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PRE-BUDGET MEMORANDUM

2013-2014

I. PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

Implementation of Reports of key Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Debate on Inheritance Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Dispute resolution measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Taxation of dividends from overseas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Import duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Service Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Goods and Services Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Expanding the tax base and dealing with unaccounted monies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

II. ECONOMIC OVERVIEW AND KEY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9

Output and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Money & Banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Key Issues and Reforms Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

III. SECTORAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-75

CEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

TEXTILE AND APPAREL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

AGRICULTURE AND ALLIED SECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

PAPER INDUSTRY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

HEALTHCARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

STEEL AND OTHER FERROUS METALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

NON-FERROUS METALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

SOLAR ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

OIL AND GAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

C O N T E N T S

(i)

ENVIRONMENT SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

CHEMICALS AND PETROCHEMICALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

SHIPPING AND PORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

POWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

CIVIL AVIATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

VEGETABLE OIL & OIL SEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

INFRASTRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

ENTERTAINMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

CIGARETTE/TOBACCO INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

HOUSING AND REAL ESTATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

LIFE SCIENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

MEDICAL EQUIPMENTS AND DEVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

ELECTRONICS HARDWARE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

TOURISM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

RETAIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

CONSUMER ELECTRONICS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

CHLOR ALKALI INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

IV. DIRECT TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76-181

Tax Rates - Companies/Firms/Limited Liability Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Tax Rates - Individual Taxpayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Surcharge and Education Cess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Minimum Alternate Tax and Alternate Minimum Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

MAT on infrastructure companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Dividend Distribution Tax under Section 115-O . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Rationalization of provisions of Section 14A and Rule 8D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Introduction of Technological Upgradation Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Disallowance under Section 40(a)(i) and 40(a)(ia) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Disallowance of cash payments under Section 40A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

(ii)

Taking/Repayment of Loans and Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Deemed Dividend [Section 2(22)(e)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Carry Backward of Business Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Section 35D - Amortization of certain preliminary expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Non-Resident related issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Advance Ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Tax Incentives and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

- Profit Linked Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

- Investment Linked Incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Restoration of exemption of income from investment in infrastructure . . . . . . . . . . . . . . . . . . . . . 112and other projects

Tax Incentives - Weighted deduction under section 35(2AB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Deduction under section 80JJAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Deduction under section 42 for Infructuous or Abortive Exploration Expenses. . . . . . . . . . . . . . . . 116

Deduction for Expenditure on prospecting for certain minerals. . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Deductibility in respect of subscription to long-term infrastructure bonds . . . . . . . . . . . . . . . . . . . 116

Income tax exemption in case of Sale of Carbon Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Amendment to Section 9(1) - Retrospective insertion of Explanations . . . . . . . . . . . . . . . . . . . . . . 127

Amendment to Section 2(14) and Section 2(47) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Insertion of Section 50D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Amendment to Section 68 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Amendment to Section 115JB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Assessment and Procedural Aspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

Electronic Filing of income-tax returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Compulsory filing of income tax return in relation to assets located outside India . . . . . . . . . . . . . 147

Assessment Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Reassessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

(iii)

Time limit for completing income-tax proceedings, where matters are . . . . . . . . . . . . . . . . . . . . . . 151partially set-aside by higher Appellate Authorities

Stay of Demand by the Tribunal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Maintenance of Books of Account in Digital Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Personal Tax related aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Calculation of interest for delay in deposit of taxes withheld - meaning of 'month' . . . . . . . . . . . . 163

Interest payable in case of default in furnishing return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Interest for deferment of advance tax under Section 234C of the Act . . . . . . . . . . . . . . . . . . . . . . 164

Deduction in respect of interest on time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Receipt of amount under Life Insurance Policy - Section 10(10D)(d) . . . . . . . . . . . . . . . . . . . . . . . . 165

Monetary Limit for Accounts Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

Relaxation on mandatory requirement of PAN (Section 206AA). . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

Tax Deducted at Source (TDS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

Retrospective Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Amendment in the definition of 'Charitable Purpose' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Credit in respect of foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Modification of Definition of Association of Persons (AOP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

Corporate Social Responsibility costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

Deduction for Road Safety Development Programmes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

Inclusive Method of accounting - Section 145A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

Enhancement of Limits for TDS under Section 194C for Payment to Contractors . . . . . . . . . . . . . . 179

Wealth Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

V. INDIRECT TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182-247

Service Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

- Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

- Valuation of Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

- Place of Provision of Services Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

- Reverse Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

- Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Central Excise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

(iv)

Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

Cenvat Credit Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220

Structural and Procedural Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

- Structural Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

- Independence of Adjudication Wing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

- Improvement in Dispute Resolution Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

- Expanding the Scope of Authority for Advance Rulings . . . . . . . . . . . . . . . . . . . . . . . . . . 232

- Introduction of Advance Pricing Mechanism in Customs Law in line with . . . . . . . . . . . . 234 Transfer Pricing regulations of Direct Taxes

- Extension of Large Taxpayer Unit (LTU) Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

- Annual Audit of Service Providers by Chartered Accountants. . . . . . . . . . . . . . . . . . . . . . 234

- Common Procedural Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

- Rate of Interest for delayed payment of excise duty or service tax . . . . . . . . . . . . . . . . . 235

- Time limit for disposal of appeals by CESTAT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

- New Benches of CESTAT at Hyderabad, Lucknow, Ranchi etc. . . . . . . . . . . . . . . . . . . . . . . 235

- Expiry of Stay order if appeal is not disposed of within the period of 180 days . . . . . . . . 236

- Issue of multiple notices on same issue for different periods . . . . . . . . . . . . . . . . . . . . . . 236

- Maintenance of scanned copies of documents in lieu of originals . . . . . . . . . . . . . . . . . . 236

- Merger of duties and cesses etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236

- Streamlining of Instructions / Circulars by issue of Annual Master Circulars . . . . . . . . . . 237

- Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

- Period of interest free warehousing of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

- Refund of Extra Duty Deposit in case of provisional assessment . . . . . . . . . . . . . . . . . . . 237

- Finalization of provisional assessments within prescribed time lines . . . . . . . . . . . . . . . . 238

- Bank Guarantees to be returned if the assessee wins first appeal . . . . . . . . . . . . . . . . . . 238

- Refund of excess Customs duty paid in case of amendment to Bill of . . . . . . . . . . . . . . . 238 Entry to rectify clerical mistakes

- Import of Commercial Samples / Prototypes / Critical Spare Parts as Baggage . . . . . . . . 239

- Confirmation of Proof of Export . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

- Implementation of the Report of Indian Institute of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 Foreign Trade on Trade Facilitation

(v)

(vi)

- Central Excise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

- Demand of interest for differential Excise Duty paid due to price increase . . . . . . . . . . . . . . 240 subsequent to removal of goods

- Availability of Credit on Bill of Entry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

- Clearance of goods for captive consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

- Valuation of Goods manufactured by job worker for captive . . . . . . . . . . . . . . . . . . . . . . . . . 241 consumption by the manufacturer

- Export of Excisable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

- End Use Certificate for import of waste paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

- Clarificatory amendment to Rule 8 (3A) of the Central Excise Rules . . . . . . . . . . . . . . . . . . . . 242

- Central Excise valuation - impact of the judgment of the Supreme Court in Fiat case . . . . . . 242

Goods and Services Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Central Sales Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

I. PREAMBLE

1

PRE-BUDGET MEMORANDUM -20142013

The Union Budget to be presented to the Parliament would be in the midst of one of the most challenging times the

world is facing. The USA is dealing with the fiscal cliff, Europe with an all pervasive crisis and the rest of world bracing

for a slowdown. We in India need to come out of the 'perceived policy paralysis' and need to present a Budget which

will continue to inspire investor confidence and help us get back to the 8-9 per cent growth trajectory.

The tax policies that we implement and follow go a long way in impacting foreign investment in the country and are

an integral part thereof. As it happens, some of the recent policy developments have not gone down well with the

investors and have shaken their faith in the efficacy of the judicial system. We at FICCI do believe that the ensuing

Budget offers a platform to communicate to the investing community that we are willing to offer a stable and

consistent tax environment conducive for investment and in conformity with our priorities.

Our detailed memorandum on the various recommendations follows. What we would like to set out in this Preamble

are the key issues which we believe need to be addressed in the forthcoming Budget:

1.1. Implementation of Reports of key Committees

One of the key positive developments in the recent past has been the setting up of the Shome and Rangachary

Committees to address the various concerns that the taxpaying community has. The Draft Reports of the Shome

Committee on GAAR and on retrospective amendment to Section 9 of the Income Tax Act have been received very

positively by the taxpaying community. It is imperative that the final reports of the Shome Committee are placed in

the public domain and, more important, the recommendations acted upon. Similarly, it is imperative that the

recommendations of the Rangachary Committee are placed in the public domain and acted upon. If this is not done

urgently, there is a danger that the deliberations of these Committees will be perceived as one more symbolic

exercise with little result to show.

FICCI would like to endorse several of the recommendations contained in the Draft Reports of the Shome

Committee. In particular, FICCI supports the view of the Committee that GAAR needs to be implemented after

adequate 3 year notice, the existing investments and structures need to be grand fathered and the subjectivity be

taken out of the implementation process. FICCI also endorses the view of the Committee that Retrospective

amendments to tax laws should be a rare phenomenon only to prevent abuse and not to overcome judicial

pronouncements, that where retrospective amendments are made they should not result in withholding tax

obligations, interest and penalty and the need to curtail the implications of amendment to Section 9 of the Income-

tax Act by prescribing threshold limits.

The Rangachary Committee has heard at length the IT/ITES industry and has come up with recommendations on

resolution of several disputes. It has also prescribed Safe Harbour Rules. Apart from implementing these

recommendations, it is necessary to ensure that other industries too find a mechanism of dispute resolution.

1.2. Debate on Inheritance Tax

The recent invitation by the Hon'ble FM to views on the revival of Inheritance Tax has sparked of a major debate.

Coming at a time when there is a need to generate capital resources to invest in developmental needs, any proposal

to introduce Inheritance Tax would be counterproductive.

A substantial portion of the resources generated in the post liberalization era is in listed entities which have helped

the progress of the country. To impose a tax which could potentially require a promoter to dilute his shareholding in

a Company merely to pay incidence of Inheritance Tax is preposterous. Moreover such a tax could be very onerous

for illiquid assets e. g. self occupied housing where the value of the property may have steeply escalated.

When the Estate Duty was in existence, the fact was that the cost of administering the tax was more that the taxes

garnered. In a country where there are few social security measures, imposition of such a tax would indeed be

counterproductive. It will lead to misuse of the provisions and there would be attempts to find loopholes to avoid

payment of such a tax.

Over a period of time, the Government has cast the net of taxes wide and there are several other avenues to

increase the tax base. FICCI strongly opposes any imposition of Inheritance Tax; in any case, even in an extreme case

if such a tax was to be imposed, there is a need for a wider debate including the need to work out the ambit of the

tax, the exemptions, the rates, etc. Such a tax should not, if at all, be imposed in a hurry and without extensive

debate which must necessarily encompass the societal ramifications as these are likely to be significant.

1.3. Dispute resolution measures

One of the key concerns of the taxpaying community is the prolonged litigation, the length of time it takes to resolve

a dispute, the need to make on account payments in the interregnum, etc. The Dispute Resolution Panel (DRP) and

the Mutual Agreement Procedure (MAP) in the context of Direct Taxes have not proved effective mechanisms in this

regard. The fact that multiple benches of ITAT/High Courts give differing decisions has not helped the cause of the

taxpaying community.

FICCI strongly recommends that there be a 'conciliation bench' which can be approached by a tax payer to help

'settle' tax disputes. This will ensure that where a tax payer has already got a favourable resolution of a dispute on a

matter, the dispute is not continued in the later years as a matter of routine. Similarly, non-resident tax payers can

focus on quantum of profits attributable to a Permanent Establishment or the adjustment on a Transfer Pricing issue.

Industry has observed that the assessing officers tend to display a revenue bias in adjudicating tax disputes. This

tendency is pronounced in disputes relating to indirect taxes. There is always pressure of maximizing revenue since

yearly targets for collection of duties are assigned to each such officer. This results in show cause notice/demands

getting confirmed even when the same are legally untenable as is evident from the statistics of appeals decided in

favour of the Department or against it. It is suggested that the adjudicating officers should be disengaged from the

duties of revenue collection. Moreover, revenue realizations dependent as they are on the economic activities should

not be a parameter to assess the efficiency or competence of a revenue officer.

2

PRE-BUDGET MEMORANDUM 2013-2014

1.4. Refunds

Tax payers are indeed concerned about the substantial refunds pending at the tax office on account of both Direct

and Indirect taxes. There is a spiral here because there is a higher withholding tax and most often tax payers are

unable to get lower tax withholding certificates because the Departments within the Tax Office who deal with

withholding tax and those dealing with assessments are different and each have their own separate Budgets. The tax

payer is stuck in between.

Once higher taxes are withheld, there is a need for a refund and one finds, in practice, that tax offices make high

pitched assessments to avoid refunds. We thus get into prolonged litigation and a tax payer has major problems

trying to get back funds which are legitimately his. A new internal instruction that refunds will not be issued if a case

is chosen for scrutiny makes a mockery of the whole system and is outrageous. This spiral needs to be broken. There

is a need to issue instructions or guidance for issue of lower or nil withholding certificates. All pending refunds need

to be granted forthwith, even when a case is chosen for scrutiny assessment.

1.5. Taxation of dividends from overseas

Over the last few years, corporate India has emerged as a fairly active global player and Indian business houses have

made investments and acquisitions which do India proud. The returns from these investments, when brought to

India, suffer tax unlike domestic dividends which are tax free in the hands of the recipients. In the last Budget, the

rate of tax was reduced to 15 per cent. FICCI believes that such dividends received out of tax paid profits overseas

and subjected to withholding taxes in those jurisdictions, should not be subjected to further tax in India on

remittance. Indeed, the US example has shown that when corporates are permitted to repatriate dividends tax free,

there is a significant inflow of funds; inward remittance of forex at this point of time would be a very welcome step

for our economy. FICCI recommends that tax on dividends from overseas be done away with; in the alternative, tax

on such dividends should be treated akin to minimum alternate tax, creditable against the normal tax liability and

payable only if the tax on normal income is less than the tax on such dividends.

1.6. Import duties

Domestic Industry continues to suffer from cost disadvantages on account of higher local taxes such as VAT, octroi,

entry tax as also due to higher cost of financing and inadequate infrastructure. It deserves a minimal level of

protection to compete with imported goods. FICCI would suggest that generally the basic customs duties should

continue at existing levels till such time a comprehensive Goods and Services Tax is introduced and the cost of

financing is reduced to competitive levels.

1.7. Service Tax

A comprehensive service tax based on the concept of a negative list of services has been introduced with effect from

1st July, 2012. It is an important step towards introduction of GST. However, it is noticed that while the levy is

universal in its application (barring the negative list and exemptions); there are restrictions on the availment of

Cenvat credit. This dichotomy needs to be resolved urgently.

Further, several doubts have been expressed about the scope of the new levy. Some of the issues requiring

clarification have been listed in the memorandum. The Ministry of Finance should issue clarifications on these issues

at the earliest to avoid litigation.

3


1.8. Goods and Services Tax

The recent move by the Hon'ble Finance Minister in reviving the move to introduce the GST, sooner rather than later,

is indeed welcome. FICCI indeed has strongly supported introduction of GST and believes that this will go a long way

in streamlining the economy and provide impetus to the growth of our GDP. FICCI believes that it is imperative that

this economic reform which is critical to the growth of the country be not a subject of party politics and should be

pushed forward at the soonest possible.

Also, it is important that the framework of GST should encompass the multiple taxes currently levied at the state and

local levels and should subsume all of them.

1.9. Expanding the tax base and dealing with unaccounted monies

Any system that taxes those who are in the tax net on a progressively higher basis leaving out those who manage to

outside the tax net is regressive and will not achieve the objectives of economic and inclusive growth.

On the subject of funds lying overseas, while being fully sensitive on the Government's rights to appropriately deal

with defaulters, FICCI has strongly recommended that India enters into an agreement with countries like Switzerland

on the lines of similar treaties entered into it by the UK as this will ensure that taxes are collected on such monies,

including future earnings. FICCI would be happy to contribute to this thought process and feels that this move should

not be delayed further.

Finally, on this subject, it is observed that despite persistent efforts in the last few years there is hardly any widening

of the tax base; efforts so far made have yielded dismal results. FICCI sees the need to tax all the sectors which are

presently outside the scope of the tax net albeit at much higher levels of income/wealth. There is no economic

justification to not tax persons who have income above the threshold of maximum marginal rates payable by other

tax payers. Changes needed to the Constitution of India in this regard should be initiated and a debate on this subject

needs to take place.

4


II. ECONOMIC OVERVIEW AND KEY ISSUES

5


Economic Overview

2.1. Output and Prices

The RBI in the latest macro-economic and monetary development has revised downwards the growth rate for

current fiscal to 5.8%.

Table 1: Chronology of downward revision of GDP for FY '13

Latest GDP numbers indicate a growth of 5.5% in Q1 of 2012-13. This growth rate is slightly higher than the 5.3%

growth registered in Q4 of FY12, a consecutive decline for five quarters. Agriculture expanded by 2.9% (vis-à-vis 3.7%

of Q1 FY 12 and 1.7% of Q4 FY 12). This positive growth in agriculture vis-à-vis last quarter is a pleasant surprise.

However, in spite of the agricultural sector clocking close to 3% growth food grain prices may remain elevated owing

to the ripple effect of the lower productivity in the months of June & July due to deficient monsoon

The industry sector recorded a growth of 3.6% which is substantially higher than the 1.9% & 2.5% growth recorded in

Q4 & Q3 FY12 respectively. However, this figure is not in line with the growth figures that have been achieved in FY10

& FY11. The growth in the mining & quarrying sector was 0.1% as compared to 4.3% in the last quarter. The

performance of the manufacturing sector was also not buoyant. The manufacturing sector reported a growth of 0.2%

in Q1FY13, vis-à-vis (-) 0.3% growth in Q4 FY12.

Institution/ month GDP forecast (in %)

RBI

April 2012

July 2012

Oct 2012

IMF#

July 2012

Oct 2012

FICCI

Oct 2012

7.3

6.5

5.8

6.2 (2012), 6.6 (2013)

4.9 (2012), 6.0 (2013)

5.7 (2012-13) 6.5 (2013-14)

Note: # IMF projections are for calendar yearSource: RBI, IMF, FICCI Research

The construction sector recorded a growth of 10.9% in the first quarter as compared to 4.8% in Q4 FY 12. The sector

has not recorded such a high growth ever since Q2 FY08. This year's good performance could be due to delayed

monsoon which otherwise affects construction activity. Cement dispatch numbers for the quarter have been fairly

decent and may be the delay in the monsoons this year has lent some support to the cement companies.

However, the worrying point was the growth rate in service sector at a low of 6.9% as compared to 10.2% in Q1 FY

12. At a disaggregated level, it was the trade, hotels & restaurants sector which dragged the services growth down.

The trade, hotels & restaurants sector recorded an all-time low growth of 4% in Q1FY13 as compared to 7% in the

last quarter and close to 14% in Q1 FY 12.

Headline inflation came in at 7.81% year on year (YoY) in Sep'12, sharply higher than previous month's print of 7.55%

YoY. The inflation print for the month of September came in at a 10-month high. The July number was revised

upward to 7.52% YoY from provisional estimate of 6.87% YoY.

Primary inflation eased to 8.77% YoY in Sep'12 from 10.4% YoY in July with food price inflation at 7.9% YoY. Within

food, the structural components of inflation in protein rich items witnessed a sharp spike compared to the previous

month. Prices for cereals jumped 14.2% YoY in Sep'12 from 10.7% YoY respectively in August. This can be mainly

owed to the spike in wheat inflation to18.6% YoY from a prior of 12.9% YoY. Meanwhile, the decline in fruits and

vegetables prices by 3.37% month on month (MoM) helped limit the monthly rise in food inflation levels.

Fuel inflation rose sharply to 11.9% YoY from 8.3% YoY, owing to a partial impact of the 13.6% hike in high speed

diesel prices in the month. The fuel inflation is likely to rise higher in October, as the rest of direct impact coupled

with the indirect impact of hike in diesel prices will be witnessed.

Inflation pressures in the manufacturing sector surged to 6.26% YoY in Sep'12 and core printed 5.57% YoY. Both

indices continue to exhibit an upward momentum.

The Central Bank is facing a sharp growth-inflation conundrum with growth continuing to remain weak, while

inflation is likely to increase in the coming months.

Table 2: Inflation rates as on Sep 2012

FY13

September

All Commodities

Primary Articles

Food Articles

Fuel & Power

Manufactured

1.1

0.5

0.6

0.5

FY12

Month YTD* Year Year

4.6 7.8

6.2 8.8

7.9 7.9

4 5.9 11.9

3.6 6.3

Source: Office of Economic Advisor* Note: YTD Implies year till date (as of Sept'12)


10.0

12.2

9.6

14

8

6

2.2. Money & Banking

The latest data available as on Oct 5'12 indicates a growth of 13.3% in Broad Money (M3). This is lower than the

targeted level of 15.0% for 2011-12. The growth in non-food credit was at 15.5%.

2.3. Public Finance

The Government has recently submitted a detailed fiscal consolidation roadmap that endeavors to bring down the

fiscal deficit to 3% by FY17. Meanwhile, fiscal deficit trends in the current fiscal reveal a likely slippage in fiscal deficit

for FY13.

Table 3: Growth in monetary indicators and RBI target

As on Oct 5'12

(YTD)

7.5

4.3

8.5

13.3

15.5

RBI target : October'12

14.0 15.0

16.0 17.0

13.9 15.0 16.0

Source: RBI & FICCI Research

RBI target August'12

FY13

Year till date Year Year

15.0

17.0

M3

Non food Credit

Deposits

Table 4: Fiscal indicators

FY13:Apr-Sept(Rs bn)

3571.15

3369.04

6940.19

FY13:Apr-SeptBudget

9773.35 37.7

14909.25 47.6

5135.90 68.0

Source: CGA

FY12:Apr-Sept

FY11:Apr-Sept

36.5

46.5

Receipts

Expenditure

Fiscal Deficit

Fiscal Indicators

% to Budget

Rev. Deficit

Primary Deficit

2632.84

205739

3504.24

193831

65.6

75.1

106.1

72.2

109.3


7

2.4. Industry

The IIP print for the month of August was a positive surprise and came in at 2.7% YoY. On the manufacturing PMI

front, the performance has been stable at 52.8 for August as well as September.

The performance on a segmental basis was more encouraging for manufacturing and mining. Mining growth

improved to 2% YoY in August as against -1.6% YoY earlier. However, for the April-August period it continues to

remain in the negative territory at -0.6% YoY. Manufacturing clocked 2.9% YoY in August whereas during Apr-Aug it

has been 0% YoY.

As per the two-industry classification, 13 out of the 22 industry groups displayed positive growth among which were

publishing, printing and radio, TV and communication equipment.

Industries such as office, accounting and computing machinery and motor vehicles and other transport equipment

demonstrated negative growth.

Further, components such as capital goods have started to show reduced volatility and declined by 1.7% YoY as

against the lows of -28.1% YoY seen in June. For April-August capital goods continues to show contraction of -13.8%

YoY. The positive surprise however, ensued from the consumer goods front, which grew by 5% YoY as against 0.5%

YoY earlier. April-August, consumer goods clocked 3.5% YoY.

Table 5: IIP Growth Trend: Apr- Aug'12

Basic

7.6

2.8

Capital

7.3 4.4

-13.8 3.5

Source: MoSPI

Intermediate Consumer

0.8

0.6

Apr- Aug '11

Apr- Aug '12

Period General

5.6

0.4

2.5. External Sector

Cumulative trade deficit for FY2013 (April-August) now stands at $71.3 bn as against $76 bn in the same period last

year. Cumulative exports for FY2013 (April-August) now stand at $119 bn - a decline of 6.6% over the corresponding

period last year. Cumulative imports for FY2013 (April-August) now stand at $190 bn - a decline of 6.6% over the

corresponding period last year.

Nevertheless, exports trajectory is expected to improve slightly going ahead owing to the lagged impact of the sharp

Rupee depreciation against the major trading partners in early part of FY2013.

However on the downside, on the imports side, the rise in international crude oil prices in the August-September

period is expected to be reflected in incoming trade data and thereby poses upside risks to quantum of India's trade

deficit.


8


Table 6: Exports & Imports: USD billion

2012 Exports

Apr

May

June

July

Aug

Sept

23.5

25.7

25.1

23.7

Source: Ministry of Commerce

Imports

41.9

35.4

37.9

41.8

22.4

22.3

37.1

37.9

Key Issues and Reforms Needed

Though the government has set pace for the reform process, a forward movement on GST, introducing greater competition in the mining sector (particularly coal), strengthening framework and creating new avenues for infrastructure financing and improving agri-marketing systems are some areas where the government should now focus on.

For example, the recent bout of inflation, which has lasted for more than two years, has highlighted a very important weak spot in our planning process. And this relates to shortage of food products whose demand is already on the rise. As income levels in the economy increase, the demand for food in general and protein rich items in particular goes up at a fast pace. We are already witnessing this in India and unless we take appropriate measures to increase supply of food items such as pulses, milk and milk products, meat, fish and eggs etc, food inflation would become endemic and derail the growth process. Additionally, steps should be taken to improve marketing and distribution of food products in the country. And one of the key reforms here is for the states to implement the amended APMC Acts in letter and spirit.

The Government should also examine the issue of land acquisition keeping the development agenda in mind. At its present stage of development, India needs industrialisation. A land acquisition policy that could hamper this by imposing heavy acquisition and relief and rehabilitation costs should be reconsidered. Likewise, Government has to play a role in acquiring land for large private sector projects, including PPP projects for infrastructure development.

Goods and Services Tax will be a landmark reform once introduced. It will be a permanent stimulus for overall economic activity and boost GDP growth, exports and employment generation. The central and the state governments must engage in a positive manner on this issue and ensure that GST is introduced in the country at the earliest. Estimates suggest that proposed GST structure, if implemented is estimated to increase the potential GDP by at least 1.7%.

Special stress must also now be laid on policies like National Manufacturing Policy and National Electronics Policy which has the potential of creating 28 to 100 million jobs in the coming decade. Such policies are particularly welcome as they will be providing gainful employment to the growing young Indian population. India needs to create substantial amount of jobs by the year 2025 so as to reap the benefit of the demographic dividend. It is believed that a chunk of such employment opportunities would be generated from the manufacturing and IT sector.

While we should continue to explore all options for raising resources for infrastructure development, greater emphasis should be laid on developing the corporate bond market and leveraging insurance and pension funds to invest in infrastructure sector.

9

10

CEMENT

3.1.1. Reduction in the rate of excise duty on Cement

Excise duty is levied on Cement @12% + Rs.120 per MT. These duty rates are one of the highest and other core

industries such as coal and steel attract duty at around 5%. Cement is one of the core infrastructure industries and it

requires large scale investments and capacity additions in view of the expected GDP growth and projected demand

for cement over the medium to long term.

Further, the excise duty structure for both cement as well as cement clinker has become quite complicated in the last

few years. Earlier it was at a specific rate per MT. Now, it has become ad-valorem cum specific duty and is further

also related to the declared MRP of the product.

There is surplus capacity of cement in the country and cement market is on a bearish trend. Therefore excise duty

rate on cement should be significantly reduced for growth of the industry at par with other core and infrastructure

industries.

3.1.2. Levy of Clean Energy Cess on Coal

A clean energy cess has been levied on coal, peat and lignite with effect from 1.7.2010. Energy is one of the major

cost drivers for cement. Though levied as a duty of excise, no cenvat credit is being allowed against this levy. This

cess, along with state VAT etc. is putting further pressure on an industry faced with surplus capacity, falling

realizations and increasing costs.

It is requested that Cenvat credit be allowed on Clean Energy Cess so as to mitigate the impact on costs.

3.1.3. Classifying Cement as “Declared Goods”

Cement is one of the basic and core infrastructure industries. However, unlike other similar industries/goods, cement

is subject to higher rates of taxation. It is requested that Cement be stipulated as “Declared Goods” under Section 14

of Central Sales Tax Act so that it is put on an equal footing with other core sector goods like coal and steel.

3.1.4. Levy of Customs Duty on Cement Imports

Presently, import of cement into India is freely allowed without paying basic customs duty. However, all the major

inputs for manufacturing cement such as limestone, gypsum, pet coke, packing bags etc. attract customs duty. In this

situation, duty free import causes further hardships to the Indian cement industry.

Hence, it is requested that to provide a level playing field, basic customs duty be levied on cement imports into India.

III. SECTORAL ISSUES


Alternatively, import duties on goods required for manufacture of cement be abolished and freely allowed without

levy of duty.

3.1.5. Reduction of Customs Duty on Imports under EPCG scheme

The EPCG is meant to encourage exports. Hence, the scheme allows import of capital goods at concessional duty rate

of 3% and export obligation is also attached along with it. Now the normal customs duty is in the range of 5-7.5%

unlike 15-20% earlier. Recognizing this, the Government has already reduced duty to 0% for certain sectors. It is

suggested that this concession should be extended to cement industry as well.

3.1.6. Abolition of import duty on tyre chips

Cement industry is an energy intensive industry and requires huge amounts of energy resources. However, it does

not get adequate supplies of domestic coal and hence has to resort to expensive imported coal. To meet its

requirements, the industry is developing alternative energy sources like tyre chips etc.

It is suggested that tyre chips be allowed to be imported by removing it from the Negative list. Further, the import

duty on the same be reduced to zero.

3.1.7. Customs Duty on Pet Coke

Pet coke is one of the important fuels used by Cement Industry. This is expensive and mostly imported and the

situation is further compounded by the fact that the import duty on pet coke is 5%, whereas on final product

'Cement' there is no basic customs duty.

The Cement Industry, therefore, requests that Customs Duty on pet coke be abolished. This would remove the

aberration in the structure of duties existing in cement imports vis-à-vis its inputs.

3.1.8. Treatment of Waste Heat Recovery as Renewable Energy Source

Energy cost is a very substantial part of the cost of producing cement. The prices of conventional energy resources

are rising higher and higher and further, greater use of these is adversely affecting the environment. Also, various

Governments are imposing renewable energy obligations on the industry.

Cement industry is putting up Waste Heat Recovery plants so as to derive more energy from the same energy

resource. In a way, this is akin to green energy. All of this requires further capital investments.

To help the industry in its endeavor to produce more such environment friendly energy, it is requested that such

energy generation be treated as Renewable Energy Source.

3.1.9. Incentives for Limestone availability for future growth

As per IBM data the total cement grade limestone reserve available to meet the industry requirements is 89.86

billion tonnes. Based on the expected growth and consumption pattern, the current reserves are expected to last

only for another 35 - 41 years. There is a need to streamline and simplify the procedures related to limestone mining

leases approval / renewal.

11


There is a need to provide incentives like lower royalty rate, excise rebate for usage of marginal and low grade

limestone.

In order to ensure systematic mining operation for better recovery, there is need to integrate small mining leases in a

limestone belt.

In order to encourage utilization of limestone deposits located in remote areas, there is a need to offer incentives like

road freight subsidy, lower royalty/excise rates etc. It is to be ensured that the systematic mining is carried out as per

approved mining plan.

3.1.10. Stimulus to the sectors which are major users of Cement

Using cement concrete technology for roads - All new expansions in the national and state highways may be made of

cement concrete as a policy. To begin with, this % could be 30% of total allocations. All existing city roads having

bitumen surface be converted gradually to cement concrete and new ones should preferably be constructed with

cement concrete technology. All connecting roads in villages must be done with cement concrete technology.

TEXTILE AND APPAREL

3.2.1. Indian Textile Industry

The Indian Textiles & Clothing industry has an overwhelming presence in the economic life of the country. It

contributes about 14% to industrial production, 4% to the GDP, and 17% to the country's export earnings. It also

provides direct employment to over 35 million persons which is second only after agriculture. India's total textile and

apparel industry size (domestic + exports) is estimated to be $ 89 billion in 2011 and is projected to grow at a CAGR

of 9.5% to reach $ 223 billion by 2021. The domestic textile and apparel market in India is worth $ 58 billion and has

the potential to grow at a CAGR of 9%, to reach $ 141 billion by 2021.

3.2.2. Challenges to the Textile Industry and National Fibre Policy

• The present demand of the industry is collectively met by 8 million tons of different fibres in India. It is envisaged

that fibre demand will reach 11.5 million tons by 2015, thereby necessitating an incremental production of 3.5

million tons.

• The two major category or fibres are cotton and man-made. The current ratio of consumption being 60:40.

• As per the draft National Fibre Policy (NFP) 2010-11, we need to harness the potential of Man Made Fibres to

catalyse the growth of the textile industry, as globally the fibre ratio is 60% man-made to the total fibre

consumption.

• Also, the evolving trends in the textile industry have created huge potential for technical textile, used primarily

for specialty applications. Due to wide functional diversity, the growth in this segment would be met by man-

made fibres.

12


•

dismantling of textile quotas (2005), whereas the cotton textile industry has witnessed substantial growth.

Indian cotton apparel exports to the world have grown at about 10.7% CAGR, while MMF apparel exports have

witnessed a decline.

• One major impediment in India is disparity of excise duty that the man-made fibre chain is subjected to.

• There have been genuine and forceful attempts by the Government towards realizing fibre neutrality when the

excise duty in 2008-09 was reduced to 4% to spur growth of the T&C industry, when the global industry faced

the economic downturn.

• But in subsequent years, there were gradual increases in excise duty from 4% to present rate of 12%.

Following suggestions may be considered by the Government for the balanced growth of the Indian Textile industry:-

3.2.3. Excise Duty on Man-made Fibres

The excise duty on polyester fibers and yarns has been raised from time to time for the last about 4 years from a

level of 4% in December 2008 to 12% in March 2012. Higher duty on synthetics results in costlier fabrics and

consequently suppresses the demand for garments using polyester fiber and yarns. A higher duty on synthetics not

only acts against the fiber neutral policy of the Government but also impacts the export of value added garments.

In order to reduce the price of synthetic fabrics and to improve the capacity utilization of the fiber/yarn

manufacturers it is requested that the duty structure on fiber and yarns be revisited and duties on polyester fibers /

filament yarn should be brought down to 4%. Such a reduction in duty would help not only the polyester yarn / fiber

manufacturers but also the texturizers, weavers, knitting industry, processors and apparel manufacturers.

A reduction in excise duty as suggested is not likely to affect the revenue collections because of increased volumes of

man-made fibres and yarns

3.2.4. Accumulation of Cenvat Credit

The draw texturized yarn was exempted from the levy of NCCD with effect from 17-05-2003, however, the duty on

the inputs namely POY, for such yarn was continued which has resulted in accumulation of NCCD credit with the DTY

manufacturers. The accumulated credit of manufacturing units needs to be reimbursed back to the units who have

paid this, alternatively same to be credited to Basic Excise duty account of assesses under excise rules.

Indian man-made fibres textile industry has not been able to create a mark in the global textiles market post

13


3.2.5. Customs Duty on Synthetic Fibres

To encourage investments across the value chain and to make the industry competitive, it is requested that the

following customs duty structure for all fibres / yarn value chains be adopted.

APPAREL

3.2.6. Levy of Central Excise Duty on Branded Readymade Garments

Branded Garment industry, as a whole, incurred huge losses earlier when the excise was introduced in 2011. In

Union Budget 2012, the excise levy was increased to 12%. Simultaneously, however, some relief was provided by

14


Item Customs duty (%)

Tariff No. Present

PTA 2917.36 5

MEG 2905.31 5

Polyester chips 3907.91 5

Polyester staple fiber 5503.20 5

Polyester filament yarn 5

Polyester tyrecord fabric 5902.20 5

Polyester high tenacity yarn 5402.20 5

Proposal

5

5

7.5

10

10

10

10

(b) Nylon Value Chain

Item Customs duty (%)

Tariff No. Present

Caprolactam 2933.71 7.5

Nylon Chips 3908.10 7.5

Nylon filament yarn 5402.45 7.5

Nylon high tenacity Yarn 5402.10 7.5

Nylon tyrecord fabric 10

Proposal

5

7.5

10

10

105902.10

(a) Polyester Value Chain

increasing the abatement from 55% to 70%. The increase in abatement, while being a very welcome step, is not,

unfortunately, enough to mitigate the severe cost pressure under which the industry is operating. The slowdown in

the economy with consequential impact on consumer sentiment has resulted in sluggish demand. Most of the

branded garment businesses are incurring losses or earn marginal profits due to high incidence of retail costs,

marketing expenses, VAT, freight and octroi. The Branded Garment Industry provides employment to lakhs of semi-

skilled women in manufacturing garments in the country. The fall in demand will have an adverse impact on the

employment of these workers from economically backward class who have very limited scope of employability

otherwise. In view of the issues stated above, it is strongly urged that the abatement provided for branded garments

be increased from 70% to 85%. Alternately, excise duty at 1% may be levied without any entitlement for abatement,

in line with similar levy imposed on about 130 items, which were exempt from central excise duty till then, in the

Union Budget of 2011. This will provide much needed relief to industry and go a long way in rebuilding the growth

sentiment.

3.2.7. Sample Movement

In garment industry, development, display and approval of samples is an iterative and fundamental activity involving

manufacture and movement of samples across supply chain - from Brand Owner to Vendor/Job worker, washing

units, value add in form of embellishments etc. and then finally from manufacturer/Brand Owner to the Buyers. To

maintain records for these multiple movements is a cumbersome process and there is no commercial transaction

involving consideration.

To facilitate the business process, it is submitted that necessary clarification be issued to consider regular delivery

challan of concerned parties with an endorsement 'For Sample Purpose. No Commercial Value' as proof and samples

be exempt from Excise Duty. Further to prevent misuse of the facility, such garments may be mutilated in the front.

3.2.8. Import of goods falling under Chapters 51, 52, 54, 55, 58 - Testing of Samples

Goods covered by the above stated chapters attract different specific duties at 8 digit HS code level. The difference in

the product description under various sub -classifications cannot be determined or identified by physical inspection

and requires submission of samples for tests by Textile Committee. This results in inordinate delays in clearance of

goods.

It is recommended that the structure of specific duties applicable to the goods covered by the said chapters be

rationalized to reduce the testing requirements. Further, clarifications/instructions may be issued to field formations

to accept test reports of any accredited testing laboratory after matching the sample fabric affixed on the test report

with the import consignment.

3.2.9. Presence of Azo dyes - Certification by international agencies

Textile goods of Chapters 51 to 62 are required to be accompanied by a certificate from a laboratory accredited by

the government of the exporting country confirming that the goods are free from Azo dyes and other harmful

chemicals. If the goods are not accompanied by such certificate, they are subjected to mandatory testing - as

prescribed vide DGFT's Public Notice No. 12 (RE-2001)/1997-2002 - to ensure that the products imported are free

from Azo dyes and other harmful chemicals. This process leads to delay in clearances and resultant additional costs.

15


Internationally, the Institute of the International Association for Research and Testing in the Field of Textile Ecology

accredits mills after carrying out rigorous controls to ensure that they do not use prohibited dyes/chemicals. Once

accredited, the certification remains valid for a specific period and a specific group of products. It is an internationally

accepted practice to accept the accreditations and not insist for consignment wise testing.

It is recommended that the international practice of accepting the accreditation certificate issued by Institute of the

International Association for Research and Testing in the Field of Textile Ecology be adopted in India also.

AGRICULTURE AND ALLIED SECTORS

3.3.1. Background

It is essential that an integrated holistic view of the agriculture value chain is taken towards providing the necessary

fillip to the stagnating agricultural growth. This requires a joint participatory approach from all concerned

stakeholders including the farmers, input vendors, traders, processors and the Government. The Union Budget can

be a very effective catalyst by laying down a comprehensive policy framework and providing a tremendous thrust

through appropriate fiscal benefits and closely monitor action plans.

We believe that an enabling policy framework with attractive fiscal incentives can be provided to attract private

investments in the rural economy. Private investment in agriculture and allied activities can provide the necessary

boost to the already committed Government spends and can have a multiplier effect in the rural economy. The under

noted suggestions and recommendations are being made in the aforesaid context.

3.3.2. Increase Investment in Agriculture and Allied Sectors

In the last budget there was no increase in funding for agriculture research. It is requested that funding to research

institutes like ICAR, state agriculture universities may be increased and a special fund created for fast track

development of high yielding varieties, hybrids and plantlets multiplied through tissue culture and other advanced

technologies under PPP mode. Similarly, a special fund may be created for research and development of high yielding

dairy cattle.

China has come up with a unique scheme where they have given a rebate to companies per unit of

Hybrid/plantlet/min tuber sold domestically for the particular crop that they want to promote. This has encouraged

companies to up production of this type of planting material.

3.3.3. Support Diversification in Captive Fishery through Innovative Financing

In order to realize the unexploited potential in fresh water fish farming, long line shark and tuna fishing, financial

assistance / incentives should be provided under special fund. This financial assistance could be provided through

soft loans, equity, risk covers and insurance, as well as through establishment of integrative farm to fork chains,

information and market intelligence, quality and safety measure.

3.3.4. Weather Stations

Government should announce a separate fund for investing in automatic weather stations in India as the expanded

network would help farmers in mitigating their risk through weather insurance products. Investments in automatic

16


weather stations should be eligible for direct tax incentive in the form of 100% tax holiday in respect of the profits

earned from this segment for a period of 10 years.

3.3.5. Model Farms

Companies be encouraged to set up model farms for farmer training and demonstration. New technologies,

equipment etc should get a 25 % subsidy subject to a maximum of Rs 5 Lakhs per farm and this should be disbursed

after at least 1000 farmers have been trained at the farm

3.3.6. Horticulture

Horticulture today accounts for about 28% of value added in the Agriculture sector and 52% of India's agri-exports

but takes up barely 9% of arable land. The Government has rightly identified the National Horticulture Mission as a

key driver of growth and value addition. This sector is also characterized by high wastages - up to 35% in the case of

certain fruits and vegetables. Large scale investments are required in cold chain infrastructure to minimize waste and

improve farmer realizations.

Cold chain infrastructure is not confined to cold storages only, but extends to temperature handling across the value

chain from farms to consumers. The cold chain thus includes farm level pre-coolers, small capacity chill cold storage,

refrigerated trucks, cold storages, food processing plants, refrigerated display cabinets for retail shops and deep

freezers.

In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural

wastage and enhancing shelf-life, it is recommended that customs duty rates on cold chain equipment and their

parts be pegged at 5% or below. Similarly, excise duty rates on cold chain equipment and parts need to be lowered to

5% or below to expand domestic manufacture, which is presently in its infancy.

3.3.7. Income Tax for Dairy Cooperatives

Under the prevailing taxation system, while primary dairy cooperatives at the village level are exempt from paying

income tax, the district and state level cooperatives are taxed at the rate of 35 percent. In 2006-07, the Government

reduced the income tax rate for private dairy companies by 10 percent but did not reduce it for cooperatives. In

order to strengthen the co-operative dairy sector, which occupies 18% of the sector the income tax rate for co-

operative sector needs to be brought at par with private dairy companies.

3.3.8. Other fiscal incentives for Cooperatives

Provide fiscal incentives to corporates aiming at increasing crop productivity and developing the entire supply chain

i.e. sorting and grading centres, warehouses, temperature and humidity controlled warehouses, cold storages,

temperature controlled transport up to consumer location. Grant fiscal incentives by way of 100 per cent

depreciation on all investments in physical assets like infrastructure development by the private sector in agriculture

and the entire agri-value chain. They should be given 100% tax holiday in respect of the profits of the undertaking for

a period of at least 10 years and further giving the assessee an option to claim this tax holiday for any 10 consecutive

years out of 15 years.

17


3.3.9. Tax exemption to Electronic Spot Exchanges

Electronic spot exchanges are directly connecting farmers to markets through purchase/sale of agricultural

commodities in the country, thereby, helping in evolving National Common Market by providing a Pan-India

alternative market across the country, for enhancement of farmers' price realization by reducing cost of

intermediation. Such an institutional framework merits Government support for full growth, therefore, the

Government may provide tax exemption to these spot exchanges for a period of 5 years.

3.3.10. Weighted Deduction for Water Harvesting, Conversation etc.

Investments made by companies in water harvesting, water conservation, repair and renovation of water bodies,

interlinking of small canals/river lets should be eligible for 150 per cent weighted deduction on expenditure. The

operation and maintenance of the above activities should also be eligible for similar benefits.

3.3.11. Excise duty exemption for Agricultural Machines

Excise duty and VAT exemption for agricultural machinery and equipments.

3.3.12. Service Tax Exemptions for Agriculture sector

Service tax exemption may be granted to the following services:-

• In terms of Notification No. 25/2012, S.T. dated 20/06/2012 exemption from service tax has been provided, inter-

alia, to services provided by a goods transport agency by way of transportation of fruits, vegetables, eggs, milk,

food grains or pulses in a goods carriage. It is recommended that the scope of exemption be enhanced to include

all agricultural produce including oil seeds, coffee, tea, spices and staples as well as marine products.

• As per extant Service Tax laws the agro-sector has been supported by keeping a bulk of services relating to

agriculture or agricultural produce in the Negative List or in the list of exempted services. However, there are

some services like Security Services, Laboratory Testing Services and so on - which are essential to secure storage

of agricultural produce and to determine quality of the produce - are subjected to Service Tax. It is

recommended that all services provided for agricultural produce be kept outside the ambit of taxable services.

3.3.13. Import Duty Exemption

Import duty exemption may be granted to the following items:-

• Laser Land Leveler and its components such as transmitter

• Machines for cleaning, sorting or grading seed, grain or dried leguminous vegetables

• Harvesting machinery; threshing machinery, root or tuber harvesting machines such as potato diggers and

potato harvesters

• Machines for cleaning, sorting or grading eggs, fruit or other agricultural produce

18


3.3.14. Tea Industry

• FICCI recommends that Indian Tea Industry be given interest subsidy @ 5% on the applicable rate of interest on

the funds specifically borrowed by the Tea Companies earmarked for the activities under the Special Purpose Tea

Fund i.e. replanting and/or rejuvenation etc ('SPTF').

• Tea producers are discouraged to take up developmental activities in their estates whether in field or in factories

due to inadequate subsidy component under the various Schemes of Tea Board. It is, therefore, prayed that the

rate of subsidy should be increased to 40% across the board on all the schemes under the aegis of Tea Board,

Ministry of Commerce (from the existing 25%).

• It is recommended to continue the benefit available under section 33AB of the Act even under the Direct Tax

Code.

• Orthodox Production Subsidy Scheme be included under the ambit of Section 10(30) of the Income Tax Act,

1961.

• FICCI recommends to provide financial incentive to encourage organic tea cultivation.

• Tea Estates are located in the remotest corners of the country and no alternate accommodation is available

locally, the managerial personnel, under force of circumstances, are to be provided with fully furnished

residential accommodation to enable them to attend their routine duties round the clock. It is therefore

suggested that for calculation of perquisites in respect of residential accommodation and for the value of

furniture provided to the employees working in the tea estate, such tea estate should be treated as 'remote

area', like those working at a mining site or an onshore oil exploration site, or a project executive site or an

accommodation provided in an offshore site.

• FICCI suggests that only 40% of the book profit of tea companies should be subjected to MAT. A suitable

modification in section 115JB of Act be made accordingly.

PAPER INDUSTRY

3.4.1. Customs Duty on Paper/Paperboards

The Indian Paper/Paperboard industry has made significant capital investments to ramp up capacities for meeting

domestic requirements. The Industry has strong backward linkages with the farming community, from whom wood,

which is a raw material, is sourced. A large part of this wood is grown in backward marginal/sub-marginal land, which

is potentially unfit for other use. In India an estimated 5 lakh farmers are engaged in growing plantations of

Eucalyptus/Subabul etc, over an estimated 10 lakh hectares. This has generated significant employment

opportunities for the local community and benefits have been reaped from this source, which are higher than other

commercial crops. It is therefore strategically important and also necessary to keep Paper/Paperboard industry

outside the ambit of FTA's (ASEAN etc) and recognize this Industry as “sensitive” deserving special treatment.

Increased imports from foreign countries are severely impacting the cost competitiveness of many paper mills in

India.

In order to provide a level playing field to the domestic industry it is recommended that:

19


(i) the Customs duty for import of Paper and Paperboards should be increased and brought in line with agricultural

products as currently industry is sourcing majority of its raw materials from Agro-forestry - supporting millions of

farmers in creating value on their marginal lands.

(ii) this category to be kept in the Negative List (i.e., no preferential treatment) in bi-lateral and multi-lateral trade

treaties and agreements.

3.4.2. Customs Duty on Import of Pulp

In May 2012 the Government reduced the import duty on pulp from 5% to “Nil”. More than 1,250 thousand MT of

pulp, valued at approximately USD 820 million (about Rs. 4,600 crores) is imported in to the country every year. The

customs duty for these imports is estimated to be about Rs. 230 crores per annum. The break-up of the pulp imports

is as under:

20

Type of Pulp Quantity ('000 MT)

Hard Wood Pulp

900 3,200

Soft Wood Pulp

200 840

Bleached Chemi Thermo Mechanical Pulp (BCTM Pulp) 5402.45 7.5

Total

1,260 4,580

Value (Rs. Crores)


In view of the fact that Soft Wood cannot be grown in the country and in the absence of BCTM technology in India,

requirements of Soft Wood Pulp and BCTM Pulp will have to be met through the import route only. However, in so

far as Hard Wood Pulp is concerned, it would be pertinent to note that the domestic industry is working closely with

the farming community for creating sustainable supply of wood - a key raw material for hard wood pulp - through re-

development of waste-lands.

Cheaper imports of duty free hardwood pulp would not be in the interest of Indian farmers as the benefit will flow to

farmers in exporting countries like Indonesia and Brazil.

Accordingly, for creation of sustainable sources of fibre required by the pulp and paper industry it is recommended

that:

(i) 5% customs duty on pulp be reinstated only for Hard Wood Pulp; and,

(ii) policy measures put in place to facilitate private sector participation in plantation development programmes.

3.4.3. Reduction of Excise Duty on Poly-coated Paper products - Central Excise Tariff No. 4811 59 00

Paper and paperboard that is coated / impregnated / covered with plastic is classified under Central Excise Tariff

4811 59 00 with an excise levy of 10% ad valorem - even as a large number of paper / paperboard items covered by

21

Central Excise Tariff 4802, 4804, 4805, 4807, 4808 and 4810 are exigible to excise duty only at 6% ad valorem.

Plastic coated paper and paperboard are essentially bio-degradable paperboard and are eco-friendly substitutes for

plastics which do not conform to requisite hygiene and environmental standards. The global trend is to actively

discourage the use of plastics and to replace it with plastic coated paper / paperboard.

In India the major consumers of this type of paper / paperboards are SSI / SME units engaged in manufacture of

paper cups that are increasingly being supplied to institutional customers like the Railways, the FMCG sector and the

household sector.

It is recommended that since SSI / SME units are not in a position to avail cenvat credit the excise duty on plastic

coated paper / paperboards, classifiable under Central Excise Tariff 4811 59 00 be reduced to 6% from 12% - in line

with most other paper / paperboards classifiable under Chapter 48.

3.4.4. Incentives for investments in environment friendly “Clean” technologies by paper industry

Today technology stands out as the most critical factor in achieving sustained competitiveness and industry

performance. Indian Paper Industry is a signatory to the Government of India's Charter on Corporate Responsibility

for Environmental Protection (CREP). This calls for substantial investments in green technologies such as introduction

of ECF (Elemental Chlorine Free) pulp manufacture, Ozone bleaching etc. to ensure a positive environmental

footprint.

In order to encourage manufacturers within the industry to adopt environment friendly “clean” technologies that

ensure, inter-alia, reduced carbon footprints, better emission norms, better effluent treatment norms, usage of

renewable sources of raw material and energy, improved waste recycling, etc., appropriate fiscal benefits should be

provided.

It is, therefore, recommended that:

(i) Import of capital goods required by the Paper & Paperboard industry for technological up-gradation - specially

aimed at environmental protection (e.g. Elemental Chlorine Free Technologies) and for compliance with CREP -

should be permitted at 'Nil' rate of Customs Duty.

(ii) Exports by manufactures who have adopted environmentally friendly technology should be granted additional

incentives in the form of duty credit-scrips etc.

(iii) Additional benefits like entitlement for import of raw materials at a 50% concessional rate of duty, full

exemption from excise and VAT taxes for paper and paperboard produced using clean technology, accelerated

tax depreciation @ 150% of the normal depreciation rates under income tax laws for investments on

environment friendly technology, should be provided to the industry.

These measures will not only promote preservation of ecology, it will also incentivize all players in the Indian Paper

Industry to adopt 'green' technologies, thus aligning domestic industry to international quality norms.


3.4.5. Plantations for pulp and paper mills on degraded waste lands

Planning Commission intends to bring 33% of land mass of India under tree cover. To achieve this objective nearly 43

million ha of land is to be afforested which includes development of degraded forest lands to the extent of 15 million

ha. This requires investment of more than 10 Billion USD over a period of 10 years.

The Government alone cannot muster required financial resources. Therefore private/public partnership is the way

forward to achieve the above targets. The industry has been making representations to Government to allot about

1.2 million hectare of waste land to meet its raw material requirements on sustainable and continuous basis and to

make it globally competitive.

The above would result in the following benefits:

(i) Employment generation - 77.4 million man days per annum

(ii) Continuous employment generation on a sustained basis

(iii) Pulp wood yield - 14 million metric tonnes per annum - resulting in meeting sustainable fibre requirement of

pulp and paper industry

(iv) Savings of foreign exchange to a tune of US $ 2 Billion per year

(v) Potential for carbon credits to a tune of US $ 36 million

(vi) Increase in forest cover resulting in attendant benefits.

It is recommended that appropriate policy changes are put in place to enable allotment of degraded waste lands to

the pulp, paper and paperboards industry for development through afforestation and watershed programmes.

HEALTHCARE

3.5.1. Infrastructure Status for Healthcare Sector

Though the government is progressively moving away from profit linked tax incentives towards investment linked

incentives, healthcare has never been accorded infrastructure status and thus has not benefitted from the related

provisions.

Infrastructure constraints have to be addressed meaningfully and with an eye on the future with burgeoning disease

burden coupled with a healthy growth rate in population. Immediate need of the hour is therefore to accord

“infrastructure status” to the sector for improvement in investment activity and enabling market forces to partly

address the issues faced. The following benefits should be made available:-

• Tax deduction of 100% of the profits and gains derived from operating and maintaining hospitals for a period of

ten consecutive assessment years, beginning with the initial assessment year in any 15 year period starting from

date of operation of hospital facility, anywhere in India. Accordingly, the savings that accrue to hospitals could be

ploughed back to expand hospital beds which would assist them in improvising the health care facility and the

bed to patient ratio.

22


•

• Any new capital expenditure towards replacement of old machinery / equipment, at any time, be entitled to

100% deduction

• Healthcare sector should be eligible for loans / financial assistance on a priority basis, at concessional rates, as

provided to the infrastructure sector.

3.5.2. Increase public spending on Healthcare

The proposal by the Planning Commission to increase the spending to 2.5-3% of GDP over the 12th five year plan is

the need of the hour and should be implemented on priority.

3.5.3. PPP Framework

• Free/concessional land and use of public healthcare facilities for private medical colleges in focus states.

• Private sector participation to be encouraged in promoting preventive and primary care with appropriate tax

incentives to primary health care chains operating beyond Tier 2 towns; and

• PPP model for private sector participation in screening and detection programs of the government.

3.5.4. Service Tax waiver on health insurance schemes

There is a pressing need to increase the safety net of health insurance in India. One measure that could help is

withdrawal of service tax on health insurance premiums, thereby leading to a lowering of cost/premium for the

consumer. Healthcare services are already exempt from service tax, and this benefit should be extended to health

insurance premiums.

3.5.5. TDS benefit on health insurance claims

In case of cashless arrangements of health insurance claims, the ultimate beneficiary of such health care services is

the individual. Therefore TDS should not be applicable on payments made towards settlement of claims by the

insurance company to the hospital on behalf of the insured.

3.5.6. R&D support

250% deduction of approved expenditure incurred on R&D activities related to indigenous development of medical

technology should be provided.

3.5.7. Technology Enabled Healthcare Services

250% deduction on approved expenditure incurred on operating technology enabled healthcare services like

telemedicine, remote radiology etc. should be provided.

Healthcare sector should be exempt from Minimum Alternate Tax

23


3.5.8. Electronic Health Record

To encourage move towards maintenance of EHR (Electronic Health Record), financial incentives/grants should be

provided to willing institutions. 250% deduction on investment made for the implementation of Electronic Health

Record (EHR) should be extended.

3.5.9. Compulsory Health Insurance for Employees

To promote Health insurance penetration in the country, it should be mandated that organizations insure every

employee for a minimum amount of Rs.1 Lakh. The employer should be allowed tax deduction on the premium paid.

Moreover, the employee should have the flexibility to increase this cover; the additional premium so paid should also

be tax exempt. This should be over and above the cover extended under the ESI, CGHS and other government health

insurance schemes.

3.5.10. Deduction for Preventive Health Check-Ups

The amount of tax deduction provided for preventive health check-ups introduced last year should be over and

above the provision of Rs 15,000 towards the health insurance premium paid under section 80D. This will definitely

incentivize people to undergo a preventive health checkup on a regular basis.

STEEL AND OTHER FERROUS METALS

3.6.1. Exemption to Coal used in Iron & Steel industry

Coking coal has been exempted from payment of Customs Duty vide S. No 122 of Notification No 12/2012-Customs

dated 17.03.2012. As per the explanation in the Notification, coking coal has been defined to mean “coal having

mean reflectance of more than 0.60 and Swelling Index or Crucible Swelling Number of 1 and above”

It has been reported that crucible swelling No. and swelling index are too technical and sensitive to test and the

departmental labs are not equipped to test these parameters creating delays and giving rise to litigation. Coals not

meeting the parameters in test but being used for metallurgical purposes in COREX / PCI / FINEX, are being charged

to duty as “Other coals” under sub heading 2701 19 90 at the rate of 5%. This has defeated the well intentioned

objective of the Government to provide relief to steel industry.

Although in the Budget 2012-13, the customs duty benefit of Nil customs duty is allowed to Steam coal (S. No 123 of

Not 12/2012-Customs dated 17.03.2012), there is still a doubt as whether the coal used in the manufacturing of steel

using Corex, Finex or PCI technology is covered under said entry.

It is accordingly requested that to simplify the process of granting exemption, the entry at sl. No. 122 may be

amended in the said notification 12/2012 - Customs to exempt “Coals for use in iron & steel making using any

technology such as Blast Furnace, COREX, PCI or FINEX”.

With the above amendment, all coals used in the manufacturing of Hot Metal / Steel will be brought on par for the

purpose of Custom Duty exemption.

24


Customs duty on Anthracite Coal (Heading No. 2701 11 00) and all such reductants should be reduced to Nil since

these are vital inputs for the Ferro Alloy industry as well as the pig iron industry.

3.6.2. Removal of Steel products from the ambit of Free Trade Agreement (FTA) with Japan & Korea

There is more than 300% increase in the import of steel in just one year from Japan & Korea. According to the Joint

Plant Committee of the Steel Ministry, imports went up to 2.88 million tonne during April-July of the current fiscal as

against 1.88 million tonne in the same period of last year, representing growth rate of 53%.

Effective rate of Customs Duty (BCD) is levied at 4.2% for Steel products falling under Chapters 7208.10 to 7229.90

for imports from Japan (Sl. No. 430 of Not No. 69/2011-Cus). Similarly, effective rate of Customs Duty (BCD) varies

from 2.2% to 3.125 % for steel imports from Korea (Sl. No. 532 to 540 of Not No. 152/2009-Cus).

In view of the discriminatory treatment for customs duty levy on imports from Japan & Korea owing to the Free

Trade Agreement (FTA) pact, domestic industry is severely affected. It is accordingly requested that urgent steps be

taken to remove steel items under chapter 7208.10 to 7212.60 from the purview of FTA.

3.6.3. Import duty on Graphite Electrodes and Refractory materials

Currently there is an import duty of 7.5% on 30” and 16” graphite electrodes & 5% for refractory materials. As there

is no sufficient domestic capacity for manufacture of these items and these need to be imported, consequently the

cost for the domestic producers is increased. It is accordingly requested that the import duty on electrodes and

refractory material may be reduced to Nil.

3.6.4. Import duty on steel grade limestone and dolomite

For Iron and Steel Industry, limestone availability was 4320 tonnes in 2008-09 (1.9% of total production) and 7664

tonnes in 2009-10 (3.3% of total production). While cement grade limestone reserves are adequate, SMS, BF and

Chemical grade limestone (required by the steel industry) are not and occur in selective areas. Increase in steel

production in the country, has led to rising demand for SMS and BF grade limestone. Limestone imports have been

increasing consistently and in 2009-10, it was imported primarily from Oman (40%), UAE (32%), Thailand (16%) and

Malaysia (5%). As the reserves of SMS and BF grade limestone within the country are scattered and there is a

capacity limitation of the existing limestone mines in various States, it is imperative that Customs duty on steel grade

lime stone (sub heading 2521 00 10) and dolomite (sub heading 2518 10 00) be reduced from 5% to nil as in the case

of coal, coke and steel scrap.

3.6.5. Import duty on HBI / DRI

Domestic Sponge Iron industry faces a threat due to sharp increase in imports of HBI / DRI from 50,000 tonnes in

2011-12 (April - August) to more than 3 lakhs tonnes in 2012-13. Imports are mainly from Middle East countries due

to lower costs because of availability of cheaper natural gas. There is urgent need to protect the investment made by

the domestic Sponge Iron industry by raising the import duty on ferrous products obtained by direct reduction of

iron ore (Heading 7203 10 00) from 5% to 10%.

25


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

Customs duty on Manganese ore (Heading 2602 00 10 to 2602 00 90), Chrome ore (Heading 2610 00 10 to 2610 00

90) and Molybdenum ore (Heading 2613 10 00 and 2613 90 00) and Vanadium oxides and Hydroxides under Heading

2825 30 and other salts of Oxometallic Acids (Vanadium Oxides Concentrates and Ammonium Meta Vanadate) under

Heading 2841 90 00 may be reduced to Nil from the existing 2.5%.

3.6.7. Customs duty on Natural gas used in steel manufacturing process

Imported Natural gas is charged to customs duty at the rate of 5%. In the 2011-12 budget exemption from custom

duty is granted to LNG imported for power generation by utilities. In view of the preference for supply of domestic

gas to the fertilizer and power sectors the only option for gas based steel plants is to import gas. The high price of

LNG is making gas based steel manufacturing unviable.

Gas used by Steel Manufacturers as process feedstock for manufacture of steel should be fully exempted from

custom duty so that these facilities remain commercially viable.

3.6.8. Project Imports

Consequent to the reduction in customs duty for the EPCG clearances from 3% to 0%, the project import duty which

was reduced from 7.5% to 5% for all the projects could not serve the intended purpose due to the apparent

advantages of EPCG licence. It is hoped that the project import duty would be reduced to 2% from 5% so that the

unnecessary burden of export obligations through EPCG route can be avoided. This would also encourage EPCG

licence holders to take recourse to the import of capital goods for the setting up of green field projects and

substantial expansions.

3.6.9. Customs duty on stainless steel flat products

There has been a considerable surge in the imports of Stainless Steel Flat products over the last three years (both in

Hot Rolled & Cold Rolled). Today, India is a 3rd largest market for Stainless Steel after China & European Union and

also has the highest growth rate next only to China. The Indian market is expected to grow 10% CAGR over the next 6

years. In order to cater to this growing demand, the domestic industry has put in massive investment towards

capacity enhancement and modernisation. However, China & EU are riddled with huge surplus capacities and

stagnant domestic demand in their respective countries. Therefore, the most expedient way for producers of such

countries is to divert their excess production to growing markets like India.

While domestic industry welcomes healthy competition, the recent surge in imports has been marked by rampant

price undercutting and massive circumvention of anti dumping duties imposed by the Govt. from time to time. The

time has come, the very viability of domestic industry is a question and domestic producers are now facing an

unprecedented challenge in terms of countering this threat.

It is submitted that the Basic Custom Duty (BCD) on Stainless Steel flat products may be increased from the existing

level of 5% to 15% in order to create a level playing field for the domestic stainless steel industry vis-à-vis their

overseas counterparts

26


27

3.6.10. Other duty changes

(i) Ship-building quality (SBQ) plates manufactured in India and used for vessels made in India must get the

deemed export status to match with duty free facility extended to imported SBQ plates

(ii) The refractory materials like mortar, mud gun mass, refractory cement etc. should be levied to import duty at 5%

instead of 7.5% to align with the prevailing 5% customs duty on refractory bricks.

(iii) Excise duty on directly reduced iron (DRI) of Heading 7203 10 00 may be reduced from 12% to 6% since the

rebars made through DRI-EAF/IF route are mainly used for housing for lower and middle class section.

(iv) The Central Excise duty on steam coal should be fully exempted.

3.6.11. Drawback Rate increase

After discontinuation of DEPB Scheme with effect from 01.10.2012 the new drawback rates have been declared. In

respect of the CRCA, Colour coated sheets and pipes, DEPB entitlement was much higher as compared to the

drawback rates now announced. Therefore the drawback rates for these items need to be revised suitably at the

level of earlier DEPB rates.

3.6.12. Shearing/Slitting/Annealing operations to be considered as Manufacturing activities under Central Excise

In order to service the just in time supply concept being adopted by the automobile industry the Steel manufacturers

have set up state of the art service centres for cutting /slitting of hot rolled/cold rolled/galvanized coils with a huge

investment of more than Rs 500 crores. At present the Shearing / Slitting/Annealing/Cutting operations of the Steel

products are not considered as manufacturing activities under Central Excise. Therefore the domestic producers have

to seek various permissions like Rule 16C from the Commissioner of Central Excise for sending such goods for job

work. Many times such permissions are either delayed or not granted resulting into substantial loss of value addition.

In order to simplify the procedure and at the same time to protect Government revenue, such operations may be

considered as normal manufacturing activities so that the manufacturers have another options to clear the goods on

payment of duties instead of being subjected to discretionary powers of granting permissions.

It is accordingly requested that appropriate amendments may be made for declaring processes such as shearing,

slitting, annealing as processes amounting to manufacture for the purpose of levy of central excise duty.

As an alternative, option to pay duty shall be made available to manufacturers who clear the goods to customers for

further manufacturing. Pickling and Oiling was treated as manufacturing in 2012 Budget.

3.6.13. Classification of Corex under Central Excise Tariff

Existing tariff entry 2705 of Central Excise schedule covers :

“2705: Coal gas, water gas, producer gas & similar gases other than petroleum gases & other gaseous

hydrocarbons.”

Certain doubts have been expressed about classification of Corex Gas under the aforesaid entry of heading 2705.


Blast Furnace gas is specifically mentioned in the heading 2705 of the HSN. Blast furnace gas & corex gas both

emerge as by-products in the process of manufacture of molten hot iron using, respectively, Blast furnace and Corex.

The manufacturing process involved in the blast furnace technology & corex technology is similar. The by-product

Corex gas is very similar in composition & use to coal gas & blast furnace gas covered under the tariff heading 2705.

However, in the absence of specific mention these gases under tariff entry 2705 a doubt is being created about

coverage of corex gas as 'similar gases 'under the said tariff entry. For removal of this doubt, either a clarification may

be issued or the aforesaid entry in heading 2705 may be amended to specifically include Corex Gas.

3.6.14. Review of Excise Duty Structure on “Patta -Patti”

The unorganised sector (normally referred to as Patta-Patti) in the Stainless Steel Industry currently accounts for

sizable portion of the stainless steel market in India. As per the estimates, the total production of Patta-Patti Sector is

around 1.1 million tons out of total Stainless Steel production of 2.4 million tons in India. This sector operates on the

basis of compounded levy scheme wherein they are exempted from paying excise duty on normal production and

are instead subject to a compounded levy of Rs.30,000 per machine per month. Since, this levy is not dependent on

production quantity and value; there is no compulsion on the Patta-Patti units to maintain production records for this

purpose.

This has resulted in a huge anomaly in Stainless Steel Industry because the organised units face a considerable

competitive disadvantage when compared to the Patta -Patti units. The organised sector is subject to 12.36% excise

duty whereas the Patta-Patti sector gets away with virtually zero duty. Moreover, even the incidence of compounded

levy is considerably diluted because of lack of exhaustive reporting regarding number of operational machines.

Moreover, most of these units don't have emission control equipments installed within their premises.

It is suggested that the duty structure applicable to Patta - patti units should be reviewed in order to create a level

playing field in Stainless Steel Industry.

NON-FERROUS METALS

Aluminum Industry

3.7.1. Increase in Basic Customs Duty on Aluminium Products from 5% at present to 10%

Indian Aluminium industry has been facing pressures from both sides - realizations and costs. Its competitiveness has

been threatened. Imports of Aluminium products have been rising sharply. Data from DGCIS/IBIS shows that average

monthly imports of unwrought aluminium into India have increased from around 15,000 tonnes in FY09 to over

20,000 tonnes per month during April-August 2012. The rising imports are happening at a time when the domestic

industry has been putting up huge investment projects in the country.

To provide a relief to the industry it is requested that the basic customs duty on Aluminium products (Heading Nos.

76.01 to 76.16) may be increased from 5% at present to 10%.

28


3.7.2. Bringing Customs Duty on Scrap at par with Aluminium

For all base metals other than Aluminium, the import duty on scrap in India is same as the duty on the metal. It is

only in case of Aluminium that the duty on scrap is Nil, while duty on aluminium products is at 5% at present.

In most of the Aluminium downstream products, scrap and primary aluminium can be used almost interchangeably.

The differential duty structure seems to be, therefore, leading to a substitution of primary aluminium by scrap -

reflected in a sharp rise in imports of scrap (CH 7602). Between FY09 and FY12, import of aluminium waste and scrap

has increased at a CAGR of 33%.

Scrap imports are causing an immense harm to the Indian aluminium industry due to market diversion.

To prevent the market diversion and adverse implications of rising scrap imports and to bring Aluminium scrap on par

with the scrap for other base metals, it is requested that the basic customs duty on Aluminium Scrap (CH 7602) may

be raised and brought on par with the duty on Aluminium products.

3.7.3. Imposition of Export Duty on Bauxite

India has the sixth largest reserves of bauxite in the world. However, this natural advantage is being negated in the

recent years as many alumina refineries (for whom bauxite is the basic raw material) in India are finding it difficult to

source bauxite of an appropriate quality. Partly, this has been due to delays in mine clearances and the expansion of

alumina refining capacity in India over the recent years.

The problem has been further intensified by the export of bauxite from India. China has been adding alumina

capacities very aggressively over the last few years, leading to increased demand for imported bauxite. In the recent

past, Indonesia - which was a major source of bauxite for China - has imposed restrictions on export of bauxite. With

these developments, exports of bauxite from India have increased sharply. As per DGCIS data, India exported 414

thousand tones of bauxite during Apr-Dec12, which was significantly higher than the export of 101 thousand tones

during FY11.

Consequently, domestic bauxite availability has become challenging. Some refineries have been forced to curtail

production in the recent months due to non-availability of bauxite. Deterioration in quality of bauxite also increases

the conversion cost for refineries.

Bauxite is India's natural advantage and it does not make economic sense to export it without value addition. This is

effectively export of jobs - while endangering the long-term resource security for the domestic aluminium industry

that is putting up huge expansion projects.

To ensure more value addition within India, it is requested to impose export duty on bauxite - in line with the export

duty on iron ore.

3.7.4. Reduction of Excise duty on Aluminum products

Due to high price of aluminum products in the country, the consumption of aluminum has been declining steadily

during the last 5-6 years. Unless aluminum is made available at an affordable price to the common man, other

29


substitutes such as plastic, wood etc. would continue to threaten the environment. Under the circumstances, excise

duty on aluminum extrusions be reduced from 12% to 8% in order to encourage the use of aluminum products in

day-to-day life.

3.7.5. Exemption from Excise duty on Aluminum Irrigation Pipes and Tubes

The price of aluminum metal in India is the highest in the world primarily due to the high customs and central excise

duties. The farming community has shifted from aluminum extruded agricultural pipes to the cheaper PVC pipes

though aluminum pipes have longer life and high re-sale value. It is requested that agricultural pipes and tubes used

for irrigation purposes should be exempted from the levy of excise duty to benefit farmers and contribute to the

agricultural production in the country.

3.7.6. Reduction in Duty on Aluminium Fluoride from 7.5% at present to 5%

Aluminium Fluoride (AlF3) is a critical input in manufacturing of aluminium. Considering the expansion projects of

Aluminium producers in India, the requirement of AlF3 is projected to increase from around 35,000 tonnes at

present to over 87,000 tonnes in the next 3-4 years. As against this, the domestic production was only 13,904 tonnes

in FY12.

The duty on AlF3 is higher than the present basic customs duty on Aluminium, leading to a situation of inverted duty

structure.

Considering the inevitability of imports of Aluminium Fluoride in India given the small domestic production base and

to address the inverted duty structure, it is requested to reduce basic customs duty on Aluminium Fluoride (CH

2826.3000) from 7.5% at present to 5%.

3.7.7. Reduction in Duty on Coal Tar Pitch from 10% at present to 5%

Coal Tar Pitch is another critical raw material for producing anodes which are used in the manufacturing process of

Aluminium.

To address the inverted duty structure, it is requested to reduce basic customs duty on Coal Tar Pitch (CH 2708.1010)

from 10% at present to 5%.

Copper Industry

3.7.8. Reduction in Basic Customs Duty on Copper Concentrate from 2.5% at present to NIL

The sharp reduction in treatment of refining charges - the key value driver of the industry - along with the continued

cost pressures, have affected the viability of the copper smelting industry. Over the years, the duty differential

between refined copper and copper concentrate has been compressed from 30% at the turn of the century to just

2.5%. At present, the duty on refined copper is 5% while the duty on copper concentrate is 2.5%. This tiny

differential, in a conversion business where TCRCs are less than 5% of the turnover, is hardly adequate.

30


It may be also noted that copper concentrate is starting point of the value chain for this strategically important

industry, and is not available in India.

31

To sustain the viability of the custom smelting model in Indian refined copper industry, it is requested to exempt

copper concentrate (CH 2603) from basic customs duty.

3.7.9. Exemption of Gold and Silver content in copper concentrate from Countervailing Duty and Additional Customs Duty

As per the present duty structure, import of Gold and Silver in pure form or as Dore anode, does not suffer

countervailing duty and additional customs duty at the time of import. However, the value of gold and silver content

imported through copper concentrate under chapter no 2603 attracts Countervailing duty @10.3% and additional

customs duty @4%. These duties are revenue neutral as the same are allowed as credit for set off on a later date.

However, there is a financial hardship to the copper smelters as huge money is blocked in the process. At the present

market valuation, the duty incidence is as high as Rs. 427,068/ Kg of Gold (ref. table below)

It is requested to exempt Gold and Silver content in copper concentrate (CH 2603) from Additional Customs Duty and

Countervailing Duty - as a revenue-neutral measure that will ease the financing burden for copper industry.

3.7.10. Technical correction in the notification regarding Exemption of Customs duty for import of Gold and Silver content in Copper Concentrate

In the Union Budget 2011-12, the Government had exempted gold and silver content in imported copper

concentrate (CH 2603) from basic customs duty to encourage production of precious metals through the copper

Type of Pulp UOM

Exchange Rate

Rs/USD 55.8

LBMA

USD/Tz 1660

Refining Charge

USD/Tz 4

Amount

Assessable Value

Customs Duty

CVD

Additional Duty

Total Duty Implication

CIF Value USD/Tz

Rs/Kg

Rs.

%

Rs.

%

Rs.

%

Rs.

Rs/Kg

1656

2874113

2902854

0

0

10.3

298994

4

128074

427068


concentrate route. While this was a welcome move, the notification (Notification No. 24/2011) incorporated that the

exemption is “subject to the condition that the importer produces ….. an assay certificate from the mining company

specifying separately, the value of gold and silver content in such copper concentrate.”

It may be mentioned that a significant quantity of copper concentrate is procured from traders or from trading

companies of the miners. This trade route has been inadvertently left out of the notification - which needs to be

corrected.

It is requested to amend the notification regarding exemption of gold and silver content in copper concentrate from

basic customs duty so as to make the assay certificate from the supplier of concentrate as an adequate condition

rather than assay certificate from the mining company. This is a technical modification without changing the intent of

the condition, and will ease the fulfillment of condition for import of copper concentrate for all existing routes.

3.7.11. Reduction in the Duty on Furnace Oil from 5% at present to NIL

Furnace oil is a critical input for Aluminium industry accounting for nearly one-tenth of the input costs. In the recent

past, furnace oil prices have been increasing continuously - in a sharp contrast to the generally declining trend in

international commodity prices and in aluminium. During FY12, furnace oil prices have increased by more than 40%.

This is creating a serious impact on the Aluminium industry, along with the impact on other user industries.

Considering the sharp increase in furnace oil prices and the burden thereof, it is requested that the duty on furnace

oil may be reduced from 5% at present to NIL.

SOLAR ENERGY

3.8.1. Background

The policy framework put forth by the Ministry of New and Renewable Energy (MNRE) through the National Solar

Mission has accelerated the growth of the solar industry in India. However, there are some larger issues before the

developers, manufacturers, Engineering, Procurement and Construction (EPC) system integrators and associated

solar energy stakeholders in India. While MNRE is taking steps to address the technology and on-ground risk

perceptions through knowledge management and sharing, there is a need to provide various fiscal measures to

Indian solar industry to enable development of high quality low cost projects and a strong solar manufacturing base

to develop India as a hub of solar energy of the world.

The FICCI solar energy task force, representing the entire value chain of the solar industry, recommends the following

points to be included in the Union Budget 2013-14.

3.8.2. Financing of Solar Energy Projects

One of the biggest challenges that Indian solar industry faces, be it project developers, manufacturers or EPC

companies, is the availability of funds at competitive interest rates. It is estimated that the difference between the

lending rates of Indian banks and that of foreign lenders is around 10%. This difference puts pressure on the solar

energy industry resulting in increase in the price of indigenously manufactured solar equipment or per unit cost of

solar power generation. In addition to non-availability of low cost funds, availability of readily available funds is also a

challenge. Low cost funds can provide a competitive edge to the Indian solar value chain.

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3.8.3. Bankability-Renewable Energy Sector as an Independent Sector

Considering the necessity for setting up projects on renewable energy source especially solar to meet the Jawaharlal

Nehru National Solar Mission targets, renewable energy should be treated as a separate sector. This will enable to

promote the renewable energy projects as well as establish grid parity.

As per the prevalent banking practice, advances to renewable energy sector are accounted in power sector exposure

limits. Further the power sector needs to grow to achieve the planned growth at an average debt funding

requirement of Rs 2 lakh crores per year in the 12th Five Year Plan (2012-2017). The funds available for power sector

will be inadequate to support renewable energy projects included in power sector. This leads to an extra pressure on

the manufacturer and developer in obtaining project finance from Indian banks as these projects are compared with

other conventional sources.

Being a nascent technology in India, despite favorable policies and support being provided by the Central

government and various State governments, lenders are reluctant to provide financing to solar energy projects.

Taking into account the above consideration, there may not be enough headroom for accommodating renewable

energy sector under power sector exposure ceiling norms, which will affect the debt funding of renewable energy

sector. Thus this necessitates a paradigm shift of banks' treatment of renewable energy sector as a sector different

from power sector having separate exposure ceiling norms.

It is recommended that Renewable Energy projects should be removed from power sector exposure limit and a

separate category for Renewable Energy is created.

3.8.4. Priority Sector lending

Considering the environmental and socio-economic benefits and contribution to energy security, Renewable Energy

Sector should be given priority sector lending status to promote both grid-connected as well as off-grid projects.

3.8.5. Low Cost Finance

In India, the rate of finance is high (13-14%) in comparison to other countries such as China (3-4%) and Germany (5-

6%). Higher cost of debt financing for solar project development or manufacturing has been a deterrent in its growth

and makes them vulnerable to foreign lenders' terms and conditions. The debt from the foreign institutions come

along with riders and force developers to accede to their terms and conditions.

It is suggested that the following steps be taken to make financing attractive for solar projects in India:-

(a) To create a separate low cost fund. The financing of projects through separate low cost finance would not only

help in reducing the solar power tariff but will also help in eliminating subsidy over time. Low cost funds will also

allow developers to choose their suppliers and thus provide a competitive platform for Indian solar manufacturers to

compete with global counterparts. Low cost finance should be made available to manufacturers of solar power

equipment as well.

33


(b) The solar energy sector should also be supported through interest subsidy on the loans and this subsidy could be

provided through the National Clean Energy Fund.

(c) The solar energy sector needs to have access to long term External Commercial Borrowings (ECBs) at reduced

rates. Government intervention is needed to work with banks to create a hedging mechanism. The industry at

present is paying around 5% to hedge foreign exchange risk resulting in additional burden on the cost of the project.

Government and banking sector should work towards developing solutions for hedging. One example could be to

take care of foreign exchange risk by allocating 1% of foreign exchange reserve towards hedging foreign exchange

risks associated with the solar energy sector. This would bring down the cost of solar power from current Rs8-9 to Rs

7-8.

3.8.6. Payment Security

Though the Central government has provided Gross Budgetary Support of Rs. 486 crores towards payment security

mechanism, lenders are still wary about off-taker risk in the event of default including the payment capability of state

electricity boards (SEBs)/Discoms due to their weak financial health.

While considering debt restructuring of discoms, it is requested that debt restructuring be done with the

conditionality of improving Transmission and Distribution losses and directive be given to the concerned authorities

for making reasonable tariff revisions annually.

Considering the technological limitations of the renewable energy sector, a clause for time bound payment may also

be provided to ensure payment security to this sector.

3.8.7. Tax holidays

Solar industry being an industry with strategic significance for not only energy security but also for improving energy

access requires economic and financial support from the government. A long term tax holiday should be extended to

Solar Energy Projects to act as a catalyst for the growth and development of the sector. The following

recommendations may be considered:-

(a) Tax holiday of 10 years on solar power projects should be announced under section 80 I(A) of Income Tax act.

(b) For taking benefits under Section 80 (I) (A), the projects are required to be completed within the same financial

year. Every year the Government extends it for one more year. Therefore, it effectively leaves less than a year for

an entity to complete the project to avail these benefits. It turns out to be uncertain for the developers who wish

to venture into a long term project.

It is suggested to extend cutoff date for availing the benefits under Section 80IA till year 2017 (end of 12th Plan)

to give a boost to grid connected solar PV projects in the country.

(c) To promote development of solar energy projects, companies engaged in the business of generating power from

grid connected solar PV projects should be exempted from payment of Minimum Alternate Tax under Section

115JB of the Income Tax Act.

34


(d) The investments made in solar photovoltaic and solar thermal manufacturing should be given accelerated

depreciation to claim IT benefits as given to the power plants that use the solar panels. The rates of depreciation

under Income Tax Act for solar power generating systems, solar modules and flat plate collector are 80%, but

there is no provision for manufacturing companies involved in solar market. 80% depreciation should be

provided to the manufacturing companies and 100% depreciation benefits should be extended to companies

installing large MW scale solar systems.

(e) Manufacturing cost of the indigenously manufactured solar equipments increases due to Customs and Excise

duties on some of the raw materials used by Solar Photovoltaic industry. It is suggested to remove or reduce the raw

material used in the manufacturing of solar photovoltaic cells and modules. On raw materials used by multiple

industries, an end use certificate may be mandated to avail such benefits by the photovoltaic manufacturing sector.

(f) As Government of India is trying to promote Solar Energy, growth of domestic industry will be very critical to meet

the objectives and success of JNNSM. All forms of tax including CST, VAT & service tax etc should be waived off on the

equipments and machinery used in grid connected and off grid solar energy projects and on input services for a

period of five years specifically during the entire 12th five year plan period.

3.8.8. Provision of Incentive in Personal Income Tax for Implementation of a Solar Energy System

Provide incentives on the Personal Income Tax payable by individuals who are implementing Solar Photovoltaic or

solar thermal systems for domestic use by either procuring Solar Products such as Lanterns, Solar Water Pumps etc

or implementing solar installations such as Solar Rooftop System, Solar Home Lighting etc. Individuals can have the

option of availing either the subsidy or the deduction of interest on loan from income as it is done in case of housing

loan.

USA and Netherlands have such schemes available wherein the tax payer (individual) can either claim subsidy or tax

incentive for implementing and/or purchase of solar products/ installations. This would help in promoting solar

energy applications across the country.

3.8.9. Technology Up-gradation Schemes for Solar Manufacturing and the Supply Chain

A special incentive package to upgrade the facilities for substituting costly raw materials with cost effective raw

materials should be introduced. This will help the industry to tide over the constant technology up gradation that is

taking place in the photovoltaic and solar thermal industry and remain cost competitive and avoid obsolescence.

Grants to the tune of 25% of investment should be provided to local manufacturing industry for up gradation of unit

to overcome obsolescence.

OIL AND GAS

3.9.1. Tax Holiday for Exploration and Production activities relating to Natural Gas including Coal Bed Methane

To avoid uncertainty, it is important Government should clarify that for the availability of tax holiday, the definition of

'mineral oil' includes natural gas retrospectively irrespective of the NELP round and that the benefit would also be

35


available to Coal Bed Methane. In other words, it should be explicitly provided that the term 'Mineral Oil' will include

Natural Gas, including to CBM for all past and future rounds of production of Natural Gas.

3.9.2. Scope of “Undertaking” for the purposes of tax holiday

The limitation of the tax holiday for oil & gas to a single undertaking based on a single PSC is regressive and

inconsistent with the construct of tax holidays for other sectors. This should be amended to define an 'undertaking'

(consistent with the judicial decisions) that each distinct field development evidenced by a separate development

plan should be an undertaking eligible for the tax holiday. This is all the more important as the amendment has been

made retrospectively and declaring each block as a single undertaking, that too with retrospective effect, will

adversely affect the profitability of operators.

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

Extend the benefit under section 80-IB(9) of the Income Tax Act from 7 years to 10 years to companies engaged in

production of mineral oil and natural gas. It may further be provided that benefit under section 80-IB(9) of the Act

shall not be restricted only to blocks licensed under a contract awarded till March 31, 2011 and the period March 31,

2011 be extended till March 31, 2017.

3.9.4. Section 80-IA be amended to include exploration and refining activities

Definition of infrastructure sector in the explanation to Section 80-IA of the Income Tax Act should be amended to

include exploration and refining activities. Accordingly, exploration and refining undertaking may be allowed

deduction for 10 consecutive assessment years as against 7 years at present out of 15 years period.

3.9.5. Deduction of expenditure covered under section 42 of the Act

It would be appropriate to provide a suitable encouraging weighted deduction of say, 150% of the actual expenses

incurred by the assessee, in respect of drilling and exploration activities etc. covered under section 42 of the Act.

The benefit of infructuous or abortive expenditure should be given in the year of incurrence of expenditure without

any condition of surrender of block as mentioned in section 42(1)(a) of the Act.

The Ministry of Finance in consultation with the Ministry of Petroleum & Natural Gas should amend all PSCs in

respect of Exploratory Blocks to provide that the allowances specified in the PSCs with respect to section 42 of the

Income Tax Act would apply in addition to the allowances provided under the Income Tax Act under other provisions

while computing income tax payable by a Contracting Party under the PSC.

3.9.6. Extension of period under Section 80 IB (9) for refining projects

As the completion of various refinery projects is likely to get delayed, it would be appropriate that the validity of the

deduction be extended from 31.03.2012 to 31.03.2015 in order to ensure that the intended benefit of deduction is

availed for the said projects.

36


3.9.7. Allow set off loss under section 35AD against profits of any other business

Under section 35AD of Income Tax Act, 100% deduction in respect of capital expenditure incurred (other than land,

goodwill and financial instrument) prior to commencement of operation of the specified business to the assessee

engaged in laying & operating a cross-country Natural Gas/Crude/Petroleum pipeline network for distribution is

allowed.

Section 70 provides that in case of loss under any head of income (other than Capital gains), assessee is entitled to

set off such loss from any other source of income under the same head. Therefore loss from one business can be set

off from profits of other businesses. However section 73A provides that loss computed under section 35AD will be

set off only against profits & gains of Specified Business and Specified Business inter-alia includes business of laying

and operating a cross-country natural gas (laid after 01.04.2007) or crude or petroleum oil pipeline network for

distribution, including storage facilities being an integral part of such network. This restricts the claim for adjustment

of loss from profits of other income which is allowed otherwise in all other cases. This discrimination needs to be

removed

In the initial 3 to 4 years there may be no profit in Specified Business of an assessee. Therefore section 73A appears

to be restrictive and unfair to the assessee. It is suggested to allow set off of loss under section 35AD against profits

of any other business carried on by the assessee.

3.9.8. Exemption for various services provided to Exploration & Production (E&P) companies

Oil and Gas exploration & production is a capital intensive industry. The capital expenditure is very significant given

the nature of business. Goods required by E&P Companies are exempt from customs / excise duties, however,

various services availed by the E&P Companies are subject to the levy of a service tax. The service tax so paid is a

cost to the operator, since excise duty on production of oil and gas products is wholly exempted.

This levy of service tax thus increases the cost of exploration activities and reduces the funds available for

exploration. The recent introduction of Negative List based taxation of services has further increased the service tax

burden. Since exploration is a non-revenue generating activity, special incentives should be offered to encourage

exploration initiatives in the country. Accordingly, services provided to companies engaged in Exploration and

Production of oil and gas should be exempted from service tax.

On the same analogy, various services imported by the E&P companies could be considered for exemption. Such

services should be included in the negative list of services.

3.9.9. Customs Duty Exemption for all items required for Oil and Gas Exploration

Currently, Sr.No.356 of notification No. 12/2012-Customs dated 17.03.2012 exempts all items covered by List 13

when imported for petroleum operations. While the notification obviously intends to cover all items critical to carry

out the “petroleum operations”, which would include not only the items required for drilling but also the extraction

of the oil and gas using equipments such as compressors, pumps, processing and refrigerating equipments, etc. some

of these equipments may also be installed in an onshore terminal and yet essential for the completion of the

37


petroleum operation. S. No. 9 of the list 13 currently covers only items required for production, processing and well

platforms. Therefore, items required for petroleum operations and installed on-shore should be specifically covered

in List 13.

It is requested that the entries against S.No.9 of List 13 of Notification No.12/2012-Cus dated 17-03-2012 may be

replaced as follows: -

“Subsea/Floating /Fixed Process, Production and well platforms and onshore facilities for

storage/production/processing of oil, gas and water injection including items forming part of the

platforms/onshore facilities and equipment/raw materials required like process equipment, turbines,

pumps generations, compressors, prime movers water makers, filters and filtering equipment, all types of

instrumentation items, control systems, electrical equipments/items, oil improvement, construction

equipment, telemetry, telecommunication, tele-control security, access control and other material required

for petroleum operations".

3.9.10. Customs exemption to Rig imported for Oil & Gas Exploration

Currently goods specified in List 13 of notification No.12/2012-Customs dated 17-03-2012 required in connection

with petroleum operations undertaken by ONGC and Oil India Limited (OIL) are exempted under Sr.No.356 when

imported by ONGC/OIL or the contractor of ONGC/OIL. However, in some cases, the contractor may engage a sub-

contractor to execute some of the work for ONGC/OIL. Since imports by the sub-contractor are not explicitly covered

in the notification (condition 41 of the notification) there may be some objection in extending this exemption to the

sub-contractors though the goods are intended for the notified purpose.

It is accordingly requested that the condition 41 of customs notification No.12/2012 dated 17-03-2012 may be

amended to permit import of the goods either by ONGC/ OIL or contractor of ONGC/ OIL or a sub- contractor of such

contractor subject to fulfilment of the prescribed conditions.

3.9.11. Exemption for onshore Exploration and Production (E&P) activities

An exemption has been provided to the parts and raw materials for manufacture of goods to be supplied in

connection with the purposes of offshore oil exploration or exploitation. Under the above exemption similar benefits

are not provided in relation to the petroleum operation carried out onshore.

This structure was introduced when petroleum operations were at a nascent stage in India. However, the recent

onshore discoveries have highlighted the fact that such an opportunity also exists onshore and benefit should thus

not be restricted to the offshore areas alone.

It is requested that the benefits extended to the offshore oil exploration activities (Sl. No, 357 of the customs

Notification no. 12/2012) should also be extended to the onshore oil exploration activities to provide the operators a

level playing field.

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3.9.12. Levy of Service Tax on Transmission Charges Included in Sale Price of Gas

Presently, Natural gas is sold to the customer including transportation to customer's premises as a bundled activity.

The transmission charges form part of Sale price and VAT is being paid on the component of transportation charges

(forming part of sale price). Accordingly, service tax should therefore not be chargeable on the component of

transmission charges. However, service tax on the component of transmission charges is being demanded by local

officers resulting in double taxation.

As there has been huge litigation in past over taxability on certain services which are as such part of supply of goods

or treated as supply of goods under various state statutes thereby resulting in double taxation of both VAT and

service tax on the same value which could never be the intention of the government.

It is suggested that CBEC may like to consider and issue a suitable clarification that service tax will not be payable on

any activity associated with transaction of sale where the component of value relatable to such activity forms part of

total sale price and attracts VAT/CST under CST/VAST laws.

Alternatively, “any activity integrally connected with transaction of sale wherein the component of value relatable to

such activity forms part of sale price under CST/VAST laws” may be added in the exclusions to the definition of

'service' under sub-section (44) of the new section 65B.

3.9.13. Exemption to LNG from customs duty for use in power sector

Liquefied Natural Gas (LNG) and Natural Gas (NG) imported for generation of power have been exempted from

Customs duties vide notification No 12/2012- Cus Dated 17.03.2012.It may be appreciated that the above exemption

may not result in any real benefit to power generating companies as it stipulates a very harsh condition requiring

them to import LNG/NG directly. R-LNG/Natural Gas is supplied to power generating companies by pipeline

companies like GAIL, GSPC etc. as per their requirement which varies from time to time. The Power generating

companies normally do not have a requirement of the size that they can import a full cargo on their own. Further,

power companies do not have storage facilities in their plant where surplus RLNG/NG could be used at a later date

for generation of power/electrical energy. The above exemption in present form is ineffective and inadequate for

power sector.

In view of above, it is suggested that the custom duty exemption to LNG/Natural Gas may be granted on imports

made by any person subject to its 'end-use' for generation of power with suitable safeguards.

3.9.14. Other

Import duty exemption on LNG should be extended to all sectors & not just power, aligning it with crude petroleum.

Swapping of gas should not attract taxes of any kind, if the swaps are made through the Ministry of Petroleum and

Natural Gas as a part of the policy measure.

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ENVIRONMENT SECTOR

Following proposals may be considered for improving the environment:-

3.10.1. National Clean Energy Fund

1. Develop an effective and efficient funds utilization framework, enabling commercial banks to lend to and invest in

Renewable Energy, Energy Efficiency & Water management/recycling projects.

2. Incentivizing commercial banks to develop and launch fund raising instruments of their own for the purposes of

easing/facilitating environmental project financing.

3.10.2. Municipal Services (Solid Waste and others)

1. Decentralized segregation and organic waste processing should be incentivized. This could be done through

penalties for noncompliance and incentives through municipality purchasing compost at rates attractive to organic

waste processers.

2. Collection and Transportation of Municipal Solid Waste (MSW)

• Grant should be provided for Solid Waste Equipment like Mini Tippers, Refuse Compactors, Tipper Trucks,

Garbage Bins, Garbage Containers, Power Sweeping Machines, Hook Loaders-Bulk Transportation, Garbage

Compaction Units, as all solid waste management concessionaires have to purchase or import some of them as

well due to lack of a quality product in India. They should be given the status of pollution control equipment

when they are imported/purchased against a work order under MSW Rules 2000 and duties should be levied at

concessional rate / nil rates.

• Activities related to management of Solid Waste should be exempted from Service Tax (by adding it to the

negative list of the Services)

• Provision of support in the budget for recycling and process outputs (output based) which will ensure better

Operations and Maintenance of existing processing facilities

3.10.3. Incentives for Processing of Municipal Solid Wastes

• 100 % depreciation in the first year for investment in wastewater recycling, waste recycling, green belt, E-waste

processing plant, advanced pollution control technologies such as flue gas de-sulphurisation, advanced

wastewater treatment such as MBR, ozone treatment, etc;

• Exemption of VAT for manufacturers and custom duty exemption for importers of advanced pollution control

equipments/systems [like flue gas de-sulphurisation, advanced wastewater treatment such as MBR, ozone

treatment, environmental monitoring instruments for air quality, stack emission, noise monitoring, water

quality, composting process control, compost quality monitoring, etc]; and

40


•

treatment plant, MSW sanitary landfill facilities, E-waste processing facilities & transport of industrial waste, E-

waste, other wastes, etc to authorized treatment, recycling or disposal sites.

• There should be enablers for recycling waste through reasonable “gate fees” for units that would recycle plastics,

paper/cardboard, metals, etc.

• Composting of Municipal Solid Waste: Marketing support of Rs. 2320 per ton of Fertilizer Control Order (FCO)

compliant city compost in order to provide compost to the farmers at an affordable price and enhance organic

Carbon in the soil to improve productivity.

• 100% of the compost produced through treatment of municipal solid waste should be purchased by the Urban

Local Bodies subject to meeting the quality norms. The purchase price of the compost should recover full costs

like the fixed costs and variable costs including the predetermined profit margins for the developer/operating

agencies. 50% of the purchase costs should be borne by the central government for a period of ten years while

the remaining 50% of the purchase costs should be borne by the state government.

• The municipal finances in India are in precarious state. The tipping fee in India is very low compared to the rates

in other parts of the world. The Municipal Solid Waste Management industry serves a huge population base and

helps in pollution control - both air and water. Therefore, on the grounds of non availability of indigenous

products in India, the industry seeks a reduction in customs tariff if the equipment is used for projects under

MSW Rules 2000. Also duty concessions and exemptions should be given to cement industry on Waste Heat

Recovery systems and Alternative Fuel and Raw Material Feeding systems.

• Construction & Demolition (C&D) waste management projects: Excise duty exemption for inputs and products

made from recycled C&D waste (such as the precast products like kerb stones, pavement blocks and tiles made

from the processing of Construction & Demolition waste).

• Waste to Energy: Electricity tariff support for Waste to Energy projects at Rs. 8/KWH similar to Solar power.

These output oriented supports will greatly help in ensuring processing of municipal waste which in turn will reduce

the indiscriminate dumping of waste.

3.10.4. Sewage Treatment

• 100% of the bulk treated water should be purchased by the Urban Local Bodies subject to meeting the quality

norms. The purchase price should ensure full cost recovery including the predetermined profit margins for the

developer/operating agencies. Union Government should give 25% subsidy on the capital costs and also give

viability of funding for sustained operations.

• Provision is requested in the Union Budget 2013-14 for financial aid in terms of 50% subsidy, for manufacturing

industries for development of effluent treatment facility by which zero liquid discharge status can be achieved in

line with the concept of 4Rs (Reduce, Recover, Reuse and Recycle). This will be helpful not only in protecting the

environment but also saving scarce valuable natural resource - water.

Service tax exemptions for Operation and Maintenance of centralized / common wastewater / industrial effluent

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3.10.5. Carbon Revenues

To motivate the Corporate Sector to engage further in green house gas (GHG) emissions reduction projects, income

derived from sale of Certified Emission Reductions (CERs) should be exempted from income tax. It should be treated

as Capital Receipt and not charged to Tax, since CERs are generated from huge investment in capital intensive

projects with low return on investment. Moreover, CDM projects receive CERs after deduction of 2% by UNFCCC as

Adaptation fund and another 2% needs to be committed for CSR activities. CERs are export products which are sold

to developed countries to meet their emissions reduction targets and are of no use in the Indian market. Therefore

these carbon credits may be treated accordingly as Export products and accorded similar benefits.

3.10.6. Incentives to promote green environment

Country is facing serious problem on deteriorating environment and it is seen that approximately 30% of municipal

waste comprises of different kinds of packaging waste like plastic, metal, glass, paper etc. which are being used by

different segments of the industry. In order to encourage the user industry to use and promote more and more

packaging materials which are environment friendly and recyclable, the Government should announce schemes to

provide incentives either in the shape of refund of indirect taxes, providing subsidies or Income tax exemption and

also concessional import duties for Capital Goods used to manufacture such packaging materials.

3.10.7. Energy Efficiency

1. Financial incentives should be extended to Demand Side Management (DSM) projects, particularly for Municipal,

Hospital, Infrastructure (i.e. Transportation, Water, etc.). Incentives may be in the form of inclusion in PAT

mechanism, Interest Subsidy, etc.

2. Subsidy/grants should be given for preparation of Detailed Energy Audits and Investment Grade energy Audits.

3. DISCOMS, TRANSCOS and ESCOs may be provided with tax incentives to promote investments in Energy

Efficiency programs.

3.10.8. Particulate Emissions (burning of agricultural residues in fields)

Straw baling units should be financed at concessional rates (perhaps similar to farm loans) as there should be

“enablers” for establishment of Biomass Briquetting units, which would pay for receipt of agricultural residues and

thus ensure that farmers do not economically suffer for collection/transporting agricultural residues instead of

burning them on the fields.

CHEMICALS AND PETROCHEMICALS

3.11.1 Duties on Petrochemical inputs, polymers and articles of plastics

The Petrochemical industry in India is passing through a difficult phase due to adverse fiscal and policy environment.

Demand growth has decelerated and reached a low of 3% during 2011-12. No major investment is forthcoming. It is

expected that demand will pick-up in future, benefits of such growth would accrue to overseas producers in the

absence of supportive policy environment for local investment.

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Some of the fiscal issues that need attention for growth of Indian petrochemical industry are detailed below with

recommendations to address these:

1. Import duty on Polymers like Polyethylene, Polypropylene, Poly Vinyl Chloride and Polystyrene at 5% in India is

one of the lowest in the world. This is even lower than those prevailing in developed nations like USA, EU and

Japan. In most of these countries, including China, the duty level is 6.5% and above.

2. On the other hand we have high duty on inputs resulting in nil to very little duty spread between polymers and

their feedstock. Import duty on naphtha at 5%, reformate (10%), propane (5%), butane (5%) and intermediates

like ethylene (5%), propylene (5%), EDC (2.5%), VCM (2.5%) and styrene (2.5%) have made local production un-

viable. Some of the feedstock like EDC, VCM and styrene are also not produced locally for domestic sale.

3. Due to FTA with Singapore, which is a large exporter of Polymers (PE, PP & PS), duty on import of Polymers has

further come down to 2.3% when imported from there. This duty would shortly come down to 0%. This has

resulted in an inverted duty of -2.7% now to -5% eventually between Polymers and Ethylene, Propylene as well

as naphtha.

4. Reformate obtained from refinery operations, which is a major input for the aromatic production, attracts 10%

import duty. The primary downstream petrochemicals from reformate, Paraxylene, has 0% import duty making it

one of the worst case of inverted duty.

5. Petrochemical industry is capital intensive. Countries we compete with have higher spreads between import

duty on Polymers and their feedstock. Middle East has added advantage of extremely low feedstock cost.

6. As a result, the petrochemical industry is in financial difficulty with very poor margins. If not corrected urgently,

there would be very little local investment and the industry will become highly import dependent. There is

already large imports and huge outflow of foreign exchange.

7. Also, in view of very low duty differential, the polymer producers are unable to offset the SAD paid on feedstock

imports, leading to large accumulation. This is further impacting on the already low margin spread available for

local producers.

In order to create a level playing field for domestic producers that encourage investment and employment in the

industry it is requested that:

1. Import duty on petrochemical inputs like naphtha, reformate, propane, butane, ethylene, propylene, EDC, VCM

and styrene may be brought down to zero. It may be highlighted here that there is very little production of many

of these items like EDC, VCM and styrene for merchant sale within the country and whatever capacity exists is

essentially for captive use.

2. Import duty on polymers like PE, PP, PVC and PS may be increased from 5% to 7.5% so as to provide a reasonable

duty spread and make local investment viable. This will also bring Indian duty structure closer to developed

economies.

3. Increase import duty on articles of plastics to a higher level or fix a minimum assessable value with import duty

at the new level to arrest undervalued imports.

4. Excise duty on plastic raw materials and plastic products be reduced from 12% to 8%.

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5. In order to address the issue of unutilized SAD credit, it is submitted that SAD may be waived on imports of

feedstock and import of monomers by end-use manufacturers. If this is not feasible, then we would request for a

facility for end use manufacturers to either adjust the SAD against the basic customs duty payable on imports or

obtain refund of such credit balance.

3.11.2 Anomaly arising due to occurrence of Inverted Duty Structure in the chemicals and petrochemicals industry

Incidence of Inverted Duty faced by the petrochemicals industry and details of current duties on finished,

intermediary and raw materials in the value chain relating to Reformate is given below:-

[i] Reformate is used for blending with gasoline and; Naphtha and Propane are feedstock for polymer. While these

basic inputs have relatively high level of import duty, duty on downstream products has been one of the lowest in

the world.

Reformate is used for blending with gasoline. While the import duty on Reformate (HS code 27075000 or 27101219)

is 10% or 5% depending on the classification; the duty on its downstream product, Motor Spirit is 2.5%.

Reformate is obtained on processing of naphtha at the refinery and is a blend stock for Motor Spirit. As shown in the

flowchart below, a major case of inverted duty structure is experienced in Reformate.

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PE Singapore 2.3%

EDC 5% to VCM 2.5%

Ethylene 5% Naphtha 5%

Propylene 5% Propane 5%

Crude 0%

Other co-products EB to Styrene 2.5%

Motor Spirit 2.5% Reformate 10% / 5% Naphtha 5% Crude 0%

[ii] Naphtha and Propane

Naphtha (HS Code 27101190) and Propane (HS Code 27111200) are primary feedstock for olefins. Cracking Naphtha

and Propane in a petrochemical plant produces building blocks like Ethylene (HS Code 29012100), Propylene (HS

Code 29012200) and downstream chemicals like EDC/Ethylene Dichloride (HS Code 29031500), VCM/Vinyl Chloride

Monomer (HS Code 29032100) and Styrene (HS Code 29025000).

While Naphtha and Propane attract import duty of 5% for petrochemical production, duties on downstream

products are lower. As shown in the flowchart below, EDC, VCM and Styrene have import duty of 2.5% resulting in an

inverted duty structure.

In order to address the concerns of the chemical and petrochemicals industry, the existing anomaly faced arising out

of such inverted duty structure may be removed.

3.11.3 Antimony Trioxide and Antimony Metal.

It is recommended to have a 5% differential between the Antimony Metal and Antimony Trioxide duties. Presently it

is 2.5% (On Antimony 7.5% and on Antimony metal it is 5%).

3.11.4 Pesticides

Pesticides (medicines for plants) are an important ingredient for agriculture sector along with good seeds and

fertilizers. They need similar treatment for the levy of excise duty, as the fertilizer sector. The excise duty on

pesticides of heading 3808 50 00 and 3808 91 11 to 3808 99 90 needs to be same as that on fertilizers.

SHIPPING AND PORTS

3.12.1. Income from transfer of qualifying asset and income from deployment of reserves be treated as income from 'core activity'

• Any profits or gains arising from transfer of a qualifying asset are chargeable to income-tax as capital gains. Such

profits, being not considered as 'core shipping income' are also subjected to MAT. This results in double taxation

45


The incidence of inverted duty on the imports of Polyethylene (PE) and Polypropylene (PP) would get magnified due

to the India-Singapore Comprehensive Economic Cooperation Agreement (CECA). Ethylene and Propylene obtained

from Naphtha and Propane and are predominantly used for making Polyethylene (PE) and Polypropylene (PP). While

the normal rate of duty on PE and PP is 5%, import from Singapore under the CECA attracts concessional rate of 2.3%

duty. Since the duty on PE and PP would eventually come down to zero under the CECA, the degree of irregularity in

the duty structure would further widen.

[iii] Ethanol & Nonyl Phenol

The table below clearly demonstrates that the import duty on raw materials is more than the import duty on finished

products. This makes domestically manufactured products from imported raw material least competitive as

compared to importing the finished product directly. It is suggested to reduce the import duty on raw material to the

level that its impact on the finished product produced locally is less than the duty impact on imported finished

product and hence promote local manufacturing.

1. Ethanol 7.50% MONO ETHYLENE GLYCOLS

5%

CTH-22071090 290553100

2 Nonyl Phenol 7.5% +antidumping duty $165/pmt

NONYL PHENOL ETHOXYLATES

7.50%

CTH-29071300 34042000

Sl.No. Feed Stock

Import Duty (%)

Finished Product

Import Duty (%)

of the same income. Book profit on sale of qualifying assets should be treated as 'core shipping income' and

should be excluded from book profits while computing MAT liability.

• In order to utilize the reserve account for the purpose of acquisition of ships, Indian tonnage tax companies need

to maintain adequate cash. Income generated through deployment of such cash in short term investments till

the time statutory reserves are utilized for acquisition of ships is not being considered as income from 'core

activity'. The reserves are created as per the requirement under the Act and is out of core and incidental

activities of the tonnage tax company and it is therefore, recommended that aforesaid income should be treated

as income from core activity of a tonnage tax company and should be subjected to tax accordingly.

3.12.2. Other Direct tax Suggestions

• Port projects should be completely exempt from MAT and from payment of Dividend Distribution Tax.

• In respect of revenue share or royalty or wharfage or any other revenue payable to the Port Authority, 150%

deduction shall be permitted.

3.12.3. Granting of Infrastructure Status to Shipping Industry

The Indian shipping industry fulfills the characteristics of infrastructure as mentioned in the harmonized Master List

of infrastructure sub-sectors. Granting infrastructure status would mean reduced cost of borrowings to buy

technologically advanced and environment friendly ships leading to increased trade volumes resulting in higher

employment and higher foreign exchange earnings/ savings. As one of the steps to rationalize, strengthen and

provide environment conducive to the growth of Indian shipping sector, it is requested that 'infrastructure' status be

granted to 'ships and other vessels' as defined under the Merchant Shipping Act, 1958.

3.12.4. Creation of a 'shipping modernization fund' for growth of Indian flag shipping

Shipping, being capital intensive, requires huge funds for financing ship acquisitions depending upon the market

conditions. Funds are mobilized largely through external commercial borrowings and internal generations. In the

current depressed shipping scenario, it is uncertain as to how the shipping companies will be able to source the

equity and debt requirement for acquisition of ships. As the shipping industry is in substantial need of funds for

acquiring tonnage, it is essential that the Govt. of India set up a fund to support the national fleet, thereby enabling

access to funds.

3.12.5. Exemption for import of equipment for port projects

Considering importance of modern equipment based on latest technology for efficient port operations, customs duty

for import of port equipment should be waived off.

3.12.6. Customs duty on foreign going vessels

Foreign going vessels are exempted from customs duty vide entry no 462 of the Table to the Notification 12/2012-

Customs dated 17 March 2012 subject to fulfillment of condition 82 of the said Notification. Earlier to this exemption

foreign going vessels were exempted from CVD provided the vessels had a global trading general licence under

section 406 of the Merchant Shipping Act, 1958. With effect from 17 March 2012, CVD is payable on conversion of

foreign going vessels to coastal vessels as follows:

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– full lease or contract value, if the import is under a lease agreement or contract

– 1/120th of the applicable duty, for each month or part thereof, of stay in India as coastal vessel

Most international jurisdictions (e.g., European Union, and Canada) do not apply CVD (or equivalent duties) on

vessels used in international transportation business. Even where the tax applies to vessels used in domestic freight,

the tax is fully credited (with a refund for any excess credits) within a few days of the payment, with no net impact

except for a temporary negative cash flow. The amendment would result in customs duty payment every time the

vessel is imported into India and converted to coastal run. There would be a significant compliance burden in having

to pay tax on every conversion, determination of the value for tax, determination of the time period of coastal use,

and making adjustments if the anticipated coastal use differs from the actual. There would be no revenue gain to the

Government as theoretically the tax paid on conversion is fully creditable against the output tax on coastal freight.

It is accordingly requested that customs duty should be exempted on vessels used in international commercial

transportation business.

3.12.7. Withdrawal of excise duty on ships and other vessels

With effect from 1 March 2011, excise duty has been introduced on various types of ships covered under chapters

8901, 8904, 8905 and 8906 9000 at 2% (increased from 1% to 2% with effect from 17 March 2012) if no CENVAT

credit is taken of taxes and duties paid on inputs and input services and 6% in other cases (increased from 5% to 6%

with effect from 17 March 2012). The new levy has created an additional burden to Indian ship yards and adversely

affected their competitiveness

In order to encourage the ship building industry, it is requested that excise duty exemption be granted to ships and

other vessels falling under chapters 8901, 8904, 8905 and 8906 9000 as was available prior to 1 March 2011.

POWER

3.13.1. Import of power under OGL (Open General Licence)

Import of power should be under OGL to tap power generation potential in neighbouring countries. The current nil

import duty on power imported from Nepal should be continued over the duration of the Power Purchased

Agreement (PPA). Cross border transmission links should also be developed.

3.13.2. Mega Power Policy

At present Mega power policy directive is to tie-up power within 3 years from date of issuance of Provisional Mega

certificate. Mega Power policy stipulates up to 85% power tie-up under Power Purchase Agreement. Changes in this

norm are essential on account of uncertainties in coal supply.

Under the Mega power policy, timeline for tie up of power should be three years from the commencement of coal

supply under Fuel Supply Agreements (FSA) instead of 3 years from date of issuance of Provisional Mega certificate.

Further, extent of power capacity tie-up should be limited to domestic coal linkage, not 85% presently prevailing.

47


3.13.3. Financial incentives for Hydro power projects

In order to promote development of clean energy, energy security should be improved and challenges faced by fossil

fuel based plants mitigated. Project cost reduction should be encouraged by extending benefits to the Construction

equipment and material. State Governments should provide exemptions from local duties.

3.13.4. Lending capacity of banks to power sector

Power sector is important and needs massive financing requirements. Many public sector banks have reached their

lending limits. This sectoral lending limit of the banks should be relaxed to facilitate fresh lending and Power sector

should be included in priority sector lending. Financing of operational projects by IIFCL should be taken out or such

other agencies should be encouraged to create more lending capacity for banks.

3.13.5. Encouraging Insurance Company Investments in power sector

Under the existing IRDA guidelines insurance company investments flow mostly to State owned institutions. Allowing

insurance company investment to Power sector will enhance market liquidity. The credit rating for investment in debt

paper should be reduced. Insurance companies should be encouraged to invest outside public-sector entities,

specifically in power sector.

3.13.6. Reduction of Macroeconomic risks

Macroeconomic risks arising out of adverse interest rate and exchange rate movements need to be reduced. The

large macro-economic shocks cannot be borne by projects supplying through long-term 25 year contracts. Long term

base rate to be introduced for infrastructure projects which should be delinked from bank base rates in order to

provide stable interest charges for projects. The base lending rates of institutions like Power Finance Corporation

(PFC) may be used for domestic debt. RBI should facilitate creation of a fund to hedge against short term interest rate

fluctuations & maintain the long term rate. Exchange rate variations should also be permitted for ECB/ECA debt.

3.13.7. Extension of Tax Holiday for Power sector

Under section 80IA, an undertaking is eligible for tax holiday only if it begins to generate power by 31.03.2013. There

is an immediate need to augment electricity generation capacity in the country. Industry has to invest large capital in

setting up of power plants to ensure uninterrupted power supply. This sunset clause under section 80IA for power

plants needs to be amended to extend the tax holiday for another period of five years. In other words undertaking

which beings generation of power by 31st March 2017 should be eligible for tax holiday.

3.13.8. Exemption from Dividend Distribution Tax for SPVs

In view of the re-investment needs by the holding company in the power sector, Dividend Distribution Tax should be

levied only at the ultimate parent company level and SPVs be exempted from the DDT.

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3.13.9. Other Tax benefits for Power sector

The following recommendations are also submitted for consideration:-

• Removal of MAT and DDT for SEZ Units

• Service tax exemption to infrastructure projects in the power sector, on the lines of the benefits available for

projects in other infrastructure sectors such as roads, railways and airports. This would reduce the cost of Power

Generation, as Power Generation Companies are not entitled to credits on tax paid on procurements.

• Removal of withholding tax on External Commercial Borrowings of Infra companies especially Power companies.

• Issuance of a clarification whether Electricity is goods or not for purposes of claiming Additional Depreciation. It

is urged that the initial depreciation of 20% be allowed in full in the first year as an incentive for investments

irrespective of the number of days of use.

EDUCATION

3.14.1 Infrastructure Status for higher education sector

To infuse more capital in the sector, grant 'infrastructure status' to higher education in order to allow legal and tax

treatment similar to other infrastructure projects.

3.14.2 Establishment of educational institutions as section 25 companies

Allowing all types of institutions to be established as Section 25 companies and permission to convert the existing

trusts and societies to Section 25 companies. This will be a positive step forward to attract private sector to invest in

the sector. Currently, government is allowing only technical institutions to be set up though Section 25 Companies.

3.14.3 Setting up of National Higher Education Finance Corporation (NHEFC)

Top priority to be accorded to the setting up of National Higher Education Finance Corporation (NHEFC) in the 12th

Five Year Plan for creating alternative avenues of revenue generation for higher educational institutions/universities.

NHEFC is an initiative by the Government aimed at fee rationalization, student financing and education financing

mechanism for the higher educational institutions. It provides loans at concessional rates of interest to agencies for

establishment of institutions in educationally backward areas.

3.14.4 National Mission for Faculty Development

• Shortage of adequately trained faculty is the biggest challenge to the growth of higher education. About 25% of

Faculty positions in Universities remain vacant while 24% of faculty in universities and 57% in colleges are

without PhD degrees. There is a need to promote specific scheme for skill development of university teachers

and for the day to day academic and research activity. Tax relief to the tune of 50% should be provided to

Universities /HEIs which spend on the capacity development and training of their staff.

• Allocate grants/funds to Universities/organizations/industry associations focusing on faculty development

programmes.

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3.14.5 Income Tax Exemptions

Given that India needs skilled personnel for global requirements, Government should make a provision that:

• Any person enrolling for a Skills Certification course be eligible for a 20% tax rebate (only applicable for the

tuition fee amount)

• Any Educational Service Provider opening a Skills Centre in a backward area should be given an incentive like

exemption from income tax for a period of 5 years.

• Establishment of the proposed Education Finance Corporation for easy access to loans. Parents or Students

allowed to open education specific accounts/purchase bonds where earnings /growth of investments inside the

account accumulate without being taxed. Withdrawal should be tax free as long as it is used for specified higher

education expenses.

CIVIL AVIATION

3.15.1. Exemption from Custom Duty for X-ray baggage inspection system and other Airport security systems.

X-ray baggage inspection system and parts thereof are eligible for NIL basic customs duty in terms of notification No.

12/2012 - Customs dated 17-03-2012 (S. No. 490) when imported by Government or its authorized persons for anti-

smuggling or by CISF, Police Force, Central Reserve Police Force, National Security Guard (NSG) or Special Protection

Group (SPG) for bomb detection and disposal. Import of x-ray baggage inspection system at Airports is for security

purpose and security is a sovereign function (Reserved Activity) as per State Support Agreement (SSA) with Ministry

of Civil Aviation (MoCA) and import cost is met out of Security Component of Passenger Service Fee. However, since

import is not directly undertaken by the above specified agencies but by respective Airport operators, duty

concession is not available though money is being paid out of funds of Government of India (GoI). Hence, this

condition needs to be amended to expand its scope to cover imports by respective Airport operators subject to

production of a certificate from Ministry of Civil Aviation.

Further this concession should not be limited to x-ray machines alone because there are other machines, which are

used for bomb detection and disposal. The list of goods eligible for exemption be expanded to cover the following

items and parts of Security Systems falling under any chapter of the Customs Tariff.

a) X-ray baggage inspection system

b) Explosive detectors

c) Bomb/suspect luggage containment vessels/units

d) Robots for handling of bombs or suspected baggage

e) Parameter security intrusion system and accessories

f) Access control system

g) Hydraulic bollards

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h) Boom barriers

i) Cameras for CCTV

All the above systems are bought as per specifications laid down by Bureau of Civil Aviation Security (BCAS), MoCA,

and GoI.

3.15.2. Concessional Customs Duty on Goods required for development of Airports

It is requested that the following items required for development of airports should be permitted to be imported at a

concessional rate of basic customs duty of 5%

1. Navigational / Communication Aids; 2. Airfield Crash Fire Tenders & other fire fighting vehicles; 3. Elevated

Transport Vehicle; 4. AC Plant of capacity more than 200 TR; 5. T-5 Triphosfor Tube; 6. Flight Inspection System

(Ground & Air); 7. Runway Marking & Pavement testing machine; 8. Baggage Conveyor (handling) system; 9.

Passenger Boarding bridges (Aerobridges) along with associated Visual Guidance Docking Systems; 10. HVAC &

accessories; 11. Travelators / Escalators / Lifts; 12. Structural glazing (glass); 13. Airport ground lighting; 14.

Aluminium (Roof sheeting); 15. False ceiling; 16. Carpet; 17. Fire proof door; 18. Revolving door; 19. LED Light

fittings; 20. Check in counters; 21. Chillers; 22. Ground Power Unit (frequency convertor); 23. Signages; 24. Chairs;

25. Vitrified tiles; 26. Runway Sweepers; 27. Variable speed drives; 28. LCD/ LED Flat Panels

3.15.3. Alternative / Take-out financing

Aviation Finance Corporation (AFC): SPV providing dedicated capital can be set up by the Government to facilitate

lower interest rates and longer maturity of loans.

3.15.4. Liberalization of Infrastructure Bonds

Allow private Airport Operators to issue long term non-taxable infrastructure bonds to raise the required funding

from the market.

3.15.5. Liberalize Sectoral Funding Limits

Ease RBI limits on sectoral funding thereby removing the current compulsion for airport developers to raise required

funds / debt from multiple banks making process time consuming and cumbersome.

3.15.6. Receivables

Special mechanism for easing cash flows issues arising from delayed Receivables from related government entities,

such as Air India / Indian Airlines.

Enhance Plan allocation for Air India and implement robust measures for quick disbursement to affected airport

operators and agencies.

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3.15.7. Issuance of Tax Free Infrastructure Bonds

To facilitate the private airport operators raise funds, it is recommended that they should also be allowed to issue tax

free infrastructure bonds from the public.

3.15.8. Clarificatory amendment in Section 80 IA with regard to upgrading existing infrastructure

Infrastructure development is a pre requisite for the growth and development of any country. Infrastructure

development is available in two ways i.e.to build altogether new infrastructure or to convert the existing structure by

upgrading it and also enhancing the existing capacity. Both activities entail huge investment and human efforts.

It is recommended that a suitable amendment may be made in the Act to clarify that the up-gradation / extension of

the existing infrastructure facility would also be eligible for the benefit of Section 80IA of the Act.

3.15.9. Support services of airport to be termed as infrastructure

In the airport sector of infrastructure, there are many ancillary/support services required which are essential for

smooth functioning of airports. These include fuel facility, parking, cargo etc. No airport can function in absence of

these facilities as these are life line services for airport.

In the absence of clear definition of 'Airport' under the present section 80-IA of the Act, it leaves an ambiguity

whether these services enjoy benefit of Sec 80-IA of the Act or not. FICCI recommends that benefit under section 80-

IA of the Act be extended to these services as well. As per the current law, the deduction is available to an enterprise

if it has entered into an agreement with the Central Government or a State Government or authorities prescribed in

the section. FICCI recommends that it should be further clarified that the agreement entered between the sub-

contractor and the main Concessionaire for carrying out ancillary activities be deemed as an agreement entered by

the sub-contractor with the Central or State Government.

3.15.10. Specific clarification on non-exclusion of security component of passenger service fee

As part of air ticket, the airline is to collect from each passenger a certain amount of passenger service fee. The

passenger service fee collected from each passenger consists of two parts, namely (1) facilitation component and (2)

security component. The amount of facilitation component is the regular income of airport operator and thus forms

an integral part of its revenue. The amount of security component is held by the airport operator in fiduciary

capacity in an ESCROW account for and on behalf of Central Government and does not form an integral part of

revenue/receipt of airport operator. However, the tax officers while finalising the assessment of the airport operators

are taxing the surplus amount lying in ESCROW account as their income.

It is recommended that a specific clarification may be issued specifying that the amount of security component of

passenger service fee which is held by the airport operator in fiduciary capacity for and on behalf of the Government

should not be made liable to tax in their hands.

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3.15.11. Other Direct Tax issues

• Section 72A of the Income Tax Act be amended to extend the benefits therein to the entire airline industry and

not only to public sector companies with a view to providing the private airlines operators a level playing field as

well as sustaining the current growth of the civil aviation sector.

• Section 10(15A) of the Income Tax Act may be Reinstated. This exemption was withdrawn for operating leases

(for aircrafts/engines) which are entered into after 1st April 2007. This has put significant burden on the airline

industry.

• As per the current provision of the Income Tax Act, airlines have to incur additional costs arising out of

withholding tax on maintenance related payments towards labour charges and fees for technical services and

royalties. These provisions need to be withdrawn and such payments allowed without requiring the tax to be

deducted at source.

• FICCI strongly recommends for provision of tax incentives for development of Maintenance, Repair and Overhaul

('MRO') facility in India which will help airlines to reduce cost of repairs carried overseas but will also develop

India as a hub for such facility.

VEGETABLE OIL & OIL SEEDS

3.16.1. Review of Customs and Excise duty structure

To bridge the gap between demand and supply, India is compelled to import a large quantity of edible oils. India has

become the largest importer of vegetable oils in the world. During November, 2011 to October, 2012 imports are

likely to be about 97/98 lakh tonnes of edible oil worth Rs 50,000 crores, a huge burden on exchequer next to crude

petroleum products and gold. It is therefore essential to increase the availability of vegetable oils from domestic

resources by encouraging diversification of land from food grains to oilseeds, increasing productivity of oilseeds and

fullest exploitation of non traditional domestic sources. For this, Government may consider the following for the

ensuing Union Budget:

• Review and withdraw export duty of 10% on deoiled rice bran.

• Consider revising the tariff value on RBD Palm oil and other oils as is being done for RBD Palmolein on fortnightly

basis to check huge imports of RBD Palm oil on questionable prices.

• Permit import of Copra cake, Palm Kernel cake and Rice bran at Nil Customs duty to increase supply for domestic

and export purposes.

• Impose import duty on Crude Palm oil (CPO) at 10% and RBD Palmolein and RBD Palm oil at 20% to protect

soybean and mustard seed farmers.

• Grant excise exemption to food grade hexane (Heading No.2710 12) used in the processing of oil seed and oil

bearing material.

• Allocate Rs.1000 crores per year for the next 3 years under the Oil Seed development programme.

• Grant exemption from the levy of excise duty to refining of vegetable oils and manufacture of Vanaspati so as to

cover by-products of vegetable oil refining industry.

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•

encourage production of value added products during the refining of rice bran oil.

INFRASTRUCTURE

3.17.1. Priority sector lending for infrastructure sector

Infrastructure growth is essential for the overall growth of the Indian economy. 12th Five Year Plan envisages

investment of USD 1000 billion during 2012-2017 for the development of infrastructure in India. Infrastructure

investment has high gestation period and it is highly sensitive to interest rate because of higher proportion of debt

financing (around 70-75%). In today's interest rate environment most of the infrastructure projects are not viable

because of high cost of debt. Government needs to give Infrastructure lending the status of priority sector lending

just like agriculture sector. Cost of debt for infrastructure should be reduced and financial institutions should be

asked to make higher allocation of loan portfolio towards infrastructure sector.

As in the case of financing for exports, banks may be asked to compulsorily provide for certain percentage exposure

to the infrastructure sector. RBI may be requested to provide interest subsidies to banks for their exposure to this

sector.

3.17.2. Permitting 100% refinancing of existing debt in Infrastructure sector by External Commercial Borrowing (ECB)

In its circular dated 23rd September 2011 on ECB for Infrastructure sector, RBI has allowed up to 25% refinancing of

existing rupee debt through ECB but with the condition that rest of 75% of ECB debt should be utilized for financing

of new projects. This is a step in the right direction and ECB borrowing norms in Infrastructure sector should be

further relaxed by permitting 100% refinancing of existing rupee debt through ECB. Restriction on utilization of 75%

of ECB borrowing for financing of new project will restrict the amount of ECB that can be raised as ECB lenders have

lower appetite of lending for new projects than for refinancing of rupee debt of operational projects. It will also

restrict the flexibility of infrastructure companies as companies should have projects which require 3 times as much

ECB as the refinancing requirement of existing rupee debt.

3.17.3. Exemption of MAT for infrastructure sector during 80IA period

Infrastructure projects get tax holiday under section 80IA for 10 consecutive years during first 15 years of its

operation. However, during this period MAT need to be paid by the companies on Book profit which to a great extent

negates the tax benefit being offered for these projects.

It is suggested that MAT should be exempted for Infrastructure sector during 80IA period.

3.17.4. Specific clarification on applicability of TDS on amount paid to National Highways Authority of India

The private toll operators are required to pay fixed amount called as additional compensation fees or Negative Grant

to National Highway Authority of India (NHAI) for allowing the site on lease/license to operate Toll plaza and collect

Grant excise duty exemption to refining of rice bran oil and processing of its by-products with a view to

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the toll charges. There is ambiguity on applicability of withholding tax on such payments made by the private

operators to NHAI. It is recommended that either such payments be specifically excluded out of the purview of

withholding tax or the section under which such payments are subject to TDS should be explicitly provided to avoid

any further ambiguity.

3.17.5. Access to Infrastructure Companies to raise capital overseas

Unlisted and listed Indian Infrastructure companies should be allowed to list in overseas capital markets by allowing

them issue direct equity shares.

Unlisted and listed Indian Infrastructure companies should be allowed, as an option, to set up an overseas entity for

raising equity abroad for investing the same in India. The transfer of holding to such an overseas entity from an

Indian entity should be permitted at erstwhile CCI / Book Value as was prevalent till 31st March, 2010.

ENTERTAINMENT

3.18.1. Television and Radio Broadcasting

At present the DTH & Cable TV services are taxed as under:-

Service Tax: 12.36% of the subscription amount

Entertainment Tax: on an average 30% of the subscription amount

Customs Duty: (i) on Set Top Boxes: 5%

(ii) on equipments used in digital head end -ranging from 7.5% to 10%

VAT on STB: 12%

Both DTH services and cable services are at present reeling under the heavy burden of multiple taxation and levies

such as license fee, service tax, entertainment tax, VAT on customer premises equipment (STB, Dish Antenna etc.)

which cumulatively add up to as high as 56%. These levies are acting as an impediment to the growth and

development of these services.

To ensure proper growth and development of this sector, the multiple levies/ taxation structure needs to be

rationalized.

3.18.2. Digitization with addressability

Migration to addressable digital systems calls for large capital investment. This would involve changing/up-grading of

head-ends by MSOs and provision of STBs at the customer premises.

During the migration period there is a need to bring down the prices of imported equipments by reducing basic

custom duty to make it affordable for the consumers and to facilitate smooth migration from analogue to digital. It is

proposed that the Government, as a special measure, should allow reduction of the basic custom duty on the major

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items in digital addressable broadcast distribution i.e. digital head-end equipments and STBs falling under Chapter 85

of the Customs Tariff as per the following list, to zero level to give a boost to conversion of the broadcast distribution

network to digital addressable.

Digital Headend

1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Equipment

Racks for CATV Head End; 7 Video Descrablers; 8 Conditional Access Modules; 9 Video Remultiplexers for CATV; 10

Encoder; 11 EMM Generator; 12 ECM Generator; 13 Integrated Receiver Decoder; 14 QAM modulator; 15

Multiplexer DVB,IVG series; 16 Transmodulator; 17 Encoder with CID

Broadcast Headend for HITS and DTH

1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Video

Descrablers; 7 Conditional Access Modules; 8 Video Remultiplexers for CATV; 9 Encoder; 10 EMM Generator; 11 ECM

Generator; 12 Integrated Receiver Decoder; 13 QAM modulator; 14 Multiplexer DVB,IVG series; 15 Transmodulator;

16 Encoder with CID; 17 Encryptors; 18 Audio Monitor amp 2-vsa; 19 Monitor 10 "; 20 Push Button; 21 Wave From

Monitor; 22 WR - 75 Cross Guide; 23 L Band Router; 24 Up Convertor; 25 Waveguide; 26 Switch Over System; 27

Beacon Tracking Rec,; 28 TWTA; 29 Broadcast Amplifiers; 30 Optical Amplifier; 31 Optical Splitter; 32 Optical

Combiner; 33 Klystrons; 34 NMS (Network Management Sys); 35 Monitoring Remote Services; 36 Generator PSI/SI;

37 Decryptor; 38 TV Cameras; 39 Combiner; 40 Power Divider

Network Distribution

1 Optical Node; 2 EDFA; 3 Optical Transmitters 1310; 4 Optical Transmitters 1550

3.18.3. Entertainment Tax Rationalization

It has been suggested by the Empowered Group of Ministers that the Entertainment Tax be subsumed in GST.

However, pending introduction of GST regime it is suggested that rationalization of rates of Entertainment Tax across

various States at a uniform level should be encouraged by Central Government.

Given that under the Digital Access System (DAS) regime there will be full transparency; there is a need to lower the

percentage/lump sum amount of Entertainment Tax, as the case may be for the DAS areas. The revenue jump on

account of Entertainment Tax is going to be 5 to 7 times because of associated transparency under which the

complete count of subscribers would be available.

Scheme for waiver of entertainment tax by State Governments should be considered for a period of 5 years for cable

networks migrating from analogue to digital so as to incentivize & promote digitalization.

3.18.4. Infrastructure Status to the Cable sector

The Cable sector needs to be given “Infrastructure” status in order to garner domestic funding.

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3.18.5. Rationalization of License Fee for DTH industry

Presently, a License Fee of 10% of the Gross Revenue collected by the DTH service provider is levied on the DTH

industry. It is recommended that the license fee for DTH services be reduced from present 10% to 6%. Since the DTH

industry is a capital intensive industry, this relief would help the industry in a long way.

3.18.6. Inclusion of DTH services in the Negative List of service tax

Cable TV and DTH Service is essentially the transmission of programme (images, audio, video, etc through radio

frequency) which is taxed as “services” by Central Government and the same transmission of programme, is also

considered as 'entertainment' services by the state governments and is also being taxed as a local service tax under a

different nomenclature i.e. “entertainment tax”. It is recommended that the DTH services be included in the negative

list of service tax.

3.18.7. Film Sector

Government should exempt necessary equipment and hardware for film production from the levy of customs duty.

3.18.8. Exemption of service tax on Digital Cinema services

Digital Cinema Solutions Providers had been granted exemption from Service Tax in respect of Services provided in

relation to delivery of the Cinematography Film in digitalized form transmitted directly to cinema theatres for

exhibition through use of Satellite, Micro Wave or Terrestrial Communication lines by virtue of Service tax

notification No. 12/2007 dated 1st March 2007. This exemption was granted to promote this technology as it has

following unique advantages:

• The technology brings transparency, efficiency and accountability in the media and entertainment business.

• It eliminates the need for printing films and thereby bring substantially cost saving to the industry.

• Delivery through digitalized mode through satellite promotes pollution control and eliminates usage of pollutant

film rolls.

• The technology curbs piracy to a great extent and elimination / reduction in piracy will substantially help the

ailing industry and also bring revenue to the Government as chances of pirated films escaping tax nets are high.

• The technology has given a great boost to the Indian film trade and is currently the mainstay for many film

industries across India.

Withdrawal of this notification in the new scheme of things has put undue hardship to the film industry particularly

when the intention of the Government is to grant relief to the industry by way of exemption from service tax and

that is why Notification No.12/2012-ST dated 17-03-2012 has proposed exemption from Service Tax in serial No.15 of

the notification for temporary transfer or permitting the use or enjoyment of copy right relating to original literary,

dramatic, musical, artistic works or cinematographic films.

In the absence of satellite delivery the remote locations of India will be starved of content and this will be a great

disservice to these price sensitive markets since they will not be able to afford the increased costs.

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In view of the above it is recommended that the exemption to digital cinema solution providers for the services

rendered in relation to delivery of digital content in movie to cinema theatres through satellite by Notification

12/2007 - ST dated 1-3-2007 should be continued.

3.18.9. Animation, Gaming & VFX Industry

On Animation, Gaming & VFX Industry the following suggestions are for consideration:

• On the lines of IITs and IIMs, Government should consider setting up Centers of Excellence for the Animation,

Gaming & VFX Industry which also offers opportunities for applied and commercial and others type of arts.

• 10 Years Tax Holiday for Animation, gaming, and Visual Effects Industry.

• Removal of withholding tax on revenues accruing from sales of mobile games in non India markets as well as

removal of withholding tax on the development contracts given to mobile game developers outside India

• Removal of withholding tax on payments to expatriates working in India for Indian mobile game development

companies

• There should be a provision of 50% reimbursable MDA (Market Development Assistance) for travel and

registration fees to international market events. Government to extend support under Market Development

Assistance (MDA) activity for Indian companies to exhibit by setting Indian Pavilions in the world markets. What

is needed is to help bringing local production companies to international markets, collect and disseminate

information and support creating the infrastructure needed for a healthy media market to develop.

• To promote domestic gaming market, Excise Duty on local manufacture should be brought down from 12.5% to

0% (similar to film and music industry). This will enable CVD to be brought to zero also. The effective reduction in

taxes would be around 15%. Import duty on consoles (Gaming hardware) to be brought down to 0% to increase

the installed base to enable the local developer ecosystem to flourish.

• Directions should be given to commercial bankers to treat Animation sector on priority and to offer concessional

rate of credit.

• The Minimum Alternate Tax (MAT) applicability for units undertaking Animation work in SEZ should be

withdrawn to encourage export of animated contents.

• The government should introduce subsidies like a CNC Fund (in France) to fund animated content co-produced

and developed in India to enable Indian producers to be competitive on the global scale.

3.18.10. Multiplexes

On Multiplexes, Government should consider the following suggestions:

• Multiplex operators should be exempted from payment of duties on import of cinema exhibition equipments.

• The Industry should be entitled to take full credit of certain 'input services' which are commonly used for non-

taxable as well as taxable activities.

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CIGARETTE/TOBACCO INDUSTRY

3.19.1. Continue with multiple price point, length based specific excise duty structure

This structure is best suited to India as it caters to the country's wide range of income distribution and enables

positioning of brands at convenient and affordable price points. It has proven to be extremely successful over the

years as it has ensured increasing revenue collections in a litigation-free environment with no valuation disputes and

transparent administration. Additionally, it provides for value-addition to achieve international quality standards and

improved farmer earnings through usage of high quality tobaccos and increased exports.

3.19.2. Maintain tax stability in Excise Duty rates

Excise Duty rates should be kept unchanged to leverage the tax efficiency of cigarettes by encouraging shifts from

non-cigarette forms of consumption. This, in turn, will maximize contribution to the Exchequer, even in a shrinking

basket of overall tobacco consumption.

3.19.3. Reduction in the rates of duty on Cigarettes

The duty evaded illegal cigarette market continues to grow unabated and the domestic industry is not able to

counter the same due to high excise duties and steep incidence of VAT on legitimate cigarettes. Measures need to be

taken to enable the legitimate industry to effectively combat this menace and, simultaneously, provide some stability

to farmer livelihoods. Accordingly, it is recommended that the rate of Central Excise duty on the 65 mm filter

cigarette slab be reduced from the existing level of Rs.689 per thousand cigarettes to Rs.200 per thousand cigarettes.

Excise duty on other slabs may also be considered for appropriate reduction to increase the revenue from this

industry.

It is anticipated that this will also have a salutary effect on tobacco tax revenue in addition to aiding the legitimate

domestic industry in achieving the above-stated objectives through viable offers to consumers.

3.19.4. Measures to check evasion of duties

(A) To curb sale of illegal, duty evaded cigarettes implement compulsory licensing under Industries (Development &

Regulation) Act, 1951 for all cigarette manufacture in the country and tracking key inputs of cigarettes through

their respective supply chains. The following measures are recommended in this regard:

(i) Licensing under I(D&R) Act, 1951 should be made compulsory for all Cigarette manufacture in the country,

irrespective of the size and nature of the Units in which such manufacture is undertaken, without any exceptions

and SSI should be included in the ambit of licence.

(ii) In line with the procedural requirements for tobacco exports, buyers of tobacco from auction platforms to file

with the Tobacco Board complete details of sales made to their domestic customers.

(B) Curb contraband cigarette trade to protect revenue collections. Suggested measures in this regard are:

(i) Basic Customs Duty on cigarettes should be increased from the extant 30% to the WTO bound rate of 150%

subject to a minimum duty equivalent to 50% of the prevailing countervailing duty, i.e., length based, specific

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central excise duty applicable on cigarettes manufactured within the country. This will go a long way in resolving

the problem of tax evasion by some unscrupulous importers by under invoicing the value of imported cigarettes.

(ii) Disallowing cigarette manufacture in EOUs and SEZs as this is misused to smuggle cigarettes into Domestic Tariff

Area.

(iii) In line with extant Policy, keep cigarettes, all tobacco and tobacco products, including cigarettes and cigars in the

Negative List in all Trade Treaties, FTAs, etc.

(C) A Chapter Note in Chapter 24 of the Central Excise Tariff should be inserted to clarify what constitutes a Biri and

how the so called “Paper Rolled Biri” is to be classified. It is suggested that for this purpose reliance is placed on

the definition of biri as stated in the Indian Standards (IS) 1925:1992. A suggested draft of the Chapter Note is

given below:

“Biris shall be either conical or cylindrical in shape and only consist of biri tobacco mixture and the wrapper

leaves to hold the contents. Any smoking product comprising of tobacco wrapped in paper, with or without

filter, will be classifiable as cigarette.”

3.19.5. Ban on FDI in manufacture and trade of Cigarettes and other Tobacco products

The Government of India has prohibited FDI in manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco

or of tobacco substitutes and has notified the same in May 2010. However, multinationals set up entities in India for

wholesale trading which serves as a platform for creating demand for their brands which is then met through large

scale contraband/smuggling. This adversely impacts domestic farmer income, employment and revenue interests.

Hence the existing ban on manufacturing must be strengthened by extending the ban end to end to cover FDI in

manufacture as well as wholesale trade in these products.

Moreover, to ensure proper implementation of the Government's tobacco control policies, the extant ban on FDI in

the tobacco sector should be reinforced by appropriate amendments in FEMA to prohibit infusion of funds into the

tobacco sector whether through (a) advances against equity, (b) preference shares and debentures - convertible or

otherwise, (c) loans and other forms of debt by whatever name called, (d) advances, (e) guarantees issued by banks,

corporate entities or any other third party (f) letters of comfort or (g) through any other means. Similar restrictions

should also be extended to entities set up by multinationals in India with the objective of marketing cigarettes and

other tobacco products.

3.19.6. E-Cigarettes

A separate tariff classification under Chapter 24 be introduced under both Excise and Customs Tariffs for e-cigarettes.

Since e-cigarettes can be sold as different parts - to be assembled by the user, length-based excise duty, as applicable

to conventional cigarettes, is impractical for e-cigarettes. Accordingly, the recommendations for duty levy e-

cigarettes are:

(i) Central Excise Duty at an appropriately high ad-valorem rate for e-cigarettes, its components and all flavours

containing nicotine meant for use in e-cigarettes.

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(ii) Customs Duty at the WTO bound rate of 150% for Chapter 24 goods i.e. all tobacco and tobacco products

Further, e-cigarettes or its part(s), refills should also be removed from OGL and put under Restricted List of import

and e-cigarettes must feature under the Negative List in all Trade Treaties, FTAs etc.

HOUSING AND REAL ESTATE

3.20.1. Industry status to real estate sector

It is requested that Real Estate Sector be granted Industry status for easier availability of funds for this sector for

purposes of availing long term and short term finances.

3.20.2. Extend loan on Stamp Duty / Registration Fee / VAT / Service Tax to buyers

(a) For the first purchase of the house, borrower should be eligible to avail 90% of the costs of purchase as loan.

(b) Second purchase of the house, eligibility to be brought down to 80% insisting on 20% by the borrower margin.

In both the categories, Stamp Duty, Registration, VAT, Service Tax should be included in the cost to bring relief to the

borrower.

3.20.3. Raise the limit for Priority Sector lending

Considering the high prices of dwelling units across country and particularly amongst tier 1 and 2 cities, the home

loan up to Rs.25 lakhs as priority sector classification should be enhanced Rs.35 Lacs for consumer loan.

3.20.4. Technology for Low Cost Housing

Considering the need to provide affordable houses at a very fast pace in the country, new construction technology is

required (such as aluminum formwork or precast technology). Currently most of these technologies are being

imported and have high taxes levied on them. The customs duty/ taxes paid for importing these technologies vary in

the range of 20-25%. This prohibits the use of these technologies and hence the pace of development of affordable

housing. The need of the hour is to reduce these taxes for the development of housing for the EWS/LIG segment.

3.20.5. Deduction of interest paid on borrowed capital

A deduction upto a maximum limit of Rs. 1,50,000/- is currently available from taxable income towards interest on

loan taken for acquisition/construction of self-occupied house property. It is recommended that this exemption

should be harmonized with the rising interest rates and increased to at least INR 2,50,000 per annum.

3.20.6. Raise the limit for deduction for principal repayment

In the case of home loan repayments, the ceiling under tax benefits is capped at Rs.1,00,000/- for principal paid. The

ceiling of Rs.1,00,000/- under Section 80C is less, particularly when home loan principal repayments are clubbed with

other tax saving instruments. Therefore, the deduction for principal repayment of housing loan under Sec 80C should

be either increased from the existing limit of Rs.1 lakh or the principal repayments treated as a separate tax

exemption entity and excluded from benefits under section 80C.

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3.20.7. Infrastructure status to development of integrated townships.

An integrated township involves development of residential, institutional, educational, medical, community and

commercial buildings etc. In the process of development of an integrated township, apart from development and

construction of above establishments, various facilities such as roads, water supply, sewerage system, sanitation,

water treatment, electrification, land scaping, solid waste treatment, horticulture and other civic services are

required to be created/provided. While according approval, the State Government specifically directs that these

development projects including all facilities/services created/provided therein will ultimately be handed over to

respective State Governments/Local Bodies and shall not remain with the developer. These integrated township

projects are therefore in a way at par with the BOT (Built, Operate & Transfer) projects.

In the light of above facts and in order to motivate the genuine Real Estate Companies to come forward and step into

promotion and development of large integrated townships in line with above arrangements to mitigate the huge

shortage of housing to all class of society, it is requested that Integrated township development projects be brought

within the definition of infrastructure.

3.20.8. Deduction for Ground Rent

Deduction for ground rent should be restored while computing the income under the head 'House Property'.

Considering the rising value of land and proportionate ground rent in metros and other big cities, it is recommended

that the deduction for ground rent be separately provided i.e. in addition to the overall statutory deduction of 30%

available within the ambit and scope of section 24 of the Act.

LIFE SCIENCES

3.21.1. Weighted deduction under section 35(2AB) for expenditure outside the approved R&D facility

A weighted deduction @ 200% is allowed on in-house research & development expenditure incurred by companies

engaged in the business of biotechnology or manufacture or production of specified goods. The pharmaceutical

research and development is very expensive and time consuming as compared to other industrial research, on

account of regulatory requirements of safety, efficacy and quality. The current provisions for deduction u/s 35(2AB)

are restrictive in nature, so as to cover only expenditure incidental to research carried on at the in-house R&D facility.

Some of the activities though directly related to research and development are not eligible for weighted deduction

e.g. clinical trials undertaken on patients in hospitals, since the same are carried outside the approved R&D facility.

All expenditure related to research carried on in the in-house facility i.e. clinical trials, bioequivalence studies,

regulatory and patent approvals should be eligible for weighted deduction, even if these activities are carried outside

the approved R&D facility including overseas expenditure.

3.21.2. Weighted deduction under section 35(2AB) for computing Book profits

Presently, while computing the 'Book Profit' under Section 115JB, the amount of weighted deduction u/s 35(2AB) is

not deducted. In the past, similar adjustment in respect of export profits under Section 80HHC was permitted for

purposes of computation of 'Book Profit' under Section 115JB. Therefore, if the Government is serious about

promoting in-house R&D in India, the amount of weighted deduction u/s 35(2AB) should be deducted while

computing tax under MAT.

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3.21.3. Weighted deduction to an approved R &D company be extended from 125% to 175%

Vide Finance Act 2010, the percentage of weighted deduction allowable u/s 35(2AA) on sponsored scientific research

undertaken through an approved National Laboratory, University, Indian Institute of Technology and other specified

institutions was increased from 125% to 200%. Similarly, the percentage of weighted deduction u/s 35(1)(ii) on

contributions made to approved scientific research associations, University, College or other institutions was also

increased from 125% to 175%. However, similar increase in the percentage of weighted deduction on contributions

made u/s 35(1)(iia) to an exclusive R&D company approved by the specified authority, has not been allowed. It is

therefore, suggested that the aforesaid anomaly should be removed and the percentage of weighted deduction on

contributions made to an exclusive R&D company for carrying research and development should be increased from

125% to 175%.

3.21.4. Other Suggestions for Direct Taxes

1. In order to facilitate and encourage Scientific Research, all expenses of revenue nature incurred prior to

commencement of business, should be allowed as deduction in the year in which business has commenced.

2. Government must create a budget through which 50% of the total income tax paid by a company in the last 10

years can be paid back, or at least as a loan to an R&D organization for 20 years at a nominal rate of interest.

3.21.5. Service Tax on Clinical Trials of Drugs

The following services in relation to Clinical Trials of Drugs are exempted from the levy of service tax vide Sr.No.7 of

Notification 25/2012-ST dated 20-06-2012, namely:-

“7. Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal

remedies on human participants by a clinical research organization approved to conduct clinical trials by the

Drug Controller General of India.”

As may be observed the exemption is applicable for clinical research organizations (CRO) if the CRO is approved

specifically by the Drug Controller General of India (DCGI). However, the DCGI does not approve any CROs; in fact

there is no mechanism in place for approving a CRO per se by the DCGI.

It is suggested that the aforesaid entry No.7 in the said Notification may be amended so that the service tax

exemption is applicable to the clinical trial process which is approved by the DCGI.

3.21.6. Excise Duty on Bulk Drugs

The rate of Central Excise duty on bulk drugs which is 10% may be brought down at par with drug formulations which

is 5%.

3.21.7. Central Sales Tax

Life saving drugs, life saving medical devices and critical diagnostic kits may be exempted from CST.

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3.21.8. Exemption from Excise Duty for Generic Drugs

At present branded and generic medicines are subjected to the same rate of excise duty. In order to promote generic

medicines, as per Government's policy, it is desirable that medicines sold under the monogram of any

pharmacopoeia (generic -without any brand name) may be exempted from the levy of central excise duty.

MEDICAL EQUIPMENTS AND DEVICES

3.22.1. Background

India's healthcare infrastructure is lagging behind when compared with other developing countries. There exists a

huge gap between demand and supply of healthcare infrastructure facilities available in the country. To achieve a

desired bed density of 2 per 1000 population by 2025, investment to the tune of $86 billion would be required, a

bulk of which has to come from the private sector / FDI going by the current figure of 74% contribution coming from

the non-government sector. Therefore, it is imperative to create an inductive environment for facilitating investments

into the sector.

3.22.2. Medical Technology Parks

Creation of exclusive dedicated Medical Technology Parks where there is a cluster of manufacturers of Medical

Technology products with basic infrastructure to support these and the inclusion of benefits for Customs duty on raw

material, excise duty concessions, VAT holidays, IT holidays, etc. Furthermore, there is a need for R&D grants /

subsidies in the Medical Technology space for promoting Domestic Innovation initiatives.

To ensure that there is thrust in the Research and Development area for design as well as innovation of these

products, special incentives must be offered to get more participants in this. As benefits to the society would be very

significant due to such projects, incentives in the form of Income Tax write-off for up to 250% of the value of

investment for R & D and innovation of Medical Instruments, Diagnostics Instruments, Consumables, Devices, etc.

should be offered.

3.22.3. Lifetime Complete Health Coverage, through Insurance Benefits for Voluntary Organ Donors

India needs to do 2,00,000 solid organ transplants each year to meet the recipient target, which is grossly

undersupplied due to the shortage of donor pool. Amendments to the Transplant Act, 1994 need to be looked at, to

increase donor pool. Also, taking a cue from the worldwide practice, it is imperative to incentivize and promote

voluntary donors to meet the organ shortage. The donors may be provided lifetime health coverage through

insurance benefits.

3.22.4. Health Coverage

There should not be rejection for health insurance due to age limitations for senior citizens even with non-

continuous / no provision of health insurance coverage. Also, there is a need for restructuring the premium, so that

the monetary burden on the end user reduces as his / her age increases and the ability to contribute decreases. This

innovative premium structuring will help increasing affordability amongst the masses.

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Customs Duty Recommendations

3.22.5. Exemption for Medical / Dental / Surgical Equipments

Medical device technology is driven by innovation and there are tens of thousands of different products and

applications in different surgical streams. Tariff barrier on imports of finished goods impacts healthcare costs

because economies of scale will not permit manufacturing of all products in the country. Therefore, import of

finished goods and raw materials/components should be at low customs rates. Local manufacturing should be

incentivized through better infrastructure rather than through tariff barriers alone. Tariff barrier on finished goods

will only result in late introduction and adoption of new technologies critical for the healthcare sector.

Customs Duty on import of finished products should be prescribed at a very low level while NIL customs duty be

specified for the import of Raw Materials / Parts / Sub-Assemblies required for ultimate local manufacturing of

instruments / Accessories and Consumables.

It is requested that Nil Basic Customs Duty be specified for Medical Equipments, Medical or Surgical Implants,

Medical Devices falling under headings 9018, 9019, 9020, 9022 and 9027. Blood Glucose Monitoring Strips of

heading 3822, Medical, Surgical or Laboratory Sterilisers of heading 8419 and Sterile surgical catgut and similar

sterile suture materials and sterile tissue adhesives for wound closure of heading 3006 should also be exempted

from customs duties.

It is requested that medical products classifiable under headings 9018 to 9022 and parts and accessories thereof

presently levied to 5% basic duty in terms of S.No. 474 of Notification No. 12/12-Cus dt. 17.03.2012, be totally

exempted from import duties. The exemption may also be extended to parts, accessories, consumables or assembly

components, whether required for manufacturing or to be assembled at site of use. This will remove classification

disputes and allow the industry to get the desired exemption. Specifically parts and components of hearing aids

should be exempted from customs duties to provide a level playing field for domestic manufacturers.

To ensure that the spare parts imported to be used for maintenance of life saving devices, are used for the same

purpose, importer may be asked to furnish “End Use Certificate” within a period of 12 months. Procedure for

Consumption Certificate for materials imported as per Customs Notification 21/2010 to be amended to read as

“Importer to submit Self Declaration for having consumed the materials in the process of manufacture of Medical

Equipment”.

The objective of the aforesaid request is to give a fillip to medical device manufacturing in India by making it

attractive to FDI from global majors. It is part of an effort to turn India into a manufacturing hub for supplying the

medical devices to not just India, but globally. Once investment begins, then this will automatically encompass

technology transfer, investment in R&D, development of ancillary industries in addition to financial investment. High

tariff barriers will drive away investment, isolate domestic industry and the opportunity will flow to other countries.

3.22.6. Special CVD 4% in lieu of VAT

For any product that is meant for retail sale, MRP is required to be declared at the point of import. Further, 4%

Special CVD is not levied on products that carry MRP at the time of import. This causes peculiar complications for the

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industry - The industry has tens of thousands of SKUs that are imported. It is not possible to forecast accurately and

get products manufactured that carry India specific labeling and within the required time and cost. As a result,

products are bonded with customs; MRP labels are affixed and then released. This is a logistical nightmare and adds

to the cost of import.

It is requested that a provision be made to exempt Medical Products falling under Chapters 9018, 9019, 9020, 9022,

9027, 3822, 8419 and 3006 from carrying an MRP sticker at the time of import and permission be granted to

importers to affix MRP stickers post importation at their own warehouses

3.22.7. Other Customs Exemptions

1. All life saving medical devices, consumables used with devices in the specific life saving treatment procedure and

their spare parts should be exempted from Customs Duty. It is recommended that the following be included in

the list of Life Saving Products:-

• Patient monitoring systems & image guidance systems

• Pacemakers

• Image Guided System

• External Defibrillators

• NT & ENT Surgery Products including electrical/pneumatic drills & the consumables

• Deep Brain Stimulation Implanters, drug pumps, lead etc

• Heart Lung Machine & Oxygenators- During cardiopulmonary

• Heart valves, Annuloplasty Rings and various Cardiac catheters

• Respirators and Masks (industrial & healthcare)

• Dialysis Machines equipments and Devices (Hemo and Peritoneal Dialysis)

• Peripheral Vascular stents

2. Sterilizers of Heading 8419 20 90 which are presently levied to import duty at 25.85% may be fully exempted

from the levy of customs duties. Plasma sterilizer allows sterilization of all type of surgical instruments and

devices.

3. Topical Skin Adhesive of Heading 3006 10 10 which is presently levied to import duty at 19.567% may be fully

exempted. These are used for wound closure, instead of conventional sutures.

4. Custom Duty waiver for essentially required radiopharmaceuticals used in Diagnostics like Imaging and Scanning

(PET-& SPECT) & Therapy some of which are not manufactured in India like Iodine 131, MIBG 131, Lutetium 177,

Yttrium 90, Ge-68-Ga 68 generator, Cold Kits for Tc 99m, Rubidium 82.

5. Cardiovascular, cancer and neurological surgeries involves Iodophor impregnated drapes (HS 3005) for

prevention of wound infection and Fibrin sealants (HS 300620) for achieving immediate sealing of blood vessels

which are critical for life of the patients. These products currently are levied duties under headings 3005 and

3006 at basic of 10% and a total import duty of 21.78%. It is submitted that these may be included in the Life

Saving category (List 4) and subjected to concessional 5% basic duty and Nil CVD.

6. Polyurethane film (Heading 3926) used for the manufacture of adhesive coated PU film, Medical grade PVC

(Heading 3921 90 99) required for the manufacture of dialysis products, Dextrose Anhydrous USP, for use in

manufacture of Intravenous fluids be exempted from the levy of customs duties.

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7. Medical Stretcher / Wheel Chairs / Medical Beds should be levied to concessional rate of basic customs duty of

5%.

8. Power tools/ drills, surgical blades and burs used in various neurological, orthopedic, spinal, by-pass surgery &

other skeletal surgeries, Endoscopy Camera, accessories & parts should be exempted from customs duty.

9. Integrated Operation Theatre (Consisting of Routers, Booms, Pendants, Lights, Monitors, Camera, and

Connectors etc) should be charged to a reduced duty of 5% basic and Nil CVD.

3.22.8. Procedural Simplification

Any imported item be it raw material or otherwise falling under chapters 28,29, 30 or 35 is allowed import subject to

obtaining No objection certificate (NOC) for each consignment from Asst. Drug Controller (ADC) posted in the Ports.

Current process is that as and when an item falling under any of the above chapters is imported, Customs EDI System

automatically issues a Compulsory Compliance report (CCR) calling for NOC from ADC before permitting the

clearance of the Cargo. Importers in turn register the customs request (CCR) with Drug Authorities and submit all

relevant import Documents for ADC Review. ADC would depute an Officer to either inspect or draw samples from the

imported lot and based on his analysis/examination issues NOC to the importer to clear the cargo. This is applicable

for all items falling under the chapters mentioned above. This procedure is not adding any value and to the contrary

is leading to delays in clearing imported Cargo and also adds up transaction cost like demurrage, Port charges and

unnecessary waste of time. It is suggested that importers should be permitted to obtain prior No Objection

Certificates from Drug Authorities for a prescribed fee with validity of 2 years and same should be used for clearing

the cargo.

3.22.9. Excise Duty Recommendations

It is recommended that the excise duty on medical equipments be reduced significantly and may be prescribed at the

lowest slab to enable the domestic industry to find a foothold.

3.22.10. Service Tax Recommendations

It is requested that the service tax on Service and Maintenance Contracts for medical equipments be either

exempted fully or a minimal rate of tax prescribed for this sector.

In-Vitro Diagnostics (IVD) Sector

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

The import of raw materials such as antigens/antibodies or any other ingredient corresponding to the manufacture

of diagnostic test kits specified in list 4 put the local manufacturer at disadvantage in comparison to imported

finished diagnostic test kit specified in list 4 which is imported at nil duty. The notification should therefore include:

“Bulk drugs / antigens/antibodies (monoclonal / polyclonal) / raw materials / components used in the manufacture

of Life saving drugs / medicines including their salts and esters and diagnostic test kits”.

• The following items which were a part of the now abolished List 37 need to be included in List 4 under

notification No.12/2012-Customs, dated 17/03/2012 to allow for a level playing field for both Indian

manufacturers and importers.

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- AIDS (Acquired Immune Deficiency Syndrome) test kits

- T.P.H.A kits and AIDS diagnostic kits.

- Rapid diagnostic kit for detecting infection with malaria parasite / Tuberculosis (TB)

- Australia antigen/ HBsAg kit.

- HCV (Hepatitis C Virus) by any technology.

- Dengue detection systems/kits.

• Exemptions for components for Elisa Kits to be expanded: The list that provides the benefit of lower duty may be

extended to include antigen or antibody on the solid phase for coating. The other key component is the enzyme

conjugate and their stabilizing buffer / solutions. It is important to put the local ELISA kit manufacturers at par

with the importers because all finished ELISA kits are imported at nil duty as per item no. 36 of List 4.

• Automated Blood Culture : When a patient shows signs or symptoms of a systemic infection, results from a blood

culture can verify that an infection is present, and they can identify the type (or types) of microorganism that is

responsible for the infection. For example, blood tests can identify the causative organisms in severe pneumonia,

puerperal fever, pelvic inflammatory disease, neonatal epiglottises, sepsis, and fever of unknown origin (FUO).

• Automated Identification & Antibiotic System: The increasing prevalence of antibiotic resistance is challenging

established empirical treatments, making early identification and susceptibility determination more important.

To avoid time-consuming overnight cultures, the rapid identification and susceptibility testing helps to detect

antibiotic susceptibility and rational use of antibiotics

• Cases of duty rationalization: With abolishing of List 37, all diagnostic devices are now covered under Chapter 90

(9027). They therefore attract high duty rates and it is recommended that they be charged to NIL duty to

encourage access to newer technologies. Further duty on manufacture or import of diagnostic reagents to be

reduced to encourage manufacturing in India. That apart duty structure of following items should be

rationalized:

- Excise duty for manufacturing of Diagnostics Reagents may be made NIL from existing 10% to allow cost

benefit to indigenous manufacturer.

- Diagnostics Reagents may be subjected to same levels of duty as Medical Equipment/Devices under Chapter

9018 as against the existing rate of 26.75%

- Duty on PCR kits may be made NIL duty as given for ELISA, CLIA Diagnostics kits, etc from existing 26.75% in

order to quantify the load of deadly viruses/bacteria such as Hepatitis C, CMV, H1N1, TB, etc in patients for

subsequent treatment and monitoring

- All diagnostics equipments including Fully Automated Biochemical Analyzers may be assessed at NIL duty or

with a total duty of 9.63% as sudden reversal and imposing duty of 14.72% makes the cost of these Hi Tech

Instruments significantly expensive

- Customs duties for Diagnostics kits may be based on criticality of the test rather than the technology.

Duty exemption be based on Test rather than Analyte for critical tests- Customs Tariff for Diagnostics kits is based on

technology rather than the Analyte causing anomalies Eg: ELISA &CLIA kits are exempt from customs duty whereas

IFA(Immuno Florescence) and Bio-chemistry kits are liable for duty under heading 3822 dutiable @ 26.75%. It is

recommended that duty exemption be based on Test rather than Analyte for the following critical tests:

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a. Blood Banking Panel

b. HIV

c. HBSAG

d. HCV

e. Sepsis Marker

f. Procalcitonin (PCT)

g. Tests of Auto immune diseases (ANA and ds DNA)

ELECTRONICS HARDWARE

3.23.1. Market Scenario

Demand in the Indian electronics market was USD 45 Billion in 2008-09 and is expected to reach USD 400 Billion by

2020.The domestic production in 2008-09 was USD 20 Billion and at the current rate of growth, the domestic

production can cater to a demand of $100B in 2020.This aggregates to a demand supply gap of nearly USD 300 Billion

by 2020.Government has announced a number of policies to promote local manufacturing & create ecosystem for

electronics manufacturing.

The following suggestions may be considered by the government for promoting electronics & semiconductor

manufacturing:-

3.23.2. Funding

Provide low Interest loans (~3%) to electronic hardware manufacturing units; prevailing interest rates are at the

maximum of 15% and reduction in that shall attract new investments & players in the electronics manufacturing

3.23.3. Tax Holidays

Tax holiday to semiconductor industry in various countries like Taiwan, China, Singapore, Malaysia lower effective

rate to zero or single digit. Taiwan and China each offer five year tax holiday with extensions possible, while

Singapore offers a 15-year tax holiday to qualified “pioneer” companies. It is recommended to allow tax exemption

and R&D grants to semiconductor companies in India.

China levied only 3% VAT on semiconductors made in China but charges 17% VAT on imported semiconductors. China

has created a tax-free environment for new semiconductor plants and Companies were subsidized through tax

incentives whether they make profit or not.

3.23.4. Remove Anomaly in duty structure

The present rates of CVD and SAD increase the cost of a finished computer or laptop that is manufactured in India as

compared to a direct import due to an inverted duty structure. Most components of computers like motherboards,

cabinets, memory modules, graphic cards attract a CVD of 10.3% and a SAD of 4% leading to an effective duty of

14.73% as against 10.3% for finished goods. On some components like microprocessor, hard disc drive, the duty rate

is 5% CVD and nil SAD.

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It is requested that corrective action may be taken to remove the anomaly in the duty structure.

3.23.5. Power / Utilities

Incentives for Alternate Power Generation - This helps the manufacturing industries to cater their need through the

alternate sources. Providing Incentives for the initiatives would help the industries to contemplate the proposals.

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Component

Duty Rate Cost proportion in

BOM cost

Weighted average

duty

HDD 5.20% 7.20% 0.40%

Processor 5.20% 20.20% 1.00%

ODD 5.20% 3.60% 0.20%

Operating System 10.30% 8.60% 0.90%

Memory 14.70% 8.90% 1.30%

Adaptor 14.70% 2.30% 0.30%

Mechanicals 14.70% 3.30% 0.50%

Keyboard 14.70% 1.30% 0.20%

BU

14.70%

38.20%

5.60%

Card

14.70%

1.00%

0.20%

Battery 26.80% 5.40%

1.50%

100.00%

12.00%

Weighted average duty rate

12.00%

Duty on finished product 10.30%

The total input duty on components is higher than the output duty on the finished product or duty on imported

finished goods as shown in the table below. The higher duty directly leads to a higher cost for manufacturers in

excise exempt zones as such manufacturers cannot claim offset of input tax against output tax. For manufacturers in

DTA areas, there is overflow of input credit due to higher input tax versus output tax which again adds to the cost.

As a result, IT companies that have established large manufacturing facilities in India that manufactures information

technology hardware like desktop and laptops are operating at only fraction of their capacities. The low production

in turn leads to further higher manufacturing cost.

This in turn discourages other component manufacturers who want to set up their manufacturing base in India.

Table: Inverted Duty structure in finished computer or laptop

3.23.6. Logistics/Manpower

Extending 24x7 customs clearance for EOUs.

TOURISM

3.24.1. The Highpoints

1. The total contribution of Travel & Tourism to GDP was INR 5651.0 billion (6.4% of GDP) in 2011.This is expected

to rise by 7% in 2012 and by 7.8% pa to INR 12891.2 billion in 2022

2. In 2011 the total contribution of Travel and Tourism to employment, including jobs indirectly supported by the

industry was 7.8% of total employment (39,352,000 jobs). This is expected to grow by 2.8% in 2012 to

40,450,000 jobs and rise by 1.7% pa to 47,911,000 jobs in 2022 (8% of the total).It is estimated to create 78 jobs

per million rupees of investment compared to 45 jobs in the agriculture sector and only 18 in the manufacturing

sector for similar investment. Along with construction, it is one of the largest sectors of service industry in India.

3. Foreign Exchange Earnings (FEE) in rupee terms during 2011 were Rs.77,591 crores with a growth of 19.6% as

compared to the FEE of Rs.64,889 crores with a growth rate of 18.1% during the year 2010 over 2009.

For an industry which is people intensive with an enormous multiplier effect it is imperative that the following

suggestions are considered by the Government for the growth of Tourism:-

3.24.2. Inclusion of Hotels as infrastructure

It is suggested that like airports, seaports and railways, hotels should be included as an infrastructural facility eligible

for benefits under Section 80 I A of the Income Tax Act. If implemented all new hotel projects will be able to avail the

benefit of deductions of 100% with respect to profits and gains for a period of 10 years. This will lead to many new

hotel projects being set up by companies re-investing their profits in the hotel sector. The country's hotel industry

needs at least Rs 72,000-crore investment in the next four-five years to build another 1.8 lakh rooms across 1- to - 5-

star categories, In fact under Section 10(23G) of the Income Tax Act, Hotels were added to the infrastructure list so

that interest received by the Financial Institutions and banks for loans extended to hotels were tax exempted.

However the section itself was discontinued with effect from 1.4.2007. Capacity building in Tourism will lead to huge

opportunity for employment.

3.24.3. Export Industry Status

Given quantum Foreign Exchange earnings, this industry should be granted deductions on foreign exchange earnings.

The benefits available under Section 80HHD of Income Tax Act 1956, which was discontinued after 2005-06, should

be revived. An exemption on the foreign exchange earning of tourism industry on the same lines as that given to

other foreign exchange-earning industries would be beneficial for the industry's growth.

3.24.4. Declaration of Tourism as an Industry

Many States of the Union of India have already granted Industry status to tourism i.e. Tamil Nadu, Kerala, Uttar

Pradesh, West Bengal, Arunachal Pradesh, Uttarakhand, Sikkim, J&K, Jharkhand, Haryana and UT of Daman& Diu,

Dadar & Nagar Haveli. It is proposed that tourism should be included in Schedule 1 of the Industries Development

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Act 1951 and that all the remaining State Government of the union of India may be requested to recognize tourism

as an Industry so that Hotels throughout the country will be able to avail of the benefits under the industrial policy of

the respective state government:-

• Land banks for budget Hotels

• Exemption of Duty on Stamp Paper

• Exemption / Concession in VAT and Sales Tax

• Property Tax levied as per Industrial rates

• Electricity rates revised as per Industrial rates

• Water Charges levied as per Industrial rates

To ease procedural hassles, Single Window clearance be adopted for approval and setting up of new hotel projects

3.24.5. PAN Number for payments in Hotels/Restaurants

As per Rule 114B, every person is required to quote PAN while making payment to hotels and restaurants against bills

for an amount exceeding Rs.25,000/-. Most parties pay by credit card and it becomes a huge problem to collect PAN

in all instances. It may be pointed out that the credit card companies are separately reporting towards payments

made by any person against credit card bills aggregating to Rs.2 lakhs or more per annum on PAN basis as per Rule

114E. The aforesaid limit of Rs.25,000/- for quoting of PAN against payment of hotel/restaurant bills was fixed long

back.

It is recommended that quoting of PAN on payment to hotels/restaurants be only made applicable for cash payments

above Rs.1,00,000.

3.24.6. TDS on Room Charges

Hotel Charges for long stay are currently subject to TDS under section 194-I of the Act. Payment made to hotels are

not in the nature of rent, per-se and hence hotels should be excluded from the purview of section 194-I of the Act

for the purpose of tax deduction at source.

3.24.7. Depreciation for Hotel Buildings

Depreciation on Hotel Buildings under section 32 to be increased to 20% from the present 10% as hotels have to

make huge investment in plant and machinery due to their running on a 24 hour basis.

RETAIL

3.25.1. Policy Reforms

• A Retail Policy should be considered for promulgation by the Government which will help modern retailing grow

from strength to strength in India. An empowered committee under the Ministry may guide and supervise

implementation of the Retail Policy and take appropriate decisions.

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•

• Incentivise States for a model Shops and Establishment Act through amendment in the various provisions of the

Act.

3.25.2. Tax Reforms

• In order to enable mergers and amalgamations in loss making retail companies, so that the amalgamated entity

is able to carry forward the predecessor losses, section 72A of the Income Tax Act 1961, should be extended to

retail companies, as currently the retail companies do not come under the definition of industrial undertaking,

which is one of the mandatory conditions for carrying forward of losses under section 72A for any M&A.

• Currently 200% weighted deduction is permissible for in-house approved R&D under section 35 (2AB), however

the same is restricted to manufacturing organization. Retail is not considered as manufacturing, however retail

companies also incur substantial R&D expenditure, which is very much required for growth and survival of the

industry. Hence this benefit should be extended to retail companies.

• Supply chain investments by retailers help support infrastructure development in logistics across the country and

positively impacts industries like agriculture. Thus supply chain investments need to be incentivized as follows:

• Exemption for capital imports of supply chain equipment including hand held scanners, fork-lifts, cold chain

equipment etc.

• Duty and tax exemption on supply chain automation products (Hand-held scanners, Ware-house

management software and associated services)

• Special tariff loans for warehousing and back-end processing

• Retail industry depends on the informal sector, private equity and banks for finance. Banks currently treat retail

as trade and the rate of interest is relatively high. In a low margin business, this is unaffordable. Hence, banks

must be encouraged to provide cheaper funding in the form of loans and cash credit lines, with a moratorium on

repayment.

• Several states have implemented entry tax and octroi. These hamper the free movement of goods and create

additional tax barriers and inefficiencies. While these may not be within the purview of the Union Government,

the Centre may attempt to influence the states which adopt such barriers.

• Several retail companies incur costs and investments in order to scale up the capability of under educated

Indians in order to facilitate their working in a retail store. These costs and investments which are developmental

in nature should be encouraged by providing suitable tax breaks

• Review stock limits under Essential Commodities Act

• Uniform legislation allowing shops to operate 365 days and extended hours.

• Amendment in APMC Act that would allow the retailers directly procure vegetables and fruits from the farmers,

invest in them to help drive yields, quality of yield, storage and processing capacities.

Industry status for the Retail Sector

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CONSUMER ELECTRONICS

3.26.1 Proposals for the Consumer Electronics industry

The following suggestions are submitted for consideration of the Government for encouraging growth of the Indian

consumer electronics industry:-

• Reduce customs duty on panels of LCD / LED televisions even for sizes below 19 inches.

• Increase customs duty on set top boxes from 5% to 10% for the next 2 years to encourage local manufacturers.

• Exempt magnetron from the whole of customs duty without any conditions, since this component has no use

other than in the manufacturing of microwave ovens.

• The abatement for assessment of consumer electronic and home appliance products (monitor, air-conditioner,

LCD television, Plasma television, refrigerator, GSM mobile phone) should be increased to 40% from the current

levels of 20% to 35% in view of heavy discounts offered by the industry on the printed MRP as per the prevailing

trade practice.

• Interest on loans for purchase of consumer durable products should be reduced to 9% to enable lower middle

income groups in the rural sector to purchase such products thus reviving the industry.

CHLOR ALKALI INDUSTRY

3.27.1 Proposals for the Chlor Alkali industry

The Chlor-Alkali Industry in the country produces mainly Caustic Soda, Chlorine and Soda Ash. Industries that have

direct linkages with this sector include Soaps and Detergent Industry, Pulp and Paper Industry, Textile Processing

Industry, Aluminium Smelting, Dyes and Dyestuff Industry, Plastic Polymers, Rayon Grade Pulp, Pharmaceuticals,

Electroplating, Adhesives/Additives. Chlorine is important for manufacturing PVC and is also used in the

pharmaceutical industry. Soda ash is used in the glass industry, silicates and other chemical industries.

The following proposals may be considered for the healthy growth of the chlor-alkali sector:-

(i) The major input in chlor-alkali industry is power. In case of caustic soda, power constitutes more than 60% of the

cost of production. Measures need to be taken to make available this important input to the industry at

internationally competitive prices. The following suggestions could be considered in this regard:-

• In order to increase the availability of coal for captive power plants at reasonable prices, coal mining should

be opened to the private sector. Coal blocks should be allocated on priority basis to power intensive

industries like Chlor-Alkali & Soda Ash through an independent regulatory mechanism.

• To reduce the input costs, Customs duty of 5% on fuel oils should be abolished for imports by power

intensive chlor-alkali industry.

• Allocation of natural gas and pricing for such gas used by captive power units feeding power to caustic soda

and soda ash units should be made available under the administrative price mechanism.

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•

industries that consume above 1 MW of power and regulators can fix the charges for such wheeling of

power, but the State Governments are not implementing this provision and they impose a huge cross

subsidy charges on consumers buying from open market. This needs to be implemented by the Government

of India on priority basis so that wheeling of power is a reality.

(ii) To reduce the cost of inputs, it is also important that interest rates are reduced and brought at international

level.

(iii) An industry like Caustic Soda & Soda Ash consumes salt to the extent of 50% of the national production. This

provides lot of employment to the salt workers and the transporters. In order to ensure quality salt supply at

reasonable cost Government should provide incentives for R&D work and mechanization of salt industry.

(iv) To secure raw materials like Ethylene & Cl2 for producing Vinyls, investments in PCPIRs may be encouraged.

Indirect import of Chlorine through EDC/VCM/PVC should be avoided by retaining appropriate duty structure on

these products.

(v) Incentives should be provided to chemical industries for pursuing green initiatives like providing star ratings

which could facilitate fast clearances of New Projects.

(vi) R&D for effective use of Hydrogen as green energy like in fuel cells to be encouraged.

(vii) To ban import of chemicals like Caustic Soda, Soda Ash, Hydrogen Peroxide from Pakistan till Pakistan removes it

from their negative list.

(viii) Most of the caustic soda industry is operating on Membrane Cell technology while duty on new plants including

Membrane and parts is 5% (Notification No.12/2012-Cus dated 17-03-2012 Sl. No.417), the spare parts of the

existing plants are subject to customs duty of 10% + CVD etc. Import of spare parts and membranes which are

not manufactured in India may be allowed free of duty.

As per Electricity Act 2003 the distribution companies are bound to provide network access to large

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IV. DIRECT TAXES

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A. Income Tax

4.1. Tax Rates - Companies/Firms/Limited Liability Partnership

Issues

• All countries around the world need to compete vigorously for international investments and one of the means is lowering the income tax rates. High corporate tax rates tend to reduce investment, entrepreneurial activity and economic growth.

• The Finance Act, 2012 had not made any change in the Corporate Tax rate, which continues to be at 30% (calculating at 32.45% with surcharge and education cess), despite the global average corporate tax rate having fallen down to 24.49% in the last year 2012.

• In the current global economic scenario, Indian corporates need to be competitive. Further, India needs to retain and foster its title as one of the most attractive foreign investment destination. The current corporate tax rate of 30% for domestic companies is fairly high. Accordingly, there is a strong case for reduction in the current corporate tax rate for domestic companies from 30 percent to 25 percent.

Recommendations

• It is therefore submitted that the corporate tax rate for domestic companies be reduced to 25 percent in the forthcoming Union Budget 2013. This will give India the competitive edge that will foster its growth and ambition to become one of the largest economies in the world.

• FICCI believes that we have not yet reached the optimal level of the Laffer Curve. In case, the tax burden is moderated and brought down to 25% level, it would in ultimate analysis result in larger revenues for the government as amply demonstrated in past in so far as whenever the tax rates were reduced, the tax revenues invariably went up.

• Similarly the income tax rates for Unincorporated bodies i.e. Firm, Limited Liability Partnership, etc., should also be reduced to 25 percent from the current 30 percent.

4.2. Tax Rates - Individual Taxpayers

Issues

The Finance Act, 2012 had marginally increased the basic exemption limit to Rs. 2 lakhs and also the peak tax rate of 30 per cent is made applicable over an income of INR 10 lakhs for individual taxpayers. However, the income trigger for peak rate in other countries is significantly higher. Hence, there is a need for further raising the income level on which the peak rate triggers, to make the same compatible with the international standards.

The Parliamentary Standing Committee on Finance (PSC) in its Report on the Direct Taxes Code Bill 2010 (DTC Bill) has appropriately recommended the following revised tax slabs for individual taxpayers.

FICCI fully shares the views of the Committee and is firmly of the view that if our individuals in the lower income

bracket are left with more disposable incomes, and those at a higher income level have to face lower tax rates, it will

serve the following purposes:-

• Incentivize people to come into the tax net;

• Ensure higher collection from greater compliance;

• Encourage consumption and savings;

• Higher exemption limit to minimize compliance and transaction costs of the tax administration; and

• Enable Income Tax wing to re-orient its resources to focus more on higher income groups - prone to tax

avoidance and evasion, and to plug loopholes and raise more revenues.

FICCI would, therefore, like to urge that the recommendations of the PSC should be implemented expeditiously

during fiscal year 2013-14.

4.3. Surcharge and Education Cess

• The surcharge on Income-tax was initially levied at a nominal rate of 2.5 percent. It thereafter increased to 10

percent. Subsequent amendments have resulted in varying Surcharge rates for different categories of persons.

The removal of levy of Surcharge for individuals, firms, etc. earlier was a welcome relief. In the Union Budget

2011, the Surcharge for domestic companies was partially reduced to 5 percent from 7.5 percent. Presently, the

Surcharge is 5 percent for domestic companies and 2 percent for foreign companies. With the increase in

collection of Direct Taxes, it would be in fitness of things to remove the surcharge for companies in the

forthcoming Union Budget 2013.

• Similarly, the object of Education Cess levy was to collect specific revenue for securing funds for educational

needs. With the increase in collection of Direct taxes, a portion of Direct Taxes collections can internally be

apportioned for funding educational projects instead of having a separate levy which also complicates the

effective tax rate computation. It is submitted that the Education Cess be also removed in the ensuing budget.

• The removal of both Surcharge and Education Cess will be in line with moving towards the DTC regime wherein

both these levies are proposed to be withdrawn.

4.4. Minimum Alternate Tax and Alternate Minimum Tax

Issues

• Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act, 1961 was introduced to collect tax

from those companies which had adequate book profit as per audited financial statements but nil or less taxable

income. The difference in these two items generally related to tax incentive or depreciation rates and method.

With the change in the economic scenario, tax incentives have and are being phased out and rates of

depreciation have been lowered.

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Slab (lakhs)

Tax rate

0-3 Nil

3-10 10%

10-20 20%

Beyond 20 30%

•

impacted significantly cash flow of Companies who otherwise have low taxable income or have incurred tax

losses. Further, this has also diluted significantly the tax incentives offered under Chapter VI-A of the Income-tax

Act,1961 (the Act) to eligible businesses and Industrial Undertakings as the difference between the corporate tax

rate at 30 percent and MAT at 18.5 percent is not very large.

• The scope of MAT has been broadened effective AY 2012-13 by bringing Special Economic Zone (SEZ) developers

and units under the ambit of MAT thereby significantly diluting benefits offered under the popular SEZ Scheme.

• Income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an

equity oriented fund is exempt under Section 10(38) of the Act. The objective of giving such exemption was that

Indian residents should invest in the Capital Market for long term. This benefit is also available to Companies

under the Act however, by including such income in the book profit the benefit is taken back from the

Companies. Taking back such benefit from the Companies is not equitable and therefore the proviso to Section

10(38) should be deleted.

• Further, an Alternate Minimum Tax (AMT) under Section 115JC of the Act was also introduced on Limited

Liability Partnership's (LLP's) which was to be computed on their taxable income as increased by deductions

eligible under Chapter VI-A and Section 10AA of the Act.

• The Finance Act, 2012 has extended the applicability of AMT to include other taxpayers i.e. Sole proprietors,

Association of Persons and Partnership firms.

• Pursuant to above, the Companies / LLPs / Firms who have invested large sums in eligible businesses / industrial

units in the backward areas are also getting penalized as the benefit of such incentive gets reduced due to the

narrow difference between the basic MAT / AMT rate of 18.50 percent and the basic corporate tax rate / LLP tax

rate of 30 percent.

• The MAT /AMT credit is allowed to be carried forward for 10 years for set-off but this period is generally not

always sufficient. Many companies, particularly investment companies whose core business is investments are

not able to utilize MAT credit efficiently and within prescribed time-limits.

• Exemption from AMT is provided to certain specified persons if the adjusted total income of such person does

not exceed INR 20 lakhs. The limit of INR 20 lakhs is inadequate considering especially the huge amount of

investments made by the businesses in relation to exports of goods and services and should therefore be raised

to at least INR 50 lakhs.

Recommendations

• MAT/AMT rates to be reduced substantially over the coming years. The basic rate of MAT / AMT to be fixed at 50

percent of the basic corporate tax rate (currently 30 percent).

• To attract more industrial and infrastructural investments, MAT/ AMT on SEZ units, SEZ developers and other

eligible businesses/industrial undertaking to be abolished.

• The MAT/AMT credit is recommended to be allowed as carried forward and set-off without any time limit.

• Income arising from transfer of a long term capital asset being equity shares and units which are subjected to

Securities Transaction Tax is exempt under Section 10(38) of the Act. As per current provisions of MAT, the tax

exemption under Section 10(38) of the Act needs to be added back to book profits of the Companies. We

recommend that the tax exemption under Section 10(38) of the Act should also be available while computing

The MAT rate has increased from 7.5 percent in 2007 to 18.5 percent for 2011-12. This increase in rate has

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MAT. In other words this exemption should not be added back while computing book profits.

• The threshold limit from exemption of AMT should be increased from INR 20 lakhs to INR 50 lakhs.

• The amount of weighted deduction under section 35(2AB) be deducted while computing MAT.

• Companies be allowed to set-off entire past book losses including unabsorbed depreciation before they are

subjected to MAT.

4.5. MAT on infrastructure companies

Issues

• Infrastructure Industry in India have been experiencing a rapid growth in its different sectors with the

development of urbanization and increasing involvement of foreign investments.

• The Indian government has offered various tax incentives benefit under Section 80-IA of the Act to the

infrastructure companies to boost infrastructure.

• The benefit available to the infrastructure companies and other entities eligible for deduction under heading C of

Chapter VI-A of the Act, gets neutralized since the companies are required to pay MAT on their book profits.

Recommendations

• To attract more and more investment in infrastructure sector, MAT on infrastructure companies should be

abolished.

4.6. Dividend Distribution Tax under Section 115-O of the Act

Issues

• The Finance Act, 2011 have also burdened the SEZ developers by including them in the scope of DDT.

• Further, DDT currently is payable at the basic rate of 15 percent translating into an effective tax rate of 16.223

percent. Since DDT is a sort of surrogate tax on behalf of the shareholders, and if the shareholders were to pay

tax on their dividend receipts, the tax impact thereon is likely to be lesser in most of the cases in comparison to

the DDT tax burden.

• The earlier DDT rate at 10 percent was lower in line with the withholding tax rate on dividends in most Indian

and international tax treaties. The increased basic DDT rate of 15 percent reduces the dividend distribution

ability of the Indian Company. Further, the uncertainty with respect to its credit in overseas jurisdictions impacts

the non-resident shareholders adversely.

Currently, DDT is also levied on undertakings engaged in infrastructure development which are eligible for tax benefit

under Section 80-IA of the Act. This is detrimental to the growth of the infrastructure sector in the Indian Economy.

The Government needs to look at providing various incentives to boost the development of robust infrastructure in

India.

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Recommendations

• To attract more investment in the SEZs, DDT on SEZ developers to be abolished.

• The tax rate of DDT is recommended to be reduced to 10 percent from the current 15 percent.

• To incentives the investment in infrastructure sector, it is recommended that DDT on industrial undertakings or

enterprises engaged in infrastructure development, eligible for deduction under section 80-IA of the Act be

abolished. It is also recommended that further exemption from DDT be granted to the “infrastructure capital

company/fund” with the condition that it invests the dividend received from its subsidiary in the infrastructure

projects.

Issue

The Finance Act, 2012 amended Section 115-O of the Act to provide that in case any company receives, during the

year any dividend from any subsidiary and such subsidiary has paid DDT as payable on such dividend, then, dividend

distributed by the holding company in the same year, to that extent, shall not be subject to Dividend Distribution Tax.

The removal of additional condition to claim the said benefit i.e. domestic company should not be a subsidiary of any

other company, is a welcome step, insofar as, removes the cascading impact of the DDT. However, continuation of

the condition that the dividend should be received from a subsidiary is still quite restrictive and unrealistic in as

much as a company is stipulated to be a subsidiary of another company, if such other company, holds more than half

in nominal value of the equity share capital of the company. The said condition is unlikely to be fulfilled by majority

of the promoter companies which hold investment in operating companies listed on stock exchanges. Even

shareholders of joint venture companies are impacted by the above restrictions. In both the scenarios, since the

operating / joint venture company i.e. the company declaring the dividend is not a subsidiary of any company, the

first condition i.e. dividend should be received from a subsidiary company is never fulfilled and accordingly when the

promoter company / shareholder of joint venture company declares dividend to their shareholders, it cannot deduct

the dividend so received from the operating / joint venture company for the purpose of payment of DDT.

Recommendations

• The condition that dividend should be received from the subsidiary company should be removed and provision

similar to erstwhile Section 80M, mentioned above, be re-introduced as per which, if the income of a company

included any dividend received from a domestic company, a deduction was allowed to the recipient company

from the income upto the amount distributed by it to its shareholders. No conditions / restrictions such as (a)

dividend should be received from the subsidiary company and (b) the company declaring the dividend should

not be a subsidiary of any other company existed in the said provisions.

• In the alternative, the benefit of this section should be extended to a company who is receiving dividend from a

company in which they have significant interest i.e. 10% of the voting power in the company.

• Besides, it is suggested that proviso to Section 115-O(1A) (which provides that the same amount of dividend

shall not be taken into account for reduction more than once) be deleted so that the cascading effect of DDT in

multi-tier corporate structure, as is intended, can be removed.

• It also needs to be clarified that in order to claim the benefit under Section 115-O(1A), it is not essential that the

holding company distributes dividend in the same year in which it receives dividend from its subsidiary company.

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• Further, investment companies which do not necessarily own/have subsidiaries as they invest in various

companies in the open market, be also made eligible for such benefit.

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

As per Section 14A of the Act, no deduction shall be allowed in respect of expenditure incurred in relation to income

not includible in the total income. Section 14A(2) of the Act provides that the amount of expenditure incurred in

relation to income not includible in the total income shall be determined by the tax authority if he is not satisfied

with the correctness of the claim of the taxpayer in respect of such expenditure in relation to income not includible

in the total income. This satisfaction is to be arrived at by the tax authority having regard to the accounts of the

taxpayer. The determination of the amount of expenditure incurred in relation to the income which is not includible

in the total income of the taxpayer is to be done in accordance with the method prescribed, i.e. Rule 8D of the

Income-tax Rules, 1962 (the rules).

Issue

• Disallowance of expenditure even if there is no exempt income or restricting the disallowance to the extent of

dividend income earned

Recommendations

• The way in which the Rule stands drafted providing for disallowance of interest based on the average value of

investment divided by total assets, leads to a conclusion that the disallowance shall happen even if there is no

income or the quantum of disallowance far exceed the income, which is not includible in the total income. This

runs contrary to the intention of Section 14A of the Act.

• It should be specifically clarified that in the year in which no income which is not includible in the total income

has accrued to the taxpayer, no disallowance in terms of Rule 8D of the Rules shall be made. Further, it should

also be clarified that the disallowance as per the deeming provisions of Rule 8D of the Rules should not exceed

the amount of exempt income earned.

Issue

• A deeming provision of the administrative expenditure at the rate of 0.5 percent of the average investments,

results in adhoc and excessive disallowance.

Recommendations

• This Rule is very harsh and by applying the formula under the said Rule, expenditure that has no connection with

the earning of exempt income gets disallowed. A deeming provision of the administrative expenditure at the rate

of 0.5 percent of the average investments, results in adhoc and excessive disallowance. There is even more

hardship when the investments are made only at the end of the accounting year (say 31 March) which are also

subject to disallowance @ 0.5 percent as per the deeming provisions.

• Rule 8D be amended such that the arbitrary clause i.e. clause (iii) of Rule 8D(2) of the Rules on disallowance of

0.5 percent of the average investments be deleted. Alternatively, the disallowance for administrative expenses

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should be made by estimating the time of the personnel and the resources involved for undertaking the

activities which would earn exempt income. The aforesaid estimation to be done on reasonable basis after

considering the facts of each case and the frequency of such activities.

Issue

• The disallowance under Section 14A of the Act is required to be made in respect of expenses incurred for

earning exempt income. The provisions are harsh in respect of the investments held as stock-in-trade or strategic

investments made purely for acquiring controlling interest. The provisions are also harsh where the investments

made in the company as per the specific requirement under a statute or contract with government.

Recommendations

• The strategic investments are generally made with the intention of acquiring controlling interest and

management of the group for the purpose of enhancing the business objective of the group. The investment idea

is therefore business driven and not with the intention of earning dividend income.

• While making such investment and also in respect of investments held as stock-in-trade, the main intention is to

maximize business income which is taxable and dividend income are purely incidental.

• Further, in respect of certain businesses like power, infrastructure development etc., the statute / government

requires the taxpayer to execute the project only through a Special Purpose Vehicle (SPV) Company. Accordingly,

making an investment in a Company is a pre-requisite business model for such businesses.

• It should be specifically clarified that aforesaid investments would not be included for computing disallowance

under Section 14A of the Act

4.8. Introduction of Technological Upgradation Allowance

Issues

• In the era of fast changing technology, corporates have to upgrade their technologies to minimize their

manufacturing cost with a view to achieving competitive edge, which is absolutely necessary for the survival

• Need for giving a much-needed boost to jack up investment in the sagging manufacturing sector

• Sectors such as drugs and biotechnology, identified as having strong potential for growth and other strategic

sectors like capital goods, engineering, electronics etc require huge amount of money for research and

development

• Need for introduction of allowance for technology upgradation

Recommendations

• In this perspective, technological upgradation allowance should also be introduced whereby a Company is

permitted to set apart a certain percentage, say, 5-7 percent of their profits, by way of deduction in the

computation of taxable profits, to be exclusively used for upgrading their technologies.

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•

very high-tech technology could also be considered on a specific/ priority basis and be entitled to such benefit.

4.9. Depreciation

Issues

• Whether depreciation allowable on Goodwill

• Need for Higher depreciation allowability for plant and machineries used in double/triple shifts.

• Need for additional depreciation for Service industries.

• Additional depreciation for Hotel Industry- Hotel buildings constitutes the 'plants' for the hotel industry as their

usage is round the clock for 24 hours. The industry has to make very heavy investments in renovation, up-

gradation and upkeep of the hotel buildings

• Depreciation allowability with regard to various items viz. printers, scanners, UPS, router, switches etc. which are

integral part of the computer and cannot be used in isolation

• Need for restoration of 100% allowance on small items of assets.

Recommendations

• In line with the recent Supreme Court decision in the case of CIT v. Smifs Securities Ltd. (2012) 24 Taxmann.com

222 a clarificatory amendment should be brought for specific inclusion of Goodwill in the definition of block of

intangible assets. Further, it would be appropriate to provide clarity on allowability of depreciation on self

generated/ purchased goodwill.

• Further, it is noteworthy that under the Companies Act, extra shift depreciation allowance is available, which is

upto 50 percent more for double shift working and 100 percent more for triple shift working, to be calculated

separately in the proportion which the number of days for which the concern worked double shift or triple shift,

as the case may be, bears to the normal number of working days during the previous year. It is common

knowledge that plant and machineries are generally used for double / triple shift working and it would be in

fitness of things to allow depreciation at least at the rate permissible under the Companies Act in such cases.

• It is imperative to introduce the concept of 'free depreciation' where an enterprise may choose the quantum of

depreciation and the years of claim so that it is in a position to plan its cash flows in a better manner to optimize

productivity. Since the total depreciation allowed to the enterprise will not exceed the cost of the asset, the

proposal per-se is revenue neutral.

• Moreover, the Government should extend the initial depreciation under Section 32(1)(iia) of the Act to service

industries as well which is currently available to only manufacturing sector. The steady growth in the

contribution by various service industries to the Country's Gross Domestic Product should be augmented by

incentive in the form of extending the initial depreciation benefit to service industries.

• Appendix 1 of the rules should be suitably amended to provide that “computer” shall also include printers,

scanners, UPS, routers, switches and other accessories and peripherals which are integral part of computer and

cannot be used independently if not used along with the computer. This clarification will provide needed

certainty to the taxpayers and will put an end to unwarranted litigation on this issue.

Certain industries like automobile, Information Technology Companies, Pharmaceutical Companies, Banks using

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• Schedule XIV of the Companies Act, 1956 makes it mandatory for companies to charge off asset for value below

Rs. 5,000. It is imperative that first proviso to section 32 of the Act allowing for charge off of small assets for

value not exceeding Rs. 5,000 be reintroduced however, it shall be made applicable to all the assets as against

only plant and machinery in the original provision.

4.10. Disallowance under Section 40(a)(i) and 40(a)(ia) of the Act

Issues

• Section 40(a)(ia) of the Act provides that specified payments to residents without deduction of tax at source will

result in disallowance of the related expenditure and the payer is considered as a taxpayer in default and is liable

for interest, penalty and prosecution (except in certain cases as stipulated).

• Further, Section 40(a)(ia) of the Act allows the taxpayer the extended time upto the due date of filing the Return

of Income for depositing the tax deducted at source whereas under Section 40(a)(i) of the Act dealing with

specified payments to non-residents no such benefit is available.

Recommendations

• FICCI recommends that the disallowance should be restricted to the amount of tax deductible on source on the

payment and not the entire payment.

• In any case, in cases where a lower rate has been applied for tax deduction, a clarificatory amendment should be

made to Section 40(a)(ia) of the Act to allow expenditure proportionate to the tax paid.

• It is further recommended that the discrimination between payments to residents and non-residents regarding

extended time line for deposit of TDS should be removed and even under Section 40(a)(i) of the Act the taxpayer

should be given the benefit of extended time for depositing the TDS on payments made to non-residents upto

the due date of filing the Return of Income.

4.11. Disallowance of cash payments under Section 40A of the Act

Section 40A(3) of the Act broadly provides that where a taxpayer makes payment or payments to a person in a day in

respect of an expenditure otherwise than by an account payee cheque or draft, and such payment or payments

exceed INR 20,000 the said expense will be disallowed. In case the payment or payments are made for plying, hiring

or leasing goods carriages, the limit is INR 35,000.

Issue

• Section 40A(3) of the Act was introduced primarily to discourage cash payments. However the section has

courted controversy. For instance where payment is made directly into the bank account of the recipient, there is

a possibility of disallowance under Section 40A(3) of the Act even though there are judicial precedents to the

contrary. Further, due to technological advancements, there are various modes of payment like internet banking,

credit card payment etc. The trail of payments through online banking channels can be easily traced.

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Recommendations

Considering the above, the following suggestions are made:

• No disallowance should be made, where payment is made by any mode other than cash.

• Further the limit of INR 20,000 which was introduced a long time back may be suitably increased to INR 50,000

per transaction per day.

4.12. Taking/Repayment of Loans and Deposits

Section 269SS of the Act requires that acceptance of any loan or deposit exceeding INR 20,000 may be made only by

an account payee cheque or an account payee bank draft.

Further, Section 269T of the Act requires that the repayment of any loan or deposit exceeding INR 20,000 may be

made only by an account payee cheque or an account payee bank draft.

Issue

• However, in the present scenario many banking transactions take place by way of Net banking facilities that

include Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Electronic Funds Transfer

(EFT) and Electronic Clearing Service (ECS). Use of payment gateways for online transactions as well as credit

cards is also on the rise.

Recommendations

• It is therefore suggested that mode of transfers like RTGS, NEFT, EFT, ECS etc be included as valid modes of fund

transfers under Section 269SS and 269T of the Act. In the alternative, any mode other cash may be accepted as

valid.

• Further the limit of INR 20,000 may be suitably increased to INR 50,000.

4.13. Deemed Dividend [Section 2(22)(e) of the Act]

Section 2(22) of the Act defines the term 'dividend' and sub-clause (e) thereof includes, within the meaning of this

term, even an advance or loan, to a shareholder having at least a 10 percent voting-power in a company in which the

public are not substantially interested, to the extent that the company possesses accumulated profits. Thus, a

payment, which is clearly not a dividend as commercially understood, is, by a fiction of law, deemed to be one. Apart

from payment to the shareholder himself, a loan or advance to a firm in which he is a partner with a 20 percent

share, or to an association or body of which he is a member and entitled to 20 percent of its income, is also

considered, to be deemed dividend, and is taxed accordingly. The object clearly is to prevent tax-avoidance by

making an advance or loan (which would not be taxable) instead of distributing the amount as a dividend, which is

subject to income tax.

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4.13.1 Taxability of genuine inter-corporate loans and advances as deemed dividend

Issues

The provision suffers from many inequities:

• It taxes a loan, though it may be quite a genuine one, which is duly repaid within its scheduled short time.

Moreover, there is no corresponding tax-relieving provision at the time of recovery of the loan.

• The tax is attracted, notwithstanding that the loan may be advanced at a fair commercial rate of interest and

notwithstanding that preponderant majority of persons owning the concern which received the loan are not

even shareholders of the lending company.

Recommendations

• In the light of all these infirmities, it is submitted that there is a strong case for deletion of the mischievous sub-

clause (e). This would also serve the desirable objects of rationalization and simplification. At present, no tax is

payable by the shareholder on dividend received from companies and only the company pays dividend

distribution tax @ 15percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the

normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend

distribution tax. If this suggestion is not accepted, then adequate provisions should be made to exclude genuine

transactions from the consequences of these provisions.

• Illustratively, genuine loans and advances, given on current market rate of interest and which are re-paid during

the year, should be excluded from the scope of deemed dividend as these are not a subterfuge for payment of

dividend. Similarly, where loans or advances are given by the companies to their shareholder employees on

current market rates of interest as per the policy of the company, deemed dividend provisions should not get

triggered as even otherwise the company is meeting its obligation by paying taxes on such interest income. Also,

loans and advances given out of business necessities, needs and exigencies should be excluded.

• Loan given as part of business transaction and Inter-corporate deposits should be excluded from the application

of Section 2(22)(e) of the Act.

4.13.2. Taxability of deemed dividend in the hands of recipient not being a registered shareholder

Recommendation

Since the object of sub-clause (e) is to prevent tax-avoidance by making an advance or loan (which would not be

taxable), instead of distributing the amount as a dividend to the shareholder, which is subject to income tax, a loan

or advance to a company / firm / association or body, which is not a shareholder, should not be considered as

deemed dividend. Alternatively, the threshold for substantial interest of the shareholder in the recipient concern

should be increased to 51 percent.

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4.13.3. Tax rate applicable to deemed dividend

Recommendation

At present, no tax is payable by the shareholder on dividend received from companies and only the company pays

dividend distribution tax @ 15 percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the

normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend distribution

tax. Thus, if the above suggestions are not accepted, even deemed dividend under sub-cause (e) should be taxed at

15 percent (i.e. the DDT rate at which the other deemed dividend are taxed).

4.14. Carry Backward of Business Losses

Tax outflow should arise only when taxpayer has earned net income even on cumulative basis. Tax collected from the

taxpayer should be eligible for refund, in case taxpayer suffers losses in subsequent years.

Issues

• Section 72 of the Act provides for carry forward and set off of business losses suffered by the taxpayer against

future profits upto subsequent 8 years. It is a clear indication that even though income-tax is payable on a year

to year basis, it is not payable till the time the taxpayer has not earned net profit. The tax is payable by the

taxpayer in the years in which all past losses are recovered.

• Business activities involve lot of uncertainty e.g. change in technology. A profit earning activity may turn into loss

making activity. Best example can be paging companies. Pagers had a very short life as they were soon replaced

by mobiles. Companies paid taxes on pager manufacturing and selling and within 2 years started suffering losses.

There was no revival for such companies.

• Carry forward facility is necessary for startup entities suffering losses in earlier years and reaping profits

subsequently. However, it does not cover impacts of cyclical changes in business environments. Such changes

require carry back of losses.

• Taxation laws of a number of countries including Canada, France, Germany, Japan, Netherlands, USA and UK

provide for carry backward of business losses for varying periods, whereas we in India do not have such facility,

which is very much needed.

• In the wake of opening up of the Indian economy and reduction in import duties and the removal of most of the

import restrictions, the Indian industry is facing stiff global competition. Some companies which could not face

the competition in the transitional phase, became temporarily sick. To assist such companies in their bad times,

it is necessary to provide some temporary financial help by way of providing for carry backward of the business

losses to the preceding 3 to 4 years in our taxing statute.

• Alternatively, a scheme may be formulated to provide option to the company to create Rehabilitation Reserve in

any given year to be utilized in the year it suffers losses. It is suggested that such reserve should be allowed as a

deduction in computing the total income of the company.

Recommendations

• Internationally, business losses are allowed to carry backward. Therefore, in line with best international practice,

it would be appropriate to introduce the same in India to allow carry backward of business losses. Further tax

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cap of 8 years should be removed to allow the carry forward of business losses infinitely. Section 72 of the Act

should be suitably amended to allow carry back of the losses and to remove upper cap of 8 years.

• Alternatively, a new provision be inserted in Chapter IV dealing with “Business Income” to provide deduction for

reserve created for future rehabilitation.

4.15. Section 35D - Amortization of certain preliminary expenses

Issues

• Section 35D provides deduction to Indian Companies for certain expenditure incurred before the

commencement of business or after the commencement in connection with the extension of the undertaking or

in connection with setting up a new unit. The benefit of deduction under Section 35D is limited to the

expenditure in the nature of legal charges and registration fees etc. incurred for incorporating the Company.

• Further, the deduction of this expenditure is restricted to 5 percent of the cost of project or capital employed at

the option of the company.

• However, legitimate expenditure incurred post incorporation for and until setting up of business, which are

neither covered within Section 35D nor can be capitalized to the actual cost of fixed assets, gets permanently

disallowed under any of the provisions of the Act even though they are incurred for the setting up the business

and becomes sunk cost. Some of this expenditure could be office / sales employees' salary, audit fees, ROC filing

fees, advertisement and business promotion expenditure incurred prior to setting up of business, etc.

• This is more particularly in the case of companies having longer gestation period for setting up their business

such as manufacturing entities, insurance business requiring multiple licenses, etc. This affects the cash flow and

the spending capacity of the company.

Recommendation

• There is no plausible reason for not allowing these expenses as deduction either as revenue or on a deferred

basis in five equal installments. Therefore, Section 35D of the Act should be suitably amended to include all the

expenses incurred by Companies post incorporation but during the course of setting up of its business as eligible

for deduction.

Even the ceiling of 5 percent should be removed as there is no rationale behind having such ceiling when the actual

expenditure is far higher.

Non-Resident Related Provisions

4.16.1. Tax Neutrality should be provided even in case with Foreign Transferee company

Issues

• The provisions of the Act are framed to provide tax neutrality only in cases where the amalgamated company is

an Indian company. Section 47(vii) of the Act provides that a transfer of shares by the shareholder of an

amalgamating company would not be liable to capital gains tax subject to the following conditions:

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• The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated

company, and

• The amalgamated company is an Indian company

• Clearly the above exemption would be allowed only in case a foreign company is merged into an Indian

company. In other words, if an Indian company merges into a foreign company, as proposed to be allowed by the

Companies Amendment Bill, Amalgamating company and the shareholders would be subject to capital gains tax

in India.

• In the emerging global scenario it is important that the merger of Indian companies into the foreign companies

should be legally recognized and made pari-passu with the foreign companies merging into Indian companies,

particularly for taxation purposes. It is noteworthy that the Companies Bill 2009 currently before Parliament has

now allowed Indian company to merge with Foreign Company, vide its Section 205(2), stipulating inter-alia that

for the payment of consideration to the shareholders of the merging company in cash, or in Indian Depository

Receipts, or partly in cash and partly in Indian Depository Receipts, as the case may be, as per the scheme to be

drawn up for the purpose.

Recommendation

Requirement of Transferee Company to be an Indian Company be removed from Section 47(vi), and (vii) of the Act.

Income deemed to accrue or arise in India

4.16.2. Clarification on definition of software royalty

In Section 9 of the Act, in sub section (1) of clause (vi), an Explanation 4 has been inserted, with effect from the 1

June 1976, clarifying that the transfer of all or any rights in respect of any right, property or information includes and

has always included transfer of all or any right for use or right to use a computer software (including granting of a

licence) irrespective of the medium through which such right is transferred.

Issues

• Royalty' internationally applies to payments for use of a copyright, patent, trademark or such intellectual

property.

• As per international commentaries and jurisprudence, any payments for use of a copyrighted article would not

typically get covered under the gamut of the term 'Royalty'.

• Taxability of the software usage / licensing payments in the hands of non-resident software companies / vendors

would go against the internationally accepted principles of taxation.

• Expenditure on software is one of the key elements for business today and especially for the IT and ITeS sector.

• Taxation of such software usage payments in the hands of non-resident software companies / vendors would

result in passing on of the costs to their Indian domestic counterparts as well as other Indian customers

(business as well as personal consumers) causing significant hardship.

• This will also significantly impact the global competitiveness of Indian Inc

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•

Recommendations

• It is suggested to roll back the Explanation 4. In view of the international tax practises and mindful of the impact

on Indian Inc, it should be clarified that the payments for use of software made to non-residents would not be

covered under the definition of 'royalty'.

• At very least, it is suggested that the amendment should not have retrospective application.

4.16.3. Clarification on inclusion of Explanation 5 to section 9(1)(vi) of the Act

In Section 9 of the Act, in sub section (1) of clause (vi), an Explanation 5 has been inserted, clarifying that royalty

includes and has always included consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

Issues

• The Explanation 5 conflicts with the existing Explanation 2 to section 9(1)(vi) of the Act in as much as there

cannot be any transfer, right to use or imparting without the possession or control in the right, property or

information vesting with the buyer/payer. Explanation 5 has the effect of taxing the consideration as royalty even

if there is no transfer, right to use or imparting to the payer.

• The provisions of this explanation are also not in line with the internationally accepted principles.

• By virtue of the above amendment, the scope of the term Royalty could get expanded to cover payments which

are not even intended and may lead to application of the tax provision which could be detrimental to the

taxpayers at large. The mere fact that a transaction involves use of equipment by a service provider, without the

customer having control/ physical possession of such equipment, payment for such facility / services cannot be

treated as Royalty. For example, where a person boards a bus or train by purchasing the requisite ticket, it

cannot be said that the person is making payment for availing the bus or train on hire as he does not have the

control over such equipment. Rather the customer is merely availing the facility of transportation, the

consideration for which facility is not in the nature of Royalty.

Recommendations

• Explanation 5 under clause (vi) of Section 9(1) inserted by the Finance Act, 2012 may be omitted altogether, as

this is clearly against the basic principle of the definition of the term Royalty provided under Explanation 2 clause

(iva) and as also understood internationally.

• In the alternative, in order to avoid ambiguity, the amendment should be modified to objectively provide the

rationale behind the insertion of the Explanation 5 and should list out the specific transactions, which it seeks to

cover.

The retrospective application of the amendment is grossly unfair and would further aggravate the situation.

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•

Assessment Year 2013-14

4.16.4. Clarification on definition of process royalty

In Section 9 of the Act, in sub-section (1) clause (vi), Explanation 6 shall be inserted, with retrospective effect from

the 1 June 1976, clarifying that the expression 'process' includes and shall be deemed to have always included

transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic

fibre or by any other similar technology, whether or not such process is secret.

Issues

• The amendment may result in inclusion of charges for the use of transponder capacity or connectivity /

bandwidth within the definition of 'Royalty'.

• Services in the nature of provision of transponder capacity or connectivity / bandwidth are merely facilities

provided. As per international tax practices and supported by the OECD Commentary, payments for such

facilities should not be treated as 'Royalty'.

• The way Explanation 6 has been currently drafted, even includes payments towards provision of basic telephone

service within the ambit of the term royalty. The business income derived by the telecom providers, if classified

as royalty, will significantly alter the tax consequences on the payer and the receiver of the consideration for the

services provided.

• Taxation of foreign companies for such facilities and subsequent passing on of the tax cost to India Inc would

entail a significant tax outgo for India Inc, especially companies operating in the field of media and

entertainment (satellite and broadcasting companies), IT and ITeS companies and Telecom.

• This would also impact their global competitiveness.

• The retrospective application of the amendment is grossly unfair and would further aggravate the situation.

Recommendations

• In line with international practises and the OECD Commentary, it is suggested that the terms 'transmission', 'up-

linking', 'amplification', 'downlinking' could be specifically defined in the Act to remove ambiguity on its scope/

coverage definition of 'royalty' and the definition of the term 'transmission' should explicitly clarify that

payments for the use of a 'facility' as a service charge, without any control on the process and where the payer is

only interested in the service and not in the use of process, should not be covered within its meaning.

• A clarification should be provided that basic services such as telephone/mobile charges and broadband/internet

connectivity charges would be outside the ambit of royalty.

• At very least, it is suggested that the amendment should not have retrospective application

Issues

• With the insertion of Explanation 4 and Explanation 6 in clause (vi) to sub-section (1) of section 9 of the Act,

there is a ambiguity as to whether subscription charges paid for download of e-content, access to online

database, reports, journals etc. can fall within the purview of “Royalty”.

In the least, such amendment should be made with only prospective effect from April 1, 2013 i.e. from

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It has been held by various Courts that the information that is available in public domain is collated and presented in

a proper form by applying the taxpayer's methodology and the payment for the same is not to be construed as

royalty. It is line with the international standards and supported by the OECD Commentary which provides that data

retrieval or delivery of exclusive or other high value data cannot be characterized as royalty or technical fee.

• Taxation of foreign companies/publishers for providing access to such online database or in the form of CD as

royalty and subsequent passing on of the tax cost to India Inc would entail a significant tax outgo for India Inc.

and will especially impact the education system in India. While there is no restriction on expansion of Indian tax

base to growing sectors, it is disappointing to see a lack of foresight in relation to a changing economy which is

likely to get more reliant on technology and intangible products by the day.

• The retrospective application of the amendment is grossly unfair and would further aggravate the situation.

Recommendations

• It is suggested that the terms 'transmission by satellite, cable, optic fibre or by any other similar technology'

could be specifically defined in the Act to remove ambiguity on its scope/coverage definition of 'royalty' and also

a detailed circular may be issued elucidating the types of payments covered within the purview of the said terms

and thus constituting royalty.

• It is recommended to suitably exclude the payment for the use/access to online databases, reports, journals etc.

and any other payments made by the payer from the purview of royalty which are essentially made for the use

of a 'facility' as a service charge and where (a) the payer is only interested in the service and not in the use of

process/technology used for transmission (b) does not have any control on the process/technology used for

transmission.

• At very least, it is suggested that the amendment should not have retrospective application.

4.16.5. Deputation of employees

• Increasing globalization has resulted in fast growing mobilization of labour across various countries.

• Typically, the company deputing the personnel initially pays the salary and other costs on behalf of the company

to which such personnel are deputed, which are thereafter reimbursed by the latter company.

Issue

The issue which had cropped up before the Indian tax authorities due to the increasing deputation agreements being

entered cross border was whether such reimbursements made by Indian entity to an overseas entity towards salary

and other costs in relation to the deputed employees should be taxable in India as being payment in the nature of

service fees.

Recommendations

• Since the employees deputed to the Indian company work under the control and supervision of the Indian

company and hence are essentially 'employees' of the Indian company, the amounts paid by the Indian company

to the foreign company are merely 'cost reimbursements' for the salaries paid on the Indian company's behalf.

• However, despite various rulings, the issue is still not free from litigation.

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•

as the employee reports and works directly for the Indian company and operationally works under the 'control

and supervision' of the Indian company, payments made by the Indian company to the foreign company towards

reimbursement of the salary cost would be treated as 'pure reimbursement' and would not be taxable under the

Act

4.16.6. Amendment to the Explanation inserted after Section 9(2)

• Section 9 of the Act provides for situations where income is deemed to accrue or arise in India. Vide Finance Act,

1976, a source rule was provided in Section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for

income by way of interest, royalty and Fees for Technical Services (FTS) respectively. It was provided, inter alia,

that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India

to the non-resident under the circumstances specified therein.

• The intention of introducing the source rule was to bring to tax interest, royalty and FTS, by creating a legal

fiction in Section 9 of the Act, even in cases where services are provided outside India as long as they are utilized

in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs

of the payer and the situs of the utilization of services which will determine the taxability of such services in

India.

• This was the settled position of law till 2007. However, the Supreme Court, in the case of Ishikawajima-Harima 1Heavy Industries Ltd . held that despite the deeming fiction in Section 9 of the Act, for any such income to be

taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It

further held that for establishing such territorial nexus, the services have to be rendered in India as well as

utilized in India.

• This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is

not relevant as long as the services are utilized in India. Therefore, to remove doubts regarding the source rule,

an Explanation was inserted below sub-section (2) of Section 9 of the Act with retrospective effect from 1 June

1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in

India under clauses (v), (vi) and (vii) of sub-section (1) of Section 9 of the Act, such income shall be included in

the total income of the non-resident, regardless of whether the non-resident has a residence or place of business

or business connection in India.

• However, the Karnataka High Court, in a recent judgment in the case of Jindal Thermal Power Company Ltd. v.

DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of

rendering of services in India for any income to be deemed to accrue or arise to a non-resident under Section 9

of the Act. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India

and the utilization of the service in India laid down by the Supreme Court in its judgment in the case of

Ishikawajima-Harima Heavy Industries Ltd. remains untouched and unaffected by the Explanation.

• With a view to removing any doubt about the legislative intent of the aforesaid source rule, the Finance Act,

2010 substituted the existing Explanation with a new Explanation to specifically state that the income of a non-

resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub-section (1) of Section 9

of the Act and shall be included in his total income, whether or not:

In order to put an end to this litigation, a specific clarification may be inserted in the Act to the effect that as long

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1 Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC)

• the non-resident has a residence or place of business or business connection in India or

• the non-resident has rendered services in India.

• This was made effective retrospectively from 1 June 1976. This retrospective nature of the amendment is a cause

of concern amongst taxpayers.

Issue

Retrospective amendment would lead to reopening of the past assessments.

Recommendations

• The relevant provisions of Section 9 of the Act in force since 1976 have been interpreted by the highest court in

India as requiring the taxpayer to also satisfy the condition of 'rendering of service in India' to be taxable in India.

It would therefore be only fair to make this provision only prospectively. This would avert litigation and send the

right messages to the international community on certainty of India's taxation statutes and its respect for judicial

decisions.

• Alternatively, a provision be inserted to clarify that past transactions would not be re-opened or contested by

the Indian Revenue on the strength of this provision.

4.16.7. Taxation of Foreign Dividends and Capital Gains

With the rapid growth and development of the Indian economy over the last two decade, many Indian entrepreneurs

have expanded their horizons outside India. A large number of Indian Corporate Houses have been making huge

investments abroad to tap the foreign markets. A number of companies have established subsidiaries not only in USA

and Europe but across the globe. While initially it was the Information Technology sector which forayed into the

global markets, over time even other sectors like healthcare, pharmaceuticals, chemicals, Fast Moving Consumer

Goods (FMCG), consumer durables, textiles, automotive, metals and mining etc. have shown interest in global

expansion. The Indian outbound investments have been steadily growing year after year. While some outbound

investments have been made directly, many have been structured through holding companies based in low taxed

jurisdiction.

The returns from these investments, when brought to India, suffer tax unlike domestic dividends which are tax free in

the hands of the recipients. A special tax regime of taxing dividend income from foreign companies at the rate 15

percent was enacted by Finance Act 2011 and which was further extended by one year by Finance Act, 2012,

however has not bolstered the Corporate India’s inclination to repatriate profits back to India. Further, capital gains

tax regime for unlisted companies not being beneficial compared to total exemption on long term capital gains from

sale of shares of companies listed in Indian stock exchange, the gains derived by overseas holding companies from

divesture in overseas operating companies are retained at overseas hold Co level.

Issues

• Dividend income earned from Indian companies is exempt in the hands of the recipient whereas dividend

income received from foreign companies is taxable in the hands of Indian residents at normal tax rates at the

rate of 32.45 percent even if the same are already taxed in the foreign country.

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•

taxable in India at the rate of 20 percent.

• Capital gains arising pursuant to certain business restructuring overseas (viz. amalgamation of foreign companies

held by Indian company, demerger) are not exempt.

Recommendations

With the signs of weakening economy and liquidity, beneficial tax regime for repatriation of dividend and capital

gains would provide sustainability to India’s growth story.

FICCI recommends that such dividends received out of tax paid profits overseas and subjected to withholding tax in

those jurisdictions, should not be subjected to further tax in India on remittance. Indeed, the US example has shown

that when corporates are permitted to repatriate dividends tax free, there is significant flow of funds. Inward

remittance of forex at this point of time would be a very welcome step for our economy. FICCI strongly recommends

that tax on dividends from overseas be done away with.

In the alternative, tax on such dividends should be treated akin to minimum alternate tax, creditable against the

normal tax liability and payable only if the tax on normal income is less than the tax on such dividends.

Capital Gains

• It is further recommended that capital gains income earned by an Indian resident/ Indian Company should be

fully exempt from income-tax in India provided the Indian resident/Indian Company holds a specified percentage

of shares in the foreign company (say 20 percent).

Overseas Business Restructuring

At times foreign companies in which Indian company has investment either merge with other foreign companies or

demerge a division into a separate company. Though such transactions are generally not taxable in the foreign

country, there are no express provisions under the Act which exempt exchange of shares arising from such merger or

demerger by the Indian parent. Accordingly, the scope of Section 47 of the Act (dealing with the provisions for

transactions excluded from the purview of transfer) should be extended to cover transfer of shares in a foreign

company by a resident or domestic company pursuant to a merger or demerger abroad, provided that such merger

or demerger is exempt from tax under the domestic tax laws of the foreign country in which such merger or

demerger takes place.

Long Term Capital gains earned by Indian Holding Company from transfer of shares in foreign companies is

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Withholding tax obligation on payments to a non-resident [Section 195 of the Act]

4.16.8. Withholding tax obligations on non-residents who do not have a place of business in India

The Finance Act, 2012 extended the obligation to withhold taxes to non-residents irrespective of whether the non-

resident has—

(i) a residence or place of business or business connection in India; or

(ii) any other presence in any manner whatsoever in India.”

The aforesaid amendment was introduced with retrospective effect from 1 April 1962.

Issue

The amendment will result in a significant expansion in the scope of withholding provisions under the Act and will

cover all non-residents, regardless of their presence / connection with India.

Recommendations

• Applicable rules of statutory interpretation read with Section 1(2) of the Act, indicates that Section 195 of the

Act as currently in force should not apply to non-residents

• This view found acceptance in the decision of the Supreme Court in the case of Vodafone International Holdings 2B.V. where it was observed that the provisions of Section 195 of the Act would not apply to payments between

two non-residents situated outside India. The Supreme Court also referred to tax presence as being a relevant

factor in order to determine whether a non-resident has a withholding obligation in India under Section 195 of

the Act.

• The amendment by the Finance Act, 2012 however seeks to expressly extend the scope of withholding tax

obligations to all persons including non-residents, irrespective of whether they have a residence / place of

business / business connection or any other presence in India.

• The extension of withholding tax obligation to all non-residents without regard to their presence/connections in

India would place an excessive and unwarranted compliance burden on non-residents. Hence the amendment

should be modified to restrict the applicability of withholding tax provisions to residents and non residents

having a tax presence in India.

• In the alternative, the amendment should be made effective only prospectively. Making such a provision

applicable with retrospective effect will operate harshly on persons who may have made payments based on the

law prevalent prior to the amendment.

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2 Vodafone International Holdings B.V. v. Union of India [2012] 345 ITR 1 (SC)

4.16.9. Withholding tax from payments to non-residents that have an India branch or a fixed place Permanent Establishment (PE) in India

Issue

The corporate tax rate for non-resident companies being 42.02 percent on net basis, results in requiring the non-

resident company file tax returns to claim refund of excess tax collected. This creates cash flow issues for the non-

resident company making operations through an Indian branch unviable, when compared with its Indian

counterparts. This additionally requires the non-resident company to mandatorily approach the Tax Authority to seek

a lower withholding tax order, the process being time-consuming and non-taxpayer friendly. Often, the non-resident

company faces a lot of difficulties justifying its request for a lower withholding tax certificate in the initial years of its

operations, when it has no past India assessments justifying its request for a lower withholding tax certificate. From

the Tax Authority's perspective, this results in excess tax collection by way of Withholding tax only to be refunded

later together with interest in addition to significant administrative burden which may not be commensurate with

the benefits of an efficient tax collection mechanism.

Recommendations

• For an effective solution to this issue, one may refer to the Vijay Mathur Report on Non-Resident Taxation

(January 2003) which advocates treating non-residents with a branch office at par with residents for the purpose

of Withholding tax payments. Illustratively, it provides as follows:

“4.13.2 Non-residents having Branch Office/Project Office in India and performing work covered u/s 194C

should be considered at par with the residents for withholding tax purposes and as such the same rate of

withholding tax should apply to payments made to them. The Working Group recommends that suitable

amendment should be made for this purpose.”

• In line with the aforesaid principle, it is recommended that payments which are in the nature of business income

of non-residents having an India branch office or 'a place of business within India' under the Companies Act,

1956 as explained earlier should be subject to similar tax withholding requirements as in case of payments to

domestic companies (residents). At the beginning of a tax year, the non-resident taxpayer who has an India

branch office or 'a place of business within India' under the Companies Act (registration with the Companies Act)

should be permitted to admit PE and opt for a Withholding tax mechanism as is applicable to a resident

company. Being treated at par with resident companies would encourage the non-resident to voluntarily obtain

PAN and file the requisite tax and other returns with the Indian Tax Authority. It would also go a long way in

facilitating ease of doing business in India and the Tax Authority would be in a position to better monitor and

regulate such non-resident companies. Further, it would also achieve the stated objective in the Kelkar Report

(December 2002) to abolish the system of approaching the Tax Authority for obtaining certificates for deduction

at lower rates and minimize the interface between the taxpayer and Tax Authorities. Significantly, it would send

positive signals to the global community on the ease of establishing a place of business within India/doing

business in India.

4.16.10. Applicability of Section 195 of the Act to individuals

Issue

• As per the provisions of Section 195, 'any person' responsible for paying to a non-resident any sum chargeable

under the Act is required to comply with the withholding tax provisions. Thus, even an individual is required to

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comply with the withholding tax provisions vis-à-vis payments made to a non-resident, for e.g. purchase of

property, payment of rent, etc. This creates undue hardship for the individual of compliance i.e. obtaining TAN,

depositing tax with the Government, filing of TDS return, issue of TDS certificate, etc.

Recommendation

• Hence, it is suggested to exclude individuals from the withholding provisions of Section 195 of the Act.

4.17. Refund of tax withheld under Section 195 of the Act

Issue

• Currently, for grant of refund of tax withheld under the provisions of Section 195 of the Act to the payer in the

case of net-off tax contracts, one of the conditions to be fulfilled is that the recipient should not have filed a

return of income in India. In this connection, it needs to be appreciated that if the payer has not issued the TDS

certificate to the recipient, the refund of the amount withheld under Section 195 of the Act should be granted to

him irrespective of whether or not the non-resident recipient has filed a return of income in India. This is more

so because the recipient may have earned certain other income(s) from India which are liable to tax in India and

it is in the regard that the non-resident may have filed a return of income in India. In such a scenario, the person

making the payment faces an undue hardship vis-à-vis obtaining refund of the tax withheld under Section 195 of

the Act.

Recommendation

• The intention of the Legislature appears to be that the non-resident recipient should not have claimed the credit

in respect of the tax withheld under the provisions of Section 195 of the Act. Thus, it is suggested that the

requirement of non-resident having not filed a return of income in India should be done away with in a case

where the payer has not issued any TDS certificate to the payee.

4.18. Mandatory application to AO to determine sum chargeable to tax

Finance Act 2012 has introduced sub-section (7) to Section 195 of the Act under which it is mandatory to make an

application to the AO to determine the appropriate proportion of sum chargeable under the Act

This provision will apply to notified persons/cases and will apply regardless of whether such transaction is chargeable

to tax or not

Issue

• Requiring compulsory clearance from the Income-tax authorities on notified overseas payments will add to the

compliance burden and can impact legitimate commercial activities

Recommendations

• The Supreme Court in the case of GE India Technology Centre observed that, there exists no obligation to deduct

tax under Section 195 of the Act unless sum payable to the non-resident is 'chargeable' under Act.

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•

cases of making an application to the tax officer for an order determining the taxability of payments being made

to the non residents, irrespective of whether such payment is chargeable to tax in India or not.

• Considering the volume of international transactions/payments, the imposition of a requirement to obtain

clearance from the tax office would prove very onerous and slow down the pace of commercial transactions. It is

submitted that the present system of reporting together with withholding tax enforcement provisions are

sufficient to ensure appropriate deduction of tax on overseas payments. Hence the section 195(7) should be

deleted

• In any event, the list of persons/cases to be notified under this provision should be tailored narrowly so as to not

affect genuine commercial transactions

4.19. Obligation to obtain CA certificate for remittance abroad against import of goods

Issue

• As per section 195(6) of the Act read with Rule 37BB of the Rules, a person making remittance to a non-resident

is required to submit Form 15CA electronically on the website designated by the income tax department and is

further required to get a certificate from a Chartered Accountant in Form 15CB in respect of the particulars filled

in Form 15CA. The requirement to obtain an undertaking in Form 15CB even in respect of transactions which are

not chargeable to tax in India like import of goods/raw materials adds to the compliance cost of Indian payers.

Recommendation

• It is recommended that a specific relaxation be provided to the importer of goods/raw materials from obtaining

a certificate in Form 15CB from a Chartered Accountant and a residuary field may be inserted in Form 15CA for

specifying the purpose of payment. The recommendation if accepted will not affect the working of the revenue

department in identifying such transactions and at the same time will relieve the payers from the unnecessary

burden of obtaining CA certificates.

4.20. Threshold limit for deduction of tax under section 195

Issue

• Currently, there is no threshold limit prescribed under section 195 of the Act unlike in section 194C, 194J, 194I of

the Act for deducting tax at source. Thus, making payments to non-residents even for a smaller amount triggers

withholding tax and casts an onerous responsibility of various compliances to be made by the payer.

Recommendation

• It is recommended that a minimum threshold limit for deduction of tax at source under section 195 of the Act

may be prescribed. This will not have much effect on the tax revenues generated from these transactions,

however, will provide immense relief to the small payers/payees.

4.21. Tax Residency Certificate (TRC)

Finance Act 2012 has introduced an amendment in Section 90 of the Act which provides that obtaining a TRC with

prescribed particulars will be mandatory for claiming relief under the tax treaties. The CBDT (vide Notification No.

The sub-section (7) of section 195 of the Act imposes mandatory requirement in the case of notified persons /

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S.O. 2188 (E) dated 17 September 2012) has introduced Rule 21AB with effect from 1 April 2013. The CBDT

Notification contains various particulars that a valid TRC should contain.

Issues

• Every country/jurisdiction may not issue a TRC containing the prescribed particulars and this could result in the

revenue authorities denying the tax treaty benefits due to procedural issues, even though the taxpayer may

otherwise be entitled to avail tax treaty benefits.

• Depending on the jurisdiction, obtaining a TRC certificate may also be a time consuming/difficult process. TRC

requirement increases the administrative difficulty for non-residents, especially from the perspective of non-

residents having very few/limited transactions connected to India.

• The TRC format specified in the CBDT notification could increase the compliance requirements and issues for

deductors. For example, the CBDT notification requires a valid TRC to specify the period for which the certificate

is valid. Therefore, while the deductor would like to obtain the TRC at the time of the transaction/deducting the

tax (to ensure that the payee is eligible for the tax treaty benefits), it would pose a hardship to the payee to

obtain a TRC before the end of the relevant financial year. The procedure so cast would pose onerous

responsibility both on the payers/payee resulting in holding of payments by the payer.

• It is unclear whether the requirement of furnishing TRC to the Indian tax authorities would be effective from

financial year starting from April 1, 2012 or April 1, 2013.

• As per the new Rule an Indian resident who wishes to obtain TRC from Indian income tax authorities, is required

to make an application in Form No. 10FA to the tax officer, containing prescribed details. However, no time limit

for issue of TRC is specified from the date of application by the assessee. Furthermore, the issue of TRC in Form

No. 10FB has been left to the discretion of satisfaction of the tax officer, without providing a substantive

definition for satisfaction in this regard.

Recommendations

• At the outset, our suggestion would be to delete the provision in total. At assessment stage, it is anyway

incumbent upon the AO to ascertain complete details before allowing tax treaty benefits. There may be

circumstances wherein the taxpayer who is a bona fide tax resident of the other contracting state is unable to

procure a TRC owing to circumstances outside his control. In such a scenario, even though the AO may otherwise

be satisfied that the tax treaty benefits must be allowed, only owing to the procedural lapse of not obtaining the

TRC which is beyond the tax payer's control, the AO would be compelled to deny tax treaty benefits, which will

cause needless hardship. Therefore, the above provision may be deleted.

• Without prejudice, even if the provision must stay, it should suffice if the taxpayer obtained a valid TRC from the

concerned authorities without requiring it to comply with any particulars (which are prescribed). It will be

difficult to obtain the TRC as per the format prescribed under the Indian laws from an offshore jurisdiction as the

offshore authorities may not agree with the kind of particulars prescribed. It is also recommended that the

requirement to obtain TRC shall be made mandatory only for cases where the total payment to a non-resident

exceeds Rs. 1 crore in a financial year. This would mitigate hardship in respect of small payments.

• It is further recommended that the requirement to furnish TRC should be cast upon the payee at the time of the

assessment of the payee and the deductor/payer should not be made liable to collect TRC from the payee at the

time of withholding tax.

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•

against assessment year 2013-14 mentioned in section 90 and 90A of the Act.

• It is recommended that the time limit to issue TRC in Form 10FB should be specified and to further specify that

in case the tax officer refuses to issue a TRC, the application of the assessee should be disposed by the tax officer

by passing a speaking order and clearly specifying the reasons for rejecting the application of assessee.

4.22. Meaning of terms not defined in a tax treaty

Any meaning assigned through notification to a term used in an agreement but not defined in the Act or tax treaty,

shall be effective from the date of coming into force of the tax treaty

(Section 90(3) - Amendment retrospective from 1 October 2009, Section 90A, Explanation 3-- Amendment

retrospective from 1 June 2006)

Issues

• Any meaning notified will have a retrospective effect from the date when the tax treaty was signed causing

uncertainty and hardship to the taxpayers

• This provision is also contrary to Government's intent of reviewing retrospective amendments, which have

caused grave concerns to overseas companies over stability in tax policy and considered positions.

Recommendations

As per Article 3 of the UN and OECD Model Convention:

• “As regards the application of the Convention at any time by a Contracting State, any term not defined therein

shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State

for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that

State prevailing over a meaning given to the term under other laws of that State”.

Further, as per the UN and OECD Model Commentaries on Article 3:

• In case of terms not defined in the tax treaty, when a conflict arises between the law in force when the

Convention was signed and that in force when the Convention is applied, the latter should prevail. This has now

been expressly codified in the Model Convention.

• The above approach provides a satisfactory balance between, the need to ensure the permanency of

commitments entered into by Contracting States when signing a convention (since a Contracting State should not

be allowed to make a convention partially inoperative by amending afterwards in its domestic law the scope of

terms not defined in the Convention) and, on the other hand, the need to be able to apply the Convention in a

convenient and practical way over time (the need to refer to outdated concepts should be avoided).

Therefore, the accepted principle is that, generally, the meaning ascribed to a particular term at the time when a tax

treaty is being interpreted should be applied. Based on the proposed explanation, the definition notified under

It should be appropriately clarified that the requirement to furnish TRC is effective from financial year 2013-14 as

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Section 90(3) or Section 90A(3) of the Act shall take effect from the date of coming into force of the tax treaty and

not from the date of the notification itself. In other words, the notification of the definition will have a retrospective

effect. Whilst the conventions do recognise the ambulatory approach of interpreting terms not defined in the tax

treaty, making such changes with retrospective effect will lead to needless hardship on the taxpayers and an unfair

expectation to be aware of a definition, which was not in existence when the arrangement / transaction was put into

place. This will lead to uncertainty, re-opening of assessments etc, which can be avoided.

Even pursuant to a notification, there is more liberal interpretation supplied to a particular term, a taxpayer may not

necessarily be able to easily claim refund / credit of taxes paid in earlier years.

It is recommended that any definition notified under Section 90(3) Section 90A(3) of the Act should apply

prospectively.

4.23. Advance Ruling

The Authority for Advance Rulings (AAR) is established to ensure a simple, inexpensive, expeditious and authoritative

procedure for seeking conclusive Rulings on taxation of a non-resident in respect of Indian income-tax implications. It

is seen becoming more and more indispensible as trade and commerce are getting more global and complex.

While the AAR mechanism continues to gain favorable responses in India and is highly looked upon as an alternate

Dispute Resolution mechanism, there remains scope for some clarifications / amendments in the existing provisions

to ensure that the underlying objectives behind setting up of the AAR are purposefully achieved. Towards this, some

suggestions/recommendations are under:

4.23.1. Scope of Advance Ruling for non-resident applicant

Issues

Sub-clause (i) to Clause (a) of Section 245N of the Act defines an Advance Ruling to mean a determination by the

Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident

applicant.

It is seen that the said sub-clause is silent on the nature of determination when compared to sub-clause (ii) of

Section 245N of the Act which specifically refers to determination in relation to the tax liability of non-resident

arising out of a transaction with a resident.

Recommendation

Hence, it is suggested to suitably employ an explicit language to facilitate easy interpretation of the legislature intent

in defining the scope for maintainability of the application before the AAR with respect to non-resident applicant.

4.23.2. Determination of Residential Status for non-resident applicant

Issue

Clause (b) of Section 245N of the Act defines applicant to inter alia include a non-resident. However, the provision

fails to stipulate in specific terms the point of time an applicant is considered to be a non-resident. As it devolves

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from the other provisions of the Act, as also from the Rulings pronounced, the residential status would have to be

determined with reference to a particular year and not with reference to a particular date. Accordingly, it appears

that non-residential status of an applicant has to be determined with respect to the previous year immediately

preceding the financial year in which the application is made, even though as on the date of application the applicant

has become a resident.

Recommendation

In this context, it is suggested that an express mention on the determination of the residential status is hereby

required so that the admission of application is not rejected merely on maintainability.

4.23.3. Time limit for withdrawal of application

Issue

Section 245Q of the Act provides an option to the applicant to withdraw the application within a period of 30 days

from date of making an application. Such a time limit fails to serve any purpose since practically even the first

hearing does not happen within the time span specified. It is however seen that the applicant is not precluded from

withdrawing the application even after the specified time with the permission of AAR.

Recommendation

In such a scenario and keeping in mind the interest of justice, it is hereby suggested that the period should be

suitably extended so as to enable the applicant to withdraw its application anytime before the application is

admitted/heard.

4.23.4. Time limit for Commissioner of Income tax to furnish his observations and relevant records

Issue

Section 245R of the Act stipulates to provide a copy of the application to the jurisdictional Commissioner of Income

tax (CIT) and if necessary to call for relevant records. Further, the Rule 13(2) of the Authority for Advance Rulings

(Procedure) Rules, 1996 also empowers the AAR to call for relevant records along with comments from the CIT, if any,

on the contents of the application. However, the Section as well as the mentioned Rule is silent on the time frame

within which the CIT is required to furnish the relevant records called and provide his comments, if any, on the

content of the application. It is seen in many cases that the CIT does not reply within a reasonable period of time

which delays the procedure for the admission of the application.

Recommendation

In view of speedy disposal of the matters, it is suggested that a time limit should be introduced and be made

mandatory for the CIT to follow as regards providing his observations and relevant records.

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4.23.5. Satisfaction of conditions mentioned in the Proviso

Issue

First proviso to sub-section (2) of Section 245R of the Act stipulates that the AAR shall not allow an application where

the question (i) is already pending before any Income Tax Authority or the Tribunal or any court, (ii) involves

determination of fair value of any property, and (iii) relates to a transaction or issue that it is prima facie designed to

avoid income-tax. A bare reading of the Section, as also from the Rulings pronounced, it appears that satisfaction of

the conditions has to be examined as on the date of the application. However, the recent Ruling of the AAR has held

that Section 245R of the Act is an integrated section not only dealing with the admission of an application but also its

final disposal and the mere fact that the disabilities are placed at the earlier stage, cannot lead to the position that

the disabilities should be ignored even when they become discernible when the application is taken up for final

disposal.

Recommendation

In such a scenario, it is suggested that the legislature should explicitly mention point of time for allowing the

application. The mentioned conditions need to be satisfied and frame clear guidelines as to what would constitute

'prima facie' tax avoidance circumstances.

4.23.6. Time limit for disposal of Advance Ruling

Issue

Sub-section (6) of Section 245R of the Act stipulates a time limit of six months from the date of application to

pronounce the Advance Ruling. However, as deduced from the Rulings pronounced and reference to handbook

issued by the AAR, it appears that the time limit is flexible and not mandatory to follow.

Recommendation

As the AAR was set-up with an underlying intent to expedite the disposal of income-tax issues, it is hereby suggested

that the time limit so specified should be adhered to and made mandatory.

4.23.7. Binding Nature of the Precedent

Issue

Section 245S of the Act which provides for the binding force of the Ruling pronounced, fails to address whether the

AAR would be bound by an earlier Ruling pronounced by it. With judicial precedents specifying that the Ruling only

has a persuasive value, it is seen that the recent Rulings of AAR taking divergent views from the stand already taken

earlier by the AAR for similar legal and factual situations.

Recommendation

Hence, with a view to establish consistency, correct legal position and to avoid conflicting Rulings on similar facts, it

would be appreciated if the Legislature suitably incorporates provisions giving effect the binding nature of the earlier

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Rulings of the AAR. Alternatively, in case the current bench of the AAR does not agree with a Ruling pronounced

earlier, the matter may be referred to a larger bench as done in the Tribunal. Suitable provisions to the above effect

may be introduced / inserted.

4.23.8. Constitution of additional Benches

Recommendation

It is suggested that in view to speed up the well-established judicial process, another bench of AAR should be

constituted at Mumbai which has a large number of taxpayers or at any other place where the volume of work so

justifies, in addition to the current bench stationed at New Delhi.

4.23.9. AAR mechanism to be extended to all resident applicants

AAR was introduced in India in 1993 as an alternate dispute resolution forum with an underlying objective of

facilitating the non-residents to ascertain their tax liability well in advance and to provide recourse to avoid long

drawn and expensive litigation under the regular course of assessment and appeal procedures. The AAR's jurisdiction

was originally confined to pronouncing rulings in cases of non-residents till it was enlarged to include cases of only

notified residents (i.e. Public Sector Company).

Issues

On conjoint perusal of sub-clause (iii) to clause (a) of Section 245N and sub-clause (iii) to clause (b) of Section 245N

of the Act along with Notification No. So 725(E) dated 3 August 2000, it transpires that the benefit of the Advance

Ruling mechanism is inter-alia available to resident applicant being Public Sector Companies, only if the issue is

relating to computation of total income and the same is pending before any Income Tax Authority or the Income-tax

Appellate Tribunal.

Such a forum is thus not available to (a) all resident applicants; and (b) for their domestic transactions which are

proposed to be entered into with other resident taxpayers, resulting in disparity between the non-resident applicants

and resident applicants.

Recommendations

Hence, it is suggested to suitably amend the provisions of Chapter XIX-B of the Act to extend the benefit of Advance

Ruling mechanism to all resident applicants (including Public Sector Companies) for their domestic transactions

proposed to be entered into with other resident taxpayers.

This would be of great advantage to resident applicants who can pre-empt their income-tax liability arising out of

high value / structuring transactions. Further, such mechanism will lend a degree of decisiveness and certainty,

provide more consistency in the application of the law, minimize controversies and result in good relations between

tax administrators and the taxpayers and thus reduce the litigation before the courts of law.

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4.23.10. Admissions of applications by AAR even where return of income has been filed

Issues

Recently, it has been seen that the AAR has rejected various applications filed by the applicants on the ground that

the tax return has already been filed before the AAR application has been filed. This is because filing of tax return has

been construed as case pending before an Income Tax Authority and going by the rules governing AAR, the latter

cannot entertain a case which is pending before an Income Tax Authority. This stand of the AAR has also been 3affirmed by the Delhi High Court in a recent ruling in the case of Netapp BV and Sin Oceanic Shipping ASA. The High

Court has held that if a company files an income tax return, then it would lose the right to seek a Ruling from the

AAR. Since the AO has the right to issue notice after the taxpayer files return, the latter becomes obligated to

disclose the details sought by the AO. Therefore, the issue can be treated as one pending before the AO.

The rationale behind introducing the AAR was to significantly faster dispute resolution process as compared to

normal litigation process and to sort out complex international tax issues which may not be appreciated by lower

level tax authorities. The applicants approach the AAR to seek certainty on taxability of transactions undertaken/to

be undertaken by them and upfront crystallization of tax implications of proposed transactions.

If such a stand is followed by the AAR, the applicants will lose the right to move to the AAR in a large number of cases

and it would cause genuine hardship to the applicants if their right to seek advance ruling is lost merely by filing

income tax return. This may prove to be a deterrent on the mechanism of the AAR and may discourage the

applicants from moving to the AAR.

Recommendations

It should be clarified that filing of income tax return will not be construed as case pending before the Income Tax

Authority and the AAR can still entertain applications where return of income has been filed by the applicant. Till the

time the AO issues the notice initiating the assessment proceedings, the applicant will have the right to apply for

Advance Ruling before the AAR and the same will be admitted by the AAR.

This will help in propagating the mechanism of AAR and will provide an opportunity to a large number of applicants

to seek clarity and certainty on various complex international tax issues faced by them.

4.24. Tax Incentives and benefits

Tax incentives by way of exemptions and deductions are designed to create economic security, promote asset

creation, accelerate the pace of industrial production, enhance exports, provide employment opportunities, remove

regional imbalances and provide social welfare.

The present tax holiday regime has over the years continuously attracted investment into these priority sectors

despite some of them being characterized by long gestation periods and red tapism. Motivation to continue

channelization of investments into these sectors is largely dependent on the tax incentives these industries enjoy.

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3 Netapp B.V. v. AAR [2012] 24 taxmann.com 174 (Del)

Hence it is crucial that the Government consider retaining attractiveness of these sectors by continuing with the

present tax holidays, removing existing ambiguities and extending the benefits to additional sectors as may be

warranted for improvement of the country's infrastructure and economic development.

Profit-Linked Incentives

4.24.1. Phase out of profit-linked incentives for industries

Issues

• Undertakings engaged in generation, transmission, distribution, modernization of existing network for power are

currently eligible for tax holidays with regard to profits generated from such business. The same has helped

attract investment, both domestic and foreign into the sector. Despite being a priority sector for the Government

and the large investments drawn into the sector for capacity addition, the Governments mission 'Power for all by

2012' appears a distant dream. Greater capacity addition and renewal/ modernization of existing networks will

require substantial investment. Phasing out of the tax incentives for the industry will dampen growth and

investment in the sector.

• Similarly, tax holiday for industrial parks has been phased out. Tax holiday enjoyed by the sector has pushed

industrialization and resulted in a spurt of industry hubs created such as for information technology,

manufacturing, warehousing, etc, across the country. Large scale developments such as an industrial park

require significant investment, which holds attractiveness on account of the tax benefits enjoyed by the sector.

Withdrawals of the incentives will surely slower investment into the sector owing to the significant upfront

capital commitment required.

Recommendation

The profit-linked incentives currently given for infrastructure and crucial sectors should be continued till the end of

12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's power and industrial sector.

4.24.2. Phase out of profit-linked incentives for industries and replacement by investment linked incentives

Issues

• The current provisions of the Act provide profit-linked incentive to infrastructure sectors and other critical

sectors such as telecom, power, etc. The Direct Taxes Code, 2010 (DTC proposed to be) effective from 1 April

2013, intends to substitute all profit-linked incentives with investment linked incentives. Under the proposed

DTC, the infrastructure companies eligible for the tax holiday as on 31 March 2013 under the current provisions

of the Act would be permitted to grandfather the tax holiday under the proposed DTC subject to the prescribed

conditions.

• The existing profit-based incentives in our country have greatly motivated in channelizing huge investments into

priority sectors of the economy such as infrastructure, exports and energy etc thereby fortifying the country in

attaining high growth rates over the last two decades and putting in on the path of energy security.

• It is therefore imperative that that these incentives, more importantly for infrastructure development including

power sector, fertilizer sector, hydrocarbon sector, cement industry and export promotion, are not only

continued but strengthened further for maintaining the growth momentum of the country.

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Recommendation

The profit-linked incentives currently given for infrastructure and crucial sectors should be continued as such, even

under the proposed DTC. This is due to the fact that even with the current tax incentive, the IRR (Internal Rate of

Return) achieved by most of the projects in such sectors are not sufficiently attractive for bankers and lenders, and

financing of these projects is proving to be a difficult exercise. Given the huge capital investments and wafer-thin

margins plaguing these sectors, the substitution of profit-linked incentive by investment-linked incentive may lead to

an adverse impact in terms of financial crunch and non-availability of funding.

4.24.3. Phase out of profit-linked incentives for certain undertakings in Special Category States

Issue

• The tax benefit under section 80IC for specified under takings in certain special category states was valid till 31st

March, 2012 and has not been extended further. In the context of the difficult economic situation in India and

low growth in the industrial sector, it is necessary to encourage industry to invest in the backward states in the

country. This will address the issue of unequal and lopsided growth, which continues at the present juncture.

Recommendation

• FICCI recommends that the aforesaid tax benefit be extended for a few more years to bring about balanced

development till the economy gets back to a higher growth trajectory

4.24.4. Substitution of profit linked incentives for specified industries with investment linked incentives and abolition of Minimum Alternate Tax (MAT) for infrastructure industry

Issues

• Budget 2009 introduced Section 35AD of the Act, wherein extending tax incentives to specified industries (cold

chain facilities, 2 star hotels, hospitals, affordable housing, housing projects under a scheme for slum

development or rehabilitation, warehousing for storage of agricultural produce, laying and operating a cross-

country natural gas or crude or petroleum oil pipeline and production of fertilizer in India, inland container

depot, container freight station, bee-keeping and production of honey and bee wax, warehousing for storage of

sugar) with respect to the capital expenditure incurred for set up and operation of such specified business.

Further, once a deduction for the capital expenditure is availed under this Section, no deduction shall be allowed

in respect of such specified business under Chapter VI-A (Deductions in respect of certain incomes).

• With the introduction of Section 35AD of the Act, the envisaged 'specified businesses' would instead of enjoying

a deduction of the profits earned (as is envisaged under the Chapter VI-A deduction), in addition to depreciation

of the capital investment on creation of the assets, would now be eligible to claim a complete

deduction/weighted deduction for the entire capital expenditure incurred in set up of the specified business. In

effect, the deduction under Section 35AD of the Act is nothing but an alternate form of accelerated deduction

for the capital expenditure in the specified business and no real benefit is being extended to these industries.

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• Additionally, with investment linked incentives, the cash flows of these capital intensive industries would suffer

on account of levy of MAT. This is because book profits will continue to be higher than taxable profits (given that

deduction for capital expenditure is not taken to the profit and loss account other than in the form of

depreciation) and hence MAT will be paid by the industry during the 'tax holiday period'. While MAT is creditable

against normal taxes in future, the period for recovery of MAT paid could result in being longer than under profit

linked incentives. `Further, given the restriction on the years for carry forward of MAT, it is possible that MAT paid

in initial years may not be recovered, especially for those taxpayer who have a longer period before reaching

break-even.

Recommendations

• The profit-linked incentives currently given for infrastructure and crucial sectors should be continued till the end

of 12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's infrastructure sector.

• It should be considered to do away with MAT for the infrastructure industry as levy of the same defeats the very

purpose of extending tax incentives to the industry, especially given the high rate of MAT now.

• While the same would have some revenue implications, but only from a short-run angle, FICCI is confident that

in the ultimate analysis the Government would continue enlarging its revenues by way of manifold direct and

indirect tax collections arising out of improved competitiveness of manufacturing and services sectors.

Investment-linked Incentive

4.24.5. Tax incentive under Section 73A vis-à-vis incentive as provided under Section 35AD

Issues

• The concept of investment-linked incentive was introduced vide the Finance (No.2) Act 2009 by inserting Section

35AD of the Act.

• In terms of the said Section 35AD of the Act, a taxpayer is allowed a deduction in respect of the whole of any

expenditure of capital nature incurred (other than on land, goodwill or financial instruments), wholly and

exclusively, for the purposes of any specified business carried on by him during the previous year in which such

expenditure is incurred by him.

• For this purpose, 'specified business' means any one or more of the following business, namely:-

• setting up and operating a cold chain facility;

• setting up and operating a warehousing facility for storage of agricultural produce;

• laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution,

including storage facilities being an integral part of such network;

• building and operating, anywhere in India, hotels of two-star or above category as classified by the Central

Government;

• building and operating, anywhere in India, hospital with at least one hundred beds for patients;

• developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed

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by the Central Government or a State Government, as the case may be, and notified by the Board in this

behalf in accordance with the guidelines as may be prescribed;

• developing and building a housing project under a scheme for affordable housing framed by the Central

Government or a State Government, as the case may be, and notified by the Board in this behalf in

accordance with the guidelines as may be prescribed;

• production of fertilizer in India;

• setting up and operating an inland container depot or a container freight station notified or approved under

the Customs Act, 1962;

• bee-keeping and production of honey and beeswax;

• setting up and operating a warehousing facility for storage of sugar.

• The underlying idea behind allowing the said deduction seems to be intended to enable the taxpayer concerned

to set-off the business losses incurred by this write-off against the taxable profits from their existing businesses

and reduce their tax liability in the year of deduction and thereby to provide part of the resources of investment

required for setting up of the businesses. Unfortunately, however, the incentive so intended cannot be achieved

owing to the insertion of another Section 73A of the Act, which restricts the set-off / carry-forward of losses by

specified business only against the profits and gains, if any, of any other specified business carried on by the

taxpayer in that assessment year and the amount of loss not so set-off can only be carried forward and set-off

against profits from specified business in the subsequent assessment years.

Recommendation

The losses from the specified business under Section 35AD of the Act ought to be made eligible for set-off against

profits from other businesses of the taxpayer, and not restricted to be set-off against only the specified businesses,

as it is not always the case that the taxpayer would only be carrying on the 'specified business'. In light of this,

Section 73A of the Act should therefore be deleted.

4.24.6. Whether the amendment to Section 35AD(3) means that the taxpayer has a choice to either claim benefit under section 35AD or Chapter VI-A

Issues

• It appears that the above amendment to Section 35AD(3) of the Act carried by the Finance Act, 2010, seeks to

prevent a taxpayer from claiming dual deduction in respect of the same business.

• Accordingly, it appears that if a taxpayer carrying on a specified business does not claim deduction under Section

35AD, he can claim deduction under the relevant provisions of Chapter VI-A, if the same exist for such business

and if the exercise of such a choice is more beneficial.

Recommendations

• A clarification be issued that the taxpayer may exercise a choice (where available to the taxpayer) to avail tax

incentive under section 35AD or Chapter VI-A, depending upon which is more beneficial to the taxpayer and thus

clear the ambiguity as currently existing.

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• Further, it is suggested that a clarification also be issued that in the event the taxpayer opts for the investment

linked incentive under Section 35AD of the Act and the same is denied/ rejected at time of revenue audit (could

be on account of non-satisfaction of prescribed conditions), in such case the taxpayer is eligible to make an

alternative claim under Chapter VI-A on satisfaction of the conditions provided therein notwithstanding the

requirement stipulated in Section 80A(5) of the Act. This is because, a taxpayer who is otherwise entitled to

deduction in respect of qualifying profits of the specified business would lose such deduction on account of

Section 80A(5) of the Act that mandates a claim for deduction under Chapter VI-A be made in its tax return. As

the taxpayer would not have claimed deduction under provisions of Chapter VI-A in its tax return in view of a

claim being made under Section 35-AD of the Act, such taxpayer would be precluded from claiming deduction in

view of Section 80-A(5) of the Act.

4.24.7. Investment linked tax incentive under Section 35AD

Issues

• Section 35AD of the Act extended investment linked tax incentive to a taxpayer engaged in building and

operating anywhere in India a 2-star or above category hotel. The same is a restrictive tax incentive to the

industry as only such taxpayers are eligible which are engaged in both building and operating the hotel. Similar

restriction exists for the hospital industry, wherein the tax incentive is available for 'building and operating

anywhere in India a hospital with at least 100 beds for patients.

• Thereafter, vide Finance Act, 2012 with retrospective effect from 1 April 2011, a new Section 35AD(6A) was

inserted, which extended investment linked tax incentive to a taxpayer engaged only in 'building' hotel (and

transferring the operation to another person). However, similar benefit was not extended for taxpayer engaged

in building hospital.

• As can be seen from a plain reading of Section 35AD of the Act, it appears that the benefit under the Section

would not be available in case the person building the hospital is different from the person operating the

hospital. This does not seem to be in harmony with the objective, specifically given the typical operating

structure of the industry wherein very often the developer or builder of the hospital is different from the

taxpayer who is operating and managing the hospital. Considering the said anomaly was removed by the Finance

Act, 2012 vide Section 35AD (6A) for hotel industry by granting investment incentive to a builder (thought not

operating the hotel), similar benefit ought to be extended to a hospital industry.

• Further, if a person does not build the hotel/ hospital, but acquires the same by purchase or rent or otherwise

for purposes of operation and management thereafter, such taxpayer would not be entitled to the benefits of

this section.

• Accordingly, to accord benefit to the industry, as is the very purpose of extending the tax incentive to the

industry by amendment of Section 35AD of the Act vide the Finance Act, 2010, the benefit should be made

available to the specified business of 'building' or 'operating' or 'building and operating' a hotel of two-star or

above category anywhere in India. Similar amendment should also be considered for case of hospitals.

Recommendations

In view of the above disconnect, a clarification is required and it is suggested that the relevant clause be amended to

read as under:

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“(aa) on or after 1st day of April, 2010, where the specified business is in the nature of building or operating or

building and operating a hotel of two-star or above category as classified by the Central Government.

Similar, amendment to also recommend for the hospital sector and the relevant clause be amended to read as

under:

(ab) on or after 1st day of April 2010, where the specified business is in the nature of building or operating or

building and operating a hospital with at least one hundred beds for patients”

Consequential amendments should also be considered in clause (iv) and (v) of sub-section (8) of Section 35AD of the

Act.

4.24.8. Weighted Deduction in respect of Capital Expenditure on certain Specified Businesses

Issues

The following specified businesses commencing operation on or after the 1st of April, 2012 has been allowed a

deduction of 150% (as against 100%) of the capital expenditure under section 35AD of the Income-Tax Act, namely:-

(i) setting up and operating a cold chain facility;

(ii) setting up and operating a warehousing facility for storage of agricultural produce;

(iii) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;

(iv) developing and building a housing project under a scheme for affordable housing framed by the Central

Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance

with the guidelines as may be prescribed; and

(v) production of fertilizer in India.

The same has been welcomed and is an inducement for setting-up of the above businesses. However, investment-

linked incentive by way of 100 per cent deduction of capital expenditure under section 35AD was introduced by The

Finance (No.2) Act, 2009, with effect from 1st April, 2010 to encourage investment in priority areas for which a

specific list (enlarged over the last two years) is contained in the section. The rationale behind the discriminatory tax

treatment in between these specified businesses is not understandable

Recommendation

It is recommended that the weighted deduction of 150% be extended to the entire list in the said section since all

the said businesses are extremely important for the Indian economy like natural gas/crude pipe line distribution,

hotels etc.

4.25. Restoration of exemption of income from investment in infrastructure and other projects

Section 10(23G) of the Act provided for tax exemption in respect of any income by way of dividends other than

dividends referred to in Section 115-O of the Act, interest or long-term capital gains of an infrastructure capital fund

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or an infrastructure capital company or a cooperative bank from investments made on or after 1 June 1998 by way of

shares or long-term finance in approved eligible businesses including infrastructure projects, developers of Special

Economic Zones (SEZs), hotel projects of not less than three star category, hospital projects with at least one hundred

beds for patients and certain housing projects. The above exemption played a significant role in attracting investment

towards development of infrastructure projects in India. This exemption was withdrawn by the Finance Act, 2006.

Issue

Consideration by the Government to restore the above exemption of income from investment in infrastructure and

other projects

Recommendation

In view of the increasing need for huge investments in infrastructure and other vital projects, we plead for

restoration of the aforesaid exemption with a view to ensuring low cost of raising capital for such thrust project

areas.

4.26. Tax Incentives - Weighted deduction under section 35(2AB)

Issues

Section 35(2AB) of the Act extends deduction of a sum equal to twice the expenditure incurred towards scientific

research on in-house research and development facility as approved by the prescribed authority to companies

engaged in the business of

• bio-technology; or

• manufacture or production of any article or thing (other than those specifically excluded for purposes of this tax

incentive).

The Section extends the weighted deduction of expenditure incurred only in respect of “in-house research and

development facility”. India is globally recognized as an attractive jurisdiction for outsourcing owing to its affordable,

skilled and English-speaking manpower. Outsourced R&D work is becoming a key area of growth for the Indian

services sector however there are no specific tax benefits available to units engaged in the business of R&D or

contract manufacturing. There certainly exists a need to provide impetus to such activities in the form of tax and

fiscal benefits.

Further, specifically in the pharma sector, pharmaceutical discovery is a lengthy, risky and expensive proposition. In

this business environment, necessitated by the current business needs, sometimes companies incur expenses

towards scientific research outside their R&D facility.

Another anomaly existing in the current provisions is that any expenditure incurred outside the approved R&D

facility by pharma companies' i.e. towards clinical trials (including those carried out in approved hospitals and

institutions by non-manufacturing firms), bioequivalence studies conducted in overseas CROs and regulatory and

patent approvals, overseas trials, preparations of dossiers, consulting/legal fees for filings in USA for NCE (new

chemicals entities) and ANDA (abbreviated new drug applications) as approved by the DSIR which are directly related

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to the R&D, etc. are currently not covered. Furthermore, Indian companies incur substantial costs in defending their

patent rights and applications in and outside India and these sums are not eligible for deduction.

Recommendations

• Extend tax benefits to units engaged in the business of R&D or contract manufacturing rather than just for in-

house R&D facilities to provide impetus to R&D in India.

• Benefits should be provided for units engaged in the business of R&D and contract manufacturing by way of

deduction from profits linked to investments. Benefits in the form of research tax credits which can be used to

offset future tax liability, similar to those given in developed economies can be introduced.

• As discussed above, in view of the lengthy, risky and expensive conception period for pharmaceutical discovery,

it should be considered for the existing provisions to specifically allow weighted deduction in respect of

expenses incurred outside the R & D facility which are sometimes necessitated by the industry's business needs.

Additionally it could be clarified that where the risk of doing research is assumed by a company, the entire cost

of R&D activities - whether outsourced or undertaken in-house - is eligible for weighted deduction in the hands

of company undertaking the risk.

• The existing anomaly in the current provisions, i.e. any expenditure incurred outside the approved R&D facility

by pharma companies' although in relation to the R&D activity is not eligible for the weighted deduction should

be removed. This will further help promote in-house R&D in India.

Issues

In order to claim deduction under the section in-house R&D facility has to be approved by the Department of

Scientific & Industrial Research ('DSIR'). Among various conditions, the DSIR guidelines lay down the following

conditions:-

(a) The company should enter into an agreement with DSIR for 'co-operation' in such research and development

facility.

The word 'co-operation' shall inter-alia, mean that the company shall be willing to undertake projects of national

importance, as may be assigned to it by DSIR, on its own, or in association with laboratories of CSIR, ICAR, ICMR,

DRDO, DBT, MCIT, M/O Environment, DOD, DAE, Department of Space, Universities, Colleges or any other public

funded institutions. The company would be free to exploit the results of such R&D projects, subject however, to any

conditions which may be imposed by Government of India, in view of national security or in public interest

(b) Assets acquired and products, if any emanating out of R&D work done in approved facility, shall not be disposed

of without approval of DSIR.

It cannot be denied that such conditions, as above, are very restrictive in nature and instead of promoting in-house

research and development, hamper the willingness of corporates to carry out in-house research and development.

Recommendation

FICCI recommends that there is a need to relax these conditions to encourage in- house R&D activities by companies.

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Issue

Currently, there seems to be an ambiguity in the office of Department of Scientific and Industrial Research ('DSIR')

with respect to whether a company engaged in the business of development and sale of software or providing IT

services or ITES is eligible for weighted deduction on the R&D expenditure incurred by it.

Recommendation

Explicit provisions should be introduced in the Act, to remove the ambiguity such that DSIR can approve the R&D

facilities of the companies engaged in development and sale of software. It is further recommended that weighted

deduction for R &D to be extended to service sector as well.

4.27. Deduction under section 80JJAA of the Act

Issues

Currently, section 80JJAA of the Act endows incentive to an Indian company which derives profits from an industrial

undertaking engaged in the manufacture or production of an article or thing, by providing a deduction for an amount

of thirty percent of the additional wages paid to the new workmen for a period of three years beginning with the

year in which new workmen is employed. The deduction is available subject to the satisfaction of the conditions

specified in the section.

The section was inserted in the Act with the intent to create more employment opportunities.

• One of the conditions stipulated by the section is that new workman should be employed for a period of three

hundred days or more during the previous year of employment. In a situation, where workman joined in July and

worked till March of the relevant previous year of employment i.e. worked for less than 300 days in Year 1 but

for full year in Year 2 and Year 3 and assuming all other conditions prescribed in section 80JJAA of the Act are

complied with, the company is still not eligible to claim deduction in any of the years.

As it can be seen that the deduction is not available to companies engaged in the service sector irrespective of the

same being major contributor of the employment in the Indian economy. Such discrimination is unfair.

Recommendations

• It is recommended that workmen in respect of whom the period of continuous employment of 300 days or more

is attained in the previous year succeeding the previous year in which the workmen is employed, the deduction

under section 80JJAA of the Act be granted from the succeeding previous year.

• Extend the benefit of deduction under section 80JJAA of the Act to assessees engaged in the business of

providing service. It will provide impetus to the growth of the service industry in India and will also generate

employment opportunities.

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4.28. Deduction under section 42 of the Act for Infructuous or Abortive Exploration Expenses

Issue

• Section 42 of the Act provides that deduction for infructuous or abortive exploration expenses is not allowed

until the surrender of the area, even though the expenses are already charged off in the books of account as per

the company's accounting practices. Typically, the provisions of the Production Sharing Contract do not require

the area to be surrendered as a prerequisite for claiming the deduction of abortive exploration cost. As a result

of the requirement to surrender the area in section 42 of the Act prior to the beginning of commercial

production, the taxpayer is not in a position to avail the deduction, of expenses on account of abortive

exploration in the year when the areas is considered abortive. This results in undue hardship being faced by the

oil exploration companies in claiming the deduction.

Recommendation

It is recommended that the requirement to 'surrender' the area should be deleted from section 42(1)(a) and

deduction should be allowed from the year in which the area is abandoned as abortive.

4.29. Deduction for Expenditure on prospecting for certain minerals

Issue

As per the existing provisions of the Act, the expenditure incurred by an assessee engaged in any operation relating

to prospecting for, or extraction or production of any mineral during the five year period ending with the year of

commercial production is allowed as a deduction from the total income to the extent of one-tenth of the amount of

such expenditure. Section 35E does not cover capital expenditure. The allowability of even revenue expenditure over

a period of 10 years makes the provision quiet restrictive. Thus, instead of promoting the development of mineral

industry in the country, the existing provision acts as detriment to the development of the minerals in India. India has

huge mineral resources which can be exploited for the benefit of the economy but however, huge expenditure is

required for prospecting and developing various mineral resources. It would be in the fitness of things, if the

Legislature makes a suitable amendment in the Act by allowing the entire revenue expenditure in the year of

commercial production

Recommendation

It is recommended that section 35E be amended to provide that the expenditure incurred at any time during the

year of commercial production and during the prior four years be allowed entirely in the year in which the

commercial production starts.

4.30. Deductibility in respect of subscription to long-term infrastructure bonds

Issue

Section 80CCF of the Act provided for a deduction to an individual or HUF in respect of subscription towards long

term infrastructure bonds (as may be notified by the Central Government) to the extent of Rs. 20,000. This benefit of

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deduction was introduced by Finance Act, 2010 and was further extended in respect of aforesaid subscriptions made

during financial year 2011-12. The rationale of providing this deduction was to promote investment in the

infrastructure sector.

Recommendation

It is recommended that benefit of section 80CCF of the Act be restored from financial year 2013-14 and onwards and

further the limit of deduction be extended to Rs. 50,000.

4.31. Income tax exemption in case of Sale of Carbon Credits

Issue

• Carbon credit is an incentive available to the industries reducing CO2 emission by investing in energy efficient

technology. Considering the 'Global Warming' impacts, it is a very important initiative on the part of industries.

Energy efficient and carbon emission reduction technologies are substantially costly and results in additional

investment for industries. It is very much likely that the income generated from sale of Carbon Credits may or

may not compensate additional outflow laid out for earning the same.

Recommendations

• Section 10 of the Act should be amended to provide exemption to income from sale of Carbon Credit

entitlements

• Alternatively, suitable amendment should be made in Section 35 of the Act to allow weighted deduction for

expenditure in relation to infrastructure requirement resulting into earning of Carbon Credit.

Mergers & Acquisitions

4.32.1. Transactions without consideration or for inadequate consideration

Issues

• The Finance Act, 2010 inserted clause (viia) in sub-section (2) of Section 56 of the Act with a view to curb abusive

transactions.

• Section 47 of the Act and other provisions of the Act exempts certain transactions from taxation. However,

proviso to Section 56(2)(viia) of the Act excludes only a part of such exempted transactions from its applicability.

Consequently, those transactions which are otherwise exempt under Section 47 of the Act will still be liable to

tax under Section 56(2)(viia) of the Act.

• The rationale behind this discrimination is not understandable. Therefore, the view is that all transactions which

are specifically exempted from capital gains tax under Section 47 of the Act or other provisions of the Act should

be outside the purview of the said Section 56(2)(viia) of the Act.

• Section 56(2)(viia) of the Act is applicable to receipt of shares. The provisions are anti-abusive and intended to

curb tax avoidance. Consequently, it should be applicable to transactions liable to tax and not otherwise. Thus

section should be applicable to receipt of shares consequent to transfers which are not covered under section

47, and not otherwise.

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•

of purview of the section, however, for avoiding litigation, it needs to be clarified that the following transactions

are also outside its purview:-

• Issue of shares including:

i. right issue

ii. Preferential allotments

iii. Conversion of financial instruments

iv. Bonus shares

v. Split/subdivision/ consolidation of shares.

• Receipt pursuant to stock lending scheme

• Receipt by trustee company.

• Buyback of shares

• By Offshore investors in cases where purchase price is determined by Indian laws in force (e.g. SEBI rules,

FEMA guidelines)

• Besides, it may be appreciated that transfer of shares of unlisted/private Indian companies for no consideration

or for consideration less than the Fair Market Value, by or between non-residents would result in double

taxation of the same income, once in the hands of the transferor and thereafter again in the hands of the

recipient. For example, share transfer transactions between associated enterprises would be subject to transfer

pricing provisions under the Act and hence income from such transactions would be taxed based on arm's length

price basis in the hands of the transferor, even though the consideration is inadequate or nil. It would therefore

be unfair to once again tax such transactions in the hands of the recipients.

• Being anti-abuse provision, it should be applicable to transactions between associated concerns and not to other

transactions. The amendment will adversely impact genuine cases where the shares are transferred at a pre-

determined price for agreed commercial and bonafide considerations, For example:

• Joint venture or investment agreements particularly for unlisted company, frequently make provisions for

put and call options to be exercised at agreed prices which are compliant with all relevant exchange control

and related laws though they may not necessarily be at fair market value. This is, often, to permit Indian

promoters to enjoy some upside benefit if their companies perform better than the rate of return expected

by the investor. To visit such promoters with an income-tax liability on a purely notional unrealized gain

when they acquire shares from the investors at the negotiated price is clearly unwarranted and, possibly,

unintended.

• Likewise, there may be default forced sale provisions in such agreements that allow a non-defaulting party

to acquire shares from a defaulting party at a price below market value. Again, to tax the non-defaulting

acquirer for the discount would be unfair and possibly, also unintended.

• It may thus be seen that the provision is clearly against the interest of the large body of bonafide and high

quality Indian promoters. Abuse of provisions by a small errant minority should not be a reason for the

government to tax the large majority that has engaged in no-wrongdoing. The provision thus needs a re-look,

ideally for withdrawal. However, suggestions are given below to reduce negative impact, if not withdrawn.

Once the section is made applicable to receipt pursuant to transfers as above, issue of shares will clearly be out

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•

(other than a domestic VCF) for a consideration higher than the fair market value, then such excess would be

treated as income in the hands of the issuer company. The method for determining fair value is not yet

prescribed. This could adversely affect the ratchet structures agreed with resident promoters wherein they were

required to infuse funds or convert at a substantial premium for the adjustment of shareholding.

• Further, in the absence of a prescribed formulae and determination left to the tax officer, it is unclear how this

provision would be applied and whether each time a closely held company issues shares at premium, it would

need to suo-motto offer income to tax under this clause

• There may be instances where the company receives consideration in one tax year but issues shares in the

following tax year or in certain cases does not issue shares but refunds the share application money to the

shareholder, there is lack of clarity in such cases as to the year in which the provision would apply or whether

the provision would apply at all

• Also, this issue is relevant for the Angel Investment industry investing in start-up ventures, where the immediate

valuation of the entity may not be a benchmark for the investment being made by Angel Investors. The

investment decision is based on the evaluation of the skills of the promoter and other intangible factors, which

may not be adequately captured in any fair value formula. Also, the typical situation for such start-ups ventures

is that the entrepreneur brings in a small amount of capital whereas the Angel Investor provides a larger

amount. Considering that the entrepreneur is the one making the efforts, his stake in the company is

proportionately higher than his capital contribution. Accordingly, levying a tax on the company ignoring this

fundamental reality would result in a big cash drain on such start-up ventures.

• This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities

premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The

overall principles enunciated under GAAR provisions to treat an arrangement as Impermissible Avoidance

Arrangement should be applied to the share subscription transaction for determining the taxability of securities

premium account in the hands of company.

• It would be prejudicial to subject the Issuer company to such adverse provisions which did not exist in law when

the transactions were entered into.

Recommendations

• Primarily, the provisions should be withdrawn.

• All transactions which are specifically exempted from capital gains tax under Section 47 of the Act or other Act

should be outside the purview of the said Sections 56(2)(viia) of the Act.

• Section 56(2)(viiia) of the Act should be applicable to receipt of shares pursuant to transfers not covered under

section 47 and not otherwise.

• Section 56(2)(viia) of the Act shall not be applicable to transactions governed under Transfer Pricing provisions.

• Section 56(2)(viia) of the Act should not be applicable to non-residents.

• Section 56(2)(viia) of the Act should be suitably amended to provide that it applies to receipt of shares from

related/connected entities. It must be clear that it is not applicable to genuine business /commercial

transactions.

As per newly introduced Section 56(2)(viib) of the Act, if shares are issued by a company to a resident person

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•

the share being received by the taxpayer is in existence and held by another person.

• Similar amendments should also be made in section 56(2)(vii) of the Act and restriction thereof should be

restricted only to shares of companies in which public are not substantially interested.

Rule 11UA of the rules should be suitably amended to value unquoted equity shares on fully diluted basis.

• The amendment in Section 56(2)(viib) of the Act should be deleted.

• Without prejudice to the above, the following need consideration:

• Applicability should be restricted to issue of shares in consideration for cash.

• The issue of shares pursuant to otherwise exempt transactions such as merger, demerger, etc should be

excluded from the purview of Section 56(2)(viib).

• The methodology for determining the fair market value of shares should be based on all relevant factors

including future cash flows, profit earnings capacity, asset valuation etc. Intangibles such as industry

experience, specialized skills, etc need to be given due weightage in the valuation to encourage

entrepreneurial activities. Sufficient weightage should also be given to widely held companies which are

business peers of the company, investment by non-resident shareholders, VCF etc.

• It is recommended that it should be suitably provided for in the section that it would apply only in the year

of issue of shares.

• It should be suitably clarified to provide that the section does not require every closely held company that

issues shares to a resident to suo-motto offer such income to tax. Further, the tax officer should be

empowered to invoke this section only if at the time of assessment; the tax officer is of the view that

premium charged by the company from the resident shareholder is in excess of the fair market value of

shares issued.

• The provisions of this section should not be made applicable in case of receipt of consideration for issue of

shares from a resident, in case where shares are issued to both residents as well as non-resident

simultaneously at the same price.

• The provision should not be made applicable to Angel investors or ratchet transactions entered into with the

promoters.

• Grand fathering should be provided to the existing arrangement / transactions pursuant to which shares are

issued.

4.32.2. Amalgamation into parent/subsidiary/co-subsidiary

Issues

• Since 1991, Government started the process of reforms which gave opportunity to companies to dismantle their

complicated structures created over the years and move towards simplified structures to conduct their

businesses in an more open and transparent manner. Government supported companies to do so by enacting

exempting provisions in the Act to ensure that only real gains gets taxed which results from disposal of assets to

outsiders and not the notional gains arising from mere changes in ownership between entities within the same

group.

Section 56(2)(viia) of the Act should be suitably amended to provide that the section should be applicable only if

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• Section 47 of the Act exempts various transactions from being taxed under the head capital gains by not

regarding such transactions to be 'Transfer' for Section 45 of the Act.

• Finance Act, 2012 has made amendment in section 47(viii) of the Act by providing that the condition regarding

allotment of shares in the amalgamated company need not be satisfied where the shareholder itself is the

amalgamated company. Section 47(vii) of the Act after amendment states as under:-

“any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by

him in the amalgamating company, if-

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated

company except where shareholder itself is the amalgamated company, and

(b) the amalgamated company is an Indian Company.”

The amendment covers only one type of situation i.e. where the amalgamated company itself holds shares in the

amalgamating company. It however does not take care of the situations listed below:

(i) Company A is a subsidiary of company B, Company B is a subsidiary of Company C. Company A and Company

B gets amalgamated into Company C.

(ii) Company P and Company Q hold shares in each other and one of the companies gets amalgamated into

another.

(iii) Company X, Company Y and Company Z are three companies and each company holds shares in the other

two companies. Any two companies get amalgamated into the third company.

(iv) Company X, Company Y and Company Z are three companies and each company holds shares in the other

two companies. All the three companies get amalgamated into another Company T.

• Further, section 42 of the Companies Act, 1956 do not allow a subsidiary company to hold shares in the parent

company. Pursuant to such merger, in case where subsidiary was holding shares in Transferor company, the

parent company cannot allot shares to it.

• Section 2(19AA) of the Act defining Demerger specifies conditions which are conflicting in nature. First condition

requires that at least 75 percent shareholders of transferor should become shareholder of transferee. Second

condition provides that shares should be issued to the shareholders of the transferor company on a

proportionate basis. If one logically reads the two conditions, it means that shares should be issued on a

proportionate basis to the shareholders of demerged company to whom shares are issued under First condition.

However, to avoid litigation, clarity needs to be provided.

• Section 41 of the Act provides that if certain income, relating to business of predecessor, will be taxable in hands

of successor even though it arises post succession. However, similar provision is not there in Section 43B, 35DD

etc of the Act where expenses need to be claimed post restructuring in hands of successor.

Recommendations

• Section 47(vii)(a) should be amended to provide exclusion to (a) shareholder of amalgamating company being

subsidiary of Amalgamated Company (b) Amalgamation of direct subsidiary with stepdown subsidiary, (c)

Amalgamation involving amalgamating company holding shares in amalgamated companies.

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on a proportionate basis to the shareholders of demerged company to whom shares are issued under First

condition. It should be clear that proportionate basis does not apply to all the shareholders.

• A new section be inserted in chapter IV providing that in case of reorganization, deduction in relation (a) to

expenditures incurred in pre-reorganization period but allowable during post-reorganization period and (b)

expenditures incurred during the previous year but allowable on certain criteria for e.g. payment basis under

Section 43B, etc. will be allowed to successor as it would have been allowed to the predecessor.

4.32.3. Conversion of one type of share into other type of share of the same company, not resulting into any real income

Issues

• Clause (x) of section 47 of the Act provides that, any transfer by way of debentures, debenture-stock or deposit

certificates in any form, of a company into shares or debentures of that company, will not be treated as a

'transfer' for the purposes of section 45 of the Act. Sub-section (2A) of Section 49 of the Act provides that, where

a share or debenture in a company, became the property of the taxpayer on such conversion, the cost of

acquisition to the taxpayer shall be deemed to be that part of the cost of debenture, debenture-stock or deposit

certificates in relation to which such share or debenture was acquired by the taxpayer.

• It is noteworthy that while inserting clause (x), the intent of the Legislature was that no taxable capital gains can

arise at the time of conversion of convertible debentures, deposit certificates or shares of the company into

debentures or shares of that company, since it amounts to conversion of an asset held by an taxpayer from one

form to another and there is no other party involved to whom any transfer is made. In fact, clause (x) of section

47 of the Act was further amended by the Finance Act, 1992 to include 'bonds' in the said provision.

• However, it appears that there has been an inadvertent omission in both the foregoing provisions, i.e.,

conversion of preference shares or warrants into equity shares of a company have not been specifically covered

under the said provisions. Similar to Section 49(2A), Section 55(2) (v) of the Act provides that cost of shares

received on conversion should be cost of the shares which were converted. Thus, there does not seem to be any

difference in taxing of conversion of debenture or share. However, legislature has missed to provide exemption

to conversion of shares.

Recommendations

• Section 47(x) of the Act should be amended to include cases of conversion of one type of shares or warrants into

shares or other type of shares.

• Section 2(42A) of the Act should be amended to provide that the period of holding of earlier instrument should

be considered as period of holding for new instrument.

Section 2(19AA) of the Act be amended to provide that the shares of the transferee company should be issued

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4.32.4. Carry forward and set off of accumulated loss and unabsorbed depreciation allowances in amalgamation or merger

Issues

• Currently, Section 72A/72AA of the Act allows carry forward of loss and accumulated depreciation only in case of

following type of companies:

• a company owning an industrial undertaking or a ship or a hotel with another company

• a banking company

• one or more public sector company or companies engaged in the business of operation of aircraft

• Apparently, the benefit is not available to all the companies engaged in the business of providing services.

Considering the facts that many multinational companies have entered in the Indian service market and it has

become imperative for the small companies to consolidate their resources to survive, the benefit applicable

under the provision of Section 72A of the Act should be extended to all companies irrespective of their line of

operations. This will encourage the flow of FDI into India as multinationals will be encouraged to invest into

existing businesses promoted and managed by Indian entrepreneurs.

• There is ambiguity on the availability of benefit to companies engaged in the business of “manufacturing of

computer software”.

• More so, section 72A(2) of the Act prescribes stringent condition about continuity of holding of assets by the

amalgamating company for at least 2 years prior to transfer and by the amalgamated company for 5 years post

transfer. Similarly it requires that the amalgamating company should be in the business for at least 3 years prior

to the amalgamation. The conditions in the hands of the amalgamated company are sufficient to control misuse

of the provisions and therefore, the conditions applicable to the amalgamating company should be deleted. Also,

holding of assets and continuation of business for 5 years is quite a long period. Same should be reduced to 3

years.

Recommendations

• Section 72A of the Act should be amended to allow benefit of carry forward of losses, pursuant to

amalgamation, to all Companies irrespective of their line of business especially services business.

• It should be explicitly clarified that the benefit of section 72 for carry forward of losses, pursuant to

amalgamation should be allowed to the companies engaged in the business of manufacture of computer

software.

• Section 72(A)(2) of the Act be amended to delete conditions under sub-clause(a) relating to amalgamating

company.

• Also, section 72A(2)(b) of the Act should be amended to reduce the period of holding assets and carrying on of

business to 3 years.

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4.32.5. Conversion into Limited Liability Partnership under provisions of Chapter X of the Limited Liability Partnership Act, 2008/conversion of firm- into company

Issues

• Chapter X of the LLP Act allows following conversions:

• Partnership Firm (Firm) into LLP (Section 55 of the LLP Act)

• Private Limited/Unlisted Public Company into LLP (Section 56/57 of the LLP Act)

• The Finance Act 2010 provided tax neutrality to conversion of Company into LLP under Section56-57 of the LLP

Act. However, there is no provision allowing tax neutrality to conversion of firm into LLP under Section 55 of the

LLP Act. Same should be provided.

• Section 47(xiiib) of the Act provides tax neutrality to conversion of Company into LLP subject to certain stringent

conditions. Such conditions should be made less stringent or some relaxation should be provided in application

of the same as discussed below:

• It is available only to a Company having Turnover of less than INR 60 lakhs for 3 years prior to such

conversion. In the current economic scenario, this limit of INR 60 lakhs needs to be removed. There is no

reason, why companies with large turnover, which otherwise qualify, should not be eligible for conversion

with tax neutrality.

• Another condition is that all the shareholders of the company, immediately before the conversion, should

become partners of the LLP. This condition should be made applicable only in respect of equity shareholders

and not preference shareholders, since preference shares are in the nature quasi equity.

• Further, it is necessary that that the aggregate of the profit sharing ratio of the shareholders of the company,

in the LLP shall not be less than 50 percent at any time during the period of five years from the date of

conversion. This condition should be applicable only to voluntary transfers and not to all the transfers. Say,

this condition should not apply in case of dilution resulting from death or disqualification of a partner or

amalgamation of a corporate partner.

• For claiming tax neutrality, it is provided that accumulated profits of the company as on the date of

conversion should not be paid to the partners of the LLP for a period of three years from date of conversion.

Under Income-tax Act LLP is considered akin to a partnership firm and there is no restriction on distribution

of the profits of the partnership firm. Further in case of partnership firm there is no requirement to show

Reserves and Surplus separately but the same is credited to partner's capital account. Thus, there should not

be any restriction on LLP in relation to payment out of profits. Further, the term accumulated profits is not

defined and may include other reserves also.

• MAT payment under Section 115JB of the Act is prepayment of taxes actually becoming due in subsequent

years under normal provisions of the Act. Consequently, Section 115JAA of the Act allows credit for such

payments in the year the company becomes liable to pay tax under normal provisions of the Act. There is no

reason, why such credit should not be allowed to LLP, which is converted from a company eligible to such

credits, if it is paying taxes under normal provisions of the Act.

• Section 47(xiii)/(xiiib) and (xiv) requires that the members of the firm/shareholders of the company should

continue to maintain profit sharing/shareholding for 5 years. 5 years is a fairly long time, it should be

restricted to 3 years.

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• Section 47A(4) of the Act provides that in case of non-compliance of any condition provided in Section

47(xiiib) of the Act, the gains on conversion of company/transfer of shares shall be the profits & gain taxable

in the hands of the LLP/shareholders in the year of such non-compliance. Similarly, proviso to Section

72A(6A) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiiib) of

the Act, the losses/unabsorbed depreciation of the company utilized by the LLP shall be income of the LLP

for the year of such non-compliance.

• Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section

47(xiii) or (xiv) of the Act, the gains on conversion of partnership or proprietary concern shall be profits &

gains taxable in the hands of the Company in the year of such non-compliance. Similar to section 72A(6A),

72A(6) deals with cases covered under section 47(xiii) and (xiv).

Recommendations

• Section 47(xiii) of the Act should be suitably amended to include conversion of a Firm into LLP along with

conversion of Firm into a Company.

• Turnover criteria should be removed from Section 47(xiiib) of the Act.

• Words “equity shareholder” should substitute the word “shareholder” wherever it appears in Section 47(xiiib) of

the Act.

• Insert proviso under clause (d) in proviso to Section 47(xiiib) of the Act to provide that it should not be applicable

to a case where a change in profit sharing takes place consequent to death of a partner or pursuant to any other

transaction covered under Section 47 of the Act.

• Condition of non-payment out of accumulated profits specified in clause (f) to proviso to Section 47(xiiib) of the

Act should be removed. If not removed, term accumulated profit should be appropriately defined.

• Provisions of Section 115JAA of the Act allowing utilization of MAT credit should be amended to allowed credit

for MAT paid by the Company to the successor LLP.

• Sections 47(xiii)/(xiiib)/(xiv) should be amended to reduce period of continuing same profit sharing /

shareholding from 5 years to 3 years.

• Words profits & gains in Section 47A(3)/(4) of the Act should be replaced with the income.

4.32.6. Continuation of deduction under Section 80-IA of the Act in case of re-organization

Issues

• Section 80-IA of the Act provides deduction in relation to profits of certain undertakings. It was well settled that

in the case of restructuring of any entity owning such undertaking, the benefits of deduction will be available to

entity owning the undertaking post restructuring.

• Board's Circular vide Letter F.No. 15/5/63-IT (AI), dated 13 December 1963; specifically provided that in the year

of corporate restructuring, the benefit shall be available to transferor entity upto the date of transfer and to the

transferee entity for the remaining period of tax holiday.

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•

entity but same will be allowed to the Transferee entity as it would have been allowed, had the restructuring not

taken place. In totality, this will restrict the total period of deduction to not more than the total period for which

the deduction should have been allowed under the provisions of the Act.

• However, sub-section (12A) was inserted in section 80-IA with effect from 1 April 2008 to provide that nothing

contained in sub-section (12) shall apply to reorganization post 1 April 2007. A view is expressed that post

insertion of sub section (12A), benefit of deduction under Section 80-IA of the Act will not be available to the

Transferee entity.

Recommendations

• Section 80-IA(12A) of the Act be deleted to enable restructuring of eligible entities.

• Section 80-IA(12) should be amended to provide for allowing deduction to the Transferor entity for the period till

transfer date and to the transferee entity post transfer.

4.32.7. Definition of Widely held Company

Issues

• Section 2(18) of the Act defines widely held company. This definition has wide implication on carry forward of

loss, taxability under Section 56(2) of the Act and in various other provisions.

• It includes a listed company, only if its shares are listed on exchange as on last date of the relevant year. Further

it includes subsidiary of listed company, only if the shares of such subsidiary were held throughout the relevant

year by the listed company. These provisions lead to situations which does not seem intended.

• Therefore, it stands logical that the conditions of listing, holding of shares etc. should be subject matter of test

on the date of transaction and should not be stretched to be continuing till the end of that financial year.

Recommendation

Section 2(18) of the Act should be suitably amended to provide test of conditions on the date of relevant transaction.

4.32.8. Non-Compliance of conditions applicable to certain reoganisations

Issues

• Section 47(iv)/(v) of the Act provides exemption to gains arising from transfer of capital assets between a holding

company and its wholly owned subsidiary company. Section 47A(1) of the Act provides that in case holding

company not continuing to hold 100 percent of shares of the subsidiary company or treatment of the transferred

asset as stock-in-trade, within a period of eight years from the date of the transfer of capital asset, the gain

exempted under Section 47(iv) / (v) of the Act shall be taxable in the hands of the transferor company for the

year of transfer. The period of eight years is too long.

• Further, in any case such income should be taxable in the year of event specified in the section and not in the

year of transfer of capital asset.

Sub-section (12) provided that in the year of restructuring deduction will not be allowable to the Transferor

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•

(xiv) of the Act, the gains on conversion of partnership or proprietary concern shall be profits & gains taxable in

the hands of the Company in the year of such non-compliance. The conditions should be complied in the year of

conversion and it should not be required to be complied forever/5years.

Recommendations

• Section 47A (1) of the Act should be amended to reduce “period of eight years” to “period of two years”.

• Further, in any case, such income should be taxable in the year of event specified in the section and not in the

year of transfer of capital asset.

• Section 47A(3) of the Act should made applicable in the year of conversion only or at the most in the year

immediately succeeding that year. Further, words 'profits & gains' in Section 47A(3) of the Act should be replaced

with the words 'income'.

4.32.9. MAT Credit

Issues

• MAT credit is akin to advance payment of tax.

• Benefit of MAT credit cannot be denied to successors in case of reorganization.

Recommendation

• S.115JAA should be amended to provide that successors in case of amalgamation, demerger or any other form of

reorganization should be eligible to claim benefit of MAT Credit.

4.33. Amendment to Section 9(1) of the Act - Retrospective insertion of Explanations

(a) To expand meaning of word “through”

(b) To shift the situs of shares in foreign company/interest in other foreign entity to India, in case the share or

interest in such company / entity derives substantial value from assets in India.

Issues

• The amendment is retrospective in nature and proposed to be inserted with effect from 1 April 1962. The

amendment would mean that the transactions in past 6 years can be brought to tax. The transactions were

carried out considering the same not to be subject to tax in India. This view has been upheld by the Supreme

Court in the case of Vodafone International BV.

• Amending the tax laws post judicial pronouncement by the Supreme Court would damage the face of India in

the International market at such a sensitive juncture of the Indian economy.

Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiii) or

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Recommendations

• The amendment should only be prospective.

• Explanation 5 to section 9(1) of the Act should be amended to provide the following:

- Explanation should be applicable only for last part of Section 9(1) of the Act relating to “or through the

transfer of a capital asset situate in India”

- The terms 'value' and 'substantial' needs to be clearly defined.

- In any case, substantial should mean > 50%

- Threshold limits in terms of (a) quantum of consideration e.g. exceeding Rs.100 crores, (b) quantum of

shares of the foreign company e.g. exceeding 20% of paid up capital etc. should be provided for applicability

of explanation.

- The phrase “the share or interest in a company or entity registered or incorporated outside India” in

Explanation 5 should be reworded to mean the share in a company incorporated outside India or ownership

interest in other entity registered outside India. It should be clear that all interest, other than ownership or

controlling interest, should not be contemplated within the ambit of Explanation 5.

4.34. Amendment to Section 2(14) and Section 2(47) of the Act

Section 2(14) - Retrospective insertion of Explanation expanding scope of the definition of capital asset - the term

'property' has been defined to include any rights in relation to an Indian company, including rights of management or

control or any other rights whatsoever.

Section 2(47) - Retrospective insertion of an Explanation to the effect that the term 'transfer' includes disposing or

parting with an asset or any interest therein or creating any interest in any asset, notwithstanding that such transfer

of rights is effected or dependent upon or flowing from transfer of shares of a foreign company.

Issues

• It is not very clear as to what is meant to be covered by the term 'any rights'. The term is very wide and is

defined in an inclusive manner.

• The amendment in Section 2(14) read with Section 2(47) of the Act, may even cover unintended consequences.

For example, creation of management or control rights upon equity infusion in an Indian Company could be

treated as transfer.

• Further, 'the rights in relation to an Indian company' should not include rights of the company. For example,

Company may have its significant asset in the form of certain rights such as hotel license, lease rights, etc.

Acquisition of shares in an Indian Company holding such rights should not be treated as creation of interest in

such assets which is deemed as 'transfer'. Lifting of corporate veil in such a manner could lead to severe

consequences.

Explanation 5 to Section9(1) of the Act seem to be inserted for covering indirect transfer of shares in Indian

Company. However, the amendment may cover all income through or from such shares.

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Recommendations

• Explanation to Section 2(14) of the Act should be amended as under :

– Rights in an Indian Company' should be restricted to management and contractual rights.

• Explanation. to Section 2(47) of the Act should be amended as under :

– Words “or creating any interest in an asset” should be deleted.

– The transactions which are otherwise not 'transfer' as per law (for example - gift) or transactions which do

not result in any transfer per se, (for example primary infusion in company for acquisition of shares) should

not be covered in the deeming fiction created by amending Section 2(47) of the Act.

4.35. Insertion of Section 50D in the Act

Section 50D is inserted to provide that in cases involving transfer of assets, if the consideration is not determinable,

fair value of the consideration received or accruing shall be deemed to be consideration

Issues

• Method of determining fair value is not specified

• Section overlaps with certain other sections providing similar mechanism for determining consideration. e.g.

section 45(3) of the Act dealing with transfer of a capital asset.

Recommendations

• Method for determination of fair value should be specified

• Applicability of the section should be restricted to the transactions not covered under other similar provisions.

4.36. Amendment to Section 68 of the Act made by Finance Act, 2012

Section 68 of the Act is amended to insert a proviso to provide that in case of closely held company share application

money (including share premium) shall be considered as not satisfactorily explained unless the investor provides

necessary explanation to the satisfaction of the Assessing Officer.

Issues

• This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities

premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The

overall principles enunciated under GAAR provisions to treat an arrangement as Impermissible Avoidance

Arrangement should be applied to the share subscription transaction for determining the taxability of securities

premium account in the hands of company.

• This amendment may overlap with provisions of Section 56(2)(viib) and may be taxed twice.

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Recommendation

• This amendment should be deleted.

4.37. Amendment to Section 115JB

S.115JB has been amended to provide that revaluation reserve should be included in book profit at the time of

retirement or disposal of asset

Issues

• Income tax is on realized profit and not on notional profit

• On retirement of an asset there is no income and same should not be made liable on the basis of book profit

also.

• There is no set-off provided that if the reserve is included on retirement same should not be included at the time

of disposal.

Recommendations

• This section should be deleted.

• The amendment should not refer to adjustment at the time of retirement of asset.

Capital Gains

4.38.1. Rate of tax applicable to Long Term Capital Gain

Issues

• Section 112 of the Act provides rate of tax of 20 percent (plus surcharge applicable if any & cess) for Long Term

Capital Gains. However, considering the fact that in computation of capital gains very limited deductions are

allowed, rate of 20 percent seem to be on a higher side. It has been observed that owing to this high taxation

cost on long-term capital gains, there may be a temptation to understate the value of sale consideration. To curb

such adjustment provisions of Section 56(2)(vii) and (viia) of the Act are brought on the statute.

• For computing the said capital gains, “indexed cost of acquisition” is deductible from the full value of the

consideration. In case of listed shares, Section 112 of the Act provides an option to the taxpayer either to pay 20

percent on post index profit or to pay 10 percent on profit without indexation. Further, there is imposition of

Education cess, Secondary and higher education cess and, Surcharge (if applicable).

• Deduction under Section 80C to 80U of the Act is not available in respect of short-term capital gains taxable

under Section 111A of the Act and long-term capital gains taxable under Section 112 of the Act.

Recommendations

• It is suggested that rate of tax on long-term capital gains be reduced to 15 percent.

• Provisions of Section 56(2)(vii) and (viia) of the Act be removed as they will no longer be required.

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•

• Deductions under Section 80C to 80U of the Act are in form of tax incentives hence such deduction should be

available from capital gains taxable under Section 111A and 112 of Act.

4.38.2. Removal of upper cap of INR 50 lakhs under Section 54EC of the Act

Issues

• Section 54EC of the Act provides tax exemption on capital gains rising from the transfer of a long-term capital

asset if invested in long-term specified assets within a period of six months from the date of such transfer. The

Finance Act, 2007 has provided that the investments in such bonds should not exceed INR 5 million in a financial

year. Currently, huge amounts are required to be deployed in the infrastructure sector and this vehicle could be

used for raising such infrastructure development funds. Moreover, the interest income on such bonds is fully

taxable.

• Tax exemption is only on capital gains invested in the bonds issued by National Highways Authority of India or by

the Rural Electrification Corporation Limited. There does not seem to be any rationale behind prescribing the

monetary limit of INR 5 million per investor per year and restricting the investment to be made in bonds issued

by National Highways Authority of India or by the Rural Electrification Corporation Limited. Especially in the

context that such funds would in any case be used for meeting the infrastructure requirements. In addition to

the above, there is an ambiguity created by certain judicial precedents, where the taxpayer who has transferred

a capital asset in the second half of a financial year and who has exhausted the exemption limit of INR 5 million

in a financial year, whether can he look to invest a further sum of INR 5 million within 6 months from the date of

transfer even if such period of 6 months spills over into next financial year.

Recommendations

Proviso to Section 54EC(1) of the Act should be deleted which mandates that the investment in such bonds does not

exceeds INR 5 million in a financial year or the limit be substantially increased

With a view to accelerate growth in the infrastructure sector, investment in bonds issued by Infrastructure Capital

Companies/Fund should also be notified for the purposes of section 54EC of the Act.

The abovementioned ambiguity should be removed by clarifying that the amount of investment per financial year is

INR 5 million irrespective of whether the same is used for claiming exemption from sale of one long term capital

asset only.

4.38.3. Cut-off date for ascertaining cost and Index factor for computation of Long Term Capital Gain

Issues

• Section 55 (2) of the Act provides that in case of asset acquired before 1 April 1981, taxpayer has an option to

replace cost of such asset by market value thereof.

• Section 48 of the Act provides that for computation of long term capital gain, “indexed cost of acquisition” is

deductible from the full value of the consideration received from the transfer of the capital asset. Indexed cost

Choice of computation of capital gain with index benefit or without should be extended to all assets.

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means cost of acquisition adjusted for inflation index. Again, base for ascertainment of index factor is 1 April

1981. Cost Inflation Index is notified every year having regard to 75 percent of average rise in the Consumer Price

Index for urban, non-manual employees for the immediately preceding previous year to such previous year. It

may thus be seen that such indexation benefit is notional and does not take care of full inflationary impact and

causes inequities to the taxpayers. Thus, the cut-off date for cost replacement and base for index being 30 year

old needs to be revised.

• Further, in case of taxpayer, acquiring assets through specified modes, period of holding of earlier transferor is

added to period of holding of taxpayer, however, index benefit is allowed only from the date of holding of the

asset by the taxpayer. This seems to be an unintended anomaly and needs to be set right.

Recommendations

• Cut-off date for cost replacement in Section 55 of the Act and for index factor in Section 48 of the Act be shifted

to 1 April 2001.

• Index benefit even to the taxpayer acquiring assets through specified modes should commence from the date of

acquisition in the hands of original purchaser.

4.38.4. Rate of Tax applicable to Short-term Capital Gains

Issues

• Section 111A of the Act provides that short-term capital gains on sale of shares of listed companies or units of

equity oriented fund should be taxed at 15 percent. The rate was 10 percent till 31 March 2009.

• The difference between normal income and capital gain arising on transfer of assets is well recognized even

under the Act. It is a known fact that owner of an asset incurs a lot of expenditure for maintaining an asset. In

case such asset is used in business, deduction is allowed for such maintenance and other expenses. However, no

such deduction is allowed if such asset is a non-business asset. Thus it makes a strong case that rate of tax in

case of capital gains should be different from the rate applicable to other incomes. This distinction is recognized

to some extent in Section 111A and 112 of the Act. However, in case of short term gain relating to assets other

than listed shares, such difference is not recognized.

• In case of assets other than listed shares, the period of holding of less than 3 years makes it a short-term capital

asset. According to the 'Cost Inflation Index' in the recent years, the inflation is about 10 percent per annum.

This would result into an inflated cost of about 30 percent in 3 years. Hence, any tax on this inflated 30 percent

would be actually taxing non-real income in hands of the taxpayer and consequently the taxpayer is taxed

without any income in his hands.

Recommendations

• The rate for listed shares should be restored to 10 percent as was the position till 31 March 2009.

• Section 111A of the Act should be amended to provide the rate of tax for short term gain on transfer of assets

other than listed shares to be at 20 percent.

Indexation benefit should be given for short-term asset if they are held for a period more than 1 year.

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4.38.5. Abolition of tax on gains arising from transfer of listed securities

Issues

• The Shome Committee Report on 1 September 2012 on General Anti Avoidance Rules has recommended that

the Government should abolish the tax on gains arising from transfer of listed securities, whether in the nature

of capital gains or business income, to both residents and non-residents. The Government is also considering

increasing the rate of Securities Transaction Tax ('STT') appropriately to make the proposal tax neutral.

• As per National Stock Exchange, India is one of the costliest destinations to trade. STT, along with other taxes,

and high brokerage structure makes trading in India almost five-six times higher than in advanced countries.

Recommendations

• The Government should abolish tax on gains arising from listed securities whether in the nature of capital gains

or business income which shall incentivize the investors to have more participation in the Indian Capital Markets.

• Increasing the STT rate will reduce the liquidity from the system and Government may consider reducing the

same.

• These are just suggestions of the Expert Committee and the Government may consider reconsidering these

amendments post receiving comments from various stakeholders involved.

Transfer Pricing

4.39.1. Transfer Pricing of Marketing Intangibles

Issue

Marketing intangibles are crucial sources of value and its value is derived from the company's levels of Advertising,

Marketing and Promotion expenditures (AMP) which adds intrinsic value to a company. Tax authorities are

increasingly scrutinizing the cross border transfer, use and further development of intangibles relating to brand and

licenses. The ruling of the Delhi High Court in the case of Maruti Suzuki India, which discusses the creation and

compensation for marketing intangibles only, underlines this trend. Now, in light of the amendment introduced vide

Finance Act 2012 which specifically includes marketing intangibles in the expanded definition of international

transactions, substantiating the arm's length compensation for the transfer price of the intangibles would pose great

challenges without specific guidance relating to these aspects in the Indian transfer pricing regulations.

Recommendation

Accordingly, in line with the Organization for Economic Co-operation and Development (OECD) principles, guidance

should be issued to recognize certain methodologies /approaches for evaluating the arm's length character of

transactions involving marketing intangibles.

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4.39.2. Transfer Pricing of Manufacturing Intangibles

Issue

Compensation for use of manufacturing intangibles has generally been in the form of royalty payouts and is

commonly benchmarked by adopting the aggregated approach further substantiated with external benchmarking

[e.g. limits specified by the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) regulations].

However, this approach is increasingly challenged by the revenue authorities, who adopt transaction-specific

approach, and the taxpayer is required to substantiate the economic and commercial benefits derived from the

royalty payout.

Recommendation

With the recent removal of the above limits as prescribed by the RBI and the FEMA regulations, it is therefore

necessary that guidance be provided to test such transactions particularly in cases of start-up or loss making

companies.

4.39.3. Transfer Pricing of Intra Group Financial Transactions / Management services

Issue

Management services are services where an entity in a multinational group renders shared services in the nature of

legal, administrative, human resources, information technology, finance, sales/ marketing, etc. to its group affiliates.

One of the important issues that draw the attention of the tax authorities is the arm's length nature of the

compensation paid for such intra-group services to related entities. The entire onus to substantiate the arm's length

payment and establish 'cost-benefit' analysis by way of maintaining service agreements, basis of charge out rates,

allocation keys, etc, is upon the taxpayer to establish that only those costs are pooled which have been incurred for

rendering of services by Associated Enterprises (AE).

Recommendations

In the absence of industry benchmarks in public domain for testing management fee payouts, guidance for

maintaining specific documentation outlining the various costs incurred in relation thereto and the related benefits

derived there from, should be highlighted and elaborated upon in the regulations.

4.39.4. Interest on Inter-company loans and Guarantee fees

Issues

Transfer pricing of cross-border financial transactions deals with inter-company loans, debentures, corporate

guarantee charges, cash-pooling arrangements, debtors discounting, etc, and intends to arrive at arm's-length

outcome in a related-party scenario. Typically, interest rates on loan transactions between third parties depend on

factors like borrowers' credit rating, loan tenor, prevailing market conditions, loan seniority, security to lender(s), etc.

The Comparable Uncontrolled Price (CUP) method, which is commonly used for arriving at arm's-length interest rates

for intra-group loan transactions, demands a high degree of comparability and necessitates complex adjustments.

Pricing a guarantee is even more challenging in the absence of comparable data and warrants application of

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sophisticated transfer pricing techniques. In India, lack of guidelines often leads to application of arbitrary methods

for pricing of inter-company financial transactions. Recently, the income-tax tribunals have laid emphasis on the

credit quality of the borrower while holding that inter-company loans should attract arm's-length interest charge.

Further, vide the Finance Act 2012, the definition of international transactions has been expanded to specifically

include capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or

sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt

arising during the course of business which would now give rise to a whole gamut of such financial transactions to be

reported by the taxpayer.

Recommendation

Given the increasing global trend of cross border financing and inter-company lending, it is of paramount importance

to introduce appropriate guidance governing the pricing of inter-company funding.

4.39.5. Transfer Pricing Methods - Profit Split Method (PSM)

Issue

• PSM is applicable mainly in international transactions involving transfer of unique intangibles or in multiple

international transactions which are so interrelated that they cannot be evaluated separately or the purpose of

determining the arm's length price of any one transaction. The method involves valuation of non routine

intangible, assigning the combined profit or loss according to each party based on allocation keys and using of

projected financials. Lack of clarity on valuation of intangibles and use of complex analysis for splitting the profit

or loss has been experienced as the major reasons for the reluctance in using this method in India, both from a

taxpayer and revenue perspective.

Recommendation

Issuance of guidance for application of this method and valuation norms can bring about clarity to the taxpayer on

usage of this method.

4.39.6. Arithmetic mean v. inter-quartile range

Issue

• The Indian transfer pricing regulations require the determination of a single arm's-length price. In cases where

multiple comparable prices exist, the Indian transfer pricing laws require the arm's-length price to be determined

as the arithmetic mean of the prices of such comparable uncontrolled transactions. The computation of a single

arm's-length price poses many difficulties, since transfer pricing, is not a mathematical or scientific calculation,

but a subjective commercial analysis.

Recommendation

Under such a scenario, median and/or inter-quartile range would be a better indicator of comparable prices. It is less

sensitive to extreme observations, particularly where the distribution is highly skewed. The TP regulations could

therefore be amended to permit application of the concept of an arm's-length range of prices, similar to provisions

contained in the OECD regulations and those of other developed nations.

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4.39.7. Structural Changes of the Dispute Resolution Panel

Issue

Transfer pricing is a serious issue faced by MNCs. Recognizing this Dispute Resolution Panel (DRP) was established.

Given recent experiences, the government should consider some structural changes to the DRP mechanism.

Recommendations

For the DRP mechanism to be an effective tool of alternate dispute resolution, reforms in the Union Budget 2013

should include:

• DRP being constituted as an 'independent' judicial board with panelists from economic legal and accounting

background and tax department

• Affixing personal accountability at each level for appeals filed by tax authorities

• Constitution of a legal cell to monitor progress of tax cases

• Limitation period to be prescribed for disposal of appeals and closely monitored and

• Suo-moto withdrawal of cases which are covered by decisions of courts and which are found without merit.

4.39.8. Stay of Demand

Issue

• In cases where the DRP is proposing an adverse recommendation to the AO, it is not clear as to whether it has

powers to issue direction to the AO to grant stay of demand if the taxpayer is intending to prefer an appeal to

Tribunal.

Recommendation

Specific provision may be introduced to also provide for such powers to the DRP, so that the DRP process achieves its

stated objective.

4.39.9. Eligible Assessee

Issue

• Section 144C(15)(b) of the Act defines 'eligible assessee' as (i) any person who has had a TP adjustment; and (ii)

any foreign company. The use of the word 'and' in the definition could lead to an interpretation that the

conditions need to be satisfied cumulatively i.e. the taxpayer has to be a 'foreign company' and should have

suffered a TP adjustment.

Recommendation

It appears that the intention of the amendment is that 'both' the above type of taxpayers should be covered within

the meaning of the phrase 'eligible assessee'. Hence, to reflect correctly the intent and prevent anomalous

interpretation on account of the wording, 'and' should be replaced by 'or'.

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4.39.10. TP Documentation requirement

Issue

• The documentation requirements are attracted if the aggregate value of the transactions exceeds INR 10 million.

Recommendation

This monetary limit seems to be on lower side especially for software, which has associates in various countries, and

calls for upward revision. Also, documentation requirements should be such as to enable the tax authorities to arrive

at arm's length price without subjecting the concerned parties to undue cost, time and harassment.

4.39.11. Use of Multiple year data / Contemporaneous data

Issues

• The transfer pricing regulations require taxpayers to maintain documentation on a contemporaneous basis. The

comparability analysis (or choice of appropriate comparables) is required to be based on data relating to the

financial year in which the international transaction has been entered into (current year data). Further, the use

of data from the past two years is permitted where the past data reveals facts which could influence the

determination of transfer prices for the current year. It is worthwhile to note that the taxpayers need to have

their transfer pricing analysis in place at the latest by the due date of filing their income-tax return.

• The issue of the number of year's data to be considered has been a matter of subjective interpretation to date. It

is generally felt that if data from the relevant financial year is not found in the public databases at the point in

time when the benchmarking exercise is undertaken, then there is sufficient cause for use of prior year's data.

However, the revenue authorities have generally disregarded the use of the same in the course of transfer

pricing audits.

Recommendation

Relevant clarifications could be incorporated in the regulations that clearly permit use of multiple year data for

comparability analysis.

4.39.12. Adjustments for differences in functions and risks

Issues

• The India transfer pricing regulations provide for making reasonably accurate adjustments to take into account

differences between international transactions and uncontrolled transactions, considering the specific

characteristics relating thereto.

• However, in practice there is no guidance or clarity on the manner in which these adjustments are to be made.

For example, adjustments in areas such as differences in levels of working capital, differences in risk profile,

differences in volumes, pricing on marginal cost, startup losses or capacity utilization and so on, have generally

not been permitted by the revenue authorities in the course of transfer pricing audits as upheld in certain

Tribunal decisions as well.

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Recommendations

Accordingly, suitable guidance on the manner of carrying out economic and risk adjustments to comparable and

taxpayer's data is necessary.

Further, the Tax Authorities should be encouraged to duly consider in the course of transfer pricing audits, business

strategies and commercial or economic realities such as market entry strategies, market penetration, and non-

recovery of initial set-up costs, unfavorable economic conditions and other legitimate business peculiarities while

determining the arm's length pricing.

4.39.13. Valuation under Customs and Transfer Pricing

Both Customs and Transfer Pricing require taxpayer to establish arm's length principle with respect to transactions

between related parties. Objective under respective laws is to provide safeguard measures to ensure that taxable

values (whether it is import value of goods or reported tax profits) are the correct values on which respective taxes

are levied. The above objective, while established on a common platform has diverse end-results as seen below:

• To increase Customs duty amounts, the Customs (GATT Valuation) Cell would prefer to increase the import value

of goods

• To increase tax, the tax department would prefer to reduce purchase price of goods

Issues

The diverse end-results create ambiguity in the manner in which the taxpayer should report values under the

Customs and the Transfer Pricing. We have judicial precedents which favor and contradict the use of custom

valuation in transfer pricing. In the case of Coastal Energy Private Ltd the Chennai Tribunal endorsed the TPO's

decision to apply the customs data for transfer pricing analysis. Similarly in the case of Liberty Agri Products Pvt. Ltd

the Chennai Tribunal again held that arm's length price on imports for transfer pricing purposes is to be determined

using the rate for customs. Contrastingly, a decision from the Delhi Tribunal in the case of Panasonic Limited and

another one from the Mumbai Tribunal in the case of Serdia Pharmaceutical highlighted the distinctive objective of

Customs valuation and the necessity for separate arm's length analysis as per transfer pricing provision.

These contradicting decisions necessitate a greater need for convergence of transfer pricing mechanism under the

Act and the Customs Regulations.

Recommendation

There is a need for a common platform that would provide a 'middle-path' of arms length price that is equally

acceptable under Customs Law and under the Transfer Pricing.

4.39.14. Safe Harbor

Safe harbor has been defined to mean 'circumstances' in which the revenue authorities shall accept the transfer

pricing declared by the taxpayer. Internationally used safe harbors take two forms:

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• Exclusion of certain classes of transactions based on quantitative limits from Transfer Pricing regulations.

• Stipulation of margins / thresholds for prescribed classes of transactions / specified industries.

Issue

The Act was specifically amended in 2009 to provide Safe Harbors to be formulated by the CBDT. Even though 3years

have passed since then, no Safe Harbors have been announced yet. The idea of safe harbor is to reduce the impact of

judgmental errors in determining transfer prices in international transactions. Safe harbor eases the compliance

burden for taxpayers, curtails disputes and reduces administrative hassles for taxmen.

Recommendations

While making these rules, the CBDT should consider simplification measures involving Cost Plus Method (CPM) and

CUP method. Safe harbors for interest rates on borrowings and lending, reimbursement and recovery of expenditure,

would be a salutary simplification measure. Such Safe Harbor may benefit large number of taxpayers but revenue

implication may not be significant. Similarly, captive IT/ ITES services can be covered by Safe Harbor provisions. The

Safe Harbor Rules in India can be framed keeping in view the national considerations and the most litigated and

disputed aspects.

Simplification measures might help in reducing the costs of maintaining detailed documentation for the taxpayers

and reduce administrative and litigation costs for both the tax department and the taxpayer. It will also help the tax

department to focus more on the bigger and more risky transactions in the interest of revenue.

4.39.15. Specified Domestic Transaction

Section 92BA has been inserted vide Finance Act 2012 by which the coverage of transfer pricing has been expanded

to include certain 'Specified Domestic Transactions' if the aggregate amount of all such transactions entered by the

assessee in the previous year exceeds Rs. 5 crores in the previous year

Issues

This amendment covers a scenario wherein the payment of remuneration by the company to its director or relative

of such directors is also required to be at arm's length. The same casts an onerous responsibility on the company vis-

à-vis justification of the arm's length nature of such payments.

There could be a situation where by the said adjustment due to non-arm's length nature can lead to double taxation.

For example a payment by a taxable entity to another taxable related entity and in case it is determined that such

payment are not at arm's length the same can lead to tax being paid by the entity making the payment and further

the other entity would also pay tax on the transaction value rather than the arm's length value, as the transfer

pricing regulations as they stand today specifically negate the corresponding adjustment.

The Advance Pricing Agreement (APA) provisions are being made applicable to only international transactions. The

same should also be made applicable to domestic transactions covered by transfer pricing regulations.

The term “specified domestic transaction” has been defined to inter alia mean any expenditure in respect of which

payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A of the

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Act. Such expenditure could possibly include capital expenditure made to such a related person. It should therefore

be clarified that this pertains to revenue expenditure only.

Recommendations

FICCI recommends that the threshold limit for applicability of transfer pricing regulations to specified domestic

transactions be increased from Rs. 5 crores to Rs. 15 crores to avoid undue hardship for small businesses

Necessary guidance for benchmarking in respect of the directors remuneration should be provided.

This amendment seeks to cover a situation wherein there could not be any loss to the exchequer. The same is not in

line with the suggestion provided by the Supreme Court in case of Glaxo Smithkline. The Supreme Court had

provided the situation wherein transfer pricing should be applicable in case of transactions between a profit making

and a loss unit / company. The other scenario which was envisaged by the Supreme Court was transactions between

units / assesses having different tax rates. Other than the scenarios contemplated above, a corresponding

adjustment should be allowed and hence provided for on the statue.

It should be suitably clarified that the transfer pricing provisions would only apply to revenue expenditure referred to

in section 40A(2)(a) of the Act, and not to payments made to persons specified in section 40A(2)(b) of the Act.

'Any other transaction as may be prescribed' covered under section 92BA of the Act may be notified and should be

made applicable from prospective effect to avoid undue hardship to the taxpayers.

The words “close connection” appearing in section 80-IA(10) of the Act needs to be clarified to avoid ambiguity in

the application of provisions of section 92BA of the Act.

4.39.16. Penalty for failure to keep and maintain information and document etc. in respect of certain transactions

Issues

The Finance Act, 2012 has substituted section 271AA with effect from 1st July 2012 which reads as under:-

“271AA. Without prejudice to the provisions of section 271 or section 271BA, if any person in respect of an

international transaction or specified domestic transaction-

(i) fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2)

of section 92D;

(ii) fails to report such transaction which he is required to do so; or

(iii) maintains or furnishes an incorrect information or document,

the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum

equal to two per cent of the value of each international transaction or specified domestic transaction entered into by

such person.”

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While the quantum of addition itself is disputable in transfer pricing assessments, fixing the penalty on the assessed

income would increase the burden of the taxpayer considerably.

Due to retrospective extension of scope of international transaction, the Transfer Pricing Officer (TPO) can ask the

taxpayer to pay penalty under the said section 271AA at the rate of 2 per cent of value of international transaction

due to failure to keep information in addition to another 2 per cent under section 271G for not furnishing the

information besides regular penalty under section 271(1)(c) of the Act. This would result in multiple tax demand on

arbitrary values.

Recommendation

It is, therefore, suggested that penalty should be restricted to tax in dispute and not linked to the value of

transaction.

Financial Services

4.40.1. Expanding the scope of section 10(23FB) to all categories of Alternative Investment Funds (AIF)

• Under the AIF Regulations, the AIFs are broadly classified into three categories viz. Category I (e.g. - venture

capital funds, social venture funds, SME funds), Category II (private equity funds, debt funds, etc) and Category

III (hedge funds, etc) based on their eligibility criteria, investment restrictions and the positive effects they would

have on the economy. The AIF regulations provide that Category I AIFs would be construed as Venture Capital

Fund (“VCF”) or Venture Capital Company (“VCC”) as specified under Section 10(23FB) of the Act for the

purposes of claiming the pass through benefits under the Act i.e. income arising to such AIFs would be taxable in

the hands of the investors and not in the hands of the AIFs. However, there is no such tax pass through benefit

accorded to Category II and III AIFs.

Issues

• The Finance Act, 2012 amended section 10(23FB) of the Act providing tax pass through to a VCF / VCC registered

under SEBI regulations for any income earned from a Venture Capital Undertaking (“VCU”). The beneficiary of a

VCF / VCC is taxed as if it has made the investments directly in the VCU. Before the amendment, VCU was

defined to mean an unlisted Indian company engaged in 9 specified sectors. The Finance Act, 2012 amended the

definition with effect from 1 April 2013 to mean a VCU referred to in the SEBI (VCF) Regulations, 1996 made

under the SEBI Act. The above amendment in section 10(23FB) of the Act read with section 115U has led to the

removal of sectoral restrictions encapsulated under the erstwhile section 10(23FB) of the Act. Therefore, all SEBI

registered VCFs / VCCs enjoyed complete tax pass through status with respect to income earned from any VCU

under section 10(23FB) of the Act.

• PASS THROUGH STATUS ONLY FOR CATEGORY 1 AIF

• However, pursuant to the AIF regulations, the above tax pass through status provided in section 10(23FB) of the

Act is now made available to Category I AIFs only. This has created disparity in the treatment accorded inter-se

between the three categories of AIFs. The aforesaid tax pass through benefit is not extended to Category II and

Category III AIFs and hence, the income earned by the AIFs falling under these categories (and if constituted as

trusts) shall be taxed as per the general trust tax provisions, which are quite onerous.

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•

being treated as a tax pass through entity. The Act does not provide any income-tax exemption on the income

earned by the VCF since the investors of the VCF have to pay tax on the same. Further, there is no deferral of tax

as well since the investors pay tax as and when income is accrued to the VCF. In a nutshell, the income is subject

to tax in the hands of the investors (subject to other provisions of the Act) and hence, this mechanism of pass

through only provides flexibility and tax certainty to the VCF.

Recommendation

Complete tax exemption for the all categories of AIF as a specific provision of tax pass through and single level of

taxation would be critical to promote investments in India.

4.40.2. Pass through status for entire income of Venture Capital Fund ('VCF')/ Venture Capital Company ('VCC')

• As per section 10(23FB) of the Act, any income earned by a VCF or VCC from a venture capital undertaking

(“VCU”) (i.e.: an unlisted Indian company) would be exempt in the hands of the VCF / VCC and be taxable in the

hands of the investors on a pass through basis. However, the provisions of section 10(23FB) do not extend to

income earned from non-VCUs.

Issues

Under the extant regulatory framework, a SEBI registered VCF / VCC cannot undertake any activity other than

investment activity. A minimum of 66.66 per cent of investible funds of a VCF / VCC must be invested in equity

shares/equity linked instruments of VCUs. Within the 33.33 per cent basket, VCF/ VCCs are permitted to make

certain non-VCU investments, which comprise the following (i) investment into special purpose vehicles (“SPVs”) set

up exclusively for downstream investments into VCUs (ii) preferential allotment by financial weak / sick listed

companies (iii) initial public offerings and (iv) preferential allotments by other listed companies.

At times, it may be commercially expedient for a VCF / VCC to make an investment into a VCU through an SPV. Such

SPVs by themselves are merely investment holding vehicles and, hence, may not qualify as VCUs for the purposes of

the Act. However, in the SPV structure, a VCF / VCC has ultimately invested its capital into the VCU albeit through an

SPV. Clearly, the tax treatment of income arising from a VCU investment made by a VCF / VCC through an SPV for

certain cogent commercial reasons ought not to be different from a direct VCU investment. It is self-evident that

capital flow into any financial weak / sick company ought to be incentivized from rehabilitation perspective etc.

Lastly, allowing VCF / VCC to participate in IPOs and preferential allotment by listed companies facilitates a more

vibrant capital market, provides Indian companies greater access to VC / PE funding and enables VCF / VCCs to

legitimately diversify their portfolio without altering their basic character of being a long term capital provider.

Also, there may be situations wherein a VCF / VCC may invest into an unlisted company, which may get subsequently

listed and the VCF / VCC may exit only post listing; technically, the investee company may not qualify as a VCU at the

time of exit and, therefore, income arising upon exit would not be covered by section 10(23FB) read with section

115U of the Act. Such a consequence seems inequitable and unintentional given that the investment was made at

the stage when the investee company was a VCU.

A VCF / VCC may have two income streams subject to differing tax treatments - income from VCUs would be taxable

under the section 10(23FB) of the Act and section 115U of the Act framework and the balance income would be

It must be noted that section 10(23FB) read with section 115U of the Act provides only a flexibility to the VCF for

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taxable as per general trust tax provisions (for VCFs), which are not tailored to apply to VCFs. Such a duality on mode

of taxability at VCF / VCC level is avoidable.

Recommendation

For the aforementioned reasons (and akin to a mutual fund whose entire income is exempt under section 10(23D) of

the Act), the whole of the income earned by SEBI registered funds ought to be taxable on a pass-through basis under

section 10(23FB) read with section 115U of the Act in the hands of the investors. Preferably, the aforesaid suggestion

should be effected retrospectively with effect from April 1, 2008.

4.40.3. Demarcation between general trust taxation provisions and VCF taxation provisions

Issues

Part B and Part C of Chapter XV of the Act (primarily Section 160 to Section 164A of the Act) deal inter alia with

general trust taxation. As stated earlier, most VCF's in India are established as trusts. However, the taxation of VCFs

and their beneficiaries is governed by a special set of provisions namely: Section 10(23FB) read with Section 115U of

the Act. The relevant provisions forming part of Part B and Part C of Chapter XV dealing with general trust taxation

would not apply to trustees of a VCF and/or their beneficiaries.

It would be advisable to insert a clarificatory provision to state that nothing contained in Part B and Part C of Chapter

XV of the Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust. This will result in

a clear demarcation between provisions dealing with taxation of VCF trusts and other general trusts.

Recommendation

Clarificatory provision should be inserted, to state that nothing contained in Part B and Part C of Chapter XV of the

Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust.

Assessment and Procedural Aspects

4.41. Dispute Resolution Panel related issues

4.41.1. Dispute Resolution Panel directions - not to be a precedent

Issue

• The Dispute Resolution Panel (DRP) may, on certain occasions, refrain from passing directions in favour of the

taxpayer due to the apprehension that the same may become a precedent for other taxpayers or for the same

taxpayer in subsequent years.

Recommendation

• In order to avoid such instances, which may hamper the administration of justice, specific provisions may be

inserted in the Act to clarify that the directions of the DRP are binding only for a particular assessment order and

a particular taxpayer and that the position may not be applicable for other AYs/ other taxpayers. The same may

be framed on similar lines to the provisions of Section 245S of the Act (as applicable to Advance Rulings).

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4.41.2. DRP may be formed as an appellate authority

Issues

• Vide Finance Act, 2012, the AO has been given a right to file an appeal against the order of the DRP, before the

ITAT. This amendment, has although granted a recourse to the AO against the directions of the DRP, it has not

effectively resolved the practical issue of independence of the DRP. The members of the DRP are actually

revenue officers who have been entrusted with the responsibility of disposing off objections against the orders,

which in many cases are passed by the AO(s) under their own jurisdiction(s).

• Moreover, currently, there are no restrictions imposed on the appointment of jurisdictional

Commissioners/Directors of Income-tax as a member of the DRP to hear cases falling within the jurisdiction of

the DRP member. In such a scenario, there may be cases of bias, actual or perceived, towards Revenue in issuing

directions in cases falling within the jurisdiction of the DRP member.

Recommendations

The members of the DRP should be independent (such as retired members of the Tribunal) now that the AO has

been entitled to appeal before the Tribunal against the order of DRP, rather than comprising of revenue officials. It is

also recommended that one DRP member should be from outside Government and person of eminence drawn from

the fields of accountancy, economics or business with knowledge of income tax matters.

Alternatively, the DRP may be disbanded and the power to hear the cases be transferred back to the Commissioner

of Income-tax (Appeals) [CIT(A)]. However, in such a case, the appeal procedure would need to be amended to bring

in certain positive features of the DRP mechanism. In particular, stringent provisions may be inserted to ensure the

following:

• That the CIT(A) should hear the appeal and dispose it off within a period of 12 months from the date of

institution of the appeal; and

• That no demand should be raised upon the taxpayer till the appeal is disposed off by the CIT(A).

Further, in order to ensure speedy disposal of appeals, more number of CIT(A)s may be appointed and allocation of

appeals to the CIT(A)s be streamlined.

Furthermore, in order to avoid cases of actual or perceived bias and to ensure objectivity in the dealing of cases,

specific provisions may be inserted to restrain a jurisdictional Commissioner/ Director from being appointed as a

member of the DRP hearing cases falling within his/ her jurisdiction. This view was also endorsed by the Uttarakhand 4High Court in its recent decision in the case of Hyundai Heavy Industries and Mumbai Tribunal in the case of

5 6Huntsman International (India) Limited and Lionbridge Technologies Private Limited .

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4 Hyundai Heavy Industries [2011-T11-28-HC-UKHAND-INTL]5 Huntsman International (India) Limited 23 taxman.com 52 (Mum)6 Lionbridge Technologies Private Limited [2012] 51 SOT 40 (Mum)

4.42. Electronic Filing of income-tax returns

4.42.1. Grant of credit for Tax Deducted at Source

Issues

• While e-filing the income-tax return, a taxpayer claims credit for TDS, advance tax and tax paid on self-

assessment. As per the CBDT instructions, no supporting documents to the return will be accepted by the tax

officers.

• Due to mismatches in the data between TDS Certificates issued by deductors to the taxpayer and the TDS details

uploaded by the deductors on TIN system (i.e. bank payment details, PAN Nos. of the deductees), complete

details of actual TDS deducted is not captured in the system.

• In addition, the information furnished by the taxpayers is not appropriately captured in the software due to

processing errors.

• As a result, no credit /short credit of TDS is being given while processing of returns, causing undue grievances to

the taxpayer where the default actually lies in the hands of deductors or in the software itself.

• As a consequence, the endeavor of the tax department to introduce paperless TDS certificates is yet to achieve

its desired goal.

Recommendations

• It is suggested that so long as the TIN and TDS systems are not independently reviewed and all bugs are fixed,

TDS Certificates issued by the deductors, advance tax challans and self-assessment tax challans which are

furnished by the deductees in the tax assessment, should be given due cognizance by the AO and credit of such

claims should be allowed within a given time frame to address the taxpayers grievances.

• It is also suggested that the AO should be made accountable for delay in granting credits when original

documents are furnished by the taxpayer.

4.42.2. Option to insert explanatory notes/ edit fields in the return

Issues

• Under the income-tax form notified by the income-tax department, there is no provision in the e-format for

giving explanatory notes in respect of any adjustments in the return of income.

• If on the one hand the taxpayer does not make any adjustments, he will have to forego the claim. On the other

hand, if the taxpayer makes the adjustment and the AO does not agree with the same, he is likely to make

adjustments to the income and also initiate penalty proceedings causing undue hardship to the taxpayer.

• Further certain fields are locked for editing and values are calculated automatically. (e.g.: In case of a taxpayer

who has not used an asset for the purpose of his business is not eligible to claim depreciation. But as the

taxpayer is required to give details of opening written down value of the asset in the income-tax form,

depreciation is calculated automatically, despite the taxpayer being not eligible to claim such depreciation.)

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Recommendation

It is suggested that the e-format of the income-tax return form be re-devised to provide the taxpayer the option to

edit fields and give explanatory notes which the taxpayer considers necessary in respect of any adjustments carried

out. It will not only safeguard the taxpayer against penalty proceedings but also against reopening of completed

assessments.

4.42.3. Carry forward of business losses in cases of newly setup companies

Issues

• As per Section 139 of the Act, every company is required to file its income-tax return. As per Section 3 of the Act,

in respect of a business newly set-up in any financial year, the 'previous year' is the period beginning with the

date of setting up of the business and ending with the said financial year.

• The actual point at which a business can be said to have been set up is at the point when the Company is ready

to commence its operations. As such, provisions relating to computation of income under the head 'profits and

gains of business' would not apply to the companies who are yet to commence its business and would not be

eligible to carry forward any business loss for possible set-off in subsequent assessment years under Section 72

of the Act.

• However, in the income-tax return form, the computation of income under head 'profits from business' is linked

to the items of profit and loss account entered in the form. As a result business loss is also automatically

calculated, although the taxpayer is not eligible to carry forward any business loss, thereby resulting in incorrect

claims.

Recommendations

• It is suggested that the e-format of income-tax return form be re-devised to manually edit fields relating to carry

forward of unabsorbed losses and also as suggested earlier, provision be made for providing explanatory notes

for carrying out the edits.

• As per the provisions of Section 3 of the Act, expenses incurred prior to the date of set-up of business are not

allowed as deduction while computing profits and gains of business. In the current income-tax return form,

there is no separate Section wherein such expenses can be mentioned. Hence, it is suggested to include a

section wherein expenses incurred prior to set-up of business may be disclosed.

4.42.4. Entering of bank account details in case of refund for foreign companies

Issue

• Foreign companies that have no PE in India and have refunds arising in India are compulsorily required to furnish

Indian bank account details in the income-tax return. Since the foreign companies have no bank accounts in

India, it is causing undue hardship to the companies.

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Recommendation

It is suggested that the e-format of the income-tax return form be re-devised to allow the foreign companies to

provide details of foreign bank accounts in the return form. In this connection, it is also suggested that, since the

cheques issued by the Income-tax department are denominated in Indian Currency which are not accepted by all the

foreign banks, a facility of remitting refunds through wire transfer be introduced.

4.43. Compulsory filing of income tax return in relation to assets located outside India

Finance Act, 2012 has made mandatory for residents (other than not ordinarily resident in India) to file tax return in

India if they have any asset (including any financial interest in any entity) located outside India or signing authority in

any account located outside India irrespective of the fact whether the resident taxpayer has taxable income or not.

Issues

• There is no minimum threshold prescribed for foreign asset/financial interest reporting. In absence of minimum

threshold, there could be diligent reporting of minimal values of bank account balances etc. defeating the

purpose of data collection, and overburdening the tax department with irrelevant information. On the other

hand, assessees may inadvertently ignore certain details (given the low values), which may trigger a non-

compliance which may not be intentional. This could be avoided by prescribing a minimum threshold.

• The time limit of 16 years prescribed by the Finance Act, 2012 for reopening of cases where any person is found

to have any asset (including financial interest in any entity) located outside India will pose serious hardships for

assessees who have returned to India after staying abroad for long as it is not reasonable to expect them to have

the documentation retained for the past 16 years to explain the bonafide. Hence, this will even cover the

genuine assessees who would have paid tax on the foreign assets while their stay abroad but are unable to prove

their bonafide in absence of any documentation for a such a prior period.

• The Central Board of Direct taxes (CBDT) has notified the tax forms for AY 2012-13, mandating disclosure of

foreign assets. In the tax return forms, a new section called Foreign Assets has been introduced to disclose

foreign assets. However, there are no guidelines on as to what would come within the purview of 'any asset,

'financial interest in any entity'. In the absence of any guidance the term may have wide connotation leading to

litigation. Clarity would be required on whether assets such life insurance policies, stock options benefits,

overseas social security schemes and pension plans, paintings, works of art, collection items (such as stamp

collection/coin collection) etc. are covered. The reporting requirement could end up to be a meaningless

collection of data if suitable guidelines are not issued.

• In practical situations, many executives of a company are appointed as authorized signatory of company account

situated outside India while discharging their duty as an employee of that company. Details of such accounts

may not be available with such executives. It has now become mandatory for every resident to report details in

the income tax form if they have signing authority in any account located outside India. Such a requirement

poses hardship for the assessees who are signatory to accounts held by the entities in which they are

employed/directors.

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Recommendations

• It is strongly recommended that a minimum threshold be prescribed for reporting of foreign assets.

• The period of 16 years for reopening of cases should be made applicable only for any assessment year beginning

from on or after AY 2012-13.

• It should be suitably clarified as to what would constitute “any asset”, “financial interest”.

• It is recommended that an exception be provided to a resident who is a signing authority to a foreign account by

virtue of his employment/directorship.

Assessment Procedure

4.44.1. Standard questionnaires

Issue

• While issuing notices [e.g. under Section 142(1) of the Act], there is a practice to issue standard questionnaires

to taxpayers without customizing it to the facts and circumstances of the taxpayer concerned, most of the

questions raised are not applicable to the taxpayer and causes unnecessary hardship to the taxpayer, who is

unsure of what action needs to be taken at his end.

Recommendation

It is suggested that the AOs be appropriately instructed to issue customized notices to a taxpayer instead of

dispatching a generic standard form questionnaire to all taxpayers.

4.44.2. Non-consideration of submissions made by taxpayer

Issue

• During assessment, a taxpayer often provides elaborate submissions in response to questions raised by the AO in

relation to notices issued under Section 142(1) or 143(2) of the Act. However, very often, the AO passes the

assessment order against the taxpayer without stating any reasons for rejecting the submissions made by the

taxpayer. Since the AO functions as a quasi-judicial authority in assessing a taxpayer's income, it is important that

the AO provides appropriate reasons for rejecting the submissions.

Recommendation

It is suggested that appropriate instructions be given to the AOs to issue a well-reasoned assessment order after

considering appropriately a taxpayer's submission.

4.44.3. Collection of demand

Issue

• Over-pitched assessments, huge demands and coercive methods without any accountability on the part of the

AOs, are a common phenomenon.

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Recommendation

It is suggested that appropriate instructions be given to the AOs to consider applications for stay of demand

favourably for payment of demand by taxpayers especially when the appellate orders are in favour of the taxpayer.

4.44.4. Proceedings under Section 201 of the Act

Issue

• In respect of Assessee-in-default (AID) proceedings carried out under Section 201 of the Act, it has been the

experience of taxpayers that credits are not granted for taxes paid and demands raised are expected to be

complied within an unreasonably short period of time. Thus, a bonafide taxpayer is not given time to weigh the

option of filing an appeal against the assessment order.

Recommendation

Since these AID proceedings are carried out on a taxpayer in respect of someone else's primary tax liability, it is

essential that the tax authorities provide additional & sufficient time to the taxpayer to collate relevant data.

4.44.5. Training at the AO/Field office level

Issue

• It has often been observed that AOs at the ground level do not have sufficient knowledge of the transactions and

indulge in roving enquiries and data from a taxpayer. Often, the AOs are prejudiced against the taxpayer and

conduct assessments based on baseless suspicion.

Recommendation

In these situations, it becomes extremely difficult for a taxpayer to submit necessary information to convince the AO

on the genuineness of the transactions. It would therefore be in fitness of things that appropriate training be

provided at the AO /field officer level and a central pool of specialists be put in place for guidance on assessment

(example in respect of non-charitable trust, etc).

4.44.6. Delay in disposing of applications

Issue

• Delay in timely processing of applications filed under Sections 195(2), 197 and 154 of the Act by the tax authority

results in inordinate delay in carrying out the commercial transactions for a taxpayer and adversely affects the

taxpayer's business.

Recommendation

The current scheme of the Act does not provide any time limit for disposal of application under Section 195(2) and

197 of the Act. Furthermore, the time limit prescribed for the application under section 154 is generally not adhered

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by the Tax Authorities. Hence, it is necessary to provide suitable time limits for disposal of such applications, with in-

built accountability and strict adherence. The order should be passed within three months from the end of the

month in which the application is made.

4.44.7. Enquiry

Issue

• During assessment, a taxpayer is often told to provide information along with all supporting documentary

evidence which is voluminous in nature within a very short span of time and sometimes the nature of

information is so large that it causes undue hardship to the taxpayer to collate the information.

Recommendation

It is therefore recommended that tax authority should set a monetary threshold limit which can be used while

enquiring information.

4.44.8. Claim made during the assessment proceedings

Issue

The tax officers reject the claims made by the taxpayers during the course of the assessment proceedings which are

omitted to be claimed by the latter in their return of income. The rejection of claim by the tax officer is made on the

basis of the judgment of the Supreme Court in the case of Goetze India Ltd. Vs. CIT (2006) 284 ITR 323 (SC), The said

Apex Court judgment has been distinguished by various courts in plethora of judgments and also not in consonance

with the Circular No. 14 dated April 11, 1955 issued by CBDT. The genuine claim of the taxpayers not entertained by

the tax officers at the time of assessment causes unnecessary hardship to the taxpayers and leads to protracted

litigation.

Recommendation

It should be suitably clarified in the Act that the tax officer is duty bound to allow the legitimate claim of the taxpayer

made before him during the course of the assessment proceedings and assess the total income/loss after allowing

the said claim.

4.44.9. Initiation of penalty proceedings on question of law

Issue

It has been seen that the tax officers initiates penalty proceedings under section 271(1)(c) of the Act even when

disallowance is being made in the assessment order on a matter of question of law. It is a settled law as has been

held by various Courts that penalty for concealment of income cannot be levied due to addition on account of a

question of law. However, initiation of penalty proceedings in such cases causes undue hardship to the taxpayers

who have to take up unwarranted litigation with the tax department and waste time and resources for filing replies

for dropping of penalty proceedings.

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Recommendation

It is suggested that appropriate instructions be given to the AOs that no penalty under section 271(1)(c) of the Act

should be initiated on addition on account of a question of law.

Reassessment

4.45.1. Reopening of assessment

Issue

• Under the existing provisions of Section 147 of the Act, the AO can reopen the assessment at any time within a

period of 4 years from the end of the relevant assessment year. In certain cases assessments are being reopened

by the AO on mere change of opinion/ information obtained through roving enquiries, causing undue hardship to

the taxpayer.

Recommendation

It is suggested that, if there are no changes in facts and circumstances of the case and the taxpayer has made full and

true disclosure of all material facts and reassessment is based on mere change of opinion/ information obtained

through roving enquiries made by the AO, opening of reassessment without bringing on record any fresh facts,

evidences or reasoning in support should be deemed to be invalid. It is suggested to insert an Explanation to Section

147 of the Act to make amendment to this effect.

4.45.2. Time Limit for filing return based on notice of reassessment

Issue

• The Finance (No.2) Act, 1996 amended Section 148 of the Act doing away with the minimum period of 30 days

within which a taxpayer was required to submit his return of income in response to a notice for reassessment.

With this amendment, the period within which the taxpayer is required to submit the return of income for the

purpose of reassessment is left to the discretion of the AO.

Recommendation

It is suggested that time limit of not less than 30 days be provided to the taxpayer for filing return of income from the

date of service of notice upon the taxpayer. It is also suggested that the printed form of notice under Section 148 of

the Act should be amended likewise.

4.46. Time limit for completing income-tax proceedings, where matters are partially set-aside by higher Appellate Authorities

Issues

• Over the years, in an attempt to continuously remove the perils faced by the taxpayer, the Legislature has been

shortening the time span within which an assessment must be completed. Toward this, Section 153(2A) of the

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Act was introduced which mandates a specific period (9 months/21 months/24 months) for framing a fresh

assessment in pursuance of an Order of higher Appellate Authorities, setting-aside or cancelling an assessment

in toto.

• However, for cases falling within the purview of Section 153(3) of the Act, wherein no fresh assessment has been

directed but the higher Appellate Authority directs the AO to reconsider some aspects after proper investigation

or to recompute the income as per the their finding or directions, no time span has been specified under the Act

for their disposal. Hence, if the complete assessment is not set aside but only a few matters are set aside for re-

examination, there is no time limit for passing orders to give effect to such direction. Consequently, it is seen

that there is a tendency on the part of AO to defer such assessments resulting into matters pending for an

unduly long period. As a result, refunds due are locked-up for no fault of the taxpayer.

Recommendation

Hence, it is suggested that in the interest of justice and to expedite the speedy disposal of matters concluded by

higher Appellate Authorities, the Legislature should either provide for a mandatory time limit in Section 153(3) of the

Act for matters partially set-aside by higher Appellate Authorities or enlarge the scope of Section 153(2A) of the Act

so as to also encompass such matters which are partially set-aside by higher Appellate Authorities.

4.47. Stay of Demand by the Tribunal

With a view to mitigate undue hardship to the taxpayer arising out of high income-tax demands pursuant to Orders

of lower tax authorities, Section 254(2A) of the Act was introduced and amended from time to time. It inter alia

empowers the Tribunal for granting stay of any proceedings (including granting extension of stay) relating to appeal

filed before it for a period not exceeding 365 days in aggregate. Further, it cast a responsibility on the Tribunal to

dispose of the appeal within such period, failing which the stay granted will stand vacated after the expiry of such

period, irrespective of the delay in disposing the appeal not being attributable to the taxpayer.

However, the Statute fails to provide elaborate/clarificatory provisions with respect to grant of stay, resulting in many

procedural hassles and long drawn litigation on stay applications. In such backdrop and in the interest of justice,

some key recommendations / suggestions that may be considered under Section 254(2A) are as under:

4.47.1. Stay beyond the maximum stipulated period of 365 days

Issue

• Section 254(2A) of the Act provides for maximum time limit of 365 days, beyond which the stay shall stand

vacated even if the delay in disposing the appeal is not attributable to the taxpayer. However, such automatic

vacation of stay does not envisage a situation where the Tribunal is unable to dispose the appeal within the

maximum stipulated time (365 days), say, complex issue, issue pending before Special Bench, administrative

reasons, etc. Such procedural delay in disposing the appeal has the effect of penalising the taxpayer even for

cases where the delay in disposing the appeal is not attributable to them. Even after specific amendments, there

are judicial decisions which have held that where delay in disposal of appeal is not attributable to taxpayer, the

Tribunal has power to extend stay of demand beyond period of 365 days.

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Recommendation

It is thus suggested to suitably relax the stringent timeframe of 365 days, where delay in disposal of appeal is not

attributable to taxpayer.

4.47.2. Stay of Demand of income-tax v. Stay of Proceedings

Issue

• Though Section 254(2A) of the Act provides for the Tribunal to grant stay of any proceedings in respect of an

appeal filed before it, Rule 35A of the Income-tax (Appellate Tribunal) Rules, 1963 refers to stay of recovery of

demand of tax, interest, penalty, fine, estate duty or any other sum. In this context, there is a grey area as to

whether the Tribunal can grant stay of proceedings to give effect to the Order of revision under Section 263 of

the Act and penalty proceedings initiated under the Act, pending the disposal of corresponding appeals against

Order made under Section 263 / 143(3) of the Act.

Recommendation

In such scenario, while judicial decisions have upheld the grant of stay of proceedings to give effect to the Order of

revision under Section 263 of the Act and penalty proceedings, it is suggested to suitably clarify the same under the

Act/Rules to avoid further litigation.

Refunds

4.48.1. Interest on delay in grant of refund

Issue

• Where refund claims are processed and granted, there may be a delay of few months from the date of grant of

such refunds to the date of actual disbursement of the refund amount to the taxpayer. However, interest under

Section 244A of the Act is typically computed on such refunds only till the date of grant of refunds and not till

the date of actual disbursement of the refunds.

Recommendation

It would be ideal to ensure that refunds are disbursed without time lag. Provisions may be inserted to ensure that in

cases where the time lag between the date of grant and the date of disbursement exceeds 30 days, interest under

Section 244A of the Act should be made applicable till the date of disbursement of refund.

4.48.2. Delay in passing of order giving effect to the order of CIT(A)/ Tribunal/ Court

Issue

• Considerable delay is seen in giving effect to the order of the CIT(A)/Tribunal/Court by the AO, particularly where

relief/refund is allowed by the CIT(A)/ Tribunal /Court. Due to the delay in giving the effect of appellate order,

substantial refund/ relief to be allowed to the taxpayer is withheld by the tax department. Though Section 244A

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of the Act provides for payment of interest for the delay in grant of refund, no time limit has been prescribed

within which the appeal effect is to be given by the AO. As a result, the tax payments made by the taxpayer on

funds borrowed at heavy rate of interest is unnecessarily held up by the tax department.

Recommendation

Provisions may be inserted to require the AO to give effect to the order of CIT(A)/ Tribunal / Court within a

reasonable period, say six months, failing which the taxpayer should be given an option to adjust the amount of

refund (along with interest) while making payment of advance tax for the current year.

4.48.3. No express provision for refund of income-tax, if recovered before the expiry of time limit to file an appeal before Tribunal or during the pendency of disposal of stay application

Issue

• Judicial precedents have held that the taxpayer would be entitled to get refund of income-tax recovered either

before the expiry of time limit to file an appeal before the Tribunal or during the pendency of disposal of stay

application. However, in the absence of express provisions to this effect under the Act, it is seen that in many

cases the Tax Authorities adopting a coercive approach against the taxpayer (recovery proceedings) whereby the

taxpayer is required to pay the income-tax, irrespective of merits of case.

Recommendations

Thus, it is suggested that the Legislature should suitably include an express provision whereby the Income-tax

Authorities are either:

• restricted to proceed with the income-tax recovery proceedings; or

• refund the income-tax paid during the recovery proceedings, without adjusting against the income-tax arrears, if

any, before the expiry of time limit to file an appeal before Tribunal or during the pendency of disposal of stay

application in such cases.

4.49. Maintenance of Books of Account in Digital Form

Issue

The present law requires the taxpayers to maintain books of account in physical form thus causing a lot of hardship

to the assessees in the world of digitization and also leading to wastage of valuable resources.

Recommendation

Section 2(12A) of the Income Tax Act needs to be amended to include books maintained in digital form also as 'books

or books of accounts' for the purpose of the Income Tax Act. Major corporate entities manage their books of account

on automated systems only and the proposed amendment would encourage maintenance of accounts in digital form

enabling effective management of cumbersome records.

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Personal Tax

4.50.1. Taxation of Employee Stock Option Plans for migratory employees

Issues

• Section 17(2)(vi) of the Act, read with Rule 3 of the Rules deal with taxation of Employee Stock Option Plans

(ESOPs). It is provided that the value of any specified security or sweat equity shares allotted or transferred,

directly or indirectly, by the employer, or former employer, free of cost or at concessional rate shall be taxable as

perquisite in the hands of the employee. For this purpose, the value of any specified security or sweat equity

shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the

date on which the option is exercised by the taxpayer as reduced by the amount actually paid by, or recovered

from, the taxpayer in respect of such security or shares.

• In this connection, what has not been appreciated is that ESOPs shares stand on a different footing because on

the date of exercise, the shares are subject to lock-in condition and cannot be considered to be a benefit and

therefore, ought not to be fictionally treated as benefit and brought under the ambit of perquisites for taxation

purposes. The Supreme Court, in CIT v. Infosys Technologies Ltd., [2008] 2 SCC 272, at page 277, had aptly held:

“During the said period, the said shares had no realisable value, hence, there was no cash inflow to the

employees on account of mere exercise of options. On the date when the options were exercised, it was not

possible for the employees to foresee the future market value of the shares. Therefore, in our view, the benefit, if

any, which arose on the date when the option stood exercised was only a notional benefit whose value was

unascertainable. Therefore, in our view, the Department had erred in treating INR 165 crores as perquisite value

being the difference in the market value of shares on the date of exercise of option and the total amount paid by

the employees consequent upon exercise of the said options.”

• That apart, it has to be appreciated that if an employee is subjected to tax on the notional benefit as perquisite,

there could be situations where he may suffer double loss, first by way of tax outgo and again as a loss on actual

sale of shares, which may neither be fair nor warranted, especially when such tax out-go are not allowed to be

set-off against capital loss.

Recommendations

• ESOPs should not be subject to tax on notional perquisite value and taxed only on capital gains arising from the

sale of shares, as was the position till 31 March 2006.

• It may be mentioned that only when Fringe Benefit Tax (FBT) was introduced by the Finance Act 2005, these

provisions were changed for the purposes of taxation of ESOPs under FBT regime. However, those very provisions

have been brought back by way of insertion in sub-clause (vi) of sub-section (2) of Section 17 of the Act, after the

abolition of FBT, which has caused a lot of anxiety. It is imperative that the earlier tax treatment be restored to

facilitate the employers in retaining talented persons in the organization. Needless to mention that ESOPs have,

over the years, emerged as a critical motivational and retention tool for companies in a highly competitive

market for talents. It proved an effective instrument to motivate employees to perform and excel and thereby a

win-win proposition for the employers / shareholders on one hand and the employees on the other. It is in this

perspective the FICCI pleads for the restoration of earlier position of taxing the ESOPs only by way of capital gains

tax on gains arising to the employee on the actual sale of shares allotted to him.

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Issues

• Notwithstanding the above, taxation of ESOPs creates an issue in the case of migrating employees, who move

from one country to another, while performing services for the company during the period between the grant

date and the allotment date of the ESOP. The domestic tax law is unsettled on the taxation of such migrating

employees and does not clearly provide for such cases.

• There was a specific clarification on proportionate taxability of benefits under the erstwhile FBT regime, where

the employee was based in India only for a part of the period between grant and vesting. However, there is no

specific provision in this regard under the amended taxation regime from 1 April 2009.

• As per Rule 3 of the Rules, the fair market value of share of the company which is not listed on a recognized

stock exchange in India on the date of exercise of ESOP represents the value determined by the merchant banker.

The requirement of obtaining a certificate from the merchant banker in case of shares granted by foreign holding

companies to the employees of Indian companies poses undue hardship on the taxpayers

Recommendations

A specific clarification should be inserted with respect to taxability of only proportionate ESOPs benefit based on

residential status of the individual, where an employee was based in India for only a part of the period between

grant and vesting

It is recommended that the rules should be amended to specifically provide that in case the shares are listed on the

foreign stock exchange, the fair market value of such shares should be the average of opening price and closing price

of the share on the said foreign stock exchange on the date of exercise of the option. This will ease the taxpayers

from the burden of obtaining merchant bankers certificate.

4.50.2. Taxation of Rent Free Accommodation (RFA)/Concessional RFA provided by the Employer

Issues

Section 17(2) of the Act provides for valuation of perquisite in case of provision of accommodation by the employer

or by way of concession in rent provided by any employer other than the Central Government or State Government.

The rule provides for valuation at specified rate of 15% or 10% or 7.5% of salary based on the size of population as

per 2001 census. However, the above method of determination of the perquisite suffers from various inequities:-

• The same employee staying in the same company owned accommodation will have a different perquisite value

with increase in salary and further, different employees with different salaries will have a different perquisite

value in respect of the same accommodation.

• The determination of the perquisite value of the accommodation based on the salary of the employee

irrespective of the size/fair rental value of the accommodation is completely illogical and unfair.

Recommendation

FICCI recommends that the rule for perquisite valuation of accommodation should be suitably amended to provide

that value should be taken as Fair Rental Value based on Valuation Report obtained from the Municipal Authorities.

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4.50.3. Taxation of Contribution to Superannuation Fund in excess of INR 1 lakh

Issues

• Section 17(2)(vii) inserted by the Finance (No.2) Act, 2009, provides that the amount of any contribution to any

approved superannuation fund by the employer in excess of INR 1 lakh will be taxable as perquisite in the hands

of the employee.

• It has to be appreciated that contributions to superannuation fund may or may not result in superannuation

benefits to the employees since there are various conditions to be fulfilled by the employees like serving a

stipulated number of years, reaching a certain age etc. Further, the pension payments are subject to tax at the

time of actual receipt by the employee after his retirement. As such this may lead to partial double taxation for

the employee where the contributions had been taxed earlier.

Recommendation

It is recommended that employer contribution to approved superannuation fund be made fully exempt from tax.

This would also be in line with the Direct Taxes code 2010.

4.50.4. Revival of Standard Deduction

Issues

• A standard deduction was earlier available to the salaried individuals from their taxable salary income. However

the same was abolished with effect from AY 2006-07. On the other hand, business expenditure continued to

remain as permissible deductions from taxable business income.

• It has to be appreciated that standard deduction is not a personal allowance and used to be given as a lump sum

for meeting employment related expenditure. In many countries like Malaysia, Indonesia, Germany, France,

Japan, Thailand etc. allowance in the form of standard deduction is available for salaried employees for

expenditure connected with salary income. To illustrate in Thailand the deduction is as high as 40 percent of

income subject to certain limits.

Recommendation

The standard deduction for salaried employees should be reinstated to at least INR 50,000 to ease the tax burden of

the employees. This should also reduce the disparity between salaried and business class with only the latter being

eligible for deduction for expenditure incurred by them for earning their income.

4.50.5. Transportation Allowance

Issues

• The transport allowance granted by the employer to the employee to meet his expenditure for the purpose of

commuting between the place of his residence and the place of his duty is currently tax exempt up to INR 800

per month in terms of Section 10(14) of the Act read with Rule 2BB of the Rules.

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•

resultant conveyance costs.

Recommendation

The exemption limit of INR 800 per month needs to be considerably raised upwards, say to minimum of INR 2,000

per month to bring it in line with the rising conveyance costs.

4.50.6. Education Allowance

Issues

The education allowance granted by the employer to the employee to meet the cost of education expenditure upto

two children is currently tax exempt up to INR 100 per month per child in terms of Section 10(14) of the Act read

with Rule 2BB of the Rules.

This exemption limit was fixed in 2000 with retrospective effect from 1 August 1997 and seems quite nominal

considering the ever rising cost of education

Recommendation

The exemption limit of INR 100 per month needs to be considerably raised upwards, say to minimum of INR 1,000

per month to bring it in line with the rising inflation and cost of education.

4.50.7. Reimbursement of Medical Expenditure

Issues

• Any sum paid by the employer in respect of any expenditure incurred by the employee on the medical treatment

of self/ family is currently exempt from tax, to the extent of INR15,000 per annum.

• This limit was last revised almost 14 years ago and needs to be revisited in light of the soaring medical and

hospitalization costs especially for private hospitals.

Recommendation

The current tax exemption limit of INR 15,000 per annum needs to be increased to at least INR 50,000 per annum.

This could to some extent help to bring the exemption up to speed with the rising medical costs. Further, this would

also be in line with the limit set in the Direct Taxes Code 2010.

4.50.8. Deduction in respect of Health Insurance Premia under Section 80D

Issues

• Currently, a deduction up to INR 35,000 (15,000 for self/ family and 15,000 for parents) is available to an

individual under Section 80D of the Act from taxable income, towards health insurance premium paid by him.

The limit for parents is increased to INR 20,000 if the parents are senior citizens.

This exemption limit was fixed in 1998 and seems quite nominal considering the ever rising fuel costs and

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•

Government hospitals but the facilities available are woefully inadequate while the private hospitals are very

expensive. Also, the penetration and awareness of health insurance in India is very slow. Most individuals buy

insurance only to save taxes.

Recommendations

Therefore, there is a need to raise the above limit to achieve two-fold objective of giving a tax incentive while also

encouraging people to obtain larger healthcare cover in wake of the rising costs.

It will be immensely helpful if, till the Government introduces adequate healthcare systems, the quantum of

deduction under Section 80D of the Act is increased. A reference to General Insurance Corporation to find out how

much they charge as premium for insurance of a family under a comprehensive hospitalization scheme will give an

indication about the reasonable higher limit of the deduction.

4.50.9. Tax Exemption in respect of Leave Travel Concession (LTC)

Issue

Presently, the economy class air fare for going to anywhere in India is tax exempt (twice in block of four years).

However, this exemption is being allowed only for travel within India. Lately, owing to low airfares and package tours,

a number of Indians prefer to avail LTC for going abroad particularly to neighboring countries like Thailand, Malaysia,

Sri Lanka, Mauritius, etc., as the fares thereto are at times less than for traveling to some far away destination within

India.

Recommendations

• It is therefore recommended to grant tax exemption for economy class airfare for travel abroad also on holidays

so long these are within the overall airfare tax exemption conditions for traveling in India. Under Rule 2B of the

Rules, the amount exempt in respect of LTC by air is to the extent of the economy fare of National Carrier i.e.

Indian Airlines. It is suggested that word “National Carrier” should be deleted from Rule 2B.

• Moreover, as per the current provisions, Leave Travel Concession/Assistance is eligible for tax relief for 2 calendar

years in a block of 4 calendar years. It is suggested that the concept of calendar year should be replaced with

financial year (April - March) in line with the other provisions of the Income Tax Law and further exemption

should be made available in respect of at least one journey in each financial year.

4.50.10. Taxation of social security contributions in the hands of Expatriates

Issues

• In respect of an expatriate employee deputed to India, the home employer and employee may be required to

contribute to social security schemes under the local law of country. In most cases, the contributions made to

these schemes may not vest on the employee at the time of making the contributions and thereby do not

provide any immediate benefit to the employee. Further, the employee contributions may also be mandatory

under the law of the home country. Both the employer and employee contributions may be available as a

deduction from taxable income in the home country of the expatriates.

Unlike many other countries, India does not have a comprehensive health-care system for its citizens. There are

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•7of such contributions from the taxable income though there have been several favorable judicial precedents .

Recommendation

It needs to be clarified under the Act, that employer contributions to such social security schemes should be exempt

in the hands of the individual employee based on the principle of vesting. Further, the employee contributions

should be available as a deduction where the same are mandatory and constitute diversion of income by overriding

title.

4.50.11. Provision of treaty benefits while calculating TDS under Section 192

Issues

• Currently, there is no provision in the Act, enabling the employer to consider admissible treaty benefits (e.g.

credits for taxes paid in another country/ treaty exclusions of income), while withholding tax under Section 192

of the Act from salary income.

• This creates cash flow issues for the expatriates who are initially subject to full withholding by their employers

and then are required to claim large refunds on account of treaty benefits at the time of filing their tax return.

Many of these expatriates may complete their assignments and leave India prior to obtaining their tax refunds

which also creates issues with respect to credit of their refund amounts.

Recommendation

Since the credit is otherwise admissible in terms of Section 90/91 of the Act, a suitable amendment may be

incorporated in Section 192 of the Act providing for the employer to consider such credits/exclusions at the time of

deducting taxes.

4.50.12. Threshold limit under Section 80C of the Act

Issues

• Over the years, investments made in various avenues available under Section 80C of the Act have helped the

Government to raise funds as well as the individuals to save tax.

• However, with too many investment/ expenditures clubbed into the existing overall limit of INR 1 lakh individuals

sometimes are discouraged from making further investments.

Recommendations

There must be a clear distinction between long-term and short-term savings. So far there has not been any

significant support in tax policy to actively encourage 'long-term savings' which is very much needed. Life insurance

and pensions are the main segments of the financial services that address the needs of individuals in the long-term.

However, currently, there is no provision under the Act, which provides for the taxability or otherwise in respect

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7 CIT v. L.W. Russel [1964] 53 ITR 91 (SC), Gallotti Raoul v. ACIT [1997] 61 ITD 453 (Mum), DCIT v. Mr. Moroux c/o Air France (Delhi) [2008], ITO v. Lukas Fole (Pune) [2009], CIT v. NHK Japan Broadcasting Corporation [Civil Appeal No. 1712 of 2009 - SC], ACIT v. Scott R. Bayman (Delhi) (May 2009), ACIT v. Harashima Naoki Tashio (Feb 2010) etc

It would be equally desirable to have many more such tax-exempt investment avenues to mobilize funds for

infrastructural and overall economic development. Therefore, the Government may consider separate exemption

limits for such important avenues.

Further, the Government may look at increasing the overall deduction limit to at least INR 200,000 to boost further

investment and increase tax savings for the individual.

That apart, Term deposits for a period of 5 years or more with a scheduled bank, in accordance with a scheme

framed and notified by the Central Government, by an individual / HUF is eligible for inclusion in gross qualifying

amount for the purpose of deduction under Section 80C of the Act. For other eligible investments viz. bonds and

mutual funds the lock in period is 3 years and hence to ensure parity, the period of term deposits for claiming

deduction under Section 80C of the Act should also be reduced to 3 years from existing 5 years.

4.50.13. Deduction for Educational Expenditure

Issue

• Education of children these days imposes a heavy burden on the middle class. A good beginning was made in

2003 by providing deduction for tuition fees under Section 80C of the Act. But Section 80C of the Act is

particularly a provision granting incentive for savings and also considering the long list of eligible investments in

this section, there is very little relief to the individual on account of the education fees incurred by him.

Recommendation

It is therefore recommended to de-link deduction for educational expenditure for children from Section 80C and

provide under a separate provision like Section 80D of the Act for medical insurance. A reference to the Ministry of

Education to find out the tuition fee for an average middle class household will give an indication about the limit of

the deduction.

4.50.14. Deduction in respect of rent paid by taxpayers not receiving a House Rent Allowance (HRA)

Issue

• Under Section 80GG of the Act, the maximum deduction available to individuals who do not receive an HRA, in

respect of rent paid is only INR 2000 per month. The said limit was last revised in 1998 and is very low in light of

the huge rental costs especially in the metro cities.

Recommendation

The exemption needs to be increased to at least INR 10,000 per month in view of the huge rental escalation. As in

the case of HRA exemption, the Government may also consider introducing separate limits for metro and non-metro

cities.

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4.50.15. Electronic meal card

Issues

• As per the revised perquisite rules reinstated in December 2009, if food and non-alcoholic beverages are

provided during working hours at office or business premises or through non-transferable paid vouchers usable

only at eating joints, the value of facility to the extent of INR 50 per meal is exempt from the tax. This limit of

Rs.50 is very meager and needs to be revised.

• Many employers these days provide this facility through electronic meal swipe cards. However, the current rules

expressly provide exemption to paid vouchers and not electronic cards though such cards were expressly

exempted under the erstwhile FBT regime subject to conditions. Accordingly their treatment is not free from

doubt.

Recommendation

The said exemption along with increased limit should be extended to electronic meal vouchers as well.

4.50.16. Deduction for interest on housing loan

Issues

• A deduction upto a maximum limit of INR 150,000 is currently available from taxable income towards interest on

loan taken for acquisition/construction of self-occupied house property provided such acquisition or

construction is completed within three years from the end of the financial year in which capital was borrowed

and the capital is borrowed on or after 1 April 1999.

• With the property prices and interest rates rising steeply with each passing year, there is a need to revise this

age-old deduction limit.

Recommendation

It is recommended that this exemption should be harmonized with the rising interest rates and increased to at least

INR 250,000 per annum.

4.50.17. Exemption for payment of Leave Encashment to be raised to INR 1 million

Issue

The exemption limit for leave encashment paid at the time of retirement or otherwise is notified by the CBDT in

accordance with the powers given under section 10(10AA) of the Act. The current limit of INR 3 lakhs is very old

(since 1998) and needs to be raised substantially with immediate effect.

Recommendation

It is suggested that the limit should be raised to INR1 million in line with the increase in the limit of gratuity.

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4.50.18. Income of minors - to increase exemption limits under Section 10(32) of the Act

Issue

As per section 10(32) of the Act, in case the income of an individual includes the income of his minor child in terms

of Section 64(1A), such individual shall be entitled to exemption of INR 1,500 in respect of each minor child if the

income of such minor as includible under section 64(1A) exceeds that amount. The current limit of INR 1,500 was

fixed by the Finance Act, 1992 and needs to be raised substantially with immediate effect.

Recommendation

The limit should be raised to at least INR10,000/- for each minor child.

Other Direct Tax provisions

4.51.1. Calculation of interest for delay in deposit of taxes withheld - meaning of 'month'

Issue

• Interest under Section 201 of the Act is calculated for every month or part of month from the date on which tax

was actually deductible to the date on which tax was actually paid. For instance, where tax was deductible on 30

June and the tax so deducted was remitted on 8 July (one day delay) interest has to be paid for June and July, i.e.

2 months for a one day delay.

Recommendation

In order to mitigate this hardship caused to the taxpayer, it is suggested that 'month' be defined as a period of 30

days to avoid litigation on this issue. This would make the reckoning of period while interpreting the tax law more

meaningful and clear.

4.51.2. Interest payable in case of default in furnishing return

Issue

• Where return of income is filed after the due date, interest under Section 234A of the Act is leviable from the

due date of filing return till the date of actual filing. Currently while computing the amount on which interest is

payable, self assessment tax paid by the taxpayer is not considered. Consequently the taxpayer has to pay a

higher amount of interest.

Recommendation

Since interest is not a penalty and the reason for levy of interest is only to compensate the revenue in order to avoid

it from being deprived of the payment of tax on the due date, it is suggested that in cases where the tax on self-

assessment is paid under Section 140A of the Act before the due date for filing return on income but return has been

filed after the due date, such tax on self-assessment should be considered as item of deduction for the levy of

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interest under Section 234A of the Act. This would be in line with the ruling of the Supreme Court in the case of 8Pranoy Roy

4.51.3. Interest for deferment of advance tax under Section 234C of the Act

Issues

• Interest under Section 234C of the Act is triggered only if advance tax paid is less than 80 percent of the actual

advance tax due for the first and second quarters, i.e. 12 percent and 36 percent respectively. This flexibility is

not available while discharging advance tax for the third and final quarters. This leaves very little margin for error

for companies while projecting business performance.

• Further the economic swings which may happen anytime during the financial year, manner of disclosure of

financial information in accordance with accounting standards, etc. may result in deviation of actual results from

projections.

Recommendation

As the above factors are beyond the control of an entrepreneur, provisions relating to trigger of interest under

Section 234C of the Act should be relaxed as below:

This proposal will also align Section 234C with Section 234B of the Act, since interest under the latter Section is

triggered only if advance tax paid is less than 90 percent of assessed tax.

4.52. Deduction in respect of interest on time deposits

Issue

The Finance Act, 2012 provided deduction to the extent of Rs. 10,000 to an individual/HUF in respect of income by

way of interest on deposits (not being time deposits) in a savings account. The provision of such a deduction is a

welcome step, however, the deduction does not apply to interest income on time deposits.

Recommendation

FICCI recommends that the deduction under Section 80TTA of the Act should also be provided on income by way of

interest on time deposits (made for a fixed period of not less than three years) and the limit should be set at least

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8 CIT v. Pranoy Roy [2009] 179 Taxman 53 (SC)

Minimum % of tax due to be paid as advance tax to avoid interest

Existing Provisions

Proposed

15 June 12 12

15 September 36 36

15 December 75 67.5

15 March 100 90

Installment

INR 20,000. This would encourage long term savings by the middle class.

4.53. Receipt of amount under Life Insurance Policy - Section 10(10D)(d) of the Act

Issue

As per Sec 10(10D)(d) of the Act, any sum received under an insurance policy in respect of which the annual

premium payable during the term of the policy exceeds ten percent of the actual capital sum assured, is taxable in

the hands of receiver. Thus, whole of maturity/ proceeds of life insurance policy in such case gets taxed under this

Section.

Recommendation

Further, to the extent such amount received is calculated based on premium within specified limit (10 per cent) the

said amount should be exempt. In other words exemption should not be eligible for amount calculated with

reference to premium in excess of 10 per cent of sum assured.

4.54. Monetary Limit for Accounts Audit

Issue

• Currently the limits for audit of accounts of taxpayers are as under:

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Particulars Existing (INR Lakhs)

Limit

Sales turnover /Gross receipts of business

100

Gross receipts of profession 25

Recommendation

Given the growth in volume of economic activity, the limits need to be revised as under:

Particulars Existing (INR Lakhs)

Limit

Sales turnover / Gross receipts of business

500

Gross receipts of profession 50

Relaxation on mandatory requirement of PAN (Section 206 AA)

4.55.1. Mandatory Requirement of PAN results in undue burden in certain cases

Issue

• Section 206AA of the Act provides that if PAN is not furnished by payee, the withholding tax rate would be 20

percent or rate in force, whichever is higher. The provisions further lay down that no certificate under Section

197 of the Act shall be granted unless the applicant has stated his PAN in the application. It also further lays

down that declaration in Form 15G/15H for Nil deduction of tax would not be valid unless PAN is furnished in

such declaration. Further, it has been specified that where the recipient of the income has furnished invalid/

incorrect PAN, it shall be deemed that such person has not furnished PAN and accordingly, tax would be required

to be deducted at the higher of the specified three rates while making payment to such persons.

Recommendations

• The mandatory requirement to furnish PAN poses a number of practical problems, for example an overseas

entity is not amenable to comply with any Indian tax compliance such as obtaining PAN, many senior citizens

may not have PAN, as they are within tax exemption limit, so may be the position for many farmers/seed growers

etc.

• Further, it must be appreciated that many foreign companies enter into a one-off transaction with an Indian

entity for provision of services or goods. Such transaction may not attract any withholding tax implication or a

withholding tax rate of 10-15 percent at the maximum (either under the treaty provisions or under Section 115A

of the Act). As the transaction may be one-off such foreign companies may not have obtained a PAN or are even

unaware of the requirements under the Indian tax laws. Even otherwise, the law also provides relaxation to the

non-residents from filing tax return in India in case of certain payments of the nature specified under section

115A of the Act provided tax is deducted at source on such payments as per the provisions of Chapter XVII-B of

the Act. However, in absence of PAN, payer of the income would not have any resort but to withhold tax at the

rate of 20 percent or even higher as applicable to foreign companies. Such excess withholding may not be

viewed favourably by the foreign companies and even act as a detriment for them in case of future transactions.

• Alternatively, foreign companies should be exempted from Indian compliances e.g. filing of tax returns, etc. (on

the same lines as relaxation provided under Section 115A).

4.55.2. Whether the provisions of Section 206AA will override the provisions of tax treaties

Recommendations

A plain reading of the provisions of Section 206AA of the Act suggests that the provision would override the

provision contained in the respective tax treaty resulting in a situation of treaty override. This is because in absence

of PAN of the foreign company, the Indian taxpayer would be required to deduct tax at the rate of 20 percent if such

rate is higher than the rate specified under the applicable tax treaty. This is likely to create hardships for the foreign

company in availing appropriate tax credit in its country of residence for the excess tax deducted over and above the

specified rate in the tax treaty and also protracted litigation in the matter discouraging foreign entities from entering

into transactions with India as also increasing the cost of doing business with India.

These provisions may act detrimental not only to the recipients of income but also may be detrimental to the payer

of such income. A payer may have deducted tax under the specified Section at the specified rates under a bonafide

belief that the PAN furnished by the income recipient is correct. In case the same is found to be invalid/ incorrect, the

payer may have to deduct tax at the rate of 20 percent or higher. In case the payer has already made the payment of

the sum to the receiver, then it would create the problem of recovery of the differential amount from the recipient of

the income.

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Further, considering the uncertainty in the Indian tax systems, practically it is seen that the foreign entities generally

prefer a tax protected agreement wherein the tax liability is to be borne by the payer of the income. In such cases,

the cost to be borne by the payer of the income would escalate by substantial amount as not only the rate of tax

would go up but even such higher rate would be required to be grossed up. This will create liquidity issues for the

payer of income as also increasing substantially his costs of doing business and importing foreign technology.

4.55.3. Undue burden on senior citizens and other persons not having taxable income

Recommendation

The provisions of Section 206AA of the Act are detrimental to the interest of not only foreign companies but also

persons resident in India, especially the senior citizens. One of the conditions under Section 206AA of the Act

specifies that no declaration under Form 15G/ Form 15H is valid unless the person furnishing such declaration has

quoted his PAN on such declaration. The condition of mandatorily furnishing PAN on such declaration is likely to

create many documentary hassles for senior citizens across the country for whom the only source of income is

perhaps interest from deposits with banks. In this regard, reference may be drawn to Section 139A of the Act which

requires a person to obtain a PAN inter alia in case his total income exceeds the maximum exemption limit while

Form 15G/ Form 15H is to be furnished by persons whose tax on total estimated income for the concerned year is

likely to be NIL. Accordingly, the provisions of Section 206AA of the Act seem to be overriding the basic provision laid

down under Sections 139A and 197A of the Act. Even if a person was to comply with the provisions of Section 206AA

of the Act and was to obtain and quote his PAN, he is likely to face various documentary hassles. There is also a fear,

perhaps not without reason, that the Income-tax officers in their zeal to widen the tax net would issue notices to

those people who have obtained PAN but have not been filing their tax returns in spite of their income falling within

the exemption limit. Further, there is apprehension that this would result in more harassment for such senior

citizens. In our country, where an individual is expected to look after their own social security needs, subjecting such

senior citizens to such unnecessary procedural requirements would only reflect very poorly on the Government as

being insensitive to the needs of our senior citizens. Hence, there is an urgent need to carve out exceptions in these

provisions for senior citizens and other persons who do not have taxable income.

4.55.4. Whether tax required to be grossed up in case Section 206AA is applicable

Recommendations

• At present, there is no clarification as to whether provisions of Section 195A of the Act would apply to Section

206AA i.e. rate at which tax is required to withheld under Section 206AA of the Act is also to be grossed-up

under Section 195A of the Act. This creates uncertainty among the tax payer and may have to bear additional

tax. A withholding tax rate of 20 percent after grossing up would be as high as 25 percent. Hence, it is suggested

that clarification may be introduced to provide that provision of 195A of the Act would not apply in the case

where provisions of Section 206AA of the Act are attracted, since Section 206AA of the Act starts with non-

obstante clause.

• We suggest that quoting of PAN should be made optional for the following category of persons:

• Individuals, including senior citizens, farmers/seed growers, transporters etc. whose total income do not

exceed the exemption limit or are illiterate and the mandatory requirement to obtain and furnish PAN may

pose practical problems

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•

treaty provisions.

• Pure business transactions of purchase/sale of goods

• In addition, the onerous responsibility and consequences faced by the payer of the income in case the

recipient furnishes incorrect/ invalid PAN should also be relaxed. It may also be clarified that the provisions of

Section 195A of the Act relating to grossing up of payments do not apply in a case where provisions of Section

206AA of the Act are attracted.

Tax Deducted at Source (TDS)

4.56.1. Exclusion of service tax, Out of pocket expenses and VAT

Issue

• TDS provisions should be amended to exclude service tax charged on all services. As per CBDT Circular No. 4

/2008 this benefit is given only in respect of rent income even though the reasoning contained therein would

apply to all services.

Recommendations

It is suggested that no tax at source be deducted on service tax component of professional fees and other services.

The benefit for the exclusion of service tax for calculating TDS should be given for other payments also.

Further where out of pocket expenses have been clearly stated in the invoice, tax should not be deducted on such

out of pocket expenses, since these are merely reimbursement of expenses incurred and do not represent income.

4.56.2. TDS on monthly provision entries and year end provision memorandum entries

Issues

• Most of the companies record provision entries towards various expenditures on a monthly basis to report

performance to their parent entities. These entries are reversed in the subsequent month.

• The tax officers often take the view that, tax is required to be withheld even on monthly accruals or provisions

which are made just to meet the accounting requirements and are reversed at the start of the following month.

These accruals are made on very broad estimates to unidentified payees. The tax officers have been insisting that

tax be deducted on these provisional entries.

Recommendation

In line with the relief given to banks for similar accruals made on account of interest accrued but not due, similar

relief should be given to other payments that are accrued but are not due to the payee and for which the payees are

not identifiable and represents only a provision made in accordance with accounting policy.

Foreign companies earning income in India which is not liable to tax in India under the Act or under tax

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4.56.3. Rationalisation of TDS provisions

Issue

• There is a lot of litigation surrounding applicability of TDS provisions on various payments.

Recommendation

In order to reduce litigation on TDS related issues, it is suggested that in the context of the current scenario, the

CBDT should issue a FAQ similar to Circular 715 dated 8 August 1995, clarifying the position on various current issues

in respect of TDS.

4.56.4. TDS credit

Issues

• The E-TDS system is undergoing issues and there is mismatch of data between TDS Certificates issued by

Deductors, TDS statements uploaded on TIN system and bank payment details, PAN of the deductees. As a result

deductees do not get the full credit for tax deducted. Further, based on the mismatch the tax authority is issuing

orders upon the deductor thereby causing unnecessary adversity to the deductor/taxpayer.

• The E-TDS system mandates all the deductors of taxes to process TDS Certificates in Form 16A's only through

TIN-NSDL website. The software of the tax department automatically picks up the address of the deductee from

the address appearing in the PAN database maintained by the tax department. As a result, all the TDS certificates

are getting issued at the address declared in the PAN application made by the deductee. This has resulted into

severe hardship for the companies which have a multi locational set up, since, all the TDS certificates gets

dumped at the Registered office of the company (being PAN based address). The accumulation of TDS

certificates at the registered office of the deductee makes it difficult for them to co-relate/reconcile them with

the accounts which are maintained at different locations and also the units are not able to identify whether the

TDS certificate is received from the party or not

Recommendations

· In view of the above, it is suggested that TDS certificates issued by the deductors, which are furnished by the

deductees in the tax assessment, should be given due cognizance and refund claims based on such TDS

certificates should be processed. Further the tax authority can suitably issue proper notice for the clarification

rather than hurriedly issuing orders to the taxpayer concerned.

· It is recommended that suitable instructions be issued by the lawmakers providing an option to the deductee to

indicate their TAN in the invoice and further a column/field may be added in the TDS returns asking the payers to

furnish the TAN against each deductee (this should however be an optional column), wherever TAN has been

provided by the deductee, at the time of submission/filing of TDS returns by the payers. At the same time, it is

also recommended that the E-TDS software of the tax department may be amended so that when the TDS

returns are processed to generate the TDS certificates, the address should first be automatically picked from the

TAN database in respect of the deductee maintained by the tax department and in case no TAN is mentioned in

the TDS return, then the address should be picked from the PAN database. This would facilitate generation of the

TDS certificate at the TAN address, wherever TAN is provided by the deductee.

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4.56.5. Intimation under section 200A of the Act

Issues

• Section 200A of the Act was introduced by the Finance (No. 2) Act, 2009 with effect from 1 April 2010.

• As per the provisions of this section, TDS Statements filed under Section 200 of the Act are processed to verify

arithmetical errors and incorrect claims. Post such processing, if any arithmetical error or incorrect claim is found

in TDS statement, intimations showing the amount of proposed demand to be levied on the deductor is issued.

Practically, it has been observed that Income-tax department has also issued notice of demand under Section

156 of the Act along with such intimations. In the absence of any provision for rectification and appeal, the said

errors were rectifiable only by filing online correction statement on the website of NSDL. However, at times

some errors could not be rectified by filing correction statements. For such errors it was very much essential that

the tax officer has an authority to rectify the same under Section 154 of the Act or the taxpayer has a right to

appeal under Section 246A of the Act.

It is a welcome move in the Finance Act 2012 that the above mentioned intimations have been made subject to

rectification or appeal. However, the said intimation is subject to rectification and appeal with effect from 1 July

2012.

Recommendations

We suggest that the said amendment should be made applicable with retrospective effect from 1 April 2010.

The reason that all the intimations issued between 1 April 2010 and 1 July 2012 if not rectified or appeals are not

admitted, will have a pending demand without any available course of action to the taxpayer.

4.56.6. Withholding tax on reimbursements

Issues

With increasing cross border transactions, reimbursements of expenditures / costs incurred on behalf of the Indian

Company by the Foreign Parent / Group Company have been subject to scrutiny by the tax authorities. Broadly

reimbursements made to the foreign company could be categorized as follows:

• Reimbursement/ allocation of expenditure/ costs (shared services/ incidental costs/ third party costs)

• Reimbursement of salaries / overseas social security contribution/ personnel related cost of deputed employees

Contrary positions have been taken by the judiciary on the issue of withholding tax on reimbursements made by an

Indian Company to its Foreign Parent / Group Company with specific reference to the facts of each case. Further with

respect to recharge of salary costs of seconded employees, there is ambiguity on the applicability of withholding tax

under Section 195 of the Act, notwithstanding the fact that tax has been withheld under Section 192 of the Act upon

payment of salary to such employee.

The consequences of non compliance with withholding tax provisions are manifold for the deductor in the form of

disallowance under Section 40(a)(i) of the Act, interest and penal proceedings

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Recommendation

To reduce litigation on this issue it is recommended that the CBDT issues a circular / FAQ clarifying with illustrations

on the applicability of withholding tax on reimbursements. Specifically, the following need to be addressed:

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Query Clarification

Recharge of salary costs of seconded employees if tax has been withheld at source in the employees’ hands

No withholding tax on payment of recharge to foreign company which has made such payment from perspective of administrative convenience

Reimbursement of third party costs or incidental expenses or travel costs on cost-to-cost basis

No withholding tax under section 195 where ? It is not payment for a service rendered, such

as travel cost ? The underlying third party cost would not

attract withholding tax in India or if paid from India

? This relates to expenses incidental to the fee

4.57. Retrospective Amendments

The Indian tax laws have been breeding grounds for protracted litigation between the tax department (i.e. the

Government) and the taxpayers. One of the weapons that is used by the Government is the amendment of

provisions with retrospective effect. These amendments override a law settled by judicial precedence or a legitimate

argument of the taxpayer supported either by an interpretation of law or by any decision of the court. Almost every

Finance Bill has some amendments, which have retrospective effect.

Issues

• Overriding of a settled law/ existing provision

• Reopening of assessment based on retrospective amendments

• Levy of penalty on tax arising due to retrospective amendments

Recommendations

Admittedly, the Parliament is supreme and it should enact laws for the benefit of the economy and the people at

large. Further, in today's constant changing world, it is imperative that the tax laws are amended regularly. However,

this should not be used to override a benefit / argument available to the taxpayer.

The legislature has powers to introduce enactments and amend enacted laws with a retrospective effect; however,

the same is not only subject to the question of competence but is also subject to judicially recognized limitations:

• Firstly, words used must expressly provide for retrospective operation as it is a settled law that a taxing provision

imposing liability is governed by the normal presumption that is not retrospective.

•

down as unconstitutional.

• Lastly, it is apposite where the legislation is introduced to overcome a judicial decision. The legislative power

cannot be used to subvert the decision without removing statutory basis of the decision.

It is important that the above principles are adhered to failing which courts will intervene at the taxpayer's behest.

Moreover, it has to be appreciated that the judiciary interprets the law as it is worded and not on the basis of what

would have been the intention of the legislation. In case it has been interpreted in a way which Government thinks

was not intended, it only means that the provisions were not properly drafted. In case some benefit has arisen from

this ambiguity to the taxpayer in the judicial pronouncement, the same should not be negated. It is the cardinal

principle of the jurisprudence that the benefit of doubt should go to the affected person.

Further, even if a retrospective amendment has a tax impact on the taxpayer, he should not be burdened additionally

by way of reopening of assessments and levy of penalty. An appropriate amendment in the tax laws specifying the

above will be a relief to the taxpayer.

4.58. Amendment in the definition of 'Charitable Purpose'

The Finance Act, 2011, has amended Section 2(15) of the Act to provide that 'the advancement of any other object

of general public utility' shall continue to be a 'charitable purpose' if the total receipts from any activity in the nature

of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or

business do not exceed INR 2.5 million in the previous year. This has been done by inserting a proviso to Section

2(15) of the Act to read as under:-

“Provided further that the first proviso shall not apply if the aggregate value of the receipts from activities

referred to therein is twenty five lakh rupees or less in the previous year;”

The said amendment where the earlier limit of INR 1 million has been increased to INR 2.5 million though a welcome

move to mitigate the problem to some extent of smaller charitable organizations but not adequate enough for bigger

ones.

It may be mentioned that originally the term 'charitable purpose' under the said section was defined to include relief

of the poor, education, medical relief and the advancement of any other object of general public utility. The problem

had arisen because the Finance Act 2008 amended the said definition by inserting a proviso to Section 2(15) of the

Act as under:-

“Provided that the advancement of any other object of general public utility shall not be a charitable

purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any

activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other

consideration, irrespective of the nature of use or application, or retention, of the income from such activity”

The then Finance Minister Shri P Chidambaram, while replying to the debate in the Lok Sabha on 29 April, 2008,

provided a clarification that:

Secondly, the retrospectively must be reasonable and not excessive otherwise, it runs the risk of being struck

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“…. I once again assure the House that genuine charitable organizations will not in any way be affected. The

CBDT will, following the usual practice, issue explanatory circular containing guidelines for determining

whether an entity is carrying on any activity in the nature of trade, commerce or business or any activity of

rendering any service in relation to any trade, commerce or business. Whether the purpose is a charitable

purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar

organizations rendering services to their members would not be affected by the amendment and their

activities would continue to be regarded as “advancement of any other object of general public utility”….”.

Issue

• The aforesaid amendment is vehemently opposed by trade organizations, chambers of commerce, NGOs and

other charitable organizations, as it was felt that it would have wide repercussions on the genuine charitable

organizations which are rendering laudable service in the country. These are not-for-profit organizations and to

be eligible for tax exemption, Sections 11 to 13 of the Act, provide for rigid regulations for charitable institutions

as regards inter-alia, investments, application of income, accumulation of profits, audit, timely filing of returns

with reports from Chartered Accountants, bar against any private benefit etc., and the tax exemption could be

withdrawn for violation of any of such conditions.

Recommendations

We are of the view that the underlying objective of tax exemption for charitable organizations should be the end use

of its income and not the generation of income. In this perspective, it pleaded that the chambers of commerce, trade

organizations, NGOs and other not-for-profit organizations should be explicitly exempted from tax provided the

income generated by them are exclusively utilized for charitable purposes and that they are strictly adhering to the

requirements under the Act.

In the alternative, we would like to suggest that at least aforesaid proposed proviso be substituted to read as under:

“Provided further that the first proviso shall not apply if the aggregate value of the receipts from activities

referred to therein is not more than 49% of the aggregate receipts.”

Issue

• The dichotomy is in respect of different tax treatment to organizations engaged in carrying out specified

activities for charitable purpose like relief to the poor vis-à-vis organization carrying out any activity of general

public utility though charitable in nature. For instance, the sale proceeds from education material/books by a

Non Government Organization (NGO) working towards the charitable purpose of education may not necessarily

affect its tax exempt status. However, where an NGO engaged in 'any other object of general public utility' say an

old age home earns revenue from sale of books or literature or providing some assistance to its members on

subject matter aligned to their main object may impact its tax exemption status, where value of such sale

proceeds/consideration exceeds 2.5 million.

Recommendation

The law should provide greater clarity on the tax treatment given to organizations falling within the purview of the

residual clause of 'advancement of general public utility'. There is a dire necessity to provide a thumb rule on what

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would constitute 'charitable purpose' under the residual clause. The nature of activity and the application of income

towards the said activity should be the emphasis of grant of tax exemption status rather than the activities from

which income is derived.

Issues

• The restrictive provisions were inserted with an intention of prohibiting indiscriminate claim of exemption under

the pretext or guise of being engaged in charitable activities. However, this has also impacted the low profile

organizations genuinely working towards the betterment of society as their activities are falling within the

purview of 'advancement of any other object of general public utility'.

• Even though the Government has provided marginal relief by increasing the limit, such a relief may not be

adequate for the organizations to eventually become self-sustainable. This would result in huge dependence on

external grants and donations for carrying their charitable activities.

Recommendation

The law should suitably be amended and the limit prescribed should be increased to enable the genuine

organizations to become self-sustainable.

Issue

• The Finance (No.2) Act, 2009 inserted clause (vii) in sub-section (5) of Section 80G of the Act to protect

donations upto 31 March, 2009 if any institution for fund established for charitable purposes, loses exemption

due to the first proviso to Section 2(15) of the Act.

Recommendation

It is suggested that a similar provision be made in Section 80G of the Act to the effect that donation to such

institutions / funds / trusts will continue to be exempt in respect of the donations and the donor will be eligible for

tax deduction benefit under Section 80G of the Act, even if the trust loses exemption owing to its receipts from

commercial activities exceed the monetary limit or the specified percentage of the total receipts as suggested above.

It may also be clarified that these will not lose recognition under Section 12AA of the Act if the receipts exceed the

said specified limits / percentage. In other words, in case of excess receipts, the exemption should not be denied in

relation to other activities.

Issue

Under section 2(15) of the Act, charitable purpose includes relief of the poor, education, medical relief, preservation

of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of

artistic or historic interest and the advancement of any other object of general public utility. Different views are

expressed by various experts with respect to “vocational training activity” as to whether same amounts to education

or not. Some views are expressed that since it is systematic process of learning which enables an individual to earn

his livelihood, therefore it is “education”. However since there is no clear cut jurisprudence on this issue, the tax

authorities take a cautious approach and do not term it as “education”

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Recommendation

FICCI strongly recommends that section 2(15) of the Act be suitably amended to provide that “education” includes

vocation training. This will boost and further provide impetus to the skill development programme undertaken by the

Government of India.

4.59. Credit in respect of foreign taxes

Issues

• As per existing provisions of the Act dealing with computation and payment of advance tax by an taxpayer,

advance tax payable is to be reduced by the TDS or tax collectible at source (TCS) under any provisions of the Act.

Although the provisions rightfully allow reduction of TDS / TCS while computing advance tax liability, the same is

restricted only to TDS / TCS under provisions of the Act and does not cover TDS in foreign country vis-à-vis

income earned by the taxpayer from such country and offered to tax in the return of income.

• However, in terms of provisions of Section 90/91 of the Act, the taxpayer is allowed to claim credit of foreign

taxes against its tax liability at the time of filing of its return of income. Further, the interest provisions in Section

234A/234B/234C of the Act for shortfall in payment of advance tax also provide for reduction of foreign taxes

while computing such interest liability.

• As a consequence of above disconnect, the taxpayer ends up paying excess advance tax, resulting in a refund

situation post claiming of credit of foreign taxes. Further, the cash to this extent gets locked till the time refund is

received.

• India domestic tax legislation does not contain any guidelines with respect to foreign tax credits with tax treaty

countries. Thus leading to double taxation of a particular stream of income and denial/reduction of foreign tax

credit.

• As per existing provisions of the Act foreign tax credit is restricted to the tax liability of the taxpayer in India and

in certain cases, the taxpayer is not in a position to claim any foreign tax credit because of losses under the Act

or in some cases he is only able to claim partial tax credit. The provisions under the prevailing tax law does not

allow for carry forward of the unutilized foreign tax credit resulting in permanent loss to the taxpayer in respect

of the foreign tax credit which he is unable to claim.

• In case of countries like USA, Canada and Switzerland the local governments at the provincial/state level also

levies taxes on income hence taxes on income levied by such jurisdictions also amounts to double taxation of

income, however, the relief of taxes paid is being denied by the tax authorities in India on the ground that such

local taxes are not covered by the applicable tax treaty.

Recommendations

• Section 209 of the Act dealing with payment of advance tax should be amended to expressly provide that

advance tax liability should be computed after reducing credit for taxes withheld in foreign country as the credit

is otherwise admissible in terms of Section 90/91 of the Act.

• FICCI recommends that with Indian companies increasingly going global, clear legislation as part of the domestic

law be incorporated which could potentially address, among others, the following aspects: conflict in

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determining source of income, change in characterization of income, varying audit periods, varying basis of

audits and mechanism for allowing full tax credit.

• A mechanism should be expressly provided in the Act for allowing credit for taxes on income levied by overseas

provincial/local tax jurisdictions by amending section 90 of the Act.

• A suitable amendment may be made in the Act by inserting a provision which allows carry forward of unutilized

foreign tax credit to be set off against the tax liability of the company as per the Act in the succeeding years.

4.60. Modification of Definition of Association of Persons (AOP)

Issues

• The term Association of Persons (AOP) has not been defined in the Act. As per section 2(31) of the Act, 'person'

includes, inter-alia, association of persons or body of individuals, whether incorporated or not. Explanation to

section 2(31) of the Act further provides that an AOP shall be deemed to be a person, whether or not such

person or body was formed or established or incorporated with the object of deriving income, profits or gains.

• Since the definition is not provided by the statute itself, one has to refer to the legal jurisprudence for

understanding the meaning of term 'AOP'. The Supreme Court observed in the case of CIT v. Indira Balkrishna

(39 ITR 546), “The word 'associate' means, according to the Oxford Dictionary, 'to join in common purpose or to

join in an action'”. The essential characteristics of an AOP flowing from the various judicial precedents can be

illustrated as under:

• Two or more persons join together or associate together;

• The parties should come together out of their own free will (out of volition);

• The association should be for common purpose or common action;

• Mutual rights and obligations;

• Incurrence of common expenditure;

• There should be joint execution and / or supervision of the work;

• Possibility of reassignment of work amongst members;

• Some kind of scheme for common management.

• Whether an AOP is constituted or not would have to be decided on a conjoint reading and analysis of the above

factors to the facts and circumstances of the case. No one factor can be said to be decisive of the subject and the

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

• In particular, the issues surrounding the 'Benefit/ profit sharing test' to determine AOP are as follows:

• Whether mere intention to collaborate without anything more is sufficient to constitute AOP [even without

profit sharing and/or without sharing of common resources/costs]?

• Whether it is sharing of gross remuneration OR it is the sharing of net profit that is relevant to decide the

existence or not of AOP?

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•

purposes of Section 2(31) of the Act are thus open to diverse interpretations. While it is recognized that whether

an AOP exists or not is both a question of law and fact, yet in the absence of legislative framework defining an

AOP in the Act, the matter is often litigative thus creating uncertainty and being costly for both the taxpayer and

the exchequer.

Recommendations

The following proviso be inserted to Explanation to section 2(31) of the Act

Existing law

Explanation to Section 2(31) of the Act:

“For the purposes of this clause, an association or persons or body of individuals or a local authority of an artificial

juridical person shall be deemed to be a person, whether or not such person or body or authority or judicial

authority was formed or established or incorporated with the object of deriving income, profits or gains.”

Proposed law

Explanation to section 2(31) of the Act:

“For the purposes of this clause, an association or persons or body of individuals or a local authority of an artificial

juridical person shall be deemed to be a person, whether or not such person or body or authority or judicial

authority was formed or established or incorporated with the object of deriving income, profits or gains.”

Provided however that an association of persons shall not be deemed to be a 'person' for the purposes of this clause

if the members of such association of persons

• receive gross receipts in their respective separate bank account(s) and

• incur their respective expenditure or costs from their respective separate bank account(s); and;

• there is no adjustment inter-se the members to share the (net) profit or loss.

Issue

As per section 86 of the Act, share of the member in the income of an AOP is not includible in total income of the

member. However, such income is not excluded while computing the MAT liability of the member unlike in the case

of a partner of firm whose share in the profits in the firm is exempt in the hands of the partner as per section 10(2A)

of the Act and also no MAT is payable by the partner on such profits under section 115JB of the Act. The reference to

section 86 in section 115JB of the Act is missing. It is unfair to have such a discriminatory tax treatment between a

partner of a firm and a member of an AOP.

The existing provisions of the Act on whether a particular association constitutes an 'association of persons' for

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Recommendation

It is recommended that section 115JB of the Act should be amended to specifically provide that the share of income

of a member from an AOP which is otherwise exempt under the provisions of section 86 of the Act should be

excluded while computing the liability of the member under 115JB of the Act

4.61. Corporate Social Responsibility costs

Issue

Corporate are currently involved in various areas of social responsibility/community development as part of nation

building. Suitable tax incentives should be introduced in respect of such Corporate Social Responsibility (CSR) Costs

to accelerate the process and to ensure that the country can reach the goal of being a developed nation in the near

future.

Recommendation

It is recommended that a weighted deduction of 150 percent of the expenditure on community / social development

(both capital and revenue) be introduced, specifically covering critical areas like education, health, animal husbandry,

water management, women's empowerment, poverty alleviation and rural development. Further, even in cases

where a company has its own trust or foundation it should also be eligible for the weighted deduction in respect of

expenditure incurred for CSR activities.

4.62. Deduction for Road Safety Development Programmes

Issue

India has reported the highest number of road fatalities among all countries in the world. Due to such incidents, the

households of road accident victims lose their near and dear ones who are left behind without any support and also

lead to an enormous economic loss. Since this is a huge task and involves large financial outlays, it is of paramount

importance that companies and individuals partnering and contributing towards the Road Safety measures be given

deduction from their income in respect of the contribution/expenditure incurred by them on approved road safety

projects.

Recommendation

FICCI recommends that a provision be inserted in the Act which shall grant deduction to assessees while computing

total income, of an amount equal to the expenditure incurred by them for the purpose of road safety measures

under schemes and programmes approved by the Central Government, the National Highway Authority of India or

the Highway Departments of the State Governments. Such a measure will go a long way towards incentivising wider

participation in the war against road accidents thus saving human lives, reducing the trauma of the families of

accident victims and stemming the unacceptable drain on the economy

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4.63. Inclusive Method of accounting - Section 145A of the Act

Issue

• The conflict in the provisions of Section 145A of the Act and the Accounting Standards notwithstanding its Nil

impact on the Profit and Loss or taxable income has transformed itself into long drawn and avoidable litigation.

Recommendations

• It is recommended that provision of Section 145A of the Act be amended to fall in line with the Accounting

Standards.

• Alternatively, it is recommended that the said provision be deleted, since in ultimate analysis, there is no

revenue implication.

4.64. Enhancement of Limits for TDS under Section 194C for Payment to Contractors

Issue

Currently any payment for contract services rendered which exceeds INR 30,000 at a time or INR 75,000 per annum

requires the persons responsible for making such payments to deduct tax at source under Section 194C. These limits

have been fixed some years ago. The deduction of tax at source on such small amounts involves deployment of

relatively large amount of resources in terms of manpower, systems and other costs at the assessee's end without

any significant benefits to the revenue.

Recommendation

It is recommended that the threshold limit be increased to INR 50,000 for single payment and INR 100,000 for

aggregate annual limit.

B. Wealth Tax

4.65. Wealth Tax

Issues

• The administration and litigation cost that the government incurs for the collection of wealth tax and in litigative

matters is too high. The government almost spends 40 percent of amount collected as its cost for collecting the

wealth tax. This is a very high cost which does not justify the quantum of collection of wealth tax. The low

collection of wealth tax could be due to lack of law enforcing machinery for collection of wealth tax. If we incur

additional expenditure to strengthen the law enforcing machinery then it would add up to the administrative

expenditure which is currently at 40 percent to 50 percent level.

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Recommendations

• The government can consider other option of increasing the exemption limit of wealth tax and to include all

taxpayers but it may lead to reduction in the number of wealth taxpayers. Considering the reduction in the

number of taxpayers and cost of collection remaining the same, wealth tax should be abolished.

• We further suggest that the levy of wealth tax tantamount to double taxation, as wealth is only an accumulated

savings of income over a period of time on which income tax has already been paid.

Issue

• Motorcars are included in the definition of the 'specified assets' for the charge of wealth tax and are termed as

unproductive items.

Recommendation

With the rise in the standard of living of the people and rise in the development of roadways, motorcar is becoming

the necessity rather than being a luxury item. Hence, the motorcar should be removed from the purview of the

definition of specified assets.

Issue

• A residential property owned by the company is charged to wealth tax if it is given to its employees drawing

salary exceeding INR 1 million

Recommendation

It is equally important that residential accommodation provided by a company to its employees drawing salary

exceeding INR 1 million should not be brought within its tax net. It has to be appreciated that companies need to

provide accommodation to its employees considering the remote location of its factory/offices and other reasons

like attracting talented persons. Such residential accommodations should not be construed as non productive assets.

Issue

• Vacant Industrial land held for more than two years from the date of acquisition is considered as non productive

asset and charged to wealth tax.

Recommendations

Vacant industrial land earmarked for future expansion should also be outside its preview even if it is kept vacant after

two years of its acquisition.

Further, considering the changing face of service industry on account of size and infrastructure requirements the

exemption benefit of initial two years should be allowed to land held for all business purposes instead of limiting the

exemption to industrial purposes only.

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Issue

• Wealth tax does not differentiate between senior citizen and the normal citizen.

Recommendation

It should give benefit to the senior citizens like under the Act. It is therefore suggested that wealth tax should not be

charged on the wealth of senior citizens.

Issue

• Government companies are charged to wealth tax and not treated at par with statutory bodies which are

exempted from wealth tax.

Recommendation

The bodies incorporated under the Central or State Act is exempted from wealth tax but Government companies are

charged to wealth tax. It is therefore suggested that the Government companies should also not be covered under

wealth tax net.

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V. INDIRECT TAXES

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SERVICE TAX

Exemptions

With the introduction of a comprehensive service tax regime with effect from 1st July, 2012, based on the concept of

a Negative List, the coverage of the service tax levy has become broad-based. FICCI has received several

representations requesting for exemptions from the levy of service tax from several sectors. In some case it appears

that the levy was unintended. The services which could be considered for exemptions are specified in the following

paragraphs.

5.1.1. Expanding the scope of services in relation to Agriculture produce under the negative List

As per Section 66D of the Finance Act, 1994, the Negative List shall comprise of the services specified therein. Clause

(d) of the said section specifies the services relating to agriculture or agricultural produce which shall not be taxable

to service tax. The agro sector has been supported by keeping a bulk of services relating to agriculture or agricultural

produce in the Negative List or in the list of exempted services. However, there are some services such as security

services, laboratory testing services, renting of immovable property services provided in relation to agriculture

produce, etc. which are essential to secure to storage of agri-produce and to determine quality of the agri-produce,

but which are subjected to service tax.

It is recommended that services provided in relation to agriculture produce may be kept outside the ambit of levy of

service tax.

5.1.2. Exemption for Services provided by Tobacco Board, Coffee Board, Tea Board etc.

As per Section 66D of the Finance Act, 1994 the Negative List of Services includes:

“(d)(vii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a

commission agent for sale or purchase of agricultural produce;”

Under Section 65B (6) "Agricultural Produce Marketing Committee or Board" has been defined to mean any

committee or board constituted under a State law for the time being in force for the purpose of regulating the

marketing of agricultural produce.

In this connection it would be pertinent to note that by virtue of it being expedient in public interest, the Union

Government has taken under its control several agri industries and has set up Boards for such industries. The duties

and objectives of such Boards include, inter-alia, regulating the relevant agri commodity and promoting its sale -

both within the country as well as exports, having due regard to the interests of all the stakeholders like the farmers /

growers, manufacturers, dealers and the government.

Examples of such Boards include Spices Board of India, Tobacco Board, Coffee Board of India, Coir Board and Tea

Board of India.

In line with the inclusion in the Negative List of services provided by Agricultural Produce Marketing Committees or

Boards, it is recommended that the services provided by Boards set up under Central enactment for similar purposes

are also included under the definition of “Board” under Section 65B of the Finance Act, 2003. This will ensure that

the tax cost of the services are not embedded in the export cost of the agri-products or in the cost of the agri-

products sold in the domestic market, as is the case today.

5.1.3. Exemption from the levy of Service tax on treatment and recycling of effluents and solid waste

Notification No. 42/2011-ST dated 25-07-2011 as amended by Notification No. 1/2012 dated 17-03-2012 exempts

services provided by an association in relation to common facility set up for treatment and recycling of effluents and

solid waste with financial assistance from Central or State Government under the taxing entry of club or association

services. However, following introduction of the comprehensive service tax regime based on the concept of Negative

List, such services of processing of waste have again been brought under the taxable net. The Central Effluent

Treatment plants are set up to help the micro and small scale industries to treat the effluent of units who cannot

afford to set up their own individual waste treatment plants.

It is requested that the exemption from the levy of service tax on processing of waste / effluent in relation to

common facility set up with financial assistance from the Central or State Government be restored.

5.1.4. Exemption from Service Tax on Membership Subscription of Associations

Trade Associations provide a common forum and help catalyze the Government / Industry dialogue. They also

undertake industry-wise collective bargaining. These non-profit Associations are for the members, by the members

and of the members and are also recognized by the Government and its various bodies who utilize services of the

Trade Associations for interface with the trade and industry.

It is requested that membership subscription to recognized Trade Associations be exempted from the purview of the

Service Tax.

5.1.5. Exemption for Services availed by 100% EOUs

CENVAT Credit Rules, 2004 permit taking of credit of inputs and input services which are used for providing output

services or output goods. In order to zero-rate the exports, Rule 5 of CENVAT Credit Rules, 2004 provides that such

accumulated credit can be refunded to the exporter subject to stipulated conditions. Notification No. 5/2006-CE (NT)

dated 14.03.2006 provides the conditions, safeguards and limitations for obtaining refund of such credit.

At present units are paying service tax liability, taking input credit and then claiming refund. However, despite several

clarifications and exhortations from the Board from time to time getting a refund of accumulated cenvat credit is a

herculean task. The field officers do not take any cognizance of the certificate issued by the statutory auditors. Issues

of “Nexus” in the software industry are not clearly understood by the concerned officers. At a strategic level

predictability is becoming a challenge. Cost of litigations is increasing and working capitals are being blocked

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In this background, it is suggested that complete exemption from service tax be provided for all types of services

availed by 100% EOUs. This would ease the cash flow of the concerned units and save the department its precious

time in processing papers.

Many service providers are captive service centres for their parent companies outside India and are exporting

hundred percent of their services outside India. The total cycle of payment of service tax on the output services and

making a claim for the total service tax paid can be avoided if such assessees are granted exemption from payment of

service tax on input services. This would meet the same objective without going through the full process.

It is suggested that service tax exemption be granted at least to assessees engaged solely in export of taxable

services.

5.1.6. Exemption for intermediary services for exports

The intermediary services of the type as explained in the following example may be considered for exemption from

the levy of service tax:-

Company A is an Indian agent of Company B, a US company which provides repair services. Company C is a potential

Indian Customer for the repair services provided by Company B. Company A identifies the Customer Company C and

negotiates the scope and value of services to be rendered in a services contract between Company B and Company

C. Company A earns a consideration for its services.

Rule 9 of the Place of Provision of Services Rules, 2012 provides that the place of provision of “Intermediary

Services” shall be the location of the service provider. 'Intermediary' has been defined to mean “a broker, an agent or

any other person, by whatever name called, who arranges or facilitates a provision of service between two or more

persons”. Therefore, services provided by Company A are eligible to be classified as an Intermediary Service. The

place of supply of these services under the current rules will be based on location of Service Provider i.e. Company A

and hence the place of provision of services will be India.

The activities performed by Company A as explained above tantamount to export under the previous Export of

Services Rules, however, these are liable to be taxed under the new service tax regime. The services of the nature

mentioned above qualify as export under the EU Place of Supply Rules also. The fact also remains that the

contractual recipient of the service as well as the beneficial enjoyment of the service, is outside India.

Also in case Company A is helping Company B sell goods to Company C in India, then the services of Company A fall

under Rule 3 of POPS and qualify as exports. Thus, there is no reason why in case of service transactions the service

of Company A should not qualify as exports.

In the circumstances, there is adequate justification for exemption from the levy of service tax on such intermediary

services.

5.1.7. Service tax exemption for services received by power industry

The economic development of the nation is intricately connected with the development of infrastructure.

Recognizing this fact, the Government has provided various incentives to the power industry including incentives by

way of tax reliefs to augment the power industry and reduce power deficiency. Accordingly various indirect tax

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advantages have been provided to certain power generation units such as mega power plants to reduce the cost of

power generation.

The Government however, has not exempted input services consumed in the power generation plants leading to

higher cost of power production. This is because the cenvat credit is not available to the power industry.

All input services received by power producing units should be exempted from service tax.

5.1.8. Exemption from payment of service tax for oil & gas exploration

The Government has consistently encouraged investment in oil exploration to reduce dependence on crude oil

import and to provide energy security to the nation. To achieve this the oil exploration sector has been granted

exemptions from all excise and customs duties so long as the exempted items are used in oil exploration. However, a

similar exemption has not been extended to services consumed by Exploration and Production entities.

This drains away a substantial portion of the funds committed for exploration as the tax is not vatable. Therefore,

service tax incurred by entities end up as 'stranded costs' on which no cenvat credit can be availed.

The service tax payable on services received for exploration activities may be exempted. Alternatively, The

Government should formulate a scheme to refund the service tax on input services consumed by the oil exploration

sector.

5.1.9. Enhancement of value limits for exemption to specified services provided by a goods transport agency

Services provided by a goods transport agency by way of transportation of the following goods are exempt from the

levy of service tax in terms of Notification No.25/2012-ST dated 20-06-2012 (Sl.No.21):-

(a) goods where gross amount charged for the transportation of goods on a consignment transported in a single

goods carriage does not exceed one thousand five hundred rupees; or

(b) goods, where gross amount charged for transportation of all such goods for a single consignee in the goods

carriage does not exceed rupees seven hundred fifty;”

The exemption has been provided as a measure of relief to small traders, manufacturers and service providers

outside the cenvat chain who are relieved from observing the compliance formalities for small freight transactions.

The exemption limits of Rs.1500 and Rs.750 were notified for the first time in 2004 vide Notification No.34/2004-ST

dated 03-12-2004. Since then freight costs has risen by 70% to 75% on account of increase in diesel prices by 56%

(from Rs.26.28 to Rs.41.13 per liter), increase in capital costs, increase in interest rate for motor vehicle finance and

other cost increases.

In view of the aforesaid circumstances, with a view to provide genuine relief to small entrepreneurs it is requested

that the exemption limits of Rs.1500 and Rs.750 may be increased to Rs.3000 and Rs.1500 respectively.

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5.1.10. Increase in exemption limit for levy of service tax

The value limit of Rupees Ten Lakhs for exemption from the levy of service tax in a financial year be increased to a

total of Rupees Twenty Lakhs.

5.1.11. Exemption for input services availed by Shipping Companies

Service tax is currently imposed not only on various services availed by the Indian shipping companies domestically

but also on some of the crucial services availed by them outside India. Globally, in major maritime jurisdictions like

UK, Singapore, Netherlands, Greece etc, taxes relating to the shipping industry are either zero rated/exempted,

whether such services are availed domestically or internationally by non-resident or resident ship owner.

The Government has, by introduction of Tonnage Tax, recognized the need to create income tax parity with other

shipping jurisdictions to create competitiveness in this industry. It is essential that this philosophy is also extended to

create a comprehensive zero rating of indirect taxes for the industry.

It is suggested that exemption from service tax should be provided on all input services availed by shipping

companies.

5.1.12. Exemption for Transmission and Distribution of Electricity

Transmission and distribution of electricity by an Electricity Transmission or distribution utility has been included in

the negative list of services. However, by definition, this relief from the levy of service tax on transmission and

distribution of electricity is available only to Central and State notified agencies (CEA, State Electricity Boards etc.).

It is requested that electricity transmission and distribution being an infrastructure input should be kept out of the

service tax net irrespective of the agency involved in this activity.

5.1.13. Exemption of Services Provided by way of Construction of Power Plants

As per entry at S. No. 14 of Notification No. 25/2012-ST dated 20.06.2012, services by way of construction, erection,

commissioning or installation of original works pertaining to airports and services provided by way of construction,

erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of roads

is exempted. Likewise, keeping in mind the public good any services involved in the work undertaken for construction

of Power Plants should also be exempted from service tax.

5.1.14. Exemption from the levy of Service Tax on Maintenance, Repair and Overhaul (MRO) Services of aircraft

MRO Business in relation to aircrafts has a huge potential to attract foreign investments and earn precious foreign

exchange and at the same time save outflow of foreign exchange from India. It is desirable to exempt the MRO

services as a whole from imposition of service tax in order to promote the industry in India. The exemption is

necessary for promoting the upcoming MRO business which has just begun to grow in India.

It is suggested that MRO services may be included in the negative list of services or may be specifically exempted

from service tax.

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5.1.15. Exemption for services provided in relation to cold storage and warehousing of goods

Prior to the introduction of the comprehensive Service Tax based on concept of Negative List, services provided in

relation to storage and warehousing of goods by way of cold storage were specifically excluded from the purview of

service tax. In order to reduce the costs of the farm produce and to prolong the shelf life of food products it is

requested that service tax may be exempted on storage and warehousing services necessary for maintenance of cold

chain at least in respect of the food products.

5.1.16 Double Taxation on Rooms and Food and Beverages provided in hotels

In Finance Act 2011 the scope of Service Tax was expanded to levy Service Tax on Room Sale & Food sold in Air

Conditioned Restaurants having liquor license despite the fact that Luxury Tax is already charged on Sale of Room

nights and VAT on Sale of Food & Beverages.

Whilst abatement, in respect of service tax has been provided @ 50% for Rooms and @ 70% for Food & Beverage, on

the balance portion there is an element of double taxation - Service Tax and Luxury Tax in the case of Rooms and

Service Tax and VAT in the case of Food & Beverages.

The total tax outflow for the Guest works out to around 20% on an average. This is a significant deterrent to the

Hospitality Industry, especially the Luxury Hotels. It is recommended that the levy of Service Tax on sale of Room

nights and Food & Beverages be discontinued.

Valuation of Services

5.1.17. Valuation of Works Contract Services

In respect of works contract services where the actual value of goods is not known, it has been prescribed that the

service tax is to be computed with reference to the “total amount” charged for the works contract. Further, it has

been stipulated that the “total amount” will be a sum equal to the gross amount charged plus the fair market value

of all goods and services supplied by the Service Recipient under the same or any other contract less amounts

charged for such goods and services by the Service Recipient.

It is apprehended that in such cases the Department would insist on service tax on value of goods that do not, in any

way, contribute towards the value of service provided and for which there is no transfer of title during the execution

of the works contract. For example, if a service recipient awards a works contract to a service provider for

preparation of foundation and installation of a machine belonging to the service recipient, the Department may

insist that as per valuation rules the cost of the machine has to be included for purposes of computation of service

tax liability.

In order to avoid such untenable situations, it is recommended that either the valuation rules are amended suitably

or appropriate clarifications are provided immediately.

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5.1.18. Value of service portion in case of works contract

As per Rule 2A of the Service (Determination of Value) Rules, 2006, in cases where the actual value of goods is not

known, the value of the service portion of the works contract service is deemed to be a specified percentage. For

different types of works contract the prescribed percentages for determining the deemed value of the service

portion are as under:

5.1.19. The segregation of works contract services with reference to goods and immovable property and the

different percentages prescribed for determining the deemed value of service portion of a works contract

has the following infirmities

(i) Issues of interpretation on what constitutes “goods” and what constitutes “immovable property.

Under Central Excise there is a plethora of litigation regarding interpretation of what is “goods” and what is

“immovable property”. It is apprehended that the same issues will arise in case of works contract services also,

particularly since the deemed value of service portion in a works contract is to be determined with reference to

prescribed percentages that are different.

In order to avoid litigation in this regard and lock-up of revenue, it is recommended that the segregation of works

contract services on the basis of “goods” and “immovable properties” be done away with and a uniform percentage

prescribed for all works contract services.

(ii) Instances of total tax pay-out (Service Tax plus VAT) on a tax base that is higher than the total value of the works

contract.

The issue with the prescribed percentages - for determination of the deemed value of service portion - is that they

appear to have been prescribed on a stand-alone basis without reference to valuation rules for works contracts

specified in the State VAT Laws.

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Where works contract is for Value of the Service portion shall be

Deemed to be

(i) execution of original works 40% of the total amount charged for the works contract

(ii) maintenance or repair or reconditioning or restoration or servicing of any goods

70% of the total amount charged for the works contract

(iii) Other works contracts not covered in (i) & (ii), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property

60% of the total amount charged for the works cont ract

As per the State VAT Laws in cases of indivisible works contracts the value of goods is deemed to be a certain

prescribed percentage. For different types of works contracts different percentages have been prescribed.

The deeming provisions come into effect under both Service Tax and State VAT laws in case of indivisible works

contracts. Since neither Service Tax law nor State VAT laws recognize the deeming provision that exist in the other

law, the assessee is forced, in many cases, to pay tax (service tax plus VAT) on a value higher than the total value of

the works contract. Illustrations of such cases are as under:-

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The recently amended Valuation Rules under Service Tax laws clearly lead to an untenable situation whereby

assessees are required to pay tax on a value base that, more often than not, is higher than the total value of service

that is provided.

The Central Government is requested to take up this matter with the Empowered Committee of State Finance

Ministers to find a solution to this problem such that the total tax (service tax plus VAT) to be paid by an assessee is

not computed on a tax base that is higher than the total value of the works contract. Alternatively, Service Tax

(Determination of Value) Rules, 2006 be amended so as to provide a uniform rate, between 10% and 15%, for

arriving at the value of service portion for all kind of works contracts.

5.1.20. Increase in abatement from value for service tax on coastal transportation services

Services of 'transport of coastal goods and goods transported through national waterways and inland water' are

liable to service tax. In the Budget 2012, the abatement of 25% available for these services was increased to 50%.

Transport of goods by road services are eligible for an unconditional abatement of 75% from the value of taxable

Type of Indivisible Works Contract

Deemed Value of Service

Portion

(Per Service Tax Laws) on which

tax payable

Deemed Value of Goods onwhich VAT

payable

(As per VAT Laws)

Total Value of Works Contract on which

Service Tax and VAT is payable

Installation of Plant

& Machinery 40%

85%

(Karnataka VAT Rules,2005)

125% (40% + 85%)

Civil Works like construction of Building

40%

70%

(Rajasthan VAT Rules,2006)

110% (40% + 70%)

Works Contract For Repairs/Not Specified

60%

75%

(Karnataka VAT Rules,2005)

135% (60% +75%)


services i.e. service tax is payable on 25% value. Rail transport is eligible for an abatement of 70% subject to the

condition that no credit of service tax is availed of taxes paid on inputs, input services and capital goods. There is a

similar abatement for transport of goods by road and rail transport services. The present anomaly results in a cost

disadvantage to Indian shipping companies vis-à-vis providers of road transport services and rail transport services.

It is requested to provide an increase in abatement from 50% to 75% for services of 'transport of coastal goods and

goods transported through national waterways and inland water'.

5.1.21. Deduction of reimbursements from the value of service

Under the Service Tax (Determination of Value) Rules, 2006 the taxable value of a service is to be computed inclusive

of cost of any reimbursements made to the service provider. The only exception is in respect of reimbursements

made to a pure agent. Prior to these Rules, cost of reimbursements could be deducted while computing the value of

taxable services provided the invoice showed value of such reimbursements was shown separately on the invoice.

Consider a case where a consultant has been appointed and he, in turn, uses the services of a lawyer in connection

with providing the consultancy service to his client. Under the Valuation Rules the value of the taxable service

provided to the client by the consultant is inclusive of the charges paid by the consultant to the lawyer as legal fees.

Accordingly, service tax is payable by the client even on the legal fees paid to individual counsel by the consultant

though, in terms of Service Tax laws such legal fees are outside the scope of service tax.

It is recommended that the Service Tax laws be amended such that cost of reimbursements in connection with input

services are allowed to be deducted while computing value of taxable services.

Place of Provision of Services Rules

5.1.22. Service tax on outbound transactions provided by an entity in taxable territory to its office in non-taxable territory

Under the service tax regime as applicable prior to July 1, 2012, the Head Office and Branch Office/ Project Office of

the same legal entity located in two different territories were treated as separate persons for the limited purpose of

import of services. In other words, if an office of a legal entity located in India imported taxable services from

another office of the same legal entity located outside India, then it was deemed as services received by Indian office

from another person and such Indian office was liable to pay service tax under reverse charge, subject to the

conditions prescribed under the law.

With the introduction of service tax regime based on the concept of a negative list, it has been provided vide

Explanation 3 of the definition of 'service' in section 65B that the establishment of a legal entity located in India and

of the establishment of the same legal entity located outside India would be treated as distinct persons. With the

introduction of this explanation, it is apprehended that even the outbound transactions (i.e. services provided by the

office in India to office located abroad) may fall under the service tax net leading to levy of service tax twice.

The issue has arisen with respect to transactions where the Indian Project Owner awards a contract to the Contractor

located outside India and the Contractor sets up a Project Office in India for actual execution of the project. The

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In the above example, the service tax implication may arise as under:

• On the main contract between Indian Project Owner and Contractor (located outside India) - Since the

Contractor has an office in India and such office is directly concerned with the provision of services, the liability

to pay service tax would fall on the Project Office of the Contractor in India

• On the transactions between the Head Office and the Project Office of the Contractor - Since the two would be

treated as two distinct persons, the remittances received by the Project Office from the Head Office to meet the

expenses for execution of the project in India are also likely to be exposed to service tax.

On a strict interpretation of the legal provisions, the Project Office may become liable to pay service tax twice on the

same transaction (one on the services provided under the main contract and second on services provided by Project

Office to Head Office), without any credit eligibility.

Perhaps the intention of the Government is to levy service tax only on the services provided by offshore office to the

office located in taxable territory (i.e. on import of service transactions), however due to the language of explanation

any transaction between offices of same legal entity located in two taxable territories are getting exposed to service

tax, resulting into multiplicity of taxes and adding to the tax cost.

Also, since the state of Jammu and Kashmir is treated as outside the taxable territory for the purposes of service tax,

transaction (inbound or outbound) between office of a legal entity located in Jammu with the office of the same

legal entity located in taxable territory is getting exposed to service tax.

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Contractor (Head Office)

Payment from HO to PO for expenses

Indian PO opened for provision of services

Payments in foreign exchange Contract for construction

of Power Plant in India

India

Outside India

Indian Project OwnerProject Office of the Contractor


Actual Provision of services

transaction is explained as per the following diagram:-

It is suggested that necessary amendments be made in the text of the explanation to clarify that the establishment

of a legal entity located in taxable territory and another establishment of the same legal entity located outside India

would be treated as distinct persons only for the purpose of transaction of import of services.

Alternatively, it may be clarified that since in the transaction structure provided above, the Foreign Contractor is

providing services to the Indian Project Owner through its Project Office in India, the liability of service tax should be

restricted to the Indian Project Office and the money remittances from the Foreign Contractor to its Project Office

are merely flow of money between two offices of one Company without any underlying transaction and hence

should not be liable to service tax

5.1.23. Place of provision of services in case of transportation of the goods by road

Rule 10 of the Place of Provision of Services Rules, 2012 (POPS Rules) provides that in case of transportation of goods

by road i.e. through Goods Transport Agency (“GTA”), the place of provision is the place where the person liable to

pay service tax is located.

In case of GTA services, the person liable to pay freight to the GTA is liable to pay service tax to the Government,

however Rule 2(1)(d) of Service Tax Rules provides, if the person liable to pay freight to the GTA is located in non-

taxable territory, then the GTA becomes liable to pay service tax on transportation services.

On a combined reading of the two provisions it appears that for transportation services provided by GTA, place of

provision shall be outside taxable territory only when the person liable to pay freight to the GTA and GTA both are

located outside the taxable territory. If any of them is located in taxable territory then irrespective for inward or

outward transportation of goods the place of provision shall be taxable territory and hence such services would

become liable to service tax.

It may be pointed out that the above provision is not in line with the provisions related to transportation of goods

through ocean, air or rail. We have provided below a table comparing the provisions related to place of provision for

transportation of goods through road and other transportation modes:

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Scenarios Service tax liability

Transportation of goods from India to outside India No

Transportation of goods from outside India to India

Ocean/ Air Rail GTA

(exports)

No

(exports)

No

Tax would be paid by the specified person. However, if the specified person is located in non-taxable territory, GTA would be liable to pay tax

No (as covered under the negative list)

Yes


To elaborate, if an Indian supplier is to supply the goods to its customer located in Nepal or to Jammu and Kashmir,

then if the goods are supplied through rail or air then since the destination of goods is outside India, the place of

provision of services would be outside India, however if he appoints a GTA and pays freight to him for transportation

services, then the place of provision would be where the supplier is located and such services would become liable

to service tax.

It is recommended that the place of provision of service rules for transportation of goods by road services should be

in line with the provision for transportation of goods through air/ sea or rail. In other words, there should not be any

change in the tax implications due to change in modes of transportation.

5.1.24. Place of provision of service in case of

(a) R&D activities conducted using inputs supplied by the service recipient and

(b) testing of software

In terms of the Place of Provision of Service Rules, 2012 ('POPS Rules'), services related to testing of goods (where

the goods are provided for examination) is likely to fall under Rule 4 and be taxable where the services are

performed.

Under the service tax regime effective prior to July 1, 2012, such services used to qualify as export based on the

location of the recipient for whom the research is carried out. In certain cases the goods are returned to the service

recipient and in certain cases the goods get consumed in the process of testing. For example, if some seeds are

supplied by the service recipient abroad for carrying out certain field trials in the area of agriculture and the seeds

get consumed in the process of testing, under the POPS Rules, the service tax liability is likely to fall on the service

provider, whereas the results of the R&D activity are made available to the service recipient abroad on payment of

service charges in foreign exchange.

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Scenarios Service tax liability

Transportation of goods within India (From J&K to a taxable territory)

Yes

Transportation of goods within India (from taxable territory to J&K)

Ocean/ Air Rail GTA

Yes

No, since the destination of goods shall be a non taxable territory

No, since the destination of goods shall be a non taxable territory

Transportation of goods within India (where movement of goods is within J&K)

No No No, Provided thatboth service recipient and GTA are located in J&K


Similarly, in the case of software testing services for overseas clients, the testing is performed on the software itself

or on a hardware in which the software is embedded or etched. Some of the testing would be undertaken in labs

located in India. The service provider would provide the test report or an exception report to the service receiver

outside India and receive the consideration in convertible foreign exchange. Rule 4(a) read with the first proviso

there under are not adequate in scope to cover such testing services, as exports.

It is recommended that the POPS Rules should be appropriately amended so that such testing related services should

not fall under Rule 4 and instead should be covered under Rule 3 of the said Rules.

In respect of testing service performed on goods, the place of provision of service should be the place where the test

report or exception report, if any, is required to be delivered.

5.1.25. Treatment of call centre services / BPO services as 'intermediary services'

The term “intermediary” as defined in Rule 2(f) may be erroneously applied to the BPO services performed from

India for clients in countries outside India. Typically, under an outsourcing arrangement, the BPO Units established in

India would follow a set of agreed procedures/ processes and when these are executed electronically, it may be

construed that services have resulted in arranging or facilitating a provision of service between the clients and the

clients' customers / service recipients. Likewise, call centre services make calls to contractual recipients located

outside India which are in the nature of marketing.

There have been doubts whether the above services would qualify under:-

(i) Rule 3 of POPS Rules (and hence, would qualify as exports, subject to fulfillment of other prescribed conditions,

since place of provision in such a case would be outside India i.e. place of the service recipient);

or

(ii) Rule 9 of the POPS Rules as an 'intermediary service' (and hence, would not qualify as exports since place of

provision of this service would be in India viz. location of service provider).

In this regard, while the Guidance Note, under Para 5.9.6, seeks to generally exclude call centers from the purview of

'intermediary', it does not address the issue of call centers set up specially for marketing the services of its overseas

service recipients (such as those in the financial sector) and other BPO activities executed electronically.

Prior to the “Negative list” regime, such services qualified as 'export' in terms of the erstwhile Export of Services

Rules. Denying export benefit on such transactions would lead to unnecessary burden and would also result in

exporting taxes along with services.

It should be clarified that B2B transactions like marketing services / BPO activities are not covered within Rule 9 of

POPS Rules. The status prior to July 1, 2012 should be continued.

5.1.26. Time charter services - impact of Place of Provision of Services Rules, 2012

In case of time charter services provided by an Indian shipping company to an overseas customer for a period up to

one month, place of provision of services is in India i.e. location of service provider and hence service tax is

applicable. These services do not qualify as export even if the services are performed entirely outside India and

consideration is received in convertible foreign exchange.

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Time charter services provided by an Indian shipping company to a foreign shipping company for a period up to one

month would attract service tax. However, if similar services provided by foreign shipping companies to foreign

customers, service not taxable since place of provision of services is outside India. Time charter services provided by

an Indian shipping company to an Indian customer for up to one month would be liable to service tax. However, if

similar services provided by foreign shipping companies to an Indian customer, service tax would not be applicable

since place of provision of services is outside India.

This results in a disparity in levy of service tax on services provided by Indian shipping companies vis-à-vis foreign

shipping companies.

Services of 'hiring of means of transport for a period up to one month' should be excluded from Rule 9 of the POPS

Rules. If this amendment is made, the place of provision of services for all time charter services irrespective of the

period of hiring would be governed by the location of service recipient as per Rule 3 of the POPS Rules i.e. the

default rule for determining the place of provision of services.

Hence, the disparity in levy of service tax on time charter services provided by Indian shipping companies and by

foreign shipping companies should be removed.

5.1.27. Voyage charter services - impact of Place of Provision of Services ('POPS') Rules, 2012

The negative list of services covers services of 'transportation of goods by vessel from outside India to the first

customs station of landing in India'.

On account of the above, CENVAT credit / refund of taxes paid on inputs, input services and capital goods used for

international transportation of goods from outside India to India is not available. Non eligibility to claim refund of

taxes and duties paid on inputs, input services and capital goods result in high costs relating to transportation of

goods. This has a serious impact on the Shipping industry and is a stumbling block to the development of the

international transportation business. Globally, major maritime jurisdictions like UK, Singapore, Netherlands, Greece

etc, give full credit of taxes paid on inputs used for export and import cargo.

Services of transportation of goods by sea from outside India to a destination in India should be excluded from the

negative list. An amendment should be made in Rule 10 of the POPS Rules stating that for services of transportation

of goods, the place of provision of services would be considered as outside India if either the origin or destination of

goods is outside India. For international transportation of goods to qualify as export, the two conditions i.e. service

recipient located outside India and consideration received in convertible foreign exchange, should not be made

applicable.

Reverse Charge

5.1.28. Reverse Charge Mechanism

Prior to introduction of the Negative List of Services, only two types of services were taxed under the reverse charge

mechanism - services provided by GTA and services provided by persons outside India in case such persons did not

have any establishment in India.

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With the advent of the Negative List of Services a whole host of services have been notified under the reverse charge

mechanism, including services of works contracts, manpower supply and security provided by non-corporate service

providers to corporate bodies. Also, penal provisions that are applicable to service providers have been made

applicable to service recipients as well in case of the services that are under the reverse charge mechanism. The

undesirable consequences of these changes in the service tax laws include:-

(i) significant increase in complexity and cost of compliance in case of corporate bodies in terms of identification of

status of service provider, maintenance of records, submission of returns, Departmental audits and so on.

(ii) undermining of threshold limits and exemptions prescribed under service tax laws. This is due to the fact that in

case of payment of tax under the reverse charge mechanism threshold limits are not applicable, leading to situations

where the service recipient, being a corporate body, has to pay service tax in respect of specified services provided

by non-corporate service providers even if such service providers are below the prescribed threshold limits.

(iii) chances of short/excess payment of service tax consequent to differences in understanding of service provider

and service recipient on whether a particular service falls under the services notified for taxation under the reverse

charge mechanism.

(iv) scope for dispute and litigation with the Department on interpretation and valuation. For example, whether a

particular service is a manpower supply service (to be taxed under reverse charge mechanism) or not would depend

on the facts of the case and is open for interpretation. Similarly, the laws prescribe that in case of works contract

services it is open to the service provider and the service recipient to follow different options of valuation. It is

apprehended that issues like these will give rise to disputes with Department, resulting in avoidable litigation and

lock-up of revenue.

The enlargement of list of services under the reverse charge mechanism has, in effect, burdened the service recipient

with responsibilities that are rightly those of the Department. In an era of growing transparency and simplicity in tax

laws this is clearly a retrograde step. Accordingly, it is strongly recommended that the list of services under reverse

charge mechanism be restricted to services provided in India by parties outside India and road transportation

services provided by GTA - as was the case prior to introduction of the Negative List of Services.

5.1.29. Exemption of Rs. 10 Lakhs for services subject to tax on reverse charge basis

Notification No. 33/2012 dated 20.06.2012 exempts taxable services of aggregate value not exceeding Rs. 10 lakhs in

any financial year from payment of Service Tax. The said exemption is made applicable to Service Providers. As per

rule 2(r) of the Cenvat Credit Rules, 2004, 'provider of taxable service' includes a person liable for paying Service Tax.

In terms Rule 2(1)(d) of Service Tax Rules read with Notification No.30/2012-ST dated 20.6.2012 there are certain

taxable services notified wherein the recipient of services are liable to discharge service tax (services subjected to tax

under reverse charge mechanism). The liability is on the receiver of services even if the service provider is below the

threshold limit of Rs.10 lakhs. The anomaly should be rectified and the exemption limit of Rs. ten lakhs so granted to

the Service Provider should also be extended to Service Receiver in such cases.

5.1.30. Exemption limits for payment of service tax on partial reverse charge basis

Under the new Service tax regime, for the first time, certain services have been notified for payment of service tax

under partial reverse charge mechanism, partly by service provider and balance by the service receiver. These

196


changes have created hardship to industry at large predominantly due to the fact that compliance becomes a major

hurdle and non-service providers like traders also undesirably get subjected to service tax jurisdiction. Lack of clarity

on the terminology adopted for implementing the reverse charge and also valuation for purpose of service tax

computation by both service provider and receiver, if different, could be prone for litigation. Further, Cenvat credit

availed thereon is likely to result in dispute.

It is suggested that the scheme of partial recovery of service tax on reverse charge basis may be withdrawn and the

entire service tax liability should be discharged by the service provider.

In case this suggestion is not acceptable for any reason, the revenue should introduce monetary threshold for the

service recipient to pay service tax under reverse charge. The objective should be to ease the compliance

requirements where the revenue implications are not substantial. We have suggested below the monetary limits for

different services liable to tax under reverse charge, which may be considered by the Revenue:

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Miscellaneous

5.1.31. Amendment of the definition of “Agricultural Produce”

The term agricultural produce has been defined under section 65B as below:

'(5) “agricultural produce” means any produce of agriculture on which either no further processing is done

Nature of services

Reverse charge applicability

Monetary Limit (in INR)

Goods Transport Agency

20,000 per case

20,000 per transporter per month

Sponsorship services 1,00,000 per event

Services by Arbitral Tribunal

Support services by Government 1,00,000 per annum

Services provided by Directors 1,00,000 per annum

Legal Services 20,000 per contract

Manpower supply/ security services 20,000 per person per month

Renting of motor vehicle 20,000 per month

Works contract services

100%

100%

100%

100%

100%

100%

Partial

Partial

Partial 1,00,000 per contract

or such processing is done as is usually done by a cultivator or producer which does not alter its essential

characters but makes it marketable for primary market;'

Under the erstwhile Service tax regime the following Notification / Circulars are issued by the Government of India

and CBEC which clarifies “Unmanufactured Tobacco” is an “Agricultural Produce” and services provided in relation to

unmanufactured tobacco is “in relation to Agriculture”:-

(i) Order issued by the Central Government under the power vested under Section 95 of the Finance Act - Order

No.1/2002:

“Agricultural produce means any produce of agriculture on which either no processing is done or such

processing is done as is usually done by a cultivator like tending, pruning, cutting, harvesting, drying which

does not alter the essential characteristics but make it only marketable and includes all cereals, pulses,

fruits, nuts and vegetables, spices, copra, sugarcane, jiggery, raw vegetable fibers such as cotton, flax, jute,

indigo, unmanufactured tobacco, betel leaves, tendu leaves, and similar products but does not include

manufactured products such as sugar, edible oils, processed food and processed tobacco.”

(ii) CBEC Circular No.143/12/2011 - ST, dated 26th May, 2011, F.No.332/37/2010-TRU (Refer Annexure-1)

It is recommended that the definition of “Agricultural Produce” may be appropriately amended to avoid issues

relating to interpretations.

5.1.32. Taxability of part consideration recovered by the employer from employee

The definition of service as provided under section 65B (44) excludes the transaction of service provided by

employee to the employer in relation to his employment.

It is an industry practice that Employers provide certain facilities to employees during the course of employment.

Few of such facilities are mandatory as per provisions of law relating to employment, like Canteen. However in order

to have a participation in the business from the side of employee, a small element of the cost is recovered from the

employee. Such benefits are considered to be provided by the employer to the employee on a concessional rate.

Most of the benefits given by an employer to its employees are procured from outside wherein service provider is

either asked to provide the facility directly to employees or is asked to visit to company's premises to provide such

services. In both the cases, the service provided by service provider is directly consumed by the employees on behalf

of their company and company remains just a conduit to recover some subsidized rates from each of its employees.

In nutshell, in cases of above types of arrangements, it is only one activity which is carried out where service

provider directly provides the services to company / employees. It is also evident from the way such transactions are

recorded in the books of accounts of the company wherein only net cost i.e. service fee charged by service provider

less recoveries from employees is shown as expenses instead of booking expenses with gross amount and showing

recoveries as miscellaneous receipt / service fee. Therefore, it is not fair to break such transactions artificially into

two transactions i.e. service provider provides the services to the company and company, in turn, is providing such

services to its employees.

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Such recovery from the employees should not be construed as a Service provided by the employer due to the fact

that the employer is not in the regular business of providing such service. The concessional benefit provided by the

employer to employee is only under the employment arrangement between the employer and the employee. The

intention of the employer is not to trade services to the employee, the intention is to provide benefits to its

employees in respect of their services. In addition, the service provider would already be charging applicable service

tax in the billing to Employer, and therefore there is no loss of revenue to the Government

Hence, in situations where part consideration is received by the employer from the employee towards the benefit

forming part of the salary of the employee, the same should not be liable to service tax. It also needs to be clarified

that any amount recovered from the employee for breach of contract of employment would be out of the purview of

the Service Tax as the contract itself is out of the scope of the service tax.

5.1.33. Transaction between unincorporated Association of Persons (“AoP”) and its members

As per Explanation-3 under clause (44) of Section 65B of the Finance Act, 1994, an unincorporated association or

body of persons and a member thereof shall be treated as distinct persons for the levy of service tax. The phrase

'unincorporated association or body of persons' (“AOP”) is not defined under the service tax laws. In the absence of

any definition, clarifying/explaining what constitutes an AOP, significant difficulties are likely to arise for the tax payer

leading to protracted litigation. The examples of such association in its simplest form could be the residents of a

block of residential flats managing the upkeep of their building to a more organized structure where a group of

persons join hands to bid for a project in the name of one of the persons in the group but where each person would

be providing services in its area of specialization. The tax consequences in such cases can be severe unless the

intention is clearly spelt out by defining the term 'unincorporated association or body of persons'.

Given the above, it is recommended that the term 'unincorporated association or body of person' should be

specifically defined under the service tax laws to avoid any unnecessary and unwarranted litigation and hardship to

the tax payer as also the project owner awarding works contract to an AOP.

Alternatively, the concept of AOP may be done away with since in any case the members of the AOP would discharge

their service tax liability. Treating AOP as a distinct person from a service tax perspective would only lead to

ambiguity in law and onerous compliance burden on the assessees without any incremental service tax revenue for

the Government.

In view of the extensive risks and resource requirements associated with exploration and allied activities in oil & gas

industry, it is common for industry players to pool in their resources and form Unincorporated Joint Venture (UJV) to

execute the project. The UJV typically executes a Production Sharing Contract (PSC) with the Government of India to

carry out the exploration and development activities and share the output. In terms of the specific requirements laid

down under the PSC, one of the members of the UJV is required to be nominated as an Operator, and is responsible

for carrying out the requisite activities on behalf of constituents of the UJV. However, all the members of the UJV

continue to be responsible for their obligations or liabilities under the PSC. To fund these operations and manage the

project, the members are required to make their contributions through various modes (e.g. in the form of 'cash calls',

allocation of manpower to the UJV, recovery of project related expenses incurred by members from UJV or vice-

versa, etc.).

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With the recent changes in service tax laws resulting from implementation of negative list based taxation regime,

certain doubts have arisen regarding the applicability of service tax on financial dealings between such UJVs and their

members.

As may be observed payments made by the members from the UJV towards 'cash calls' are not towards an activity

carried out by UJV for the members, which is a pre-requisite for levy of service tax. Such payments are in essence

pure funding arrangements/ capital contributions made by the members to the UJV. Even with respect to other

payments made by UJV to members towards project related expenses/ charges, there is no intention to provide a

service. Instead, these are necessary for the functioning of the UJV. Therefore, even if the members and UJV are

viewed as separate entities for service tax purposes, the underlying transactions are not towards any service

provided by either party to the other.

While the industry is of the view that service tax is not applicable on such transactions, in view of the broadened

ambit of service tax under the negative list based regime, it is imperative to have absolute clarity and certainty in

terms of tax treatment. Any additional cost to the industry in the form of service tax or litigation cost would translate

into a higher cost of exploration and development, which would not be desirable, given the impetus that the

Government intends to give to the sector.

Therefore, it is submitted that appropriate clarifications/ exemption notifications may be issued to ensure that

transactions between the members and UJV, and inter se between the members, remain outside the purview of

service tax.

5.1.34. Periodicity of Filing Service Tax Return for small Service Providers

Small Service providers classified on the basis of threshold limit of annual turnover upto 50 Lakhs should be given

exemption from half yearly filing of service tax return. Yearly return filing procedure should be made for small service

providers.

5.1.35. Extension of Due Date of Payment of Service Tax

The Service Tax Rules, 1994 have been amended advancing the date of payment of service tax from 25th of the

month following the month in which the service charges are collected to 5th of the following month or 6th if the

payment is made by internet. Further, in case of month of March, the service tax is required to be paid by 31st March

only. The amendment creates practical difficulties in case of organizations having multiple branches / locations over

the country but paying service tax on a centralized basis due to time required in collating and reconciling the

necessary data. Further, in view of non availability of provisions for adjusting service tax liability against subsequent

payment, the amount even if paid on estimated basis will get blocked till the refund, if any, is granted by service tax

authorities.

It is suggested that if it is not possible to restore the earlier provisions of due date for payment of service tax viz.

25th of the following month, the due date for payment should be fixed between 15th-20th day of the succeeding

month for all months including the month of March.

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5.1.36. Rate of Interest for delayed payment of excise duty or service tax

The rate of interest on delayed payment of excise duty has been revised with effect from 1st April 2011 to a uniform

rate of 18% per annum. The rate of interest on delayed payment of taxes has been increased from erstwhile 13% per

annum to 18% per annum.

The rate of interest as has been prescribed for delayed payment of taxes is exorbitantly high as compared to the rate

of interest which the exchequer would have earned if the same would had been deposited with the nationalized

banks. Such high rate of interest is more penal in nature rather than being compensatory. Such high rate of interest is

also detrimental to the overall industry as a whole and especially with regard to assessees' who have paid short tax

or no tax under a bona fide belief.

The rate of interest on delayed payment of taxes should be prescribed at 12% per annum for delayed payment of

excise duty as well as service tax (as is the case for delayed payment of income tax).

5.1.37. Point of Taxation for Construction Activities

The Construction Business is very unique and complex in nature. The execution of huge Projects for reason of

Engineering, Procurement and Logistic support, Client Coordination, follow up with other Agencies, control and

monitoring, etc. need officiating from multiple divisions spread across different geographical location. With this

background the transaction documentation, holding of records / details for measurements and check measurements,

payment receipts and disbursement, maintenance of Books of Accounts and other statutory records, also have to be

decentralized. Therefore, Construction Business has got to be supported by a system of Progressive Billing which is a

continuous activity till the completion of the Project. These Progressive Bills are raised for an adhoc amount which

are considered as “Work in Progress” instead of normal sales as per Accounting Standard (AS7) in the Books of A/c

because of the uncertainty in recognizing the element of Profit in the ongoing Projects.

It will therefore be appropriate only when the incidence of Service Tax is attracted only after due certification of Bills

by the Architects / Engineers instead of imposing Service Tax on every running bill which is always subject to

modification.

5.1.38. Dual Levies on Software-VAT and Service Tax

The definition of the term “service” given under section 65B (44) is wide enough to cover any activity. The definition

excludes sale of goods and other deemed sale transactions as per Article 366(29A) of the Constitution, like for

example transfer of right to use goods. Hence, all transactions which are treated as “sale” shall be outside the ambit

of service tax.

Historically, while packaged software has been treated as 'goods' and customized software has been treated as

'services'.

In this respect, the Central Board of Excise and Customs (“CBEC”) has issued a Guidance Note on “Taxation of

Services - An Education Guide” ('the Guidance Note') which also states that pre-packaged or canned or shrink

wrapped software, when supplied on a media, would qualify as 'goods' and hence would not be liable to Service tax.

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However, the CBEC has issued a Guidance Note on “Taxation of Services - An Education Guide”. Para 6.4.4 of the

guide suggests that download of software shall be liable to service tax.

From the said Para it appears that in case separate consideration is charged for license to use packaged software, the

same may attract Service tax, as license to use software may not fulfill all the conditions of 'transfer of right to use

goods'. However, it is a settled position under the VAT laws of all the States that providing right to use the license/

copyright in software is to be construed as a deemed sale transaction and therefore is to be levied with VAT at the

applicable rates.

The Guidance Note further appears to suggest that Service tax shall be applicable on software that has been

downloaded electronically by end customers. The said view appears to have been formed based on the 1understanding that the Supreme Court judgment in the case of Tata Consultancy Services (“the TCS Judgment”) can

be applied only to transactions of sale of software on media. Therefore, the Guidance Note suggests that conclusion

of the TCS Judgment cannot be made applicable where software is not sold on media, and therefore no VAT is

payable on the same (thereby implying that Service tax shall be payable).

However, the payment of VAT on sale of software supplied electronically has been a settled position, for the reason

that software is treated as “goods” for the purpose of VAT, having all the attributes of the term “goods” as laid out by

the TCS Judgment (even when supplied electronically). Pertinently, the term “goods” for VAT purposes is wide

enough to cover tangible and intangible goods and software supplied electronically also qualifies as “goods”.

As software is treated as “goods”, even when supplied electronically, and VAT is being discharged on the same, the

question of treating the same as a “service” does not arise.

Even otherwise, no Service tax should apply on copyright in packaged/canned software, whether sold on media or

otherwise, due to a specific exemption provided under the Mega Exemption Notification No 25/2012-Service Tax

dated June 20th, 2012 (“Mega Exemption Notification”). The reason for the same is explained as below.

(i) Section 66E of the Service tax law, as amended by the Finance Act, 2012, prescribes nine types of activities as

declared services (“deemed services” for service taxation).

(ii) One of the declared services refers to temporary transfer or permitting the use or enjoyment of any intellectual

property right.

(iii) The Mega Exemption Notification exempts temporary transfer or permitting the use of copyright covered under

clauses (a) or (b) of sub-section (1) of Section 13 of the Copyright Act, 1957 (“the Copyright Act”). The said

clauses include, inter alia, original literary work within its purview.

(iv) As per Section 2(o) of the Copyright Act, literary work includes computer programmes, tables and compilations

including computer databases. Hence, copyright in packaged/canned software, whether sold on media or

otherwise, would get covered under the said category and hence would be exempt from Service tax.

Given the above, observation in the Guidance Note with respect to licensing of software creates a contradiction vis-

à-vis exemption granted under the Mega Exemption Notification in respect of copyright in computer programmes.

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1 Tata Consultancy Services v. State of Andhra Pradesh [2002(178)ELT22(SC)]


In the interest of smooth functioning of trade and industry and in the interest of certainty, it is recommended that

CBEC clarify the position that provision of standard software, including license to use such software, whether

electronically or on a media, would not be liable to Service tax.

Applicability of VAT, Service Tax and Tax Deducted at Source on Software makes it very difficult for the Product

companies to do business in India, especially where tax rates are high and margins are low or negligible. If necessary,

an exemption may be granted to remove any doubts on the issue.

5.1.39. Service Tax on Insurance Charges for Export Shipments

Service Tax is charged on the insurance premium if insurance is done for export shipments on FOB basis. However, no

service tax is payable if insurance is done for export shipments till delivery along with freight i.e. on CIF basis. It is a

well known fact that duties and levies should not be exported. It is accordingly requested that no Service Tax be

levied on Insurance Premium paid on export shipments whether the export is made on FOB basis or CIF basis.

Sometimes, the Importers abroad ask the exporters in India to pay for destination terminal handling charges (DTHC)

in the importing country. Service Tax @12.5% is being charged from exporters who pay this DTHC.

It is requested that the Service Tax should not be levied on Terminal Handling Charges levied at the importer's end.

5.1.40. Payment of service tax on accrual basis

The Service Tax Point of Taxation Rules have been amended with effect from 01-07-2011 to make service tax liability

payable on billing basis and not on receipted basis i.e. on accrual basis and not cash basis

The amendment needs reconsideration as the service tax payers are caused unnecessary hardship. The service

providers are investing the funds for providing services and asking them to pay service tax on accrual basis even if

the payment for the same is not received will cause unnecessary burden on the Service Tax payers.

It is accordingly requested that the payment of service tax should be demanded only on receipt of the charges for

services rendered.

5.1.41. Cenvat Credit of Service Tax on freight for transportation of Goods from ICDs to Port of Export

Notification 31/2012-ST exempts the service provided to an exporter of goods in relation to transport of the said

goods by goods transport agency in a goods carriage directly from their place of removal, to an inland container

depot, a container freight station, a port or airport, as the case may be.

The exemption recognizes the fact that the taxes ought not to be exported and simultaneously does not debar an

exporter to avail CENVAT credit of the Service Tax payable instead of going in for the Exemption. However, certain

Commissionerates are disputing the availment of Credits and insisting on opting for the Exemption. The conditions

laid down in the Notification for claiming exemption are cumbersome.

It is suggested that suitable clarification/ amendments may be issued to enable an Exporter to avail the CENVAT

credit of Service Tax paid on the above referred services instead of mandatorily going in for the Exemption route.

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5.1.42. Service tax on input services consumed in shipping industry

While input services consumed by the shipping industry are taxable, these services consumed in sea transportation

to a place outside India though in the nature of export of service are not eligible for credit. This leads to an

anomalous situation where services used for export get taxed and this tax gets exported as they add to the

transaction cost. Obviously this is an unintended consequence and needs to be remedied by zero rating the input

services.

Inputs services consumed by the shipping industry in export of goods should be exempted from service tax.

5.1.43. Prosecution under the Service Tax law

Prosecution provisions were introduced in Service Tax in 1994 by way of Section 89 of the Finance Act, 1994. This

section was omitted in 1998 and at that time the then Finance Minister in his Budget Speech had mentioned:-

“176. I am conscious of the fact that there is strong resentment against the procedures and legal obligations

relating to service tax. I have removed a number of obnoxious and deterrent provisions in law. I also propose

to abolish several of the redundant and irritating Central Excise Rules very shortly.”

Section 89 of Finance Act, 1994 has been reintroduced in Finance Act, 2011 and clause (1) (a) has been further

amended, to widen the scope, in Finance Act, 2012. If these provisions were perceived to be “obnoxious and

deterrent”, there is no reason why it should not viewed to be the same today.

It is suggested that the prosecution provisions of law should be removed, in view of the potential for misuse by the

tax administrators / field formations.

5.1.44. Penal provisions when complete details are available from the records of the assessee

Section 73 (4A) of the Finance Act,1994 provides that where during the course of any audit, investigation or

verification, it is found that any service tax has not been levied or paid or has been short levied or short paid or

erroneously refunded, but the true and complete details of transactions are available in the specified records, the

person chargeable to service tax or to whom erroneous refund has been made, may pay service tax in full or in part

along with interest and penalty up to a maximum of 25% of the tax amount before service of notice.

It is submitted that in the event the complete details of the transaction are available in specified records of the

assessee then it would be incorrect to presume that there is any intention to evade duty or tax. The non-payment or

short-payment of tax in such cases would normally arise out of bona-fide belief that the tax is not payable or due to

genuine human error.

Penalty should be imposed only where there is an intention to evade payment of duty by the assessee. In cases

illustrated above where the records are available to the Department for scrutiny and audit at any time, an assessee

should not be asked to pay penalty - more so in cases where duty is deposited suo-moto, even if such deposit is

made pursuant to the error being brought to the notice of the assessee during the course of audit or investigation or

verification.

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Service Tax Law should be amended to do away with penal provisions when complete details are available from the

records of the assessee. Similar amendment should be made in Central Excise Act.

CENTRAL EXCISE

5.2.1. Reduction of Excise Duty on Soy Processed Products

Excise Duty on certain Soy Processed Products was rationalized during Budget 2012-13, however, many Value Added

Products are still under the umbrella of Excise Duty varying between 4 to 8%. According to the recommendations of

WHO, 14 gm of Soy Protein per day (565 Kcal) can meet nutrition needs of our citizens thereby reducing the

expenses on Health Care by minimum Rs.20,000 crores per annum. This will improve the health and physical

development of our citizens.

It is suggested that Excise Duty on the entire range of Soy Processed Food Products be exempted.

5.2.2. Excise duty on carton boxes, notebook etc.

Carton boxes, register, notebooks, labels etc. are classified under heading 4819, 4820 and 4821 of the Central Excise

tariff and are leviable to duty at the rate of 12%. The basic raw materials required for production of these items are

paper and paper board which attract an excise duty of 6% only. Similarly, carton boxes of corrugated paper or paper

board of heading 4819 10 attract a duty of 6%. It is accordingly requested that the differential duty structure on

various types of boxes may be done away with and central excise duty on products of tariff items 4819, 4820 and

4821 should be reduced to 6%.

5.2.3. Excise duty on waste and scrap of paper and paper board

Excise duty on recovered (waste and scrap) paper or paper board is levied at the rate of 12% under heading 4707.

Waste paper and paper scrap are, however, charged a duty at the rate of 6% in terms of Notification No.12/2012-CE

dated 17-3-2012 (sl. No.160). Further, recovered (waste and scrap) paper or paper board arising in the course of

printing of educational text books is wholly exempted from excise duty in terms of the entry 161 of the table in the

said Notification. It may be noted that it is impossible in the print industry to segregate recovered waste and scrap of

paper and paper board since in the recovery process these wastes get mixed up. It is suggested that the goods

covered by sl.no. 160 and 161 of the said table should be subjected to a uniform rate of duty of 6%.

5.2.4. Excise Duty on Sugar Confectionery containing Cocoa

The sugar confectionery space is not a level playing field. While excise duty on sugar confectionery is @ 6%, if the

same sugar confectionery contains traces of cocoa, the excise duty doubles to 12%. The presence of cocoa merely

adds to the flavour like coffee or lime or mint and does not materially change the nature of product. Sugar

confectionary is defined by rigid price points of Rs.1 or Rs.2 and is consumed by a price sensitive segment of the

population. Higher excise duty merely because of the presence of cocoa is an unnecessary burden on the common

man. The lower rate of excise duty of 6% should be made applicable to all sugar confectionery whether or not it

contains cocoa.

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5.2.5. Value of exemption limit for Small Scale Industries (SSI) sector

Units in the small scale sector are eligible for exemption from excise duties provided the value of clearances effected

by them in a financial year does not exceed Rs.1.5 crores (Notification No.8/2003-CE dated 01-03-2003). Costs of raw

materials and input services have increased substantially since 1-4-2007 when the exemption limit was enhanced

from Rs. 1 crores to Rs.1.5 crores. FICCI has received several representations from its constituent members

requesting for recommending an increase in the exemption limit of Rs.1.5 crores having regard to the increase in the

costs of raw materials and input services.

FICCI would suggest that the Government take a decision in the matter in the context of the impending introduction

of GST and the timeframe for such reform of the indirect tax administration.

5.2.6. Return of Specified Goods covered by notification No. 1/2011-CE for Reprocessing, Rework

In the Union Budget 2011-12, vide Notification No. 1/2011 -C.E. dated 01.03.2011, Central Excise duty was levied for

the first time on specified goods (which were earlier exempted from duty) with a condition that no cenvat credit of

duty on inputs or input services has been taken for such goods. As there is no cenvat credit available the Government

imposed a nominal levy of 1% duty (Assessment under Section 4 or 4A of the Central Excise Tariff). The above rate of

1% got revised to 2% in the Union Budget 2012-13 and the condition of non availment of cenvat on inputs or input

services continued.

It is to point out that there are situations whereby the duty paid stocks need to come back to factory for quality

checking or re-processing or re-work (for example coffee/tea pre-mixes, soup powders, tooth powder, medicaments

etc. where reprocessing amounts to manufacture). The same goods will be cleared after necessary re-work or re-

processing from the same factory. As per the Notification referred above, no credit could be availed when the goods

are returned to factory, in the event of payment of nominal levy of 1 or 2 % at the time of first removal from the

factory. However after quality checking or re-processing or re-work, if the same goods are cleared again, duty is

required to be paid once again (second time) prior to clearance. Therefore the goods would suffer duty twice as

there is no credit mechanism available in the aforesaid instance. The intent of the legislature is very clear that no

goods would suffer duty twice. But as per the current notification, conditions have not been prescribed and there is

no mechanism to avail credit on 2% dutiable goods which need to undergo some process as explained supra.

It is requested that an amendment may be made in the notification to permit availment of cenvat credit in such

situations.

5.2.7. Benefits under Excise Act & Rules for Supplies to SEZ

Central Excise Rules applicable to physical exports from Domestic Tariff Area (DTA) Units have been made applicable

to Special Economic Zone (SEZ) supplies through SEZ Rules. However, the Excise Department is denying such benefits

on the grounds that there are no specific provisions in the Central Excise Act or Rules to extend such benefits to SEZ

supplies and the provisions of SEZ Act or Rules do not override the provisions of Central Excise Rules. Consequently,

the Domestic Tariff Area (DTA) units are being denied the benefit of Refund under Rule 5 of the CENVAT Rules which

are applicable to physical exports. The circulars issued by the Central Board of Excise and Customs are not being

followed by the Commissioners. The Department has even filed appeal before the Customs Excise and Service Tax

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Appellate Tribunal (CESTAT) on the issue, which has been allowed but the decision has been stayed by the Mumbai

High Court.

It is proposed that the Government should make its stand clear on the subject so as to enable the suppliers to SEZ to

firm up their business plan. If all the benefits under the Central Excise Act applicable to physical exports were

intended to be extended to SEZ supplies, the same may be implemented through retrospective amendment of the

Central Excise Rules to put an end to the litigation on the subject resulting in hardship to the DTA suppliers.

5.2.8. Exemption from excise duty on interplant transfers

When goods are produced for further manufacture within the same factory the intermediate goods are exempted

and duty is collected after the final stage of manufacture. However, if the intermediate goods are cleared on stock

transfer from one factory to another of the same manufacturer, duty is payable on value calculated using the cost

construction method. This approach is based on the premise that cenvat credit would be available at the receiving

end and the value chain will remain revenue neutral.

However, there are instances where cenvat credit builds up for a variety of reasons such as large export volumes of

the final product, credit accumulated in new factory, inverted duty structure etc. This creates a huge working capital

burden on the manufacturers. In such circumstances, the manufacturer should be allowed to clear the intermediate

product from one unit to another without payment of duty but with adequate controls to ensure the actual receipt

and consumption at the receiving end. Such a procedure was available under the erstwhile Chapter X where the

intermediate goods could move in-bond without payment of duty. Currently, such exemption for intermediate

products has been extended to goods such as parts of power tillers (Not 16/2011 CE dt. 1.3.2011) & parts of mobile

handsets (sl. No. 31 of Notification No. 6/2006-CE, dt. 1.3.2006), subject to following the procedure of the Central

Excise [Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods] Rules, 2001.

It is accordingly suggested that suitable exemption from excise duty, to intermediate products transferred to any

other factory of the same manufacturer for use in the manufacture of dutiable final products may please be issued,

subject to following the procedure of the Central Excise [Removal of Goods at Concessional Rate of Duty for

Manufacture of Excisable Goods] Rules, 2001.

Also, provisions may be made in the Cenvat Credit Rules to grant permission to transfer credit from one unit to

another of the same manufacturer, so long as the units are manufacturing the intermediate product and final

product in the same product line.

5.2.9. Excise duty exemption for distilled water used for industrial purpose

With a view to conserve precious ground water, the Central Government has exempted water treatment plants and

pipes used for treating water (including de-salination using sea water) from excise and customs duty. The only

condition is that the processed water should be consumed for agricultural or industrial purpose. However, distilled

water itself (classifiable under CETH 28530010) obtained through this process and used for industrial purpose is

apparently not exempt. This appears to be an unintended omission. When excise and customs duty exemptions are

granted to the desalination plant which produces distilled water, the water produced would qualify for exemption.

Such distilled water is used in a variety of industrial applications, mainly in generating electricity. Having extended

the excise and customs duty exemption for the capital goods, equipments and pipes, to produce desalinated water it

would be appropriate that the distilled water used for industrial purpose is also exempted from duty.

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It is accordingly requested that desalinated / distilled water falling under CETH 28530010 when supplied for

industrial use may be exempted from excise duty.

5.2.10. Grant of Deemed Export Benefit for supply of HR Plates to Ship Building Units

Roughly, 50% of total import of Hot Rolled Steel Plates is by Ship Building Units (SBUs). Import of Hot Rolled steel

plates by SBUs is exempt from all excise duties. Supply of these plates by domestic manufacturers attracts excise duty

of 12%. Ship Building Activity is not covered in CENVAT chain resulting in the excise duty paid by the users on

indigenous steel as an additional cost. Ship Building Units, therefore, prefer importing the Steel Plates putting

domestic manufacturers at a disadvantage.

Hot rolled steel plates should be exempted from the levy of excise duty when supplied to ship building units;

alternatively, deemed export benefits should be extended for supply of Hot Rolled Steel Plates to Ship Building Units

in order to provide a level playing ground to the domestic manufacturers.

5.2.11. Deemed Export Status for supplies to Defence Projects

Ministry of Defence is making sincere efforts for ensuring the progressive evolution of DPP but Indian (Private Sector)

Industry has been facing regressive and differential treatment in terms of taxes and duties vis-à-vis Foreign OEMs as

well as DPSUs/OFBs. The existing tax/ duty treatment places the private industry players at a significant disadvantage

thereby restricting their ability to leverage the capabilities and capacities built up for defence manufacturing. If given

the opportunity, the industry can make major contribution and effort in strengthening the national defence industrial

base and positively contribute in the national endeavour to largely indigenize the defence & aerospace sector. This

can reverse the decades old import - indigenous ratio of 70:30 in favour of Indian Industry through significant 'import

substitution' as well as create System Integration capabilities within the Indian Defence Industry.

At present Deemed Export Status is available to various projects with an intention to encourage Indian Industry

manufacture the required equipment and to compete with Foreign Supplier in terms of cost. It also saves valuable

foreign exchange of the country and supports the growth of Indian Industry. The Defence Projects currently being

not treated as Deemed Export Projects are deprived of the benefits available to the later projects.

Benefits of Deemed Export project should be extended to all the Defense projects which are awarded through

International Competitive Bidding. Similar benefit should be extended to Indian offset partners as well as to its sub-

contractor.

5.2.12. Withdrawal of Excise Duty on Fly Ash

Excise duty is levied on fly ash at the concessional rate of 2%, vide Notification No. 1/2011 - CE & 2/2011 - CE. Fly ash

is a waste product generated on burning of coal in the boiler of power plant.

It has been held by the Hon'ble Supreme Court in case of Union of India Vs. Ahmadabad Electricity Co. Ltd., in 2003

(158) ELT 3 (SC) that burning of coal as fuel to produce steam cannot amount to manufacture and that ash is a by-

product and not manufactured product.

There is no change in the process generation of fly ash viz. a waste generated on burning coal in the boilers,

therefore the above judgment still holds good & hence fly ash generation should not be treated as manufacture. No

excise duty should be levied on fly ash.

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5.2.13. Excise Duty rates on cold chain equipment

In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural

wastage and enhancing shelf-life, it is recommended that excise duty rates on cold chain equipment and their parts

be pegged at 5% or below.

5.2.14. Excise duty exemption for capital goods used for Research & Development

Excise duty on inputs / capital goods for Research & Development adds to the R&D cost. Presently, Cenvat credit on

inputs / capital goods is available only if they are used in the factory. However, many companies have R&D centres

independent of the factory of manufacture and thus Cenvat credit on such capital goods is not allowed. Thus this is

unfavourable to the companies who are carrying out R&D independent of factory of manufacture. It is suggested

that specific provisions may be inserted to exempt Excise Duty on capital goods required for R&D purpose.

Alternatively, Cenvat credit of capital good used for R&D purpose should be available irrespective of the location of

the R&D unit.

5.2.15. Exemption for Ice-creams

Ice cream is classifiable under 2105 00 of the Central Excise tariff and was exempt from excise duty till 28th February,

2011. Ice creams were subjected to central excise duty at the rate of 5% with effect from 1st March, 2011; a

concessional rate of duty of 1% was also prescribed subject to the condition of non-availment of cenvat credit on

inputs or input services. Ice creams are also covered under the small scale industry exemption scheme and goods

upto a value of Rs.1.5 crores in a financial year are exempt.

Ice cream industry is a highly fragmented one and majority of the players are small. At the same time, it is a highly

capital intensive industry. Maintenance of hygienic manufacturing environment requires additional capital cost. With

the rising cost of the capital, mounting inflation and stress on the customer's capacity to spend, the levy of excise

duty even at nominal rate puts tremendous financial burden on the industry. It is requested that the levy of excise

duty on ice cream be withdrawn altogether.

5.2.16. Exemption for goods supplied against International Competitive bidding

Serial no. 336 of Notification no. 12/2012-CE dated 17-03-2012 exempts “all goods supplied against International

competitive bidding” from Central Excise duty subject to the Condition no. 41 which states “if the goods are

exempted from duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and

the additional duty leviable under Section 3 of the said Customs Tariff Act when imported into India”. The exemption

under Customs is conditional upon complying with certain procedural / documentation requirements.

While such condition of complying customs notification had been deleted for Ultra Mega & Mega Power Projects,

such adversity still persists under the condition no. 41 attached to Sr. No. 336 of notification no. 12/2012-CE.

It causes undue hardship to the domestic manufacturers particularly those who are supplying goods for petroleum

operations, as they are forced by the field officers to comply with the condition, attached to the Customs Exemption

notification no. Sr. No. 356 & 358 of 12/2012-Cus. dated 17-03-2012, i.e. to obtain a certificate from Directorate

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General Of Hydrocarbon (DGH) certifying that such goods are required for Petroleum Exploration, for the purpose of

availing excise exemption. However, DGH refuses to give such certificate to domestic manufacturers.

It is suggested to amend the condition no. 41 to Serial No. 336 of the Notification 12/2012-CE dated 17-03-2012, in a

way that certificate from project authority (i.e. Customer) be enough for availing the excise exemption.

5.2.17. Excise Duty rates on Computers

Currently India has one of the highest taxation rates in the world on computers. It is requested that Excise duty rates

on computers and parts thereof may be reduced

5.2.18. Excise duty exemption for Confectionery

Organized Confectionery Industry is the second largest category in the processed food industry with a turnover of

nearly Rs. 1,600 crores, providing significant sustainable rural / semi urban employment. Confectionery is primarily

targeted towards children. Confectionery is basically made out of Sugar, Milk and Milk Products, Glucose etc which

are agricultural produce.

In order to provide some relief to industry, it is recommended that the central excise duty on confectionary be

realigned to 2% - the rate of excise duty imposed on most other food products like Soya Milk Drinks, Preserved Fruits

and Vegetables, Milk Based Beverages, Mudi (Puffed Rice), Ice-cream, Ready to Eat Packaged Food, Mineral Water,

Dried Soups and Broths, Pasta, Fruit Juice, Potato Chips and so on.

5.2.19. Providing retrospective effect to the exemption from Excise Duty on Captively Consumed Intermediate Product

At present, Biscuits up to MRP of Rs. 100 per Kg are exempt from payment of excise duty. During the course of

manufacture of biscuits, intermediate products like invert (sugar) syrup/cream are produced and consumed almost

immediately within the manufacturing process. Whilst the Government has exempted such intermediate goods from

excise duty with effect from September 2011 the Department, however, continues to raise duty demands for the

past period - disregarding the submission of the manufacturers to the effect that these intermediate products don't

have any shelf life and are consumed captively, almost immediately, within the manufacturing process.

It is therefore requested that in order to avoid vexatious litigation in the matter the exemption from excise duty be

given retrospective effect from April 2007.

5.2.20. Clean Energy Cess

In the Union Budget 2010 the Hon'ble Finance Minister imposed levy of a Clean Energy Cess on purchase of coal. No

doubt, the Cess was introduced on the principle of “polluter pays”. Whilst this principle may be justifiable for

industries causing environmental pollution, it must be kept in mind that within the industry there are players who

have invested considerable sums of money on state of the art technology like elemental chlorine free paper

manufacture, ozone bleaching processes, waste water management, solid waste recycling, usage of energy from

renewable sources etc. to ensure environment friendly manufacture.

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In view of the above, levy of a clean energy cess on coal - which impacts adversely on the cost competitiveness of

manufacturers - should be restricted to only those manufacturers who do not adopt clean technologies.

Manufacturers who have already adopted internationally recognized clean technologies, at considerable investment,

should be incentivized and encouraged by way of being exempted from levy of any clean energy cess.

5.2.21. Exemption for units in North Eastern States

Notification No. 20/2007 -CE dated 25.04.2007 provides for exemption from duty of excise as is equivalent to the

amount of duty paid other than by utilization of Cenvat Credit. The aforesaid notification was brought in as to give

effect to the Industrial Policy Resolution of Central Government namely North East Industrial and Investment

Promotion Policy 2007 (NEIIPP, 07). This policy provision was in continuation of 100% excise duty exemption on

finished products in North Eastern Region as was available under NEIP, 1997.

The Notification was amended in 2008 because it felt that the Notification was being misused by certain

manufacturers. To obviate this problem various criteria were introduced in the amending notifications such as value

addition, rate of value addition fixed on an adhoc basis, procedure for fixation of special rate for refund of excess of

duty over value addition rate as notified and amendments to the value addition rate for few industries where the

Department considered that notified rate and special rate mechanism did not result in total refund. Most of the

industries whose rates were not revised are also facing difficulties in getting total refund in view the aforesaid

criteria. It is submitted that these amendments instead of improving the effectiveness of the refund mechanism

resulted in various abnormalities which defeated the very purpose for which the notification was issued. In the guise

of streamlining the procedure of refund, the net refund admissible to the manufacturer was actually curtailed and

they did not receive the full benefit as was intended by the original notification and such amending notification also

resulted in defeating partially the original North East Industrial and Investment Promotion Policy.

To alleviate the difficulties faced by the manufacturers in the North Eastern Region in getting full refund of the duty

paid otherwise than by cenvat credit and to remove the difficulties faced by the genuine manufacturers in

implementing the aforesaid criteria mentioned above, it is suggested that the Notification No. 20/2007 -CE dated

25.04.2007 be restored in its original form. If in the implementation of the notification certain problems arise they

could be suitably dealt with by the administrative authorities implementing notification and granting refunds. The

exclusions mentioned in the Policy denying the benefit to certain categories of manufacturers or certain processors

could be continued to achieve the objectives in the Memorandum.

CUSTOMS

5.3.1. Inverted duty structure for import of Copper & Brass strips/ Phosphorous Bronze Strips for Connectors and other applications

Instances of disparity caused due to inverted duty structure on the import of Copper & Brass Strips/ Phosphorous

Bronze Strips.

(a) Imports of finished Copper & Brass Strips/ Phosphorous Bronze Strips are exempted from import duty when

imported by connectors/terminal manufacturers in terms of exemption under notification No. 25/99 - Customs

dated 28-02-1999 (Serial no 90 & 112).

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The connector(s) is the terminal contact part made out of brass, phosphorous bronze, copper, which passes current

and joins two components. Maximum usage of this part is in the automobile sector as the terminal part of the wiring

harness system or in white good items, electrical panels and engines and several other applications.

During the last few years, the Indian non-ferrous industry has become strong with 5 established large manufacturers

and many other smaller manufactures. All the large manufactures are capable of producing strips and foils of copper,

brass as well as phosphorous bronze required for connector application with high precision and close tolerance as

required by this industry. Presently, these items are imported mainly from China at lower cost. This is adversely

affecting the competitiveness in the domestic as well as in export market segments. The raw material i.e. copper and

zinc attracts full rate of duty of 5% at the time of import. Various Indian manufacturers prefer imports over our

product because of difference of 5% on account of custom duty.

The preferential treatment given due to this duty exemption of 5% puts Indian industry at a disadvantage. It is

recommended that the duty exemption in the current market scenario should be removed.

(b) Various manufactures of copper and copper alloy are permitted to be imported duty free or at concessional rates

from Nepal, Bangladesh, Thailand etc. in terms of various exemptions given to imports from these countries.

Consequently, the manufacturers of copper, copper alloys, strips and foils become uncompetitive in view of the

fact that the imported finished products are either duty free or charged to a concessional import duty.

It is recommended that the import of basic raw material in the form of Copper Ingots (Tariff Head 74031900), Copper

Cathode (Tariff Head 74031100), Copper Scrap (Tariff Head 74040019), Brass Scrap (Tariff Head 74040022), Tin (Tariff

Head 80011090) and Zinc (Tariff Head 79011100) to be used for the manufacturing of various Copper and Copper

based alloys strips and foils may be allowed at zero percent duty. This would enable Indian non ferrous

manufacturers to be at par and would provide parity with those Companies who are availing benefits under the

above captioned exemption notifications.

5.3.2. Exemption from Special Additional Duty (SAD) for goods imported for sale in India

Goods when imported into India for subsequent sale are exempted from the levy of Additional Duty of Customs

under Section 3(5) of the Custom Tariff Act in terms of notification no.102/2007-Customs dated 14-09-2007. One of

the conditions for the exemption is that the exemption shall be available by following the procedure prescribed for

refunds. The current procedure is cumbersome and leaves lot of discretion to the authorities in granting of refund.

Since the intent of the Government is to grant an exemption, it is requested that the exemption be given upfront at

the time of import itself instead of by way of a refund. The importer may be asked to declare at the time of import

that:

• Goods will be sold within a specified period

• The importer undertakes to pay SAD on goods which remain unsold for the specified period

Given that Customs is gradually moving to 'self-assessment' and post import audit regime, verification of

declarations in selected cases may not be an issue.

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5.3.3. Level Playing Field for Domestic Capital Goods Industry

The Indian Capital Goods Industry (Private and Public Sectors) has, over the past 6 decades, built expensive and

sophisticated manufacturing facilities and has also acquired “State-of-the-art" technology for supplying complete

range of equipments required by Core Sectors viz. Fertilizer, Power, Oil & Gas, Gas Process, Refinery, Coal Mining, etc.

The Indian industry has also fully geared up to cater to the requirements of Defence, Nuclear power, Aerospace and

other strategic sectors.

Government has however given customs duty exemptions to imported goods required for certain industries and has

reduced the custom duty to zero or 5%. This acts against the interests of the domestic capital goods industry. In some

cases Government has no doubt extended the deemed export status to the supplies affected by the domestic

manufacturers.

However, due to the incidence of local taxes & duties, the domestic manufacturers face the cost disadvantages to the

extent of 12% to 26%, on account of sales tax, entry tax / octroi, higher cost of finance, inadequate infrastructure,

etc.

To encourage domestic capital goods manufacturing and to offset a part of the cost disadvantages faced by the

domestic Capital Goods manufacturers due to incidence of higher local taxes & duties, it is suggested that the full

exemption to such goods from the levy of customs duties may be reviewed to provide at least minimal protection to

the domestic industry. Further, full deemed export benefits be accorded to the domestic manufacturers.

This will inter-alia help the domestic industry to compete with the foreign companies in India and create reference

from Indian projects, which can be used for qualifying and securing business in overseas markets. It would also

increase competition and ultimately reduce the cost of the project.

5.3.4. Inverted Duty Structure under ASEAN-India FTA (AIFTA) for Soap and Raw Materials of Soap

Soap import from ASEAN countries comprise more than 20% of total soap imports in to India. However, import of

raw materials for soap such as palm fatty acids, crude palm stearin, lauric acid and so on from ASEAN countries is

much higher and accounts for about 90% of import of these raw materials.

In terms of the commitments made by India under AIFTA the reduction in rates of Basic Customs Duty for soap and

raw materials of soap has resulted in an inverted duty structure whereby the rate of duty on the value-added

finished product, i.e., soap, is lower than the rate of duty on its raw materials. In fact, in about two years time the

rate of customs duty on ASEAN soap imports will become “Nil” whilst the imports of most raw materials of soap from

ASEAN countries will continue to suffer customs duty at, more or less, the prevailing rates. This is apparent from the

data given in the table on next page.

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214

In such a scenario it would be far more cost efficient to import soap from ASEAN countries for resale in India rather

than undertaking value-addition activity by way of import of raw materials and soap manufacture in the country. As a

consequence, it is apprehended that the significant investment made by industry in building up capacities in this

respect - particularly in economically backward regions where Government has provided tax incentives to spur

development - will be at an economic disadvantage.

Adoption of either of the following recommendations will also help safeguard the investments in capacities -

particularly in backward regions, thereby enabling actualization of the Government's objective of economic

development of such regions.

In order to protect employment and value-addition activity in this sector it is recommended that the Government

considers:

i. Moving Toilet Soaps (HS Code 34011190) from the Normal Track to the Exclusion List, i.e., excluding soap from

preferential duty treatment in AIFTA.

ii. Alternately, if it is not possible to exclude soap from the Normal Track, including the raw materials of soap in the

Normal Track in AIFTA such that the rates of customs duty on these raw materials are aligned to that applicable

on soap.

BASIC CUSTOMS DUTY

Goods HS Tariff ID Pre AIFTA

2010 2011 2012 2013 2014 2015 2016

Soap

(Normal Track)1 34011190 10.0% 7.5% 5.0% 5.0% 2.5% 0% 0% 0%

Raw Materials for Soap

Palm Fatty Acid Distillate (Sensitive Track)2

38231900 15.0% 14.0% 13.0% 12.0% 11.0%

10.0% 8.0% 5.0%

Crude Palm Stearin (Special Product)3

15119090 10.0% 10.0% 10.0% 10.0% 10.0%

10.0% 10.0% 10.0%

Crude Palm Kernel Oil

(Exclusion List)4

15132110 12.5% 12.5% 12.5% 12.5% 12.5%

12.5% 12.5% 12.5%

Lauric Acid

(Exclusion List)

29159090 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%

2 Normal Track : Basic Customs Duty Rate to reduce to 0% by December 2013.3 Sensitive Track : Customs Duty Rate to reduce to 10% by 2014 and 5% between 2016 and 2018 4 Special Product : Reduction in rate of Basic Customs Duty Rate at a rate slower than reduction in other tracks. 5 Exclusion List : Excluded from any preferential duty treatment.


5.3.5. Oleo Chemicals Industry

In the context of Oleo Chemicals industry, it is suggested that:-

(i) fatty alcohols manufactured by export oriented units in India may be permitted to clear in the domestic tariff

area at reduced rates of duties so that such units can survive and compete with import from ASEAN countries.

(ii) steps may be taken to eliminate inversion in import duty on crude palm kernel oil (CPKO) falling under heading

1513 21 10 (100%; 12.5%) and other vegetable oils for industrial applications, fatty alcohols of heading 3823 70

(7.5%), soap noodles of heading 3401 20 (5%) and surfactants of heading 3402 00 (5%) so that the industry can

compete with imports from ASEAN countries.

(iii) inversion in import duty on fatty alcohols based surfactants (5%) against fatty alcohols as feedstocks (7.5%) to

make the domestic industry to compete with imports.

(iv) import duty inversion may be removed between crude glycerin (12.5%) and refined glycerin (6% ASEAN and 7.5%

general)

5.3.6. Cocoa Beans

Cocoa beans currently attract a very high tariff rate of basic Customs duty @30% (effective rate 36.5%) in an effort to

protect the domestic agricultural produce. The demand in India for cocoa however far outstrips domestically grown

cocoa beans and Industry is forced to import cocoa beans and/or intermediate cocoa products like cocoa butter,

cocoa liquor & cocoa powder to meet the requirement in India. The average demand for cocoa beans and

intermediate cocoa products over the past 4 years has been growing so significantly that domestically grown cocoa

beans can meet less than half of the annual demand. Consequently, import of cocoa beans and intermediate cocoa

products has been on the rise. Till such time as the domestic production of cocoa beans does not match the growing

demand for cocoa and intermediate cocoa products, relief from the prohibitively high customs duty of cocoa beans

and intermediate cocoa products is necessary in the interest of consumers and industry.

5.3.7. Customs duty on import of bamboo sticks for manufacture of Agarbatti

As per information provided by South Asia Bamboo Foundation, “there are about 10,000 agarbatti manufacturing

units in the country including tiny, small and medium enterprises, besides about 200 well-established ones. Nearly

12 lakh people are directly or indirectly employed by the industry. Of the total agarbatti market of Rs 1,100 crores,

the organised market contributes about 40%. The states of North East India used to fulfil 90% of raw sticks demand

in India. The sticks are produced at the household and community level in many NE states”.

In the 2011 budget, customs duty on import of bamboo sticks for Agarbatti was reduced from 30% to 10%

(Notification No. 12/2012 - Cus dated 17-3-2012, S.No.49). This has resulted in making the bamboo stick

manufacturers of North East India uncompetitive compared to cheap imports from Vietnam and China, as the

manufacturers from the NE region have to also contend with high transportation cost.

A revision in the customs duty to pre 2011 status of 30% would help the bamboo industry in the North East.

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5.3.8. Custom Duty relief for fire and security systems

Most essential security and life safety products are not made in India. Countries like China and Korea have become

large feeders of electronically based security products to the world. They have adopted mass production techniques

and have been manufacturing these products for over 15 years. In view of the R&D efforts put in by them and

deployment of robotic tools, their products are of top quality and cost-wise competitive. It is not currently feasible to

indigenize the manufacture of these products.

The following essential security and safety products attract an import duty of approximately 26.85%:-

CCTC Camera Systems

Access Control and Biometric Readers

Intrusion Detection System

Fire Alarm and Suppression Systems

These items are essential for maintaining surveillance at all places like markets, hotels, cinema halls and other public

places. Biometric systems are required for controlling access into restricted areas similarly intrusion detection

systems detect breach in perimeters as also buildings. Fire alarm and suppression systems comprise of smoke and

heat detectors and associated control systems.

In view of their essential usage, it is recommended that the customs duties on these products should be fully

exempted.

5.3.9. Reduction of import duties on Global Positioning System (GPS) / Global Navigation Satellite System (GNSS) technology

Global Positioning System (GPS)/Global Navigation Satellite System (GNSS) is a technology which helps in

determining position in a global co-ordinate frame to bring all the positioning data to a common reference. This aids

in building a solid positioning foundation to be used in Geographic Information Systems (GIS).

The commercial uses of GPS/GNSS are diverse with applications across industry such as Cadastral, Infrastructure

development, Utility, Forestry, Mining, Agriculture, Transportation and Logistics. Some applications are simple, such

as determining a position, whereas others are complex blend of GPS/GNSS with communications and other

technologies to offer a comprehensive solution. GPS/GNSS as a technology is fast becoming an indispensible tool in

infrastructure development, natural resource management, transparent governance etc. Productivity enhancement

resulting from the adoption of GPS/GNSS technology as a professional tool can yield tremendous benefits to the user

community as well as the nation.

GPS/GNSS receivers are becoming a key part of our lives whether in a phone, a watch or in a car. However, there are

hindrances in the import of this technology in India. Under Chapter 8526 GPS/GNSS attracts a high duty of over 27%

which acts as a deterrent in use of the technology. Cell phones with GPS do not attract any customs duty. Since

GPS/GNSS would yield returns through productivity gains, savings and timely execution of projects especially

infrastructure development such as Roads, Rail, Cadastral, Agriculture, Mining, and Environment, it is important to

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promote this technology in India. Since there are no indigenous manufacturers of in India, it is important to

significantly reduce import duties and in the case of infrastructure projects remove import duties on GPS/GNSS

receivers as part of national GIS initiative.

5.3.10. Import duty on Gold

Following the increase in the duty on gold as a part of the last budget there have been reports of increased

smuggling of the gold into the country. It is recommended that import duty on gold may be reduced from the current

levels of about 4% to 1%.

5.3.11. Feedstock for Chemical Industry

The customs duty on feedstocks like Ammonia (NH3) (for making urea fertilizer), Methanol and Ethanol (for

manufacturing organic chemicals like dyes, pesticides etc.) should be reduced to zero. Specially in NH3 and Methanol

the country is import dependent due to domestic production not able to meet the demand. But the duty impact

makes the feedstock costly for industry and hence impacts growth and competitiveness of value added products out

of these two feedstocks, thus depriving nation of export revenue as well as higher indirect taxes out of value added

products.

5.3.12. Rationalization of rates of custom duty for imports of brass rods from ASEAN countries and Brass Scrap

Presently the rate of Custom duty for import of Brass Scrap is 5% whereas the custom duty for import of rods from

ASEAN countries is 3%.

Thus, there is difference in rates of custom duty in Brass Scrap and Rods imported from ASEAN countries which

affects Indian manufacturers producing rods and exporting to different countries. Rates of custom duty may be

rationalized so as to maintain equity.

5.3.13. Valuation of Catalysts made from precious metals for levy of Customs duty

Refineries require certain critical catalysts made from Platinum, a precious metal. Normally, the catalyst metal is

imported from the vendor under a lease agreement which requires the spent catalyst to be returned after use. After

the catalyst is used in the refinery and its useful life is over, the Platinum is returned through London Metal Exchange

(physical export). The value of such catalysts is very high mainly due to the Platinum contained therein. Also, the

supplier is paid only to the extent of the lease and not the full value of the catalyst (excluding the Platinum value).

However, at the time of import, the customs duty is assessed on the entire value of catalyst including platinum even

though the transaction value is limited to the lease arrangement only. The additional value of the platinum on which

customs duty is paid is often 400% to 450% of the lease charges. This seems unfair and needs to be rectified.

It is requested that a suitable Notification may be issued to exempt the duty on the portion of value of the precious

metal exported as spent catalyst after use. Usually this would be around 50% of the value of the catalyst imported.

Suitable safeguards through Undertaking/Bond maybe furnished by the refinery till the spent catalyst is exported.

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5.3.14. Reduction in Environment Cess on Coal

Coal Cess of Rs 50 per ton of coal produced or imported in India was introduced in Union Budget 2010. This is akin to

a 'carbon tax', inspired by the 'polluter pays' principle, and is meant to fund the National Clean Energy Fund. This

cess has an adverse impact across sectors; its impact is even more severe for the Aluminium industry, which is a

power-intensive industry and depends on coal-fired electricity in the Indian context.

There is a case for reconsidering the rate of cess in view of the following:

a) Endowment of energy resources to India has been predominantly tilted towards coal, which accounts for 55% of

India's energy needs and 75% of power generation. Considering the future energy requirements of the growing

economy, coal would continue to be the dominant source of energy - and a critical driver of the country's

competitiveness. The effective users of coal or coal-generated electricity are spread across sectors and all strata

of population. Cess on coal has made generation of electricity costlier by about 5 paise per unit. Thus, taxation of

coal is not a progressive tax.

b) Coal consumption accounts for nearly 40% of the emissions of Greenhouse gases from India, as per World Bank

estimates for 2005. Rather than making this sector bear the entire burden of the Clean Energy Fund, it may be

worthwhile to broaden this tax and moderate the burden on coal users, especially since a large portion of the

burden of coal cess is being passed on to the entire population in the form of costlier electricity. There could be

more effective options to broaden the tax (such as air travel, high-end cars) in a manner that the more affluent

polluters are taxed more. This will be in line with the principle of 'progressive taxation'. Else, this levy will

become a parallel to the efforts at the global platforms to make the poor countries participate proportionately in

emissions reduction.

It is requested that the cess on coal should be reduced from Rs 50 per ton to Rs 10 per ton and government should

explore ways of distributing the burden of the Clean Energy Fund more equitably.

5.3.15. Additional Duty on Coal

The applicable CVD on all types of coal import other than steam coal is 6%. The CVD credit is not available in respect

of imports made by power industries and this will only add up to the cost of power generated. Hence it is requested

that the levy of 1% CVD on Imported coal (chapter sub heading 2701 19 20) for generation of electricity may be

withdrawn.

5.3.16. Customs duty on ships on coastal conversion

For more than 60 years ocean going ships were not subject to customs duty at the time of import or on subsequent

entry to Indian coastal waters. It was treated as a “conveyance” and hence not subject to import duty. It was dutiable

only at the time of ship-breaking. But from 17th March 2012 ocean going ships are subject to customs duty at the

time of each coastal conversion.

As per the International practice prevailing in many maritime nations ocean going ships in international trade are not

subjected to customs duty on each arrival for coastal operation. Ship should be subject to customs duty only at the

time of ship breaking.

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As ocean going ships are in international trade, these should be exempted from customs duty.

5.3.17. Exemption for goods supplied in connection with Offshore Oil Exploration

Serial No. 357 of the Customs Notification No. 12/2012-Cus dated 17-03-2012 exempts “Parts and raw material for

manufacture of goods supplied in connection with the purpose of offshore oil exploration or exploitation” from the

Customs Duty subject to the condition No. 42, which stipulates that the parts and raw materials are used in the

manufacture of goods in accordance with the provisions of section 65 of the Customs Act, 1962 (52 of 1962); and

that a certificate is produced in each case from the prescribed authority to the effect that the goods are required for

the purposes of off-shore oil exploration or exploitation.

Contrary to the intention of the Government for granting the said exemption, the field revenue officers are raising

the customs duty demand on the finished goods that are manufactured under Bond (u/s 65 of Customs Act) and

supplied to Offshore Petroleum Exploration Projects.

This contention of the field officers is unjustified, as there could not be a relief where exemption is granted from

customs duty on raw materials but duty be levied on the finished product.

It is suggested that a clarification may be issued that the finished goods cleared from the bonded premises for off-

shore oil exploration would not be leviable to any excise or customs duty. Alternatively, an appropriate exemption

may be provided to achieve the desired objective.

5.3.18. Oil exploration - condition of no foreign exchange remittance

Companies authorized to undertake oil exploration activities in India are eligible for Customs duty exemption of

specified equipment imported for this purpose under Notification No 12/2012 -Cus dated 17 March 2012 (Sr. No.358

and 359). The exemption is granted subject to specific conditions, one such condition requires furnishing of an

undertaking that no foreign exchange would be remitted from India for these imports (Condition No 43 and 44 of the

aforesaid Notification).

There are other end use based/ sector specific exemption, however, none of these exemptions carries similar

condition or requires similar compliance from the importer. Hence, above condition/ compliance requirement may

be removed as the compliance with the condition is resulting in avoidable complications/ issue to the Industry.

5.3.19. Baggage Allowance

Duty Free baggage allowance should be raised from Rs.35000 to Rs.50000 for incoming passengers. Allowance from

children should be raised from Rs.15000 to Rs.20000.

5.3.20. Other changes

1. Duty on consumables like titanium dioxide, anatase grade (heading 2823 00) and spin finish oil for treatment of

textiles (heading 3403 11 00) should be reduced from 10% and 7.5% respectively to 5%.

2. The rate of depreciation for calculation of Net Book Value for the purpose of calculating Customs duty on De-

bonding of 100% EOUs has not been revised for long time. The depreciation rates prescribed are very low and do

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not reflect the actual useful life of computer and networking equipment. Due to technological advancement and

increased obsolescence the Depreciation rates should be increased to reflect the current reality.

3. In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural

wastage and enhancing shelf-life, it is recommended that customs duty rates on cold chain equipment and their

parts be pegged at 5% or below.

4. Customs duty on inputs / capital goods for Research & Development adds to the R&D cost. It is suggested that

specific provisions may be inserted to exempt Customs Duty on capital goods required for R&D purpose.

5. Capital cost of investment in food processing plants remain prohibitive due to duties in excess of 20%. Import

duty may be reduced on machinery for food processing which will inter-alia benefit the agriculture sector.

CENVAT CREDIT SCHEME

5.4.1. Restrictions on Input Tax Credit

The implementation of the concept of Negative List of Services is obviously, a precursor to the introduction of GST in

the country. Whilst practically all activities done by one person for another for a consideration, with the exception of

activities restricted to transfer of title in goods, have been brought under the service tax net, the restrictions,

exceptions and limitations on availability of input tax credit still continue. This is clearly an anomaly and has led to an

inequitable situation whereby the taxation of services is universal based on the principles of GST whilst the credit for

the tax paid on input services continues to be restricted, as was the case during the regime of taxation of services

based on a Positive List.

In order to correct this inequity and to provide much needed relief to industry the service tax laws in general and,

specifically, the definition of input service should be amended to allow input tax credit without any restrictions - in

line with the principles of GST.

Accordingly, it is recommended that the definitions of input service should be reinstated to what it was prior to

amendments brought about by the Union Budget of 2011 such that service tax credit is also available for all input

services used in connection with activities related to business and additionally, there is no restriction, as prevails

currently, on availing credit of tax on services like (i) construction or execution of works contract of a building or a

civil structure (ii) services related to laying of foundation or making of structures for support of capital goods (iii)

services provided by way of renting of a motor vehicle / rent-a-cab services (iv) service of general insurance business

and so on.

5.4.2. Simplification of CENVAT Credit scheme - classification as inputs, capital goods and input services

The biggest stumbling block that the current CENVAT Credit regime faces in meeting its objectives is the abundance

of interpretative disputes vis-a-vis qualification as 'input', 'input service' and 'capital goods' and the restrictive

interpretations adopted in this regard.

Service tax and excise duty are value added taxes; that is to say, they are not taxes on the business and have to be

borne by the ultimate consumers. The ultimate objective of a value added tax should be to ensure a free flow of

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credit between various business entities and to ensure that the burden of paying tax is only on the end consumer of

the service / goods. The concept of 'value added tax' is elucidated in the International VAT / GST Guidelines dated

February, 2006 issued by the Organization for Economic Co-operation and Development (“OECD Guidelines”). The

OECD Guidelines clearly point out that complete deductibility of input taxes is the key feature of value added taxes.

The relevant portion is excerpted below:

“These features give value added taxes their main economic characteristic, that of neutrality. The full right to

deduction of input tax through the supply chain, with the exception of the final consumer, ensures the neutrality of

the tax, whatever the nature of the product, the structure of the distribution chain and the technical means used for

its delivery (stores, physical delivery, Internet).”

Thus, in order to ensure that the CENVAT Credit scheme meets its objectives it is important that unnecessary

qualifications/categorizations like 'input', 'input service' and 'capital goods' be done away with and all input side tax

costs forming part of a business entity's profit and loss account (and forming part of the price of the final output

good/service) should be allowed as credit.

5.4.3. Removal of restrictions in availment of cenvat credit on services related to civil construction or services which are mandatory for business

The definition of 'input service' places restrictions on availment of cenvat credit on certain services which inter-alia

include Services related to civil construction, Services related to motor vehicles i.e. cab services, Services which are

used for consumption of any employee

In so far as Civil construction related services are concerned many a times construction of a property is essential for

provision of output services i.e. without construction of property the manufacturer or service provider cannot

undertake its activities. For instance, without construction of factory building, the manufacturer cannot manufacture

the goods, without construction of office complex or shopping mall, the service provider would not be able to

provide renting services, without the construction of pipeline, a service provider cannot provide services of

transportation of goods through pipeline. Hence, in cases where the construction services form integral part of

provision of services, credit should not be denied to the manufacturer or service provider.

It is recommended that necessary amendment should be made in the definition of “input service” to allow credit

when the immovable property is used for manufacture of excisable goods or for provision of taxable services. The

credit should be denied only in cases where the immovable property is used for sale or for non-taxable purposes.

5.4.4. Credit on services for consumption of employees

It is understood that the intention of the Government is to deny credit on services which are not used for business

purposes and are more in the nature of personal consumption.

However, it should be noted that certain services on which credit has been denied are essential part of the business

of the assessee. For instance, for factories it is a statutory requirement to provide meal facilities to employee and

hence they have to procure catering services; for call centers etc it is mandatory to provide cab facilities to

employees.

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Therefore, it is recommended that while the credit can be denied on services primarily meant for personal

consumption of the employees like, beauty treatment, cosmetic and plastic surgery, membership of club, health and

fitness centre, travel benefits extended to employees while on leave and the like services, the credit on services like

outdoor catering, cab facilities, medical insurances etc should not be denied.

5.4.5. Credit reversal in case of removal of used capital goods from the factory

In terms of the amendments made in Rule 3(5A) of the Cenvat Credit Rules where the capital goods (on which credit

is availed) are removed after being used whether as capital goods or as scrap or waste, the cenvat credit is to be

reversed based on the specified percentage per quarter or transaction value, whichever is higher.

The reversal percentage per quarter prescribed under Cenvat Credit Rules is 2.5 percentage points for each quarter

of the year or a part thereof by straight line method (except in case of IT goods). This provision assumes that capital

goods (other than IT goods) have a shelf life of 10 years and if the goods are removed from the factory prior to

completion of 10 years then the credit would have to be reversed as per the abovementioned formula.

It may be pointed out that there are several capital goods (for e.g. refractory bricks, batteries, DG sets, AC, power

management system, etc) which have shelf life of 3 - 5 years due to industrial usage, technological obsolescence, etc.

Hence, if such goods are cleared after completion of their useful life, then no credit reversal should be required or if

the same goods are cleared as scrap, the credit should be required to be reversed only to the extent of duty payable

on the transaction value.

However, as per the amendment in Rule 3(5A), in case of removal of these goods prior to completion of 10 years,

only partial credit is allowed as per the formula prescribed under Rule 3(5A). This is causing undue administrative

cost for the companies in terms of keeping track of original invoice for 10 years, computation of depreciated CENVAT

Credit and co-relating the same with original purchase invoices. Some of the other difficulties faced in

implementation of this provision are:-

(a) Practically, one type of capital goods (mostly in nature of consumables) would be purchased by the assessee

under different invoices and such goods purchased under each of the invoice may in turn be used in different

machines. In such a case, it is impossible to correlate the capital goods with the invoice under which such goods

were received.

(b) For most of the capital goods, the unit of measurement (UoM) at the time of purchase of invoice and UoM at the

time of selling them as scrap differs. Also, practically, the scrap of number of capital goods is sold in a single lot.

Most parts are received in numbers as UOM, however their scrap e.g. MS scrap is sold by weight basis in MTs. In

such a case, it is impossible to correlate the scrapped material with the invoice under which it was purchased.

(c) Another situation can be where an item in the nature of capital goods is purchased and during the life of such an

item, some of its parts are worn out and are required to be replaced. In such a case, it would be impossible to

determine the amount of cenvat credit attributable to such part.

The aforesaid illustrations are few amongst various problems that can arise out of the present amendment. Further,

the provision requiring payment of duty on used capital goods based on transaction value is against the basic

principle of Cenvat Rules which require the assessee to reverse credit (fully or on depreciated basis). Similarly, the

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requirement of reversing cenvat credit on waste & scrap of capital goods based on depreciated value is incorrect

particularly when the capital goods are used to their fullest economic life. In the past also, the Cenvat Rules or

erstwhile Central Excise Rules, 1944 had similar provisions linking the payment to duty leviable. However, the same

were withdrawn considering the aforesaid problems.

It is suggested that the following options may be adopted by the Revenue to address the above problem:

• Credit should be reversed based on the transaction value at which such goods are sold, subject to maximum of

cenvat credit availed on such goods and checks to be put forth to safeguard the interest of the revenue as in case

of undervaluation of manufactured goods

• Allowing payment of CENVAT on certified book value of asset after considering depreciation or transaction value

whichever is higher, subject to the maximum amount of credit availed on such capital goods

It should be noted that the amount of credit reversal, in any of the options, should not be more than the amount of

cenvat credit availed by the assessee on such capital goods, since such goods are not manufactured by the assessee.

5.4.6. Eligibility to avail CENVAT credit on Capital Goods in the year of receipt

In terms of Rule 4(2) of the CENVAT Credit Rules, 2004 the credit of CENVAT in respect of capital goods has to be

distributed over two years. In the year in which the capital goods are received in the factory credit equivalent to 50%

of CENVAT can be availed. The balance 50% can be availed only during the next financial year. As a result of this a lot

of time and effort is expended in tracking each item of capital goods in terms of year of entry, amount of credit

available in each year, etc. Apart from the cost involved in such tracking, this also leads to errors and, consequently,

long-drawn disputes/litigation with the Department.

It is recommended that the CENVAT Credit Rules, 2004 be amended appropriately to enable credit of full CENVAT in

respect of capital goods in the year of receipt in to the factory. This would be in line with the provisions on CENVAT

credit in respect of inputs.

5.4.7. CENVAT Credit - distribution of credit on the basis of turnover

Rule 7 of the Cenvat Credit Rules contains the provisions relating to the manner and procedure for distributing the

Cenvat Credit of the tax paid on the input services. Rule 7(d) of the Credit Rules provides that credit of service tax

attributable to service used in more than one unit shall be distributed pro rata on the basis of the turnover during

the relevant period of the concerned unit to the sum total of the turnover of all the units to which the service relates

during the same period.

Explanation 3(a) to Rule 7 provides that the relevant period shall be the month previous to the month during which

the Cenvat Credit is distributed.

The above amendment has created hardship for all industries by creating many practical difficulties. Computation of

turnover on a month to month basis is extremely difficult for industries which have factories located in multi-

locations and such distribution can only be on provisional basis. It may have to be revised often as and when the

turnover figures are updated (and it may be more than once). Moreover in many cases the assessee may choose to

distribute the credit once in 2-3 months instead of each month.

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In the case of Large Taxpayer Units (LTUs) they have the flexibility of transferring excess cenvat credit from one unit

to another. The option of passing on the entire eligible input service tax credit to any one unit needs to be restored.

It is further requested that the Cenvat Rules may be amended to provide -

(a) The assessee has the option to distribute the credit as and when felt necessary and not each month, and

(b) for the purpose of distribution of CENVAT credit, an ISD may be permitted to follow the principles laid down

under Rule 6 (3A) of the CENVAT credit rules at the company level as a whole with provisional transfer to

individual sites on the basis of the previous year's ratio and making suitable adjustments by the 30th June of the

next financial year. In any case, the credit to be availed would not exceed the total tax already collected by the

Department.

5.4.8. Cascading of Service Tax for Brand Owners when Manufacture is by Job-Workers

As per the provisions of CENVAT Credit Rules, 2004 CENVAT credit on inputs and capital goods may be availed by a

manufacturer as long as such inputs / capital goods are physically received in his factory premises (or outside the

factory of the manufacturer of the final products for generation of electricity for captive use within the factory in

case of capital goods) under cover of a valid Central Excise Invoice and are used by him in or in relation to

manufacture.

However, under the same Rules, credit of service tax may be availed by an assessee on payment of the same to any

input service provider, as long as the input service is received in or in relation to manufacture. The credit is, thus,

only available on the basis of Invoice payments.

In the case of Brand Owners who employ job-workers exclusively for manufacture of goods, the benefit of CENVAT

credit on inputs is available since the job-worker can claim the CENVAT credit and offset his central excise liabilities

against the said credit. However, as far as service tax is concerned, since the payments for taxable input services are

generally effected by the Brand Owner instead of the job-worker, the benefit of service tax credit is not available.

This is due to the fact that the Brand Owner cannot avail the credit since he is not the manufacturer and the

manufacturer, i.e., the job-worker, cannot avail the credit since he does not pay for the taxable input service.

Consequently, under the Rules the Brand Owner employing job-workers exclusively is discriminated vis-à-vis Brand

Owners having their own manufacturing facilities, in so far as credit of service tax is concerned.

A typical example would be one where the principal manufacturer undertakes advertising and sales promotion,

market research; storage upto the place of removal for the goods manufactured by it as well as by its job workers

and discharges the service tax liability thereon.

The CENVAT Credit Rules also provide for an Input Service Distributor (ISD) mechanism whereby the credit of service

tax can be distributed by an office of the manufacturer or producer of final products or provider of output service,

which receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards purchase of input services.

Hence, by definition, the ISD cannot distribute credit of service tax to job-workers in case the input services are paid

for by the principal, i.e., the Brand Owner.

Accordingly, the provisions of the CENVAT Credit Rules, 2004 create an inequitable situation, in that, the benefit of

CENVAT credit pertaining to inputs and capital goods is available to the assessee irrespective of whether manufacture

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is in-house or at job worker premises whereas the benefit of service tax credit is available only if the manufacture is

at the assessee's own unit. This inequity dilutes the cost competitiveness of assessees who own brands and use job-

workers exclusively for manufacture of goods - more so since, the scope of the service tax has been expanded

following the introduction of 'negative list' based approach to Service Tax.

It is recommended that the CENVAT Credit Rules be amended to provide a mechanism that enables availment and

distribution of credit of service tax by brand owners to job-workers. This will ensure cost competitiveness of the

brand owners and protect the long-term interests of job-workers.

5.4.9. Cenvat Credit of capital goods used outside the factory

Presently the benefit of Cenvat Credit on capital goods installed outside the factory is restricted to only few of the

industries like Mining, construction, power generation unit etc. We wish to bring to your kind notice that the

industries dealing with milk products also require refrigeration, chilling, cooling machineries as well as other

necessary infrastructure for storing the milk at the point of collection i.e.; dairy farmers. The milk is collected from

dairy farmers in the village and needs to be stored under refrigeration /chilling conditions the same is perishable and

milk is shifted to the manufacturing site once or twice in a day after proper storage and chilling.

Since this activity of chilling is in direct relation to manufacturing activities of the manufacturer and has to take place

near to the point of collection of milk to maintain the quality of milk, it is requested that the cenvat credit on

machine used for chilling, cooling etc installed outside the factory by industries using milk as ingredients may be also

allowed.

5.4.10. Refund of service tax under Rule 5B of Cenvat Credit Rules

An output service provider providing services taxable under reverse charge mechanism (and therefore unable to

utilize credit for payment of tax on output services) is allowed to claim refund of unutilized credit on inputs or input

services, subject to fulfillment of the procedure and conditions prescribed.

It should be noted that the definition of 'output service' excludes the services on which whole of the service tax is

payable by the service recipient. The issue that arises here is if the services on which service tax is payable under

reverse charge do not qualify as output services, the input services used by the service provider to provide such

services would not qualify as input services in terms of Cenvat Credit Rules. Hence, the service provider providing

such services may not be able to claim refund of such input services under Rule 5B of the Cenvat Credit Rules.

It is understood that the intention of the Government in excluding such services from the definition of output

services is to provide that for the service recipient such services would not qualify as output services and hence he

cannot utilize cenvat credit to discharge the service tax liability under reverse charge. However, due to the language

used in definition of output services, such services would not even qualify as output services for the service provider,

which may lead to difficulties in claiming credit of input services used by the service provider to provide such

services.

It is recommended that necessary amendments may be made in the definition of “output service” or rule 5B to

clarify that services in respect of which the liability to pay service tax is entirely on the recipient would not qualify as

output services for service recipient but for service provider the services would qualify as output services.

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5.4.11. Refund of unutilized Cenvat Credit

It has been observed that there is accumulation of cenvat credit with the manufacturers on several counts. Some of

the manufacturers of excisable goods supply most of their production to other manufacturers of goods for export by

availing the exemption in terms of Notification No 43/2001 - Central Excise dated 26-06-2009. This leads to

accumulation of cenvat credit of the duties paid on the inputs. In many other cases the excise duty rate on the

finished articles is either exempt or is low enough not to fully exhaust the cenvat credit admissible to the

manufacturers on the components and the raw materials.

Similarly, in specific situations of import of goods like inverted duty structure, lower value addition, manufactured

goods subjected to MRP levy, the credit of duty mainly on account of SAD is not fully utilized and gets accumulated.

It is recommended that a provision may be made for refund of cenvat credit to such manufactures. In fact all excess

credits accruing for whatever reason should be allowed as refunds periodically like in the case of VAT

5.4.12. Credit of duty paid on conveyor belts / pipelines used for transporting material / intermediate goods

In certain industries such as the steel industry, the manufacturer who produces the steel from the basic iron ore is

compelled to set up separate units often in different geographical locations due to the proximity to mineral/energy

resources.

For instance, the iron ore will be available in abundance in one geographical area whereas the natural gas for the

steel manufacture may be available elsewhere. The units though situated in different locations, are nevertheless part

of an integrated manufacturing chain as one unit feeds the raw material for the other till the ultimate finished

products emerges and gets shipped to the customer.

To maximize efficiency and control transportation costs, the output from one unit is dispatched through non-

conventional means to the next unit say through conveyor belts (for short distances) or through pipelines (iron ore

slurry). The pipelines connect the units and integrate the manufacturing chain and become an integral part of the

manufacturing process. The current Cenvat credit rules seem to allow credit on capital goods only when used inside

the factory. However, an exception has been made for capital goods used for generation of electricity for captive use

even if the power equipment is used outside the factory (Rule 2 (a) (A) (1A) of the Cenvat Credit Rules, 2004).

Such conveyor belts and pipelines used for transferring the raw material from one unit to another for further

manufacture being an integral part of the manufacturing chain and an integral part of the manufacturing process,

they should be eligible for credit. This would be in line with the fundamental VAT principle which is to refund the

taxes paid on goods which are used in the production of goods or services.

An appropriate amendment may be made to enable credit on conveyor belts and pipelines which are connecting one

unit to another for transportation of materials and also inputs used for generating electricity for further

manufacture.

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5.4.13. Classification of Refractory Bricks as Inputs

Refractory Bricks are categorized as capital goods though they are more in the nature of consumables and have a

useful life of less than one year. It is requested that an amendment may be made in the Cenvat Credit Rules to

provide that for the purposes of the Rules, Refractory Bricks would be deemed to be categorized as Inputs and be

allowed cenvat credit accordingly.

5.4.14. Retrospective Application of Amendment of Rule 14 of Cenvat Credit Rules

In Finance Act 2012, the Government has amended Rule 14 of the Cenvat Credit Rule by replacing the word “or” with

“and” to clarify that liability to pay interest on wrongful credit will arise only in the cases where the assessee has

utilized such credits resulting in a financial loss to the exchequer and not otherwise. It is a welcome change and will

nullify the Supreme Court judgment in the matter of Ind Swift laboratory. However, the change has been made with

prospective effect and may still lead to unnecessary litigation for the past period.

It is requested that this amendment may be made effective retrospectively as this was always the intention of the

legislators and the proposed change has just clarified the same.

5.4.15. Credit Availment for Input by the Works Contractor

Service Tax (Determination of Value) Rules, 2006 provide that the provider of taxable service opting to pay service

tax under clause 2A (ii) [on deemed value of service] is not entitled to take CENVAT credit of duty on inputs, used in

or in relation to the said works contract, under the provisions of the CENVAT Credit Rules, 2004.

There is no restriction to take CENVAT credit of duty paid on capital goods and/or service tax paid on input services.

It is recommended that the laws be amended appropriately to allow CENVAT credit in respect of inputs to works

contractors who have opted to pay service tax on deemed value of service as provided under clause 2A (ii) of Service

Tax (Determination of Value) Rules, 2006.

5.4.16. Inputs cleared 'As Such'

Rule 3(5) of CENVAT Credit Rules, 2004 provides for payment of excise duty on inputs / capital goods equal to the

credit availed on them in case they are cleared from the factory 'as such'. In order to comply with this provision, the

manufacturer has to keep track of inputs, the rate of duty at the time of their entry into the factory and the value at

which they were purchased - until such time that the inputs are in stock. Since maintenance of such voluminous data

over long periods is prone to human error, very often there are objections by Departmental officers, particularly

Audit, and consequent litigation.

It is recommended that Central Excise statutes be amended to allow removal of inputs 'as such' on payment of excise

duty at the rate prevailing on the date of removal and the value for purpose of duty determination be the Weighted

Average Cost of the inputs as on that date (as per the assessees books of accounts).

5.4.17. CENVAT Credit on Service Tax paid on Input Services

Under Rule 6 of CENVAT Credit Rules, 2004 there is no restriction on availing CENVAT credit of excise duty paid on

capital goods that are used for manufacture of goods that are dutiable and goods that are exempt. For example, if

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any capital goods are used to manufacture any goods that are excisable and has any by-product that is exempt or if

any capital goods are used to manufacture exempt as well as dutiable goods alternately, there is no restriction on

availment of CENVAT credit.

However, under the same Rule 6 in case of input services that are used partly for providing taxable output services or

for manufacturing excisable goods and partly for providing exempt output services or manufacturing exempt goods,

in order to avail input tax credit the assessee has to satisfy any one of three stringent conditions that have been

prescribed.

It is recommended that the CENVAT Credit Rules 2004 be amended appropriately permitting the manufacturers and

service providers to avail entire CENVAT credit of service tax paid on all input services, if such services are partly used

for exempted goods and partly for dutiable final products or partly used for providing both taxable service as well as

exempted service.

5.4.18. CENVAT Credit on Service Tax paid on intermediate Goods

There are many instances where a manufacturer manufactures excisable goods in two or more stages across

different manufacturing units. In cases like these it is quite possible that intermediate goods are manufactured in one

or more stages and then the same are transferred to another manufacturing unit where the finished goods are

manufactured. In cases where such intermediate goods are exempt from central excise duty, the manufacturer is

denied CENVAT credit of input services used in the manufacturing process notwithstanding the fact that the

intermediate goods are used thereafter for manufacture of excisable goods.

It is recommended that in such cases the manufacturer is allowed to take credit of input taxes paid on services and

transfer the same, through the ISD mechanism to the unit where the dutiable finished goods are manufactured.

5.4.19. Other Issues

(a) Cenvat credit should be made available on steel and cement used in the buildings.

(b) Presently unutilized credit of SAD is permitted to be transferred at the end of each quarter to other registered

premises. It is requested that such a facility should be made applicable in respect of the entire unutilized cenvat

credit.

(c) Cenvat credit of service tax paid on GTA services for outbound transport should be allowed without any

condition like freight being part of assessable value or place of removal etc.

(d) Consumables such as coal, fuel, oil, diesel etc. are directly used in the process of manufacturing and hence

should be treated as inputs and credit of duty paid on these items should be permitted.

(e) As per present rules if the payment is not made to the service provider within three months from the date of

Invoice, credit taken, if any, needs to be reversed. The payment terms are decided by the service provider and

service receiver and hence there should not be restriction on availment of credit even if payment is made after

90 days. For inputs or capital goods credit there is no such restriction and hence in order to have an uniformity in

availing cenvat credit the restriction of payment should be removed.

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(f) An amendment has been made in Rule 2(l) substituting the words 'in relation to clearance of final products from

the place of removal' to 'clearance of final products, up to the place of removal', with effect from 01-04-2008.

The amendment providing for denial of the credit on and from 01-04-2008 is clearly against the principle of the

CENVAT credit scheme which is the avoidance of the cascading effect of taxes.

It is suggested that the amendment be withdrawn and the benefit of Credit on outward transportation be

extended.

(g) As per Rule 6 (8) of Cenvat Credit Rules, if the foreign exchange realization is not received within 6 months for

export of services, it will be treated as exempted service. Being so, Cenvat credit @ 6% of the value of service

needs to be reversed. As the terms of payment are decided by the parties and one year time limit for bringing

the foreign exchange is allowed as per FEMA, the rule 6(8) should be amended suitably to prescribe the time

allowed as per FEMA.

(h) The prices of SKO supplied to PDS and LPG supplied to domestic household customers continue to be regulated

by the Government. The duty exemption for such supplies has been granted in the interest of Government policy

in this regard. In other words the benefit of exemption does not accrue to the manufacturers. However, the

manufactures are required to reverse the Cenvat Credit attributable to such supplies. But, the manufacturers are

not compensated for the loss resulting from such reversals.

It is accordingly requested that SKO supplied to PDS and LPG supplied to Domestic households should be

excluded from the mischief of Rule 6 of Cenvat Credit Rules, 2004, by including these goods in list of goods

specified under Rule 6 (6) of the Cenvat Credit Rules, 2004.

(i) Cenvat credit should be allowed on “Input” used in wheeling of power to other manufacturing unit within the

same company / legal entity

(j) Service Tax input credit should be made available on various services availed by the assessee in relation to a

residential colony which is situated next or near to the plant area. A nexus exists between manufacturing facility

and the residential colony in a continuous process industry. It is essential for the manufacturer to have its staff

located near the plant to cope up with any type of emergency.

(k) The erstwhile procedure of Customs endorsement of Bill of Entry copy for availment of CENVAT Credit by the end

user unit has been dispensed with vide Customs Public Notice No. 16/2006 dated 22-03-2006. This is causing

hardships to the manufacturers since they are unable to avail CENVAT Credit on the imported [free issue]

material received by them from their customers.

It is suggested that the procedure of Customs endorsement of the Bill of Entry EDI copy for availment of CENVAT

Credit by the end user unit, be restored at the earliest by way of a suitable Customs Trade Notice to this effect.

Or alternatively a provision should be made in the Bill of Entry format for indicating the details of the consignee

(end user receiver) of the goods in addition to the details of the Importer as is being done in the case of Excise

invoices where the Invoice is made on the buyer with the consignee indicated as the end user.

(l) The courier agency imports the goods for various customers under the single bill of entry and thereafter provides

the photocopy of the bill of entry to various customers. Department is currently denying the credit on the basis

of the self certified copy of bill of entry. It is practically impossible for courier agency to provide original bill of

entries to each of its customers.

A provision may be made in the Cenvat Credit Rules to provide that the credit would be available on the basis of

self certified copy of bill of entries issued by courier agencies to the respective customers.

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STRUCTURAL AND PROCEDURAL ISSUES

Structural Changes

5.5.1. Independence of Adjudication Wing

The adjudicating authority, namely, Asstt. Commissioner / Dy. Commissioner / Additional Commissioner /

Commissioner / Superintendent (Adjudication) has to play a dual role - that of a tax collector as well as adjudicator of

the disputes. There is always pressure of maximizing revenue since yearly targets for collection of duties are assigned

to each such officer. Under the circumstances, when he is required to adjudicate customs or excise duty disputes, it is

practically impossible for him to remain impartial and do justice to the assessee even in deserving cases. This results

in show cause notice/demands getting confirmed even when the same are legally untenable as is evident from the

statistics of appeals decided in favour of the Department or against it. Consequently the assessees are required to

carry the matter in appeal thereby increasing litigation.

It is suggested that the Adjudicating Wing should be separately established in each Commissionerate. The

adjudicating officers should be disengaged from the duties of revenue collection. The Adjudicator Wing should not

be working under the Commissioner. These officers could be placed under the Directorate of Legal Affairs or any

other such Central Directorate. If this suggestion is implemented, it is felt that the adjudicating authorities will not

have any revenue bias and shall pass orders with a judicious mind and as per the law laid down by various judicial

authorities, thereby reducing needless litigation arising from high pitched assessments.

5.5.2. Improvement in Dispute Resolution Mechanism

The present system of resolving disputes between the taxpayer and the department is unsatisfactory and requires to

be overhauled. The existing system is marked by -

(a) issue of show-cause notices on frivolous grounds

(b) issue of protective demand notices following objections by Central Revenues Audit which remain unresolved for

years till the objections are settled

(c) delay in completing the adjudication process

(d) lack of uniformity in assessment decisions taken for different units manufacturing the same commodity and even

for different facilities of the same manufacturers

(e) failure of the Committee system to prevent filing of appeals in undeserving cases thereby prolonging litigation.

Once a show-cause notice has been issued even though on unreasonable and unsustainable grounds the process of

adjudication has to be gone through entailing time and costs. The adjudication process itself is lengthy - issue of

adjudication orders is delayed months after the personal hearing has been granted. On many occasions the officers

get transferred without completing the adjudication requiring fresh hearings and increased costs. Judicial precedents

are ignored and the demand notices are confirmed even when the law is well settled. The adjudication orders are

not speaking orders and generally do not provide the reasons for ignoring a judicial decision except for recording that

the facts of the case are different.

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The aforesaid factors severely impact the tax environment of a business. There is no clarity / finality on the tax

liability of a business entity; the contingent liability keeps on adding disproportionately and the compliance burden

keeps on increasing. It has a net dampening effect on the business environment. Following suggestions are

submitted for consideration to reduce the hardships for the businesses:-

(a) The department has successfully established an advanced system of automation covering customs, central excise

and service tax assessments processing several thousand online transactions of import and export consignments

per day apart from the excise and service tax returns of lakhs of assessees. It is absolutely necessary that all the

processes involved in an adjudication are captured online and are accessible to the public at large.

The data capture should start from the stage of issue of show-cause notice, the date on which a reply has been

furnished by the assessee, the date of personal hearing, the date of issuing the adjudication order, the stages in the

first appeal, second appeal etc. The grounds on the basis of which the show-cause notice has been issued should be

briefly recorded in the system so that on the one hand senior supervisory officers can review whether the notice has

been issued on bonafide grounds and on the other hand it can be used by other Assessing officers to review the

practice of assessment in their jurisdiction.

An important field of data capture should be the name of the officer designated to adjudicate that show-cause

notice. In case the officer gets transferred, the system should capture the name of the new officer to whom the case

has been assigned along with the date of such assignment. Apart from enabling monitoring the progress of

adjudication, such a system should also enable evaluation of the quality of orders passed by each officer since the

system would record the outcome of appeal if any filed against the said order. Such a system would enable the

department to assess the judiciousness of each adjudicating officer at any point of time in his career. In the long run

it is expected that such an exercise would help improve the quality of decision making by the officers.

(b) Administrative measures should be introduced to ensure that the adjudicating officer issues the orders within a

reasonable time of the hearing having been completed. The automated system as proposed above would no

doubt provide the necessary information regarding the cases pending for issue of orders after the hearings have

been completed. In case an officer is transferred, while he may be relieved of his regular assignment, he may be

retained for a reasonable period (one to two months) to finalize the orders for which personal hearings have

been completed till the date of issue of the orders. He may be conferred the requisite legal authority to

complete this task.

It is further suggested that a provision be made in the law that in case a show-cause notice is not adjudicated upon

within a specified period of the date of issue of show-cause notice, the proceedings shall lapse as if the show-cause

notice was never issued. Given the current pendency of adjudications, this period may initially be fixed at 3 years but

be brought down to 1 year progressively. Thus, if a show-cause notice is not adjudicated upon within 1 year for

reasons not attributable to the notice, the proceedings should be deemed to have never been initiated and

consequential reliefs should follow. Such an extreme step is considered necessary since administrative measures

taken so far have not yielded the desired results and the trade is put to unnecessary hardships for delays on the part

of the adjudicating officers. It may be noted that even the income tax law has a sunset clause if the assessments for a

particular year are not finalized within the prescribed time limit.

(c) There is need for flow of information from the policy makers to the field and vice versa. Many a times the field

officers issue demand notices because they have understood a particular policy (exemption notification / rules /

regulations etc.) in a different manner than what the policy makers intended. The instructions / circulars issued

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by the Ministry sometimes do not explain the full background of the policy changes made by the Government. It

is suggested that the field officers should be encouraged to seek clarifications from the policy makers to have

their doubts clarified. It will also enable policy makers to identify deficiencies if any in the policy or in the

manner in which a particular notification / rule or regulation has been drafted for taking corrective action if any.

The policy makers should not shy away from their responsibility to clarify matters to the field formations. The

objective should be to disseminate information and explain the policy objectives in clear terms to prevent

litigation ab-initio. It must also be realized that tax policy is a specialized field and the officers who have to

frequently shuffle between various areas of work (customs, excise, service tax, enforcement, assessment etc.)

cannot be expected to acquire expertise within the limited period they are assigned to a particular post. The

policy wings of the Ministry should be adequately staffed if so required to enable such a timely flow of

information. It is felt that increased allocation of human and financial resources in this area of work would

provide the desired results. Given the electronic means of communication at their disposal, timely flow of

information and sharing of knowledge can prevent litigation to a large extent.

(d) The department should repose an element of trust in its officers and not view every decision taken in favour of

the assessee with suspicion.

(e) The practice of issuing protective demands following objections by the Central Revenues Audit needs to be

reviewed. Once an objection has been received, the department should evaluate the objection and decide

whether the objection is sustainable or not. Such evaluation should be completed within a prescribed time limit

of say one month of the receipt of the Audit report. The question whether the CRA objection is sustainable or

not should be examined at a pre-decided level say Commissioner or Chief Commissioner of Customs or Central

Excise, as the case may be. In case instructions are to be sought from the Ministry, let it be so but the decision

should be taken within one month. Electronic communication systems be made use of to expedite the decision

making process.

In case, the department agrees with the CRA, a show-cause notice be issued and adjudicated upon as soon as

possible. If, however, the department does not agree with the Audit contention, no notice should be issued to the

assessee. In such a case the department should convince the CRA about the correctness of the decision made by

them. The practice of issuing a show-cause notice as soon as the Audit report is received, without examining the

merits thereof, should be discontinued. It is suggested that these modalities be settled between the department and

the CRA.

It is felt that these measures apart from proper supervision by senior officers may result in reducing litigation and

improving the Dispute Resolution Mechanism.

5.5.3. Expanding the Scope of Authority for Advance Rulings

The Authority for Advance Rulings (Central Excise, Customs and Service Tax) was constituted with the objective of

providing binding rulings to the foreign investors intending to set up joint ventures in India so that they are assured

in advance of their indirect tax liability. After its inception, the scope of the Authority to entertain applications for

issuing rulings has been enlarged and at present, apart from non-residents, the following categories of resident

companies have been notified under the relevant provisions of Customs Act, 1962, Central Excise Act, 1944 and

Finance Act, 1994, making them eligible for applying for advance rulings:

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a) Residents proposing to import goods from Singapore under the Comprehensive Economic Cooperation

Agreement for seeking advance ruling on origin of goods under the Customs Act, 1962

b) Public Sector Companies in Customs, Central Excise as well Service Tax matters

c) Residents proposing to import goods under the project imports facility for seeking advance ruling under the

Custom Act

d) Public Limited Companies in the matter of Customs

However, this still leaves out a large segment of the taxpayers from availing the benefit of obtaining a binding ruling

on their indirect tax liability. It is therefore, felt that there is a strong case for revisiting the approach towards the

scope of matters handled by the Authority.

The facility of advance ruling is considered to be an important element in the taxpayer services and is generally made

widely available. An effective advance ruling machinery contributes to reduction of disputes by eliminating them in

the bud. It affords both the taxpayers as well as the tax administration the advantage of certainty in taxation and of

lowering the cost of compliance.

Although the institution of Authority for Advance Rulings was set up primarily by the desire to attract foreign

investment, the time has come to introduce a complete level playing field between foreign and domestic businesses

in the matter of a facility as important as advance ruling. There is also need to eliminate discrimination between

public sector and private sector companies. Further, there appears to be no justifiable reason to exclude taxpayers

which are not companies from jurisdiction of this authority. In fact a time has come when the facility of advance

ruling should be made available universally to one and all.

It is accordingly recommended that that all persons, whether individuals, proprietary or partnership firms, and public

or private limited companies may be made eligible to seek advance rulings in respect of Customs, Central Excise and

Service Tax matters on equal footing.

Another important issue has arisen in the context of advance rulings following the judgment of the Supreme Court in

the case of Columbia Sportswear Company vs Director of Income Tax, Bangalore. In that case the Court, while dealing

with a petition under Art. 136 of the Constitution, held that the Authority for Advance Rulings is a “tribunal” within

the meaning of Articles 136 and 227 of the Constitution and, consequently, petitions against its rulings would lie to

the High Courts. As a result of this ruling High Courts can now entertain petitions against rulings issued by this

Authority. This is bound to prove counterproductive to the basic purpose for which the Authority was constituted,

namely, to provide quick, efficacious and binding rulings to eligible applicants and to minimize litigation. With the

opening of the doors of High Courts to the challenges against the Authority's rulings, matters will follow the usual

dilatory course of normal litigation and will take much longer to attain finality. Ideally, therefore, the rulings of this

Authority should be allowed to be questioned only in the Supreme Court. The legislation that created this Authority

has not provided for a statutory appeal - obviously owing to the concern to avoid delays in matters attaining finality.

However, with the judgment of the Supreme Court, a piquant situation has arisen and it is the absence of a statutory

appeal that would contribute to delays in matters reaching finality.

It is recommended that the Government should amend the legislation relating to this Authority to provide for an

appeal against the Rulings of the Authority directly to the Supreme Court. This would avoid parties approaching the

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High Courts and the original purpose of setting up of the Authority for an expeditious decision to the taxpayers

would be served.

Further, currently the provision permits appointment of a retired Judge of the Supreme Court as the Chairperson of

the authority. Limiting the appointment of Chairperson to a retired Judge of Supreme Court at times results in delay

in constitution of the authority and consequent disposal of the applications. Hence, relevant provision may be

amended to permit appoint of a retired Judge of High Court as well to address issues relating to delays in taking up

and disposal of applications.

5.5.4. Introduction of Advance Pricing Mechanism in Customs Law in line with Transfer Pricing regulations of Direct Taxes

Advance Ruling Mechanism facilitates ruling on principles to be adopted for valuation of imported goods in terms of

the provisions of the Customs Act, 1962. However, very few applications on valuation till date have been dealt by the

Authorities.

With the opening up of the Indian economy, the number and volume of transactions of import and export between

related entities has gone up substantially. The existing mechanism of examination of such transactions by the Special

Valuation Branches (SVBs) in the Custom Houses is inadequate to determine the true price of the goods imported or

exported. Apart from the considerable time taken to finalize the prices, there are also questions about the processes

deployed for such determination.

It is suggested that an Advance Pricing Agreement (APA) Mechanism on the lines of the one recently notified by the

Ministry of Finance (CBDT) under Transfer Pricing Regulations may be considered. Alternatively, prices as agreed

under the Transfer Pricing regulations of CBDT may be adopted since those regulations also require determination of

arm's length prices in the course of international transactions of goods and services between related persons. It may

also be provided that the SVB of Custom Houses and Transfer Pricing Officers (TPO) of CBDT would accept the

determination made by each other in respect of the transactions examined by them.

5.5.5. Extension of Large Taxpayer Unit (LTU) Scheme

Government of India has been framing a number of schemes to simplify the tax laws in the country and make them

taxpayer friendly. Amongst these several schemes and the measures, one of the most pioneering scheme is relating

to Large Taxpayer Units. However, the above scheme is limited to only those units, whose registered office is at any

of the places at Bangalore, Chennai, Delhi, Kolkata or Mumbai. Hence if any unit is fulfilling all other conditions, but

its registered office is not located at the places as mentioned above, It can't apply for LTU facility.

To simplify the procedures for all units especially multilocational units not having their registered office at the

notified places, it is strongly suggested that the LTU facility should be made available to all units irrespective of the

location of their registered office. The Department should also open additional LTU offices at other cities such as all

the State Capitals etc.

5.5.6. Annual Audit of Service Providers by Chartered Accountants

A new comprehensive service tax regime based on the concept of the Negative List has been introduced with effect

from 1st July, 2012. This has resulted in several new assessees being brought under the tax net apart from

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broadening the scope of transactions that are now covered for the levy of service tax. It is suggested that the

concept of annual audit by chartered accountants be introduced for specified assessees in lieu of an audit by the

departmental officers. This suggestion is based on a similar audit being conducted by the chartered accountants for

the purposes of income tax. This mechanism would reduce the burden on the administrative machinery of the

department in conducting such audits by going to the assessees premises. The department would of course be

scrutinizing the returns of the assessee and also have the authority to conduct any special audit of a particular

assessee, if it is so desired.

Common Procedural Issues

5.5.7. Rate of Interest for delayed payment of excise duty or service tax

The rate of interest on delayed payment of excise duty has been revised with effect from 1st April 2011 to a uniform

rate of 18% per annum. The rate of interest on delayed payment of taxes has been increased from erstwhile 13% per

annum to 18% per annum.

The rate of interest as has been prescribed for delayed payment of taxes is exorbitantly high as compared to the rate

of interest which the exchequer would have earned if the same would had been deposited with the nationalized

banks. Such high rate of interest is more penal in nature rather than being compensatory. Such high rate of interest is

also detrimental to the overall industry as a whole and especially with regard to assessees' who have paid short tax

or no tax under a bona fide belief.

The rate of interest on delayed payment of taxes should be prescribed at 12% per annum for delayed payment of

excise duty as well as service tax (as is the case for delayed payment of income tax).

5.5.8. Time limit for disposal of appeals by CESTAT

At present Section 35C (2A) of the Central Excise Act,1944 specifies a recommendatory time limit of three years from

the date on which such appeal is filed for hearing and disposing off the appeal. This leads to piling of huge number of

cases at Tribunal level, which also blocks the Government revenue for the cases which are in its favour and increases

the interest cost for the appellant.

There has to be a statutory deadline for disposal of Appeals and not only recommendatory deadline as it exists at

present. Once the dead line is statutorily fixed there would be pressure on the Appellate Authorities to dispose of

the appeals within the statutory time limit.

5.5.9. New Benches of CESTAT at Hyderabad, Lucknow, Ranchi etc.

There is no CESTAT bench near many big cities like Hyderabad, Lucknow, Ranchi, etc. which makes cost of defending

demands prohibitive due to unaffordable fees at existing cities where the Benches are located and the cost of travel

and stay. With decentralization, pendency at existing Benches and the cost of litigation will come down.

It is suggested that the new Benches be opened at cities like Hyderabad, Lucknow, Ranchi, etc.

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5.5.10. Expiry of Stay order if appeal is not disposed of within the period of 180 days

Under the provisions of Section 35C of the Central Excise Act, 1944, stay granted by CESTAT for full or partial waiver

of pre-deposit of duty demanded, penalty levied etc. shall automatically be vacated, if the appeal itself is not decided

within 180 days from the date of stay order. As soon as the period of 180 days is over, the department is attempting

to recover the duty, in spite of the fact that the assessee is not responsible for delay in decision of the appeal. This

necessitates the appellant to make fresh application every six month till the disposal of appeal, thereby increasing

time spent on unproductive work and cost.

The above provisions are not equitable and are arbitrary. The limitation on validity of stay granted by CESTAT should

be withdrawn in order to spare the applicant from this unnecessary hardship.

5.5.11. Issue of multiple notices on same issue for different periods

It has been observed that field officers issue separate show-cause notices on the same issue by splitting up the

period for which the “short levy” pertains. This is reportedly done to keep the value limits for which the notice is

issued within the competence of the Assistant / Deputy Commissioner to avoid having to put up the matter to the

Commissioner. This however increases the administrative work and the costs for the assessee who has to file

separate replies and appeals later on apart from paying higher fees for the advocates.

It is suggested that the departmental officers should be instructed to issue a single show-cause notice for the same

issue for the entire period.

5.5.12. Maintenance of scanned copies of documents in lieu of originals

Large organizations opting for centralized registration have a considerable volume of invoices for raw materials,

components and input services. As a result, it is practically not feasible to retain original invoices at the location at

which centralized registration is taken. To ensure safety of these documents, significant processes towards storage

and retrieval of original documents have been set up.

Amendment should be made in the service tax and other laws prescribing that in the case of large assessees,

furnishing of the scanned copies of the original invoices at the time of inspection or audit should be treated to be a

sufficient documentary evidence for the purpose of substantiating eligibility to avail and utilize Cenvat credit.

Clarification may also prescribe a methodology on how the records of the scanned copied should be maintained and

the checks which should be applied for the maintaining of this alternate mechanism of storing documentary

evidence.

5.5.13. Merger of duties and cesses etc.

Separate levy of 2% Education Cess (EC) and 1% Secondary & Higher Education Cess (SHEC) should be abolished and

merged into basic duties. These levies are causing innumerable complications in documentation, credit availment

and accounting. To overcome such hardships, it is suggested that the rates of the main duty be rationalized to the

extent of EC and SHEC and levy of these cesses separately be abolished. For example, instead of the present excise

duty structure of BED 12% + EC 2% + SHEC 1% = Total 12.36% duty, it can be simplified as single Basic Excise Duty rate

of 12.36%. With the level of automation achieved by the customs and central excise department, the allocation of

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revenue for the purposes for which the cesses were levied can be made at the backend by the automated systems. It

is further suggested that these allocations need not be made transaction by transaction but can be made as a fixed

percentage from the total excise or customs collections credited to the consolidated fund of India. This will result in a

major simplification of the revenues collection process.

5.5.14. Streamlining of Instructions / Circulars by issue of Annual Master Circulars

The Ministry of Finance issues several Circulars / Instructions each year for Customs, Excise, Service Tax etc. It is

difficult at any given point of India to ascertain which of the circulars issued in the previous years are still valid or not.

As a step towards improving taxpayers' services it is requested that a master circular be issued on 1st April of every

year replacing individual circulars issued in the past. The Reserve Bank of India follows this practice for the last so

many years and it makes compliance much easier. A master circular was attempted a few years ago in respect of

service tax but it has not been updated. This exercise needs to be revived again not only for service tax but also for

customs and central excise for the benefit of taxpayers. This will make assessees aware of the necessary procedural

requirements

Customs

5.5.15. Period of interest free warehousing of goods

In terms of Section 61 of the Customs Act, 1962 interest is payable on the warehoused goods, if the goods are not

cleared for home consumption within 3 months from the date of warehousing. The normal warehousing period

under Section 61 is one year, hence charging interest on duty for the goods kept in the warehouse beyond 3 months,

defeats the very purpose of one year validity.

Liberalization of the interest free period will enable importer to pick up and store consignments when the

international prices are favourable so that abrupt fluctuations on account of international prices, supplies constraint,

currency fluctuations do not impact the operations and local sale price.

It may also be pointed out that Free Trade Warehousing Zones (FTWZ)/SEZs offer similar facilities to trade and unlike

bonded warehouse, FTWZ do not have any prescribed interest free warehousing period. The trade and industry

prefer to store their imported goods in such FTWZs/SEZs. However, compared to FTWZ/SEZs, bonded warehouses

offer greater locational flexibility and thereby give significant advantage from logistics perspective.

It is therefore requested that warehoused goods may be allowed to be cleared from bonded warehouses at least up

to 6 months period, without payment of interest on duty.

5.5.16. Refund of Extra Duty Deposit in case of provisional assessment

Pending validation of value declared in case of related party imports, the imports are provisionally assessed and

allowed clearance on payment of Extra Duty Deposit ('EDD') ranging from 1% to 5%. EDD can be claimed as refund on

acceptance of the value declared by the authorities and finalization of assessment.

However, claiming refund of EDD tends to be a challenge as authorities seek to apply the test of 'unjust enrichment'

even to these cases. Since EDD is in the nature of a deposit that is collected separately by the authorities, its refund

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should not be governed by the provision relating to refund of Customs duty. The refund should be allowed

automatically in cases where value declared is accepted by the authorities and Bills of Entry are finally assessed.

It is accordingly recommended that legal provisions may be amended appropriately to provide that the test of

“unjust enrichment” shall not be applied in cases of refund of extra duty deposits.

5.5.17. Finalization of provisional assessments within prescribed time lines

Pending validation of value declared in case of related party imports by the Special Valuation Branch (SVB) of the

Customs House, the imports are provisionally assessed. Normally the validation process and issuance of a formal

order takes minimum of 3-6 months.

The order issued by the SVB accepting the prices declared by the importer needs to be reviewed by the Review Cell

of Customs for issuance of formal acceptance of the order. This acceptance needs to be furnished to the Customs

authorities at the concerned ports for commencing the process of finalization of assessment.

Completion of the above formalities takes another 3-4 weeks. However, even covering the above milestones, being a

manual process, the assessment takes minimum of 6 months to 1 year including completion of review by Audit Cell.

Hence, considerable time is taken before the importer can seek finalization of Bills of Entry, obtain cancellation of PD

Bond and consequential refund.

As a measure of trade facilitation it is suggested that an amendment may be made in the regulations to provide for

completion of the whole process of finalization of assessments within a specified period. (Internal timelines may be

prescribed for passing of the SVB order, review by the Review and Audit departments etc.). In the event of failure to

complete the process no further extra duty deposits should be charged and the duty deposits already paid should be

refunded. In view of the high degree of automation achieved by the customs department it should not be a difficult

proposition to implement.

5.5.18. Bank Guarantees to be returned if the assessee wins first appeal

The Customs department asks for Bank guarantees for registration of contract, fulfillment of export obligation,

provisional release of goods etc. However in spite of the first appeal being decided in favour of assessee the Bank

Guarantees are not released quoting the reason that the department has filed an appeal which takes years as the

department may file appeal again till the matter the decided by the Supreme Court. It is requested that the

procedure may be set out to release the Bank Guarantees immediately if the first appeal is decided in favour of the

assessee if he is a manufacturer. As the industry is going through a very critical phase release of bank guarantees will

help the manufacturer to manage cash flow efficiently.

5.5.19. Refund of excess Customs duty paid in case of amendment to Bill of Entry to rectify clerical mistakes

In terms of Section 149 of the Customs Act, 1962, a Bill of Entry is permitted to be amended/ modified even after

goods have been cleared for home consumption on the basis of documentary evidence which was in existence at the

time the goods were cleared.

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However, any consequent refund arising out of such amendment e.g. in case of incorrect adoption of invoice value,

exchange rate, etc. is denied by the authorities on the ground that the assessment has attained finality as same was

not challenged in terms of Circular No 24/2004-Cus dated 18 March 2004 and Hon'ble Supreme Court Judgment in

case of Priya Blue Industries Limited Vs Commissioner of Customs (Preventive) 2004 (172) E.L.T. 145 (S.C.)

Amendment may be considered in the laws to allow refund in case of amendments permitted under Section 149

without the requirement to challenge the assessment.

5.5.20. Import of Commercial Samples / Prototypes / Critical Spare Parts as Baggage

R&D Units need to provide quick turn around on software testing / validation on certain samples / prototypes.

Further, sometimes spare parts essential for a running plant are required to be imported on an emergency basis as a

baggage item of the engineers assigned for the maintenance / repair of the plant / machinery. It is requested that

the procedure for allowing commercial samples / prototypes / spare parts for critical business activities as items of

baggage should be simplified and well advertised.

5.5.21. Confirmation of Proof of Export

In order to avail duty benefits arising out of exports made by an assessee, voluminous documents have to be

submitted by the assessee to the Central Excise Department. The requirement of submission of documents in

physical form leads to delays in processing claims and is prone to clerical errors. Considering the fact that in today's

information age, where the Department itself is moving rapidly towards electronic filing of returns and records it is

recommended that the proof of export confirmation can be automated between the Customs Department and the

Central Excise Department and the burden on the assessee - in terms of submission of voluminous documents to the

Central Excise Department - can be removed.

5.5.22. Implementation of the Report of Indian Institute of Foreign Trade on Trade Facilitation

The Centre for WTO Studies at the Indian Institute of Foreign Trade had commissioned a study to carry out “Trade

Facilitation Gap Analysis for Border Clearance Procedures in India” i.e. to examine the gap between the steps taken

by the department on its own for trade facilitation and the continuing bottlenecks, if any. The Study was supported

by Ministry of Commerce and was carried out in close cooperation with the Central Board of Excise and Customs.

The Study has identified areas where constraints need to be removed to ensure smooth flow of trade. The Study has

also touched upon certain areas where exporters and importers bear unnecessary costs which erode their

competitiveness in the international market. The recommendations and suggestions made in the Study would help

expediting the process of cargo clearance and reducing the transaction time and cost of clearance of import / export

and transit cargo, both at the sea ports and at the airports. The copies of the Study have already been submitted to

the Ministry of Finance.

FICCI had organized a seminar earlier this year on the draft of this Study which elicited valuable inputs, which have

been incorporated in the Study. It is requested that the recommendations and the suggestions made in the study be

considered for examination by the Government.

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Central Excise

5.5.23. Demand of interest for differential Excise Duty paid due to price increase subsequent to removal of goods

The Supreme Court decision in CCE Vs. SKF India Ltd. (2009 (239) ELT 385), wherein the Court has held that the

interest is payable on differential duty payable because of revision of prices subsequent to removal of goods.

Demand of interest is not justified as at the time of removal there was no short payment or non-payment and

differential duty was not determined by the CE Department but the same was paid by the manufacturers on their

own. Therefore, keeping in view the aforesaid practice of industry, it would affect the manufacturers if there is a levy

of interest on the duty payable on the supplementary invoices raised due to revision of price subsequent to the

removal of goods. Further, the aforesaid interest so paid on supplementary invoice will not be eligible for CENVAT

Credit and hence would add the cost of the product

It is suggested that an explanation to Section 11 AB of the Central Excise Act 1944 may be added to the effect that no

interest would be payable on account of differential duty paid because of any price revision subsequent to the

removal of goods

5.5.24. Availability of Credit on Bill of Entry

It has been reported that the Department is disallowing the credit availability on the basis of Bill of Entry despite the

credit chain being established from the point of importation to the point of credit. It has been learnt that the Hon'ble

High Court and Supreme Court have held that the credit is allowed on the basis of Bill of Entry even if Bill of Entry is

not in the name of the person who is availing the credit. It is pertinent to mention here that the rule of endorsement

on Bill of Entry has also been omitted.

It is suggested that when the chain from point of importation to the point of credit is established, the credit on the

basis of Bill of Entry should be allowed.

5.5.25. Clearance of goods for captive consumption

As per Rule 8 of the Cenvat Excise Rules, the goods for captive consumption are to be cleared on cost of production +

10% profit margin. The computation of cost of production is based on the actual cost sheet which is prepared at the

year end and accordingly the clearances have to be made on provisional basis on estimated cost of production during

the year. The cost normally varies from month to month in view of changes in raw material / packing material cost,

cost of various consumables like diesel, electricity, etc.etc. This variation in cost could be upward or downward

depending on the marketing conditions of the various inputs.

It may be appreciated that in case the estimated cost of production in any month increases, the assessee has to pay

differential duty for the previous period with interest and start paying duty on revised estimated cost of production

in future. If at a later date due to reduction of cost of raw/packing materials, the cost of production goes down, there

is no provision for adjustment of excise duty paid in the past especially where the goods manufactured for captive

consumption are sent to excise exempted areas like Himachal, Northeast etc. In such cases the excess excise duty

paid in the past becomes an additional cost as no credit for the same is available at the other site of the

manufacturer.

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In order to simplify the process the assessee may be permitted to clear the goods for captive consumption on

provisional basis based on the actual cost sheet of the last year and any adjustment for difference in actual cost of

production at the yearend vis a vis the rates at which the goods were cleared during the year should be allowed to

be adjusted within 3 months of the close of the year. In case the actual cost is more than the cost at which the goods

are cleared provisionally during the year the assessee may be permitted to pay the differential duty within 3 months

at the close of the year without any interest and if the duty is not paid within 3 months, the assessee should be

asked to pay interest from the due date of payment of excise duty of each month.

In cases where actual cost at year end is less than the rate at which the duty was paid during the year, and the

assessee has not claimed the credit of such duty as the consignee was in excise exempt area, the assessee may be

permitted to claim refund based on the certificate obtained from the consignee that no credit for the duty was

availed by them. This certificate may also be required to be authenticated by the excise authorities of the consignee.

This process will reduce the complexity of change of cost of production on monthly basis and will also ensure that

the proper duty is paid to the department and hence will not lead to any loss of revenue to the department. We may

add that this process suggested by the industry is somewhat similar to the present process of cenvat credit rules

6(3A).

5.5.26. Valuation of Goods manufactured by job worker for captive consumption by the manufacturer

Presently there is no specific valuation rule for clearance of goods manufactured by job worker which are used by the

manufacturer for captive consumption. Normally such goods manufactured by job worker for captive consumption of

the manufacturer are cleared based on cost of raw material + packing material+ other inputs supplied by the

principal + the conversion charges paid by the manufacturer to job worker. The conversion charges included in the

cost also includes the profit margin of the job worker. The basis of computation of assessable value on cost of

material + conversion charges is based on the Supreme Court's decision in the case of Ujjagar Prints. Recently certain

Commissionerates have objected to this basis of clearance and raised show cause notices stating that Rule 8 should

be applied even in such kind of situations and accordingly, the Job-Worker should pay the excise duty on the

assessable value arrived on the basis of cost of raw material + packing material+ other inputs supplied by the

principal + the conversion charges paid by the manufacturer to job worker + 10% margin. This basis of calculation

results in unnecessary addition of 10% towards profit margin as the profit margin of the said job worker who is

manufacturer of this goods already stands included in the conversion charges.

Accordingly it is suggested that either a clarification may be issued for valuation of goods cleared by job worker for

captive consumption clarifying that the value should be cost of goods + conversion charges which includes profit

margin of the job worker or a specific Rule may be inserted in the valuation Rules for such cases. This will avoid

unnecessary hardship to the assessee as well as this will also reduce possible litigations on this account.

5.5.27. Export of Excisable Goods

For removal of goods from the factory for exports the manufacturer exporters are required to file one “application

for removal form” (ARE-1) each day. When there are bulk orders and the cargo is moved from the factory to the

premises of the Container Freight Station (CFS) over a period of time (i.e., rather than on a single day) multiple ARE-1

are required to be filed for export to be made to a single customer.

It is recommended that:

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i. Large manufacturer exporters be permitted to raise one single ARE-1 for all the clearances made (i.e., for the

aggregate quantity of clearances made over say a week) for export of cargo to a single customer. This would

reduce the number of ARE-1s being raised for clearances from the factory for a single customer order.

ii. The process of submission of proof of exports should get simplified in view of the fact that the process of

obtaining endorsements on the ARE-1s post the exports is a highly time consuming process. The data relating to

proof of exports should automatically flow between the customs and central excise department without the

need for the exporters to get involved in the process.

5.5.28. End Use Certificate for import of waste paper

As per Customs Notification no.21/2002 as amended from time to time, provides for import of waste paper at Nil

rate of customs duty, provided the importer furnishes an End Use Certificate (EUC) from the jurisdictional excise

authorities.

It is recommended that furnishing of end-use certificates should be dispensed with for manufacturer importers as

the process of obtaining EUCs is highly time consuming process and results in higher transaction costs. The private

records maintained by manufacturers - which are relied upon by Central Excise Audit also - should be prescribed as

appropriate documentation for verification of end use of imported waste paper.

5.5.29. Clarificatory amendment to Rule 8 (3A) of the Central Excise Rules

Rule 8 of the Central Excise Rules 2002 permits the facility of payment of excise duty on a monthly basis. Sub rule

(3A) of the rule seeks to deny the facility if there is “default” in payment of the duty.. This sub-rule is being invoked

by the field formations even in cases of inadvertent errors in duty calculation, which cannot be equated with

“default” as there is no intention to willfully default in payment of duty. Obviously, cases of inadvertent clerical errors

cannot be construed as a default in payment of duty and such errors do not deserve harsh punishment.

It is requested that the rule 8 (3A) of Central Excise Rules 2002 may be amended by substituting the words “willful

default” in place of the word “default” and inserting an explanation - “For the purpose of this rule, inadvertent

clerical errors shall not be construed as a default”.

5.5.30. Central Excise valuation - impact of the judgment of the Supreme Court in Fiat case

The Hon'ble Supreme Court in a recent decision in the case of CCE, Mumbai vs. Fiat India (P) Ltd [AIT-2012-354-SC]

has held that selling products for a long period of time at prices below the cost of production cannot be considered

as ordinary sale under Section 4 of the Central Excise Act as it existed prior to 1.7.2000. It has also been held that

under new Section 4 (i.e. post 1.7.2000), such sale of goods below the cost of production to benchmark with the

price of the competitors will violate the condition of “price being the sole consideration for sale”. In other words, it

has been held that 'intention' of the seller can determine as to whether sale price should be acceptable for the

purpose of levy of excise duty, even if there is no additional consideration flowing from the buyer.

Till the pronouncement of the above judgment, the understanding prevailing in the Government & industry was that

unless there is a quantifiable additional consideration flowing from the buyer to seller, the sale price shall be

accepted as the transaction value at which the goods are sold in ordinary course.

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The decision is likely to have significant impact on industry. The manufacturers across the globe, when selling their

merchandize fix a price in the market based on several factors and alter the same periodically to exist in the market.

In many cases, the manufacturers may choose to sell the goods below the cost of production for various reasons. For

example:-

• The manufacturers may choose a strategy to sell one product at a loss and make up the losses from the sales of

other items.

• The manufacturers may offer special discounts to penetrate the market.

• There can be sudden increase in the raw material prices or the cost of labour, due to totally external factors.

However, the manufacturers may be forced to sell the goods below the cost of production because of their

inability to pass on the extra cost to their buyers.

• There are several capital intensive industries like Oil Refineries, Fertilizer plants, Tyre Companies, Manufactures

of Turbines, heavy boilers, etc. and these industries typically have long gestation period. During this time, the

products will be sold below the cost after taking into account the high depreciation and interest on the capital

goods.

The judgment of the Hon'ble Supreme Court has unsettled the valuation norms under Section 4 of the Act.

Implemented in letter and spirit, the law as interpreted by the Hon'ble Supreme Court would require each

manufacturer to declare its cost of manufacture so that assessing officers can verify whether the goods are being

sold at below the cost price. The judgment negates the principle of “transaction cost” and would result in subjectivity

in assessments and consequential uncertainty of the tax liability.

It is requested that Section 4 of the Central Excise Act may be amended to clarify the true meaning of the term

“transaction value”. It may specifically be provided that any factor taken into account by the manufacturer while

fixing the transaction value but which does not result in any flow back directly or indirectly to the manufacturer shall

be deemed to have not influenced the price between the manufacturer and the buyer. It is further requested that

the amendment may be given retrospective effect in order not to disrupt the past assessments.

GOODS AND SERVICES TAX

5.6.1. Introduction of Goods and Services Tax

The Government had a target of introducing a nation-wide GST enactment originally from 1st April, 2011. The

Government has initiated several measures in this direction but the timeframe for introduction of a comprehensive

GST remains unclear.

GST is going to be a landmark reform in the field of indirect taxation and would have a beneficial impact on the

economy of the country. Government of India should reach out to State Governments and come out with a clear plan

of implementation and timing at the earliest. It is requested that the draft legislative framework should be placed in

the public domain so that industry can study the impact and gear up for a smooth transition to the new system of

taxation.

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FICCI would like to reiterate that all the taxes levied by the Centre and the States on goods and services must be

subsumed in the proposed GST including stamp duty, purchase tax, APMC fees, royalties, property tax, tax on motor

vehicles, tax on goods and passengers, duty on electricity, entry tax, octroi, etc. We would also urge that the GST

should be extended to all sectors of the economy without exception i.e. it must include petroleum and natural gas,

real estate, alcohol and power generation sectors.

CENTRAL SALES TAX

5.7.1. Natural Gas, Naphtha and LNG to be 'declared goods' under CST Act

Currently State Governments charge varying VAT rates on Natural Gas, Naphtha and LNG (including regasified LNG

i.e. R-LNG) ranging between15% to 18%. To bring down the cost of these inputs for manufacturing, natural gas and

naphtha may be declared as Goods of Special Importance in Inter State Trade or Commerce under Section 14 of the

Central Sales Tax Act, 1956. This change will reduce the VAT impact on gas purchased in certain States where the

rates are higher. Such a move would also benefit the Public Sector Oil Companies. It is requested that natural gas and

naphtha be declared as declared goods under the CST Act.

It is further requested that Aviation Turbine Fuel (ATF) may also be classified at Declared goods with a uniform rate of

sales tax of 4% all over the country. This will facilitate emergence of Indian airports as hubs and stabilize ATF prices

across the country resulting in lower tariffs for the passengers.

5.7.2. Rate of Central Sales Tax

Central Sales Tax rate of 2 per cent has continued to remain the same since 2008, though the rate was expected to be

reduced to 1 per cent with effect from 1st April, 2009 and to Nil from 1.4.2010 on implementation of Goods and

Services Tax. Now that the introduction of GST is on the anvil and the Finance Minister has recently stated that bill

will be introduced before the financial year ends, it is time to gradually phase out CST.

It is suggested that the CST rate be at least reduced to 1% in the forthcoming Budget.

5.7.3. Refund of CST for Deemed Exports

Exporters who use copper as an input would have been an important market segment for the copper industry, but

for the disadvantage faced on account of the Central Sales Tax (CST, currently at 2%). Such exporters find it more

attractive to import copper vis-à-vis buying from the domestic copper producers - since they have to absorb the

burden of CST in case of the latter. Consequently, this important market segment has completely dried up for the

Indian copper industry.

To remove the above disadvantage to us vis-à-vis imports, it is requested to allow refund of CST for exporters (i.e. our

customers in the deemed export segment).

5.7.4. Exemption from Central Sales Tax on goods supplied to E&P Companies for petroleum operation

The import of goods required for petroleum operation is exempt from customs duties. Furthermore, the import of

goods into India is also not subject to Value Added Tax / Central Sales Taxes.

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However, if similar goods are procured indigenously from the local vendor, although the excise duty is exempt on

supply of such goods to E&P Companies for petroleum operation, the supplier of goods however is required to

charge either Value Added Tax or Central Sales Tax based on the nature of transaction. The applicable rate of VAT /

CST depends upon the nature of goods and the same could vary from 4% to 13.5% depending upon the nature of

goods.

This situation creates disparity for the Indian vendor as he is required to charge VAT at applicable rate whereas the

same goods sourced from the foreign parties is not subject to any such taxes. This anomaly makes Indian vendor

uncompetitive vis-à-vis the foreign players.

Localisation of petroleum operations would help in combating the foreign exchange deficit. In other words, it

reduces the imports in India thus making Indian rupee stronger.

While it is the jurisdiction of each State to classify and levy tax on petroleum products, the Centre can play its role by

granting exemption under the CST regime to the various goods required for undertaking the petroleum operation.

Considering the fact that levy of CST on the sale of goods by indigenous supplier would render the local industry

uncompetitive and incentivises the foreign player, Government may issue a notification granting exemption to goods

required for petroleum operations, under Central Sales tax law. Alternatively, the benefits may be provided on similar

lines as available to supplies to SEZ.

5.7.5. Exemption for STP/EHTP Units

On interstate purchases of goods, the Software Technology Park/Electronic Hardware Technology Park (STP/EHTP)

units are required to pay central sales tax on all such procurements made from other states. Further CST paid adds to

cost of goods/services exported by such units as no input credit is allowed to the units for such CST paid. There is CST

reimbursement scheme for STP units however it is not efficient as there is insufficient allocation of funds for such

reimbursements, the STP authorities asks for lot of documentation and the refund claims kept pending for two- three

years and thereafter either the claims are rejected or partially awarded.

Similar to the CST exemption provided to SEZ units the STP/EHTP units should be allowed to avail CST exemption

against form I on interstate purchases made.

5.7.6. Extension of sale in transit facility to SEZ transactions

As per the SEZ Act read with Section 8(6) of the CST Act and Rule 12(11) of the CST (Registration and Turnover) Rules,

the interstate sale made by a DTA to a SEZ unit is exempt from tax provided Form I is issued by the SEZ

unit/developer. For the issuance of Form I, the SEZ unit/developer has to obtain registration under the CST Act.

As per the above provision the SEZ unit / Developer can issue only Form I for their direct purchases made from DTA

Units, However DTA units are unable to effect 6(2) sale transaction to SEZ units /Developer as only Form C is

prescribed under section 6(2) of the CST Act for the purpose of claiming exemption from levy of tax on subsequent

sales.

In addition to Form C, Form I should also be prescribed under CST Act to enable SEZ units / Developer procuring

goods by way of sale in transit / 6(2) sale transactions.

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5.7.7. Inclusion of goods required for Natural Gas pipeline network in the category of goods eligible for concessional CST against form C

Under Section 8(1)(b) read with section 8(3) and 8(4) of CST Act, the concessional VAT of 2% is applicable on inter-

state sale of goods used for certain specified purposes against issuance of form C. The goods used for

telecommunication network were specified for the purpose w.e.f 13.05.2002. Laying of cross country pipelines

including connecting gas source to ultimate consumers is a priority in the course of developing National Gas Grid

announced in the last budget. As the goods required for use in Natural Gas pipeline network are still not covered,

Natural gas transmission companies like GAIL is not able to issue form C for purchase of goods for pipeline network

at concessional tax of 2%.

Since PNGRB regulated tariff is applicable to the pipeline network being expanded by GAIL across the country, it will

be in the interest of the consumers in particular, if the capital cost of the pipeline is reduced. Eligibility of pipeline

transmission projects for inter-state procurement of goods against form C will enable reduction in project cost which

will ultimately benefit the consumers.

Considering the importance of Natural Gas transmission pipeline network for building a national gas grid, it is

suggested that the goods required for Natural Gas pipeline network should be included in eligible category of goods

under section 8(1)(b) read with section 8(3) of CST Act.

5.7.8. Sale of Goods beyond 12 nautical miles

For oil and Gas exploration and exploitation, facilities are required to be established in the EEZ and Continental shelf

area. These facilities are located much beyond territorial limits of India i.e. much beyond 12 nautical miles from the

shoreline. Sales tax authorities in many states are trying to levy CST on sale of goods effected beyond 12 nautical

miles treating this type of sale as 'Inter-State Sale”, which is resulting in litigation and confusion. The legal position is

that such sale cannot be exigible for CST as CST Act has not been extended to EEZ and CS area.

Ministry of Finance should issue a clarification that CST cannot be levied on sale beyond 12 nautical miles until CST

Act is suitably amended. Government, thereafter, should amend the CST Act for levy of tax, with prospective effect.

5.7.9. Restriction on free trade in Agri-commodities

Certain statutory provisions in the Central / State Sales Tax legislation which restrict the applicability of exemption

from sales tax for sale/purchase in the course of Export need to be amended appropriately as these provisions

hinder free trade in agri-commodities.

Section-5 of the Central Sales Tax Act, 1956 covers, inter alia, some aspects of taxes/exemptions applicable to the

trade conducted in the course of export. Three of the provisions therein affect the free trade in the course of

exports.

Firstly, it is mandatory that the purchases must take place after procuring the Export Order to qualify the transaction

for exemption from Sales Tax.

In items like agri commodities, where supplies are seasonal and the demand is spread over the year, it is important

that an exporter procures the exportable commodities in advance (during the season) even if the demand does not

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exist in the international market at that point; even if it does, prices may not be right. Exporters either sell in distress

or lose the business opportunity to remain within the scope of this provision.

Sec 5(3) of CST Act to be amended such that any sale or purchase of any goods preceding the sale or purchase

occasioning the export of those goods out of India is also deemed to be in course of such export not withstanding

whether such sale or purchase took place against an existing Export Order

Secondly, the exemption is applicable to the penultimate sale prior to the actual export sale alone.

Traditionally, in India the existing commodity trade channels and the highly fragmented structure of Indian farms has

fostered a chain of traders and agents between a farmer and the exporter. The aforesaid provisions of CST severely

restrict trading liquidity because it is not always possible that an exporter directly procures from farmers. Thus, the

only alternative is to pay taxes at all points until the penultimate leg, making the price uncompetitive in the process.

Lastly, the procedure to avail exemption from CST necessitates a one-to-one linkage of various purchases and sales.

This would mean complication in blending of goods of various qualities to produce the exportable product of a

desired specification, when multiple purchases (made at different points of time) are used to deliver multiple sales

(compounded by the first provision explained above). An exporter has to issue Form H under the CST Act in support

of his claim of tax exemption.

It is recommended that Form H may be permitted to be issued and the exemption be availed by the buyers at all

transaction points as long as the goods are eventually exported (evidenced by the Bills of Lading as required under

the current regulations) irrespective of the timing of buying (meaning that an exporter can also buy goods before

entering into a sales contract) without necessarily linking purchases and sales one-to-one (only the aggregate

volumes may be considered at the time of assessment).

5.7.10. “C” Forms

Though Airport sector is an important infrastructure sector like telecom, electricity generation and distribution, and

mining, it is not included as one of the eligible categories which can issue concessional Form 'C' because of which

purchase of goods for Airport development attracts higher Sales Tax resulting in increased cost of project, which is

not in public interest as any increase in cost of project ultimately translates into higher passenger fees. In view of

this, Airport sector should also be allowed to issue C Form and to this extent Section 8(3)(b) of Central Sales Tax Act,

1956 may be suitably amended.

Goods for construction activity are not eligible for “C” Forms which increases the cost of construction. Goods for

construction industry should be made eligible for lower rate of CST of 2%.

At present, 'C' forms are submitted to assessing authority within three months after the end of the relevant quarter

to which 'C' form relate (Rule 12(7) of CST Rule,1957).

The time limit for submitting 'C' forms should be extended upto assessment in view of difficulties in collection from

various dealers.

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N O T E S