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PRE-BUDGET MEMORANDUM 2016-17

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EconomyTaxes

GrowthBusiness

Investment


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EconomyTaxes

GrowthBusiness

Investment


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5(iii)

PREAMBLE ............................................................................................................................................. 1-2

ECONOMIC OVERVIEW ............................................................................................................................. 3

SECTORAL ISSUES ..................................................................................................................................... 7

– AGRICULTURE ......................................................................................................................................................... 7

– CHEMICALS AND PETROCHEMICALS .................................................................................................................... 11

– CIGARETTES .......................................................................................................................................................... 18

– CIVIL AVIATION ..................................................................................................................................................... 20

– E-COMMERCE ....................................................................................................................................................... 21

– EDUCATION .......................................................................................................................................................... 23

– FINANCIAL SERVICES ............................................................................................................................................ 25

– HEALTHCARE, MEDICAL EQUIPMENTS AND DEVICES .......................................................................................... 30

– INFORMATION TECHNOLOGY AND ITES ............................................................................................................... 38

– INFRASTRUCTURE ................................................................................................................................................ 39

– MICRO, SMALL AND MEDIUM ENTERPRISES ....................................................................................................... 39

– NON FERROUS METALS ........................................................................................................................................ 40

– OIL AND GAS ........................................................................................................................................................ 43

– PAPER AND PAPER BOARD ................................................................................................................................... 48

– REAL ESTATE ......................................................................................................................................................... 51

– RENEWABLE ENERGY ........................................................................................................................................... 54

– RETAIL ................................................................................................................................................................... 55

– STEEL AND OTHER FERROUS PRODUCTS ............................................................................................................. 55

– TEXTILES ............................................................................................................................................................... 59

– TOURISM .............................................................................................................................................................. 60

– MEDIA AND ENTERTAINMENT INDUSTRY ............................................................................................................ 61

DIRECT TAXES ......................................................................................................................................... 67

– Tax Rates – Companies/Firms/Limited Liability Partnership ................................................................................ 67

– Tax Rates - Individual Taxpayers ........................................................................................................................... 68

– MinimumAlternateTaxandAlternateMinimumTax-Section115JB/115JC ...................................................... 68

C O N T E N T S


6(iv)

– DividendDistributionTax-Section115-O ........................................................................................................... 70

– DeemedDividend-Section2(22)(e) .................................................................................................................... 71

– PlaceofEffectiveManagement ............................................................................................................................ 72

– RationalizationofprovisionsofSection14AandRule8D.................................................................................... 74

– TaxationofSubsidies ............................................................................................................................................ 76

– RecommendationstoWidentheTaxBase ........................................................................................................... 77

– IssuesrelatedtoallowabilityofcertainExpenditures,DeductionsandDisallowances ....................................... 78

– GeneralAntiAvoidanceRule-ChapterX-A ......................................................................................................... 84

– TaxIncentivesandBenefits-Section35AD ......................................................................................................... 87

– CarrybackofLosses-Section72 ......................................................................................................................... 91

– DeductionunderSection80JJAAoftheAct ........................................................................................................ 92

– DefinitionofAssociationofPersons(AOP)tobemodified-Section2(31) ......................................................... 92

– Non-resident related provisions ........................................................................................................................... 94

– Mergers&Acquisitions ...................................................................................................................................... 110

– Capital Gains ...................................................................................................................................................... 118

– AdditionalIncome-taxondistributedincomeforbuy-backofUnlistedShares ................................................. 121

– TaxabilityofImmovablePropertyreceivedforinadequateconsideration-Section56(2) ................................ 123

– TransferPricing................................................................................................................................................... 124

– Financial Services ............................................................................................................................................... 133

– Tax Deducted at Source (TDS) ............................................................................................................................ 140

– Personal Tax ....................................................................................................................................................... 144

– Other Direct Tax provisions ............................................................................................................................... 151

INDIRECT TAXES .....................................................................................................................................154

– MeasurestoRationaliseIndirecttaxes .............................................................................................................. 154

– Service Tax .......................................................................................................................................................... 157

– Central Excise ..................................................................................................................................................... 169

– Customs ............................................................................................................................................................. 175

– Cenvat Credit ...................................................................................................................................................... 182

– Central Sales Tax................................................................................................................................................. 187

C O N T E N T S


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PREAMBLEThelast12monthshavebeenextremelyeventful,bothfortheglobalaswellastheIndianeconomy.WhileexternalfactorshavehighlightedtheattractivenessofIndiaasaninvestmentdestination,therearestillseveralreformmeasuresthatarenecessarytoensurethatoureconomyisplacedfirmlyonadoubledigitgrowthtrajectory.Onthetaxfrontaswell,therehavebeenseveralpositivestepsoverthecourseoftheyear;however,muchstillneedstobedonetorestoretaxpayerconfidenceinthesystemandtoensurethatthetaxchallengesdonotundermineIndia’sgrowthopportunity.Webelievethatthecomingbudgetoffersanimportantopportunityforthegovernmenttoinitiatemeaningfullong-termreforms in the taxsystem.Thiswillhelpset the tone forboosting investorsentiment-both foreignaswellasdomestic-andpavethewayforusheringinaneweraofgrowth.

SpecificrecommendationsonvariouskeyaspectsofourdirectandindirecttaxlawsaresetoutinthisMemorandum.Ataconceptuallevel,webelievethatthefollowingkeyareaswarrantthecloseattentionoftheGovernment:

Growth Friendly Tax Policies

Taxisnowwidelyacknowledgedasakeycomponentofeconomicpolicy.Hence,thereisaneedtoensurethatourtaxpoliciesaregearednotonlytowardsthecollectionoftherevenue,butalsotowardsboostingoureconomicgrowth.Theproposaltoreducecorporatetaxratesannouncedaspartoflastyear’sbudgetisundoubtedlyastepintherightdirection.However,thereareseveralotherfactorsthatwarrantacloserlookinthisregard:

First, there is a need to give greaterweightage to business and economic factors in the framing of tax policy. Forinstance,importantprovisionssuchasthelevyoftaxonsubsidiesshouldhavebeensubjecttoawiderpublicdebateandexaminationpriortoenactment.Suchprovisionshavethedirectabilitytoaffecttheeconomicviabilityofprojectsaroundthecountryandthereforerequiredetailedandcarefulconsideration.

Second, there is a need to ensure stability in tax policy in the medium term. For instance, in an income-tax context, thisinvolveseliminatingfrequentpolicyreversals,bothdirectly(fore.g.throughtheremovalofMATexemptiontoSEZunits)aswellas indirectly(fore.g.throughlevyofbuybacktaxtoovercomecapitalgainsexemptionsintreaties,orwideningthescopeofsection56).

Third,adequatecaremustbetakentoensurethatthefine-printofvariousprovisionsareinsyncwiththelargerpolicyobjectivessoughttobeachieved.Thereareseveralbeneficialprovisionsthatfailtoachievetheirintendedresults,duetocomplexandoftenunviablepre-conditionsandrequirementsbeingprescribed.Thesemustbeurgentlyaddressed.

Lastly,while revenueandenforcementconsiderationsareundoubtedly important,proposals in this regardmustbebalancedwith theiroverall economic impact, aswell as thepotential complianceburden that these couldpose totaxpayers.

Greater Clarity in Law

Thereisanurgentneedtoensuregreaterclarityintaxlaws.Thisisveryoftentheprimaryreasonfortheproliferationoftaxdisputesinthecountry.Thereareseveralprovisionsinthelaw,whichneedurgentrationalisation,sothattheycankeepplacewithrapidchangesinthebusinessworld.Thereisalsoaneedforgreatersophisticationinthelawsothat complexandoftencontentious issuesemerging fromnewbusinessmodels areproactivelyaddressed throughlegislativeaction,ratherthanevolvingthroughprolongedlitigationthroughouralreadyoverburdenedjudiciary.

Proactivestepsarealsoneededfromthegovernmenttoensurethatcontentiousissuesareidentifiedandaddressedthroughcirculars,instructions,positionpapersetc.fromtimetotime.Additionally,itmustbeensuredthattheissuessoaddressed,arefollowedinletteraswellasspiritbytaxauthoritiesaroundthecountry.


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Consistency in Interpretation and Implementation

Theimplementationoftaxlawsacrossthecountryisofteninconsistent,withofficerstakingdifferentviewsonsimilartopics.Asmentionedabove,thereareseveralareaswherethelawisunclear,andthelackofguidanceoftencontributestoextremelysubjectiveanddivergentapproachesbytaxofficers.Evenincaseswherecircularsareissued,oneoftenfindsthattheirprovisionstooareappliedinconsistentlybyofficers.

Whilefactualquestionsundoubtedlyneedtobeaddressedbyindividualofficers,thedivergenceinthepositionstakenbytheauthoritiesonlegalissuesneedstobeurgentlyaddressed.Measuresneedtobetakentoensurethatthereisstrictadherencetothelegalpositionsandcircularsissuedbythegovernment.

Overhauling the Administrative and Dispute Resolution Machinery

Asingle-mindedfocuswithinthetaxdepartmentonmeetingrevenuetargetsrisksunderminingthegoalofanimpartialandobjectiveimplementationoftaxlaw.ThepresenceofalargehiddeneconomyinIndiaundoubtedlynecessitatesastrongresponsefromthetaxauthoritiestoseekoutandbringtotaxhiddenincomes.However,afocusonmeetingnumericaltargetsasanendinitselfwithoutadequatelyacknowledgingthevariouscauses/sourcesoftherevenueshortfall,oftenresultsintheauthoritiesseekingtomaximizetaxcollectionsatallcosts,ratherthanensuringthatalltaxpayersarepayingthecorrectamountoftax.

Ashortfallincollectionsoftenarisesduetomultiplefactors,notallofthemwithinthecontrolofthetaxauthorities(includingtaxrates,economiccyclesetc.).Hence,asinglesource-agnosticapproachtotaxcollectionsshouldbeendedsoastoensurethatresourcesofthedepartmentarenotundulyfocusedonmaximizingtaxcollections.Eliminatingtherelevanceofrevenuetargetsintheperformanceappraisalsofofficerswillalsogoalongwayinimprovingthetaxpayerexperience. Taxpayer feedback could also be made part of the overall performance appraisal process.

Onthedisputeresolutionfrontaswell,thereisaneedforradicaloverhaul.Issuanceofnoticesonfrivolousgrounds,routine adjustments accompanied by a failure to follow binding precedents leads tomuchwonted litigation. Thiscoupledwiththepracticeofroutinefilingoffurtherappealsbythetaxauthorities,clogsuppreciousjudicialtime,andrisksunderminingourentiretaxsystem.Despiteseveralinstructions,thereislittlechangeatthegroundlevel.ItisnotuncommontoseeSLPsbeingfiledbeforetheSupremeCourtbythetaxauthoritiesonpurequestionsoffact,evenincaseswheretheHighCourt,ITATandtheCommissioner(Appeals)haveconsistentlyruledinfavourofthetaxpayer.

FICCI’spaperonDisputeresolutionintaxmatterscouldprovideausefulreferencepointfortheinitiationofmeaningfulreforminthisregard.

Tosumup,therelevanceoftaxpolicyindeterminingtheoveralleconomicclimatecannotbeunderestimated.IfIndiaistofullyleveragethebenefitsoftheprevailingfortuitousexternalenvironment,seriousreforminitiativeswillneedtobelaunchedatadomesticlevel.Theforthcomingbudgetcouldbeanappropriateplatformforkick-startingthisprocess,particularlyasregardsreformingthetaxsystem.

We,atFICCI,wouldbedelightedtoworkwiththeGovernmenttoprovideallpossiblesupportinthisregard.


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ECONOMIC OVERVIEW2.1. Current State of Economy

The global economic landscape is undergoing a significant metamorphosis. The year 2015 has not been withoutchallengesandsomerecentdevelopmentshaveweighedheavyonglobaleconomicprospects.First,GreecemisseditsrepaymentdeadlinetoIMFinJunethisyearposingsignificantrisktostabilityintheEuropeanUnion.Alongside,abreakinChina’sunprecedentedyearlongbullruncausedripplesintheglobalstockmarket.ThiswasfurtherfollowedbyChina’sunanticipatedmovetodevalueyuanonAugust11,2015raisingfearsofagreaterthananticipatedslowdowninworld’sbiggestgrowthengine.

Amidstthissituationofpersistinguncertainty,India’sgrowthoutlookhasremainedintact.Therehasbeensomevolatilityinexchangeratesandstockmarketsgiventhecontagioneffect;butIndia’smacrofundamentalshavegainedsubstantialstrengthoverthepastyearandtheongoingpolicyinitiativeshaveplacedusonastrongerfooting.

India’sGDPgrowthwasreportedat7.3%in2014-15(vis-à-vis6.9%growthin2013-14)andthegrowthestimateforthefiscalyear2015-16hasbeenputmarginallyhigherat7.4%bytheReserveBankofIndia.Further,estimatesbyagencieslikeIMFandWorldBankalsoplaceIndia’sgrowthtobeinasimilarrange.

InthelatestGlobalCompetitivenessReport,2015-16,WorldEconomicForum,Indiawasranked55among140countries.Thismarkedanimprovementby16positionsfromtherankin2014andendedfiveconsecutiveyearsoffallinIndia’sranking.Further,accordingtolatestFinancialTimesrankingofdestinationsforgreenfieldinvestmentsinthefirsthalfoftheyear2015,IndiaemergedasatoprankerperformingbetterthanChinaandUnitedStates.

Indiahasonceagainsuccessfullyplaceditselfontheinvestmentradarandtheslewofreformsundertakenoverthepastyearhasprovidedaperfectdoseofoptimism.

Thekeypressurepointsonthedomesticfrontuntilabouttwoyearsago-inflation,currentaccountdeficitandfiscaldeficit-remainlargelyundercontrol.TheConsumerPriceIndexhassoftenedsignificantlyoverthepastyearandtheWholesalePriceIndexhasbeeninthenegativeterrainforelevenconsecutivemonthsendingSeptember2015.Thedeclinehasbeenbroadbasedreflectingsubduedglobalcommodityprices.Thoughpressureonfoodpricescanemergegoing ahead, the Government is fully geared to handle the situation. The Government has committed to addressstructuralchallengesinthefoodsupplychainandisalsoworkingtowardsimprovingoverallagri-productivitylevels.

Onthefiscalfront,theGovernmentismakinganearnestefforttoensurefiscalprudencebybringinggreaterefficacyinexpendituremanagementsystemandpruningdownunnecessaryexpenses.

However,India’sexternalperformanceremainsaconcernandtheprolongedweakdemandconditionsgloballymakerecoverydifficult.Exportshavebeeninthenegativeterrainandcantakesomemoretimetorecuperate.

Giventhecurrentstateofaffairs,itremainsimperativetogiveagreaterpushtodomesticconsumptionandinvestments.Whiletheexistingstalledprojectsarebeingdebottleneckedandsomepickupinimplementationhasbeennoted;thereisstillasenseofapprehensionwithregardtoundertakingnewprojectsamongstmembersofcorporateIndia.

TheReserveBankofIndiahascutthereporateby125bpsbetweenJanuaryandSeptember2015.TheBankshavealsorespondedbyrevisingdowntheirbaserates.Industrylooksforwardtoaneffectivetransmissionofratestorevitalizedomesticdemandandinvestment.Amidtheprevailingglobalheadwinds,thesetwowillbethemostcriticalfactorsforrealizingourgrowthaspirations.

2.2. Government Stays Committed to Reforms

TheGovernmenthasdisplayedastrongcommitmenttomeettheoverallobjectiveoftakingIndiatoahighergrowth


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trajectory.Thecentral focusofpolicymeasuresbeingundertakenhasbeengenerating jobopportunities for India’syouth.ThepreviousUnionBudgetfor2015-16wasalsoinlinewithGovernment’sbroadervision.

TheGovernmenthas laidemphasisonpushing thegrowthof industrial sectorand is consistentlyworking towardscreatingaconduciveenvironmentfordoingbusinesses.Severalmeasureshavebeenundertakentocutdownredtapeanddiminishhumaninterfacetomakethesystemefficient.Therehasbeenconsiderableactiononadministrativeandprocedural reforms.

With respect to taxation,we have seenGovernment’s resolve to simplify the tax structure. The announcement ofrationalizingthecorporatetaxstructure,includingreductionincorporatetaxratefrom30percentto25percentoverthe next four years has been much appreciated by Industry.

Various campaigns initiated by theGovernment including the ‘Make in India’, ‘Digital India’, ‘Skill India’ are clearlydirectedtowardscreatingproductivejobsandaskilledworkforce.Ithasbeennearlyayearsincethesecampaignswereannouncedandtheresponsereceivedhasbeenveryencouraging.Severalforeignanddomesticinvestors,belongingtoa wide array of sectors, have indicated interest to invest in India.

Promotingentrepreneurshiphas alsobeen the top agenda for theGovernment. The announcement to set up SelfEmploymentandTalentUtilization(SETU)FundandtheMicroUnitsDevelopmentRefinanceAgency(MUDRA)inthelastUnionBudgetareverypositivesteps.InadditiontothisHon’blePrimeMinisterannouncedthe‘StartupIndiaStandupIndia’initiativeonAugust15,2015.Thisinitiativeisexpectedtoboostentrepreneurshipbypromotingbankfinancingandofferingincentivesforjobcreation.

ThebiggestdragonIndia’scompetitivenesshasbeentheinfrastructuresectorandthereremainsahugelacunabetweenourgrowthaspirationsandtheconcurrentlogisticssupportavailable.Financingneedofinfrastructureprojectsishugeandremainsamajorchallenge.ThesettingoftheNationalInvestmentandInfrastructureFundannouncedinUnionBudget2015-16isawelcomemove.Theoperationalframeworkforthefundhasbeenalreadyapprovedandthefundis expected to be launched soon.

In addition, tax-free infrastructure bonds for rail, road and irrigation projectswere reintroduced.Government alsoindicatedadoptionof‘plugandplay’approachincaseofUMPPs,planforcorporatizationofportsandstepstowardsrevitalizingPublicPrivatePartnerships.

On the agriculture front, the announcement to create aUnifiedNationalAgricultureMarketwas significant.Movetowardsasinglenationalmarketforagri-producewillhelpreinintheinflationarypressureincaseoffoodcommodities.

India’sbankingsectorisalsosetforaturnaroundonthebackofvariouseffortsandreformsoftheGovernment.Thegovernmenthasrecentlyannounced‘Indradhanush’reformsforrevampingthePublicsectorbanks–theseencompassreforms in7 keyareasnamelyAppointments,BankBoardBureau,Capitalisation,DestressingPSBs, Empowerment,FrameworkofAccountabilityandGovernance.Thesereformspavewayforafarmorerobustfinancialsector.Moreover,actiononseveralotherimportantannouncementsincludinggoldmonetization,blackmoneyandsettingupofabankboard bureau is already underway.

Besidesthefocusonstrengtheningeconomicforces,theGovernmenthaslaidanequalemphasisonsocialandinclusivedevelopment.IntheUnionBudget2015-16,severalstepswereannouncedtowardscreatingauniversalsocialsecuritysystemforallIndians.TheGovernmentisalsoworkingtowardsprovisionofhousingforall,availabilityofbasicamenitieslikewater,electricityandmedicalfacilities,widercoverageunderpensionandinsuranceschemes–alltobeachievedby2022–marking75yearsofIndia’sindependence.

ThegovernmenthasexhibitedcontinuedactionwithregardtoreformsbothduringtheannouncementoftheUnionBudgetsandoutsideofit.Itwillbemostapttofurtherbuildonthismomentum.Thereisaneedtokeepnurturingtheemergingsignsofaturnaroundandmakethemmoresustainable.


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2.3. Focus areas for Union Budget 2016-17

TheforthcomingUnionBudgetprovidesanopportunitytomendthegapsintheexistingsystemandstrengthenthedemandconditionstoboostoveralleconomicoutput.WhilethefollowingsectionsofthisPre-budgetmemorandumprovidespecificsuggestionsforvarioussectors,someofthekeyareasthatrequirespecialfocustofacilitatetransitiontohighgrowthtrajectoryaredetailedbelow:-

(a) Give further thrust to ‘Make-in-India’ Program: Stimulate Demand and Investments

‘Make in India’ is a laudable initiativewhich has generatedmuch interest amongst the domestic aswell as globalinvestors.SeveralglobalcompanieshavemadeplansforinvestmentsinIndia.However,domesticinvestmentsareyettopickuppaceascapacityutilizationlevelsacrosssectorscontinuetoremainlowduetoweakdemand.ThereisanurgentneedtopropupdemandtoimpartmomentumtothecapexcycleandputGDPonahighgrowthtrack.FollowingmeasuresmaybeconsideredintheforthcomingUnionBudget.

One,lowerlendingrateswillgiveamuchneededboosttodemandforhousing,durablesandalsoencouragegreaterinvestmentsbyindustry.FollowingthereductioninpolicyratebytheReserveBankby125basispoints,manybankshaveinitiatedreductioninlendingrates.However,greatereffortsarerequiredtofacilitateaneffectiveandequivalenttransmission.TheGovernmentshouldconsiderfasttrackingtherecapitalizationplansofpublicsectorbanksandalsoinitiatethereviewofsmallsavingsframeworktoenablebankstolowertheircostofcapital.Inaddition,theGovernmentshouldalsoaddress the issueof stressedassetsofpublic sectorbanks.WhileAssetReconstructionCompaniesarebeingstrengthened, theGovernmentshouldconsider settingupaNationalAssetManagementCompany (NAMCO)thatcantakeoverlargeNPAsfromthebalancesheetsofbanks.Thiswouldreleasecapital,providebankswithlendableresourcesandalsohelpinloweringinterestcost.

Two, the forthcoming Union Budget should lay out an appropriate personal tax framework that can put greaterdisposableincomeinthehandsofconsumers.Thiswillgiveastrongboosttoconsumerdemandandfacilitateexpansionofeconomicactivities.

Three,theGovernmentshouldworktowardsanearlyimplementationofGST.Onceimplemented,GSTwillfacilitateseamlessandefficientmovementofgoodsacrosscountry,lowertheproductioncosts,easethetaxburdenandincreasethe overall output in the economy.

Four,thereisaneedtobringaboutalevelplayingfieldfordomesticindustryvis-à-visimports.WhiletheGovernmenthastakenstepstocorrecttheinverteddutystructureinthepast,theGovernmentshouldcorrectallremaininganomaliesin the duty structure.

Five,specificmeasuresarerequiredtopushtheexports,whichhavebeenreelingunderstressfora longtime.TheGovernmentshouldcreateamechanismforearlyrefundofthedutydrawbackamounts,introduceinterestsubventionscheme,enhance incentivesunder theMerchandiseExports from IndiaScheme (MEIS), addmore itemsunder theMEIS,andpromoteexportsofspecificitemsasapartofthetradeagreements.

Six,welookforwardtothereductionincorporatetaxrateintheforthcomingUnionBudget,asannouncedbyHon’bleFinanceMinisterwhilepresentingthelastBudget.

Seven,weneedtocreateastrongsupplyeco-systemforthekeysectorsasidentifiedunderthe‘MakeinIndia’program.TheGovernmentcouldconsiderspecialfiscalincentivesforattractinginvestmentsinnew/relativelynewsectorsthatarecriticalforintegrationintotheglobalvaluechainssuchasmanufacturingofelectroniccomponents.Thismayincludetaxholidays,incentivesforadoptionofnewtechnologyetc.


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(b) Give boost to MSMEs and Start-ups

AsapartoftheStart-upIndiainitiative,theGovernmentmayconsiderfollowingspecificmeasures.

One, a rebated income-tax for small start-up businesses called START (Startup Rebated Tax) can be introduced to encouragesmallStart-upsandthusboostjob-creation.TheGovernmentshouldalsointroduceemploymentlinkedtaxrebates to entrepreneurs.

Two,easeofdoingbusinessisextremelyimportantforMSMEs,whofacetimeandcapabilityconstraintsinadheringtocomplexproceduresandcompliances.ThereisaneedtohaveasinglewindowmechanismforMSMEsthatservesasone-stop shop service for all business related compliances,with in-built provisions fortimeboundanddeemedclearances.

(c) Continue thrust on Infrastructure

TheGovernmenthasremainedcommittedtoacceleratinginfrastructureactivitiesinthecountry.Giventhehugefundrequirements, theGovernmentmayconsider launching fundssimilar to theNational Investmentand InfrastructureFund,perhaps,withothercountriesasco-investors.Suchfundscanbemanagedbyprofessionalfundmanagersandleveragedmultipletimesbyprovidingequityforlargeprojectsacrosssectors.

Whilemassiveimpetushasbeengiventopublicinvestment,governmentmayalsoconsiderinitiatingprivatizationofpublicsectorportsforimpartinggreaterefficiencyinportoperations.

(d) Continue with Fiscal Consolidation

Inadditiontotheabove,itremainscriticalthatwecontinuetomoveonthepathoffiscalconsolidation.Itisimportantthatthegovernmentcontinuesitsendeavortogarnerhigherrevenuesandattemptstomovetowardsamoreefficientexpendituremanagementsystem.

Withrespecttotherevenues,theGovernmentshouldaimatwideningthetaxbase–incomesaboveacertainthresholdneedtobetaxedirrespectiveofthesource.

Ontheexpenditureside,anefforthasbeenmadebythegovernmenttoget the focusbackonproductiveoutlays.Productiveinvestmentsshouldcontinueevenasstepsaretakentoreininconsumptiveexpenditure.

WealsolookforwardtothereportoftheExpenditureManagementCommission(EMC)inidentifyingareasforbettermanagementandexpenditurecontrol.Theforthcomingbudgetshould implementthekeyrecommendationsof theEMCinthisregard.


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SECTORAL ISSUESAGRICULTURE

3.1.1. Agriculture Marketing

GovernmenthasannouncedthecreationofaNationalAgriculturalMarket.SmallFarmers’AgribusinessConsortium(SFAC)hasbeendesignatedasthenodalagencywhichhasappointedE&Yasthetransactionadvisor.ItappearsthatGovernmentwouldliketohaveaGovernmentpromotedsingleentityforsettinguptheNationalAgriculturalMarket.Fewsuggestionsinregardtolackofcommonmarketandpoorlinkageofagriculturemarketinformationareasunder:

(a) AsAgriculturalcommoditiesareverylargeanddiverseinnatureitwouldbeimpossibleforasingleentitytodealwiththecomplexitiesandthescaleinvolvede.g.fruits&vegetables,grains,oilseedsandpulses,wouldeachrequiredifferentmarketingchannelsandinfrastructure.Similarly,cotton,spices,ediblenuts,copraandrubberwouldrequirehavingdifferentstructures.

(b) ModernandefficientAgriculturalMarketingstructureswouldrequirewellcapitalizedentitiesthatunderstandandareactive in thesemarkets. Governmentshould thereforecreateanenablingenvironment topromotenotasinglebutmultipleplayerswhomayspecializeinoneormoreAgriculturalcropsforsettingupPanIndiamarkets.GovernmentofIndiapolicyshouldthereforesetNetWorthandGovernancecriteriaforrecognizingsuchentitiesanalogoustothepolicyadoptedforNationalCommodityExchanges

(c) Government promoted entities such as APMCs /Marketing Boards have not provided the farm communityadequateandtransparentmarketinganddistributionchannels.

(d) ImplementationofthisreformwouldrequireconcurrenceofStateGovernmentsasAgricultureisastatesubjectwhichcoulddelayitsimplementation.ItisthereforeproposedthatintheinitialphaseentitiesmaybeenabledtosetupmarketsformandifeepaidproducewhichwouldnotrequireanyapprovaloftheStateGovernment.Severaltransactionscouldthenbeenabledtoevenbypassthemandiswhichhaveinanycasebecomedysfunctionalandinefficient.

3.1.2. Procurement and Stock Management of Food Grains by Private Sector Entities

Topromoteefficiency inprocurementoperations theGovernmentof Indiahas recentlyannouncedanewpolicyofengagingprivatesectorplayersforEasternstates.Thesameshouldbeextendedtootherregionsandstates.InrespectofPulsesandOilseedswhileFCI/Nafedmaycontinuetobethenodalagency,allprocurementoperationsshouldbeallowedwiththeparticipationoftheprivatesectororganizedentities.AlongwithprocurementunderMSP,credibleprivatesectorentitiesshouldalsobeoutsourcedforstockmanagementservicesto improveefficienciesandensureimprovedqualityofpreservationoffoodgrains.

3.1.3. Agriculture Storage

Approximately15MMTofAgrowarehousinghasbeenbuiltorcontractedunderFCI7/10yearguaranteedscheme.However, still there is estimated gap of 15 MMT in agro warehousing in the country. In this context the policyrecommendationsareasfollows:-

(a) The interest subventionschemefor farmerswhostore theirproduceshouldbeextended toall farmersandallwarehousereceiptsratherthanbeingrestrictedtoonlynegotiablereceiptsandtoonlysmallandmarginalfarmers.

(b) ThecapitalsubsidyundertheGrameenBhandaranYojanashouldberestored.TheCapitalsubsidyof15%,whichwasannouncedinthe2014budget,hasbeensuspendedandnobudgetshavebeenprovided.Intheinterimtheprojectswheretheloanshavebeensanctionedshouldberestored.


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(c) GovernmentshouldextendCapitalsubsidyforconstructionofverticalsilosbyorganizedprivatesectorentitiestogiveanimpetustomodernandefficientstoragestructures.WhilenoGovernmentguaranteeneedstobegivenforsuchstructuresallsuchsilosshouldautomaticallybetreatedonparwithCWCgodownsforusebytheFCIonneedbasisandtherentalsfixedat10%abovetheCWCratestoencourageestablishmentofmodernstructures(storageandgrainhandling)whichwouldprovidebetterqualityofpreservationandfoodsafety.

(d) UnderPrioritysectorlendingguidelines–WHR(WarehouseReceiptFunding)shouldgetdifferentialtreatmentaspartofthelargeragrocreditbudget.ItisalsosuggestedthatSubsidy/ViabilityGapfundingshouldbeprovidedtowarehouseserviceprovidersforworkingwithsmallandmarginalFarmers.

(e) Servicetaxonwarehouserent,warehousemanagementservices, laboratoryservices foragroproduce,agrocommoditycareservicesshouldbetakenoff.

(f) The tenureofWarehousing construction lending is lowandROI ishigh. It is suggested that the terms fromNABARDtofundagrowarehousesshouldberevisited.Itissuggestedthatrepaymentperiodshouldbeincreasedto10yearsandtheROIshouldbeintherangeof8-8.50%.

(g) Multiple regulations/registration requirements make agro warehousing an unviable business. There shouldbe single regulator in WDRA (Warehouse Development and Regulatory Authority) to bring much neededtransparencyandhence,betterregulationsandinvestmentsinthesector.

(h) ThepaceofadoptionofNegotiabilityofWarehouseReceiptsandhenceexpansionofpost-harvestcreditisslow.Therefore,targetshouldbesetforbankstolendagainstNegotiableWarehouseReceiptswithintheAgrolendingbudget.Secondly,lendingagainstnegotiableWarehouseReceiptsshouldbequalifiedunderAgroCredit

(i) Capital subsidy for cold stores should be enhanced and also extended to all capital investments in back end supplychainlogisticstoreducethelossesinfruitsandvegetables.

(j) InvestmentinSolarTechnologyApplicationsforColdChaintoReduceDependenceonElectricityinRuralAreasshould be increased.

3.1.4. Agricultural Income

(a) Contract Farming

TheGovernment is promoting consolidationof farms/farming throughphysical pooling, collective farmingby FPOs(FarmerProducerOrganizations)orsuchotherentities.Allofthesehelpintransferoftechnology,HYV(HighYieldingvariety)ofseeds,quality inputsandmodernagronomypractices/equipmenttosmall farmersbysuchorganisationstohelpfarmersimproveyieldsandincome.Corporatesareworkingwithfarmersforcontractmultiplicationofhighyieldingvarietiesofseedofwhichthereisanacuteshortageincountry,encouragingorganicfarmingandcultivationofhighvaluecrops.

However,insuchContract/Jointfarminglandbelongstothefarmerbutothervitalinputs(suchasagriculturalexpertise,seeds and/or other inputs, etc.) are provided by the corporate. Further risk of failure of the crop impacts both the farmerand thecorporate.Hence forallpracticalpurpose there isapartnership.Till recently such interventionsbywayofcontractfarmingwereconsideredtobeanagriculturalactivityandtheincometherefromwasconsideredasAgriculturalincome.However,manyIncomeTaxOfficersaredisallowingsuchincomeasagriculturalincomewithoutappreciatingthetruenatureof theactivityandthe intentof theGovernment leadingtounnecessary litigationandharassment.Thisisbeingdoneinspiteofvariousjudgementsinfavourofsuchcontractfarmingcausinguncertaintyandharassment to suchagriculturalpartnershipprocess.This isoneamongstmany reasonswhycontract farming/consolidationmodelsarenottakingoff.


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Inorder topromoteagriculturalpartnershipbetween farmersandcorporate, it is suggested thataclarificationbeissuedstatingcollaborative/joint/contractfarmingasagriculturaloperationsandtheincomethereasAgriculturalincometax.Suchjoint/contractfarmingshouldinclude(a)growingofseedundercontract/jointfarmingwheretheriskandrewardofthecropissharedbetweenthecorporateandthefarmer(b)contract/jointfarmingofcropswheresomeofthecriticalelementssuchasseeds,inputsalongwithagronomyexpertiseareprovidedbythecontractor.

Merely,purchaseofcropsunderacontractpricedeclaredinadvanceisnotsoughttobecoveredunderagriculturalincomebutwherethecontractorhasastakeandactiveinvolvementinthecropitshouldbecovered.

(b) Modern Farming via Hydroponics etc.

GovernmentisencouragingmodernfarmingtechniqueswhichincludesAeroponics,Aquaponics,Hydroponics,NutrientFilmTechnique(NFT)etc.ThesetechnologydrivenagriculturesolutionsarealsocriticalfortheSmartCityconcepttofeedthelocalcitizens.“Agriculturalincome”isdefinedundersection2(1A)oftheIncomeTaxAct,1961.However,IncomeTaxOfficersareclaimingthatcropsgrownbyusingtheabovetechniques i.e.Aeroponics,Aquaponics,Hydroponics,Nutrient FilmTechnique (NFT) etc. arenot coveredunder section2(1A) as the crop is grown inwateror air oronrooftops/buildingsandnotonland.Thisisvitiatingthewholeconceptofmodernagriculture.

Thisisanincorrectinterpretationaswhatisproducedinnurseries/greenhousesthroughmodern/innovativetechniquesisanagriculturalcropandsuchactionswillonlydetermoderncultivation.Suggestedsolutionisthataclarificationbeissuedthat“IncomederivedfromcropsgrownbyusingfarmingtechniqueslikeAeroponics,Aquaponics,Hydroponics,NutrientFilmTechnique(NFT),innethousesandgreenhousesandsuchothermoderntechniquesshallbedeemedtobeagriculturalincome.’orabroaderdefinitioncouldbethat“incomederivedfromcropsgrowneitheronland,waterorairshallbedeemedtobeagriculturalincome”.

3.1.5. Farm Machinery

All typesofCropHarvesters /CottonPickersareexempted fromExcise,hence levyingof4%SAD in respectofanyparts(e.g.mechanical,electric,plasticcomponentetc.)coveredunderanyCustomsTariffHeading,importedforuseinmanufactureoftheseproductsbeexemptedfrom4%SAD,asithascascadingeffectonpricewhennocenvatcreditofSAD is available.

3.1.6. Crop Insurance

Sinceservicetaxisnotleviedoncropinsuranceformingpartofagovernmentnotifiedscheme,itmaywellbeworthconsideringwaiverofservicetaxoncropinsurancetakenbycorporationswherethebeneficiaryisthefarmer.Themajoradvantageofthisproposalisthatitmayresultininnovativeproductswhichcanbereplicated.

Secondly,allowingcorporationscreditoncropinsurancepremiumunderCSRwillleadtobetterproductsandtimelypaymentofclaims.Throughthis,subsidyburdenofthegovernmentwillalsocomedown.CropsnotnotifiedundertheGovernmentschemescanalsobecoveredundertheCSRinitiatives.

3.1.7. Dairy

Indiaisthelargestproducerofmilkintheworld,buttomeetthegrowingdemandformilkandacuteshortageofsupply,formationofcommercialdairiesshouldbepromoted.Twoconcernsinrunningsuchdairiesare(a)easyavailabilityofsilagethatispreparedfromMaize(Corn)(b)secondly,easyavailabilityofcredit.Itissuggestedthat

(a) GovernmentshouldremoveImportdutyonaSelf-propelledForageHarvestersforaperiodof5-10yearstopromoteentrepreneurswhocanprepareandsellsilagecommercially.


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(b) Such commercial dairies face the reluctance of banks to lend in absence of 100% collateral guarantee.Governmentshouldcatalyseflowofbankcredit tosuchfirstgenerationentrepreneurs forsettingupdairieswithoutthehasslesofarrangingcollateral.ThiscanbedonebyprovidingbackupguaranteetoBanksonbehalfof Commercial dairy owners / promoters.

Other Proposals

3.1.8. Exemption for Services related to Agricultural Produce

AsperextantServiceTaxlawstheagro-sectorhasbeensupportedbykeepingabulkofservicesrelatingtoagricultureoragriculturalproduceintheNegativeListorinthelistofexemptedservices.However,therearesomeserviceslikeWarehouseManagementServices,SecurityServices,andLaboratoryTestingServicesetc.whichareessentialtosecurestorageofagri-produceandtodeterminequalityoftheagri-producebutwhicharesubjectedtoServiceTax.

Itisrecommendedthatallservicesprovidedforagriculturalproducebeexemptedfromservicetax.

3.1.9. Service Tax on Processing of Whole Pulses to Split Pulses

Negative List of Services includes processes carried out at an agricultural farm including tending, pruning, cutting,harvesting,drying,cleaning,trimming,sundrying,fumigating,curing,sorting,grading,coolingorbulkpackagingandsuchlikeoperationswhichdonotaltertheessentialcharacteristicsofagriculturalproducebutmakesitonlymarketablefortheprimarymarket.Incaseofprocessingofwholepulsestosplitpulses,suchactivityiscarriedoutinfactories.Thepricesofthepulsesareshowinganupwardtrendinlastfewyearsowingtolowerproduction,impactofweather,etc.Levyofservicetaxonsuchprocessingactivitiesaddstothehigherpricesofpulses,whichisastapledietforthecommonman.Onasimilarcorollary,FinanceMinistryhasexemptedlevyofservicetaxonprocessingofpaddyintorice.

Itisrecommendedthattheprocessingofwholepulsesintosplitpulsesshouldbecoveredundernegativelistofservicetax.

3.1.10. Expansion of the Scope of Definition of “Board” under Section 65B

AsperSection66DoftheFinanceAct,1994theNegativeListofServicesincludes:

“(d)(vii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce;”

Underclause(6)ofSection65B,“AgriculturalProduceMarketingCommitteeorBoard”hasbeendefinedtomeananycommitteeorboardconstitutedunderaStatelawforthetimebeinginforceforthepurposeofregulatingthemarketingofagriculturalproduce.

In this connection itwould be pertinent to note that by virtue of it being expedient in public interest, theUnionGovernmenthastakenunderitscontrolseveralagriindustriesandhassetupBoardsforsuchindustries.ThedutiesandobjectivesofsuchBoardsinclude,inter-alia,regulatingtherelevantagricommodityandpromotingitssale–bothwithin the country aswell as exports, having due regard to the interests of all the stakeholders like the farmers /growers,manufacturers,dealersandthegovernment.ExamplesofsuchBoardsincludeSpicesBoardofIndia,TobaccoBoard,CoffeeBoardofIndia,CoirBoardandTeaBoardofIndia.

In linewiththeinclusionintheNegativeListofservicesprovidedbyAgriculturalProduceMarketingCommitteesorBoards, it is recommended that the services provided by Boards set up under Central enactments for similar purposes arealsoincludedunderthedefinitionof“Board”underSection65BoftheFinanceAct,1994.Thiswillensurethatthetaxcostoftheservicesarenotembeddedintheexportcostoftheagri-productsorinthecostoftheagri-productssoldinthedomesticmarket,asisthecasetoday.


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CHEMICALS AND PETROCHEMICALS

3.2.1. Background

TheIndianChemicalIndustryisanintegralpartofIndianeconomy.Theindustryhaskeylinkageswithseveralotherdownstream industries such as agriculture, infrastructure, textiles, food processing etc.Over the last fewdecades,the chemical industryhas seenan increasing shift towardsAsia. Indian chemical industry standsout tobe the3rdlargestproducerinAsiaand12thintheworldintermsofvolume.ThechemicalindustryinIndiastandsat~USD144Billion*FY14andisexpectedtogrowat~9%p.a.overthenextfiveyears.Itcurrentlyaccountsfor~3.4%oftheglobalchemicalsindustry(~USD4Trillion)Theindustrywhichincludesbasicchemicals&itsproducts,petrochemicals,paintsandvarnishes, gases, soaps,perfumesand toiletries isoneof themostdiversifiedofall industrial sectors covering~80,000products.

Thegrowthofthissectorwillbeprimarilydrivenbydomesticconsumptionbecausepercapitaconsumptionofmostofthechemicalsismuchlowerthanglobalaverages.Thegovernmenthasbeentakinginitiativestoaddresschallengesininfrastructure, feedstock availability, complex tax and duty structure and overcome other system intricacies. One of the initiativesis‘MakeinIndia’campaign,whichaimstofacilitateinvestment,fosterinnovation,enhanceskilldevelopmentandbuildbest-in-classmanufacturinginfrastructure.GOIisfocusingtoraisetheshareofmanufacturinginGDPfrom16%inFY14to25%by2022.

Tomeetthis increasingdemandeitherthe localproductionwillhavetorampuporthe importswillhavetogoup.As importdutieshavefallenacrossSouthandSoutheastAsia, largeglobalmanufacturershavesetuptransnationalsupplychainsincountrieswithbetterinfrastructure,portsandfriendlyregulatoryregimes.Thishasledtoglobalplayersshiftingfrommanufacturingtoassemblyand,subsequently,tooutrightimportsintoIndia.Ourviewisthatsustainedgrowthismorelikelytostemfromtheriseofdomesticmanufacturing,ratherthanrelyingoninternationalcompanies.Besidessimplifyingregulatoryprocessesandcompliancerelatedissues,thegovernmentwillhavetolookatpoliciesspecifictothechemicalmanufacturingsectortogeneratesizableimpact.IndustryfeelsFreeTradeAgreements(FTAs)arehavinganegativeimpactonbusiness.FTAscreatean‘inverteddutystructure’makingitcheapertoimportafinishedproductratherthanmanufacturingorassemblingitinIndia.

3.2.2. Feedstock for Chemical Industry

(a) Reduction of Customs Duty on Feedstock Ethyl Alcohol

Presently, India is net deficit of ethanolwith estimatedproductionaround245 crore litres against consumptionoftotal325crorelitres(in2014-15).Launchof5%EthanolBlendingProgrammewiththerequirementof105crorelitresof ethanol has raised the demand. This has further increased price of ethanol available to chemical industries. Due to theinadequatesuppliesofethanolinthedomesticmarket,IndianChemicalindustryisforcedtoimportethanol.Thechemicalindustrywouldbedependentonethanolimportsforthenextfewyearstomeetitsrequirements.

Products manufactured by Ethanol based chemical industry compete with products made from petroleum route where feedstockisderivedfromcrudeoil.Currentlyimportdutyonindustrialethanolis5%whereasitisnilforcrudeoiland2.5%forethylene.Hence,therehastobealevelplayingfieldtomakethisindustrycompetitive.Onapplicationside,thedownstreamapplicationsofethanolarefuelblending,potableliquor,Pyridine,MonoEthylGlycol(MEG-furtherusedforPolyesterFibreandFilms,PackagingFilmsandPetbottlesetc.).EthylAlcoholisalsousedformakingAceticAcid,EthylAcetateandAceticAnhydride.Mostoftheseproducts(Pyridine,EthylAcetateetc.)areexportedoutofcountryandaremajorbuildingblocksforvariousagrochemicalsandpharmaceuticalsproducts.RemovalofDutywillfurtherboost the export of such products and will increase the forex revenue for the country.


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Inviewoftheabove,itisrequestedthatbasiccustomsdutyonfeedstockethylalcoholshouldbereducedtonilasthiswillpromotegrowthofdownstreamchemicalindustryproducts.Itwillalignthedutyrateswithotherfeedstocktomakeethanolbasedchemical industrycompeteinglobalmarketwiththefinishedproductsobtainedfromthepetroleumroute.

(b) Reduction of Customs Duty on Feedstock Methyl Alcohol

Methanolconsumptioninthecountryisestimatedat1.8-2.0milliontonnesandisexpectedtoreach2.5milliontonsbytheendofthe12thfive-yearplan.Thecurrentproductioncapacityinthecountryis0.385milliontonnes/annumtherebycreatingasignificantgapwhichwouldprimarilybemetthroughimportsfromMiddleEastandChina.

Onapplicationside,thedownstreamproductsofmethanolareAceticAcid,Formaldehyde,DiMethylEther,MethylTertiaryButylEther,Gasolineetc.whicharemajorbasicbuildingblocksformajorityofchemicalsinIndia.Theremovalofdutyonmethanolwillboostthedownstreamindustryandwillreduceoutgoofforeignexchangefromcountryalsotheresultant lowercostofproductionwill increasetheprofitabilityofendproductsexportedoutofcountry.Thereexistsstrongopportunityininvestmentinmethanolcapacityinthecountry,butthesearelimitedbyfeedstock(naphthaandnaturalgas)availability.Insuchascenario,thegovernmentcanincentivizethedevelopmentdownstreamindustrybyremovingcustomdutyonmethanol.

ItisrequestedthatbasiccustomsdutyonfeedstockMethylalcoholshouldbereducedtonilasthiswillpromotegrowthof downstream chemical industry products.

(c) Increase of Customs Duty rates of Ethyl Acetate

India is among the top5 global producers and is anet exporterof ethyl acetate. India is dependenton SingaporeforaceticacidimportswhichareusedasinputinthemanufactureofEthylAcetate.InviewofthelopsidedFTA,thecompanywhichsupplies theaceticacidaswellethylacetatehasacostand logisticadvantage. India isnotable tocompete with them.

UndertheSingaporeFTA,importofEthylacetatesuffers0%dutywhereasAceticacidissubjectto5.56%duty.Hence,thereisaninverteddutystructurewhichneedsrectification.ItissuggestedthatcustomsdutybeimposedonEthylacetateatparwithaceticacid.

3.2.3. Alkali Industry

ThealkaliindustryinthecountryproducesmainlyCausticSoda,ChlorineandSodaAsh.Theseproductsarethebasicbuildingblocksandfindvariousapplicationsasgivenbelow:-

Caustic Soda is used in the Soaps and Detergent Industry, Pulp and Paper Industry, Textile Processing Industry,AluminiumSmelting,DyesandDyestuffIndustry,PlasticPolymers,RayonGradePulp,Pharmaceuticals,ElectroplatingandAdhesives/Additives.

Chlorine, joint-product of Caustic Soda Industry, is very important for manufacturing PVC, one of the five majorthermoplasticcommodityplastics.Besidesthis,itisusedindisinfectionofdrinkingwater,inpharmaceuticalindustryand various other chemical industries. Because of the strong oxidizing properties of Chlorine, it is effectively usedto control growthofbacteriaandviruses indrinkingwater therebypreventing the spreadofwater-bornediseasessuchasCholera.UseofChlorineisveryimportantforcountrieslikeIndiaespeciallyincaseoffloods.Over85%ofthepharmaceuticalsrelyonChlorinechemistryincludingmedicinesthattreatheartdisease,cancer,AIDSandmanyotherlifethreateningdiseases.Chlorinetabletsarealsousedbypublichealthworkersinruralareas.

SodaAshisusedinGlassIndustry,Soaps&Detergents,SilicatesandvariousotherChemicalIndustries.

ThepresentglobalcapacityofCausticSodaisestimatedat94millionMTPAwhileIndia’scapacityisonly3.3milliontonnesi.e.amere3.5%oftheworldcapacity,whileChinahasacapacityof44milliontonnesi.e.47%oftheworld


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capacity.SimilarlytheglobalSodaAshcapacityis60millionMTPA.Chinahasthelargestcapacityat25millionMTPAor41.5%oftotalglobalcapacity,whileIndia’scapacityisonly3.1milliontonnesi.e.5.2%.

TheIndianindustryisfacingchallengesduetohighpowercost,cheaperimportsandimpactofcascadingdutiesandtaxes.

Thesechallengesaffectthecapacityutilizationwhichissub-optimalatlessthan80%.

Followingrecommendationsaremadeinthisbackground:-

(a) Membrane Cell Plant / Electrolysers, Membranes & their parts for manufacturing Caustic Soda

None of these items aremanufactured in India asmanufacturing is cost intensive and the low demand does notjustifyinvestmentsinmanufacturing.Anexemptiontotheseitemsfromthecurrentrateof2.5%willimprovethecostcompetitivenessoftheindustrywhohaveinvestednearlyRs.5000croresinthepasttenyearstoconverttoenergy-efficientandeco-friendlymembranecelltechnologyforcausticsodaproduction

ItisrequestedthatfullexemptionfromthelevyofCustomsdutymaybegrantedonimportsofmembranecellplant/electrolysers,membranes&theirpartsformanufacturingcausticsoda.ThiswillhavearevenueimpactofRs.1.2croresperannumforsparesandRs.0.6croresperannumformembranesTheresultinghigherproductionanddutiespaidthereonwilloffsetthisamountsubstantially.

(b) Caustic Soda and Soda Ash

IndiaisfacingchallengesduetocheapimportsfromlowpowercostcountriesinSouth,SEAsia&MiddleEast.Intermsoftechnology,IndiaissecondonlytoJapaninadoptionoflatesttechnologybyinvestingsubstantially.However,thehighcostofpowerrendersIndianmanufacturingatacomparativedisadvantage.

Itissuggestedthatbasiccustomsdutiesonimportsofcausticsodaandsodaashmaybeincreasedfrom7.5%to15%

(c) Poly Vinyl Chloride (PVC)

PolyVinylChloride(PVC)isprobablythemostimportantplastic.ItisabasicproductthatgoesintoservingthebasicneedsofIndianpeople.Todayunfortunatelymorethan1.4milliontonsofPVC,representingmorethan50%ofthelocaldemand,isimportedintothecountryduetolackoflocalinvestment.ThelackofincentiveforcreatinglocalcapacityinIndiahasmeantthat,whilePVCdemandinIndiaisgrowingatarapidrate,unfortunatelyitisbeingservicedbyimports–bycompanieswhoareservingtheIndianmarketfromtheiroverseaslocations,ratherthanbysettingupcapacitiesinIndia.ThedemandforPVCinIndiaisgrowingatover10%everyyear,anddomesticmanufactureisdisadvantageddue to non-availability of ethylene and the high cost of power. This is resulting in very poormargins for domesticmanufacturers,leadingtoacompletedisinterestincapacityadditions.

Toredressthissituation,itisrecommendedthatdutyonPVCberaisedto10%fromthepresentlevelof7.5%.ThismovewillresultinapositiverevenueimpactofaroundRs.190crores.IncreasingthedutywillgiveanimpetustothedomesticPVCindustryandprovidetheincentiveforfurtherexpansionsandinvestmentwithinIndia.

(d) Ethylene di-Chloride (EDC) and Vinyl Chloride Monomer (VCM)

EDC and VCM are key inputs in the manufacture of PVC. There is no local manufacture of these products for merchant saleintheIndianmarket;hencenoIndianmanufacturerwillbeaffectedbybringingdowncustomsdutytonil.Facilitiestomanufacturethese intermediatesareusuallysetuponly forcaptiveuse.Thisproposalwill thereforenot impactsettingupofsuchfacilities.Incountrieswithdevelopedpetrochemicalinfrastructure,thesearesourcedoffpipeline;inIndia,VCMisshippedunderhighlyspecializedconditionsinvolvinghugelogisticscost,makingdomesticmanufacturersuncompetitivecomparedtotheirinternationalcounterparts.


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Itisrecommendedthatimportdutyonthese,whichiscurrentlyat2.5%,bebroughtdownto0%.Therevenueimpactis reasonably small at around Rs. 90 crores, which is more than made up by the increased revenue that can accrue from an increase in Basic Customs Duty (BCD) on PVC resin.

3.2.4. Agrochemicals

Agrochemicals/Pesticidesareanimportantingredientfortheagriculturesectoralongwithgoodseedsandfertilizers.Theyneedsimilartreatmentforthepurposesoflevyofexciseduty,asthefertilizersector.Excisedutyonpesticides(heading38085000and38089111to38089990)needstobebroughtonparwiththedutyonfertilizers.Excisedutyontechnicalgradepesticideandformulations is12.50%. If thisduty isreducedto8%itwillbringdownthecostofpesticidestofarmersandencouragecountrywideproductionleadingtolowerlogisticscosts.

3.2.5. Oleo Chemicals

TheimportsfromASEANunderASEAN-IndiaFTAincurapreferentialtariffwhichhasaslightnegativeimpactonthedomesticbusiness.UnderASEANFTA, in general import duty onmostOleo chemicals has been reduced,whereasthereductionindutyoninputrawmaterials ismuchlessthusrenderingdomesticchemicalmanufacturingindustryuncompetitive.Followingsuggestionsmaybeconsideredtorevivetheindustry:

(a) SinceASEANFTAisunderreview,dutystructurehurtingOleochemicals,Surfactants,HomeandPersonalCareProducts needs to be reviewed by imposing reasonable import duties to protect domestic manufacturingindustry.ThisisimportantasevenafterhavingveryloworzeroimportdutyontheirfinishedproductsasperFTA,Indonesia/MalaysiacontinuetogiveeconomicadvantagetotheirdomesticmanufacturersbyimposingExportDutyontherawmaterialslikePalmOil,PalmKernelOilanditsfractions.

(b) Chapter 3401 and 3402 which cover all the surfactant, Soap Noodle, Personal and Home Care Products that use raw materials imported from Indonesia / Malaysia should be removed from ASEAN FTA and should be listed undernormaltrackandanimportdutyof15%,bothunderFTAandunderGeneralTariffarea(asitwasapplicablepriortoitsinclusioninASEANFTA)shouldbeimposedimmediatelytosaveextinctionofthisindustrysegment.

(c) FattyAlcoholscoveredunderChapter382370andChapter290517,whichalsodependsontherawmaterialsfrom Malaysia / Indonesia, should also be removed from the ASEAN FTA and be listed under normal track and an importdutyof15%,bothfromFTAandfromGeneralTariffarea,beimposedonitsimportintoIndia.Thiswillsavethedomesticindustryfromclosureasitalreadyhassurplusmanufacturing.

(d) CrudeGlycerineisoneofthekeyby-productsofOleochemicalsIndustryanditspricingverymuchaffectstheeconomics of the main products manufactured from the oils. Currently there is an inverted duty structure for CrudeandRefinedGlycerine.SinceIndiahassufficientglycerinerefiningcapacity,itisrecommendedthatimportduty(bothFTAandGeneralTariff)onCrudeGlycerine(HSCode15200000)shouldbereducedtozeroandimportduty(BothFTAandGeneralTariff)onrefinedGlycerinewhichiscoveredunderHSCode29054500beincreasedto15%.

(e) SouthEastAsianmanufacturersuseNaturalquality rawmaterials likeCrudePalmOil (HSCode1511),PalmKernelOil(HScode1513)formanufacturinghighqualityfinishedproducts.Indianmanufacturersshouldalsobeallowedtoimportsimilarqualityrawmaterialswithoutaconditionofminimum20%FFAcontentatNILrateofdutyonlyforthemanufactureofSoapsandOleochemicalsonactualuserconditions.ForthispurposerecentNotificationNo.12/2014-Cusdated11-07-2014shouldbesuitablyamended.

3.2.6. Chemical Clusters

TheChemicalIndustryhasspecialrequirementofdealingwitheffluentdischarge.Thissectorisimportantandthereisahugeunrealisedpotentialofgrowthasindicatedbythepresentverylowpercapitaconsumptionlevelsinthecountry


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as also for export. Most of Indian Chemical industry is in small and medium sector and same restricts the capability ofinvestmentofentrepreneursforadoptionofnewertechnologies.Theprovisionofcommonfacilitiesintheformofgoodqualitypower/watersupply,effluenttreatment/incineration,testingandotherlogisticfacilitiessuchaschemicalstoragetanks,telecom/firefightingandrail/roadconnectivitycanfacilitatethesector.Furtherifrelatedindustriesaresetupincloseproximityinanindustrialestate,theycouldbeverticallyintegratedresultinginasavingonthetransfercostoffeedstockandfinishedgoods.This,coupledwithlowerinvestmentoninfrastructureasaresultofsharing,wouldtremendouslyimprovetheircostcompetitiveness.Thiswillalsohelpincontainingtheenvironmentalloadlinkedtothechemical industry.Existinghubs(brownfield)willneedslightlydifferentapproach.About3-4suchchemicalclustersbasedonthebestmodels,couldbesetupindifferentregionsofthecountryandthesecouldbecometherolemodelforreplication.DepartmentofChemicalsandPetrochemicalsisalreadyfacilitatingclusterapproachinplasticssector.

3.2.7. Technology Up-gradation Fund for Chemicals Industry

Toremaingloballycompetitiveandcomplywithrequirementsofinternationalconventions,Indianchemicalindustryneedstoupgradeitstechnologytomeetworldstandardsandshowimprovedperformanceinglobaltrade.Anumberofchemicalplantsareofsmallercapacitiesandoperatingatuneconomicscalesofproductionwithobsoletetechnologies.The industry,especially themicro, smallandmediumenterprisesector,doesnothaveaccess tocapital toupgradetechnologyonitsown.Also,non-availabilityoftechnologyleadstoimportsinsometechnology-intensivesub-segments.

Toaddresstheseissues,thegovernmentmayestablisha“TechnologyUp-gradation&InnovationFund”(TUIF)thatcanaddressspecifictechnologyissues,facedbytheindustry.Thefundshouldalsosupportsettingupofcommonchemicalsinfrastructure(e.g.effluenttreatmentplants,chemicalwastedisposalplants,etc.),whichwouldbenefitindustriesandtheenvironment.Fromthis fundsupportmaybeextendedtothechemical industryfortechnologyup-gradationatlowerrateofinterest.Thiswillhelpindustryinimprovingqualityofoutputandbecomemorecompetitive.

3.2.8. Petrochemicals

Petrochemicalsconstituteaveryimportantsegmentofworldchemicalsmarket,withashareofnearly40percent.Theindustryisimportantasithasseverallinkageswithothersectorsoftheeconomy.Petrochemicalshavebackwardlinkageswithotherindustriesinpetroleumrefining,naturalgasprocessingandforwardlinkageswithindustriesthatdealinavarietyofdownstreamproducts.Also,theindustryoffersalternatives,whichserveassubstitutesfornaturalproductsandhence,hasthecapacitytomeettheconstantlygrowingdemandthatwouldotherwisestrainthenaturalresources.The petrochemical industry is facing financial difficulty with pressure on prices andmargins, this has discouragedcapacityexpansion, investment inthesector isseverely laggingdemandgrowth.This ismakingthe“Makein India”campaigninfructuous.Therearealreadylargeimportsandhugeoutflowofforeignexchange.Thesituationwouldgetaggravatedwithburgeoningtradegap.Intheaboveback-drop,FICCIwouldliketomakethefollowingsubmissionsfortheGovernment’sconsideration.

(a) Feedstock and Inputs

(i) Feedstockisthemajorcomponentofcostinpetrochemicals.WhileintheBudget2014-15,partialreliefwasgivenbyreducingtheimportdutyfrom5%to2%onfeedstocklikeEthane,PropaneandButane,dutyonthelargestfeedstockfortheindustry-Naphtha,remainedunchanged,Naphthaisalsousedforpowerandfertilizerproduction,whereinforfertilizerproductionitisexemptfromimportduty.Thisanomaloussituationneedstobecorrected.

(ii) lmportdutyonkeypetrochemicalfeedstocksNaphtha(HScode:27101290)maythereforebereducedto2.5%tobringitatparwithotherpetrochemicalfeedstock.Thisinturnwouldincreasethedutyspreadbetweenthefeedstockandend-product (polymers)and incentivizedomesticmanufacturing.Currently,the duty spread in India is one of the lowest in the world.


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(iii) LiquefiedNaturalGas(LNG)isabasicinputtothechemicalandpetrochemicalindustry.Inordertoenhancethecostcompetitivenessoftheindustry,importdutyonMixedpetroleumGases/LNG(HScode:27i12900)bebroughtdownfrom5%to2.5%.

(iv) ImporttariffonkeypetrochemicalinputsEDC(HScode:29031500),VCM(HScode:29032100)andStyrene(HScode:29025000)maybebroughtdownfrom2%tozero.Thereisvery littleproductionofmanyofthese formerchant salewithin the country andwhatever capacity exists is essentially for captiveuse.ThereisnodomesticproductionofStyreneandtheentireStyrenerequirementofthecountryisimported.

(b) Polyethylene (PET)

Polyethylene(PET)isoneoftheimportantrawmaterialsextensivelyusedbytextileandthepackagingindustry.Withthegrowthofretail,demandforPETisexpectedtoriserapidly,Mostofthemajorplasticsraw-materialsattract7.5%duty.Indiaishavingsignificantinvestmentinitsproductionandthecountryisanetexporterofthismaterial,importdutyonPET(HScode:390760)maythereforeberaisedfromtheexistinglevelof5%to7.5%thusbringingthisatparwithothermajorcommodityplastics,The3tarifflinescoveredunderthePETtariffsubheading390760are39076010,39076020and39076090ofwhich39076010findswideapplicationsinthetextilessector.

(c) Engineering Plastics

Indiahasanascentengineeringplasticproductioncapacity.Theseareadvancedmaterialswith superiorpropertiesmainly used in critical applications in automotive, appliances, electrical, lighting and electronic sectors. India hasreasonableinvestmentforproductionofABSandSAN.However,importdutyonthematerialscontinuetobeat5%.ItisproposedthatimportdutyonABS(HScode:39033000)andSAN(HScode:39032000)beincreasedfrom5%to7.5%aligningthiswithothermajorplasticraw-materials.

(d) Synthetic Rubber

Indiahasagrowingautomotiveindustryandassociatedtyreandrubbergoodsindustry.TheindustryusesbothsyntheticandnaturalrubberswhereinimportdutyonthemajorsyntheticrubberlikeSBRandPBRareat10%level.Theobjectiveistoprotectthenaturalrubbersectorfromlargescaleimportofsyntheticrubber.However,ButylrubberorIIRhasanimportdutyof5%,muchbelowthelevelapplicableforothermajorsyntheticrubbers.InviewofthisimportdutyonIsobutyleneIsopreneRubber(IIR)(HScode:40023100)andHaloButylRubber(HilolsobutenelsopreneRubber-HIIR;HScode:40023900)beraisedfromtheexisting5%to10%torationalizethedutystructureinthesyntheticelastomerssector.

(e) Man-made Fibres and Yarns

Thewholeoftextileindustryhasbeendemandingreductionintheexcisedutyonman-madefibre(MMF)andyarnstoincreasethedomesticconsumption.Thepresentrateof12.5%isveryhighanddiscriminatesMMFwithCottonwhichhaszeroexciseduty.Thismakesman-madetextiles,usedbymasses,expensive.Itmaybenotedtheallspunyarnsofcottonweregivenanoptionalroutein2004andspunyarnsofman-madefibrestoogiventheoptionalroutein2006.Areductioninexcisedutyfromexisting12.5%to8%maybeconsidered.

3.2.9. Indian Plastics Processing Industry

ThisisanimportantsegmentofIndianindustrywithusageinpackaging,agricultureasalsoauto,medicalandothersegmentsastheyreplaceitemssuchaswood,metaletc.Thesectorhashugeunrealizedpotential,goingbythepresentverylowlevelsofconsumptioninthecountry.Percapitausageisonlyabout10kginIndiaascomparedtoabout100kginUSAand40kginChina.CentralExciseDutyonPlasticPolymersandArticlesofPlasticsPlasticproductshavereplacedwoodenproductssubstantially:-

• 6000MTofplasticfurnituresaves140,000cubicmeterofwoodor32000hectaresofforest.


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• Plasticcrateshavesubstitutedalmost95%ofwoodencratesusedinthesoftdrinkindustry.

• Theonlyviablealternativetothewoodenfurnitureisplasticmouldedfurniture.Plasticshavebeencomingupasreplacementofwoodinfurnitureinamajorway.

• OnlyPVCdoorsandwindows,plasticscrates,plasticsfurniturecansaveatleast17.5milliontreesfromcutting.Plasticbasedwoodsubstitutesareamenabletorecycling.Toconservewood,theGovernmentofIndiain1988had issued a directive to promote wood substitutes, including plastics in all Government and institutionalpurchasesforfurniture,doorandwindowframeandshutters.

TheorganizedPlasticIndustryistodayhamstrungbythegreymarket–estimatedtobeashighas40%--ontheonehandandunder-invoiced,smuggledimportsfromChinaontheother.Reducingthecentralexcisedutyto8%willbringdownthecostspreadsbetweenorganizedsegmentandthegreymarketandcorrespondinglyboostGovernmentrevenuesboththroughbettercomplianceandincreasedturnover.ItisrequestedthatCentralExcisedutyonplasticpolymersandarticlesofplasticsbereducedfrom12.5%to8%.

Importsofarticlesofplasticaretakingplaceatlowandunjustifiedprices.ArticlesofplasticsarealsoimportedunderCChapters42,56,63,67,90,94,95and96, thevolumeswhereofarealsogrowing. Ithasbeen recommendedbythesubgrouponthePlasticProcessingIndustryconstitutedbytheDepartmentofChemicalsandPetrochemicalsthatCustomsDutyondifferentialbetweenPlasticPolymersandProcessedPlasticsGoodsshouldbe10%.Keepingthesefactors inview, it isessentialthat importdutystructureonimportsofarticlesofplastics isre-calibratedtoincreaseimportdutyonplasticgoodsfromcurrent10%to15%.Itmaybenotedthatimportdutiesinmanyofcountriesintheregionareintherangeof15-20%.

3.2.10. Technology Up-gradation Fund for Plastics sector

Existingunitsneedup-gradation/installationofnewplantandmachineryinplaceofoldplantandmachinery.Technologyup-gradationfundscheme(TUFS)forPlasticsindustryisneededbadly.ThiswillprovideloantounitsatsubsidizedratestoPlasticsProcessorsforthepurchaseofnewmachineryforup-gradation.TheIndianplasticsprocessingandconvertingindustryhaslargepopulationofoldertechnologymachineryandthusdoesnothavethesametechnologicaledgetoremaincompetitiveincostsandqualitycomparedtoourglobalcompetitors.TheproposedSchemeaimsatmakingavailablefundstothedomesticplasticsprocessingandconvertingindustryfortechnologyup-gradationofexistingunitsaswellastosetupnewunitswithstate-of-the-arttechnologysothatitsviabilityandcompetitivenessinthedomesticaswellasinternationalmarketsmayenhance.ThereisincreasingcompetitionfromChinaandothercountriesnotonlyintheinternationalmarket,butalsointhedomesticmarket.Tomeetthechallengestheindustryisrequiredtobecomecompetitive,costeffectiveandqualityoriented.Thiswillmaketheindustrycompetitive.

3.2.11. Setting up of Centres of Excellence

CentresofExcellence(COE)areneededfordealingwithspecificissues/segmentsinthechemicalindustryasfollows:-

(a) IndianBureauofCorrosionControl-IndialosesacolossalfigureofoverRs2lakhcroreseveryyearduetothemenaceofcorrosion.Theannualcostofcorrosionworldwideisestimatedtobe$2.2trillion.Corrosionhasahugeeconomicandenvironmentalimpactonvirtuallyallfacetsoftheworld’sinfrastructure,fromhighways,bridges,andbuildings to oil and gas, chemical processing,water andwastewater systems andparticularly industrialstructures.ACentreofExcellence(COE)jointlywithindustrycanhelpidentifythecausesandmeasurestodealwithcorrosionincludingawarenessgeneration.

(b) Agrochemicals, Dyes/Colourants and Pesticides - This segment of industry has huge potential and needs tobeencouraged.More than60%ofproduction fromthesesectors in India isgettingexported, indicating thepotentialofthesectorfromaglobalperspective.ACOEforthissegmentwillbehelpful.


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(c) Fire-RetardantChemicals -Accidentalfiresarecausinghuge losses. (Estimated lossof lives is25000personsperannum,besideshugeeconomiccost).Inmodernhomeswhereroomscontainupholsteredfurniture,variedelectricalandelectronicequipment,(mademainlyofplasticcomponents)andotherconsumergoods,firescandeveloprapidlyandviolently.The focusso farhasbeenonfightingfires,after theyhavetakenplace.Therehavebeenrecentdevelopmentsinthesectorinrelationtochemicalswhichretard/preventfire.Thereisneedtoencourageandcreateawarenessabout thesedevelopments in thechemical industry.The focusofflameretardantsisonfirepreventionratherthanfiremitigation.Itisimportanttobringoutissuesrelatedtothesafetyaspectsandalsothepotentialofchemicalsforfiresafetyinapreventivemodeasalsoinanenvironmentfriendlymanner.WeproposesettingupaCentreofExcellencefortheFireSafetyaspect.

3.2.12. Reverse SEZs - Setting up of Chemical Complexes in Resource Rich Countries

TheconceptenvisagesIndianCompaniestoinvestintosuchazoneestablishedinresourcerichcountries,tousethecheapgas/resourcesavailabletomakechemicalbuildingblocksandbringthemtoIndiaforthecountry’sneeds.Bothcountrieswillbebenefitedasinvestmentsflowtothatcountryasalsojobsgetcreated.Indiareceivesassuredsupplyofintermediates/chemicalsforfinalvalueadditioninthecountry

ThecountryisdeficitincheapenergysourcesparticularlynaturalgasandneedstodependmoreandmoreonfuelssuchasLNG.ThelocalavailabilityofgasisverylimitedandunabletomeettotalneedsandthecountryneedstodependonimportedLNG.OntheinternationalscenariowithnewdiscoveryofshalegasintheUSAandrecentdiscoveriesinAfrica,thelocalgaspricesinthesecountriesarenowbetween$2to3/MMBTU.Learningfromothercountries,suchasChinawhereenergyandmineralneedshavepushedthecountrytosourcetheseinputsinfarflungregions,suchasBrazil,Africaetc.,Indianeedstosimilarlyprogressinordertosecureitsneedsinenergyandbuildingblocks.Theclosestenergy/gasavailability inabundance incountriesaround India isasthose inAfrica,MiddleEastandontheeasternborderofIndia.However,sincethesecountriesarepoliticallyunstable,itisalwaysahighriskforanindividualCompanytosetupgasbasedmanufactureofbasicbuildingblocksinthesecountries.Itistherefore,proposedthattheIndianGovernmenthelpcreateaSpecialEconomicZone(SEZ)inthesecountriesandmaintainapoliticallystablerelationshipwiththelocalGovernment.VariousIndianCompanieswouldbeinterestedtoinvestintosuchanSEZtousethecheapgasavailabletomakechemicalbuildingblocksandbringthemtoIndiaforthecountry’sneeds.TheReverseSEZwouldbeblessedwithpoliticalstabilityduetotheIndianGovernmentandeconomicattractivenessduetocheapavailabilityofgasinthesecountries.

ThebiggestbeneficiarywouldfirstbetheFertilizerindustrywhichwouldbeabletogetgas,itsmajorinputatapricewhichwouldbe1/4thofitscurrentprice.Itisexpectedthateveryfertilizerplantwithanindividualcapacityof1500tons/daywouldbeabletosaveaboutathousandcroreseveryyear,therebycontributingtoreducesubsidiespermanently.ThePetrochemicalindustrycouldlookatmakingbasicbuildingblocksalongwiththeFertilizerindustriesintheseReverseSEZareassuchasAmmonia,MethanolandotherC1chemistryproducts.CheapavailabilityofC1buildingblocksfromtheReverseSEZareawillhelpassurelargeinvestmentsondownstreamproductsinIndia(homemarket)Indiacouldalsoexploreopportunitiestomakepowerbasedoncrude/cheapMethanolbeingimportedinsteadofLNG.SomecountriessoidentifiedincludeMozambique,Iran,OmanandMyanmar.

CIGARETTES

3.3.1. No Increase in Excise Duties

Asaresultofataxationpolicytargetingthecigarettesegment,theshareofcigaretteshasbeendecliningoverthelast30years.WiththelasthikeinexcisedutyaffectedinUnionBudget2015,theincreaseoverthelast4yearsaggregatesto a 98%. The issue is compoundedby arbitrary increase in State Taxeson cigarettes –with rates as high as 42%.Consequently,Indiaisamongstthecountrieswherecigarettesareleastaffordable.


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The illegal cigarette segment comprisingboth contraband (customsdutyevaded)andexcisedutyevadeddomesticcigarettes,continuedtogrowandat23billionstickscurrentlyaccountsfornearly20%ofthetotalcigarettessoldinIndia.

Decliningvolumesoflegitimateduty-paidcigarettesinthenationalmarkethasnotonlyresultedinreduceddomesticoff-takeof tobaccobut, coupledwithwithdrawalofexport incentivesunder thenewForeignTradePolicyexposedIndian farmers toexploitationby foreignbuyers.Besides lossof revenuetotheGovernment,millionsofpersons inthecigarettevaluechain-whoselivelihoodsaresupportedbythecigaretteIndustrylikefarmerswhogrowcigarettetypetobaccos,smallretailersrunningcigarettevendingkiosks,distributors,salesmenetc. -wouldalsobeadverselyimpacted.

It is awell-established principle of fiscal policy thatmoderation and stability in rates is not only one of themosteffectivemeansofincreasingtaxrevenue,butalsoofwideningthetaxbase.Inordertoenablethelegitimateindustryto effectively combat themenaceof illegal cigarettes, facilitate shift in tobacco consumption into revenue-efficientcigaretteformandtoprovideimpetustorevenuebuoyancyitisstronglyrecommendedthatcurrentexcisedutyratesforcigarettesbemaintainedtoenablerecoveryandoptimisationofGovernmentrevenue.

3.3.2. Continuation of Length Based Specific Duty Structure of Excise for Cigarettes

Lengthbasedspecificexcisedutystructureisasimple,transparentmethodoftaxationwhichiseasytoadministerandwhichhasnopotentialforvaluationdisputes.Ithasenabledmanufacturerstopositiontheirproductsatvariouspricepoints,acrossdifferentsocioeconomicstrataoftheIndiansociety.Ithasalsofacilitatedintroductionofhighqualityproducts–benchmarkedtointernationalbrands-resultinginincreaseddemandforhighqualityIndiantobaccosleadingtoimprovedfarmerearnings.RetentionofthisstructurehasbeenrecommendedrepeatedlybyeminenteconomistslikeDr.RajaChelliahandDr.VijayKelkar.

Therefore,itisrecommendedthatlengthbasedspecificexcisedutystructureoncigarettesberetained.

3.3.3. Review of Length based Segments in the Cigarette Duty Structure

TheexistingexcisedutystructurewheredifferentlengthbasedsegmentsaresubjectedtodifferentratesofexcisedutywasdesignedkeepinginmindthediversesocioeconomicprofileoftheIndianpopulaceandtheneedtoofferproductsatdifferentpricepointsinlinewiththeiraffordability-profile.AccordinglytheIndustryhasbeenofferinga‘laddered’portfolioofproductsatmultiplepricepointscateringtotheneedsofallsectionsoftheSociety.

However,theUnionBudget2014hasdeletedthe‘greaterthan75mmbutlessthanorequalto85mm’categoryandcombinedthiswith‘Others’segmentpresumablytosimplifytheexcisedutystructure.GiventhediversityinthesocioeconomicprofileoftheIndianpopulace,it isimportanttohavemultiplelengthbasedtaxpoints.Thisfacilitatestheindustrytomakeofferstailoredtomeettherequirementsofeachsectionofthesociety.

Secondly,inthe‘lessthan65mmsegment’,thecumulativeincreaseinexcisedutyratehasbeenasteep109%inthelast2UnionBudgets.ThissegmenthadenabledthelegitimateindustrytoholdontoRs.2pricepointthushelpingpartialretentionofvolumes,whichwouldhaveotherwisegoneintoillegalsegment,withinitsfold.TherecentincreasehasforcedtheindustrytovacatethecrucialRs.2pricepoint.Thisputsthelegalindustryataseveredisadvantage.

Inordertoeffectivelycombatthemenaceofillegalcigarettes,thereisaneedforanewsegmentof‘lessthan60mmlength’withanexcisedutyofRs.200perthousandcigarettes.Thereforeitisrecommendedthat-

(i) Theexistinglengthbasedsegmentsshouldbecontinued

(ii) Anewlengthsegmentof‘lessthan60mmlength’beintroducedwithanexcisedutyofRs.200perthousandcigarettes


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(iii) Inaddition,therateofCentralExcisedutyonthe65mmfiltercigaretteslabbereducedfromtheexistinglevelofRs.1440perthousandcigarettestotheearlierlevelofRs.689perthousandcigarettes

3.3.4. Standardise Tobacco Taxation across all types of Tobacco Products

Unlikemostcountriesintheworld,cigarettesaccountforlessthan11%ofthetotaltobaccoconsumption.Infact,with17%oftheglobalpopulationIndiaaccountsforonly1.8%ofglobalcigaretteconsumption.Ontheotherhand,Indiaaccountsforabout84%oftheglobalNon-smokingTobaccoconsumption.Besides,biriandsmokelesstobaccoformsareknowntobepotentiallymoredangerousthancigarettessincemostmanufacturersproduceinferiorquality,cheapproductswith higher tar, nicotinedeliverieswhich aremoreharmful for consumers. Smokeless tobacco is popularamongstwomenandchildrenasthefearofdetectionislessanditdoesnotattractsocialsanctionlikesmoking.

Inordertoensuresustainabletaxbuoyancyfromtobaccoitisrecommendedthatthetaxbaseiswidenedbybringingin the largeunorganisedsegmentof the tobaccosector into the taxnet,and the largedifferential incentralexciseratesbetweencigarettesandothertobaccoproductsreducedgradually.Registrationofallmanufacturersoftobaccoproducts must be made compulsory.

3.3.5. Exempt Excise Duty on Cigarettes used Captively for Testing

Currently excise duty is applicable on all cigaretteswhich are used in non-destructive quality testing. InnumerabledisputeshavearisenwiththeDepartmentonwhatmachinetestsaredestructive.Further,costshavealsoincreasedbywayofdutypaidoncigarettesusedinnon-destructivequalitytests.Itisrecommendedthatfulldutyexemptiontocigarettesusedforqualitytestingpurposesshouldbeprovided.

3.3.6. Paper Rolled Biris

Inorder toevadehighexciseduty that ispayableoncigarettes, certain smokingproductsmasqueradingas “PaperRolledBiri”havemushroomedinthemarket.Theseproductsareclaimedtobehand-madeandaresoldataboutRs0.25paiseperstick.TheylookandsmokelikeregularcigarettesandaresoldinpackageswhicharealsoverysimilartocigarettepackagesandyettheyareclaimedtobeBirisandthereforeescapealltaxesthatarepayableonCigarettes.CurrentlyPaperRolledBirisareclassifiedunder24031929as“Biris–Others”.

AChapterNoteinChapter24oftheCentralExciseTariffshouldbeinsertedtoclarifywhatconstitutesaBiriandhowthesocalled“PaperRolledBiri”istobeclassified.ItissuggestedthatforthispurposerelianceisplacedonthedefinitionofbiriasstatedintheIndianStandards(IS)1925:1992.TheChapterNotemustalsoclarifythataproductcomprisingoftobaccowrappedinpapermustbeclassifiedas“cigarettes”.AsuggesteddraftoftheChapterNoteisgivenbelow.

“Birisshallbeeitherconicalorcylindrical inshapeandonlyconsistofbiri tobaccomixtureandthewrapper leavestohold the contents.Any smokingproduct comprisingof tobaccowrapped inpaper,withorwithoutfilter,will beclassifiableascigarette.”

It isrecommendedthatpaperrolledbirisbeclassifiedascigarettesandappropriateexcisedutybasedonlengthbeimposed.

CIVIL AVIATION

3.4.1. Issuance of Tax Free Infrastructure Bonds

To facilitate the private airport operators to raise funds, it is recommended that they should also be allowed to issue tax freeinfrastructurebondstothepublic.Further,theinvestmentsinthesebondsshouldbenotifiedforthepurposeofclaimingdeductionunderSection80CCFoftheActandtheapplicabilityofSection80CCFshouldbeextendedtocovertheinvestmentsmadefromfinancialyear(FY)2016-2017onwards.


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3.4.2. Support Services of Airport to be termed as Infrastructure

Intheairportsector,therearemanyancillary/supportservicesandfacilitiesrequiredwhichareessentialforsmoothfunctioningofairports.Theseincludefuelfacility,parking,cargofacilitiesetc.Noairportcanfunctionintheabsenceofthesefacilitiesasthesearelifelineforairport.

Intheabsenceofcleardefinitionof‘Airport’underthecurrentSection80-IAoftheAct,itleavesanambiguitywhetherthesefacilitiesareentitledtobenefitofSection80-IAoftheActornot.FICCIrecommendsthatbenefitunderSection80-IAoftheActbeextendedtocoverthesefacilitiesaswell.

3.4.3. Other Tax Issues

(a) Section72AoftheActbeamendedtoextendthebenefitsthereintotheentireairlineindustryandnotonlytopublicsectorcompanieswithaviewtoprovidetheprivateairlineoperatorsalevelplayingfieldaswellassustainingthecurrentgrowthofthecivilaviationsector.

(b) Toprovideimpetustomanufacturersofcriticalcomponentsofanaircraft,theperiodfor100%deductionundersection10AA(1)(i)oftheActmaybeextendedto8yearsfromexisting5yearsfornewunitswhichareengagedintomanufactureofcriticalcomponentstoAerospaceIndustry.

(c) TaxincentivesfordevelopmentofMaintenance,RepairandOverhaul(‘MRO’)facilityinIndiabeprovided.Itwillhelp airlines to reduce cost of repairs presently carried overseas and will also develop India as a hub for such facility.

E-COMMERCE

3.5.1. Provide Exemption from TDS on Payment to E-Commerce Service Providers

Currently,theprovisionsofsection194H,194-Iand194CoftheActmandatedeductionoftaxatsourceonaccrualorpaymentofcommission,warehouserentorservicechargestoaserviceproviderbytheprincipal.However,inthee-commercebusiness,thee-commerceserviceprovidercollectstheentiresalesconsiderationfromtheendcustomerandpaystheamount(netofcommission,servicecharges)totheactualsellerofgoodsorservices;similartothecreditcard industry.

InordertocomplywiththestringentTDScompliancerequirements,theprincipalsellersofgoodsandserviceshavetoawaitcomputationofcommission/servicechargesandremittanceofsalesconsiderationfrome-commerceserviceprovider and then deposit applicable TDS thereon. Presently, the e-commerce sector serves several thousands of small andmediumenterprisesanditispracticallyverydifficultforthelattertocomplywithTDSprovisions.

Itmaybeworth-whiletonoteherethatasimilarsituationwasfacedbycreditcardissuerswhoretaintheirshareofcommissionandremitsalesconsideration(netofcommission)tothesellersofgoodsandservices.ToeasetheburdenofTDScomplianceonsuchsellersofgoodsandservices,CBDTissuedanotificationno.56/2012dated31.12.2012asper which the commission paid to banks on credit card and several other services was exempted from the purview ofTDS.Itisaccordinglyrecommendedthattherequirementtodeducttaxatsourcebymanufacturersortradersonretentionordeductionofcommissionorservicechargesorrentaletc.bythee-commercecompaniesbedispensedwith.Alternatively,thee-commercecompaniesmayberequiredtodepositaprescribedsum(say1%ofcommission,servicechargeetc.)totheGovernmentatthetimewhensalesconsiderationbecomespayabletotheactualsellerofgoodsorservicesoratthetimeofactualpaymentofsuchsalesconsideration.

3.5.2. Restriction on Carry Forward and Set-off of Losses

Currently,aspertheprovisionsofsection72oftheAct,businesslosscanbecarriedforwardandset-offforaperiodof8yearssubjecttocertainrestrictionsprescribedundersection79oftheAct.Giventhecapitalintensivenatureof


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thee-commerceindustryandhugegestationperiodtypicallyexperiencedbye-commercecompanies,thetime-limitof8yearsmaynotbesufficientforabsorptionofthelosses.Further,section79restrictsthee-commercecompaniesfromcarryforwardandsetofflossesincaseshareholdingvariesby51percentormoreintheyearinwhichthelossisconsideredtobesetoffvis-a-vistheyearinwhichthelossisincurred.WhiletheSecuritiesExchangeBoardofIndiahasalsoapprovedenablingprovisionsfortechnologybasedstart-upsandothercompaniestoraisecapitalbyleveraginginstitutionalplatforms,theprovisionintheActasitstandstoday,actuallydiscouragesaninvestortoinvestinstart-up(wherethenaturalwindowofsettingoffoflossesforthelegalentityisnarroweddownorrestrictedevenforgenuinecaseswherethereasonofchangeinshareholdingiscapitalinfusionandnotreallychangeofmanagementandcontroloftheentity).

There isaneed foraclarification/circular tobe issuedby theGovernmentstatingthat restrictionprescribedundersection79oftheActwillnotapplytostartupswherechangeinshareholdingpatternisduetoinfusionoffundingbyinvestorswithoutchangeinthemanagementofthecompanyrunbyoriginalfoundersandtherigoursofsection79oftheActshouldberestrictedtocaseswherethechangeinshareholdingiseffectedwithaviewtoavoidorreducetaxliabilitybywayofarestructuringexercise.Atimelyclarificationtoresolvethisanomalyforthebenefitofentirestart-upecosystemwillhelpinpromotingresearchandinnovationinnewareas,creatingbusinessandstart-upculturewhichwillleadinemploymentgenerationformillennialgenerationandinmakingtheDigitalIndiadreamcometrue.

It is further recommended that thetime-limit for carry forward and set-offof business loss be extended from thecurrentperiodof8yearsto12yearsundersection72oftheITActtoenterprisesoperatinginthefieldofe-commerce.

3.5.3. Allow carry forward of losses under Section 72A

Alargenumberofinvestmentsaremadeinstart-upsintechnologyorientedsectorlikee-commerce.Alargenumberofcompaniesmakesubstantiallossesintheirinitialstagesbutthesaidlossesarenotavailableforcarryforwardandsetoffinthehandsoftheacquiringcompanies.ThereisaneedtowidenthescopeofSection72Atoincludetechnologyenablede-commercecompaniessoastoencourageconsolidationsthroughmergers,acquisitionsandinternalrestructurings.

It is recommendedthat thedefinitionof the term“industrialundertaking”undersection72Aof theActshouldbebroadenedtoincludeallkindsofinformationtechnologyorientedservicecompanies.

3.5.4. Allow Weighted Deduction under Section 35(2AB)

Section35(2AB)oftheActprovides200%weighteddeductiononscientificresearchexpenditureincurredbycompanieswhoareengagedinthebusinessofbio-technologyorinanybusinessofmanufactureorproductionofanyarticleorthingorcomputersoftware.Severale-commercecompaniesinvestheavilyindevelopinganddesigningwarehousingandlogisticsprocessestohandlemillionsofproductssituatedinmultiplelocationsthroughroboticorotherprocesses.Itisrecommendedthattheprovisionsofsection35(2AB)oftheActshouldbewidenedtoextendthetaxbenefitsoftheresearchanddevelopmenttoe-commerceserviceproviderswhousetechnologytodevelopvarioustoolsinthecourseof/forrenderingservice.ThiswouldalsobeinlinewithmanyforeigncountrieswheretheR&Dincentiveprovisionsareliberal and not restricted to a brick and mortar setup.

3.5.5. Concurrent demand of CST from Origin State and local VAT from the Destination State

Theprovisionsofsection9dealwiththelevyandcollectionoftaxandpenaltiesundertheCentralSalesTaxAct,1956.Itexplicitlystatesthattaxshallbecollectedbythestatefromwhichthemovementofgoodscommences.However,duetorevenuecollectionpressuresandlackofawareness,theVATauthoritiesofstatestowhichthegoodsareconsignedalsodemandVATwithrespecttosalesmadetotheconsumersintheirrespectivestates.Inotherwords,thereisadoubleclaimoftax-fromtheoriginstatefromwhichthemovementofthegoodsoccasionedandthedestinationstatewherethe consumers are located.


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Thecurrentappealandfasttrackdisputeresolutionmechanismprovidedu/s18AofCSTAct,1956prescribethatifadealerreceivesataxdemandu/s6A(2)or(3)fromastateonstocktransferofgoodsandonwhosesaleshehasalreadypaidtaxinanotherstate,hecandirectlyappealtoVATtribunaloftheoriginstate.However,nosuchappealprocedurehasbeenprescribedforavice-versasituationi.e.wheretheCentralSalesTaxhasalreadybeenpaidinonestateoninter-statesalesofgoodsandwheretheotherstatealsodemandsVATonthesame,allegingthesametobelocalsalesinitsstate.Inmostofthestates,ataxpayerisevencompelledtomakeasubstantialpre-deposittoevenfileanappealbeforethefirstappellateauthority.Further,inaneventualityofsuchinter-statetransactionbeingheldaslocalsale,thereisnorecoursetoclaimingrefundofCSTpaidtotheOriginstate;orforthesettlementofthetaxpaidamongsttheStates.

Inwakeoftheabove,itisrecommendedthatexpeditiousappellatemechanismprescribedundersection18AoftheCSTAct,beextendedtodisputesentailingwhethertransactionqualifiestobeinter-statesaleundersection3oftheCSTAct,involvingtwoStatesseekingtotaxthesametransaction(i.e.,theoriginStateseekingtotaxthetransactionasaninterstatesaleandthedestinationStateseekingtotreatthetransactionasalocalsale).

3.5.6. Scope of the Authority for Advance Rulings

ItisrequestedthatAdvanceRulingAuthorityconstitutedundertheCSTActmaybeempoweredtoissueclarificationinrespectofthefollowingamongstothers:

- CSTliabilityontransactionsentailinginterstatemovementofgoods

- CSTliabilityontransactioninthecourseofexportorimport

Thismechanismshouldaidinreducinglitigationandinprovidingcertaintyoftaxpositiontodealers.

EDUCATION

3.6.1. School Education

EducationisoneofthemostimportantsectorsofanygrowingeconomylikeIndia.Educationandskilldevelopmentarecrucialforreapingthedemographicdividend.Indiaisexpectedtohaveoneoftheyoungestpopulationsintheworldwiththemedianagebeing32.Consideringthe importanceofeducationandskilldevelopment,theGovernmentofIndiahasset itselfanaggressivetargetofachieving30%grossenrolmentratio(‘GER’) inhighereducationby2020,whichtranslatesintosubstantiallyincreasingtheGERinthenexteightyearsfromthecurrentGERat22.5%(2013-14E).Inschooleducation,thecurrentGERof69.3%isexpectedtogrowto95%by2022.

Under the current regime, pre-school and school education has been excluded from the service tax net. Further,educationrecognizedbylawandvocationaleducationalcourseshavealsobeenexcluded.Thus,mostoftheeducationservices are not taxed currently.

Educational institutionsprocurea varietyof input services inorder to run the institutionsandprovideeducationalservices. Prior to amendments made in the Union Budget 2014-15, ‘auxiliary educational services’ procured byeducational institutionswerenotliabletoservicetax.Theterm‘auxiliaryeducationalservices’wasquitebroadandincludedwithinitsambitoutsourcedservicesprocuredbyeducationalinstitutions.IntheUnionBudget2014-15,thelistofinputserviceseligibleforexemptionwaspruneddowntojustfourservices,namelytransportation,catering,security/cleaning/housekeepingandanyservicerelatingtoadmissionto,orconductofexamination.

PosttheamendmentinUnionBudget2014-15,thescopeofexemptionsavailabletotheeducationsectorhavebeencurtailed by excluding services such as renting of immovable property, development of course content, servicespertaining to trainingof teachers, coursewaredevelopmentetc.Thishashampered theeducationsector, since thecostofeducationalservicesprovidedbytheinstitutionshasincreasedonaccountofservicetaxontheseinputserviceswhichcannotbeclaimedbackbytheeducationalinstitutions.


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Inaddition,theeducationalinstitutionsalsopayValueAddedTax(VAT)onthepurchaseofgoodswhichareusedforimpartingeducationsuchascomputers,classroomfurnitureandstationeryetc.ThisVATisalsoacostforeducationalinstitutionssincethereisnooutputVATliability.

Basedonthedataofeducationalcompanies,thetotalcostofrunninganeducationalinstituteincludesthecostofinputtaxintherangeof6%to8%whichisultimatelypassedontothecustomeri.e.thestudent.

ItisrecommendedthatthetaxtreatmentoftheeducationsectorprevailingpriortothechangesintheUnionBudget2014-15 may be restored.

3.6.2. Higher Education

Followingincentives/exemptionsmaybeprovidedinthecontextofhighereducation:-

A. To address the shortage of faculty in the country, the Government should expedite the launch of NationalMissionforFacultyDevelopmentandprovideataxrelieftothetuneof50%toUniversities/HigherEducationalInstitutionsthatspendonthecapacitydevelopmentandtrainingoftheirstaff.

B. GiventhepriorityofSkillDevelopmentinthenationalagenda,Governmentshouldmakethefollowingprovision-

- AnypersonenrollingforaSkillsCertificationcoursebeeligiblefora20%taxrebate(onlyapplicableforthetuitionfeeamount)

- AnyEducationalServiceProvideropeningaSkillsCentreinabackwardareashouldbegivenanexemptionfromincometaxforthefirst3years.

C. Alldonations(andnotjustrestrictedonlytoresearchfunding)toqualifiedHigherEducationalInstitutionsshouldbeeligiblefor200%taxdeduction

D. NeworexistingeducationalinstitutionsmakingafreshinvestmentofRs.75croresoraboveshouldbeeligibleforapreferredandlongtermLoanfacilitywithinterestratesatparwithBaseRatesorPrimeLendingRatesofthecommercialbanksorfinancialinstitutionsandforatenureofupto15yearswithstepuprepaymentplan

E. HigherEducationalInstitutionsshouldbefreetosetupcampusesoverseasfreelyandalineofcreditofatleast$500mshouldbesetupbytheEximBank,asapartofIndia’sdiplomaticeffortsanduseofsoftpower

F. Taxbreaktocorporateswhichnominatetheiremployeesforhighereducationeitherthroughthecontinuingeducationmodelorafulltimeprogram.Thefeespaidbycorporateforemployees’educationshouldqualifyforinvestment in human resources and hence exempted for tax purposes.

G. AscollegesfeeshaveincreasedtremendouslyincometaxpayersshouldbeallowedadeductionagainstgrosstotalincomeuptoaminimumofRs1,00,000perchildforfeespaidtoahighereducationalinstitutionrecognizedbyGovernment.ThiswillmitigatethecostofHighereducation.

H. Industriessettinguphighereducationresearchinstitutesataninvestmentof20croresormorewithrespecttoNationalSecurityAdvisoryBoard,Governmentof Indiadocumenton“Strategic IndustriesandEmergingTechnologies for a Future-Ready India” in key identified areas of Micro and nano-electronics, AdvancedMaterials,PhotonicsshouldbeeligibleforapreferredandlongtermLoanfacilitywithinterestratesatparwithBaseRatesorPrimeLendingRatesofthecommercialbanksorfinancialinstitutionsandforatenureofupto10years with step up repayment

I. IndustriesinvestingtothetuneofRs.20croresormoreinproductfocussedresearchinstitutionsimilartotheFraunhoferInstitutesinGermanyshouldbeeligibleforapreferredandlongtermLoanfacilitywithinterestratesatparwithBaseRatesorPrimeLendingRatesofthecommercialbanksorfinancialinstitutionsandforatenureof up to 10 years with step up repayment


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J. Manufacturing industries investing in technical skill development institutes to the tuneof 5 crores ormoresimilartoUniversityofAppliedSciencesorHochschule(primarilyvocationalortechnicalonparwithUniversity)shouldbeeligibleforapreferredandlongtermLoanfacilitywithinterestratesatparwithBaseRatesorPrimeLendingRatesofthecommercialbanksorfinancialinstitutionsandforatenureofupto5yearswithstepuprepayment.

FINANCIAL SERVICES

I - INSURANCE

3.7.1. Period of Carry Forward and Set-off of Losses in Case of Insurance Business

Theinsuranceindustryhasalonggestationperiodandittakesalongtimetoachieveabreak-even.Accordingly,thelimitof8yearsforcarryforwardandsetoffofbusinesslossesisnotsufficient.ConsideringtheimportanceofInsuranceSectorforthe Indianeconomy, itshouldbeallowedtocarryforwardandset-offunabsorbedbusiness lossesforanindefiniteperiod.

3.7.2. Sum Assured to Premium Ratio for Life Insurance Policies

TaxbenefitsunderSection10(10D)andSection80CoftheActinrespectoflifeinsurancepoliciesareavailableonlyincasewherepremiumpayableforanyoftheyearsduringthetermofthepolicydoesnotexceed10%ofActualCapitalSumAssured.ThismakestheLifeInsurancepoliciesunattractiveformiddleandhigheragegroupsgiventhatthereisanexponentialriseinthecostofmortalityafterage45.Givenuncertainmacro-economiccircumstances,customersareunwillingtoenterintoverylongpremiumpaymentcommitments.

Itissuggestedthatthesumassuredmultiplebeloweredto5timesofthepremiumpaidorthetaxbenefitsshouldbelinkedwiththetenureofthepolicyratherthanthesumassuredandaccordingly,thetaxbenefitshouldbegivenonlyon policies with a minimum tenure of 10 years.

3.7.3. Enhanced Deduction of Life Insurance Premium under Section 80C of the Act

Section80Cof theActbasicallyprovides foradeductionuptoRs150,000for investmentsmade invarioussavingsinstrumentssuchasmutualfunds,bankdepositsalongwithlongtermsavingsinlifeinsuranceplans,pensionplans,etc.InordertoencouragegrowthinthelifeinsurancesegmentitisrecommendedthattheGovernmentshouldincreasethelimitofdeductionforlifeinsurancepremium/bycreatingaseparatelimitfordeductibilityoflifeinsurancepremiumalongwithanoverallenhancementintheinvestmentlimitundersection80CoftheActtoatleastRs200,000.

3.7.4. Deduction in Respect of Insurance Premium

Presently, deduction under Section 80C of the Act is available for paymentsmade for life insurance premium anddeductionunderSection80Disavailableforpaymentsformedicalinsurancepremium.Onsimilarlines,itissuggestedthatpremiumpaidforpersonalaccidentpolicy,homeinsuranceandtravelpolicyshouldbeallowedasdeductiontothepolicy holders.

3.7.5. Discrimination in Taxation of Pension Products vis-a-vis Non-Pension Products

Thereisdiscriminationintaxtreatmentofpensionproductsvis-a-visnon-pensionproductsundertheActtotheextentthatanyamountreceivedfromthepensionfund(includinginterestorbonus)[onsurrenderoronreceiptofpensionundertheannuityplan]isentirelytaxable,however,incaseoflifeinsurancepolicy/UnitLinkedInsurancePolicy(ULIP),theentirematurityproceedsaretaxexempt,iftheconditionsprescribedinSection10(10D)oftheActaresatisfied.EveniftheconditionsprescribedunderSection10(10D)oftheActarenotfulfilled;onlyincomeportioninthesurrendervalue(i.e.surrendervalue–premiumspaid)istaxed.Thus,thereisdiscriminationinthetaxabilityofpensionvis-a-vis


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non-pensionproductsundertheAct.Thisalsoleadstotaxationofreturnofcapitalincaseofpensionproductswhichishighlyunjustified.

ConsideringtheimportanceofpensionproductsinIndiaduetolackofanyotherSocialSecuritymeasures,taxabilityofPensionproductsshouldbetreatedatparwithtraditionalandULIPproducts.ItisfurtherrecommendedthatsimilarprovisionsofreversalofdeductionincaseofsurrenderofNon-PensionproductscanbemadeapplicabletothePensionproductsaswellandonlytheincomeportioninthesurrendervalueshouldbeconsideredfortaxability.

3.7.6. Taxability of Re-insurance Premiums earned by Foreign Re-insurers

It should be explicitly clarified that the re insurance premiumearnedby foreign re insurers from Indian insurancecompanieswhereinnopartoftheoperationsofthereinsurerarecarriedoutinIndiaisnotliabletotaxinIndia.Further,inordertoallaytheapprehensionofforeignreinsurers,itisrecommendedthatclaritybeprovidedontheaspectoftaxabilityofreinsurancepremiumpaidbyIndianinsurancecompaniesbyclarifyingthatthewithholdingtaxprovisionsshallnotapplytopaymentmadebyIndianinsurancecompaniestoforeignreinsurers.

3.7.7. Adjustment of TDS in case of Free Look Cancellations

InsuranceRegulatoryandDevelopmentAuthority(IRDA)allowspolicyholderstocancelthepolicyduringthefreelookperiod(currentlysetto15days).Incaseofcancellationsduringfreelookperiod,thecommissionincomeaccrued/paidtoagentsneedstobereversed/recovered.ItshouldbeprovidedthattaxesthatwerealreadydeductedunderSection194DoftheActandpaidtotheGovernmentTreasuryonthecommissionamounts,whichnolongerwouldbepayableonaccountoffreelookcancellations,shouldbeallowedtobeadjustedinmeetingthesubsequentTDSliabilityoftheinsurersoralternatively,amechanismshouldbelaiddownforclaimingrefundofsuchexcessTDSdeposited.

3.7.8. TDS on Policy Holders’ Pay-out

Section194DAoftheActwasintroducedvidetheFinanceAct(No2),2014,forapplyingTDSonpolicyholderspay-outwhereamountexceedsRs1Lakh.ThisSectionshouldberepealedasitisdetrimentaltotheinsurancebusiness.Thelow threshold of Rs 100,000 not only increases the compliance burden for insurers but also causes small taxpayers and personsnotrequiringtootherwisefilethetaxreturnstodosoforclaimingofrefunds.Thisisideallynotdesirable.ThethresholdlimitofRs1LakhunderSection194DAshouldbeenhancedinlinewiththebasicexemptionlimitapplicabletoindividuals.Also,clarityisrequiredonthefollowingissues:

a) WhetherSection194DAoftheActwouldapplytootherproductsissuedbyinsurancecompaniesaspermittedbyIRDSsuchashealthinsurancepolicy,pensionplan,groupinsurancepolicylikegratuity,superannuationetc.?

b) WhetherSection194DAoftheActwouldapplytoreversionarybonusandterminalbonus,wherebonusgetsconvertedintopremium?

c) Whatwouldbetreatmentincaseofpartialsurrenderofpolicy?

3.7.9. Enhance Threshold Limit for TDS on Insurance Commission

Thethreshold limit fordeductionof taxatsourceundersection194Dof theActmaybe increasedtoRs.50,000/-.Further, the requirementof issuanceof TDS certificateunder section194Dof theActonaquarterlybasismaybedispensedwithandmaybeallowedtobeissuedonyearlybasisasdoneundersection192oftheAct.

3.7.10. Extend the Deduction under Section 80CCD to Approved Pensions Plans of IRDAI

TherearespecifictaxbenefitsavailableforcontributionstotheNPSundersection80CCDoftheAct.ItisrecommendedthatthesamebenefitbealsoextendedtotheInsuranceRegulatoryDevelopmentAuthorityofIndia(‘IRDAI’)approvedpensionplansofferedbylifeinsurancecompanies.


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3.7.11. Taxation of Income Distributed by Securitization Trusts to Insurance Companies

Giventhepeculiarnatureoflifeinsurancebusiness,theprofitsoflifeinsurancecompaniesaretaxableattherateof12.5%asperSection115BoftheAct.Insurancelawpermitslifeinsurancecompaniestoinvestinthesecuritiesissuedbythesecuritizationtrust.Alevyofadditional-tax@30%onincomedistributedbysecuritizationtrusttolifeinsurancecompaniescanhavetheimpactofreducingthereturnintheirhandsonsuchinvestmentsandconsequently,reducingthereturnsthatcanbedistributedtoitspolicyholders.Itisrecommendedthattheincomedistributedbysecuritizationtrusts to life insurance companies should also be provided a special tax treatment whereby income so distributed shall [email protected]%andnot@30%.

The income of a fund set up by the life insurance company under a pension scheme, which is approved by IRDA, is exemptfromtaxunderSection10(23AAB)oftheAct.ItshouldbeclarifiedthatnoadditionaltaxwouldbepayableinrespectofincomedistributedbythesecuritizationtrustoninvestmentsmadefromIRDAapprovedpensionfundsetupby a life insurance company.

3.7.12. Tax Treatment on Assignment of Keyman Insurance Policies

TheFinanceAct,2013hasmadeanamendmenttoSection10(10D)oftheActtoprovidethatakeymaninsurancepolicywhichhasbeenassignedtoanypersonduringitsterm,withorwithoutconsideration,shallcontinuetobetreatedasakeymaninsurancepolicy.Accordingly,thematurityproceedsreceivedundersuchapolicyisnotexemptunderSection10(10D)oftheAct.ItmaybenotedthatCBDTvideCircularno.762dated18thFebruary,1998hasclarifiedthatthesurrendervalueofthepolicy,endorsedinfavouroftheemployeeandincaseofotherpersonshavingnoemployer-employeerelationship,betreatedas“profitsinlieuofsalary”or“incomefromothersources”respectivelyandtobetaxedaccordingly.Thesituationwouldtriggerdoubletaxationsincethesurrendervalueofthepolicyatthetimeofassignmentwouldgettaxedinthehandsoftheassigneeandfurther,thematurityproceedswillbealsobetaxedaftertheamendmentmadetotheprovisionsofSection10(10D)oftheAct.

Itisrequestedthat,CBDTshouldissueaclarificationtoprovidethatthematurityproceedsunderakeymaninsurancepolicyshouldbereducedbytheamountonwhichtaxhasalreadybeenpaidatthetimeofassignmentofsuchpolicy.

II - NON BANKING FINANCIAL COMPANIES (NBFCs)

3.7.13. Exclusion of Interest paid to NBFC from the Provisions of Section 194A of the Act

NBFC’shavetofaceseverehardshipintermsofcollectionofTDScertificatesfromitscustomerswhosenumbersruninthousands.Therefore,paymentofinteresttoNBFC’sshouldbeexcludedfromthepurviewofprovisionsofSection194AoftheActandtaxcollectionsthroughNBFC’sshouldbemadebywayofadvancetax.ThiswillprovidelevelplayingfieldtoNBFCssimilartobankingcompanies,LIC,UTI,publicfinancialinstitutionetc.,whicharealsoexemptedfromthepurviewofthisSection.

3.7.14. Deduction for Provision for NPAs for NBFCs and Treatment of Recognition of Income

AspertheprovisionsofSection36(1)(viia)oftheAct,provisionsforbadanddoubtfuldebts(ifmadeasperRBIdirections)madebybanksareallowedasadeductiontotheextentof7.5%fromthegrosstotalincomeand10%ofaggregateaverageruraladvancesmadebythem.NBFCsarenowsubjecttodirectionsofRBIasregardsincomerecognitionandprovisioning norms. Accordingly, NBFCs are also compulsorily required tomake provisions for NPAs. However, thedeductionunderSection36(1)(viia)oftheActisnotavailabletoNBFC.ThisdiscriminationseverelyimpedesfunctioningofNBFCs.NBFCsarevitalchannelforcreditdeliveryespeciallytotheunder-privilegedsegmentsofthesociety, it isessential thatsuchdiscriminationsbetweenNBFCsandbanksbeeliminated.This inconsistencymayberesolvedbyincludingNBFCs/NBFC-MFIsalsoinSection36(1)(viia)oftheAct.


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Section43DoftheActrecognisestheprincipleoftaxingincomeonstickyadvancesonlyintheyearinwhichtheyarereceived.ThisbenefitisalreadyavailabletoBanks,FinancialInstitutionsandStateFinancialCorporations.InaccordancewiththedirectionsissuedbytheRBI,NBFCsfollowprudentialnormsandliketheaboveinstitutionsaremandatorilyrequiredtodeferincomeinrespectoftheirnon-performingaccounts.ItisaccordinglyrecommendedthattheprovisionsofSection43DoftheActshouldalsobemadeapplicabletoNBFCsregisteredwithRBI.

3.7.15. Deduction for Reserves to NBFC-MFIs (Micro Finance Institutions)

Section36(1)(viii)oftheActprovidesdeductioninrespectofspecialreservecreatedandmaintainedbyaspecifiedentity,totheextentof20%oftheprofitsderivedfromeligiblebusiness.Thedeductionisavailabletoareservecreatedbyafinancialcorporationengagedinthebusinessofprovidinglong-termfinanceforindustrialoragriculturaldevelopmentin Indiaorbyapubliccompanyformedandregistered in Indiawiththemainobjectofcarryingonthebusinessofprovidinglong-termfinanceforconstructionorpurchaseofhousesinIndiaforresidentialpurposes.NBFC-MFIsalsoprovidelong-termfinanceforagriculturalandindustryintheformofmicro-credit/smallloansbutarenoteligiblefordeductionunderSection36(1)(viii)oftheAct. It is,therefore,suggestedthatNBFC-MFIsshouldalsobe includedasspecifiedentityeligibleforclaimingdeductionunderSection36(1)(viii)oftheAct.

III - BANKING

3.7.16. Extend Provisions of Section 43D to ‘Non-Performing Securities’

Section43DoftheActprovidesthatinthecaseofascheduledbank,incomebywayofinterestinrelationtoprescribedcategoriesofbadordoubtfuldebts,shallbechargeabletotaxinthepreviousyearinwhichitiscreditedbythescheduledbank to its profit and loss account; or inwhich it is actually received by the bank,whichever is earlier. A suitableamendmentmaybebroughtintothelawtoprovidethattheprovisionisapplicabletonon-performinginvestmentsaswell.

RBIguidelinesrequireinterestonnon-performingsecuritiestobereckonedasincomeonrealisationbasis,whereasfortaxpurposeitistobereckonedonaccrualbasis.Thebenefitofsection43Dmaybeextendedtotaxationofnon-performingsecuritiesaswellwhichwouldbeinlinewithRBIguidelines.

Further,Rule6EAoftheRulesprovidesthecriteriafordeterminingtheprescribedcategoriesofbadanddoubtfuldebtsforthepurposeofsection43D,whichcontinuestorecognizebadanddoubtfuldebtsonthebasisof6monthoverduedelinquencynorms.Rule6EAshouldbeamendedinlinewithcurrentRBIguidelineswhichprovideforaperiodof90daysofoverduedelinquencynormstorecognisebadanddoubtfuldebts.Section43DoftheActprovidesfortaxationofinterestonbadordoubtfuldebtshavingregardtotheguidelinesissuedbytheRBIinrelationtosuchdebts.Rule6EAhashowevernotkeptpacewiththechangeswithRBIguidelineswhichcreatesanissueintheassessmentofbanks.

3.7.17. Provide Exemption on Deduction of Tax at Source on Income of Banks

TDSontheincomeofbankscauseconsiderableinconvenienceinviewofhugevolumesofTDScertificatestobecollectedbybanksforcommissionreceivedoncrosssellingetc.SinceTDSisonlyameansofadvancecollectionoftaxandbankspayadvancetax,itisrecommendedthatbanksbegrantedexemptionfromTDSundersection196oftheAct.

3.7.18. Definition of Rural Branch

Aspersection36(1)(viia)of theAct,banksareeligible toavaildeduction in respectofprovisionmade forbadanddoubtfuldebtsasunder:

(A) 7.5%oftotalincome;and

(B) 10%oftheaggregateaverageadvancesmadebytheruralbranchesofthebank.


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Clause(ia)of Explanationtosection36(1)(viia)defines“ruralbranch”situatedinaplacewhichhasapopulationofnotmorethantenthousandaccordingtothelastprecedingcensus.Itisrecommendedthatinthedefinitionofruralbranchesthelimitforpopulationshouldbeincreasedtoatleastonelakhinsteadoftenthousand.

3.7.19. Period for Maintenance of Special Reserve under Section 36(1)(viii) of the Act

TheexistingprovisionsofSection36(1)(viii)oftheActprovideforadeductiontothebankingcompanyinrespectofanyspecialreservecreatedandmaintainedforprovidinglong-termfinanceforindustrialoragriculturaldevelopmentordevelopmentofinfrastructurefacilityinIndia;orfordevelopmentofhousinginIndia.Thedeductionishenceavailabletospecialreserve“createdandmaintained”bythetaxpayer.Thus,anyamountwithdrawnfromsuchspecialreserveissubjecttotaxasperSection41(4A)oftheActintheyearofwithdrawal.Section41(4A)oftheActseemstohavehadanun-intendedconsequenceof retaining theamounts inspecial reserveaccount inperpetuity,even longafter thepurposeofgrantingtheloanshasbeenfulfilled.ItisrecommendedthatSection41(4A)oftheActshouldbesuitablyamendedtospecifyaperiod,say5years,forretainingthetransferredamountsinspecialreserveassuchaperiodwouldbeadequatetofulfilthepurposeofgrantinglong-termfinance.

3.7.20. Threshold Limit for Applicability of TDS on Interest

Atpresent,banksarerequiredtodeductTDS@10%incaseinterestpayableondepositsexceedsRs.10,000peryear.ThelimitofRs.10,000wassetinFY2007-08andsincethentaxslabshavebeensubstantiallyrationalized.Therefore,itisessentialthattheTDSprovisionsbealsorationalized.ItisrecommendedthatthethresholdlimitfordeductionofTDSoninterestotherthaninterestonsecuritiesbeincreasedfromRs.10,000toRs.100,000wherethepayerisabankingcompany.

Rule31(3)requiresquarterlyissuanceofTDScertificatesinForm16A.ItisrecommendedthatTDScertificateinForm16A should be allowed to be issued on annual basis as in the case of Form 16.

3.7.21. Conversion of Indian Branch of a Foreign Bank into a Subsidiary Company

TheFinanceAct,2013 insertedSection115JG intheAct toprovidetaxneutralconversionofan Indianbranchofaforeignbanktoasubsidiarycompany.Section115JGoftheActprovidesthatwhereaforeignbankbranchsituatedinIndia is converted into an Indian subsidiary company, in accordance with a scheme framed by the Reserve Bank of India andsubjecttotheconditionsasmaybenotifiedbytheCentralGovernmentinthisbehalf,thenthecapitalgainsarisingfromsuchconversionshallnotbechargeabletotax.

Also,thereshouldbenogainonconversionrecordedinthebooksoftheIndianbranch.Thegain,ifany,couldariseonlytotheHeadoffice/foreignparentcompanytoberecordedinthebooksoftheforeignparent.TheMATprovisionsshouldnotbeapplicabletotheincomefromthetransferoftheIndiabranch,beingincomeearnedbytheHeadoffice/foreignparentcompany.However,thereisnospecificexemptionfromtheMinimumAlternateTax(MAT)provisionsforaforeigncompany.

Further, the amendment made by the Finance Act 2015, would have no impact on the proposed transfer, as the case of conversionenvisagesatransferoftheIndianbranchtothesubsidiarycompanyandnotatransactioninsecuritiesgivingrisetocapitalgains,ascontemplatedbytheamendedMATprovisions.

Considering, thefactthatconversionofan Indianbranch intoasubsidiarycompanywouldbeonlypursuanttotheGuidelinesoftheReserveBankofIndiaandwouldnotresultinanycommercialprofits/realincome,werecommendthat specificexemptionbegranted fromtheapplicabilityofMATprovisiononconversionby foreignbanksof theirbranches into Indian subsidiary companies.


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Further, theprovisionsofSection115JGof theActdonotprovideanyclarityoncertain transitional issues suchasvalueatwhichclosing‘blockofassets’aretobetransferredtosubsidiaryandtreatmentofallowabilityofexpensestosubsidiaryearlierdisallowedunderSection43Binthehandsofbranch.Itisrequestedthatclaritymaybeprovidedontaxtreatmentoftheseissuestoachievetheintendedobjectiveofconversionofbranchintosubsidiary.

3.7.22. Implementation of ICDS for Banks to be made in sync with RBI and SEBI Requirements

ICDSaimstobringconsistencyincomputationofincomeandreducepotentiallitigation.ThepreambleintheNotificationissuedbyCBDTforreleasingIncomeComputationandDisclosureStandards(ICDS)specificallyclarifiesthatnoseparatebooksofaccountsarerequiredtobemaintainedforthepurposeofcomplyingwiththeICDS.TheoverallcruxoftheICDSseemstobemoreapplicabletoIndustry/sectorswhichrelyonvariousconflictingjudicialprecedentsfordefermentof incomeandhence,paymentoftax.BanksandNBFCsaregovernedbyReserveBankofIndia(‘RBI’)Regulations/andorSecuritiesandExchangeBoardofIndia(‘SEBI’)RegulationsanditsoverallaccountingincludingaccountingonInvestments,accountingonderivativesandforwardcontracts,exchangerateforconversionareallgovernedbyRBI/SEBIGuidelines.Practically,theBanksandNBFCswillposeaseriouschallengegivensignificantdifferencesbetweenitsaccountingtreatmentgovernedbyRBI/SEBIguidelinesandICDSandthesewillcreateadjustmentbetweenaccountingtreatmentandcomputationofincome.Hence,ExceptionsneedtobecarvedoutforBanking/FinancialSectorfromthe applicability of all the ICDS.

3.7.23. Restoration of Deduction under Section 80P to Co-operative Banks

WithdrawalofdeductionunderSection80PoftheActhasgivenaheavyblowtotheco-operativebankswhichhelpedsmallandmediumenterprises.Itisrecommendedthatthedeductioninrespectofincomeofco-operativebanksunderSection80PoftheActbereinstated.

3.7.24. Other suggestions

• It is recommended that electronic filing of Form No. 15G, 15H, 60 and 61 should be introduced so thataccountabilityismaintainedandthereisacheckonfrivolousfilingandfalsedeclarationofsuchforms.Further,this will also reduce unnecessary paper work.

• It is recommended that Section 72AA of the Act should be amended to allow carry forward and set-off ofaccumulatedbusinesslossesandunabsorbeddepreciationallowanceincaseofalltypesofbankingconsolidation.

• ItisrecommendedthatSection163oftheAct,shouldbeamendedtoprovidethatinthefollowingscenariosbanksshouldnotberegardedas‘representativeassessee:’

o Provision of mere custodial services, under license issued by SEBI.

o ProvisionofservicesasAuthorizedDealer(“AD”)forfacilitatingtheremittanceoffunds,inthecourseitsordinarybankingbusiness.

HEALTHCARE, MEDICAL EQUIPMENTS AND DEVICES

I - HEALTHCARE AND INSURANCE

3.8.1. Measures to Improve Healthcare of Citizens

India’shealthcareinfrastructureislaggingbehindwhencomparedwithotherdevelopingcountries.Thereexistsahugegapbetweendemandandsupplyofhealthcareinfrastructurefacilitiesavailableinthecountry.Therefore,itisimperativetocreateaninductiveenvironmentforfacilitatinginvestmentsintothesector.Followingmeasuresaresuggestedtoimprovethehealthcareofcitizens:-

(a) IncreasebudgetsharetothehealthcaresectorwithgreaterprovisionfortheNationalRuralHealthMissionandNationalUrbanHealthMission.


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(b) PlanforaUniversalScreeningProgrammefortheentirecountry,foragegroup(maybe35–60years)whichisatrisk.TheProgrammecanbeimplementedinstagesundera10to15yearhealthtarget.Programmeshouldincludemassiveawarenesscampaignthroughprintandelectronicmediainlocallanguage,capacitybuildingforASHAworkers&AuxiliaryNurses/Midwivesandscreeningprogrammestakenup inselectedBlocks(AadarshGaon)instages.

3.8.2. Incentives for Voluntary Organ Donors

Indianeedstodo2,00,000solidorgantransplantseachyeartomeettherecipienttarget,whichisgrosslyundersuppliedduetotheshortageofdonorpool.Inordertoincentivizeandpromotevoluntarydonorstomeettheorganshortage,donorsmaybeprovidedlifetimehealthcoveragethroughinsurancebenefitsthroughfunding.

3.8.3. Compulsory Health Insurance for Employees

To promote Health insurance penetration in the country, it should be mandated that organizations insure everyemployeeforaminimumamountofRs.1Lakh.Theemployershouldbeallowedtaxdeductiononthepremiumpaid.Moreover,theemployeeshouldhavetheflexibilitytoincreasethiscover;theadditionalpremiumsopaidshouldalsobemadetaxexempt.ThisshouldbeoverandabovethecoverextendedundertheESI,CGHSandothergovernmenthealth insurance schemes.

3.8.4. Health Insurance Coverage for Senior Citizens

MedicalInsurancePremiumforseniorcitizenshouldbesubsidizedorthelimitincreasedtoRs.50,000perannum.Also,thereisaneedforrestructuringthepremium,sothatthemonetaryburdenontheenduserreducesashis/herageincreasesandtheabilitytocontributedecreases.Thisinnovativepremiumstructuringwillhelpincreasingaffordabilityamongstthemasses.

3.8.5. Tax Incentives

(a) ServiceTaxExemption

(i) ThereisapressingneedtoincreasethesafetynetofhealthinsuranceinIndia.Onemeasurethatcouldhelp iswithdrawalofservicetaxonhealth insurancepremiums,thereby leadingtoa loweringofcost/premium for the consumer. Mediclaim insurance Premium may be exempted from levy of Service Tax.

(ii) ServicetaxonServiceandMaintenanceContractsformedicalequipmentbeexemptedfully.

(iii) Allinputservices,incancertreatment,shouldbeconsideredforservicetaxexemptiontoreducethecostof health care providers.

(iv) AllHealthcareEducationandTrainingservices,especiallylife-savingones,shouldbeexemptedfromservicetax.

(v) CENVATcreditshouldbemadeeligibletobeavailedinrespectofinputsfortheRashtriyaSwasthyaBeemaYojana(RSBY)policiestokeepthecostofservicingthesepolicieslow.

(b) Direct Taxes Relief

(i) TaxexemptiononPreventiveHealthcheck-upshouldberaised fromthecurrentRs.5000toRs.20000undersection80DoftheAct.

(ii) Consideringtheincreasedcostofmedicaltreatments,healthinsuranceisnecessaryforeveryindividual.Thesamecanbepromotedbyofferingtaxincentives.Inordertoencourageinvestmentinhealthinsurancepolicies, it is suggested that thecurrent limitofRs25,000prescribedundersection80Dof theActbeenhanced to Rs 50,000.


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(iii) Increase in Tax holiday from current five year to ten year time frame under section 80-IB for privatehealthcare providers in non-metros for minimum of 50 bedded hospitals instead of current 100 beds.

(iv) Income Tax/MAT exemption for at least 15 years for domesticallyManufacturedMedical Technologyproductstopromote“MakeinIndia”.

(v) To incentivize hospitals and diagnostic laboratories to undergo accreditation, there should be 100 %deductiononapprovedexpenditureincurredforsecuringaccreditationfromNationalAccreditationBoardforHospitalsandHealthcareProviders(NABH)andNationalAccreditationBoardforTestingandCalibrationofLaboratories(NABL)respectively.

(vi) ToencouragemovetowardsmaintenanceofElectronicHealthRecord(EHR),financial incentives/grantsshouldbeprovidedtowillinginstitutions.250%deductiononinvestmentmadefortheimplementationofEHR should be extended.

(vii) 250%deductionforapprovedexpenditureincurredonoperatingtechnologyenabledhealthcareserviceslike telemedicine, remote radiology etc. should be allowed for improving accessibility, affordability &qualityhealthcareinremoteareas.

(viii) For an insurance company, claims expense includes reserve towards claim which is Incurred But Not Reported (“IBNR”). Currently, IBNR reserves are computed based on appointed actuary basis IRDAguidelines.Schedule1ofIncomeTaxactissilentaboutadmissibilityofIBNRreserveasallowableexpense.Intheabsenceofanyguidelines,thereareinstanceswhereinTaxauthoritiescontestthisexpense.Thisreserve should be included as allowable expense.

(ix) Duetoanomalyinthecurrentincometaxlaw,theself-insuredmarket(otherwiseknownas“AdministrativeServicesOnly”orASO(whichisacombinationofhealthcareadministrationandstoplossinsurance)havenotevolved.Asaresult,inIndia,smallemployers(havinglessthan100employees)whodonotusuallybuyinsurance(becausetheydonotwanttoincuranannualoutflowofpremium)donothaveanoptiontojoinaASOgrouptoprovidehealthcarebenefitstotheemployees.Therefore,mostemployeesborrowonanad-hoc basis to fund healthcare costs and remain in debt to their employer. It is therefore recommended that the law be amended to provide that any sum paid by the employer for medical treatment of the employee or a member of his family is exempt from tax in the hands of the employee if the treatment is in anyhospitalornursinghomewhichisempanelledwithanyregisteredhealthinsurancecompanyinIndiaas a provider of health insurance.

(x) Healthcare sector should be exempt from Minimum Alternate Tax.

II - MEDICAL ELECTRONICS AND MEDICAL DEVICES

3.8.6. Encouraging Complete or Partial in-house Manufacturing

India isaverysmallmanufacturinghubforMedicalEquipment(~2%oftheUSD66B IndianHealthcareMarket).ToprovidecosteffectivehealthcareinIndia,Governmentshouldencouragecompleteorpartialin-housemanufacturingsetup.Inthisprocessthefollowingbenefitsareexpectedtoattractmoreinvestment:-

(i) 150%depreciationoninfrastructureinvestmentU/S35ofITAct

(ii) ExemptionfromExciseDutyonequipmentmanufacturedorassembledinIndia,whereinthevalueofimportedrawmaterialcontentdoesnotexceed50%ofcompleteequipmentcost. Inanycaseexcisedutyonmedicalequipmentbereducedsignificantlyandmaybeprescribedatthelowestslabtoenablethedomesticindustrytofindafoothold


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(iii) Zerocustomdutyonallimportedrawmaterialsbymanufacturers,whereintheimportedrawmaterialcontentislimitedupto50%ofcompleteequipmentcost

(iv) R&DCesstobeCenvatablewithExciseduty

3.8.7. Other Tax Incentives

(a) Anynewcapitalexpendituretowardsreplacementofoldmachinery/equipment inhospitals,atanytime,beentitledto100%deduction.

(b) ManufacturersofindigenousmedicaltechnologicalproductsbegrantedcompletetaxexemptionfromMAT.

(c) 250% deduction of approved expenditure incurred on R&D activities related to indigenous development ofmedicaltechnologyshouldbeprovided.

3.8.8. Exemption for Medical / Dental / Surgical Equipment

a) NilBasicCustomsDutybespecifiedforMedicalEquipment,MedicalorSurgicalImplants,MedicalDevicesfallingunderheadings9018,9019,9020,9022and9027.

b) BloodGlucoseMonitoringStripsofheading3822,Medical,SurgicalorLaboratorySterilisersofheading8419andsterilesurgicalcatgutandsimilarsterilesuturematerialsandsteriletissueadhesivesforwoundclosureofheading3006shouldalsobeexemptedfromcustomsduties.

c) Medicalproductsclassifiableunderheadings9018to9022andpartsandaccessoriesthereofpresentlyleviedto5%basicdutyintermsofS.No.474ofNotificationNo.12/12-Cusdated17.03.2012,betotallyexemptedfromimportduties.Theexemptionmayalsobeextendedtoparts,accessories,consumablesorassemblycomponents,whetherrequiredformanufacturingortobeassembledatsiteofuse.Thiswillremoveclassificationdisputesandallowtheindustrytogetthedesiredexemption.Specificallypartsandcomponentsofhearingaidsshouldbeexemptedfromcustomsdutiestoprovidealevelplayingfieldfordomesticmanufacturers.

d) Toensurethatthesparepartsimportedtobeusedformaintenanceofcriticalcaredevices,areusedforthesamepurpose,importermaybeaskedtofurnish“EndUseCertificate”withinaperiodof12months.ProcedureforConsumptionCertificateformaterialsimportedasperCustomsNotification21/2010tobeamendedtoreadas“ImportertosubmitSelfDeclarationforhavingconsumedthematerials intheprocessofmanufactureofMedicalEquipment”.

e) Priorto2012,MedicalCyclotronswereclassifiedseparatelyandeligibleforconcessionaldutyasapplicableformedicalequipment.PresentlyCyclotrons(whetherusedforIndustrialorMedicalpurpose)arelistedunderoneheadinginCTH8543andCyclotronsforMedicalusedonotqualifyfortheconcessionaldutybenefitwhichisnormallyavailableforMedicalEquipment.TheMedicalgradecyclotronssupportproductionofRadioisotopicdrugswhichareusedeither for treatmentordetectionofCancercellsatanearlystage.TheAtomicEnergycommissionwhichisthenodalagencyforcertificationofcyclotronsalsohasdifferentapprovalstandardsforIndustrialandMedicalGradecyclotrons.MedicalgradeCyclotronshouldbeconsideredforconcessionaldutybenefitsimilartoCTH9018or9022asthesewillbeusedformedicalpurposeonly.

3.8.9. Other Customs Exemptions/Concessions

1. Allmedicaldevicesusedincriticalcare,consumablesusedwithdevicesinthespecificcriticalcaretreatmentprocedureandtheirsparepartsshouldbeexemptedfromCustomsDuty.Itisrecommendedthatthefollowingbeincludedinthelistofcriticalcareproducts:-

• Patientmonitoringsystemsandimageguidancesystems


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• Pacemakersandtheirleadsforcardiactherapy

• ExternalDefibrillators

• NTandENTSurgeryProductsincludingelectrical/pneumaticdrillsandtheconsumables

• DeepBrainStimulationImplanters,drugpumps,leadsusedinneurosurgeryetc.

• Heart Lung Machine and Oxygenators, cannula, accessories used in vascular therapy and duringcardiopulmonary

• Heartvalves,AnnuloplastyRingsandvariousCardiaccatheters

• RespiratorsandMasks(industrialandhealthcare)

• DialysisMachinesequipment,dialyzers,dialysispumpconsumablesandDevices (HemoandPeritonealDialysis)

• PeripheralVascularStents

• RevealDiagnosticdevices

• Externallooprecorders

2. ThedutyleviedonsparepartsoftheRadiotherapyequipment(currentlychargedat31%)bereducedto11%atparwiththerateforthemainequipment.

3. SterilizersofHeading84192090whicharepresentlyleviedtoimportdutyat25.85%,maybeleviedareducedcustomsdutyto0-5%.Sterilisersareusedforsterilizingmedicaldevicessuchasimplants,suturesetc.Theyplayacriticalroleascriticalcareequipment

4. TopicalSkinAdhesivelikesteristripofHeading3006whichispresentlyleviedtobasiccustomsdutyof10%(inadditiontoAdditionalduty,cessesandSAD)maybegivenanexemptionbylevyingbasiccustomdutyintherangeof0-5%andprovidedexemptionfromCVDandSADThisdutyexemptionwouldenablemillionstohaveanaffordabilityastheseadhesivesareusedforskinclosurebyreplacingconventionalsutures.

5. Full CustomDutywaiver for essentially required radiopharmaceuticals used in Diagnostics like Imaging andScanning(PET-andSPECT)andTherapysomeofwhicharenotmanufacturedinIndialikeIodine131,MIBG131,Lutetium177,Yttrium90,Ge-68-Ga68generator,ColdKitsforTc99m,Rubidium82,Ir-192.

6. Cardiovascular,cancerandneurologicalsurgeriesinvolveIodophorimpregnateddrapes(HS3005)forpreventionofwoundinfectionandFibrinsealants(HS300620)forachievingimmediatesealingofbloodvesselswhicharecriticalforlifeofthepatients.Theseproductscurrentlyarelevieddutiesunderheadings3005and3006atbasicof10%andatotalimportdutyof21.78%.Itissubmittedthatthesemaybeincludedinthecriticalcarecategory(List4)andsubjectedtoconcessional5%basicdutyandNilCVD.

7. MedicalgradePVC(Heading39219099),Polypropylene,HDPErequiredforthemanufactureofdialysisproducts,DextroseAnhydrousUSP,foruseinmanufactureofIntravenousfluidsbeleviedcustomdutiesintherangeof0-5%.

8. Powertools/drills,surgicalbladesandbursusedinvariousneurological,orthopaedic,spinal,by-passsurgeryandotherskeletalsurgeries,EndoscopyCamera,accessoriesandpartsshouldbeleviedcustomdutyintherangeof0-5%.

9. IntegratedOperationTheatre(ConsistingofRouters,Booms,Pendants,Lights,Monitors,Camera,andConnectorsetc.)shouldbechargedtoareduceddutyof5%basicandNilCVD.


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10. SterilizationGasCartridgesusedbyHospitalstosterilizesurgicalinstrumentsincludingsutures,cathetersetc.beforecriticalcaresurgeriescurrentlyattractanimportdutyof7.5%+12.5%+3%+4%.Inordertoprovideanaffordablehealthcaretomillionsofpeoplezeroorminimumbasiccustomsdutyof5%maybeimposedandCVDandotherdutiesmaybeexempted.

11. PDSplates(3920.69.99)-PDSplateisascaffoldingsupportfor“nasalreconstructivesurgery”especiallyusedforSeptoplasty and Rhinoplasty. Most of the cases wherein these plates will be used are the ones in which there aretraumacasesandthereisseveredamagetothenasalcavityandseptum.Effectivedutyof26.85%makesitreallyunaffordableforthepatientsasitincreasesthebasicsurgerycostofnasalreconstruction.Thisproductwhichcanhelpalotofpatientsrecoverfromthetraumaofnasalreconstructivesurgerywillonlybeaccessibletoaselectedsectionofthesocietyincasesuchheavydutyratesareimposed.

12. CustomsdutyonmostofDiagnosticreagentsis28%exceptEIA,CLIA,HIVandHBsAGetc.Customdutyonhigh-endspecialised testing like tumourmarker,Moleculardiagnosticproduct shouldbebroughtdown toNIL toenabletheseteststobecomemoreaffordabletopeople.

III - IN-VITRO DIAGNOSTICS (IVD) SECTOR

3.8.10. Duty Exemption for Antigens / Antibodies used in Diagnostic Kits

• The import of raw materials such as antigens/antibodies or any other ingredient corresponding to themanufactureofdiagnostictestkitsspecifiedinlist4putthelocalmanufactureratdisadvantageincomparisontoimportedfinisheddiagnostictestkitspecifiedinlist4whichisimportedatnilduty.Thenotificationshouldthereforeinclude:“Bulkdrugs/antigens/antibodies(monoclonal/polyclonal)/rawmaterials/componentsusedinthemanufactureofcriticalcaredrugs/medicinesincludingtheirsaltsandestersanddiagnostictestkits”.

• ThefollowingitemswhichwereapartofthenowabolishedList37needtobeincludedinList4undernotificationNo.12/2012-Customs,dated17/03/2012toallow fora levelplayingfield forboth Indianmanufacturersandimporters:

- AIDS(AcquiredImmuneDeficiencySyndrome)testkits

- T.P.H.AkitsandAIDSdiagnostickits.

- Rapiddiagnostickitfordetectinginfectionwithmalariaparasite/Tuberculosis(TB)

- Australiaantigen/HBsAgkit.

- HCV(HepatitisCVirus)byanytechnology.

- Denguedetectionsystems/kits.

• ExemptionsforcomponentsforElisaKitstobeexpanded:Thelistthatprovidesthebenefitoflowerdutymaybeextendedtoincludeantigenorantibodyonthesolidphaseforcoating.Theotherkeycomponentistheenzymeconjugateandtheirstabilizingbuffer/solutions.ItisimportanttoputthelocalELISAkitmanufacturersatparwiththeimportersbecauseallfinishedELISAkitsareimportedatnildutyasperitemno.36ofList4.

• Casesofdutyrationalization:WithabolishingofList37,alldiagnosticdevicesarenowcoveredunderChapter90(9027).Theythereforeattracthighdutyratesandit isrecommendedthattheybechargedtoNILdutytoencourageaccesstonewertechnologies.FurtherdutyonmanufactureorimportofdiagnosticreagentstobereducedtoencouragemanufacturinginIndia.Thatapartdutystructureoffollowingitemsshouldberationalized.

• ExcisedutyformanufacturingofDiagnosticsReagentsmaybemadeNILfromexisting10%toallowcostbenefittoindigenousmanufacturer.


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• DiagnosticsReagentsmaybesubjectedtosamelevelsofdutyasMedicalEquipment/DevicesunderChapter9018asagainsttheexistingrateof26.75%.

• DutyonPCRkitsmaybemadeNILasgivenforELISA,CLIADiagnosticskits,etc.fromexisting26.75%inordertoquantifytheloadofdeadlyviruses/bacteriasuchasHepatitisC,CMV,H1N1,TB,etc.inpatientsforsubsequenttreatmentandmonitoring.

• Alldiagnosticsequipments includingFullyAutomatedBiochemicalAnalyzersmaybeassessedatNILdutyorwithatotaldutyof9.63%assuddenreversaland imposingdutyof14.72%makesthecostoftheseHiTechInstrumentssignificantlyexpensive.

• Imported automatedpre-analytical andpost analytical equipment for IVDdevices and their accessories arecurrentlybeingchargedtodutyat29%approximately.TheseshouldbeconsideredforNILorlowerdutysoastopromoteaffordabilityoflabautomationandtomanagehighthroughputlabsandGovt.sitestogivehighqualityresults.

• Sparesformedicalequipmentunderchapter9027,maybesubjectedtosamelevelsofdutyascorrespondingMedicalEquipment/Devicesunderheading9018,asagainsttheexistingratesforsparesat26-29%toextendtheproductivelifeofpurchasedMedicalEquipmentbyGovernmentHospitalsandLabs.

• CustomsdutiesforDiagnosticskitsmaybebasedoncriticalityofthetestratherthanthetechnology.

3.8.11. Duty Exemption be based on Test rather than Analyte for Critical Tests

CustomsTariffforDiagnosticskitsisbasedontechnologyratherthantheAnalytecausinganomaliese.g.:ELISA&CLIAkits are exempt from customs duty whereas IFA (Immuno Florescence) and Bio-chemistry kits are liable for duty under [email protected]%.ItisrecommendedthatdutyexemptionbebasedonTestratherthanAnalyteforthefollowingcriticaltests:

(a) BloodBankingPanel

(b) HIV

(c) HBSAG

(d) HCV

(e) Sepsis Marker

(f) Procalcitonin (PCT)

(g) TestsofAutoimmunediseases(ANAanddsDNA)

(h) Diabetes –Glucose, HbA1C, microalbumin, etc.

(i) Cardiac–Triglycerides,Cholesterol,LDL,HDL,lipids,CRP,hs-CRP,etc.

(j) TherapeuticDrugmonitoring–Tacrolimus,Sirolimus,etc.

(k) Kidneyfunctiontests–Creatinine,TotalProtein,Albumin,Urea,Uricacid,etc.

(l) LiverFunctiontests–AlkalinePhosphatase,Bilirubin,GammaGTP,SGPT,SGOT,etc.

(m) Electrolyte balance – Sodium, Potassium, Chloride, Calcium, Phosphorus, etc.


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IV - PHARMACEUTICAL INDUSTRY

3.8.12. Exemption for Oncology and Critical care/ICU drugs

OncologyandCriticalcare/ICUdrugsbeinglifesavingdrugsshouldbeexemptedfromExciseduties.Somemoleculesarealreadyexempted,however,followingmoleculesarealsosuggestedforexemption:-

Oncology Drugs - Aprepitant, Fosaprepitant Dimeglumine, Abirateroneacetate, Bortezomib, Erlotinib, Fulvestrant,Gefitinib,Oxaliplatin,Palonosetron,Pemetrexed,PaclitaxelIP,Docetaxel.

ICU/CriticalcareDrugs–SulbactamSodium,Colistimethate,Tigecycline,Voriconazole,Doripenem,Cefepime,Imipenem,Meropenem, PolymyxinBSulphate, Tazobactam, Cilastatin, Meropenem+Sodium Carbonate, Cefepime+Tazobactam,Imipenem+Cilastatin.

3.8.13. Correction of Inverted Duty Structure in Pharmaceutical Industry

ThepharmaproductsclassifiableunderChapter30oftheCentralExciseTariffareexigibletoexcisedutyataconcessionalrateof6%keeping inmindtheessentialnatureofthemedicines.Thesaidfiscaladvantagehasbeenprovidedasawelfareperquisiteconsideringtheessentialnatureoftheseproducts.

TheprincipalrawmaterialrequiredformanufacturingthepharmaproductsisAPI(ActivePharmaceuticalIngredient)classifiableunderChapter29oftheTariff.Ironically,APIsaretaxedat12.5%.Thiscreatesan‘inverteddutystructure’wheretherateofdutyontheprincipalrawmaterial istwicetherateofdutyofthefinalproduct,resultinginhugeaccumulatedunutilizedCenvatcreditwhichfinallyculminatesintohigherpriceofpharmaproducts.

Thus,theobjectivesofGovernmenttoprovisionfiscaladvantagestopharmaceuticalproductsbyreducingtherateofexcisedutydoesnotachievefruitionowingtoarelativelyhigherrateofAPIs.ThereductioninthedutyforAPIsshouldfollowasalogicalsequencetoavoidaninverteddutystructure.

ItissuggestedthattheexcisedutyonAPIsbereducedto6%.

3.8.14. Medical Services provided by Clinical establishments

Medical services provided by Clinical establishments are exempt from Service tax. The Hospital provides services to patientandtheyengagedoctorsforprovidingsuchservices.HospitalraisestheirmemooffeesbyspecifyingOperationCharges,DoctorFeesandmedicalConsumables.TheDepartmentistakingaviewthatHospitalprovidesinfrastructuretoDoctorandintendstorecovertheServicetaxonsuchcharges.Thereisaneedtoclarifythatsuchservicesarealsointhe nature of medical services and exempt from Service tax.

3.8.15. Excise Duty Exemption for Essential Medicines

DrugslistedintheNationalListofEssentialMedicinesconsideredbyDepartmentofPharmaceuticalsforPriceControlshouldalsobeexemptedfromthelevyofExcisedutieswithaviewtoreducetheirprices.

3.8.16. Weighted Deduction under Section 35(2AB) for computing Book Profits

Presently,whilecomputingthe‘bookprofit’underSection115JB,theamountofweighteddeductionunderSection35(2AB)isnotdeducted.Inordertopromotein-houseR&DinIndia,theamountofweighteddeductionundersection35(2AB)oftheActshouldbedeductedwhilecomputingbookprofitforthepurposeofMAT.

3.8.17. Safe Harbour Rule for Contract Manufacturing

TheCentralBoardofDirectTaxeshasrecentlynotifiedSafeHarbourRulecoveringsectorlikeIT/ITES,KPOandAutoComponentmanufacturerprescribingdesirablemarginssothatitavoidslitigationundertransferpricingregulation.

Itisrequestedtoprovidesimilarguidelinesforpharmacompaniesthataremanufacturingandexportingtheproductas contract manufacturer.


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3.8.18. Clinical Trials - Weighted Deduction under Section 35(2AB)

WeightedDeductionu/s35(2AB)shouldbeenhancedfromexisting200%to250%foraperiodofnext10yearsi.e.upto31stMarch,2024.Thecurrentprovisionsfordeductionu/s35(2AB)coversonlyexpenditureincidentaltoresearchcarriedonatthein-houseR&Dfacility.AsclinicaltrialsarespecializedandexpensivemostR&Dfacilitiesoutsourcethesetrials.Hence,Inordertosuccessfullylaunchanynewdrug,theinnovatorhastogettheclinicaltrialdoneoutsideapprovedfacilitieswithinIndia&abroad.Thereforeallexpenditurerelatedtoresearchi.e.clinicaltrials,bioequivalencestudies,regulatoryandpatentapprovalsshouldbeeligibleforweighteddeduction,eveniftheseactivitiesarecarriedoutsidetheapprovedR&Dfacility.Presently,asperDSIRguidelinesamountspentbyarecognizedin-houseR&Dtowardsforeignconsultancy,buildingmaintenance,foreignpatentfilingarenoteligibleforweighteddeductionu/s35(2AB).DSIRguidelinesneedtobemodifiedaccordinglytoallowtheabovesaidexpensesforweighteddeductionu/s35(2AB).

INFORMATION TECHNOLOGY (IT) AND IT ENABLED SERVICES (ITES)

3.9.1. Extend Deduction under Section 35(2AB) of the Income Tax Act to Computer Software

Currently,weighteddeductionof200%isavailableforexpenditureincurredonscientificresearchonin-houseresearchanddevelopmentfacilityasapprovedbyDepartmentofScientific&IndustrialResearch.Thedeductionisavailabletoacompanyengagedinthebusinessofbio-technologyorinanybusinessofmanufactureorproductionofanyarticleorthing.Thereisanambiguitywhetherin-houseResearch&Developmentfacilityforcomputersoftwareiscoveredwithintheambitofsection35(2AB)andwhetherthesoftwareproductshouldbeeventuallyownedbythecompany.

ItshouldbeprovidedexplicitlyintheActthatthebenefitsofweighteddeductionundersection35(2AB)oftheActarealsoavailabletocompaniesengagedinthemanufactureof‘computersoftware’.ThedefinitionofcomputersoftwareforthepurposeofthissectionshouldbethesameasprovidedunderExplanation2tosection10AoftheAct.

3.9.2. Allow Weighted Deduction on Skill Development Expenditure

Topromoteskilldevelopment inthe ITsector,weighteddeductiononskilldevelopmentexpenditure incurredby ITcompaniesshouldalsobemadeeligiblefordeductionundersection35CCDoftheAct.

3.9.3. Parity in the Treatment of Export Turnover and Total Turnover

Theterm‘totalturnover’hasnotbeendefinedintheAct.Thetaxauthoritiesdonotprovideparityinthetreatmentoftheterm‘ExportTurnover’(‘ET’)and‘TotalTurnover’(‘TT’)forthepurposeofcomputationofdeductionundersections10A/10AA/10BoftheAct.Hence,certainitemswhichareexcludedwhilecomputingtheETarenotexcludedfromtheTT,therebydistortingthefigureofET/TT.ItisrecommendedthatdefinitionoftotalturnovershouldbeclearlyprovidedintheActandwhichshouldbeinparitywiththedefinitionofexportturnover(inrelationtoexclusionofcertainitems).

3.9.4. Clear Guidelines on Attribution of Profits to Permanent Establishment

Manyatimes,aPermanentEstablishment(‘PE’)offoreignenterprisesisallegedbythetaxauthoritiesonaccountofmereprocurementofordersforsaleofgoodsorprovisionofservicesoransweringsalesrelatedqueries,etc.TheseareroutineservicesoutsourcedtoIndianenterprises.ProvisionoftheseservicesisthebackboneofIT/ITeSsectorinIndiaforwhichtheygetremuneratedatArm’sLengthPrice(‘ALP’).Foreigninvestors/companiesarelosinginteresttoinvestinIndiasincethereisatendencyofthetaxauthoritiestoallegethattheIndianentityisaPEoftheforeignentity.TheyalsofearattributionofprofitsoftheforeignentitytosuchanallegedPE.Thisisin-spiteofthefactthatIndianentityisremuneratedatALPbytheforeigncompanyandsuchALPisacceptedduringtransferpricingauditoftheIndianentity.

It is recommendedthat theActshouldcategoricallyprovidethatno furtherprofitscanbeattributedtoPE, ifPE isremuneratedonarm’slengthbasis.


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INFRASTRUCTURE

3.10.1. Amendment of Section 80-IA Regarding Upgrading Existing Infrastructure

Infrastructuredevelopmentisaprerequisiteforthegrowthanddevelopmentofanycountry.Infrastructuredevelopmentisavailableintwowaysi.e.tobuildaltogethernewinfrastructureortoconverttheexistingstructurebyupgradingitandalsoenhancingtheexistingcapacity.Bothactivitiesentailhugeinvestmentandhumanefforts.

ItisrecommendedthatasuitableamendmentmaybemadeintheActtoclarifythattheup-gradation/extensionoftheexistinginfrastructurefacilitywouldalsobeeligibleforthebenefitofSection80-IAoftheAct.

3.10.2 MAT on Infrastructure Companies

Infrastructure Industry in India has been experiencing a rapid growth with the development of urbanization andincreasinginvolvementofforeigninvestments.GovernmenthasofferedvarioustaxincentivesunderSection80-IAoftheActtotheinfrastructurecompaniestoboostinfrastructure.ThebenefitavailabletotheinfrastructurecompaniesunderthenormalprovisionoftheActgetneutralizedsincethecompaniesarerequiredtopayMATontheirbookprofit.

Toattractmoreinvestmentininfrastructuresector,MAToninfrastructurecompaniesshouldbeabolished.

MICRO, SMALL AND MEDIUM ENTERPRISES

3.11.1. Improve Access to Finance

Banksarenot forthcoming to lendunder various schemes like theCGTSMEdue to it beingnon- collateralizedandtheirriskperception.Therefore,SIDBIshouldbeconvertedintoafull-fledgedCommercialBankforMSMEs.TheprimeobjectofsettingupSIDBIwastofulfillcreditneedsofMSMEs,butevenafter25yearsofitsexistence,non-availabilityofadequatecredit continues tobeamajorconcern forMSMEsdue to the reason thatSIDBIhasnotexpanded itsoperationsbeyond100branchesandprimarilyconfiningtobearefinancingagency.SIDBI’Srefinancingroleisnomorerelevant now.

3.11.2. Service Tax for Rentals on Immovable Property for Units in MSME Sector

Rentalonimmovableproperty,usedforindustrialpurposeformanufacturingactivitiesbymicroandsmallsector,castsahugeburdenontheunitsintheMSMESector.LargemanufacturingunitsdonotexperiencetheburdenoftheServicetaxonrentastheyareeligibletoclaimCENVATofthetaxpaid.MSMEunitsarenotabletosetofftheburdenoftheservicetaxpaidonrentasmostofthemarenotrequiredtopayexciseduty,theirvalueofclearancesbeingwithintheexemptionlimit.

It may appear that service tax is payable only if the annual rent is Rs 10 lakhs or more. Fact is that small units may be takingapartofpremisesonrentforRs.5,000permonthbuttheownermaybeliabletopayservicetaxbecausehistotalrentalincomefromthepremisescrossestheexemptionlimitofRs.10Lakhs.

MSMEswho takepremiseson rentmostly arebeginnersor youngentrepreneurswhodon’thavefinances to starttheirnewenterpriseintheirownpremises.Theyputalltheiravailableresourcesandenergytoriskinstartinganewenterprise.Micro&SmallSectorsshouldbeexemptedfromthepurviewofServiceTaxforrentalfortheiroffice/factory/ warehouse premises for their own use.

3.11.3. Date of Payment of Service Tax

Rule 6 of the Service Tax Rules 1994 prescribes the dates and the manner in which the service tax shall be paid to the creditoftheCentralGovernment.InthesaidRulecertainrelaxationshavebeenprovidedincaseswheretheassesseisan individualorproprietaryfirmorapartnershipfirm. It is requestedthatprivate limitedMSMEsshouldalsobeextendedsimilarrelaxationsinpaymentofservicetax.


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Payment of Service Tax by the 5th of next month is too early for MSMEs to comply with. This may be extended to at leasttill20thofthemonth.

3.11.4. Payment of Service Tax by MSMEs on Realization of Proceeds

AsperthePointofTaxationRules,thePointofTaxationshallbethetimewhentheinvoicefortheserviceprovidedisissued.TheseprovisionsareadverselyaffectingunitsintheMSMEsectorsinceinmanycasesespeciallymanufacturingandautocomponentindustry,paymentsarereceivedafter60daysinthenormalcourseandsometimeafter90daysofthe issue of invoice. Any tax which is paid to the Government is from the resources of the MSME unit itself. Given that thefinancesofMSMEunitsarealreadystretchedtheyfindthisahugestrainontheirbusinesssinceliquidityisanissueandMSMEunitsoperateonverytightmargins.

ItisrequestedthataspecialrelaxationforpaymentofservicetaxforMSMEsmaybeprovidedsothattheydonothavetopaytaxesinadvancefromtheirresourcesbutthepaymentisaffectedonrealizationoftheirduesfromthebuyers.

3.11.5. Allow investment in Plant and Machinery for Rs. 25 crores or more in span of three years

Deductionforinvestmentallowanceaspersection32AC(1A)oftheIncomeTaxActattherateof15%for3yearsisallowedtoamanufacturingcompanywhichinvestatleastRs25croresormoreinplantandmachineryinafinancialyearstartingfromApril1,2014,asannouncedintheUnionBudget2014-15.However,theprovisionwillbenefitMSMEsonlyiftherevisioninthelimitofdefiningMSMEswillmatchtheaboveinvestmentlimits.ItisrecommendedthatinordertoallowMSMEstotakethebenefitofthesaiddeductiontheacquisitionandinstallationinplantandmachineryof Rs. 25 crores or more should be allowed to be made within a span of three years i.e. April 1, 2014 to March 31, 2017.

3.11.6. Provisions of Section 56(2)(viib) of the Act not to Apply on Investments by Angel Investors

Itisrecommendedthattheinvestmentsmadebyaninvestorwhoispartofarecognised,formalangelgroup,shouldnotbeconsideredforthepurposeofinvokingtheprovisionsofsection56(2)(viib)oftheAct.

NON FERROUS METALS

I - COPPER

3.12.1. Exemption from the Levy of Import Duty on Copper Concentrate

Copper is a critical input for various industries, including infrastructure indicators. The critical rawmaterial for thisindustry,i.e.copperconcentrate,isavailableveryscarcelyinIndia,makingitimperativeforthecountrytoimporteitherrefinedcopperorcopperconcentrate.Giventhestructuralconstraintofnon-availabilityofcopperconcentrate,Indianproducerssetupcustomcoppersmelters(similartothebusinessmodelsofChina,JapanandKorea)basedonimportedconcentrate.Nearly90%oftherequirementforcopperconcentratesismetthroughimports.

Thecustomizedcoppersmeltersoperateonaconversionbusinessmodelwithvery thinmargins.CopperpricesonLondonMetalsExchange(LME)areapass-throughfortheindustrysincetheyalsoimportconcentrateatrulingLMEpriceslesstheinternationallynegotiatedTreatmentandRefiningCharges(TCRC).Inrecentyears,TCRCshavefacedadownwardpressuredueto:(a)Delaysinimplementationofminingprojectsafterthefinancialmeltdown,(b)Fallingcopperoregradesacrosstheworldand(c)Increasedrequirementforconcentratesfromemergingmarkets,especiallyChina.ThesharpreductioninTCRCs–thekeyvaluedriveroftheindustry–alongwiththecontinuedcostpressures,haveaffectedtheviabilityofthecoppersmeltingindustry.Overtheyears,thedutydifferentialbetweenrefinedcopperandcopperconcentratehasbeencompressedfrom30%attheturnofthecenturytojust2.5%.Thistinydifferential,inaconversionbusinesswhereTCRCsarelessthan5%oftheturnover,ishardlyadequate.


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To sustain the viability of the smelting model in Indian refined copper industry, it is recommended that copperconcentrate be exempted from basic customs duty. This proposal is likely to result in a revenue loss of Rs 200 crore whichcanbeoffsetbyanincreaseincustomdutyoncopperproductsto10%(likelyrevenuegainofRs350crores).

3.12.2. Increase in Customs Duty on Copper products from 5% to 10%

Indianprimarycopperproducershadsetupglobal-scalecapacitiestomaintaintheircostcompetitivenesswithstate-of-the-art technology. However, this resulted in Indian refined copper capacity (close to a million tonnes) that issignificantlyhigherthanthedomesticmarketsize (nearly0.6milliontonnes).Despitesuchexcesscapacity in India,importsofrefinedcopperproductsaresteadilygoingup.Importshavezoomednearly100%fromaround85,000tonnesin2012-13toover170,000tonnesin2014-15.Thisiserodingthemarketsizeavailableforthedomesticplayersandtheimportshaveashareof35%ofthetotalmarket.TheFreeTradeAgreementswithJapan,Malaysiaandothercountriesarecausingasurgeintheimports.

InviewoftherisingimportsandconsideringtheexcesscapacityinIndianrefinedcopperindustry,itisrecommendedthatthebasiccustomsdutyoncopperproductsbeincreasedfrom5%to10%

3.12.3. Technical Correction in the Notification Exempting Gold and Silver Content in Copper Concentrate

IntheUnionBudget2011-12,Governmenthadexemptedgoldandsilvercontentinimportedcopperconcentrate(CH2603) frombasic customsduty to encourageproductionof preciousmetals through the copper concentrate route(NotificationNo.24/2011-Customsdated1.3.2011).Whilethiswasawelcomemove,theexemptionissubjecttotheconditionthattheimporterproducesanassaycertificatefromtheminingcompanyspecifyingseparately,thevalueofgoldandsilvercontentinsuchcopperconcentrate.Inthiscontext,itispointedoutthatasignificantquantityofcopperconcentrateisprocuredfromtradersorfromtradingcompaniesoftheminers.Thistraderoutehasbeeninadvertentlyleft out of the notification – which needs to be corrected. It is therefore, recommended that the notification beamendedsoastomaketheassaycertificatefromthesupplierofconcentrateasanadequateconditionratherthanassaycertificatefromtheminingcompany.

II - ALUMINIUM

3.12.4. Imposition of Export Duty on Alumina

Around80-85%oftotalaluminaexportsfromIndiain2013-14weredestinedforMiddleEastcountries.Atthesametime,importsfromMiddleEasthavesurgedfrom308kTinFY11to528kTinFY15withaCAGRof14%.Thismeansthatthe IndiancompaniesarehelpingMiddleEastsmeltersrunandexportbackvalueaddedproduct to India. In India,Aluminium smelters of 1.5 million tons capacity are ready but have not been commissioned due to non-availability of alumina. Incasethe indigenousrequirementofalumina is fulfilledfromdomesticsources(insteadofexportingthesametoMiddleEast),Indiawillbeabletoexportaluminiumwhichwillfetchmorevalue.Thiswillalsosaveoutflowofforeignexchangeandreduceloadoninfrastructure.Itisaccordinglysuggestedthatexportdutyof5%beimposedonexport of alumina.

3.12.5. Reducing Import Duty on Aluminium Fluoride

India is net importer of Aluminium fluoride. Aluminium industry is importing 100% of its requirement of AlF3.ContributionofAluminiumfluorideincostofproductionofaluminiummetalisaround1.5%.ThedemandforAlF3willincreasewiththeoperationalizationofexpansionprojects.DutycorrectiononAlF3willnothaveanyimpactonanyotherindustry.Hence,itisrecommendedtoreduceimportdutyonAluminiumFluoridefrom7.5%to2.5%.

3.12.6. Reducing Import Duty on Coal Tar Pitch

CoalTarPitchisacrucialrawmaterialforaluminiumtobeusedasbindingmaterialformanufacturinganodesfortheelectrolysisprocesswiththealuminiumindustryusingasubstantialquantityoftotalproduction/importsofCTPitch.


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Itscontributioninthetotalcostofproductionofaluminiumisaround3.5-4%.ItissuggestedtoreduceimportdutyonCTPitchfrom5%to2.5%.

3.12.7. Increasing of Export Duty on Bauxite

India’saluminaproductioncapacityis6.1milliontonnesperannum.Therequirementforbauxiteisaround18milliontonnesperannum.Sincenonewmajorbauxiteminescouldbestartedinthelast20years,AluminarefineriesinIndiaarefindingitdifficulttosourceindigenousbauxiteandareforcedtoimport.Ontheotherhandmerchantminersareexportinghugequantitiesofbauxite.

Eventhoughthegovernmenthasincreasedtheexportdutyto20%onbauxiteinUnionBudget2014-15,ithasfailedtostemtheoutflowofbauxite.BauxiteexportsinFY14andFY15were3.3and6.4milliontonnesrespectively.

Toensuredomesticvalueadditionwithin India,exportofbauxitemustbediscouraged. It is thereforesuggestedtoincreaseexportdutyonbauxitefrom20%to30%.

3.12.8. Increase in Basic Customs Duty on Aluminium Products from 5% to 10%

IndianAluminiumindustryhasseenahugesurgeinimportsinrecentyears.Themarketshareofdomesticmanufacturershasdroppedto44%in2014-15withimportsnearlydoublingto15.63lakhtonnefrom8.81lakhtonnein2010-11.Thethreatof imports isprimarilyfromtwolocations:MiddleEastandChina.Boththeselocationshaveahugecapacitysurplus.Further,thedomesticcapacityof41lakhtonnesperannumiscurrentlyoperatingat50%.

TheconsumptionofaluminiuminIndiaisexpectedtogrowat10-11%CAGRoverthenextdecade.Tocatertosuchhugedemandpotential,Indianprimaryaluminiumindustryhasannouncedambitiousgrowthplansinvolvingmassivecapitaloutlayforincreasingthecapacityto5millionTPAby2020.Therisingimportsare,however,endangeringtheverybasisoftheselargeinvestmentsandtheirviability.Thesurgeinimportsishappeningatatimewhentheindustryhasbeenalreadysqueezedbysubduedrealizationsandincessantincreaseincostofproduction.

Withsuchadversities it is recommendedthat the importofaluminiumproducts into Indiashouldbecontrolledbyincreasingthebasiccustomsdutyonaluminiumproducts(HScodes7601,7603,7607)from5%to10%.

3.12.9. Customs duty on Aluminium Scrap at par with the duty on the Metal Products

For all base metals other than Aluminium, import duty on scrap in India is the same as the duty on the metal. It is only in caseofAluminiumthatthedutyonscrapis2.5%,whiledutyonaluminiumproductsisat5%.InmostoftheAluminiumdownstreamproducts,scrapandprimaryaluminiumcanbeusedalmostinterchangeably.Thedifferentialdutystructureseemstobe,therefore,leadingtoasubstitutionofprimaryaluminiumbyscrap–reflectedinasharpriseinimportsofscrap(CH7602).ScrapimportsarecausinganimmenseharmtotheIndianaluminiumindustryduetomarketdiversion.

ItisrecommendedthatthebasiccustomsdutyonAluminiumScrap(CH7602)beraisedandbroughtonparwiththeduty on Aluminium products

3.12.10. Inclusion of Aluminium Ingots under Interest Subvention Scheme

Inordertoencourageexports,GovernmenthaswidenedtheInterestSubventionSchemebyincluding134engineeringproductsvideacirculardatedJanuary14,2013issuedbyRBI.WhilethislistincludesAluminiumwirerodsandAluminiumsheets,itdoesnotincludetheprimaryproduct,i.e.AluminiumIngots(HS7601).ExportsofaluminiumingotsfromIndiahavebeennearlystagnantoverthelastthreeyearsataround200tonnesperannum.Theseexportsmaygetsomeleverageifingotsareincludedundertheabovescheme.Itis,therefore,recommendedthatAluminiumIngots(HS7601)beincludedundertheInterestSubventionScheme.


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III – ZINC AND LEAD

3.12.11. Increase in Basic Custom duty on Zinc and Lead Ingots, Alloys, Scrap etc.

Heavy investmentshavebeenmadebydomestic industry innon-ferrousmetalsector,but lowdomesticdemand isleadingtoexcesssupplies.Despitetheavailabilityofmetalsinthecountryimportsareincreasinginthemarket.Therehasbeena123%increaseinZincimportsinFY15overFY14&96%increaseinZincAlloysforthesameperiodleadingto an oversupplied market.

Theimporttrendofleadhasrecordeda17%increasefromlastyear.ImportvolumeofZincalloyshasdoubledcomparedtopreviousyear.ImportofZincscraphassignificantlyincreasedbymorethan72%sinceFY2010-11,andrenderedthemanufactureofhighqualitydownstreamproductsofZincuncompetitive.

Qualityofzinc/leadproducedby Indian industrycompareswith thebest in theworldandthere isno incentive fordomesticconsumers(ofzinc/lead)togoinforimportsexceptforthecheaperpriceofmaterial.CheaperimportsunderFreetradeagreementslikefromSouthKoreaunderIndia–KoreaCEPAtradeagreementwhereimportdutiesonzinc,lead and value added products like alloys are now nil, result in oversupply in market and disturb balance of trade. ProductioncapacityisunderutilizedresultinginlossofjobsespeciallyinSMEsectorofalloyingsector.LikewisecheaperimportsofZincOxide,isagreatcauseofconcernforthedomesticdownstreamindustry.

ItisrecommendedthatbasicCustomdutyonZincIngots(HScode790111,790112),LeadIngots(HScode780110),ZincAlloys(HScode790120),Zincscrap(HScode790200)andLeadScrap(HScode780200),maybeincreasedfromexisting5%to7.5%andonZincoxide(HScode281700)fromexisting7.5%to10%

3.12.12. Customs Duty on Lead Concentrates

Limitedavailabilityoforeincountryandrestrictionsonnewminingareleadingtoshortageofleadoreandconcentratesandidlecapacity.Highimportdutiesonconcentratemakeproductionofleadingotscostlierandfacestiffcompetitionfrominternationalplayersbothinthedomesticaswellasinternationalmarket.

ItissuggestedthatbasicCustomsdutyonLeadconcentrates(HScode260700),bereducedfrom2.5%toNil.

OIL AND GAS

3.13.1. Service Tax Exemption to Services used in Exploration & Production (E&P) Sector

Services in relation to Survey and explorationofmineral,Oil&Gas servicewere brought in the service tax net inSeptember2004.AstheoperatorsandtheirassociatesinE&Psectordonotprovideanytaxableoutputserviceordonotmanufacturesanyexcisablegoods,theyarenotabletosetofftheservicetaxpaidandhavetoabsorbthecost.Further,the risks anduncertainty associatedwith capital intensive E&P sector underlines theneedof providing supportiveenvironment forsustainingthebusiness.Afteradventof theconceptofnegative list, theburdenof inputstagetaxhasfurtherincreasedonE&Psector.Thisunderlinestheneedofprovidingsupportiveenvironmentforsustainingthebusiness.Servicesrelatedtocoreinfrastructuresectoractivitieslikehighways,airports,seaports,metro,railwaysetc.arealreadyexemptedfromservicetaxoneconomicconsiderations.ItisthereforesuggestedthattheservicesrequiredforE&Psectormaybeincludedinthenegativelistofservicessoastoreducetheircostinlinewithconsiderationgiventoservicesrequiredforinfrastructuredevelopmentlikeroads,airport,railways,portsetc.ItwillincentivizeinvestmentinE&Psectorbywayofreductionincapitalcost


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3.13.2. Abolish National Calamity Contingency Duty

NationalCalamityContingentDutyofExcise(NCCD)wasintroduced@Rs.50permetrictonneonindigenouscrudeoilandsimultaneouslyanadditionaldutyofcustomsattherateofRs50permetrictonneonimportedcrudeoilwasalsointroducedeffectivefrom1stMarch2003.Thisdutywastobevalidforoneyeari.e.upto29thFebruary2004soastoreplenishtheNationalCalamityContingencyFund,butitisstillcontinuing.

It is recommended that NCCD on Crude Oil should be abolished.

3.13.3. Oil Industries Development Cess

Oil Industry Development (OID) Cess is levied on Crude Oil produced as a duty of excise under the Oil Industries (Development)Act1974.OIDCessoncrudeoilproducedfromNominationblocksandpre-NELPExploratoryblocksispresentlyleviableatRs.4,500/MT.However,incaseofpre-NELPdiscoveredblocks(e.g.PMTandRavva),OIDCessispayableasmentionedinrespectivePSCi.e.Rs.900/MTwhereasOIDCessisexemptedincaseofNELPblocks.

OIDCesswaslastrevisedfromRs.2,500/MTtoRs.4,500/MTwitheffectfrom17March,2012,whenthepriceofIndianbasketofcrudewasintherangeofUS$110/bbl.Subsequently,crudepriceshavereducedconsiderably.Duringcurrentyear2015-16,theaveragepriceofIndianbasketofcrudeisUS$57.83/bbl(till28Aug’15)andpresentlyitishoveringaroundUS$47/bbl.

ExistingrateofOIDCessofRs.4,500/MTworksout totheorderofUS$9.52/bbl (consideringexchangerateofRs.63/$andBMTfactorof7.5bbl/MT). It isalsopertinenttomentionthatatcurrentlevelofcrudepricesandcostofproduction,theeconomicviabilityofmanyoftheschemes/projectsalreadyapprovedbyONGCisinjeopardy.Therefore,atcurrentlevelofcrudeprices,thereisanurgentneedforreviewofpresentapplicablerateofOIDCessofRs.4,500/MT(equivalenttoUS$9.52/bbl).

Itisrecommendedthatatthepresentlevelofcrudeprice,upstreamoilcompaniesarenotinapositiontoabsorbtheapplicableOIDCessandthereisanurgentneedforreviewoftheexistingrateofOIDCess.Itissuggestedthatkeepinginviewthevolatilityincrudeprices,itwouldbeprudentthatOIDCessmaybeleviedatad-valorembasis,say@8%to10%onrealizedprice.

3.13.4. Reduction of Customs Duty on LNG import

LasttwodecadeshaveseensubstantialeconomicgrowthinIndiacoupledwithincreasedenergyconsumptiontodriveafastgrowingeconomy.GivenIndia’sfuturegrowthaspirations,itisclearthataccesstoabundantenergywillbecriticaltosustainingthemomentumofthisgrowth.Thus,energysecurityhasassumedstrategicimportanceforacountrylikeIndia.Ontheotherhand,Indiahasfewindigenousenergyresources,whicharenotenvironmentfriendly.Underthisenergyconditionnecessarilythecountryhastodiversifyitsfuelmixandlooktoglobalenergymarketsforitsenergyneeds.IntheIndiancontext,importedLNGcanonlybealongtermsolution.

Despitethefewdomesticdiscoveriesaddingmarginallythenaturalgasproduction,butthedemandfornaturalgashascontinuouslyoutstrippedthesupply.ThereforeimportedLNGwillbecriticaltoovercomethewidegapbetweengasdemandanddomesticproduction.LNGbeingacleanestfossilfuelcomparedtotraditionalfuelslikeoilandcoalwhicharenotenvironmentfriendly,itmustbepromotedandatthesametimedeservesmorefiscalconcession.TheHydrocarbonVisionalsoenvisagesincreasedusageofnaturalgas/LNGasacleanandefficientenergysource.

ItisrecommendedthatcustomsdutyonimportedLNGmaybereducedto2.5%ifitcannotbeexemptedaltogetherinonego.

3.13.5. Anomaly in Excise and Customs Notifications for Exemption of Duty on Furnace Oil

AsperNotificationNo.12/2012-Customsdated17.03.2012,customsdutyincaseofimportofFurnaceOilisexemptprovidedsuchimportofFurnaceOilisforthepurposeofmanufactureoffertilizers.However,NotificationNo.12/2012-


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Excisedated17.03.2012,exemptsexcisedutyonthefurnaceoilprovidedthefollowingtwoconditionsaresatisfied:

(i) Suchfurnaceoilisintendedforuseasfeedstockinthemanufactureoffertilizers.

(ii) TheexemptionshallbeallowedifithasbeenprovedtothesatisfactionofanofficernotbelowtherankoftheDeputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, havingjurisdictionthatsuchgoodsareclearedfortheintendedusespecifiedincolumn(3)oftheTable.

Onaccountofthevarianceinthenotificationundercustoms&excise,thesaleofthisproductindigenouslyhasbeenaffectedasthecustomersareabletoimporttheproductfreeofdutyeveniftheproductisnotintendedforuseasfeedstockinthemanufactureoffertilizer.Thisresultsinhigherimportsanddraininforeignexchangeeventhoughtheproduct is available locally.

Consideraligningtheimportduties(BCDandCVD)onimportofFOandexcisedutyonmanufactureofFOforuseinfertilizersbyallowingsameexemptiontodomesticmanufactureashasbeenallowedincaseofimports,orimposelevyofBCDandCVDonimportofFOforuseotherthaninthefeedstockinthemanufactureoffertilizersoastobringinpriceparitybetweenimportedandindigenouslymanufacturedFO.

3.13.6. Tax Holiday for Exploration and Production Activities Relating to Natural Gas and CBM

Toavoiduncertainty,itisimportantthattheGovernmentshouldclarifythatfortheeligibilitytoavailtaxholidayunderSection80-IBoftheAct,thedefinitionof‘mineraloil’wouldincludenaturalgasretrospectivelyirrespectiveofNELProundandthatthebenefitshouldalsobeavailabletoCoalBedMethane(”CBM”).Inotherwords,itshouldbeexplicitlyprovidedthattheterm‘mineraloil’will includenaturalgasandCBMforallpastandfutureroundsofNELPforthepurposesofSection80-IBoftheAct.

3.13.7. Treatment of Losses and Depreciation Allowance in Amalgamation or Demerger

Section72AoftheActneedstobeamendedsothataccumulatedlossandunabsorbeddepreciationallowancefromspecifiedbusinessoflayingandoperatingacross-countrynaturalgaspipelinenetworkfordistribution,includingstoragefacilitiesbeinganintegralpartofsuchnetworkisallowedtobecarriedforwardandsetoffinthehandsoftheresultingcompanyincaseofdemergeroramalgamatedcompanyincaseofamalgamation,providedthelossisdirectlyrelatabletotheundertakingstransferred.

3.13.8. Scope of ‘Undertaking’ for the Purposes of Tax Holiday

ThelimitationofthetaxholidayforoilandgastoasingleundertakingbasedonasinglePSCisregressiveandinconsistentwiththeconstructoftaxholidaysforothersectors.Thisshouldbeamendedtodefinean‘undertaking’(consistentwiththejudicialdecisions)thateachdistinctfielddevelopmentevidencedbyaseparatedevelopmentplanshouldbeanundertakingeligibleforthetaxholiday.Thisisallthemoreimportantastheamendmenthasbeenmaderetrospectivelyanddeclaringeachblockasasingleundertaking,thattoowithretrospectiveeffect,willadverselyaffecttheprofitabilityof operators.

3.13.9. Extension of benefit under Section 80-IB(9) from 7 years to 10 years

ItissuggestedthatthebenefitunderSection80-IB(9)oftheActmaybeextendedfrom7yearsto10yearstocompaniesengagedinproductionofmineraloilandnaturalgas.ItmayfurtherbeprovidedthatthebenefitunderSection80-IB(9)oftheActshallnotberestrictedonlytoblockslicensedunderacontractawardedtill31stMarch,2011andtheperiodbeextendedtill31stMarch,2017.

3.13.10. Amend Definition of ‘Infrastructure Facility’ to include Exploration and Refining Activities

Definitionof ‘infrastructure facility’ asper Section80-IAof theAct shouldbeamended to includeexplorationandrefiningactivities.


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3.13.11. Extension of Section 42 to investment in Foreign E&P blocks

Section42oftheActisaspecialprovisionforcomputingtheprofitsorgainsofanybusinessconsistingofprospectingfororextractionorproductionofmineraloils.Itprovidesforspecificdeductionsubjecttothesatisfactionoffollowingcumulativeconditions:-

• Expenditurebywayofinfructuousorabortiveexplorationexpensesinrespectofanyareasurrenderedpriortothebeginningofcommercialproductionbytheassessee;

• CompanieshaveenteredintoanagreementwiththeCentralGovernmentforextractionorproductionofmineraloils;and

• SuchagreementhasbeenlaidonthetableofeachhouseofParliament.

Theword“surrendered”inthesectionprecludesallowabilityofdeductionforexpenditureincurredinanareawhichcannot be surrendered due to practical constraints. It is therefore suggested that theword “surrendered”may bedeletedfromsection42(1)(a)oftheActortheword“surrendered”maybereplacedwiththeterm“relinquishedinfullorinpart”.

Accordingly,asperSection42oftheAct,deductionisnotallowedforexpenditureincurredbyIndiancompaniesforprospectingorextractionorproductionofmineraloilsfromoilandgasblockssituatedabroad.

It is suggested that Section 42 of the Act be amended to remove the aforesaid conditions so as to enable IndiancompaniestoclaimspecificdeductionofexpenditureincurredonoilandgasblockssituatedoutsideIndia.

Explorationofhydrocarbonsisahighriskbusiness.Byitsverynature,theoutcomeofsuchexpenditureisquiteuncertain.However,toensureenergysecurityofthecountryitisveryessentialthatalleffortsaremadetoexploreallprospectiveareasavailableinthecountry.Therefore,itisrecommendedthatweighteddeductionof200%inrespectofexplorationexpenditureundersection42oftheIncome-taxAct,1961beprovided.

3.13.12. Taxation of Non-Residents on Presumptive Basis under Sections 44B, 44BB, 44BBA and 44BBB

A. Application of Section 44BB where Section 44DA applies

FinanceAct,2010madeanamendmentintheprovisotoSection44BBoftheActwhichprovidedthatSection44BBshallnotapplytoanon-residenttaxpayerincasetheprovisionsofSection44DAoftheActareapplicable.AcorrespondingamendmentwasalsomadeinSection44DAoftheAct.TheseamendmentsweremadeeffectivefromApril1,2011.However,therehasbeenacontroversyontheaforesaidamendmentwhereinRevenueauthoritiescontendthattheamendmenthasaretrospectiveimpact.Onthisbasis,revenueauthoritieshavebeenreopeningcompletedassessmentsunderSection147oftheActeventhoughjudicialauthoritieshaveheldthattheamendmentisprospectiveinnature[BJServicesCompanyMiddleEastLimitedvs.DDIT(SpecialAppealNo316and317of2012,UttarakhandHighCourt)].TheprospectiveapplicationoftheamendmentisalsoevidentfromoftheintentionofthelegislatureasperthenotestoclausestotheFinanceAct,2010explainingthesaidamendments.

Itissuggestedthataclarificationbeissuedtoclarifythattheamendmentisprospectiveinnature.Thiswillhelpavoidunwarrantedlitigation.

B. Scope of ‘FTS’

Theterm‘FTS’hasbeendefinedinExplanation2toSection9(1)(vii)oftheAct.Theconsiderationreceivedfor‘miningor likeproject’hasbeenspecificallyexcludedfromthedefinitionofFTS.Theservicesrenderedbythenon-residentoilfieldservicesproviders(suchasseismicdataacquisitionandprocessing,provisionforhireofvesseletc.)areintegraltoexplorationofmineraloilandfundamentaltothedrillingoperations.


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TheCBDT,vide instructionno1862datedOctober22,1990,alsoclarified that theservices rendered inconnectionwithprospectingetc.ofmineraloilcanbetermedas‘mining’operations.However,ithasbeenseenthattheRevenueAuthoritieshavenotbeenabidingtotheaboveinstructioninholdingthatservicesrenderedbythenon-residentoilfieldservicesprovidersareinthenatureofFTS.Thus,thebenefitofdeemedprofitregimeunderSection44BBoftheActisbeingdeniedtosuchnon-residentoilfieldserviceproviders.

InordertoavoidunwarrantedlitigationinIndiaonapplicabilityofprovisionsofSection44BBoftheAct,itissuggestedthatamendmentbemadeinSection9(1)(vii)oftheActtospecificallyexcludetheservicesrenderedbyoilfieldserviceproviders from the ambit of the term FTS.

C. Statutory Taxes not to form part of Gross Receipts

CertainSectionsoftheActprovidefortaxationofnon-residentsonapresumptivebasis,suchasSections44B,44BB,44BBAand44BBBoftheAct.TheseSectionsdeemaspecifiedpercentageoftheamountsreceivedbythenon-residentsfortheactivitiescoveredbytheprovisionsasincomeundertheAct.Inthepasttherehasbeenconsiderablelitigationonwhether Government dues, such as service tax, recovered by the non-residents from the Indian partieswouldconstitutepartofgrossreceipts[suchasDITvsSchlumbergerAsiaServicesLtd(317ITR156)(UttarakhandHC),SiemOffshoreIncvsDIT(337ITR207)(AAR)].Asthesestatutoryduesaretobepaidoverbythenon-residenttaxpayerstothe Government, there is no income element therein.

Inviewoftheabove,theseSectionsoftheActshouldbeamendedtoprovidethatstatutorytaxesanddues(suchasservice tax) recoveredby thenon-residentserviceprovider fromthe Indian residentswouldnot formpartofgrossreceiptsforcomputingdeemedincomeundertheSection.Thiswillbefairandwilleliminateunnecessarylitigationonthe issue.

3.13.13. Exemption from MAT

OilexplorationandproductioncompaniesshouldbeexemptedfromthepurviewofSection115JBoftheActtopromotethedomesticexplorationandproduction.Thiswillreduceimportdependenceofthenation.

3.13.14. Clarification on Depreciation on Premium paid to Acquire E&P Assets Abroad

It should be explicitly provided that the premium paid to acquire any Exploration and Production asset abroad isintangibleasseteligiblefordepreciationunderSection32oftheAct@25%.

3.13.15. Weighted Deduction for Cross Country Natural Gas/ Crude/ Petroleum Oil Pipeline Network

UnderSection35ADofAct,100%deductioninrespectofcapitalexpenditureincurred(otherthanland,goodwillandfinancialinstrument)priortocommencementofoperationofspecifiedbusinessescarriedonbyataxpayerincludinglayingandoperatingacross-countrynaturalgas/crude/petroleumpipelinenetworkfordistributionisallowed.TheFinanceAct,2012furtherincreasedtheweighteddeductionto150%oftheexpenditureinrespectofcertainspecifiedbusinessesasperSection35AD(1A)oftheAct.Itisrecommendedthatsimilarweighteddeductionshouldbeallowedtospecifiedbusinessoflayingandoperatingacrosscountrynaturalgas/crude/petroleumoilpipelinenetworkfordistribution.

3.13.16. Allow 100% Depreciation on Equipment used for Upgradation of Fuel Quality

UndertheAutoFuelpolicy,theGovt.hasdirectedoilcompaniestosupplyHighSpeedDieselwithminimumprescribedSulphurcontent.AspertheproposedAutoFuelPolicyofGovernmentoilcompaniesarerequiredtoprovidetheHSDwithmaximumsulphurcontentof0.005%(BS-IV)witheffectfrom01.04.2017throughoutthecountry.HugecapitalinvestmentisrequiredtobeundertakensothattheycancomplywiththeDirectivesoftheGovernmentandtoremovetheSulphurfromcrudeoilwhichisinexcessofprescribedlimits.SuchreductionofSulphurcontentalsohelpstoreduce


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theAirPollution.ItisrecommendedthatplantandmachineryandequipmentsusedforthepurposesofupgradingautofuelqualityinaccordancewiththeAutoFuelPolicyofGovernmentofIndiathroughreductionofsulphurcontentoroctaneimprovementbemadeeligiblefordepreciation@100%.

PAPER AND PAPER BOARD

3.14.1. Customs Duty on Paper/Paperboards

The Indian Paper/Paperboard industry hasmade significant capital investments to ramp-up capacities formeetingdomesticrequirements.TheIndustryhasstrongbackwardlinkageswiththefarmingcommunity,fromwhomwood,whichisarawmaterial,issourced.Alargepartofthiswoodisgrowninbackwardmarginal/sub-marginalland,whichispotentiallyunfitforotheruse.Thisindustry,beingmainlybasedinbackwardareas,hastransformedthesocioeconomicconditionsofthepopulationresidingthere.It isthereforestrategicallyimportantandalsonecessarytokeepPaper/Paperboardindustry,outsidetheambitofFTA’s(ASEANetc.)andrecognisethisIndustryas“sensitive”deservingspecialtreatment.Increasedimportsfromforeigncountriesareseverelyimpactingtheeconomicviabilityofmanypapermillsin India.

Inordertoprovidealevelplayingfieldtothedomesticindustryitisrecommendedthat:

(a) CustomsdutyforimportofPaperandPaperboardsshouldbeincreasedandbroughtinlinewithagriculturalproductsascurrentlyindustryissourcingmajorityofitsrawmaterialsfromAgro-forestry–supportingmillionsoffarmersincreatingvalueontheirmarginallands.

(b) Thiscategorytobekeptinthe‘sensitive’List(i.e.,nopreferentialtreatment)inbi-lateralandmulti-lateraltradetreatiesandagreements.

3.14.2. Reduction of Excise Duty on Poly-coated Paper and Paperboards

ThemarketsizeinIndiafordisposablecupsiscloseto40billioncupsperyearoutofwhich10billioncupsarepapercups.Thebalance30billionisplasticcups-heretootherearetwovarietiesviz.,HIP(HighImpactPolystyrene)andPP(Polypropylene).Amongplasticcups,60%ofthemarketisforPP,30%isforRecycledHIPSand10%isforVirginHIPS.

Poly coated paperboard is used formanufacture of paper cups,which containsmore than 90% byweight of bio-degradablefoodgradepaperboardandisaneco-friendlysubstituteforplastics.Theglobaltrendistoactivelydiscouragetheuseofplastics(whichdonotconformtorequisitehygieneandenvironmentalstandards)andtoreplaceitwithpolycoated paper / paperboard.

InIndiamajorconsumersofthistypeofpaper/paperboardsareSSI/SMEunitsengagedinmanufactureofpapercupsthatareincreasinglybeingsuppliedtoinstitutionalcustomersliketheRailways,theFMCGsectorandthehouseholdsector.Papercupsareusedformassconsumptionitemssuchastea,coffee,fruitjuices,softdrinks,icecreametc.

Paperandpaperboardthatiscoated/impregnated/coveredwithpolycoatingareclassifiedunderCentralExciseTariffs48115190(Bleached,weighingmorethan150g/m2-Other)and48115990(Other-Other)withanexciselevyof12.5%advalorem–evenasalargenumberofpaper/paperboarditemscoveredbyCentralExciseTariff4802,4804,4805,4807,4808and4810areexcisabletoexcisedutyonlyat6%advalorem.

Further SSI/SME Units are not able to avail Cenvat credit for the excise duty paid on the base board used for manufacture of poly coated paper cups.

Itisrecommendedthatexcisedutyonpolycoatedpaper/paperboards,classifiableunderCentralExciseTariffs48115190(Bleached,weighingmorethan150g/m2-Other)and48115990(Other-Other)bereducedto6%from12.5%-inlinewithmostotherpaper/paperboardsclassifiableunderChapter48.Suchamovewillalsobea“green”initiativeinlinewithglobaltrends.


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3.14.3. Customs Duty on Wood Logs / Chips

India is a wood fibre deficient country, with the domestic demand-supply gap in woodwidening every year. Rawmaterialsconstitute35-40%ofcostofpaperproduction.Currently,thewoodandbamboodemandofthecountry’sPulp&PaperIndustryisaround11milliontonnesagainstavailabilityof9milliontonnesperannum.Thedemandisexpected to increase to 15 million tonnes by 2024-25.

Indiabeingafibredeficientcountry,indigenouspapermanufacturersareforcedtouseavarietyofrawmaterialsuchaswood, agro-residues,wastepaper, etc. Becauseof this reason thedomesticpaperproducers import substantialquantitiesofwoodpulpandwastepapertomeettherawmaterialdeficit.

Onaccountofthesignificantdemand-supplygapinrespectoftheprimaryrawmaterialfortheindustry,thecostofwoodhasgoneupexponentiallyoverthelastfewyears.Shortageofsupplywithexponentialriseinpricesofwoodis adversely impacting the competitiveedgeof the industry and thedomesticmanufacturers are cedingground tocheaperimports.Itistherefore,importanttobringdownthecostofdomesticaswellasimportedrawmaterial.

In India, the total importdutypresentlyon theprimary rawmaterial -wood logs/chips - is9.27%,with thebasiccustomsdutyat5%.ItisimportanttomentionherethatundertheIndia-ASEANFreeTradeAgreement(FTA),woodlogs/chipsimportsattract‘nil’rateofbasiccustomsduty.

Inordertoreduceinputcostofwood,theGovernmentshouldintroduce‘zero’rateofcustomsdutyforallheadsonimportofwoodlogs/chips(HSNo.44011010,44012100,44012200).

3.14.4. Customs Duty on Import of Pulp

InMay2012theGovernmentreducedtheimportdutyonpulpfrom5%to“Nil”.Morethan1.25millionMTofpulp,valued at approximately USD 820 million is imported in to the country every year. The customs duty for these imports isestimatedtobeaboutRs.245crorep.a.

Thebreak-upofthepulpimportsisasunder:

Type of Pulp Quantity (‘000 MT) Value (Rs. Crore)

Hard Wood Chemical Pulp 900 3,420

SoftWoodChemicalPulp 200 900

Bleached Chemi Thermo Mechanical Pulp (BCTM Pulp) 160 580

Total 1,260 4,580

InviewofthefactthatSoftWoodcannotbegrowninthecountry,requirementofSoftWoodPulpwillhavetobemetthroughtheimportrouteonly.However,insofarasHardWoodPulpisconcerned,itwouldbepertinenttonotethatthedomesticindustryisworkingcloselywiththefarmingcommunityforcreatingsustainablesupplyofwood–akeyrawmaterialforhardwoodpulp–throughre-developmentofwaste-lands.

InsofarasBleachedChemiThermoMechanicalPulp(BCTMP)isconcerned,thetechnologyformanufacturingBCTMPhasnotbeenavailableinIndia.Inlinewiththevision“MakeinIndia”,forthefirsttime,theindustryissettingupastateofartBCTMPmanufacturingfacilityinIndia,whichisexpectedtobeoperationalbyJune2016.TheprojectinvolveshugecapitalinvestmentsandwillcontinuouslysaveforexoutflowsthatwouldotherwisebespentforimportofBCTMpulp.


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Inaneraofincreasingglobalcompetitionitisnecessaryforgovernmentsandindustrytoworkinpartnershiptoensurecreationofeconomicwealthforthenation.Accordingly,forcreationofsustainablesourcesoffibrerequiredbythepulpandpaperindustryitisrecommendedthat:

(i) policymeasuresbeputinplacetofacilitateprivatesectorparticipationinplantationdevelopmentprogrammes,and

(ii) 10% customs duty on pulp be imposed only for Hard Wood Chemical Pulp and Bleached Chemi ThermoMechanical Pulp (BCTMP)

3.14.5. Incentives for Investments in “Clean” Technologies by Paper Industry

Todaytechnologystandsoutasthemostcriticalfactorinachievingsustainedcompetitivenessandindustryperformance.IndianPaperIndustryisasignatorytotheGovernmentofIndia’sCharteronCorporateResponsibilityforEnvironmentalProtection(CREP).ThiscallsforsubstantialinvestmentsingreentechnologiessuchasintroductionofECF(ElementalChlorineFree)pulpmanufacture,Ozonebleachingetc.toensureapositiveenvironmentalfootprint.Theindigenousmillsareconsciously focusingoncleantechnologieswhicharecosteffectivewithqualitybenefits.TheGovernmentshouldencouragesuchinitiativesoftheindustry.ButIndianPaperIndustrybeingatraditional industrysuffersfrominadequateeconomyofscaleandobsolescenceofprocesstechnology.

Inordertoencouragemanufacturerswithintheindustrytoadoptenvironmentfriendly“clean”technologiesthatensure,inter-alia, reduced carbon footprints, better emission norms, better effluent treatment norms, usage of renewablesourcesofrawmaterialandenergy,improvedwasterecycling,etc.,appropriatefiscalbenefitsshouldbeprovided.

It is recommended that-

(a) Entitlementforimportofallrawmaterialsata50%concessionalrateofduty.

(b) Exportsbymanufactureswhohaveadoptedenvironmentallyfriendlytechnologyshouldbegrantedadditionalincentivesintheformofcashincentiveof5%ofFOB.

(c) FullexemptionfromexciseandVATtaxesforpaperandpaperboardproducedusingcleantechnology.

(d) Acceleratedtaxdepreciation@150%ofthenormaldepreciationratesunderincometaxlawsforinvestmentsonenvironmentfriendlytechnology,shouldbeprovidedtotheindustry.

Thesemeasureswillnotonlypromotepreservationofecology, itwillalso incentivizeallplayers intheIndianPaperIndustrytoadopt‘green’technologies,thusaligningdomesticindustrytointernationaleco-friendlynorms.

3.14.6. Clean Energy Cess

CleanEnergyCessonpurchaseofcoalwasimposedintheUnionBudget2010.Nodoubt,theCesswasintroducedontheprincipleof“polluterpays”.Whilstthisprinciplemaybejustifiableforindustriescausingenvironmentalpollution,itistoberecognizedthatwithintheindustrythereareplayerswhohaveinvestedconsiderablesumsofmoneyonstateofthearttechnologylikeelementalchlorinefreepapermanufacture,ozonebleachingprocesses,wastewatermanagement,solidwasterecycling,usageofenergyfromrenewablesourcesetc.toensureenvironmentfriendlymanufacture.

Inviewoftheabove, levyofacleanenergycessoncoal–which impactsadverselyonthecostcompetitivenessofmanufacturers–shouldberestrictedtoonlythosemanufacturerswhodonotadoptcleantechnologies.Manufacturerswho have already adopted internationally recognized clean technologies, at considerable investment, should beincentivizedandencouragedbywayofbeingexemptedfromlevyofanycleanenergycess.

Itisfurtherrecommendedthatthe‘CleanEnergycess’oncoal,ifusedforpowergeneration,shouldbemadecenvatable.


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REAL ESTATE

3.15.1. Service Tax – Value of Construction Contract liable to tax

For construction contractswhere serviceproviderdoesnotmaintain separatebooksof accounts and services, thecurrentServiceTax lawprovides for taxation@40%of thetotalamountchargedforsuchcontract [Rule2A (ii)ofServiceTax(DeterminationofValue)Rules2006].Ontheotherhand,inmostoftheStatesforsuchcontractsservicesportionisassumedas30%orless,andremainingvalueissubjecttoVAT.SomerepresentativeStatesstandarddeductiontowardsservicesisasfollows:

State Standard deduction for Services

Andhra Pradesh 30%

Delhi 20%

Maharashtra 30%

Haryana 25%

Gujrat 30%

Tamil Nadu 30%

Therefore,thereisadoubletaxationhappeningforthedifferenceinthevalue.

ItisrecommendedthatthesaidRule2A(ii)percentagechargeabletoservicetaxbebroughtdowntoamaximumof30%fromthecurrent40%ofthetotalamountchargedundersuchcontracts.ThiswouldactasastimulustothemuchdesiredgrowthofRealEstatesector.

3.15.2. Real Estate Investment Trusts (REIT’s)

UnionBudget2014-15hadintroducedataxregimeforREITsandBudget2015-16madefurtheramendmentstothetaxationofREITs.However,REITshavenotreallytakenoffandthefollowingfurtheramendmentswillhelpinmakingREITsareality:-

(a) Removal of Dividend Distribution Tax (‘DDT’) on distribution of dividend by Special Purpose Vehicle (‘SPV’) to REIT

Asperthecurrentlegislation,dividendreceivedbyabusinesstrustshallbesubjecttoDDTatthelevelofSPVbutthesameisexemptinthehandsofthebusinesstrust.DDTattheSPVlevelmayleadtomultiplelevelsoftax.Thismakesthebusinesstaxstructuretaxinefficient.ItissuggestedthatincidenceofDDTberemovedondistributionofdividendbySPVtoREIT.Thisisalsoin-linewithglobalREITtaxationregimeswheretherearenodistributiontaxes

(b) Extension of capital gains exemption on interest or assets in a firm to business trust

UnderthecurrentlegislationexemptionoftaxeshasbeenprovidedonlyincaseoftransferofsharesofaSPVbysponsor.SEBIregulationsinrelationtoBusinessTrustspermittheBusinessTrusttoholdassetsdirectlyaswellasholdinterestinafirm.Therefore,thesametaxtreatmentshouldbeextendedtothesponsorontransferofassetsorinterestinfirmtotheBusinessTrustagainstissuanceofunits.Provisionofexemptionontransferofassetsdirectlywouldencouragethesponsors/investorstotransferassets.WhereanassetisdirectlytransferredorinterestinafirmistransferredtotheBusinessTrust,therewouldnotbeanydividenddistributiontaxinthechainandtherefore,theinvestorswouldbenefitfromhigherdistributions.BusinessTrustisanewproductandhencerequirestaxincentivestomakeitattractiveforinvestors from various classes.


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(c) Clarity on exemption on transfer of shares of SPV to REIT

BasedonthecombinedreadingofSection47(xvii)andexplanationtoSection10(23FC)oftheAct,inordertobeeligibleforexemptionoftaxesunderSection47(xvii)theSPVwhosesharesaretransferredshouldbeanIndiancompanyinwhichtheBusinessTrustalreadyhascontrollinginterest.Practically,onceaTrustisregistered,thesponsor/investorwouldtransfersharesofSPVstotheBusinessTrustagainstissueofunits.However,asperthedefinitionofSPVs,theexemptionasprovidedunderSection47(xvii)wouldnotbeavailabletothesponsor/ investor insuchasituationasBusinessTrustwillgetthecontrollingstakeonlyaftersuchtransfertakesplace.ThereforetheexemptioncontemplatedinSection47(xvii)maybetheoretical.BasedonthereadingofmemorandumexplainingprovisionsofFinanceBill,2014,weunderstandthattheintentionofthelegislatureistoprovideexemptiontosponsor/investoronsaleofsharesofSPV.However,aliteral interpretationoftheprovisionseemstosuggestadifferentview.Accordingly, itneedstobeamended.

(d) Expenses of Business Trust and allocation of Business Trust expenses to income distributed to unit holders

ThenewtaxregimeinrelationtoBusinessTrustsdoesnotclarifydeductibilityoftheexpensesinthehandsofbusinesstrust.Further,section115UA(1)oftheActprovidesthat‘anyincomedistributedbyabusinesstrusttoitsunitholdersshallbedeemedtobeofthesamenatureandinthesameproportioninthehandsoftheunitholderasithadbeenreceivedby,oraccruedto,thebusinesstrust’.SincedistributionofincometounitholdersisproposedtobetaxedintheproportioninwhichincomeisearnedbytheBusinessTrust,itisimperativethatprovisionsbeintroducedprescribingthemethodofallocationofexpensesofTrustondistributiontounitholders.NewtaxregimeforBusinessTrustdoesnotprovideaclearroadmapinrelationtodeductibilityofexpensesandallocationofthesameinthehandsofunitholders.Inabsenceofclarity,suchdeductibilityandallocationwouldbeleftopenforinterpretationbytaxauthorities.BusinessTruststructuremaynotbeconsideredasataxefficientstructure.ItisrecommendedthatanallocationmethodologyshouldbeputinplaceinrelationtoexpensesincurredattheREITlevel.

(e) Period of holding of units of a business trust to qualify as long term capital asset should be 12 months

ItismentionedinthememorandumthatlistedunitsofBusinessTrustwouldbegivensametaxbenefitsinrespectoftaxabilityofcapitalgainsasequitysharesofacompany.BusinessTrustsshouldbeaccordedsametreatmentprovidedforlistedequityshares.Accordingly,periodofholdingforthepurposeofcapitalgainsshouldbe12monthsandnot36months.Inabsenceofthesame,intentionofthelegislaturetograntsametaxbenefitsisnotachieved.

3.15.3. Deduction of Interest paid on Borrowed Capital

Thedeductionavailableundersection24oftheActistoamaximumlimitofRs.2,00,000/-forinterestonloantakenforacquisition/constructionofself-occupiedhouseproperty.Giventherisinginterestratesandtheincreaseinpropertypricesandalsotospurthedemandforhousing,itisrecommendedtheexemptionshouldbeincreasedtoatleastRs.3,00,000/- per annum.

3.15.4. Taxability of Unsold Flats in the Hands of Real Estate Developers

Theissuerelatestotheadditiononaccountofannuallettingvalue(ALV)offlats,constructedbutlyingunsold,assessedonnotionalbasisunderthehead“IncomefromheadHouseProperty” inthehandsofrealestatedevelopers.SuchunsoldconstruedflatsasperthespecificexclusionprovidedinSection22oftheActwouldnotattracttaxunderthehead‘incomefromhouseproperty’whichcomeswithinthepurviewofexceptionprovidedinSection22oftheAct,inas much as, it exclude the property that an owner occupy for the purpose of his business.

However,thetaxauthoritieshavemadeadditionstotheincomeoftherealestatedevelopersonaccountofannuallettingvalue(ALV)offlats,constructedbutlyingunsold,assessedonnotionalbasisunderthehead“IncomefromheadHouseProperty”.Ithasnotbeenappreciatedthattherealestatedevelopersarenotinthebusinessofrentingoutof


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flatsandlettingoutvacantorotherproperties.Thus,suchrealestatedeveloperscannotbetaxedinrespectofALVofflatsnotionallybecausethey(asowners)areoccupantsoftheflats,andsuchoccupationislimitedforthepurposeofbusiness, as a builder.

ItisrecommendedthataclarificationmaybeissuedbytheCBDTtoprovidethatpropertyheldasstock-in-tradebytherealestatedeveloperforthepurposesofitsbusinesswouldnottobeassessedtoincometaxonanotionalALVbasisunderthehead“IncomefromHouseProperty”.

3.15.5. Clarity on Taxability of Joint Development Agreement (‘JDA’)

Section45oftheIncomeTaxActprovidesthatanyprofitsorgainsarisingfromthetransferofacapitalassetinthepreviousyearshallbechargeabletoincometaxunderthehead“CapitalGains”andshallbedeemedtobetheincomeofthepreviousyearinwhichthetransfertookplace.Further,section2(47)oftheActdefinestransfertoincludeallowingpossessionof immovablepropertyunderacontractreferredtoinsection53AoftheTransferofPropertyAct1882.Giventheabovetherehasbeenconsiderablelitigationbetweenthetaxauthoritiesandtaxpayersaround(i)timingoftaxationand(ii)methodofarrivingatsaleconsideration.Appropriateclarifications/amendmentsshouldbemadetoprovidethatincaseofaJDAbetweenlandowneranddeveloper,theprofitorgainfromthetransferoflandwillariseonlyoncompletionofthedevelopmentprojectorwhenshareofrevenuefromthesaleofthepropertyorshareofbuilt-uparea,oncompletionoftheproject,isreceivedbythelandowner.

Similarly,itshouldbeclarifiedintheServiceTaxlawastothepersonliabletopaytax,pointoftaxationandvaluationaspectscoveringrevenuesplit,whereconsiderationisnotinmoneyetc.

3.15.6. Characterization of Rental Income

Thereisanambiguityprevailingaroundcharacterizationofrentalincomeashousepropertyorbusinessincome.Suchcharacterizationshouldbeclarifiedsoastoensurethatuniformpracticesarefollowedacrossindustryandlitigationarisinginthisregardisremoved.

3.15.7. Raise the Limit for Deduction for Principal Repayment

Inthecaseofhomeloanrepayments,theceilingundertaxbenefitsiscappedatRs.1,50,000/-forprincipalpaid,whichisveryless,particularlywhenhomeloanprincipalrepaymentsareclubbedwithothertaxsavinginstruments.Therefore,thedeductionforprincipalrepaymentofhousingloanunderSection80CoftheActshouldbeeitherincreasedfromtheoverallexistinglimitofRs1,50,000ortheprincipalrepaymentsshouldbeconsideredforaseparate/standalonetaxexemption(ratherbeenclubbedunderSection80CoftheAct).

3.15.8. Infrastructure Status to Development of Integrated Townships

An integrated township involves development of residential, institutional, educational, medical, community andcommercial buildings etc. In the process of development of an integrated township, apart from development andconstructionofaboveestablishments,variousfacilitiessuchasroads,watersupply,seweragesystem,sanitation,watertreatment,electrification, land scaping, solidwaste treatment,horticultureandother civic servicesare required tobe created/provided.While according approval, the State Government specifically directs that these developmentprojectsincludingallfacilities/servicescreated/providedthereinwillultimatelybehandedovertorespectiveStateGovernments/LocalBodiesandshallnotremainwiththedeveloper.Theseintegratedtownshipprojectsare,therefore,inawayatparwiththeBOT(Built,Operate&Transfer)projects.

In the lightof above facts and inorder tomotivate thegenuineReal EstateCompanies to come forwardand stepintopromotionanddevelopmentoflargeintegratedtownshipsinlinewithabovearrangementstomitigatethehugeshortage of housing to all class of society and development of robust infrastructure for the Indian economy, it isrequestedthatIntegratedtownshipdevelopmentprojectsbebroughtwithinthedefinitionofinfrastructureoratleast


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variousfacilitiessuchasroads,watersupplysystemetc.createdafterobtainingGovernmentapprovalsbeconsideredasinfrastructurefacilityforthepurposeofSection80-IAoftheActanddeductionunderSection80-IAoftheActbegrantedtothedevelopersinrespectofsuchinfrastructuredevelopment.

3.15.9. Deduction for Ground Rent

Deductionforgroundrentshouldberestoredwhilecomputingtheincomeunderthehead‘HouseProperty’.Consideringthe rising valueof land andproportionate ground rent inmetros andother big cities, it is recommended that thedeductionforgroundrentbeseparatelyprovidedi.e.inadditiontotheoverallstatutorydeductionof30%availablewithintheambitandscopeofSection24oftheAct.

RENEWABLE ENERGY

3.16.1. Solar Manufacturing

(a) TomodifythesubsidyschemeforrooftopsolarandextendthesametoalltheadoptersinsteadofrestrictingthesameonlytogovernmentbuildingsandPSU.GovernmentofIndiahassetatargetof40GWfortherooftopsegment.Suchtargetwillnotbemetifitisrestrictedonlytosmallusersegment.Thesubsidycanbeafixedpriceonapprovedcapexforadefiniteperiodandreviewedthereafter.

(b) Tilllastyear,exportsofPVcellsfromIndiawereeligiblefor2%exportincentiveandalsofordeliveriestoSEZwithinIndia.FromthisyeartheincentivesarerestrictedtoonlyCategoryBcountrieswhicharenotactiveinthesolarsector.SucharestrictionneedstoberemovedtoopenupexportsfromIndia.

(c) IncometaxbenefitforRenewableSEZ–InsteadofMATapplicabilitynow,therenewableunits inSEZshouldenjoytheITbenefitasbeforeforaperiodof5yearsfromstartup.

(d) VATexemptionisavailableinfewstatesandhencemaybeextendednation-widetoavoidanomalyofCSTandVAT on solar products

(e) ThereisanexcisedutyexemptionforSolarproductsmanufacturedwithinaSEZ/DTAforDTAsale.Thisshouldbe extended for all components that are to be sold in DTA which may not directly be a solar product but a componentusedinthemanufacturingofasolarproduct.

3.16.2. Solar Power Generation

(a) Allocation for sovereign fund to support dollar based tariff / competitivebidding in solar power generationprocurement

(b) RemovalofcapformarginsandmaturityundertheECBguidelinesforsolarpowergenerationprojects

(c) Allowuncappedcapital lending fromHoldcosaspartof theYieldcoarrangement toenablehigherECB fundavailability

(d) The possibility ofGreenBonds for Solar Sectormay be considered for projects once they achieve CoD andrated at AA or above. These should be tax free bonds (as allowed to NTPC recently). This will reduce the cost of borrowingto7%-7.5%

(e) SolarparksshouldbetreatedonparwithSEZsandMATexemptionmaybeprovidedtopowerprojectswithinSolar Parks.

(f) Section80IAbenefitsshouldbeavailabletoanentitythatismergedoramalgamatedwithitsparentorsubsidiaryorsistercompany.Extensionof80IAforprojectshavingCoDafterMar2017by3years.Generallyforanynew


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project,anSPVismadetofacilitateprojectdevelopment.GiventhatinvestmentisdonebyParentinthatSPV,postdevelopmentifParentwantstomergethatsubsidiarywithothersimilarSPVsorwithParentitselfforbettermanagementorotheroperationalconsiderations,itshouldnotstandtolose80IAbenefits. Theintentionof80IAistopromoteinvestmentandthatisachievedatCoDoftheproject.

(g) Includestandalonestoragesolutionunderthedefinitionoftherenewablegeneration.WaiverofcustomsandexcisedutiesonEnergyStorageBatteriesandtheirancillariesassociatedwithSolarRooftopandUtilityscalerenewable power plants

(h) Exemptionofservicetaxforcompaniesprovidingpowerbackupservices

3.16.3. Exemption to Income from Sale of Carbon Credit Entitlements

CarboncreditisanincentiveavailabletotheindustriesreducingCO2emissionbyinvestinginenergyefficienttechnology.Consideringthe‘globalwarming’impacts,itisaveryimportantinitiativeonthepartofindustries.Energyefficientandcarbonemissionreductiontechnologiesaresubstantiallycostlyandresultsinadditionalinvestmentforindustries.ItisverymuchlikelythattheincomegeneratedfromsaleofCarbonCreditsmayormaynotcompensateadditionaloutflowlaidoutforearningthesame.

Section10of the IncomeTaxAct shouldbeamended toprovideexemption to income from saleofCarbonCreditentitlements. Inaddition, inordertoprovide impetustogenerationofpowerthroughrenewableenergysources,aspecifictaxholidayforthesamemaybeprovidedintheSection80-IAoftheAct.

RETAIL

3.17.1. Allow Carry Forward of Losses under Section 72A

Inordertoenablemergersandamalgamationsinlossmakingretailcompanies,sothattheamalgamatedentityisabletocarryforwardthepredecessorlosses,section72AoftheActshouldbeextendedtoretailcompanies,ascurrentlythere isanambiguityprevailingastowhetherretailcompaniescomeunderthedefinitionof industrialundertakingornot,whichisoneofthemandatoryconditionsforcarryingforwardoflossesundersection72Aforanymergerandacquisition.

3.17.2. Allow Weighted Deduction under Section 35(2AB)

Currently200%weighteddeductionispermissiblefor in-houseapprovedR&Dundersection35(2AB),howeverthesameisrestrictedtomanufacturingorganization.Retailisnotconsideredasmanufacturing,howeverretailcompaniesalsoincursubstantialR&Dexpenditure,whichisverymuchrequiredforgrowthandsurvivaloftheindustry.Hencethisbenefitshouldbeextendedtoretailcompanies.

3.17.3. Extend deduction under Section 35AD

Investmentlinkedincentivesprovidedtothespecifiedbusinessesundersection35ADoftheActshouldbeextendedtothe retail sector as well.

STEEL AND OTHER FERROUS PRODUCTS

3.18.1. Increase in Import Duty on Steel Long and Flat products

CustomsdutyonimportsofIron&Steelatpresentis10%onLongProductsand12.5%onFlatProducts.Inviewofthecontinuedeconomicslowdowninthecountrywhichhadanadverseimpactonthesteelsectorasalsokeepinginview


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theinvestmentsundertakenbydomesticsteelproducersinanticipationofanincreaseinconsumptioninthecountry,thereisanurgentneedtoprovideprotectiontothedomesticindustry.Thisbecomesallthemoreimperativeinviewofoversupplyintheglobalmarketwhichhasledtoincreasedprotectionismbeingresortedtobyalmostallthecountriesto protect their local industry.

DuringApril-August2015,Indiaimported4.5milliontonnessteelascomparedto2.9milliontonsduringApril-August2014registeringawhopping51%growth.Exports,ontheotherhand,fellby28%,andwere1.76milliontonsagainst2.4milliontonsinApril-August2015.

Itisrecommendedthatthebasiccustomsdutyonallsteelimportsmayberaisedto25%.

3.18.2. Import duty on Manganese ore, Chrome ore etc.

CustomsdutyonManganeseore,Chromeore,Molybdenumore,Vanadiumoxides,HydroxidesandothersaltsofOxometallicAcids(VanadiumOxidesConcentratesandAmmoniumMetaVanadate)maybereducedtonilfromtheexisting2.5%.

3.18.3. Reduction in Customs Duty on Coking Coal

Importdutyofcokingcoalhasbeenincreasedto2.5%intheUnionBudget2014-15.Cokingcoalisusedlargelybythesteelindustry.Negligiblequantityofcokingcoalisavailabledomestically,andthustheneedismetmainlyfromimports.

Thezerodutyoncokingcoalisinplacesince1978.Theincreaseinimportdutyfromzeroto2.5%oncokingcoalhasincreasedthecostofsteelmakingsubstantially,leadingtodomesticsteelbeinguncompetitivevis-à-visimports.Itwillalsocontributetoinflation.

ItisthereforerecommendedthatthedutyoncokingcoalbeexemptedaswasthecasepriortotheBudget2014-15.

3.18.4. Reduction of Basic Custom Duty on Metallurgical Coke

BasicCustomDutyonmetallurgicalcokehasbeenplacedat5%.Cokingcoal,SteamcoalandMetcokearekeyinputsinsteelmakingandaccountforsubstantialportionofcostofproductionforSteel.HistoricallycoalusedformetallurgicalpurposeshasenjoyedexemptionassteeliscriticalinfuellingIndia’sgrowth.Subsequently,duetoscarceavailabilityofcokingcoaltechnologyhasbeendevelopedtouseothercoal(non-cokingcoalincludingwhatcouldbetermedassteamcoal)formetallurgicalpurposesthroughtechnologiessuchasCOREX.Duringtheperiod2012-2013suchcoalwasexempt(Sl.No.123ofNotificationNo.12/12-Cusdated17.03.2012)butthisexemptionwassubsequentlywithdrawn.ItissuggestedthatbasiccustomdutyonmetallurgicalcokemaybereducedtoNIL.

3.18.5. Increase of Basic Custom Duty on LAM Coke

BasicCustomdutyonLAMCokebeincreasedfrom5%to10%ad-valorem.LAMCokeisavalueaddedproductandmadefromCokingCoalatvariouscaptiveandmerchantCokeOvenPlantsforonwardusageformetallurgicalpurposesmostlyinBlastFurnacesforSteelmaking.DevaluationofitscurrencybyChinahasmadeitsimportsverycheapandIndianCokeOvenPlantsareincurringlosses.

3.18.6. Reduction of Custom Duty on Natural Gas used for Production of Steel

Indiahasagasbasedsteelmanufacturingcapacityof10MTPAaccountingforalmost9%ofthetotalsteelmanufacturingcapacity in the country. The gas basedunits inwestern coast of the countrywere the earliest gas users andhavecontributedinabigwayinnurturingthegasandsteelindustriesduringtheirnascentyears.However,theunitstodayarefacingunprecedentedchallengesfortheirsustainabilityduetonon-availabilityofaffordablenaturalgas.

Theseunitsalsorepresentmorethan45%ofspongeironproductioninthecountryandarecriticallydependentonnaturalgasasfeedstock.Althoughtheseunitshaveanallocationofmorethan7MMSCMDdomesticgasfromAPMandRILKGD6butarecurrentlyreceivinglessthan0.60MMSCMDgas.Duetothenon-operationsoftheseunits,ithasto


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faceholisticadverseeffectssuchasstrandedinvestmentandunemployment.ItisrecommendedthatcustomsdutyonLNGismadeNILwithoutanyuserconditionsothatuserindustriesincludingGasBasedSteelPlantsareabletoimportLNGforusageinmanufactureofsteel.

3.18.7. Reduction in Import Duty of Iron Ore

Indiaiscurrentlyfacedwithashortageintheproductionofironore,theprimaryrawmaterialforsteelmaking.Theironoreproductioninthecountryhasfallenfrom218milliontonsin2009-10to144milliontonsin2013-14and125milliontonsin2014-15.Asaresult,severalIndiansteelproducersareimportingtheironore.Butwiththeimportdutyof2.5%ontheimportedore,itisaddingontothefinancialcostsforthedomesticproducersandisthusfurthererodingtheirshrinkingmargins.

Thus,tillsuchtimethatthedomesticproductionofironoreincreasesandthesupplygapisbridged,importdutyonironoremaybebroughtdowntozero,fromthecurrentlylevied2.5%.

3.18.8. Import duty on Steel Grade Limestone and Dolomite

ForIndiansteelindustry,thecementgradelimestonereservesareadequatebutthereservesofSMS,BFandChemicalgradelimestonearenotadequateandarealsoavailableinselectiveareas.Increaseinsteelproductioninthecountry,has led to rising demand for SMS and BF grade limestone. Therefore the limestone imports have been increasingconsistently.ItisimperativethatCustomsDutyonsteelgradelimestone(subheading25210010)anddolomite(subheading25181000)bereducedfrom2.5%toNIL.

3.18.9. Reduction in Customs Duty on Ferro Nickel, Pure Nickel and Ferro Moly

Stainlesssteelismadeofcombinationofiron,chromium,silicon,nickel,carbon,nitrogen,andmanganese.Propertiesofthefinalalloyaretailoredbyvaryingtheamountsoftheseelements.Itisahighlyrawmaterialintensiveindustrywithover70%ofthecostbeingaccountedforbyrawmaterialandthereforeadequaterawmaterialavailabilityiscriticalforthis industry.

ThekeyingredientsforproductionofstainlesssteelincludeFerrochrome,FerroNickel,PureNickel,FerroMolyetc.ThesearenotavailableinIndiaandneedtobenecessarilyimportedforproductionofstainlesssteel.

It is recommended that the basic Customs Duty on all key raw materials like Ferro Nickel, Pure Nickel, Ferro Niobium, FerroVanadium,FerroTitaniumandFerroMolybereducedtozerotoensurethatdomesticindustryremainscompetitiveglobally.ItwouldalsohelptheIndianstainlesssteelmanufacturerstopursueamoreaggressiveexportstrategysincetheywouldbecostcompetitiveintheinternationalmarkets.

3.18.10. Import Duty on Electrodes, Refractory Material

Currentlythereisimportdutyof7.5%onelectrodes(sizes30”and16”)and5%forrefractorymaterials.Asthereisnosufficientdomesticcapacityformanufactureoftheseitemsandneedtobeimported,thecostofdomesticproducersisincreased;thereforetheimportdutyonelectrodesandrefractorymaterialmaybereducedtoNil.

3.18.11. Import Duty on Stainless Steel Scrap

TheDomesticStainlessSteelIndustryusesElectricArcFurnace(EAF)routeformanufactureofstainlesssteelandis,therefore,constrainedtouseStainlessSteel(SS)ScrapinsteadofIronOre.ThebulkoftheScraprequirementsoftheDomesticstainlessSteelproducersaremetthroughimportswhichisprocuredmainlyfromcountrieslikeEurope,Korea,South East Asia, Central Asia etc.

Despite the dependence of domestic industry on imported scrap, the Ministry of Finance, vide Notification No.25/2013-Customsdated8thMay’2013,hadannounced increase inBasicCustomDutyon Stainless Steel Scrap (HSCode720421)andSteelScrap(HSCode720449)fromNILto2.5%.


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ItissuggestedthatthedutyonStainlessSteelscrapberestoredtotheoriginalrateof“NIL”.ItmaybepointedoutthatChinamaintainsitsscrapdutyatzero.

3.18.12. Customs Duty on Seconds and Defective Goods falling under Chapter 72

Primequalityofmajorfinishedsteelproductsare [email protected]%.However,secondsanddefectivegoodsfallingunderChapter72oftheCustomsTariffareliabletocustomsduty@15%.Inviewofthenarrowmarginofdifferencebetweentheratesofimportdutiesofprimequalityandseconds/defectivegoods,therehasbeenasurgeofimportsof‘seconds’and‘defective’steelproductsinthecountry.Thisisputtingfurtherpressureontheindustryalreadygrapplingwiththechallengeofsubdueddemandandrisingcostofproduction;alongsideraisingthequalityconcernsforlong-terminfrastructureandconstructionprojectsusingsteel.Inordertosuppresstheimportsofdefectivesteelintothecountry,therateofseconds/defectivegoodsneedstobe increased. It issuggestedthatCustomsdutyonsecondsanddefectivegoodsfallingunderChapter72beraisedto40%.

3.18.13. Reduction of Excise Duty on Pre-fabricated Steel Structures

Pre-engineeredbuilding/pre-fabricatedstructuralshaveemergedinIndiaforlastfewyearsowingtofasttracksteelbasedconstructionandtoincorporatethelatestinnovativedesignsrequiringspecialprofilesdevelopedbystructuralengineersandarchitectsinthefieldofconstruction.

Ithasbeenananomalythatwhilethesitebasedpre-fabricationofstructuralsarepermittedtobeusedinthebuilding/structurewithoutpaymentofExciseDutyasthesearenottakenoutofthesite,thepre-fabricationactivitiesconductedonstructuralsatoutsidepremisesofthepre-fabricatedmanufacturersareexcisable@12.5%.Thishas ledtomassfabricationofstructuralsat thesitewhichdonot followthequalitynormsas required instructural fabricationandgenerallydonebyfabricatorshavinglittleknowledgeofgoodqualityfabrication.Ontheotherhand,thesteelstructuralsfabricatedatthepremisesoffabricatorsfollowstate-of-the-arttechnologyandstandardoperatingpracticesofgoodfabrication,arepricedmuchhigher(afterloadingExciseDutyof12.5%)andhencelackorders.

It is, therefore, recommended that the Excise Duty on fabricated steel structure undertaken by PEB/Pre-fabricators at theirownpremisesbereducedfromthecurrent12%to8%.Thiswouldreducethepricegapbetweensteelfabricationatsitesandatfabricatorspremisesandwouldprompttheconsumerstogoinforqualityfabrication

3.18.14. Classification of COREX under Central Excise Tariff

Existingtariffentry2705ofCentralExciseschedulecovers:“2705:Coalgas,watergas,producergasandsimilargasesotherthanpetroleumgasesandothergaseoushydrocarbons.”CertaindoubtshavebeenexpressedaboutclassificationofCorexGasundertheaforesaidentryofheading2705.BlastFurnacegasisspecificallymentionedintheExplanatoryNotesofheading2705.Blastfurnacegasandcorexgasbothemergeasby-productsintheprocessofmanufactureofmoltenhotironusing,respectively,BlastfurnaceandCorex.Themanufacturingprocessinvolvedintheblastfurnacetechnologyandcorextechnologyissimilar.Theby-productCorexgasisverysimilarincompositionandusetocoalgasandblastfurnacegascoveredunderthetariffheading2705.However,intheabsenceofspecificmentionofthesegasesundertariffentry2705,adoubtisbeingcreatedaboutcoverageofcorexgasas‘similargases’underthesaidtariffentry.Forremovalofthisdoubt,eitheraclarificationmaybeissuedortheaforesaidentryinheading2705maybeamendedtospecificallyincludeCorexGas.

3.18.15. Review of Exemptions (CVD and Excise Duty) on Grain Silos Kits

DomesticGrainSiloKitManufacturerswhoarelargelyinMSMEsectorhavetopay12.5%asExcisedutywhichisnon-cenvatable.This isasignificantcost impactparticularly forasmallsectorplayer.Moreover,manufacturingsector inIndiafacesdomesticdisparitiesviz.under-developedinfrastructureandhighfinancecostwhichtranslateinto11-12%ofadditionalcosts.


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MajormaterialusedinGrainSiloKitisgalvanizedsteel.Indiawithacoatedcapacityofapproximately10milliontonnescompulsorilyexports30%of itsproductionof6milliontonnes,fetchinglowermarginsduetoshortageofdomesticdemand.

Hence50%reductioninthepaymentof12.5%ofexcisedutyfordomesticmanufacturesandbringingtheimportdutyonGrainSilokitsatparwiththisnewreducedexciseduty,wouldpartiallycompensatethedomesticdisparities,encouragedomesticproduction,thuscreatingemploymentopportunitiesanddemandfordomesticsteel.

3.18.16. Removal of Clean Energy Cess

ThehikeincleanenergyCessfromRs100perTonnetoRs200perTonneshouldberolledbacktotheoldlevelorberemovedaltogether.SteelPlantshavingISO14001accreditationandorCleanDevelopmentMechanism(CDM)undertheKyotoProtocolshouldbeexemptedfromthepaymentofCleanEnergyCess.

3.18.17. Warehousing Facility for Steel Products

Inthesteelindustry, it isapracticethatmostofthematerialsaresoldfromstockyards/depotswhicharesituatedacrossthecountryandthereisatimelagbetweendispatchofmaterialfromthemanufacturingplantandsalefromthestockyard/depot.Assuch,thereispossibilityofadifferenceinpriceprevailingatthetimeofdispatchofmaterialsfromtheplantandthepriceprevailingatthetimeoffinalsaleofmaterialfromstockyard.

AsperWarehousingprovisionsofRule20ofCentralExciseRules2002,theCentralGovernmentmaybynotification,extend the facility of removal of any excisable goods from the factoryof production to awarehouse, or fromonewarehousetoanotherwarehousewithoutpaymentofdutysubjecttosuchconditionsetc.asmaybespecified.

ItisrequestedthatIronandSteelproductsshouldbeincludedinthewarehousingprovisionsunderthesaidrule20.Suchchangewillnotonlysimplifytheprocedures,butwillalsoeliminatedisputesrelatingtovaluationatthetimeofdispatchfromplantwhile,atthesametime,achievingthepurposeoflevyofdutyonfinalsellingprice.

3.18.18. Process of Cutting/Slitting of Sheet Metals should be deemed to be “Manufacture”

Itissuggestedthattheprocessofcutting/slittingofsheetmetalsbeconsideredasamountingto“manufacture”andhence leviable to excise duty.

Presently this is causingenormous confusion&administrativehurdleswhere service centresoperate for cutting&slittingofsheetsandsupply to the industry. This is inviewof the fact that insomecases (likeprofilecutting) it isconsideredasmanufactureandinothercasesitisnotconsideredas“manufacturing”leadingtocomplexities/litigation.

3.18.19. Weighted Deduction under Section 35AD of the Act

Thesteelindustryisahighlycapital-intensiveindustry.Toimprovethereturnoninvestmentinthesteelindustryandtoattractfreshinvestments,capitalexpenditureinsteelbusinessshouldbeallowedweighteddeductionof150%oftheexpenditureunderSection35ADoftheAct.

TEXTILES

3.19.1. Excise Duty on Man-made Fibres (MMF)

The value chain in textile and apparel sectorhasdifferential tax treatment. The levyof different rateshas createdneedlessdistortions.InIndia,whileexcisedutyonnaturalfibreslikecotton,woolandflaxisnil,man-madefibresandyarnsattractdutyashighas12.5%.China,Pakistan,SriLanka,IndonesiaandThailandfollowfibreneutralpolicyi.e.thedutyoncotton/cottonyarnandMMF/MMFyarntextilesareimposedatthesamelevel.

GloballyMMFtextilesconstitute66%oftotalproduction.However,inIndiaitisonly34%;whereascottonconstitutes


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66%.Theglobalfibreconsumption trend in future is likely to furthertilt in favourofman-madefibres.Oneof theconcernsraisedbyindustryisthatMMFbeingahightechnologyandhighinvestmentarearequiresanenablingandbetterfiscalenvironmentAtpresent,IndiaalsodoesnothavethecompletevaluechaininMMFi.e.fabric,processingandapparelmaking.ReductioninexcisedutyonMMFwillstimulatethegrowthoftheindustrybyattractinginvestmentsleadingtocompletingthevaluechainandhigherproductionandexportsandtherebygenerateadditionalemployment.

Itisthereforesuggestedthatexcisedutyonman-madefibres/yarnsshouldbereducedto8%toreducethehugegapbetweenthedutiesonman-madefibresandcotton.Therevenuelossonthisaccountwouldbemadeupwithincreasedconsumptionaswitnessedin2008-09whentheexcisedutyonman-madefibreswas4%.Thismeasurewillfurtherhelpthe downstream industry especially weavers.

3.19.2. Removal of Import Duty on Dissolving Grade Pulp

SoftWoodDissolvingGradePulp is not available in India due to tropicalweather conditions andper se has to beimported fromtemperatecountries inEurope,NorthAmerica,SouthAfrica,etc. SoftWoodPulp ishighlyessentialtoproducehighqualityViscoseRayon.Further, thecurrentdomesticcapacityofHardWoodPulp isapproximately2,11,000MTasagainstarequirementofapproximately4,50,000MTthusresultinginmorethan50%shortageofRGWP.Toovercomethisshortfall,thedomesticindustryiscompelledtoimport.VSFimportsfromASEANhaveNILdulywhilepulphas2.5%dutymakingitacaseofInverteddutystructure.ItisthereforerecommendedthattheImportDutyonRGWPbebroughtdowntoNIL.

3.19.3. Textile Upgradation Fund Scheme (TUFS)

ThisSchemehasbeenoperatingsince1999andhasbeenprevalentovertheperiodwithvariousamendmentsandcurrentlyvaliduptoMarch,2017.Duringlast3-4years,therehavebeenproblemsinimplementationofthisSchemeandmanyoftheeligiblebeneficiarieshavenotbeenprovidedbenefits.ThepresentprovisionundertheSchemeisnotsufficienttotakecareofthearrearspayabletovariousclaimants.

ExportsincentivesarebeingrationalizedduetomultilateralcommitmentsunderWTO.Hence,TUFSisperhapstheonlynon-actionablesupportpossibleforIndiantextilesindustry.CurrentyearbudgetallocationwasreducedfromRs1864CroretoRs1520Crore.AllocationneedstobeincreasedtoRs5000Croregivennewinvestmentsdonebyexportersandlastyear’spendingapplicationsforthescheme.

FortherestructuredTUFS,ItissuggestedthattermloanssanctionedbybanksshouldbeconsideredundertheexistingTUFSscheme.Also,CappingundertheschemewilldiscouragelargeinvestmentsinthedomesticindustryandderailcompetitivenessofIndianmanufacturer.

TOURISM

3.20.1. Service Tax on Room Rent and on Sale of Food and Beverages

InFinanceAct2011 thescopeofServiceTaxwasexpanded to levyServiceTaxon rentingofRoomsandFoodandBeveragessalesbyAirConditionedRestaurantshavingliquorlicense(subsequentlythecoveragewasextendedtoallrestaurants)despitethefactthatinhotelsLuxuryTaxischargedonrentingofRoomsandVATischargedbyallhotelsandrestaurantsonSaleofFoodandBeverages.

Whilstthecurrentabatementinrespectofservicetaxhasbeenprovided@40%forRoomsand@60%forFoodandBeverage,onthebalanceportionthereisanelementofdoubletaxation–ServiceTaxandLuxuryTaxinthecaseofRoomsandServiceTaxandVATinthecaseofFoodandBeverages.

ThetotaltaxoutflowfortheGuestworksouttomorethan20%onanaverage.Consequently,thistaxlevyisasignificant


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deterrenttotheHospitalityIndustrywhichisalreadyimpactedadverselybythegeneralslowdownoftheglobaleconomy.ItisrecommendedthatthelevyofServiceTaxonrentingofRoomsandsaleofFoodandBeveragesbediscontinuedtoprovide some relief to the industry.

3.20.2. Infrastructure Status for all Hotels

TopromoteTourismandtheHospitalityIndustry,itismostimportantthathotelsirrespectiveofprojectcostandstarratingaregiveninfrastructurestatus.Thishasbeenalongstandingdemandoftheindustryandifinthisbudgetthiscanbeincorporated,theIndustrywillgetahugeboostwhichinturnwillgeneratemoreemployment.

ThefollowingbenefitswillaccruetotheHospitalityIndustry:-

(i) HigherDebtEquityRatio.

(ii) RelativelylowerRateofInterestonTermLoans.

(iii) LongertenureofTermLoansupto20years.

(iv) FinancialAssistanceincludingtakeoutfinancingfromspecializedagenciessuchasIIFCL,IDFCandInfrastructureDebt Funds.

(v) Deductionsinrespectofprofitsundersection80-IAoftheIncomeTaxAct.

Thiswouldgiveamajorboosttothedevelopmentofsmallandmid-segmenthotelswhichistheneedofthehour.Itwillalsopropelthefurtherdevelopmentoflarge,upscaleandluxuryhotels.

MEDIA AND ENTERTAINMENT INDUSTRY

3.21.1. Overview

TheIndianmediaandentertainmentindustrygrewfromINR918billionin2013toINR1026billionin2014,registeringanoverallgrowthof11.7percent.Theindustryisestimatedtoachieveagrowthrateof13percentin2015totouchINR1159billion.ThesectorisprojectedtogrowatahealthyCAGRof13.9percenttoreachINR1964billionby2019.

Televisionclearlycontinuestobethedominantsegment,howeverwehaveseenstronggrowthpostedbynewmediasectors.Gaminganddigitaladvertisingrecordedastronggrowthof22.4percentand44.5percentcomparedtothepreviousyear,however,filmsectorhasshownaminimalgrowthof0.9percentin2014over2013.

RadioisanticipatedtoseeaspurtingrowthpostrolloutofPhase3licensing.ThebenefitsofPhase1&2ofcabledigitalaccesssystem(DAS)rollout,andcontinuedPhase3rolloutareexpectedtocontributesignificantlytostrongcontinuedgrowthintheTVsectorrevenuesanditsabilitytoinvestinandmonetizecontent.ThesectorisexpectedtogrowataCAGR of 15.5 percent over the period 2015-2019.

I - TELEVISION BROADCASTING

3.21.2. Deduction of tax at source under Section 194H on the “15% agency commission”

OneofthemainsourcesofincomeofTelevisionBroadcastingCompanies(‘Broadcasters’)isthroughsaleofadvertisementairtime.BroadcastersselladvertisementairtimeeithertoAdvertisementagencyorAdvertisers.Belowistheflowofadvertisementairtimesaletransaction:

– AdvertisersappointsAdvertisementagencyforprovidingvariousservicesinrespecttoanyadcampaignincludingprocurementofairtimefrombroadcasterstotelecasttheadvertisementsonthetelevisionchannel.

– Advertisementagencyprocuresairtimeontelevisionchannels,onbehalfofadvertisers,fromBroadcasters.

– TransactionbetweenAdvertisementagencyandBroadcastersisonprincipaltoprincipalbasis.


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– Post entering into a contract with Broadcasters, Advertisement agency releases order confirming theadvertisementairtimepurchase.

– BroadcasterstelecasttheadvertisementaspertheinstructionofAdvertisementagencyandraiseinvoiceforsaleofadairtime.

– Broadcastersmention“15%agencycommission”ontheinvoiceraisedbyit,whichisanageoldindustryandcustomarypractice.

– AdvertisementagencymakesthepaymenttoBroadcastersofthe invoiceraised,afterdeductingappropriatetaxesonnetamountofinvoice(i.e.afterreducingthe15%agencycommission).

– Advertisementagencyinturnraisestheinvoiceonadvertisersforrecoveringthecostofairtimeplustheirownservicecharges.

– AdvertisersmakepaymenttoAdvertisementagencyafterdeductionofappropriatetaxesontheentireinvoiceraised by Advertisementagencyincludingoncostofairtime.

– ThetwotransactionnamelybetweenBroadcastersandAdvertisementagencyandAdvertisementagencyandAdvertisersareseparateanddistinct.

Further,“15%Agencycommission”mentionedbyBroadcastersinitsinvoicesforadairtimesaleraisedonAdvertisementAgency/Advertisersismerelyapresentationintheinvoicesandnotarealtransaction.NeithertheBroadcastersnorAdvertisementagencyrecognizesthesameasrevenue/expense.Itiscustomaryinnature,asisalsoevidentfromthefactthatevenontheinvoicesraiseddirectlyonadvertisers;thesaid“15%agencycommission”isappearing.

Further,Broadcastersarenotsupposedtomakeanypaymentstowards“15%agencycommission”mentionedintheinvoice,asthereisnoagreementorarrangementtopaysuch15%agencycommissionwithAdvertisementagency/Advertisers.Infact,BroadcastersdonotmakeanypaymenttoAdvertisementagency/Advertisersinrespectofthesaid“15%agencycommission”mentionedontheinvoices.

Considering, thenatureof the transaction, FICCI recommendsa clarification/ instruction, thatno taxesneed tobededucted at source by the Broadcasters on the “15% agency commission” as mentioned in the invoice raised byBroadcasterstoAdvertisementagency/Advertisers,shouldbeissued.

3.21.3. Payment for Content Production

There is an ambiguity being faced since the tax authorities have been adopting a view that the payment towardsproductionofcontentisinthenatureoffeesfortechnicalservicesandsubjecttotaxattherateof10%undersection194JoftheActwhereasExplanationIIItosection194CoftheActclarifiesthatpaymentsmadetowardsacontract,concerning broadcasting and telecasting including production of programmes for such broadcasting or telecasting,wouldfallunderthedefinitionof‘work’forthepurposeofsection194CoftheAct.

Inordertoavoiddifferenceinpositionsadoptedbythetaxpayerandtaxdepartmentonapplicabilityofrelevantsectionandtomitigateresultantlitigationandhardship,aclarificationmaybeissuedregardingappropriateclassificationofcontentproductionservicesandapplicabilityofrelevantsectionforwithholdingoftaxes.

3.21.4. Carriage Fees/Placement Charges

Broadcasterspayplacement/carriagefeetothecableoperators/DTHoperatorstoplacetheirchannelinprimebandswhichinturnenhancestheviewershipofthechannel.Suchchargesarepaidunderacontractmerelyforplacingthechannelonagreedfrequencybands.

Thetaxdepartmentiscontendingthatsincethecableoperatorsareprovidingtechnicalservices,thepaymentsmadetowardsplacementofchannelsissubjecttoTDSundersection194JoftheAct.


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TheGovernmentshouldprovideaclarificationthatthepaymentsmadetowardscarriagefeesarenotinthenatureofroyaltyorfeesfortechnicalservicesandTDSisrequiredtobemadeonsuchpaymentsaspersection194CoftheAct.

3.21.5. Parity with Manufacturing Industry under Section 72A of the Act

Thedisparitybetweentheserviceandthemanufacturingsectorisveryadverselyaffectingthegrowthandconsolidationof Service sector.

The tax benefits under Section72Aof theAct in respect of amalgamationor demerger (carry forward and set offof accumulated loss andunabsorbeddepreciation allowances) are currently limited to industrial undertakings or aship,hotel,aircraftorbanking.Thedefinitionofindustrialundertakingshouldbewidenedtoincludeserviceindustry,broadcastersandcontentproductioncompanies.

3.21.6. Infrastructure Status

TheBroadcast,CableandDTHsectorshouldbetreatedasinfrastructureindustryandallthebenefitsandincentivesavailableforinfrastructureindustryshouldbeextendedtoCableandDTHsectorincludingtheavailabilityoffinanceataconcessionalrate.ThesectorshouldbeallowedtaxconcessionsasperSection80-IAoftheAct.

ThedigitizationprocessandthedeploymentofSTB’sareheavycapitalorientedandthusrequirehuge investmentswhichmayforcevariousamalgamationsandthustheyshouldbeallowedtosetoffaccumulatedlossesandunabsorbeddepreciationallowancestobecarriedforwardasperSection72AoftheAct.

3.21.7. Rationalization of Indirect taxes

Therateoftaxeswhichrangefrom30%to70%,especiallytheentertainmenttaximposedbythestates,overandabovetheservicetax,arepunitiveinnature.StateEntertainmenttaxlegislationslevyhightaxesonthesubscriptionearnedbycableoperatorsandDTHOperators.Thenon-availabilityofcreditofcentraltaxesagainstthestatetaxesandviceversaincreasesthetaxburdenontheentertainmentindustry.Inadditiontothis,theCentralGovernmenthasleviedservicetaxat14%onthetransferofcopyrightswhichisalreadybeingtaxedas‘goods’underthevariousstateVATlegislations.Suchpunitiveleveloftaxationincentivizesunhealthypractices,suchaspiracy,revenueleakageonaccountofunderreportingofrevenues,etc.Itisimportantthattheoveralltaxationlevelisbroughtdownforthesectorasawhole.

II - RADIO BROADCASTING

3.21.8. Tax Exemptions for Radio Broadcasting

Governmentshouldconsiderthefollowingsuggestions:

• PhaseIIIofDigitization:Providetaxholidayof5yearsfornewcapitalinvestmentinPhaseIII.

• CustomDuty:ReducecustomsdutyoncapitalequipmentforRadiobroadcastingto4%.

• Servicetaxexemptionforbillingstoservicerecipientscoveredinthenegativelist.

III - FILM SECTOR

3.21.9. Tax Holiday for 5 years for setting up of New Screens

Therehasbeenanincreaseinpiracy,sincethenumberofscreensforviewingfilmshasnotincreasedinproportiontotheincreaseinnumberoffilmsandthenumberofpeopleviewingthesefilms.

Itisessentialtoextendbenefittocinemaownersintermsof80-IBoftheActtomultiplexesconstructedafterMarch2005toencouragetheset-upofmultiplexesandtherebyimprovethedensityofcinemahousesinthecountry.ThiswillencouragesettingupofnewscreensinIndiaandhelpinimprovingscreendensity.


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3.21.10. Reduction of prescribed Time Limit under Rule 9A and 9B

AsperRule9AoftheIncomeTaxRules,ifafilmproducersellsallrightsofexhibitionofhisfeaturefilm,theentirecostofproductionisallowedasadeductionincomputingtheprofitsandgainsofsuchpreviousyear.However,ifthefilmproducerdoesnotsellallrightsofexhibitionofhisfeaturefilm,thefollowingtwoscenariosariseintermsofdeductionofcostofproduction:

Scenario1:FeatureFilmisreleasedforexhibitiononacommercialbasisatleast90daysbeforeendofthefinancialyear.Inthisscenario,thefilmproduceriseligibletoclaimdeductionoftheentirecostofproduction;or

Scenario2:FeatureFilm isreleasedforexhibitiononacommercialbasiswithinaperiod90daysbeforeendofthefinancialyear.Inthisscenario,thefilmproduceriseligibletoclaimdeductionofcostofproductiononlyuptoaceilinglimitandanyexcesscostofproductioniscarriedforwardtothenextfinancialyear.Thisceilinglimitistheamountofrevenuesgeneratedbythefeaturefilminthefinancialyear.

Incertaincaseswherenotallrightsofexhibitionofafeaturefilmaresoldanditisreleasedforexhibitiononacommercialbasiswithin90daysbeforeendofthefinancialyear,thefeaturefilmperformspoorlyanditisexhibitedonlyforashortduration.Consequently,thefilmproducermaynotrecovercosts.InsuchcasesinviewoftheprevailingITRules,thefilmproducersareunabletoclaimadeductionofentireproductioncostand,thelossistobecarriedforwardtothenextfinancialyear.Accordingly,suchfilmproducersareunabletoclaimlossesintheyearthefeaturefilmisreleasedforexhibitiondespitenofurtherscopeofincome.Asimilarsituationexistsinthecaseofexpenditureofdistributionrightsin view of Rule 9B of IT Rules.

FICCIsuggeststhattheexistingperiodof90daysbeforeendofthefinancialyear(underRule9Aand9BofITRules)issuitablyreducedtograntrelieftoassesseeswhosefeaturefilmshaveincurredlossesandhavebeenreleasedforexhibitioninthelastquarterofthefinancialyear.

3.21.11. Exemption of Service Tax on major Inputs/Input Services

Itisrecommendedthatmajorinputs/inputservicesthatareusedinrelationtotheatricalrightsinmovies,beexemptedfrom service tax

Since the major inputs/input services used in relation to revenue earned from theatrical rights are taxable, theCENVAT credit of service tax paid on such inputs/input services is blocked in the supply chain due to applicability of CCR.Eventuallysuchtaxesresultinincreaseofthecostofproductiontherebydefeatingthepurposeofprovidinganexemptionontheoutputservice.

3.21.12. Re-instatement of the Service Tax exemption on Transmission of Digital Cinema

ServicetaxontransmissionofdigitalcinemaisadirectcosttotheProducerssincethesameisinrelationtotheatricalexhibitionofcinematographfilm(whichisanexemptservicewitheffectfrom1April2013)andhencenocreditcanbeavailed of such service tax.

Itisrecommendedtore-instatetheexemptiontodigitalcinemaservicedistributors,asitexistedearliervidenotification12/2007STdated1March2007whichhasbeenrescindedwiththeintroductionofthenegativelist.2.12.13.

3.21.13. Clarity on export status of Post-production Services

GiventhevarioustechnologicaladvancesintheIndianFilmIndustry,manyIndianentitiesarehiredbyforeignproducersforcarryingpostproductionactivity.Forsuchactivities,thecontentistemporarilyimportedintoIndia(eitherphysicallyorelectronically)andre-exportedaftercompletionofservice.Post-productionactivitieswhichmaybeperformedinIndia,donotfindexplicitmentionintheprovisothatcarvesoutexceptionstotheperformancebasedrule inPOPSRules.


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Claritymaybeboughtastotheinclusionofpost-productionactivitiesintheexclusiontothisRule.Alternatively,thesecond proviso to the Rule 4(a) of the POPS Rules be reworded.

3.21.14. Service Tax exemption to On-screen Advertising in Cinemas

Since1stOctober2014,thenegativelistofserviceshasbeenamendedwherebyon-screenadvertisingwithincinemasshallbeliabletoservicetax.Onscreenadvertisingincinemasandmultiplexesshouldbeexemptedfromlevyofservicetax.

Theon-screenadvertisingwithincinemascaterstoadvertiserswithsmallbusinesses,withlimitedresources.Forlargeadvertisers,on-screenadvertisingisasecondarymediumofadvertisingatbestandtheyhaveasmallcontributiontoon-screenadvertisingwithincinemas.Theon-screenadvertisingformsanimportantsourceofrevenuefortheexhibitors,whicharealreadyreelingunderthepressureofmultipletaxes.Re-instatementofservicetaxonsuchrevenuewillonlyincrease their tax burden.

3.21.15. Applicability of Service Tax on Food and Beverages sold within Cinemas

ThefoodandbeveragessoldintheatresduringmoviesaresubjecttoVATunderlocalstatelawsandthesameispaidbytheexhibitors.Witheffectfrom1stApril,2011RestaurantServicesbecametaxablewherebyservicesrenderedbyanyair-conditionedrestaurantservingalcoholweremadeliabletoservicetaxandlaterwitheffectfrom2013theconditionofservingalcoholwaswithdrawn.Howeverthewordingsoftheproposedamendmentwerenotclearwherebythereisambiguityastowhetherthesaleoffoodandbeveragesbycinemahallsandmultiplexesiscoveredinthisservice.

Unlikerestaurants,thereisnoseatingarrangement,nocutleryisprovidedandnowaiteristheretoservefoodandbeveragesandhencethereisnoelementofserviceinvolvedinanymeaningfulmanner.

Itmaybeclarifiedthatlevyofservicetaxisintendedon“restaurants”renderingcertainservicesandisnotintendedonsaleoffood,beverageandsnacksfromcandycountersincinematheatres.

3.21.16. Service Tax exemption on entry to Award Functions, Musical Performance etc.

TheUnionBudgetof2015hadamendedthenegativelistofservicesandeffectivelywithdrawntheunconditionalservicetaxexemptionwhichwasgrantedtoticketsforawardfunctions,musicevents,sportseventsetc.WitheffectfromJune2015,servicetax ispayablewhentheconsiderationforadmissiontoentertainmenteventssuchasawardfunction,concert,pageant,sportingeventetc.ismorethanRs.500perperson.

Paymentforadmissiontoanyeventisalreadyliabletoahighstateentertainmenttax.Levyingofaservicetaxof14%overandabovethehighratesofentertainmentimposesahighburdenontheentertainmentsector.

Aclarificationshouldbeissuedtospecifythatthevalueofticketforthepurposeoflevyofservicetaxonsuchadmission(wheretheticketpriceismorethanRs.500)shouldbethevalueexcludingEntertainmenttax.Further,itshouldalsobeclarifiedthatifservicetaxispayable,thesameshouldbecomputedonavalueexclusiveofEntertainmenttaxandaccordinglynoservicetaxshouldapplyonentertainmenttaxamount.

3.21.17. Customs Duty exemption on film equipment under the ATA Carnet

TheATACarnetpermitsdutyfreetemporaryadmissionofgoodsintoamembercountry.Thelistofexemptedproductscoversfilmingequipment too. However, there isnoCustomsNotification inorder toexempt the importoffilmingequipmentfromthelevyofCustomsDuty,onthelinesoftheATACarnet.


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ItisrecommendedthatCustomsDutyshouldbeexemptedonfilmequipmentunderATACarnet.Thefilmproductionequipmentisveryexpensiveandnoteasilyavailableinallcountriesbecauseofwhichthefilmproducersarecompelledtotemporarilyimportthesameonleaseforthepurposeofproducingthefilm.Inabsenceofacustomsnotificationtoexemptfilmingequipment,theATAcarnetdutyexemptionbenefitcannotbeextendedtoimportoffilmingequipment.Theseimportssignificantlyincreasetheburdenoftaxonthefilmproducers.

IV - ANIMATION, VFX & GAMING (AVG) INDUSTRY

3.21.18. Proposals for Animation, Gaming and VFX Industry

ForAnimation,Gaming&VFXIndustrythefollowingsuggestionsareforconsideration:

• 10YearsTaxHolidayforAnimation,Gaming,andVisualEffectsIndustry.

• Removalofwithholdingtax:Thereshouldberemovalofwithholdingtaxonrevenuesaccruingfromsalesofmobilegamesinnon-IndiamarketsaswellasremovalofwithholdingtaxonthedevelopmentcontractsgiventomobilegamedevelopersoutsideIndia.Also,thereshouldberemovalofwithholdingtaxpaidbyexpatsworkinginIndiaforIndianmobilegamedevelopmentcompanies.

• TheMinimumAlternateTax(MAT)applicabilityforunitsundertakinganimationworkinSEZshouldbewithdrawntoencourageexportofanimatedcontents.

• RestorationofSTPIadvantageschemeforAVGCorITESforanother10to20yearsandcover/encourageexportsaswellasIPcreation.

• Excisedutyreduction:Topromotedomesticgamingmarket,exciseDutyonlocalmanufactureshouldbebroughtdowntonil(similartofilmandmusicindustry).ThiswillenableCVDtobebroughttozeroalso.Theeffectivereductionintaxeswouldbearound15%.Importdutyonconsoles(Gaminghardware)tobebroughtdownto0%toincreasetheinstalledbasetoenablethelocaldeveloperecosystemtoflourish.

• MarketDevelopmentAssistance:Thereshouldbeaprovisionof50%reimbursableMDA(MarketDevelopmentAssistance)fortravelandregistrationfeestointernationalmarketevents.GovernmenttoextendsupportunderMarketDevelopmentAssistance(MDA)activityforIndiancompaniestoexhibitbysettingIndianPavilionsintheworldmarkets.Whatisneededistohelpbringinglocalproductioncompaniestointernationalmarkets,collectanddisseminate informationand support creating the infrastructureneeded for ahealthymediamarket todevelop.


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INCOME TAX4.1. Tax Rates – Companies/Firms/Limited Liability Partnership

Issues

• Thetaxrateondomesticcompanies iscurrentlybeingleviedat30%,whichisquiethighincomparisonwiththe global standards. Further, the FinanceAct 2015has increased the rateof surcharge leviedondomesticcompaniesby2%.Theeffectivetax rate (includingsurchargeandcess) foradomesticcompanyhaving totalincomeaboveINR10croreis34.608%whichisquiethigh.

TheHon’bleFinanceMinisterinhisBudgetSpeechforUnionBudget2015-2016,hasproposedtoreducethecorporatetaxratefrom30%to25%inthenextfouryears.Thereductioninthetaxratewouldbeaccompaniedbyrationalisationandremovalofvariouskindsoftaxexemptionsandincentivesforcorporatetaxpayers.Ourrecommendationsinregardtothesaidproposalaregivenbelow.

• Inadditiontohightaxrate,enhancedDDTandlowereddepreciationrates,imposeafurtherstrainoncompanies,leading to increasedpay-outof taxes thus leaving inadequate funds forgenerationof internal resources forploughingbackforexpansion,modernization,technologyup-gradation,etc.

• Therateoftaxforfirmsandlimitedliabilitypartnershipisconsiderablyhighandneedstobereducedto25%.

Recommendations

• Theprocessofphasingoutofexemptionsanddeductions shouldnotbeona lock stockbarrelbasisacrosssectors.Therearevarious sectorswhere the turnaroundtime for thecompanies to reachabreakevenandstart earningprofits takes longer than someother industries. For e.g. infrastructure sectorwould take longforthecompletionofprojects.TheGovernmentandhealthcaresectorsaswellhavelonggestationperiods.Therewouldbecertainentitieswhichwouldhaverecentlycommencedcommercialoperations,willhave totacklephasingoutmuchfasterthananticipatedandplanned.Thus,thephaseoutofdeductionsandexemptionsshouldbeapplicable ina selectivemannerandbeyond thatwhichwouldconsider thesensitivityofvariousindustries.

• ItisrecommendedthattheCorporateTaxrateof25%shouldbeafterinclusionofsurchargeandeducationcess.

• TheGovernmentshouldconsulttheindustryandstakeholdersatlargebeforephasingoutthevariousexemptionsandincentivesavailabletoacorporatetaxpayerandthemannerinwhichtheywouldbephasedoutinaspanoffouryearssothatthebusinessesarenotaffectedadversely.

• Theremayalsobeaneedtore-lookatanumberofdisallowancesasaresultofwhichthechargeableincomeisfoundtobeinexcessofcommercialincome.Anidealsituationisonewherethereisnomismatchbetweencommercial and statutory income.

• Basicpurposeof introducingMATwas tobringall zero tax companieswithin the taxnet. Itwas introducedtoneutralize the impact of incentives.Wewouldwelcomean announcement that,with thephasingout ofincentives,theburdenofMATwillbegraduallyreducedandthatMATwillbeeventuallyphasedout.

• Consistentwiththereductionofratesoftax,therateofDividendDistributionTaxmayalsobereducedsuitablysoastobecompetitiveintermsofthecomprehensivetaxburden.

• Similarly, the income tax rates for unincorporated bodies i.e. Firm, Limited Liability Partnership (LLPs), etc.,shouldalsobereducedto25%fromthecurrent30%.


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• Itwouldbeappropriatetoremovethelevyofsurchargeandeducationcessoncorporateandnon-corporatetaxpayers.

4.2. Tax Rates - Individual Taxpayers

TheFinanceAct(No.2),2014hadmarginallyincreasedthebasicexemptionlimittoRs.2.5lakhs.Currently,thepeaktaxrateof30%ismadeapplicableoveranincomeofRs.10lakhsforindividualtaxpayers.However,theincomelevelonwhichpeakrateisappliedinothercountriesissignificantlyhigher.Hence,thereisaneedforfurtherraisingtheincomelevelonwhichthepeaktaxratewouldtrigger,tomakethesamecompatiblewiththeinternationalstandards.

FICCIrecommendsthefollowingrevisedtaxslabsforindividualtaxpayers.FICCIwould,therefore,liketourgethattheaforesaidrecommendationbeimplementedduringFY2016-2017.

Slab (Rs. lakhs) Tax Rate

0-3 Nil

3-10 10%

10-20 20%

Beyond 20 30%

The Finance Act, 2015 has levied surcharge@ 12% on individuals having total income exceeding Rs. 1 crore. Theincreasedsurchargeoncertaincategoryofindividualsdistortsequityandtendstodiscourageentrepreneurshipandincentivizespeopletorelocatetootherlocations.ItissuggestedthattheUnionBudget2016-17shouldwithdrawthelevyofsurchargeonindividualshavingincomeaboveRs.1crore.

4.3. Minimum Alternate Tax and Alternate Minimum Tax - Section 115JB/115JC

Issues

• CurrentrateofMATof18.5%isquiethighandhasimpactedsignificantlycashflowofcompanieswhootherwisehavelowtaxableincomeorhaveincurredtaxlosses.Further,thishasalsodilutedsignificantlythetaxincentivesofferedunderChapterVI-AoftheActtoeligiblebusinessesandindustrialundertakingsasthedifferencebetweenthecorporatetaxrateof30%andMATof18.5%isnotveryhigh.

• Further,anAlternateMinimumTax(AMT)wasalsointroducedonLLPs,individuals,HUF,AOPetc.whichistobecomputedonadjustedtotalincome.AdjustedtotalincomeistotalincomeasincreasedbydeductionclaimedunderChapterVI-AandSection10AAoftheActandundersection35ADoftheAct(netofdepreciation).

• Pursuanttoabove,theCompanies/LLP’swhohaveinvestedlargesumsineligiblebusinesses/industrialunitsinthebackwardareasarealsogettingpenalizedasthebenefitofsuchincentivegetsreducedduetothenarrowdifferencebetweenthebasicMAT/AMTrateof18.5%andthebasiccorporatetaxrate/LLPtaxrateof30%.

• Presently,theamountoflossbroughtforwardorunabsorbeddepreciationwhichislessasperbooksofaccountisallowedasadeductionwhilecomputingbookprofitsundersection115JBofAct.AcompanyhavinghugebooklossesandmeagreunabsorbeddepreciationorviceversawouldbeadverselyaffectedandwouldenduppayingMATdespitehavingaccumulatedlosses.Thiscausesunduehardshiptorevivecompaniesandhamperstherevivalprocesssubstantially.

• TheMAT/AMTcredit isallowedtobecarriedforwardfor10yearsforset-offbutthisperiod isgenerallynotalwayssufficient.Manycompanies,particularlyinvestmentcompanieswhosecorebusinessisinvestmentsarenotabletoutilizeMATcreditefficientlyandwithinduetime-limitsprovided.


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• TheMATCreditallowableundertheActisdifferenceofincometaxpayableundernormalprovisionoftheActandMATwhichwouldhavebeenpayable.Duetothesaidrestriction,thetaxpayersarenotabletoutilizethecreditefficientlyintimeandtherefore,inmostofthecasethecreditiseithernotavailableorislapsed.

• Currently,thecompanieslicensedunderSection8oftheCompaniesAct,2013areleviedMAT.Thesecompaniesareformedprimarilyforundertakingcharitableobjects.Suchcompanieshaveastatutorymandatetoapplytheirsurplusforpromotingtheirobjects.Thereisalsoaprohibitionfrompaymentofanydividendtoitsmembers.MATleviedonsurplusofthesesection8companies,willneverbeavailableforset-offasMATcreditasthesecompanieswillneverhavetopaytaxunderthenormalprovisionsoftheAct.ThereisnojustifiablereasontolevyMATonanypresumptivebookprofitsofthesecompanies,especiallywhenthesecompanieswereneverintended to be taxed.

• Incomearisingfromthetransferofalong-termcapitalasset,beinganequityshareinacompanyoraunitofanequityorientedfundisexemptunderSection10(38)oftheAct.TheobjectiveofgivingsuchexemptionwasthatIndianresidentsshouldinvestinthecapitalmarketforlongterm,however,byincludingsuchincomeinthebookprofitthebenefitistakenbackfromtheCompanies.TakingbacksuchbenefitfromtheCompaniesisnotequitable.

• TheFinanceAct,2011broadenedthescopeofMATbybringingSEZdevelopersandunitsundertheambitofMATtherebysignificantlydilutingbenefitsofferedunderthepopularSEZScheme.Inthisregard,theFinanceMinisterinhisBudgetspeechfor2014-15,statedthatmanufacturingisofparamountimportanceforthegrowthoftheeconomy.HefurtherstatedthattheGovernmentiscommittedtorevivetheSEZsandmakethemeffectiveinstrumentsofindustrialproduction,economicgrowth,exportpromotionandemploymentgeneration.

• ExemptionfromAMTisprovidedtocertainspecifiedpersonsiftheadjustedtotalincomeofsuchpersondoesnot exceed Rs. 20 lakhs. The limit of Rs. 20 lakhs is inadequate considering especially the huge amount ofinvestmentsmadebythebusinessesinrelationtoexportofgoodsandservices.

Recommendations

• ThebasicrateofMAT/AMTshouldbereducedtomakeitequivalentto50%ofthebasiccorporatetaxrate(i.e.15%).

• Companiesshouldbeallowedtoset-offentirepastbooklossesincludingunabsorbeddepreciationbeforetheyaresubjectedtoMAT.

• TheMAT/AMTcreditshouldbeallowedtobecarriedforwardandset-offwithoutanytimelimit.

• Currently,saleoflistedsecuritiesisfreefromlevyofCapitalGainsTax.ThishasresultedinbuoyancyofCapitalMarkets,promotedsubstantialFIIinflowsandensuredtransparency.However,thereisonelacunahere.Ifthesellerofthelistedsharesisacompany,thereisnotaxabilityofthegainsbutthebookprofitsaresubjecttothelevyofMinimumAlternateTax(MAT).ThelevyofMATat20percent+defeatstheveryexemptionfromlevyofcapitalgainstax.ItisthereforesuggestedthatprofitswhichareexemptfromlevyofcapitalgainstaxbealsonottakenaspartofbookprofitsforthepurposesofMAT.

• MATonSEZdevelopersandunitsshouldbeabolished.

• ThethresholdlimitfromexemptionofAMTshouldbeincreasedfromRs.20lakhstoRs.50lakhs.

• TheamountofweighteddeductionunderSection35(2AB)oftheActshouldbedeductedwhilecomputingMAT/AMT.Thebenefitof investment linkeddeductions isgettingdilutedasMAT/AMTat18.5%appliesonbookprofits. Therefore, thesedeductions should also be allowedwhile computing the bookprofit/adjusted totalincomeundertheprovisionsofSection115JB/Section115JCoftheActrespectively.


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• In computing the adjusted total income for AMT, investment linked deductions on capital expenditure forspecifiedbusiness(netofdepreciation)shouldnotbeaddedbackunderSection115JCoftheAct.

• Toattractmoreindustrialandinfrastructuralinvestments,MAT/AMToneligiblebusinesses/industrialundertakingshould be abolished.

• SetoffofMATcreditshouldbeallowedinfull.

• ItissuggestedthatthecompanieslicencedunderSection8oftheCompaniesAct,2013beexcludedfromthepurview of MAT.

4.4. Dividend Distribution Tax - Section 115-O

Issues

• AspertheprovisionsofSection115-OoftheAct,thedomesticholdingcompanywillnothavetopayDDTondividends paid to its shareholders to the extent it received dividends from its subsidiary company on which DDT hasbeenpaidbythesubsidiary.However,theprovisionasitstandsontoday,givesreliefinrespectofdividendreceivedfromonlythosecompaniesinwhichtherecipientcompaniesareholdingmorethanhalfofthenominalvalueofequitycapital.

• Further,theFinanceAct,2011hasalsoburdenedtheSEZdevelopersbyincludingtheminthescopeofDDT.

• DDTcurrentlyispayableatthebasicrateof15%.Further,dividendsdistributedbydomesticcompanieswillbegrossedupforthepurposeofcomputingDDT,translatingintoaneffectivetaxrateofabout20%(afterthelevyofsurchargeof12%andcessof3%).SinceDDTisasortofsurrogatetaxonbehalfoftheshareholders,andiftheshareholders were to pay tax on their dividend receipts, the tax impact thereon is likely to be lesser in most of the cases in comparison to the DDT tax burden.

• Itisstillalsounclearwhethertherateofsurcharge(andevencess)hastobeconsideredwhilegrossinguptheamountofdistributableprofits.TheGovernmentshouldspecificallyclarifythisaspecttoavoidlitigation.

• TheMemorandumexplainingtheprovisionoftheFinance(No.2)Bill,2014statesthatpriortointroductionofDDT,thedividendsweretaxableinthehandsoftheshareholder.However,aftertheintroductionoftheDDT,alowerrateof15%iscurrentlyapplicablebutthisrateisbeingappliedontheamountpaidasdividendafterreductionoftaxdistributedbythecompany.Therefore,thetaxiscomputedwithreferencetothenetamount.In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which areactuallyreceivedbytheshareholderofthedomesticcompanyneedtobegrossedupforthepurposeofcomputingtheadditionaltax.

The above memorandum appears contrary when compared with the speech of the Finance Minister who whileintroducingtheDDTintheBudgetof1997-98statedasfollows:“Somecompaniesdistributeexorbitantdividends.Ideally,theyshouldretainthebulkoftheirprofitsandploughthemintofreshinvestments.Iintendtorewardcompanieswhoinvestinfuturegrowth.Hence,Iproposetolevyataxondistributedprofitsatthemoderaterateof10%ontheamountsodistributed.Thistaxshallbeanincidenceonthecompanyandshallnotbepassedontotheshareholder’.Thus,thethenmoderaterateof10%hasalmostdoubledwithaneffectiverateofDDTresultingtoabout20%.

• TheearlierDDTrateof10%waslowerinlinewiththerateofTDSondividendsinmostIndianandinternationaltaxtreaties.TheincreasedbasicDDTrateof15%(effectiverateofabout20%)reducesthedividenddistributionabilityofdomesticcompaniesandtheuncertaintywithrespecttoitscreditinoverseasjurisdictionsimpactsthenon-resident shareholders adversely.


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• Currently,DDTisalsoleviedonundertakingsengagedininfrastructuredevelopmentwhichareeligiblefortaxbenefitunderSection80-IAoftheAct.ThisisdetrimentaltothegrowthoftheIndianEconomy.

Recommendations

• AlldividendsonwhichDDThasbeenpaid,beallowedtobereducedfromdividendsirrespectiveofthepercentageofequityholdingkeepinginmindthatinvestmentcompanieswhichdonotnecessarilyown/havesubsidiariesastheyinvestinvariouscompaniesintheopenmarket,bealsomadeeligibleforsuchbenefit.

• TheprovisotoSection115-O(1A)oftheActprovidesthatthesameamountofdividendshallnotbetakenintoaccountforreductionmorethanonce.ThelevyofDividendDistributionTax(DDT)atmultiplelevelshasbeenasubjectmatterofgrievancebycorporates.ApartofthisissuehasbeenresolvedbyprovidingintheActthatifaholdingcompanyreceivesdividendfromitssubsidiary,afurtherdistributionofdividendbytheparentwillnotattractlevyofDDT.Asithappens,promoterholdingsinoperatingcompaniesarenotnecessarilyinasingleparent.Also,irrespectiveofwhetherthereexistsaparent-subsidiaryrelationship,ataxondividendswhichhavealreadysufferedlevyofDDTamountstomultipletaxationandneedstobeavoided.ItisthereforesuggestedthatdividendswhichhavesufferedDDTbetreatedaspassthroughandbenotsubjectedtolevyofDDT.

• TheMinistryofCommerceandIndustry(DepartmentofCommerce)hasrecommendedtherestorationoforiginalexemptionfromMATandDDTtoSEZdevelopersandunits.InlinewiththeseintentionsoftheGovernmentandtoattractmoreinvestmentintheSEZs,DDTonSEZdevelopersandunitsshouldbeabolished.

• ThetaxrateofDDTisrecommendedtobereducedto10%fromthecurrenteffectiverateofabout20%(afterincludingtheeducationcess,surchargeandgrossing-upofthedividend).

• Toincentivisetheinvestmentininfrastructuresector,itisrecommendedthatDDTonindustrialundertakingsorenterprisesengagedininfrastructuredevelopment,eligiblefordeductionunderSection80-IAoftheAct,shouldbeabolished.ItisalsorecommendedthatfurtherexemptionfromDDTbegrantedtothe‘infrastructurecapitalcompany/fund’withtheconditionthatitinveststhedividendreceivedfromitssubsidiaryintheinfrastructureprojects.

4.5. Deemed Dividend - Section 2(22)(e)

Section2(22)oftheActdefinestheterm‘dividend’andsub-clause(e)thereofincludes,withinthemeaningofthisterm,evenanadvanceorloan,toashareholderhavingatleasta10%voting-powerinacompanyinwhichthepublicarenotsubstantiallyinterested,totheextentthatthecompanypossessesaccumulatedprofits.Thus,apayment,whichisclearlynotadividendascommerciallyunderstood,is,byafictionoflaw,deemedtobeone.Apartfrompaymenttotheshareholderhimself,aloanoradvancetoanyconcerninwhichheisapartneroramember,withabeneficialinterestofnotlessthan20%isalsoconsidered,tobedeemeddividend,andistaxedaccordingly.Theobjectclearlyistopreventtax-avoidancebydeeminganadvanceorloan(whichwouldnotbetaxable)asdividendswhichissubjecttoincometax.

4.5.1. Taxability of genuine inter-corporate Loans and Advances as Deemed Dividend

Issues

Theprovisionsuffersfrommanyinequities:

• It taxesa loan, though itmaybequiteagenuineone,which isduly repaidwithin its scheduled shorttime.Moreover,thereisnocorrespondingtax-relievingprovisionatthetimeofrecoveryoftheloan.

• Thetaxisattracted,notwithstandingthattheloanmaybeadvancedatafaircommercialrateofinterestandnotwithstandingthatpreponderantmajorityofpersonsowningtheconcernwhichreceivedtheloanarenotevenshareholdersofthelendingcompany.


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Recommendations

• Atpresent,notaxispayablebytheshareholderondividendreceivedfromcompaniesandonlythecompanypaysDDT.Therefore,levyoftaxondeemeddividendinthehandsofshareholderatthenormalrateisunjustifiableespeciallywhenallotherdeemeddividendsarealsosubjectedtoDDT.Ifthissuggestionisnotaccepted,thenadequateprovisionsshouldbemadetoexcludegenuinetransactionsfromtheconsequencesoftheseprovisions.

• Illustratively,genuineloansandadvances,givenoncurrentmarketrateofinterestandwhicharere-paidduringtheyear,shouldbeexcludedfromthescopeofdeemeddividendasthesearenotasubterfugeforpaymentofdividend.

• LoangivenaspartofbusinesstransactionandInter-corporatedepositsshouldspecificallybeexcludedfromtheapplicationofSection2(22)(e)oftheActtoavoidunnecessarylitigation.

4.5.2. Accumulated Profits not to include Capital Reserves - Section 2(22)(e)

Issue

• AspertheCompaniesAct,capitalreservescannotbeutilizedfordistributionofdividendbyacompany.Thisleads to controversies as to whether capital reserves should form part of accumulated reserves for the purpose ofSection2(22)(e)oftheAct.

Recommendation

• Anamendmentshouldbebrought inSection2(22)of theAct toexcludecapital reserves fromtheambitof“accumulatedprofits”.

4.5.3. Taxability of Deemed Dividend in the hands of recipient not being a shareholder

Recommendation

• Theobjectofsub-clause(e)ofSection2(22)oftheActistopreventtax-avoidancebymakinganadvanceorloan(whichwouldnotbetaxable),asadeemeddividendtotheshareholder,whichissubjecttoincometax.Itisrecommendedthatthethresholdforsubstantialinterestoftheshareholderintherecipientconcernshouldbeincreasedto51%.

4.6. Place of Effective Management

TheFinanceAct,2015hasmodifiedtheconditionofdeterminingresidentialstatusofacompany.AcompanywillnowberesidentinIndiaifitisanIndiancompany;orplaceofeffectivemanagementinthatyear,isinIndia.Placeofeffectivemanagement (‘POEM’) is defined tomean a placewhere the keymanagement and commercial decisions that arenecessaryfortheconductofthebusinessofanentityasawholeare,insubstancemade.

Issues

• Inspiteoftheexplanationtosection6(3)oftheActthereisstillinsufficientclarityonwhatwouldconstitute‘theplacewherekeymanagementandcommercialdecisionsthatarenecessaryfortheconductofthebusinessofanentityasawholeare,insubstancemade’.

• InstanceswhereIndianmultinationalcompaniestohaveacommongrouppolicy,forinstancehumanresourcespolicy,financepolicy,riskmanagement,commoncodeofconduct,etc.forthepurposeofuniformity,mobility,consistencyandendurance.Thesepoliciesare,bycustom,formulatedatheadquartersandcirculatedtothegroupcompaniesforensuringcompliance.Inthecontextofoutboundinvestment,thesepoliciesarelikelytobeformulated and circulated by Indian company. It should not happen that the presence of such common policies


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mayleadtoallegationofgroupcompaniesbeingconsideredaresidentinIndia.

• Issuemayariseastoatwhichpointoftimeinthepreviousyear,theresidentialstatushastobedeterminedviz.atthebeginningoftheyearortheendofthepreviousyear.Thesectiondoesnotspecifytimingofsuchexamination. This is a critical point and has many implications. For example, the tax deduction provisionsapplicabletoresidentandnon-residentaredifferent.Iftheresidentialstatusdeterminationisdoneattheendoftheyear,thenhowsuchtaxdeductionprovisionsoperatewhereobligationfordeductionwoulddependontheresidentialstatus?

• Theterm‘commercial’ascontainedinthePOEMdefinitionisverywide;therefore,thesameshouldbereplacedinlinewiththeinternationallyacceptedprinciples.

• ThereshouldbeclarificationinrelationtotermsusedinthedefinitionofPOEMlike‘insubstancemade’,etc.

• Inthisglobalscenario,managersworkingandresidinginmultiplejurisdictionscancommunicatethroughtheuseoftechnologyratherthanphysicallymeetinginonelocationtotakedecisions.Therefore,iftechnologyisusedasthekeymediumformakingmanagementandcommercialdecisions,eachjurisdictioninwhichamanagerislocatedatthetimeofdecisionmakingcanberegardedasaplaceofmanagement.Therefore,itisrecommendedthatadetailedguidelinewithrespecttosuchscenariosshouldbeissued.

• ItwouldbeunfairtoapplythePOEMprovisionsonaforeigncompanyinsuchscenarios–aforeigncompanyhavingmanufacturingbaseoutsideIndiaonly,whosemajorityoftheemployeesandassetsemployedforthebusinessareoutsideIndiaorwhereincomeoftheforeigncompanyisderivedfromassetsandresourceslocatedoutside India only.

• Whether overseas boardmembers of a foreign company visiting India and possibly taking some importantdecisioncouldcreateanexposurethattheforeigncompanybetreatedasresident?

Recommendations

• CBDTshouldissueasetofguidingprinciplesfordeterminationofPOEM.POEMisaninternationallyacceptedconceptandisfactdependentexercised,aswitnessedbyseveralIndianandforeigncourtrulings.

• Sincetheamendedprovisionislikelytohaveabearingonforeigncompaniesandmanyotherstakeholders,itisrecommendedthatadraftoftheguidelinesmaybereleasedtothepublicfordiscussionandcommentsbeinvitedonthesame.Afterconsideringtherepresentationsandsuggestionsmadebyindustrygroupsandvariousstakeholders,thefinalguidelinesshouldbenotified.

• Defer applicability of the provision to A.Y. 2017-18, such that taxpayers have reasonable time to study theguidelinesandhavelawcompliantimplementation.ThisisinlinewiththeGovernment’scommitmenttoavoidsuddensurprisesandinstabilityintaxpolicy.Hence,itisrecommendedthatthisprovisionismadeeffectiveonlyfromA.Y.2017-18,aftertheguidelinesandprinciplesfordeterminationofPOEMarefinalized.

• Guidelines should clarify the meaning of the following terms to avoid any ambiguity with regards to itsinterpretation:

– Key

– Commercial

– Management


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– Substance

– Effective

– As a whole

• Additionally,guidelinesshouldcontainillustrativeexamplestointerpretthefollowingissues:-

o Whethertheterm‘keymanagement’needstobereadalongwith‘commercial’,asbothofthemarejoinedbytheconjunction‘and’

o Decisions necessary for conduct of business, as the same may vary from case to case.

o Shareholderfunctionsversuskeymanagementandcommercialdecisionsinscenario,whereshareholdersholdingmajoritymayhavelargersayinconductofbusinessofentity.

o Hardships of variation in tax residency status - Amongst multiple consequences, dual residence mayandoftendoesresultinliabilityfordoubletaxation,withconcernonabilitytobeabletoabsorbfulltaxcreditwhentaxesaredemandedbyboththecountriesbyclaimingresidence.Insuchascenario,havingadomesticlawprovisionwhichisambiguouscouldeasilyaggravatethechancesofdualresidencyanditsadverseeffects.Also,wheretaxesarepaidintwocountries,claimingforeignTaxCreditinrespectofthesamewillposeasubstantialchallenge.

• ItissuggestedthattheGovernmentshouldcarefullycalibratePOEMintentanddraftguidelinestoensurethatPOEMisindeedananti-avoidanceruleandthatthereisclarityincomputingincomeundersuchrules.

4.7. Rationalization of provisions of Section 14A and Rule 8D

AsperSection14AoftheAct,nodeductionshallbeallowedinrespectofexpenditureincurredinrelationtoincomenotincludibleinthetotalincome.Section14A(2)oftheActprovidesthattheamountofexpenditureincurredinrelationtoincomenotincludibleinthetotalincomeshallbedeterminedbythetaxofficerifheisnotsatisfiedwiththecorrectnessoftheclaimofthetaxpayerinrespectofsuchexpenditureinrelationtoincomenotincludibleinthetotalincome.Thissatisfactionistobearrivedatbythetaxofficerhavingregardtotheaccountsofthetaxpayer.Thedeterminationoftheamountofexpenditureincurredinrelationtotheincomewhichisnotincludibleinthetotalincomeofthetaxpayeristo be done in accordance with the method prescribed, i.e. Rule 8D of the Rules.

Issue

• DisallowanceismadeonthebasisoftheformulaprescribedinRule8Dwithouthavingregardtheamountofexempt income earned.

Recommendations

• ThewayinwhichtheRule8Dstandsdraftedleadstoasituationwherethequantumofdisallowancemayfarexceedtheexemptincome.ThiscouldbeabsurdattimesandrunscontrarytotheintentionofSection14Aofthe Act.

• ItshouldbeclarifiedthatthedisallowanceasperthedeemingprovisionsofRule8DoftheRulesshouldnotexceed the amount of exempt income earned in the relevant FY.

Issue

• [email protected]%oftheaverageinvestments,resultsinadhocandexcessive disallowance.


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Recommendations

• ThisRuleisveryharshandbyapplyingtheformulaunderthesaidRule,expenditurethathasnoconnectionwiththeearningofexemptincomegetsdisallowed.Adeemingprovisionoftheadministrativeexpenditure@0.5%oftheaverageinvestments,resultsinadhocandexcessivedisallowance.Thereisevenmorehardshipwhentheinvestmentsaremadeonlyattheendoftheyear(say31March)whicharealsosubjecttodisallowanceat0.5%asperthedeemingprovisions.

• It issuggestedthatRule8DoftheRulesshouldbeamendedsuchthatthearbitraryclause i.e.clause(iii)ofRule 8D(2) of the Rules on disallowance of 0.5% of the average investments be deleted. Alternatively, thedisallowance for administrative expenses should bemade by estimating the timeof the personnel and theresourcesinvolvedforundertakingtheactivitieswhichwouldearnexemptincome.Theaforesaidestimationtobedoneonreasonablebasisafterconsideringthefactsofeachcaseandthefrequencyofsuchactivities.

Issue

• Ithasbeennoticedthatevenifexemptincomeisnotearnedduringaparticularyear,thetaxofficersdisallowtheexpenditureinrelationtotheinvestmentswhichhavethepotentialtoearntaxexemptincome.

Recommendations

• Section14A(1)oftheActreadsas:

“nodeductionshallbeallowedinrespectofexpenditureincurredbytheassesseeinrelationtoincomewhichdoesnotformpartofthetotalincomeunderthisAct”

• BasedontheprovisionsofsaidSection,itisrecommendedthatifthereisnoincomeinaparticularyear,whichdoesnotformpartofthetotalincomeunderthisAct,thenthedisallowanceunderSection14(A)shouldnotbetriggered.AclarificationtothiseffectthroughtheamendmentintheAct,notification,etc.wouldbehelpfulinreducingunwarrantedlitigationonthisissue.

Issue

• Ithasbeennoticedthatforthepurposeofcomputingdisallowanceunderclause(ii)ofRule8D(2)oftheRulestotal interestexpendituredebitedtotheprofitandlossaccountisconsideredbythetaxofficers,eveniftheinterestexpenditurehasnonexuswithearningofexemptincome.

Recommendation

• ItshouldbeexplicitlyclarifiedthattheinterestexpenditurewhichisnotdirectlyrelatabletoexemptincomeorreceiptistobeexcludedfromtheinterestexpenditureconsideredforthepurposeofcomputingdisallowanceunderSection14AoftheActreadwithRule8DoftheRules.

Issue

• The disallowance under Section 14A of theAct is required to bemade in respect of expenses incurred forearningexemptincome.Theprovisionsareharshinrespectoftheinvestmentsheldasstock-in-tradeorstrategicinvestmentsmadepurelyforacquiringcontrollinginterestorasperthespecificrequirementunderastatuteorcontractwithgovernment.

Recommendations

• Thestrategicinvestmentsaregenerallymadewiththeintentionofacquiringcontrollinginterestforthepurposeofenhancingthebusinessobjectiveofthegroup.Theinvestmentideaisthereforebusinessdrivenandnotwiththeintentionofearningdividendincome.Insuchcases,dividendincome,ifany,ispurelyincidentalinnature.


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• Further, inrespectofcertainbusinesseslikepower, infrastructuredevelopmentetc.,thestatute/governmentrequiresthetaxpayertoexecutetheprojectonlythroughaSPVCompany.Accordingly,makinganinvestmentinaCompanyisapre-requisitebusinessmodelforsuchbusinesses.Insuchcasesalso,dividendincome,ifany,ispurely incidental in nature.

• ItshouldbespecificallyclarifiedthataforesaidinvestmentswouldnotbeincludedforcomputingdisallowanceunderSection14AoftheAct.

Issue

• Asperclause(f)ofExplanation1toSection115JBoftheAct,expenditurerelatabletoexemptincomewhichisdebitedtotheprofitandlossaccountneedstobeaddedbackforthepurposeofcomputationofbookprofitsunderSection115JBoftheAct.However,ithasbeenobservedthatthedeemingprovisionsofSection14AoftheActreadwithRule8DoftheRulesareappliedbythetaxofficerstodisallowtheexpenditureincurredinrelationtoexemptincomeforthepurposeofcomputingthebookprofitsunderSection115JBoftheAct.ThisisagainsttheprovisionsofSection115JBoftheActandresultintodisallowanceofexpenditureinexcessoftheexpenditureactuallyincurredanddebitedtotheprofitandlossaccount.

Recommendation

• AspecificclarificationshouldbeissuedtoprovidethattheprovisionsofSection14AoftheActreadwithRule8Dof the Rules cannot be appliedforthepurposeofcomputationofdisallowanceofexpenditureunderclause(f)toExplanation1toSection115JBoftheAct.Itfurtherneedstobeclarifiedthatitisonlytheactualexpenditureincurred to earn exempt incomeanddebitedtotheprofitandlossaccountwhichhastobeaddedtocomputethebookprofitsunderSection115JBoftheAct.

4.8. Taxation of Subsidies

Theissueofwhethersubsidiesreceivedbyataxpayerare‘income’undertheIncome-taxAct,1961hasbeenthesubjectmatterofsomelitigationhistorically.However,basedonjudicialpronouncementsovertheyears,thelawhadevolvedsuchthatonlysubsidiesgrantedtomeetrevenueexpenditureorlosseswereconsideredas‘income’.Subsidiesgrantedforincentivisingthesettingupofnewunitsinbackwardareasorotherwisewereconsideredtobeofacapitalnature.

Thislongstandingpositionwasoverturnedbytheamendmenttosection2(24)introducedaspartofthisyear’sFinanceAct.Anewclause(xviii)hasbeeninsertedasaresultofwhichanyassistanceintheformofsubsidyorgrantorcashincentiveordutydrawbackorwaiveror concessionor reimbursementby theCentral or StateGovernmentor anyauthorityorbodyoragencywillbeconsidered‘income’andliabletotax.

ThisamendmentwasnotpartoftheFinanceBill,2015asoriginallyintroducedandaccordinglymanytaxpayersdidnothaveasuitableopportunitytoassesstheimpactofthisproposalandmakerepresentationsinthisregard.Nonetheless,theimpactofthisamendmentisextremelyfarreachingandcouldhaveseriouseconomicconsequences.

TheimpactthatsuchanamendmentwillhaveonthevariousinitiativeslaunchedbystategovernmentsovertheyearstoincentiviseinvestmentsinbackwardregionsoftheirrespectiveStatescannotbeunderstated.Itgoeswithoutsayingthatsuchincentiveswhetherintheformofconcessionalland,salestaxincentives,reducedstampdutiesetc.actasapowerfulstimulustoinvestmentsinsuchregions.Alevyofincome-taxonthevalueofsuchbenefitswillresultmanyprojectsbecomingunviable, thusaffecting the successof the ‘Make in India’ initiative. Itwill alsomean that Stategovernmentswillberequiredtoeffectivelygross-upthequantumofincentivesiftheirexistingschemesaretoretaintheirattractiveness.


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SuchaprovisionrunscontrarytotheGovernment’sstatedprincipleofempoweringstates.ThelevyoftaxbytheCentreonincentivesgivenbyStatesinessenceamountstoareverseresourcetransferfromtheStatestotheCentrewhichrunscountertotheobjectiveofcooperativefederalismadvocatedbytheGovernmentandtheNITIAayog.

Itisthereforesubmittedthatthisprovisionbedroppedandthepositionprevailingbeforetheamendmentberestored.

4.9. Recommendations to Widen the Tax Base

TheissueofwideningoftaxbaseofthecountryhasbeenasubjectmatterwhichhasreceivedconsiderableattentionofthesuccessiveGovernmentsovertheyears.Therehasbeenintensedebateonthesubjectintherecentpastalso.FICCIhascomeupwithananalysisintheformofapapertitled‘Wideningoftaxbaseandtacklingblackmoney’.ThedocumentidentifiestherootcausesofgenerationofblackmoneyinIndia,sectorswhereblackmoneygenerationisprevalentandsuggestionstouncoverthegeneration,accumulationanddistributionofblackmoneywithintheIndianeconomy.AcopyoftheaforesaidstudyhasbeensubmittedtotheRevenueSecretaryandotherofficialsoftheMinistryof Finance.

Someoftheimportantsuggestionsformingpartofthedocumentareasfollows:-

1. Incentivize transactions through credit/debit cards and other banking instruments

It isrecommendedthatGovernmentmayprovidesomeincentivessothatdealers(particularlyofhighvalueditemslike jewellery, FMCG etc.) are encouraged to accept payments through credit card / debit card and other bankinginstruments.TheseincentivescouldtaketheformofanadditionaldeductionfromincomerelatabletothetransactionvalueforcalculatingthetaxliabilityorareducedValueAddedTax(VAT).

2. Set-up central database to store invoices

Itissuggestedthatacentraldatabasebeestablished,tofacilitatestoringofinvoicesissuedbyFastMovingConsumerGoods(FMCG)companiestosmallbusinessesacrossthecountry.ThedatabasecanbethenusedtoeffectivelymonitorthepurchasesmadebythesesmallbusinessesfromFMCGsstoresandthecorrespondingsalesreportedbythem.Thiswillhelpindetectinganydiscrepancyinsalesreportedbysmallbusinessesandprobablechainofgenerationofblackmoney.

3. Expand the scope of Presumptive Taxation

TheGovernment can consider bringing a presumptive profit estimation scheme by incorporating provisions in theincometaxlawtocaptureprofessionalswhooperatethroughtransactionsincashandstayoutofthetaxnet.

4. Tax on Agricultural Income

StateGovernmentsbeencouragedtoushersuitablemechanism(whileprovidingreasonablyhighlevelofthresholdstoavoidsmallfarmersbeingburdened)forincreasingthescopeandquantumofagriculturalincometax.

5. Reforms in real estate

Astheregistrationchargesandtaxesaredependentonthevalueofthetransaction,buyersunder-reportthevaluetoavoidpayinghighertaxesandcharges(bymakingaportionofthepaymentincash).Thisenablesthepartiesinvolvedtodeclarelowertransactionvalues.

Taxesandchargesatthetimeofregistrationcanbesplitintotwoparts—afixedcomponentandavariablecomponent.Irrespectiveofthereportedvalueofthepropertyafixedcomponentbepaidtocivicauthorities,whilethevariablecomponent may be dependent on the current market prices of the property. The market price of a property may be determinedbyanindependentgovernmentapprovedagency.Thevalueofthepropertyreportedbytheagencymayformthebasisforcalculatingthetaxesandchargestobepaidbythebuyer.


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6. Create IT infrastructure to track tax evasion

It is imperative to deploy and use robust IT Infrastructure to consolidate and exchange information pertaining todifferentstreamsoftaxesi.e.,Incometax,Servicetax,Salestax,Exciseduty,etc.byusingcommonmeanssuchasPANofanassessee.Thiswillfacilitateintrackingcasespertainingtotaxevasionresultinginaccumulationofblackmoney.

7. Expand the provisions of Tax Deduction at Source/Tax Collection at Source

It issuggestedthattheprovisionsoftheIncomeTaxAct,1961beamendedtoexpandthescopeofTDSandTCSbyincludinguncoveredsectorswhereblackmoneygetsgenerated.

8. Enhance tax base by detecting non-filers of income tax returns

Toenhancethetaxbaseandaugmenttaxcollection,itispivotalforthegovernmenttofocusonnon-filersanduncoverblackmoney in the economy. The Income-Tax (IT) department should implement strongermechanisms to identifypersonswhoresortedtotaxevasionandbringthemunderthetaxnet.

9. Simplify the tax structure

TheGovernmentshouldsimplifythetaxstructure,andpossiblyreducetaxrates.Thiswoulddetertaxevasionbyleadingtoreportingoffulltransactionvalue.Thestepwouldbeinstrumentaltodiscourageblackmoneygeneration.

TheStudy“WideningofTaxBaseandTacklingBlackMoney”canbeaccessedfrom

http://www.ficci.com/publication-page.asp?spid=20548

4.10. Issues related to allowability of certain Expenditures, Deductions and Disallowances

4.10.1. Depreciation – Section 32

Issues

• WhetherdepreciationallowableonGoodwill.

• Oilwellsareclassifiedasbuildingsandtherefore,depreciationatalessrateof10%isallowedonthesame.

• NeedforHigherdepreciationforplantandmachinery.

• Whether‘non-competefee’canberegardedas‘anyotherbusinessorcommercialrightofsimilarnature’,tobeeligiblefordepreciationas‘intangibleasset’underSection32oftheAct.

• TheambiguityrevolvesroundwhethertheunabsorbeddepreciationrelatingtoAY1997-98uptoAY2001-02canbecarriedforwardforsetoffwithoutanytimelimitaftertheamendmentmadebytheFinanceAct,2001.

Recommendations

• InlinewiththerecentSupremeCourtdecisioninthecaseofCITv.SmifsSecuritiesLtd.(2012)24Taxmann.com222,aclarificatoryamendmentshouldbebroughtforspecificinclusionofGoodwill inthedefinitionofblockofintangibleassets.Further,itwouldbeappropriatetoprovideclarityonallowabilityofdepreciationonself-generated/purchasedgoodwill.

• Oil/Gaswellshouldbeclassifiedas ‘PlantandMachinery’ formineraloilconcernseligibleforspecialrateof60%depreciation.However,taxofficersconsideroilwellasbuildingandallowdepreciation@10%asagainsteligiblerateof60%applicabletosuchplant&machineryrelyingonthedefinitiongiveninnotesformingpartofAppendix–I“Tableofratesatwhichdepreciationisadmissible’’wherein‘building’hasbeendefinedtoincluderoads,bridges,culverts,wellsandtubewells.Taxofficersconsiderthatoilwellisalsocoveredasbuildingsinceitisaninclusivedefinition.


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Oilwellsarenotnormalwellandrequirespecialequipment,knowledgeandskillwhichgointodevelopingoilwell. Therefore, one cannot consider oil well as same as any water well. Oil well is made up of various machineries and‘cementing’isjustoneprocesstostrengthenthestructureofsuchwellandthereforebynomeansoilwellscanbeconsideredasbuilding.ItisrecommendedthatanecessaryclarificationbywayofcircularmaybeissuedbytheGovernmenttotheeffectthatoil/gaswellbeclassifiedas‘PlantandMachinery’formineraloilconcernseligibleforspecialrateof60%depreciation.

• Itwouldbeinfitnessofthingstorestoretherateofdepreciationongeneralplantandmachineryto25%from15%toencourageinvestmentinnewplantandmachineryentailingup-gradationofobsoletetechnologies.

• Moreover,theGovernmentshouldextendtheinitialdepreciationunderSection32(1)(iia)oftheActtoserviceindustriesaswellwhichiscurrentlyavailabletoonlymanufacturingsector.

• Thereisalackofclarityastowhetherpaymentmadefornon-competefeesshallbeeligiblefordepreciationunderSection32oftheActas‘intangibleassets’,whichhasgivenrisetounintendedlitigation.However,variousjudicialprecedents[PentasoftTechnologiesLimitedvs.DCIT(264CTR187)(MadrasHC)andITOvsMedicorpTechnologiesIndiaLtd(122TTJ394)(ChennaiTribunal)]haveheldthatnon-competefeesshallfallwithinthemeaningof‘anyotherbusinessorcommercialrightofsimilarnature’.Itistherefore,suggestedthataclarificatoryamendmentshouldbemadeinSection32(1)(ii)oftheActtoincludenon-competefeewithinthedefinitionof‘intangibleasset’.

• TheGovernmentshouldclarifythattheunabsorbeddepreciationrelatingtoAY1997-98toAY2001-02canbecarriedforwardforset-offwithoutanytimelimit.

4.10.2. Investment Allowance - Section 32AC

TheFinanceAct(No.2),2014hasamendedSection32ACoftheAct,whereinthetaxpayershallbeallowedadeductionof15%ofcostofnewplantandmachinery,forinvestmentmadeupto31March2017,ifsuchinvestmentsaremorethanRs.25croreinaFY.Further,thetaxpayereligibletoclaimdeductionundertheearliercombinedthresholdlimitofRs.100croreforinvestmentmadeinFYs2013-14and2014-15shallcontinuetobeeligibletoclaimdeductionevenifitsinvestment in the year 2014-15 is below the new threshold limit.

Issues

• Thephrase‘manufactureorproductionofanarticleorthing’hasnotbeendefinedinSection32ACoftheActwhichcanentaillitigation.

• TheMemorandum explaining the provisions of the Finance Bill, 2013 states that the proposed investmentallowanceismeantforacompanyengagedinthebusinessofmanufactureofanarticleorathing.However,other sectors likedevelopingandbuildingan infrastructure facility, telecom infrastructure serviceproviders,processing/assemblingactivities, creationofbroadband facilityareequally important for thegrowthof theIndian economy. Similarly, the investment allowance should be allowed for the other sectors for the overall growthoftheeconomy.

• NewassetforthepurposeofSection32ACoftheActwouldnotincludeanyofficeapplianceincludingcomputersandcomputersoftware.Itmaybenotedthatthecomputersandcomputersoftwaresuchasservers,ERPsystemsetc.areintendedtoenhanceoveralloperationalefficiency.Hence,itisironicalthatmoderntechnologiestoolssuchascomputerandcomputersoftwareareexcludedthoughtheybringaboutefficiencyinmanufactureandproductionofgoods.


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• ThebenefitintendedtobeprovidedbywayofgrantofinvestmentallowanceunderSection32ACoftheActwouldgetdilutedonlevyofMATunderSection115JBoftheAct.

• Thereisambiguityastowhethertheunutilizedinvestmentallowance(incasethereisnosufficientincometoabsorb the investment allowance) would be carried forward to the next year or not.

• Oneoftheeligibilitycriteriaforgrantofinvestmentallowanceisthatthetaxpayermust‘acquireandinstall’thenewplantandmachineryintheyearofclaim.Theterms‘acquired’and‘installed’forthepurposeofSection32ACoftheActarenotdefinedwhichwillleadtodoubtsoninterpretationandmayentaillitigation.Further,it ispossible that ‘acquisitionand installation’maynotbecompleted in the sameyear; installationofassetspecificallyforbigprojectsmayspillovertothesubsequentyearofacquisition.Insuchcases,thebenefitislostwhichisnottheobjectivebehindtheintroductionoftheinvestmentallowance.

• Thecumulativeconditionofacquisitionandinstallationofnewassetsinthesamefinancialyearcastbysub-section(1A)ofsection32ACoftheActforanamountexceedingRs.25croresmaysimplyforfeittheincentiveirrespectiveoftheobjectiveofthesection.Thetaxpayermakinginvestmentineachofthethreequalifyingyearsmaystillnotgetanyreliefiftheacquisitionofassetsistowardstheendofthefinancialyearwhiletheinstallationhappensinthesubsequentfinancialyear.

Recommendations

• TheallowanceunderSection32ACof theActshouldalsobeextendedtoothersectorsof theeconomy likethoseinoperatingdevelopingandbuildinganinfrastructurefacility,telecominfrastructureserviceproviders,processing/assemblingactivities,creationofbroadbandfacility,andconversionofLNGintoRLNGetc.Thiswilltrulyprovideafilliptotheeconomyandwillmeetthetrueintentoftheprovisions.

• Further,itisnotclearifdeductionunderthisSectionisapplicabletoIT(InformationTechnology)/ITES(ITEnabledServices) companies using various kinds of computers/ data processing machines to manufacture/developsoftware.Therefore,itissuggestedthatanexplanationbeinsertedunderSection32ACtoextendsuchbenefittoIT/ITEScompaniesengagedin‘manufacturing‘or‘developing’ofsoftware.Also,thedefinitionof“newassets”underSection32ACoftheActshouldbeamendedtocover‘computersorcomputersoftwareusedbyIT/ITEScompaniesformanufacturing/developmentofsoftware’.

• The investment allowance eligible for deduction under Section 32AC of the Act should be reduced whilecomputingbookprofitofthecompanyundertheprovisionsofSection115JBoftheAct.OtherwiseataxpayermayhavetopayMATthoughbeingeligibleforthedeductionundernormalprovisionsoftheAct.Suchreductionofbookprofitbythedeductionamountwillgivetaxpayerstheinvestmentbenefitinrealtermsandtherebyattractmoreindustrialandinfrastructuralinvestments.

• Specificprovisions for carry forward and setoffof investment allowance for an indefiniteperiod shouldbebroughtintheAct.

• The scope of ‘manufacture or production of any article or thing’ and terms ‘acquired’, ‘installed’ be clearlydefinedtoavoidanypotentiallitigationoninterpretationandimplementationoftheprovision.

• Itmaybeclarifiedthatthedeductionundersection32AC(1A)oftheActwillbegrantedaslongasnewplantandmachineryexceedingRs.25crores isacquiredand installedwithintheblockofspecifiedyears(3years)irrespective of the fact that acquisition and installation of new assets falls in different financial years. ThethresholdforacquisitionandinstallationofassetsexceedingatleastRs.25croresinsinglefinancialyearmayberemoved.


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4.10.3. Investment in new Plant and Machinery in notified backward areas – Section 32AD

Issues

• Thebenefitundersection32ADoftheActisgrantedtotheTaxpayerwhosetsupanundertakingorenterpriseformanufactureorproductionofanyarticleorthinginspecifiedareaonorafter1April2015.ThiswouldmeanthatexistingTaxpayerswhohavealreadysetupanundertakinginsaidareaswillnotbeentitledtoavailbenefitofsection32ADoftheAct.

• Thebenefitshouldbeextendedtoassetswhere100%depreciationisclaimedinafinancialyear.Suchbenefitwouldencourageinvestment inprioritysectorwhichearnhigherdepreciationbecauseofthesignificanceoftheir industry. For example, the amendmentwill denybenefit to the Industrywhich employs fuel efficientmachineryeligiblefordeprecation@100%.

• Thebenefitintendedtobeprovidedbywayofgrantofhigheradditionaldepreciationandadditionalinvestmentallowanceonacquisitionandinstallationofnewassets/plantandmachineryinthenotifiedbackwardareaswillgetdilutedonlevyofMAT.

Recommendations

• Sincetheintentionistoencourageinvestmentinnotifiedbackwardareas,itisrecommendedthatbenefitbegrantedeventoexistingTaxpayerwhoundertakessubstantialexpansion.

• Toavoiddilutionofincentivebenefit,theinvestmentallowanceshouldbedeductibleeveninthecomputationof‘bookprofit’underMATprovisions.

4.10.4. Amortization of certain Preliminary Expenses - Section 35D

Issues

• Section35Dof theActprovidesdeductiontoresident taxpayers forcertainexpenditure incurredbeforethecommencementofbusinessorafterthecommencementinconnectionwiththeextensionoftheundertakingorinconnectionwithsettingupanewunit.ThebenefitofdeductionunderSection35DoftheActislimitedtothespecifiedexpendituresuchaslegalcharges,registrationfeesetc.incurredforincorporatingtheCompany.

• Further,thedeductionofthisexpenditureisrestrictedto5%ofthecostofprojectorcapitalemployedattheoptionoftheCompany.

• However, legitimateexpenditure incurredpost incorporation for anduntil settingupof business,which areneithercoveredwithinSection35Dnorcanbecapitalizedtotheactualcostoffixedassets,getspermanentlydisallowedundertheprovisionsoftheActandbecomesadeadcostforthetaxpayerseventhoughtheyareincurredforthesettingupofthebusiness.Someofthisexpenditurecouldbeoffice/salesemployees’salary,auditfees,advertisementandbusinesspromotionexpenditureincurredpriortosettingupofbusiness,etc.

• Thisismoreparticularlyinthecaseofcompanieshavinglongergestationperiodforsettinguptheirbusinesssuchasmanufacturingentities,insurancebusinessrequiringmultiplelicenses,etc.Thisaffectsthecashflowandthespendingcapacityofthecompany.

Recommendations

• Thereisnoplausiblereasonfornotallowingtheseexpensesasdeductioneitherasrevenueoronadeferredbasisinfiveequalinstalments.Therefore,Section35DoftheActshouldbesuitablyamendedtoincludealltheexpensesincurredbyCompaniespostincorporationbutduringthecourseofsettingupofitsbusinessaseligiblefordeduction.


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• Eventheceilingof5%shouldberemovedasthereisnorationalebehindhavingsuchceilingwhentheactualexpenditureisfarhigher.

4.10.5. Tax treatment of Corporate Social Responsibility expenditure – Section 37

Issues

• OneofthehighlightsoftheCompaniesAct,2013isthateverycompanymeetingthespecifiedthresholdwouldneedtomandatorilyspend2%oftheir‘averagenetprofits’onCorporateSocialResponsibility(CSR).

• AspertheFinance(No.2)Act,2014,theexpenses incurredbythetaxpayerontheactivitiesrelatingtoCSRreferredtoinSection135oftheCompaniesAct,2013shallnotbedeemedtobeincurredforthepurposeofbusinessandhence,shallnotbeallowedasadeductionunderSection37(1)oftheAct.

Recommendation

• It isrecommendedthattheExplanation2toSection37shouldbeomittedandadeductionofCSRexpensesincurredbythetaxpayerspursuanttoprovisionsoftheCompaniesActshouldbeallowedunderSection37incomputingbusinessincome.

4.10.6. Deductibility of discount on issue of ESOP

Issue

• Thedeductibilityofdiscounton issueof ESOPas allowablebusiness expenditureunder theActhasbeenamatteroflitigation.Recently,theSpecialBenchofBangaloreIncome-taxAppellateTribunal(Tribunal)inthecaseofBioconLtd.vs.DCIT(155TTJ649)heldthatESOPisoneofmodesofcompensatingtheemployeesfortheirservicesandispartoftheirremuneration.Further,byundertakingtoissuesharesatadiscount,thecompanydoesnotpayanythingtoitsemployeesbutincursobligationofissuingsharesatadiscountedpriceonafuturedateinlieuoftheirservices,whichisexpenditurecoveredunderSection37oftheAct.However,inabsenceofclearguidelinesontaxtreatmentofsuchdiscountlaiddownundertheAct,theissuehasledtounwarrantedlitigation.

Recommendation

• ItshouldbeexplicitlyprovidedintheActthatdiscountonissueofESOPisadeductiblebusinessexpenditure.Further,theprinciplesregardingthedeterminationofESOPdiscountanditstimingforclaimingexpensewhilecomputingtaxableincomeundertheActshouldbeclearlylaiddowntoavoidanyambiguity.

4.10.7. Disallowance - Section 40(a)

Issues

• TheFinanceAct (No2),2014amendedSection40(a)(ia)of theAct toprovide that if specifiedpayments toresidentsaremadewithoutTDS,itwillresultindisallowanceofonly30%ofthesuchpaymentsandthepayerisconsideredasanassessee indefault.PriortoFY2014-15,entireamount(insteadof30%)ofthespecifiedpaymentsonwhich taxwasnotdeductedwasdisallowedunderSection40(a)(ia)of theAct. Inaddition,nodisallowance shall be made and the taxpayer shall not be treated as an assessee in default, where the resident payee has paid the taxes due on such receipt and furnished evidence in support of this such as return of income forthatyear,acertificatefromaccountanttothiseffectetc.Thisbenefit isonlyavailable incaseofresidentpayees.


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• There is an interpretation issue whether an expenditure which suffered 100% disallowance prior to thisamendmentfordefaultinTDSinearlierfinancialyearwillnowbeallowedonlytotheextentof30%intheyearofpaymentofTDSonaccountofstrictreadingofprovisotosection40(a)(ia)oftheAct.

• TherehasbeenarecentdebateregardingdisallowanceofexpensesunderSection40(a)(ia)oftheActwhetheritwouldcovertheamountswhichwere‘paid’duringtheFYoronlytheamountswhichremained‘payable’attheendoftheFY.Inthisregard,thereareconflictingdecisionsbyvariousCourts[suchasCITvs.VectorShippingServices(P)Ltd(357ITR642),MerilynShipping&TransportsvACIT(146TTJ1),ITOvs.PratibhutiViniyogLimited(ITA No 1689/Mum/2011)].

• Inviewofwidespreadlitigationonthisissue,theCBDThasclarified(videCircularNo10of2013datedDecember16,2013)thatdisallowanceunderSection40(a)(ia)oftheActfornon-complianceofTDSprovisionsisapplicablebothtoamountspaidaswellasremainingpayableattheendoftheFY.

Recommendations

• Itisrecommendedthat30%disallowanceshouldberestrictedonthepartofthepaymentonwhichthetaxwasnotdeducted/depositedatsourceandnotoftheentirepayment.

• ItisrecommendedthattheprovisionsofSection40(a)(ia)shouldclarifythatif,inearlieryears,thedisallowanceof100%wasmade,then100%oftheamountshouldbeallowedasdeductiononpaymentofsuchtaxestotheGovernmentTreasuryduringthesubsequentyears(insteadof30%).

• DuetoambiguityintheprovisionsofSection40(a)(ia)oftheActandcontrarydecisionsontheissuewhethersuchprovisionwouldbeattractedonboth‘paidandpayable’,itisrecommendedthatamendmentshouldbemadeinSection40(a)(ia)oftheActtospecificallyclarifytheapplicabilityofsuchprovisions.

• Inordertoalignthetwosubsection(i)and(ia)ofSection40(a),itisalsosuggestedthatSection40(a)(i)oftheActshouldbeamendedtoprovidethefollowing:

– 30%disallowance,insteadof100%disallowanceforamountpaid/payabletonon-residents,

– no disallowance in cases where the due taxes have been paid by the non-resident payees subject toconditionsasapplicableincaseofresidentpayees.

4.10.8. Deduction of employees’ contribution to Provident Fund etc. – Section 43B

Issue

• Section43BoftheActallowsdeductiontowardsemployercontributiontoPF/anyotherfundforthewelfareoftheemployeesifthesameisdepositeduptothedateoffilingthereturnof income.However,deductionfor employees’ contribution to PF/ ESI or anyother fund is governedby Section36(1)(va) of theActwhichmandatesthattheemployeescontributionshouldbecreditedtotherelevantfundbytheduedatespecifiedundertherelevantAct,rule,orderornotificationgoverningthatfund.Differentialtaxtreatmentforemployees’contributionandemployercontributiontothesamefundisdiscriminatory.

Recommendation

• ItisthereforerecommendedthatsuitableamendmentbemadeintheActsoastobringtheprovisionsrelatingtotheEmployees’contributiontowardsemployeewelfarefundsinlinewiththeemployer’scontributiontowardssuch funds.


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4.11. General Anti Avoidance Rule - Chapter X-A

TheGeneralAntiAvoidanceRules(GAAR)hadfirstbeenintroducedintheDirectTaxCodein2009tocurb‘ImpermissibleAvoidanceAgreement’ (IAA)entered intobyaperson to avoid taxes. TheGAARhadbeen introduced todealwithaggressivetaxplanninginvolvinguseofsophisticatedstructures.TheFinanceAct,2012hadinsertedChapterX-A,dealingwiththeprovisionsofGAARtobeeffectivefrom1April2014.Subsequently,FinanceAct2013,amendedprovisionsofChapterX-AandthecurrentGAARprovisionswouldcomeintoforcewitheffectfrom1stApril2016.TheCBDThasalsonotifiedcertainrulesrelatingtoapplicationofGAAR.

TheFinanceAct,2015deferredimplementationofGeneralAntiAvoidanceRules(GAAR)bytwoyearssoastointroduceprovisionsofGAARwitheffectfromfinancialyear2017-18.IthasbeenproposedthatGAARwillapplytoinvestmentsmadeonorafter1April2017,whenGAARis implemented.CertainrecommendationsrelatedtoGAARaregivenasbelow:-

• Inordertomaintain investmentmomentuminthecountry,thedeferralofGAARprovisionstofinancialyear2017-18 was indeed a welcome move. As stated in the Explanatory Memorandum to the Finance Bill, 2015, GAARprovisionswouldbeimplementedaspartofacomprehensiveregimetodealwithBaseErosionandProfitShifting(BEPS)andaggressivetaxavoidance.

• ConsideringthecurrenteconomicenvironmentandeffortsoftheGovernmenttoattractFDI,GAARshouldbefurtherdeferred.ThiswillprovidecertaintytotheinvestorsandhelpaccomplishtheeffortsoftheGovernmenttobringtaxcertainty.

IfGovernmentdecidesnottodeferGAAR,thenfollowingneedstobeaddressedonimmediatebasis:-

4.11.1. Factors relevant for determining Impermissible Arrangements

• Section97(4)oftheActprovidesthatfactorslike,periodortimeforwhichthearrangementexists,thefactofpaymentoftaxesandthefactthatanexitrouteisprovidedbythearrangement,mayberelevantbutshallnotbesufficientfordeterminingwhetheranarrangementlackscommercialsubstanceornot.

Recommendations

• Apart from the circumstancesprovided for clarifyingwhether thearrangement lacks commercial substance,thefollowingadditionalpointsmayalsobeconsideredrelevantfordeterminingwhetherthearrangementisanimpermissibleavoidancearrangement:

– theformandsubstanceofthetransactioninwhichtheschemewasenteredintoorcarriedout;

– whetherthetransactionisasingleisolatedtransactionoraseriesoftransactions;

– thechangeinthefinancialpositionofthetaxpayerthathasresultedorwillresultfromthetransaction;and

– thechangeinthefinancialpositionofthepartyconnectedtotherelevanttaxpayerthathasresultedorwillresultfromtransaction.

4.11.2. Scope of the term ‘Significant’ in Section 97(1)

Section97(1)providesforaconditionthatanarrangementshallalsobeconsideredtobelackingcommercialsubstance,ifitdoesnothaveasignificanteffectuponbusinessrisks,ornetcashflowsapartfromthetaxbenefit.

Issues

• Itisafactthatanyprudentbusinessmanwouldundertakeatransactionwithathird-partywhichwilldefinitelyhaveabearingonthebusinessrisks/netcashflowsofhim/otherparty.Theintentbehindtheinsertionofthisprovision is togobehindthetaxpayerswhoundertakeatransactionwhichdoesnothaveaneffectontheirbusinessrisks/netcashflows.


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• Theterms ‘significant’ isnotdefinedunderthesectiontoquantifytheactualrisk/netcashflowinordertoconcludethatthearrangementlackscommercialsubstance.

Recommendation

• Theterm“significant”needstobedefinedappropriatelytoavoidpotentiallitigation.

4.11.3. DTAA vis-a-vis Domestic Tax Laws

Section90(2A)oftheActprovidesthattheprovisionsofnewlyinsertedChapterX-Ai.e.GAARshouldapply,thesamewouldoverrideDTAAprovision,evenifsuchprovisionsarenotbeneficialtothetaxpayer.

Issues

• Insertionofthisprovisionwouldnullifytheinternational&globalprincipleon“treatyoverridingdomestictaxlaws”.

• A Double Taxation Avoidance Agreement (DTAA) is a bilateral agreement entered between two sovereigngovernments.AsperArticle26and31oftheViennaConvention,aDTAAshouldbeimplementedingoodfaith.FurtherasperArticle27oftheViennaConvention,aGovernmentcannotinvokeitsinternallawasajustificationfor its failuretoperformtheDTAA.Therefore,aunilateralamendment inthedomestic lawofanyparticularcountrycannotoverrideaDTAAwhichhasbeensignedwithfullknowledge,understandingandconsentofbothof the Governments.

Recommendation

• Thisamendmentshouldbewithdrawnsincethesameisagainsttheinternationallyacceptedprinciples.Giventheresultantimplicationsonthenon-residenttaxpayers,thisamendmentshouldberolledback.

4.11.4. Appeals against directions of Approving Panel

Section144BAprovidesthatthedirections, issuedbytheApprovingPanelshallbebindingonthetaxpayerandtheCommissioner,andnoappealundertheActshalllieagainstsuchdirections.

Issues

• ThedirectionissuedbytheApprovingPanelisaspertheprovisionsoftheAct.Therefore,taxpayershouldbeprovidedwitharighttoappealagainstsuchdirectionswiththeTribunal.

• In the absenceof any right to appeal under theAct, the taxpayerwill only have anoption tofile awrit tochallengethedirectionsoftheApprovingPanel.

Recommendation

• TheprovisionsneedtobeamendedtostatethatthedirectionsissuedbytheApprovingPanelcanbeappealedwiththeTribunalandhigherforums.

4.11.5. Other recommendations

The Committee under the Chairmanship of Dr. Parthasarathi Shome, after considering the suggestions of variousstakeholders, submitted its final report on GAAR to the Government. The Government considered the report ofthe Committee and accepted some of the recommendations with a few modifications. However, some of therecommendationsdonotfindanyreference intheFinanceAct2013.Someofthecriticalsuggestions inrelationtoGAARaregivenbelow:

• Fromaforeigninvestor’sstandpoint,itiscriticaltohavecertaintyonwhetherornotoffshoreforeigninvestorsinvestingintoIndiawouldbeentitledtotreatybenefits,asmaybeapplicable.IfGAARisinvoked,treatybenefitscould be denied.Moreover, the language of the conditions triggering GAAR including ‘misuse or abuse of


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provisionsoftaxlaws’,‘lackscommercialsubstance’,‘notforbonafidepurposes’and‘substantialcommercialpurpose’etc.areverywidelywordedandsubjective.ThiscouldbeamenabletovariousdifferinginterpretationsevenamongtheRevenueAuthorities.ThiswouldresultinsignificantuncertaintyonwhetherornotoffshoreIndiainvestmentstructuressetupbyforeigninvestorswouldberespectedandtreatybenefitsgranted.Theseprovisionscouldalsoimpacttransactionclosure/costsowingtouncertaintyonTDS/representativeassesseerelatedliabilitiesetc.

Itissuggestedthatcertainobjectivecriteria/conditionsshouldbelaiddown,whichiffulfilledwouldnotresultinthetriggeringofGAARprovisionsanditsconsequentialimplicationsonanyoffshoreentityincludingdenialoftreatybenefits.

Further, it isrecommendedthatthe languageclarifyingtheobjectivecriteria/conditionsshouldalso includeexamples (like incurrenceofminimumspecifiedexpenditureby theoverseasentity)whereGAARprovisionswouldnotbetriggered.

• AspertherecentlynotifiedRules,theprovisionsofGAARshallnotapplytoanarrangementwherethetaxbenefitarisingtoallthepartiestothearrangementintherelevantAY(AY)doesnotexceedRs.3croreinaggregate.Thisthresholdlimitshouldbefurtherenhancedsoastocaptureonlyhighlysophisticatedstructures.

• ManycountriesdonotapplyGAARwhereSAARisapplicable.Itisasettledprinciplethat,whereaspecificruleisavailable,ageneralrulewillnotapply.SAARnormallycoversaspecificaspectorsituationoftaxavoidanceandprovidesaspecificruletodealwithspecifictaxavoidanceschemes.

AspertherecommendationsoftheExpertCommitteeonGAAR,wherethetreatyitselfhasantiabuseprovisionsin the formofanLimitationofbenefitclause (LOB) (as in thecaseof IndiaSingapore tax treaty), theGAARprovisionsshallnotapplyoverridingthetreaty.

Thus,GAARshouldnotbeasubstituteforSAAR.Itshouldbeinvokedonlyasaresidual,tofortifytheSAARs,andonlyinthecaseofabusivetransactions.Therefore,clearexamplesshouldbeprovidedconfirmingthatwhereLOBexists inataxtreaty,GAARwillnotbe invoked.Also itmaybeclarifiedthatwhereSAARprovisionsareprovidedunderthetaxtreatiesand/ordomestictaxlawsthesameshouldprevailoverGAAR.

• A distinction between taxmitigation and tax avoidance should bemade to ensure that legitimate businesschoicesdonotresultintheinvocationofGAAR.Toensureclarity,asrecommendedbytheShomeCommittee,anillustrativenegativelistofsuchinstanceswhereGAARcannotbeinvokedshouldbeissued.

• DetailedillustrationsmustbegiventhroughGuidelines/CircularstoappropriatelyclarifytheprovisionsofGAAR.Illustrativeexamplesof situationswhereGAARcanand cannot apply shouldalsobe formulated inorder toprovide clarity to the taxpayers.

• InalignmentwiththeintentoftheGovernmentasmentionedbytheHon’bleFinanceMinisterinhisUnionBudgetSpeechfor2015-16,inordertoensurecompleteclarity,thelawshouldbeamendedtoclarifyunequivocallythatallinvestmentsmadeupto31March2017shouldbegrandfatheredtomakeGAARtrulyprospective.

• Provisionsforavoidingthetaxationofthesameincomeinthehandsofthesametaxpayeracrosstaxyears,iftheGAARprovisionsareinvokedaremissingintheamendmentsbroughtinsofar.

It is recommended that provisions should be enacted in a manner which would ensure that the same income is nottaxedtwiceinthehandsofthesametaxpayerinthesameyearorindifferentAYs.


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4.12. Tax Incentives and Benefits -¬ Section 35AD

4.12.1. Profit Linked Incentives for specified industries vis-a-vis Investment-Linked Incentives

Section35ADof theAct,extends investment linked incentives to taxpayerswith respect to thecapitalexpenditureincurredforsettingupandoperationofspecifiedbusinesses.Further,onceinvestmentlinkedincentiveforthecapitalexpenditureisavailedunderthissection,nobenefitshallbeallowedinrespectofsuchspecifiedbusinessunderChapterVI-A(Deductionsinrespectofcertainincomes)andsection10AAoftheAct.

Issue

• DeductionunderSection35ADisanalternateformofaccelerateddeductionforthecapitalexpenditureinthespecifiedbusiness.However, thecashflowsof thesecapital intensive industriessufferonaccountof levyofMAT.This isbecausebookprofitscontinuetobehigherthantaxableprofits(giventhatdeductionforcapitalexpenditureisnottakentotheprofitandlossaccountotherthanintheformofdepreciation)andhence,MATispaidbytheindustryduringtheincentiveperiod.WhileMATiscreditableagainstnormaltaxesinfuture,theperiodforrecoveryofMATpaidcouldresultinbeinglongerthanunderprofitlinkedincentives.Further,giventherestrictionontheyearsforcarryforwardofMAT, it ispossiblethatMATpaid in initialyearsmaynotberecovered,especiallyforthosetaxpayerswhohavealongerperiodbeforereachingbreak-even.

Recommendations

• Theprofit-linkedincentivescurrentlygivenforinfrastructureandcrucialsectorsshouldbecontinuedtilltheendof12thFiveYearPlani.e.till2017toencourageinvestmentandgrowthofIndia’sinfrastructuresector.

• Withthegovernments‘MakeinIndia’campaign,therewouldbeaneedtobringundertheambitofdeductionofSection35ADmoresectorstofurtherstrengthentheindustrialbaseofthecountry,fore.g.thesteelindustrybeingahighcapitalintensiveindustry,capitalexpenditureshouldbeallowedasadeductionontheamountofexpenditure incurred.

• ItshouldbeconsideredtodoawaywithMATfortheinfrastructureindustryaslevyofthesamedefeatstheverypurposeofextendingtaxincentivestotheindustry,especiallygiventhehighrateofMATnow.

4.12.2. Dilution of Tax Incentive under Section 35AD by insertion of Section 73A of the Act

Issue

• TheunderlyingideabehindallowingtheinvestmentlinkedincentivegrantedunderSection35ADoftheActistoenablethetaxpayertoset-offthebusinesslossesincurredbythiswrite-offagainstthetaxableprofitsfromtheirexistingbusinessesandreducetheirtaxliabilityintheyearofdeductionandtherebytoprovidepartoftheresourcesofinvestmentrequiredforsettingupofthebusinesses.However,theincentivesointendedcannotbeachievedowingtotheinsertionofSection73AoftheAct,whichrestrictstheset-off/carryforwardoflossesbyspecifiedbusinessonlyagainsttheprofitsandgains,ifany,ofanyotherspecifiedbusinesscarriedonbythetaxpayerinthatAYandtheamountoflossnotsoset-offcanonlybecarriedforwardandset-offagainstprofitsfromspecifiedbusinessinthesubsequentAYs.

Recommendation

• The losses from the specifiedbusinessunder Section35ADof theActought tobemadeeligible for set-offagainstprofitsfromotherbusinessesofthetaxpayer,andnotrestrictedtobeset-offagainstonlythespecifiedbusinesses,asitisnotalwaysthecasethatthetaxpayerwouldonlybecarryingonthe‘specifiedbusiness’.Inlightoftheabove,section73AoftheActshouldthereforebedeleted.


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4.12.3. Clarification on amendment to Section 35AD(3) of the Act

Issues

• ItappearsthattheaboveamendmenttoSection35AD(3)oftheActcarriedbytheFinanceAct,2010,seekstopreventataxpayerfromclaimingdualdeductioninrespectofthesamebusiness.

• Accordingly,itappearsthatifataxpayercarryingonaspecifiedbusinessdoesnotclaimdeductionundersection35AD,hemayoptfordeductionundertherelevantprovisionsofChapterVI-AorSection10AA,ifthesameexistforsuchbusinessanditismorebeneficial.

Recommendations

• Aclarificationshouldbeissuedthatthetaxpayermayexerciseanoption(whereavailabletothetaxpayer)toavailtaxincentiveundersection35ADorChapterVI-A/Section10AAoftheAct,dependinguponwhichismorebeneficialtothetaxpayer.

• Further,itissuggestedthataclarificationmayalsobeissuedthatintheeventthetaxpayeroptsfortheinvestmentlinkedincentiveunderSection35ADoftheActandthesameisdenied/rejectedattimeofassessmentproceedings(couldbeonaccountofnon-satisfactionofprescribedconditions),insuchcasethetaxpayeriseligibletomakeanalternativeclaimunderChapterVI-AorSection10AA,onsatisfactionof theconditionsprovidedtherein,notwithstandingtherequirementstipulatedinSection80A(5)oftheActor10AAoftheAct.Thisisbecause,ataxpayerwhoisotherwiseentitledtodeductioninrespectofqualifyingprofitsofthespecifiedbusinesswouldlosesuchdeductiononaccountofSection80A(5)oftheActthatmandatesaclaimfordeductionunderchapterVI-Abemadeinitsreturnofincome.AsthetaxpayerwouldnothaveclaimeddeductionunderprovisionsofChapterVI-A/Section10AAoftheActinitsreturnofincomesinceclaimwasmadeunderSection35ADoftheAct,suchtaxpayerwouldbeprecludedfromclaimingdeductioninviewofSection80-A(5)/Section10AAoftheAct.

4.12.4. Investment Linked Tax Incentive under Section 35AD is a Restrictive Tax Incentive

Issues

• Section35ADoftheActextendedinvestmentlinkedtaxincentivetoataxpayerengagedinbuildingandoperatinganywhereinIndiaa2-starorabovecategoryhotel.Thesameisarestrictivetaxincentivetotheindustryasonlysuchtaxpayersareeligiblewhichareengagedinbothbuildingandoperatingthehotel.Similarrestrictionexistsforthehospitals,whereinthetaxincentiveisavailablefor‘buildingandoperating’anywhereinIndiaahospitalwithatleast100bedsforpatients.’

• Thereafter,videFinanceAct,2012w.e.f.1stApril2011,anewsection35AD(6A)oftheActwasinserted,whichextendedinvestment linkedtax incentivetoataxpayerengagedonly in ‘building’hotel(andtransferringtheoperation to another person). However, similar benefitwas not extended for taxpayer engaged in buildinghospital.

• AscanbeseenfromaplainreadingofSection35ADoftheAct,itappearsthatthebenefitunderthesectionwouldnotbeavailableincasethepersonbuildingthehospitalisdifferentfromthepersonoperatingit.Thisdoesnotseemtobeinharmonywiththeobjective,specificallygiventhetypicaloperatingstructureoftheindustrywhereinveryoftenthedeveloperorbuilderofthehospitalisdifferentfromthetaxpayerwhoisoperatingandmanagingthehotel/hospital.Considering,thesaidanomalywasremovedbytheFinanceAct,2012,videSection35AD(6A) forhotel industrybygranting investment incentivetoabuilder (thoughnotoperatingthehotel),similarbenefitoughttobeextendedtoahospitalindustry.


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• Further,ifapersondoesnotbuildthehotel/hospital,butacquiresthesamebypurchaseorrentorotherwiseforpurposesofoperationandmanagementthereafter,suchtaxpayerwouldnotbeentitledtothebenefitsofthissection.

• Ifanyassetforwhichsuchdeductionisallowed,isusedforotherthanthespecifiedbusiness,beforetheperiodofeightyearsaftertheassetacquisition,thensuchdeductionallowed,asreducedbytheamountofdepreciationallowableasifnodeductionunderthisSectionwasallowed,shallbedeemedtobethebusinessincomeofthetaxpayer of the FY in which the asset is so used.

• Currently,therearenobenefitsavailableforrural/semi-urbanhealthcareinfrastructure(otherthanforbuildingandoperatinghospitalswithatleast100bedsundersection35AD).

Recommendations

• In view of the above discrepancy, a clarification is required and it is suggested that the relevant clause beamendedtoreadasunder:

“(aa) on or after 1st day of April,2010,wherethespecifiedbusiness is inthenatureofbuildingoroperatingorbuildingandoperatinganewhotelof two-starorabovecategoryasclassifiedby theCentralGovernment.”

Similar amendment is also recommended for the hospital sector and the relevant clause be amended toreadasunder:

“(ab)onorafter1stdayofApril 2010, where the specified business is in the nature of building or operating or building and operating a new hospital with at least one hundred beds for patients”

• Consequentialamendmentsshouldalsobeconsideredinclause(iv)and(v)ofsub-Section(8)(c)ofSection35ADof the Act.

• Theconditionofnon-transferabilityoftheassetshouldbereducedtoatleastfouryearssinceevenusageoftheassetforfouryearsindicatethatthetaxpayerintendedtousetheassetforthespecifiedbusiness.Higherperiodofnon-transferabilityputsrestrictiononthetransferofindependenceofthetaxpayer’sbusinessdecisionandtherefore,willprovetobecounter-productivetothebusinessgrowth.

• Itshouldbeclarifiedthatifanassetisnotusedforthespecifiedbusinessduetoobsolescence,etc.andatthesametimenotusedinanyotherbusiness,thenthedeductionallowedunderthisSectionshallnotbereversed.

• It is recommendedthattheweighteddeductionof150%beextendedandmadegenerallyapplicabletotheentire listofbusinesscovered in theSection35ADsinceall thesaidbusinessesareextremely important forthe Indianeconomy likenaturalgas/crudepipe linedistribution,hotelsetc.Thiswouldhelp to remove thediscriminatorytaxtreatmentbetweenvariousspecifiedbusinesses.

• It is suggested that a weighted deduction for healthcare infrastructure expenditure (other than hospitals)incurred in rural/ semi urban areas should be also provided.

4.12.5. Tax Incentives - Weighted Deduction under Section 35(2AB) and 35(1)(iia)

Issues

• No deduction under section 35(2AB) of the Actwill be allowed for expenditure incurred towards scientificresearchafterMarch31,2017.InordertoencourageresearchinitiativesbyIndiancorporates,thebenefitfordeductionundersection35(2AB)oftheActshouldbeextendedbeyondMarch2017.


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• Section35(2AB)oftheActextendsdeductionofasumequaltotwicetheexpenditureincurredtowardsscientificresearch on in-house research and development facility as approved by the prescribed authority to companies engagedinthebusinessof

– bio-technology;or

– manufactureorproductionofanyarticleorthing(otherthanthosespecificallyexcludedforpurposesofthistaxincentive).

• The aforesaid Sectionextends theweighteddeductionof expenditure incurredonly in respectof “in-houseresearch and development facility”. India is globally recognised as an attractive jurisdiction for outsourcingowingtoitsaffordable,skilledandEnglish-speakingmanpower.OutsourcedR&DworkisbecomingakeyareaofgrowthfortheIndianservicessectorhowevertherearenospecifictaxbenefitsavailabletounitsengagedinthebusinessofR&Dorcontractmanufacturing.Therecertainlyexistsaneedtoprovideimpetustosuchactivitiesintheformoftaxandfiscalbenefits.

• Further,specificallyinthepharmasector,pharmaceuticaldiscoveryisalengthy,riskyandexpensiveproposition.Inthisbusinessenvironment,necessitatedbythecurrentbusinessneeds,sometimescompaniesincurexpensestowardsscientificresearchoutsidetheirR&Dfacility.

• AnotheranomalyexistinginthecurrentprovisionsisthatanyexpenditureincurredoutsidetheapprovedR&Dfacilitybypharmacompanies’i.e.towardsclinicaltrials(includingthosecarriedoutinapprovedhospitalsandinstitutionsbynon-manufacturingfirms),bioequivalencestudiesconducted inoverseasCROsandregulatoryandpatentapprovals,overseastrials,preparationsofdossiers,consulting/legalfeesforfilingsinUSAfornewchemicals entities (NCE) and abbreviated newdrug applications (ANDA) as approvedby theDepartment ofScientificandIndustrialResearch(DSIR)whicharedirectlyrelatedtotheR&D,etc.arecurrentlynotcovered.Furthermore,IndiancompaniesincursubstantialcostsindefendingtheirpatentrightsandapplicationsinandoutsideIndiaandthesesumsarenoteligiblefordeduction.

Recommendations

• It isrecommendedthatthebenefitofdeductionundersection35(2AB)oftheActmaybeextendedbeyondMarch 31, 2017.

• It is suggested toextend taxbenefits tounitsengaged in thebusinessofR&Dorcontractmanufacturing toprovideimpetustoR&DinIndia.

• Presently,therearenospecificprovisionswhichenablecarryforwardofR&Dbenefitsseparately.ConsideringthetimetakeninR&Dactivity,anditsbenefitavailableafteraverylonggap,itissuggestedthatitshouldbeclarifiedthattheunutilizedR&Ddeductionshouldbeavailableforcarryforwardandsetoffindefinitely(asinthecaseofunabsorbeddepreciation).

• BenefitsshouldbeprovidedforunitsengagedinthebusinessofR&Dandcontractmanufacturingbywayofdeductionfromprofitslinkedtoinvestments.Benefitsintheformofresearchtaxcreditswhichcanbeusedtooffsetfuturetaxliability,similartothosegivenindevelopedeconomiescanalsobeintroduced.

• It is furthersuggestedthattheexistingprovisionsshouldspecificallyallowweighteddeduction inrespectofexpensesincurredoutsidetheR&Dfacilitywhicharesometimesnecessitatedbytheindustry’sbusinessneeds.Additionally,itcouldbeclarifiedthatwheretheriskofdoingresearchisassumedbyacompany,theentirecostofR&Dactivities(whetheroutsourcedorundertakenin-house)iseligibleforweighteddeductioninthehandsofcompanyundertakingtherisk.


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Issues

• Currently, there seems to be an ambiguitywith respect towhether a company engaged in the business ofdevelopmentandsaleofsoftwareorprovidingITservicesorITESiseligibleforweighteddeductionontheR&Dexpenditure incurred by it.

• Currently, as perDSIR guidelines amount spent by a recognized in-houseR&D towards foreign consultancy,buildingmaintenance,foreignpatentfilingetc.arenoteligibleforweighteddeductionunderSection35(2AB)oftheAct.SuchexpensesareessentialincarryingoutresearchattheapprovedR&Dcentres.

Recommendations

• ExplicitprovisionsshouldbeintroducedintheAct,toprovidethatDSIRcanapprovetheR&Dfacilitiesofthecompaniesengagedindevelopmentandsaleofsoftware.ItisfurtherrecommendedthatweighteddeductionforR&Dexpenditurebeextendedtoservicesectoraswell.

• It is further suggested thatDSIRguidelinesneed tobemodifiedaccordingly to specifically includeexpenses(suchasforeignconsultancy,buildingmaintenance,foreignpatentfilingetc.)forclaimingweighteddeductionunderSection35(2AB)oftheAct.

Issue

• TheDSIRguidelinesprovidethateligiblecapitalexpenditureonR&Dwillincludeexpenditureonplant,equipmentoranyothertangibleitemonly.Italsoprovidesthatcapitalexpenditureofintangiblenatureisnoteligibleforweighteddeduction.

Recommendations

• ItisrecommendedtoprovideweighteddeductionforexpenditureincurredoninternallydevelopedintangibleassetsunderSection35(2AB)oftheAct.

• ItisalsorecommendedthatanyinitialcostpaidforacquiringR&Drelatedintangibleassets,whichareusedintheR&DunitshouldalsobeallowedforweighteddeductionunderSection35(2AB)oftheAct.

Issue

• Section35(2AB)hasbeengraduallyamendedtoprovideincreasedtaxbenefitsonexpenditureincurredtowardsin-houseR&Dfacilities i.e. from125%to200%.However,Section35(1)(iia),whichprovidestax incentives inrespectofpaymentsmadetoR&Dcompany,hasremainedfixedat125%.Infact,theconditionsspecifiedbytheDSIRforgrantofapprovalforarecognizedR&Dfacility/companyunderSection35(2AB)andSection35(1)(iia)oftheActrespectivelyarethesameandhence,thetaxbenefitsprovidedunderSection35(1)(iia)oftheActshouldbeatparitywiththetaxbenefitsprovidedunderSection35(2AB)oftheActintermsofquantumofbenefits.

Recommendation

• InordertobefairbetweenanR&DcompanyrecognizedbyDSIRunderSection35(1)(iia)andanin-houseR&DfacilityunderSection35(2AB),thetaxbenefitsunderSection35(1)(iia)shouldbeincreasedto200%fromthepresentlevelof125%.

4.13. Carry back of Losses - Section 72

Issue and Recommendation

• Itishasbeenobservedthatprovisionsrelatingtocarry-backofbusinesslossesareprevalentinmanydevelopedcountrieslikeUnitedStatesofAmerica,Singapore,UnitedKingdometc.Incaseofcarrybackoflosses,lossesareallowedtobeoffsetwiththeprofitsofthepreviousyears.


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Such provisions should also be introduced in the Act and carry back of losses up to 3 to 5 years should be allowed.

4.14. Deduction under Section 80JJAA of the Act

TheFinanceAct,2015hasextendedthedeductionundersection80JJAAoftheActtoallassesseesderivingprofitsfrommanufacturingofgoodsinfactorywhichwaserstwhilerestrictedonlytoIndiancompanies.

“Additionalwages”tomeanthewagespaidtothenewregularworkmeninexcessof50(erstwhileitwas100)workmenemployedduringthepreviousyear.

Issues

• Thedeductionunder section80JJAAof theAct is not available to companies engaged in the service sectorirrespectiveofthesamebeingmajorcontributorofemploymentintheIndianeconomy.

• Wagesarenotdefinedunderthissection.

• Oneoftheconditionsstipulatedbythesectionisthatnewworkmanshouldbeemployedforaperiodofthreehundreddaysormoreduringthepreviousyearofemployment.Inasituation,whereworkmanjoinedinJulyandworkedtillMarchoftherelevantpreviousyearofemploymenti.e.workedforlessthan300daysinYear1butforfullyearinYear2andYear3andassumingallotherconditionsprescribedinSection80JJAAoftheActarecompliedwith,thecompanyisstillnoteligibletoclaimdeductioninanyoftheyears.

• Incaseofanexistingundertakingthe10percentincreaseinthenumberofregularworkmeniscalculatedasapercentageofexistingnumberof‘workmen’andnot‘regularworkmen’asonthelastdayoftheprecedingyear,whichminimizesthechancesoffallingwithintheeligibilitycriteriaof10%.

Recommendations

• ItisrecommendedthatthebenefitofdeductionunderSection80JJAAshouldbeextendedtoassesseesengagedinprovidingservices.ItwillprovideimpetustothegrowthoftheserviceindustryinIndiaandwillalsogenerateemploymentopportunities.

• Thecomponentsofwagestobeconsideredforthepurposeofcomputationofdeductionunderthissectionshouldbeclearlydefined.

• It is recommended that appropriate clarification should be introduced with respect to grandfathering ofallowabilityofdeductionincaseofamalgamation/merger/demerger.

• Workmen in respectofwhomtheperiodof continuousemploymentof300daysormore isattained in thepreviousyearsucceedingthepreviousyearinwhichtheworkmenisemployed,thedeductionundersection80JJAAoftheActshouldbegrantedfromthesucceedingpreviousyear.

• Forthepurposeofcalculatingthepercentageincreaseinthenewregularworkmenemployedduringayear-asperprovisotoclause(i)ofExplanationtoSection80JJAA-parityshouldbemaintainedi.e.onlytheexistingnumberof‘‘regularworkmen”asagainstall‘workmen’employedasonthelastdayofthepreviousyearshouldbe considered as a base.

4.15. Definition of Association of Persons (AOP) to be modified - Section 2(31)

Issues

• ThetermAssociationofPersons(AOP)hasnotbeendefinedintheAct.AsperSection2(31)oftheAct,‘person’includes,inter-alia,associationofpersonsorbodyofindividuals,whetherincorporatedornot.Explanationto


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Section2(31)oftheAct furtherprovidesthatanAOPshallbedeemedtobeaperson,whetherornotsuchpersonorbodywasformedorestablishedorincorporatedwiththeobjectofderivingincome,profitsorgains.

• Since the definition is not provided by the statute itself, one has to refer to the legal jurisprudence forunderstandingthemeaningofterm‘AOP’whichresults inunwarranteddlitigationandsubjectivity.Recently,theDelhiHC in thecaseof LindeAG, LindeEngineeringDivisionandAnrvsDDIT (W.P.no3914/2012)heldthatapartfrompresentinga‘commonface’asmembersofaconsortium,highlevelofcommonmanagement,elementofmutualagencyandjointactionformutualpurposeisalsonecessarytoformanAOP.Theessentialcharacteristics of anAOPflowing from the various judicial precedents including this recent decision can beillustratedasfollows:-

– Twoormorepersonsjointogetherorassociatetogether;

– Thepartiesshouldcometogetheroutoftheirownfreewill(outofvolition);

– Theassociationshouldbeforcommonpurposeorcommonaction;

– Mutualrightsandobligations;

– Incurrenceofcommonexpenditure;

– Thereshouldbejointexecutionand/orsupervisionofthework;

– Possibilityofreassignmentofworkamongstmembers;

– Somekindofschemeforcommonmanagement.

• WhetheranAOPisconstitutedornotwouldhavetobedecidedonaconjointreadingandanalysisoftheabovefactorstothefactsandcircumstancesofthecase.NoonefactorcanbesaidtobedecisivefordeterminingAOPand the priority of the factors is also not laid down in law.

Recommendation

• ItissuggestedthatthetermAOPmaybeappropriatelydefinedtolaydowntheessentialaspectsforconstitutinganAOP.Thiswouldprovidesomecertaintyandhelptoreducelitigationfortheconsortiumsformedbynon-residents to execute contracts in India.

Issues

• AlargenumberofbiginfrastructurecontractsareawardedbyPublicSectorUndertakings/Governmentcompaniestonon-residents.Manydevelopersalsorequirecontractorstobidinaconsortiumwithaviewtoensurethatspecificcomponentsoftheprojectgetexecutedbyanearmarkedcontractorwhohasrequisitecapabilitiesinthisregardandyet,derivethecomfortthattheentireproject(comprisingofseveralparts)willbesuccessfullycommissionedbytheconsortiumofcontractors,althougheachcontractorwillbeexecutingitsspecificpartonly.Theconsortiummembers/contractorsundertake their respectivescopeofworkseparately/ independentofeachotheranddonotshareprofits/losseswitheachother.Further,thereisaseparateconsiderationearmarkedforeachcontractorandthepaymentismadedirectlytorespectivecontractorbythecustomer.Thus,contractorsenterintoconsortiumandagreetojointlyundertaketheworkforbetterco-operationintheirrelationshipwiththe developer/ provide comfort to developer and for no other purpose.

Consequently,theintentionbehindconsortium/contractsplitarrangementsisnevertoconstituteapartnership/AOPbuttomeetthebusinessrequirementsofthedeveloper.


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• Withaviewtoprovideclarificationinthisregard,CBDThadissuedinstructionno1829datedSeptember21,1989,wherein,itwasclarifiedthatcompaniesformingtheconsortiumforexecutionofpowerprojectsonturnkeybasiswillnotconstituteanAOPundertheActandoffshoresupplyofgoodsbynon-residentcontractorsengagedinexecutionofturnkeyprojectsshallnotbeliabletotaxinIndia,ifthetitletothegoodsistransferredoutsideIndia.However,intheyear2009,thesaidinstructionwaswithdrawnonaccountofmisuseofsuchinstructionbyvarious non-residents.

• TheprinciplesoutlinedintheaforesaidinstructionhavealsobeenacceptedbytheSupremeCourtinthecaseof Ishikawajima-HarimaHeavy Industries Ltd andHyundaiHeavy IndustriesCo. Ltd. (2007) 161Taxman191(SC). Further,DelhiHC in thecaseof LindeAG, LindeEngineeringDivisionandAnrvsDDIT (supra)hasalsofollowedtheaforementionedprinciplesandheldthatoffshoresupplyofgoodsbynon-residentcontractorsarenottaxableinIndia,ifthetitleofsuchgoodsistransferredoutsideIndia.TheHCfurtherheldthatiftheoffshoreservicesareinextricablylinkedtosuchoffshoresupplies,thensuchservicesarenottaxableinIndia.

• However, the RevenueAuthorities are taxing such non-residents as AOP at thewithholding tax/assessmentprocedurestageonthebasisofafewfavourableAARrulingsandwithdrawaloftheabovementionedcircular.Furtherinthisregard,therearevarioustaxcomplexitiesthatareassociatedwithassessmentsofAOP,includingdoubletaxationofnon-residentsinIndiaandtheircountryofresidence(withnopossibilityofdoubletaxationbeingavoided). The saidpositionof theRevenueAuthorities is causinghardship to the industryand is alsoresultinginpessimismasregardstheuncertaintaxenvironmentinIndia.LargeamountofworkingcapitalisalsogettingblockedupinTDS/paymentoftaxdemandsconsequenttocompletionofassessments.

Recommendation

• Inlightoftheabove,itisstronglyrecommendedthattheaforementionedinstructionshouldbereissuedandtheclarificationbemadeapplicabletotheinfrastructuresectorandEPCcontracts.Thereissuanceofthe“1989clarification”wouldgoalongwayininstillingconfidenceamongstthenon-residentcontractorsasregardsthestability/fairnessoftheIndiantaxregime,which,inturn,wouldalsoencouragenon-residentcontractorstosetuptheirmanufacturinghubsinIndiaandtherebyresultinamultipliereffectontheIndianeconomy.

4.16. Non-resident related provisions

4.16.1 Provisions regarding Indirect Transfer of Capital Asset situated in India

Explanation5toSection9(1)(i)oftheAct,whichwasintroducedbytheFinanceAct,2012providesthatashareoraninterestinacompanyorentityregisteredorincorporatedoutsideIndiashallbedeemedtobesituatedinIndia,iftheshareorinterestderivesitsvaluesubstantiallyfromtheassetslocatedinIndia.

TheFinanceAct, 2015hasamendedprovisionsdealingwith indirect transferof capital asset situated in India. Theamendmentprovidesclarityoncertaincontentiousaspectswithregardstotaxationofincomearisingoraccruingfromsuchindirecttransfers.ThefollowingamendmentshavebeenintroducedintheAct.

• ShareorinterestinaforeigncompanyorentityshallbedeemedtoderiveitsvaluesubstantiallyfromIndianassetsonlyifthevalueofIndianassets(whethertangibleorintangible)asonthespecifieddateexceedstheamountofINR10croresandrepresentsatleast50%ofthevalueofalltheassetsownedbytheforeigncompanyorentity.

• ThevalueofanassetshallbeitsFairMarketValue(FMV).

• Thedateofvaluationofassets(withoutreducingtheliabilities)shallbeasattheendoftheaccountingperiodprecedingthedateoftransfer.However,incasethevaluationofassetsasonthedateoftransferexceedsbyatleast15%ofbookvalueoftheassetsasonthedateonwhichtheaccountingperiodofthecompany/entityendsprecedingthedateoftransfer,thenthespecifieddateshallbethedateoftransfer.


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• Exemptionfromapplicabilityoftheaforesaidprovisionhasbeenprovidedinthefollowingsituations:-

o Wherethetransferoralongwithitsrelatedpartiesdoesnothold(i)therightofcontrolormanagement;(ii)thevotingpowerorsharecapitalorinterestexceeding5%ofthetotalvotingpowerortotalsharecapitalintheforeigncompanyortotalinterestintheentitydirectlyholdingtheIndianassets(HoldingCo).

o IncasewheretheIndianassetsarenotdirectlyheld,thenifthetransferoralongwithrelatedpartiesdoesnothold(i)therightofmanagementorcontrolinrelationtosuchforeigncompanyortheentity;and(ii)anyrightsinsuchforeigncompanywhichwouldentitleittoeitherexercisecontrolormanagementoftheholdingcompanyorentitleittovotingpowerexceeding5%intheholdingcompany.

• TheFinanceAct,2015hasintroducedSection47(vicc)intheActwhich,subjecttofulfillmentofcertainconditionsprovidesthattransferofsharesofaforeigncompany(whichdirectlyorindirectlyderivesitsvaluesubstantiallyfromsharesofanIndiancompany)bythedemergedforeigncompanytotheresultingforeigncompanyunderaschemeofdemergerwillnotberegardedastransfer.

• TheIndianentitywillberequiredtofurnishinformationrelatingtoindirecttransfers.Incaseofanyfailure,theIndiancompanywillbeliableforapenaltyofINR500,000or2%ofthevalueofthetransactionasspecified.

Issues and Recommendations

• Retrospective amendments havingmajor impact have been introduced in 2012 in the nameof clarificatoryamendments.Inreality,theyaresubstantiveamendmentsanditwasunfairthattheamendmentsweremaderetrospectiveeffectivefrom1April,1962.

FICCIisoftheviewthattheGovernmentshouldmaketheamendmentprospectiveoratleastmayannouncethatthefollowingdefaultconsequenceswilloperateprospectively:-

– Interestlevyondemandarisingasaresultofamendmentshouldberestrictedtoprospectiveperiod.

– Nopenaltyproceedingsmaybeinitiatedinrespectofallegedunderstatementofincome.

– Taxwithholdingobligationshouldbeappliedprospectively.

– Payerofincomeshouldbeconsideredasarepresentativeassesse,onaprospectivebasis.

• Bywayofamendment,50%ofthevaluehasbeenfixedtointerpret“substantialvalue”derivedfromIndiawhichaccordswiththe internationalunderstanding. Thisamendment ismadeapplicablefrom1April2016.Thereappearstobenoreasonwhytheparameterfor“substantialvalue”shouldnotbemadeapplicabletopendingproceedings,sothatatleastthetaxpayersmaynothavetostruggleontheinterpretationasmaybeadoptedinassessments as may pertain to past years. Hence, it is recommended that the said amendment should also apply retrospectively.

• “Explanation 5 to Section 9(1)(i) clarifies that an asset or a capital asset being any share or interest in acompany…………”.WhetherallandanytypeofassetwillbecoveredbythisExplanationorwhetheritwillberestrictedtoonlycapitalassetinthenatureofshareorinterestinanentity.Therefore,clarityisrequiredoninterpretationofthisphrase.

• Thereisnoclarityonthephrase‘assetslocatedinIndia’mentionedinExplanation5toSection9(1)(i)oftheAct,giventhatthefollowinginterpretationsarepossible:

– WhetherthesectionreferstosharesofanIndiancompanyasassetslocatedinIndia;or

– WhetheritisreferringtotheassetsownedandheldbytheIndiancompanywhetherinIndiaoroutsideIndia.


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Clarificationshouldbeprovidedforthephrase‘assetslocatedinIndia’mentionedinExplanation5toSection9(1)(i)ofthe Act.

• ValuecomparisonyardstickrecommendedbyShomeCommitteeispragmaticandmaybeadopted.

• AspertherecommendationsmadeinthereportreleasedbytheCommitteeheadedbyDr.Shometoexaminetheprovisionsrelatingtotaxationofindirecttransferofassets,thecomparisonbetweenIndiaassetvalueandvalueoftargetentitywhichistransferred,shouldbebasedoncommercialprinciplesaftertakingintoconsiderationtheliabilitieswhichmayhavebeenincurredbyallcompanies.Ifthisrecommendationisaccepted,thevaluecomparisonwillbecomelogical.

• Theintentofthelawistocapturethisgainifitisenclosedwithinanindirecttransfer(insteadofadirecttransfer)andthe Indiaassetvalue issubstantialatmorethan50%.For thiscomparison, the fairvalueof thesubjectmatterofindirecttransfershouldalsobedeterminedaftertakingliabilitiesintoaccount.Thecommercialdealisunlikelytoignoretheliabilities.

• Givenitslanguage,Explanation6tosection9(1)(i)oftheActispronetoserioustaxlitigationonitsinterpretation.Ignoring liabilities can lead todistortionof values - Explanation6 to section9(1)(i)of theAct, asproposed,requiresthatthefairvalueshouldbedeterminedwithoutreducingtheliabilities.Itissubmittedthatignoringliabilitieswhichareincurredintheconductofbusinessmaydistortthecomparisonofvaluessubstantially.

• ValuationMethodology–GuidingPrinciples

ThevaluationofsharesinthecontextoftheindirecttransferprovisionsposesseveralpracticalaswellaslegalchallengeswhichshouldbeappropriatelyaddressedintheRules.Thesuggestionsinthisregardarebasedonthreefundamentalprinciples:

(i) Theidentifiedmethodologymustbeobjectiveandshouldminimisethepossibilityofdisputesonvaluation.

(ii) Themethodologymustbesuchthatthevaluationcanbeeasilyundertakenbasedoninformationthatiseither readily available with or easily ascertainable by the taxpayer.

(iii) Theneedfortaxpayerstoobtaininformationnecessaryforthevaluationmustbeappropriatelybalancedbytheneedforforeigncompaniestocomplywithapplicablesecuritieslawsandtheirneedtomaintaintheconfidentialityofcompetitivebusinessinformation.

• ValuationofassetslocatedinIndia

Iftheassets locatedin IndiacompriseofsharesofanIndiancompany,theirvaluationbeundertakenonthefollowingbasissoastoensurecertaintyandminimiselitigation:

(i) IncaseswherethesharesoftheIndiancompanyarelisted,theclosingmarketpriceofsuchsharesonthespecifieddatemustbetakenastheirvalueforthepurposesofExplanation6.

(ii) In cases where the shares of the Indian company are not listed, we submit that the Discounted Cash Flow (DCF)MethodshouldbeadoptedasthesolebasisfordeterminingthevalueofIndianshares.Thiswillbeinlinewithinternationallyacceptednormsofvaluation.

Valuationofallassetsownedbytheforeigncompany

UnderSection9(1)(i)readwithExplanation6,sharesofaforeigncompanyaredeemedtobesituatedinIndiaifthevalueofassetslocatedinIndiarepresentsatleast50percentofthevalueofallassetsownedbytheforeigncompanyorentity.


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Aliteralreadingofthisprovisionsuggeststhatthefairvalueofallassetsownedbytheforeigncompany/entitywouldhavetobeundertakeninordertodeterminewhetherthe50percenttestissatisfied.Itissubmittedthatsuchareadingwillcauseseriouspracticaldifficulties.Giventhatmostcompaniesownalargenumberofdiverseassets,avaluationexercisethatrequiresallassetstobe identifiedandindividuallyvaluedcouldprovetobehighlyimpractical,ifnotimpossible.

Therefore,theRulesshouldprovidethatthevalueofallassetsoftheforeigncompanyforthepurposesExplanation6 should be taken as the value of the company based on the price at which the shares are transferred (i.e. the transactionvalue).Thiswillensureobjectivityinthecomputationandminimisethepotentialfordisputes.

Alternatively,inthecaseoflistedforeigncompanies,themarketcapitalisationcouldbeconsideredasthevalueoftheforeigncompany.Thistoowillprovideanon-contentiousandobjectivebasisofvaluation.

• Since theobjectiveof theamendment is to tax indirect transfer through shell companies, a listed companyshouldnotbeconsideredasashellorconduitcompany.ThesamewasalsosuggestedbytheShomeCommittee.

The non-exclusion of listed company shares from the ambit of the indirect transfer provisions will cause serious hardship to shareholders in several listed companies as well as pose several computational and practicalchallengesincaseswherefrequenttradingofsharestakesplaceonadailybasis.

Suchcasesalsoposesignificantchallengesfromthepointofviewofwithholding,giventhattheveryidentifyofthesellerisnotascertainable.Furtherchallengesexistinrespectofascertainingwhetherthesellerholdsmorethan5%ornot,whetherhequalifiesfortreatybenefits,hiscostofacquisitionetc.

Evenifoneweretotaketheviewthatwithholdingismerelyatentativedeterminationoftax,andissubjecttothecorrectdeterminationatthetimeofassessment,thepracticalchallengesinrequiringmillionsofinvestorsinstockmarketsaroundtheworldtoobtainaTANinIndia,deducttax,anddepositthesamewiththegovernment,andissueTDScertificateswithoutevenknowingtheidentityofthepersononwhosebehalfsuchtaxisdepositedaresimplymind-boggling.Further,therewouldbenobasisonwhichsuchbuyerscouldevenissueTDScertificatessincetheidentityofthesellerwouldnotbeknown.

TheExpertCommitteeundertheChairmanshipofDr.ShomeaswellastheParliamentaryStandingCommitteeon Finance (in the context of the Direct Taxes Code Bill, 2010) have also recommended exclusions for listed company shares.

Inviewoftheabove,indirecttransferprovisionsmustbesuitablymodifiedtoprovideforanadditionalexclusionfromcapitalgainsliabilityincasesoftransferofsharesofforeigncompanieswhicharelistedandregularlytradedonrecognizedstockexchangesabroad.Thecriteriaforrecognitionofstockexchangesandfordeterminationoftheregularlytradingthresholdmayalsobesuitablyclarified.

Ifthisapproachisnotconsideredfeasible,thefollowingtwoproposalsmaybeconsideredasanalternative:-

(i) A limitedexclusion for transfers that takeplaceon the stockexchange (asopposed toblanketexclusion forall listed shares). Such a provision will be similar to the domestic law exemption under Section 10(38) fortransactionstakingplaceonthestockexchange.

(ii) Exclusion fromwithholding in respectof all transactions in respectof listed securities.Given that thereareseriouspracticalchallengessetoutaboveonthewithholdingaspects,thiscouldprovidemuchneededrelief.

• TherearenoprovisionsintheActwhichexemptstheParticipatory-Note(P-Note)holdersfromtheapplicabilityof the provisions of indirect transfer on sale of P-Notes outside India.


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Therefore, it is recommended that the provisions should be made in the Act so as to explicitly exempt the P-NoteholdersfromtheapplicabilityoftheprovisionsofindirecttransfersoastoprovidecertaintytoForeignInstitutionalInvestors(FII)(whopaytaxesinIndiaontheirincomeearned/derivedinIndia)toencouragemoreforeigninvestmentsinIndia.

• Intra-grouptransfersaspartofgroupre-organizations(otherthanamalgamationanddemerger)shouldalsobeexempt from the indirect transfer provisions.

• WhileExplanation5toSection9(1)(i)oftheActprovidesthatsharesofaforeigncompanywhichderivesdirectlyorindirectlyitssubstantialvaluefromtheassetslocatedinIndiashallbedeemedtobesituatedinIndia.Section47(vicc)providesexemptiononlyifthesharesofforeigncompanyderivesubstantialvaluefromsharesofanIndiancompany. Whilethe intentmaybetoexemptallcasesofdemergerwhereforeigncompanyderivessubstantialvaluefromassetslocatedinIndia,thereadingofSection47(vicc)indicatesthatthesaidexemptionwouldbeavailableonlyincaseswherethesharesoftheforeigncompanyderivesubstantialvaluefromsharesofIndiancompany.DuetothisinconsistencyinthelanguageofSection47(vicc)vis-à-visExplanation5toSection9(1)(i), transferofsharesofa foreigncompanywhichderives itsvaluepredominantly fromassets located inIndia(otherthansharesofanIndiancompany)underaschemeofdemergermaybedeprivedoftheaforesaidexemption.Similarinconsistenciesalsoexitinthelanguageofsection47(viab)oftheAct.

ItisrecommendedthatSection47(vicc)shouldbeamendedtoprovidethat“anytransferinademerger,ofacapitalasset,beingashareofaforeigncompany,referredtoinExplanation5toclause(i)ofsub-section(1)ofsection9,whichderives,directlyorindirectly,itsvaluesubstantiallyfromtheassetslocatedinIndia,heldbythedemergedforeigncompanytotheresultingforeigncompany,if,—………………..“SimilaramendmentshouldalsobemadeinSection47(viab)oftheAct(i.e.incaseofamalgamation).

• TheonusofreportinghasbeencastontheIndianentity.Generally,theIndianentitymaynothaveinformationrelatingtooverseasindirecttransfer,therefore,theonusofreportingshouldnotbecastontheIndianentity.TheonusplacedontheIndianconcerntoreportcertaineventsortransactionundersection285AoftheActisimpracticaland/oronerousforthebelowreasons.

o ConsideringthattheIndianconcernhasexposuretoenormouspenalty.Theexposurecanmultiplyiftherearemultipleorrepetitivetransactionsduringthesameyear(includingstockexchangetransactions).Theexposurecouldthenbeashighas2%ofthevalueofeachtransaction.

o Itisquitelikelythat,exceptinsomeapparentcaseswhereIndiancompanyisdirectlyinvolved,theIndianCompanymaynothaveanyknowledgewhatever(or,maynothavepreciseoraccurateknowledge)abouttransactionsattheshareholderorupperlayerinthechain.Further,thereisnoneedforapresumptionthattheverticalchainstructureisnecessarilyataxavoidancegimmick,suchthatIndianconcerncanbepresumedtobeapartytosuchavoidance.Suchapresumptionmaynotonlybefactuallyincorrect,butmayalsoreflectaclimateofdistrustfortaxpayers.

• Considering,thattheprovisionsrelatetoindirecttransfers,theonus,ifatall,shouldbecastonthepartiestothetransactionandnottheIndianentity.Alternatively,thattherequirementshouldbemadeapplicableonlyinthosecaseswhereIndiancompanyisapartytothetransactionorhasfullknowledgeofthetransactionandyetthereisawillfulnon-disclosure.Asnextbestalternative,itmustbelimitedtoacasewherethetransactionresultsinchangeincontrolandmanagementofIndiancompany.

Also, the Finance Act, 2015, prescribes a threshold for applicability for the indirect transfer provisions. There shouldalsobeaminimumthresholdprescribedforreportingoftransactionsbytheIndianentity.


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• Theexpression“Indianconcern”mayhavedifferentmeanings.Itmayevenencompasspermanentestablishmentorotherformsofpermanentestablishmentsofaforeigncompany.Clarityneedstobeprovidedonthisaspectalso.

• Inthecontextofamalgamationsanddemergers,section47oftheActprovidesforexclusionfromcapitalgainstaxsubjecttocertainconditions.However,theseexclusionsareprovinginadequate,withincreasedcrossbordereconomicactivityandtransactions.

For instance, although specific exemptions are provided for under section 47 for companies which areamalgamated/demergedinanoffshoretransactionthatgivesrisetoindirecttransfertaxinIndia,nocorrespondingexemptionhasbeenprovidedtotheshareholdersofsuchcompanies.Thismaybecontrastedwiththepositioninrespectofdomesticamalgamations/demergerswhereexclusionisprovidedinsection47atboththecompanyand the shareholder level.

Similarly,noexemptionisprovidedforIndianshareholdersowningsharesinforeigncompanieswhichundergoanamalgamation/demerger.

Giventheabove,itisrecommendedthataspecificprovisionalongthelinesofsection47(vii)oftheActmaybeinsertedtoprotectshareholdersofforeignamalgamating/demergedcompany.Thesemustbeprovidedforinthe Act at the earliest.

4.16.2. Tax neutrality in case of Overseas Reorganization

Issues

• TheprovisionsoftheActareframedtoprovidetaxneutralityonlyincaseswheretheamalgamatedcompanyis an Indian company. Section47(vii) of theActprovides that a transferof sharesby the shareholderof anamalgamatingcompanywouldnotbeliabletocapitalgainstaxsubjecttothefollowingconditions:

– Thetransferismadeinconsiderationoftheallotmenttohimofanyshareorsharesintheamalgamatedcompany, and

– TheamalgamatedcompanyisanIndiancompany.

• Clearly,theaboveexemptionwouldbeallowedonlyincaseaforeigncompanyismergedintoanIndiancompanyandnotvice-versa.Inotherwords,ifanIndiancompanymergesintoaforeigncompanyandthepaymentofconsiderationtotheshareholdersofthemergingcompanyisincash,orinDepositoryReceipts,orpartlyincashandpartlyinDepositoryReceipts,asenvisagedinSection234oftheCompaniesAct,2013,theamalgamatingcompanyanditsshareholderswouldbesubjecttocapitalgainstaxinIndia.

• In theemergingglobal scenario it is important that themergerof Indiancompanies into foreigncompaniesshouldbelegallyrecognisedandmadepari-passuwiththemergerofforeigncompaniesintoIndiancompanies,particularlyforincometaxpurposes.

Recommendation

• ItissuggestedthattherequirementoftransfereecompanytobeanIndianCompanyunderSection47(vi)and(vii) of the Act should be removed.


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4.16.3. Review of Retrospective Amendments made by Finance Act, 2012

(a) Clarification on definition of software royalty – Section 9(1)(vi)

InSection9(1)(vi)of theAct,Explanation4hasbeen insertedwitheffect fromthe1 June1976,clarifying that thetransferofalloranyrightsinrespectofanyright,propertyorinformationincludesandhasalwaysincludedtransferofalloranyrightforuseorrighttouseacomputersoftware(includinggrantingofalicence)irrespectiveofthemediumthroughwhichsuchrightistransferred.

Royaltyinternationallyappliestopaymentsforuseofacopyright,patent,trademarkorsuchintellectualproperty.Asperinternationalcommentariesandjurisprudence,anypaymentsforuseofacopyrightedarticlewouldnottypicallygetcoveredundertheterm‘Royalty’.TheGovernmentshouldconsidertheadversityoftheamendmentsmadebyFinanceAct,2012onthebusinessesandmakechangesinthelawtoreverseitseffect.ItissuggestedtorollbackExplanation4toSection9(1)(vi)oftheAct.Further,itissuggestedthatinviewoftheinternationaltaxpracticesandkeepinginmindtheimpactonIndianindustry,itshouldbeclarifiedthatthepaymentsforuseofcopyrightedsoftwaremadetonon-residentswouldnotbecoveredunderthedefinitionof‘royalty’.

Alternatively,theamendmentshouldhaveonlyprospectiveapplication.

(b) Clarification on inclusion of Explanation 5 to Section 9(1)(vi) of the Act

InSection9(1)(vi)oftheAct,Explanation5hasbeeninsertedclarifyingthatroyaltyincludesandhasalwaysincludedconsiderationinrespectofanyright,propertyorinformation,whetherornot:

(a) thepossessionorcontrolofsuchright,propertyorinformationiswiththepayer;

(b) suchright,propertyorinformationisuseddirectlybythepayer;

(c) thelocationofsuchright,propertyorinformationisinIndia.

Issues

• Explanation5conflictswiththeexistingExplanation2toSection9(1)(vi)oftheActinasmuchastherecannotbeanytransfer,righttouseorimpartingwithoutthepossessionorcontrolintheright,propertyorinformationvestingwiththebuyer/payer.Explanation5alsohastheeffectoftaxingtheconsiderationasroyaltyevenifthereisnotransfer,righttouseorimpartingofanyright,propertyorinformationtothepayer.

• Theprovisionsofthisexplanationarealsonotinlinewiththeinternationallyacceptedprinciples.

• Byvirtueoftheaboveamendment,thescopeofthetermRoyaltygetsexpandedtocoverpaymentswhicharenotintendedtobecovered.Themerefactthatatransactioninvolvesuseofequipmentbyaserviceprovider,withoutthecustomerhavingcontrol/physicalpossessionofsuchequipment,paymentforsuchfacility/servicescannotbetreatedasroyalty.Forexample,whereapersonboardsabusortrainbypurchasingtherequisiteticket,itcannotbesaidthatthepersonismakingpaymentforavailingthebusortrainonhireashedoesnothavethecontroloversuchequipment.Ratherthecustomerismerelyavailingthefacilityoftransportation,theconsiderationforwhichfacilityisnotinthenatureofRoyalty.

Recommendations

• ItissuggestedthatExplanation5toSection9(1)(vi)oftheActinsertedbytheFinanceAct,2012maybeomittedaltogether, as this is clearly against the basic principle of the definitionof the term royalty providedunderExplanation2clause(iva)andasalsounderstoodinternationally.

• Alternatively,inordertoavoidambiguity,theamendmentshouldbemodifiedtoobjectivelyprovidetherationalebehindtheinsertionoftheExplanation5andshouldlistoutthespecifictransactions,whichitseekstocover.


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• Alternatively,theamendmentshouldhaveonlyprospectiveapplication.

(c) Clarification on definition of process royalty – Section 9(1)(vi)

InSection9(1)(vi)oftheAct,Explanation6wasinserted,withretrospectiveeffectfromthe1stJune1976,clarifyingthattheexpression‘process’includesandshallbedeemedtohavealwaysincludedtransmissionbysatellite(includingup-linking,amplification,conversionfordown-linkingofanysignal),cable,opticfibreorbyanyothersimilartechnology,whether or not such process is secret.

Issues

• Theamendmentmayresultininclusionofchargesfortheuseoftranspondercapacityorconnectivity/bandwidthwithinthedefinitionof‘Royalty’.

• Services in the nature of provision of transponder capacity or connectivity/ bandwidth aremerely facilitiesprovided.AsperinternationaltaxpracticesandOECDCommentary,paymentsforsuchfacilitiesshouldnotbetreatedas‘royalty’.

• Explanation6evenincludespaymentstowardsprovisionofbasictelephoneservicewithintheambitoftheterm‘royalty’.Thebusinessincomederivedbythetelecomproviders,ifclassifiedasroyalty,willsignificantlyalterthetaxconsequencesonthereceiveroftheconsiderationfortheservicesprovidedandwillburdenthepayerwithTDS compliances.

• TaxationofforeigncompaniesforsuchfacilitiesandsubsequentpassingonofthetaxcosttoIndiaInc.wouldentailasignificanttaxoutgoforIndiaInc.,especiallycompaniesoperatinginthefieldofmediaandentertainment(satelliteandbroadcastingcompanies),ITandITEScompaniesandtelecom.

• Theretrospectiveapplicationoftheamendmentisgrosslyunfairandfurtheraggravatesthesituation.

Recommendations

• InlinewithinternationalpracticesandtheOECDCommentary,itissuggestedthattheterms‘transmission’,‘up-linking’,‘amplification’,‘downlinking’couldbespecificallydefinedintheActtoremoveambiguityonitsscope/coverageinthedefinitionof‘royalty’

• Thedefinitionoftheterm‘transmission’shouldexplicitlyclarifythatpaymentsfortheuseofa ‘facility’asaservicecharge,withoutanycontrolontheprocessandwherethepayerisonlyinterestedintheserviceandnotintheuseofprocess,shouldnotbecoveredwithinitsmeaning.

• Aclarificationshouldbeprovidedthatbasicservicessuchastelephone/mobilechargesandbroadband/internetconnectivity charges, payment to cable operators for viewing the television channels, electricity charges,wheeling/transmission charges paid to state electricity grid or to private electricity transmission companieswould be outside the ambit of royalty.


Issues

• WiththeinsertionofExplanation4andExplanation6toSection9(1)(vi)oftheAct,thereisanambiguityastowhethersubscriptionchargespaidfordownloadofe-content,accesstoonlinedatabase,reports,journalsetc.canfallwithinthepurviewof“Royalty”.


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• IthasbeenheldbyvariousCourtsthattheinformationthatisavailableinpublicdomainiscollatedandpresentedinaproperformbyapplyingthetaxpayer’smethodologyandthepaymentforthesameisnottobeconstruedasroyalty.ItisinlinewiththeinternationalstandardsandsupportedbytheOECDcommentary,whichprovidesthatdataretrievalordeliveryofexclusiveorotherhighvaluedatacannotbecharacterizedasroyaltyorFTS.

• Taxationofforeigncompanies/publishersforprovidingaccesstosuchonlinedatabaseorintheformofCDasroyaltyandsubsequentpassingonofthetaxcosttoIndianindustrywouldentailasignificanttaxoutgoforIndiaInc.andwillespeciallyimpacttheeducationsysteminIndia.

• Theretrospectiveapplicationoftheamendmentisgrosslyunfairandwouldfurtheraggravatethesituation.

Recommendations

• It issuggestedthattheterms‘transmissionbysatellite,cable,opticfibreorbyanyothersimilartechnology’couldbespecificallydefinedintheActtoremoveambiguityonitsscope/coveragedefinitionof‘royalty’andalsoadetailedcircularmaybeissuedelucidatingthetypesofpaymentscoveredwithinthepurviewofthesaidtermsandthusconstitutingroyalty.

• Itisrecommendedtosuitablyexcludethepaymentfortheuse/accesstoonlinedatabases,reports,journalsetc.andanyotherpaymentsmadebythepayerfromthepurviewofroyalty,whichareessentiallymadefortheuseofa‘facility’asaservicechargeandwhere(a)thepayerisonlyinterestedintheserviceandnotintheuseofprocess/technologyusedfortransmission(b)doesnothaveanycontrolontheprocess/technologyusedfortransmission.


(d) Amendment to the Explanation inserted after Section 9(2)

Issues

• Section9oftheActprovidesforsituationswhereincomeisdeemedtoaccrueorariseinIndia.VideFinanceAct,1976,sourcerulewasprovidedinSection9throughinsertionofclauses(v),(vi)and(vii)insub-Section(1)forincomeinthenatureofinterest,royalty/FTSrespectively.Itwasprovided,inter-aliathatincaseofpaymentsasmentionedundertheseclauses,incomewouldbedeemedtoaccrueorariseinIndiatothenon-residentunderthecircumstancesspecifiedtherein.

• The intentionof introducingthesourcerulewastobringtotax interest, royaltyandFTS,bycreatinga legalfictioninSection9oftheAct,evenincaseswhereservicesareprovidedoutsideIndiaaslongastheyareutilisedinIndia.Thesourcerule,therefore,meansthatthesitusofrenderingofservicesisnotrelevant.ItisthesitusofthepayerandthesitusoftheutilisationofserviceswhichwilldeterminethetaxabilityofsuchservicesinIndia.

• Thiswasthesettledpositionoflawtill2007.However,theSupremeCourt,inthecaseofIshikawajima-HarimaHeavyIndustriesLtd(288ITR408)heldthatdespitethelegalfictioninSection9oftheAct,foranysuchincometobetaxableinIndia,theremustbesufficientterritorialnexusbetweensuchincomeandtheterritoryofIndia.Itfurtherheldthatforestablishingsuchterritorialnexus,theserviceshavetoberenderedinIndiaaswellasutilisedinIndia.

• ThisinterpretationwasnotinaccordancewiththelegislativeintentthatthesitusofrenderingserviceinIndiaisnotrelevantaslongastheservicesareutilisedinIndia.Therefore,toremovedoubtsregardingthesourcerule,anExplanationwasinsertedbelowsub-section(2)ofSection9oftheActwithretrospectiveeffectfrom1stJune1976videFinanceAct,2007.TheExplanationsoughttoclarifythatwhereincomeisdeemedtoaccrueorariseinIndiaunderclauses(v),(vi)and(vii)ofsub-Section(1)ofSection9oftheAct,suchincomeshallbeincluded


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in the total incomeof thenon-resident, regardlessofwhether thenon-residenthasa residenceorplaceofbusinessorbusinessconnectioninIndia.

• However,theKarnatakaHC,inthecaseofJindalThermalPowerCompanyLtd.v.DCIT(TDS)(286ITR182),hasheldthattheExplanation,initspresentform,doesnottakeawaytherequirementofrenderingofservicesinIndiaforanyincometobedeemedtoaccrueorarisetoanon-residentunderSection9oftheAct.IthasbeenheldthatonaplainreadingoftheExplanation,thecriteriaofrenderingservicesinIndiaandtheutilisationoftheserviceinIndialaiddownbytheSupremeCourtinitsdecisioninthecaseofIshikawajima-HarimaHeavyIndustriesLtd.remainsunalteredandunaffectedbytheExplanation.

• Withaviewtoremovinganydoubtaboutthelegislativeintentoftheaforesaidsourcerule,theFinanceAct,2010substitutedtheexistingExplanationwithanewExplanationtospecificallystatethattheincomeofanon-residentshallbedeemedtoaccrueorariseinIndiaunderclause(v)or(vi)or(vii)ofsub-Section(1)ofSection9oftheActandshallbeincludedinhistotalincome,whetherornot:

– thenon-residenthasaresidenceorplaceofbusinessorbusinessconnectioninIndiaor

– the non-resident has rendered services in India.

• Thiswasmadeeffectiveretrospectivelyfrom1stJune,1976.Theretrospectivenatureoftheamendmentisacauseofconcernamongsttaxpayerssinceitwouldleadtoreopeningofpastassessments.

Recommendation

• TherelevantprovisionsofSection9oftheAct,inforcesince1976,havebeeninterpretedbytheSupremeCourtinIndiarequiringthetaxpayertoalsosatisfytheconditionof‘renderingofserviceinIndia’forbeingtaxableinIndia.Itwouldthereforebeonlyfairtomakethisprovisionapplyprospectively.Alternatively,aprovisionbeinsertedtoclarifythatpasttransactionswouldnotbere-openedorcontestedbythetaxofficersonthestrengthof this provision.

4.16.4. Requirement for Non-residents to comply with TDS obligations - Section 195

TheFinanceAct,2012extendedtheobligationtodeducttaxatsourcetonon-residents irrespectiveofwhetherthenon-residenthas:

(i) aresidenceorplaceofbusinessorbusinessconnectioninIndia;or

(ii) any other presence in any manner whatsoever in India.

Theaforesaidamendmentwasintroducedwithretrospectiveeffectfrom1April1962.

Issue

• TheamendmentwillresultinasignificantexpansioninthescopeofTDSprovisionsundertheActandwillcoverallnon-residents,regardlessoftheirpresence/connectionwithIndia.

Recommendations

• InthedecisionoftheSupremeCourtinthecaseofVodafoneInternationalHoldingsB.V.[(2012)345ITR1(SC)],itwasobservedthattheprovisionsofSection195oftheActwouldnotapplytopaymentsbetweentwonon-residentssituatedoutsideIndiasubjecttocertainconditions.TheSupremeCourtalsoreferredtotaxpresenceasbeingarelevantfactorinordertodeterminewhetheranon-residenthasanobligationtodeducttaxatsourceinIndiaunderSection195oftheAct.


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• TheamendmentbytheFinanceAct,2012,however,seekstoexpresslyextendthescopeofTDSobligationstoallpersonsincludingnon-residents,irrespectiveofwhethertheyhavearesidence/placeofbusiness/businessconnectionoranyotherpresenceinIndia.TheamendmentshouldbemodifiedtorestricttheapplicabilityofTDSprovisionstoresidentsandnon-residentshavingataxpresenceinIndia.

• Alternatively,theamendmentshouldbemadeeffectiveonlyprospectively.Makingsuchaprovisionapplicablewith retrospective effectwill operate harshly on personswhomay havemade payments based on the lawprevalent prior to the amendment.

4.16.5. Taxation of Foreign Dividends and Capital Gains - Section 115BBD and Section 47

• AspecialtaxregimeunderSection115BBDoftheActprovidesfortaxingdividendincome@15%fromspecifiedforeigncompanies(withshareholdingoftheIndiancompanyof26%ormore).

• Capitalgainstaxregimeforunlistedcompaniesarenotbeneficialascomparedtoexemptiononlongtermcapitalgains fromsaleofsharesofcompanies listedon Indianstockexchange. Also, thegainsderivedbyoverseasholding companies from divesture in overseas operating companies are also retained at overseas holdingcompany level.

Issues

• ThebenefitofreducedrateoftaxondividendsasperSection115BBDoftheActisrestrictiveandisavailableonly to Indian companies only and not to other persons.

• LongtermcapitalgainsearnedbyIndianholdingcompanyfromtransferofsharesinforeigncompaniesistaxableinIndia@20%.

• TherearenoprovisionsundertheActforavailingunderlyingtaxcreditondividendsandsuchtaxcreditcanbeavailedonlythroughafewtaxtreaties.

• Capitalgainsarisingpursuanttocertainbusinessrestructuringoverseas(viz.amalgamationofforeigncompaniesheldbyIndiancompany,demerger)arenotexempt.

Recommendations

• Thereducedrateoftaxondividendsreceivedfromaspecifiedforeigncompanyshouldalsobeextendedtoallpersons(includingacompany)asdefinedinSection2(31)oftheAct.

• Alternatively,taxonsuchdividendsshouldbetreatedakintoMAT,creditableagainstthenormaltaxliabilityandpayable only if the tax on normal income is less than the tax on such dividends.

4.16.6. Cascading effect of DDT on dividend received from Foreign Companies - Section 115-O

AspertheamendmentinSection115-OoftheActvideFinanceAct2013,dividendtaxedasperSection115BBDoftheActreceivedbytheIndiancompanyfromitsforeignsubsidiary(i.e.whereequityshareholdingoftheIndiancompanyismorethan50%),thenanydividenddistributionbysuchIndianHoldingCompanytoitsshareholdersinthesameFYtotheextentofsuchforeigndividendswillnotbeliabletoDDT.

Issue

• AsperSection115BBDoftheAct,dividendreceivedfromaspecifiedforeigncompanyi.e.aforeigncompanyinwhichtheholdingoftheIndiancompanyis26%ormoreinthenominalvalueofequitysharecapital,issubjecttotaxatalowerrateof15%.However,asperprovisionsofSection115-OoftheAct,wheredividendisreceived


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fromaforeignsubsidiary(i.e.morethan50%equityshareholding)whichissubjecttotax@15%underSection115BBD of the Act, then such dividend will be reduced from the DDT base on any further dividend distributed by theIndiancompany.Inotherwords,wheretheIndiancompanyholds26%to50%innominalvalueoftheequitysharecapitaloftheforeigncompany,thensuchdividendwouldnotbeexcludedforcomputingDDTbaseoftheIndian parent.

Recommendation

• It is suggestedthat therequirementrelatingtoshareholdingofmorethan50% in the foreignsubsidiary forthepurposeofSection115-OoftheActshouldbereducedto26%,inthespecifiedcompanytoremovethecascadingeffectofDDT.Also,theobjectiveofincentivizingrepatriationoffundsshallbesuccessfulwhenthedividendreceivedfromaspecifiedforeigncompanyanddistributedbytheIndiancompanyisnotliabletoDDT,therebyremovingthecascadingeffect.

4.16.7. Information to be furnished for making remittance abroad - Section 195(6)

Issues

• TheFinanceAct,2015amendedSection195(6)whichprovidesasfollows:

‘The person responsible for paying to a non-resident, (not being a company), or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.’

• Aspersection195(6)readwithRule37BBoftheIncome-taxRules,1962(theRules),apersonmakingremittancetoanon-residentisrequiredtosubmitForm15CAelectronicallyonthewebsitedesignatedbytheincometaxdepartmentandisfurtherrequiredtogetacertificatefromaCharteredAccountant(CA)inForm15CBinrespectoftheparticularsfilledinForm15CA.

• InAugust2013,theCentralBoardofDirectTaxes(CBDT)hadamendedRule37BBoftheRulesvideitsNotificationNo. 58 of 2013, dated 5 August 2013, to broaden the requirement of collecting information and reportingrequirementsforallremittancesoutsideIndia.TheRulealsoprescribestoprovideinformationincaseswhereamounts are not liable to be taxed under the Act.

• TheCBDTissuednotificationno.67of2013,dated2September2013,whichhasfurtherrevisedthescopeandtheformatofreportingofinformationunderRule37BBoftheRules.ItprovidesthatthepersonresponsibleformakinganypaymentincludinganyinterestorsalaryoranyothersumchargeabletotaxundertheActshallberequiredtofurnishdetailsintheprescribedforms.Thenotificationalsoprovidesaspecificlistofpaymentswhicharenotrequiredtobereportedundertherevisedrule.TheamendedRulehascomeintoforcefrom1October 2013.

• Therewasambiguitywith respect towhether theamended rulewouldapply to transactionswhicharenotchargeabletotaxsuchasimportofgoodsorpaymentsinthenatureofFeesforTechnicalServices(FTS)/royalty,whicharenottaxableinIndiabyvirtueofbeneficialDoubleTaxationAvoidanceAgreements(DTAA)provisions.“Importofgoods”isoneofthetransactions,whichwasincludedinthespecifiedlist,prescribedvidenotificationno.58of2013andthendeletedfromthespecifiedlistvidenotificationno67of2013.

• InviewofaboveamendmenttoSection195(6)madebytheFinanceAct,2015onceagaintheissuehasarisenastowhetherthetaxpayerneedstoobtainaCAcertificateinform15CBandprovideparticularsinform15CAforpaymentswhicharenotchargeabletotax.


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• Theamendmentmandatesreportingofevennon-taxabletransactions.Astheforeignremittances incaseofentitieshavingmulti-territorialoperationsaregenerallyvoluminous,reportingofeachtransactionalongwithobtainingaCAcertificatecouldbeaverydauntingtask.Thiswould increasethenumberofcertificatesthatwouldhavetobetakenbythepayerfurtherentailinganincreaseinthecompliancecost.

Theabovecoupledwith the fact thatnotallpaymentsmadetonon-residentsarenecessarilychargeable totax,therebeingseveralconsiderationswhichcontributetoconcludeaboutthetaxabilityofpaymentsmadetonon-residents. The amendment would severely increase the compliance burden associated with Form 15CA and 15CBreportingincasewherethepaymentsarenotchargeabletotax.

• AtpresentthereisnoprovisiontocancelorcorrecttheerroneousForm15CAandanassesseeisrequiredtofilland upload a fresh form in case of any error, which makes the task more tedious.

• The FinanceAct, 2015has also introducedpenalty in caseof failure to furnish informationor furnishingofinaccurateinformationasrequiredtobefurnishedunderSection195(6),totheextentofINRonelakh.

Recommendations

• Consideringthefarreachingimplicationsoneaseofdoingbusiness,Governmentshouldconsiderwithdrawalofamendedsection195(6)oftheAct.

• Ifprovisionsarenotwithdrawn,newrulesshouldbenotifiedattheearliest.

• ItisrecommendedthatCBDTshouldissueaclarificationprovidingalistofpaymentswhichareexcludedforthepurposeofcomplyingwiththerequirementsofForm15CAandForm15CB.Thisisneededmoresoinrespectofregulartradepayments(imports)anditwillalsoreducehasslesofdoingbusinesswithIndia.EvenpaymentswhichhavebeenspecificallyexemptundertheAct(fore.g.dividendpayments,lifeinsurancematurityproceeds,etc.),personalremittances(fore.g.paymentsfortravel,education,maintenanceoffamilyabroad,etc.)capitalaccounttransactions(fallingoutsidetheambitofSection4,5and9oftheAct)shouldbespecificallyexcludedforthepurposeofcomplyingwiththerequirementsofForm15CAand15CB.

• Newrulesshouldprovideforsufficientlyhighmonetarythresholdbeyondwhichcompliancewillgettriggered.Thiswillensurethatsmallvaluetransactionsdonotfallwithintheproceduralnet.

• Sincerulesareyettobenotified,non-complianceintheinterimperiodshouldnothaveanypenalconsequencesfor the taxpayer.

• Asystemshouldbethereinplacesoastoenablethepayerstoedit/canceltheerroneousForm15CAratherthanfillingallthedetailsinfresh.

• Itshouldbeclarifiedthatpenaltyoughttobeleviedonlyifthereisanon-disclosureorinaccuratedisclosureofinformationwilfullyleadingtonon-deductionoftaxonremittanceswhicharechargeabletotaxundertheprovisions of the Act.

4.16.8. Mandatory application to tax officer to determine sum chargeable to tax - Section 195

• FinanceAct2012hasintroducedsub-Section(7)toSection195oftheActunderwhichitismandatorytomakeanapplicationtothetaxofficertodeterminetheappropriateproportionofsumchargeableundertheAct.

• This provisionwill apply tonotifiedpersons/ cases andwill apply regardless ofwhether such transaction ischargeabletotaxornot.

Issue

• Compulsoryclearance fromtheRevenueAuthoritiesonnotifiedoverseaspaymentsadds to thecomplianceburdenandcanimpactlegitimatecommercialactivities.


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Recommendations

• TheSupremeCourtinthecaseofGEIndiaTechnologyCentreobservedthat,thereexistsnoobligationtodeducttaxunderSection195oftheActunlesssumpayabletothenon-residentis‘chargeable’underAct.

• Considering, thevolumeof international transactions/payments, the impositionofa requirement toobtainclearancefromthetaxofficewouldproveveryonerousandslowdownthepaceofcommercialtransactions.ItissubmittedthatthepresentsystemofreportingtogetherwithTDSprovisionsaresufficienttoensureappropriatedeductionoftaxonoverseaspayments.Hence,Section195(7)oftheActshouldbedeleted.

• Withoutprejudicetotheaboverecommendation,thelistofpersons/casestobenotifiedunderthisprovisionshouldbetailoredsoastonotaffectgenuinecommercialtransactions.

4.16.9. TDS from payments to Non-residents having Indian branch/ fixed place PE

Issue

• The corporate tax rate for non-resident companies being 40 (plus surcharge and education cess) results inrequiringanon-residentcompanytofilereturnofincometoclaimrefundofexcesstaxesdeducted.Thiscreatescash flow issues for the non-resident companyhaving operations through an Indian branchunviable,whencomparedwith its Indian counterparts. This additionally requires the non-resident company tomandatorilyapproachthetaxofficetoseeka lowerTDScertificate, theprocessbeingtime-consumingandnon-taxpayerfriendly.Often,thenon-residentcompanyfacealotofdifficultiesjustifyingitsrequestforalowerTDScertificateintheinitialyearsofitsoperations,whenithasnopastassessmentsinIndia.Fromthetaxofficer’sperspective,thisresultsinexcesstaxcollectionbywayofTDSonlytoberefundedlatertogetherwithinterestinadditiontosignificantadministrativeburden,whichmaynotbecommensuratewiththebenefitsofanefficienttaxcollectionmechanism.

Recommendation

• Itisrecommendedthatpaymentswhichareinthenatureofbusinessincomeofnon-residentshavinganIndiabranchofficeor‘aplaceofbusinesswithinIndia’shouldbesubjecttosimilarTDSrequirementsasincaseofpaymentstodomesticcompanies.Further,atthebeginningofataxyear,thenon-residenttaxpayerwhohasanIndiabranchofficeor‘aplaceofbusinesswithinIndia’shouldbepermittedtoadmitPEandoptforaTDSmechanismasisapplicabletoaresidentcompany.ItwouldgoalongwayinfacilitatingeaseofdoingbusinessinIndiaandthetaxofficerwouldbeinapositiontobettermonitorandregulatesuchnon-residentcompanies.Further,itwouldalsoachievethestatedobjectiveintheKelkarReport(December2002)toabolishthesystemofapproachingthetaxofficerforobtainingcertificatesfordeductionatlowerratesandminimizetheinterfacebetweenthetaxpayerandtaxofficer.

4.16.10. Tax Residency Certificate (TRC)

• TheFinanceAct,2012hadprovidedthat inordertobeeligibletoclaimreliefundertheDTAA,ataxpayer isrequired toproduceaTRC issuedby theGovernmentof the respectivecountryor the specified territory inwhichsuchtaxpayerisresident,containingcertainprescribedparticulars.Subsequently,theCBDTprescribedthe details to be included in the TRC.

• TheFinanceAct,2013hasdoneawaywiththerequirementofobtainingprescribedparticularsintheTRC.Inotherwords, the taxpayer can continue toobtain theTRCas issuedby the foreignauthorities. TheFinanceAct,2013alsointroducedaprovisiontoclarifythatthetaxpayershallnowberequiredtofurnishsuchotherinformationordocumentasmaybeprescribed.


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• TheCBDTsubsequentlyissuedanotificationamendingtheRule21ABoftheRules,prescribingtheadditionalinformation required to be furnished by non-residents along with the TRC. The details are required to befurnished in Form 10F.

Issues

• EventhoughtherequirementtofurnishTRCcontainingprescribedparticularshasbeendispensedwith,however,dependingonthejurisdiction,obtainingaTRCcertificatemayalsobeatimeconsuminganddifficultprocess.TRC requirement increases theadministrativedifficulty fornon-residents,especially from theperspectiveofnon-residentshavingveryfew/limitedtransactionsconnectedtoIndia.

• ThedeductorwouldliketoobtaintheTRCatthetimeofthetransaction/depositingthetax(toensurethatthepayeeiseligibleforDTAAbenefits),thepayeewouldtypicallybeabletoobtainTRConlyaftertherelevantyear.

• AspertheRule21ABoftheRules,anIndianresidentwhowishestoobtainTRCfromIndianRevenueAuthorities,isrequiredtomakeanapplicationinFormNo.10FAtothetaxofficer,containingprescribeddetails.However,notimelimitforissueofTRCisspecifiedfromthedateofapplicationbythetaxpayer.Furthermore,theissueofTRCinFormNo.10FBhasbeenlefttothediscretionofsatisfactionofthetaxofficer,withoutprovidingasubstantivedefinitionforsatisfactioninthisregard.

• Rule 21AB of the Rules does not clarify the authority for signing Form 10F,which causes confusion to thetaxpayersandtheRevenueAuthorities.

Recommendations

• TherequirementtoobtainTRCforataxpayertoprovethatheisaresidentoftheotherstateshallbedeletedastheremaybecircumstanceswhereinthetaxpayerwhoisabonafidetaxresidentoftheothercontractingstateisunabletoprocureaTRCowingtocircumstancesoutsidehiscontrol.Atassessmentstage,itisanywayincumbentuponthetaxofficertoascertaincompletedetailsbeforeallowingDTAAbenefits.Insuchascenario,eventhoughthetaxofficermayotherwisebesatisfiedthattheDTAAbenefitsmustbeallowed,onlyowingtotheprocedurallapseofnotobtainingtheTRCwhichisbeyondthetaxpayer’scontrol,thetaxofficerwouldbecompelledtodenyDTAAbenefits,whichwillcauseneedlesshardship.

• Withoutprejudice,eveniftherequirementtoobtainTRCmuststay,itisrecommendedthattheTRCshouldbemade mandatory only for cases where the total payment to a non-resident exceeds Rs. 1 crore in a FY. This would mitigatehardshipinrespectofsmallpayments.

• ItisalsorecommendedthattherequirementtofurnishTRCshouldbecastuponthepayeeatthetimeoftheassessment of the payee and the deductor/ payer should not be made liable to collect TRC from the payee at the timeofTDS.

• ThetimelimittoissueTRCinForm10FBshouldbespecifiedandtofurtherspecifythatincasethetaxofficerrefusestoissueaTRC,theapplicationofthetaxpayershouldbedisposedbythetaxofficerbypassingaspeakingorderandclearlyspecifyingthereasonsforrejectingtheapplicationofthetaxpayer.

• ItmaybespecifiedthatpersonsprescribedunderSection140(c)oftheActforthepurposeofsigningthereturnofincomewouldbeeligibletosignForm10F.

4.16.11. Multiple defect notices issued for returns filed by non-residents

Non-resident assessees entitled to avail of beneficial provisions of the double taxation avoidance agreement andassesseeshavingincomechargeabletotaxatspecialratesoftax(viz.royalty,FTS,etc.)arerequiredtoreportthesamein‘ScheduleSI’oftheITR-6.Asthenon-residentdoesnothaveanofficeorplaceofbusinessinIndiaandisalsonotrequiredtomaintainanyspecificbooksofaccounts,thedetailsofprofitandlossaccountandthebalancesheetarenot


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requiredtobefilledintheITR-6.However,duetoaninherenttechnicaldefaultintheexcelutilityforITR-6,atthetimeofgeneratingthexmlfileforuploadingontheincome-taxe-filingwebsite,thegrosstotalincomeisalwaysreportedas‘NIL’insteadoftheaggregateamountreportedin‘ScheduleSI’.

Further,atthetimeofprocessingtheROI,assesseeshavebeenrepeatedlyissueddefectnoticesundersection139(9)forsome/allofthefollowingreasons:-

a) TaxesarebeingpaidevenwherethegrosstotalincomeisNil

b) Non-filingschedules‘PartA–P&L’and‘PartA–BS’

c) CreditforTDSisbeingclaimed,andnocorrespondingincomehasbeenofferedtotax.

Inthemeanwhile,noactionhasbeentakentorectifythetechnicaldefaultintheexcelutility.Accordingly,non-processingofthereturnsduetotheaforementioneddefectnoticeswithoutanycommensuratemeasurestorectifytheexcelutilityhasresultedinahugequantumofrefundsduetoassesseesremainingunpaid.

ItisherebysuggestedthatappropriatemeasuresbetakentorectifythetechnicaldefaultintheexcelutilityforITR-6.Further, forreturnsfiledusingtheexistingutility (includingROIsforwhichdefectnoticeshavebeen issued), it issuggestedthatthesaidanomalyistakenintoconsiderationbytheCPCatthetimeofprocessingofthereturnundersection143(1)andthereturnisprocessedafterincorporatingtheincomereportedin‘Schedule–SI’aspartofthegrosstotal income.

4.16.12 Clarity on taxability of Global Depository Receipts

GDRisaforeigncurrencydenominatedfinancialinstrumentissuedoutsideIndiabyaforeigndepositorytoinvestors,againstanunderlyingIndiansecuritywhichisdepositedwithadomesticcustodianinIndia.

Earlier,GDRsweregovernedby‘IssueofForeignCurrencyConvertibleBondsandOrdinaryShares(throughdepositoryreceiptsmechanism)Scheme1993’(“1993Scheme”).BasedontherecommendationsoftheSahooCommitteeandvariousotherstakeholders,theCentralGovernmentrepealedthe1993Scheme(excludingprovisionsgoverningforeigncurrencyconvertiblebonds)andreplaceditwiththeDepositoryReceiptsScheme,2014(“2014Scheme”)witheffectfrom December 15, 2014.

Keychangesintroducedunderthe2014Schemevis-a-visthe1993Scheme,inter-alia,includethefollowing:-

1993 Scheme vis- vis 2014 Scheme

(a) GDRs could be issued only by Indian listed companies. GDRs can be issued by both listed and unlisted Indian companies whether public or private.

(b) GDRscouldbeissuedonlyagainstunderlyingshares.GDRscanbeissuedagainstunderlyingpermissiblesecuritiessuch as shares, debt instruments etc.

(c) TheSchemespecifically laiddownthemanneroftaxationonconversionofGDRsintoshares.TheSchemeissilentonthemanneroftaxationonconversionofGDRsintoshares/securities.

Itmaybepertinenttonotethatsection47(viia)oftheIncomeTaxAct,1961(‘theAct’)providesforspecificexemptionon transfer of GDRs from one non-resident to another non-resident outside India. However, the Act was silent with respecttocostofacquisition(“cost”)andperiodofholding(“period”)tobeconsideredofunderlyingshareswhichwillbe received on conversion of GDRs into shares.

TheFinanceAct2015(“FA2015”)nowprovidesthatonconversionofGDRsintotheunderlyinglistedcompanyshares,thecostofthesharesshouldbethepriceprevailingonarecognisedstockexchangeonthedateofadviceforconversion


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andtheperiodofholdingshallbereckonedfromsuchdate.However,thecostandperiodinascenariowhereGDRsareissuedagainstunlistedsharesorotherpermissiblesecuritiessuchasdebenturesetc.havenotbeenspecifiedastheFA2015onlyprescribesthemechanismfordeterminingthecostandperiodincaseof“listedshares”.Also,thedefinitionofGDRasperExplanationtosection115ACAoftheActhasbeenchangedtoprovidethatGlobalDepositoryReceipts”meansanyinstrumentintheformofadepositoryreceiptorcertificate(bywhatevernamecalled)createdbytheOverseasDepositoryBankoutsideIndiaandissuedtoinvestorsagainsttheissueof,—

(i) ordinarysharesofissuingcompany,beingacompanylistedonarecognisedstockexchangeinIndia;or

(ii) foreigncurrencyconvertiblebondsofissuingcompany

AsaresultoftheaboveamendmentmadeinExplanationtosection115ACAoftheAct,thereisanapprehensionthatataxofficercandenytheexemptionontransferofGDRmadeoutsideIndiabyanon-residenttoanothernon-residentifsuchGDRhasbeenissuedagainstthesharesofanunlistedIndiancompany.Itcanbeallegedthatexemptionundersection47(viia)oftheActisonlyinrespectofGDRissuedagainstsharesofalistedIndiancompany.However,itisawellsettledpositionthattransferofGDRsoutsideIndiabyanon-residenttoanothernon-residentisnottaxableinIndia.Theamendment made by Finance Act, 2015 is also not in line with 2014 Scheme which provides that GDRs can be issued bybothlistedandunlistedIndiancompanieswhetherpublicorprivate.Theambiguitycreatedbytheamendmentcanbeahugedenttothestart-up investments.Thiswillhavean impactofrelocatingnewstart-upstoother locations.Suchkindofdistinctioncreatedbetweenlistedandunlistedcompanies(duetochangeinthedefinitionofGDR)alsodoesnotserveanypurposeastheGDRshavetobelistedonastockexchangeoutsideIndiawhichissufficienttobringtransparencyintradingoftheseGDRs.

FICCIrecommendsthattheGovernmentshouldspecificallyprovidethatthetaxbenefitonGDRs issuedagainsttheordinarysharesofanunlistedcompanywillbeinparitywithGDRsissuedagainstsharesofalistedcompany,aslongastheseGDRsaretradedonarecognisedstockexchangeoutsideIndia.

4.17. Mergers & Acquisitions

4.17.1. MAT Credit - Section 115JAA

Issues

• MATcreditisakintoadvancepaymentoftax.

• BenefitofMATcreditcannotbedeniedtosuccessorsincaseofreorganization.

Recommendation

• Section115JAAoftheActshouldbeamendedtoprovidethatsuccessorsincaseofamalgamation,demergeroranyotherformofreorganizationshouldbeeligibletoclaimbenefitofMATCredit.

4.17.2. Carry forward and set off of Accumulated Losses in Amalgamation or Merger

Issues

• Currently, Section 72A of the Act allows carry forward of loss and accumulated depreciation in case ofamalgamation/demergerofthefollowingtypeofcompanies:

– acompanyowninganindustrialundertakingorashiporahotelwithanothercompany,

– abankingcompany,

– oneormorepublicsectorcompanyorcompaniesengagedinthebusinessofoperationofaircraft


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• Apparently, the benefit is not available to all the companies engaged in the business of providing services.ConsideringthefactsthatmanymultinationalcompanieshaveenteredintheIndianservicemarketandithasbecome imperative for thesmallcompanies toconsolidate their resources tosurvive, thebenefitapplicableundertheprovisionofSection72AoftheActshouldbeextendedtoallcompaniesirrespectiveoftheirlineofoperations.

• Moreso,Section72A(2)oftheActprescribesstringentconditionaboutcontinuityofholdingofassetsbytheamalgamatingcompanyforatleast2yearspriortotransferandbytheamalgamatedcompanyfor5yearsposttransfer.Similarlyitrequiresthattheamalgamatingcompanyshouldbeinthebusinessforatleast3yearspriortotheamalgamation.Theconditionsinthehandsoftheamalgamatedcompanyaresufficienttocontrolmisuseof theprovisionsandtherefore, theconditionsapplicable to theamalgamatingcompanyshouldbedeleted.Also,holdingofassetsandcontinuationofbusinessfor5yearsisquitealongperiod.

• Wheresuchlossofspecifiedbusinessundersection35ADoftheActisdirectlyrelatabletotheundertakingstransferredtotheresultingcompany,beallowedtobecarriedforwardandsetoffinthehandsoftheresultingcompany.

Recommendations

• Section72AoftheActshouldbeamendedtoallowbenefitofcarryforwardoflosses,pursuanttoamalgamation,toallcompaniesirrespectiveoftheirlineofbusinessespeciallyservicesbusiness.

• Section 72(A)(2) of the Act be amended to delete conditions under sub-clause(a) relating to amalgamatingcompany.

• Also,Section72A(2)(b)oftheActshouldbeamendedtoreducetheperiodofholdingassetsandcarryingonofbusiness to 3 years.

4.17.3. Amendment in Section 2(42A) of the Act

Issues

• TheFinance(No.2)Act,2014hasamendedSection2(42A)oftheAct,whichprovidesthatunlistedsharesandunitsofnon-equitymutualfundsshouldbeconsideredshorttermcapitalassetifthesamearenotheldformorethan 36 months.

• Undertheearlierprovisions,ifshares/unitswereheldformorethan12months,thesamewereconsideredtobelongtermcapitalassetandwasliabletolowerrateoftax.Therefore,theinvestorwouldhaveacquiredtheshares/unitsonthebasisthatthesamecouldbesoldafter12monthsandtaximpactwillbeatalowerrate.Thisimpactstheinvestorconfidenceaboutreliabilityoftaxpolicies.

Recommendations

• Itisrecommendedthatthisproposalshouldbedroppedandtheerstwhileholdinglimitforunlistedsharesandaunitofamutual fund(otherthananequityorientedmutual fund)asa longtermcapitalassetsshouldbecontinuedi.e.morethan12months.

• Alternatively,theamendmentshouldbemadeapplicablefrom31stMarch,2015(insteadof10thJuly2014)soas to avoid undue hardship to the investors who purchased shares/ units before 1st April, 2014 but could not redeemsuchshares/unitbefore10thJuly,2014.


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4.17.4. Change of rate of tax on sale of units of a Mutual Fund - Section 112

Issue

• Theconcessionalrateoftaxof10%onlongtermcapitalgainisnomoreavailabletotheunitsofamutualfund.ThisamendmentinSection112wouldagainimpactdebtschemesofMutualfund(MF)

Recommendation

• Thisproposalshouldbedroppedandaccordinglybeneficialrateoftax(i.e.10%)shouldcontinuetobemadeapplicable as earlier on such schemes.

4.17.5. Grossing-up of a Dividend Distribution Tax in relation to Mutual Fund - Section 115R

Issues

• TheFinance(No.2)Act,2014hasamendedSection115RwhereintheDDT inrelationtotheunitholders isrequired to be grossed up. Accordingly, theDDT to be paid after grossing up of the amount distributed asdividend.

• ThisamendmentinSection112wouldimpactdebtschemesofMutualfund(MF)

Recommendation

• ThisamendmentshouldbedeletedandtheerstwhilemethodofcomputationofDDTshouldcontinuetobeappliedonincomedistributedbyamutualfund.GrossingupeffectisespeciallyverysteepinthecaseofmutualfundsonaccountofthehigherDDT(vis-à-visDividendonshares).

4.17.6. Status of widely held company to be considered on date of Transaction

Issues

• Section2(18)oftheActdefineswidelyheldcompany.Thisdefinitionhaswideimplicationoncarryforwardofloss,taxabilityunderSection56(2)oftheActandinvariousotherprovisions.

• Itincludesalistedcompany,onlyifitssharesarelistedonexchangeasonlastdateoftherelevantyear.Further,itincludessubsidiaryoflistedcompany,onlyifthesharesofsuchsubsidiarywereheldthroughouttherelevantyearbythelistedcompany.Theseprovisionsleadtosituationswhichdoesnotseemintended.

• Therefore,itstandslogicalthattheconditionsoflisting,holdingofsharesetc.shouldbesubjectmatteroftestonthedateoftransactionandshouldnotbestretchedtobecontinuingtilltheendofthatFY.

Recommendation

• Section 2(18) of the Act should be suitably amended to provide test of conditions on the date of relevanttransaction.

4.17.7. Transactions without consideration or for inadequate consideration

Issues

• TheFinanceAct,2010insertedclause(viia)inSection56(2)oftheActwithaviewtocurbabusivetransactions.

• Section47of theAct andotherprovisionsof theActexempts certain transactions from taxation.However,provisotoSection56(2)(viia)oftheActexcludesonlyapartofsuchexemptedtransactionsfromitsapplicability.Consequently,thosetransactionswhichmayotherwisebeexemptunderSection47oftheActarestillliabletotaxunderSection56(2)(viia)oftheAct.


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• Section 56(2)(viia) of the Act is applicable to receipt of shares without consideration or with inadequateconsideration. These are anti-abuse provisions intended to curb tax avoidance. Consequently, it should beapplicabletotransactionsliabletotaxandnototherwise.Thus,thisSectionshouldbeapplicabletoreceiptofshareswhicharenotcoveredunderSection47.

• Withoutprejudicetotheaboverecommendation,itneedstobeclarifiedthatthefollowingtransactionswouldbeexcludedfromitsambit:

Issueofsharesincluding:

– rightissue

– Preferentialallotments

– Conversionoffinancialinstruments

– Bonus shares

– Split/subdivision/consolidationofshares.

– Receiptpursuanttostocklendingscheme.

– Receipt by Trustee Company.

– Buyback of shares.

– ByoffshoreinvestorsincaseswherepurchasepriceisdeterminedbyIndianlawsinforce(e.g.SEBIrules,FEMAguidelines).

Being anti-abuse provision, it should be applicable to transactions between associated concerns and not to othertransactions.Theamendmentwilladverselyimpactgenuinecaseswherethesharesaretransferredatapre-determinedpriceforagreedcommercialandbonafideconsiderations.Forexample:

• Jointventureorinvestmentagreementsparticularlyforunlistedcompany,frequentlymakeprovisionsforputandcalloptionstobeexercisedatagreedprices,whicharecompliantwithallrelevantexchangecontrolandrelatedlaws,thoughtheymaynotnecessarilybeatfairmarketvalue.Thisis,often,topermitIndianpromoterstoenjoysomeupsidebenefitiftheircompaniesperformbetterthantherateofreturnexpectedbytheinvestor.Tolevyincome-taxliabilityonsuchpromoterspurelyonanotionalunrealizedgain,whentheyacquiresharesfromtheinvestorsatthenegotiatedpriceisclearlyunwarrantedand,possibly,unintended.

• Likewise,theremaybedefaultforcedsaleprovisionsinsuchagreementsthatallowanon-defaultingpartytoacquiresharesfromadefaultingpartyatapricebelowmarketvalue.Again,totaxthenon-defaultingacquirerfor the discount would be unfair and possibly, also unintended.

Recommendations

• All transactionswhichare specificallyexempted fromcapital gains taxunderSection47of theActorotherprovisionsoftheActshouldbekeptoutsidethepurviewofthesaidSections56(2)(viia)oftheAct.

• Section56(2)(viia)oftheActshouldbesuitablyamendedtoprovidethatitappliestoreceiptofpropertiesbeingshares incloselyheldcompanyfromrelated/connectedentities. Itmustbeclearthat it isnotapplicabletogenuinebusiness/commercialtransactions.

• Section56(2)(viia)oftheActshouldbesuitablyamendedtoprovidethattheSectionshouldbeapplicableonlyifthesharesbeingreceivedbythetaxpayerareinexistenceandheldbyanotherperson.

• Rule11UAoftherulesshouldbesuitablyamendedtovalueunquotedequitysharesonafullydilutedbasis.


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4.17.8. Amalgamation/ Demerger into Parent/ Subsidiary/ Co-subsidiary - Section 47

Issues

• Section47oftheActexemptscertaintransactionsfrombeingtaxedunderthehead‘capitalgains’byspecifyingsuchtransactionsnottoberegardedas‘transfers’underSection45oftheAct.

• Sub-Section(vii)ofSection47oftheActstates:

“any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if-

(a) thetransferismadeinconsiderationoftheallotmenttohimofanyshareorsharesintheamalgamatedcompanyexceptwhereshareholderitselfistheamalgamatedcompany.

(b) theamalgamatedcompanyisanIndianCompany.”

• Section42oftheCompaniesAct1956/19oftheCompaniesAct,2013doesnotallowasubsidiarycompanytoholdsharesintheparentcompany.Pursuanttosuchmerger,incasewheresubsidiarywasholdingsharesintransferor company, the parent company cannot allot shares to it.

• Section2(19AA)of theActdefines ‘demerger’ and specifies conditionswhichare conflicting innature. Firstcondition requires that at least 75% shareholders of transferor company should become shareholders oftransfereecompany.Secondconditionprovidesthatsharesshouldbeissuedtotheshareholdersofthetransferorcompanyonaproportionatebasis. Ifone logically readsthetwoconditions, itmeansthatsharesshouldbeissuedonaproportionatebasistotheshareholdersofdemergedcompany,towhomsharesareissuedunderfirstcondition.However,toavoidlitigation,clarityneedstobeprovided.

• Section41oftheActprovidesthatcertainincomesubjecttoconditions,relatingtobusinessofpredecessor,willbetaxableinhandsofsuccessoreventhoughitarisespostsuccession.However,similarprovisionisnotthereinSection43B,35DDetc.oftheActwhereexpensesneedtobeclaimedpostrestructuringinhandsofsuccessor.

Recommendations

• Section47(vii)oftheActshouldbeextendedtospecificallycover:-

– shareholderofamalgamatingcompanybeingsubsidiaryofamalgamatedcompany

– Amalgamationofdirectsubsidiarywithstep-downsubsidiary,

– Amalgamationinvolvingamalgamatingcompanyholdingsharesinamalgamatedcompanies.

• Section2(19AA)oftheActbeamendedtoprovidethatthesharesoftheresultingcompanyshouldbeissuedon a proportionate basis to the shareholders of demerged company towhom shares are issuedunder firstcondition.Itshouldbeclearthatproportionatebasisdoesnotapplytoalltheshareholders.

• AnewSectionbeinsertedinchapterIVprovidingthatincaseofreorganization,deductioninrelationto:-

– toexpendituresincurredinpre-reorganisationperiodbutallowableduringpost-reorganisationperiodand

– expenditures incurredduringthepreviousyearbutallowableoncertaincriteria,fore.g.paymentbasisunder Section43Bof theAct, etc.will be allowed to successor as itwould havebeen allowed to thepredecessor.


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4.17.9. Conversion of one type of share into other type of share of the same company

Issues

• Section47(x)oftheActprovidesthat,anytransferbywayofdebentures,debenture-stockordepositcertificatesinanyform,ofacompanyintosharesordebenturesofthatcompany,willnotbetreatedasa‘transfer’forthepurposesofSection45oftheAct.Section49(2A)oftheActprovidesthat,whereashareordebenture inacompany,becamethepropertyofthetaxpayeronsuchconversion,thecostofacquisitiontothetaxpayershallbedeemedtobethatpartofthecostofdebenture,debenture-stockordepositcertificatesinrelationtowhichsuchshareordebenturewasacquiredbythetaxpayer.However,theperiodofholdingofearlierinstrumenthasnotbeenconsideredwhilecalculatingtheperiodofholdingforthenewinstrument.

• Itisnoteworthythatwhileinsertingclause(x),theintentofthelegislaturewasthatnotaxablecapitalgainscanariseatthetimeofconversionofconvertibledebentures,depositcertificatesorsharesofthecompany intodebentures or shares of that company, since it amounts to conversion of an asset held by a taxpayer from one formtoanotherandnootherpartyinvolvedtowhomanytransferismade.Infact,clause(x)ofSection47oftheActwasfurtheramendedbytheFinanceAct,1992toinclude‘bonds’inthesaidprovision.

• However,itappearsthattherehasbeenaninadvertentomissioninboththeforegoingprovisions,i.e.,conversionofpreferencesharesorwarrantsintoequitysharesofacompanyhavenotbeenspecificallycoveredunderthesaidprovisions.SimilartoSection49(2A),Section55(2)(b)(v)oftheActprovidesthatcostofsharesreceivedonconversionshouldbecostoftheshareswhichwereconverted.Thus,theredoesnotseemtobeanydifferenceintaxingofconversionofdebentureorshare.However,legislaturehasmissedtoprovideexemptiontoconversionof preference shares.

Recommendations

• Section47(x)oftheActshouldbeamendedtoincludecasesofconversionofonetypeofsharesorwarrantsintoshares or other type of shares.

• Section47(x)oftheActshouldbeamendedtoincludecasesofconversionofloan/ECBintosharesorothertypeof shares. This could be limited to loans which have terms / features similar to debentures and bonds.

• Section47(x)oftheActshouldbeamendedtoalsoincludecasesofconversionofIDRsintoshares.

• Section2(42A)oftheActshouldbeamendedtoprovidethattheperiodofholdingofearlierinstrumentshouldbeincludedforcomputingtheperiodofholdingofnewinstrument.

4.17.10. Transfer of capital asset between Holding Company and Subsidiary –Section 47

Issues

• Undertheexistingprovisionsofclause(iv)and(v)ofSection47oftheAct,transferofacapitalassetbyaholdingcompanytoitssubsidiarycompanyandviceversaisnotregardedasa‘transfer’forthepurposesofcapitalgainsif inter-alia, the parent company holds whole of the share capital of subsidiary company.

• Inordertocarryoutbusinessintoday’schallengingbusinessenvironment,businesshousescreatemultilayercorporate structure for complyingwith various regulatory and contractual requirements aswell as risk ringfencingforitslenders.

Recommendation

• It is therefore, suggested that benefits of clause (iv) and (v) of Section 47may be extended to step downsubsidiarieswheretheparentcompanyholdswholeofsharecapitalofsuchsubsidiarydirectlyorthroughother100%heldsubsidiary.


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4.17.11. Non-Compliance of conditions applicable to certain re-organizations - Section 47

Issues

• Section47A(1)oftheActprovidesthatincaseholdingcompanydoesnotcontinuetohold100%ofsharesofthesubsidiary company or converts/treats the transferred asset as stock-in-trade, within a period of 8 years from the dateofthetransferofcapitalasset,thegainsexemptedunderSection47(iv)/(v)oftheActshallbetaxableinthehandsofthetransferorcompanyintheyearoftransfer.Itshallbenotedthataperiodof8yearsistoolong.

• Further,inanycasesuchincomeshouldbetaxableintheyearofeventspecifiedintheSectionandnotintheyear of transfer of capital asset.

Recommendations

• Section47A(1)oftheActshouldbeamendedtoreduce“periodof8years”toreasonableperiod.

• Further,inanycase,suchincomeshouldbetaxableintheyearofeventspecifiedinthesectionandnotintheyear of transfer of capital asset.

• Words‘profits&gains’inSection47A(1)oftheActshouldbereplacedwiththeword‘income’.

4.17.12. Conversion into Limited Liability Partnership/ conversion of Firm into Company

Issues

• ChapterXoftheLLPActallowsfollowingconversions:

– Partnershipfirm(Firm)intoLLP(Section55oftheLLPAct)

– Privatelimited/unlistedpubliccompanyintoLLP(Section56/57oftheLLPAct)

In view of the above, the Finance Act 2010 provided tax neutrality to conversion of Company into LLP under Section56/57oftheLLPAct.However,thereisnoprovisionallowingtaxneutralitytoconversionoffirmintoLLPunderSection55oftheLLPAct.

• Section47(xiiib)oftheActprovidestaxneutralitytoconversionofCompanyintoLLPsubjecttocertainstringentconditions.Suchconditionsshouldbemadelessstringentorsomerelaxationshouldbeprovidedinapplicationofthesameasdiscussedbelow:

– ItisavailableonlytoaCompanyhavingTurnoveroflessthanRs.60lakhsfor3yearspriortosuchconversion.In the current economic scenario, this limit of Rs. 60 lakhs needs to be removed. There is no reason, why companieswith large turnover,whichotherwisequalify, shouldnotbeeligible for conversionwith taxneutrality.

– Anotherconditionisthatalltheshareholdersofthecompany,immediatelybeforetheconversion,shouldbecomepartnersoftheLLP.Thisconditionshouldbemadeapplicableonlyinrespectofequityshareholdersandnotpreferenceshareholders,sincepreferencesharesareinthenatureofquasiequity.

– Further,itisnecessarythattheaggregateoftheprofitsharingratiooftheshareholdersofthecompany,intheLLPshallnotbelessthan50%atanytimeduringtheperiodoffiveyearsfromthedateofconversion.Thisconditionshouldbeapplicableonlytovoluntarytransfersandnottoallthetransfers.Say,thisconditionshouldnotapplyincaseofdilutionresultingfromdeathordisqualificationofapartneroramalgamationof a corporate partner.


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– For claiming tax neutrality, it is provided that accumulated profits of the company as on the date ofconversion should not be paid to the partners of the LLP for a period of three years from date of conversion. UndertheAct,LLPisconsideredakintoapartnershipfirmandthereisnorestrictionondistributionoftheprofitsofthepartnershipfirm.Furtherincaseoffirm,thereisnorequirementtoshowreservesandsurplusseparately,butthesameiscreditedtopartner’scapitalaccount.Thus,thereshouldnotbeanyrestrictiononLLPinrelationtopaymentoutofprofits.Further,thetermaccumulatedprofitsisnotdefinedand may include other reserves also.

– MATpaymentunderSection115JBoftheActisprepaymentoftaxesactuallybecomingdueinsubsequentyearsundernormalprovisionsoftheAct.Consequently,Section115JAAoftheActallowscreditforsuchpayments in the year the company becomes liable to pay tax under normal provisions of the Act. There is noreason,whysuchcreditshouldnotbeallowedtoLLP,whichisconvertedfromacompanyeligibletosuchcredits,ifitispayingtaxesundernormalprovisionsoftheAct.

– Section47(xiii)/ (xiiib) and (xiv)of theAct requires that themembersof thefirm/ shareholdersof thecompanyshouldcontinuetomaintainprofitsharing/shareholdingfor5years.Itshouldbenotedthat5yearsisafairlylongtimeandtherefore,itshouldberestrictedto3years.

– Section47A(4)oftheActprovidesthat incaseofnon-complianceofanyconditionprovided inSection47(xiiib)oftheAct,thegainsonconversionofcompany/transferofsharesshallbetheprofits&gainstaxable in the hands of the LLP/ shareholders in the year of such non-compliance. Similarly, proviso to Section72A(6A)oftheActprovidesthatincaseofnon-complianceofanyconditionprovidedinSection47(xiiib)oftheAct,thelosses/unabsorbeddepreciationofthecompanyutilizedbytheLLPshallbeincomeof the LLP for the year of such non-compliance.

– Section47A(3)oftheActprovidesthat incaseofnon-complianceofanyconditionprovided inSection47(xiii)or(xiv)oftheAct,thegainsonconversionofpartnershiporproprietaryconcernshallbeprofits&gainstaxableinthehandsoftheCompanyintheyearofsuchnon-compliance.SimilartoSection72A(6A),72A(6)dealswithcasescoveredunderSection47(xiii)and(xiv).

Recommendations

• Section 47(xiii) of the Act should be suitably amended to include conversion of a Firm into LLP alongwithconversion of Firm into a Company.

• TurnovercriteriashouldberemovedfromSection47(xiiib)oftheAct.

• Words“equityshareholder”shouldsubstitutetheword“shareholder”whereveritappearsinSection47(xiiib)of the Act.

• Insertprovisounderclause(d)inprovisotoSection47(xiiib)oftheActtoprovidethatitshouldnotbeapplicabletoacasewhereachangeinprofitsharingtakesplaceconsequenttodeathofapartnerorpursuanttoanyothertransactioncoveredunderSection47oftheAct.

• Conditionofnon-paymentoutofaccumulatedprofitsspecifiedinclause(f)toprovisotoSection47(xiiib)oftheActshouldberemoved.Ifnotremoved,termaccumulatedprofitshouldbeappropriatelydefined.

• ProvisionsofSection115JAAoftheActallowingutilizationofMATcreditshouldbeamendedtoallowedcreditfor MAT paid by the company to the successor LLP.

• Sections47(xiii)/(xiiib)/(xiv)shouldbeamendedtoreduceperiodofcontinuingsameprofitsharing/shareholdingfrom 5 years to 3 years.

• Wordsprofits&gainsinSection47A(3)/(4)oftheActshouldbereplacedwiththeincome.


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4.17.13. Continuation of deduction under Section 80-IA in case of re-organization

Issues

• Section80-IAoftheActprovidesdeductioninrelationtoprofitsofcertainundertakings.Itwaswellsettledthatinthecaseofrestructuringofanyentityowningsuchundertaking,thebenefitsofdeductionwillbeavailabletoentityowningtheundertakingpostrestructuring.

• BoardCircularLetterF.No.15/5/63-IT(AI),dated13thDecember,1963specificallyprovidedthatintheyearofcorporaterestructuring,thebenefitshallbeavailabletotransferorentityuptothedateoftransferandtothetransfereeentityfortheremainingperiodoftaxholiday.

• Sub-Section (12)providedthat in theyearof restructuringdeductionwillnotbeallowable to the transferorentitybutsamewillbeallowedtothetransfereeentityasitwouldhavebeenallowed,hadtherestructuringnottakenplace.Intotality,thiswillrestrictthetotalperiodofdeductiontonotmorethanthetotalperiodforwhichthedeductionshouldhavebeenallowedundertheprovisionsoftheAct.

• However,sub-Section(12A)wasinsertedinSection80-IAwitheffectfrom1stApril,2008toprovidethatnothingcontainedinsub-Section(12)shallapplytoreorganizationpost1stApril,2007.AviewisexpressedthatpostinsertionofsubSection(12A),benefitofdeductionunderSection80-IAoftheActwillnotbeavailabletotheamalgamated/resultingentity.

Recommendations

• Section80-IA(12A)oftheActbedeletedtoenablerestructuringofeligibleentities.

• Section 80-IA(12) of the Act should be amended to provide for allowing deduction to the amalgamating/demergedentityfortheperiodtilltransferdateandtotheamalgamated/resultingentityposttransfer.

4.17.14. Amendment to Section 68

ThefirstprovisotoSection68oftheActprovidesthatincaseofcloselyheldcompanyshareapplicationmoneyshallbeconsideredasincomeofthecompanyunlesstheinvestorprovidesnecessaryexplanationtothesatisfactionoftheAssessingOfficer.

Issues

• Thisamendmentisnotneededanddesirable.AnytaxavoidancewhichisstructuredthroughexcessivesecuritiespremiumcouldbebroughtunderthepurviewofGAARprovisionsthroughadequatemethodologyandrules.TheoverallprinciplesenunciatedunderGAARprovisionstotreatanarrangementasImpermissibleAvoidanceArrangementshouldbeappliedtothesharesubscriptiontransactionfordeterminingthetaxabilityofsecuritiespremium account in the hands of company.

• ThisamendmentmayoverlapwithprovisionsofSection56(2)(viib)oftheActandmaybetaxedtwice.

Recommendation

• ItissuggestedthatthefirstprovisotoSection68shouldbedeleted.

4.18. Capital Gains

4.18.1. Issues under Section 54EC of the Act

Issues

• Section54ECoftheActprovidestaxexemptiononcapitalgainsarisingfromthetransferofalongtermcapitalasset,ifinvestedinlong-termspecifiedassetswithinaperiodofsixmonthsfromthedateofsuchtransfer.Theinvestmentsinsuchbonds,inaFYandthesubsequentFY,shouldnotexceedRs.50lakhs.


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• Further,theremightbeasituationwhere,thespecifiedassetsarenotavailableduringthesaidperiodofsixmonths.Also,itmaybepossiblethattheprice/rate/costatwhichthespecifiedassetisavailableduringthestipulatedperiodmaynotbeviableforthetaxpayertoinvest.

• Purposebehindgrantingofexemptionistopromoteinvestment inspecifiedassets.TheredoesnotseemtobeanyrationalebehindprescribingthemonetarylimitofRs.50lakhsperinvestororspecifyingthestringenttime lineof6months.Especially in thecontext that such fundswould inanycasebeused formeeting theinfrastructurerequirements.

• Thespecifiedassetsforthepurposeofsection54ECareonlybondsissuedbyNationalHighwaysAuthorityofIndiaorbyRuralElectrificationCorporationLimited.TheGovernmentshouldalsoinclude‘mutualfundunits’withinthepurviewofspecifiedassetstochannelizemoreinvestmentsinthecapitalmarkets.

Recommendations

• Currently,hugeamountsarerequiredtobedeployedintheinfrastructuresectortogivethesectorthemuchneededboostandthisvehiclecouldbeusedforraisingsuchinfrastructuredevelopmentfunds.Thus,thereisaneed to revisit the limits prescribed.

• Moreover,theinterestincomeonsuchbonds,whicharepresentlyfullytaxable,shouldbeawarded‘non-taxable’status.

• ProvisotoSection54EC(1)oftheActwhichrestrictstheinvestmentinsuchbondsnotexceedingRs.50lakhsina FY should be deleted.

• Recently inserted Second Proviso to Section 54EC(1) of the Act should also be deleted which restricts theinvestmentintheFYoftransferanditssubsequentFY,withrespecttotheassettransferred,insuchbondsnotexceedingRs.50lakhs.

• Thetimeperiodof6monthsshouldbeliberalizedandtheexemptionshouldbepermittedfortheinvestmentsmadebeforetheduedateoffilingofreturnofincomeunderSection139(1)oftheAct.

• Thelistofspecifiedassetsshouldbebroadenedbyincludingmutualfundunitsredeemableafterthreeyears.

4.18.2. Cut-off date for ascertaining cost and Index factor - Section 48/55

Issues

• Section55(2)(b)(i)and(ii)oftheActprovidesthatincaseofassetacquiredbefore1April1981,taxpayerhasanoptiontoreplacecostofsuchassetbymarketvaluethereof.

• Section48oftheActprovidesthatforcomputationoflongtermcapitalgain,“indexedcostofacquisition”isdeductiblefromthefullvalueoftheconsiderationreceivedfromthetransferofcertaincapitalassets.Indexedcostmeanscostofacquisitionadjustedforinflationindex.Again,baseforascertainmentofindexfactoris1stApril,1981.CostInflationIndexisnotifiedeveryyearhavingregardto75%ofaverageriseintheConsumerPriceIndexforurbanandnon-manualemployeesfortheimmediatelyprecedingpreviousyeartosuchpreviousyear.Itmaythusbeseenthatsuchindexationbenefitisnotionalanddoesnottakecareoffullinflationaryimpactandcausesinequitiestothetaxpayers.Thus,thecut-offdateforcostreplacementandbaseforindexbeing30yearold needs to be revised.

• Further,incaseoftaxpayer,acquiringassetsthroughspecifiedmodes,periodofholdingofearliertransferorisaddedtoperiodofholdingoftaxpayer,however,indexbenefitisallowedonlyfromthedateofholdingoftheassetbythetaxpayer.Thisseemstobeanunintendedanomalyandneedstobesetright.


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Recommendations

• Cut-offdateforcostreplacementinSection55oftheActandforindexfactorinSection48oftheActshouldbeshiftedto1stApril2001.

• Indexbenefiteventothetaxpayeracquiringassetsthroughspecifiedmodesshouldcommencefromthedateofacquisitioninthehandsoforiginalpurchaser.

4.18.3. Rate of Tax applicable to Short-term Capital Gains - Section 111A

Issues

• Section111AoftheActprovidesthatshort-termcapitalgainsonsaleofsharesoflistedcompaniesorunitsofequityorientedfundshouldbetaxedat15%.Theratewas10%till31March2009.

• Thedifferencebetweennormal incomeandcapitalgainarisingontransferofassets iswell recognizedevenundertheAct.Itisaknownfactthatownerofanassetincursalotofexpenditureformaintaininganasset.Incasesuchassetisusedinbusiness,deductionisallowedforsuchmaintenanceandotherexpenses.However,nosuchdeductionisallowedifsuchassetisanon-businessasset.Thus,itmakesastrongcasethatrateoftaxincaseofcapitalgainsshouldbedifferentfromtherateapplicabletootherincomes.ThisdistinctionisrecognizedtosomeextentinSection111Aand112oftheAct.However,forshorttermgainsonassetsotherthanlistedshares,suchdifferenceisnotrecognized.

Recommendations

• Therateforlistedsharesshouldberestoredto10%aswasthepositiontill31stMarch2009.

• Section111AoftheActshouldbeamendedtoprovidetherateoftaxforshorttermgainontransferofassetsotherthanlistedsharestobeat20%.

4.18.4. Abolition of tax on gains arising from transfer of Listed Securities

Issues

• Incaseof thetaxpayerwho isan investorand isalsoengaged in thebusinessof trading insecurities, thereisanongoingdisputeastothetaxabilityofthegainsarisingonaccountofthetransferofthesharesheldasinvestment.

• AsperNationalStockExchange,Indiaisoneofthecostliestdestinationstotradeinsecurities.STT,alongwithothertaxes,andhighbrokeragestructuremakestradinginsecuritiesinIndiaalmostfive-sixtimeshigherthaninadvanced countries.

Recommendations

• Atpresent,onlythe longtermcapitalgainsarisingontransferof listedsharesroutedviaarecognizedstockexchange are exempt. Various courts have laid down guidelines to determine the nature of the gains. Theguidelinesarebasedonthefactsoftheparticularcaseandcannotbeappliedtoallthecases,therefore,leavingtheissueunresolvedandcausingunduehardshipstothetaxpayers.

• TheShomeCommitteeReporton1stSeptember2012onGAARrecommendedthattheGovernmentshouldabolishthetaxongainsarisingfromtransferoflistedsecurities,whetherinthenatureofcapitalgainsorbusinessincome, to both residents and non-residents.

• Hence,itisrecommendedthatthecapitalgainstaxleviedonthetransferoflistedsecuritiesbeabolished.

• Alternatively,suitableamendmentsshouldbebrought in theAct, toprovideacleardistinctionbetweentheincomefromtradingactivities&incomefrominvestmentactivities.


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4.18.5. Insertion of Section 50D in the Act

Section50Disinsertedtoprovidethatincasesinvolvingtransferofassets,iftheconsiderationisnotdeterminable,fairvalueoftheconsiderationreceivedoraccruingshallbedeemedtobeconsideration.

Issues

• MethodofdeterminingfairvalueisnotspecifiedundertheAct.

• SectionoverlapswithcertainotherSectionsprovidingsimilarmechanismfordeterminingconsideration,e.g.Section45(3)dealingwithtransferofacapitalasset.

Recommendation

• MethodfordeterminationoffairvalueshouldbespecifiedundertheAct.ApplicabilityofSection50DoftheActshouldberestrictedtothetransactionsnotcoveredunderothersimilarprovisions.

4.19. Additional Income-tax on distributed income for buy-back of Unlisted Shares

TheFinanceAct,2013has introducedadditional incometaxof20%totheextentofdistributedincomepaidtotheshareholderinabuybackschemeforpurchaseofitsownshares.Ithasalsobeenprovidedthatincomearisingtotheshareholder as a result of such buy back will be exempt from tax.

Issues

• TheMemorandumtotheFinanceBill,2013statesthatthepurposeof introducingsuchprovisions istocurbavoidanceofpaymentoftaxbywayofDDT.However,theseprovisionswouldalsocovergenuinetransactionswithinitspurviewwhichisagainsttheintentofthelaw.

• TherateofDDTis15%underSection115-OoftheAct.However,levyofadditionaltaxondistributedincomebywayofbuybackisatthehigherrateof20%.

• Theprovisionsuffersfrommanydeficiencies:-

– Distributed incomehas been defined as consideration paid by the company on buy back of shares asreducedbytheamountwhichwasreceivedbythecompanyforissueofsuchshares.Thereductionofissuepricefromconsiderationpaidforcomputationofdistributedincomemaynotbeappropriateasitwouldleadtodoubletaxationunderthefollowingsituations:

(a) Wheretheshareholderhasacquiredthesharesthroughsecondarytransactionbypayingcostwhichishigherthantheissuepricereceivedbythecompany.

(b)Wheresharesareallottedtoanindividualbyhisemployer/formeremployer.Insuchascenario,thebenefitistaxableasaperquisiteunderSection17(2)(vi)oftheAct.Incase,whensuchsharesaresoldsubsequentlybytheindividual(eitherunderabuybackorotherwise)forthepurposeofcomputingtheindividual’scapitalgains,thecostofacquisitionistakenastheFMVconsideredfortheperquisitevaluationasperSection49(2AA)oftheAct.

• Inlightofthedefinitionof‘distributedincome’,thecompanywillhavetopaythetaxonthedifferencebetweentheconsiderationpaiduponbuybackofsharesandtheamountreceiveduponissueofsuchshares.

• Incasethecompanyhasraisedcapitalfromdifferentpersonsatdifferentpricesatdifferentpointsoftime,theprovisionsoftheChapterdonotprovidewhether(i)thecompanywouldneedtotakeaveragepriceofsuchsharesforthepurposeofcalculatingthedistributedincome(i.e.determinedistributedincomeatCompanylevel)or(ii)itwouldneedtocalculatethedistributedincomeseparatelyinrespectofeachshareholderparticipating


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inthebuy-backaftertakingintoaccounttherespectivecostofacquisitionofeachsuchshareholderor(iii)thecompanywouldneedtodeterminethedistributedincomevis-à-vispershare.

• Incasethecompanyhastocalculatethedistributedincomeseparatelyinrespectofshareholder,thentrackingtheactualissuepriceincaseofeachshareholderparticipatinginthebuybackcouldgetonerousinthefollowinginstances:

– sharesareindematmode,wherethecompany’sshareholderregisterwouldreflectonlythenameofthedepositaryparticipantandnotthenamesofeachshareholder/beneficiary;and

– incasetherehavebeenmultiplecorporateactions/businessreorganizations/mergers&demergers,etc.involvingthecompanyasthiswouldaltertheinitialissuepriceforeachshare.

Recommendation

• Inviewoftheabove,theformulaforcomputationofdistributedincomemaybeprescribedatthecompanylevelforeachbuy-back(ratherthanspecifictoshareholders).Thebuy-backdistributiontaxshouldbemadeakintoDDT.

Other Issues and Recommendations

Issues

• TheActdoesnotprovideforthemannertodetermineamountreceivedbythecompanyonissueofsharesatthetimeofcorporateactionssuchasbonusissuance,sharesplit,shareconsolidation,mergerofcompany,etc.Inthesecases,whilstthecompanyhasnotreceivedactualcashflow,therewouldbeachangeinfairvalueoftheshareduetosuchcorporateactions,whichwillimpactthecost/numberofsharesheldbytheshareholders.

• Ithasbeenprovidedthattheincomearisingtotheshareholdersinrespectofbuybackofunlistedsharesbythecompanywouldbeexemptinthehandsoftheshareholder.Thiswouldresultindenialofcarryforward/set-offoflossesresultingfrombuyback.

• TheconstructofChapterXII-DAintheActdoesnotenabletheshareholdertotakebenefitofindexationonthecostofacquisition,sincethecompanyispayingtaxonsuchdistributedincomewithoutconsideringindexationbenefit.Thisisverymuchdetrimentaltotheinterestoflongtermshareholderssincetheywillbelosingouttheindexationbenefit,eveniftheyareholdingthesharesforalongtime.Theprovisiontotallyignorestheholdingperiod of shares by the shareholder.

• Ithasbeenprovidedthattheadditionalincome-taxpayablebythecompanyshallbethefinaltaxonsimilarlinesasDDT.InSection115-OoftheAct,forcomputingtheDDT,ondistributionofdividendsbythecompanytoitsshareholders,therecipientholdingcompanyisallowedcreditfordividendsreceived.NosuchsimilarprovisionsarethereinSection115QAoftheAct.

• Theprofitarisingonbuybackofsharesinthehandsoftheshareholdercompany,willremaininitsbooksandmaybeliableforDDTonsubsequentdistributionofdividendbythecompanyoutof itsaccumulatedprofits(whichincludesprofitsonbuybackofshares).Thiswouldleadtodoubletaxation.

• AsexplainedintheMemorandum,thepurposeofintroductionofthisprovisionistocurbavoidanceofDDT.Therefore,provisionshouldtaxwhatwasbeingavoided,i.e.dividend.CompaniesAct,1956/2013doesnotallowutilizationofsecuritiespremiumforpaymentofdividend.EvenSection115-OoftheActdoesnotlevytaxonsuchdistribution.Section115-OoftheActleviestaxondividendasdefinedunderSection2(22)oftheActwhichrestrictsquantumofdividendtotheextentofaccumulatedprofits.Buybackispermittedevenoutofsecurities


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premiumwhich,bynostretchofimaginationcanbeconsideredtobeaccumulatedprofit,henceitshouldnotbemade liable to tax under new provisions.

• Section46AoftheActisspecificallydealingwiththistypeoftransactionsandtherefore,clarityonapplicabilityofSection46AoftheActneedstobeprovided.

• Thetransactionofbuyback,though,taxableasdistributiontaxunderthenewlyinsertedprovisionsoftheAct,maystillbetaxableascapitalgainsintheforeignjurisdiction.AmechanismmaybeprovidedundertheActforallowingcreditofthetaxespaidunderSection115QAoftheActtoavoiddoubletaxation.

• ConsideringthecommercialandregulatorydifficultiesforstructuringexitthroughIPO,put/calloptions,etc.,buy-backofsharesprovidestheVentureCapital(VC)/PrivateEquity(PE)fundswithalikelyandfeasibleexitavenueonwhichtheycanpossiblyrelyupon.Levyofdistributiontaxonexitthroughsuchroutewouldbeunfairto the VC/ PE funds.

Recommendations

• Thisamendment(provisionsinsertedthroughChapterXII-DA)shouldberolledbackortheapplicabilityoftheprovisionshouldberestrictedtocasesinvolvingavoidanceofDDT.

• Alternatively,therateoftaxondistributedincomeaspertheprovisionofSection115QAoftheActshouldberestrictedto15%asapplicabletoDDT.

• Thecomputationofdistributedincomeshouldbebasedoncostofsharesinthehandsoftheshareholderandnottheissuepriceofthecompanyincaseofsituationsstipulatedabove.Further,itshouldbespecifiedthatincasewheresharesareboughtbackbyanemployer/formeremployer,distributedincomewouldmeanconsiderationpaid by the company on buy back of shares as reduced by the fair market value which was considered for the purposeofperquisitevaluationunderSection17(2)(vi)oftheAct.

• Appropriate guidelines should be issued with respect to determination of the issue price under situationshighlightedabove.

• Amechanismforavailingcreditofsuchtaxshouldbenotifiedasimposingsuchtaxasafinaltax,withnocreditavailableisgrosslyunjustified.

• ItisrecommendedthatVC/PEfundsshouldbespecificallyexemptedfromapplicabilityofthesaidchapter.

4.20. Taxability of Immovable Property received for inadequate consideration - Section 56(2)

Section56(2)(vii)(b)oftheActprovidesthatreceiptofimmovablepropertybyanindividualorHUFforaconsiderationwhich is less than stamp duty value of the property by more than Rs. 50,000, will be taxable as income from other sourcesonthestampdutyvalueinexcessoftheconsideration.

Issues

• Section56(2)(vii) of theAct in respect of transfer of immovable property for inadequate considerationwasoriginallyinsertedbyFinanceAct,2009,butlaterondeletedbyFinanceAct,2010withretrospectiveeffectfromdateofinsertion.Theredoesnotseemtobeanyreasonforreintroductionofthesame.

• Theprovisionleviestaxoninadequacyofconsideration.Section50C/43CAoftheActdealswithsuchinadequacyinhandsoftheseller/transferor.Section56(2)(vii)oftheActwilltaxthesameinadequacyinthehandsofthepurchaseras‘incomefromothersources’,wheresaleconsiderationislessthanthestampdutyofthepropertybyanamountexceedingRs.50,000asstampdutyvaluelesssaleconsideration.Both,sellerandpurchaser,paytaxonsameinadequacyofconsiderationandthus,thereisdoubletaxationtothatextent.


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Recommendations

• Clause(ii)toSection56(2)(vii)(b)oftheActshouldbedeletedasitwillleadtodoubletaxation,whichcouldnotbetheintendedobjectiveoftheGovernment.

• Alternatively,Section50C/43CAoftheActmayneedtobecorrespondinglymodifiedtoexcludesuchtransactionwhichhasbeentaxedunderSection56(2)(vii)(b)oftheAct.

4.21. Transfer Pricing

4.21.1. Transfer Pricing - Marketing Intangibles

Issues

• Marketingintangiblesarecrucialsourcesofvalueanditsvalueisderivedfromthecompany’slevelsofAdvertising,MarketingandPromotionexpenditures (AMP)whichadds intrinsicvalue toacompany.Revenueauthoritiesare increasinglyscrutinizingthecrossbordertransfer,useandfurtherdevelopmentof intangiblesrelatingtobrandandlicenses.TherulingoftheDelhiHCinthecaseofMarutiSuzukiIndia,whichdiscussesthecreationandcompensationformarketingintangiblesonly,underlinesthistrend.Further,theSpecialBenchoftheDelhiTribunal inthecaseofLGElectronics IndiaPvt.Ltd.heldthattransferpricingadjustment inrelationtoAMPexpenditureincurredbythetaxpayerforcreatingorimprovingthemarketingintangibleforandonbehalfoftheforeignAssociatedEnterprise(AE)ispermissible.ItalsoheldthatthesaidfunctioncanbeconstruedasprovisionofservicebythetaxpayertotheAEforwhich,earningamark-upinrespectofAMPexpenditureincurredforandon behalf of the AE, is appropriate.

• Recently,theDelhiHighCourtinthecaseofSonyEricssonMobileCommunicationIndiaPvt.Ltd.andseveralotherconnectedmattersupheldthetaxdepartment’sjurisdictiontoconsiderAMPexpenditureasaninternationaltransactionsubjecttotransferpricing.TheHighCourtfurtherheldthatvariouslegalratiosacceptedandappliedby the Income-taxAppellateTribunals relyingupon theSpecialBenchruling in thecaseofLGElectronicsaserroneousandunacceptable.TheHighCourtheldthatdistributionandmarketingareintertwinedfunctionsandcanbeanalyzedtogetherasabundledtransactionandthatsegregationofnon-routineAMPexpenditureusingthebrightlineapproachisnotappropriate.InlinewiththefindingsoftheDelhiTribunalinthecaseofBMWIndiaPrivateLimited,theHighCourtalsoheldthatseparateremunerationfortheAMPactivitiesmaynotberequiredifsuchcompensationisalreadyprovidedbywayoflowerpurchasepriceorreducedpaymentofroyalty.IthasbeenobservedbytheHighCourtthat, for justifyingargumentof“margin”,selectionofcomparables,havingsimilarintensityoffunctionsonaccountofAMP,asthetaxpayer,iscrucial.ProperadjustmentsaresuggestedbytheHighCourttoeliminatethematerialdifferences.However,HighCourtdidnotprovideguidanceonthenatureofadjustmentsthatmayberequired.

• InlightoftheamendmentintroducedvideFinanceAct2012whichspecificallyincludesmarketingintangiblesintheexpandeddefinitionofinternationaltransactions,theSpecialBenchrulinginthecaseofLGElectronicsIndiaPvt.Ltd.,andtheHighCourt’sjudgmentincaseSonyEricssonandBMWIndia,identifyingatransactionrelatingtomarketingintangibledevelopmentandsubstantiatingthearm’slengthcompensationforthetransferpriceoftheintangibleswouldposegreatchallengeswithoutspecificguidancerelatingtotheseaspectsintheIndiantransferpricingregulations

Recommendation

• Accordingly,inlinewiththeOrganizationforEconomicCo-operationandDevelopment(OECD)principlesandrecommendationsgivenbytheOECDunderAction8oftheOECD/G20BaseErosionandProfitShifting(BEPS)ActionPlan,guidanceshouldbeissuedtorecognizecertainmethodologies/approachesforevaluatingthearm’slengthcharacteroftransactionsinvolvingmarketingintangibles.


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4.21.2. Transfer Pricing of Manufacturing Intangibles

Issues

• Compensationforuseofmanufacturing intangibleshasgenerallybeen intheformofroyaltypayoutsand iscommonlybenchmarkedbyadoptingtheaggregatedapproach.

• However,thisapproachisincreasinglychallengedbytheRevenueAuthorities,whoinsistonadoptingtransaction-specificapproach,andthetaxpayerisrequiredtosubstantiatetheeconomicandcommercialbenefitsderivedfrom the royalty payout.

Recommendation

• WiththeremovalofthelimitsexchangecontrolthatwasprescribedbytheForeignExchangeManagementActRegulations,itisnecessarythatguidancebeprovidedtotestsuchtransactionsparticularlyincasesofstart-uporlossmakingcompanies.

4.21.3. Transfer Pricing of Intra Group Financial Transactions/ Management services

Issues

• Managementservicesareserviceswhereanentityinamultinationalgrouprenderssharedservicesinthenatureof legal,administrative,humanresources, informationtechnology,finance,sales/marketing,etc. to itsgroupaffiliates.

• OneoftheimportantissuesthatdrawtheattentionoftheRevenueAuthoritiesisthearm’slengthnatureofthecompensationpaidforsuchintra-groupservicestorelatedentities.Anotherimportantaspectisdemonstratingthebenefitsderivedby theservice recipient.Theentireonus tosubstantiate thearm’s lengthpaymentandbenefitreceivedandestablishingthe‘cost-benefit’analysisbywayofmaintainingserviceagreements,basisofchargeoutrates,allocationkeys,evidenceofservices/benefitsreceivedetc.,isuponthetaxpayer.

Recommendation

• Accordingly, in the absenceof any guidance or industry benchmarks in public domain for testingpaymentstowardsintra-groupservices,detailedguidelinesinlinewiththeOECDprinciplesandrecommendationsgivenbytheOECDunderAction10oftheOECD/G20BEPSActionPlan,,formaintainingspecificdocumentationoutliningthevariouscostsincurredinrelationtheretoandtherelatedbenefitsderivedtherefrom,shouldbeintroducedintheregulations.EventheconceptofLowvalue-addingintra-groupservicesasrecommendedindiscussiondrafttoIntra-groupservicesissuedundertheabove-mentionedActionPlanshouldbeintroducedwhichwillresultinstreamliningthetaxpayersandtheRevenueauthorities’resourcestowardsmorehigh-valuetransactions.

4.21.4. Interest on Inter-company Loans and Guarantee fees

Issues

• Transferpricingofcross-borderfinancial transactionsdealswith inter-company loans,debentures,corporateguaranteecharges,cash-poolingarrangements,debtorsdiscounting,etc.,andintendstoarriveatarm’s-lengthoutcomeinarelated-partyscenario.Typically,interestratesonloantransactionsbetweenthirdpartiesdependon factors like borrowers’ credit rating, loan tenor, prevailingmarket conditions, loan seniority, security tolender(s), etc.

• TheComparableUncontrolledPrice(CUP)method,whichiscommonlyusedforarrivingatarm’s-lengthinterestrates for intra-group loan transactions, demands a high degree of comparability and necessitates complexadjustments.Pricingaguarantee isevenmorechallenging in theabsenceof comparabledataandwarrants


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applicationofsophisticatedtransferpricingtechniques. In India, lackofguidelinesoften leadstoapplicationof arbitrarymethods for pricing of inter-company financial transactions. The Tribunal has laid emphasis onthecreditqualityoftheborrowerwhileholdingthatinter-companyloansshouldattractarm’s-lengthinterestcharge. Further, vide the FinanceAct, 2012, the definition of international transactions has been expandedto specifically includecapitalfinancing, includingany typeof long-termor short-termborrowing, lendingorguarantee,purchaseorsaleofmarketablesecuritiesoranytypeofadvance,paymentsordeferredpaymentorreceivableoranyotherdebtarisingduringthecourseofbusinesswhichwouldnowgiverisetoawholegamutofsuchfinancialtransactionstobereportedbythetaxpayer.

Recommendation

• Given the increasing global trend of cross border financing and inter-company lending, it is of paramountimportance to introduce appropriate guidance governing the pricing of inter-company funding. Further,consideringtheincreasedamountoflitigationpertainingtotheinter-companyloansandguaranteetransaction,withnoclearviewofthehigherappellateauthorities,appropriateclarificationontheapproach/methodologytobeadoptedforanalyzingthesetransactionsisrequired.

4.21.5. Transfer Pricing Methods - Profit Split Method (PSM)

Issue

• PSM is applicablemainly in international transactions involving transferof unique intangiblesor inmultipleinternationaltransactionswhicharesointer-relatedthattheycannotbeevaluatedseparatelyforthepurposeofdetermining thearm’s lengthpriceofanyone transaction.Themethod involvesvaluationofnon-routineintangible,assigningthecombinedprofitorlossaccordingtoeachpartybasedonallocationkeysandusingofprojectedfinancials.LackofclarityonvaluationofintangiblesanduseofcomplexanalysisforsplittingtheprofitorlosshasbeenexperiencedasthemajorreasonsforthereluctanceinusingthismethodinIndia,bothfromataxpayerandrevenueperspective.

Recommendation

• IssuanceofguidanceforapplicationofthismethodandvaluationnormscanbringaboutclaritytothetaxpayeronusageofthismethodespeciallyinlightofsomerecentTaxTribunaljudgmentsacceptingtheuseofPSMasthe most appropriate method.

4.21.6. Transfer Pricing documentation and scrutiny requirement

Issues

• ThedocumentationrequirementsareattractediftheaggregatevalueofthetransactionsexceedsINR1Crore.

• Themonetarythresholdformandatory‘transferpricing’auditisINR15Crore.

Recommendations

• ThesemonetarylimitshaveremainedstaticaftertheintroductionoftransferpricingregulationsintheActandseem to be on lower side especially in case of companies, which has associates in various countries. This limit formaintenanceofmandatorydocumentationandinitiatingscrutinyproceedingsrequiresanupwardrevision.Also,documentationrequirementsshouldenabletheRevenueAuthoritiestoarriveatALPwithoutsubjectingtheconcernedpartiestounduecost,timeandharassment.

• ItissuggestedthatthethresholdformaintainingTPdocumentationandalsoformandatoryTPauditshouldbeincreased.


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• ItisfurtherrecommendedtoalignthedocumentationrequirementsandauditprocessestotherecommendationsmadeunderAction13oftheOECD/G20BEPSActionPlani.e.TPdocumentationtobemaintainedunderathree-tierstructure[MasterFile,LocalFileandCountry-by-Country(CbC)Report].OECDhasalsorecommendedthatall the data provided in the Master File and CbC report should be used only for risk assessment purposes by the Revenueauthorities.TheOECDhasalsoissuedfurtherguidanceonimplementationofCbCreportingspecifyinga thresholdof € 750million (approximately INR5250 crores) and suggestedways for informationexchangemechanismsbetweenvariousgovernments.

4.21.7. Adjustments for differences in Functions and Risks

Issues

• TheIndianTPregulationsprovideformakingreasonablyaccurateadjustmentstotakeintoaccountdifferencesbetween international transactions and uncontrolled transactions, considering the specific characteristicsrelatingthereto.

• However,inpracticethereisnoguidanceorclarityonthemannerinwhichtheseadjustmentsaretobemade.Forexample,adjustments inareassuchasdifferences in levelsofworkingcapital,differences in riskprofile,differencesinvolumes,pricingonmarginalcost,startuplossesorcapacityutilizationandsoon,havegenerallynotbeenpermittedby theRevenueAuthorities in the courseof transferpricingaudits asupheld in certainTribunal decisions as well.

Recommendation

• Accordingly, suitableguidanceonthemannerofcarryingouteconomicandriskadjustments tocomparableandtaxpayer’sdataisnecessary.Further,theRevenueAuthoritiesshouldbeencouragedtodulyconsiderinthecourseoftransferpricingaudits,businessstrategiesandcommercialoreconomicrealitiessuchasmarketentrystrategies,marketpenetration,andnon-recoveryofinitialset-upcosts,unfavorableeconomicconditionsandotherlegitimatebusinesspeculiaritieswhiledeterminingthearm’slengthpricing.

4.21.8. Valuation under Customs and Transfer Pricing

BothCustomsandTPrequiretaxpayertoestablisharm’slengthprinciplewithrespecttotransactionsbetweenrelatedparties.Objectiveunderrespectivelawsistoprovidesafeguardmeasurestoensurethattaxablevalues(whetheritisimportvalueofgoodsorreportedtaxprofits)arethecorrectvaluesonwhichrespectivetaxesarelevied.Theaboveobjective,whileestablishedonacommonplatformhasdiverseend-resultsasseenbelow:

– ToincreaseCustomsdutyamounts,theCustoms(GATTValuation)Cellwouldprefertoincreasetheimportvalueofgoods.

– Toincreasetax,theRevenueAuthoritieswouldprefertoreducepurchasepriceofgoods.

Issues

• Thediverseend-resultscreateambiguityinthemannerinwhichthetaxpayershouldreportvaluesundertheCustomsandtheTransferPricing.Wehavejudicialprecedentswhichfavorandcontradicttheuseofcustomvaluationintransferpricing.InthecaseofCoastalEnergyPvt.Ltd.,theChennaiTribunalendorsedtheTransferPricingOfficer(TPO)decisiontoapplythecustomsdatafortransferpricinganalysis.Similarly, inthecaseofLibertyAgriProductsPvt.Ltd.theChennaiTribunalagainheldthatarm’slengthpriceonimportsfortransferpricingpurposesistobedeterminedusingtherateforcustoms.Contrastingly,adecisionfromtheDelhiTribunalin thecaseofPanasonic Ltd.and theMumbaiTribunal in thecaseofSerdiaPharmaceuticalhighlighted thedistinctiveobjectiveofCustomsvaluationandthenecessityforseparatearm’slengthanalysisaspertransfer


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pricingprovisions.Further,inaChennaiTribunaldecisioninthecaseofMobisIndiaLtd,theTribunalheldthatcustomsvaluationwasnotacceptableascomparableforALPdeterminationasthepurposeofcustomsvaluationdoesnotfitintheschemeofTPanalysisundertheAct.

• ThesecontradictingdecisionsnecessitateagreaterneedforconvergenceoftransferpricingmechanismundertheActandtheCustomsRegulations.

Recommendation

• Thereisaneedforacommonplatformthatwouldprovidea‘middle-path’ofarm’slengthpricethatisequallyacceptableunderCustomsLawandundertheTransferPricing.

4.21.9. Definition of International Transaction

Issues

Certainclausesoftheexplanationinthedefinitionof“internationaltransaction”aspersection92BoftheActoverridethechiefmachinerysectionfortransferpricingi.e.section92(1)oftheAct.

• Clause(c)oftheExplanation(Capitalfinancing)-Thecurrentlanguageseemstocovertransactionssuchasissueofshares,borrowingorlendingtransactions(principleloanamount)underitsambit.However,thesetransactionsdonothaveanyimpactontheprofitandlossaccountofthetaxpayersandhenceleadtounnecessarycomplianceburdeninrespectofthesetransactionsaswellasthepotentialexposuretopenaltyincaseofnon-compliance.

• Clause (e) of the Explanation (Business restructuring) – The current clause covers transactions of businessrestructuring,irrespectiveofthefactthatithasabearingontheprofit,income,lossesorassets.

Recommendations

• ThedefinitionsarecontrarytotheprovisionsofSection92oftheActandhenceshouldbedeleted/modifiedaccordingly.

• Thewords“irrespectiveofthefactthatithasabearingontheprofit,income,lossesorassets”needmodificationordeletionastheyarecontrarytoprovisionsofsection92(1)andsection92BoftheAct.

• Further,theActdoesnotdefinewhatismeantby“businessrestructuringorreorganization”.Acleardefinitionmaybeincluded(inSection92F)soastoprovideclaritytothetaxpayers/taxauthoritiestoavoidanyunduelitigationonthetopic.

4.21.10. Safe Harbour

• On19thSeptember2013,thefinalSafeHarbourRules(SHRs)werereleasedafterconsideringthecommentsofvarious stakeholders.

• SafeHarbourhasbeen introduced forSoftwaredevelopmentServices (ITservices), ITES,KnowledgeProcessOutsourcingServices(KPOservices),ContractResearchandDevelopment(ContractR&D)relatingtoITservicesandgenericpharmaceuticals,formanufactureandexportofcoreandnon-coreautomobilecomponentsandforfinancialtransactionslikeloanandguarantees.

KPO services and Contract R&D services - Issues and recommendations

• Costplusmarginsproposedaretoohighandabovethetaxpayer’sexpectations-TheSafeharbourratioof25%inthecaseofKPOservicesseemstobeinahigherrange.AdownwardreductioninthecurrentlyprescribedrateswouldencouragemoretaxpayerstooptfortheSafeharbourregime.


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• Clarity required incategorization (e.g. for ITESv/sKPOand for ITservicesv/sContractR&Drelatingto IT)–Contrary to industry expectations, the categorization between ITES and KPO services and IT services andcontract R&D relating to software development has not been done awaywith. To provide distinction fromroutinebusinessprocessoutsourcingservices,thedefinitionofKPOservicesincludesonlythoseservicesthatrequire “application of knowledge and advanced analytical and technical skills”. The definitions of variouseligibleinternationaltransactions,includingthatoftheITESandKPOandITservicesandcontractR&Dservicesrelatingtosoftwaredevelopment,asprovidedintheSHRsleavelotofroomforsubjectiveinterpretationsandconsequentcontroversies/disputesoncategorizationofservices.

• Moreover, the provisions in the SHRs relating to tax officer’s review of taxpayer’s continued eligibility insubsequentAYsalsoaddtotheuncertaintyoncategorizationofservicesandeligibilityfortheSafeHarbour.

• TheruleshaveartificiallysegregatedITservicesintosoftwareandcontractR&DservicesandIT-enabledservicesintoBusinessProcessOutsourcing(‘BPO’)servicesandKPOservice.Theindustryfeelsthatthiscomplicatesthematterasmanyoftheactivitiesmaybeoverlappingandcompliancewouldrequireamoretechnicalanalysisthanenvisagedintherules.Itisrecommendedthatadditional/clearcriterionsareintroducedforclassificationofservices.Inanycase,ifsuchclassificationismade,itshouldnotbemerelybasedonthenatureofservicesprovidedandthereshouldbecertainothercriteriatodeterminetheclassificatione.g.valueofoutcomeoftheactivityperformedvis-à-vistheultimatecustomeretc.

Advancing of intra-group loans – Issues and recommendations

• ThecreditratingoftheborrowerisoneoftheprimeconsiderationsforanyloantransactionandthishasalsobeendulyrecognizedbytheRangacharyCommittee(RC)reportbyrecommendingdifferentinterestrates(forloansaboveINR50crores)forHigh,Medium,LowandJunkcategoryofborrowers.

• Adoptionof30thJuneasthedateforestablishingBaseRate-Consideringthedynamicnatureofthefinancialmarket,theinterestrateprevailingasonthedateonwhichloanisgrantedisofprimeimportance.Accordingly,interestrateclosesttothedateoflending,asmaybeavailable,shouldbeadopted.

• Benchmarkinginterestrateyearonyear–Typically,theinterestrateshouldbefixedatthetimeofenteringintotheloanarrangement.ItshouldbeeligibleforSafeHarbourthroughoutthetermoftheloanandnotjusttheAYsoptedforbythetaxpayerforSafeHarbour(validmaximumuptoaperiodof5yearsstartingwithAY2013-14duringwhichSHRareapplicable).

Providing intra-group guarantees – Issues and recommendations

• Downward revisionofproposedSafeHarbour rate for guaranteecommission/ fees:The rateof2/1.75% inthecaseofguaranteesbelowandaboveINR100croresrespectivelyisonthehigherside.Inmanycasestheguaranteefeechargedbybankscouldbemuchlesser.

• ThecreditratingoftheborrowerisoneoftheprimeconsiderationsforanyguaranteetransactionandthishasalsobeendulyrecognizedbytheRCreportbyrecommendingdifferentinterestrates(forloansaboveINR100crores)forHigh,Medium,LowandJunkcategoryofborrowers.

• TheaboveSHRsmaynotnecessarilycoverWhollyOwnedSubsidiaries.ItshouldcovertransactionswithallAEs.

General Issues and Recommendations

• RequirementforcontemporaneousdocumentationwillcontinuetoapplyinitsentiretyevenincaseataxpayerhasoptedforSHR-Accordingly,thebasicobjectiveofsimplicityandeasycomplianceisnotbeingmetbytheSHRprovisions.However,theRCreporthasrecommendedthatthetaxpayersoptingforSafeHarbourshould


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be required tomaintainonlybasicdocumentation like thedetails of international transaction, shareholdingstructure,natureofbusinessandindustryandfunctionalanalysis.ItisthereforerecommendedthattheSHRbeamendedtoprovidethatthetaxpayersoptingforSafeHarbourshouldbeexemptedfromallthedocumentationrequirementsandshouldberequiredtomaintainonlybasicdocumentationasrecommendedbytheRC.

• ThemarginsprescribedundertheSafeHarbourrulesareveryhighanddonotreflectindustrybenchmarks.TheGovernmentmustre-evaluatetheseinthelightofcurrenteconomicenvironmentandthefactthatcontinuedinsistenceonsuchhighmarginserodescompetitivenessofIndianserviceprovidersandresultsinshiftingworkout of India.

• Safeharborrulesdonotprovideprotectionagainstdoubletaxation.ThetaxpayerstandstheriskoffacingdoubletaxationiftheresidentcountryofthetaxpayerdoesnotacceptthesafeharbornormsofIndia.

MAP should be available for taxpayers who opt for Safe Harbour, as recommended by the OECD. This would greatlyincreasetheattractivenessoftheframework.

• Currently,SHRshavebeennotifiedincaseofspecifieddomestictransactionsofgovernmentownedelectricitycompaniesprescribinglimiteddocumentationrequirementsforsuchcompanies.Itisrecommendedthatmoresuchindustriesshouldbecoveredforsimplifieddocumentation.

• ItisrecommendedthataclarificationshouldbeissuedthattheSafeHarbourwouldnotbecomeabasisfortheRevenueAuthoritiestochallengethearm’lengthpricingofthetaxpayerinprioryears.

4.21.11. Specified Domestic Transaction

‘SpecifiedDomesticTransactions’nowgetcoveredinthescopeofTransferPricingprovisionsiftheaggregateamountofallsuchtransactionsenteredbythetaxpayerinthepreviousyearexceedsINR20crores(w.e.fFY2015-16,beforethatit was INR 5 crores)

Issues

• Theterm‘specifieddomestictransaction’hasbeendefinedto interaliameananyexpenditure inrespectofwhichpaymenthasbeenmadeoristobemadetoapersonreferredtoinclause(b)ofsub-section(2)ofSection40A of the Act. Such expenditure could possibly include capital expenditure made to such a related person. It shouldthereforebeclarifiedthattheseprovisionspertaintorevenueexpenditureonly.

• Thisamendmentalsocoversascenariowhereinthepaymentofremunerationbythecompanytoitsdirectororrelativeofsuchdirectorsisalsorequiredtobeatarm’slength.Thesamecastsanonerousresponsibilityonthecompanyvis-à-visjustificationofthearm’slengthnatureofsuchpayments.

• Currently,therearenoprovisionsrelatingtocorrespondingadjustmentintransferpricingregulationsinrespecttospecifieddomestictransactions.Itisimportantthatifanyadjustment[upwardordownward]ismadeunderthedomestictransferpricingprovisions,thencorrespondingadjustmentinthehandsoftheotherpartyshouldbe invariably be made.

• Presently,threedifferentSectionsoftheActprescribevaryingthresholdsfordeterminationof‘relatedparty’whichareasunder:-

– SubstantialInterest–Notlessthan20%ofvotingpower–ExplanationtoSection40A(2)

– AssociatedEnterprises-Notlessthan26%ofvotingpower-Section92A(2)(a)&(b)

– AssociatedPerson-Notlessthan26%ofvotingpower-Section80AreadwithSection35AD(8)


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Recommendations

• Necessaryguidanceforbenchmarkingdirectors’remunerationshouldbeprovided,asbythenatureitselfthesecouldbeverypeculiartransactionsdependingontheextentofownership,technicalability,seniorityetc.

• Thisamendmentseekstocoverasituationwhereintherecouldnotbeanylosstotheexchequer.ThesameisnotinlinewiththesuggestionprovidedbytheSupremeCourtinthecaseofGlaxoSmithkline.TheSupremeCourthadprovidedthesituationwhereintransferpricingshouldbeapplicableincaseoftransactionsbetweenaprofitmakingandalossunit/company.TheotherscenariowhichwasenvisagedbytheSupremeCourtwastransactionsbetweenunits/taxpayershavingdifferenttaxrates.Otherthanthescenarioscontemplatedabove,acorrespondingadjustmentshouldbeallowedandhenceprovidedforinthestatue.

• It should be suitably clarified that the transfer pricing provisionswould only apply to revenue expenditurereferredtoinSection40A(2)(a)oftheAct,andnottopaymentsmadetopersonsspecifiedinSection40A(2)(b)of the Act.

• ‘Anyothertransactionasmaybeprescribed’coveredunderSection92BAoftheActmaybenotifiedandshouldbemadeapplicablefromprospectiveeffecttoavoidunduehardshiptothetaxpayers.

• Necessary amendments should be made in the domestic transfer pricing provisions to provide for thecorrespondingadjustments.

• Itissuggestedthatthethresholdfordeterminationof‘relatedparty’prescribedintheaforesaidsectionsshouldbeharmonizedandnecessaryamendmentsinthisregardshouldbecarriedout.

• Thewords“closeconnection”appearinginSection80-IA(10)oftheActneedstobeclarifiedtoavoidambiguityintheapplicationofprovisionsofSection92BAoftheAct.

• Further,clarityshouldbeprovidedwithregardtointer-unitallocationofcostsbetweeneligibleandnon-eligibleunitsi.e.whethercorporatecostallocationsfromanon-taxholidayunitofacompanytoataxholidayunitofthesamecompanywouldgetcoveredwithintheprovisionsofSection80-IA(8)andconsequentlyneedtobereportedasaspecifieddomestictransaction.

• TheAdvancePricingAgreement(APA)provisionsarebeingmadeapplicabletoonlyinternationaltransactions.Thesameshouldalsobemadeapplicabletodomestictransactionscoveredbytransferpricingregulations.

4.21.12. Rollback of APA

TheCBDTintroducedtherollbackrulesundertheAPAprogramon14March2015.Thereweresomeambiguitiesabouttheimplementationoftherollbackrules,andtherefore,CBDTissuedFAQsclarifyingcertainissues.Inthisregard,someoftheaspectsthatneedtobefurtheraddressedareasunder:

Issues

• TheinternationaltransactionproposedtobecoveredundertherollbackistobethesameascoveredunderthemainAPA.Theterm‘sameinternationaltransaction’impliesthatthetransactionintherollbackyearhastobeof the same nature and undertaken with the same AEs, as proposed to be undertaken in the future years and in respect of which APA has been reached.

• Therulesprovidethatiftheapplicantdoesnotcarryoutanyactionsprescribedforanyoftherollbackyears,theentireAPAshallbecancelled.


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Recommendations

• Itisrecommendedthatthisprovisionshouldberelaxedtotheextentthatthetaxpayerswithsimilartransactionswithnosubstantialchangesinthefunctional,assetandriskprofileshouldbeallowedtotakebenefitofthisprovision.Further,ifthesame/similartransactionisundertakenwithanotherAE,thebenefitofrollbackshouldbe provided.

Thus,itisrecommendedthattheprovisionshouldbemadeapplicabletosimilarnatureoftransactionsandwithdifferentAEs.

• ItisrecommendedthatthisprovisionshouldberelaxedandshouldnotresultinthecancellationoftheentireAPA.

4.21.13. Advance Pricing Agreements (‘APA’) and Mutual Agreement Procedure (‘MAP’)

Issue

• NobilateralAPAisallowedforsettlingtransferpricingdisputesintheabsenceofArticle9(2)incertainDTAAsforallowingcorrespondingtransferpricingreliefinthehostcountry(e.g.Germany,France,Singapore).

Recommendation

• AtaxpayershouldbeallowedtofileabilateralAPAevenincaseswhereArticle9(2)[correspondingadjustment]isnotprovidedforintheDTAAwithatreatypartner.ThisisaninternationallyacceptedprincipleandshouldbeallowedfortaxpayersinIndiaaswell.OtherwiseIndiashouldrenegotiateitstreatiestoincludeArticle9(2).Suchenablementwouldbeahugerelieffortaxpayers.

4.21.14. Amendments in electronic version of Form 3CEB


• ThesoftwareutilitydesignedforelectronicversionofForm3CEBdoesnotprovidereportingoftransactionsinanycurrencyotherthanIndianrupees.Itissuggestedtoprovidereportingoftransactionsundertakenbybanksinforeigncurrencytoprovidereportingoftransactionsinforeigncurrency.

• Currently,voluminoustransactionsarerequiredtobemanuallypunchedinelectronicversionsofForm3CEBavailableonincometaxwebsite.Thisresultsinmammothmanualeffortsandincreaseschancesoferroneousreporting.Therefore,itissuggestedtoprovideexcelutilityofForm3CEBontheincometaxwebsiteforreportingofcertaintransactiontermsintextform.

4.21.15. Penalty for failure to keep and maintain information and document etc.

Issue

• TheFinanceAct,2012hassubstitutedSection271AAwitheffectfrom1stJuly2012whichreadsasunder:-

“271AA. Without prejudice to the provisions of Section 271 or Section 271BA, if any person in respect of an international transaction or specified domestic transaction-

i. failstokeepandmaintainanysuchinformationanddocumentasrequiredbysub-Section(1)or sub-Section(2)ofSection92D;

ii. failstoreportsuchtransactionwhichheisrequiredtodoso;or

iii. maintainsorfurnishesanincorrectinformationordocument,


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theAssessingOfficer or Commissioner (Appeals)may direct that such person shall pay, byway ofpenalty, a sum equal to 2% of the value of each international transaction or specified domestictransactionenteredintobysuchperson.”

Whilethequantumofadditionitselfisdisputableintransferpricingassessments,fixingthepenaltyontheassessedincome would increase the burden of the taxpayer considerably.

Dueto retrospectiveextensionof scopeof international transaction, the taxofficerorCommissioner (Appeals) canaskthetaxpayertopaypenaltyunderthesaidSection271AA@2%ofvalueofinternationaltransactionduetofailuretokeepinformationinadditiontoanother2%underSection271GfornotfurnishingtheinformationbesidesregularpenaltyunderSection271(1)(c)oftheAct.Thiswouldresultinmultipletaxdemandonarbitraryvalues.

Recommendation

• It is, therefore, suggested thatpenalty shouldbe restricted to tax indisputeandnot linked to the valueoftransaction.

Issue

• WhiletheFinanceAct,2014,extendedthepowerto levypenaltyunderSection271GtotheTPOfor failureto furnish information/ TP documentation, which was earlier restricted to tax officer or the Commissioner(Appeals),interestingly,therehasbeennoamendmenttoSection271AA(whichprescribesthepowertolevypenalty for failure to keepandmaintain informationanddocument, etc. in respectof certain transactions),currentlyprovidedonlytothetaxofficerortheCommissioner(Appeals),possiblyseekingto limitpowerstolevypenaltyformattersrelatingtonon-compliancewithstatutoryprovisions,onlytotaxofficers/Commissioner(Appeals),whileextendingpowerstolevypenaltytoTPOsformattersrelatingtoproceedingsinthecourseofconduct of TP audits.

Recommendation

• Consideringthatclause(iii)toSection271AAalsostatesthatpenaltyshallbeleviedformaintainingor“furnishing”incorrectinformationordocument,astheactof“furnishing”istypicallyassociatedwithaTPauditproceedings,it is recommended that there should be some consistency on this front.

4.22. Financial Services

4.22.1. Taxation of Long Term Capital Gains on Transfer of Unlisted Securities

Issues

• TheFinanceAct,2012hadamendedSection112(1)(c)oftheActtoprovideaconcessional longtermcapitalgains of 10%on transfer of capital assets being unlisted securities in the hands of non-residents (includingforeigncompanies).

• However,themannerinwhichtheterm‘unlistedsecurities’hasbeendefinedmayleadtotheunintentionalconsequenceof the10%concessional tax ratenot applying to gains arisingon transferof sharesof privatecompaniesheldaslongtermcapitalassets.

• UnlistedsecuritieshavebeendefinedvideExplanation(ab)toSection112(1)oftheActas follows“Unlistedsecuritiesmeanssecuritiesotherthanlistedsecurities”.Explanation(aa)defines

“listed securities” as follows:

“Listed securities mean the securities which are listed on any recognised stock exchange in India”.


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• Further,Explanation(a)toSection112(1)oftheAct,providesthat“theexpression‘securities’shallhavethemeaning assigned to it in clause (h) of Section 2 of the Securities Contracts (Regulations) Act, 1956 (32 of1956)”.Therelevantextractoftheexpression‘securities’asdefinedinSection2(h)oftheSecuritiesContracts(Regulations)Act,1956(“SCRA”)isasunder:

“Section 2(h) - Securities include –

Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

ii.……………”

• ForthepurposesofSection112oftheAct,itthereforebecomesimperativetoexaminethescopeoftheterm“securities”undertheSCRA.Basedonvariousjudicialprecedents,ithasbeenheldthatthesharesofaprivatelimitedcompanywerenotsecuritiesasdefinedinSection2(h)oftheSCRA.ItwasheldthatthesharesmustbemarketabletoqualifyasasecurityundertheSCRA.Asthesharesofaprivatecompanyarenotfreelytransferable,theywerenotheldtobemarketableandhencenotasecurityforthepurposesofSection2(h)oftheSCRA.

• Therefore,basedontheaboveinterpretationoftheterm‘securities’,theaforesaidbenefitoftheconcessionalrateof10%underSection112(1)(c)oftheActmaybeavailableonlyonlongtermcapitalgainsarisingontransferofunlistedmarketablesecuritiesi.e.longtermcapitalgainsarisingonthesaleofsharesofaprivatecompanymaynotqualifyfortheaboveconcessionalrateoftaxation.

• Theintentionofthelegislaturewastoextendthebenefitofthe10%concessionaltaxrateonlongtermcapitalgainsarisingontransferofunlistedsecuritiesbyanynon-resident.However,basedonvariousjudicialprecedentsoninterpretationoftheterm“securities”asperSCRAcouldleadtolitigationonthismatter.Thereappearsnobasistoexcludegainsarisingfromtransferofprivatecompaniesfromtheabovefavourableregime.Moreover,asignificantportionoftheinvestmentsmadebythePEfundsinIndiaisactuallyinprivatelimitedcompaniesforseveralregulatory/commercialreasons.

Recommendation

• Inordertocreatecertaintyandavoidundue litigation, it is requestedthatall longtermcapitalgainsarisingtonon-residentsontransferofallunlistedsecuritiesshouldbesubjecttoconcessionaltaxrateof10%underSection112(1)(c)oftheActwithretrospectiveeffectfromApril1,2013.Inthisregard,wesuggestthattheterm“securities”inExplanation(a)toSection112(1)shouldbedefinedasunder:

“shares, scrips, stocks, bonds, debentures, debenture stock, warrants or other securities of like nature issued by a private company, public company, any other body corporate and funds registered with Securities and Exchange Board of India (‘SEBI’) under SEBI (Alternative Investment Funds) Regulations, 2012 and SEBI (Venture Capital Funds) Regulations, 1996 and includes other securities as specified in Section 2(h) of SCRA”

4.22.2. Income Characterization – Capital Gains vs. Business Income

Issues

• Venture capital investments typically come from high net-worth sophisticated and long term investors andinstitutions.Unlikeseveralothertypesofinvestments,venturecapitalistsprovidefundtobuildupresourcesandenterpriseswiththeintentionofenhancingthelongtermgrowthandvalueofcompaniesandtargetreturnsontheircapitalbyincreasingshareholdervaluethroughexpansionanddevelopmentofthecompany.TheobjectiveofVCfundsistomakelongterminvestments,asdistinguishedfromotherinvestorssuchashedgefundsandtraders,whodealinsecuritieswithmuchshorterholdingperiodswiththeintentiontomakeshorttermwindfall


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gains.Forexample,VCfunds,bytheirverynature,arelongterminvestorswithcomparativelylowfrequencyoftransactions.VCfundsarenotpermittedtomakeinvestmentsoutofborrowedfunds.Moreover,undertheextantregulatoryframework,aSEBIregisteredVCfundcannotundertakeanyactivityotherthaninvestmentactivity.Accordingly,thepurposeofaVCFundistomakeinvestmentasagainstengagingintothebusinessofdealinginshares.

• Therefore,any incomeofaSEBIregisteredVC/AIF funds (otherthanCategory IIIAIFwhichareundertakingderivativesorcomplextradingtransactions)fromsaleofshares/securitiesshouldbeinthenatureof‘capitalgains’andnot‘businessincome’.

Recommendation

• TheprovisionsoftheActshouldbesuitablyamendedtoexplicitlyprovidethatincomefromsaleofinvestmentsby SEBI registeredVC/AIF funds (other than Category III AIFwhich are undertaking derivatives or complextradingtransactions)wouldbetreatedas‘capitalgains’andtaxedaccordingly,includingapassthroughbasisinthehandsoftheinvestors.Thiswouldsimplifythesystemoftaxation,bringcertaintyandeliminateneedlesslitigationontheincomecharacterizationissue.

4.22.3. Safe Harbour provisions for Fund Managers present in India

InordertoencouragefundmanagerstoshifttheirbasetoIndiaandmitigateconcernsofadversetaxconsequencesinmakingthisshift,theFinanceAct,2015hasclarifiedthatmanagementofoverseasfundsbyfundmanagersinIndiashallnotcreateabusinessconnectionoftheoverseasfundsinIndiasubjecttocertainprescribedconditions.TheFinanceAct,2015hasprescribedvariousconditionstobefulfilledtobecomean‘eligibleinvestmentfund’andan‘eligiblefundmanager’throughaninsertionofanewsection9AtotheAct.

Issues

• Theconditionsprescribedbythesectionarequiteonerous. Theyseemtotargetthelargeinstitutionalfundinvestorsasitisdifficultforprivateequityfundstofulfilltheconditions.Accordingly,theconditionsshouldbestreamlined to provide clarity to all.

• Thequalifyingconditionscontainedinthesectionmaynotbepracticallyfeasible,especiallyincaseofanchorinvestorsorbuyoutdealse.g.restrictionsonminimumnumberofinvestors,maximumamountofinvestmentsbyeachinvestorseverallyandjointlywithotherinvestors,prohibitiononfundscontrollinganybusinessinIndia.

• Also,aneligiblefundmanagershouldnotbea‘connectedperson’oftheoffshorefundwhereinthedefinitionoftheterm‘connectedpersons’isverywide.

• TheconditionsdonotprovideanexemptionfromestablishmentofbusinessconnectionincaseafundisresidentinacountrywithwhichIndiahasnotenteredintoaDoubleTaxationAvoidanceAgreement(“DTAA”).Therefore,itwouldbedifficulttoavailsimilarbenefitsforthefundmanagersofsuchjurisdictions.

• ‘Controlandmanagement’hasnotbeenclarifiedbytheamendment. The issuebeinghighlysubjectiveandthereforelitigativeshouldbeclarified.

• Inorder tobe registeredwith Securities andExchangeBoardof India (“SEBI”), a ForeignPortfolio Investors(“FPI”)shouldhaveminimumof20membersandnomembershouldhaveparticipatinginterestinexcessof49percent.However,theFinanceAct,2015stipulatesthatanoffshorefundshouldhaveminimum25membersandnomembershouldhaveparticipatinginterestinexcessof10percent.TheseconditionsshouldbealignedaspertheSEBIconditionstoensureuniformityinboththelaws.


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Recommendations

• Theeligiblefundshouldbedefinedonthelinesof“broadbasedfunds”asdefinedunderSEBI(FPI)Regulations.Adraftisasunder:

‘“Private Equity Fund” shall mean

a) appropriatelyregulatedbroadbasedfunds;OR

b) broadbasedfundsthatarenotappropriatelyregulatedbutwhoseinvestmentmanagerisappropriatelyregulated

whichcollectfundsfromforeigninvestorsforinvestingitinaccordancewithadefinedinvestmentpolicyforthebenefitofitsinvestors.

Explanation1:

Forthepurposesofthisclause,aPrivateEquityFundshallbeconsideredtobe“appropriatelyregulated”ifitisregulatedorsupervisedbythesecuritiesmarketregulatoroftheconcernedforeignjurisdiction,inthesamecapacity in which it proposes to make investments in India

Explanation2:

A. Forthepurposesofthisclause,“broadbasedfund”shallmeanafund,establishedorincorporatedoutsideIndia,whichhasatleasttwentyinvestors,withnoinvestorholdingmorethanforty-ninepercentofthesharesorunitsof the fund.

Providedthatifthebroadbasedfundhasaninstitutionalinvestorwhoholdsmorethanfortyninepercentofthesharesorunitsinthefund,thensuchinstitutionalinvestormustitselfbeabroadbasedfund.

B. ForthepurposeofclauseAofthisExplanation,forascertainingthenumberofinvestorsinafund,directinvestorsaswellasunderlyinginvestorsshallbeconsidered.

C. ForthepurposeofclauseBofthisExplanation,onlyinvestorsofentitieswhichhavebeensetupforthesolepurposeofpoolingfundsandmakinginvestments,shallbeconsideredforthepurposeofdeterminingunderlyinginvestors.’

• Inadditiontosafeharbourinrespectofbusinessconnectionandresidencyrisk,certaintyontreatyeligibility,subjecttoholdingavalidtaxresidencycertificateinthehomecountry,shouldbeprovidedforoffshorePEfunds.

4.22.4. Issue of shares at a value higher than Fair Market Value to VCF/ VCC - Section 56(2)

Issues

• ThoughFinanceAct2012specificallycarvedoutsubcategoryVCFunderCategoryIAIFfromtheprovisionsofSection56(2)(viib)oftheAct,certainunintendedconsequencesasstatedbelowhavearisenwhichimpacttheVC industryat large.The industrybeingtightly regulatedbySEBI is facingcertainunintendedconsequenceswhichinclude:

– Certainunintendedtransactions(fore.g.;–capitalreservearisingpursuanttomerger)mayalsogetcoveredwithinthepurviewofSection56(2)(viib)oftheAct,whichisnotdesirable.

– ItisquitecommonforVCinvestorstoenterinto“ratchetstructures”withtheissuercompany/promoterwherein convertibles are issued and conversion price is formula based and linked to the company’sperformance,adjustmentofshareholdingpercentageetc.Incertainscenarios,suchratchetcouldresultinthecompanyissuingsharestoparties(otherthanVCF/VCC)athighpremiumattractingtaximplications


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inthehandsoftheissuercompanyundertheaboveamendment.Thus,theprovisionsofSection56(2)(viib) of theAct could adversely affectbonafide, arm’s length ratchet structures agreedwith residentpromoters/otherinvestorswhereintheyarerequiredtoinfusefundsorconvertatasubstantialpremiumfortheadjustmentofshareholding.

– Also, this issue is relevant for the angel investment industry investing in start-up ventures,where theimmediate valuation of the entitymay not be a benchmark for the investment beingmade by angelinvestors. Start-upventures,at the stagewhereangels invest,usuallyhaveno revenuesorprofitsandthevaluationisbasedonthepotentialandpromiseoftheidea,thebackgroundandcompetenceofthefounding team,etc.and isusuallyasimplematterofnegotiationbetweenthe foundersand theangelinvestors.Itisoftenwrongforonepartyortheotherbutitissimplyimpossibletocreateafrozenlogicforsuchinvestments,beitDCForavaluationbymerchantbankers,etc.Anysuchmechanism,orothersthatmaybeproposed,wouldbe impracticalandunfortunatelypushthepartiesconcernedtocontriveadherence,anextremelyundesirableoutcomeasboth founders/angel investorswould liketooperatewithintheletterandtheintentofthelaw.

a. SubjectingthevaluationoftheinvestmenttoanFMVbyRevenueAuthoritiesdoesnotwork,asexplainedabove.TheRevenueAuthoritieswouldnothavethedomainunderstanding tovaluethe innovation(infacteventwodifferentangel investorswouldvaluethesamecompanydifferently).Thiswillsubjectallinvestmentsinstart-upcompaniestore-evaluationandwillopenaplethoraofdisputes/appeals.Thiswillscareangelinvestorsaway.

b. ThisprovisioncharacterizestheinvestmentbyAngelsas Incomeinthehandsoftheinvesteecompany,which is fundamentally incorrect. TheAngel Investor’s investment is to grow the company and createrevenues/incomeinthecompany.Bychangingthenatureoftheinflowintothecompany,thecompanyandtheinvestorsignaway30%oftheinvestment(lesstheFMV)totax:starvingthecompanyofcriticalcashflowinvestment.So investorswhoare investingtaxpaidmonieswillnot investasthiswillattractanotherroundoftaxalbeitthroughtheinvesteecompany.Thisamountstodoubletaxation.

• AsthisSectiononlyappliestodomesticinvestors,itdiscriminatesagainstthemascomparedtoforeigninvestors,whoarenotsubjecttothisclause.

– The above provisionmay also hinder the ability of investee companies tomake genuine arm’s lengthinorganicacquisitions.

– ExclusionunderSection56(2)(viib)oftheActshouldapplytosharesissuedtoallCategoryIandIIAIFsandnotonlytothesubcategory“venturecapitalfund”.

• It isalsonotedthatdespite the fact that theaboveprovisionshavebeen introduced forshares issued fromApril01,2012onwards,VCUsarebeingissuedwithtaxdemandsonpremiumreceivedpriortoApril01,2012.Thiscausesanunnecessaryburdenonportfoliocompaniesandincreasestheirlitigationandcompliancecosts.Accordingly,itisrepresentedthatappropriateinstructionsshouldbeissuedtotaxofficerstorefrainfromthispractice.

• Theremaybe instanceswhere the company receives consideration inone tax yearbut issues shares in thefollowing taxyearor in certain casesdoesnot issue sharesbut refunds the shareapplicationmoney to theshareholder, there is lack of clarity in such cases as to the year in which the provision would apply or whether the provision would apply at all.

• ItwouldbeprejudicialtosubjecttheIssuerCompanytosuchadverseprovisionswhichdidnotexistinlawwhenthetransactionswereenteredinto.


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Recommendations

• Giventhatthesaidprovisionisintendedtoeffectivelybean‘anti-avoidance’provision,thefollowingsituationswhereno‘tax-avoidance’oughttobeinvolvedmeritexclusion.Consequently:-

– Applicabilityshouldberestrictedtoissueofsharesinconsiderationforcash.

– The issue of shares pursuant to otherwise exempt transactions such as merger, demerger, inorganicacquisitionsetc.shouldbeexcludedfromthepurviewofSection56(2)(viib)oftheAct.

– ItisrecommendedthatitshouldbesuitablyprovidedforintheSectionthatitwouldapplyonlyintheyearof issue of shares.

– It shouldbesuitablyclarified toprovide that theSectiondoesnot requireeverycloselyheldcompanythatissuessharestoaresidenttosuo-mottooffersuchincometotax.Further,thetaxofficershouldbeempoweredto invokethisSectiononly ifat thetimeofassessment, the taxofficer isof theviewthatpremiumchargedbythecompanyfromtheresidentshareholderisinexcessofthefairmarketvalueofshares issued.

– Theprovisionshouldnotbemadeapplicabletobonafideratchetstructures.

• InvestmentsmadebyanInvestorwhoispartofarecognized,formalAngelgroup,shouldbeexemptedfromthisclause,subjecttothefollowingdefinitionsandstipulations:-

– AnAngelInvestorgroupmaybedefinedasaformalgroup,ofwhichtheangelinvestorsaremembersandcollectivelyinvesttheirownmoney(directlyorthroughtheirinvestmentvehicle)inanunlistedentity,attheseedstage,inwhichthereisnofamilyconnectionandwheretheinvestmentbyanindividualislessthanRs.5croresandbytheangelgroup,lessthanRs.10crores.

– SeedstageisdefinedasabusinesswhoseturnoverisbelowRs.25crores;thelimitsoninvestmentsandturnoverthresholdfortheseedstageshouldbeindexedtoinflation.

– The value of the shares may be determined as of the date of the issue of the shares or any date earlier than thedateofissueofshares,notbeingadatewhichismorethan180daysearlierthanthedateofissueofshares.

– TheinvesteecompanyshouldnothavereceivedmorethanRs.10croresbeforetheAngelroundfromanysource.

– Thevaluationofthecompany,atthetimeoftheangelinvestment,shouldnotexceedRs.50crores(asvaluedbytheangelgroup).

– Angel Groups would ensure that no investments are made in companies where family members areinvolved.AllAngelInvestorsallinvestthroughasingleshareholderAgreementinwhichtheAngelgroupentityalsoholdsapercentageofthesameinvestment.ThiswouldensurethereisabodyreviewingandupdatingactivityintheinvesteecompanyandwillalsobesubjecttoAudit.

– InvestorKYCinformation(likePANnos.)willbemadeavailabletotheAngelGroup&Investeecompanies.

– InvestmentbybusinessincubatorswhichhavebeenrecognizedorpromotedbytheGovernmentofIndiashould be exempted.


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– RecognitionofanAngelGroupcouldbeonthefollowingbasis:

a. Numberofyearsinexistence:atleast3years

b. NumberofinvestormembersintheGroupaveragedoverthelast2years:Atleast150members

c. Numberofinvestmentsmadeindifferentcompanies:atleast25

d. theAngelGroupisanentitywithaproperSecretariat&operations:foratleast3years

e. AngelGroupentityberecognizedeitherbytheFinanceMinistryoranyotherappropriateentityofthe government

– TheprovisionshouldnotbemadeapplicabletoallCategoryIandIIAIFs.

– The provision should not be made applicable to any issuance of securities under any arrangement/instrument/transactionexistingpriortothesaidamendment.

– SpecificinstructionsshouldbeissuedtotaxofficertorefrainfromchallengingthesharepremiumpaidbyVCFtoVCUonsubscriptionofsharespriortoApril1,2012.

4.22.5. Taxation of Securitization Trust

TheFinanceAct,2013,hasprovidedaspecialtaxationregimeinrespectoftaxationofincomeofsecuritizationtrustswherebyincomeearnedbysecuritizationtrustregulatedbySEBI/RBIwillbeexempt.Securitizationtrustsdistributingincometoitsinvestors(otherthanthoseexemptfromtax)willbeliabletopaytaxonincomedistribution.However,incomereceivedbyaninvestorfromsecuritizationtrustswillbeexemptfromtax.Certainissuesinvolvedinthisnewtaxationregimearegivenbelow:-

Issues

• The effect of this change is amortal blow to the Pass Through Certificates (PTC)market. Banks, insurancecompanies,NBFCsandothertaxpayingentitieswillbeseverelyimpacted.RBIhasguidelinesonsecuritizationofstandardassetswhichbanksandNBFCshavetofollowmandatorily.Also,NBFC-MFI(MicrofinanceInstitutions)securitize a large part of their portfolio with banks, financial institutions, larger NBFCs and corporate andaccordingly,taxondistributionofincomebysecuritizationtrustswouldseverelyimpactthemalso.

• ThespecialtaxregimewouldcreatechallengeunderSection14AoftheActasitwouldentaildisallowanceunderthesaidSection in thehandsof the investorwhohaseffectivelyborneadditional income-taxunderSection115TA of the Act.

• Nocreditcanbetakenbytheinvestorinrespectofthedistributiontax.Assuchitbecomesastraightforwardlossof income for the PTC holder.

• Thedistributiontaxisataxongrossincome;howeverthenetincomeoftheinvestorsinsecuritizedinstrumentsisonlyasmallfractionofthegrossincome.

• Thetrusteewouldneedtomaintainalistofinvestorsatanygivenpointoftime.Thisisrequiredastherecouldbeataxexemptinvestorwhocouldhavesoldhisinvestmenttoataxableinvestororviceversa.Thischangewillimpactthedistributiontaxtobepayablebythetrusteeinthesubsequentpayout.

• Therearenograndfatheringprovisionswithrespecttoexistingstructures.AstransactionsworththousandsofcroreswhichwerestructuredthroughSPVswithoutapprehendingwhatisproposedintheBudgetshouldnotbesubjectedtoanewtaxregime.


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Recommendations

• Inorder tooffer levelplayingfield toall investors, it is recommended that the incomedistributedby trustsshouldnotbesubjecttodistributiontaxandshouldbeofferedtotaxbytheinvestorsasperthenormaltaxregime.Thiswillenabletheinvestortoclaimcreditofsuchtaxesagainstitsnormaltaxliability.Insuchcases,unendinglitigationondisallowanceunderSection14AoftheActwillalsoculminate,sincesuchincomewillnolongerbeexemptinthehandsoftheinvestor.

• It isrecommendedthattheexistingtransactions(enteredbeforeJune1,2013)shouldbeexplicitlyexcludedfromthisnewtaxationregime.

4.22.6. Clarification on lower TDS rates on Corporate Bonds and Government Securities

Issues

• RateofTDSinrespectofinterestearnedbyFIIsandQualifiedForeignInvestors(‘QFIs’)onbondsissuedbyIndiancompaniesandGovernmentsecuritieshasbeenreducedfrom20%(forFIIs)/40%(forQFIs)to5%videSection194LDoftheFinanceAct2013.ThisisawelcomechangebytheGovernmenttoencourageforeigndebtinIndia.However,thebenefitofreducedratewasmadeavailableonlyif:

– ThecouponrateoncorporatebondsdoesnotexceedtherateasnotifiedbytheCentralGovernment;and

– ThebenefitwillbeavailableinrespectofinterestincomeaccruingtoFIIsandQFIsbetweentheperiodJune01,2013and30thJune2017irrespectiveofthedateofinvestment.

• Currently,ontechnicalreadingoftheprovision,aFII/QFIshallnotbeabletoavailthebenefitoftheconcessionaltaxrateifitscouponrateexceedsthenotifiedrateofCentralGovernment.Thus,inordertoencourageforeigndebtinvestmentinIndia,itisrepresentedthatthebenefitofreducedTDSrateshallbemadeavailabletoallFIIs/QFIsirrespectiveofthenotifiedrate(i.e.thecouponrateasnotifiedbytheGovernment).

• Section194DoftheActinter-aliastatesthatthebenefitisavailabletointerestpayableon“bonds”ofIndiancompanies.

Recommendations

WiththeintenttoencourageforeigndebtinvestmentinIndiabyFIIs/QFIs,itisrepresentedthat:

• Section194LDoftheActtobeamendedtostatethatbenefitofreducedTDSrateshallbeavailabletoallFIIs/QFIsirrespectiveofthenotifiedrate(i.e.theceilingcouponratetobenotified).

• Withoutprejudicetoabove,itisrepresentedthatinterestuptothenotifiedratebesubjecttobeneficialrateandanyincrementalcouponabovethenotifiedratebesubjecttonormaltaxratesasapplicableundertheActortreaty(asopposedtotheentireinterestincomebeingtaxableatthenormaltaxratesaspertheAct/treaty).

• Language of Section 194LDmay be amended to explicitly cover “debentures” in addition to bonds as wellespeciallyconsideringprivatecorporatedebtistypicallyraisedthroughdebentures.

4.23. Tax Deducted at Source (TDS)

4.23.1. TDS on monthly and year end provision entries in books of Accounts

Issues

• Mostof the companies recordprovisionentries towards various expenditureson amonthlybasis to reportperformancetotheirparententities.Theseentriesarereversedinthesubsequentmonth.


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• Theseaccrualsaremadeonverybroadestimates.Thetaxofficershavebeeninsistingthattaxbedeductedonthese provisional entries.

• Year-endprovisions aremadeby assessees to followaccrual systemof accounting.Very oftenprovision forexpensesattheyear-endaremadebasedonbestestimatesavailablewiththeassesseeevenifthesupportinginvoiceisreceivedatthesubsequentdate.Asperthecurrenttaxregime,taxisrequiredtobedeductedonsuchprovisionswhichoftenleadstoexcessdeductionanddepositoftax,disputeswiththevendorandunnecessaryburdenposedonthepayerincarryingextensivereconciliations.

Recommendation

• Itisrecommendedthatrelieffromdeductionoftaxatsourceshouldbegivenonpaymentsthatareaccruedbutarenotduetothepayeeandforwhichthepayeesarenotidentifiableandrepresentsonlyaprovisionmadeinaccordancewithaccountingpolicy.

4.23.2. Reduced Withholding Tax on Income by way of Interest under Section 194LC

InordertoenablelowcostfinancetoIndiancompanies,theFinanceAct,2012hasinsertedSection194LCintheActwhichprovides for lowerwithholding tax@5%on interestpaymentsby Indiancompaniesonborrowingsmade inforeigncurrency(underaloanagreementorbywayofissueoflongterminfrastructurebonds).TheFinance(No2)Act,2014,amendedthesectiontoincludealllongtermbonds(includinginfrastructurebonds).

Issue

• Apartfromloansandbonds,debenturesarealsowidelyusedforraisingfundsbytheIndiancompanies.Currently,thereisnoclaritywhetherinterestpaymentonsuchdebentureswouldbeeligibleforreducedwithholdingtaxrateundersection194LCoftheAct.

Recommendation

• The concessional tax rate of 5% on interest should be made applicable on other debt securities includingdebentures,tradecreditissued/availedbyanyIndiancompany.Further,itisalsosuggestedthattherateoftaxoninterestthroughallkindsofforeigncurrencyborrowings(includingissueofbondsanddebentures)shouldbecompletelyeliminatedinthelong-runtopromoteforeignexchangeinflowsintoIndia.

4.23.3. TDS credit

Issues

• The E-TDS system is undergoing issues and there is mismatch of data between TDS certificates issued bydeductors, TDS statements uploaded on TIN system and bank payment details, PAN of the deductees. As a result, deducteesdonotgetthefullcreditfortaxdeducted.Further,basedonthemismatchthetaxauthorityisissuingordersuponthedeductortherebycausingunnecessaryadversitytothedeductor/taxpayer.

• TheE-TDSsystemmandatesallthedeductorsoftaxestoprocessTDSCertificatesinForm16A’sonlythroughTIN-NSDLwebsite.ThesoftwareofthetaxdepartmentautomaticallypicksuptheaddressofthededucteefromtheaddressappearinginthePANdatabasemaintainedbythetaxdepartment.Asaresult,alltheTDScertificatesaregettingissuedattheaddressdeclaredinthePANapplicationmadebythedeductee.Thishasresultedintoseverehardshipforthecompanieswhichhaveamultilocationalsetup,since,alltheTDScertificatesgetdumpedattheRegisteredofficeofthecompany(beingPANbasedaddress).TheaccumulationofTDScertificatesattheregisteredofficeofthededucteemakesitdifficultforthemtoco-relate/reconcilethemwiththeaccountswhicharemaintainedatdifferentlocationsandalsotheunitsarenotabletoidentifywhethertheTDScertificateisreceived from the party or not.


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Recommendations

• In view of the above, it is suggested that TDS certificates issued by the deductors,which are furnished bythedeductees in thetaxassessment,shouldbegivenduecognizanceandrefundclaimsbasedonsuchTDScertificatesshouldbeprocessed.Further, thetaxofficercansuitably issuepropernotice for theclarificationratherthanhurriedlyissuingorderstothetaxpayerconcerned.

• ItisrecommendedthatsuitableinstructionsbeissuedbythelawmakersprovidinganoptiontothededucteetoindicatetheirTANintheinvoiceandfurtheracolumn/fieldmaybeaddedintheTDSreturnsaskingthepayerstofurnishtheTANagainsteachdeductee(thisshouldhoweverbeanoptionalcolumn),whereverTANhasbeenprovidedbythedeductee,atthetimeofsubmission/filingofTDSreturnsbythepayers.Atthesametime,itisalsorecommendedthatE-TDSsoftwareofthetaxdepartmentmaybeamendedsothatwhentheTDSreturnsareprocessedtogeneratetheTDScertificates,theaddressshouldfirstbeautomaticallypickedfromtheTANdatabaseinrespectofthededucteemaintainedbythetaxdepartmentandincasenoTANismentionedintheTDSreturn,thentheaddressshouldbepickedfromthePANdatabase.ThiswouldfacilitategenerationoftheTDScertificateattheTANaddress,whereverTANisprovidedbythedeductee.

• ItisrecommendedthatcreditforTDSshouldbeallowedtothetaxpayerintheyearinwhichsuchTDScertificateis issued to the taxpayer/ payee or in the year in which TDS credit appears on the online database of the payee withouthavingtherequirementtoclaimtaxcreditintheyearinwhichcorrespondingincomehasbeenofferedtotax.ThiswouldaddressthevariousproblemsbeingfacedbythepayeestodayinclaimingduecreditforTDS.

4.23.4. Enhancement of Limits for TDS - Section 194C and others

Issues

• UnderSection194CoftheAct,TDSisapplicableinrespectofcontractsformanufacturingorsupplyingaproductaccordingtotherequirementorspecificationofacustomerbyusingmaterialpurchasedfromsuchcustomer.However,inalargenumberofinstances,itisobservedthatthematerialwhichispurchasedfromthecustomerrepresentsasmallfractionofthetotalcostandthisprovisionhascreatedhugeoperatingproblems,sincethetransactionmaybea‘principal–toprincipal’contractforpurchaseandsaleofgoodsandtheprofitmarginmaybe very small.

• Currently,anypayment forcontractservices renderedwhichexceedsRs.30,000atatimeorRs.75,000perannumrequiresthepersonresponsibleformakingsuchpaymentstodeducttaxatsourceunderSection194Cof the Act.

• Also,anypaymentforcommissionorbrokerageasperSection194HoftheAct,whichexceedsRs.5,000(atatimeorinaggregateperannum)requiresthepersonresponsibleformakingsuchpaymentstodeducttaxatsourceunderSection194HoftheAct.TheselimitswerefixedmanyyearsagoandTDSonsuchsmallamountsinvolvesdeploymentofrelativelylargeamountofresourcesintermsofmanpower,systemsandothercostsatthetaxpayer’s,endwithoutanysignificantbenefitstotherevenue.

Recommendations

• ItissuggestedthattheprovisionsofSection194CoftheActbeshouldbeapplicableonlyinsuchcaseswherethematerialpurchasedfromthecustomerissubstantialinnature,i.e.,sayitexceeds40%ofthetotalmaterialcost(inclusiveofrawmaterialsandpackingmaterials).

• ItisrecommendedthatthethresholdlimitshouldbeincreasedtoRs.50,000forsinglepaymentandRs.100,000foraggregateannuallimitunderSection194CoftheActandthethresholdlimitfordeductionoftaxatsourceoncommission/brokeragebeincreasedtoRs.25,000fromthepresentRs.5,000.


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• Onsimilarbasis,consideringtheinflationquotient,thethresholdlimitsforotherTDSprovisionsshouldalsobeenhancedasfollows:-

Section Category Enhancement requested

194A Interest on Bank Deposits

TDSlimitofexistingRs.10,000tobeincreasedtoRs.1.00LakhssincethebasicexemptionlimitofIncomeincreasedsubstantiallyandtheseniorcitizensareaffectedinthiscategory.

194C Payment to ContractorsExistingRs.30,000(singlepayment)andRs.75,000(aggregate)tobeenhancedtoRs.1.00LakhsandtoRs.2.50Lakhsrespectively.

194H CommissionorBrokeragePaymentExistingthresholdlimitofRs.5,000beenhancedtoRs.50,000 for the year.

194I Payment of rentTheexistinglimitofRs.1.80Lakhsperyeartobeenhanced to Rs.3.00 Lakhs.

194J Payment to ProfessionalsTheexistinglimitofRs.30,000tobeenhancedtoRs.1.00 Lakhs

4.23.5. TDS on transfer of Immovable Properties (other than agricultural land) - Section 194IA

Section194IAoftheActprovidesthateverytransfereeatthetimeofpaymentorcreditofsumasaconsiderationfortransferofimmovablepropertytoresidenttransferorshalldeducttax@1%onsuchsum.

Issues

• Thisprovisionhasledtolotofpracticaldifficulties.Someoftheissuesareelucidatedbelow:

– Consideringthatthetaxisrequiredtobedeductedonthegrosstransactionvalueratherthannetgains,transferorswillhaveacash-flowimpactinsituationswherethesalesareatalossoratnogainsandcaseswherecapitalgainsareexemptfortheseller.Thismayleadtoarefundsituationwhichcanonlybeclaimedbytheselleratthetimeoffilinghisreturnofincome.

– TheprovisionposesseverehardshipforrealestatecompanieswhoareburdenedwiththetaskofcollectingandpreservingthephysicalcopiesofvoluminousnumberofTDScertificatesformakingandsubstantiatingthe claim for TDS.

– Therearegoingtobedifficultiesincomplyingwiththeprovision,incaseswherethepropertiesareboughtbyavailingloanfromthebankandpaymentismadedirectlybybanktotherealestatecompaniesorthetransferors as the case may be.

• Thisamendmentisforwideningthetaxbaseandtobringthetransferorsintaxnet.Considering,theexistinginflation,evenabuilderbuildingonesinglebuildingwillhaveturnoverofmorethanRs.1croreandwillbeliabletotaxauditunderSection44ABandwillbeundertaxnet.

• ThresholdlimitofRs.50lakhsfortheapplicabilityoftheprovisionisverylow.Theprovisionwillposeonerouscompliancerequirementevenonsmallpurchasers.


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Recommendations

• ItissuggestedthattheprovisionofSection194IAoftheActshouldbedeleted.

• Alternatively,theprovisionshouldbemadeapplicabletosecondarytransactionsandnottofirstpurchasefromthe builder/ developer.

Further, threshold limit for the applicability of the above provision should be increased from Rs. 50 lakhs to Rs. 1 crore.

4.23.6. TDS on interest component included in Tribunal Awards to victims of Motor Accidents

Issue

• TheRevenueAuthoritiesgenerallytreattheamountofinterestpaidondelayedcompensationawardedunderMotorVehicleAct,1988as‘interest’liableforTDSunderSection194AoftheAct

Recommendation

• ItissuggestedthatsuchinterestbeexcludedfromthepurviewofTDSunderSection194AoftheAct.

4.24. Personal Tax

4.24.1. Taxation of Employee Stock Option Plans for migratory employees - Section 17

Issues

• Section17(2)(vi)oftheAct,readwithRule3oftheRulesdealwithtaxationofEmployeeStockOptionPlans(ESOPs). It isprovidedthatthevalueofanyspecifiedsecurityorsweatequitysharesallottedortransferred,directly or indirectly, by the employer, or former employer, free of cost or at concessional rate shall be taxable asperquisiteinthehandsoftheemployee.Forthispurpose,thevalueofanyspecifiedsecurityorsweatequitysharesshallbethefairmarketvalueofthespecifiedsecurityorsweatequityshares,asthecasemaybe,onthedateonwhichtheoptionisexercisedbythetaxpayer,asreducedbytheamountactuallypaidby,orrecoveredfrom, the taxpayer in respect of such security or shares.

• Inthisconnection,whathasnotbeenappreciatedisthatESOPsharesstandonadifferentfootingbecauseonthedateofexercise,thesharesaresubjecttolock-inconditionandcannotbeconsideredtobeabenefitandtherefore,oughtnottobefictionallytreatedasbenefitandbroughtundertheambitofperquisitesfortaxationpurposes.TheSupremeCourt,inCITv.InfosysTechnologiesLtd.,[2008]2SCC272,atpage277,hadaptlyheld:

“During the said period, the said shares had no realisable value, hence, there was no cash inflow to the employees on account of mere exercise of options. On the date when the options were exercised, it was not possible for the employees to foresee the future market value of the shares. Therefore, in our view, the benefit, if any, which arose on the date when the option stood exercised was only a notional benefit whose value was unascertainable. Therefore, in our view, the Department had erred in treating Rs. 165 crores as perquisite value being the difference in the market value of shares on the date of exercise of option and the total amount paid by the employees consequent upon exercise of the said options.”

• ItmaybementionedthatonlywhenFringeBenefitTax(FBT)wasintroducedbytheFinanceAct2005,theseprovisionswerechangedfor thepurposesof taxationofESOPsunderFBTregime.Unfortunately, thoseveryprovisionshavenowbeenbroughtbackbywayofinsertioninsub-clause(vi)ofsub-Section(2)ofSection17oftheAct,aftertheabolitionofFBT,whichhascausedalotofanxiety.Itisimperativethattheearliertaxtreatmentberestoredtofacilitatetheemployersinretainingtalentedpersonsintheorganization.


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Recommendation

• ItissuggestedthatESOPsshouldnotbesubjecttotaxonnotionalperquisitevalueandtaxedonlyoncapitalgainsarisingfromthesaleofshares,aswasthepositiontill31stMarch2006.

Issues

• Notwithstanding the above recommendation, taxation of ESOPs creates an issue in the case of migratingemployees,whomove fromone country to another,whileperforming services for the companyduring theperiodbetweenthegrantdateandtheallotmentdateoftheESOP.Thedomestictaxlawisunsettledonthetaxationofsuchmigratingemployeesanddoesnotclearlyprovideforsuchcases.

• TherewasaspecificclarificationonproportionatetaxabilityofbenefitsundertheerstwhileFBTregime,wheretheemployeewasbasedinIndiaonlyforapartoftheperiodbetweengrantandvesting.However,thereisnospecificprovisioninthisregardundertheamendedtaxationregimefrom1stApril2009.

• ConsideringthevariousjudicialprecedentsontheissueonlytheproportionatebenefitofESOPpertainingtotheservicesrenderedbytaxpayerinIndiashouldbetaxableinIndiaandnottheentirebenefit.

Recommendation

• AspecificclarificationshouldbeinsertedwithrespecttotaxabilityofonlyproportionateESOPbenefitbasedonresidentialstatusoftheindividual,whereanemployeewasbasedinIndiaforonlyapartoftheperiodbetweengrantandvesting.

4.24.2. Taxation of contribution to Superannuation Fund in excess of Rs. 1 lakh - Section 17

Issues

• Section17(2)(vii)insertedbytheFinance(No.2)Act,2009,providesthattheamountofanycontributiontoanyapprovedsuperannuationfundbytheemployerinexcessofRs.1lakhwillbetaxableasperquisiteinthehandsof the employee.

• Ithastobeappreciatedthatcontributionstosuperannuationfundmayormaynotresult insuperannuationbenefits to theemployees, since therearevariousconditions tobe fulfilledby theemployees likeservingastipulatednumberofyears,reachingacertainageetc.Further,thepensionpaymentsaresubjecttotaxatthetimeofactual receiptbytheemployeeafterhis retirement.Thismay leadtopartialdoubletaxationfortheemployeewherethecontributionshadbeentaxedearlieralso(whenthecontributionsexceededINRonelakh).

Recommendation

• Itisrecommendedthatemployercontributiontoapprovedsuperannuationfundbemadefullyexemptfromtax.

4.24.3. Taxation of Rent Free Accommodation (RFA)/Concessional RFA

Issues

• Section17(2)oftheActprovidesforvaluationofperquisiteincaseofprovisionofrentfreeaccommodationbytheemployertotheemployeeorbywayofconcessioninrentinrespectofsuchaccommodationprovided.IncaseofaccommodationprovidedbytheemployerotherthanCentralGovernmentoranyStateGovernment,Rule3oftheRulesprovidesforvaluationofperquisiteatspecifiedrateof15%or10%or7.5%ofsalarybasedonthesizeofpopulationasper2001census.However,theabovemethodofdeterminationoftheperquisitesuffersfromvariousinequities:-

- Anemployeestayinginthesamecompanyownedaccommodationwillhaveadifferentperquisitevaluewithincreaseinsalaryandfurther,employeeswithdifferenceinsalarieswillhaveadifferentperquisitevalueinrespectofthesameaccommodation.


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- Thedeterminationof theperquisitevalueof theaccommodationbasedonthesalaryof theemployeeirrespectiveofthesize/fairrentalvalueoftheaccommodationiscompletelyillogicalandunfair.

- TheperquisitevalueinrespectofaccommodationprovidedtoemployeesofCentral/StateGovernmentisbasedonlicensefeechargedforsuchaccommodationasreducedbyrentactuallypaidbytheemployee.ThevaluationrulescastdiscriminationbetweenemployeeofCentral/StateGovernmentandanyotheremployee.

Recommendation

• FICCIrecommendsthattheruleforcomputingperquisitevalueofrentfreeaccommodationshouldbesuitablyamended.Forcomputing theperquisitevalue, thevalueof theaccommodationshouldbeFairRentalValuebased on the valuation report obtained from themunicipal authorities (withoutmaking any discriminationbetween employee of Central/State Government and any other employee).

4.24.4. Deduction for Investment in Infrastructure bonds

Issue

• FinanceAct,2010had introduced section80CCFw.e.f.April 1,2011,which stipulates thatdeductionwouldbeavailable to the individuals in respectofsubscription innotified longterm infrastructurebonds.Thesaiddeductionisavailableonlyfor investmentsmadeinpreviousyearrelevantforAssessmentYear2011-12and2012-13.TheFinanceBill,2015hadproposedforre-introductionoftaxfreeinfrastructurebonds.Itisdesirablethatthebenefitunderthissectionisnotlimitedtotwoyearsastheintentbehindtheintroductionofthissectionistopromoteraisingoffundsforinfrastructuraldevelopment.

Recommendation

• Itisrecommendedthatsuitablechangesbemadeinsection80CCFoftheActsothatthisdeductionisavailablefor AY 2016-17 and onwards.

4.24.5. Revival of Standard Deduction

Issues

• Astandarddeductionwasearlieravailabletothesalariedindividualsfromtheirtaxablesalaryincome.However,thesamewasabolishedwitheffectfromAY2006-07.

• Ontheotherhand,businessexpensescontinuedtoremainaspermissibledeductionsfromtaxablebusinessincome.

• Ithastobeappreciatedthatstandarddeductionisnotapersonalallowanceandusedtobegivenasalumpsumformeetingemploymentrelatedexpenses.InmanycountrieslikeMalaysia,Indonesia,Germany,France,Japan,Thailandetc., allowance in the formof standarddeduction is available for salariedemployees for expensesconnectedwithsalary income.To illustrate inThailandthededuction isashighas40%of incomesubjecttocertain limits.

Recommendations

• ThestandarddeductionforsalariedemployeesshouldbereinstatedtoatleastRs.100,000toeasethetaxburdenof theemployeesandkeeping inmindtherateof inflationandpurchasingpowerof thesalaried individual,which is dependent on salary available for disbursement.


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• Thisshouldalsoreducethedisparitybetweensalariedandbusinessclasswithonlythelatterbeingeligiblefordeductionforexpensesincurredbythemforearningtheirincome.

4.24.6. Transportation Allowance - Section 10

Issues

• Thetransportallowancegrantedbytheemployertotheemployeetomeethisexpenditure for thepurposeofcommutingbetweentheplaceofhisresidenceandtheplaceofhisdutyiscurrentlytaxexemptuptoRs.1600permonthintermsofSection10(14)oftheActreadwithRule2BBoftheRules.ThelimitwasmarginallyincreasedfromRs.800permonthtoRs.1600permonthinthelastbudget.

• The exemption limit of Rs. 1600permonth seemsquite nominal considering the ever rising fuel costs andresultant conveyance costs.

Recommendation

• TheexemptionlimitofRs.1600permonthneedstobeconsiderablyraisedupwards,saytominimumofRs.3,000permonthtobringitinlinewiththerisingconveyancecosts.

4.24.7. Education Allowance

Issues

• TheeducationallowancegrantedbytheemployertotheemployeetomeetthecostofeducationexpenditureuptotwochildreniscurrentlytaxexemptuptoRs.100permonthperchildintermsofSection10(14)oftheActread with Rule 2BB of the Rules.

• Thisexemptionlimitwasfixedintheyear2000withretrospectiveeffectfrom1August1997andseemsquitenominalconsideringtheeverrisingcostofeducation.

Recommendation

• TheexemptionlimitofRs.100permonthneedstobeconsiderablyraisedupwards,saytominimumofRs.1,000permonthtobringitinlinewiththerisinginflationandcostofeducation.

4.24.8. Reimbursement of Medical Expenditure - Section 10

Issues

• Anysumpaidbytheemployerinrespectofanyexpenditureincurredbytheemployeeonthemedicaltreatmentof self/ family is currently exempt from tax, to the extent of Rs. 15,000 per annum.

• Thislimitwaslastrevisedlongbackandneedstoberevisitedinlightoftherisingmedicalandhospitalizationcosts especially for private hospitals.

• Theexpenditureincurredby/forretiredemployeesinrespectofmedicaltreatmentonself/familyiscurrentlynot exempt from tax.

Recommendations

• ThecurrenttaxexemptionlimitofRs.15,000perannumneedstobeincreasedtoatleastRs.50,000perannum.Thiscouldtosomeextenthelptobringtheexemptionuptospeedwiththerisingmedicalcosts.

• Further,theexemptioninrespectofexpenditureonmedicalreimbursements/hospitalizationexpenditure inapprovedhospitalsshouldalsobeextendedtoretiredemployees.


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4.24.9. Tax Exemption in respect of Leave Travel Concession (LTC) - Section 10

Issues

• Presently,theeconomyclassairfareforgoingtoanywhereinIndiaistaxexempt(twiceinblockoffouryears).However,thisexemptionisbeingallowedonlyfortravelwithinIndia.

• Lately,owingtolowairfaresandpackagetours,anumberofIndiansprefergoingabroad,insteadofavailingLTC,particularlytoneighbouringcountrieslikeThailand,Malaysia,SriLanka,Mauritius,etc.,asthefarestheretoareattimeslessthanfortravellingtosomefarawaydestinationwithinIndia.

Recommendations

• It isthereforerecommendedtogranttaxexemptionforeconomyclassairfarefortravelabroadalso,solongthesearewithintheoverallairfaretaxexemptionconditionsfortravellinginIndia.Here,itispertinenttonotethatinarecentrulingbytheChandigarhBenchoftheTribunal,inthecaseofOmPrakashGuptavs.ITO(ITAno.938/CHD/2011-taxsutra.com) it has been held that amount received by the taxpayer on account of Leave Travel Concession(LTC),whichwasreceivedbytaxpayeronaccountoftraveltobothForeignandIndiandestinationandthejourneyconcludedbyvisittoaplaceinIndia,isnoteligibleforincometaxexemptionasthetaxpayerhasalsotravelledtoaforeigndestination.However,consideringthecurrentprevailingtrendinrespectofforeigntravel,thereisaneedtoincludeoverseastravelaswelloratleasttoexemptproportionateexpensespertainingtotravelwithinIndiaincaseofjointtravel(withinIndiaandoverseasdestination).

• Further,underRule2BoftheRules,theamountexemptinrespectofLTCbyairistotheextentoftheeconomyfareofNationalCarrieri.e.IndianAirlines.Itissuggestedthatword“NationalCarrier”shouldbedeletedfromRule 2B.

• Moreover,asperthecurrentprovisions,LeaveTravelConcession/Assistanceiseligiblefortaxrelieffor2calendaryearsinablockof4calendaryears.ItissuggestedthattheconceptofcalendaryearshouldbereplacedwithFY(April–March)inlinewiththeotherprovisionsoftheIncomeTaxLawandfurtherexemptionshouldbemadeavailableinrespectofatleastonejourneyineachFY.

4.24.10. Taxation of Social Security Contributions in the hands of Expatriates - Section 17

Issues

• InrespectofanexpatriateemployeedeputedtoIndia,thehomeemployerandemployeemayberequiredtocontributetosocialsecurityschemesunderthelocallawofcountry.Inmostcases,thecontributionsmadetotheseschemesmaynotvestontheemployeeatthetimeofmakingthecontributionsandtherebydonotprovideanyimmediatebenefittotheemployee.Further,theemployeecontributionsmayalsobemandatoryunderthelawofthehomecountry.Boththeemployerandemployeecontributionsmaybeavailableasadeductionfromtaxable income in the home country of the expatriates.

• However,currentlythereisnoprovisionundertheAct,whichprovidesforthetaxabilityorotherwiseinrespectofsuchcontributionsfromtaxableincome,thoughtherehavebeenseveralfavourablejudicialprecedentstothiseffectsuchasCITv.L.W.Russel[1964]53ITR91(SC),GallottiRaoulv.ACIT[1997]61ITD453(Mum),ITOv.LukasFole(Pune)(2009-TIOL-556),CITv.NHKJapanBroadcastingCorporation[CivilAppealNo.1712of2009–SC].

• Recently,eventheDelhiHCpronouncedthedecisionincaseofYoshioKubo,whereinitwasheldthatemployer’scontribution tooverseas social security, pension andmedical/ health insurancedonot qualify as perquisiteunderSection17(1)(v)oftheActandarenottaxableinthehandsoftheemployees.


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Recommendation

• It needs to be clarified under the Act, that employer contributions to such social security schemes shouldbeexempt inthehandsofthe individualemployeebasedontheprincipleofvesting.Further,theemployeecontributionsshouldbeavailableasadeductionwherethesamearemandatoryandconstitutediversionofincomebyoverridingtitle.

4.24.11. Provision of treaty benefits while calculating TDS under Section 192

Issues

• Currently,thereisnoprovisionintheAct,enablingtheemployertoconsideradmissibletreatybenefits(e.g.creditsfortaxespaidinanothercountry/treatyexclusionsofincome),whileTDSunderSection192oftheActfrom salary income.

• Thiscreatescashflowissuesfortheexpatriateswhoareinitiallysubjecttodeductionoftaxbytheiremployersandthenarerequiredtoclaimlargerefundsonaccountoftreatybenefitsatthetimeoffilingtheirreturnofincome.ManyoftheseexpatriatesmaycompletetheirassignmentsandleaveIndiapriortoobtainingtheirtaxrefunds which also creates issues with respect to credit of their refund amounts.

Recommendation

• SincethecreditisotherwiseadmissibleintermsofSection90/91oftheAct,asuitableamendmentmaybeincorporatedinSection192oftheActprovidingfortheemployertoconsidersuchcredits/exclusionsatthetimeofdeductingtaxes.

4.24.12. Threshold limit under Section 80C of the Act

Issues

• Overtheyears,investmentsmadeinvariousavenuesavailableunderSection80CoftheActhavehelpedtheGovernment to raise funds as well as the individuals to save tax.

• However, with too many investment/ expenditures clubbed into the existing overall limit of Rs. 150,000(includingcontribution topension fundsunderSection80CCC,pension schemeunderSection80CCDof theAct),individualssometimesarediscouragedfrommakingfurtherinvestments.

Recommendations

• Theremustbeacleardistinctionbetween long-termandshort-termsavings.So far therehasnotbeenanysignificant support in tax policy to actively encourage “long-term savings”which is verymuch needed. Lifeinsuranceandpensionsarethemainsegmentsofthefinancialservicesthataddresstheneedsofindividualsin the long-term. Itwouldbeequallydesirable tohavemanymore such tax-exempt investmentavenues tomobilizefundsforinfrastructuralandoveralleconomicdevelopment.Therefore,theGovernmentmayconsiderseparateexemptionlimitsforsuchimportantavenues.

• Further, theGovernmentmay lookat increasing theoveralldeduction limit toat leastRs.200,000 toboostfurtherinvestmentandincreasetaxsavingsfortheindividual.

• Termdepositsforaperiodof5yearsormorewithascheduledbank,inaccordancewithaschemeframedandnotifiedbytheCentralGovernment,byanindividual/HUFiseligibleforinclusioningrossqualifyingamountforthepurposeofdeductionunderSection80CoftheAct.Forothereligibleinvestmentssuchasbondsandmutualfunds,thelockinperiodis3yearsandtoensureparity,theperiodoftermdepositsforclaimingdeductionunderSection80CoftheActshouldalsobereducedto3yearsfromexisting5years.


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4.24.13. Overall deduction in respect of amount paid under Pension/ Annuity Plans

Issue

• AsperSection80CCEoftheAct,theoverallceilingfordeductionisRs.1.5LakhsforthepaymentscoveredbySection80C,paymenttowardsannuityplanscoveredbySection80CCCandpaymenttowardsNPScoveredbySection80CCD.

Recommendation

• TheoverallceilinglimitofSection80CCEshouldbeenhancedtoaugmentsavingsintheeconomytopromoteeconomicgrowth.

4.24.14. Deduction for Educational Expenses - Section 80D

Issue

• Educationof children thesedays imposesaheavyburdenon themiddle class.Agoodbeginningwasmadein2003byprovidingdeduction for tuition feesunder Section80Cof theAct.But Section80Cof theAct isparticularlyaprovisiongrantingincentiveforsavingsandalsoconsideringthelonglistofeligibleinvestmentsinthisSection,thereisverylittlerelieftotheindividualonaccountoftheeducationfeesincurredbyhim.

Recommendation

• Itisthereforerecommendedtode-linkdeductionforeducationalexpensesforchildrenfromSection80CandprovideunderaseparateprovisionlikeSection80DoftheActformedicalinsurance.AreferencetotheMinistryofEducationtofindoutthetuitionfeeforanaveragemiddleclasshouseholdwillgiveanindicationaboutthelimitofthededuction.

4.24.15. Deduction in respect of rent paid by Taxpayers not receiving a HRA

Issue

• UnderSection80GGoftheAct,themaximumdeductionavailabletoindividualswhodonotreceiveaHouseRent Allowance (HRA), in respect of rent paid is only Rs. 2,000 per month. The said limit was last revised in 1998 andisverylowinlightofthehugerentalcostsespeciallyinthemetrocities.

Recommendation

• TheexemptionneedstobeincreasedtoatleastRs.10,000permonthinviewofthehugerentalescalation.AsinthecaseofHRAexemption,theGovernmentmayalsoconsiderintroducingseparatelimitsformetroandnon-metrocities.

4.24.16. Deduction in respect of Interest on deposits in Savings Account - Section 80TTA

Issue

• Section80TTAwasinsertedbytheFinanceAct,2012toprovidedeductionofuptoRs.10,000/-inthehandsofindividualsandHUFsinrespectofinterestonsavingsaccountwithbanks,postofficesandco-operativesocietiescarryingonbusinessofbanking.However,itisunlikelythatsalariedindividualswouldkeeptheirentiresavingsinasavingsbankaccount,whichearnsamuchlowerrateofinterestascomparedtotermdeposits.Theyarelikelytotransfersomeportionoftheirsavingstoseveraldepositstoearncomparativelybetterreturns.

Recommendation

• ItissuggestedthatthescopeofSection80TTAoftheActshouldbewidenedtoincorporatealltypesofdeposits(suchastermdeposits,recurringdepositsetc.)madewithinthebankingchannels,therebyinducingsavingsforthegrowthoftheeconomy.


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4.24.17. Electronic Meal Card


• AspertherevisedperquisiterulesreinstatedinDecember2009,iffoodandnon-alcoholicbeveragesareprovidedduringworkinghoursatofficeorbusinesspremisesorthroughnon-transferablepaidvouchersusableonlyateatingjoints,thevalueoffacilitytotheextentofRs.50permealisexemptfromthetax.ThislimitofRs.50isverymeagreandneedstoberevised.

• Many employers these days provide this facility through electronicmeal swipe cards.However, the currentrulesexpresslyprovideexemptiontopaidvouchersandnotelectroniccardsthoughsuchcardswereexpresslyexemptedundertheerstwhileFBTregimesubjecttoconditions.Accordingly,theirtreatmentisnotfreefromdoubt.

• Thesaidexemptionalongwithincreasedlimitshouldbeextendedtoelectronicmealvouchers.

4.24.18. Exemption for payment of Leave Encashment - Section 10

Issue

• TheexemptionlimitforleaveencashmentpaidatthetimeofretirementorotherwiseisnotifiedbytheCBDTinaccordancewiththepowersgivenunderSection10(10AA)oftheAct.ThecurrentlimitofRs.3 lakhswasnotifiedin1998)andneedstoberaisedsubstantiallywithimmediateeffect.

Recommendation

• Itis,therefore,suggestedthatthelimitshouldberaisedtoRs.10lakhsinlinewiththeincreaseinthelimitofgratuity.

4.24.19. Income of minors - to increase exemption limits under Section 10(32) of the Act

Issue

• AsperSection10(32)oftheAct,incasetheincomeofanindividualincludestheincomeofhisminorchildintermsofSection64(1A),suchindividualshallbeentitledtoexemptionofRs.1,500inrespectofeachminorchildiftheincomeofsuchminorasincludibleunderSection64(1A)exceedsthatamount.ThecurrentlimitofRs.1,500wasfixedbytheFinanceAct,1992andneedstoberaisedsubstantiallywithimmediateeffect.

Recommendation

• ItissuggestedthatthelimitofexemptionunderSection10(32)oftheActshouldberaisedtoatleastRs.10,000for each minor child.

4.25. Other Direct Tax provisions

4.25.1. Calculation of Interest for delay in deposit of taxes deducted - meaning of ‘Month’

Issue

• AsperSection201(1A)oftheAct,interestonlatedeductionofTDSiscalculated@1%foreverymonthorpartofmonthfromthedateonwhichtaxwasactuallydeductibletothedateonwhichtaxwasdeductedandinterestonlatedepositofTDSiscalculatedat1.5%foreverymonthorpartofmonthfromthedateonwhichtaxwasdeductedtothedateonwhichtaxisactuallypaid.However,forthepurposeofcalculatingperiodofdelay,theRevenueAuthoritiescalculateinterestonacalendarmonthbasis.Forinstance,wheretaxwasdeductibleon30Juneandthetaxsodeductedwasremittedon8July,interesthastobepaidforJuneandJuly(i.e.2months)fora one day delay.


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Recommendation

• Inordertomitigatethishardshipcausedtothetaxpayer,itissuggestedthat‘month’bedefinedasaperiodof30daystoavoidlitigationonthisissue.Thiswouldmakethereckoningofperiodwhileinterpretingthetaxlawmoremeaningfulandclear.

4.25.2. Interest payable in case of default in furnishing Return - Section 234A

Issue

• Wherereturnofincomeisfiledaftertheduedate,interestunderSection234AoftheActis leviedfromtheduedateoffilingreturntillthedateofactualfiling.Currently,whilecomputingtheamountonwhichinterestispayable,self-assessmenttaxpaidbythetaxpayerisnotconsidered.Consequently,thetaxpayerhastopayahigheramountofinterest.

Recommendation

• Sinceinterestisnotapenaltyandthereasonforlevyofinterestisonlytocompensatetherevenue,inordertoavoiditfrombeingdeprivedofthepaymentoftaxontheduedate,itissuggestedthatincaseswherethetaxonself-assessmentispaidunderSection140AoftheActbeforetheduedateforfilingreturnonincomebutreturnhasbeenfiledaftertheduedate,suchtaxonself-assessmentshouldbeconsideredasitemofdeductionforthelevyofinterestunderSection234AoftheAct.

4.25.3. Monetary Limit for Audit of Accounts

Issue

Currentlythelimitsforauditofaccountsoftaxpayersareasfollows:-

Particulars Existing Limit (Rs. Lakhs)

Sales turnover/ Gross receipts of business 100

Gross receipts of profession 25

Recommendation

Giventhegrowthinvolumeofeconomicactivity,thelimitsneedtoberevisedasunder:-

Particulars Proposed (Rs. Lakhs)

Sales turnover/ Gross receipts of business 500

Gross receipts of profession 50

4.25.4. Relaxation on mandatory requirement of PAN - Section 206AA

Section206AAoftheActprovidesthatifPANisnotfurnishedbypayee,therateofTDSwouldbe20%orrateinforceorratesspecifiedinrelevantprovisionsoftheAct,whicheverishigher.TheprovisionsfurtherlaydownthatnocertificateunderSection197oftheActshallbegrantedunlesstheapplicanthasstatedhisPANintheapplication.ItalsofurtherlaysdownthatdeclarationinForm15G/15HforNildeductionoftaxwouldnotbevalidunlessPANisfurnishedinsuchdeclaration.Further,ithasbeenspecifiedthatwheretherecipientoftheincomehasfurnishedinvalid/incorrectPAN,itshallbedeemedthatsuchpersonhasnotfurnishedPANandaccordingly,taxwouldberequiredtobedeductedatthehighestofthespecifiedthreerateswhilemakingpaymenttosuchpersons.


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Issues

• AplainreadingoftheprovisionsofSection206AAoftheActalsosuggeststhatincasetheforeigncompanydoesnothaveaPANinIndia,theprovisionsoftheActwouldoverridetheprovisionscontainedintherespectiveDTAA,resultinginasituationoftreatyoverride.Thisislikelytocreatehardshipsfortheforeigncompanyinavailingappropriatetaxcreditinitscountryofresidence(fortheexcesstaxdeductedoverandabovethespecifiedratein theDTAA)andalso result inprotracted litigation,which increases thecostofdoingbusiness in Indiaandtherefore,discouragesforeignentitiesfromenteringintotransactionsinIndia.

• Theseprovisionsmayactdetrimentalnotonlytotherecipientsofincomebutalsomaybedetrimentaltothepayerof such income.Apayermayhavedeductedtaxasper theprovisionof theActat thespecifiedratesunderabonafidebeliefthatthePANfurnishedbytheincomerecipientiscorrect.Incasethesameisfoundtobeinvalid/incorrect,thepayermayhavetodeducttax@20%orhigher.Incasethepayerhasalreadymadethepaymentofthesumtothereceiver,thenitwouldcreatetheproblemofrecoveryofthedifferentialamountfromthe recipient of the income.

• Further,consideringtheuncertaintyintheIndiantaxsystems,itisseenthattheforeignentitiesgenerallypreferataxprotectedagreementwhereinthetaxliabilityistobebornebythepayeroftheincome.Insuchcases,thecosttobebornebythepayeroftheincomewouldescalatebysubstantialamountasnotonlytherateoftaxwouldgoupbutevensuchhigherratewouldberequiredtobegrossedup.ThiswillcreateliquidityissuesforthepayerofincometherebyincreasingcostsofthepayerfordoingbusinessinIndiaandimportingforeigntechnology.

Recommendations

• WesuggestthatquotingofPANshouldbemadeoptionalforthefollowingcategoryofpersons:

– Individuals,includingseniorcitizens,farmers/seedgrowers,andtransportersetc.whosetotalincomedonotexceedtheexemptionlimitorareilliterate.

– Foreigncompanies.

• Inaddition,theonerousresponsibilityandconsequencesfacedbythepayeroftheincomeincasetherecipientfurnishes incorrect/ invalid PAN should also be relaxed.


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INDIRECT TAXESMEASURES TO RATIONALIZE THE INDIRECT TAX SYSTEM

5.1.1. Provide Clarity in Tax Matters

OneofthemainreasonsforlitigationandconsequentialhazytaxenvironmentisthelackofclarityonthestandoftheRevenueoncertainspecificissues.Asaresult,taxauthoritiesofdifferentjurisdictionsadoptdifferentstandsindealingwithsuchissues,therebyresultinginlackofconsistencyandunnecessarylitigation.Governmentshouldbeproactiveinprovidingclarificationssothatthedisputesarenippedinthebud.Itshouldcomeoutwithstatusnotes,positionpapersoncontentiousissuesafterdueconsultationswiththestakeholderstosetatrestuncertainties,ifany.Evenifthematterissub-judice,Governmentshoulddeclare itspositionasto itsunderstandingand intentof the legislation. Itshoulddirectitsfieldofficerstofollowtheinterpretationasdeclaredunlessit’soverturnedbyacompetentjudicialforum.

5.1.2. Standing Committee for Stakeholder Consultations/Clarifications

AnExpertStandingCommitteecouldbeset-upbytheGovernmenttoofferclarificationstothetaxpayers incaseofintroductionofanewlegislation/amendmentsinexistinglegislationsornewprocedurestobefollowedbythetaxpayer.TheExpertStandingCommitteeshouldbepermittedtoholdstakeholderconsultationsandfurtherbeallowedtoco-optexpertsforspecificissues.TheExpertStandingCommitteeshouldprovideaframeworkfordialoguewiththetaxpayerswithaviewtoresolvetaxpayerdoubtsanddisputes(especiallymisinterpretationsandmisunderstandings)earlyintheprocess.

5.1.3. Introduce Accountability for Assessing Officers

Inthepresenttaxsystem,thefirststagewhereafairdecisioncanbeexpectedisatthelevelofTribunals.TherevenuefocussedapproachoftheAssessingOfficersisborneoutofthefactthat70to80%ofthedecisionoftheTribunalsareagainsttheRevenue.Currently,theAssessingOfficersroutinelyconfirmthetaxdemandsagainstthetaxpayersprimarilywithaviewtoachievetargetsandalsothegeneralapproachtoerrinfavourofRevenue.Certainmeasuresneedtobeputinplacetobringaboutanattitudinalchangesothattheofficersareencouragedtotakefairandjudiciousdecisions.

Apartfromannualperformanceappraisals,thereshouldbeperiodicspecialreviewoftheofficersatthetimeoftheirpromotion/postingtoevaluatetheirabilitytobefairandjudicious.GiventhefactthatmostofthedecisionsaresetasideonappealatthestageofTribunal,asystemneedstobecreatedtocapturetheresultsoftheappealsagainsttheordersoftheofficers.Accordingly,thereshouldbeaperiodicalreviewofthetraitoffairnessandjudiciousnessoftheAssessingOfficersbasedontheoutcomesoftheappealsatleastuptotheTribunallevel.SuchameasurewouldinthelongtermimprovethequalityoforderspassedbytheAssessingOfficersandCommissionershandlingappellatework.

5.1.4. Time Limit for Adjudiction of Show Cause Notices

Atpresent,nostatutorytimelimit isprescribedforadjudicationofshowcausenotices issuedbytheofficersoftheCustoms, Central Excise and the Service Tax department. As a result, there are certain cases, where the show cause noticesarenotadjudicatedbytheauthoritiesforanumberofyears.ThispracticeismorecommonwheretheshowcausenoticesareissuedpursuanttoauditobjectionsraisedbyC&AG.Theseshow-causenoticesaretransferredtocallbooksandnotadjudicatedforalongperiodoftime.Thiscreatesanuncertaintyforthenoticeeasanumberofbusinessdecisions are kept on hold due to lack of clarity on the issues for which the dispute is raised by the department vide issuanceofshowcausenotice.

ItissuggestedthatsometimelimitbeprescribedforadjudicationofShowCauseNoticesissuedbythedepartmentsothattheissuesarenotkeptopenindefinitely.SuitableamendmentshouldbemadeinlawtoprovidethatiftheShow


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CauseNoticeissuedbythedepartmentisnotdisposedofwithinthespecifiedtimelimitforreasonsnotattributabletothenoticee,thenoticeshallbedeemedtohaveneverbeenissuedandthemattersettledinfavourofnoticee.

5.1.5. Provision for setting aside show cause notices by an Empowered Authority

Manyatimes,especiallyinrespectofindirecttaxes,revenueofficersissueshowcausenoticesentailinghugeamountofrevenue,whicharepatentlyillegalandcontrarytothesettledpositionoflaw.WhensuchcasesarebroughttothenoticeoftheseniorofficersoftheBoard,theyexpresstheirinabilitytointerveneinthequasi-judicialprocesswhileconcedingthatthenoticeisdevoidofanymerit.Theassesseeisburdenedwithaliabilityinitsbooksofaccountsandhastoincursubstantiallegalexpensesandadministrativecostsindefendingthenoticeandcarryitthroughtheprocessofadjudication,appealetc.

ItissuggestedthatthelawsbeappropriatelyamendedtoconstituteanAuthoritycomprisingofseniorofficers/taxexpertswhichisempoweredtoexamineshowcausenoticeswhichareprima-facieillegalandagainstjudicialpronouncements,anddeclaresuchnoticesasnullandvoid.Appropriatesafeguards(specifythresholds,highfeesforsuchreviewsetc.)bebuiltintoensurethatonlygenuinecasesandaminimalnumberofcasesisplacedbeforesuchanAuthorityforadecision.

5.1.6. Safeguards against invoking the extended time-limit of 5 years for demanding disputed duties and taxes

TheCustoms,CentralExciseandServiceTaxlawspermitthetaxofficerstoraiseademandforaperiodofpast5yearsincaseanyshortlevyisnoticedbecauseofawilfulmis-declaration,collusionorfraudonthepartoftheassessee.Innormal cases of disputes, the demand can be raised for a period of past one year only. It is observed that the Revenue Officersinvokemis-declaration/fraudetc.asamatterofroutineandissueshowcausenoticesdemandingdutiesandtaxesforthepast5years.Eventhoughthelawrequirestheextendedperiodof5yearstobeinvokedonlywiththeapprovaloftheCommissionerofCustoms,CentralExciseorServiceTax,itisobservedthatsuchconcurrenceisgrantedbytheseniorofficersroutinelywithoutcarefullyexaminingthemeritsofthecase.ReliefinsuchcasesisgrantedonlywhenthematterreachestheAppellateTribunalinappeal.

Itissuggestedthatappropriatesafeguardsbeprovidedtopreventinvocationoftheextendedperiodofdemandinaroutinemanner.

5.1.7. Audit Objections by C&AG

ShowCauseNotices (SCNs)areroutinely issuedbasedonobservations/objectionsof theComptrollerandAuditorGeneral(C&AG)evenwheresuchCAGobservationsarecontrarytojudicialrulings/clarificationissuedbytheCBEC.EventhoughtheCBEChasinthepastdiscouragedblindadoptionofCAGobjectionsandissuanceofSCNonthebasisthereof,asageneralpractice,allCAGobservationsareconvertedintoSCNallegationsimmediatelyonreceiptoftheCAGauditobservationstoprevent“lossofrevenue”becauseof‘timebar’.

It is recommended that-

(a) Thelawcouldstipulatethatallauditreportsunderservicetax,centralexciseincludingpostclearancecustomsauditmustbemadeavailabletotheassesseewithinatimeboundmannertoensurethattaxpayersaremadeawareofpotentialissuesthattheycouldbefacedwithandfurthergiventimetoprepareforatimelyresolutionoftheensuingadjudication.ThisprovisionshouldbemadeapplicabletoCAGauditreportsaswell.

(b) Furthertothesame,thepracticeofissuingprotectiveSCNs/demandsfollowingobjectionsbytheCAGneedstobereviewed.Onceanobjectionhasbeenraised,thedepartmentshouldevaluatetheobjectionanddecidewhethertheobjectionissustainableornot.Suchevaluationshouldbecompletedwithinaprescribedtimelimit(ofsayonemonth)ofthereceiptoftheauditreport.IncasethedepartmentagreeswiththeCAG,ashow-causenoticeshouldbeissuedwithinaperiodof1monthfromsuchevaluation/agreement.


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(c) Incase,thedepartmentdoesnotagreewiththeAuditcontention,nonoticeshouldbeissuedtothetaxpayer.Insuch a case, the department should convince the CAG about the correctness of the decision made by them. In case no consensus is reached between the department and the CAG on the merits of the issue within a prescribed timeframe(say3months),aSCNshouldbeissuedandadjudicationcommencedwiththeadjudicationbeingundertakenbytheSpecialAdjudicationCellonafasttrackbasis.

(d) Thepracticeofissuingashow-causenoticeassoonastheAuditreportisreceived,withoutexaminingthemeritsthereof,shouldbediscontinued.

5.1.8. Pre Deposit and Stay of Recovery before Appellate Authorities

AspertheFinanceAct,2014,anewSectionhasbeen introducedunderExcise,CustomsandServiceTax lawwhichprescribes amandatory fixed pre-deposit of 7.5%of duty/ penalty demanded for filing appealwith Commissioner(Appeals)ortheTribunalatthefirststageandanother10%ofdutydemandedorpenaltyimposedforfilingsecondstageappealbeforetheTribunal.

Itisnormallyseenthatalargenumberofdemandsarebeingissuedbythedepartmentwithoutfollowingthesettledcaselawsinsimilarissues.Further,somedemandsareissuedformereprocedurallapsesandhugepenaltiesarealsoimposedbythedepartmentinsuchcases.Inamajorityofsuchcases,atTribunallevel,demandsareinvariablyquashedoramountsaredrasticallyreducedandappealsagainstsuchordersbytherevenuearedismissedwithconsequentialbenefitofrefundofpredeposits.AsperreplygiventoaquestioninLokSabha,only19.7%ofthedecisionsrenderedbytheCESTATin2011-12wereinfavouroftheRevenue.Morethan80%ofthedecisionsoftheTribunalareagainsttheRevenueAuthorities.Therecanbenojustificationtoindiscriminatelycompeleveryappellanttomakeapre-depositforhisappealbeingentertained.

NodoubttheIndianjudicialsystemincludingquasi-judicialauthorities,areatpresent,burdenedwithahugeloadofcases.Buttherecanbebettermeanstoprovidespeedyaswellasfairjustice.Suchmeasurescanincludeensuringbetterqualityinadjudicationproceedings,increaseinmanpowerandfixingresponsibilityforfrivolous,un-sustaineddemands,settingareasonablebutmandatorytimelimitforcompletionofadjudicationandappealproceedingsatalllevelsetc.

Inviewoftheaboveconcerns,itissuggestedthattheconceptofmeritbasedpre-depositbere-introducedandthemandatory pre-deposit should be withdrawn.

Iftheaforesaidsuggestionisnotacceptable,FICCIwouldliketosubmitfollowingsuggestionsforconsideration:-

(a) GiventheadversesuccessrateofthelitigationinfavourofRevenue,thereshouldbenopre-depositforfilingappeals before Commissioner(Appeals)

(b) Theprovisionsofpre-depositshouldnotapplyinthefollowingsituations:

(i) MatterswheredutydemandedislessthanRs.25Lakh.Thiswouldreducethecostofadministrationinmonitoringpaymentsandrefundofpredepositsinlargenumberoflowvalueappeals

(ii) Incaseofappealsfiledbyindividuals

(iii) In case, the appellant has received a favourable order of Tribunal in his own case earlier on the same issue

(iv) WhereorderhasbeenpassedbytheAdjudicationAuthorityorAppellateAuthority:

•withoutfollowingprinciplesofnaturaljustice

•withoutjurisdiction

•witherrorsincomputationofdemandwhichareapparent


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SERVICE TAX - LEVY AND EXEMPTIONS

5.2.1. Reverse Charge Mechanism

Thereversechargemechanismhasresultedin:

(i) Significantincreaseincomplexityandcostofcomplianceincaseofcorporatebodiesintermsofidentificationofstatusofserviceprovider,paymentoftaxperapplicableratioforthespecifictypeofservice,maintenanceofrecords, submission of returns, Departmental audits etc.

(ii) Underminingofthresholdlimitsandexemptionsprescribedunderservicetaxlaws.Thisisduetothefactthatincaseofpaymentoftaxunderthereversechargemechanismthresholdlimitsarenotapplicable,leadingtosituationswheretheservicerecipient,beingacorporatebody,has topayservice tax in respectofspecifiedservices provided by non-corporate service providers even if such service providers are below the prescribed threshold limits.

(iii) Chancesofshort/excesspaymentofservicetaxconsequenttodifferencesinunderstandingofserviceproviderandservice recipientonwhetheraparticularservice fallsunder theservicesnotified for taxationunder thereversechargemechanism.

(iv) ScopefordisputeandlitigationwiththeDepartmentoninterpretationandvaluation.Forexample,whetheraparticularserviceisamanpowersupplyservice(tobetaxedunderreversechargemechanism)ornotwoulddependonthefactsofthecaseandisopenforinterpretation.

InaneraofgrowingtransparencyandsimplicityintaxlawstheenlargementoflistofservicesunderthereversechargemechanismisaretrogradestepandhasburdenedtheservicerecipientwithresponsibilitiesthatarerightlythoseoftheDepartment.Inadditiontoincreasingthecomplexityofcompliance,theenlargementofthelistofservicesunderthereversechargemechanismhasalsodilutedthethresholdlevelsprescribedunderlawsince,evenifaserviceproviderisexemptfromtaxbyvirtueofbeingbelowthresholdlimits,underreversechargemechanismtheservicerecipient(bodycorporate in this case) will have to pay the service tax.

Toremovethisinequityitissuggestedthatthereversechargemechanismshouldberesortedtoinrarecircumstances.Forthesakeofadministrativeconvenienceit issuggestedthatthereversechargeberestrictedtoservicesprovidedinIndiabypartiesoutsideIndia,servicesprovidedbynon-executivedirectorstoacompanyandroadtransportationservicesprovidedbyGTA.Inanycasethepartialreversechargeshouldbegivenup;thetaxshouldbecollectedinwholeeither by the service provider or by the service recipient.

5.2.2. Exemption from Service Tax in respect of various Input Services procured by Power Industry

There is a well adverted policy of the Government of India that the power sector is a priority sector on account of ournationalconcernsrelatingtotheenergygenerationandenergysecurity.Levyofservicetaxon inputservices isanadditionalburden/sunkcostonthepowersectorandwouldsubstantiallyaddto theiroperationalcost in turnincreasingpriceofsupplyofelectricitytoconsumers.

Though there are Excise/Customs duty exemptions for power sector like other infrastructure sectors, still servicetaxisapplicableinrespectofvariousinputservicesprocuredbypowersector.Someoftheseare-projectreport&analysis,engineering&architectservices,consultancyservices,siteformation&clearance,excavation,earthmoving&demolition,erection,commissioning&installationofplant,goodstransportagencyforsupplyofgoods,repairs&maintenance,supplyoftangiblegoods(likeheavymachinery),businesssupportservices,businessauxiliaryservices.


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Therearealreadyvariousservicetaxexemptionsprovidedtootherinfrastructuresectorssuchascanal,damorotherirrigationworks,pipeline,watertreatment/seweragetreatment/ordisposal,road,bridge,tunnelorterminalforusebygeneralpublicetc.

Inorder tobringparity topower sector vis-a-visother infrastructure sectorsand thereby tomakepoweravailableatreasonablepriceforindustrial&domesticconsumption,refundofservicetaxshouldbeprovidedfortaxpaidonvarious input services availed by power sector.

5.2.3. Service Tax on Administrative Charges for the Pradhan Mantri Jeevan Jyoti Bima Yojana

Asperthescheme,thepremiumforinsuringisRs.330/-perannum.TheparticipatingbankwilldebittheamountofRs.330/-intheaccountofthepolicyholder.ThebankwillretainRs.41/-towardsadministrativechargesandremitthebalanceofRs.289/-toLifeInsuranceCompanies.Thoughtheamountofpremiumisexemptfromservicetax,thereimbursementofadministrativecharges isnotexempt. If theoutputservice(premium) isconsideredasexempt,aproportionalamountofcenvatisrequiredtobereversedbytheserviceprovideraspertheCenvatCreditRules.Itissuggestedthatservicetaxexemptionbegiventothereimbursementofadministrativechargesandtheschemeshouldbe made tax neutral in all aspects.

5.2.4. Service Tax on Transmission and Distribution of Electricity

UndertheNegativelist“transmissionordistributionofelectricitybyanelectricitytransmissionordistributionutility”isnottaxable(sec.66D).Further,thedefinitionof“electricitytransmissionordistributionutility”undersec65B(23)oftheFinanceActinteraliacoversdistributionlicenseeand“anyotherentityentrustedwithsuchfunctionbytheCentralGovernmentor,asthecasemaybe,theStateGovernment”

Under the negative list, service provided by an entity approved by Central or State Government is not taxable.However,anyfranchiseeappointedbyaprivateparty (DistributionLicensee) isnotcoveredunderthenegative list.Earliernotificationno32/2010dated22.06.2010specificallyexemptedthetaxableserviceprovidedtoanyperson,byadistributionlicensee,adistributionfranchiseeoranyotherperson.

Itisrequestedthatthebenefitofearliernotificationshouldbeextendedtocurrentexemptionlist.Allthefranchiseesappointed by a private party (Distribution Licensee) should also be covered under the definition of “electricitytransmissionordistributionutility.”

5.2.5. Service Tax on payments made by Head Office in India to branches in Foreign Countries and vice versa

Undertheservicetaxregime,anExplanation3(b)hasbeeninsertedtothedefinitionof‘service’undersection65B(44)toprovidethatanytransactionbetweenanestablishmentoutsideIndiaandanestablishmentinIndiawouldbetreatedasa‘service’.Abranchoranyotherestablishmentofapersonlocatedinanon-taxableterritorywouldbedeemedtobeadistinct“person”forservicetaxpurposes.

IndianCompanieshavingbranchesoverseasremitfundstothebranchestocovertheirdaytodayexpensesincludingservicesconsumedlocallybythebranches.Forexample,Indianexporters(‘IndianOffice’)needtoestablishnon-tradingrepresentativeofficesabroad(‘ForeignOffice’)toboosttheirexports.TheseForeignOfficesarenotrevenuegeneratingandthereforeIndianOfficehastonecessarilyfundtheiractivities.

Similarly,anOffshoreCompanyifawardedacontractforexecutionofworkinIndiamayset-upabranch/projectofficeinIndiafortheonshorepartofthework.Insuchcase,sincetheOffshoreentityistheContractingpartyandwouldraiseinvoicestothecustomer,thedaytodayoperationcostoftheIndianbranch/projectofficeisbeingmetbytheremittancesmadebytheOffshoreCompany.


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ThedeemingprovisionintendstotaxsuchimprestremittancesmadebytheIndianOfficetotheForeignOfficeorviceversa.Itmaybenotedthattherearemanysituationsinwhichthetaxleviedonsuchimprestremittancesareleadingtodoubletaxsituation.Forinstance,

(a) Remittancesusedby thebranch/project offices to fund their activities suffer local taxes in their respectivecountries.Thebranch/projectOffice,beingnon-revenuegeneratinginmanycases,doesnotgetanycreditofthetaxessosuffered.

(b) In caseof remittancesmadeby theOffshoreCompany to Indianbranch/projectoffice forexecutionof theproject,thebranch/projectofficegetexposedtoservicetaxinIndia,whichbecomescostfortheCompany,asneithertheoffshoreofficenorthebranch/projectofficehastheabilitytoclaimcreditofsuchtaxes.AgainwhentheHeadOfficewillraisebillstoitscustomer,thetransactionwouldbecomeliabletoservicetaxinthehandsofcustomerunderreversecharge

Thus,taxationofimprestremittancesin/outofIndiaresultsindoubletaxationwherethesametransactionistaxedtwice.IncaseofremittanceoffundbytheIndianheadofficetooffshorebranchoffice,anargumentmaybeplacedthatservicetaxpaidbytheIndianOfficecanbeclaimedasCenvat,however,itmustbenotedthatsubstantialportionofCenvatcreditsoavailedislostthroughapplicationofRule7andRule6oftheCenvatCreditRules2004.

PerhapstheintentionoftheGovernmentistolevyservicetaxonlyontheservicesprovidedbyoffshoreofficetotheofficelocatedintaxableterritory(i.e.onimportofservicetransactions),howeverduetothelanguageofexplanationany transactionbetweenofficesof same legalentity located in two taxable territories (including the transactionofprovidingfundswithoutanyservicebeinginvolved)aregettingexposedtoservicetax,resultingintomultiplicityoftaxesandaddingtothetaxcost.

ItisrecommendedthattheimprestremittancesbytheIndianOfficetoForeignOfficeandviceversashouldbekeptoutof service tax levy.

5.2.6. Cold Chain Services to be exempt from levy of Service Tax

MajorDairyandMilkproductswhicharemeantformasshumanconsumptionhavealimitedshelflifeandneedtobepreservedatdefinedtemperaturestokeepthemfitforhumanconsumption.Thegovernmentthoughhaveencouragedsettingupofcoldstoragefacilitiesononehandhaveadverselyeffectedtheusageofthesamebylevyofservicetaxonthem.WithproposedGSTexpectedtobearound20%to22%thiswouldfurtheradverselyhittheDairyindustry.

ServicesprovidedincoldstoragefacilitiesusedforstorageofproductsforhumanconsumptionshouldbeexemptedfromlevyofServiceTaxtorelieveultimateconsumersfromadditionalburden.Thiswouldencouragetheindustrytosetupcoldstoragefacilitiesinruralareasaswellandensureavailabilityofdairyproductsinsuchpockets.

5.2.7. Stock Broker services rendered to FII / NRIs

TheFinanceAct (No2)2014hasamended thedefinitionof ‘intermediary’ to include intermediaryof ‘goods’ in itsscope.Accordingly,witheffect from1October2014,an intermediaryof goods, suchasa commissionagent (i.e. abuyingorsellingagent)shallbecoveredunderRule9(c)ofthePlaceofSupplyofServicesRules,2012(POPS)andthetaxabilityoftheservicewoulddependonlocationofsuchintermediary.

Theaboveamendmentwouldhaveeffectofincluding‘stockbrokering’serviceunderRule9(c)ofPOPSasthedefinitionof‘goods’includes‘securities’.ThestockbrokeringservicerenderedbythebrokerstoFPI/NRIswouldalsobecoveredunderRule9(c)andwouldattractservicetaxsincethebrokerislocatedinIndia.Thiswouldhaveanimpactonbusinessofnon-residentinvestors,asitwillincreasethetransactioncosts.


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Without prejudice to the above, several brokers in Mumbai have received letters / notices from the Service taxdepartment,MumbaiaskingthemtopayservicetaxonbrokeragechargedtoFPIs/NRIsunderpre-amendedruleaswell.ThiscontradictsthecurrentpositionoftheGovernmenttosubjectthestockbrokingservicestotaxwitheffectfrom 1 October 2014.

Hence,itneedstobeexpresslyclarifiedthatthelevyofservicetaxwillbeeffectiveprospectivelyfrom1October2014andnootherprovisioninthepre-amendedlawwouldbeinvokedtotaxstockbrokingservicestoFPIsandNRIswithretrospectiveeffectfrom1July2012.

Appropriate amendment should be made in Rule 9(c) to expressly include stock broker as intermediaries and clarify that stockbrokeringserviceistaxablewitheffectfrom1October2014andnotpriortothatdate.

5.2.8. Double Taxation of Licensed Intellectual Property Right (VAT and Service Tax)

Temporarytransferorpermittingtheuseorenjoymentofanyintellectualpropertyrightisliabletoservicetax.

In lightof various settled judicialprecedents, intellectualproperty right (IPR)hasalsobeenheld tobe ‘goods’ andaccordingly,sincesoftwaresuppliedelectronicallyconstitutesgoods,itissubjectedtoVATundertherespectiveStateVATlegislations.Furtherthe‘temporarytransferofrighttousesoftware’isconstruedasaserviceandsubjecttolevyofServiceTax.HoweverthereisstillconfusionandlitigationexistingasmanyStateGovernmentsarestilllevyingsalestaxonsupplyoftemporaryIPR,giventhefactthatthedefinitionofsaleinfewstateVATlegislationsincludes‘righttouse’.TheobjectiveshouldbetodoawaywithdoubletaxationandbringaboutclarityonthefactwhetherIPRis‘goods’or‘service’.

ItisrecommendedthatsuitableexplanationsshouldbeaddedintheFinanceActitselftoensurethatsaleofIPRistaxedonlyonce–eitherunderVATasgoodsorunderServicetaxlegislationastaxableservice.

5.2.9. Service Tax on Regulatory/Statutory Fees paid to Foreign Governments/Government Agency

In thebudgetpresented for theyear2015-16, thedefinitionof theterm“Government”hasbeendefinedtomeandepartments of Central Government or State Government or Department of such Government, Union territory and its departments.[Definitionof“Government”underSection65B(26A)].

Chemical/PharmacompaniesarerequiredtopaystatutoryfeestotheForeignGovernments/agenciesforregistrationoftheirproductsetc.AchangeinthedefinitionhasresultedinsuchpaymentsbeingtaxableinthehandsoftheIndiancompaniesonreversechargebasis.Thiswillresultinhugeservicetaxoutflow,blockingofworkingcapital.

ExemptionfromservicetaxshouldbeprovidedonsuchpaymentsmadetoanyForeignGovernmentandagenciesasthey are statutory in nature.

5.2.10. Increase in Exemption Limit for levy of Service Tax

ThevaluelimitofRupeestenlakhsforexemptionfromthelevyofservicetaxinafinancialyearhasnotbeenrevisedformanyyearsdespiteincreasesinthevariouscostindices.ItisrequestedthattheexemptionlimitmaybeincreasedtoatotalofRupeestwentylakhs.TherequestisbeingmadesinceintroductionofGSTisuncertaininthenearfutureandtheincreaseintheexemptionlimitneednotawaitintroductionofGST.

5.2.11. Service Tax on Maintenance, Repair, Overhaul and Upgradation of Aircraft for Ministry of Defence

Servicesofmaintenance,repair,overhaulandupgradationofaircraftandaircraftpartsareliabletoservicetax.Underthemegaexemptionnotification(notificationno.25/2012),therewasanentryunderserialno.25(b),whichprovidedexemption to servicesprovided toGovernment, a local authorityor a governmental authoritybywayof ‘repairormaintenanceofavesseloranaircraft’.TheexemptionwithrespecttoaircraftwaswithdrawnwitheffectfromApril1,2013.


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Exemptionprovidedtorepairofaircraftsshouldbere-introducedbysuitablyamendingNotificationno.25/2012-ST,dated20-06-2012.Suchexemptionshouldalsocoverrepair,maintenance,etc.beingprovidedtoaircraftequipment,componentsandpartsaswell.Exemptionshouldbeextendedtoservicesthatareultimatelyused/consumedfortheofficialpurposesofMinistryofDefence.

5.2.12. Service Tax Exemption for Defence PSUs for Specified Services

Section68(2)oftheFinanceActreadwithNotification30/2012andRule2(1)(d)(i)(G)oftheServiceTaxRules,1994mandatesservicerecipientinIndiatopayservicetax,ifanytaxableserviceisprovidedoragreedtobeprovidedbyanyperson who is located in a non-taxable territory and received by any person located in the taxable territory provided the place of provision of services is in taxable territory (i.e. India) in terms of the Place of Provision of Service Rules, 2012.

IncaseofDefencePSUs,therearenumeroustechnologytransferagreementsfortransferofrighttousetechnologyrelating tomanufacture,overhaul, andmaintenanceofdefenceequipment.Asper section66Eof theFinanceAct,temporary transfer or permitting the use or enjoyment of any intellectual property right is a declared service andchargeable to service tax. Accordingly, service tax has been levied on royalty or fees paid under these technologytransferagreementsleadingtoincreaseincostofmanufactureofdefenceequipment.ItmaybenotedthatDPSUsarenotinapositiontoavailCENVATcreditofservicetaxpaidonthesechargesasfinishedgoodsareexemptandhencesuchservice tax paid always results as a cost in the hands of DPSUs which in turn increases the cost of products supplied to Ministry of Defence.

ItissuggestedtograntexemptiononservicesavailedbyDPSUstowardstechnologytransferorsettingupofmanufacturingfacilityfordefenceinlinewiththeexemptiongrantedtoRBI.Thiswillreducethecostoffinishedgoodsandalsosavetax compliance cost for DPSUs.

5.2.13. Service Tax liability on Mandatory Deputation of ONGC personnel to Government of India

GovernmentofIndia(theMinistryofPetroleumandNaturalGas),videResolutionNo.O-20013/2/92-ONG,D-III,anddatedApril8,1993(‘theResolution’)hassetupanindependentregulatorybodynamelytheDirectorateGeneralofHydrocarbons(‘DGH’),undertheadministrativecontroloftheMinistryofPetroleumandNaturalGas(MoP&NG).

DGHisatechnicalarmoftheMoP&NGanditsexpenditureisfundedbythegrantsfromtheOilIndustryDevelopmentBoard which is nodal agency for the development of the Oil Industry, which, in turn, is provided by the CentralGovernment.ThemanpowerofDGHconsistsofpersonnelfromtheMoP&NGandalsofromOilIndustryondeputation/tenurebasis.TheemployeesdeputedbyONGCtoDGHarepaidsalaryandallowancesbyONGC,whicharesubsequentlyrecovered from DGH.

Itmaybeobservedthat,deputationofmanpowertoDGHisbasedonspecificdirectiveoftheGovernmentofIndiatofulfilcertainsecurity,safetyandregulatoryobjectivesthatarepartofthesovereignfunctionoftheGovernmentand,therebeingnointentiontoprovideorreceiveserviceonbothsides,eitherasaprovideronthepartofONGCorasarecipient on the part of the Government of India.

It is requested thatanexemption/clarificationmaybe issued thatmandatorydeputationofpersonnel fromPSU inDirectorateGeneralofHydrocarbonsoranyGovernmentDepartment,isnotataxableservice.Also,onimplementationofGST,theserecommendationsmaypleasebeincorporatedmutatis-mutandis.

5.2.14. Assessment of Drawings and Designs Imported for the implementation of Projects to Customs Duty and Service Tax

WhileexecutinglargeprojectsandplantsinIndia,theimporteddrawingsanddesignsformanindispensableandintegralpartoftheentireproject.Generally,suchdrawingsanddesignsrelatetoinstallationofimportedaswellasindigenousequipment,manufactureofindigenousequipment,undertakingcivilandstructuralworkinIndia,etc.


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The drawings and designs are imported in printed form on paper (referred as hard copy),which are used for theaforementionedpurposes.Apartfromhardcopy,thesamedrawingsanddesignsarealsoimportedinelectronicformi.e.,onDiscs(referredassoftcopy),whichareusedforfuturereferencepurpose.Thereisonlyoneconsiderationagreedfordrawingsanddesigns.

Whenhardcopyisimported,itisclassifiedunderChapterHeading4911ofCustomsTariffandtheconsiderationforsuchdrawingsanddesignsgetsfullyandunconditionallyexemptfromlevyofCustomsDutybyvirtueofSerialno.275ofNotificationNo.12/2012-Cusdated17.3.2012.Theexemptionhasbeeninexistencefrom1994onwardstilldate.

Whensoftcopyisimported,thecustomsdepartmentisclassifyingthemunderChapterHeading85239090ofCustomsTariffandtheconsiderationforsuchdrawingsanddesignsisbeingsubjectedtolevyofcustomsdutyonthegroundthatthereisnoexemptionnotificationforsoftcopyclassifiableunderChapterHeading85239090.

The above anomalous position is arising due to the fact that drawings and designs are imported in different formthroughtwodifferentmediaandthecustomsimplicationdifferbasedonformofmedia.

Itisconsideredtobegoodpracticetostructurethetariffinataxneutralmanner.Inotherwords,thetaxliabilityoroutcomeshouldnotvarydependinguponthemodeofcarryingoutthetransaction.Thetaxstructureshouldbesuchthattheconsequencesaresameirrespectiveofthemethodadoptedforundertakinganytransaction.ThistheoryandprinciplehasbeenacceptedandappliedbyCBECasisevidentfromTRUBudgetCirculardated29.2.2008,para4.1.5whichisreproducedbelow:

“4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.”

In fact, taxneutralapproach is foreseenfromthemanner inwhichthe InformationTechnologysoftware is treated.Similartaxneutralapproachneedstobegiventoimporteddrawingsanddesigns.Thesoftcopyshouldbetreatedatparwithhardcopyandhence,nocustomsdutyshouldbeleviedonthesoftcopyaswell.

Also,theimporteddrawingsanddesignsaresubjectedtoservicetaxonreversechargebasisbyvirtueofSection66BreadwithRule2(1)(d)(G)onthegroundthattheimporteddrawingsanddesignsreceivedintheformofCDisinthenatureofservice.Itisinequitableandillogicaltotreatdrawingsanddesignsasgoodsandservicesatthesametime.

Itisrequestedthataclarification/notificationmaybeissuedprovidingthattheimporteddrawingsanddesignswouldnotbesubjectedtocustomsdutyandservicetax,atthesametime.

5.2.15. Service Tax on NRI Remittance Related Services

The Central Board of Excise and Customs (CBEC) has issued a circular No. 180/06/2014 – ST dated 14th October 2014 whichhastheeffectofimposingaservicetaxonNRIremittancefeesincurredfordisbursingmoneytoNRIfamiliesinIndia.ThiscircularwasissuedreversingtheearliercircularissuedbyCBECon10thJuly,2012,whichclarifiedthatnoservicetaxisleviableontheservicesrelatedtoNRIrenitencesthoughthereisnochangeinservicetaxlaworremittancemodel.

IndiaisthelargestmigrantremittancereceivingnationoftheworldwithremittancefromNon-ResidentIndians(NRIs)exceedingUSD70billionannually.NRIsremitthemoneytotheirdependentsinIndiaeitherthroughbankingchannelsorbyusingmoneytransferservicesprovidedbyMoneyTransferServiceOperators(MTSOs).TheMTSOsdonothaveanypresenceinIndiaandhaveappointedvariousrepresentativestodisbursemoneytothepersonsnominatedbyNRIs.TheserepresentativesreceiveacommissionfromMTSOsfordisbursingthemoneytothebeneficiaryinIndia.Asperthenewcircular,thebanksandfinancialinstitutionsoragentswhichlevyafeeorcommissionforfacilitatingthedeliveryofNRI money in India will have to pay service tax.


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NRIremittanceshaveremainedthemost importantconstituentofIndia’seconomicdevelopmentforthepastthreedecades. It is pertinent to note that a significant percentage of the country’s population is dependent upon NRIremittancesfortheir livelihood.TheServicetax levyhas increasedthecostofsendingmoneyto IndiafortheNRIs,whichwouldconsequentlymean,lesserdisposableincomeinthehandsofNRIfamilies.ThismayincentivizeNRIstoroutetheirmoneythroughillegalchannelssuchasthehawalanetworkpromotingmoneylaunderingandblackmoneycreation/transfer.

Itisrecommendedthatthecirculardated14thOctober2014maybewithdrawnanditmaybeclarifiedthattheNRIremittancerelatedservicesprovidedbyanIndianentity/banktoaforeignmoneytransferserviceoperator(MTSO)willnotattractservicetaxandqualifyasanexportofservices.Alternatively,aspecificexemptionbeprovidedexemptingsuch services.

SERVICE TAX - CLARIFICATIONS

5.2.16. Adjustment of Service Tax paid on Amounts Written off

WiththeintroductionofPointofTaxationRules,2011ServiceTaxispayableonaccrualorreceiptwhicheverisearlier.TheServiceTaxliabilityisdischargedirrespectiveofreceiptofpaymentfromthecustomer.WhiletheServiceTaxliabilityisdischargedonanaccrualbasis,incaseofbaddebtsthereisnorecourseforadjustmentofServiceTaxpaidthereon.Thistaxtreatmentisnotfairtothebanksasthebanksareforcedtopaytaxwithoutactuallyearninganything.

AsServiceTaxisanindirecttaxwhichshouldberecoveredfromtheultimateuseroftheservice,itisrecommendedthattheBankshouldbeallowedtoadjusttheproportionateServiceTaxwhichcouldnotberecoveredagainstservicetaxliabilityforthesubsequentperiod.ParticularlyinthecaseofCreditCardetc.whereduetoinherentnatureofthebusinessdelinquenciesarehigh,reliefforBadDebtsmustbeallowed.

5.2.17. Service Tax implication on the Foreign Bank Charges

Aspartoftraderelatedservices,abankinIndialiaiseswithanoverseascorrespondentbankforcollectionofexportproceeds/remittanceofimportproceedsontherequestofitscustomers.Duringthisprocess,theoverseasbankactsonbehalfofoverseastradecounterpartyandmaylevyitscharges/fees,whichmaybedeductedfromexportproceedsofIndiancustomer/additionallychargedtoIndianimporter.

BanksinIndiaseparatelychargetheircustomersfortraderelatedservicesrendered,onwhichtheylevyandrecoverservicetaxfromthecustomers.However,sincebanksinIndiaareactingintheircapacityas“authorizeddealer”whiledealingwiththeoverseascorrespondentbanks,theyhavetakenapositionthattheyarenotliabletoservicetaxbywayofreversechargeonchargesleviedbytheoverseascorrespondentbanks.Thisisaunanimouspositionadoptedbyallthebanksincludingforeignbanks,Indianprivatesectorbanksandpublicsectorbanks.

OfficeoftheCommissionerofServiceTax-I,MumbaihasissuedaTradeNotice,contendingthatit’sthebanksinIndiaandnottheircustomerswhoobtainandutilizetheservicesofoverseascorrespondentbanks.Hence,thebanksinIndiaareliabletopayservicetaxbywayofreversecharge.Accordingly,noticeshavebeenissuedtoallBankstoprovidedataforlastfiveyears.

Theserviceisprovidedbyaperson(ForeignBank)locatedinanon-taxableterritorytoExporter(whichislocatedintaxable territory). The actual service recipient is the Indian customer. The bank in India merely facilitates the payments in the capacity as Authorised Dealer. Hence, the Indian Banks cannot be considered as service recipients. Given this, as per Rule 2 (1) (d) of Service Tax Rules, 1994 read with Not. No. 30/2012-ST, Service Tax would be payable by the recipientoftheservicei.e.theIndiancustomer.ClarificationmaybeissuedwhetherinsuchtransactionsServiceTaxontheForeignBankchargesispayablebytheIndiancustomersorthebanks.


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5.2.18. Levy of Service Tax on amount recovered towards Penalty, Fines, Liquidated Damages etc.

Section66BofChapterVoftheFinanceActisthepresentchargingsectionaccordingtowhichservicetaxisleviableattherateof14%onthevalueofservices,otherthanthosespecifiedintheNegativeList,providedoragreedtobeprovided in the taxable territory by one person to another.

Section65B(44)of theActdefines the term“service“ tomeananyactivity carriedoutbyaperson foranother forconsideration, including declared serviceswith certain exclusions. The term “activity” has not been defined in theAct.TheministryofFinance,intheGuidanceNotedated20.06.2012hasobservedthatintheabsenceofanyspecificdefinitiontheterm“activity”shallbegiventhemeaningasitisunderstoodcommonlytoincludeanactdone,aworkdone,adeeddone,anoperationcarriedout,executionofanact,provisionofafacilityetc.Itisfurtherstatedthatactivitycouldbeactiveorpassiveandwouldalsoincludeforbearancetoact.

AsperSec66E(e)oftheFinanceAct,1994,“agreeingtotheobligationtorefrainfromanact,ortotolerateanactorasituation,ortodoanact”shallbeadeclaredserviceandliabletoservicetax.It isclearformabovethatinordertoattractthelevyofservicetax,thereshouldbeanactivityandtheactivityshouldbeundertakenbyonepersontoanotherpersonforaconsideration.

TheCentralExciseDepartmentinsomecasesisdemandingservicetaxbasedontheaboveprovisionontheamountrecoveredaspenalty,fineorliquidateddamagesbythecustomersfromthevendors.

Inthisregard,itisimportanttonotethatsuchrecoveriesdonebythecustomerisnotaconsiderationforanyserviceprovided by the customers to its vendors as there exists no reciprocity in such cases and the amount recovered from vendorisinthenatureofcompensationonly.Incontract,compensationisbeingpaidbyoneofthecontractingpartiestotheotherforanylossorinjurycausedtothelatterbysomeconductinbreachofthetermsofthecontract.

ReferencecanbedrawnfromtheCBECcircularrefno96/7/2007/-STdated23.08.2007whichclarifiesthatanamountcollectedfordelayedpaymentoftelephonebillisnottobetreatedasconsiderationchargedforprovisionoftelecomserviceandtherefore,doesnotformpartofthevalueofthetaxableservicesundersection67readwithServiceTax(DeterminationofValue)Rules,2006.

IthasalsobeenclarifiedvideCircularNo121/3/2010-STdated26.04.2010thatdetentionchargescollectedtoholdamarinecontainerbeyondtheholdingperiodisdeterminedbytheshippingcompanies/steameragentisnotchargeabletoservicetax,thesamebeinginthenatureofa“penalrent”notaconsiderationforaservice.

ItissuggestedthatCBECshouldissuenecessaryclarificationinthemattertoavoiddisputes

5.2.19. Promoting Digital India – Remove Dual Levy of Taxes

TopromoteDigitalIndia,costofdigitizingshouldbemadeoptimal.Pre-packagedorcannedsoftwarelicensesaregoodsasheldbytheApexCourtin2004inthecaseofTataConsultancyServices(TCS).Consequently,StateslevyVAT/CSTonthesaleofsuchsoftwarelicenses.LevyofVAT/CSTisalsoacceptedinthetrade.

Traditionally, Pre-packaged Softwarewas delivered via CD, Disc, and Floppy etc. and hence the Apex Court in theTCSdecisionreferredthesame.Withadvancementintechnology,Softwareisdownloadablethroughinternet.Sincemediumofdeliveryisthroughinternetandit’snotasperApexCourt’sdecision,Departmentconsidersitasaserviceandleviesservicetax.LevyofVAT/CSTisbeingmadebytheStatesfollowingtheTCSdecisionandservicetaxbyCentralGovernmentleadingtoduallevy.

Softwarewouldremaingoodswhetheritisdeliveredonmediaordownloadedontheinternet.Levyofservicetaxonanitemwhichisgoodsisnotappropriateandrequirestobeeliminatedtoavoidduallevy.


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HenceitshouldbeclarifiedthatPre-packagedorcannedsoftwareinwhateverformdeliveredisgoodsandthereforenotsubjecttoservicetax.Thiswillgoalongwayinreducingthecostofdigitization,whichisoneoftheprimarythrustareas of the Government.

5.2.20. Exemption from levy of Services Tax on common costs apportioned by the operator to UJV

AspertheProductionSharingContract (“PSC”)signedbythemembersofUnincorporatedJointVenture(UJV)withtheGovernmentofIndia,oneoftheparticipantmemberisdesignatedasan“operator”.ApportionmentofCommonCostsamongstmembers isconsequenttoacontractualobligationforcarryingPetroleumOperationsunderthePSCandqualifiesastransactionsinmoneywithoutanyelementofserviceandwithoutanyelementofconsiderationsoastoattractServicetax.Withoutprejudice,asoperatoriscontractorunderPSCandapportionmentofCommonCostsistowardsproductionofcrudeoilandnaturalgas,thesamewillfallundernegativelistasprovidedinsection66D(f)ofthe Finance Act.

Toobviateanycontroversy,itisrequestedthatasuitableclarificationmaybeissuedstatingthatServicetaxwouldnotbeleviableontheCommonCostsapportionedbytheoperatortotheUJVformedinpursuanceofProductionSharingContracts(“PSC”)withGovernmentofIndiaforOilandGas.

5.2.21. Sharing of Services by Group Companies

In today’s business scenario, “business groups”managemultiple lines of business through separate legal entities,subsidiaries,orgroupcompanies.Thus,sharingofexpenses/costsandallocationofexpensesbetweenthesecompaniesofthesamegroupbecomesinevitable.Oneofthegroupcompaniesentersintoamasteragreementwithavendorforsupplyofcommonservicessuchashousekeeping,security,electronicdatatransfer(EDP),manpowersupply,cateringetc.tooneormoregroupcompaniesorengagesemployeesatcorporatelevelontheroleofonegroupcompanywhowillhandleworkrelatingtopurchase,marketing,electronicdatatransfer(EDP),HRetc.inrespectofallthecompanies.Thecostisallocatedtoallgroupcompanieswithoutmarkup.Thedistributionisbeingdoneasperstandardaccountingpolicieslaiddownandtoobtainoperationalefficiencyinadditiontoadministrativeconvenience.Thecostallocationcouldbeonthebasisoftimeandresourceusagebyaunitorcompanyortheallocationcouldbeonthebasisofsomepredecidedfactors liketurnover,no.ofemployees,consumptionvalueofrawmaterial,numberofuser(for IT/EDPservices),manufacturingcapacitiesetc.However,inanycasenoprofitelement/mark-upisthere.

Serviceshavebeenprovidedaverywidedefinition,basiswhichadoubthasbeenraisedbythefieldformationthatthewordsanyactivityincludesallocation/sharingofexpensesbetweenthegroupcompaniesandareliableforpaymentofservicetaxontheamountofexpensessoallocatedorshared.Suchburdenofcostleadstohighcostofproductsandaddstounnecessarylitigationcost.

Necessaryclarificationonthisaspectneeds tobe issuedtoavoiddisputes.Sincegroupcompaniesaregettingonlyreimbursement of expenses actually incurred, it does not amount to provision of service.

5.2.22. Taxability of Interchange Fees in a Card/ATM Transaction

Inacardtransaction,acquiringBank(bankowningthePOSmachineorATM)dischargesfullServiceTaxliabilityontheentireMerchantServicefees(MSF)earned.Further,aportionofMSFsharedwiththeissuingBank(Bankwhoissuesthecard)commonlyreferredas‘interchangeincome’issubjecttoServiceTaxinthehandsofissuingBank.

TheinterchangefeesshouldnotbeliabletoServiceTaxonfollowinggrounds:

(i) Inacardtransaction,theAcquiringBankdischargesfullServiceTax liabilityontheentireMSFearnedwhichincludestheinterchangesharedwiththeissuingBank.Thus,therearenoleakagesofServiceTax.


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(ii) NocontractofservicebetweentheissuingbankandtheacquiringBankandtheinterchangeincomeismerepassingoffeesthathasalreadysufferedtaxinthehandsofacquiringbank.

(iii) ThesettlementoffeesbetweentheissuingbankandtheacquiringbankisdonebytheCardassociation.TheAcquiringbankwill notbe able to claim theCenvat credit as interchange fees is not at all an input for theacquiringbankandfurthernoinvoicesystempresentlyprevailingforraisingofinvoiceeitherbytheissuingbankorthecardassociation.

NecessaryclarificationtobeissuedthatinterchangefeereceivedbyabankshouldnotbeliabletoServiceTaxprovidedthatServiceTaxhasbeenpaidontheentireMSFbytheacquiringBank.

5.2.23. Clarification on outdoor Catering Services

VideNotificationNo.25/2012-STdated20thJune,2012theserviceswhichareexemptfrompaymentofservicetaxwerenotified.VideEntryNo.19servicesprovidedinrelationtoservingoffoodorbeveragesbyarestaurant,eatingjointoramessotherthanthosehavingthefacilityofair-conditioningorcentralair-heatinginanypartoftheestablishmentat anytimeduring the year anda licence to servealcoholic beverages is exempt frompaymentof service tax.Onrepresentation from industry, theauthoritieshave introducedanotherentryvideNotificationNo.14/2013-STdated22ndOctober,2013videEntryNo.19AthatservicesprovidedinrelationtoservingoffoodorbeveragesbyacanteenmaintainedinafactorycoveredunderFactoriesAct,1948(63of1948),havingthefacilityofair-conditioningatanytimeduringtheyeartogiverelieftotheair-conditionedcanteenmaintainedinafactory.

InsertionofentryNo.19AinadditiontotheS.No.19impliesthatnon-air-conditionedcanteenmaintainedinafactoryis already coveredunder S.No.19. The tax authorities in thefield are giving a narrow interpretation that a non-airconditionedfactorycanteenisnotentitledtothesaidbenefitandthebenefitincaseofanair-conditionedcanteenisavailableonly if thecatering isundertakenbythefactorythemselvesandnotbyappointingathirdpartyserviceprovider. The aforesaid facts clearly establish that non-air conditioned factory canteens are already covered underS.No.19.

Henceaclarificationmaybeissuedtoclearthesedoubts.

5.2.24. Medical Services provided by Clinical establishments

Medical services provided by Clinical establishments are exempt from Service tax. The Hospital provides services to patientandtheyengagedoctorsforprovidingsuchservices.HospitalraisestheirmemooffeesbyspecifyingOperationCharges,DoctorFeesandmedicalConsumables.TheDepartmentistakingaviewthatHospitalprovidesinfrastructuretoDoctorandintendstorecovertheServicetaxonsuchcharges.Thereisaneedtoclarifythatsuchservicesarealsointhe nature of medical services and exempt from Service tax.

5.2.25. Service Tax on Contributions made towards Implementation of CSR Projects

UnderthedirectivesoftheDepartmentofPublicEnterprises,GovernmentofIndia(GOI),largepublicsectorundertakings(PSUs)arerequiredtospend2%oftheirprofittowardsvariouswelfaremeasuresunderCorporateSocialResponsibility(CSR)projects.Accordingly,largePSUsaremakingcontributionsforwelfareactivities,whichisprimarilythefunctionoftheGovernment.AsimilarstipulationhasbeenmadeundertheCompaniesAct.

GOIGuidelinesprovide that, the implementationof theproject create apositive imageabout the company in thepublic’sperception.Accordingly,while takingupanyCSRproject it isensured that thePSU’s tradenameor logo isproperlydisplayed.However, theServiceTaxDepartmenthasexpressedaviewthatthesetransactionsarecoveredundersponsorship,asthePSUisgettingmileagefromtheCSRProject,andaresubjecttoservicetax.


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ThisdisplayoftradenameorlogoattheCSRsiteforcreatingapositiveimageshouldnotbeconstruedasmileageforcommercialadvantagetoPSUsandthereforeshouldnotbesubjecttoservicetax.

ItisrecommendedthataclarificationmaybeissuedtotheeffectthatCSRactivitiesbeingcarriedoutbyCentralPSUsin terms of GOI Guidelines are not services leviable to service tax.

SERVICE TAX - PROCEDURES AND MISCELLANEOUS ISSUES

5.2.26. Due Date for Payment of Service Tax

Currentlyduedateofpaymentofservice tax ingovernment treasury is6thof the followingmonth. It ispracticallyverydifficultfortheassesseetoreconcileitsmonthlyaccountsandcomputetheservicetaxliabilityby5thofthenextmonth.Further,paymentofservicetaxforMarchisrequiredtobedepositedinthegovernmenttreasuryby31stMarchitselfwhichispracticallydifficultasincertaincasesthevalueofservicesiscomputedasapercentageofsalesandthesalescontinuetill31Marchof theyear.Theproblem iscompounded incaseofassesseeshavingmultiplebusinesspoints spread over the country. Assessees are forced to deposit service tax on adhoc basis as actual amount cannot be computedbeforethecloseofthefinancialyear.Further,inviewofnon-availabilityofprovisionsforadjustingservicetaxliabilityagainstsubsequentpayment,theamountevenifpaidonestimatedbasiswillgetblockedtilltherefund,ifany,isgrantedbyservicetaxauthorities.

Itissuggestedthatthepaymentdatemaybeextendedtoatleast15thofthenextmonthsothatassesseegetssufficienttimeforreconcilinganddepositingthecorrectamount.Thiswillavoiddepositofanyshortorexcessservicetaxamountwhichnecessitatesfilingofrefundoradjustmentsinsubsequentreturns.

Further,fordepositofservicetaxforMarch,nointerestshouldbechargedfromtheassesseeincaseatleast80%ofthetotalmonthlyservicetaxisdepositedbasistheestimatedvalueofservices.

5.2.27. Interest on delayed payment of Service Tax

AsperBudget2014,witheffectfrom01-10-2014,ratesofInterestfordelayinpaymentofServiceTaxmattershavebeenincreasedasperslabsof18%forfirst6months,24%fornextsixmonthsandthereafter30%forperiodbeyond1year.ThisisexorbitantandapplicableonlyinServiceTaxmatters.TherateofinterestondelayedpaymentofExciseandCustomsdutyirrespectiveoftimegapisflatlyat18%.Further,thegovernmentoffersinterestat6%onpre-depositsanddelayed refunds across Service Tax, Excise and Customs.

Therearemanyoccasionswhereunderabonafidebelieforduetointerpretationalissues,servicetaxliabilityisnotdischargedbytheassessee.Insuchcases,levyofinterestattherateof30%isnotjustifiable.Incase,theassesseehascollected the service tax from the recipient of service and has not deposited the same with the Government, levy of suchahigherrateofinterestisfullyjustified.However,levyofsuchhigherrateofinterestincasesdisputedbecauseofinterpretationoflawisunfairandunjust.Thisisacastigatorymeasureandtranslatesintoaheavylitigationcostsincethe appellate process normally extends beyond a year.

It is recommended that the interest rates should be reduced from 24/30 percent back to 18 percent so as to reduce theunduecostburdenonanassessee.HigherrateofinterestmaybeprescribedforsituationswherethetaxpayerhasadmittedhistaxliabilitybutstillhasnotdepositedthetaxwiththeGovernment.Liabilitiesarisingoutofdifferencesininterpretationoflaw,valuationorapplicabilityofanyexemptionnotificationneedtobekeptoutofthepurviewofpenalratesofinterest.Interestratesshouldbeuniformlyapplicableatthesamerateof18%acrossServicetaxExciseandCustomsmatters.


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5.2.28. Service Tax – Reimbursements

FinanceAct2015hasincludedthereimbursementssoughtbyserviceproviderswithinthedefinitionof“Consideration”forthepurposeofdeterminingthevalueoftaxableservice.ItmaybepertinenttonotethatClearing&HandlingAgents(CHAs), during the courseof providingCHA service alsomakepayments for certain expenses, onbehalf of servicerecipientonaPrincipaltoAgentbasisandseekreimbursementsofthesamefromtheservicerecipient.Theimpositionof service tax on such reimbursements adds to the overall cost structure of the exporter. Exporters can seek refund of servicetaxeitheron-lineataprescribedrate(asperScheduleofRates,underNotificationNo.41/2012-STdated29thJune2012)orseekrefundmanuallyestablishingtheactualservicetaxsufferedbytheexporterinthecourseofexport.The rateprescribed forclaiming refundson-linehasnotbeen increasedappropriately tocognise for theadditionalservicetaxsufferedonreimbursements.

ReimbursementsclaimedbyServiceProviderspurelyonaPrincipaltoAgentbasis,asabovebespecificallyexcludedfromthedefinitionof“consideration”.Alternately,theprescribedrates(asperScheduleofRates,underNotificationNo.41/2012-STdated29thJune2012)beincreasedappropriatelytocoverfortheincrementalcostonaccountofservicetax on such reimbursements.

5.2.29. Service category based Registration to be removed

Registrationprovisionsunderservicetaxrequiretheassesseetoregisterforvariousservicecategoriesinwhichheisdealing.Therefore,theassesseehastoamendtheservicetaxregistrationcertificatetimeandagaintoincorporatenewservicecategoryasaproviderorreceiverofsaidservice.

Frequentamendmentstotheexistingregistrationtoincorporatenewservices,increasesadministrativeburdenontheassesseeanddepartmentalofficerswithoutanyvalueadditiontotheDepartment

It is recommendedthatassesseesbeprovidedwith facility forself-declarationandcertificationunderACES foranyadditionofnewservicecategory.Systemapprovalshouldbeintroducedforadditionordeletionofservicecategory.

5.2.30. Disclosure of Service category in the Invoice

Asperrule4AoftheServiceTaxRules,1994,itisnotmandatorytomentiontheservicecategoryunderwhichservicetaxisbeingchargedbytheServiceProvider.

Thisleadstointerpretationofservicecategorybytheservicerecipientinorderto(i)paythereversechargeofservicetax;(ii)availCenvatCreditor(iii)claimservicetaxrefunds/exemption.Theservicecategorydeterminedbytheservicerecipientmaybedifferentfromtheservicecategoryunderwhichserviceisprovidedorservicetaxispaidbytheserviceprovider.

Rule4AoftheServiceRules,1994shouldbeamendedtoprovidethatthedescriptionofaserviceintheinvoiceshallbethesameastheservicetaxcategoryunderwhichservicetaxispaid/payable.Thiswouldaidtheofficersandassesseetoreduceunnecessarylitigation.

5.2.31. Non-Taxability of Export of Testing Services

Rule 4 of the POPS Rules deals with performance based services. It states that place of provision of service shall be thelocationwheretheserviceisactuallyperformed.Incaseoftestingofsoftwareorhardwareproducts,theplaceofprovisionofserviceistreatedastheplacewhereservicesareactuallyperformedthoughtheactualuseandenjoymentofserviceisatoverseaslocationandmadeliabletotaxdespiteofreceiptofmoneyinforeigncurrency.

Levyingservicetaxontestingserviceswhichareexportedwouldresultinexportingtaxesoverseas,impactingglobalcompetitivenessofIndianITIndustry.


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Itisrecommendedthatsubrule4(a)ofthePOPSRulesshouldbeamendedtoprovideanexceptionthatinrespectoftestingserviceperformedongoods,theplaceofprovisionofserviceisthelocationoftheservicerecipient(i.e.towhomthetestreportorexceptionreport,ifany,isrequiredtobedelivered.)

5.2.32. Point of Taxation for Life Insurance Services

ConsideringpeculiarnatureofLifeInsurancewherein-

(a) Life insurance premium are always paid in advance.

ServicetaxRulesprovidethatreceiptofthepaymentasprovisionofserviceasperthepointoftaxation(POT)forlevyingtheservicetax.

(b) Breakupofpremiumintochargesandinvestmentisnotavailabletilltheassociatedunitsareallocatedincaseof ULIP.

Hencepointoftaxationshouldbewhentheunitsarecreated.

(c) Thecontractforinsuranceisnotmadetillthepolicyisissued.

Therefore,noobligationtorenderservicearisestillcontractforinsuranceismade.Hence,servicetaxshouldbeappliedoncecontractofinsuranceissignedi.e.issuanceofpolicy.

Taxobligationhowever,arisesonaccrualorrealizationwhicheverisearlier.Itissuggestedthatrecognitionshouldbeasunder:

(a) ReceiptofpremiumasPointofTaxationunderLifeInsuranceServicesforpoliciesotherthanULIP

(b) IncaseofULIPsPointofTaxationisthedatewhentheassociatedunitsareallotted.

(c) Service tax should be applied on issuance of policy and not on proposal deposit.

CENTRAL EXCISE - LEVY AND EXEMPTIONS

5.3.1. Withdraw National Calamity Contingent Duty

NCCD amounting to Rs 50 perMT of crude oil purchasedmay bewithdrawn as it is an additional burden on thebusinesses.Furtherthereisamultitudeofothertaxesanddutiesoncrudeoil.

AquotefromthespeechwhileintroducingtheFinanceBill2003,“Unfortunately,theNationhasbeenfacingaseveredroughtthisyear.ThefundsraisedearlierundertheNationalCalamityContingentDutyarenotsufficient.Itis,therefore,proposedtoimposea1percentNationalCalamityContingentDutyonpolyesterfilamentyarn,motorcars,multiutilityvehiclesandtwo-wheelers.Similarly,crude,domesticorimported,willalsobesubjectedtoadutyofRs.50permetrictonneforthispurpose.However,thesenewlevieswillbelimitedtooneyearonly.“

ThoughtheGovt.saiditwasonlyforoneyear,ithasbeenextendedthereafter.Thuswhatwasintroducedforonlyoneyeartocombatdroughtstillcontinues.NCCDunderFinanceAct2003isleviedasasurchargeoverandabovethebasiccustomsdutyleviedundertheCustomsTariffAct.

ItissuggestedthatNCCDbewithdrawn.Alternatively,NCCDmaybeallowedtobetakenasCENVATcreditintheexcisedutypaymentonclearanceofmanufacturedgoodsfromthefactory.

5.3.2. Option to avail Exemption from Payment of Excise Duty

FinanceAct,2005,byamendingSection5AoftheCentralExciseActwitheffectfrom14thMay,2005,hadmadeachangeinthepositionwithrespecttoexemptiononpaymentofcentralexcisedutyonanexemptedproduct.Asperthe


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amendmentifanyexcisablegoodsareexemptedfromthepaymentofexcisedutyunconditionally,themanufacturerof such goodswill be bound to avail the exemption. Prior to this amendment the exemptionwas optional to themanufacturerandthemanufacturerwasfreetoworkunderCENVATschemeiftheexemptiondoesnotsuithim.

SuchaprovisionintheCentralExciseActactsasadisincentiveformanufacturerswhointendtosetupfactoriesforthemanufactureofexemptedgoodsbymakinghugeinvestmentincapitalgoodsastheycannotavailofthecenvatcreditofthedutiespaid.Thesituationgetsworseincasetheexemptedgoodssomanufacturedhappentobeusedasinputsinthemanufactureofdutiablegoods.TheexcisedutypaidbythemanufacturerisatotallossbecausetheCENVATchainis broken.

Itisrequestedthattheprovisionofavailmentofexemptionbeingoptionalshouldberestored.

5.3.3. Excise Duty Rationalization and Simplification on Cement

[email protected]%+Rs.125/-perMT.Dutyratesoncementareoneofthehighest.Othercoreindustriessuchascoalandsteelattractdutyataround6%.Cementisoneofthecoreinfrastructureindustriesanditrequireslarge-scaleinvestmentsandcapacityadditionsinviewoftheexpectedGDPgrowthandprojecteddemandforcementoverthemediumtolongterm.

Further,theexcisedutystructureforbothcementaswellascementclinkerhasbecomequitecomplicatedinthelastfewyears.EarlieritwasataspecificrateperMT.Now,itisleviedonthebasisofadvaloremcumspecificratesandisfurther also related to the declared MRP of the product.

Hence,tobringratesofdutyoncementatparwithothercoreandinfrastructureindustries,theExciseDutyrateshouldberationalizedandreducedfromthecurrent12.5%plusspecificdutyto6-8%withoutadditionofSpecificDuty.Also,thedutystructurebesimplifiedtobeeitheronspecificrateperMToronadvalorembasisandwithoutrelatingtoMRPetc.

5.3.4. Exemption for Waste Water Recycle, Reuse & Zero Liquid Discharge (ZLD) Systems

By 2020 (5 years from now) it is predicted that India will be one of the most water stressed countries of the world i.e., minimumwaterwillnotbeavailabletomajorityofitspopulationanditsindustryandtomeetitsrequirement,Indiawill have to use its waste water.

Government has come out with a policy that most of the industry (a list is available) have to use either their own waste waterrecycledor,recycle&reusesewageofmajormetroslikeChennai,Mumbai,Delhi.Besides,underCleanGangaActionPlan,theMinistryofEnvironment&ForestsandMinistryofWaterResourcesalongwithCPCBhavemandatedthatindustriesalongtheGangarivermustimplementZeroLiquidDischarge(nowaterisdischargedbytheindustries,80–85%ofthewaterisreused).

Wastewater recycleand reuseandZLDareexpensive technologies that require2times the investmentofawatertreatmentplantandhencethepaybackisveryhighmakinginvestmentunviable.IfincentivesbythewayoftaxrebatesareofferedinlinewithsimilarincentivesavailableforinitiativeslikeSolarPower,RenewablePowerbyMNES,thentherewillbesignificantimpetusonimplementationofWasteWaterRecycle,Reuse&ZeroLiquidDischarge(ZLD)Systems.ExciseDutyonfilteringandpurifyingmachineryunderheading84212190isapplicablewithoutanyconcessionaswellVAT/CST is leviable on sale of such systems.

Itisrequestedthatnotaxesanddutiesshouldbeimposedonmanufactureandsaleofwastewaterrecycle&reusesystems including ZLD systems at least for the next 5 years. 100% Depreciation should be allowed in the year ofinstallationofWasteWaterRecycle,Reuse&ZLDsystem.


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5.3.5. Excise Duty on Fly Ash

Excisedutyispayableongenerationofflyash,thoughitisnotamanufacturedproductashasbeenheldbytheSupremeCourt.Thisisalsoagainstthefundamentalprinciplesoflevyofexciseduty.However,excisedutyisbeingchargedonflyashbecauseoftheentryatS.No.27ofCentralExciseNotificationno.1/2011.ThuspowergeneratingcompanieswhichotherwisearenotcoveredunderExciselawhavetomakeexcisecompliancesduetogenerationofflyashinthermalplants.

ItisrequestedthatflyashshouldbekeptoutofExcisecoverage.

5.3.6. Extension of Concessional Rate of Excise Duty on Capital Goods for Food Processing Industry

VideNotificationNo12/2104C.E.dated11thJuly,2014concessionalrateofexcisedutyhasbeenprovidedforprocess/packingmachineryusedinthemanufactureofagricultural/apiary/horticultural/dairy/poultry/aquatic/marineproduce and meat.

Whilethefoodprocessingindustrywelcomestheaboveinitiativewhichwillhelpreducethecapitalcost,alargeportionofprocessedfoodindustrywhichdealswithbasicessentialpackagedfoodsforcommonmansuchasstaples,biscuitsandsoonaredeprivedofthebenefitofconcessionalrateofexcisedutyonprocess/packingmachinery.Organisedpackagedfoodprocessingindustryprocuressubstantialprocess/packagingmachineryandthisdiscriminationwithinthesameindustryisinequitable.

Itisrecommendedthatconcessionalrateofexcisedutyonprocess/packingmachinerybeextendedtotheentirefoodprocessingindustryinsteadoflimitingthesametocertainsectorswithintheindustry.

5.3.7. Exemption for inputs for Aircrafts supplied to Government

Supplyofaircrafts toGovernment isexempt fromexcisedutyundernotificationno.12/2012.However, there isnoexemptionavailableoninputs,whichareusedinthemanufactureofaircraftsandaircraftspartsforsupplyingtoMinistryofDefenceforitsofficialuse.Excisedutyispayableonprocurementofinputs.ExemptiononallgoodsmanufacturedbyPSUs(includingHindustanAeronauticsLimited)forsupplytoDefenceministrywaswithdrawnwitheffectfromJune1,2015videNotificationNo.39/1995-CE.

InputstobeusedforthemanufactureofaircraftandaircraftpartstobesuppliedtoGovernmentshouldbeexempted.AllgoodsmanufacturedandsuppliedbyVendors/Contractors/Sub-ContractorstoHALunit,forthepurposeofmanufactureandsupplytotheMinistryofDefenceforofficialuseshouldbeeligibleforexemptionsubjecttoactualusercondition.

ThiswouldenablereductionincostoffinishedgoodsthatareprocuredbyMoDandalsowouldencourageindigenousmanufacturersandwouldenablethemtobepricecompetitiveforsupplytoDefencePSUswhichwillresultinforeignexchangesavingsandalsoimportsubstitutiontothecountry.

5.3.8. Increase in Excise Exemption Limit for Biscuits from Rs. 100/Kg to Rs. 125/Kg

Atpresentlowerpriced-biscuits(i.e.biscuitssoldataMRPequaltoorlessthanRs.100/Kg)enjoyanexemptionfromcentralexciseduty.TheexemptionwasgrantedintheYear2007takingintoconsiderationthatlowerpricedbiscuitsareahealthy,hygienic,safeandnutritiousstapleintendedformassconsumptionbythelowerincomestrataofthesociety.

Since2007 the costof rawmaterialsused in themanufactureofbiscuits (primarilywheatflour,oil and sugar)hasincreasedexponentially–havingmorethandoubled,alongwithsharpincreaseinlabour,transportationandenergycosts. Under the circumstances the exemption limit of Rs. 100/Kg that was provided for biscuits meant for massconsumptionisprovingtobeinadequate.

ItisrecommendedthattheexemptionlimitbeincreasedfromRs.100/KgtoRs.125/Kgsuchthatthepopularvariantsof biscuits remain within the reach of the common man.


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5.3.9. Incentives for Manufacture of Compressors with Non-ODS Technology

NotificationNo12/2012CEdated17/3/2012 allows for exemption frompaymentof ExciseDuty onCapitalGoodsrequiredfor–

(i) SubstitutionofOzonedepletingSubstances

(ii) SettingupNewCapacitiesforNon–ODSTechnologies

ItisrequestedthatthisexemptionbeextendedtoincludeRawMaterials/Consumables,R&DEquipment,TestingandCalibrationequipment.

CENTRAL EXCISE - PROCEDURES AND OTHER ISSUES

5.3.10. Excise Duty on Sales Tax/VAT Benefit given by State Governments

Excisedutyispayableontransactionvalueofsaleofgoodsi.e.pricechargedbysellerfrombuyer.SalestaxandothertaxesaretobedeductedfromaboveTransactionValueifsuchtaxisactuallypaid/payableonsuchgoods.

Asameasuretopromotespecifiedareasandindustries,variousStateGovernmentsgrantbenefitstoindustrieswhicharelinkedtothesalestaxpayablebytheseindustries.Suchbenefitscouldbebywayof:-

(i) Exemptionfrompaymentofsalestaxforaparticularperiod.

(ii) Defermentofpaymentofsalestaxforaparticularperiod.

(iii) Grantofincentiveequivalenttosalestaxpayablebytheunits.

TheCentralBoardofExciseandCustomsexaminedtheissueofexclusionoftheseamountsforcomputationofthevalueofgoodsonwhichexcisedutyispaidandaddressedthesameinBoardCircularNo.378/11/98-CXdated12.03.1998.TheBoardinitssaidcircularstatedthatonlyinsituation(i)above,thesalestaxisnotdeductibleasnosalestaxispayablebytheassesseeinaccordancewiththelaw.Howeverforsituation(ii)and(iii)above,theBoardclarifiedthattheamountofsalestaxisdeductibleforthedeterminationofassessablevalueofgoodsforlevyofExciseDuty.

Thesaidcircularof12.03.1998isstillapplicableevenafteramendmenttoSection4oftheCentralExciseActwitheffectfrom 01.07.2000. This is evident from Circular No.679/70/2002-CX dated 04.12.2002 wherein the earlier Board Circular of12.03.1998wasreferredanditwasclarifiedthatwheredefermentofpaymentofsalestaxforaparticularperiodisallowedbytheStateGovernmentasanincentive,interestonmoneyretainedbytheassesseeforthatperiodcannotbeconsideredasan“additionalconsideration”forlevyofexciseduty.

It is also important to note that CBEC issued a Circular No. 671/62/2002-CX dated 09.10.2002 which correctly laid downtheprinciplethatonlythatamountofsalestaxwillbepermissibleasdeductionundersection4asisequaltotheamountlegallypermissibleunderthelocalsalestaxlawstobecharged/billedfromthecustomer/buyer.Thuswherethe local sales tax lawentitles theseller tochargeaparticularamountas sales tax from itsbuyers, then thesamemustbeallowedasadeductionfromthetransactionvalueeveniflaterontheStateGovernment,toincentivizethemanufacturer, allows him to retain a part of the sales tax collected by him as a subsidy.

Onabroaderperspectivealso,schemesofgrantofincentivebytheStateGovernmentsbywayofretentionofpartorwholeofsalestaxcollectedareonlymethodsforextendingthebenefitsastheycanbeeasilymanagedandaccountedfor.Alternatively,theStateGovernmentscouldhavecollectedtheentiresalestaxamountandthereafter,givenbackbyissuingchequeforthewholeorpartofittothesameindustriesassubsidies,grants,etc.Howeversuchamethodologycan be cumbersome for both the Government as well as the industries.


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Likewise,someStateGovernmentsalsograntincentivebywayofdefermentofsalestaxforaparticularperiodorallowtheassesseetopayapartofthesalestaxamountupfrontinlieuofdefermentofsalestaxtobepaidafteraparticularperiod.TherecanbeasituationwheretheassesseecollectsthesalestaxfromthebuyersofitsgoodsbutdepositstheentireamounttotheStateGovernmentafteraparticularperiod,say5years.Insuchasituation,theBoardvideitscirculardated04.12.2002hasalreadyclarifiedthatinterestonmoneyretainedbytheassesseeforthatperiodcannotbeconsideredasan“additionalconsideration”for levyofexciseduty.Ontheotherhand,somestates likeStateofHaryana,allowtheassessetopay50%ofthesalestaxamountupfrontinlieuofdefermentofsalestax.ThusinessencetheStateGovernmentallowstheupfrontpaymentof50%oftaxamountinlieuofpaymentof100%taxaftersay5years. Thus, it is also in nature of interest which has been held by the CBEC to be not includible in the assessable value for excise duty payment.

Hon’bleSupremeCourtinthecaseofSuperSyntex(India)Ltd.hasheldthatunderthepresentprovisionsofSection4oftheCentralExciseActwhichcameintoeffectfrom01.07.2000,apartofthesalestaxamountcollectedandretainedbythemanufacturer,asallowedunderanincentiveschemelaunchedbytheStateGovernment,shouldbeaddedtotheassessable value of the product for the payment of excise duty.

AsimilarjudgmenthasalsobeensubsequentlydeliveredbytheHon’bleSupremeCourtincaseofCCEvMarutiSuzukiIndia Limited (Civil appeal No.5183 of 2004)

Thus,tillthepronouncementoftheabovejudgmentsbyHon’bleSupremeCourt,theunderstandingprevailinginthegovernmentas clarifiedbywayofCBECcirculars& industrywas thatapartof the sales taxamount collectedandretainedbythemanufacturer,asallowedunderanincentiveschemelaunchedbytheStateGovernment,bywayofdeferment or otherwise, should not be added to the assessable value of the product for the payment of excise duty.

VariousmanufacturersacrossthecountryandoperatingindifferentbusinesssegmentsarefacingseriousproblemsinlightofthisjudgmentoftheHon’bleSupremeCourtinasmuchastheexcisedepartmentisaskingthemtopayexcisedutyandinterestonthesalestaxincentiveamountsgrantedtothembyvariousStateGovernments.

ItissuggestedthatsuitablelegislativeamendmentsbemadetosolveproblemrelatingtoStateGovernmentincentives.Substanceofamendmentcanbefollowing:-

Theamountofsalestaxcollectedandretainedbythemanufacturer,asallowedunderanincentiveschemelaunchedbytheStateGovernment,shallbeconsideredasequivalenttosalestaxactuallypaidundertheexciselawandthusshallnotbeaddedtotheassessablevalueofgoodsforexcisedutycalculation.

5.3.11. Interest on differential Excise Duty paid due to price increase after removal of Goods

TheSupremeCourtinCCEVs.SKFIndiaLtd.(2009(239)ELT385),hasheldthattheinterestisleviableondifferentialdutypayablebecauseofrevisionofpricessubsequenttoremovalofgoods.

Demandofinterestisnotjustifiedasatthetimeofremovaltherewasnoshortpaymentornon-paymentanddifferentialduty was not determined by the CE Department but the same was paid by the manufacturers on their own. Therefore, keepinginviewtheaforesaidpracticeofindustry,itwouldaffectthemanufacturersifthereisalevyofinterestonthedutypayableonthesupplementaryinvoicesraisedduetorevisionofpricesubsequenttotheremovalofgoods.Further,theaforesaidinterestsopaidonsupplementaryinvoicewillnotbeeligibleforCENVATCreditandhencewouldaddthecost of the product.

ItissuggestedthatanexplanationtoSection11ABoftheCentralExciseAct1944maybeaddedtotheeffectthatnointerestwouldbepayableonaccountofdifferentialdutypaidbecauseofanypricerevisionsubsequenttotheremovalofgoods.


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5.3.12. Credit of Duty on Goods Brought to the Manufacturer’s Depot/Stockyard

AsperRule16ofCentralExciseRules,2002,whereanygoodsonwhichdutyhadbeenpaidatthetimeofremovalthereofarebroughttoanyfactoryforbeingre-made,refined,re-conditionedorforanyotherreason,theassesseeshallbeentitledtotakeCENVATcreditofthedutypaidasifsuchgoodsarereceivedasinputsundertheCENVATCreditRules,2002andutilisethiscreditaccordingtothesaidrules.

AspertheaboveprovisionamanufacturercantakeCENVATcreditofthegoodsonlyincasethegoodsarebroughtbacktothefactory.However,thereisnoprovisionforbringingbacksuchgoodstothedepot/stockyardofthemanufacturer.Alargemanufacturingunitoperatesthroughnumberofdepots/stockyardssituatedacrossthecountry.Bringingbackgoods to the factory results in increasedexpenditureonaccountof freight cost, if the factory is situatedata longdistancefromthecustomer’splace.

Itissuggestedthattheexistingruleshouldbesuitablyamendedsothatgoodscanalsobebroughtbacktothedepot/stockyardofthemanufacturerinsuchsituations.

5.3.13. Issue of Excise Invoices by Exchange Accredited Warehouses

UndertheExchangetradingsystem,thecommoditiesdepositedintothewarehousemaychangehandsmanytimesbeforeactualphysicaldeliveryofgoods.Duetomultiplechangesofownership,theultimatebuyermaynotreceivethegoodsfromthefirststagedealerorthesecondstagedealer,evenwhenthereisnophysicalmovementofgoods.ThisdisentitlestheultimatebuyerfromavailingCENVATcreditofCENVATdutyalreadypaid.Thisproblemdiscouragesdeliveryofcommoditiessuchasbasemetalsonexchanges.

ItisrecommendedthatCenvatcreditshouldbeallowedforthefirstremovalofexcisablegoodsfromexchangedesignatedwarehouseafterinitialdepositioninthesamewarehouse.Exchangeaccreditedwarehousesmaybepermittedtoissueexciseinvoicestobuyersobtainingphysicaldeliveryofgoods,againstwhichCENVATcreditmaybeallowed.Theneedtoissueexciseinvoicesfortradesofcommodityexchangesmaybewaived.Theaboveprocedurewillnotresultinanylossofrevenuesincethegoodswillbeunderthephysicalcontroloftheaccreditedwarehouseandwillbedeliveredbythewarehouseonlyafterissueofexciseinvoicestothebuyerstakingdelivery.

5.3.14. Warehousing provision for the Steel Industry

In thesteelbusiness, it isapracticethatmostof thematerialsaresold fromstockyards/depotswhicharesituatedacrossthecountryandthereisatimelagbetweendispatchofmaterialfromthemanufacturingplantandsalefromthestockyard/depot.Assuch,thereispossibilityofadifferenceinthepriceprevailingatthetimeofdespatchofmaterialsfromtheplantandthepriceprevailingatthetimeoffinalsaleofmaterialfromthestockyard.

AsperRule20ofCentralExciseRules2002,theCentralGovernmentmaybynotification,extendthefacilityofremovalofanyexcisablegoodsfromthefactoryofproductiontoawarehouse,orfromonewarehousetoanotherwarehousewithoutpaymentofdutysubjecttosuchconditions,includingpenaltyandinterestetc.Atpresentthisbenefitisavailabletobenzene,tolueneetc.SteelindustriesshouldalsobeallowedthisfacilityunderRule20ofCentralExciseRules2002.Thiswillsimplifytheexistingprocedure,as,excisedutywillbepaidonfinalsellingpricefromstockyard.Thiswillensurecorrectpaymentofdutyandtheprocedurewillbesimplercomparedtoexistingpracticeofpayingdutyonnormaltransactionvaluewhichmaydifferfromfinalprice.Suchchangewilleliminatedisputesrelatingtovaluationatthetimeofdispatchfromplantwhile,atthesametime,achievingthepurposeoflevyofdutyonfinalsellingprice.

5.3.15. Printing of Digital Signature on the Invoice

ComputerizationandcommunicationtechnologyhasdevelopedmanifoldandmanyindustrieshaveimplementedthebestavailableERPSoftwarelikeSAPaftermakinghugeinvestments.Inlargesectorindustriesthousandsoftheinvoicesaregeneratedondailybasisandsigningeachpageoftheinvoicesmanuallyconsumeslotoftimeandeffort.


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CBECvidenotificationno8/2015-CentralExcise(N.T.),datedMarch1,2015insertedrule11(8)ofCentralExciseRule2002whichisasunder:

“An invoice issued under this rule by a manufacturer may be authenticated by means of a digital signature:

Provided that where the duplicate copy of the invoice meant for transporter is digitally signed, a hard copy of the duplicate copy of the invoice meant for transporter and by the manufacturer shall be used for transport of goods.”

CBECvide theabovenotificationhasallowedauthenticationof invoicebymeansofdigital signature.However, theduplicate copyof invoice should be self-attestedby themanufacturer. Thenotificationhas put a conditionof self-attestationoftheduplicatefortransportercopywhichisnotservingthepurposeasinthisprocess,oncetheinvoiceswillhavetobedigitallysignedandthenself-attestationisalsorequiredtobedoneonduplicatecopy.Anassesseewillhavetospendsomeamountoftimeandresourcesasisbeingdonetoday.

Itisrequestedthatrequirementofself-attestationofduplicatecopyshouldbedispensedwithatleastforthelargetaxpayers.

5.3.16. Appropriation under Section 11

PresentlydepartmentofficerssanctionrefundordersandadjustthesameunilaterallyagainstdemandswhicharenotconfirmedthroughAdjudicationorders.This is incorrectandsuchadjustmentcanbemadeonly ifthedemandsareconfirmedandaftertheexpiryoftheperiodforfilingappeal/stayapplication.

EventhoughthisissuehasbeenclearlyclarifiedbyCBECinChapter18oftheManual,itisfeltthattheSection11shouldbeamendedtoclearlystatethatonlyconfirmeddemandscanbeappropriatedagainstthesanctionedrefunds.

CUSTOMS - EXEMPTIONS

5.4.1. Import of Specified Goods for Petroleum operations – Simplification of conditions of Import

ONGC,aNationalOilCompanyishaving401Blocksallottedonnominationbasisand86BlocksallottedunderNewExplorationandLicensingPolicy(NELP)forexplorationandproductionofhydrocarbons inadditiontofewPre-NELPBlocks.Normally,ONGCcharterhiresDrillingRigs,OffshoreVesselorothercapitalequipmentforPetroleumoperationinbothnominatedaswellasNELPblocksonlongtermcontractof3to5years.

NotificationNo. 12/2012-Cusdated17/3/2012provides customsduty exemption to specified goods for petroleumoperationsunderentries356,358and359asfollows:-

(i) VideS.No.356ofnotificationNo.12/2012-Cus,dated17/3/2012,theexemptionfromcustomsdutyisavailableon import of specified goods (List 13 annexed with notification) in connection with petroleum operationsundertakenunderMiningLeaseissued/renewedafter01.04.1999andgrantedbytheGovernmentofIndiaoranyStateGovernmenttotheOilandNaturalGasCorporationorOilIndiaLimitedonnominationbasis,subjectsubmissionofcertificatefromDGHandotherconditionsprescribed.

(ii) VideS.No.358ofnotificationNo.12/2012-Cus,dated17/3/2012,theexemptionfromcustomsdutyisavailableon import of specified goods (List 13 annexed with notification) in connection with petroleum operationsundertaken under specified contracts subject to submission of certificate from DGH and other conditionsprescribed.

(iii) VideS.No.359ofnotificationNo.12/2012-Cus,dated17/3/2012,thespecifiedgoods(List13annexedwithnotification)requiredinconnectionwithpetroleumexplorationsundertakenunderspecifiedcontractsundertheNewExplorationLicensingPolicyareexemptfrombasiccustomsdutyaswellasCVD,subjectsubmissionofcertificatefromDGHandotherconditionsprescribed.


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TheobjectiveofexemptiongrantedunderSl.Nos.356,358or359ofNotification12/2012-Cusistoexempttheimportofspecifiedgoodsinconnectionwithpetroleumoperationsfromcustomsduty.WhetherthegoodsareessentialforsuchuseiscertifiedbytheDGH.Theconditionsprescribedunderthesethreeentriesaresimilar.TheListofspecifiedgoodsallowedtobeimportedissimilarforSl.Nos.356,358and359.ConditionsNos.41,43&44underSl.Nos.356,358&359respectivelyarealsosimilar.

ItisrecommendedthatallthesethreeSl.Nos.356,358&359shouldbemergedintoonesothatoncetheconditionsareallfulfilledforavailingofexemptionatthetimeofimport,thespecifiedgoodscanmoveforpetroleumoperationfromeligibleNominatedBlockstoaNELP/PreNELPoilfieldorvice-versawithouttherequirementofobtainingcertificatesubject to thecondition that there isnochange inLicensee/Contractororsub-contractororboth.Thiswillobviatethedelay inmovementofhighlycostlyequipment,substantialsaving incostbyeffectiveutilizationofDrillingRigs/equipment,andalsosavingincompliancecost.

IncaseifthereischangeinLicensee/Contractororsub-contractororboth,theconditionofNotificationNo28/2013-cusdated16/05/2013wouldberequiredtobefulfilled.

5.4.2. Exemption from payment of Custom Duty on import of Liquefied Natural Gas (LNG)

LNGisacleanfuelandmainlyusedinfertilizerandpowersector.RecognizingtheshortageofGas,GovernmenthasencouragedimportofLNG.SinceLNGfallsinthesamelogicalcategoryasCrudeOil,thesemusthavethesametreatmentforpurposesoftaxationasappliedtoCrudeOil.

Sincecustomdutyoncrudeoilhasalreadybeenmadezero,importofLNGpresentlyattracting5%Customdutyshouldalsobeexempt.ThroughFinanceAct2012,Govt.hasexemptedlevyofCustomdutyonimportofLNGforPowerSector.However,thisexemptionshouldbeextendedtoothersectorsalso.

It isrecommendedthatexemptionfrompaymentofCustomDutyonimportofLiquefiedNaturalGas(LNG)maybegrantedfordomesticuse.

5.4.3. Reduction of Custom Duty on Safflower seeds to avoid Inverted Duty Structure

IndiahasbeenimportingSafflowerseedsandSafflowerOilfromAustraliasince2003.AtthemomentimportdutyonCrudeSafflowerOil(HSCode15121120)is12.5%videCustomsNotificationNumber46/2015Date17thSep,2015and30%ofSafflowerSeeds(HSCode1207990).Duetotheprohibitivenatureofdutystructureinimportingoilseeds,bulkoftheimportshasbeeninoilform.Webelievethatafavourabledutystructureforimportingoilseedswillhelpdomesticindustry,producersaswellasconsumersforthefollowingreasons,namely:-

(a) Increaseindomesticcrushingleadingtobettercapacityutilizationindomesticmanufacturingindustry

(b) Localizationof crushing activitywill result in availability of SafflowerDe-OiledCake. SafflowerDOC is a richsourceofproteinandothernutrientsandiswidelyusedforcattlefeed.Indiancrusherscanreadilyexportthefeedtointernationalbuyers(MiddleEast)

(c) Currently,allSafflowergrownin India isofLinoleicvariety.Duetotheabsenceofdomesticoleiccultivation,theindustryneedstoimporttheoleicvarietyfromAustraliaandothercountries.Therefore,evenifzerodutyimportsareallowed,theimportswillnotsubstitutethedomesticproductionasthetwoarenotinterchangeable.Hence,itwillreducethecostofhealthySaffloweredibleoiltotheconsumerswithoutadverselyaffectingtheIndian producers.

(d) Globallyallthemajorconsumersofedibleoilhaveadutystructurefavouringimportofoilseedsoverimportsofoil.ThisisdoneinordertomakethelocalcrushingindustryviableandalsotoreplaceimportsofDe-Oiledcakeswithdomesticproduction.


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CorrectingthisinvertednatureofimporteddutiesinIndiawillgoalongwayinbenefittingindustryandconsumersalike.

5.4.4. Reduction of Custom Duty on Oat Flakes

Withlifestylediseaseslikediabetes(almost6.2millionpeopleareaffected)andheartdiseases(2.4millionIndiansdiefromcardiacdiseaseseveryyear)ontherise,itisimperativetopromotehealthyfoodinIndia.

Oatsisconsideredtobethe“super”grainduetoitsmultiplehealthbenefitslike:

(a) Fightscholesterol

(b) Fibrefordigestivewellbeing

(c) Great source of protein

(d) Reducesbloodsugar

(e) Lowers risk for heart disease

UsageofOatsinIndiandietisverylow.AsperUSDAdatacomparedtousageof15kgpercapitainEurope&7kgpercapitainNorthAmericas,theconsumptioninIndiais0.01kgpercapita.UnaffordabilityisoneoftheprimereasonswhytheconsumptioninIndiaislow.CurrentdutystructureforOatsflakesdemandsaCustomsdutyof30%andaSpecialDutyof4%inadditiontotheEducationCessoverthis.Thissignificantlymakestheproductcostlier&unaffordableforalargesectionofthesociety.

InordertomakethisproductavailableforlargerpopulationtoavailitshealthbenefitsandtopromotetheeventualgrowthofthisfooditeminIndia,werequestfortheremovalofImportdutyonoatflakes.

5.4.5. Exemption for X-ray Baggage Inspection Systems and other Airport Security Systems

ExemptionfromdutiesofCustomsonallAirportSecuritysystemsincludingX-raybaggageinspectionsystemandpartthereofrequiredbyAirportOperator,uponcertificationofMoCA.

X-raybaggageinspectionsystemandpartsthereofareeligiblefornilbasiccustomsdutysubjecttotheconditionthatimportshouldbebyGovernmentoritsauthorizedpersonforanti-smugglingorbyCISF,PoliceForce,CentralReservePoliceForce,NationalSecurityGuard(NSG)orSpecialProtectionGroup(SPG)forbombdetectionanddisposal.Importof x-ray baggage inspection systematAirports is for security purpose and security is sovereign function (ReservedActivity)asperStateSupportAgreement(SSA)withMinistryofCivilAviation(MoCA)andimportcost ismetoutofSecurityComponentofPassengerServiceFee.However,sinceimportisnotdirectlyundertakenbytheabovespecifiedagenciesbutbyrespectiveAirportoperators,dutyconcessionisnotavailablethoughmoneyisbeingpaidoutoffundsofGovernmentofIndia.Hence,thisconditionneedstobeamendedtoexpanditsscopetocoverothersecuritysystemsalsoandtoincorporateimportbyrespectiveAirportoperatorssubjecttoproductionofaneligibilitycertificatefromtheGovernment (MoCA). This concession should not be limited to x-ray machines alone because there are other machines, whichareusedforbombdetectionanddisposal.Further,itshouldalsoincludeothergoodsrequiredforAirportsecurity.Entryforexemptionshouldbeamendedtoreadas“X-raybaggageinspectionsystemandotherairportsecuritysystemsandpartsthereof”(fallingunderchapter84,90oranyotherchapter).Followingsystemsshouldbeincludedinthelistofeligibleitems:-

(a) X-raybaggageinspectionsystemandpartsthereof,

(b) Explosive detectors,

(c) Bomb/suspectluggagecontainmentvessels/units.

(d) Robotsforhandlingofbombsorsuspectedbaggage,


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(e) Parameter security intrusion system and accessories

(f) Access control system,

(g) Hydraulicbollards,

(h) Boom barriers

(i) Cameras for CCTV.

5.4.6. Measures to address Accumulated Credit of Special Additional Duty (SAD)

SpecialAdditionalDuty(SAD)of4%wasintroducedintheFinanceBillof2005ongoodsimportedintoIndiahavingregardtothesalestax/valueaddedtaxandotherlocaltaxessufferedbylikegoodsinIndiatocreatealevelplayingfieldforthedomesticmanufacturers.

Though,theCenvatCreditRulesallowthemanufacturertoavailcreditofSADagainstdutypaymentfortheclearanceoffinalproducts,itisnotpossibletofullyutilizeSADleviedonimportedrawmaterialincaseswherethevalueadditionintheconversionofrawmaterialintofinishedgoodsisminimal.ThisresultsinaccumulationofSADcredityearonyear,adverselyaffectingthecashflow.

StainlessSteel Industrywith importofapproximately55%of itsRawMaterial (suchasSS scrap/MSScrap/Nickel)coupled withminimal value addition is suffering from vast accumulation of SAD credit. Appreciating the Industryconcerns,SpecialAdditionalDutyofCustoms(SAD)onmeltingscrapofironorsteelandstainlesssteelscrapforthepurposeofmeltingwasreducedfrom4%to2%videNotificationNo.11/2015-Cusdated01.03.2015.

Itissuggestedthattofurtheraddresstheconcern,SADmaycompletelybewaivedonimportsofSSscrap/MSScrap/Nickel/ Ferro chrome / Ferro Nickel / Ferro Moly by end-use manufacturers.

5.4.7. Procurement of goods by a SEZ unit from a trader

The tax/duty freeprocurementofgoodsbyaSEZ (‘SpecialEconomicZone’)unit is thebasic frameworkof theSEZschemetoensurethattaxesarenotexportedandgoodscanbesuppliedatthebestcompetitiveprice.

ASEZunitfulfilsitsrawmaterialsrequirementsbyprocuringgoodsfromindigenousmanufacturers,fromoutsideIndia(import)andfromtraders.Atpresent,whileaSEZunitcanimportorprocuregoodsfromthemanufacturerduty-free,therearenoprovisionstopermitprocurementofgoodsfromimportertraderswithoutpaymentofduty.Accordingly,thisresultsinexportoftaxeswhichisinherentlyagainsttheSEZscheme.

Anargumentcanbeplacedthatinsteadofprocuringgoodsfromatraderonpaymentofduty,theSEZunitcanimportthegoodsorprocuregoodsdirectlyfromthemanufacturerwithoutpaymentofduty.However,itmustbenotedthattax considerations arenot theonly considerations for formulating the sourceof procurements. There arebusinessconsiderationswhichareequallyifnotmoreimportant.Forexample,thegoodsrequirementsmightnotbeotherwiseavailable,logisticscostetc.

TheframeworkoftheSEZschemepermitsanexportertoprocurethegoodssolelyonbusinessconsiderationswithoutanyinterferenceoftaxconsiderations.

Accordingly,itisofparamountimportancethatkeepingwiththespiritofSEZscheme,necessarylegalprovisionsshouldbesetinplacetoensuredutyfreeprocurementsofgoodsbyaSEZunitfromtraders.

5.4.8. Exemption of SAD on Import of Pulp and other inputs by the Paper Industry

IntheUnionBudgetfor2015-16,exemptionofSADoninputstobeusedbyvariousindustrieshasbeenannouncedsoastoprovidereliefonaccumulationofCENVATcredit.PulpandPaperIndustryisahighlycapitalintensiveindustry


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whereinputcreditoncapitalitemsissubstantialandontopofit,2.4%SADisleviedonimportofpulpwhichfurtheraccumulatesCENVATcredit,resultingintoblockageofworkingcapital.

Therefore,theGovernmentshouldfavourablyconsidertheexemptionofSADonimportofpulpandotherinputsbythePulp&PaperIndustry.

5.4.9. Custom Duties on Soy Products

SoyProteinisahighqualitycompletesourceofplantoriginproteinwhichisequalinqualitytoMilk,EggsandMeat.Inadditiontotheproteinquality,Soyproteinoffershealthbenefitssuchasreductionofcholesterolandriskofheartdiseases and certain types of cancers.

Soy protein is commercially available as Soy Protein Isolate (3504 00 91) and Soy Protein Concentrate (2106 10 00) andotherproductsmadefromsoyproteinssuchasSoyaBeveragepowders(21069099).Theseareusedinmakingavarietyofprocessedfoodproductssuchasinfantformulations,bakeryproducts,soyamilk,proteinbars,etc.forHealthandNutritionindustry.ProductssuchasSoyaBeveragePowdershavebeenimportedintoIndiaforoveradecadeforusebytheNutrition&HealthindustrytoformulateLactose-freeproductsforthelactoseintolerantconsumers.SincetheseproductsarecurrentlynotproducedinIndiaandimportedathighlevelofduties[SoyProteinIsolateat10%,SoyProteinConcentratealsoat10%andSoyaBeveragepowdersat30%]comparedtootherAsiancountriesaswellasotherproductcategories in India, theproductsarenot reaching towiderpopulationataffordableprices.TheprevalenceofveryhighratesoftotalaggregatecustomdutiesforSoyProteinIsolates(22%),Concentrates(22%)andBeveragePowders(45%)inIndiaisactingashindrancetothegrowthoftheHealthandNutritionindustry.

Itisrecommendedthattheratesofdutiesontheseproductsmaybebroughtonparwithratesofdutyavailableforoverallindustryingeneralandthefoodindustryinparticular

5.4.10. Assessment of Drawings and Designs Imported for the Manufacture of Projects

WhileexecutinglargeprojectsandplantsinIndia,theimporteddrawingsanddesignsformanindispensableandintegralpartoftheentireproject.Generally,suchdrawingsanddesignsrelatetoinstallationofimportedaswellasindigenousequipment,manufactureofindigenousequipment,undertakingcivilandstructuralworkinIndia,etc.

The drawings and designs are imported in printed form on paper (referred as hard copy),which are used for theaforementionedpurposes.Apartfromhardcopy,thesamedrawingsanddesignsarealsoimportedinelectronicformi.e.,onDiscs(referredassoftcopy),whichareusedforfuturereferencepurpose.Thereisonlyoneconsiderationagreedfordrawingsanddesigns.

Whenhardcopyisimported,itisclassifiedunderChapterHeading4911ofCustomsTariffandtheconsiderationforsuchdrawingsanddesignsgetsfullyandunconditionallyexemptfromlevyofCustomsDutybyvirtueofSerialno.275ofNotificationNo.12/2012-Cusdated17.3.2012.Theexemptionhasbeeninexistencefrom1994onwardstilldate.

Whensoftcopyisimported,thecustomsdepartmentisclassifyingthemunderChapterHeading85239090ofCustomsTariffandtheconsiderationforsuchdrawingsanddesignsisbeingsubjectedtolevyofcustomsdutyonthegroundthatthereisnoexemptionnotificationforsoftcopyclassifiableunderChapterHeading85239090.

The above anomalous position is arising due to the fact that drawings and designs are imported in different formthroughtwodifferentmediaandthecustomsimplicationdifferbasedonformofmedia.

Itisconsideredtobegoodpracticetostructurethetariffinataxneutralmanner.Inotherwords,thetaxliabilityoroutcomeshouldnotvarydependinguponthemodeofcarryingoutthetransaction.Thetaxstructureshouldbesuchthattheconsequencesaresameirrespectiveofthemethodadoptedforundertakinganytransaction.Thistheoryand


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principlehasbeenacceptedandappliedbyCBECasisevidentfromTRUBudgetCirculardated29.2.2008,para4.1.5whichisreproducedbelow:

“4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.”

In fact, taxneutralapproach is foreseenfromthemanner inwhichthe InformationTechnologysoftware is treated.Similartaxneutralapproachneedstobegiventoimporteddrawingsanddesigns.Thesoftcopyshouldbetreatedatparwithhardcopyandhence,nocustomsdutyshouldbeleviedonthesoftcopyaswell.

Also,theimporteddrawingsanddesignsaresubjectedtoservicetaxonreversechargebasisbyvirtueofSection66BreadwithRule2(1)(d)(G)onthegroundthattheimporteddrawingsanddesignsreceivedintheformofCDisinthenatureofservice.Itisinequitableandillogicaltotreatdrawingsanddesignsasgoodsandservicesatthesametime.

Itisrequestedthataclarification/notificationmaybeissuedprovidingthattheimporteddrawingsanddesignswouldnotbesubjectedtocustomsdutyandservicetax,atthesametime.

5.4.11. Reduction in Custom Duty on Food Processing Machinery & Equipment

Indiahasahighrateofimportdutyonplantmachineryrequiredforfoodprocessingindustryascomparedtoothercountriesintheregion.Theindustrythoughbeinglargeisstillinanascentstageofdevelopment.InIndiaonly2.2%ofthetotalfoodsandvegetablesproducedareprocessedascomparedto65%inUSand23%inChina.PenetrationofprocessedfoodindustryislowinIndia,5-6%ofallfooditemswithsufficientheadroomtogrow.Foodprocessingisessentialtoavoidwastageoffood,currently40%offoodandvegetablesperishduetolackofprocessingfacilities.Theindustryhasahugepotentialforemploymentgeneration.Theindustryislargelyunorganizedwithrelativelylowlevelsofprocessingandvalueadds.Atpresentcustomsdutyonfoodprocessingmachineryandtheirpartsisveryhigh,rangesfrom22%to28%.Thereforeitisrequestedtoexemptplantandmachineryforfoodprocessingsectorwhichwillgoalongwayinpromotinggrowthofthefoodprocessingindustry.

5.4.12. Reduction of Customs Duty on Safety Related Auto Parts

BasicCustomsdutymaybereducedonthelifesavingsafetyrelatedautopartsasfollows:-

SeatBelts2%

AirBagAssembly5%

Anti-lockbrakingsystem5%

5.4.13. Installation Certificates from Jurisdictional Excise officer under EPCG Scheme

Para 5.3.1 of Handbook of procedures (Vol.1) of Foreign Trade policy, provides for the submission of InstallationcertificatefromJurisdictionalExciseofficerinrespectofitemsprocuredunderEPCGlicence.

The relevant text has been produced below-

“Authorization holder shall produce to the concerned RA a certificate from the Jurisdictional Central Excise Authority, confirming installation of Capital Goods at factory premises of authorization holder or his supporting manufacturer(s) /vendor(s) within six months from date of completion of import.”

Customs Circular No.14 /2008 dated 26.09.2008 also provides that -

The Authorization holder under the EPCG Scheme shall produce to the concerned Regional Authority, acertificate from the jurisdictional Central ExciseAuthority, confirming installationof capital goods at factorypremisesofAuthorizationholderorhissupportingmanufacturer(s)/vendor(s)withinsixmonthsfromthedateofcompletionofimports.


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In large manufacturing companies, Installation of Capital equipment requires assembling various resources andexpertiseandisdependentonvariousactivitieslike,siteclearance,civilwork,structuralwork,availabilityofshutdown,safetypreparationinunsafesiteconditions,etc.Installationofcapitalequipmentstartsonlyaftercompletionofthesepre-requisiteactivities.Delayinanyoftheseactivitieswillhaveadverseimpactonscheduleofinstallationofcapitalequipment. Inmany cases the time taken in installation of capital goods exceeds sixmonths. Although, there is aprovisionforextensionoftimeforinstallationofequipmentbutitrequirestimeandeffortsinfollowingtheproceduresrelatedtoobtainingextensionoftime.

Inviewofthesituationsmentionedaboveitisrequestedtoextendthepermissiblelimitforinstallationofcapitalitemsfrom 6 months to 12 months.

5.4.14. Fabrics and Garments under Customs Tariff Chapters 51, 52, 54, 55, 61 & 62

FabricsandgarmentscoveredinabovestatedchaptersattractdifferentspecificdutiesofCustomsat8digitHScodeleveldependingonthefibrecontent,grampersq.meter(GSM)offabric,weavetypeetc.

The difference in the product description under various sub–classifications cannot be determined or identified byphysicalinspectionandrequiressubmissionofsamplesforchemicaltestsbyTextileCommittee.Thisresultsininordinatedelaysinclearanceofgoods.

ThestructureofspecificdutiesapplicabletogoodscoveredundertheaforesaidChaptersshouldbeharmonisedandrationalisedtoobviatethenecessityoftesting.Intheeventsometestingisfoundtobeessential,testreportsfromanyaccreditedtestinglaboratoryshouldbeaccepted.Ifnecessary,thesamplefabricaffixedonthetestreportcanbematchedwiththeimportconsignment.

5.4.15. Correction of Inverted Duty Structure on Capacitor Grade Polypropylene Granules

Customsdutyonimportsof“capacitorgradepolypropylenegranules”ITCHSCode39021000is7.5%,whilecapacitorgradeBOPPFilmisattractingzeropercentcustomsdutyinviewofitsapplicationinelectronicsector.Thus,itisacaseof inverted duty structure.

Currently“CapacitorgradePolypropyleneGranules”arenotproducedinIndia.ProductionofcapacitorgradeBOPPFilmrequiresaveryspecialkindofpolypropylenegranuleswithveryhighpurity,ultra-lowashcontentandhighisotacticity.

Consideringtheaverageimportpriceoftheproductatpresent(Rs.350perkg),itisestimatedthattheaveragevalueoftheconsumptionoverthenextfouryearsshallbeintheregionofUS$50millionperyear.Consideringtargetedmarketshareof75%byIndianindustryand60%costsonaccountofpolypropylenegranules,theproposalimpliessignificantforeignexchangesavingsinregionofUS$15millionperannumforthecountry.

5.4.16. Incentives for Manufacture of Compressors with Non-ODS Technology

ThedutyontheR134Asyntheticrefrigerationoil is7.5%aspernotificationnumber12/2012-Customs.WithaviewtoincentivizemanufactureofCompressorswithNon-ODSTechnology,itissuggestedthatthisrateofdutybefurtherreducedto5%.

CUSTOMS - PROCEDURES AND OTHER ISSUES

5.4.17. Refund of Customs Duties to SEZ

PresentlythereisnoprocedureforrefundofexcesscustomsdutypaidbyanSEZonitsdomesticsales.WhilecustomsdepartmentisoftheviewthatthisshouldberefundedbySEZauthorities(ReadMinistryofCommerce)asthereisnoprovisionintheCustomsAct1962,SEZauthoritiesareoftheviewthatthereisnoprovisiontorefundcustomsdutiesinSEZAct/Rules.


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Since duty is paid under the Customs code, in our view refund should also be sanctioned by customs authorities.GujaratHighcourthasalsotakenviewthatcustomsdutyrefundshouldbesanctionedbyJurisdictionalCommissionerof Customs.

Hence,untilaprocedureinprovidedintheSEZAct/Rules,Customsshouldsanctionsuchrefundclaims.

5.4.18. Review of Special Valuation Branch (SVB) Procedures

WiththeopeningupoftheIndianeconomy,thenumberandvolumeoftransactionsofimportandexportbetweenrelatedentitieshasgoneupsubstantially.TheexistingmechanismofexaminationofsuchtransactionsbytheSpecialValuationBranches(SVBs)intheCustomHousesisinadequatetodeterminethetruepriceofthegoodsimportedorexported.Apartfromtheconsiderabletimetakentofinalizetheprices,therearealsoquestionsabouttheprocessesdeployedforsuchdetermination.UncertaintiesprevailoverthetimeframeforassessmentandpassingofordersbytheSVBauthorities.EspeciallydelaysinrenewingtheSVBorderevenwhenwherethereisnochangeinfactpatternhasbeencausingseverehardshiptothecompanies.SinceimportdutyhasalmostattainedASEANlevelandmanyFTA’sareinplace,thereislittlescopeofunderinvoicing/dutyevasion.

FollowingmeasuresmaybeconsideredbytheGovernmentforfacilitatingthetrade:-

(a) Currently, theprocedures followedby the Special ValuationBranchesof theCustomHouses are codified indepartmentalcirculars.TheprocessesshouldbegivenalegalbackingbyamendingtheCustomsActandlayingdownappropriatelybindingrulesorregulations.

(b) Statutorytimelines shouldbeprescribed for issueofordersby SVB, their acceptancebyReviewCell, audit,cancellationofprovisionaldutybonds,refundsofdepositsetc.

(c) Intheeventoffailuretocompletetheprocesseswithinprescribedtimelimits,nofurtherextradutydepositsshouldbechargedandthedutydepositsalreadypaidshouldberefunded.1%EDDshouldbewaivedforACP/AEO status holders.

(d) Renewal of SVB orders should be done once in 5 years instead of every 3 years. No duty deposits should be asked forduringSVBrenewalprocess

(e) Nottoinsiston“unjustenrichment”conditionwhilerefundingEDD

(f) Initialburdenofproofthattransactionvalueisnotatarm’slengthshouldlayonSVBinsteadoftheassessee

AnAdvancePricingAgreement(APA)MechanismonthelinesoftheonerecentlynotifiedbytheMinistryofFinance(CBDT)underTransferPricingRegulationsmaybeconsidered.

CENVAT CREDIT

5.5.1. Rationalisation of CENVAT Credit Scheme

Implementationof theconceptofNegativeListofServiceshas resulted inallactivitiesundertakenbyaperson foranotherforaconsiderationbeingbroughtunderthetaxnet.However,therestrictions,exceptionsandlimitationsonavailabilityofinputtaxcreditstillcontinue.Thisanomalyhasledtoaninequitablesituationwherebythetaxationofservicesisuniversalwhilethecreditforthetaxpaidoninputservicescontinuestoberestricted.

Inorder tocorrect this inequityandtoprovidemuchneededrelief to industry theservice tax laws ingeneraland,specifically,thedefinitionofinputserviceshouldbeamendedtoallowinputtaxcreditwithoutanyrestrictions–inlinewiththeprinciplesofGST.Further,inordertoensurethattheCENVATCreditschememeetsitsobjectivesitisimportantthatunnecessaryqualifications/categorizationslike‘input’,‘inputservice’and‘capitalgoods’bedoneawaywithandallinputsidetaxcostsinrelationtobusinessactivityshouldbeallowedascredit.


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5.5.2. Credit of Service Tax on Services for Goods Manufactured Through Job Workers

AspertheprovisionsofCENVATCreditRules,2004CENVATcrediton inputsandcapitalgoodsmaybeavailedbyamanufactureraslongassuchinputs/capitalgoodsarephysicallyreceivedinhisfactorypremisesundercoverofavalidCentralExciseInvoiceandareusedbyhiminorinrelationtomanufacture.Creditofservicetaxmaybeavailedbyanassesseeonpaymentofthesametoanyinputserviceprovider,aslongastheinputserviceisreceivedinorinrelationto manufacture. The credit is, thus, only available on the basis of Invoice payments.

In thecaseofBrandOwnerswhoemploy job-workersexclusively formanufactureofgoods, thebenefitofCENVATcrediton inputs isavailablesincethe job-workercanclaimtheCENVATcreditandoffsethiscentralexcise liabilitiesagainstthesaidcredit.However,asfarasservicetaxisconcerned,sincethepaymentsfortaxableinputservicesaregenerallyaffectedbytheBrandOwnerinsteadofthejob-worker,thebenefitofservicetaxcreditisnotavailable.Thisis due to the fact that the Brand Owner cannot avail the credit since he is not the manufacturer and the manufacturer, i.e.,thejob-worker,cannotavailthecreditsincehedoesnotpayforthetaxableinputservice.Consequently,undertheRulestheBrandOwneremployingjob-workersexclusivelyisdiscriminatedvis-à-visBrandOwnershavingtheirownmanufacturingfacilities,insofarascreditofservicetaxisconcerned.

Atypicalexamplewouldbeonewheretheprincipalmanufacturerundertakesadvertisingandsalespromotion,marketresearch;storageuptotheplaceofremovalforthegoodsmanufacturedbyitaswellasbyitsjobworkersanddischargesthe service tax liability thereon.

The CENVAT Credit Rules also provide for an Input Service Distributor (ISD) mechanism whereby the credit of service taxcanbedistributedbyanofficeofthemanufacturerorproduceroffinalproductsorproviderofoutputservice,which receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards purchase of input services. Hence, bydefinition,theISDcannotdistributecreditofservicetaxtojob-workersincasetheinputservicesarepaidforbytheprincipal, i.e., the Brand Owner.

Accordingly, theprovisionsof theCENVATCreditRules,2004createan inequitablesituation, in that, thebenefitofCENVATcreditpertainingtoinputsandcapitalgoodsisavailabletotheassesseeirrespectiveofwhethermanufactureisin-houseoratjobworkerpremiseswhereasthebenefitofservicetaxcreditisavailableonlyifthemanufactureisattheassessee’sownunit.Moreover,neithertheprincipalmanufacturernorthejobworkerisentitledtotakecreditofthe service tax paid on above services whose value is included in the assessable value for payment of excise duty. This leadstoacascadingeffectwhichisagainstthebasicprincipleofCenvat.Thisinequitydilutesthecostcompetitivenessofassesseeswhoownbrandsandusejobworkersexclusivelyformanufactureofgoods-moresosince,thescopeoftheservicetaxhasbeenexpandedfollowingtheintroductionof‘negativelist’basedapproachtoServiceTax.

It is recommended that the CENVAT Credit Rules be amended to provide a mechanism that enables availment and distributionofcreditofservicetaxbybrandownerstojob-workers.Thiswillensurecostcompetitivenessofthebrandownersandprotectthelong-terminterestsofjob-workers.

5.5.3. Eligibility to avail CENVAT Credit on Capital Goods in the Year of Receipt

In termsofRule4(2)of theCENVATCreditRules, 2004 the creditofCENVAT in respectof capital goodshas tobedistributedovertwoyears.Intheyearinwhichthecapitalgoodsarereceivedinthefactorycreditequivalentto50%ofCENVATcanbeavailed.Thebalance50%canbeavailedonlyduringthenextfinancialyear.Asaresultofthisalotoftimeandeffortisexpendedintrackingeachitemofcapitalgoodsintermsofyearofentry,amountofcreditavailableineachyear,etc.Apartfromthecostinvolvedinsuchtracking,thisalsoleadstoerrorsand,consequently,long-drawndisputes/litigationwiththeDepartment.


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It is recommended that the CENVAT Credit Rules, 2004 be amended appropriately to enable credit of full CENVAT in respectofcapitalgoodsintheyearofreceiptintothefactory.ThiswouldbeinlinewiththeprovisionsonCENVATcreditin respect of inputs.

5.5.4. Removal of Restrictions in Availment of Cenvat Credit on Services related to Civil Construction

Thedefinitionof ‘inputservice’placesrestrictionsonavailmentofcenvatcreditoncertainserviceswhich inter-aliaincludeservices related tocivil construction,services related tomotorvehicles i.e. cabservices, serviceswhichareusedforconsumptionofanyemployee.PresentlyCenvatisnotavailableonlayingoffoundationorbuildingupcapitalstructures. Thus duty paid on steel, cement, iron, plates used for civil structure are not cenvatable.

Insofarascivilconstructionrelatedservicesareconcernedmanyatimesconstructionofapropertyisessentialforprovisionofoutputservicesi.e.withoutconstructionofpropertythemanufacturerorserviceprovidercannotundertakeitsactivities.Forinstance,withoutconstructionoffactorybuilding,themanufacturercannotmanufacturethegoods,withoutconstructionofofficecomplexorshoppingmall, theserviceproviderwouldnotbeabletoproviderentingservices,withoutconstructionofatowerthetelecomserviceprovidercannotprovidetelecomservicesandwithouttheconstructionofpipelineaserviceprovidercannotprovideservicesoftransportationofgoodsthroughpipeline.Hence,incaseswheretheconstructionservicesformintegralpartofprovisionofservices,creditshouldnotbedeniedtothemanufacturer or service provider.

Itisrecommendedthatnecessaryamendmentshouldbemadeinthedefinitionof“inputservice”toallowcreditwhenthecivilworksareusedformanufactureofexcisablegoodsorforprovisionoftaxableservices.Thecreditshouldbedenied only in cases where the immovable property is used for sale or for non-taxable purposes.

5.5.5. Interest under Amended Rule 14 of Cenvat Credit Rules 2004

AspertheamendedRule14effectivefrom01.03.2015,aprovisionhasbeenmadefordeemedutilizationofCenvatcreditasextractedbelow:

Forthepurposesofsub-rule(1),allcreditstakenduringamonthshallbedeemedtohavebeentakenonthelastdayofthemonthandtheutilizationthereofshallbedeemedtohaveoccurredinthefollowingmanner,namely:-

(i)theopeningbalanceofthemonthhasbeenutilizedfirst;

(ii)creditadmissibleintermsoftheserulestakenduringthemonthhasbeenutilizednext;

(iii)creditinadmissibleintermsoftheserulestakenduringthemonthhasbeenutilizedthereafter.

Theneteffectofthisrulewillbethat,ifanyineligible/debatablecreditistaken,itwillbeexemptfrominterestonlyforonemonth.Inthesubsequentmonth,thepreviousmonth’sclosingbalancewillbecome,openingbalanceofthesubsequentmonthandunderthedeemingprovision,theopeningbalance,whichincludesineligiblecredittakeninthepreviousmonth,willbedeemedtobeutilizedfirst.

Inotherwords,thereliefprovidedinBudget2012byamendingRule14byreplacingthephrase“takenorutilized”by“takenandutilized”hasbeentakenaway.ThiscoupledwiththerestrictionofavailingCenvatcreditwithinoneyearfromthedateofdocument,issuedunderRule9ofCCR,2004putstheassesseinaverydifficultsituationasthedisputedmatterstakeseveralyearstogetresolved.

ItissuggestedthatthedeemingprovisionforutilizationofCenvatCreditinRule14maybedeleted,sothattheassessecanavailthecreditbutkeepthecreditunutilizedbymaintainingclosingbalancewhichishigherthantheamountindispute. TheunutilizedCenvat credit can simply be reversed if thematter goes against the assesse,without beingburdened with any interest.


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5.5.6. Denial of Cenvat Credit for Movement of Goods from one Factory of LTU to another

In terms of Rule 12A of Cenvat Credit Rules, 2004, a large tax payer can transfer cenvat credit availablewith oneofhis registeredmanufacturingpremises tohisothermanufacturingpremises soas toeffectivelyutilize the creditwhiledischargingdutyonthefinalproduct.ThisisoneofthemajorbenefitsprovidedtomanufacturershavingmultimanufacturinglocationsandbeingpartofLTU.

ByamendmenttoRule12(4)ofCenvatCreditRules,2004,videnotificationNo.21/2014CE(N.T),theGovernmenthastakenawaythisbenefit.SuchanactionisretrogradeandagainstthecommitmentoftheGovernmenttohaveastableandpredictabletaxregime.TheconceptofLTUistotreattheassesseeasa“singlemanufacturer”andtheamendmentviolates this concept.

Consideringthefactthatthemanufacturersarealreadyfacingfinancialhardship,theamendmenttoRule12(4)lookstobedraconianandtheGovernmentneedtore-thinkandrestorethetransferofcenvatcreditfromonemanufacturinglocationtootherwhoformpartofLargeTaxPayersunit.

5.5.7. Eligible Document for availing CENVAT Credit in respect of Regulated Entities (e.g. banks)

Inthecaseofservicesinvolvingmultiplebanks,theregulatorsdecidethesettlementagency.Consideringthenumberoftransactions,theserviceproviderdoesnotissueanybillasthecostofissuingsuchinvoices,processingthesameandstorageofthesameinvolveshugecostandtime.Consideringthatsuchagenciesareregulatedentities,thelawshouldcarveoutexceptiononthe linesoffirstprovisotoRule4AoftheServiceTaxRules,wherebythe invoiceetc. isnotrequiredwhencreditistakeninrespectofpaymentmadeonthebasisofadvice/statementissuedbythesesettlementagencies.

5.5.8. Allowing payment of Service Tax on import of services through Cenvat credit

Sec66BreadwithSec68(2)oftheFinanceAct,1994requirestheservicerecipientinIndiatopayservicetaxonservicesreceived from overseas supplier. As per Rule 3(4) of the Cenvat Credit Rules, 2004, Cenvat credit available with the servicerecipientcannotbeutilizedforpaymentofservicetaxonimportofservices.Theservicerecipientisrequiredtodischargethisliabilityincash.ServiceexportersarenotabletoutilizetheavailableCenvatcredittodischargetheliabilityonimportofservices.Theadditionalrequirementofpaymentofcashtodischargesuchtaxliabilityon“reversecharge”basisinflatesthepoolofunutilizedCenvatcreditalreadyavailablewiththeexporter.Suchpaymentoftaxincashimpactstheworkingcapitalrequirementsoftheexporters.Theissuegetsfurtheraggravatedintheabsenceofefficientandeffectivemechanismforrefundoftax.

SincethepaymentofreversechargeisneutraltotheRevenue,itisrecommendedthatthereversechargeliabilityforexporterofservicesbeallowedtobepaidthroughCenvatwithappropriatemechanismforre-creditthesameunderCenvat Credit Rules 2004.

5.5.9. Allowing Cenvat credit based on Supplementary Invoice

As per rule 9 (1) (bb) of the Cenvat Credit Rules, 2004, supplementary invoice issued by the service provider to recover service tax which is recoverable from him on account of non-levy or non-payment or short payment of appropriate service tax, is not a valid invoice / document to claim Cenvat credit of service tax. For the default of the service provider, theservicereceiverisburdenedwithadditionalcostwhoiscontractuallyboundtopayservicetax.

It is recommended that Rule 9(1) (bb) should be amended to allow Cenvat credit on all supplementary tax invoices. Delay incollectionof taxesby theserviceprovider shouldnot result in theservice receiverbeing ineligible to takeCenvat credit.


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5.5.10. Utilization of Education Cess & Secondary Higher Education Cess

LevyofEducationCessandSecondary&HigherEducationCesshasbeenremoved/subsumedwitheffectfrom1stMarch, 2015.

AsperRule3(7)(b)oftheCENVATCreditRules,2004,CENVATCreditofEducationCessandSecondaryEducationCesscanbeutilizedrespectivelyforpaymentofEducationCess/SecondaryEducationCessonly.CreditofEducationCessandSecondaryandHigherEducationCesspaidoninputsorcapitalgoodsreceivedinthefactoryofmanufactureoffinalproductonorafterthe1stdayofMarch,2015canbeutilizedforpaymentofthedutyofexcise.Similarly,thecreditofEducationCessandSecondaryandHigherEducationCesspaidoninputservicesreceivedbythemanufactureroffinalproductonorafterthe1stdayofMarch,2015canbeutilizedforpaymentofthedutyofexcise.

However, there are many cases where the material and services are received in the factory before 1st March 2015 but thecredithasbeenavailedafter1stMarch2015.ThisaspecthasnotbeenconsideredinthenotificationandhenceitisnotclearastowhetherthecenvatcreditonEducationCessandSecondary&HigherEducationCessavailedontheinputs,capitalgoodsandinputservicesreceivedbefore1stMarch2015canbeutilizedforpaymentofexcisedutyafter1st March 2015.

ItissuggestedthatCBECshouldissueaclarificationandallowtheutilizationofcenvatcreditonEducationCessandSecondary&HigherEducationCessavailedonmaterialandservicesreceivedbefore1stMarch2015forpaymentofCentralExcisedutyandaccordinglyCenvatCreditRulesshouldbeamended.

5.5.11. Obligation of a Manufacturer in case of Clearance of By-product/Waste/Refuse

AsperRule6ofCenvatCreditRules,2004,CenvatCreditshallnotbeallowedonsuchquantityof inputswhichareusedinrelationtothemanufactureofexemptedgoods.Inmanymanufacturingprocessesunintendedemergenceofby-productstakesplace.AspertherecentdecisionofHon’bleSupremeCourtinthematterofM/sHindustanZincLtdvs Union of India (2014-TIOL-55-SC-CX), provision of Rule 6 of Cenvat Credit Rules is not applicable in the case of by-products.

Itissuggestedthataclarificationinthisregardshouldbeissuedtoavoidunnecessarydispute.

5.5.12. Cenvat Credit on Inputs and Capital goods installed outside factory for Specified Purposes

As per Rule 2(a)(A)(1) of the Cenvat Credit Rules, 2004, CENVAT in respect of Capital Goods can be availed, when it is used in the factoryofmanufacturerof thefinalproducts. Further,Rule2(a)(A)(1a) alsoextends theeligibilityofCENVATontheCapitalGoodsusedoutsidethefactoryofmanufacturerofthefinalproducts,whenthesameisusedforgenerationofelectricityforcaptiveusewithinthefactory.Similarly,aspertheRule2(k)(i)oftheCenvatCreditRules,2004,cenvatcreditof“input“isavailableonthegoodsusedinthefactoryofmanufacturer.

Alargemanufacturingunit isrequiredtoundertakeinstallationofcertainCapitalgoods/Inputsoutsidethefactorywithoutwhichitisnotpossibletocarryoutthemanufacturingprocess.ForexamplerailwaytracksarelaidoutsidethefactorywhichisinterconnectedwithIndianRailwaysnetworkforbringingrawmaterialsinsidethefactory.Similaristhecaseofpumpingstations,waterpipelines,etc.installedoutsidefactorywhichhelpsincontinuoussupplyofwatertotheplantwhichisrequiredinmanufacturingprocess.

SuitableamendmentmaypleasebemadeinthisregardsothatcreditcanbeavailedforCapitalGoods/Inputswhichare installed outside the factory premises for supplying essential rawmaterial / utilities to the plant for enablingmanufacturing.

5.5.13. CENVAT credit of Service Tax paid on Cab Services

AsregardsCENVATcreditofservicetaxpaidonRent-a-Cabservice,currentlythedefinitionof‘inputservices’excludes‘rentacab’servicefromthemainpartofthedefinition.TransportationisakeycostelementforIT/ITEScompanies.


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Itconstitutesabout4-5%oftotalcost.Provisionoftransportationisnotjustforthecomfortoftheemployeesbuttoensuresafety,securityandontimearrivalofitsemployees.Justasfreightonrawmaterialsisacriticalmanufacturingcost, cost incurredon transportationofemployees isacritical costofprovidingservicesby the IT/ITESCompanies.Therefore,expenditureonrent-a-cabserviceetc.incaseofIT/ITESCompaniesisagenuinebusinessexpenditureusedin manufacture/ output service and the credit of the same should thus be available.

CENTRAL SALES TAX

5.6.1. Rate of Central Sales Tax

CentralSalesTax(CST)rateof2percenthascontinuedtoremainthesamesince2008,thoughtheratewasexpectedtobereducedto1percentwitheffectfrom1stApril,2009andtoNilfrom1.4.2010onimplementationofGoodsandServicesTax.InviewofthefactthatthereisuncertaintyontheintroductionofGSTinthenearfuture,itisimperativethatconcessionalrateofCSTbereducedfrom2%to1%ascommittedearlier.

ItissuggestedthattheCSTratebereducedto1%.

5.6.2. Other changes in CST laws

Central Sales Tax laws be amended -

(i) suchthatjob-workersreceivingmaterialsbywayofinter-StatestocktransferfromtheirPrincipalsarepermittedto issue Form F to the Principals.

(ii) soastopermitthedealerstosubmittheStatutoryDeclarationsorCertificatesatanytimebeforetheAssessmentOrder for the relevant period is passed.

(iii) toallowpurchaseofallgoodsbyadealerinthecourseofinter-statetrade,ataconcessionalrate,solongassuchgoodsareusedinthefactorybythemanufactureroffinalproducts.

(iv) toallowpurchaseofallgoodsbyadealerinthecourseofinter-statetrade,ataconcessionalrate,solongasthesameisusedinconnectionwithmarketinganddistributionrelatedactivities.

5.6.3. Amendment of CST Act - Issue of “C” Forms for activity of “Transmission of Electricity”

TheprovisionofSection8(3)(b)ofCentralSalesTaxAct,1956providedthatthebenefitofconcessionalrateofCSTforpurchaseofgoodsisavailabletoaregistereddealerwhoisinthegenerationordistributionofelectricityoranyotherformofpower.Theinclusionofthewords“generationordistributionofelectricityoranyotherformofpower”wasmade vide CST II Amendment 1958, which came into force from 1.10.1958.

The Electricity Act was enacted in 1910 before the Central Sales Tax Act, when the Transmission business was the part oftheGenerationandDistributionbusiness.Duetotheprivatizationandunbundlingofpowersector,theactivitiesof “generation”, “transmission” and “distribution” of electricity were segregated in the year 1992. However nocorrespondingamendmentwasmadeintheCSTAct.

Sincetheword“transmission”isnotappearinginsection8(3)(b)oftheCST,someofthestates(namelyUtterPradesh)aredenyingthebenefitofregistrationandconcessionalformstointerstatetransmissioncompanies.

Theobjectsandreasonfor includingelectricitysector insection8(3)(b)oftheCSTAct indicatethe intentionofthelegislaturetoallowthesectortobebenefittedwiththepurchaseofgoodsatconcessionalrateoftaxandtherebypassonthebenefittotheconsumers.Withoutinclusionoftheword“Transmission”,thestatesareinterpretingtheprovisionsdifferentlyleadingtodisputedtaxdemandsandlitigation.


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Transmissionbeingintegralpartoftheelectricitybusiness,theword“Transmission”istobeaddedinsection8(3)(b)oftheCSTActsothatthereisnolegalissueaboutentitlementtoregistrationandavailmentofconcessionalCSTratebytransmissionutilitiesundertheCentralSalesTaxAct.

5.6.4. Concurrent demand of CST from Origin State and local VAT from the Destination State

Theprovisionsofsection9dealwiththelevyandcollectionoftaxandpenaltiesundertheCentralSalesTaxAct,1956.Itexplicitlystatesthattaxshallbecollectedbythestatefromwhichthemovementofgoodscommences.However,duetorevenuecollectionpressuresandlackofawareness,theVATauthoritiesofstatestowhichthegoodsareconsignedalsodemandVATwithrespecttosalesmadetotheconsumersintheirrespectivestates.Inotherwords,thereisadoubleclaimoftax-fromtheoriginstatefromwhichthemovementofthegoodsoccasionedandthedestinationstatewherethe consumers are located.

Thecurrentappealandfasttrackdisputeresolutionmechanismprovidedu/s18AofCSTAct,1956prescribethatifadealerreceivesataxdemandu/s6A(2)or(3)fromastateonstocktransferofgoodsandonwhosesaleshehasalreadypaidtaxinanotherstate,hecandirectlyappealtoVATtribunaloftheoriginstate.However,nosuchappealprocedurehasbeenprescribedforavice-versasituationi.e.wheretheCentralSalesTaxhasalreadybeenpaidinonestateoninter-statesalesofgoodsandwheretheotherstatealsodemandsVATonthesame,allegingthesametobelocalsalesinitsstate.Inmostofthestates,ataxpayerisevencompelledtomakeasubstantialpre-deposittoevenfileanappealbeforethefirstappellateauthority.Further,inaneventualityofsuchinter-statetransactionbeingheldaslocalsale,thereisnorecoursetoclaimingrefundofCSTpaidtotheOriginstate;orforthesettlementofthetaxpaidamongsttheStates.

Inwakeoftheabove,itisrecommendedthatexpeditiousappellatemechanismprescribedundersection18AoftheCSTAct,beextendedtodisputesentailingwhethertransactionqualifiestobeinter-statesaleundersection3oftheCSTAct,involvingtwoStatesseekingtotaxthesametransaction(i.e.,theoriginStateseekingtotaxthetransactionasaninterstatesaleandthedestinationStateseekingtotreatthetransactionasalocalsale).

5.6.5. Scope of the Authority for Advance Rulings

ItisrequestedthatAdvanceRulingAuthorityconstitutedundertheCSTActmaybeempoweredtoissueclarificationinrespectofthefollowingamongstothers:

- CSTliabilityontransactionsentailinginterstatemovementofgoods

- CSTliabilityontransactioninthecourseofexportorimport

Thismechanismshouldaidinreducinglitigationandinprovidingcertaintyoftaxpositiontodealers.

5.6.6. Levy of CST on Sale from SEZ units to DTA units

WhileundertheSEZAct,suchsalesaretreatedasanimporttransactionforthepurposeoflevyofCustomsduties,suchtransactionsarenottreatedassaleinthecourseofimportforthepurposesofCSTAct.Ifsuchsalesaretreatedas“SaleinthecourseofimportunderSection5(2)oftheCentralSalestaxAct,1956”,theyareexemptfromlevyofCST.Inthatevent,Specialadditionalduty(SAD)of4%isleviableonsuchtransactions.Presentlywhensuchgoodsareclearedintodomestictariffarea,thereisanexemptionfromSADbutCSTispayable.CSTisacosttothebuyersandnocreditisavailable.However,SADiscenvatableandhencethebuyerswhoaremanufacturersordealersinexcise,getthecreditback.

TheSEZActallowsunitsinthezonestosellasmuchastheywanttoinDTAprovidedtheiroverallforeignexchangeearnings ismorethanthe foreignexchangespentbythem.However,paymentofCSTondomestic inter-statesalesmakestheproductscostlyandtherebyuncompetitiveinthemarkets.


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Hence,inordertoencouragemoredomesticsalesandalsotoensurethatthecostofthefinishedproductsisreduced,itisrequestedthatsuchsalesfromSEZunitstoDTAunitsshouldbetreatedassaleinthecourseofimportandexemptfrom levy of CST.

5.6.7. Enable SEZs to issue Form I to Subcontractors

UnderSEZActandRules,SEZunits/DevelopersandalsothecontractorsandsubcontractorsappointedbytheSEZUnits/DevelopersareentitledforCSTexemptiononinterstateprocurementofgoodsusedforsettingupandforauthorizedoperations,onfurnishingdulysignedFormI.

However,undertheCSTActthereisnoenablingprovisionorrulewhichprovidesforissuanceofFormItothevendorsofcontractororsubcontractorappointedbytheSEZunits/Developer.ThisresultsinadditionalcosttotheSEZunittotheextentofCSTchargedbythesupplierstosub-contractor.ThisdefeatstheveryintentionofprovidingfiscalbenefitstoSEZunits/developersundertheSEZAct.

It is recommended tomakesuitableamendment to theCSTAct toenableSEZunits to issueForm Idirectly to thevendor/manufacturer/importerofthegoodseventhoughthepurchaser isthecontractororsub-contractor,as longascontractor/subcontractoralsogivesadeclarationthatsuchgoodsarereceivedbytheSEZunits/developerfor itsauthorizedoperationorforuseinsettingupofSEZ.AcopyoftheFormIissuedtothemanufacturercanbegiventothesub-contractorforhimtoclaimtheexemptionaswell.

Alternatively,thebill-to-ship-tomodelbeingfreelyusedinthecommercialfield,itissuggestedthatFormI(tobeissuedbytheSEZentity)beamendedtoreflectboththesupplyingvendor’snameaswellasthecontractor’sname,sothattheentirelegoftheinter-statetransactionisexemptfromlevyofCSTandthetrueintentoftheSEZregimeisachieved.

5.6.8. Central Sales Tax exemption for STP/EOU/EHTP

Currently,unitslocatedinaSEZdonothavetopayCentralSalesTax(CST),inlieuofissuanceofFormI.TherationaleofexemptingSEZfromthelevyofCSTisnottoexporttaxesandmakeIndianexportsgloballycompetitive.However,thisfacilityisavailabletoaunitlocatedinSEZonly,andnottoSTP/EOU/EHTP.Therefore,STPs/EOUs/EHTPshavetoprocuregoodsbypayingCST,andthenapplyforarefundoftheCSTsopaid.ThisaddstotheadministrativecostonthepartoftherevenueandtotheworkingcapitalrequirementsonthesideoftheSTP/EOU/EHTP.

Thereisnorationalefornotextendingthe0%CSTratefacilitytoEOU/STP/EHTPexportersonthelinessimilartothatofSEZunitsespeciallysincemechanismforreimbursementofCSTtaxtoSTP/EHTPsisavailable.Fromtheviewpointofadministrativeease,0%CSTratemechanismworksmoreefficientlythanthemechanismforreimbursement.

SimilartotheCSTexemptionprovidedtoSEZunits,STP/EOU/EHTPunitsshouldalsobeallowedtoavailCSTexemptionagainstFormIoninterstatepurchasesmade.

5.6.9. Loss of Tax Cost In Cases of Sales Returns

AsperSection8AoftheCentralSalesTaxAct,1956,thesalepriceofgoodsreturnedtothedealerbythepurchaserofgoodsshallbedeductedfromtheaggregateofthesaleprices,providedinter-aliathatthegoodsarereturnedwithinaperiodofsixmonthsfromthedateofdeliveryofgoods.Additionally,asperthesameSection8A,deductioncanbemade from the turnover of dealer the value of sales returns within a period of six months only from date of delivery.

InIndiatheapparelindustryoperatesona“twoseasons”basis–winterandsummer.Thesummerseasonis,infact,alongseasonandclosureoftheseasonwithinsixmonthsisnotfeasible.Asperindustrypractice,about60%oftheestimateddemandforaseasonisplacedinstoresatthepre-seasonlaunchphase.Attheendoftheseason,unsoldgarments(typicallyabout30%ofthetotalgoodsplaced)arereturnedtobrand-ownerbywayofsalesreturns.


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Inmostofthecases,salesreturnsarereceivedafteraperiodofsixmonthsfromdateofdelivery,resulting innon-adjustmentofCSTpaidonearliersale.TheproblemiscompoundedbythefactthatAssessingAuthorityissueFormCfor the value of net purchases (which is net of returns) as disclosed in the VAT / CST return. Hence, Form C is not issued bythebuyerforreturns,whichresultsinadditionalliabilityofdifferentialtaxforthedealerforreturnsreceivedbeyondsix months.

Itisrecommendedthatincaseofreadymadegarmentsperiodforacceptanceofsalesreturnmaybeextendedtooneyearfromdateofdeliveryofgoods,and,suitableclarificationsbeprovidedforissuanceofForm–Congrossvalueofgoodspurchased.Alternately,thedeductionforsalesreturnsbeallowedonlyforvalueofsalesreturnswithinaperiodof six months.

5.6.10. Inclusion of Asbestos Cement Roofing Sheets in the list of Declared Goods

Thechrysotileasbestoscementroofingsheetsarebyandlargeusedbythepoorpeopleinthevillagesfortheirhousingpurposeinplaceofthatchedroofingandclaytiles.Almost90%ofACroofingsheetsproducedinthecountrygoforsuchruralhouseroofingalloverIndia.ACroofinghasprovenoverthelast60yearstobethemostidealpermanentrooffortheeconomicallyweakersectionsandthepoor(familiesunderBPL).Theprimaryraw-materialsformanufacturingchrysotilefibercementroofingsheetsarecement,flyashandchrysotiletypeofasbestosfiberintheratioofroughly55%cement,35%flyashand10%chrysotileasbestos.Thechrysotileasbestosfiberisusedasareinforcementmaterialintheproduct.ACsheetscostlessthanonethirdofequivalentalternativemetalsheeting.HenceACsheetroofingispreferredbythefinanciallyweakersectionsofsociety.

Galvanizediron(corrugatedandplainsheets)byvirtueoftheirbeingadeclaredgoodsundersection14ofCSTActenjoythebenefitofgoodsclassifiedasofspecialimportanceinInter-Statetradeandcommerce.Ifthegalvanizediron(GI)corrugatedsheetsaretreatedasessentialgoods,chrysotileasbestoscementsheetswhicharealsousedforroofing,deserveanequalconsideration,beingapoorman’srequirementwhichbenefitstheruralpopulation.

Itisrequestedthattheasbestoscementroofingsheetsmaybeincludedinthelistofdeclaredgoodsofspecialimportanceputtingitinthelistofsuchgoodsundersection14oftheCSTAct1956.

5.6.11. Provide Special Tax Treatment for Inter-State Swapping of Natural Gas

GAILissupplyingNaturalGas/RLNGbelongingtoGAILaswellasbelongingtoothersupplier/producerssuchasRIL,IOCL,GSPCetc. to various consumers in fertilizer, Power, CNGandother industrial sectors throughout the countrythroughitscross-countrypipelinenetwork.Presently,thedomesticgasisavailableinthestateofGujarat,Maharashtra,AndhraPradesh,Rajasthan,TamilNaduandinaverylittlequantityinTripuraandAssam.LNGimportispossibleinthecoastalareaslikeAndhraPradesh,Kerala,Maharashtra,Gujarat,TamilNadu,OrissaandBengal.TheDemandofNaturalGashoweverexistsallacross thecountry tomeet therequirementofvarioussectors likepower, fertilizer,CityGasDistribution(fortransportanddomesticuse),Petrochemical,LPG,SteelIndustryetc.

To cater thisdemand,aggregationof thedomesticand importedNaturalGas is essential andhas tobe comingledandtransportedinthecrosscountrycommonpipelinenetwork.Inthelargerpublicinterest,DomesticNaturalGasispresentlysuppliedtotheconsumersasperallocationanddirectivesgivenbytheGovernment.ThepriceofdomesticgasisalsocontrolledbytheGovernmentwhereastheimportedgasisprocuredatsignificantlyhigherpricebasedoninternationalexchangeindices.


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Thegasproduced/available(producedinKGD6)oneastcoastinAPlargelybelongstoM/sRILandtheGasavailableonwestcoastlargely(producedbyONGCorimported)belongstoGAIL.Gasavailablefromdifferentsourcesisinvariablycomingledorneedstobeswappedonaccountoffactorssuchas:

Forcomingling:-

(i) Crosscountrypipelinesareconnectedtomultiplesources

(ii) PNGRBguidelinesforcommonaccessofpipelinestoallsuppliers

(iii) Natureofcommodityrequiringeconomicalandsafetransportationthroughpipeline.

(iv) Not viable to have pipeline Infrastructure for each source separately

Forswapping:-

(i) ConnectivityoftheconsumerstothesourceofGasvisaviscorrespondingcontractualarrangementbetweenparties

(ii) Affordabilityoftheconsumers

(iii) MOP&NGdirectionsforlargerpublicinterest

(iv) OptimizationoffacilitiesrelatedtotransportationofNaturalGas.

ForefficientandequitabledistributionofgasfromthedifferentsourcestothedifferentStates,CentralGovernmenthasissuedtheguidelineforGasswappingvideMOP&NGorderno.(L-12011/10/2011-GP).Evenpoolingofgasfromdifferentsources (poolingofhighpriced importedgaswith lowpriceddomesticgas) is requiredtosupplyofgasatreasonablepricetodifferentconsumersacrossvarioussectors.TheconceptofgaspoolingispursuedbyMOP&NGalsoforthemostoptimalutilizationofNaturalGas.

Therewerenotaximplicationsincommingling,swappingorpoolingofNaturalGas/RLNGfromdifferentsourcessolongasthegasbelongedtoonesupplier.Sincecommingling,swappingorpoolingofNaturalGastookplaceinonestate,itwasalsopossibletodemonstratephysicalmovement.However,asaresultofextensionofthecommingling,swappingorpoolingofNaturalGas/RLNGamongthesourceslocatedindifferentstates(i.e.AP/Maharashtra&Gujarat)orgasbelongingtodifferentsuppliers(i.e.GAIL,RIL,GSPC,IOCetc.),thetaximplicationsaregoingtobecomemore&morecomplexandarebecomingunmanageable.

Asper section3ofCSTAct,1956, saleorpurchaseof goods isdeemed tobe in the courseof inter-state tradeorcommerceifthesaleorpurchaseoccasionsthemovementofgoodsfromonestatetoanother.Sincetherequirementofsection3stipulatesphysicalmovementofgoods,itisdifficulttocomplywiththisrequirementduetoreasonsexplainedabove.

Due to above trends, it has alsobecomedifficult todemonstratephysicalmovementofGas emanating fromeachsourcecorrespondingtoitsfinaldelivery/saletoconsumers.SincetaxtreatmentunderexistingVAT/CSTlawsislargelydependentonphysicalmovementofgoods,itisverychallengingtoascertainrealtaxliabilityunderthesecircumstances.

Considering the importance ofNaturalGas in economic development of the nation and its environmental friendlynature,thereisanurgentrequirementofspecialtaxtreatment/specialtaxregimeforsaleandpurchaseofNaturalGasunderCSTAct,1956whichwillbenefitallthegasconsumersinpower&fertilizersector.ItwillremovethebarriersinsmoothtradeofNaturalGasandwillalsoremovetaxdistortionsingassectorcausedbydoubletaxationandcascadingeffect.


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Recently,theMinistryofFinance(MoF),Govt.ofIndia(DepartmentofRevenue)videOfficeMemorandumdated21stJuly2015hasissuedclarificationthatcontractualmovementofgas(asevidencedbycommercialdocumentation)wouldbeconsideredasphysicalmovementofgoodsfromoneStatetoanotherforthepurposeofSection3oftheCentralSales Tax Act 1956.

WhiletheintentofGovernmentisthestepinrightdirection,wefindfollowinglegalinfirmitiesinthisregard:

(a) As per our understanding, Central Government cannot issue a clarification, which is inconsistent with theprovisionsofCentralSalesTaxAct(CSTAct).WefindthattheCentralGovt.’spowerstoissuetheclarificationsarelimitedonlytoprovideclarifyortogiveeffecttoaprovisionoftheCSTActandnottoissueclarificationwhichwouldalterorgivedifferentmeaningtotheprovisioncontainedinsection3oftheCSTAct.Accordingly,theOfficeMemorandumdated21stJuly2015hasnolegalvalidity.

(b) Section3ofCSTAct1956formulatesprinciplesastowhenasaleofgoodscouldbetermedasinter-Statesale.In termsofsection3of theCSTActandpursuanttoHon’bleSupremeCourt rulings inmanycases,physicalmovement of goods from one State to another State is a prerequisite to determine whether any sale hasoccurredinthecourseofinter-Stateornot.TheimplicationoftheOfficeMemorandumdated21stJuly2015wouldbethatsuchphysicalmovementofnaturalgaswouldnolongerbeaconditiontodeterminewhetherthe saleofnatural gas is an inter-State saleornot. Thekey ingredientswouldbe (i) contractual [insteadofphysical]movementofgas,and(ii)injectingofgasinthepipelinesysteminoneStateandtakingoutequivalentquantityofgasfromthepipelinesysteminanotherState.However,section3oftheCSTActdoesnotrecognise“contractualmovement”ofgoods.Thus,theclarificationissuedaspertheOfficeMemorandumdated21stJuly2015isfraughtwithanemergingsituation,whichisnotlegallybindingontheStates.IfStatesdonotconsidersuch contractual movement as inter-State movement and impose demands of tax, interest and penalty in this regard,itwillhavehugetaximplicationsonthesellersandtheirbuyersleadingtouncertaintiesandlitigations.

InordertoachievethedesiredobjectivesetoutintheaforesaidOM,itisnecessarythatsuchaclarificationisgiveneffectbywayofanamendmenttotheCSTAct,1956toensurethatsuchaprovisionislegallybindingonallthestakeholders,viz-Stategovernments,taxauthorities,andsellersandbuyersofnaturalgas.

Governmentmayconsiderinsertinganewsection3AintheCSTActinthefollowingmanner:

“3A. A sale or purchase of natural gas (which includes re-gasified natural gas) shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase-

(a) occasions the contractual movement of natural gas from one State to another; or

(b) is effected by a transfer of documents of title to natural gas during its contractual movement from one State to another.

Explanation: “contractual movement” means movement of natural gas in pursuance of a contract between the seller and the buyer of such natural gas when it is transported through common carrier pipeline (s) / distribution network operated by one or more operators.”

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