and central excise duty on products of tariff items 4819, 4820 and
4821 should be reduced to 6%.
5.2.3. Excise duty on waste and scrap of paper and paper board
Excise duty on recovered (waste and scrap) paper or paper board is levied at the rate of 12% under heading 4707.
Waste paper and paper scrap are, however, charged a duty at the rate of 6% in terms of Notification No.12/2012-CE
dated 17-3-2012 (sl. No.160). Further, recovered (waste and scrap) paper or paper board arising in the course of
printing of educational text books is wholly exempted from excise duty in terms of the entry 161 of the table in the
said Notification. It may be noted that it is impossible in the print industry to segregate recovered waste and scrap of
paper and paper board since in the recovery process these wastes get mixed up. It is suggested that the goods
covered by sl.no. 160 and 161 of the said table should be subjected to a uniform rate of duty of 6%.
5.2.4. Excise Duty on Sugar Confectionery containing Cocoa
The sugar confectionery space is not a level playing field. While excise duty on sugar confectionery is @ 6%, if the
same sugar confectionery contains traces of cocoa, the excise duty doubles to 12%. The presence of cocoa merely
adds to the flavour like coffee or lime or mint and does not materially change the nature of product. Sugar
confectionary is defined by rigid price points of Rs.1 or Rs.2 and is consumed by a price sensitive segment of the
population. Higher excise duty merely because of the presence of cocoa is an unnecessary burden on the common
man. The lower rate of excise duty of 6% should be made applicable to all sugar confectionery whether or not it
contains cocoa.
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5.2.5. Value of exemption limit for Small Scale Industries (SSI) sector
Units in the small scale sector are eligible for exemption from excise duties provided the value of clearances effected
by them in a financial year does not exceed Rs.1.5 crores (Notification No.8/2003-CE dated 01-03-2003). Costs of raw
materials and input services have increased substantially since 1-4-2007 when the exemption limit was enhanced
from Rs. 1 crores to Rs.1.5 crores. FICCI has received several representations from its constituent members
requesting for recommending an increase in the exemption limit of Rs.1.5 crores having regard to the increase in the
costs of raw materials and input services.
FICCI would suggest that the Government take a decision in the matter in the context of the impending introduction
of GST and the timeframe for such reform of the indirect tax administration.
5.2.6. Return of Specified Goods covered by notification No. 1/2011-CE for
Reprocessing, Rework
In the Union Budget 2011-12, vide Notification No. 1/2011 -C.E. dated 01.03.2011, Central Excise duty was levied for
the first time on specified goods (which were earlier exempted from duty) with a condition that no cenvat credit of
duty on inputs or input services has been taken for such goods. As there is no cenvat credit available the Government
imposed a nominal levy of 1% duty (Assessment under Section 4 or 4A of the Central Excise Tariff). The above rate of
1% got revised to 2% in the Union Budget 2012-13 and the condition of non availment of cenvat on inputs or input
services continued.
It is to point out that there are situations whereby the duty paid stocks need to come back to factory for quality
checking or re-processing or re-work (for example coffee/tea pre-mixes, soup powders, tooth powder, medicaments
etc. where reprocessing amounts to manufacture). The same goods will be cleared after necessary re-work or reprocessing from the same factory. As per the Notification referred above, no credit could be availed when the goods
are returned to factory, in the event of payment of nominal levy of 1 or 2 % at the time of first removal from the
factory. However after quality checking or re-processing or re-work, if the same goods are cleared again, duty is
required to be paid once again (second time) prior to clearance. Therefore the goods would suffer duty twice as
there is no credit mechanism available in the aforesaid instance. The intent of the legislature is very clear that no
goods would suffer duty twice. But as per the current notification, conditions have not been prescribed and there is
no mechanism to avail credit on 2% dutiable goods which need to undergo some process as explained supra.
It is requested that an amendment may be made in the notification to permit availment of cenvat credit in such
situations.
5.2.7. Benefits under Excise Act & Rules for Supplies to SEZ
Central Excise Rules applicable to physical exports from Domestic Tariff Area (DTA) Units have been made applicable
to Special Economic Zone (SEZ) supplies through SEZ Rules. However, the Excise Department is denying such benefits
on the grounds that there are no specific provisions in the Central Excise Act or Rules to extend such benefits to SEZ
supplies and the provisions of SEZ Act or Rules do not override the provisions of Central Excise Rules. Consequently,
the Domestic Tariff Area (DTA) units are being denied the benefit of Refund under Rule 5 of the CENVAT Rules which
are applicable to physical exports. The circulars issued by the Central Board of Excise and Customs are not being
followed by the Commissioners. The Department has even filed appeal before the Customs Excise and Service Tax
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Appellate Tribunal (CESTAT) on the issue, which has been allowed but the decision has been stayed by the Mumbai
High Court.
It is proposed that the Government should make its stand clear on the subject so as to enable the suppliers to SEZ to
firm up their business plan. If all the benefits under the Central Excise Act applicable to physical exports were
intended to be extended to SEZ supplies, the same may be implemented through retrospective amendment of the
Central Excise Rules to put an end to the litigation on the subject resulting in hardship to the DTA suppliers.
5.2.8. Exemption from excise duty on interplant transfers
When goods are produced for further manufacture within the same factory the intermediate goods are exempted
and duty is collected after the final stage of manufacture. However, if the intermediate goods are cleared on stock
transfer from one factory to another of the same manufacturer, duty is payable on value calculated using the cost
construction method. This approach is based on the premise that cenvat credit would be available at the receiving
end and the value chain will remain revenue neutral.
However, there are instances where cenvat credit builds up for a variety of reasons such as large export volumes of
the final product, credit accumulated in new factory, inverted duty structure etc. This creates a huge working capital
burden on the manufacturers. In such circumstances, the manufacturer should be allowed to clear the intermediate
product from one unit to another without payment of duty but with adequate controls to ensure the actual receipt
and consumption at the receiving end. Such a procedure was available under the erstwhile Chapter X where the
intermediate goods could move in-bond without payment of duty. Currently, such exemption for intermediate
products has been extended to goods such as parts of power tillers (Not 16/2011 CE dt. 1.3.2011) & parts of mobile
handsets (sl. No. 31 of Notification No. 6/2006-CE, dt. 1.3.2006), subject to following the procedure of the Central
Excise [Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods] Rules, 2001.
It is accordingly suggested that suitable exemption from excise duty, to intermediate products transferred to any
other factory of the same manufacturer for use in the manufacture of dutiable final products may please be issued,
subject to following the procedure of the Central Excise [Removal of Goods at Concessional Rate of Duty for
Manufacture of Excisable Goods] Rules, 2001.
Also, provisions may be made in the Cenvat Credit Rules to grant permission to transfer credit from one unit to
another of the same manufacturer, so long as the units are manufacturing the intermediate product and final
product in the same product line.
5.2.9. Excise duty exemption for distilled water used for industrial purpose
With a view to conserve precious ground water, the Central Government has exempted water treatment plants and
pipes used for treating water (including de-salination using sea water) from excise and customs duty. The only
condition is that the processed water should be consumed for agricultural or industrial purpose. However, distilled
water itself (classifiable under CETH 28530010) obtained through this process and used for industrial purpose is
apparently not exempt. This appears to be an unintended omission. When excise and customs duty exemptions are
granted to the desalination plant which produces distilled water, the water produced would qualify for exemption.
Such distilled water is used in a variety of industrial applications, mainly in generating electricity. Having extended
the excise and customs duty exemption for the capital goods, equipments and pipes, to produce desalinated water it
would be appropriate that the distilled water used for industrial purpose is also exempted from duty.
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It is accordingly requested that desalinated / distilled water falling under CETH 28530010 when supplied for
industrial use may be exempted from excise duty.
5.2.10. Grant of Deemed Export Benefit for supply of HR Plates to Ship Building Units
Roughly, 50% of total import of Hot Rolled Steel Plates is by Ship Building Units (SBUs). Import of Hot Rolled steel
plates by SBUs is exempt from all excise duties. Supply of these plates by domestic manufacturers attracts excise duty
of 12%. Ship Building Activity is not covered in CENVAT chain resulting in the excise duty paid by the users on
indigenous steel as an additional cost. Ship Building Units, therefore, prefer importing the Steel Plates putting
domestic manufacturers at a disadvantage.
Hot rolled steel plates should be exempted from the levy of excise duty when supplied to ship building units;
alternatively, deemed export benefits should be extended for supply of Hot Rolled Steel Plates to Ship Building Units
in order to provide a level playing ground to the domestic manufacturers.
5.2.11. Deemed Export Status for supplies to Defence Projects
Ministry of Defence is making sincere efforts for ensuring the progressive evolution of DPP but Indian (Private Sector)
Industry has been facing regressive and differential treatment in terms of taxes and duties vis-à-vis Foreign OEMs as
well as DPSUs/OFBs. The existing tax/ duty treatment places the private industry players at a significant disadvantage
thereby restricting their ability to leverage the capabilities and capacities built up for defence manufacturing. If given
the opportunity, the industry can make major contribution and effort in strengthening the national defence industrial
base and positively contribute in the national endeavour to largely indigenize the defence & aerospace sector. This
can reverse the decades old import - indigenous ratio of 70:30 in favour of Indian Industry through significant 'import
substitution' as well as create System Integration capabilities within the Indian Defence Industry.
At present Deemed Export Status is available to various projects with an intention to encourage Indian Industry
manufacture the required equipment and to compete with Foreign Supplier in terms of cost. It also saves valuable
foreign exchange of the country and supports the growth of Indian Industry. The Defence Projects currently being
not treated as Deemed Export Projects are deprived of the benefits available to the later projects.
Benefits of Deemed Export project should be extended to all the Defense projects which are awarded through
International Competitive Bidding. Similar benefit should be extended to Indian offset partners as well as to its subcontractor.
5.2.12. Withdrawal of Excise Duty on Fly Ash
Excise duty is levied on fly ash at the concessional rate of 2%, vide Notification No. 1/2011 - CE & 2/2011 - CE. Fly ash
is a waste product generated on burning of coal in the boiler of power plant.
It has been held by the Hon'ble Supreme Court in case of Union of India Vs. Ahmadabad Electricity Co. Ltd., in 2003
(158) ELT 3 (SC) that burning of coal as fuel to produce steam cannot amount to manufacture and that ash is a byproduct and not manufactured product.
There is no change in the process generation of fly ash viz. a waste generated on burning coal in the boilers,
therefore the above judgment still holds good & hence fly ash generation should not be treated as manufacture. No
excise duty should be levied on fly ash.
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5.2.13. Excise Duty rates on cold chain equipment
In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural
wastage and enhancing shelf-life, it is recommended that excise duty rates on cold chain equipment and their parts
be pegged at 5% or below.
5.2.14. Excise duty exemption for capital goods used for Research & Development
Excise duty on inputs / capital goods for Research & Development adds to the R&D cost. Presently, Cenvat credit on
inputs / capital goods is available only if they are used in the factory. However, many companies have R&D centres
independent of the factory of manufacture and thus Cenvat credit on such capital goods is not allowed. Thus this is
unfavourable to the companies who are carrying out R&D independent of factory of manufacture. It is suggested
that specific provisions may be inserted to exempt Excise Duty on capital goods required for R&D purpose.
Alternatively, Cenvat credit of capital good used for R&D purpose should be available irrespective of the location of
the R&D unit.
5.2.15. Exemption for Ice-creams
Ice cream is classifiable under 2105 00 of the Central Excise tariff and was exempt from excise duty till 28th February,
2011. Ice creams were subjected to central excise duty at the rate of 5% with effect from 1st March, 2011; a
concessional rate of duty of 1% was also prescribed subject to the condition of non-availment of cenvat credit on
inputs or input services. Ice creams are also covered under the small scale industry exemption scheme and goods
upto a value of Rs.1.5 crores in a financial year are exempt.
Ice cream industry is a highly fragmented one and majority of the players are small. At the same time, it is a highly
capital intensive industry. Maintenance of hygienic manufacturing environment requires additional capital cost. With
the rising cost of the capital, mounting inflation and stress on the customer's capacity to spend, the levy of excise
duty even at nominal rate puts tremendous financial burden on the industry. It is requested that the levy of excise
duty on ice cream be withdrawn altogether.
5.2.16. Exemption for goods supplied against International Competitive bidding
Serial no. 336 of Notification no. 12/2012-CE dated 17-03-2012 exempts “all goods supplied against International
competitive bidding” from Central Excise duty subject to the Condition no. 41 which states “if the goods are
exempted from duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and
the additional duty leviable under Section 3 of the said Customs Tariff Act when imported into India”. The exemption
under Customs is conditional upon complying with certain procedural / documentation requirements.
While such condition of complying customs notification had been deleted for Ultra Mega & Mega Power Projects,
such adversity still persists under the condition no. 41 attached to Sr. No. 336 of notification no. 12/2012-CE.
It causes undue hardship to the domestic manufacturers particularly those who are supplying goods for petroleum
operations, as they are forced by the field officers to comply with the condition, attached to the Customs Exemption
notification no. Sr. No. 356 & 358 of 12/2012-Cus. dated 17-03-2012, i.e. to obtain a certificate from Directorate
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General Of Hydrocarbon (DGH) certifying that such goods are required for Petroleum Exploration, for the purpose of
availing excise exemption. However, DGH refuses to give such certificate to domestic manufacturers.
It is suggested to amend the condition no. 41 to Serial No. 336 of the Notification 12/2012-CE dated 17-03-2012, in a
way that certificate from project authority (i.e. Customer) be enough for availing the excise exemption.
5.2.17. Excise Duty rates on Computers
Currently India has one of the highest taxation rates in the world on computers. It is requested that Excise duty rates
on computers and parts thereof may be reduced
5.2.18. Excise duty exemption for Confectionery
Organized Confectionery Industry is the second largest category in the processed food industry with a turnover of
nearly Rs. 1,600 crores, providing significant sustainable rural / semi urban employment. Confectionery is primarily
targeted towards children. Confectionery is basically made out of Sugar, Milk and Milk Products, Glucose etc which
are agricultural produce.
In order to provide some relief to industry, it is recommended that the central excise duty on confectionary be
realigned to 2% - the rate of excise duty imposed on most other food products like Soya Milk Drinks, Preserved Fruits
and Vegetables, Milk Based Beverages, Mudi (Puffed Rice), Ice-cream, Ready to Eat Packaged Food, Mineral Water,
Dried Soups and Broths, Pasta, Fruit Juice, Potato Chips and so on.
5.2.19. Providing retrospective effect to the exemption from Excise Duty on Captively
Consumed Intermediate Product
At present, Biscuits up to MRP of Rs. 100 per Kg are exempt from payment of excise duty. During the course of
manufacture of biscuits, intermediate products like invert (sugar) syrup/cream are produced and consumed almost
immediately within the manufacturing process. Whilst the Government has exempted such intermediate goods from
excise duty with effect from September 2011 the Department, however, continues to raise duty demands for the
past period - disregarding the submission of the manufacturers to the effect that these intermediate products don't
have any shelf life and are consumed captively, almost immediately, within the manufacturing process.
It is therefore requested that in order to avoid vexatious litigation in the matter the exemption from excise duty be
given retrospective effect from April 2007.
5.2.20. Clean Energy Cess
In the Union Budget 2010 the Hon'ble Finance Minister imposed levy of a Clean Energy Cess on purchase of coal. No
doubt, the Cess was introduced on the principle of “polluter pays”. Whilst this principle may be justifiable for
industries causing environmental pollution, it must be kept in mind that within the industry there are players who
have invested considerable sums of money on state of the art technology like elemental chlorine free paper
manufacture, ozone bleaching processes, waste water management, solid waste recycling, usage of energy from
renewable sources etc. to ensure environment friendly manufacture.
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In view of the above, levy of a clean energy cess on coal - which impacts adversely on the cost competitiveness of
manufacturers - should be restricted to only those manufacturers who do not adopt clean technologies.
Manufacturers who have already adopted internationally recognized clean technologies, at considerable investment,
should be incentivized and encouraged by way of being exempted from levy of any clean energy cess.
5.2.21. Exemption for units in North Eastern States
Notification No. 20/2007 -CE dated 25.04.2007 provides for exemption from duty of excise as is equivalent to the
amount of duty paid other than by utilization of Cenvat Credit. The aforesaid notification was brought in as to give
effect to the Industrial Policy Resolution of Central Government namely North East Industrial and Investment
Promotion Policy 2007 (NEIIPP, 07). This policy provision was in continuation of 100% excise duty exemption on
finished products in North Eastern Region as was available under NEIP, 1997.
The Notification was amended in 2008 because it felt that the Notification was being misused by certain
manufacturers. To obviate this problem various criteria were introduced in the amending notifications such as value
addition, rate of value addition fixed on an adhoc basis, procedure for fixation of special rate for refund of excess of
duty over value addition rate as notified and amendments to the value addition rate for few industries where the
Department considered that notified rate and special rate mechanism did not result in total refund. Most of the
industries whose rates were not revised are also facing difficulties in getting total refund in view the aforesaid
criteria. It is submitted that these amendments instead of improving the effectiveness of the refund mechanism
resulted in various abnormalities which defeated the very purpose for which the notification was issued. In the guise
of streamlining the procedure of refund, the net refund admissible to the manufacturer was actually curtailed and
they did not receive the full benefit as was intended by the original notification and such amending notification also
resulted in defeating partially the original North East Industrial and Investment Promotion Policy.
To alleviate the difficulties faced by the manufacturers in the North Eastern Region in getting full refund of the duty
paid otherwise than by cenvat credit and to remove the difficulties faced by the genuine manufacturers in
implementing the aforesaid criteria mentioned above, it is suggested that the Notification No. 20/2007 -CE dated
25.04.2007 be restored in its original form. If in the implementation of the notification certain problems arise they
could be suitably dealt with by the administrative authorities implementing notification and granting refunds. The
exclusions mentioned in the Policy denying the benefit to certain categories of manufacturers or certain processors
could be continued to achieve the objectives in the Memorandum.
CUSTOMS
5.3.1. Inverted duty structure for import of Copper & Brass strips/ Phosphorous Bronze
Strips for Connectors and other applications
Instances of disparity caused due to inverted duty structure on the import of Copper & Brass Strips/ Phosphorous
Bronze Strips.
(a) Imports of finished Copper & Brass Strips/ Phosphorous Bronze Strips are exempted from import duty when
imported by connectors/terminal manufacturers in terms of exemption under notification No. 25/99 - Customs
dated 28-02-1999 (Serial no 90 & 112).
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The connector(s) is the terminal contact part made out of brass, phosphorous bronze, copper, which passes current
and joins two components. Maximum usage of this part is in the automobile sector as the terminal part of the wiring
harness system or in white good items, electrical panels and engines and several other applications.
During the last few years, the Indian non-ferrous industry has become strong with 5 established large manufacturers
and many other smaller manufactures. All the large manufactures are capable of producing strips and foils of copper,
brass as well as phosphorous bronze required for connector application with high precision and close tolerance as
required by this industry. Presently, these items are imported mainly from China at lower cost. This is adversely
affecting the competitiveness in the domestic as well as in export market segments. The raw material i.e. copper and
zinc attracts full rate of duty of 5% at the time of import. Various Indian manufacturers prefer imports over our
product because of difference of 5% on account of custom duty.
The preferential treatment given due to this duty exemption of 5% puts Indian industry at a disadvantage. It is
recommended that the duty exemption in the current market scenario should be removed.
(b) Various manufactures of copper and copper alloy are permitted to be imported duty free or at concessional rates
from Nepal, Bangladesh, Thailand etc. in terms of various exemptions given to imports from these countries.
Consequently, the manufacturers of copper, copper alloys, strips and foils become uncompetitive in view of the
fact that the imported finished products are either duty free or charged to a concessional import duty.
It is recommended that the import of basic raw material in the form of Copper Ingots (Tariff Head 74031900), Copper
Cathode (Tariff Head 74031100), Copper Scrap (Tariff Head 74040019), Brass Scrap (Tariff Head 74040022), Tin (Tariff
Head 80011090) and Zinc (Tariff Head 79011100) to be used for the manufacturing of various Copper and Copper
based alloys strips and foils may be allowed at zero percent duty. This would enable Indian non ferrous
manufacturers to be at par and would provide parity with those Companies who are availing benefits under the
above captioned exemption notifications.
5.3.2. Exemption from Special Additional Duty (SAD) for goods imported for sale in
India
Goods when imported into India for subsequent sale are exempted from the levy of Additional Duty of Customs
under Section 3(5) of the Custom Tariff Act in terms of notification no.102/2007-Customs dated 14-09-2007. One of
the conditions for the exemption is that the exemption shall be available by following the procedure prescribed for
refunds. The current procedure is cumbersome and leaves lot of discretion to the authorities in granting of refund.
Since the intent of the Government is to grant an exemption, it is requested that the exemption be given upfront at
the time of import itself instead of by way of a refund. The importer may be asked to declare at the time of import
that:
•
Goods will be sold within a specified period
•
The importer undertakes to pay SAD on goods which remain unsold for the specified period
Given that Customs is gradually moving to 'self-assessment' and post import audit regime, verification of
declarations in selected cases may not be an issue.
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5.3.3. Level Playing Field for Domestic Capital Goods Industry
The Indian Capital Goods Industry (Private and Public Sectors) has, over the past 6 decades, built expensive and
sophisticated manufacturing facilities and has also acquired “State-of-the-art" technology for supplying complete
range of equipments required by Core Sectors viz. Fertilizer, Power, Oil & Gas, Gas Process, Refinery, Coal Mining, etc.
The Indian industry has also fully geared up to cater to the requirements of Defence, Nuclear power, Aerospace and
other strategic sectors.
Government has however given customs duty exemptions to imported goods required for certain industries and has
reduced the custom duty to zero or 5%. This acts against the interests of the domestic capital goods industry. In some
cases Government has no doubt extended the deemed export status to the supplies affected by the domestic
manufacturers.
However, due to the incidence of local taxes & duties, the domestic manufacturers face the cost disadvantages to the
extent of 12% to 26%, on account of sales tax, entry tax / octroi, higher cost of finance, inadequate infrastructure,
etc.
To encourage domestic capital goods manufacturing and to offset a part of the cost disadvantages faced by the
domestic Capital Goods manufacturers due to incidence of higher local taxes & duties, it is suggested that the full
exemption to such goods from the levy of customs duties may be reviewed to provide at least minimal protection to
the domestic industry. Further, full deemed export benefits be accorded to the domestic manufacturers.
This will inter-alia help the domestic industry to compete with the foreign companies in India and create reference
from Indian projects, which can be used for qualifying and securing business in overseas markets. It would also
increase competition and ultimately reduce the cost of the project.
5.3.4. Inverted Duty Structure under ASEAN-India FTA (AIFTA) for Soap and Raw
Materials of Soap
Soap import from ASEAN countries comprise more than 20% of total soap imports in to India. However, import of
raw materials for soap such as palm fatty acids, crude palm stearin, lauric acid and so on from ASEAN countries is
much higher and accounts for about 90% of import of these raw materials.
In terms of the commitments made by India under AIFTA the reduction in rates of Basic Customs Duty for soap and
raw materials of soap has resulted in an inverted duty structure whereby the rate of duty on the value-added
finished product, i.e., soap, is lower than the rate of duty on its raw materials. In fact, in about two years time the
rate of customs duty on ASEAN soap imports will become “Nil” whilst the imports of most raw materials of soap from
ASEAN countries will continue to suffer customs duty at, more or less, the prevailing rates. This is apparent from the
data given in the table on next page.
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BASIC CUSTOMS DUTY
Goods
HS Tariff ID
Soap
(Normal Track) 1
Raw Materials for
Soap
Palm Fatty Acid
Distillate
(Sensitive Track) 2
Crude Palm
Stearin
(Special Product)3
Crude Palm
Kernel Oil
(Exclusion List)4
Lauric Acid
(Exclusion List)
Pre
AIFTA
2010
2011
2012
2013
2014
2015
2016
34011190
10.0%
7.5%
5.0%
5.0%
2.5%
0%
0%
0%
38231900
15.0%
14.0%
13.0%
12.0%
11.0
%
10.0%
8.0%
5.0%
15119090
10.0%
10.0%
10.0%
10.0%
10.0
%
10.0%
10.0%
10.0%
15132110
12.5%
12.5%
12.5%
12.5%
12.5
%
12.5%
12.5%
12.5%
29159090
7.5%
7.5%
7.5%
7.5%
7.5%
7.5%
7.5%
7.5%
In such a scenario it would be far more cost efficient to import soap from ASEAN countries for resale in India rather
than undertaking value-addition activity by way of import of raw materials and soap manufacture in the country. As a
consequence, it is apprehended that the significant investment made by industry in building up capacities in this
respect - particularly in economically backward regions where Government has provided tax incentives to spur
development - will be at an economic disadvantage.
Adoption of either of the following recommendations will also help safeguard the investments in capacities particularly in backward regions, thereby enabling actualization of the Government's objective of economic
development of such regions.
In order to protect employment and value-addition activity in this sector it is recommended that the Government
considers:
i.
Moving Toilet Soaps (HS Code 34011190) from the Normal Track to the Exclusion List, i.e., excluding soap from
preferential duty treatment in AIFTA.
ii.
Alternately, if it is not possible to exclude soap from the Normal Track, including the raw materials of soap in the
Normal Track in AIFTA such that the rates of customs duty on these raw materials are aligned to that applicable
on soap.
2
Normal Track : Basic Customs Duty Rate to reduce to 0% by December 2013.
Sensitive Track : Customs Duty Rate to reduce to 10% by 2014 and 5% between 2016 and 2018
4
Special Product : Reduction in rate of Basic Customs Duty Rate at a rate slower than reduction in other tracks.
5
Exclusion List : Excluded from any preferential duty treatment.
3
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5.3.5. Oleo Chemicals Industry
In the context of Oleo Chemicals industry, it is suggested that:(i) fatty alcohols manufactured by export oriented units in India may be permitted to clear in the domestic tariff
area at reduced rates of duties so that such units can survive and compete with import from ASEAN countries.
(ii) steps may be taken to eliminate inversion in import duty on crude palm kernel oil (CPKO) falling under heading
1513 21 10 (100%; 12.5%) and other vegetable oils for industrial applications, fatty alcohols of heading 3823 70
(7.5%), soap noodles of heading 3401 20 (5%) and surfactants of heading 3402 00 (5%) so that the industry can
compete with imports from ASEAN countries.
(iii) inversion in import duty on fatty alcohols based surfactants (5%) against fatty alcohols as feedstocks (7.5%) to
make the domestic industry to compete with imports.
(iv) import duty inversion may be removed between crude glycerin (12.5%) and refined glycerin (6% ASEAN and 7.5%
general)
5.3.6. Cocoa Beans
Cocoa beans currently attract a very high tariff rate of basic Customs duty @30% (effective rate 36.5%) in an effort to
protect the domestic agricultural produce. The demand in India for cocoa however far outstrips domestically grown
cocoa beans and Industry is forced to import cocoa beans and/or intermediate cocoa products like cocoa butter,
cocoa liquor & cocoa powder to meet the requirement in India. The average demand for cocoa beans and
intermediate cocoa products over the past 4 years has been growing so significantly that domestically grown cocoa
beans can meet less than half of the annual demand. Consequently, import of cocoa beans and intermediate cocoa
products has been on the rise. Till such time as the domestic production of cocoa beans does not match the growing
demand for cocoa and intermediate cocoa products, relief from the prohibitively high customs duty of cocoa beans
and intermediate cocoa products is necessary in the interest of consumers and industry.
5.3.7. Customs duty on import of bamboo sticks for manufacture of Agarbatti
As per information provided by South Asia Bamboo Foundation, “there are about 10,000 agarbatti manufacturing
units in the country including tiny, small and medium enterprises, besides about 200 well-established ones. Nearly
12 lakh people are directly or indirectly employed by the industry. Of the total agarbatti market of Rs 1,100 crores,
the organised market contributes about 40%. The states of North East India used to fulfil 90% of raw sticks demand
in India. The sticks are produced at the household and community level in many NE states”.
In the 2011 budget, customs duty on import of bamboo sticks for Agarbatti was reduced from 30% to 10%
(Notification No. 12/2012 - Cus dated 17-3-2012, S.No.49). This has resulted in making the bamboo stick
manufacturers of North East India uncompetitive compared to cheap imports from Vietnam and China, as the
manufacturers from the NE region have to also contend with high transportation cost.
A revision in the customs duty to pre 2011 status of 30% would help the bamboo industry in the North East.
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5.3.8. Custom Duty relief for fire and security systems
Most essential security and life safety products are not made in India. Countries like China and Korea have become
large feeders of electronically based security products to the world. They have adopted mass production techniques
and have been manufacturing these products for over 15 years. In view of the R&D efforts put in by them and
deployment of robotic tools, their products are of top quality and cost-wise competitive. It is not currently feasible to
indigenize the manufacture of these products.
The following essential security and safety products attract an import duty of approximately 26.85%:CCTC Camera Systems
Access Control and Biometric Readers
Intrusion Detection System
Fire Alarm and Suppression Systems
These items are essential for maintaining surveillance at all places like markets, hotels, cinema halls and other public
places. Biometric systems are required for controlling access into restricted areas similarly intrusion detection
systems detect breach in perimeters as also buildings. Fire alarm and suppression systems comprise of smoke and
heat detectors and associated control systems.
In view of their essential usage, it is recommended that the customs duties on these products should be fully
exempted.
5.3.9. Reduction of import duties on Global Positioning System (GPS) / Global
Navigation Satellite System (GNSS) technology
Global Positioning System (GPS)/Global Navigation Satellite System (GNSS) is a technology which helps in
determining position in a global co-ordinate frame to bring all the positioning data to a common reference. This aids
in building a solid positioning foundation to be used in Geographic Information Systems (GIS).
The commercial uses of GPS/GNSS are diverse with applications across industry such as Cadastral, Infrastructure
development, Utility, Forestry, Mining, Agriculture, Transportation and Logistics. Some applications are simple, such
as determining a position, whereas others are complex blend of GPS/GNSS with communications and other
technologies to offer a comprehensive solution. GPS/GNSS as a technology is fast becoming an indispensible tool in
infrastructure development, natural resource management, transparent governance etc. Productivity enhancement
resulting from the adoption of GPS/GNSS technology as a professional tool can yield tremendous benefits to the user
community as well as the nation.
GPS/GNSS receivers are becoming a key part of our lives whether in a phone, a watch or in a car. However, there are
hindrances in the import of this technology in India. Under Chapter 8526 GPS/GNSS attracts a high duty of over 27%
which acts as a deterrent in use of the technology. Cell phones with GPS do not attract any customs duty. Since
GPS/GNSS would yield returns through productivity gains, savings and timely execution of projects especially
infrastructure development such as Roads, Rail, Cadastral, Agriculture, Mining, and Environment, it is important to
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promote this technology in India. Since there are no indigenous manufacturers of in India, it is important to
significantly reduce import duties and in the case of infrastructure projects remove import duties on GPS/GNSS
receivers as part of national GIS initiative.
5.3.10. Import duty on Gold
Following the increase in the duty on gold as a part of the last budget there have been reports of increased
smuggling of the gold into the country. It is recommended that import duty on gold may be reduced from the current
levels of about 4% to 1%.
5.3.11. Feedstock for Chemical Industry
The customs duty on feedstocks like Ammonia (NH3) (for making urea fertilizer), Methanol and Ethanol (for
manufacturing organic chemicals like dyes, pesticides etc.) should be reduced to zero. Specially in NH3 and Methanol
the country is import dependent due to domestic production not able to meet the demand. But the duty impact
makes the feedstock costly for industry and hence impacts growth and competitiveness of value added products out
of these two feedstocks, thus depriving nation of export revenue as well as higher indirect taxes out of value added
products.
5.3.12. Rationalization of rates of custom duty for imports of brass rods from ASEAN
countries and Brass Scrap
Presently the rate of Custom duty for import of Brass Scrap is 5% whereas the custom duty for import of rods from
ASEAN countries is 3%.
Thus, there is difference in rates of custom duty in Brass Scrap and Rods imported from ASEAN countries which
affects Indian manufacturers producing rods and exporting to different countries. Rates of custom duty may be
rationalized so as to maintain equity.
5.3.13. Valuation of Catalysts made from precious metals for levy of Customs duty
Refineries require certain critical catalysts made from Platinum, a precious metal. Normally, the catalyst metal is
imported from the vendor under a lease agreement which requires the spent catalyst to be returned after use. After
the catalyst is used in the refinery and its useful life is over, the Platinum is returned through London Metal Exchange
(physical export). The value of such catalysts is very high mainly due to the Platinum contained therein. Also, the
supplier is paid only to the extent of the lease and not the full value of the catalyst (excluding the Platinum value).
However, at the time of import, the customs duty is assessed on the entire value of catalyst including platinum even
though the transaction value is limited to the lease arrangement only. The additional value of the platinum on which
customs duty is paid is often 400% to 450% of the lease charges. This seems unfair and needs to be rectified.
It is requested that a suitable Notification may be issued to exempt the duty on the portion of value of the precious
metal exported as spent catalyst after use. Usually this would be around 50% of the value of the catalyst imported.
Suitable safeguards through Undertaking/Bond maybe furnished by the refinery till the spent catalyst is exported.
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5.3.14. Reduction in Environment Cess on Coal
Coal Cess of Rs 50 per ton of coal produced or imported in India was introduced in Union Budget 2010. This is akin to
a 'carbon tax', inspired by the 'polluter pays' principle, and is meant to fund the National Clean Energy Fund. This
cess has an adverse impact across sectors; its impact is even more severe for the Aluminium industry, which is a
power-intensive industry and depends on coal-fired electricity in the Indian context.
There is a case for reconsidering the rate of cess in view of the following:
a) Endowment of energy resources to India has been predominantly tilted towards coal, which accounts for 55% of
India's energy needs and 75% of power generation. Considering the future energy requirements of the growing
economy, coal would continue to be the dominant source of energy - and a critical driver of the country's
competitiveness. The effective users of coal or coal-generated electricity are spread across sectors and all strata
of population. Cess on coal has made generation of electricity costlier by about 5 paise per unit. Thus, taxation of
coal is not a progressive tax.
b) Coal consumption accounts for nearly 40% of the emissions of Greenhouse gases from India, as per World Bank
estimates for 2005. Rather than making this sector bear the entire burden of the Clean Energy Fund, it may be
worthwhile to broaden this tax and moderate the burden on coal users, especially since a large portion of the
burden of coal cess is being passed on to the entire population in the form of costlier electricity. There could be
more effective options to broaden the tax (such as air travel, high-end cars) in a manner that the more affluent
polluters are taxed more. This will be in line with the principle of 'progressive taxation'. Else, this levy will
become a parallel to the efforts at the global platforms to make the poor countries participate proportionately in
emissions reduction.
It is requested that the cess on coal should be reduced from Rs 50 per ton to Rs 10 per ton and government should
explore ways of distributing the burden of the Clean Energy Fund more equitably.
5.3.15. Additional Duty on Coal
The applicable CVD on all types of coal import other than steam coal is 6%. The CVD credit is not available in respect
of imports made by power industries and this will only add up to the cost of power generated. Hence it is requested
that the levy of 1% CVD on Imported coal (chapter sub heading 2701 19 20) for generation of electricity may be
withdrawn.
5.3.16. Customs duty on ships on coastal conversion
For more than 60 years ocean going ships were not subject to customs duty at the time of import or on subsequent
entry to Indian coastal waters. It was treated as a “conveyance” and hence not subject to import duty. It was dutiable
only at the time of ship-breaking. But from 17th March 2012 ocean going ships are subject to customs duty at the
time of each coastal conversion.
As per the International practice prevailing in many maritime nations ocean going ships in international trade are not
subjected to customs duty on each arrival for coastal operation. Ship should be subject to customs duty only at the
time of ship breaking.
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As ocean going ships are in international trade, these should be exempted from customs duty.
5.3.17. Exemption for goods supplied in connection with Offshore Oil Exploration
Serial No. 357 of the Customs Notification No. 12/2012-Cus dated 17-03-2012 exempts “Parts and raw material for
manufacture of goods supplied in connection with the purpose of offshore oil exploration or exploitation” from the
Customs Duty subject to the condition No. 42, which stipulates that the parts and raw materials are used in the
manufacture of goods in accordance with the provisions of section 65 of the Customs Act, 1962 (52 of 1962); and
that a certificate is produced in each case from the prescribed authority to the effect that the goods are required for
the purposes of off-shore oil exploration or exploitation.
Contrary to the intention of the Government for granting the said exemption, the field revenue officers are raising
the customs duty demand on the finished goods that are manufactured under Bond (u/s 65 of Customs Act) and
supplied to Offshore Petroleum Exploration Projects.
This contention of the field officers is unjustified, as there could not be a relief where exemption is granted from
customs duty on raw materials but duty be levied on the finished product.
It is suggested that a clarification may be issued that the finished goods cleared from the bonded premises for offshore oil exploration would not be leviable to any excise or customs duty. Alternatively, an appropriate exemption
may be provided to achieve the desired objective.
5.3.18. Oil exploration - condition of no foreign exchange remittance
Companies authorized to undertake oil exploration activities in India are eligible for Customs duty exemption of
specified equipment imported for this purpose under Notification No 12/2012 -Cus dated 17 March 2012 (Sr. No.358
and 359). The exemption is granted subject to specific conditions, one such condition requires furnishing of an
undertaking that no foreign exchange would be remitted from India for these imports (Condition No 43 and 44 of the
aforesaid Notification).
There are other end use based/ sector specific exemption, however, none of these exemptions carries similar
condition or requires similar compliance from the importer. Hence, above condition/ compliance requirement may
be removed as the compliance with the condition is resulting in avoidable complications/ issue to the Industry.
5.3.19. Baggage Allowance
Duty Free baggage allowance should be raised from Rs.35000 to Rs.50000 for incoming passengers. Allowance from
children should be raised from Rs.15000 to Rs.20000.
5.3.20. Other changes
1.
Duty on consumables like titanium dioxide, anatase grade (heading 2823 00) and spin finish oil for treatment of
textiles (heading 3403 11 00) should be reduced from 10% and 7.5% respectively to 5%.
2.
The rate of depreciation for calculation of Net Book Value for the purpose of calculating Customs duty on Debonding of 100% EOUs has not been revised for long time. The depreciation rates prescribed are very low and do
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not reflect the actual useful life of computer and networking equipment. Due to technological advancement and
increased obsolescence the Depreciation rates should be increased to reflect the current reality.
3.
In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural
wastage and enhancing shelf-life, it is recommended that customs duty rates on cold chain equipment and their
parts be pegged at 5% or below.
4.
Customs duty on inputs / capital goods for Research & Development adds to the R&D cost. It is suggested that
specific provisions may be inserted to exempt Customs Duty on capital goods required for R&D purpose.
5.
Capital cost of investment in food processing plants remain prohibitive due to duties in excess of 20%. Import
duty may be reduced on machinery for food processing which will inter-alia benefit the agriculture sector.
CENVAT CREDIT SCHEME
5.4.1. Restrictions on Input Tax Credit
The implementation of the concept of Negative List of Services is obviously, a precursor to the introduction of GST in
the country. Whilst practically all activities done by one person for another for a consideration, with the exception of
activities restricted to transfer of title in goods, have been brought under the service tax net, the restrictions,
exceptions and limitations on availability of input tax credit still continue. This is clearly an anomaly and has led to an
inequitable situation whereby the taxation of services is universal based on the principles of GST whilst the credit for
the tax paid on input services continues to be restricted, as was the case during the regime of taxation of services
based on a Positive List.
In order to correct this inequity and to provide much needed relief to industry the service tax laws in general and,
specifically, the definition of input service should be amended to allow input tax credit without any restrictions - in
line with the principles of GST.
Accordingly, it is recommended that the definitions of input service should be reinstated to what it was prior to
amendments brought about by the Union Budget of 2011 such that service tax credit is also available for all input
services used in connection with activities related to business and additionally, there is no restriction, as prevails
currently, on availing credit of tax on services like (i) construction or execution of works contract of a building or a
civil structure (ii) services related to laying of foundation or making of structures for support of capital goods (iii)
services provided by way of renting of a motor vehicle / rent-a-cab services (iv) service of general insurance business
and so on.
5.4.2. Simplification of CENVAT Credit scheme - classification as inputs, capital goods
and input services
The biggest stumbling block that the current CENVAT Credit regime faces in meeting its objectives is the abundance
of interpretative disputes vis-a-vis qualification as 'input', 'input service' and 'capital goods' and the restrictive
interpretations adopted in this regard.
Service tax and excise duty are value added taxes; that is to say, they are not taxes on the business and have to be
borne by the ultimate consumers. The ultimate objective of a value added tax should be to ensure a free flow of
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credit between various business entities and to ensure that the burden of paying tax is only on the end consumer of
the service / goods. The concept of 'value added tax' is elucidated in the International VAT / GST Guidelines dated
February, 2006 issued by the Organization for Economic Co-operation and Development (“OECD Guidelines”). The
OECD Guidelines clearly point out that complete deductibility of input taxes is the key feature of value added taxes.
The relevant portion is excerpted below:
“These features give value added taxes their main economic characteristic, that of neutrality. The full right to
deduction of input tax through the supply chain, with the exception of the final consumer, ensures the neutrality of
the tax, whatever the nature of the product, the structure of the distribution chain and the technical means used for
its delivery (stores, physical delivery, Internet).”
Thus, in order to ensure that the CENVAT Credit scheme meets its objectives it is important that unnecessary
qualifications/categorizations like 'input', 'input service' and 'capital goods' be done away with and all input side tax
costs forming part of a business entity's profit and loss account (and forming part of the price of the final output
good/service) should be allowed as credit.
5.4.3. Removal of restrictions in availment of cenvat credit on services related to civil
construction or services which are mandatory for business
The definition of 'input service' places restrictions on availment of cenvat credit on certain services which inter-alia
include Services related to civil construction, Services related to motor vehicles i.e. cab services, Services which are
used for consumption of any employee
In so far as Civil construction related services are concerned many a times construction of a property is essential for
provision of output services i.e. without construction of property the manufacturer or service provider cannot
undertake its activities. For instance, without construction of factory building, the manufacturer cannot manufacture
the goods, without construction of office complex or shopping mall, the service provider would not be able to
provide renting services, without the construction of pipeline, a service provider cannot provide services of
transportation of goods through pipeline. Hence, in cases where the construction services form integral part of
provision of services, credit should not be denied to the manufacturer or service provider.
It is recommended that necessary amendment should be made in the definition of “input service” to allow credit
when the immovable property is used for manufacture of excisable goods or for provision of taxable services. The
credit should be denied only in cases where the immovable property is used for sale or for non-taxable purposes.
5.4.4. Credit on services for consumption of employees
It is understood that the intention of the Government is to deny credit on services which are not used for business
purposes and are more in the nature of personal consumption.
However, it should be noted that certain services on which credit has been denied are essential part of the business
of the assessee. For instance, for factories it is a statutory requirement to provide meal facilities to employee and
hence they have to procure catering services; for call centers etc it is mandatory to provide cab facilities to
employees.
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Therefore, it is recommended that while the credit can be denied on services primarily meant for personal
consumption of the employees like, beauty treatment, cosmetic and plastic surgery, membership of club, health and
fitness centre, travel benefits extended to employees while on leave and the like services, the credit on services like
outdoor catering, cab facilities, medical insurances etc should not be denied.
5.4.5. Credit reversal in case of removal of used capital goods from the factory
In terms of the amendments made in Rule 3(5A) of the Cenvat Credit Rules where the capital goods (on which credit
is availed) are removed after being used whether as capital goods or as scrap or waste, the cenvat credit is to be
reversed based on the specified percentage per quarter or transaction value, whichever is higher.
The reversal percentage per quarter prescribed under Cenvat Credit Rules is 2.5 percentage points for each quarter
of the year or a part thereof by straight line method (except in case of IT goods). This provision assumes that capital
goods (other than IT goods) have a shelf life of 10 years and if the goods are removed from the factory prior to
completion of 10 years then the credit would have to be reversed as per the abovementioned formula.
It may be pointed out that there are several capital goods (for e.g. refractory bricks, batteries, DG sets, AC, power
management system, etc) which have shelf life of 3 - 5 years due to industrial usage, technological obsolescence, etc.
Hence, if such goods are cleared after completion of their useful life, then no credit reversal should be required or if
the same goods are cleared as scrap, the credit should be required to be reversed only to the extent of duty payable
on the transaction value.
However, as per the amendment in Rule 3(5A), in case of removal of these goods prior to completion of 10 years,
only partial credit is allowed as per the formula prescribed under Rule 3(5A). This is causing undue administrative
cost for the companies in terms of keeping track of original invoice for 10 years, computation of depreciated CENVAT
Credit and co-relating the same with original purchase invoices. Some of the other difficulties faced in
implementation of this provision are:(a) Practically, one type of capital goods (mostly in nature of consumables) would be purchased by the assessee
under different invoices and such goods purchased under each of the invoice may in turn be used in different
machines. In such a case, it is impossible to correlate the capital goods with the invoice under which such goods
were received.
(b) For most of the capital goods, the unit of measurement (UoM) at the time of purchase of invoice and UoM at the
time of selling them as scrap differs. Also, practically, the scrap of number of capital goods is sold in a single lot.
Most parts are received in numbers as UOM, however their scrap e.g. MS scrap is sold by weight basis in MTs. In
such a case, it is impossible to correlate the scrapped material with the invoice under which it was purchased.
(c) Another situation can be where an item in the nature of capital goods is purchased and during the life of such an
item, some of its parts are worn out and are required to be replaced. In such a case, it would be impossible to
determine the amount of cenvat credit attributable to such part.
The aforesaid illustrations are few amongst various problems that can arise out of the present amendment. Further,
the provision requiring payment of duty on used capital goods based on transaction value is against the basic
principle of Cenvat Rules which require the assessee to reverse credit (fully or on depreciated basis). Similarly, the
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requirement of reversing cenvat credit on waste & scrap of capital goods based on depreciated value is incorrect
particularly when the capital goods are used to their fullest economic life. In the past also, the Cenvat Rules or
erstwhile Central Excise Rules, 1944 had similar provisions linking the payment to duty leviable. However, the same
were withdrawn considering the aforesaid problems.
It is suggested that the following options may be adopted by the Revenue to address the above problem:
•
Credit should be reversed based on the transaction value at which such goods are sold, subject to maximum of
cenvat credit availed on such goods and checks to be put forth to safeguard the interest of the revenue as in case
of undervaluation of manufactured goods
•
Allowing payment of CENVAT on certified book value of asset after considering depreciation or transaction value
whichever is higher, subject to the maximum amount of credit availed on such capital goods
It should be noted that the amount of credit reversal, in any of the options, should not be more than the amount of
cenvat credit availed by the assessee on such capital goods, since such goods are not manufactured by the assessee.
5.4.6. Eligibility to avail CENVAT credit on Capital Goods in the year of receipt
In terms of Rule 4(2) of the CENVAT Credit Rules, 2004 the credit of CENVAT in respect of capital goods has to be
distributed over two years. In the year in which the capital goods are received in the factory credit equivalent to 50%
of CENVAT can be availed. The balance 50% can be availed only during the next financial year. As a result of this a lot
of time and effort is expended in tracking each item of capital goods in terms of year of entry, amount of credit
available in each year, etc. Apart from the cost involved in such tracking, this also leads to errors and, consequently,
long-drawn disputes/litigation with the Department.
It is recommended that the CENVAT Credit Rules, 2004 be amended appropriately to enable credit of full CENVAT in
respect of capital goods in the year of receipt in to the factory. This would be in line with the provisions on CENVAT
credit in respect of inputs.
5.4.7. CENVAT Credit - distribution of credit on the basis of turnover
Rule 7 of the Cenvat Credit Rules contains the provisions relating to the manner and procedure for distributing the
Cenvat Credit of the tax paid on the input services. Rule 7(d) of the Credit Rules provides that credit of service tax
attributable to service used in more than one unit shall be distributed pro rata on the basis of the turnover during
the relevant period of the concerned unit to the sum total of the turnover of all the units to which the service relates
during the same period.
Explanation 3(a) to Rule 7 provides that the relevant period shall be the month previous to the month during which
the Cenvat Credit is distributed.
The above amendment has created hardship for all industries by creating many practical difficulties. Computation of
turnover on a month to month basis is extremely difficult for industries which have factories located in multilocations and such distribution can only be on provisional basis. It may have to be revised often as and when the
turnover figures are updated (and it may be more than once). Moreover in many cases the assessee may choose to
distribute the credit once in 2-3 months instead of each month.
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In the case of Large Taxpayer Units (LTUs) they have the flexibility of transferring excess cenvat credit from one unit
to another. The option of passing on the entire eligible input service tax credit to any one unit needs to be restored.
It is further requested that the Cenvat Rules may be amended to provide (a) The assessee has the option to distribute the credit as and when felt necessary and not each month, and
(b) for the purpose of distribution of CENVAT credit, an ISD may be permitted to follow the principles laid down
under Rule 6 (3A) of the CENVAT credit rules at the company level as a whole with provisional transfer to
individual sites on the basis of the previous year's ratio and making suitable adjustments by the 30th June of the
next financial year. In any case, the credit to be availed would not exceed the total tax already collected by the
Department.
5.4.8. Cascading of Service Tax for Brand Owners when Manufacture is by Job-Workers
As per the provisions of CENVAT Credit Rules, 2004 CENVAT credit on inputs and capital goods may be availed by a
manufacturer as long as such inputs / capital goods are physically received in his factory premises (or outside the
factory of the manufacturer of the final products for generation of electricity for captive use within the factory in
case of capital goods) under cover of a valid Central Excise Invoice and are used by him in or in relation to
manufacture.
However, under the same Rules, credit of service tax may be availed by an assessee on payment of the same to any
input service provider, as long as the input service is received in or in relation to manufacture. The credit is, thus,
only available on the basis of Invoice payments.
In the case of Brand Owners who employ job-workers exclusively for manufacture of goods, the benefit of CENVAT
credit on inputs is available since the job-worker can claim the CENVAT credit and offset his central excise liabilities
against the said credit. However, as far as service tax is concerned, since the payments for taxable input services are
generally effected by the Brand Owner instead of the job-worker, the benefit of service tax credit is not available.
This is due to the fact that the Brand Owner cannot avail the credit since he is not the manufacturer and the
manufacturer, i.e., the job-worker, cannot avail the credit since he does not pay for the taxable input service.
Consequently, under the Rules the Brand Owner employing job-workers exclusively is discriminated vis-à-vis Brand
Owners having their own manufacturing facilities, in so far as credit of service tax is concerned.
A typical example would be one where the principal manufacturer undertakes advertising and sales promotion,
market research; storage upto the place of removal for the goods manufactured by it as well as by its job workers
and discharges the service tax liability thereon.
The CENVAT Credit Rules also provide for an Input Service Distributor (ISD) mechanism whereby the credit of service
tax can be distributed by an office of the manufacturer or producer of final products or provider of output service,
which receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards purchase of input services.
Hence, by definition, the ISD cannot distribute credit of service tax to job-workers in case the input services are paid
for by the principal, i.e., the Brand Owner.
Accordingly, the provisions of the CENVAT Credit Rules, 2004 create an inequitable situation, in that, the benefit of
CENVAT credit pertaining to inputs and capital goods is available to the assessee irrespective of whether manufacture
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is in-house or at job worker premises whereas the benefit of service tax credit is available only if the manufacture is
at the assessee's own unit. This inequity dilutes the cost competitiveness of assessees who own brands and use jobworkers exclusively for manufacture of goods - more so since, the scope of the service tax has been expanded
following the introduction of 'negative list' based approach to Service Tax.
It is recommended that the CENVAT Credit Rules be amended to provide a mechanism that enables availment and
distribution of credit of service tax by brand owners to job-workers. This will ensure cost competitiveness of the
brand owners and protect the long-term interests of job-workers.
5.4.9. Cenvat Credit of capital goods used outside the factory
Presently the benefit of Cenvat Credit on capital goods installed outside the factory is restricted to only few of the
industries like Mining, construction, power generation unit etc. We wish to bring to your kind notice that the
industries dealing with milk products also require refrigeration, chilling, cooling machineries as well as other
necessary infrastructure for storing the milk at the point of collection i.e.; dairy farmers. The milk is collected from
dairy farmers in the village and needs to be stored under refrigeration /chilling conditions the same is perishable and
milk is shifted to the manufacturing site once or twice in a day after proper storage and chilling.
Since this activity of chilling is in direct relation to manufacturing activities of the manufacturer and has to take place
near to the point of collection of milk to maintain the quality of milk, it is requested that the cenvat credit on
machine used for chilling, cooling etc installed outside the factory by industries using milk as ingredients may be also
allowed.
5.4.10. Refund of service tax under Rule 5B of Cenvat Credit Rules
An output service provider providing services taxable under reverse charge mechanism (and therefore unable to
utilize credit for payment of tax on output services) is allowed to claim refund of unutilized credit on inputs or input
services, subject to fulfillment of the procedure and conditions prescribed.
It should be noted that the definition of 'output service' excludes the services on which whole of the service tax is
payable by the service recipient. The issue that arises here is if the services on which service tax is payable under
reverse charge do not qualify as output services, the input services used by the service provider to provide such
services would not qualify as input services in terms of Cenvat Credit Rules. Hence, the service provider providing
such services may not be able to claim refund of such input services under Rule 5B of the Cenvat Credit Rules.
It is understood that the intention of the Government in excluding such services from the definition of output
services is to provide that for the service recipient such services would not qualify as output services and hence he
cannot utilize cenvat credit to discharge the service tax liability under reverse charge. However, due to the language
used in definition of output services, such services would not even qualify as output services for the service provider,
which may lead to difficulties in claiming credit of input services used by the service provider to provide such
services.
It is recommended that necessary amendments may be made in the definition of “output service” or rule 5B to
clarify that services in respect of which the liability to pay service tax is entirely on the recipient would not qualify as
output services for service recipient but for service provider the services would qualify as output services.
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5.4.11. Refund of unutilized Cenvat Credit
It has been observed that there is accumulation of cenvat credit with the manufacturers on several counts. Some of
the manufacturers of excisable goods supply most of their production to other manufacturers of goods for export by
availing the exemption in terms of Notification No 43/2001 - Central Excise dated 26-06-2009. This leads to
accumulation of cenvat credit of the duties paid on the inputs. In many other cases the excise duty rate on the
finished articles is either exempt or is low enough not to fully exhaust the cenvat credit admissible to the
manufacturers on the components and the raw materials.
Similarly, in specific situations of import of goods like inverted duty structure, lower value addition, manufactured
goods subjected to MRP levy, the credit of duty mainly on account of SAD is not fully utilized and gets accumulated.
It is recommended that a provision may be made for refund of cenvat credit to such manufactures. In fact all excess
credits accruing for whatever reason should be allowed as refunds periodically like in the case of VAT
5.4.12. Credit of duty paid on conveyor belts / pipelines used for transporting material
/ intermediate goods
In certain industries such as the steel industry, the manufacturer who produces the steel from the basic iron ore is
compelled to set up separate units often in different geographical locations due to the proximity to mineral/energy
resources.
For instance, the iron ore will be available in abundance in one geographical area whereas the natural gas for the
steel manufacture may be available elsewhere. The units though situated in different locations, are nevertheless part
of an integrated manufacturing chain as one unit feeds the raw material for the other till the ultimate finished
products emerges and gets shipped to the customer.
To maximize efficiency and control transportation costs, the output from one unit is dispatched through nonconventional means to the next unit say through conveyor belts (for short distances) or through pipelines (iron ore
slurry). The pipelines connect the units and integrate the manufacturing chain and become an integral part of the
manufacturing process. The current Cenvat credit rules seem to allow credit on capital goods only when used inside
the factory. However, an exception has been made for capital goods used for generation of electricity for captive use
even if the power equipment is used outside the factory (Rule 2 (a) (A) (1A) of the Cenvat Credit Rules, 2004).
Such conveyor belts and pipelines used for transferring the raw material from one unit to another for further
manufacture being an integral part of the manufacturing chain and an integral part of the manufacturing process,
they should be eligible for credit. This would be in line with the fundamental VAT principle which is to refund the
taxes paid on goods which are used in the production of goods or services.
An appropriate amendment may be made to enable credit on conveyor belts and pipelines which are connecting one
unit to another for transportation of materials and also inputs used for generating electricity for further
manufacture.
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5.4.13. Classification of Refractory Bricks as Inputs
Refractory Bricks are categorized as capital goods though they are more in the nature of consumables and have a
useful life of less than one year. It is requested that an amendment may be made in the Cenvat Credit Rules to
provide that for the purposes of the Rules, Refractory Bricks would be deemed to be categorized as Inputs and be
allowed cenvat credit accordingly.
5.4.14. Retrospective Application of Amendment of Rule 14 of Cenvat Credit Rules
In Finance Act 2012, the Government has amended Rule 14 of the Cenvat Credit Rule by replacing the word “or” with
“and” to clarify that liability to pay interest on wrongful credit will arise only in the cases where the assessee has
utilized such credits resulting in a financial loss to the exchequer and not otherwise. It is a welcome change and will
nullify the Supreme Court judgment in the matter of Ind Swift laboratory. However, the change has been made with
prospective effect and may still lead to unnecessary litigation for the past period.
It is requested that this amendment may be made effective retrospectively as this was always the intention of the
legislators and the proposed change has just clarified the same.
5.4.15. Credit Availment for Input by the Works Contractor
Service Tax (Determination of Value) Rules, 2006 provide that the provider of taxable service opting to pay service
tax under clause 2A (ii) [on deemed value of service] is not entitled to take CENVAT credit of duty on inputs, used in
or in relation to the said works contract, under the provisions of the CENVAT Credit Rules, 2004.
There is no restriction to take CENVAT credit of duty paid on capital goods and/or service tax paid on input services.
It is recommended that the laws be amended appropriately to allow CENVAT credit in respect of inputs to works
contractors who have opted to pay service tax on deemed value of service as provided under clause 2A (ii) of Service
Tax (Determination of Value) Rules, 2006.
5.4.16. Inputs cleared 'As Such'
Rule 3(5) of CENVAT Credit Rules, 2004 provides for payment of excise duty on inputs / capital goods equal to the
credit availed on them in case they are cleared from the factory 'as such'. In order to comply with this provision, the
manufacturer has to keep track of inputs, the rate of duty at the time of their entry into the factory and the value at
which they were purchased - until such time that the inputs are in stock. Since maintenance of such voluminous data
over long periods is prone to human error, very often there are objections by Departmental officers, particularly
Audit, and consequent litigation.
It is recommended that Central Excise statutes be amended to allow removal of inputs 'as such' on payment of excise
duty at the rate prevailing on the date of removal and the value for purpose of duty determination be the Weighted
Average Cost of the inputs as on that date (as per the assessees books of accounts).
5.4.17. CENVAT Credit on Service Tax paid on Input Services
Under Rule 6 of CENVAT Credit Rules, 2004 there is no restriction on availing CENVAT credit of excise duty paid on
capital goods that are used for manufacture of goods that are dutiable and goods that are exempt. For example, if
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any capital goods are used to manufacture any goods that are excisable and has any by-product that is exempt or if
any capital goods are used to manufacture exempt as well as dutiable goods alternately, there is no restriction on
availment of CENVAT credit.
However, under the same Rule 6 in case of input services that are used partly for providing taxable output services or
for manufacturing excisable goods and partly for providing exempt output services or manufacturing exempt goods,
in order to avail input tax credit the assessee has to satisfy any one of three stringent conditions that have been
prescribed.
It is recommended that the CENVAT Credit Rules 2004 be amended appropriately permitting the manufacturers and
service providers to avail entire CENVAT credit of service tax paid on all input services, if such services are partly used
for exempted goods and partly for dutiable final products or partly used for providing both taxable service as well as
exempted service.
5.4.18. CENVAT Credit on Service Tax paid on intermediate Goods
There are many instances where a manufacturer manufactures excisable goods in two or more stages across
different manufacturing units. In cases like these it is quite possible that intermediate goods are manufactured in one
or more stages and then the same are transferred to another manufacturing unit where the finished goods are
manufactured. In cases where such intermediate goods are exempt from central excise duty, the manufacturer is
denied CENVAT credit of input services used in the manufacturing process notwithstanding the fact that the
intermediate goods are used thereafter for manufacture of excisable goods.
It is recommended that in such cases the manufacturer is allowed to take credit of input taxes paid on services and
transfer the same, through the ISD mechanism to the unit where the dutiable finished goods are manufactured.
5.4.19. Other Issues
(a) Cenvat credit should be made available on steel and cement used in the buildings.
(b) Presently unutilized credit of SAD is permitted to be transferred at the end of each quarter to other registered
premises. It is requested that such a facility should be made applicable in respect of the entire unutilized cenvat
credit.
(c) Cenvat credit of service tax paid on GTA services for outbound transport should be allowed without any
condition like freight being part of assessable value or place of removal etc.
(d) Consumables such as coal, fuel, oil, diesel etc. are directly used in the process of manufacturing and hence
should be treated as inputs and credit of duty paid on these items should be permitted.
(e) As per present rules if the payment is not made to the service provider within three months from the date of
Invoice, credit taken, if any, needs to be reversed. The payment terms are decided by the service provider and
service receiver and hence there should not be restriction on availment of credit even if payment is made after
90 days. For inputs or capital goods credit there is no such restriction and hence in order to have an uniformity in
availing cenvat credit the restriction of payment should be removed.
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(f) An amendment has been made in Rule 2(l) substituting the words 'in relation to clearance of final products from
the place of removal' to 'clearance of final products, up to the place of removal', with effect from 01-04-2008.
The amendment providing for denial of the credit on and from 01-04-2008 is clearly against the principle of the
CENVAT credit scheme which is the avoidance of the cascading effect of taxes.
It is suggested that the amendment be withdrawn and the benefit of Credit on outward transportation be
extended.
(g) As per Rule 6 (8) of Cenvat Credit Rules, if the foreign exchange realization is not received within 6 months for
export of services, it will be treated as exempted service. Being so, Cenvat credit @ 6% of the value of service
needs to be reversed. As the terms of payment are decided by the parties and one year time limit for bringing
the foreign exchange is allowed as per FEMA, the rule 6(8) should be amended suitably to prescribe the time
allowed as per FEMA.
(h) The prices of SKO supplied to PDS and LPG supplied to domestic household customers continue to be regulated
by the Government. The duty exemption for such supplies has been granted in the interest of Government policy
in this regard. In other words the benefit of exemption does not accrue to the manufacturers. However, the
manufactures are required to reverse the Cenvat Credit attributable to such supplies. But, the manufacturers are
not compensated for the loss resulting from such reversals.
It is accordingly requested that SKO supplied to PDS and LPG supplied to Domestic households should be
excluded from the mischief of Rule 6 of Cenvat Credit Rules, 2004, by including these goods in list of goods
specified under Rule 6 (6) of the Cenvat Credit Rules, 2004.
(i) Cenvat credit should be allowed on “Input” used in wheeling of power to other manufacturing unit within the
same company / legal entity
(j) Service Tax input credit should be made available on various services availed by the assessee in relation to a
residential colony which is situated next or near to the plant area. A nexus exists between manufacturing facility
and the residential colony in a continuous process industry. It is essential for the manufacturer to have its staff
located near the plant to cope up with any type of emergency.
(k) The erstwhile procedure of Customs endorsement of Bill of Entry copy for availment of CENVAT Credit by the end
user unit has been dispensed with vide Customs Public Notice No. 16/2006 dated 22-03-2006. This is causing
hardships to the manufacturers since they are unable to avail CENVAT Credit on the imported [free issue]
material received by them from their customers.
It is suggested that the procedure of Customs endorsement of the Bill of Entry EDI copy for availment of CENVAT
Credit by the end user unit, be restored at the earliest by way of a suitable Customs Trade Notice to this effect.
Or alternatively a provision should be made in the Bill of Entry format for indicating the details of the consignee
(end user receiver) of the goods in addition to the details of the Importer as is being done in the case of Excise
invoices where the Invoice is made on the buyer with the consignee indicated as the end user.
(l) The courier agency imports the goods for various customers under the single bill of entry and thereafter provides
the photocopy of the bill of entry to various customers. Department is currently denying the credit on the basis
of the self certified copy of bill of entry. It is practically impossible for courier agency to provide original bill of
entries to each of its customers.
A provision may be made in the Cenvat Credit Rules to provide that the credit would be available on the basis of
self certified copy of bill of entries issued by courier agencies to the respective customers.
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STRUCTURAL AND PROCEDURAL ISSUES
Structural Changes
5.5.1. Independence of Adjudication Wing
The adjudicating authority, namely, Asstt. Commissioner / Dy. Commissioner / Additional Commissioner /
Commissioner / Superintendent (Adjudication) has to play a dual role - that of a tax collector as well as adjudicator of
the disputes. There is always pressure of maximizing revenue since yearly targets for collection of duties are assigned
to each such officer. Under the circumstances, when he is required to adjudicate customs or excise duty disputes, it is
practically impossible for him to remain impartial and do justice to the assessee even in deserving cases. This results
in show cause notice/demands getting confirmed even when the same are legally untenable as is evident from the
statistics of appeals decided in favour of the Department or against it. Consequently the assessees are required to
carry the matter in appeal thereby increasing litigation.
It is suggested that the Adjudicating Wing should be separately established in each Commissionerate. The
adjudicating officers should be disengaged from the duties of revenue collection. The Adjudicator Wing should not
be working under the Commissioner. These officers could be placed under the Directorate of Legal Affairs or any
other such Central Directorate. If this suggestion is implemented, it is felt that the adjudicating authorities will not
have any revenue bias and shall pass orders with a judicious mind and as per the law laid down by various judicial
authorities, thereby reducing needless litigation arising from high pitched assessments.
5.5.2. Improvement in Dispute Resolution Mechanism
The present system of resolving disputes between the taxpayer and the department is unsatisfactory and requires to
be overhauled. The existing system is marked by (a) issue of show-cause notices on frivolous grounds
(b) issue of protective demand notices following objections by Central Revenues Audit which remain unresolved for
years till the objections are settled
(c) delay in completing the adjudication process
(d) lack of uniformity in assessment decisions taken for different units manufacturing the same commodity and even
for different facilities of the same manufacturers
(e) failure of the Committee system to prevent filing of appeals in undeserving cases thereby prolonging litigation.
Once a show-cause notice has been issued even though on unreasonable and unsustainable grounds the process of
adjudication has to be gone through entailing time and costs. The adjudication process itself is lengthy - issue of
adjudication orders is delayed months after the personal hearing has been granted. On many occasions the officers
get transferred without completing the adjudication requiring fresh hearings and increased costs. Judicial precedents
are ignored and the demand notices are confirmed even when the law is well settled. The adjudication orders are
not speaking orders and generally do not provide the reasons for ignoring a judicial decision except for recording that
the facts of the case are different.
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The aforesaid factors severely impact the tax environment of a business. There is no clarity / finality on the tax
liability of a business entity; the contingent liability keeps on adding disproportionately and the compliance burden
keeps on increasing. It has a net dampening effect on the business environment. Following suggestions are
submitted for consideration to reduce the hardships for the businesses:(a) The department has successfully established an advanced system of automation covering customs, central excise
and service tax assessments processing several thousand online transactions of import and export consignments
per day apart from the excise and service tax returns of lakhs of assessees. It is absolutely necessary that all the
processes involved in an adjudication are captured online and are accessible to the public at large.
The data capture should start from the stage of issue of show-cause notice, the date on which a reply has been
furnished by the assessee, the date of personal hearing, the date of issuing the adjudication order, the stages in the
first appeal, second appeal etc. The grounds on the basis of which the show-cause notice has been issued should be
briefly recorded in the system so that on the one hand senior supervisory officers can review whether the notice has
been issued on bonafide grounds and on the other hand it can be used by other Assessing officers to review the
practice of assessment in their jurisdiction.
An important field of data capture should be the name of the officer designated to adjudicate that show-cause
notice. In case the officer gets transferred, the system should capture the name of the new officer to whom the case
has been assigned along with the date of such assignment. Apart from enabling monitoring the progress of
adjudication, such a system should also enable evaluation of the quality of orders passed by each officer since the
system would record the outcome of appeal if any filed against the said order. Such a system would enable the
department to assess the judiciousness of each adjudicating officer at any point of time in his career. In the long run
it is expected that such an exercise would help improve the quality of decision making by the officers.
(b) Administrative measures should be introduced to ensure that the adjudicating officer issues the orders within a
reasonable time of the hearing having been completed. The automated system as proposed above would no
doubt provide the necessary information regarding the cases pending for issue of orders after the hearings have
been completed. In case an officer is transferred, while he may be relieved of his regular assignment, he may be
retained for a reasonable period (one to two months) to finalize the orders for which personal hearings have
been completed till the date of issue of the orders. He may be conferred the requisite legal authority to
complete this task.
It is further suggested that a provision be made in the law that in case a show-cause notice is not adjudicated upon
within a specified period of the date of issue of show-cause notice, the proceedings shall lapse as if the show-cause
notice was never issued. Given the current pendency of adjudications, this period may initially be fixed at 3 years but
be brought down to 1 year progressively. Thus, if a show-cause notice is not adjudicated upon within 1 year for
reasons not attributable to the notice, the proceedings should be deemed to have never been initiated and
consequential reliefs should follow. Such an extreme step is considered necessary since administrative measures
taken so far have not yielded the desired results and the trade is put to unnecessary hardships for delays on the part
of the adjudicating officers. It may be noted that even the income tax law has a sunset clause if the assessments for a
particular year are not finalized within the prescribed time limit.
(c) There is need for flow of information from the policy makers to the field and vice versa. Many a times the field
officers issue demand notices because they have understood a particular policy (exemption notification / rules /
regulations etc.) in a different manner than what the policy makers intended. The instructions / circulars issued
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by the Ministry sometimes do not explain the full background of the policy changes made by the Government. It
is suggested that the field officers should be encouraged to seek clarifications from the policy makers to have
their doubts clarified. It will also enable policy makers to identify deficiencies if any in the policy or in the
manner in which a particular notification / rule or regulation has been drafted for taking corrective action if any.
The policy makers should not shy away from their responsibility to clarify matters to the field formations. The
objective should be to disseminate information and explain the policy objectives in clear terms to prevent
litigation ab-initio. It must also be realized that tax policy is a specialized field and the officers who have to
frequently shuffle between various areas of work (customs, excise, service tax, enforcement, assessment etc.)
cannot be expected to acquire expertise within the limited period they are assigned to a particular post. The
policy wings of the Ministry should be adequately staffed if so required to enable such a timely flow of
information. It is felt that increased allocation of human and financial resources in this area of work would
provide the desired results. Given the electronic means of communication at their disposal, timely flow of
information and sharing of knowledge can prevent litigation to a large extent.
(d) The department should repose an element of trust in its officers and not view every decision taken in favour of
the assessee with suspicion.
(e) The practice of issuing protective demands following objections by the Central Revenues Audit needs to be
reviewed. Once an objection has been received, the department should evaluate the objection and decide
whether the objection is sustainable or not. Such evaluation should be completed within a prescribed time limit
of say one month of the receipt of the Audit report. The question whether the CRA objection is sustainable or
not should be examined at a pre-decided level say Commissioner or Chief Commissioner of Customs or Central
Excise, as the case may be. In case instructions are to be sought from the Ministry, let it be so but the decision
should be taken within one month. Electronic communication systems be made use of to expedite the decision
making process.
In case, the department agrees with the CRA, a show-cause notice be issued and adjudicated upon as soon as
possible. If, however, the department does not agree with the Audit contention, no notice should be issued to the
assessee. In such a case the department should convince the CRA about the correctness of the decision made by
them. The practice of issuing a show-cause notice as soon as the Audit report is received, without examining the
merits thereof, should be discontinued. It is suggested that these modalities be settled between the department and
the CRA.
It is felt that these measures apart from proper supervision by senior officers may result in reducing litigation and
improving the Dispute Resolution Mechanism.
5.5.3. Expanding the Scope of Authority for Advance Rulings
The Authority for Advance Rulings (Central Excise, Customs and Service Tax) was constituted with the objective of
providing binding rulings to the foreign investors intending to set up joint ventures in India so that they are assured
in advance of their indirect tax liability. After its inception, the scope of the Authority to entertain applications for
issuing rulings has been enlarged and at present, apart from non-residents, the following categories of resident
companies have been notified under the relevant provisions of Customs Act, 1962, Central Excise Act, 1944 and
Finance Act, 1994, making them eligible for applying for advance rulings:
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a) Residents proposing to import goods from Singapore under the Comprehensive Economic Cooperation
Agreement for seeking advance ruling on origin of goods under the Customs Act, 1962
b) Public Sector Companies in Customs, Central Excise as well Service Tax matters
c) Residents proposing to import goods under the project imports facility for seeking advance ruling under the
Custom Act
d) Public Limited Companies in the matter of Customs
However, this still leaves out a large segment of the taxpayers from availing the benefit of obtaining a binding ruling
on their indirect tax liability. It is therefore, felt that there is a strong case for revisiting the approach towards the
scope of matters handled by the Authority.
The facility of advance ruling is considered to be an important element in the taxpayer services and is generally made
widely available. An effective advance ruling machinery contributes to reduction of disputes by eliminating them in
the bud. It affords both the taxpayers as well as the tax administration the advantage of certainty in taxation and of
lowering the cost of compliance.
Although the institution of Authority for Advance Rulings was set up primarily by the desire to attract foreign
investment, the time has come to introduce a complete level playing field between foreign and domestic businesses
in the matter of a facility as important as advance ruling. There is also need to eliminate discrimination between
public sector and private sector companies. Further, there appears to be no justifiable reason to exclude taxpayers
which are not companies from jurisdiction of this authority. In fact a time has come when the facility of advance
ruling should be made available universally to one and all.
It is accordingly recommended that that all persons, whether individuals, proprietary or partnership firms, and public
or private limited companies may be made eligible to seek advance rulings in respect of Customs, Central Excise and
Service Tax matters on equal footing.
Another important issue has arisen in the context of advance rulings following the judgment of the Supreme Court in
the case of Columbia Sportswear Company vs Director of Income Tax, Bangalore. In that case the Court, while dealing
with a petition under Art. 136 of the Constitution, held that the Authority for Advance Rulings is a “tribunal” within
the meaning of Articles 136 and 227 of the Constitution and, consequently, petitions against its rulings would lie to
the High Courts. As a result of this ruling High Courts can now entertain petitions against rulings issued by this
Authority. This is bound to prove counterproductive to the basic purpose for which the Authority was constituted,
namely, to provide quick, efficacious and binding rulings to eligible applicants and to minimize litigation. With the
opening of the doors of High Courts to the challenges against the Authority's rulings, matters will follow the usual
dilatory course of normal litigation and will take much longer to attain finality. Ideally, therefore, the rulings of this
Authority should be allowed to be questioned only in the Supreme Court. The legislation that created this Authority
has not provided for a statutory appeal - obviously owing to the concern to avoid delays in matters attaining finality.
However, with the judgment of the Supreme Court, a piquant situation has arisen and it is the absence of a statutory
appeal that would contribute to delays in matters reaching finality.
It is recommended that the Government should amend the legislation relating to this Authority to provide for an
appeal against the Rulings of the Authority directly to the Supreme Court. This would avoid parties approaching the
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High Courts and the original purpose of setting up of the Authority for an expeditious decision to the taxpayers
would be served.
Further, currently the provision permits appointment of a retired Judge of the Supreme Court as the Chairperson of
the authority. Limiting the appointment of Chairperson to a retired Judge of Supreme Court at times results in delay
in constitution of the authority and consequent disposal of the applications. Hence, relevant provision may be
amended to permit appoint of a retired Judge of High Court as well to address issues relating to delays in taking up
and disposal of applications.
5.5.4. Introduction of Advance Pricing Mechanism in Customs Law in line with Transfer
Pricing regulations of Direct Taxes
Advance Ruling Mechanism facilitates ruling on principles to be adopted for valuation of imported goods in terms of
the provisions of the Customs Act, 1962. However, very few applications on valuation till date have been dealt by the
Authorities.
With the opening up of the Indian economy, the number and volume of transactions of import and export between
related entities has gone up substantially. The existing mechanism of examination of such transactions by the Special
Valuation Branches (SVBs) in the Custom Houses is inadequate to determine the true price of the goods imported or
exported. Apart from the considerable time taken to finalize the prices, there are also questions about the processes
deployed for such determination.
It is suggested that an Advance Pricing Agreement (APA) Mechanism on the lines of the one recently notified by the
Ministry of Finance (CBDT) under Transfer Pricing Regulations may be considered. Alternatively, prices as agreed
under the Transfer Pricing regulations of CBDT may be adopted since those regulations also require determination of
arm's length prices in the course of international transactions of goods and services between related persons. It may
also be provided that the SVB of Custom Houses and Transfer Pricing Officers (TPO) of CBDT would accept the
determination made by each other in respect of the transactions examined by them.
5.5.5. Extension of Large Taxpayer Unit (LTU) Scheme
Government of India has been framing a number of schemes to simplify the tax laws in the country and make them
taxpayer friendly. Amongst these several schemes and the measures, one of the most pioneering scheme is relating
to Large Taxpayer Units. However, the above scheme is limited to only those units, whose registered office is at any
of the places at Bangalore, Chennai, Delhi, Kolkata or Mumbai. Hence if any unit is fulfilling all other conditions, but
its registered office is not located at the places as mentioned above, It can't apply for LTU facility.
To simplify the procedures for all units especially multilocational units not having their registered office at the
notified places, it is strongly suggested that the LTU facility should be made available to all units irrespective of the
location of their registered office. The Department should also open additional LTU offices at other cities such as all
the State Capitals etc.
5.5.6. Annual Audit of Service Providers by Chartered Accountants
A new comprehensive service tax regime based on the concept of the Negative List has been introduced with effect
from 1st July, 2012. This has resulted in several new assessees being brought under the tax net apart from
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broadening the scope of transactions that are now covered for the levy of service tax. It is suggested that the
concept of annual audit by chartered accountants be introduced for specified assessees in lieu of an audit by the
departmental officers. This suggestion is based on a similar audit being conducted by the chartered accountants for
the purposes of income tax. This mechanism would reduce the burden on the administrative machinery of the
department in conducting such audits by going to the assessees premises. The department would of course be
scrutinizing the returns of the assessee and also have the authority to conduct any special audit of a particular
assessee, if it is so desired.
Common Procedural Issues
5.5.7. Rate of Interest for delayed payment of excise duty or service tax
The rate of interest on delayed payment of excise duty has been revised with effect from 1st April 2011 to a uniform
rate of 18% per annum. The rate of interest on delayed payment of taxes has been increased from erstwhile 13% per
annum to 18% per annum.
The rate of interest as has been prescribed for delayed payment of taxes is exorbitantly high as compared to the rate
of interest which the exchequer would have earned if the same would had been deposited with the nationalized
banks. Such high rate of interest is more penal in nature rather than being compensatory. Such high rate of interest is
also detrimental to the overall industry as a whole and especially with regard to assessees' who have paid short tax
or no tax under a bona fide belief.
The rate of interest on delayed payment of taxes should be prescribed at 12% per annum for delayed payment of
excise duty as well as service tax (as is the case for delayed payment of income tax).
5.5.8. Time limit for disposal of appeals by CESTAT
At present Section 35C (2A) of the Central Excise Act,1944 specifies a recommendatory time limit of three years from
the date on which such appeal is filed for hearing and disposing off the appeal. This leads to piling of huge number of
cases at Tribunal level, which also blocks the Government revenue for the cases which are in its favour and increases
the interest cost for the appellant.
There has to be a statutory deadline for disposal of Appeals and not only recommendatory deadline as it exists at
present. Once the dead line is statutorily fixed there would be pressure on the Appellate Authorities to dispose of
the appeals within the statutory time limit.
5.5.9. New Benches of CESTAT at Hyderabad, Lucknow, Ranchi etc.
There is no CESTAT bench near many big cities like Hyderabad, Lucknow, Ranchi, etc. which makes cost of defending
demands prohibitive due to unaffordable fees at existing cities where the Benches are located and the cost of travel
and stay. With decentralization, pendency at existing Benches and the cost of litigation will come down.
It is suggested that the new Benches be opened at cities like Hyderabad, Lucknow, Ranchi, etc.
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5.5.10. Expiry of Stay order if appeal is not disposed of within the period of 180 days
Under the provisions of Section 35C of the Central Excise Act, 1944, stay granted by CESTAT for full or partial waiver
of pre-deposit of duty demanded, penalty levied etc. shall automatically be vacated, if the appeal itself is not decided
within 180 days from the date of stay order. As soon as the period of 180 days is over, the department is attempting
to recover the duty, in spite of the fact that the assessee is not responsible for delay in decision of the appeal. This
necessitates the appellant to make fresh application every six month till the disposal of appeal, thereby increasing
time spent on unproductive work and cost.
The above provisions are not equitable and are arbitrary. The limitation on validity of stay granted by CESTAT should
be withdrawn in order to spare the applicant from this unnecessary hardship.
5.5.11. Issue of multiple notices on same issue for different periods
It has been observed that field officers issue separate show-cause notices on the same issue by splitting up the
period for which the “short levy” pertains. This is reportedly done to keep the value limits for which the notice is
issued within the competence of the Assistant / Deputy Commissioner to avoid having to put up the matter to the
Commissioner. This however increases the administrative work and the costs for the assessee who has to file
separate replies and appeals later on apart from paying higher fees for the advocates.
It is suggested that the departmental officers should be instructed to issue a single show-cause notice for the same
issue for the entire period.
5.5.12. Maintenance of scanned copies of documents in lieu of originals
Large organizations opting for centralized registration have a considerable volume of invoices for raw materials,
components and input services. As a result, it is practically not feasible to retain original invoices at the location at
which centralized registration is taken. To ensure safety of these documents, significant processes towards storage
and retrieval of original documents have been set up.
Amendment should be made in the service tax and other laws prescribing that in the case of large assessees,
furnishing of the scanned copies of the original invoices at the time of inspection or audit should be treated to be a
sufficient documentary evidence for the purpose of substantiating eligibility to avail and utilize Cenvat credit.
Clarification may also prescribe a methodology on how the records of the scanned copied should be maintained and
the checks which should be applied for the maintaining of this alternate mechanism of storing documentary
evidence.
5.5.13. Merger of duties and cesses etc.
Separate levy of 2% Education Cess (EC) and 1% Secondary & Higher Education Cess (SHEC) should be abolished and
merged into basic duties. These levies are causing innumerable complications in documentation, credit availment
and accounting. To overcome such hardships, it is suggested that the rates of the main duty be rationalized to the
extent of EC and SHEC and levy of these cesses separately be abolished. For example, instead of the present excise
duty structure of BED 12% + EC 2% + SHEC 1% = Total 12.36% duty, it can be simplified as single Basic Excise Duty rate
of 12.36%. With the level of automation achieved by the customs and central excise department, the allocation of
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revenue for the purposes for which the cesses were levied can be made at the backend by the automated systems. It
is further suggested that these allocations need not be made transaction by transaction but can be made as a fixed
percentage from the total excise or customs collections credited to the consolidated fund of India. This will result in a
major simplification of the revenues collection process.
5.5.14. Streamlining of Instructions / Circulars by issue of Annual Master Circulars
The Ministry of Finance issues several Circulars / Instructions each year for Customs, Excise, Service Tax etc. It is
difficult at any given point of India to ascertain which of the circulars issued in the previous years are still valid or not.
As a step towards improving taxpayers' services it is requested that a master circular be issued on 1st April of every
year replacing individual circulars issued in the past. The Reserve Bank of India follows this practice for the last so
many years and it makes compliance much easier. A master circular was attempted a few years ago in respect of
service tax but it has not been updated. This exercise needs to be revived again not only for service tax but also for
customs and central excise for the benefit of taxpayers. This will make assessees aware of the necessary procedural
requirements
Customs
5.5.15. Period of interest free warehousing of goods
In terms of Section 61 of the Customs Act, 1962 interest is payable on the warehoused goods, if the goods are not
cleared for home consumption within 3 months from the date of warehousing. The normal warehousing period
under Section 61 is one year, hence charging interest on duty for the goods kept in the warehouse beyond 3 months,
defeats the very purpose of one year validity.
Liberalization of the interest free period will enable importer to pick up and store consignments when the
international prices are favourable so that abrupt fluctuations on account of international prices, supplies constraint,
currency fluctuations do not impact the operations and local sale price.
It may also be pointed out that Free Trade Warehousing Zones (FTWZ)/SEZs offer similar facilities to trade and unlike
bonded warehouse, FTWZ do not have any prescribed interest free warehousing period. The trade and industry
prefer to store their imported goods in such FTWZs/SEZs. However, compared to FTWZ/SEZs, bonded warehouses
offer greater locational flexibility and thereby give significant advantage from logistics perspective.
It is therefore requested that warehoused goods may be allowed to be cleared from bonded warehouses at least up
to 6 months period, without payment of interest on duty.
5.5.16. Refund of Extra Duty Deposit in case of provisional assessment
Pending validation of value declared in case of related party imports, the imports are provisionally assessed and
allowed clearance on payment of Extra Duty Deposit ('EDD') ranging from 1% to 5%. EDD can be claimed as refund on
acceptance of the value declared by the authorities and finalization of assessment.
However, claiming refund of EDD tends to be a challenge as authorities seek to apply the test of 'unjust enrichment'
even to these cases. Since EDD is in the nature of a deposit that is collected separately by the authorities, its refund
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should not be governed by the provision relating to refund of Customs duty. The refund should be allowed
automatically in cases where value declared is accepted by the authorities and Bills of Entry are finally assessed.
It is accordingly recommended that legal provisions may be amended appropriately to provide that the test of
“unjust enrichment” shall not be applied in cases of refund of extra duty deposits.
5.5.17. Finalization of provisional assessments within prescribed time lines
Pending validation of value declared in case of related party imports by the Special Valuation Branch (SVB) of the
Customs House, the imports are provisionally assessed. Normally the validation process and issuance of a formal
order takes minimum of 3-6 months.
The order issued by the SVB accepting the prices declared by the importer needs to be reviewed by the Review Cell
of Customs for issuance of formal acceptance of the order. This acceptance needs to be furnished to the Customs
authorities at the concerned ports for commencing the process of finalization of assessment.
Completion of the above formalities takes another 3-4 weeks. However, even covering the above milestones, being a
manual process, the assessment takes minimum of 6 months to 1 year including completion of review by Audit Cell.
Hence, considerable time is taken before the importer can seek finalization of Bills of Entry, obtain cancellation of PD
Bond and consequential refund.
As a measure of trade facilitation it is suggested that an amendment may be made in the regulations to provide for
completion of the whole process of finalization of assessments within a specified period. (Internal timelines may be
prescribed for passing of the SVB order, review by the Review and Audit departments etc.). In the event of failure to
complete the process no further extra duty deposits should be charged and the duty deposits already paid should be
refunded. In view of the high degree of automation achieved by the customs department it should not be a difficult
proposition to implement.
5.5.18. Bank Guarantees to be returned if the assessee wins first appeal
The Customs department asks for Bank guarantees for registration of contract, fulfillment of export obligation,
provisional release of goods etc. However in spite of the first appeal being decided in favour of assessee the Bank
Guarantees are not released quoting the reason that the department has filed an appeal which takes years as the
department may file appeal again till the matter the decided by the Supreme Court. It is requested that the
procedure may be set out to release the Bank Guarantees immediately if the first appeal is decided in favour of the
assessee if he is a manufacturer. As the industry is going through a very critical phase release of bank guarantees will
help the manufacturer to manage cash flow efficiently.
5.5.19. Refund of excess Customs duty paid in case of amendment to Bill of Entry to
rectify clerical mistakes
In terms of Section 149 of the Customs Act, 1962, a Bill of Entry is permitted to be amended/ modified even after
goods have been cleared for home consumption on the basis of documentary evidence which was in existence at the
time the goods were cleared.
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However, any consequent refund arising out of such amendment e.g. in case of incorrect adoption of invoice value,
exchange rate, etc. is denied by the authorities on the ground that the assessment has attained finality as same was
not challenged in terms of Circular No 24/2004-Cus dated 18 March 2004 and Hon'ble Supreme Court Judgment in
case of Priya Blue Industries Limited Vs Commissioner of Customs (Preventive) 2004 (172) E.L.T. 145 (S.C.)
Amendment may be considered in the laws to allow refund in case of amendments permitted under Section 149
without the requirement to challenge the assessment.
5.5.20. Import of Commercial Samples / Prototypes / Critical Spare Parts as Baggage
R&D Units need to provide quick turn around on software testing / validation on certain samples / prototypes.
Further, sometimes spare parts essential for a running plant are required to be imported on an emergency basis as a
baggage item of the engineers assigned for the maintenance / repair of the plant / machinery. It is requested that
the procedure for allowing commercial samples / prototypes / spare parts for critical business activities as items of
baggage should be simplified and well advertised.
5.5.21. Confirmation of Proof of Export
In order to avail duty benefits arising out of exports made by an assessee, voluminous documents have to be
submitted by the assessee to the Central Excise Department. The requirement of submission of documents in
physical form leads to delays in processing claims and is prone to clerical errors. Considering the fact that in today's
information age, where the Department itself is moving rapidly towards electronic filing of returns and records it is
recommended that the proof of export confirmation can be automated between the Customs Department and the
Central Excise Department and the burden on the assessee - in terms of submission of voluminous documents to the
Central Excise Department - can be removed.
5.5.22. Implementation of the Report of Indian Institute of Foreign Trade on Trade
Facilitation
The Centre for WTO Studies at the Indian Institute of Foreign Trade had commissioned a study to carry out “Trade
Facilitation Gap Analysis for Border Clearance Procedures in India” i.e. to examine the gap between the steps taken
by the department on its own for trade facilitation and the continuing bottlenecks, if any. The Study was supported
by Ministry of Commerce and was carried out in close cooperation with the Central Board of Excise and Customs.
The Study has identified areas where constraints need to be removed to ensure smooth flow of trade. The Study has
also touched upon certain areas where exporters and importers bear unnecessary costs which erode their
competitiveness in the international market. The recommendations and suggestions made in the Study would help
expediting the process of cargo clearance and reducing the transaction time and cost of clearance of import / export
and transit cargo, both at the sea ports and at the airports. The copies of the Study have already been submitted to
the Ministry of Finance.
FICCI had organized a seminar earlier this year on the draft of this Study which elicited valuable inputs, which have
been incorporated in the Study. It is requested that the recommendations and the suggestions made in the study be
considered for examination by the Government.
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Central Excise
5.5.23. Demand of interest for differential Excise Duty paid due to price increase
subsequent to removal of goods
The Supreme Court decision in CCE Vs. SKF India Ltd. (2009 (239) ELT 385), wherein the Court has held that the
interest is payable on differential duty payable because of revision of prices subsequent to removal of goods.
Demand of interest is not justified as at the time of removal there was no short payment or non-payment and
differential duty was not determined by the CE Department but the same was paid by the manufacturers on their
own. Therefore, keeping in view the aforesaid practice of industry, it would affect the manufacturers if there is a levy
of interest on the duty payable on the supplementary invoices raised due to revision of price subsequent to the
removal of goods. Further, the aforesaid interest so paid on supplementary invoice will not be eligible for CENVAT
Credit and hence would add the cost of the product
It is suggested that an explanation to Section 11 AB of the Central Excise Act 1944 may be added to the effect that no
interest would be payable on account of differential duty paid because of any price revision subsequent to the
removal of goods
5.5.24. Availability of Credit on Bill of Entry
It has been reported that the Department is disallowing the credit availability on the basis of Bill of Entry despite the
credit chain being established from the point of importation to the point of credit. It has been learnt that the Hon'ble
High Court and Supreme Court have held that the credit is allowed on the basis of Bill of Entry even if Bill of Entry is
not in the name of the person who is availing the credit. It is pertinent to mention here that the rule of endorsement
on Bill of Entry has also been omitted.
It is suggested that when the chain from point of importation to the point of credit is established, the credit on the
basis of Bill of Entry should be allowed.
5.5.25. Clearance of goods for captive consumption
As per Rule 8 of the Cenvat Excise Rules, the goods for captive consumption are to be cleared on cost of production +
10% profit margin. The computation of cost of production is based on the actual cost sheet which is prepared at the
year end and accordingly the clearances have to be made on provisional basis on estimated cost of production during
the year. The cost normally varies from month to month in view of changes in raw material / packing material cost,
cost of various consumables like diesel, electricity, etc.etc. This variation in cost could be upward or downward
depending on the marketing conditions of the various inputs.
It may be appreciated that in case the estimated cost of production in any month increases, the assessee has to pay
differential duty for the previous period with interest and start paying duty on revised estimated cost of production
in future. If at a later date due to reduction of cost of raw/packing materials, the cost of production goes down, there
is no provision for adjustment of excise duty paid in the past especially where the goods manufactured for captive
consumption are sent to excise exempted areas like Himachal, Northeast etc. In such cases the excess excise duty
paid in the past becomes an additional cost as no credit for the same is available at the other site of the
manufacturer.
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In order to simplify the process the assessee may be permitted to clear the goods for captive consumption on
provisional basis based on the actual cost sheet of the last year and any adjustment for difference in actual cost of
production at the yearend vis a vis the rates at which the goods were cleared during the year should be allowed to
be adjusted within 3 months of the close of the year. In case the actual cost is more than the cost at which the goods
are cleared provisionally during the year the assessee may be permitted to pay the differential duty within 3 months
at the close of the year without any interest and if the duty is not paid within 3 months, the assessee should be
asked to pay interest from the due date of payment of excise duty of each month.
In cases where actual cost at year end is less than the rate at which the duty was paid during the year, and the
assessee has not claimed the credit of such duty as the consignee was in excise exempt area, the assessee may be
permitted to claim refund based on the certificate obtained from the consignee that no credit for the duty was
availed by them. This certificate may also be required to be authenticated by the excise authorities of the consignee.
This process will reduce the complexity of change of cost of production on monthly basis and will also ensure that
the proper duty is paid to the department and hence will not lead to any loss of revenue to the department. We may
add that this process suggested by the industry is somewhat similar to the present process of cenvat credit rules
6(3A).
5.5.26. Valuation of Goods manufactured by job worker for captive consumption by the
manufacturer
Presently there is no specific valuation rule for clearance of goods manufactured by job worker which are used by the
manufacturer for captive consumption. Normally such goods manufactured by job worker for captive consumption of
the manufacturer are cleared based on cost of raw material + packing material+ other inputs supplied by the
principal + the conversion charges paid by the manufacturer to job worker. The conversion charges included in the
cost also includes the profit margin of the job worker. The basis of computation of assessable value on cost of
material + conversion charges is based on the Supreme Court's decision in the case of Ujjagar Prints. Recently certain
Commissionerates have objected to this basis of clearance and raised show cause notices stating that Rule 8 should
be applied even in such kind of situations and accordingly, the Job-Worker should pay the excise duty on the
assessable value arrived on the basis of cost of raw material + packing material+ other inputs supplied by the
principal + the conversion charges paid by the manufacturer to job worker + 10% margin. This basis of calculation
results in unnecessary addition of 10% towards profit margin as the profit margin of the said job worker who is
manufacturer of this goods already stands included in the conversion charges.
Accordingly it is suggested that either a clarification may be issued for valuation of goods cleared by job worker for
captive consumption clarifying that the value should be cost of goods + conversion charges which includes profit
margin of the job worker or a specific Rule may be inserted in the valuation Rules for such cases. This will avoid
unnecessary hardship to the assessee as well as this will also reduce possible litigations on this account.
5.5.27. Export of Excisable Goods
For removal of goods from the factory for exports the manufacturer exporters are required to file one “application
for removal form” (ARE-1) each day. When there are bulk orders and the cargo is moved from the factory to the
premises of the Container Freight Station (CFS) over a period of time (i.e., rather than on a single day) multiple ARE-1
are required to be filed for export to be made to a single customer.
It is recommended that:
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i.
Large manufacturer exporters be permitted to raise one single ARE-1 for all the clearances made (i.e., for the
aggregate quantity of clearances made over say a week) for export of cargo to a single customer. This would
reduce the number of ARE-1s being raised for clearances from the factory for a single customer order.
ii. The process of submission of proof of exports should get simplified in view of the fact that the process of
obtaining endorsements on the ARE-1s post the exports is a highly time consuming process. The data relating to
proof of exports should automatically flow between the customs and central excise department without the
need for the exporters to get involved in the process.
5.5.28. End Use Certificate for import of waste paper
As per Customs Notification no.21/2002 as amended from time to time, provides for import of waste paper at Nil
rate of customs duty, provided the importer furnishes an End Use Certificate (EUC) from the jurisdictional excise
authorities.
It is recommended that furnishing of end-use certificates should be dispensed with for manufacturer importers as
the process of obtaining EUCs is highly time consuming process and results in higher transaction costs. The private
records maintained by manufacturers - which are relied upon by Central Excise Audit also - should be prescribed as
appropriate documentation for verification of end use of imported waste paper.
5.5.29. Clarificatory amendment to Rule 8 (3A) of the Central Excise Rules
Rule 8 of the Central Excise Rules 2002 permits the facility of payment of excise duty on a monthly basis. Sub rule
(3A) of the rule seeks to deny the facility if there is “default” in payment of the duty.. This sub-rule is being invoked
by the field formations even in cases of inadvertent errors in duty calculation, which cannot be equated with
“default” as there is no intention to willfully default in payment of duty. Obviously, cases of inadvertent clerical errors
cannot be construed as a default in payment of duty and such errors do not deserve harsh punishment.
It is requested that the rule 8 (3A) of Central Excise Rules 2002 may be amended by substituting the words “willful
default” in place of the word “default” and inserting an explanation - “For the purpose of this rule, inadvertent
clerical errors shall not be construed as a default”.
5.5.30. Central Excise valuation - impact of the judgment of the Supreme Court in Fiat
case
The Hon'ble Supreme Court in a recent decision in the case of CCE, Mumbai vs. Fiat India (P) Ltd [AIT-2012-354-SC]
has held that selling products for a long period of time at prices below the cost of production cannot be considered
as ordinary sale under Section 4 of the Central Excise Act as it existed prior to 1.7.2000. It has also been held that
under new Section 4 (i.e. post 1.7.2000), such sale of goods below the cost of production to benchmark with the
price of the competitors will violate the condition of “price being the sole consideration for sale”. In other words, it
has been held that 'intention' of the seller can determine as to whether sale price should be acceptable for the
purpose of levy of excise duty, even if there is no additional consideration flowing from the buyer.
Till the pronouncement of the above judgment, the understanding prevailing in the Government & industry was that
unless there is a quantifiable additional consideration flowing from the buyer to seller, the sale price shall be
accepted as the transaction value at which the goods are sold in ordinary course.
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The decision is likely to have significant impact on industry. The manufacturers across the globe, when selling their
merchandize fix a price in the market based on several factors and alter the same periodically to exist in the market.
In many cases, the manufacturers may choose to sell the goods below the cost of production for various reasons. For
example:•
The manufacturers may choose a strategy to sell one product at a loss and make up the losses from the sales of
other items.
•
The manufacturers may offer special discounts to penetrate the market.
•
There can be sudden increase in the raw material prices or the cost of labour, due to totally external factors.
However, the manufacturers may be forced to sell the goods below the cost of production because of their
inability to pass on the extra cost to their buyers.
•
There are several capital intensive industries like Oil Refineries, Fertilizer plants, Tyre Companies, Manufactures
of Turbines, heavy boilers, etc. and these industries typically have long gestation period. During this time, the
products will be sold below the cost after taking into account the high depreciation and interest on the capital
goods.
The judgment of the Hon'ble Supreme Court has unsettled the valuation norms under Section 4 of the Act.
Implemented in letter and spirit, the law as interpreted by the Hon'ble Supreme Court would require each
manufacturer to declare its cost of manufacture so that assessing officers can verify whether the goods are being
sold at below the cost price. The judgment negates the principle of “transaction cost” and would result in subjectivity
in assessments and consequential uncertainty of the tax liability.
It is requested that Section 4 of the Central Excise Act may be amended to clarify the true meaning of the term
“transaction value”. It may specifically be provided that any factor taken into account by the manufacturer while
fixing the transaction value but which does not result in any flow back directly or indirectly to the manufacturer shall
be deemed to have not influenced the price between the manufacturer and the buyer. It is further requested that
the amendment may be given retrospective effect in order not to disrupt the past assessments.
GOODS AND SERVICES TAX
5.6.1. Introduction of Goods and Services Tax
The Government had a target of introducing a nation-wide GST enactment originally from 1st April, 2011. The
Government has initiated several measures in this direction but the timeframe for introduction of a comprehensive
GST remains unclear.
GST is going to be a landmark reform in the field of indirect taxation and would have a beneficial impact on the
economy of the country. Government of India should reach out to State Governments and come out with a clear plan
of implementation and timing at the earliest. It is requested that the draft legislative framework should be placed in
the public domain so that industry can study the impact and gear up for a smooth transition to the new system of
taxation.
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FICCI would like to reiterate that all the taxes levied by the Centre and the States on goods and services must be
subsumed in the proposed GST including stamp duty, purchase tax, APMC fees, royalties, property tax, tax on motor
vehicles, tax on goods and passengers, duty on electricity, entry tax, octroi, etc. We would also urge that the GST
should be extended to all sectors of the economy without exception i.e. it must include petroleum and natural gas,
real estate, alcohol and power generation sectors.
CENTRAL SALES TAX
5.7.1. Natural Gas, Naphtha and LNG to be 'declared goods' under CST Act
Currently State Governments charge varying VAT rates on Natural Gas, Naphtha and LNG (including regasified LNG
i.e. R-LNG) ranging between15% to 18%. To bring down the cost of these inputs for manufacturing, natural gas and
naphtha may be declared as Goods of Special Importance in Inter State Trade or Commerce under Section 14 of the
Central Sales Tax Act, 1956. This change will reduce the VAT impact on gas purchased in certain States where the
rates are higher. Such a move would also benefit the Public Sector Oil Companies. It is requested that natural gas and
naphtha be declared as declared goods under the CST Act.
It is further requested that Aviation Turbine Fuel (ATF) may also be classified at Declared goods with a uniform rate of
sales tax of 4% all over the country. This will facilitate emergence of Indian airports as hubs and stabilize ATF prices
across the country resulting in lower tariffs for the passengers.
5.7.2. Rate of Central Sales Tax
Central Sales Tax rate of 2 per cent has continued to remain the same since 2008, though the rate was expected to be
reduced to 1 per cent with effect from 1st April, 2009 and to Nil from 1.4.2010 on implementation of Goods and
Services Tax. Now that the introduction of GST is on the anvil and the Finance Minister has recently stated that bill
will be introduced before the financial year ends, it is time to gradually phase out CST.
It is suggested that the CST rate be at least reduced to 1% in the forthcoming Budget.
5.7.3. Refund of CST for Deemed Exports
Exporters who use copper as an input would have been an important market segment for the copper industry, but
for the disadvantage faced on account of the Central Sales Tax (CST, currently at 2%). Such exporters find it more
attractive to import copper vis-à-vis buying from the domestic copper producers - since they have to absorb the
burden of CST in case of the latter. Consequently, this important market segment has completely dried up for the
Indian copper industry.
To remove the above disadvantage to us vis-à-vis imports, it is requested to allow refund of CST for exporters (i.e. our
customers in the deemed export segment).
5.7.4. Exemption from Central Sales Tax on goods supplied to E&P Companies for
petroleum operation
The import of goods required for petroleum operation is exempt from customs duties. Furthermore, the import of
goods into India is also not subject to Value Added Tax / Central Sales Taxes.
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However, if similar goods are procured indigenously from the local vendor, although the excise duty is exempt on
supply of such goods to E&P Companies for petroleum operation, the supplier of goods however is required to
charge either Value Added Tax or Central Sales Tax based on the nature of transaction. The applicable rate of VAT /
CST depends upon the nature of goods and the same could vary from 4% to 13.5% depending upon the nature of
goods.
This situation creates disparity for the Indian vendor as he is required to charge VAT at applicable rate whereas the
same goods sourced from the foreign parties is not subject to any such taxes. This anomaly makes Indian vendor
uncompetitive vis-à-vis the foreign players.
Localisation of petroleum operations would help in combating the foreign exchange deficit. In other words, it
reduces the imports in India thus making Indian rupee stronger.
While it is the jurisdiction of each State to classify and levy tax on petroleum products, the Centre can play its role by
granting exemption under the CST regime to the various goods required for undertaking the petroleum operation.
Considering the fact that levy of CST on the sale of goods by indigenous supplier would render the local industry
uncompetitive and incentivises the foreign player, Government may issue a notification granting exemption to goods
required for petroleum operations, under Central Sales tax law. Alternatively, the benefits may be provided on similar
lines as available to supplies to SEZ.
5.7.5. Exemption for STP/EHTP Units
On interstate purchases of goods, the Software Technology Park/Electronic Hardware Technology Park (STP/EHTP)
units are required to pay central sales tax on all such procurements made from other states. Further CST paid adds to
cost of goods/services exported by such units as no input credit is allowed to the units for such CST paid. There is CST
reimbursement scheme for STP units however it is not efficient as there is insufficient allocation of funds for such
reimbursements, the STP authorities asks for lot of documentation and the refund claims kept pending for two- three
years and thereafter either the claims are rejected or partially awarded.
Similar to the CST exemption provided to SEZ units the STP/EHTP units should be allowed to avail CST exemption
against form I on interstate purchases made.
5.7.6. Extension of sale in transit facility to SEZ transactions
As per the SEZ Act read with Section 8(6) of the CST Act and Rule 12(11) of the CST (Registration and Turnover) Rules,
the interstate sale made by a DTA to a SEZ unit is exempt from tax provided Form I is issued by the SEZ
unit/developer. For the issuance of Form I, the SEZ unit/developer has to obtain registration under the CST Act.
As per the above provision the SEZ unit / Developer can issue only Form I for their direct purchases made from DTA
Units, However DTA units are unable to effect 6(2) sale transaction to SEZ units /Developer as only Form C is
prescribed under section 6(2) of the CST Act for the purpose of claiming exemption from levy of tax on subsequent
sales.
In addition to Form C, Form I should also be prescribed under CST Act to enable SEZ units / Developer procuring
goods by way of sale in transit / 6(2) sale transactions.
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5.7.7. Inclusion of goods required for Natural Gas pipeline network in the category of
goods eligible for concessional CST against form C
Under Section 8(1)(b) read with section 8(3) and 8(4) of CST Act, the concessional VAT of 2% is applicable on interstate sale of goods used for certain specified purposes against issuance of form C. The goods used for
telecommunication network were specified for the purpose w.e.f 13.05.2002. Laying of cross country pipelines
including connecting gas source to ultimate consumers is a priority in the course of developing National Gas Grid
announced in the last budget. As the goods required for use in Natural Gas pipeline network are still not covered,
Natural gas transmission companies like GAIL is not able to issue form C for purchase of goods for pipeline network
at concessional tax of 2%.
Since PNGRB regulated tariff is applicable to the pipeline network being expanded by GAIL across the country, it will
be in the interest of the consumers in particular, if the capital cost of the pipeline is reduced. Eligibility of pipeline
transmission projects for inter-state procurement of goods against form C will enable reduction in project cost which
will ultimately benefit the consumers.
Considering the importance of Natural Gas transmission pipeline network for building a national gas grid, it is
suggested that the goods required for Natural Gas pipeline network should be included in eligible category of goods
under section 8(1)(b) read with section 8(3) of CST Act.
5.7.8. Sale of Goods beyond 12 nautical miles
For oil and Gas exploration and exploitation, facilities are required to be established in the EEZ and Continental shelf
area. These facilities are located much beyond territorial limits of India i.e. much beyond 12 nautical miles from the
shoreline. Sales tax authorities in many states are trying to levy CST on sale of goods effected beyond 12 nautical
miles treating this type of sale as 'Inter-State Sale”, which is resulting in litigation and confusion. The legal position is
that such sale cannot be exigible for CST as CST Act has not been extended to EEZ and CS area.
Ministry of Finance should issue a clarification that CST cannot be levied on sale beyond 12 nautical miles until CST
Act is suitably amended. Government, thereafter, should amend the CST Act for levy of tax, with prospective effect.
5.7.9. Restriction on free trade in Agri-commodities
Certain statutory provisions in the Central / State Sales Tax legislation which restrict the applicability of exemption
from sales tax for sale/purchase in the course of Export need to be amended appropriately as these provisions
hinder free trade in agri-commodities.
Section-5 of the Central Sales Tax Act, 1956 covers, inter alia, some aspects of taxes/exemptions applicable to the
trade conducted in the course of export. Three of the provisions therein affect the free trade in the course of
exports.
Firstly, it is mandatory that the purchases must take place after procuring the Export Order to qualify the transaction
for exemption from Sales Tax.
In items like agri commodities, where supplies are seasonal and the demand is spread over the year, it is important
that an exporter procures the exportable commodities in advance (during the season) even if the demand does not
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exist in the international market at that point; even if it does, prices may not be right. Exporters either sell in distress
or lose the business opportunity to remain within the scope of this provision.
Sec 5(3) of CST Act to be amended such that any sale or purchase of any goods preceding the sale or purchase
occasioning the export of those goods out of India is also deemed to be in course of such export not withstanding
whether such sale or purchase took place against an existing Export Order
Secondly, the exemption is applicable to the penultimate sale prior to the actual export sale alone.
Traditionally, in India the existing commodity trade channels and the highly fragmented structure of Indian farms has
fostered a chain of traders and agents between a farmer and the exporter. The aforesaid provisions of CST severely
restrict trading liquidity because it is not always possible that an exporter directly procures from farmers. Thus, the
only alternative is to pay taxes at all points until the penultimate leg, making the price uncompetitive in the process.
Lastly, the procedure to avail exemption from CST necessitates a one-to-one linkage of various purchases and sales.
This would mean complication in blending of goods of various qualities to produce the exportable product of a
desired specification, when multiple purchases (made at different points of time) are used to deliver multiple sales
(compounded by the first provision explained above). An exporter has to issue Form H under the CST Act in support
of his claim of tax exemption.
It is recommended that Form H may be permitted to be issued and the exemption be availed by the buyers at all
transaction points as long as the goods are eventually exported (evidenced by the Bills of Lading as required under
the current regulations) irrespective of the timing of buying (meaning that an exporter can also buy goods before
entering into a sales contract) without necessarily linking purchases and sales one-to-one (only the aggregate
volumes may be considered at the time of assessment).
5.7.10. “C” Forms
Though Airport sector is an important infrastructure sector like telecom, electricity generation and distribution, and
mining, it is not included as one of the eligible categories which can issue concessional Form 'C' because of which
purchase of goods for Airport development attracts higher Sales Tax resulting in increased cost of project, which is
not in public interest as any increase in cost of project ultimately translates into higher passenger fees. In view of
this, Airport sector should also be allowed to issue C Form and to this extent Section 8(3)(b) of Central Sales Tax Act,
1956 may be suitably amended.
Goods for construction activity are not eligible for “C” Forms which increases the cost of construction. Goods for
construction industry should be made eligible for lower rate of CST of 2%.
At present, 'C' forms are submitted to assessing authority within three months after the end of the relevant quarter
to which 'C' form relate (Rule 12(7) of CST Rule,1957).
The time limit for submitting 'C' forms should be extended upto assessment in view of difficulties in collection from
various dealers.
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