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The FM’s Budget Speech began with the resolve to take some hard decisions recognising the present situation of the global crisis and the slowing in domestic growth. Reference was made to the need for fiscal consolidation, and there was recognition that much needs to be done by way of policy reform. However, given the events of the past year, how far the Government will be able to tackle either of these issues is moot. What is worrisome is the approach that the Government appears to be adopting when it comes to tax structures. Yet again, we have a retrospective amendment to negate the effect of a Supreme Court judgement – businesses and tax practitioners the world over will look to whether this amendment is challenged and what the outcome is with anxious interest. Further, the GAAR amendments proposed will all but erase the line that exists between legitimate tax planning and tax evasion. Another aspect is the wide power now vested in taxing authorities. Certainly from a tax perspective, these developments will weigh heavily in an analysis of India as a place to do business in. Though the timeline to the DTC and GST remains suspended, significant amendments have been made to the income tax and service tax provisions as preparatory steps. The highlights of the Budget and the tax proposals are discussed in the following pages. We hope you will find this an interesting read. Dileep C Choksi

C3 Advisors Pvt. Ltd. C3 Legal WTS India Pvt. Ltd. Universal Trustees Pvt. Ltd. c/o C3 Advisors Pvt. Ltd Mafatlal House Backbay Reclamation Mumbai 400020 India www.c3advisors.net Tel. +91 (22) 6145 5600 Fax +91 (22) 6145 5601 Offices also at: - Ahmedabad - New Delhi Contributors: Amey Nargolkar, Anshul Pathania, Ashish Khare, Gauri Shah, Harish Motwani, Kunjan Gandhi, Mandar Gadkari, Navin Dialani, Prajakta Naik and Udayan Choksi. This publication analyzing the highlights and key tax proposals in the Union Budget 2012 is created by C3 Advisors Pvt. Ltd., C3 Legal, WTS India Pvt. Ltd. and Universal Trustees Pvt. Ltd. The information is intended to provide general guidance. This general guidance should not be relied on as a basis for undertaking any transaction or business decision. The advice of an expert should be obtained based on individual circumstances. For further information please contact us.

1. BUDGET 2012 AND CORPORATE DECISION MAKING ........... 3 2. ECONOMIC SURVEY HIGHLIGHTS .......................................... 4 3. REGULATORY AMENDMENTS ................................................. 7 4. DIRECT TAX:

A. Income Tax ........................................................................... 8 B. Wealth Tax ......................................................................... 12

5. INDIRECT TAX: A. Central Excise Duty ............................................................ 13 B. Customs Duty ..................................................................... 15 C. Service Tax ......................................................................... 18 D. CENVAT Credit Rules ........................................................ 33

BUDGET 2012 AND CORPORATE DECISION MAKING

India’s Union Budget is an event much awaited by corporate circles. The key reason for this is the major policy decisions that are announced in the Budget for specific sectors of the economy and for the industry in general. These commitments put forth by the Central Government open up a plethora of options for the corporate world and define the direction of their decision making for the better part of the year. This year’s Union Budget, touted as a ‘Mixed Bag of opportunities’ also has a few elements introduced with a purpose to give the much – needed impetus to reverse the slowdown in the Industry. Below is a short study of the influence on the 3 primary areas which govern corporate decision making. Fund raising In order to enable Indian companies to access lower cost of capital, the budget has allowed raising funds through the ECB route for stressed sectors such as Power, Infrastructure and Airlines, as also for low cost affordable housing. It has withheld tax on interest payments on ECBs from 20% to 5% for three years. These measures will see a greater number of organisations looking overseas for raising finances to substitute their capital expenditure investment. To enhance the availability of equity to SME sector, the Government is proposing to set up a Rs. 5,000 crore India Opportunities Fund with SIDBI. Also, the restriction on Venture Capital funds to invest into nine specified sectors is proposed to be removed. This will open up avenues for new age entrepreneurs to tap growth capital to fund their start-ups. Further, measures like two way fungibility in Indian Depository Receipts, allowing Qualified Foreign Investors to access corporate Bond market and setting up Infrastructure Debt Funds will lead to enhanced domestic and foreign participation in Indian Capital and Bond market. The Government is also looking at setting up a Financial Holding company, to meet the capital requirements of the Public Sector Banks, which will further ease corporate lending. Cost pressures To provide relief to the manufacturing sector, the Budget has announced reduction on basic import duty on imported machinery, components, raw materials and capital goods, for several sectors. It has also provided for concessions on the excise duty for certain priority sectors like Textile, Healthcare, Infrastructure and Energy. These actions will result in better margins for the companies in this these sectors.

To promote the growth of SMEs, the Government has proposed to exempt capital gains tax on sale of residential land, where the proceeds are towards purchase of plant and machinery. The Budget has also suggested exemption of service tax on copyrights relating to recording of cinematographic films, to give an impetus to the Film Industry. Cross border transactions The announcement on introduction of Advance Pricing Agreement (APA) in the Finance Bill, 2012 will have a significant impact on any inbound and outbound transactions between corporate entities of same or different group, planned in the near future. It is proposed that this will bring down tax litigation and provide tax certainty in cross border transactions.

ECONOMIC SURVEY HIGHLIGHTS

STATE OF THE ECONOMY

The Economic Survey 2011–12, presented on March 15, 2012 reviews the performance of the Indian economy over the last financial year and highlights the policy initiatives of the government and the future prospects.

The economy is expected to register a growth rate of 6.9% in 2011-12 after having grown at the rate of 8.4% in each of the two preceding years. This indicates a slowdown compared not just to the previous two years but over 2003 to 2011 (except 2008-9). The reason for the slowdown partly lies in global factors, particularly the crisis in the Eurozone area and near-recessionary conditions prevailing in Europe; sluggish growth in many other industrialized countries, like the USA; stagnation in Japan; and hardening international prices of crude oil. On the other hand, domestic factors, namely the tightening of monetary policy, in particular raising the repo rate in order to control inflation and anchor inflationary expectations, resulted in some slowing down of investment and growth, particularly in the industrial sector. However, by any cross-country comparison, India still remains among the front-runners. With services (growing at 9.4%) and agriculture (2.5%) continuing to perform well, India’s slowdown can be attributed to weakening industrial growth (3.9%). The future outlook for Indian economy looks promising and there are signs that the weakness in economic activity is over and a gradual upswing may be expected.

INTERNATIONAL TRADE & CAPITAL INFLOWS

Despite difficult conditions in the global economy, exports are estimated to grow in the current year by 14.3% in real terms over and above 22.7% growth achieved in the previous year (2010-11). Imports are likely to end the year with a real growth rate of 17.5% as against 15.6% in 2010-11.

India’s trade has been quite resilient. The growth of exports and imports rebounded to 40.5% and 28.2% in 2010-11 after the 2008 global economic crisis. India not only reached pre-crisis levels in exports but also surpassed pre-crisis trends in export growth rate, unlike many other developing and even developed countries

The country’s share in global exports and imports also increased from 0.7% and 0.8% respectively in 2000 to 1.5% and 2.2% in 2010.

During the first half of 2011-12, India’s exports witnessed a high growth of 40.6%. However, since October 2011 there has been a deceleration as a result of the crisis originating in the periphery and spreading to the core economies in the euro area. Cumulative exports were at US $242.8 billion, registering a growth of 23.5% during 2011-12 (April-January). Imports in 2011-12 (April-January) at US$391.5 billion registered a growth of 29.4%. Trade deficit for 2011-12 (April-January) at US $ 148.7 billion was 40.4% higher than the US $ 105.9 billion in 2010-11 (April-January).

India has made progress in diversifying its export and import markets. While the share of ASEAN countries in total trade has increased from 33.3% in 2000-1 to 57.3% in the first half of 2011-12, that of Europe and America fell from 26.8% to 19%. This has helped India weather the global crisis emanating from Europe and America. The USA has been displaced by the UAE as India’s largest trading partner, followed by China, since 2008-9.

Net capital flows at US$ 41.1 billion in the first half of 2011-12 remained higher as compared to US$ 38.9 billion in the first half of 2010-11. Under net capital flows, foreign direct investment (FDI) has shown considerable increase at US$ 12.3 billion during the first half of 2011-12 vis-à-vis US$ 7.0 billion in the corresponding period of 2010-11. Similarly, ECBs increased to US$ 10.6 billion during the first half of 2011-12 as against US$ 5.7 billion in the first half of 2010-11. Portfolio investment, mainly comprising FII investments and American depository receipts (ADRs)/global depository receipts (GDRs), however, witnessed large decrease in inflows to US$ 1.3 billion in the first half of 2011-12 vis-à-vis US$ 23.8 billion in the first half of 2010-11. However, net capital inflows as a proportion of GDP have shown moderation from 5.0% in the first half of 2010-11 to 4.5% in the first half of 2011-12.

FOREIGN EXCHANGE RESERVES

During the financial year 2010-11, foreign exchange reserves increased by US$ 25.7 billion from US$ 279.1 billion at end March 2010 to US$ 304.8 billion at end March 2011. In 2011-

9.60% 9.30%

6.70% 8.40% 8.40%

6.90%

FY07 FY08 FY09 FY10 FY11 FY12

REAL GDP GROWTH

22.6%

29.0%

13.6%

-3.5%

40.5%

23.5% 24.5%

35.5%

20.7%

-5.0%

28.2% 29.4%

FY07 FY08 FY09 FY10 FY11 FY12

Exports Imports

GROWTH IN FOREIGN TRADE

12, the reserves increased by US$ 6.7 billion from US$ 304.8 billion at end March 2011 to US$ 311.5 billion at end September 2011. In the current fiscal, foreign exchange reserves rose and then declined. The reserves reached an all-time high of US$ 322.0 billion at end August 2011. However, they declined to US$ 311.5 billion at end September 2011. At end December 2011, reserves stood at US$ 296.7 billion and at end January 2012 at US$ 292.8 billion, indicating a decline of US$ 12.0 billion from US$ 304.8 billion at end March 2011. The decline in reserves is partly due to intervention by the RBI to stem the slide of the rupee against the US dollar.

PERFORMANCE OF CORE SECTORS OF THE ECONOMY

Agriculture During 2010-11, agriculture and allied activities such as forestry, logging and fishing, accounted for 14.5% of gross domestic product (GDP) at 2004-05 prices, as compared to 14.7% in 2009-10. Although agriculture’s share in the GDP is declining, it still accounts for about 58% employment in the country according to Census 2001. Hence, growth in agriculture and allied sectors remains a ‘necessary condition’ for inclusive growth. A reasonable growth in agriculture is important both from the nutritional point of view as well as to control food prices and overall headline inflation. The country produced 244.78 million tonnes of food grains in the year 2010-11, backed by normal monsoons. As per the current estimates, production of food grains during 2011-12 is estimated at an all time record level of 250.42 million tonnes due to increase in the production of rice and wheat.

Government has also taken several measures for improving agricultural credit flow and bringing down the rate of interest on farm loans. The flow of agricultural credit since 2003-04 has consistently exceeded the target. In the year 2010-11 the achievement was 119% of the target. The target of credit flow for the year 2011-12 has been fixed at Rs.4,75,000 crore and achievement as on November 2011 is Rs.2,94,023 crore.

With higher levels of purchasing power, there has been a higher demand for protein rich food items. The country has to step up efforts for increasing production of milk and other dairy products, egg, poultry, fish, meat, etc. There have been increases in the prices of these items because supply has not kept pace with demand. Further, the country is also facing

problems in storage capacity, which would help reduce post-harvest losses. Adoption of modern farm implements and tools especially by small farmers is still low because of their lack of resources. Addressing infrastructure requirements in the agriculture sector, especially storage, communication, roads, and markets should be a priority.

Other areas for improvement are the generation of real-time market intelligence and agricultural market reforms. Further, the level of secondary food processing in India is very low compared to many western countries. Investment in food processing, cold chains, handling, and packaging of processed food needs encouragement.

Services The services sector covers a wide range of activities from information technology (IT) to trade, hotels, and restaurants; transport, storage and communication; financing, insurance, real estate, and business services; and community, social, personal services and construction. With economic progress, manufacturing often takes a back seat, giving way to the services sector in terms of both output and employment, and manufacturing firms themselves become increasingly service centric in order to remain competitive. In India, services sector has taken a substantial lead over manufacturing and there are positive spillovers from services growth to manufacturing, through income, demand, technology and organizational learning. The share of services in India’s GDP at factor cost (at current prices) increased from 55.1% in 2010-11 to 56.3% in 2011-12 as per current estimates. If construction is also included, the service sector’s share increases to 63.3% in 2010-11 and 64.4% in 2011-12. With a 16.9% share, trade, hotels, and restaurants as a group is the largest contributor to GDP among the various services’ subsectors, followed by financing, insurance, real estate and business services with a 16.4% share. Community, social, and personal services with a share of 14.3% is in third place. Construction, a borderline service inclusion, is at fourth place with an 8.2%.

The CAGR of the services sector at 10.2% for the period 2004-5 to 2010-11 has been higher than the 8.6% CAGR of GDP during the same period, clearly indicating that the services sector has outgrown both the industry and agriculture sectors. In the years 2009-10 and 2010 11, the services sector has grown at 10.5% and 9.3% respectively. In 2011-12, the growth rate of services is estimated at 9.4%.

India’s services exports grew at a CAGR of 20.6% during the period 2004-5 to 2010-11, compared to the 19.7% CAGR of merchandise exports in the same period. The CAGR for import of services was 20.2%, compared to the CAGR of merchandise imports at 21.4%.

The outlook of the services sector in the domestic economy is linked to the prospects of the sector externally. Though it has

199.2

309.7

252 279.1

304.8 292.8

FY07 FY08 FY09 FY10 FY11 FY12

FOREIGN EXCHANGE RESERVES (US$ BN)

been quite resilient, a slight moderation in growth to 9.4% in 2011-12 is expected on account of the steep fall in growth of public administration and defence services reflecting fiscal consolidation of the government. While software service exports have continued to be steady, the unfolding events in the euro area could lead to some sluggishness in this sector. However, the domestic economy is more dominant in the case of services and any changes in government spending in community, social, and personal services within the fiscal space available or newly created fiscal space could strengthen the growth prospects of the services sector with ripple effects in related sectors.

Industry The key indicator of industrial performance is index of industrial production (IIP), released each month. Industrial growth in the country has been largely aligned with the growth rate of gross domestic product (GDP). The long-term average annual growth of industries comprising mining, manufacturing, and electricity, between 1991-2 and 2011-12, averaged 6.7% as against GDP growth of 6.9%. The share of manufacturing, which is the most dominant sector within industry, also remained in the 14-16% range during this period. During the period April-December 2011, the industrial production grew by 3.6%, compared to 8.3% in the corresponding period of the previous year. There was a contraction in production in the mining sector, particularly in the coal and natural gas segments during the period. The electricity sector witnessed an improvement in growth in the current year. This sector contributed 22.6% to overall industrial growth, which was more than twice its weight in the IIP. Growth also moderated in the manufacturing sector from 9.0% in April-December 2010 to 3.9% in April-December 2011. Industrial-sector growth during the current financial year is expected to be between 4 and 5%. Volatility in growth has been seen across all the broad sectors of the IIP with capital goods and intermediates being the most volatile. In fact, volatility of the manufacturing sector was largely on account of extreme fluctuations in growth in the capital goods and intermediates segments.

Corporate sector sales are another indicator of industrial performance. Abridged financial results of the listed manufacturing companies indicate robust sales growth (in nominal terms) during 2011-12. In the first three quarters of the current year, sales growth has varied between 20 and 25%. However, expenditure growth has outpaced revenue growth leading to a lower growth in net profits which declined in the latest two quarters. Higher expenditure growth was initially led by high raw materials expenses, but interest expenses grew more sharply in Q2 and Q3 of 2011-12.

During the year, the government released the National Manufacturing Policy (NMP) in November 2011. The policy aims at attaining a sustained 12-14% growth in this sector and to (i) enable manufacturing to contribute at least 25% of GDP

by 2022; (ii) create 100 million additional jobs in the manufacturing sector by 2022; (iii) create appropriate skill sets among the rural migrant and urban poor for their easy absorption in manufacturing; (iv) increase domestic value addition and technological depth in manufacturing; and (v) enhance global competitiveness of Indian manufacturing.

Prospects Indian economy has been adversely affected by the sharp global economic slowdown and its GDP growth is likely to decline to 6.9% during the current year, somewhat mirroring what happened in 2008-9, when growth was 6.7%. A part of India’s slowdown is also rooted in domestic causes. The persistent high inflation at over 9% for most of the year has also played a role. However, calculations based on tracking several statistical indicators lead to a forecast of the growth rate of real GDP for 2012-13 to be 7.6% and for 2013-14 to be 8.6%. The industrial sector performed poorly this year and the share of industry in the GDP, which had peaked at 28.7%, has now retreated to 27%. This is an adverse move for an emerging economy. It is expected that this decline will gradually get reversed on its own, starting in 2012-13. In this regard, the National Manufacturing Policy, as a first dedicated policy measure for manufacturing is expected to provide a major impetus to the manufacturing sector of the Indian economy. The National Manufacturing Policy, while adequately addressing the concerns relating to labour welfare and environmental conservation, attempts to simplify business regulations and certification to reduce transactions costs for industry and improve its competitive position.

In 2010-11 and 2011-12, there is a slight moderation in services growth. This is mainly due to the steep fall in growth of public administration and defence services, creating some fiscal space for the government. Growth in trade, hotels, and restaurants is more robust at 11.2%. The outlook for some of the services in the economy is also linked to the global prospects.

Monetary policy remained focused on controlling inflation and anchoring inflationary expectations, with 13 adjustments in policy rates since March 2010. This had a short-term slowing effect on growth, as was anticipated. But it also contributed to moderating inflation to around 6.5% by March. Vigilance will nevertheless be required and steps need to be taken to quickly deal with any unexpected developments and global shocks such as increases in the price of crude oil.

FRBM ACT

Two new concepts introduced included in the amendments to the FRBM Act.

Effective Revenue Deficit is the difference between the revenue deficit and grants for creation of capital assets.

Medium – term Expenditure Framework Statement to set forth a three year rolling target for expenditure indicators.

Recommendations to reduce the number of centrally sponsored schemes and to address plan and non plan classification.

Better tracking and utilization of funds through the Central Plan Scheme Monitoring System.

TAX REFORMS

GST Network to become operational by August 2012.

Constitutional amendments for drafting legislation for centre and state GST in progress.

DTC to be enacted at the earliest post report of the Parliamentary Standing Committee.

FEMA / FDI

Multi brand retail trade up to 51% in abeyance.

Minority equity participation (up to 49%) by foreign airlines under consideration.

Direct import of ATF by Indian carriers permitted.

External Commercial Borrowings (ECB) permitted to part finance Rupee debt of existing power projects.

ECB proposed to be allowed for capital expenditure on maintenance and operations of toll systems for roads and highways, if part of original project.

ECB to be permitted for working capital requirements of airline industry for a period of one year subject to a maximum of US $ 1 bn.

ECB to be permitted for funding of low cost affordable housing projects.

CAPITAL MARKETS

Qualified Foreign Investors to be allowed access to the Indian corporate bond market.

Process of IPO proposed to be simplified. Mandatory for companies to make IPOs of 10 crore and above in electronic form through nationwide broker network.

Wider shareholder participation through electronic voting facilities proposed to be made mandatory for top listed companies.

Proposed two - way fungibility in IDRs, subject to a ceiling, to encourage foreign participation.

A central KYC depository to be developed to avoid multiplicity of data.

LEGISLATIVE REFORMS

Prevention of Money Laundering (Amendment) Bill, 2011 to bring certain provision in line with global standards.

Benami Transactions (Prohibition) Bill, 2011 to replace the existing 1988 Act.

National Drugs and Psychotropic Substance (Amendment) Bill, 2011 is introduced to strengthen implementation.

The Pension Fund Regulatory and Development Authority Bill, 2011, The Banking Laws (Amendment) Bill, 2011 and the insurance laws (amendment) bill, 2008 to be introduced.

To take forward the financial sector legislative reforms by introducing various bills, viz. - The Micro Finance Institutions (Development and

Regulation) Bill, 2012; The National Housing Bank Amendment Bill, 2012; The Small Industries Development Bank of India

(Amendment) Bill, 2012; National Bank for Agriculture and Rural Development

(Amendment) Bill, 2012; Regional Rural Banks (Amendment) Bill, 2012; and Public Debt Management Agency of India Bill, 2012.

Additionally, The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, has already been tabled.

INFRASTRUCTURE AND INDUSTRIAL DEVELOPMENT

Irrigation, terminal markets, common infrastructure in agricultural markets, soil testing labs, capital investments in fertilisers, oil and gas/LNG storage and oil and gas pipelines, fixed network for telecommunications and telecommunication towers eligible for Viability Gap Funding (VGF).

Guidelines to be issued for PPP joint ventures with defence PSUs.

Setting up of Infrastructure Debt Funds to tap long tenor pension and insurance funds.

India Infrastructure Finance Company Limited (IIFCL) set up to ease access to credit to infrastructure projects through credit enhancement and take-out finance.

Irrigation and Water Resource Finance Company to be set up to mobilise funds for irrigation projects.

MICRO, SMALL AND MEDIUM ENTERPRISES

India Opportunities Venture Fund to be set up along with SIDBI to enhance equity availability.

Two SME exchanges launched to allow greater access to finances.

Mandatory for ministries and CPSEs to procure 20% of their annual purchases from MSMEs.

RATES OF INCOME TAX The rates are moderately changed to be in line with the recommendation in the DTC though there is no clear indication when DTC will be implemented.

Income slab Indiv/HUF Age 60 – 80 years

Above 80 years

Up to 200000 NIL NIL NIL

200001 – 250000 10% NIL NIL

250001 – 500000 10% 10% NIL

500001 – 1000000 20% 20% 20%

Above 1000000 30% 30% 30% No surcharge; above rates to be increased by education cess @ 3%

Tax rates for co-operative societies, firms, local authorities and companies remain unchanged. No differential treatment for women. WIDENING OF TAX BASE Alternate Minimum Tax (AMT) - wef April 1, 2012 In addition to companies which are subjected to MAT and LLPs which are subjected to AMT, firms, individuals and HUFs are liable to Minimum Tax @ 18.5% on the adjusted total income (taxable income before deduction u/s 80 H – 80 RRB). Applicable to Individual / HUFs / AOP / BOI / artificial juridical person where adjusted total income exceeds ` 2 million.

Withholding tax (TDS) - wef October 1, 2012 Every purchaser shall deduct 1% of the purchase price of an immovable property situated in a specified urban agglomeration where the price exceeds ` 5 million or where the price exceeds ` 2mn in any other area.

Where the purchase price is less than the value adopted for purpose of stamp duty then TDS is at such adopted value. The transfer deed shall be registered only on the proof of deduction and payment of TDS. TDS on remuneration to director - wef July 1, 2012 Tax to be deducted @10% on directors’ remuneration not in nature of salary. This would be in variation from practices adopted today where tax is often deducted at a higher rate. Tax collection at source (TCS) - wef July 1, 2012

Sellers of bullion and jewellery required to collect tax @1% from buyers where cash purchases exceed ` 200,000.

Also tax to be collected @ 1% on coal, lignite and iron ore on purchases other than for personal consumption or for manufacturing, processing or production or any article or thing.

Presumptive tax based on Daily Tonnage income of shipping company - wef April 1, 2012 In case of shipping there is only an increase in the attributed tonnage income. The basis of taxation remaining unchanged.

Qualifying ship having net tonnage

Existing amount of daily tonnage income

Proposed amount of daily tonnage income

Up to 1000 46/100 tons ` 70 for each 100

tons 1000 > 10000 460+ 35 for each

100 tons > 1000 tons

`700 + ` 53 for each 100 tons > 1000 tons

10000 > 25000 3610+ 28 for each 100 tons > 10000 tons

` 5470 + ` 42 for each 100 tons > 10000 tons

> 25000 7810 + 19 for each 100 tons > 25000 tons

` 11770 + ` 29 for each 100 tons > 25000 tons

MEASURES TO PREVENT CIRCULATION AND GENERATION OF UNACCOUNTED MONEY Subscription to share capital and share premium accounts of closely held companies - wef April 1, 2012 In addition to the taxation of share premium referred to later, onus to explain source of investment in closely held companies is of the company itself (other than SEBI registered VCF, VCC). Cash credits, unexplained money, investments, etc – wef April 1, 2013 Unexplained cash and investments to be taxed @ 30% plus surcharge and cess, as applicable. Assets located outside India – wef April 1, 2012

Residents having any assets (including financial interest in any entity) located outside India to compulsorily file Income tax return whether having taxable income or not.

The time limit for issue of notice for reopening an assessment in relation to any asset located outside India increased to 16 years.

Penalty on undisclosed income – wef July 1, 2012

@ 10% if admitted during course of search.

@ 20% if not admitted but disclosed in return of income.

@ 30% -90% if neither admitted or disclosed.

Prosecution proceeding – wef July 1, 2012 Threshold limit for prosecution increased from ` 100000 to ` 2.5 million of tax, penalty or interest evaded. Share premium in excess of FMV – wef April 1, 2013 Receipt of share premium by closely held company in excess of FMV to be treated as income. TAX INCENTIVES AND RELIEF Tax incentives for funding of Infrastructure sectors – wef July 1, 2012 Interest on new foreign currency borrowings (from July 2012 to July 2015) from nonresident sources outside India for certain infrastructure sectors to be taxed at a reduced rate of 5% (plus applicable surcharge and cess). Lower tax rates on dividend received from foreign companies– wef April 1, 2013 Like for AY 2012-13 gross dividends received by an Indian company from a specified foreign company (shareholding >26%) to be taxed at 15% as against the normal rate of tax. Venture Capital Funds or Venture Capital Companies – wef April 1, 2013

No sectoral restriction on business of VCU.

Income accruing to VCF / VCC, taxable in the hands of the investor on accrual basis with no deferral.

TDS provisions made applicable on income credited or paid by VCF or VCC to investors.

Removal of cascading effect of Dividend distribution Tax (DDT) – wef July 1, 2012 Cascading effect of DDT in a multi- tier corporate structure removed. This provision will have to be reconciled with the proposed Companies Bill which restricts multi tier holding companies. Exemption in respect of income of foreign company selling crude oil. – wef April 1, 2012 Exemption given in respect of income of a foreign company received in India in rupees on account of sale of crude oil. Power sector – wef April 1, 2013 Initial depreciation at 20% of actual cost of new machinery or plant acquired for the business of generation and distribution of power in addition to normal depreciation. Deduction available from profits u/s 80IA(iv) extended to March 31, 2013.

Weighted deduction for scientific research and development – wef July 1, 2012 Weighted deduction @ 200% of actual expenditure incurred on approved in house research and development facilities available till AY 2017-18. Weighted deduction for agriculture extension project – wef April 1, 2013 Expenditure incurred on agriculture project now allowed at a weighted deduction @ 150%. Weighted deduction for expenditure for skill development – wef April 1, 2013 Expenditure incurred on PPP project for skill development (as notified by the board) in it is in manufacturing sector now allowed at a weighted deduction @ 150%. Turnover or gross receipts for audit and presumptive tax Threshold limits for audit of accounts u/s 44AB (wef April 1, 2013).

Activity Existing Revised Carrying on business ` 6.0 mn ` 10.0 mn

Profession ` 1.5 mn ` 2.5 mn

Presumptive taxation of 8% shall only apply to persons carrying on business and not profession (wef AY -2011-12). Senior citizens– wef AY 20013-14 Exempt from advance tax if no income from business or profession. Eligible age of 60 years for qualification as senior citizen applicable to all sections of the IT Act. New investment avenues to claim exemption from long term capital gains tax - wef AY 2013-14 Individual or HUF can now invest sale consideration of a residential property in the equity of a new start up SME company in the manufacturing sector utilized by such company for purchase of new P&M subject to conditions. Reduction in rate of STT - wef July 1, 2012 STT in cash delivery segment reduced from 0.125% to 0.1%. Deduction for capital expenditure in specified businesses - wef AY 2013-14 Three new businesses have been included for the purposes of investment linked deduction u/s 35 AD. Weighted deduction @ 150% of the capital expenditure for certain specified businesses commencing operation on or after April 1, 2012. Expenditure on preventive healthcare- wef AY 2013-14 Deduction u/s 80D to include expenditure on preventive health check up not exceeding ` 5000/-

Interest on saving accounts - wef AY 2013-14 Individuals or HUF shall now be eligible for a deduction of up to ` 10000 against income by way of deposits in savings

account. RATIONALIZATION OF WITHOLDING TAX Disallowance of business expenditure on account non deduction of tax on payment to resident payee - wef AY 2013-14 No disallowance where resident payee has paid full taxes. Fee and penalty for delay in furnishing of TDS/TCS statement and penalty for incorrect statement - wef AY 2013-14

Levy of fee of 200 per day for late furnishing of TDS statement and in addition a penalty ranging from ` 10000 –

` 100000.

Penalty for incorrect information in TDS statement ranging from ` 10000 – ` 100000.

Intimation after processing of TDS statement u/s 200A - wef July 1, 2012 It is now subject to rectification, appealable and deemed as notice of demand us 156. Threshold for TDS on payment on interest for debentures Threshold is now increased from ` 2500 to ` 5000/-

RATIONALIZATION OF INTERNATIONAL TAX PROVISIONS Income deemed to accrue or arise in India –wef April 1, 1962 S 9 and S 195 of the IT Act are amended to tax income arising from transfer of any share or interest in a company registered or incorporated outside India if such transfer in effect, transfers the share or interest of the assets located in India including any rights in or in relation to an Indian company including rights of management or control or any other rights whatsoever. This in effect overrules the decision of the Supreme Court in the Vodafone case by specifically providing legislation for taxation of such transfers. Royalty – wef June 1, 1996 Definition of ‘royalty’ amended to include consideration received for transfer of all/ any rights in respect of any right or property or information for use or right to use a computer software( including granting of license) irrespective of the medium by which such right is transferred.

Definition of ‘royalty’ also amended to include consideration in respect of any right, property or any information whether or not the possession or control of such a right etc, is with the payer, used directly by the payer or the location of such a right is in India. Royalty amended to clarify the term process to include transmission by satellite, cable, optic fibre or any similar technology whether or not such process is secret. Taxation of NR/ non citizen entertainer, sports person etc – wef AY 2013-14 Income arising from performance in India shall be taxable @ 20% of gross receipts. Withholding tax @ 20% for payments made after July 1 2012. Tax Residency Certificate (TRC) – wef AY 2013-14 Submission of TRC by the tax payer claiming benefit under DTAA shall become necessary but not sufficient condition for availing benefits under the agreement. Extension of time limit for assessment or reassessment where information is sought under DTAA – wef July 1, 2012 The current time limit of six months extended to one year. RATIONALIZATION OF TRANSFER PRICING PROVISIONS Advance Pricing Agreement (APA) – wef July 1, 2012

• The taxpayer can approach the CBDT for determination of

the ALP in relation to an international transaction to be entered into by the taxpayer

• ALP in an APA shall be determined by the CBDT in the manner prescribed in the TP provisions. However, the CBDT is empowered to make such other adjustments as may be necessary or expedient to do so

• ALP determined under the APA shall be deemed to be the ALP in relation to the international transaction in relation to the international transaction in respect of which the APA has been entered into and shall be binding on both, the taxpayer and the revenue authorities

• APA shall be valid for the period specified in the APA, subject to a maximum period of five consecutive financial

CGP Cayman Island

HTI BVI

VIH (BV) Netherlands

HEL India

years and shall remain in force as long as there are no changes, in law, on the basis of which the APA was entered into.

Non- reporting of International transactions – wef July 1, 2012. TPO now empowered to determine ALP of an unreported international transaction. Application of Transfer Pricing to domestic transactions – wef AY 2013-14. Transfer pricing regulations made applicable to transactions between resident related parties (including companies having common holding company) for the purpose of computation of income and disallowance of expenses where aggregate value of such transactions exceed ` 50 million during the year. Determination of Arm’s Length Price (ALP) - wef October 1, 2009. Tolerable band of 5% in determination of ALP not to be considered as standard deduction. No reopening of assessment only on this ground. International Transactions to include-wef AY 2002-03 International transactions to include transactions of purchase, sell, transfer of tangible and intangible movable and immovable properties, business restructuring or reorganisation, irrespective of the fact that it has a bearing on the profit, income, losses or assets Filing of returns, penalties, reassessment etc. Due date of Transfer Pricing Report (TP Report) will be November 30 of each year (wef AY 2012-13). Penalty @2% of the value of international transaction if the taxpayer fails to maintain prescribed documents or report any international transaction so required or furnishes / maintains any incorrect information or documents (wef July 1, 2012). Reopening proceedings can be initiated for non filing of report or otherwise by not including such international transaction in the report (wef July 1, 2012). Dispute Resolution Panel (DRP) AO is empowered to file an appeal before the Tax Tribunal against an order past in pursuance of directions of the DRP (wef July 1, 2012). DRP is empowered to enhance the variation and consider any issue irrespective whether the taxpayer raised such matter or not (wef AY 2009 -10).

GAAR

GAAR shall be invoked where an arrangement is made to obtain a tax benefit and which also satisfies one of the four tests shown above. A tax benefit is depicted below.

OTHER AMENDMENTS Extension of time limit for completion of assessments and reassessments etc. wef July 1, 2012.

Proceeding u/s Current time allowed Proposed Period

143 21 months from end of the AY

24 months

143 & 92CA 33 months from end of the AY

36 months

148 9 months from end of the FY in which notice issued

12 months

148 & 92CA 21 months from end of the FY in which notice issued

24 months

250/254/263 9 months from end of the FY in which notice issued

12 months

250/254/263 and 92CA

21 months from end of the FY in which notice issued

24 months

Charitable Organisations – wef AY 2009-10 No tax exemption for such organisation in the year in which its receipts from commercial activities exceed the threshold of `

2.5 million whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded. Due date for furnishing audit reports – wef AY 2012-13 Due date for furnishing of tax audit reports u/s 44AB shall be the same as the due date for filing of return u/s 139 (September 30).

Where TP Reports are to be filed the due date shall be November 30 each year as also for the filing of the return and tax audit report. MAT – wef AY 20013-14 Book profit shall be increased by the amount of revaluation reserve relating to the revalued asset which has been retired or disposed if the same is not credited to the P&L account. Advance tax – wef AY 20013-14 Tax payer liable to pay advance tax in respect of income which has been received or paid without deduction or collection of tax.

Cost of acquisition - wef AY 1999-2000 In case of conversion of sole proprietorship or firm into a company which is not regarded as a transfer, the cost of acquisition of the asset in the hands of the company will be the same as prior to the conversion. Capital gains on sale of agricultural land by HUF – wef AY 2013-14 Benefit of reinvestment of the capital gains for purchase of agricultural land extended to HUF. Gift from relative – wef October 1, 2009 Gift received by an HUF from its members not considered as income.

Consideration in certain cases - wef AY 2013-14 In respect of transfer of assets where consideration is not determinable or attributable, the fair market value of such an asset shall be the full value of consideration for the purposes of computing the capital gains. Cash donations – wef AY 2013-14 Donations in excess of ` 10000 shall be allowed u/s 80G and

80 GGA, if such sum is paid by any mode other than cash. Eligibility conditions for life insurance policies – wef AY 2013-14 Amount received under insurance policies issued on or after April 1, 2012 would be exempt where the premium payable for any of the years does not exceed 10% of the actual capital sum assured.

Residential house – wef AY 2013-14 Exempt where allotted by the company to an employee or an officer or a director in whole time employment having a gross annual salary lesser than ` 1 million (earlier ` 0.5 million).

Reassessment – wef AY 2013-14 Limit of four years extended to 16 years where wealth located outside India has escaped assessment.

DUTY RATES The standard rate has been increased from 10% to 12% (effective 12.36% including EC and SHEC). The merit rate has been increased from 5% to 6% (effective 6.18% including EC and SHEC). The nominal rate introduced in 2011 on 130 items has been increased from 1% to 2% (effective 2.06% including EC and SHEC). The rate changes are effective 17-3-2012. LEGISLATIVE AMENDMENTS Amendments to Central Excise Act, 1944 [Effective from the date of enactment of the Finance Bill, 2012] Amendment to Section 4 The definition of ‘inter-connected undertakings’ in Explanation (i) to Sub section (3) of Section 4 is proposed to be substituted which was earlier being borrowed from the Monopolies and Restrictive Trade Practices Act, 1969 as the latter has been repealed. Amendment to Section 9 To align with the provisions of relating to offences and penalties with those under the Customs Act, Section 9 is proposed to be amended. Section 9 provides that cases of evasion in which the duty leviable exceeds INR one lakh shall be punishable with a term of imprisonment extending to seven years and with fine. The section is being amended to enhance this amount to thirty lakh. Amendment to Sections 9A and 13; Insertion of Section 13A Section 9A and 13 are being amended to provide that all offences under the Act shall be non-cognizable and bailable except an offence punishable with term of imprisonment of three years or more under section 9 notwithstanding anything contained in the Code of Criminal Procedure, 1973. Section 13A is being inserted to provide for the conditions for grant of bail in the case of offences punishable with a term of imprisonment of three years or more under section 9. It also mandates a prior authorization from the Central Government of a police officer to initiate investigation in cases under the Act. Amendment to Section 11A Section 11A is being amended to exclude in computing the period of one year or five years for issuance of show cause notice, the period where the service of notice was stayed by an order of a court or tribunal.

Amendment to Section 11AC Presently, no time limit is provided to pay reduced penalty. However, the amendment proposes to restrict the benefit only if the reduced penalty is paid within a 30 days of the communication of the order. Amendment to Section 12F The existing Section 12F relating to search and seizure is being amended to align the provisions with Customs Act, in as much as the report is required to be submitted to the Commissioner of Central Excise instead of the Magistrate. Amendment of Section 18 and 20; Deletion of Section 19 Section 18 is being substituted to provide that all searches save as provided under the Central Excise Act, shall be carried out as per the procedure laid down in the Code of Criminal Procedure. Consequential changes are being proposed in Section 20 and Section 19 is sought to be omitted. Amendment to notification issued under Section 5A Notification No. 1/2010 exempts Central Excise duty to goods cleared from new units or units that have undertaken substantial expansion in the State of Jammu and Kashmir for a period of 10 years from the date commencement of commercial production. The notification through a retrospective amendment seeks to clarify that the exemption of 10 years for units which have undertaken substantial expansion would be computed from the date of commercial production from the expanded capacity. Amendments to Central Excise Rules [Effective 17-3-2012] Rule 22 (3) is proposed to be amended to empower the officers of audit, cost accountants and chartered accountants appointed under section 14A or 14AA to prescribe the time limit for production of documents for the units which are being audited. Amendments to Central Excise Tariff Act, 1985 [Effective from the date of enactment of the Finance Bill, 2012] Chapter 25 To remove doubts as to the correct classification of polished marbles, the words “or polishing” in Note 6 of Chapter 25 are being removed.

Chapter 26

Under Chapter 26, the description of tariff items 2601 11 10 to 2601 11 90 covering iron ore and concentrates based on Fe content are being revised.

Chapter 48

To avoid disputes as to classification, Note 14 is proposed to be inserted in chapter 48 to provide that notwithstanding anything contained in Note 12, if the paper and paper products of heading 4811, 4816 or 4820 are printed with any character, name, logo, motif or format they shall remain classified under Chapter 48 as long as such products are intended to be used for further printing.

Chapter 71

A new Note is proposed to be inserted in Chapter 71 to provide that for the purposes of headings 7113 and 7114, the process of affixing or embossing trade name or brand name on articles of jewellery or on articles of goldsmiths‟ or silversmiths‟ wares

of precious metal or of metal clad with precious metal, shall amount to manufacture, which was earlier restricted to only jewellery.

Chapter 72

A new Note is proposed to be inserted in Chapter 72 to provide that the process of oiling and pickling in respect of goods of heading 7208 shall amount to manufacture.

Chapter 76

A new Note is proposed to be inserted in Chapter 76 to provide that the process of cutting, slitting and printing of aluminum foils shall amount to manufacture.

Chapter 85

A new Note is proposed to be inserted in Chapter 85 to provide that the processes of matching, batching and charging of Lithium ion batteries or the making of battery packs shall amount to manufacture.

Chapter 54

A new Note is proposed to be inserted in Chapter 54 to retrospectively provide that notwithstanding anything contained in Note 1, man-made fibre such as polyester staple fibre and polyester filament yarn manufactured from plastic and plastic waste including waste polyethylene terephthalate bottles shall be classified as textile material under Chapter 54 or Chapter 55 respectively with effect from 29.06.2010. Duty in respect of clearances already made is to be recovered from the manufacturers of these goods within one month of the date of enactment of the Finance Bill, 2012 failing which interest at the rate of 24% is payable. The manufacturers are however permitted to take into account credit of duty paid on inputs, input services and capital goods.

Specific rate changes [Effective 17-3-2012]

Cement Uniform rate of duty has been prescribed for packaged cement manufactured by mini-cement plants as well as non-mini cement plants as against earlier differential rates depending upon Retail Sale Price (RSP).

Automobiles The basic rates of excise duty applicable to different type of Cars (motor vehicles) have been enhanced from 10% to 12% and from 22% to 24% and 27% depending upon different variants of Cars.

Tobacco Products Cigarettes are being notified under section 4A for RSP based assessment with abatement of 50% from RSP. The basic excise duty on hand-rolled bidis is being increased from Rs.8 to Rs.10 per thousand and on machine-rolled bidis from Rs.19 to Rs.21 per thousand. The rates of duty per machine applicable to pan masala, gutka, chewing tobacco, zarda scented tobacco and unmanufactured tobacco under the compounded levy scheme are being increased.

Precious Metals At present, branded jewellery of precious metals attracts excise duty of 1%. The scope of the levy is extended to include unbranded jewellery within its ambit. However, the duty on such unbranded jewellery would be charged on 30% of transaction value declared in the invoice. Unbranded silver jewellery is already exempt. Branded silver jewellery is also being exempted from excise duty. Excise duty on gold jewellery sold from EOUs into domestic tariff area (DTA) is being increased from 5% to 10%. Excise duty on refined gold is being increased from 1.5% to 3%. Excise duty on gold produced from copper smelting is being increased from 2% to 3%. Excise duty on silver produced from copper smelting is being reduced from 6% to 4%. Full exemption from excise duty is being provided on articles of goldsmith and silversmith wares of precious metals or of metals coated with precious metals, not bearing a brand name. Gold coins of purity 99.5% and above and silver coins of purity 99.9% and above are being fully exempted from excise duty.

Textiles For the purpose of charging excise duty on ready-made garments bearing a brand name or sold under a brand name, the level of abatement from the retail sale price (RSP) is being increased from 55% to 70%.

Environment friendly goods Excise duty is being reduced from 10% to 6% on battery packs supplied to manufacturers of electric vehicles for use as spares and OEMs subject to end-use condition. Excise duty is being reduced from 10% to 6% on specific parts of Hybrid vehicles supplied to manufacturers of such vehicles subject to end-use condition. Excise duty on LED lamps is being reduced to 6%.

Mass Consumption Items Refills and inks used for the manufacture of writing instruments of value not exceeding Rs.200 per piece are being fully exempted from excise duty subject to actual user condition. Exemption limit on footwear is being enhanced from Rs.250 per pair to Rs.500 per pair. Footwear above Rs.500 per pair would attract basic excise duty of 12%. Basic Excise duty on iodine is being reduced from 10% to 6%.

Miscellaneous Items Full exemption from excise duty is being provided to food preparations containing fruits and vegetables falling under Chapter 20, which are prepared in a hotel, restaurant or a retail outlet, whether or not such food is consumed in such hotels/ restaurants/ retail outlets. Excise duty on parts of mobile phones, other than those cleared to a manufacturer of mobile phones, is being reduced from 10% to 2%, provided no Cenvat credit is taken. Excise duty is being reduced from 10% to 6% on matches manufactured by semi-mechanized units and processed food products of soya Exemption on intra ocular lenses being restored.

DUTY RATES There is no change in the peak rate of basic customs duty of 10%. However, the portion of Education Cess and Secondary and Higher Education Cess leviable on the CVD portion of customs duty is being exempted to avoid double levy of cess. The change is effective 17-3-2012. LEGISLATIVE AMENDMENTS Amendments to Customs Act, 1962 [Effective from the date of enactment of the Finance Bill, 2012] Insertion of Section 28AAA A new section 28AAA is being inserted to provide for recovery of duties, from the person who has obtained by means of

collusion or wilful mis-statement or suppression of facts duty credit scripts and other such instruments issued under the Foreign Trade (Development and Regulation) Act, 1992 and utilized by him for the purposes of the Act. The recovery is only to the extent of utilization and this action would be without prejudice to the action against the importer. The application is the proposed section is only against those instruments which are utilized after the current Finance Bill receives the assent of the President of India. Section 28BA is also being amended to make the provisions relating to provisional attachment of property applicable to the proposed Section 28AAA. Amendment to Section 104 and 104A and 138 Section 104 is being amended to provide that all offences under the Act shall be non-cognizable and bailable except an offence punishable with term of imprisonment of three years or more under section 135 notwithstanding anything contained in the Code of Criminal Procedure, 1973. Section 104A is being inserted to provide for the conditions for grant of bail in the case of offences punishable with a term of imprisonment of three years or more under section 135. It also mandates a prior authorization from the Central Government of a police officer to initiate investigation in cases under the Act. Section 138 dealing with summary trial of offences, is being amended to exclude offences under section 135 since such offences are now cognizable. Amendment to Section 122 Section 122 is being amended to enhance the monetary limits for adjudication of cases involving confiscation of goods and imposition of penalty from INR two lakh to five lakh for Deputy/ Assistant Commissioners and from INR 10,000 to 50,000 for Gazetted officer lower in rank to Assistant/ Deputy Commissioner. Amendment to Section 47 Section 47 is being amended to provide that the Central Government may notify the class or classes of importers who shall pay customs duty electronically in case the bill of entry has been returned for payment of duty before the commencement of Customs (Amendment) Act, 1991. Amendment to Section 153 Section 153 is being amended to enable service of summons/ orders/ notices through Customs approved courier service. Amendments to Customs Tariff Act, 1975 [Effective from the date of enactment of the Finance Bill, 2012, except where indicated] Amendment to Section 8C Section 8C empowers the Central Government to levy safeguard duty on imports from Peoples’ Republic of China. It

is being amended to allow the duty even if measures have been taken to adjust market disruption to domestic industry if the Central Government is of the opinion that such articles or goods imported into India are causing or threatening to cause market disruption. The amendment is brought in to align with the Transitional Product Specific Safeguard Mechanism under Chinese Accession Protocol signed with WTO in 2001. Amendments to Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 [Effective 17-3-2012] The Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 is being amended to allow the Eligibility Certificate to be obtained for a period not exceeding a year instead of consignment wise or quarterly and permitting re-export of unused/ rejected goods imported at concessional duty with the prior permission of the Commissioner if re-exported within six months from the date of importation at a value not less than the value of the imports. Amendments to Baggage Rules, 1998 [Effective 17-3-2012] The duty-free allowance under the Baggage Rules is being enhanced from INR 25000 to INR 35000 for adult passengers of Indian origin and from INR 12,000 to INR 15,000 for children up to 10 years of age. Amendments to Project Import Regulations, 1986 [Effective 17-3-2012] Presently, project import status is available to installation of Mechanized Handling Systems & Pallet Racking Systems in mandis or warehouses for food grains and sugar, with concessional rate of basic customs duty of 5% with full exemption from additional duty of customs (CVD) and special additional duty of customs (SAD). This exemption is being extended to systems installed for handling horticultural produce. Project imports status with 5% BCD is also being granted to the green houses set up for protected cultivation of horticulture and floriculture produce. Special Additional Duty (SAD) [Effective 17-3-2012] Notification Nos. 20/2006-Customs dated 1.3.2006 and 29/2010-Customs dated 27.2.2010 prescribing the effective rates of SAD have been superseded. A new condition has been inserted requiring the importer of specified goods to declare the VAT registration number and the State of destination where the goods would be sold for the first time

after import. This condition would apply to such goods imported on or after 01.05.2012. Credit Rules are also being amended effective from 01.04.2012 to permit transfer of unutilized credit of SAD lying in balance at the end of each quarter to other registered premises of the same manufacturer. Specific rate changes [Effective 17-3-2012] Automobiles Basic customs duty on Completely Built Units (CBUs) of large cars/ MUVs/ SUVs permitted for import without type approval (value exceeding US$40,000 and engine capacity exceeding 3000cc for petrol and 2500cc for diesel) is being increased from 60% to 75%.

Metals Basic customs duty on coating material for manufacture of electrical steel is being reduced from 10% to 5% subject to actual user condition. Basic customs duty on ammonium meta-vanadate used in the manufacture of ferro-vanadium is being reduced from 7.5% to 2.5%. Nickel oxide/ hydroxide and nickel ore/ concentrate are being fully exempted from basic customs duty. Exemption from SAD currently available to CRGO steel is being restricted to prime quality of such steel. Basic customs duty on flat rolled products (HR and CR) of non-alloy steel is being increased from 5% to 7.5%. Precious Metals Basic customs duty on standard gold bars and platinum bars is being increased from 2% to 4%. Basic customs duty on non-standard gold is being increased from 5% to 10%. Basic customs duty on gold ore/concentrate and ore bars for refining is being increased from 1% to 2%. Basic customs duty of 2% is being imposed on cut and polished colored gemstones. Capital Goods/Infrastructure Basic customs duty on capital goods, plant and equipment imported for setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants is being reduced from 7.5% to 2.5%. Full exemption from basic customs duty is being provided to initial setting up and substantial expansion of fertilizer projects. The exemption would be valid till 31.03.2015. Steam coal is being fully exempted from basic customs duty. CVD is also being reduced from 5% to 1% on such coal. This dispensation would be valid up to 31.3.2014. Natural gas/Liquefied Natural Gas imported for power generation by a power generation company is being fully exempted from basic customs duty. Full exemption from basic customs duty is being provided to uranium concentrate, sintered natural uranium dioxide, sintered uranium dioxide pellets for generation of nuclear power. Full exemption from basic customs duty, CVD and SAD is being extended to equipment imported for road construction projects awarded by Metropolitan Development

Authorities. Full exemption from basic customs duty and CVD at present available to tunnel boring machines for hydel and road projects is being extended to all infrastructure projects. The exemption shall also be available for parts required for assembly of such machines. At present, full exemption from basic customs duty and CVD is available to specified road construction equipment. This exemption is now being extended to tunnel excavation and specified lining equipment also. Full exemption from basic customs duty is being extended to coal mining projects. At present machinery and instruments for surveying and prospecting of mines attract basic customs duty of 10% and 7.5% respectively. These rates are being reduced and unified at 2.5%. Basic customs duty on Railway safety (Train Protection and Warning System) equipment and railway track laying machines is being reduced from 10% to 7.5% Aircrafts & Ships Full exemption from basic customs duty and CVD is being provided to new and retreaded aircraft tyres. Full exemption from basic customs duty and CVD is being extended to parts of aircraft and testing equipment for maintenance and repair of aircraft imported by third-party Maintenance, Repair and Overhaul (MRO) units. CVD on foreign-going vessels on conversion for coastal trade shall now be charged on proportionate basis depending on the period for which it operates as a coastal vessel in India. The value shall be taken as the lease value when the import is against a lease agreement/ contract. Environment Protection Equipments for setting up of solar thermal projects are being fully exempted from SAD. Concessional rate of 5% basic customs duty is being extended to raw materials for the manufacture of intermediates, parts and sub-parts of blades for rotors for wind energy generators. Full exemption from basic customs duty is being extended to tri band phosphor for use in the manufacture of Compact Fluorescent Lamps. At present, full exemption from basic customs duty and SAD along with 6% CVD is available to specified parts for the manufacture of hybrid vehicles. This dispensation is now being extended to some additional parts for the manufacture of such vehicles. The customs duty regime of Nil basic customs duty along with Nil SAD and 6% CVD is being extended to lithium ion batteries for the manufacture of battery packs for supply to electric or hybrid vehicle manufacturers. Health Basic customs duty is being reduced from 5% to 2.5% on iodine. Basic customs duty is being reduced on isolated soya protein and soya protein concentrate from 15% and 30% respectively to 10%. Basic customs duty is being reduced from 10% to 5% on probiotics. Customs duty on six specified life saving drugs/vaccines and their bulk drugs is being reduced

from 10% to 5% with Nil CVD (by way of excise duty exemption). A concessional import duty regime of 2.5% basic customs duty with 6% CVD and Nil SAD is being prescribed for specified raw materials for the manufacture of syringes, needles, catheters, cannulae subject to actual user condition. A concessional import duty regime of 2.5% basic customs duty with 6% CVD and Nil SAD is also being extended to parts and components for the manufacture of blood pressure monitors and blood glucose monitoring systems (Gluco-meters). Full exemption from basic customs duty and CVD is being extended on steel tube & wire, cobalt chromium tube, Hayness Alloy-25 and polypropylene mesh for the manufacture of coronary stents/coronary stent systems and artificial heart valves subject to actual user condition. Textiles Basic customs duty on shuttleless looms, along with parts and components for their manufacture, is being reduced from 5% to Nil. The exemption would apply only to new machinery. Basic customs duty on automatic silk-reeling and processing machinery and raw silk testing equipments is being reduced from 5% to Nil. The exemption would apply only to new machinery. The concessional rate of basic customs duty of 5% is being restricted only to new textiles machinery. Consequently, second hand machinery would now attract basic customs duty of 7.5%. Basic customs duty on wool waste and wool tops is being reduced from 10% and 15% respectively to 5%. Basic customs duty on titanium dioxide is being reduced from 10% to 7.5%. Full exemption from basic customs duty is being extended to aramid yarn and fabric when used in the manufacture of bullet proof helmets for supply to defence and police. Electronics/ Hardware Full exemption from basic customs duty is being provided to LCD and LED TV panels of 20 inches and above. LEDs required for the manufacture of LED lamps are also being exempted from SAD. The scope of full exemption from basic customs duty, CVD and SAD presently available to parts, components and accessories for manufacture of mobile handsets including cellular phones is being amplified to include parts of memory cards. The validity of the exemption from SAD is also being extended from 31.03.2012 to 31.03.2013. Full exemption from basic customs duty currently available to copper, brass and phosphor bronze strips and similar items imported for the manufacture of connectors is being withdrawn. Full exemption from basic customs duty currently available to poly-laminated aluminium tape and poly-laminated steel tape presently exempt if imported for the manufacture of cables and conductors for telecom use is also being withdrawn.

Paper Waste paper is being fully exempted from basic customs duty.

Agriculture / Agro Processing/Plantation Sector Basic customs duty on sugarcane planter, root or tuber crop harvesting machine and rotary tiller & weeder, parts & components for their manufacture is being reduced from 7.5% to 2.5%. At present, project import status is available to installation of Mechanized Handling Systems & Pallet Racking Systems in mandis or warehouses for food grains and sugar, with concessional rate of basic customs duty of 5%. Such systems are also exempt from additional duty of customs (CVD) and special additional duty of customs (SAD). The same dispensation [i.e. 5% BCD + Nil CVD + Nil SAD] is also being extended to such systems for horticultural produce. Project imports status is being granted to the green houses set up for protected cultivation of horticulture and floriculture produce. As such, these projects would attract concessional rate of basic customs duty of 5%. Basic customs duty is being reduced from 10%/7.5% to 5% on specified coffee plantation and processing machinery. The concessional duty would be available up to 31.3.2014. Basic customs duty is being reduced from 10% to 5% on coffee brewing and vending machines (commercial type). The concessional duty would be available up to 31.3.2014. Basic customs duty is also being reduced to 2.5% on parts required for manufacture of such coffee vending and brewing machines. Basic customs duty is being reduced on specified soluble fertilizers and liquid fertilizers, other than urea, from 7.5% to 5% and from 5% to 2.5% respectively. Miscellaneous A basic customs duty of 10% is being imposed on Digital Still Cameras of certain specifications. Basic customs duty on boric acid is being increased from 5% to 7.5%. Basic customs duty on boiler quality tubes and pipes for the manufacture of boilers is being reduced from 10% to 7.5% subject to end use condition. A concessional customs duty dispensation of 5% basic customs duty + 6% CVD+ Nil SAD is being prescribed for imports of hydrophilic non-woven, hydrophobic non-woven and super absorbent polymer for manufacture of adult diapers subject to actual user condition. Brass scrap, timber logs and dredgers are being fully exempted from SAD.

TAX RATE The service tax rate will be increased back to the 2009 pre-stimulus rate of 12% (effective 12.36% including EC and SHEC), with effect from 1-4-2012.

LEGISLATIVE AMENDMENTS IN CURRENT SCHEME OF TAXATION Amendments to Finance Act, 1994 [Effective from the date of enactment of the Finance Bill, 2012] Date for determining applicable tax rate, value and exchange rate A new section (section 67A) provides that the applicable service tax rate, value of service and exchange rate (if applicable) will be the rate applicable at the time when the service is provided or agreed to be provided. A similar provision currently included in the Service Tax Rules in relation to the tax rate will be deleted. Special audit A new section (section 72A) will provide for the Commissioner of Central Excise to direct a person to get his accounts audited by a chartered or cost accountant under certain circumstances. Currently, section 83, applies the provisions of section 14AA of the Central Excise Act, 1944 in relation to availment and utilization of credits. Longer period for issuance of show cause notice By an amendment to section 73, the period for issuance of a show cause notice in normal situations will be extended from 1 year to 18 months. Also, follow up demands will be made through statements rather than separate notices. Further, the facilitation of suo moto payment of service tax (without penalty) pre empting the issuance of a show cause notice will also be available in cases where the shortfall is discovered in the course of an audit, investigation or verification. No penalty for default in payment of service tax in relation to Renting Of Immovable Property Service Through a new clause to section 80 relating to non-imposition of penalty, penalty will be waived for service providers who pay the service tax due (as on 6-3-2012) with interest within 6 months from the date on which the Finance Bill, 2012 receives Presidential assent. Settlement of cases to be available for service tax matters The option to resolve a proceeding through settlement before the Settlement Commission will be available to service tax assesses as it is under the central excise provisions, by an amendment to section 83 which applies certain provisions of the Central Excise Act, 1944 to service tax.

Revision application before Central Government in place of appeal to CESTAT By an amendment to section 83, the revision process under section 35EE of the Central Excise Act, 1944 will apply to service tax to the extent applicable. Shorter period for assessee appeal to Commissioner (Appeals); longer period for Department appeal to CESTAT By an amendment to section 85, in line with the provisions under the Central Excise Act, 1944, an appeal to the Commissioner (Appeals) will have to be filed within 2 months (as against the present 3 months). The Department, on the other will be given 4 months to file an appeal before the CESTAT (as against the present 3 months). Relaxation in applicability of prosecution provision The present stipulation in section 89 which provides for a potential prosecution for non-issuance of an invoice will be replaced with the offence of knowingly evading payment of service tax. Rule making powers of the Central Government The Central Government will also be empowered under section 94 to make rules in relation to compounding of offences, and to provide for the settlement of cases. Retrospective application of rule 6(6A) of CENVAT Credit Rules in relation to services provided to SEZs The aforesaid rule is being retrospective effect from 10-2-2006 whereby the CENVAT restrictions under rule 6 will not apply in respect of services provided to SEZs notwithstanding that such services are defined as exempted services. Amendments to Service Tax Rules [Effective 1-4-2012] Extension in time allowed for raising of invoice Assesses will be allowed 30 days from the date of provision of service or receipt of payment, as applicable, to raise an invoice, as opposed to the present 14 days. For a service provider who is a bank or financial institution, the time allowed will be 45 days. Pursuant to representations from telecom and credit card businesses who often receive small payments in excess of the invoiced amounts, by a proviso to rule 4A(1), payments up to Rs. 1,000 in excess of the invoiced amount will not need to be separately invoiced for. Due date in relation to export of services A proviso has been inserted in rule 6(1) to provide that the usual due dates for payment of service tax will not apply in

respect of cases where payment is received within the period specified by RBI, including any extended period. Service tax on receipt basis for individuals and partnership firms earning less than Rs. 50 lakh/year By a proviso to rule 6(1), individuals and partnership firms whose aggregate value of services provided in the previous financial year did not exceed Rs. 50 lakh will have the option to pay service tax on receipt basis (instead of accrual basis) in the current financial year in respect of services up to Rs. 50 lakh. Monetary limit for adjustment of service tax removed Excess service tax paid, on account of reasons not involving interpretation of law, taxability, classification, valuation or the applicability of an exemption will be adjustable without limit (as opposed to the Rs. 2 lakh ceiling earlier). Changes in presumptive rates of tax The optional presumptive rate of tax for a life insurance service provider will be 3% of the premium in the first year and 1.5% in subsequent years, up from the 1.5% currently levied. Corresponding to the increase in the rate of service tax from 10% to 12%, the presumptive rates of tax for purchase and sale of foreign currency and promotion, marketing and organizing of lottery will be revised. Common registration form and return for central and service tax A common simplified registration form, and common one page return has been proposed. Amendments to Point of Taxation Rules [Effective 1-4-2012] Date of payment defined A new rule 2A will define the date of payment as being the earlier of the date on which the receipt of the payment is entered in the books, and the date of credit in the bank account. Per a proviso, the date of payment shall be the date of credit in the bank account in the event that there is a rate change and the credit in the bank account is after 4 days from the date of the rate change. The TRU circular explains that for service providers whose point of taxation is determined by the date of receipt, the effect of this rule is that a delay in depositing receipts (after 31-3-2012) could result in the higher tax rate applying. Change in point of taxation pursuant to amendment in Service Tax Rules Parallel with the extension in time allowed for raising an invoice, the point of taxation will be the invoice date so long as

the invoice is issued within the period prescribed in rule 4A of the Service Tax Rules. Point of taxation in respect of payments up to Rs.1,000 in excess of invoice amount The point of taxation in respect of the excess amount shall be the date of raising the (subsequent) invoice, unless the service provider elects otherwise Payment of tax on services taxed for the first time Rule 5 will be substituted, and the new rule provides that in respect of service taxed for the first time, no tax will be payable only if the payment has been received before the service became taxable and the invoice is issued within 14 days of the date from which the service becomes taxable. Special provision for continuous service deleted The point of taxation for continuous services will be merged into the principal rule (rule 3). Per rule 3, the date of completion in relation to a continuous service will be the date of completion of each such event that would trigger the making of a payment, as specified in the contract. Benefit of point of taxation being linked to receipt for individuals and partnership firms providing specified services discontinued The dispensation under rule 7(c) for individuals and partnership firms providing Chartered Accountant Services, Cost Accountant Services, Company Secretary Services, Architect Services, Interior Decorator Services, Legal Services and Scientific And Technical Consultancy Services that their point of taxation would be the date of receipt of payment will no longer apply. This nature of relaxation will only be available under the revised 50 lakh based concession under the Service Tax Rules. Residual rule where point of taxation cannot be determined Per new rule 8A, where the point of taxation cannot be determined on the basis of the date of invoice or date of payment, the relevant officer will make a best judgement assessment based on available accounts, documents and other evidence. Other Amendments [Effective 1-4-2012] Amendment to Works Contract (Composition Scheme for Payment of Service Tax) Rules Corresponding to the increase in the rate of service tax from 10% to 12%, the composition rate will increase to 4.8% with effect from 1-4-2012, from the 4% currently.

Taxation of Transportation Of Passengers By Air Service The present dual structure for passenger transportation service, i.e. a specific amount for economy class travel and an ad valorem amount for higher class travel will be replaced with a tax on 40% of the value charged irrespective of class of travel. LEGISLATIVE AMENDMENTS RELATING TO TAXATION UNDER NEGATIVE LIST Amendments to Finance Act, 1994 [Effective from a date to be notified by the Central Government after the enactment of the Finance Bill, 2012] New scheme of taxation In November 2011, the CBEC had circulated a Revised Concept Paper on Taxation of Services based on Negative List, further to the first paper that had been released in August 2011. The Revised Paper suggested that the switchover to taxing services on a comprehensive basis with a list of exclusions would predate the introduction of GST, which would pave the way for the implementation of GST. The provisions of the Finance Bill and the notifications issued by the Central Government are based on and build on the ideas in the Revised Paper. This is reflected, inter alia, in the definition of services – defined for the first time, the exclusions of transactions in goods, luxuries and entertainments – apparently in view of the Constitutional division of taxing powers between the Centre and the States, and the inclusion of “declared services” under the ambit of service tax. Unfortunately, some transactions that are taxed to VAT as deemed sales (on the entire consideration) will continue to attract service tax. The switchover will requires several attendant changes to the attendant rules, some of which have already been notified. New charging section A new charging section (section 66B) will bring to tax all services other than those specified in the negative list, which are provided in the taxable territory. Service ‘Service’ has been defined (in the new definition section 65B) to mean “any activity carried out by a person for another for consideration”. The definition specifically includes “declared services”, and excludes (i) a transfer of title in goods or immovable property and a transaction in money or actionable claim, (ii) services under a contract of employment, and (iii) fees taken by a court or tribunal. An unincorporated association or body of persons and a member thereof, and two

establishments of a person, one inside the taxable territory and one outside, are will be considered to be distinct persons. The “declared services” are a set of 9 types of transactions (set out in section 66E) that have been legislated as being service transactions. The TRU circular seeks to clarify that these services “are amply covered by the definition of service but have been declared with a view to remove any ambiguity for the purpose of uniform application of law across the country”. An analysis of the declared services is on p.23. Negative list The negative list (set out in section 66D) comprises 19 services that are outside the ambit of the levy of service tax. An analysis of the items in the proposed negative list is on p.24. Concept of taxable territory Per the charging section, only services provided or deemed to be provided in the taxable territory, i.e. India (including her territorial waters and defined maritime zones, and installations etc. therein, seabed and subsoil, and airspace - except the state of Jammu & Kashmir) will be exigible to service tax. Per the provisions of section 66C, the Central Government will notify rules to determine the place of provision of service (to be called the Place of Provision of Service Rules, 2012). The TRU circular contains a copy of the draft rules, an analysis of which is on p.27. With the linkage of taxability to the place of provision of a service/ deemed place of provision under the new rules, the concept of export of service per the Export of Services Rules, 2005 and the trigger for the reverse charge on cross-border services under the Taxation of Services (Provided from outside India and Received in India) Rules, 2006 will no longer apply. “Exports” and “imports” of service will be considered on the basis of the deemed place of provision of the service. Classification of services Given that different services will no longer be brought to tax under specific taxing entries, coupled with the fact of a negative list and a list of exemptions, classification of services will now be based on description. The new section on classification (section 66F) provides that unless specified, reference to a “main” service shall not include a service used for providing the main service. Also, where falling under a particular description would qualify the service for differential treatment for any purpose, a specific description will be preferred over a general description. The tax treatment of a “bundled service” (a situation in which the provision of a service is combined with elements of other services) will depend upon whether such bundling is in the ordinary course of business – if yes, the service will be treated as being the

single service which gives the bundle its essential character; if no, the service will be treated as being the single service which would result in the highest incidence of service tax. Exemptions Given the comprehensive nature of the levy, the current exemptions that are proposed to be continued have been notified. Per notification 12/2012-Service Tax, 34 identified services will be exempt from service tax. A listing of the exempted services is on p.27. Abatements Similarly, the current abatements to arrive at the tax base, that are proposed to be continued, have been notified. Per notification 13/2012-Service Tax, in respect of 13 identified services, the tax base will be determined by applying an abatement on the gross amount charged for the service. A tabulation of the abatements is on p.30. Service recipient to be liable for tax in certain cases Through a proviso to section 68(2) - which section provided for the Central Government to notify services in respect of which the service tax is payable by a person other than the service provider - the Central Government can notify services in respect of which both service provider and service recipient will be considered persons liable to pay service tax. Presently, in respect of 3 services, viz. hiring of a motor vehicle, manpower supply, and works contract service, part payment of service tax will have to be made by the service recipient, if the service provider is an individual or firm or LLP and the service recipient is a body corporate. The balance tax will be payable by the service provider. This is somewhat akin to the concept of a TDS. A comprehensive listing of the notified services in respect of which the service tax is payable by a person other than the service provider, and those in respect of which both service provider and service recipient will be considered persons liable to pay service tax, per notification 15/2012-Service Tax, is on p.32. Cessation of applicability of current provisions Simultaneous to the activation of the new scheme, the current sections 65 (on definitions), 65A (on classification of services), 66 (charging section), and 66A (reverse charge) will cease to apply.

Amendment to Service Tax (Determination of Value) Rules [Effective from a date to be notified by the Central Government after the enactment of the Finance Bill, 2012] Valuation of works contract Rule 2A relating to determining the value of taxable service involved in the execution of a works contract will be substituted as follows. (i) The value shall be equivalent to the gross amount charged less the value of goods involved in the execution, the property in which is transferred (excluding VAT/sales tax) and including certain service related amounts – if the VAT/sales tax liability is discharged on the basis of actual value of property in goods, such value shall be applied. (ii) Where the value has not been so determined, it shall be determined as follows, i.e. at 40%of the total contract value in respect of original works (new constructions and additions and alterations to abandoned/damaged structures) where the gross value does not include the value of the land, and 25% of the total contract value where the gross value does include the value of the land; and at 60% of the total contract value in respect of other works contracts including completion and finishing services. The total contract value will include the value of any goods and services supplied free of cost (which will be determined on the basis of fair market value where not ascertainable). CENVAT credit of the goods, property in which is transferred, will not be available. Valuation of service involved in supply of food and drink Per new rule 2C, the determination of value of taxable service involved in supply of food and drink in a restaurant and in outdoor catering will be at 40% and 60% of the total amount, respectively. Any goods classifiable under chapter 1 to 22 of the Central Excise Tariff shall not be considered as inputs under the CENVAT Credit Rules, and CENVAT credit thereon, will not be available. Inclusions in value In rule 6 which specifies the inclusion and exclusion of certain items, any amount realized as demurrage for the provision of a service beyond the period originally contracted will be includible, whereas interest on deposits and delayed payment of consideration, and accidental damages due to unforeseen actions not relatable to the provision of service will be excludible. Other Amendments [Effective from a date to be notified by the Central Government after the enactment of the Finance Bill, 2012] Exemption from service tax equivalent to R&D Cess On the switchover to taxation under the negative list, an exemption from service tax will be available to the extent of R&D Cess (as available currently in respect of certain taxable

services), provided that the R&D Cess is paid within 6 months, and the records evidence the linkage between the invoice of the vendor and the R&D Cess payment challan.

Declared Services - Analysis Set out below is a tabular analysis of the declared services. As implicitly suggested in the TRU circular, there may have been some doubts as to the taxability of these transactions that have been declared to be services. Several of these relate to taxing entries that have been the subject matter of challenge on the ground that they encroach upon the State List, and the courts have held in favour of the Revenue given the wide sweep of residual entry 97 of the Central List. The Revised Paper had indicated that even the transactions that are taxed to VAT as deemed sales under article 366(29A) would be taxed to service tax (except on the value of goods), the fact remains that pending the introduction of GST, situations of double taxation will arise. No. Declared service Analysis

1 Renting of immovable property

The question of the Constitutional validity of the chargeability of rent under the current taxing entry of Renting Of Immovable Property Service to service tax is presently pending before the Supreme Court. However, going by the present trend of decisions, the Supreme Court has been reluctant to strike down the charge of service tax under entry 97 of List I of the Seventh Schedule.

2 Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority

A similar question on Constitutional validity in respect of the current taxing entries of Construction Of Complex Service and Commercial Or Industrial Construction Service was raised before several High Courts, which have upheld the charge of service tax.

3 Temporary transfer or permitting the use or enjoyment of any intellectual property right

Such a service (other than in respect of copyright) is currently chargeable to service tax under the taxing entry of Intellectual Property Right Service. The inclusion of this service as a declared service will continue the present double-taxation of such transactions, given that “transfer of right to use” goods including intellectual property rights is chargeable to VAT as a deemed sale.

4 Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software

Such a service is currently chargeable to service tax under the taxing entry of Information Technology Software Service. Two other activities set out under this taxing entry, viz. providing the right to use software for commercial exploitation, and providing the right to use software supplied electronically have not been included within the declared service definition. However, in view of the declared service of “transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods” (see below), it appears that licensing of software will continue to be chargeable to service tax. Given this, the reasoning in the TRU circular that pre-packaged software is goods and therefore not covered under this entry requires further analysis (give the fact of the current exemption from service tax view of the charge to central excise duty/customs duty), and seems to leave unanswered the situation of electronic transfers.

5 Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act

For the first time, given that any “activity” for consideration will be taxed as a service, even arrangements such as non-compete agreements will be exigible to service tax. The TRU circular clarifies in this regard that the term ‘activity’ could be active or passive and include forbearance to act.

6 Transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods

Such a service is currently chargeable to service tax under the taxing entry of Supply of Tangible Goods Service (in respect of tangible goods) - this entry brought to tax transactions in which there was a right to use provided without transfer of possession and effective control and which were therefore not exigible to VAT, as held by the Supreme Court in State of Andhra Pradesh and Anr. V Rashtriya Ispat Nigam Ltd. [[2002] 126 STC 114 (SC)]. The absence of this qualification in the declared service will mean that under the negative list, such transactions in respect of intangibles will also attract service tax (also see comment above regarding software licences).

7 Activities in relation to delivery of Such a service is currently chargeable to service tax under the taxing entry of Banking and

goods on hire purchase or any system of payment by instalments

Other Financial Services, and is one of the transactions which the states tax to VAT as a deemed sale, and which the Centre is taxing to service tax on the basis that there is an element of service therein. As at present, the service tax is to apply on 10% of the amount. From the consumer’s point of view, however, there is double taxation, given that the states levy VAT on the entire consideration.

8 Service portion in the execution of a works contract

Such a service is currently chargeable to service tax under the taxing entry of Works Contract Service, and is another of the transactions which the states tax to VAT as a deemed sale, and which the Centre is taxing to service tax on the basis that there is an element of service therein. The saving grace is that the VAT and service tax will apply on mutually exclusive tax bases out of the total consideration.

9 Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.

Such a service is currently chargeable to service tax under the taxing entry of Restaurant Service, and is yet another of the transactions which the states tax to VAT as a deemed sale, and which the Centre is taxing to service tax on the basis that there is an element of service therein. Here again, whereas there is an abatement to arrive at the tax base for service tax, from the consumer’s point of view, however, there is double taxation, given that the states levy VAT on the entire consideration.

Negative List Services - Analysis Set out below is the tabular analysis of the services in the negative list. Most of the service sectors set out in the Revised Paper, viz. (A) services provided by specified persons, (B) services relating to social welfare and public utilities, (C) financial services, (D) transport services, and (E) education have been kept in the negative list. Significantly, some of the other services in the negative list relate to matters falling under the States’ taxing powers under the Constitution. Some of the service sectors considered for inclusion in the negative list in the Revised Paper, viz. construction and real estate, healthcare and others relating to specific transactions have now been excluded from the ambit of service tax through an exemption notification. No. Negative List service Analysis

1 Services by Government or a local authority excluding the following services: (i) Services by the Department

of Posts by way of speed post, express parcel post, life insurance and agency services

(ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport

(iii) Transport of goods or passengers

(iv) Support services, other than services covered under clauses (i) to (iii) above, provided to business entities.

Many services provided in course of sovereign or statutory function by government or local authorities are currently exempt.

2 Services by RBI Services provided by the RBI are currently exempt.

3 Services by a foreign diplomatic mission located in India

Services provided by foreign diplomatic missions are currently exempt.

4 Services relating to agriculture by way of: (i) Agricultural operations

directly related to production

Agriculture is a State subject. In respect of such transactions, the legislative competence of Parliament with reference to Entry 97 of List I of Seventh Schedule would have permitted a charge of service tax. These services appear to have been kept in the negative list in view of the special status of agriculture.

of any agricultural produce including

(ii) Cultivation, harvesting, threshing, plant protection or seed testing

(iii) Supply of farm labour (iv) Processes carried out at an

agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market

(v) Renting or leasing of agro machinery or vacant land with or without a structure incidental to its use

(vi) Loading, unloading, packing, storage or warehousing of agricultural produce

(vii) Agricultural extension services

(viii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce

Services relating to transportation and storage in relation to agriculture operations and produce are currently exempt.

5 Trading of goods Trading of goods is currently defined as an exempted service under the CENVAT Credit Rules, 2004.

6 Any process amounting to manufacture or production of goods

The exclusion relating to manufacture is in line with the fact that such processes attract a levy of Central or State excise duty.

7 Selling of space or time slots for advertisements other than advertisements broadcast by radio or television

The State Legislatures have been bestowed with the exclusive taxing power in relation to the matters in the State List (including those relating to taxes) which precludes the Centre from taxing such matters. The intent in placing these entries in the negative list could possibly be derivative of this. Further, the issue of the division of taxing powers between the Centre and the States vis-a-vis sale and service transactions has been settled by the Supreme Court in Bharat Sanchar Nigam Limited V UOI [2006 (2) STR 161 (SC)]. It may be noted, however, that in cases of other overlaps, the Centre has successfully adopted the argument (as was taken before the Delhi High Court in Bharti Telemedia Ltd, Tata Sky International Travel House Ltd - [(2011) 33 STT 71, (2009) 25 VST 653 (Delhi)] in a context of entertainment tax and service tax that the strands could easily be separated by employing the aspect theory.

8 Providing access to a road or a bridge on payment of toll charges

Please refer to out comments in S. No. 7 above. As recently clarified, toll charges are currently not exigible to service tax.

9 Betting, gambling or lottery Please refer to out comments in S. No. 7 above.

10 Admission to entertainment events or amusement facilities

Please refer to out comments in S. No. 7 above.

11 Transmission or distribution of electricity by an electricity transmission or distribution utility

Electricity is referred to in the Concurrent List. In the absence of a specific taxing power, these subjects can be taxed by the Centre under Entry 97 of List I of the Seventh Schedule. Tranmission and distribution services are currently exempt.

12 Pre-school education and education up to higher secondary school or equivalent or education as a part of a curriculum for obtaining a qualification recognised by any law or education as a part of an approved vocational education course

Please refer to out comments in S. No. 11 above.

13 Renting of residential dwelling for use as residence

Please refer to out comments in S. No. 11 above.

14 (i) Extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount

(ii) Inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers

Interest on loans is currently excluded under the valuation provisions, whereas forex transactions between banks are currently exempt.

15 Transportation of passengers, with or without accompanied belongings, by: (i) Stage carriage (ii) Railways in a class other than

first class; or airconditioned coach

(iii) Metro, monorail or tramway (iv) Inland waterways (v) Public transport, other than

predominantly for tourism purpose, in a vessel of less than fifteen tonne net

(vi) Metered cabs, radio taxis or auto rickshaws

These services appear to have been kept in the negative list in view of socio-economic considerations.

16 Transportation of goods: (i) By road except by goods

transportation agency or courier agency

(ii) By an aircraft or a vessel from a place outside India to the first customs station of landing in India

(iii) By inland waterways

These services appear to have been kept in the negative list in view of socio-economic considerations.

17 Funeral, burial, crematorium or -

mortuary services including transportation of the deceased

Draft Place of Provision of Services Rules, 2012 - Analysis Set out below is the tabular analysis of the Draft Place of Provision of Services Rules, 2012 (POP Rules). The POP Rules, founded on the principle of taxing the service in the jurisdiction of consumption, will effectively replace the Export of Services, Rules 2005 and Taxation of Services (Provided from outside India and received in India) Rules, 2006. The POP Rules provide 10 different rules to determine the place of provision of service. In a situation where a particular transaction attracts more than one rule, the provision of service would be determined in accordance with the rule that occurs later among the rules that are applicable. The Central Government has also been empowered to notify services or circumstances in which the place of provision of service shall be determined based on the effective use and enjoyment of the service. Although these rules are primarily meant for cross border services, the rules may be relevant even for determining services that are wholly consumed within a SEZ.

No. Rule Place of Provision of Service

1. Generally POP to be the location of the service recipient and in case his location is not available, POP shall be the location of the service provider

2. Services based on performance POP to be the place where the services are actually performed. However, in case the services are provided from a remote location by electronic means, POP shall be the location of goods at the time of provision of service

3. Services in relation to immovable property

POP shall be the location or the intended location of the immovable property

4. Event services POP shall be the location where the event is held

5. Where services referred in 2,3,4 at provided in multiple locations

POP shall be the location where the greatest portion of service is provided

6. Where provider and recipient are located in taxable territory

POP shall be the location of the receiver

7. Where POP shall be the location of the provider

- Services provided by banking company or financial institution or NBFCs to account holders

- Telecommunication services provided to subscribers - Online information and database access or retrieval services - Intermediary services - Hiring of means of transport for a period up to a month

8. Goods transportation services (except by way of mail or courier)

POP shall be the place of destination of goods. However, in case of services of a goods transportation agency, POP shall be the location of the person liable to pay tax

9. Passenger transportation services POP shall be the location where the passenger embarks on the conveyance of a continuous journey

10. Services provided on-board a conveyance

POP shall be the first scheduled point of departure of that conveyance for the journey

List Of Exemptions From Service Tax

1. Services provided to the United Nations or a specified international organization 2. Health care services 3. Services by a veterinary clinic 4. Services by an trust or institution registered under section 12AA of the Income tax Act, 1961 by way of charitable

activities 5. Renting of precincts of a religious place meant for general public, or conducting of any religious ceremony 6. Services provided to any person other than a business entity by:

(a) an individual as an advocate (b) a person represented on and as arbitral tribunals

7. Technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by an approved clinical research organisation

8. Training or coaching in recreational activities relating to arts, culture or sports 9. Services provided:

(a) to an educational institution by way of catering under any centrally assisted mid – day meals scheme sponsored by Government

(b) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of transportation of students or staff

(c) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of services in relation to admission to such education

10. Services provided to a recognised sports body by an individual as a player, referee, umpire, coach or manager for participation in a tournament or championship organized by a recognized sports body, or by another recognised sports body

11. Services by way of sponsorship of tournaments or championships organized: (a) by a national sports federation, or its affiliated federations, where the participating teams or individuals represent

any district, state or zone (b) by Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All India

Sports Council for the Deaf, Paralympic Committee of India, Special Olympics Bharat (c) by Central Civil Services Cultural and Sports Board (d) as part of national games, by Indian Olympic Association (e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme

12. Services provided to the Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of:–

(a) a civil structure or any other original works meant predominantly for a non-industrial or non-commercial use (b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or

antiquity (c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural

establishment (d) canal, dam or other irrigation works (e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii)sewerage treatment or disposal (f) a residential complex predominantly meant for self-use or the use of their employees or members of Parliament,

State Legislatures etc., persons holding Constitutional posts, and certain officers of Central and State Government bodies.

13. Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of: (a) road, bridge, tunnel, or terminal for road transportation for use by general public (b) building owned by trust or institution registered under section 12 AA of the Income tax Act, 1961 and meant

predominantly for religious use by general public (c) pollution control or effluent treatment plant, except located as a part of a factory (d) electric crematorium

14. Services by way of erection or construction of original works pertaining to:- (a) airport, port or railways (b) single residential unit otherwise as a part of a residential complex (c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by

competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India

(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes (e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as

food stuff excluding alcoholic beverages

15. Temporary transfer or permitting the use or enjoyment of a copyright covered under clause (a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957, relating to original literary, dramatic, musical, artistic works or cinematograph films

16. Services by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassador

17. Collecting or providing news by an independent journalist, Press Trust of India or United News of India 18. Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging

purposes, having declared tariff of a room below one thousand rupees per day or equivalent 19. Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those

having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a licence to serve alcoholic beverages

20. Transportation by rail or a vessel from one port in India to another of the following goods: (a) petroleum and petroleum products falling under Chapter heading 2710 and 2711 of the First Schedule to the

Central Excise Tariff Act, 1985 (b) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap (c) defence or military equipments (d) postal mail, mail bags or household effects (e) newspaper or magazines registered with Registrar of Newspapers (f) railway equipments or materials (g) agricultural produce (h) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic

beverages (i) chemical fertilizer and oilcakes

21. Services provided by a goods transport agency by way of transportation of: (a) fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage (b) goods where gross amount charged on a consignment transported in a single goods carriage does not exceed

one thousand five hundred rupees (c) 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 22. Giving on hire:-

(a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers (b) to a goods transport agency, a means of transportation of goods

23. Transport of passengers, with or without accompanied belongings, by: (a) air, embarking or terminating in an airport located in the state of Arunachal Pradesh, Assam, Manipur,

Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Baghdogra located in West Bengal (b) a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire

24. Motor vehicle parking to general public excluding leasing of space to an entity for providing such parking facility 25. Services provided to the Government or a local authority by way of:

(a) repair of a ship, boat or vessel (b) effluents and sewerage treatment (c) waste collection or disposal (d) storage, treatment or testing of water for drinking purposes (e) transport of water by pipeline or conduit for drinking purposes

26. Services of general insurance business provided under certain prescribed schemes 27. Services provided by an incubatee up to a total business turnover of fifty lakh rupees in a financial year subject to the

following conditions, namely:

(a) the total business turnover had not exceeded fifty lakh rupees during the preceding financial year, and (b) a period of three years has not lapsed from the date of entering into an agreement as an incubatee

28. Service by an unincorporated body or an entity registered as a society to own members by way of reimbursement of charges or share of contribution:

(a) as a trade union

(b) for the provision of exempt services by the entity to third persons (c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third

person for the common use of its members in a housing society or a residential complex 29. Services by the following persons in respective capacities:

(a) a sub-broker or an authorised person to a stock broker (b) an authorised person to a member of a commodity exchange (c) a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of

mutual fund (d) a selling or marketing agent of lottery tickets to a distributer or a selling agent (e) a selling agent or a distributer of SIM cards or recharge coupon vouchers (f) a business facilitator or a business correspondent to a banking company or an insurance company in a rural

area 30. Carrying out an intermediate production process as job work in relation to:

(a) agriculture, printing or textile processing (b) cut and polished diamonds and gemstones, or plain and studded jewellery of gold and other precious metals,

falling under Chapter 71 of the Central Excise Tariff Act ,1985 (c) any goods on which appropriate duty is payable by the principal manufacturer (d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray

painting or auto black, during the course of manufacture of parts of cycles or sewing machines up to an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year

31. Services by an organiser to any person in respect of a business exhibition held outside India 32. Services by way of making telephone calls from:

(a) departmentally run public telephones (b) guaranteed public telephones operating only for local calls (c) free telephone at airport and hospitals where no bills are being issued

33. Services by way of slaughtering of bovine animals 34. Services received from a service provider located in a non- taxable territory by:

(a) the Government, a local authority or an individual in relation to any purpose other than industry, business or commerce

(b) an trust or institution registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities.

Abatements No. Service Post Abatement Percentage with conditions

1. Financial leasing services including equipment leasing and hire purchase

10% Consideration received for the purpose of computing the gross amount charged is an amount, forming or representing as interest, i.e. the difference between the installment paid towards repayment of the lease amount and the principal amount contained in such installment paid; The exemption shall not apply to an amount, other than an amount forming or representing as interest, charged by the service provider such as lease management fee, processing fee, documentation charges and administrative fee.

2. Transport of goods by rail 30%

3. Transport of passengers by rail with or without accompanies belongings

30%

4. Supply of food or any other article of human consumption or any

70%

drink in a premises including hotel, convention centre, club, pandal, shamiana or any other place specially arranged for organising a function

Provided that no CENVAT Credit on any goods classifiable under chapter 1 to 22 of the Central Excise Tariff Act, 1985 has been taken Consideration received for the purpose of computing the gross amount charged is the sum total of the gross amount and the value of all goods, excluding the value added tax, if any, levied on goods or services supplied free of cost for use in or in relation to the supply of food or any other article of human consumption or any drink, under the same contract or any other

contract: Where the value of goods or services supplied free of cost is not ascertainable, the

same shall be determined on the basis of the fair market value of the goods or services 5. Transport of passengers by air,

with or without accompanied belongings

40% Provided that no CENVAT credit on inputs and capital goods, used for providing the taxable service, has been taken

6. Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.

60% Provided that no CENVAT credit on inputs and capital goods, used for providing the taxable service, has been taken

7. Transport of goods by road by Goods Transport Agency

25% Provided that no CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has been taken

8. Services provided in relation to chit

70% Provided that no CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has been taken ‘Chit’ has been defined in the notification

9. Renting of any motor vehicle designed to carry passengers

40% Provided that no CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has been taken

10. Transport of goods in a vessel from one port in India to another

50% Provided that no CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has been taken

11. Services provided or to be provided to any person, by a tour operator in relation to a package tour

25%

Provided that no CENVAT credit on inputs, capital goods and input services, used for

providing the taxable service, has been taken and the bill issued for this purpose indicates

that it is inclusive of charges for such a tour. 12. Services provided or to be

provided to any person, by a tour operator in relation to a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour

10%

Provided that no CENVAT credit on inputs, capital goods and input services, used for

providing the taxable service, has been taken and the bill or challan issued for this purpose

indicates that it is towards the charges for such accommodation The exemption shall not apply in cases where the invoice or bill issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.

13. Services, other than services specified in 11 and 12 above, provided or to be provided to any

40% Provided that no CENVAT credit on inputs, capital goods and input services, used for

person, by a tour operator in relation to a tour

providing the taxable service, has been taken and the bill issued for this purpose indicates that it is the gross amount charged for such a tour.

Service Recipient’s Liability to pay Service Tax Set out below is the tabular analysis of Notification No. 15/2012 – Service Tax with the extent of tax payable by the recipient. The balance if any is payable by the service provider. No. Service Extent of Service Tax payable by the Service Recipient

1. Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business

100%

2. Services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road

100%

3. Services provided or agreed to be provided by way of sponsorship

100%

4. Services provided or agreed to be provided by an arbitral tribunal

100%

5. Services provided or agreed to be provided by individual advocate

100%

6. Services provided or agreed to be provided by way of support service by Government or local authority

100%

7. Services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on abated value

100%

8. In respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on non-abated value

40%

9. Services provided or agreed to be provided by way of supply of manpower for any purpose

75%

10. Services provided or agreed to be provided by way of works contract

50%

11. Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory

100%

AMENDMENTS TO CENVAT CREDIT PROVISIONS Amendments under current scheme of taxation [Effective 1-4-2012, except where indicated] CENVAT credit on motor vehicles The definition of capital goods has been amended to include motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis, in respect of manufacturers and service providers. For specified service providers, motor vehicles falling under tariff headings 8702, 8703, 8704, 8711 and their chassis will qualify as capital goods. Credit of components, spares and accessories of motor vehicles which qualify as capital goods will also be available. Restrictions in input service definitions removed The current restriction in rule 2(l) on General Insurance Service, Rent-A-Cab Service, Authorised Service Station Service and Supply Of Tangible Goods Service has been replaced – the restrictions in respect of Rent-A-Cab Service and Supply Of Tangible Goods Service will only apply insofar as these services relate to a motor vehicle which is not a capital good, and the restrictions in respect of General Insurance Service and Authorised Service Station Service will not apply to a motor vehicle manufacturer in respect of a vehicle manufactured by him, and to a general insurance service provider in respect of a vehicle insured by it. Reversal of credit on removal of capital goods [Effective 17-3-2012] The third proviso to rule 3(5) providing for reversal of credit in respect of capital goods which are removed after being used on the basis of depreciated value has been deleted and merged into rule 3(5A) which considered a situation of capital goods cleared as scrap or waste. Where the amount calculated on the depreciated value is less than the duty leviable on the transaction value of the clearance, the amount payable shall be the duty leviable on the transaction value. CENVAT credit in respect of capital goods and inputs delivered to a place outside the premises of the service provider CENVAT credit will be available even in cases where the capital goods and inputs are delivered to the service provider to a place outside the premises of the service provider, subject to the maintenance of documentary evidence of the delivery and location. Provisions relating to refund amended Rule 5 which provided for the use of CENVAT credit on inputs and input services used in relation to exports to be applied in

the discharge of the manufacturer’s central excise duty liability and service provider’s liability, and for a refund of such credit where such adjustment was not possible. This provision has been replaced to allow a refund of CENVAT credit in the ratio of export turnover to total turnover, per the following formula: Refund = (Export turnover of goods + Export turnover of services) ÷ Total turnover × Net CENVAT credit The new scheme will apply to exports made on or after 1-4-2012. Refunds under the old scheme will continue to be available for a period of 1 year. Obligation of a manufacturer or producer manufacturing exempted goods and a service provider providing exempt services For an assessee not maintaining separate books account, the option rate will be increased from 5% to 6% in consonance with the increase in the service tax rate The restriction on availment of CENVAT credit to the extent of 20% for providers of Life Insurance Services and Management Of Investment under ULIP Services will be removed. Restrictions on distribution of credit by an ISD Credit of service tax attributable to service used wholly in a unit will not be distributable, and credit of service tax attributable to service used in more than 1 unit will have to be distributed pro rata on the basis of the turnovers of the units to which the service relates. Transfer of unitilised CENVAT credit of SAD permitted Manufacturers having multiple registered premises will be permitted to transfer CENVAT credit of SAD lying unutilised at the end of a quarter from one unit to another, subject to the accounting thereof and the issuance of a transfer challan. LTU benefit in respect of transfers to units in Jammu & Kashmir The facility to remove inputs to other units without payment under rule 3(5) will not be available if the recipient unit is availing of the exemption under Notification 1/2010-CE. Interest payable only in the event of incorrect utilization [Effective 17-3-2012] In line with the position taken by several High Courts and CESTAT benches, that interest would only be payable in the event that CENVAT credit has been incorrectly utilised, rule 14 has been amended to provide that only when credit has been “taken and utilised wrongly” will interest be payable. The

Supreme Court had taken a different view, on a literal reading of the rule. Amendments proposed on the switchover to taxation under the negative list Removal of specific references Provisions linked to specific taxing entries will be replaced by provisions based on service descriptions Exported service to be defined Exported services will not be taxable under the scheme of place of provision of service, and will have to be specifically defined to enable the use of credits. Restriction on credit availment in relation to interest In place of the fixed 50% restriction that currently operates for entities in the banking and financial sector, it is proposed that the restriction will be linked to the actual proportion of net interest (interest earned – interest paid on deposits), subject to a minimum of 50% interest paid on deposits. For the non-financial sector, the reversal of credits is proposed on gross interest basis.

NOTES