ECONOMIC LAWS PRACTICE
ADVOCATES & SOLICITORS
Union Budget 2012
An Analysis of Tax Proposals
Foreword
Dear Reader,
The Budget in the form of Finance Bill 2012 was pronounced earlier today.
In a year of multiple fiscal challenges the Finance Minister has done an admirable job in
introducing various industry and sector specific measures to address issues which were
holding back the prospects of Indian Industry. In particular, the power, infrastructure and
entertainment industry have received noteworthy support in the Budget.
The disturbing trend in this Budget is the concerted effort made to negate any judicial
pronouncements which are adverse to the revenue. The retrospective amendment in
relation to the taxation of indirect transfer of shares (the Vodafone judgment), and, the
royalty issues in relation to software are the most stark examples of the Legislature
thumbing its nose at the Judiciary.
The Negative List Taxation introduced for Service Tax substantially reinvents the law on
Service Tax and will have a deep impact on service transactions. The introduction of the
Negative List prior to the introduction of GST leads to significant gaps in relation to
generation and use of tax credits. This anomaly will doubtless add to the real indirect tax
cost of transactions in India.
The much awaited introduction of GST and DTC continues to be work in progress, with no
definitive date of introduction.
As always, we at ELP would be happy to hear your comments on this publication and happy
to support.
We look forward to your comments and questions.
Best Regards,
Rohan Shah
Managing Partner
Economic Laws Practice
Date: March 16, 2012
2
CONTENTS
FOREWORD ................................................................................................................... 2
CHAPTER 1 – BUDGET HIGHLIGHTS .......................................................................... 4
CHAPTER 2 – SERVICE TAX ........................................................................................ 7
Legislative Changes
7
CHAPTER 3 – EXCISE DUTY ...................................................................................... 45
Legislative Changes
45
Changes in Rate of Excise Duty
51
CHAPTER 4 – CUSTOMS DUTY ................................................................................. 63
Legislative Changes
63
Changes in Rate of Customs Duty
68
CHAPTER 5 - CENVAT CREDIT RULES, 2004 ........................................................... 75
CHAPTER 6 – DIRECT TAXES .................................................................................... 80
Income Tax Rates
103
Transfer Pricing
105
Banking, Finance and Infrastructure Update
112
GLOSSARY OF TERMS............................................................................................. 120
3
Chapter 1 – Budget Highlights
1. Indirect taxes
a. Tax Rates
a. Service Tax and Excise Duty – raised from 10% to 12%
b. GST – no definitive time-line for introduction
a. Place of Supply Rules introduced for comments
b. Harmonisation of Service Tax and Excise Duty regimes – Common Tax Code
proposed
c. GST Network to be operational from August 2012
c. Negative list approach to tax services introduced – 17 categories of services alone
outside the tax net
d. Settlement Commission provisions extended to Service Tax cases.
e. Ordinary limitation period under Service Tax law increased to 18 months.
f.
No change in the rate of CST.
2. Direct Taxes
a. Decision of Hon’ble Supreme Court in the case of Vodafone negated through a
retrospective Legislative amendment. Indirect transfer of shares/ assets liable to be
taxed in India retrospectively with effect from April 1, 1962.
b. General Anti Avoidance Rules (GAAR) introduced giving wide powers to tax authorities
to probe transactions.
c. Measures proposed to prevent generation and circulation of unaccounted money. White
paper on Black Money to be published.
d. Software payments to be regarded as royalty. Amendment in this regard introduced
retrospectively with effect from June 1, 1976.
e. Introduction of Advance Pricing Agreements
f.
Scope of Transfer Pricing Enlarged to Cover Specified Domestic Related Party
Transactions.
g. Enlarged Definition of International Transactions to now cover marketing intangibles,
guarantee related transactions etc.
4
h. Benefits to assessee with respect to safe harbor range restricted to 3%.
i.
Sunset clause for power sector extended to 31st March, 2013
j.
Tax on unaccounted income
k. Share premium in excess of fair market value of the shares to be treated as income
l.
Re-opening of assessments upto 16 years if the assets located outside India have
escaped assessment
m. Introduction of TDS provisions on key transactions, such as purchase of bullion,
immovable property
5
Effective date of various changes
Particulars
Date from when effective
Negative list for services
From a date to be notified after the
enactment of the Finance Bill, 2012
Amendments to Point of Taxation Rules under the
March 17, 2012
Finance Act, 1994
Amendments to CENVAT Credit Rules, 2004
Effective from April 1, 2012
(Other than those specified in the relevant
Notifications)
Legislative changes in Customs and Excise
Date of enactment of the Finance Bill, 2012
New rates of Custom Duty
March 17, 2012
New rates of Excise Duty
March 17, 2012
New rate of Service Tax
April 1, 2012
6
Chapter 2 – Service Tax
Legislative Changes
Amendments to the Act
New Charging Section
• Section 66B is proposed to be inserted in the Act (w.e.f. a date to be notified by the Central
Government) as the new charging Section, providing for the levy of Service Tax at the rate of
12% on the value of all services, other than those specified in the negative list, provided or
agreed to be provided or deemed to have been agreed to be provided in the taxable territory,
by one person to another and collected in such manner as may be prescribed.
Negative List
(34) "negative list" means the services which are listed in Section 66D as not liable to Service
Tax
Services under Negative List
Related Definitions
ELP’s Comments
Government Authorities
Section 66D(a) services by
Government or a local
authority excluding the
following services to the extent
they are not covered
elsewhere -
"support services" means
infrastructural, operational,
administrative, logistic,
marketing or any other support
of any kind comprising functions
that entities carry out in ordinary
course of operations themselves
but may obtain as services by
outsourcing from others for any
reason whatsoever and shall
include advertisement and
promotion, construction or works
contract, renting of immovable
property, security, testing and
analysis;
Currently, many services
provided during the course of
Sovereign or statutory functions/
duties are exempted through
specific Notifications.
(i) services by the Department
of Posts by way of speed post,
express parcel post, life
insurance and agency services
provided to a person other
than Government;
(ii) services in relation to an
aircraft or a vessel, inside or
outside the precincts of a port
or an airport;
"business entity" means any
person ordinarily carrying out
any activity relating to industry,
commerce or any other
7
For the support services
provided by the Government to
business entities, the liability to
pay Service Tax is on the
‘business entity’ under reverse
charge mechanism
(iii) transport of goods or
passengers; or
(iv) support services, other
than services covered under
clauses (i) to (iii) above,
provided to business entities;
business;
"port" has the meaning assigned
to it in clause (q) of section 2 of
the Major Port Trusts
Act, 1963 or in clause (4) of
section 3 of the Indian Ports Act,
1908;
Currently, services provided by
Reserve Bank of India are
exempted vide Notification
22/2006 dated May 31, 2006
Currently, services provided to
foreign diplomatic mission or
consular post in India are
exempted vide Notification No.
33/2007, dated May 23, 2007
Reserve Bank of India
Section 66D(b) services by the
Reserve Bank of India
Foreign Diplomatic Mission
Section 66D(c) services by a
foreign diplomatic mission
located in India;
Agriculture
Section 66D(d) services
relating to agriculture by way
of—
“Agriculture”, “Agricultural
extension” and “Agricultural
produce” has been defined
(i) agricultural operations
directly related to production of
any agricultural produce
including cultivation,
harvesting, threshing, plant
protection or seed testing;
Currently, services relating to
transportation and storage and
warehousing services in relation
to agriculture produce are
specifically exempted.
The proposed negative list
further widens the scope of
exemption so as to include all
the services in relation to
agriculture activity and
agricultural produce.
(ii) supply of farm labour;
(iii) processes carried out at an
agricultural farm including
tending, pruning, cutting,
harvesting, drying, cleaning,
trimming, sun drying,
fumigating, curing, sorting,
grading, cooling or bulk
packaging and such like
operations which do not alter
the essential characteristics of
agricultural produce but make
it only marketable for the
8
primary market;
(iv) renting or leasing of agro
machinery or vacant land with
or without a structure
incidental to its use;
(v) loading, unloading,
packing, storage or
warehousing of agricultural
produce;
(vi) agricultural extension
services;
(vii) services by any
Agricultural Produce Marketing
Committee or Board or
services provided by a
commission agent for sale or
purchase of agricultural
produce;
Trading
Section 66D(e) trading of
goods;
Manufacture
Section 66D(f) any process
amounting to manufacture
or production of goods;
Sale of Space or Time
Section 66D(g) selling of
Currently, trading is included in
the definition of ‘exempted
services’ by way of explanation
in Rule 2(e) of CCR, 2004
"process amounting to
manufacture or production of
goods" means a process on
which duties of excise are
leviable under section 3 of the
CE Act, 1944 or any process
amounting to manufacture of
alcoholic liquors for human
consumption, opium, Indian
hemp and other narcotic drugs
and narcotics on which duties of
excise are leviable under any
State Act for the time being in
force;
“advertisement" means any
form of presentation for
9
Currently the exclusion under
the definition of Business
Auxiliary Service is only
restricted to the activity of
manufacture under CE Act. The
aforesaid position is clarified by
the recent clarification vide
Letter Dy. No.
2305/Commr(ST)/2011, dt.
15.07.2011
The current taxing entry of “sale
of space or time for
space or time slots for
advertisements other than
advertisements broadcast by
radio or television;
promotion of, or bringing
awareness
about, any event, idea,
immovable property, person,
service, goods or actionable
claim through
newspaper, television, radio or
any other means but does not
include any presentation made
in person;
advertisement services“ is
however very wide to also cover
sale of space or time for display,
advertising, showcasing any
product or service, aerial
advertising, selling of time slots
etc.
The following is the impact of
proposed amendment:
Taxable – sale of space or time
for advertisement broadcast on
radio or televisions, sale of time
slot by broadcasting
organisation
Toll charges
Section 66D(h) service by way
of access to a road or a bridge
on payment of toll charges
Game of chance
Section 66D(i) betting,
gambling or lottery;
Entertainment and
Amusement
Section 66D(j) admission to
entertainment events or
access to amusement
facilities
Non-taxable – sale of space or
time for advertisement in print
media, bill boards, public places,
building, conveyances, cell
phones, ATMs, internet, aerial
advertisement
Circular No. 152/3/2012 dated
February 22, 2012 was issued
specifically clarifying that toll
charges would not be liable to
Service Tax.
"betting or gambling" means
The service of promotion,
putting on stake something of
marketing and organising of
games of chance including
value, particularly money, with
consciousness of risk and hope
lottery would still be liable to
of gain on the outcome of a
Service tax, as covered by the
game or a contest, whose result existing taxable entry under
may be determined by chance or Section 65(105)(zzzn)
accident, or on the likelihood of
anything occurring or
not occurring;
"amusement facility" means a
facility where fun or recreation is
provided by means of rides,
gaming devices or bowling
alleys in amusement parks,
amusement arcades, water
10
Presently, not taxable under the
Finance Act, 1994
parks, theme parks or such
other places but does not
include a place within such
facility where other services are
provided;
Electricity transmission and
distribution
Section 66D(k) transmission or
distribution of electricity by an
electricity transmission or
distribution utility
Education
Section 66D(l) services by way
of (i) pre-school education and
education up to higher
secondary school or
equivalent;
(ii) education as a part of a
curriculum for obtaining a
qualification recognised by any
law for the time being in force;
"entertainment event" means
an event or a performance which
is intended to provide recreation,
pastime, fun or enjoyment, by
way of exhibition of
cinematographic film, circus,
concerts, sporting event,
pageants, award functions,
dance, musical or theatrical
performances including drama,
ballets or any such event or
programme
"electricity transmission or
distribution utility" means the
Central Electricity Authority; a
State Electricity Board; the
Central Transmission Utility or a
State Transmission Utility
notified under the Electricity Act,
2003; or a distribution or
transmission licensee under the
said Act, or any other entity
entrusted with such function by
the Central Government or, as
the case may be, the State
Government
"approved vocational education
course" means (i) a course run by an industrial
training institute or an industrial
training centre affiliated to the
National Council for Vocational
Training offering courses in
designated trades notified
under the Apprentices Act,
1961; or
(ii) a Modular Employable Skill
Course, approved by the
11
Currently, services of distribution
and transmission of electricity is
exempted vide Notification 32/
2010 dated June 22, 2010 and
Notification No 11/2010 dated
February 27, 2010
Currently, taxing entry of
Commercial Training or
Coaching centre services also
excludes any institute or
establishment which issues any
certificate or diploma or degree.
It has been specifically clarified
that the course should be
recognised by Indian law.
(iii) education as a part of an
approved vocational education
course;
Residential renting
Section 66D(m) services by
way of renting of residential
dwelling for use as residence;
National Council of Vocational
Training, run by a person
registered with the Directorate
General of Employment and
Training, Union Ministry of
Labour and Employment; or
(iii) a course run by an institute
affiliated to the National Skill
Development Corporation
set up by the Government of
India
“renting" means allowing,
permitting or granting access,
entry, occupation, use or any
such facility, wholly or partly, in
an immovable property, with or
without the transfer of
possession or control of the said
immovable property and
includes letting, leasing,
licensing or other similar
arrangements in respect of
immovable property
Currently, the taxing entry of
“renting of immovable property”
covers renting for use in the
course of furtherance of
business or commerce, and
excluded the following services
from its scope:
• Renting by a religious body
or to a religious body;
• Renting to specified
educational body
TRU Circular has clarified that in
case of bundled services (used
for residential and nonresidential), the services would
be classified as per principles of
classification in section 66F of
the Finance Act, 1994 i.e.
dominant nature of such a
bundle.
Interest/ Discounts and
Interbank forex trading
Section 66D(n) services by
way of (i) extending deposits, loans or
advances in so far as the
consideration is represented
by way of interest or discount;
(ii) inter se sale or purchase of
foreign currency amongst
banks or authorised dealers of
"interest" has the meaning
assigned to it in clause (28A) of
section 2 of the Income-tax
Act, 1961
Earlier by way of Notification no.
29/2004 dated September 22,
2004, exemption was available
on services in relation to
• overdraft facility
• cash credit facility
• discounting of bills, bills of
exchange or cheques
Interest on loans was specifically
excluded under Determination of
12
foreign exchange or amongst
banks and such dealers;
Public Transport
Section 66D(o) service of
transportation of passengers,
with or without accompanied
belongings, by (i) a stage carriage;
(ii) railways in a class other
than (A) first class; or
(B) an air-conditioned coach;
(iii) metro, monorail or
tramway;
(iv) inland waterways;
(v) public transport, other than
predominantly for tourism
purpose, in a vessel of less
than fifteen tonne net; and
(vi) metered cabs, radio taxis
or auto rickshaws;
Goods Transportation
Section 66D(p) services by
way of transportation of goods
(i) by road except the services
of (A) a goods transportation
agency; or
(B) a courier agency;
(ii) by an aircraft or a vessel
from a place outside India to
Value of Services Rules, 2006
"metered cab" means any
contract carriage on which an
automatic device, of the type
and make approved under the
relevant rules by the State
Transport Authority, is fitted
which
indicates reading of the fare
chargeable at any moment and
that is charged accordingly
under
the conditions of its permit
issued under the Motor Vehicles
Act, 1988 and the rules made
thereunder;
"inland waterway" means
national waterways as defined in
clause (h) of section 2 of
the Inland Waterways Authority
of India Act, 1985 or other
waterway on any inland water,
as
defined in clause (b) of section 2
of the Inland Vessels Act, 1917
"customs station" shall have
the meaning assigned to it in
clause (13) of section 2 of the
Customs Act, 1962;
"goods transport agency"
means any person who provides
service in relation to transport of
goods by road and issues
consignment note, by whatever
name called;
13
Interbank Foreign Exchange
trading was specifically
exempted under Notification No.
19/2009 dated July 7, 2009
under Banking & Other Financial
Services.
Currently, only transport of
passengers by Air and Rent-acab are taxable. Further,
transport of person embarking
from port in India by a cruise
ship is taxable.
Under Negative List,
transportation of passengers
through railways in a first class
and air-conditioned coach would
be liable to tax.
Currently, services by “Goods
Transport Agency” and “Courier
Agency” are liable to Service
tax. Further, “Transport of
Goods through inland
waterways” is liable to Service
tax.
the first customs station of
landing in India; or
(iii) by inland waterways;
Funeral services
Section 66D(q) funeral, burial,
crematorium or mortuary
services including
transportation of the
deceased.
-
Declared Services
"declared service" means any activity carried out by a person for another person for
consideration and declared as such under section 66E.
Definition covered under Section 66E
Renting services
Section 66E(a) renting of immovable property;
Construction services
Section 66E(b) construction of a complex,
building, civil structure or a part thereof, including
a complex
or building intended for sale to a buyer, wholly or
partly, except where the entire consideration is
received after issuance of completion-certificate
by the competent authority.
Explanation.— For the purposes of this clause,—
(I) the expression "competent authority" means
the Government or any authority authorised
to issue completion certificate under any law for
the time being in force and in case of non
requirement
of such certificate from such authority, from any
of the following, namely:––
(A) architect registered with the Council of
14
Comments
The services are currently covered under the
taxing entry of “renting of immovable property”
service which taxes renting for use in the course
of furtherance of business or commerce. The
levy of Service tax on “renting of immovable
property” is presently pending before the
Supreme Court in Home Solutions Retails
(India) Ltd vs. Union of India [2011-TIOL-103SC-ST]
The services are currently covered by Section
65(105) (zzzh) of the Act covering services in
relation to construction of complex
Explanation – The construction of a complex
which is intended for sale, wholly or partly, by a
builder or any person authorised by the builder
before, during or after construction (except in
cases for which no sum is received from or on
behalf of the prospective buyer by the builder or
the person authorised by the builder before grant
of completion certificate by the authority
competent to issue such certificate under any law
for the time being in force) shall be deemed to be
service provided by the builder to the buyer.
The Hon’ble Bombay High Court in Maharashtra
Chamber of Housing Industry and Another vs.
Union of India and Others [2012-VIL-15-BOMST] and Punjab & Haryana High Court in G S
Architecture constituted under the Architects Act,
1972; or
(B) chartered engineer registered with the
Institution of Engineers (India); or
(C) licensed surveyor of the respective local body
of the city or town or village or
development or planning authority;
(II) the expression "construction" includes
additions, alterations, replacements or
remodelling of any existing civil structure.
Intellectual Property Rights Services
Section 66E(c) temporary transfer or permitting
the use or enjoyment of any intellectual property
right.
Information Technology Software Services
Section 66E(d) development, design,
programming, customisation, adaptation,
upgradation, enhancement, implementation of
information technology software.
"information technology software" means any
representation of instructions, data, sound or
image, including source code and object code,
recorded in a machine readable form, and
capable of being manipulated or providing
interactivity to a user, by means of a computer or
an automatic data processing machine or any
other device or equipment.
Services under Obligation
Section 66E(e) agreeing to the obligation to
refrain from an act, or to tolerate an act or a
situation, or to do an act;
Supply of goods
Section 66E(f) transfer of goods by way of hiring,
leasing, licensing or in any such manner without
transfer of right to use such goods;
15
Promoters vs. Union of India [2011 (21) STR
100 (P&H)] has upheld the levy of Service tax
under the Explanation to Section 65(105)(zzh).
Currently Section 65(105) (zzr) taxes services
provided by the holder of intellectual property
right, in relation to intellectual property service.
The current taxing entry presently covers:
• Providing the right to use information
technology software for commercial exploitation
including right to reproduce, distribute and Sell
information technology software and right to
use software components for the creation of
and inclusion in other information technology
software products
• Providing the right to use information
technology software supplied electronically.
Amount received for monopoly rights / noncompete fees would now become liable to
Service tax
The present taxing entry of “Supply of tangible
goods services” cover supply of tangible goods
without transfer of effective possession and
control.
Under the proposed amendment, no distinction
has been made between tangible and intangible
goods. However, the term “goods” have been
defined to mean “every kind of moveable
property...”. This would also include intangible
goods in terms of the decision of the Hon’ble
Supreme Court in Tata Consultancy Services
vs. State of Andhra Pradesh [2004 (178) ELT
22 (SC)].
It has also been clarified that “Transfer of right of
goods” must involve transfer of possession and
effective control over such goods.
Hire Purchase services
It has been clarified that the delivery of goods on
Section 66E(g) activities in relation to delivery of
hire purchase or any system of payment on
goods on hire purchase or any system of
installment is not chargeable to Service tax as
payment by instalments.
the same is deemed to be sale of goods. The
entry covers only the activities or services
provided in relation to such delivery of goods.
Works contract services
It has been clarified that the contracts for
Section 66E(h) service portion in the execution of erection, commissioning or installation of plant,
a works contract;
machinery, equipment or structures, whether
"works contract" means a contract wherein
prefabricated or other would be treated as works
transfer of property in goods involved in the
contract if:
execution of such contract is leviable to tax as
• Transfer of property in goods is involved in
sale of goods and such contract is for the
such a contract; and
purpose of carrying out construction, erection,
• The machinery equipment structures are
commissioning, installation, completion, fitting
attached or embedded to earth after erection
out, improvement, repair, renovation, alteration of
commissioning or installation.
any building or structure on land or for carrying
out any other similar activity or a part thereof in
relation to any building or structure on land.
Catering services
The service portion of catering services has been
Section 66E(i) service portion in an activity
holistically brought under Service tax.
wherein goods, being food or any other article of
human consumption or any drink (whether or not
intoxicating) is supplied in any manner as a part
of the activity.
New Exemptions / Concessions
Sr.
No.
1.
2.
Description of service in respect of ELP’s Comment
which exemption from payment of
Service Tax is proposed to be granted
Services provided to the United Nations or This exemption, presently available under
a specified international organization.
Notification No. 16/2002-S.T. dated 2.8.2002, has
been continued into the negative list regime.
Health care services by a clinical Under the current taxing entry for “Health Checkestablishment, an authorised medical up and Treatment Services”, services provided by
practitioner or para-medics.
specified clinical establishments and entities are
16
Sr.
No.
3.
4.
5.
6.
Description of service in respect of ELP’s Comment
which exemption from payment of
Service Tax is proposed to be granted
covered, and the same are exempted in terms of
Notification No. 30/2011-S.T. dated 25.4.2011.
Owing to the broad scope of the proposed
definitions of the terms ‘clinical establishment’ and
‘health care services’, the ambit of proposed
exemption is wider as compared to the present
exemption.
Services by a veterinary clinic in relation to Services provided by a veterinary clinic are
health care of animals or birds.
presently not covered within the Service Tax net.
Accordingly, a specific exemption has been carved
out in respect of such services.
Services by an entity registered under For the purposes of levy of Service Tax under the
Section 12AA of the IT Act by way of taxing entry for “Club or Association Service”, the
charitable activities.
definition of the term ‘club or association’ under
Section 65(25aa) of the Act specifically excludes
any person or body of persons engaged in any
activity having objectives which are in the nature
of public service and are of a charitable, religious
or political nature. The said exemption has been
continued into the negative list regime. However,
though previously, exemption under the IT Act on
the ground of being a public charitable institution
was of no consequence or relevance for Service
Tax purposes, the same has now been made
relevant. Also, a comprehensive definition of the
term ‘charitable activities’ has been proposed, for
the sake of clarity.
Services by a person by way of• Presently, the definition of the term ‘renting of
(a) renting of precincts of a religious place
immovable property' specifically excludes renting
meant for general public; or
of immovable property by a religious body or to a
(b) conduct of any religious ceremony.
religious body.
• Vide Notification No. 14/2003-S.T. dated
20.6.2003, services provided by a mandapkeeper for use of the precincts of a religious
place as a mandap, have been exempted.
Services provided to any person other than The said services were also not covered within the
a business entity by scope of the existing taxing entry for “Legal
(a) an individual as an advocate; or
Consultancy Service” and status quo has been
(b) a person represented on and as arbitral maintained in the negative list regime.
tribunals.
17
Sr.
No.
7.
8.
9.
Description of service in respect of
which exemption from payment of
Service Tax is proposed to be granted
Services 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.
Services by way of training or coaching in
recreational activities relating to arts,
culture or sports.
Services provided(a) to an educational institution by way of
catering under any centrally assisted mid –
day meals scheme sponsored by
Government.
(b) to or by an institution in relation to
educational
services,
where
the
educational services are exempt from the
levy of Service Tax, by way of
transportation of students or staff.
ELP’s Comment
This benefit, presently available in terms of
Notification No. 11/2007-S.T., dated March 1,
2007, has been continued into the negative list
regime. However, no definition for the term ‘clinical
research organization’ has been proposed, owing
to which the ambiguity in relation to scope of the
said term remains.
Vide Notification 24/ 2004-S.T. dated 10.9.2004 as
amended, services provided by vocational training
institutes and recreational training institutes stand
exempted. Though services provided by
recreational training institutes are proposed to be
covered by this exemption, approved vocational
education courses form part of the proposed
negative list.
Vide Notification No. 47/2010 dated 3.9.2010,
exemption is given to NGOs registered under
Central or State Acts providing catering services
under any centrally assisted mid – day meals
schemes. The proposed exemption is available to
all categories of caterers providing catering
services under any centrally assisted mid – day
meals schemes.
It had been clarified vide Board Letter No. F. No.
137/70/2007 CX-4 (PT) dated 15.12.2008 that
schools running transport services for their
students are not liable to pay Service Tax under
the category of Tour Operator Services or Rent-aCab Services. The proposed exemption has the
effect of extending the benefit of the exemption to
entities other than institutions in relation to
educational services and in relation to
transportation of school staff.
(c) to or by an institution in relation to At present, such services are non-taxable and
educational
services,
where
the status quo has been maintained in the proposed
educational services are exempted from negative list regime.
the levy of service tax, by way of services
in relation to admission to such education.
18
Sr.
No.
10.
11.
12.
Description of service in respect of
which exemption from payment of
Service Tax is proposed to be granted
Services provided to a recognised sports
body by(a) an individual as a player, referee,
umpire, coach or manager for participation
in a tournament or championship
organized by a recognized sports body;
(b) another recognised sports body;
Services by way of sponsorship of
tournaments or championships organised,(a) by a national sports federation, or its
affiliated
federations,
where
the
participating teams or individuals represent
any district, state or zone;
(b) by Association of Indian Universities,
Inter-University Sports Board, School
Games Federation of India, All India
Sports Council for the Deaf, Paralympic
Committee of India, Special Olympics
Bharat;
(c) by Central Civil Services Cultural and
Sports Board;
(d) as part of national games, by Indian
Olympic Association; or
(e) under Panchayat Yuva Kreeda Aur
Khel Abhiyaan (PYKKA) Scheme;
Services provided to the Government or
local authority by way of erection,
construction,
maintenance,
repair,
alteration, renovation or restoration of (a) a civil structure or any other original
works meant predominantly for a nonindustrial or non-commercial use;
(b) a historical monument, archaeological
site or remains of national importance,
archaeological excavation, or antiquity
specified under Ancient Monuments and
Archaeological Sites and Remains Act,
1958;
(c) a structure meant predominantly for
use as (i) an educational, (ii) a clinical, or
(iii) an art or cultural establishment;
19
ELP’s Comment
Presently, sponsorship services when provided for
tournaments/championships
organized
by
specified bodies are exempted in terms of
Notification No. 30/2010-S.T., dated 22.06. 2010.
Specified services when provided to the
Government or local authority are proposed to be
exempted in terms of this entry.
Sr.
No.
13
14
Description of service in respect of ELP’s Comment
which exemption from payment of
Service Tax is proposed to be granted
(d) canal, dam or other irrigation works;
(e) pipeline, conduit or plant for (i) drinking
water supply (ii) water treatment
(iii)sewerage treatment or disposal; or
(f) a residential complex predominantly
meant for self-use or the use of their
employees or other persons specified in
the Explanation 1 to clause 44 of section
65 B of the said Finance Act;
Services provided by way of erection,
construction,
maintenance,
repair,
alteration, renovation or restoration of,(a) road, bridge, tunnel, or terminal for
road transportation for use by general
public;
(b) building owned by an entity registered
under section 12AA of the Income tax Act,
1961(43
of
1961)
and
meant
predominantly for religious use by general
public;
(c) pollution control or effluent treatment
plant, except located as a part of a factory;
or
(d) electric crematorium;
Services by way of erection or construction
of original works pertaining to,(a) airport, port or railways;
(b) single residential unit otherwise as a
part of a residential complex;
(c) low- cost houses up to a carpet area of
60 square metres per house in a housing
project approved by competent authority
empowered under the ‘Scheme of
Affordable Housing in Partnership’ framed
by the Ministry of Housing and Urban
Poverty Alleviation, Government of India;
(d) post- harvest storage infrastructure for
agricultural produce including a cold
storages for such purposes; or
(e) mechanised food grain handling
20
The taxing entries for Works Contract Service and
Commercial or Industrial Construction Service
specifically exclude services in respect of roads,
airports, railways, transport terminals, bridges,
tunnels and dams.
•
•
•
The taxing entries for “Works Contract Service”
and “Commercial or Industrial Construction
Service” specifically exclude services in
respect of roads, airports, railways, transport
terminals, bridges, tunnels and dams.
Presently, the definition of the term ‘residential
complex’ only covers complexes having more
than 12 residential units. Therefore, complexes
having more than 1 residential unit will now be
covered in the Service tax net.
Presently, exemption from Service Tax is
available in relation to housing projects under
the JNNURM and RAY schemes in terms of
Notification No. 6/2011-S.T., dated 1.3.2011
read with Notification No. 28/2010-S.T. dated
22.6.2010.
Sr.
No.
15.
16
17.
18.
19.
20.
Description of service in respect of ELP’s Comment
which exemption from payment of
Service Tax is proposed to be granted
system, machinery or equipment for units • Presently, exemption from Service Tax is
processing agricultural produce as food
available in respect of erection, commissioning
stuff excluding alcoholic beverages;
or installation of mechanised food grain
handling systems and equipment for setting up
or substantial expansion of cold storage vide
Notification No. 12/2010-ST dated 27.02.2010.
Temporary transfer or permitting the use or
enjoyment of a copyright covered under
clause (a) or (b) of sub-section (1) of
section 13 of the Indian Copyright Act,
1957 (14 of 1957), relating to original
literary, dramatic, musical, artistic works or
cinematograph films;
Presently, the taxing entry of “Copyright Services”
under Section 65(105)(zzzzt) excludes the rights
covered under Sec 13(1)(a) of Copyright Act, 1957
from its ambit. The exemption has now been
extended to include temporary transfer or
permitting the use or enjoyment of a copyright
covered under Sec 13(1)(b) of Copyright Act, 1957
i.e. recording of cinematographic films.
Services by a performing artist in folk or These services are not covered under any of the
classical art forms of (i) music, or (ii) existing taxing entries.
dance, or (iii) theatre, excluding services
provided by such artist as a brand
ambassador
Services by way of collecting or providing
news by an independent journalist, Press
Trust of India or United News of India.
Services by way of renting of a hotel, inn, This benefit is presently available in terms of
guest house, club, campsite or other Notification No. 31/2011-S.T., dated 25.4.2011.
commercial places meant for residential or
lodging purposes, having declared tariff of
a room below rupees one thousand per
day or equivalent;
Services provided in relation to serving of Presently, in terms of Section 65(105)(zzzzv), only
food or beverages by a restaurant, eating services provided by a restaurant having airjoint or a mess, other than those having conditioning in any part of the establishment which
the facility of air-conditioning or central air- has a license to serve alcoholic beverage in
heating in any part of the establishment, at relation to serving of food or beverage, including
any time during the year and which has a alcoholic beverages, at any time during the
license to serve alcoholic beverages;
financial year are taxable.
Services by way of transportation by rail or Notification No. 8/2010-ST, dated 27.2.2010, as
a vessel from one port in India to another amended, exempts taxable service provided in
of the 9 specified varieties of goods.
relation to transport of specified goods.
21
Sr.
No.
21.
22.
23.
24.
25.
Description of service in respect of
which exemption from payment of
Service Tax is proposed to be granted
Services provided by a goods transport
agency by way of transportation of fruits,
vegetables, eggs, milk, food grains or
pulses, or where gross amount charged on
a consignment transported in a single
goods carriage does not exceed Rs. 1,500;
or
where gross amount charged for
transportation of all such goods for a single
consignee in the goods carriage does not
exceed Rs. 750
Renting of motor vehicles to State
transport undertaking meant to carry more
than twelve passengers and to a goods
transport
agency,
a
means
of
transportation of goods.
Transport of passengers by(i) air embarking or terminating in an
airport located in the state of
Arunachal Pradesh, Assam, Manipur,
Meghalaya,
Mizoram,
Nagaland,
Sikkim, or Tripura or at Baghdogra
located in West Bengal; or
(ii) a
contract
carriage
for
the
transportation
of
passengers,
excluding tourism, conducted tour,
charter or hire
Services by way of motor vehicle parking
to general public excluding leasing of
space to an entity for providing such
parking facility
ELP’s Comment
This benefit is presently available in terms of
Notification No. 33/2004-S.T. and Notification No.
34/2004-S.T., both dated 03.12.2004 and the
same has been continued into the proposed
negative list regime.
The benefit in relation to vehicles provided to
goods transport agency is presently available in
terms of Notification No. 1/2009-S.T., dated
5.1.2009. The proposed exemption will additional
extend to motor vehicles rented to State transport
undertaking meant to carry more than twelve
passengers.
This benefit is presently available in terms of
Notification No. 27/2010-ST dated 22.06.2010 and
Notification No. 20/2009-ST dated 07.07.2009 and
the same has been continued into the proposed
negative list regime.
Currently under the taxing entry for “Renting of
Immovable Property”, the renting of vacant land
used for parking purposes is excluded from the
purview of Service Tax. Effectively, leasing of
space to an entity for providing parking facility is
brought within the Service Tax net.
Services provided to the Government or a Currently, the services of repair of ships or boats
local authority by way of or vessels belonging to the Government of India
(a) repair of a ship, boat or vessel;
and the services of supply of water are exempted,
(b) effluents and sewerage treatment;
only when provided within a port or an airport vide
(c) waste collection or disposal;
Notification No. 31/2010-S.T., dated 22.6.2010.
(d) storage, treatment or testing of water Effectively, the above services remains exempted
22
Sr.
No.
Description of service in respect of
which exemption from payment of
Service Tax is proposed to be granted
for drinking purposes; or
(e) transport of water by pipeline or conduit
for drinking purposes
26.
Services of general insurance business
provided under specified schemes
27.
Services provided by an incubatee up to
total business turnover of Rs. 50 lakh in an
FY, subject to the following conditions:
(a) total business turnover had not
exceeded Rs. 50 lakh in the preceding FY
(b) 3 years has not lapsed from the date of
entering into agreement as an incubatee
Service by an unincorporated body or an
entity registered as a society to own
members by way of reimbursement of
charges or share of contribution (a) as a trade union;
(b) for the provision of exempt services by
the entity to third persons; or
(c) up to an amount of Rs. 5000 per month
per member for sourcing of goods or
services from a third person for common
use of its members in a housing society or
residential complex
28.
29.
Services by the following persons in
respective capacities (a) a sub-broker or an authorised person to
a stock broker;
(b) an authorised person to a member of a
23
ELP’s Comment
even when provided outside the port / airport.
Also, certain services of non-commercial nature
and in the interest of public at large (health,
sanitation etc.) are proposed to be exempted
when provided to the Government and local
authority.
Except for Coconut Palm Insurance Scheme,
other schemes were exempt from payment of
Service Tax under various Notifications issued
from time to time. However, Comprehensive Crop
Insurance Scheme and Insurance schemes of
small transactions except motor insurance which
were exempted vide Notification No. 3/94-S.T.
dated 30.6.1994, have been excluded from the
scope of exemption. There is thus a minor change
in scope of existing exemption scheme.
Presently an incubatee is exempt from payment of
Service Tax under Notification No. 10/2007-S.T.
dated 01.03.2007 and the same exemption has
been continued into the negative list regime.
Presently under the taxing entry for “Club or
Association Services” activities of trade unions are
exempt. Exemption for resident welfare
association is also available under Notification No.
8/2007-S.T. dated 1.3.2007. However, other
categories which were exempted from the scope
of ‘Club or Association Services’ have not been
included in the present scheme of exemption.
Taxable service by a sub-broker or an authorised
person to a stock broker is presently exempt under
Notification No. 31/2009-S.T. dated 01.09.2009.
Taxable service by a selling or marketing agent of
lottery tickets to a distributer or a selling agent is
Sr.
No.
30.
Description of service in respect of
which exemption from payment of
Service Tax is proposed to be granted
commodity exchange;
(c) a mutual fund agent or distributor to
mutual fund or asset management
company for distribution or marketing of
mutual fund;
(d) a selling or marketing agent of lottery
tickets to a distributer or a selling agent;
(e) a selling agent or a distributer of SIM
cards or recharge coupon vouchers; or
(f) a business facilitator or a business
correspondent to a banking company or an
insurance company in a rural area;
Carrying out an intermediate production
process as job work in relation to specified
goods
31.
Services by an organiser to any person in
respect of a business exhibition held
outside India
32.
Services by way of making telephone calls
from:
(a) departmentally run public telephones;
(b) guaranteed public telephones operating
only for local calls; or
(c) free telephone at airport and hospitals
where no bills are being issued
Services by way of slaughtering of bovine
animals
33.
34.
Services received from a service provider
located in a non- taxable territory by: (a)
the Government, a local authority or an
individual in relation to any purpose other
than industry, business or commerce; or
(b) an entity registered under section 12AA
of the Income tax Act, 1961 (43 of 1961)
for the purposes of providing charitable
activities.
24
ELP’s Comment
presently exempted vide Notification No. 50/2010ST dated 08.10.2010. The exemptions for other
four categories of services have been introduced
for the first time.
Activities amounting to manufacture of excisable
goods was previously excluded under the taxing
entry for ‘business auxiliary services’. However,
with the proposed introduction of negative list, this
exemption is necessitated.
Presently under Notification No. 5/2011-ST, dated
01.03.2011, these services are exempted and
these are continued in the proposed negative list
regime.
Presently, under Notification No. 3/94-S.T. dated
30.06.1994, these services are exempted and
these are continued in the proposed negative list
regime.
Presently, under Notification No. 2/2000-S.T. dt.
01.03.2000 exemption is granted to mechanized
slaughter houses.
Section 66A does not apply the reverse charge to
individuals receiving services for non-business
purposes.
Certain provisions shall cease to apply
• The following provisions of the Act shall cease to apply, upon the new provisions coming into
force and will remain relevant only for the purposes of services provided in the prior period:
o
Sections 65 - Definitions
o
Section 65A - Classification of taxable services
o
Section 66 - Charge of Service Tax
o
Section 66A - Charge of Service Tax on services received from outside India
Classification of taxable services
• A new provision, Section 66F, setting out principles governing specified description of
services or bundled services, is proposed to be introduced in place of Section 65A (proposed
to be omitted from a date to be notified), which provides as under:
o
Reference to a service shall not include reference to a service used in providing such
main service.
o
For services capable of differential treatment for any reason based on its description, the
most specific description to be preferred over a more general description.
o
In case of a bundled service i.e. when provision of one service is combined with
element(s) of other service(s), taxability is to be determined as under:
If various elements of such service are naturally bundled in the ordinary course of
business, it shall be treated as provision of the single service which gives such
bundle its essential character.
If various elements of such service are not naturally bundled in the ordinary course
of business, it shall be treated as provision of the single service which results in the
highest liability of Service Tax.
ELP's Comments
Vide the new provision, the concept of ‘composite service’ under Section 65A has been
replaced by ‘bundled service’, the focus being on whether such bundling of services is in the
ordinary course of business. Accordingly, if provision of a non-taxable service requires
certain taxable services to be provided along with it in the usual course of business, such
service will be deemed to be non-taxable in entirety, if the non taxable service defines the
essential character of the bundle of services offered.
25
Ambit of the definition of ‘money’ expanded
• The definition of ‘money’ in clause (b) of Explanation to Section 67 is proposed to be omitted
as a new definition has been introduced vide clause (33) of the newly introduced Section 65B.
Apart from other instruments that had been defined to be ‘money’ vide the said Explanation,
Indian legal tender, bill of exchange and electronic remittances also stand included in the
definition. Also, any similar instrument when used as consideration to settle an obligation or
exchange with Indian legal tender of another denomination, shall be deemed to be ‘money’ for
the purposes of the Act.
Date of determination of rate of tax, value of taxable service and rate of exchange
• New Section 67A has been introduced per which the rate of Service Tax, the value of a
taxable service and the rate of exchange, if any shall be such rate or value in force or as
applicable, at the time when the taxable service has been provided or agreed to be provided.
For the term ‘rate of exchange’, the definition as per Explanation to Section 14 of the Customs
Act, 1962 has been adopted.
Central Government empowered to determine the extent of Service Tax payable
by a person liable to discharge Service Tax under the Act
• A new proviso is proposed to be added to Section 68(2) whereby the Central Government is
empowered to notify the service as also the extent of Service Tax payable by the person, who
is made liable to discharge Service Tax under the Act. In respect of such services, the
remaining portion of the Service Tax shall be payable by the service provider.
Provisions relating to special audit
• Hitherto, provisions relating to special audit as contained in Section 14AA of the CE Act were
made applicable to Service Tax in terms of Section 83.
• New Section 72A is proposed to be introduced in the Act giving comprehensive powers for
such audit relevant for Service Tax purposes. Scope of the special audit under Section 72A
shall also cover cases where Chief Commissioner has reasons to believe that operations of
any person liable to tax, are spread out in multiple locations and it is not possible or practical
to obtain a true and complete picture of his accounts from the registered premises.
26
Amendments in relation to provisions for recovery of Service tax
• Provisions of Section 73 are proposed to be amended as follows:
Amendment Proposed
ELP’s Comments
Period for issuance of demand notices in This is being done to have the benefit of
normal situations proposed to be extended accessing audited accounts of large
from 12 months to 18 months.
assesses, who are now required to file return
on a monthly basis in Form EST-1 and
issuing notices for recovery of Service Tax
based thereon.
New sub-section (1A) proposed to be This is being done to save the Departmental
inserted which provides that for follow-up Officers from botheration of re-typing the
demands, service of a statement by the same charges and also to save paper.
Central Excise Office containing details of
Service Tax being demanded shall be
deemed to be service of a notice, subject to
the condition that the grounds relied upon for
the subsequent period are same as
mentioned in the earlier notices.
Reference to sub-section (3) is being deleted Sub-section (4A) -- which provides for penalty
in sub-section (4A), so that the latter section @ 1 % for each month when tax is paid
will not overrule the earlier.
before issuance of notice during any audit,
investigation or verification -- will not overrule
sub-section (3) which provides that no
penalty under any of the provisions of the Act
or the rules made thereunder shall be
imposed in respect of payment of Service Tax
before issuance of Notice under that subsection.
Penalty not imposable for default in payment of Service Tax in respect of Renting
of Immovable Property Service
• Section 80 pertains to non-imposition of penalty in cases where the failure to discharge
Service Tax is attributed to a reasonable cause, which the assessee is able to prove. A new
sub-section is proposed to be added to Section 80 vide which no penalty under Section 76,
77 or 78 shall be imposable on the assessee, as of 6th March, 2012, for failure to pay Service
Tax under the taxing entry for “Renting of Immovable Property Service”, provided that the
amount of Service Tax along with applicable interest is paid within a period of 6 months from
the date on which the Finance Bill, 2012 receives the assent of the President. This is in the
27
nature of an amnesty provision to enthuse tax and interest payment by forsaking penalty with
a view to bring long standing litigation on this issue to an end.
Provisions relating to settlement of cases introduced under Service Tax
• Sections 31, 32 and 32A to 32P of the CE Act dealing with settlement of cases are proposed
to be added in Section 83.
ELP's Comments
• This should encourage quick settlement of disputes and provide relief from prosecution and
penalties in certain cases.
Statutory period for filing of appeals amended
• W.e.f. the date on which the Finance Bill, 2012 receives the assent of the President, a newsubsection is proposed to be added to Section 85, per which the statutory period for filing of
appeals to the Commissioner of Central Excise (Appeals), stands reduced to two months from
the date of receipt of the order, instead of three months. However, upon satisfaction that the
assessee was prevented by a sufficient cause from presenting such appeal within the
statutory period, an extension of one month may be granted.
• Section 86 is proposed to be amended to increase the statutory period for filing of appeals to
the Appellate Tribunal, by the Committee of Commissioners or the Committee of Chief
Commissioners from three months to four months. However, for an assessee preferring an
appeal to the Appellate Tribunal, the statutory period continues to be three months from the
date of receipt of the order appealed against.
Provisions relating to Revision mechanism introduced
• At present in Service Tax, appeals against the order of Commissioner (Appeals) lie before the
Tribunal whereas under 35EE of CE Act a revision mechanism is available whereby in certain
specified matters (e.g. credit of any duty allowed to be utilized towards payment of Excise
Duty on final products, rebate on exports, etc.) the Central Government can be approached
for a revision of the order. This revision mechanism has been made applicable to Service
Tax.
28
Offences and prosecution
• Section 89 lists out offences under the Act which are punishable with imprisonment. In terms
of clause (a) of sub-section (1) thereof, as currently in force, the provision of service or receipt
of service (in cases where the service recipient is liable to pay Service Tax under reverse
charge) without issuance / receipt of an invoice as per the Act or the Rules made thereunder
is a punishable offence. W.e.f. the date on which the Finance Bill, 2012 receives the assent of
the President, the said Section 89 (1)(a) stands amended to provide that any person who
knowingly evades the payment of Service Tax under the Act, shall be said to have committed
an offence punishable under the Act.
ELP's Comments
Under the provisions of Section 89, as presently in force, prosecution for offences under the
Act could be initiated only in respect of the specific instances defined as offences under the
Act, namely (a) provision / receipt of service without issuance / receipt of invoice; (b)
availment and utilization of credit of taxes and duty in violation of the provisions under the Act;
(c) maintenance of false books of accounts, failure to supply information or supplying false
information; (d) having collected the tax payable, failure to discharge tax liability within a
period of six months from the date on which payment of such tax becomes due. In light of the
above amendment, mere non–issuance of invoice would not tantamount to a punishable
offence under the Act. However, owing to its broad sweep, prosecution may be initiated in
respect of any act of the assessee which may be construed to be intentional evasion of
Service Tax. The said amendment has been proposed with a view to give comprehensive
coverage to offences as also to align the law relating to prosecution under Service Tax with
other indirect taxes.
Amendments to Rule making power of Central Government under Section 94
• The Rule making power of Central Government under Section 94 is proposed to be amended
to give effect to the introduction of the negative list, introduction of provisions relating to
Settlement of cases and introduction of provisions relating to compounding of offences.
• A new provision Section 93B, is proposed to be inserted to make all Rules made under
Section 94 and applicable to taxable services, to be equally applicable in respect of services,
other than taxable services, insofar as they relate to determination of any tax liability, refund,
29
credit or Service Tax or duties paid on inputs and input services or for carrying out the
provisions of the Act.
Service tax exemption with retrospective effect
• Section 97
Services in relation to repair of roads have been exempted by Notification 24/2009-ST dated
27th July, 2009. [In Karvembu & Co. vs. Under Secretary, Department of Revenue [2010
(20) STR 591 (Mad.)] and R. Devarajan vs. Union of India [2010 (20) STR 758 (Mad.)] it
was held that this exemption is available only w.e.f. 27.7.2009]. Section 97 is proposed to be
introduced to grant this exemption for the earlier period commencing from June 16, 2005.
• Section 98
Services of Management, Maintenance or Repair in relation to non-commercial Government
buildings are proposed to be exempted with retrospective effect from June 16, 2005 till the
coming into force of the negative list when such repair will be exempted by the new mega
Notification.
• Exemption granted vide Notification No. 42/2011-S.T. dated 25.7.2011 to services provided
by a club or an association in relation to common facility set-up for treatment and recycling of
effluents and solid waste discharged by dyeing units with financial assistance from the Central
or State Government, is proposed to be made applicable with retrospective effect from June
16, 2005.
• Refund is proposed to be granted of the Service Tax collected which would not have been so
collected had the above exemption(s) been in force at all material times.
Amendments to the Service Tax Rules, 1994
• Limited liability partnership has been included in the definition of partnership firm.
• Issue of invoice/bill/challan to be within 30 days of date of “provision of service” (previously
reference was 14 days of date of “provision of service”). This is an important amendment in
30
light of the fact that prosecution provisions can be invoked for non-issuance of invoice on
time.
• Proviso has been introduced that Banking Company or a financial institution including a nonbanking financial company or any other body corporate or any other person, providing service
to any person, in relation to banking or other financial services invoice has to issue
invoice/bill/challan within 45 days.
• Proviso has been introduced that when a service provider receives Rs. 1,000/- in excess of
the invoice amount, no invoice is required to be issued for the excess amount if the service
provider has opted to determine the point of taxation as provided in POT Rules. Service Tax
liability would henceforth be based on original invoice issued on accrual basis.
• Proviso has been introduced that for taxable services covered under Rule 3 (1) of the Export
Rules, Rule 6(1) shall not apply if the payment is received within the period specified by the
Reserve Bank of India, including such extended period as may be allowed from time to time.
Service providers exporting taxable service were earlier required to show remittance of
foreign exchange within the period specified by Reserve Bank of India, failing which Rule 7 of
the POT Rules provided for determination of point of taxation for these taxable services, as if
Rule 7 did not exist. Consequentially, there was an exposure for payment of Service Tax with
interest. Considering that the foreign exchange may not be repatriated within specified time
and that Reserve Bank of India normally grants an extension, the aforesaid amendment has
been made. Rule 7 of the POT Rules has been amended to exclude the earlier stipulation.
Consequential amendment has also been made in Rule 6 (1) by inserting a proviso that tax is
not payable by a service provider who has exported taxable service if payment is received
within the period specified or such extended period as may be allowed by Reserve Bank of
India. The issue which however remains open is what happens if the application made for
extension to the Reserve Bank of India is pending for approval.
• Proviso has been introduced that individuals and partnership firms whose aggregate value of
taxable services provided from one or more premises is Rs. 50 lakhs or less in the previous
financial year, shall have the option to pay Service Tax on taxable services provided or to be
provided up to a total of Rs. 50 lakhs in the current financial year, by the dates specified in
31
Rule 6(1) with respect to the month or quarter, in which payment is received. This is an
exception to accrual basis of payment of Service tax granted to small service providers.
• Rule 6(4B) has been substituted with providing that adjustment of excess amount paid, under
sub-rule (4A), shall be subject to the condition that the excess amount paid is on account of
reasons not involving interpretation of law, taxability, classification, valuation or applicability of
any exemption notification. The monetary limit of Rs.2.00 lakhs and intimation to jurisdictional
Superintendent has been omitted.
• A insurer carrying on life insurance business has an option to pay Service Tax of 3 percent in
the first year and 1.5 percent in the subsequent years of the premium charged from policy
holder as against 1.5 percent which was charged earlier
• Presumptive rate of taxation for purchase or sale of foreign currency has been increased from
0.1 percent to 0.12 percent and the minimum amount of tax from rupees 25 to rupees 30 (up
to Rs. 1,00,000/-), from “Rs. 100 and 0.5 percent” to “Rs. 120 and 0.06 percent” (between Rs.
1,00,000/- to Rs. 10,00,000/-) and the maximum amount of tax chargeable has been
increased from Rs. 5,000/- to Rs. 6,000/-
• The minimum rate of taxation for promotion, marketing and organising lottery has been
increased from Rs. 6,000/- to Rs. 7,000/- and the maximum rate has been increased from Rs.
9000/- to Rs. 11,000/-.
ELP's Comments
• After the introduction of negative list and several new exemptions it is expected that STR will
undergo further revision and many more amendments will have to be carried out to comply
with the revised enactment.
• The draft PPSR which has been released for comments and feedback will replace the existing
Export Rules and Import Rules. Considering the proposed changes in the PPSR, and for the
reason that Export Rules and Import Rules will be rescinded, the provisions which form part of
the Export Rules and the Import Rules but have not been incorporated in the PPSR will have
to be incorporated in the STR.
32
• A common simplified registration format for Central Excise and Service Tax has been placed
for comments and feedbacks, along with further liberalization in registration requirements,
particularly centralized registrations. Rule 4 of the STR is proposed to be substituted by a new
Rule which is much more simplified than the existing Rule 4.
• A simplified one page common return for Central Excise and Service Tax, which will be called
EST, has been placed for comments and feedbacks. The introduction of the new common
return will simplify the process of filing returns for an assessee who is registered as a
manufacturer and a service provider. It has also been proposed that the cycles for payment of
Service Tax and filing of return should coincide.
Amendments to Point of Taxation Rules, 2011 (“POT Rules”)
• These amendments have been made effective from 01.04.2012
• Time period for issuing invoices under Rule 4A of the Service Tax Rules, 1994 has been
extended from 14 days to 30 days ordinarily and 45 days for Banks and Financial Institutions.
Consequent changes have been made to Rule 3(a) of the POT Rules providing for
determination of Point of Taxation.
• POT Rules had provided that the Point of Taxation in case of exports was date of receipt of
payments. This was done to remove hardships that were caused due to accrual method for
exporters since the provision of service will not constitute as an export until such payment is
received. This dispensation is now shifted to Service Tax Rules, 1994, as per which there is
no liability to pay Service tax on exports under Rule 6, subject to the condition that payments
are received within the period specified by RBI.
• Earlier the Point of Taxation for individuals/proprietorships/ partnership firms providing
specified services (Chartered Accountant, Cost Accountant, Company Secretary, Architect,
Interior Decorator, Legal, Scientific and Technical consultancy services) was date of receipt of
payments. This dispensation, like in the case of Export of services, has also been shifted to
Service Tax Rules, 1994 and has been extended to all individuals and partnership firms
(including limited liability partnership) up to a turnover of Rs 50 lakh in a financial year
provided the taxable turnover did not exceed this limit in the previous financial year. Further, it
33
is clarified that for computing the above limits, the turnover of the whole entity is required to
be summed up and not any single registration.
• Definition of “continuous supply of service” has been amended to include not only continuous
service but also service which is provided or to be provided on recurrent basis, under a
contract, for a period exceeding three months with the obligation for payment periodically or
from time to time. However the term “recurrent basis” has not been defined and may therefore
be a subject matter of litigation.
• Rule 6 in relation to “continuous supply of services” has been deleted and is merged with
Rule 3. Rule 4 and Rule 5 dealing with change in effective rate of tax and introduction of new
services is made applicable to continuous supply of services as well.
• In case of small advances received (up to Rs. 1000) over and above the amount specified in
the invoice, the service provider is given the option to determine the Point of Taxation as the
date of invoice/ completion of service, instead of date of payment. This is introduced to
address accounting issues for service providers in industries such as telecommunication,
credit cards, who regularly receive minor excess payments from the customers.
• Rule 5, dealing with new services, has been substituted to specify that no tax is chargeable
on services where payment has been received and invoice issued within a period of 14 days
(earlier “period of 14 days” was “period referred to in rule 4A of the Service Tax Rules, 1994”).
It is pertinent to note that the changes made to Rule 4A (to provide that invoices can be
issued within 30 days/45 days), is not reflected under the amended Rule 5 of the POT Rules.
• A new Rule 2A has been inserted to specifically define “date of payment”, keeping in view the
impending change in rate effective April 1, 2012 and introduction of Negative List at a later
date. In normal circumstances this date shall be the earlier of the dates of entry into books of
accounts or actual credit in the bank account (when applicable). However, when there is
change in effective rate of tax or a new levy between the said two dates, the date of payment
shall be the date of actual credit in the bank account, if the amount is credited through a
banking instrument more than four working days after the date of such change. Further, date
of receipt is also determined as per above. It is clarified that this will not have any impact,
where date of invoice is the Point of Taxation.
34
• A residual Rule 8A has been introduced to provide for Point of Taxation as per best judgment
assessment in cases where the Point of Taxation cannot be determined due to unavailability
of date of invoice or date of payment or both. In such cases, the Central Excise Officer, may
determine the point of Taxation to the best of his judgment based on available accounts,
documents or other evidence as available and after giving an opportunity to be heard to the
assessee.
• The Explanation under Rule 4 (Change in effective rate of taxes), has been omitted and
included as a separate definition under Rule 2(b) of the Rules.
ELP's Comments
• The increase in period for raising invoices under Service Tax Rules, 1994 and
correspondingly under POT Rules has provided a breather to several industries where the
service providers tended to extend the actual date of raising the tax invoices beyond the 14
days time period. Further, it also has favourable repercussions on their credit taking abilities
on the basis of such invoices.
• However, the invoices are required to be issued in relation to date of “completion of service”
and there is still ambiguity regarding when “completion” of services is constituted.
• In relation to composite contracts involving both taxable and exempt services, sometimes, at
the time of receipt of advances, it is not clear how much of such advances can be apportioned
towards taxable and non-taxable services, and assessees have been taking the position to
apportion the said advances proportionately. There is still no clarity on this aspect.
Amendment to Works Contract (Composition Scheme for Payment of Service
Tax) Rules, 2007
• Rate of Service Tax under the composition scheme for works contract service has been
enhanced from 4% to 4.8% w.e.f. 01.04.2012 vide Notification No. 10/2012-ST dt. 17.03.2012
Amendment to Service Tax (Determination of Value) Rules, 2006
• Rule 2A is amended to include another method for determination of the value of taxable
services involved in execution of a works contract.
35
o Where the works contract is entered into for execution of original works, Service Tax will
be payable on 40% of the total amount charged. Where the gross amount charged for the
works contract includes the value of land in respect of the construction service, then the
Service Tax will be payable on 25% of the total amount charged.
o In case of other works contract which include completion and finishing services such as
glazing, plastering, floor and wall tiling, installation of electrical fittings not covered above,
Service Tax will be payable on 60% of the ‘total amount charged’.
• The terms ‘original works’ and ‘total amount’ have been defined.
o ‘Original work’ is defined to mean all new constructions and all types of additions and
alterations to abandoned / damaged structures on land to render them workable
o ‘Total amount’ is defined to mean sum total of gross amount and the value of all goods
excluding the value added tax levied on goods and the services supplied free of cost for
the execution of the works contract
• Further, it has been clarified that the CENVAT Credit of the Excise Duty paid on the goods,
property which is transferred in the execution of the works contract will not be available.
• New Rule 2C has been inserted for determination of value of taxable service involved in
supply of food and drinks in a restaurant or as outdoor catering. Following table provides for
the value of taxable service in terms of percentage of total amount:
Sr.
Description of service
No
1
2
Percentage of taxable
service of the total amount
Service involved in the supply of food or any other
article of human consumption or any drink at a
restaurant
Service involved in the supply food or any other article
of human consumption or any drink as outdoor catering
service
40
60
• Further, it has been clarified that the any goods classified under chapter 1 to 22 of the CETA
meant for human consumption shall not be considered as ‘inputs’ for the service portion of the
activity.
36
• Rule 6 is amended by inserting a new clause to specifically include within the value of taxable
services any amount realized as demurrage or by any other name whatever called for the
provision of a service beyond the period originally contracted or in any other manner relatable
to the provision of service.
• In sub-rule (2) of Rule 6 clause (iv) ‘interest on loans’ has been substituted to include interest
on deposits and interest on delayed payment of any consideration for the provision of
services or sale of goods.
• Rule 6 has been amended to specifically exclude from the value of taxable services
accidental damages due to unforeseen actions not relatable to the provisions of service.
Draft Place of Provision of Services Rules, 2012
• These draft Rules will determine the place of provision of services and these Rules are
proposed to be issued in supersession of the Export Rules and the Import Rules.
• The ‘place of provision’ of services in different situations is proposed to be as follows:
Situation
Place of provision of service
1
Generally
It will be the location of the service
receiver.
It will be the location of service
provider where the location of the
service receiver is not available in
the ordinary course of business.
2
Performance based services,
(i)
where the services are provided in
respect of goods that are required to
be made physically available by the
service receiver to the service
provider, in order to provide the
service.
It will be the location where the
services are actually performed.
It will be the location where goods
are situated at the time of provision
of service where the services are
provided from a remote location by
way of electronic means.
(ii)
Where the services are provided in It will be the location where the
conjunction with supply of goods services are actually performed.
under another contract by the service
provider
(iii)
Where the services are provided It will be the location where the
37
3
4
5
6
7
8
entirely or predominantly, in the services are actually performed.
ordinary course of business, in the
physical presence of an individual,
represented either as the service
receiver or a person acting on behalf
of the receiver.
Services relating to immovable property
It will be the place where the
immovable property is located or
intended to be located.
Services relating to events
It will be the place where the event
is actually held.
Service (mentioned at 2,3,4 above) provided at It will be the location in the taxable
more than one location, including a location in the territory
where
the
greatest
taxable territory
proportion of the service is
provided.
Provider and receiver are located in taxable It will be location of the service
territory
receiver
Specified Services
It will be location of the service
(i)
Services provided by a banking provider.
company, or a financial institution, or a
non-banking financial company, to
account holders;
(ii)
Telecommunication services provided
to subscribers
(iii)
Online information and database
access or retrieval services;
(iv)
Intermediary services;
(v)
Service consisting of hiring of means
of transport, upto a period of one
month
Services of transportation of goods (other than by It will be the place of destination of
mail or courier)
the goods.
For goods transportation agency services
Passenger transportation services
Services provided on board a conveyance
38
It will be the location of the person
liable to pay tax.
It shall be the place where the
passenger
embarks
on
the
conveyance for a continuous
journey.
It shall be the first scheduled point
of departure of that conveyance for
the journey.
• The Central Government is to have the power to notify any description of service or
circumstances in which the place of provision shall be the place of effective use and
enjoyment of service.
• It is proposed that where the provision of a service is, prima facie, determinable in terms of
more than one rule, the provision of a service is to be determined in accordance with the rule
that occurs later among the rules that merit equal consideration.
• The terms ‘location of the service provider’ and ‘location of the service receiver’ are also
defined in the draft Rules.
ELP's Comments
• As the taxability of services is proposed to be determined based on the location of its
provision, these draft Rules contain provisions to determine where a service is provided.
Although, these Rules will be mainly relevant in scenario of cross border services
transactions, the same will also be equally relevant in certain other situations such as for
determining the services that are wholly consumed within a SEZ, in determining taxable
jurisdiction for service provider operating within India from multiple locations without having
centralized registration.
• These draft Rules will be introduced in supersession of the Export Rules and the Import
Rules. Whether there is import of services or export of services will have to be examined in
terms of the provision of these Rules and in light of any further conditions / requirements that
may be introduced in the Service Tax Rules. In consequence the issue of service delivered
and consumed outside India may get reintroduced and make the provisions relating to export
of services more onerous.
• These draft Rules have been issued along with the Draft Guidance Paper to help the
departmental officials and businesses to understand the new provisions and to make advance
preparations. Feedback is sought in relation to any aspect of these draft Rules particularly
where the provisions are likely to create situations that may place legitimate businesses in
any disadvantageous position or loss of legitimate revenue for the government.
39
Existing Exemptions / Concessions amended
Sr.
Taxable Service
Existing
No.
1.
Conditions
Notification No.
Transportation of
goods by rail
service
Notification No.
7/2010-ST and
8/2010-ST and
9/2010-ST dated
27.02.2010
• Rescission of Exemption of government
railway, in relation to transport of goods
in containers by rail made effective from
July, 2010
• Exemption for transportation of specific
goods by rail made effective from July,
2010
• Abatement of 30% under Notification No.
01/2006-ST made effective from July, 2010
Existing Exemptions / Concessions superseded and replaced
Sr.
Taxable Service
No.
1.
Transportation of
Passenger by Air
Service
Terms of the previous
Terms of the superseding
Notification
Notification
• Liability restricted to:
• Liability restricted to:
o Rs. 150 for economy class
o Service tax on 40% of
value for all classes
o 10% for business class,
• Credit restricted for:
• Credit restricted for:
o Inputs, or
o inputs
used for providing such
o capital goods
used for providing such
taxable services
taxable services
Abatement of Service Tax
Abatement has been provided for the following services, subject to conditions.
Sr.
No.
1
Service
Financial leasing
services (as
defined) including
equipment leasing
and hire purchase
% on which tax to be
calculated (post abatement)
10
40
Condition
Only applies to amount, forming
or representing as interest, i.e.
the difference between the
installment paid towards
repayment of the lease amount
and the principal amount
contained in such installment
paid
Sr.
No.
2
3
4
5
6
7
8
9
Service
Transport of goods
by rail
Transport of
passengers, with or
without
accompanied
belongings by rail
Supply of food or
any other article of
human
consumption or any
drink, in a
premises, including
hotel, convention
center, club,
pandal, shamiana
or any place
specially arranged
for organizing a
function
Transport of
passengers by air,
with or without
accompanied
belongings
Renting of hotels,
inns, guest houses,
clubs, campsites or
other commercial
places meant for
residential or
lodging purposes.
Transport of goods
by road by Goods
Transport Agency
Services provided
in relation to chit
(as defined)
Renting of any
motor vehicle
designed to carry
passengers
% on which tax to be
calculated (post abatement)
30
Condition
30
70
40
No CENVAT credit of goods
classifiable under chapter 1 to
22 of CETA
Consideration is sum total of
gross amount and value of all
goods, excluding VAT, free of
cost services (value to be
based on fair market value)
used in or in relation to the
supply of food or any other
article of human consumption
or any drink, under the same
contract or any other contract.
No CENVAT credit of inputs
and capital goods
60
No CENVAT credit of inputs
and capital goods
25
No CENVAT credit of inputs,
input services and capital
goods
No CENVAT credit of inputs,
input services and capital
goods
No CENVAT credit of inputs,
input services and capital
goods
70
40
41
Sr.
No.
10
11
Service
Transport of goods
in a vessel from
one port in India to
another
(i) Services
provided or to be
provided to any
person, by a tour
operator (as
defined) in relation
to a package tour
(as defined)
(ii) Services
provided or to be
provided to any
person, by a tour
operator in relation
to a tour, if the tour
operator is
providing services
solely of arranging
or booking
accommodation for
any person in
relation to a tour
(iii) Services, other
than services
specified in (i) and
(ii) above, provided
or to be provided to
any person, by a
tour operator in
relation to a tour
% on which tax to be
calculated (post abatement)
50
Condition
No CENVAT credit of inputs,
input services and capital
goods
25
No CENVAT credit of inputs,
input services and capital
goods
The bill is inclusive of charges
for such tour
10
No CENVAT credit of inputs,
input services and capital
goods
Invoice indicates that charges
are toward accommodation
Does not apply if invoice only
includes the service charges for
arranging or booking
accommodation for any person
and does not include the cost of
such accommodation
40
No CENVAT credit of inputs,
input services and capital
goods
Invoice indicates that amount
charged in the bill is the gross
amount charged for such a tour
The abatements will take effect w.e.f. the date on which Section 66B of the Act comes into
force.
42
Liability to pay Service Tax on the service recipient, and extent thereof
The liability to pay Service Tax has been cast on the service recipient in the following cases,
along with the extent of payment to be discharged, w.e.f. the date on which Section 66B of the
Act comes into force:
Sr.
No.
When payment of Service Tax to be
made by service recipient
1.
Services by an insurance agent to any
person carrying on insurance business
Transportation of goods by road services
by a GTA to a factory, society, cooperative society, excise dealer, body
corporate or partnership
(The person who pays or is liable to pay
freight either himself or through his agent
for the transportation of goods by road in
goods carriage will be treated as the
person receiving the service)
Sponsorship services to any corporate or
partnership located in the taxable territory
Services by arbitral tribunal
Services by individual advocate
Support services by Government or local
authority located in the taxable territory
Renting or hiring any motor vehicle
designed to carry passenger
(i) Abated value
(ii) Non-abated value
Supply of manpower for any service
Works contract service by an
individual/HUF/proprietary
firm/partnership firm/association of
persons (whether registered or not) to
company or body corporate located in the
taxable territory
Services provided by any person who
located in a non-taxable territory and
received by any person located in the
taxable territory
2.
3.
4.
5.
6.
7.
8.
9.
10.
43
Extent of Service
Tax payable by
provider
Nil
Extent of Service
Tax payable by
recipient
100%
Nil
100%
Nil
100%
Nil
Nil
Nil
100%
100%
100%
Nil
60%
25%
50%
100%
40%
75%
50%
Nil
100%
Exemption for R&D Cess
Taxable services involving import of technology has been exempted from Service Tax to the
extent of cess payable under Section 3 of the Research and Development Cess Act, 1986,
subject to the following conditions:
•
The amount of R&D Cess is paid within 6 months of the invoice date (or date of credit in
case of associated enterprises);
•
The R&D Cess has been paid at or before the time of payment for service; and
•
Records are maintained for establishing the linkage between the invoice/credit and the
R&D Cess payment challan.
This exemption will take effect w.e.f. the date on which Section 66B of the Act comes into force.
ELP’s Comments
This exemption was previously available only in relation to ‘intellectual property services’ and
‘consulting engineer services’, but, has now been extended to all taxable services involving the
import of technology.
Amendment to the definition of ‘aggregate value’ for availing the threshold
exemption under Service tax
• Definition of ‘aggregate value’ has been amended to mean ‘the sum total of value of taxable
service charged in the first consecutive invoices issued or to be issued’ instead of the first
consecutive payments received during the year.
ELP’s Comments
The amendment has been brought in to align the notification with the position subsequent to the
introduction of the Point of Taxation Rules, 2011.
Service Tax exemption to common effluent / solid waste treatment plants
• Notification No.1/2012-ST dt. 17.03.2012 has been issued providing for Service Tax
exemption to associations including registered co-operative societies having common facility
set-up for treatment and recycling of effluents and solid waste, with financial assistance from
the Central or State Government. The Finance Bill, 2012 proposes to effectuate this
exemption retrospectively from June 16, 2005.
44
Chapter 3 – Excise Duty
Legislative Changes
Amendments to the CE Act, 1944
• In Explanation (i)
to Sub section (3) of Section 4 definition of term ‘inter connected
undertakings’ is proposed to be substituted. Earlier the definition of inter connected
undertakings as provided under clause (g) of section 2 of the Monopolies and Restrictive
Trade Practices Act, 1969 was borrowed for the purpose of Section 4 of the Act, however, in
light of the fact that Monopolies and Restrictive Trade Practices Act, 1969 has been repealed
with effect from 1st September 2009, an exhaustive definition is now being provided under
Finance Bill 2012.
• The duty threshold for the purpose of triggering the provisions of Section 9 of the CEA relating
to offences and penalties are sought to be enhanced from Rupees one lakh to Rupees thirty
lakhs.
• The provisions of prosecutions are sought to be amended to overcome the Judgement of the
Supreme Court rendered in the case of Om Prakash vs. Union of India reported in 2011
(272) ELT 321 (SC)
o
Consequently the provisions of Section 9A(i) is sought to be substituted such that all
offences punishable with a term of imprisonment of 3 years or more under Section 9 shall
be treated as non cognizable notwithstanding anything contained in provisions of Code of
Criminal Procedure 1973;
o
The existing Section 13 is sought to be substituted with a comprehensive provision to deal
with powers of arrest under the provisions of the Act. In these Connection provisions of
Section 13 (4) and 13(5) of the Act is relevant in so far as the same negates the effect of
Supreme Court Decision in Om Prakash (supra).
o
A new provision namely Section 13A is introduced under the Act providing for the
conditions for release of a person who is accused of offences punishable for a term of
three years or more.
45
o
Similar amendments have been proposed under the Customs Act vide amendment to /
insertion of Section 104, Section 138 and Section 104A.
• Section 11A(8) of the Act is sought to be substituted to provide that where service of notice is
stayed by an order of a court or tribunal, the period of such stay shall be excluded from the
period of one year referred to in Section 11A(1) or five years referred to in 11A(4) and 11A(5);
• Provisions of Section 11AC1(c) providing the benefit of reduced penalty, is sought to be
substituted to overcome judgements of various High Courts including in CCE, Rohtak vs.
J.R. Fabrics Pvt. Ltd. [2009 (238) ELT 209 (P& H)] and K.P. Pouches Pvt. Ltd. vs. Union
of India [2008 (228) E.L.T. 31 (Del.)]. Under the earlier Section 11AC1(c) there was no time
limit to pay the reduced 25% penalty, whereas under the proposed amendment the benefit of
reduced penalty will be available only if the reduced penalty is also paid within the specified
period of thirty days.
• The existing sub-Section (2) to Section 12F relating to search and seizure is sought to be
substituted to bring it in line with the provisions of the Customs Act 1962. Accordingly the
requirement of submissions of reports to a magistrate under Section 165 of the Code of
Criminal Procedure, 1973 is substituted and the report is required to be submitted to the
Commissioner of Central Excise.
• Section 18 of the Act is sought to be substituted to provide that save as provided under the
provisions of the Act, searches shall be carried out as per the procedure laid down in the
Code of Criminal Procedure, 1973.
• Consequent to the changes sought to be made in Section 18 of the Act, Section 19 is being
omitted and some consequential amendments are being carried out in Section 20.
• Paragraph 9 of Notification No. 1/2010–CE dated February 6, 2010 granting exemption to
goods cleared from new units established/expanded after 6 February 2010 in J&K amended
retrospectively enlarging the period of exemption. Earlier the benefit was to apply for a period
not exceeding 10 years from the date of publication of Notification or from the date of
commercial production. Post the amendment the benefit would be available for the above
46
period from the date of commercial production or from the date of commercial production from
the expanded capacity.
• Schedule 3 to Section 2(f)(iii) amended to include all goods falling under Chapter Sub
heading 2402 2010 to 2402 2090 of the CETH i.e. filter cigarettes of varying lengths and/or
varying filter lengths.
• Powers of AAR to hear cases relating to CENVAT Credit will also cover cases of Central
Excise Duty. Earlier Section 96C covered cases relating to CENVAT Credit availed in respect
of Service Tax only.
Amendments to the Central Excise Tariff Act, 1985
• To remove doubts as to the correct classification of polished marbles, the words “or polishing”
have been omitted from Note 6 to Chapter 25. In view of the aforesaid amendment, the
process of polishing slabs/tiles may not be classified under Chapter 2515 and 2516 of the
Tariff Act.
• Under Chapter 26 of the Tariff Act, Chapter heading 2601 1110 to 2601 1190 and the entries
relating thereto are amended to be substituted, based on the percentage of Fe content.
• Note 14 is amended to be inserted in Chapter 48 to the effect that notwithstanding anything
contained in Note 12, if the paper and paper products of heading 4811, 4816 or 4820 are
printed with any character, name, logo, motif or format they shall remain classified under
Chapter 48 as long as such products are intended to be used for further printing. The said
Note has been inserted with an intention to avoid classification disputes.
• A new Note is proposed to be inserted in Chapter 54, after Note 1, to provide that
notwithstanding anything contained in Note 1, man-made fibre such as polyester staple fibre
and polyester filament yarn manufactured from plastic and plastic waste including waste
polyethylene terephthalate bottles shall be classified as textile material under Chapter 54 or
Chapter 55, respectively. The said amendment is being carried out with retrospective effect
from 29.06.2010. Duty in respect of clearances already made is to be recovered from the
manufacturers of these goods within one month of the date of enactment of the Finance Bill,
47
2012 failing which interest at the rate of 24% will be payable. Under the said amendment, the
manufacturers are being permitted to take into account credit of duty paid on inputs, input
services and capital goods.
• Note 13 of Chapter 71 is amended to provide that for the purposes of headings 7113 and
7114, the process of affixing or embossing trade name or brand name on articles of jewellery
or on articles of goldsmiths‟ or silversmiths‟ wares of precious metal or of metal clad with
precious metal, shall amount to manufacture. In the earlier note, the process of affixing or
embossing of trade name or brand name was restricted to articles of jewellery.
• A note is inserted after Note 5 of Chapter 72 to provide that the process of oiling and pickling
in respect of goods of heading 7208 shall amount to “manufacture”. There are various
pending litigations where the Department has issued show cause notices on the ground that
the aforesaid process of oiling and pickling does not amount to manufacture.
• A note is inserted after Note 2 in Chapter 76 to provide that the process of cutting, slitting and
printing of aluminium foils shall amount to “manufacture”. The said amendment is made to
overcome judgement of the Hon’ble Supreme Court passed in the case of CCE, New Delhi
vs. S.R. Tissues Pvt. Ltd. [2005 (186) ELT 385 (SC)], where the Hon’ble Supreme Court
has held (in the context of jumbo tissue rolls) that the aforesaid process does not amount to
manufacture.
• A note is inserted after Note 10 in Chapter 85 to provide that the processes of matching,
batching and charging of Lithium ion batteries or the making of battery packs shall amount to
“manufacture”.
• Tariff entries relating to copper scrap, brass scrap, nickel scrap, aluminium scrap, lead scrap
and zinc scrap are amended to align the same with the revised ISRI classification. As an
illustration, in Chapter Heading 7602 0010 in column 2 for the words “ISRI code word ‘Talap’,
has been substituted by “ISRI code word ‘Talc’.
48
Vide Notification No. 8/2012–Central Excise (N.T.)
• Section 11AA and Section 11AB were merged into a single provision viz. Section 11AA, vide
Finance Act, 2011. Accordingly, the changes which should have been effected in 2011 are
now being made by the present Finance Bill. In order to give effect to the said amendment,
references to Section 11AB have been amended to read as Section 11AA.
• Proviso to Rule 12AA has been omitted. The effect of this amendment is that it now makes it
mandatory for a Principal Manufacturer of jewellery to obtain registration, maintain accounts
and comply with the various provisions of the CE Rules. Prior to the amendment, registration
was optional inasmuch as the Job Worker could undertake to obtain registration instead of the
Principal Manufacturer.
• Explanation 2 to Rule 12AA has also been deleted. The effect of this amendment is that
application of the said Rule is extended to include both branded as well as unbranded
jewellery.
Vide Notification No. 10/2012-Central Excise (N.T.)
• References to “Section 11AB” have been amended to read as “Section 11AA” in Chewing
Tobacco and Un-manufactured Tobacco Packing Machines (Capacity Determination and
Collection of Duty) Rules, 2010.
• Scope of the CENVAT Credit scheme has been enlarged and credit is now admissible not
only on chewing tobacco in bulk packs but also on “Jarda Scented Tobacco”.
• A welcome amendment to sub-rule (6) of Rule 16 of the above Rules is that earlier, while
interest was liable to be paid on wrongful availment of credit, irrespective of whether the same
was utilised or not, henceforth, the same shall be liable to be paid only in case of wrongful
availment and utilisation. Mere wrongful availment will not attract interest liability.
Vide Notification No. 13/2012 –Central Excise (N.T.)
• The need to file returns on a monthly basis has been relaxed and the same can now be
submitted by manufacturers of “excisable goods on concessional rates” on a quarterly basis.
49
• References to Section 11AB have been amended to read as Section 11AA.
Vide Notification No. 11/2012, 14/2012, 15/2012 and 16/2012 –Central Excise (N.T.)
• References to “Section 11AB” have been amended to read as “Section 11AA” in the following:
o Pan Masala Packing Machines ( Capacity Determination and Collection of Duty) Rules,
2008
o Notification No.45/2001 Central Excise (N.T.) dated 26.06.2001
o Notification No.31/2007 Central Excise (N.T.) dated 02.08.2007
o Notification No.42/2001 Central Excise (N.T.) dated 26.06.2001
50
Changes in Rate of Excise Duty
Rate structure for goods, other than petroleum goods
• The standard rate of Central Excise Duty has been enhanced from 10% to 12% except for the
goods covered under following chapter headings:
o All goods of Chapter 31, other than those clearly not to be used as fertilizers;
o Articles of jewellery of heading 7113; and
o Mobile handsets and cellular phones of heading 8517.
• The merit rate of Excise Duty has been enhanced from 5% to 6% on 76 items except for the
goods covered under following chapter headings:
o Goods of heading no. 2701, i.e. coal;
• The rate of duty of 1% has been increased to 2 % on 130 items.
• A chapter note in chapter 48 is being inserted to provide that if paper and paper products of
headings 4811, 4816 or 4820 are printed with any character, name logo, motif or format, they
shall remain classified under chapter 48 as long as such products are intended to be used for
further printing.”
.
Increase in rate
• The rate of Excise Duty on Medicinal and Toilet Preparations under the M&TP (Excise Duties)
Act has been increased from 10% to 12% ad valorem.
Full exemption from Central Excise Duty
• For specified raw materials like stainless steel tube and wire, cobalt chromium tube, hayness
alloy-25 and polypropylene mesh which are used for manufacture of coronary stents/
coronary stent system and artificial heart valve on actual user basis.
• Refills and inks in bulk packs (not meant for retail sale) which are used for the manufacture of
pens of value not exceeding Rs. 200 per piece.
• Intraocular lens
51
• Parts, components and specified accessories which are required for the manufacture of
mobile phone viz. battery chargers, PC connectivity cables, memory cards and hands-free
headphones.
o However if above goods cleared as spares, then concessional rate of 2% will be
applicable provided no CENVAT credit of any inputs or input services is availed .
• Food preparations containing fruits and vegetables falling under chapter 20, which are
prepared and served in a hotel, restaurant or retail outlet whether or not such food is
consumed in such hotel, restaurant or retail outlet
• Six specified life saving drugs/vaccines and bulk drugs for their manufacture
• Excise Duty on pneumatic tyres, new or retreaded, used in aircraft
• Parts and testing equipment for manufacture, repair and overhauling of aircraft falling under
heading 8802.
Reduction in rate from 10% to 6%
• Matches manufactured by “semi-mechanised” units – the latter being units that carry out the
processes of frame-filling or dipping of splints with the aid of machines.
• LED lamps.
• Iodine.
• Processed food products of soya.
• Parts of Blood Pressure Monitors and Blood glucose monitoring systems (Gluco-meters) on
actual user basis.
• Specified raw materials viz. polypropylene, stainless steel strip and stainless steel capillary
tube for manufacture of syringe, needle, catheters, and cannulae on actual user basis.
52
Duty impact on certain goods
Cement
The rate structure applicable to Portland cement falling under Heading no.252329 has been
revised as follows:
I
Mini Cement Plant:
Existing duty rate
All goods cleared in Packaged
form
(i) retail sale price not exceeding 10% ad valorem
Rs. 190 per 50 kg bag or per
tonne equivalent retail sale price
not exceeding Rs. 3800;
(ii) retail sale price exceeding Rs. 10% ad valorem + Rs.
190 per 50 kg bad or per tonne 30 per MT
equivalent retail sale price
exceeding Rs. 3800;
II
Other than Mini Cement plant
Existing Duty Rate
New duty rate
6% ad valorem + Rs.120
per MT
New duty rate
All goods cleared in Packaged
form
(i) retail sale price not exceeding 10% ad valorem + Rs.
Rs. 190 per 50 kg bag or per 80 per MT
tonne equivalent retail sale price
not exceeding Rs. 3800;
(ii) retail sale price exceeding Rs. 10% ad valorem + Rs.
190 per 50 kg bag or per tonne 160 per MT
equivalent retail sale price
exceeding Rs. 3800;
12% ad valorem +
Rs.120 per MT
III
Cement not cleared in packaged
form
10% ad valorem
12% ad valorem
IV
Cement clinker
10% ad valorem + Rs. 12% ad valorem
200 per MT
• Portland cement has been covered under Section 4A of the CE Act and value for the purpose
of charging duty would be determined on the basis of the Retail Sale Price. However, 30%
abatement is available on such value.
53
Vide Notification No. 7/2012– Central Excise(N.T.)
• Percentage abatements have been prescribed for goods subjected to Retail Sale Price (RSP)
based valuation under Section 4A of the CE Act:
Various types of cement
:
30%
Cigarettes
:
50%
All types of Footwear
:
35%
Ready–made garments, made-up articles and textiles:
• Ready- made garments and made-up articles of textiles bearing a brand name or sold under
a brand name are chargeable to Excise Duty at the rate of 12% ad valorem. However, 70%
abatement is available on the RSP.
• The effective Excise Duty rate applicable to the textile sector (other than readymade
garments and made ups bearing a brand name or sold under a brand name) is currently
covered by Notification No. 29/2004-CE dated 9.7.2004. This Notification is being superseded
by Notification No. 7/2012 –CE dated 17th March, 2012, the details of which are being
provided below:
S. No.
(1)
1.
2.
3.
4.
Chapter,
heading or subheading or
tariff item
(2)
5204 to 5212
56 (except
56011000)
57.
5.
58 (except
58043000, 5805
and 5807)
59
6.
60
7.
61, 62 and
63(except
Description of goods
Rates
(3)
All goods of cotton, not containing any other textile
material
All goods of cotton, not containing any other textile
material
All goods of cotton, not containing any other textile
material
All goods of cotton, not containing any other textile
material
(4)
6%
All goods of cotton, not containing any other textile
material
All goods of cotton, not containing any other textile
material
All goods of cotton, not containing any other textile
material, other than those bearing a brand name or sold
6%
54
6%
6%
6%
6%
6%
63090000 and
6310)
under a brand name.
Explanation.- For the removal of doubts, it is hereby
clarified that ‘goods of cotton, not containing any other
textile material’, shall include goods made from fabrics of
cotton, not containing any other textile materials, even if
they contain sewing threads, cords, labels, elastic tapes,
zip fasteners and similar items used for stitching,
fastening, holding or adornment, of materials other than
cotton.
Vide Notification No. 17/2012 –Central Excise (N.T.)
• The tariff value in respect of articles of apparel, not knitted or crocheted, all sorts falling under
sub-heading No.6201 of the First Schedule to the Central Excise Tariff Act, 1985 has been
further reduced from 45% to 30% after the same was reduced from 60% to 45% last year.
Also, since the Standards of Weights and Measures Act, 1976 has been repealed and
substituted by the Legal Metrology Act, 2009, references to the previous Act have been
modified suitably to read as “Legal Metrology Act, 2009”.
Automobiles:
• Rates of Excise Duty applicable to motor vehicles falling under heading nos.8702 and 8703
have been enhanced in the following manner:
Sr. No. Description of goods
Earlier Rate
I. Length not exceeding 4 meters
Engine capacity not exceeding 1200cc (petrol, 10% ad valorem
1
LPG or CNG)
12%
valorem
ad
12%
valorem
ad
24%
valorem
22% + Rs.15000 27%
per unit
valorem
ad
Engine capacity not exceeding 1500 cc (diesel)
10% ad valorem
1
Engine capacity not exceeding 1500 cc
22% ad valorem
2
Engine capacity exceeding 1500 cc
2
Revised Rate
II. Others
Chassis for automobiles and parts of electric/ hybrid vehicles
• Excise Duty structure applicable to chassis falling under heading 8706 has been rationalized.
• Earlier, such chassis used to attract a composite rate of duty consisting of an ad valorem
component of 10% or 22% and a specific component of Rs. 10,000 per chassis.
55
ad
• These have now been combined into an ad valorem rate and increased to 15% or 25% ad
valorem respectively.
• Concessional rate of 6% is prescribed for the batteries supplied to manufacturers of
electrically operated vehicles (both two and three-wheeled motor vehicles).
o Provided the manufacturers are registered with the Indian Renewable Energy Development
Agency or any State Nodal Agency as notified by the Ministry of New and Renewable
Energy for Central financial assistance.
• Concessional rate of 6% shall also be applicable to battery packs of lithium ion batteries when
supplied to manufacturers of hybrid or electric vehicles.
o For the said purpose a note has been inserted to Chapter 85 specifying the processes of
matching, batching and charging or making of battery packs of Lithium Ion batteries to be a
deemed process of manufacture.
Crude Petroleum
• The rate of cess leviable as a duty of excise on crude petroleum under the Oil Industries
Development Act has been increased from Rs. 2500 per metric ton to Rs. 4500 per metric
ton.
.
Classification of Natural marble Slabs subjected to processes of resin filling, fibre
netting and Polishing
• Notification No.4/2006-CE dated 1.3.2006 is amended to specifically include Polished Marble
Slabs under CETH 6802 21 90 so as to extend the concessional Excise Duty rate of Rs.30
per square meter to Polished Marble Slabs by Notification No.12/2012-CE dated 17th March,
2012.
Excise Duty exemption on Pipes used for Collector wells
•
MS pipes of diameter 30cm used in collector well, infiltration well for water purification are
eligible for exemption from Excise Duty under Serial No.233 of Notification No. 12/2012-CE
dated 17.3.2012.
56
Ships, vessels and dredgers
Reference
Particulars
Clarifications
It makes changes to the
Notification No.38/2011-CE dated
29th July, 2011 regarding
structures applicable to ships,
Notification vessels and dredgers:
Full exemption from Excise Duty
No.
12/2012 CE available to ships and vessels.
– Dated
17th March,
2012
Clause 125
of the
Finance
Bill, 2012
Pan
The exemption is available on satisfaction of
following conditions:
• If it is procured by a company or person holding
a general licence (Indian/ foreign) issued by the
Director General, Shipping
• The ship or vessel is used only for this purpose,
and
• such company or person undertakes to pay o full duty on the vessel if it converts to coastal
status against a general licence;
o 1/120th part of the aggregate duty payable on
the vessel for each month (or part thereof) of
operation as a coastal vessel if such
conversion is for a specified period.
a retrospective exemption from This shall come into effect on the date of
additional duty of customs (CVD) enactment of the Bill.
has been provided to “foreigngoing vessels” imported into India
for the period from 1st March,
2011 to 16th March, 2012
Masala,
Gutkha,
Chewing
tobacco,
Zarda
Scented
Tobacco
and
Unmanufactured tobacco in pouches
• The above items packed in pouches with the aid of packaging machines are leviable to
Excise Duty in terms of Section 3A of the CE Act and the rates of duty applicable to all these
items have been increased. The details of rate increase are as follows:
S.
No.
(1)
1.
2.
3.
4.
5.
6.
7.
8.
Retail sale price (per
pouch)
(2)
Up to Rs. 1.00
From Rs. 1.01 to Rs. 1.50
From Rs. 1.51 to Rs. 2.00
From Rs. 2.01 to Rs. 3.00
From Rs. 3.01 to Rs. 4.00
From Rs. 4.01 to Rs. 5.00
From Rs. 5.01 to Rs. 6.00
Above Rs.6.00
Rate of duty per packing machine per month
(Rs. in lakh)
Pan masala
Pan masala containing tobacco
(3)
(4)
14
19
21
29
26
36
40
54
51
70
64
88
77
105
76 + 12.54 * (P - 6), where P 104 + 17.17 * (P - 6), where P
57
represents retail sale price of represents retail sale price of the
the pouch
pouch
Illustration. -The rate of duty per packing machine per month for a gutkha pouch having
retail sale price of Rs. 8.00 (i.e. ‘P’) shall be
= Rs. 76 + 12.54*(8-6) lakhs = Rs. 101.58
lakhs
S.
No.
(1)
Retail sale
price (per
pouch)
(2)
Rate of duty per packing machine per month (Rs. in lakh)
Unmanufactured Tobacco
Chewing tobacco
Pouches not Pouches
Pouches not Pouches
containing
containing
containing
containing
lime tube
lime tube
lime tube
lime tube
(3)
(4)
(5)
(6)
Chewing tobacco
commonly known
as filter khaini
(7)
1. Upto Rs. 1.00
12
11.25
8.50
8.00
8.00
2 From Rs. 1 to
Rs. 1.50
3. From Rs. 1.51
to Rs. 2.00
4. From Rs. 2.01
to Rs. 3.00
5. From Rs. 3.01
to Rs. 4.00
6. From Rs. 4.01
to Rs. 5.00
7. From Rs. 5.01
to Rs. 6.00
17.75
17.00
12.75
12.00
12.00
21.50
20.25
15.25
14.50
15.00
32
37.50
22.75
21.75
21.25
40.00
25.00
28.50
26.75
27.00
50.00
47.00
35.75
33.25
31.50
60.25
56.25
43.00
40.00
36.50
8. Exceeding
Rs.6.00 but not
exceeding
Rs.7.00
9 Exceeding
Rs.7.00 but not
exceeding
Rs.8.00
10 Exceeding
Rs.8.00 but not
exceeding
Rs.9.00
11 Exceeding
Rs.9.00 but not
95.00
89.50
67.75
64.00
40.50
95.00
89.50
67.75
64.00
44.25
95.00
89.50
67.75
64.00
47.50
95.00
89.50
67.75
64.00
50.00
58
12
13
14
15
16
17
exceeding
Rs.10.00
Exceeding Rs.
10.00 but not
exceeding
Rs.15.00
Exceeding Rs.
15.00 but not
exceeding
Rs.20.00
Exceeding
Rs.20.00 but
not exceeding
Rs.25.00
Exceeding Rs.
25.00 but not
exceeding
Rs.30.00
Exceeding
Rs.30.00 but
not exceeding
Rs.35.00
Exceeding
Rs.35.00 but
not exceeding
Rs.40.00
134.50
126.75
96.00
90.37
168.75
160.75
120.25
114.75
198.00
187.75
141.00
133.75
225.50
213.75
160.75
152.25
244.50
230.50
174.25
164.62
263.50
247.75
188.25
177.00
18 Exceeding Rs.
279.00
267.00
198.75
40.00 but not
exceeding
Rs.45.00
19 Exceeding
296.50
283.50
211.50
Rs.45.00 but
not exceeding
Rs.50.00
20 From Rs.50.00 296.50 + 5.94 283.50+ 5.67 * 211.50 + 4.23
onwards
* (P-50)
(P-50)
* (P-50)
50+7.5*(P-10)
190.50
202.50
202.5 0+
4.05 * (P50)
Where ‘P’ above represents RSP of the pouch for which duty rate is to be determined
Illustration1:- The rate of duty per packing machine per month for a chewing tobacco (other
than filter khaini) pouch not containing lime tube and having RSP of Rs.55.00 (i.e. ‘P’) shall
be = Rs. 296.50 + 5.94*(55-50) lakhs = Rs. 326.20 lakhs”
59
Illustration 2:- The rate of duty per packing machine per month for a Filter Khaini pouch
having retail sale price of Rs.15.00 (i.e. ‘P’) shall be = Rs. 50 + 7.5*(15-10) lakhs = Rs.
87.50 lakhs’.
• For Zarda Scented tobacco covered by the aforesaid provisions, CENVAT Credit of duty paid
on goods cleared in bulk has been allowed to manufacturers packing it in pouches
Precious metals and Jewellery
• The scheme of levy of Excise Duty on precious metal jewellery has been revamped to levy
Excise Duty of 1% ad valorem on both branded and unbranded precious metal jewellery
(except silver jewellery).
• Tariff value would be equal to 30% of the “transaction value” declared on the invoice and
transaction value shall have the same meaning as assigned to it under Section 4 of the CE
Act.
• The benefit of SSI exemption would be available to manufacturers of precious metal jewellery
and the aggregate value of clearances (both for the purpose of eligibility and exemption)
would be computed on the basis of tariff value with 70% abatement for the remainder of FY
2011- 12 i.e. March 17, 2012 to March 31, 2012.
• Branded Silver Jewellery, gold coins of 99.5% purity made from gold bars and silver coins of
99.9% purity made from silver bars are being granted full exemption. Excise Duty on gold
jewellery sold from EOUs into DTA has been increased from 5% to 10%.
• Rule 12AA of the Central Excise Rules has been amended to provide that every person who
gets articles of jewellery of heading no.7113 produced or manufactured on job-work shall
obtain registration, maintain accounts, pay duty leviable on such goods and comply with the
procedural requirements, as if he is the manufacturer.
• Excise Duty on refined gold manufactured starting from the stage of ore, concentrate or dore
bars has been increased from 1.5% to 3%.
60
Vide Notification No. 9/2012– Central Excise (N.T.)
• The tariff value of jewellery (excluding silver) under Chapter Heading 7113 of the CETA has
been increased to 30% from 10%. The basis for calculating the duty is the value declared in
the invoice i.e. the transaction value. Articles of jewelry manufactured from precious jewelry
so also old jewelry which is provided by the retail customer are excluded from the purview of
the Notification.
Footwear
• Footwear with RSP not exceeding Rs. 500 per pair has been fully exempted, while full duty
would be chargeable on Footwear with RSP exceeding Rs. 500 per pair. The full exemption is
subject to the condition that the RSP should be indelibly marked or embossed on the
Footwear itself both for imported Footwear and Footwear manufactured domestically.
Vide Notification No. 7/2012– Central Excise (N.T.)
• Percentage abatements have been prescribed for goods subjected to RSP based valuation
under Section 4A of the CE Act:
All types of Footwear
:
35%
Cigarettes
• The existing slab of filter and non filter cigarettes of “length not exceeding 60 mm” is being
modified to “length not exceeding 65 mm”. Consequently, the slab “exceeding 60mm but not
exceeding 70mm” is also being revised to “exceeding 65mm but not exceeding 70mm” in both
filter and non filter segment . However the existing rate of Excise Duty applicable to cigarettes
of length not exceeding 60mm would apply to cigarettes -both filter and non filter of length not
exceeding 65mm. Similarly, the existing rates of NCCD and AED applicable to cigarettes of
length not exceeding 60mm would continue to apply to cigarettes -both filter and non filter of
length not exceeding 65mm [Clause 141 read with the Seventh schedule and Notification no.
10 /2012- CE, Notification No. 11 /2012 -CE and Notification No. 9 /2012 –CE dated the
March 17, 2012]
• A 10% ad valorem duty is being imposed in addition to the existing specific duty on all slabs
of cigarettes other than filter and non filter cigarette of length not exceeding 65 mm.
61
• The Excise Duty on Cigars, Cheroots and Cigarillos is also being enhanced.
• The rate of Excise Duty on biris is being increased by Rs.2 per thousand for both handmade
and machine made biris. [S.No.47 & 48 of Notification No.12 /2012-CE dt. March 17, 2012]
• The rates of Excise Duty on Chewing tobacco classified under tariff item 2403 99 10,
unmanufactured tobacco classified under Heading 2401 and Jarda scented tobacco classified
under 2403 99 30, notified under Section 3A is being enhanced. [Notification No.14/2012-CE
dt. March 17, 2012]
Vide Notification No. 7/2012– Central Excise (N.T.)
• Percentage abatements have been prescribed for goods subjected to RSP based valuation
under Section 4A of the CE Act:
Cigarettes
:
50%
62
Chapter 4 – Customs Duty
Legislative Changes
Amendments to the Customs Act
Section 28AAA proposed to be inserted
• Presently, Section 28 provides for recovery of duties not levied or short levied or erroneously
refunded. The Finance Bill, 2012 proposes to introduce a new Section 28AAA, to enable
recovery of duties from a person who has obtained instruments (scrip / authorization / license
/ certificate issued under the FTDR Act) by means of collusion or willful mis-statement or
suppression of facts.
o The proposed section provides for recovery of duty along with interest from the person
(importer / exporter / agent or employee of such importer or exporter) to whom the
instrument (viz. Advance Authorization, SFIS scrip, etc.) has been issued, where such
instrument has been utilized by a person other than the person to whom the instrument was
issued, and:
(a) such instrument has been obtained by means of collusion, willful misstatement or
suppression of facts;
(b) the recovery of the duty would be to the extent of the utilization of such instrument
which was earlier exempted / debited;
(c) the action relating to recovery of duty under this section against the person to whom the
instrument was issued shall be without prejudice to an action against the importer under
Section 28.
o This section would apply only to such instruments which are utilized on or after the date on
which the Finance Bill, 2012 receives the assent of the President of India, irrespective of
the date of obtaining such instrument.
o For recovering the duty under this section, the proper officer will have to serve a show
cause notice on such person. No time limit has been prescribed for the issuance of Show
Cause Notice under this section.
o Where the duty recoverable is demanded by an order under Section 28, then no order can
be passed under this section.
63
o In case of failure to pay duty within the stipulated time under this section, the duty shall be
recovered in the manner specified under section 142(1).
• Section 28AB is proposed to be simultaneously amended, so as to include the provisions
relating to provisional attachment of property applicable to the proposed Section 28AAA.
Extension of Monetary limits of jurisdiction of Deputy / Assistant Commissioner
• Section 122 is proposed to be amended to enhance the monetary limit of adjudication of
cases involving confiscation of goods and imposition of penalty, as follows:
o From Rs. 2 lakhs to Rs. 5 lakhs – Deputy/ Assistant Commissioner;
o From Rs. 10,000 to Rs. 50,000 – Gazetted officer lower in rank to Assistant / Deputy
Commissioner.
Service of Orders and Decisions by Courier
• Section 153 is proposed to be amended to enable the service of any orders / decisions /
summons / notices by any courier, which has been approved by the Commissioner of
Customs.
• In Alex Joseph vs. CCE [2004 (163) ELT 68 (Tri. - Bang.)] the Hon’ble Tribunal held that
the Customs Act does not provide for serving of hearing notice vide Courier or/and Telegrams
and therefore the same is not permissible.
• This amendment is proposed to overcome such situations.
Amendment to / Introduction of provisions of prosecution
• Section 104 and 138 of the Customs Act dealing with prosecution are proposed to be
amended and Section 104A is proposed to be introduced to overcome the judgment of the
Hon’ble Supreme Court in the case of Om Prakash (supra).
• Similar amendments are proposed in excise law. Such provisions are discussed in detail in
the Excise section above.
Miscellaneous Amendments
• Section 2(10) and Section 7(1)(aa) are being amended to include air freight station.
o These amendments would empower the CBEC to appoint air freight stations for unloading
of import cargo and loading of export cargo as in the case of inland container depots.
64
• Section 47 is being amended to provide that in case the bill of entry has been returned for
payment of duty before the commencement of the Customs (Amendment) Act, 1991, and
payment has not been made, the Central Government may notify class of importer(s) who can
pay duty electronically.
• Vide the Finance Act, 2011 Section 28AA and Section 28AB were substituted with a new
Section 28AA. Now reference to Section 28AB in Section 75A is proposed to be substituted
with Section 28AA.This amendment is being given retrospective effect from 08.04.2011.
• Section 138 deals with summary trial of offences. This section is proposed to be amended to
exclude offences punishable with imprisonment for a term of three years or more, under
Section 135, since it is being proposed vide Section 104 that such offences shall be
cognizable.
• The limits of duty free allowance under the Baggage Rules are proposed to be enhanced as
under:
Particulars
Passengers of Indian Origin
Children upto 10 years
Present
Rs. 25,000
Rs. 12,000
Proposed
Rs. 35,000
Rs. 15,000
Amendments to the Customs Tariff Act
Section 8C proposed to be amended
• Section 8C empowers the Central Government to levy safeguard duty on imports from the
People’s Republic of China. It is being proposed that such duty may continue if the Central
Government is of the opinion that such articles or goods continue to be imported into India so
as to cause or threaten to cause market disruption to domestic industry even though the latter
has taken measure to adjust to such disruption.
o The proposed amendment would align the provisions of the CTA with the Transitional
Product Specific Safeguard Mechanism under Chinese Accession Protocol signed with
WTO in 2001.
65
Vide Notification No. 21/2012-Customs (N.T)
• Notification Nos. 20/2006-Cus. dated 01.03.2006 and 29/2010-Cus. dated 27.02.2010
specifying the effective rate of SAD, have been superseded.
• Some key amendments are as under:
o A condition is being inserted requiring the importer of specified goods to declare the State
of destination where the goods are intended to be sold for the first time after import and the
VAT registration number. This condition would apply to such goods imported on or after 1st
May, 2012.
o The Credit Rules are being amended to permit transfer of unutilized credit of SAD lying in
balance at the end of each quarter to other registered premises of the same manufacturer.
This change would come into effect from 01.04.2012.
Notification No. 22/2012-Customs (N.T)
• Amendment to the Customs (Import of Goods at Concessional Rate of Duty for Manufacture
of Excisable Goods) Rules, 1996
o In terms of Rule 4(1) and (1A), for importing goods at concessional rate of duty an
application indicating estimated quantity of goods required in a quarter has to be filed with
AC / DC of Central Excise. As per the amendment, the said application can now cover
goods required for a period not exceeding one year, instead of a quarter.
o A new Rule 7A has been inserted which provides that, goods imported at concessional rate
of duty (which have not been utilized for intended purpose or are defective) can be reexported, subject to the following conditions:
(a) Such re-export is with prior permission from jurisdictional AC / DC of Central Excise;
(b) Such re-export is within six months from the date of import; and
(c) The value of such re-export goods is not less than the value of imports.
o The Annexure specified in Rule 7(c) has been substituted with a new Annexure.
Rate of Customs duty
• The peak rate of duty, i.e. 10% remains unchanged.
• Currently, cesses are levied on CVD and thereafter on the aggregate of Customs duties
which includes the CVD component. The method of computation of Customs duty has been
modified to avoid computation of the cesses twice, as under:
66
A
B
C
D
E
F
G
H
I
J
K
Assessable value (CIF + Landing Charges)
Basic customs duty (BCD) 10%
Value for CVD (A+B)
CVD equivalent to central Excise Duty 10%
Educational Cess on CVD 2%
Sec. and Higher Educational Cess 1%
Customs duty for calculation of Cess
Customs Educational cess 2%
Customs Secondary and higher educational cess 1%
Value of SAD
SAD @ 4%
Total duty
*Notification No. 13 /2012-Customs
**Notification No. 14 /2012-Customs
67
Present
100.00
10.00
110.00
11.00
0.22
0.11
21.33
0.43
0.21
121.97
4.88
26.85
Proposed
100.00
10.00
110.00
11.00
0*
0**
21.00
0.42
0.21
121.64
4.865
26.495
Changes in Rate of Customs Duty
There is no change in the peak rate of BCD @ 10%.
Notification No. 21/2002 dated 01.03.2002 has been superseded by the Notification No.
12/2012 dated 17.03.2012.
Exemption from Duty
• Full Exemption from BCD
o
Aramid thread / yarn / fabric, polyethylene plate, thermoplastic film for manufacture of
bullet proof helmets for the supply to defense and police
o
Nickel Ore and Concentrate
o
Steam Coal - Valid upto 31.03.2014
o
Liquefied Natural Gas and Natural Gas for generation of electrical energy by power
generating company
o
Triband Phosphor
o
Pneumatic tyres (new or retreaded) for aircraft subject to conditions
o
Waste paper or paperboard
o
Tunnel boring machines and parts and components thereof for use in the assembly of
Tunnel boring machines
o
Tunnel excavation and lining equipments consisting of drilling jumbos, loaders, tunnel
excavators, shotcrete machines and 3 stage crushers for use in highway development
projects
o
Specified
road
construction
equipments
for
projects
awarded
by
Metropolitan
Development Authority.
o
Parts, components and sub-parts of parts and components required for manufacture of
memory cards for mobile phones
o
LCD and LED TV panels for 20 inches and above
o
Lithium ion automotive battery for manufacture of Lithium ion battery packs for supply to
hybrid/electric vehicle
o
Specific parts of hybrid vehicles
o
Parts and testing equipment, for maintenance repair, and overhauling of specified aircraft
o
Specified raw material required for manufacture of Coronary stents/coronary stent system
and artificial heart valve
o
Dredgers
68
Reduction in rate - BCD
• From 30% to 5%
o
Artemia
• From 30% to 10%
o
Soya protein concentrate
• From 15% to 10%
o
Isolated soya protein
• From 7.5% to NIL
o
Nickel oxide and hydroxide
o
Sintered Natural Uranium Dioxide/Sintered Uranium Dioxide pellets (U-235) for use in the
production of nuclear power
o
New shuttleless looms and parts/components for manufacture of the same used in textile
industry
• From 7.5% /10% to 2.5%
o
Super Absorbent Polymer imported for use in the manufacture of adult diapers
o
Ammonium Metavanadate
o
Specified agriculture machinery including parts and components required for manufacture
of the same.
o
Parts of Blood Pressure Monitors and blood glucose monitoring systems
o
Survey (DGPS) instruments, 3D modeling software for ore body simulation cum mine
planning and exploration equipment
• From 5% to 2.5%
o
Iodine
o
Specified liquid fertilizers
o
Polypropylene, Stainless Steel Strip and Stainless Steel capillary tube for manufacture of
syringe, needle, catheters, and cannulae
69
• From 10% to 7.5%
o
Titanium dioxide
o
Pipes and tubes for use in manufacture of boilers
o
Track machines and parts
o
Train Protection and warning system
• From 15% to 5%
o
Wool tops and other combed wool
• From 10% / 7.5% to 5%
o
Probiotics
o
Organic/ inorganic coating material for manufacture of electrical steel subject to condition
o
Waste of wool or of fine or coarse animal hair, including yarn waste but excluding garneted
stock
o
Hydrophilic Non-Woven, Hydrophobic Non–Woven use in the manufacture of Adult
Diapers
o
Marine sea water pumps with fibre impellers and Automatic fish/prawn feeder
o
Specified water soluble
o
Raw materials, intermediates required for the manufacture of parts of blades for rotors of
wind operated generators.
o
Parts and components of digital still image video cameras for specific configuration
Full Exemption from CVD
• Aramid thread / yarn / fabric, polyethylene plate, thermoplastic film for manufacture of bullet
proof helmets for the supply to defense and police
• Pneumatic tyres (new or retreaded) for aircraft subject to conditions
• Tunnel boring machines and parts and components thereof for use in the assembly of tunnel
boring machines
• Tunnel Excavation and Lining equipments consisting of drilling jumbos, loaders, tunnel
excavators, shotcrete machines and 3 stage crushers for use in highway development
projects
• Specified road construction equipments for projects awarded by Metropolitan Development
Authority
70
• Parts, components and sub-parts of parts and components required for manufacture of
memory cards for mobile phones
• Parts and testing equipment, for maintenance repair, and overhauling of specified aircraft
• Installation of Mechanized Handling Systems & Pallet Racking Systems in mandis or
warehouses for horticulture produce
Concessional CVD
• Super Absorbent Polymer use in the manufacture of adult diapers is reduced to 6%
• Hydrophilic Non-Woven, Hydrophobic Non – Woven use in the manufacture of Adult Diapers
is reduced to 6%
• Lithium ion automotive battery for manufacture of Lithium ion battery packs for supply to
hybrid/electric vehicle is reduced to 6%
• Specific parts of hybrid vehicles is reduced to 6%
Increase in Basic rate of Customs Duty
• Boric Acid is enhanced from 5% to 7.5%
• Platinum is enhanced from 2% to 4%
• Cut and polished colored gemstones enhanced from NIL to 2%
• Flat rolled products of non- alloy steel whether or not clad plated or coated is enhanced from
5% to 7.5%
• BCD on CBUs of Motor Car with FOB value more than US$ 40000 and with engine capacity
more than 3000cc for petro-run vehicles and more than 2500 cc for diesel- run vehicles has
been increased from 60% to 75%
• Bicycles in fully built condition as well as in form of CKD/SKD kits has been increased from
10% to 30%
• Bicycles parts and components is increased from 10% to 20%
Exemption from SAD
• Specified goods i.e. pre-packaged goods intended for retail sale, patient and proprietary
medicines, articles of apparels and clothing accessories excluding parts and telephone for
cellular network or other wireless network and specified watches subject to declaration of
State where goods are intended to be sold for the first time on payment of VAT.
71
• Aramid thread / yarn / fabric, polyethylene plate, thermoplastic film for manufacture of Bullet
proof helmets for the supply to Defense and Police
• Installation of Mechanized Handling Systems & Pallet Racking Systems in mandis or
warehouses for horticulture produce
• All items mentioned under List 10 of Notification No. 12/2012- Customs, dated 17.03.2012
• Mailroom equipment suitable for use with specified goods, if the importer, at the time of import
is an establishment registered with the Registrar of Newspapers, India (RNI).
• Gold ores and concentrates for use in the manufacture of gold under Chapter 26.
• Super absorbent polymer imported for use in the manufacture of adult diapers
• Hydrophilic Non-Woven, Hydrophobic Non-Woven, imported for use in the manufacture of
Adult Diapers
• Parts of printers
• Parts and components of Digital Still Image video Cameras capable of recording video with
minimum resolution of specific configuration.
• Light emitting diodes (electroluminescent) imported for manufacture of LED lights or fixtures
and LED lamps
• Parts required for the manufacture of goods required for medical, surgical, dental or
veterinary use and accessories thereof
• Specified goods required for manufacture of syringes, needles, catheters and cannulae
• Specified goods required for manufacture of Coronary stents / coronary stent system and
artificial heart valve
• Parts and components required for manufacture of Blood Pressure Monitors and blood
glucose monitoring system (Gluco-meters).
• Parts, components, accessories and sub-parts for the manufacture of mobile handsets
including cellular phones and for the manufacture of battery chargers, PC connectivity cables,
Memory cards and hands-free headphones of mobile handsets including cellular phones.
• Lithium ion automotive battery for manufacture of Lithium ion battery packs for supply to the
manufacturers of hybrid and electric vehicle
• Specified goods for use in the manufacture of samples of hand knotted carpets
• Specified goods for use in the manufacture of polyester tyre cord fabric
• Solar lanterns or solar lamps
• Specified goods imported from Nepal
72
• All items of machinery (including those required for testing and quality control) and
components required for setting up of a solar thermal power generation project or facility
• Wood in the rough, whether or not stripped of bark or sapwood, or roughly
• Slate and slate pencils
• Cold rolled sheets of grain – oriented silicon – electrical steel other than seconds and
defectives
• Brass scrap
• Goods to be imported by or on behalf of Security Printing and Minting Corporation of India
Limited
• Other aircrafts (for example, helicopters, aeroplanes)
• Dredgers
• Goods required for the expansion of any existing specified Mega Power project
• Goods for projects specified under Heading No. 9801
• All dutiable articles, imported by a passenger or a member of a crew in his baggage
Withdrawal of BCD exemption
• Digital still image video camera of specific configuration
• Poly-laminated aluminum tape and poly-laminated steel tape for the manufacture of specified
goods
Export Duty
• Export Duty on “chromium ores and concentrates all sorts” is enhanced from Rs. 3000 per
tonne to 30 % ad valorem
Project Imports
Projects Notified
Rate
Project for installation of merchandised handling systems and pallet racking
5% BCD and
systems in mandis and warehouses for horticulture produce
exemption from
CVD and SAD
Green house set up for protected cultivation of horticulture and floriculture
produce
73
5% BCD
• BCD is reduced to NIL from 5% for initial setting up as well as substantial expansion of all
fertilizer project for a period of 3 years i.e. up to 31.03.2015
• BCD is reduced to 2.5% for the capital goods/equipments required for setting up or
substantial expansion of iron ore pellet plants and iron ore beneficiation plants
• Coal Mining projects is reduced to Nil from 5%
Other Amendments
• The period of stay for duty free import of aircraft (not registered) reduced from 6 months to 15
days, maximum extension permissible up to 60 days
• Unconditional exemption from CVD is extended on import of foreign going vessels for a
period from 01.03.2011 to 17.03.2012
• CVD on foreign going vessels imported into India is exempt subject to payment of duty at the
time of its conversion for coastal run.
74
Chapter 5 - CENVAT Credit Rules, 2004
Amendments proposed to be made to definitions1 – Amended by Notification No.
18/2012-C.E. (N.T.) dt. 17.03.2012
• “Capital goods”
o The definition has been extended to cover “motor vehicles other than those falling under
tariff headings 8702, 8703, 8704, 8711 and their chassis”.
o Similar amendment has been made for motor vehicles used for the specified services.
o Credit in respect of components, spares and accessories of motor vehicles which are
capital goods for the assessee has been allowed.
• “Input service”
o The specified services relating to motor vehicles for which credit is restricted have been
reduced to cover only:
(i) ‘rent-a-cab services’ and ‘supply of tangible goods services’ insofar as they relate to
a motor vehicle which is not capital goods, and
(ii) ‘general insurance services’ and ‘repair, reconditioning, restoration of motor vehicle
services’ (except when used by a manufacturer in relation to a motor vehicle
manufactured by him, or a general insurance service provider in respect of a motor
vehicle insured / reinsured by him).
ELP’s Comments
These definitions have liberalised the availability of credit for: (i) motor vehicles as capital
goods, and (ii) services connected with motor vehicles.
Key sector specific changes2
• The 20% credit restriction for providers of ‘life insurance services’ and ‘management of
investment under ULIP services’, which was introduced in the previous budget, has been
deleted.
1
2
These amendments shall take effect on 01.04.2012, unless otherwise specified.
These amendments shall take effect on 01.04.2012, unless otherwise specified.
75
New provisions relating to availment and utilisation of CENVAT Credit3
• A new enabling rule has been substituted in relation to refunds of CENVAT credit for
exporters of goods and services (procedure and conditions to be specified by Notification).
o
The refund is to be calculated in the ratio of export turnover from goods and services to
total turnover.
o
This ratio is applied to the net CENVAT credit which is the credit of inputs and input
services less any reduction under Rule 3(5C).
o
Export turnover for goods is the value of goods cleared during the relevant period, and
exported.
o
Export turnover for services is based on the services completed during the relevant period,
i.e. payments received in the relevant period + prior advances for services completed in
that period – advances for services not completed in that period.
o
‘Export service’ has been separately defined and is to be determined per the Export Rules,
but irrespective of whether payment has been received.
o
Value of services is to be determined per Rule 6(3) and Rule 6(3A).
o
Total turnover is the sum of turnover from all excisable goods cleared (exempted, dutiable
or exported), all services provided and any inputs removed as such.
o
Refund is not available if benefit of drawback / rebate has been availed.
o
The new refund scheme applies to export made on or after 01.02.2012. Refunds under the
old rule may be claimed within 1 year from the commencement of the new rule.
• Manufacturers have been permitted to transfer unutilized credit of Special Additional Duty
from one registered premises to another, at the end of the quarter, subject to issuance of a
challan and the making of an entry in the relevant Rule 9 document. The benefit does not
apply to transferring or receiving premises which are availing any of the specific area-based
Excise exemptions.
Vide Notification 12/2012-C.E. (N.T.) dt. 17.03.2012, consequential changes have been made
to Form ER-1, the monthly return filed by manufacturers of final products, to reflect details of
credit, and credit utilized toward, inter-unit transfer of credit under Rule 10A of the Credit
Rules.
3
These amendments shall take effect on 01.04.2012, unless otherwise specified.
76
Amendments to existing provisions relating to availment and utilisation of
CENVAT credit4
• The provision for paying CENVAT credit on the transaction value of capital goods cleared as
such, or as waste and scrap, has been amended to provide that CENVAT credit shall be paid
on the depreciated value of the goods (per the rates provided) or the transaction value,
whichever is greater. This amendment shall be effective from 17.03.2012.
• CENVAT credit in respect of inputs and capital goods will also be allowed where the inputs
are delivered at a location other than the premises of the service provider, subject to
maintenance of documentary evidence.
• The rate at which payment is to be made under rule 6(3) of the Credit Rules has been
increased from 5% to 6% of the value of exempted goods and services. The same applies to
services exempted on condition that no credit of inputs and input services have been taken.
• The valuation provision for purposes of Rule 6(3) and Rule 6(3A) has been extended to
situations in which the option under Rule 6(7A) of the STR is applied for ‘life insurance
services’.
• Distribution of credit of Service Tax by an input service distributor has been restricted: (i) to
the respective unit where the service is used wholly by that unit, and (ii) to being carried out
on a pro rata basis (per the turnover) of units to which the service relates. Units are defined to
include registered and unregistered premises of manufacturers and service providers.
Turnover is to be calculated per the procedure prescribed for the new refund scheme.
• The documents for availing credit have been amended to include challans evidencing
payment by all categories of service recipients who are liable to pay the Service Tax.
• Notification 1/2010-C.E. dated 06.02.2010 has been added to the list of notifications, whose
benefit, if availed, would disentitle the manufacture to the large taxpayer benefits.
4
These amendments shall take effect on 01.04.2012, unless otherwise specified.
77
• The interest provision has been amended so as to require payment of interest only if
CENVAT credit is both taken and utilized wrongly. This amendment shall take effect from
17.03.2012.
While various High Court and CESTAT decisions [CCE & ST vs. Bill Forge Pvt. Ltd. [2011TIOL-799-HC-KAR-CX]; CCE, Delhi-III vs. Maruti Udyog Ltd. [2007 (214) ELT 173 (P&H)];
CCE vs. Gupta Steel [2006 (205) ELT 24 (Guj)]; Bidhata Industries Pvt. Ltd vs. CCE,
Thane [2007 (220) ELT 919 (Tri-Mum)]) had held that no interest would be payable if credit
were only taken and not utilised, the Supreme Court in Union of India vs. Ind-Swift
Laboratories Ltd. [2011-TIOL-21-SC-CX] held that, since the rule required payment of
interest if credit is taken or utilised wrongly, interest would also be payable if credit is only
wrongly taken. The rule has now been amended to substitute the expression ‘taken and
utilised’ wrongly, putting to rest the controversy, albeit prospectively.
• Consequential amendment replacing references to Section 11AB of the CE Act with
references to Section 11AA, following the merger of these provisions during the previous
budget. This amendment shall take effect from 17.03.2012.
Retrospective amendments relating to availment and utilisation of CENVAT Credit
• The amendment in the previous year’s budget which was introduced w.e.f. 01.03.2011, and
which stated that the restrictions prescribed in Rule 6(1)-(4) for capital goods, inputs and input
services used in manufacture of exempted goods or provision of exempted services, has
been extended to apply retrospectively from 10-2-2006 to 28-2-2011.
• In the Union Budget 2010-11, a retrospective amendment was made (for the period
10.09.2004 to 31.03.2008) permitting manufacturers who had availed CENVAT credit but not
maintained separate accounts, and whose disputes in relation thereto were pending before
various fora, to reverse the credit proportionate to the value of exempted goods. The
amendment required the manufacturer to make an application to the Commissioner of Central
Excise along with inter alia a certificate from a Chartered Accountant or a Cost Accountant
certifying the quantum of credit attributable to inputs used in or in relation to the manufacture
of exempted goods. While the proportionate payment had been permitted for inputs and input
services, the requirement for the certificate was stipulated only in relation to inputs. This
oversight has now been corrected for the relevant past period.
78
Proposed changes necessitated by introduction of the negative list
• All references to specific services to be removed and replaced by a broad reference.
• Given that an exported service will no longer be a Service Taxable in India per the place of
supply rules (since, per the basic test, the recipient of service will be outside India), the
definition of output service will be amended to include ‘export service’ (as now defined in rule
5) so that credit is available in respect of the same, which the exporter can apply for refund of
the credit.
• Since interest on loans and advances will become exempted services, the existing 50% credit
restriction for the banking and financial sector will be replaced with a formula to determine
reversal of credits on an actual basis, with the value of service being net interest (interest
earned less interest paid on deposits, subject to a 50% minimum interest paid on deposits).
Reversal of credits will be on gross interest basis for the non-financial sector.
79
Chapter 6 – Direct Taxes
Key Amendments
Taxability of Indirect Transfers [Sections 2(14), 2(47), 9(1)(i) and 195 of the IT Act]
Amendment
•
•
•
•
Section 9(1)(i) of the IT Act seeks to inter alia levy tax on a “transfer of a
capital asset situated in India”.
Explanations have been inserted, with retrospective effect from April 1,
1962, to clarify the meaning of the terms “transfer”, “capital asset”, and
further expand the scope of Section 9(1)(i) of the Act, thereby bringing
within the ambit of the IT Act, capital gains arising from the off-shore
transfer of assets/shares, outside India.
o Capital Asset - An explanation has been inserted in Section 2(14) of the
IT Act to clarify that the term “property” shall be deemed to have always
included any rights, in or in relation to an Indian Company, thereby
expanding the scope of the term ‘capital asset’
o Transfer - An explanation has been inserted in Section 2(47) of the IT
Act to clarify that the term “transfer” shall be deemed to have always
included disposing of or parting with an asset or any interest therein, or
creating any interest in any asset in any manner whatsoever, directly or
indirectly, notwithstanding that such transfer of rights has been
characterized as being effected or dependent upon or flowing from the
transfer of a share or shares of a company registered or incorporated
outside India.
o Through - Explanation 4 has been inserted to Section 9(1)(i) of the IT
Act to clarify that the term “through” shall be deemed to have always
meant and included “by means of”, “in consequence of”, or “by reason
of”.
o Scope of Section 9(1)(i) of the IT Act - Explanation 5 has been inserted
to Section 9(1)(i) of the IT Act to clarify that an asset or a capital asset
being any share or interest in an entity incorporated/located outside
India, shall be deemed to have always been situated in India, if the
share or interest derives, directly or indirectly, its value substantially
from the assets located in India.
Further, an explanation has been added to Section 195 of the IT Act, to
clarify that the obligation under Section 195(1) to make deduction shall be
deemed to have always extended to all persons, resident or non-resident,
irrespective of the presence of the non-resident, in India.
Clause 113 of the Finance Bill, 2012, is proposed to be introduced to
validate the proceedings under the IT Act and the tax levied, collection or
imposed in respect of the tax on capital gains arising out of transactions
which has taken place outside India. Accordingly, any tax levied,
80
ELP’s Comments
•
•
•
•
demanded, assessed, imposed or deposited before the commencement of
the proposed Finance Act, 2012 chargeable for a period prior to such
commencement but not collected or recovered before such
commencement, may be collected or recovered and appropriated in
accordance with the provisions of the Income-tax Act, 1961 as amended by
the proposed Finance Act, 2012 and there shall be no liability or obligation
to make any refund whatsoever.
Taxability of indirect transfer of shares has been a bone of contention
between tax authorities and tax payers across the world, and India is no
different. Pre the present amendments, India did not have any provision
whereby such indirect transfer of shares could be brought within the ambit
of taxation in India. Vide the aforesaid amendments, the legislature has
sought to overrule the decision of the Hon’ble Supreme Court in the case
of Vodafone International Holdings BV v. UOI, which in terms of the then
existing provisions, had held the indirect transfers of shares outside India,
to be not liable to tax in India.
While the present amendments are much in line with the trend across
developing countries like China, Mexico, Indonesia, Peru, and various
developed countries like USA, Australia and others, to tax indirect transfers
of shares, to prevent tax erosion, the Government has gone a step ahead,
and introduced the aforesaid amendments (by way of an explanation) with
retrospective effect, thereby dismantling the certainty in law, previously
provided by the Hon’ble Supreme Court.
Reading the provisions of Section 195 of the IT Act (as amended) with the
aforesaid explanations, it is clear that the withholding provisions will also
apply to non-residents, regardless of their presence in India, once the
chargeability under the IT Act has been established. However, what will be
important to see is how the collection/recovery of tax will be effectuated
from such non-residents, who have effectuated an indirect transfer of
shares outside India, and who have no presence, in India, whether by way
of a representative assessee or a PE or otherwise.
Retrospective amendment
o By the insertion of the aforesaid amendments, the Government has
sought to alter the chargeability of Section 9(1)(i) of the IT Act, with
retrospective effect, in the guise of “clarifying” the position in law, vide
the introduction of “Explanations”.
o There are different lines of judgements on the issue of sustainability of
such retrospective amendments. As per one line of judgements (Ujagar
Prints and Ors. v. Union of India and Ors., MANU/SC/0305/1986,
I.N. Saksena vs. State of M.P (1976) 4 SCC 750, Bakhtawar Trust &
Ors. v. M.D.Narayan and Others (2003) 5 SCC 298) a retrospective
amendment which is directed to negate a Supreme Court judgement is
not sustainable. If however, the judgement proceeds on the basis of a
lacuna in the law and the retrospective amendment addresses that
81
•
•
•
•
•
lacuna and as a result renders the judgement ineffective, then the
retrospective amendment is valid in law. There is also the view as
expressed by the Hon’ble Supreme Court in the case of National
Agricultural Co-operative Marketing Federation of India vs. UOI
reported in 2003 5 SCC 23, wherein the Hon’ble Supreme Court has
inter alia held that, if a clarificatory explanation seeking to get over
previous judicial decisions tantamount to a new levy, or is in substance,
a change in law, such retrospective amendment will then be rendered
unconstitutional.
o Further, such an amendment, inasmuch as it seeks to effectively
introduce a new levy, vide a retrospective amendment, is also violative
of an assessee’s fundamental right to do business, as provided under
Article 14 and Article 19(1)(g) of the Constitution of India.
o It needs a special mention that, while the growing revenue pressures of
a developing economy may require India to take steps to prevent tax
erosion by means of strategic tax levy, the present amendments to seek
to tax indirect transfers of shares, with a retrospective effect is only
harsh and unjust. As Late Shri Nani A. Palkivala once said, “Every
government has a right to levy taxes. But no government has the right,
in the process of extracting tax, to cause misery and harassment to the
tax payer and the gnawing feeling that he is made a victim of palpable
injustice.”
The explanation to Section 2(14) of the IT Act, will now bring within its
ambit every kind of a right, including Call/Put Options, ROFRs, etc, thereby
exposing such transactions to the levy of capital gains tax in India.
Provisions of Section 149 are proposed to be amended to allow the tax
authorities to issue notice to examine the taxability in India, of income
arising in respect of “Financial interest in an entity” located outside India for
an extended period of sixteen years. In the backdrop of the amendments to
tax offshore transfer, this amendment could enable the tax authorities to
reopen cases for the aforesaid extended period.
The present amendment, when read with the introduction of the General
Anti Avoidance Rules (effective from April 1, 2013), clearly points to the
fact that the Government of India, has left enough room for itself to override a treaty, and tax every possible transaction which may fall within the
ambit of the IT Act in light of the new provisions, irrespective of the
provisions of Section 90 of the IT Act (as amended). In view of the above, it
may also be important to evaluate whether the transactions which have
already been effectuated, between treaty partner countries, will continue to
enjoy treaty protection.
Present amendment does not define the term “substantial value”, neither
does it make any reference to 50% limit proposed by the DTC Bill, 2010.
In view of the above, it may be critical to challenge the aforesaid
amendments in a Writ Court, as being unconstitutional and grossly unjust.
82
Insertion of GAAR [Chapter X-A]
Amendment
ELP’s Comments
• A new Chapter X-A has been introduced with effect from 1 April 2013
comprising of section 95 to section 102. Under Section 95, any
arrangement entered may be declared as impermissible avoidance
arrangement and consequently may come into ambit of GAAR.
• Provisions of this chapter can be applied to even a part of or step in a
transaction.
• For the purposes of arrangement to be termed as impermissible
avoidance arrangement, the main purpose or one of the main purpose
of arrangement is to obtain a tax benefit and it:
o Creates rights and obligation which were not ordinarily created
between independent parties; or
o Directly or indirectly, results in misuse or abuse of any provision of
the Act; or
o Lacks commercial substance; or
o Not for bona-fide purposes.
• Express provisions are inserted spelling out circumstances under which
transaction is deemed to lack ‘commercial substance’
• Onus of proof lies on the taxpayer that the main purpose of the
arrangement was not to obtain tax benefit;
• Consequences if arrangement is declared as impermissible avoidance
arrangement
o denial of tax benefit or a benefit under a tax treaty;
o disregarding, combining or recharacterising the impermissible
avoidance arrangement;
o treating the impermissible avoidance arrangement as if it had not
been entered into or carried out;
o disregarding any accommodating party or treating any
accommodating party and any other party as one and the same
person;
o deeming persons who are connected persons in relation to each
other to be one and the same person for the purposes of determining
tax treatment of any amount.
• GAAR provisions to apply in addition to any other basis of determination
of tax liability
• Connected parties are treated as one and the same by disregarding any
corporate structure
• Guidelines will be prescribed
• Various terms are defined in the Chapter
83
• GAAR is a globally followed practice and India has joined the league by
insertion of these provisions in the Act. These provisions were initially a
part of the DTC Bill, 2010. The current proposed provisions appear to be
in line with the provisions in DTC Bill, 2010.
• The current provisions are inspired from the GAAR provisions in the
South Africa.
• Being non-obstinate provisions, GAAR override all the other provisions
of the Act. Further, the terms used and defined in the GAAR provisions
are wide enough to include most of the tax planning transactions within
the GAAR net.
• Treaty override provisions leave no recourse to assessees to whom
GAAR provisions are made applicable.
• A number of judgments have existed on tax avoidance and tax evasion
in India for a long time. For the first time, express provisions in the Act
have proposed providing express powers to the tax authorities at lower
level to probe any suspicious transactions. However, it is worthwhile to
note that the legislation has created enough checks before GAAR
provisions can be invoked by the tax authorities. An approval of the
Commissioner of Income Tax and Approving Panel. These checks have
been brought in by inserting section 144BA in the Act.
• Further, the current GAAR provisions give powers to the tax authorities
to disregard the entire transaction even if GAAR provisions are invoked
for a part of or a step in the whole transaction.
• There is no minimum cap that is prescribed for invoking GAAR
provisions. However, one needs to look if such cap is brought into the
guidelines which are yet to be prescribed.
• Further, the possibility of tax authorities invoking GAAR after a Ruling of
the AAR and in circumstances where there is no change in the facts or
law appears to be unaddressed. The better view appears to be that tax
authorities should not be permitted to invoke GAAR in such situation,
however the same needs to be tested.
• Before the Finance Act is given finality, one needs to look at whether
Government makes changes in line with the recommendations of the
Standing Committee of Finance on DTC.
84
Requirement of Tax Residency Certificate to Claim Treaty Benefits [Section 90]
Amendment
•
•
ELP’s Comments
•
•
•
Sub-section (2A) is inserted with effect from 1st April 2013 which
provides that provision of Chapter X-A of the Act shall apply even if
they are not beneficial for the assessee.
Sub-section (4) is inserted with effect from 1st April 2013 which
provides that an assessee, which is a non-resident, to whom an
agreement referred to in sub-section (1) applies, shall not be entitled
to claim relief under such agreement unless a certificate is obtained,
of his being a resident in a country or specified territory from the
Government of such country or specified territory. Format will be
prescribed.
The insertion of section 90(2A) are substantial provisions inserted with
an intent to leave no escape for the assessee to whom GAAR
provisions are applied.
The insertion of section 90(4) has made the claim of treaty benefits
possible only after the submission of tax residency certificate of the
resident country. Though this requirement is made necessary, it is
intended that submission of tax residency certificate may not be
treated as conclusive evidence.
It is also worthwhile to note there are practical difficulties in obtaining
a tax residency certificate in certain countries.
Taxability of Software Payments (Section 9)
Amendment
•
•
•
Explanation 4 and 5 to Section 9(vi) of the IT Act in relation to
definition of ‘royalty’ has been introduced wherein it has been
provided that any transfer of all or any rights in respect of any right
includes transfer of all or any right for use or right to use a computer
software including granting of a license.
The consideration paid would be royalty, whether or not:
o Possession or control of such right is with the payer;
o Such right is directly used by the payer;
o The location of such right or property is in India.
The amendment is retrospectively effective from June 1, 1976.
85
ELP’s Comments
•
•
•
•
•
The amendment to the definition of the term ‘royalty’ in Section 9 of
the IT Act has brought within its ambit any payment made taxable for
using a copyrighted article in relation to computer software.
The amendment is retrospectively effective and reverses of the
rulings pronouncements by various judicial forums which have taken
a view that consideration paid for right to use a copyrighted article is
not royalty.
The amendment will require every non-resident receiving
consideration for sale of computer software taxable in relation to the
software payments received from India and will also require the nonresident to obtain PAN and file its return of income.
The amendment will mandate deduction of tax on every payment
made to non-residents in relation to software payments. This would
mean that every individual who is purchasing software from a nonresident is required to deduct tax as the language in Section 195 of
the IT Act does not provide for minimum threshold in excess of which
tax is required to be deducted. If the individual fails to deduct tax,
then such an individual will be deemed to be an assessee in default.
A non-resident will be entitled to take the benefit of DTAA, wherein
the provisions relating to definition of royalty is stricter than the
provisions of the IT Act. However, it needs to be examined on a case
to case basis.
Credit of Share Application Money, Share Premium, etc. [Section 68]
Amendment
ELP’s Comments
• Proviso is inserted to Section 68 with effective from 1st April 2013.
• Any explanation offered by a closely held company with regard to
credit of share application money, Share Capital, Share Premium or
any such amount shall be deemed to be non-satisfactory unless:
o The resident person whose name credit has been recorded offers
explanation about nature and source of such sum; and
o Tax authorities find such explanation to be satisfactory
• This provision has brought in with an intention to tighten the noose of
closely held companies entering into benami transactions. However,
this would cause unnecessary burden to genuine investors.
• This provisio does not apply to non-residents. It also does not apply to
venture capital funds.
86
Tax on unaccounted income [Section 115BBE]
Amendment
ELP’s Comments
• Section 115BBE shall be effective from 1st April 2013.
• Section 115BBE of Act provides that where total income of the
assessee is as per income referred under section 68, 69, 69A, 69B,
69C and 69D, than the income tax payable shall be aggregate of:
o The amount of income tax calculated on income referred under
section 68, 69, 69A, 69B, 69C and 69D, at the rate of thirty per
cent;
o The amount of income tax chargeable on income if the above
incomes were not been included
• No deductions or allowance will be allowed under this section.
• The provisions of section 115BBE acts as a penal section for
providing for a flat rate of taxation for income on account of
unexplained or unaccounted income or assets.
• This would have a far reaching impact as the interest and penalty
provisions are also linked to the tax amount resulting in larger
outflows towards interest and penalty.
Share premium in excess of fair market value to be treated as income (Section
56(2)(viib))
Amendment
•
•
•
•
A new clause (viib) has been introduced in Section 56(2) of IT Act,
which is applicable to a company, not being a company in which
public are substantially interested, which receives, in any previous
years, from any person being a resident, any consideration for issue
of shares.
In such a case, if the consideration exceeds the face value of such
shares, the aggregate consideration received for such shares as
exceeds the fair market value of shares shall be chargeable to
income tax.
This provision shall not apply where the consideration for issue of
shares is received by a venture capital undertaking from a venture
capital company or a venture capital fund.
Valuation guidelines to determine the fair market value to be
prescribed.
87
ELP’s Comments
•
•
•
•
The new clause has in effect been introduced to tax the excess share
premium amount received by an unlisted company on issuance of
shares to a resident, wherein the excess amount cannot be
substantiated by way of fair market value. The excess will be taxable
as income in the hands of the company.
The introduction of this clause will have a substantial impact on all
the private limited companies which issue shares more than the fair
market value. Generally the shares issued by private limited
companies are more than the fair market value.
The provisions are not applicable to debentures, however, will cover
preference shares.
The provisions are not applicable if the shares are issued to a nonresident.
Provisions in relation to assets located outside India (Section 139, Section 147,
Section 149)
Amendment
•
•
•
ELP’s Comments
•
•
•
Section 139 of the IT Act has been amended to provide that every
resident having any asset located outside India is required to furnish
its return of income irrespective of the fact that the resident tax payer
has taxable income or not.
Section 147 of the IT Act has been amended to provide that income
shall be deemed to have escaped assessment where a person is
found to have any asset located outside India, chargeable to tax, has
escaped assessment.
Section 149 of the IT Act has been amended to increase the time
limit for issue of notice for re-opening an assessment to 16 years,
where the income is in relation to any asset located outside India.
These Sections have been introduced to take account of black
money, of all those residents, in the form of assets located outside
India.
The amendments in the above Sections will have far reaching effect
wherein any resident even acting as a trustee or a beneficiary of an
Offshore Trust, will be mandatorily required to file return of income
irrespective of whether the resident has any taxable income in India.
It needs to be determined whether non-resident owning shares in a
company registered in a foreign country will be treated as a financial
interest and thus subjected to provisions of Section 149.
88
Introduction of Advance Pricing Agreements [Section 92CC and 92CD ]
Amendment
•
•
•
•
•
•
The Board, with the approval of the Central Government, may enter
into an advance pricing agreement with any person for the purpose of
determining the arm’s length price or specifying the manner in which
arm’s length price is to be determined in relation to an international
transaction to be entered into by that person.
The agreement referred to in sub-section (1) shall be valid for such
period not exceeding five consecutive previous years as may be
specified in the agreement.
The advance pricing agreement shall not be binding if there is a
change in law or facts having bearing on the agreement so entered.
Agreement to be held void ab initio if it is found that agreement has
been obtained by the person by fraud or misrepresentation of facts
Board is empowered to prescribe a scheme specifying the manner,
form, procedure and any other matter generally in respect of the
advance pricing agreement
Where the taxpayer has filed a return of income under Section 139
for any assessment year, prior to the date of entering into the
agreement, then it is required that a modified return be submitted
within a period of three months from the end of the month in which
the said agreement was entered into.
89
ELP’s Comments
•
•
•
•
•
•
•
•
•
•
Advance Pricing Agreements (APAs) which were proposed under the
Direct Tax Code in 2010 have now been made part of the current
legislation to reduce litigation and provide certainty to the taxpayer.
The scheme of APAs outlining the manner, form and procedure
would be announced by CBDT in near future. The scheme will
provide clarity on whether APAs would be unilateral or bilateral.
CBDT has been conferred with powers to make adjustments or
variations in the transfer pricing methods and manner of
determination of ALP. This power will provide flexibility to CBDT in
carrying out scenario analysis for determining the arm’s length price
without being compartmentalised by the current framework.
The APAs does not provide for a roll-back option for earlier years.
The APA process would be lengthier than other jurisdiction as the
approval process has to go through Competent authorities followed
by CBDT and then finally by the Central Government.
There is no clarity on whether taxpayers would be dispensed from
the requirement of maintaining documentation for years under APA.
Further, even for years under APA process, it is not clear whether
transfer pricing audit would continue as a parallel procedure.
The timelines for completion of APA process is not prescribed. The
tax authorities can take make their counterpart wait for endless time
in a bilateral APA process thereby frustrating them to agree with the
position(s) proposed by Indian authorities.
The entire APA process does not have a guaranteed outcome –
While the taxpayer would need to make full disclosures, there is no
certainty of an acceptance of the proposed agreement in the
taxpayer’s case by the Authorities. This means that a failed APA
would give the taxing authorities information otherwise not available
with the Tax Authority.
Trust deficit: The taxpayer’s lost confidence due to inefficacies of the
Dispute Resolution Panel as a mechanism for resolving transfer
pricing issues. The authorities will have to put in significant effort in
gaining the confidence and making the APA program successful.
The CBDT has proactively announced posting of a Transfer pricing
rank officer (Smt. Batsala Jha Yadav - earlier TPO, Delhi) as Director
(APA) with the Indian Competent Authority for a period of 5 years.
90
Scope of Transfer Pricing Enlarged to Cover Domestic Related Party
Transactions [Section 92, Section 92BA]
Amendment
•
ELP’s Comments
•
•
•
•
•
•
•
•
•
Definition of international transaction has been extended to include
“Specified Domestic Transactions” with a threshold limit of
Rs. 5 crores. Specific domestic transactions that would now fall within
the ambit include:
o Expenditures in respect of which payment has been made or is to
be made between domestic related parties under clause (b) of
sub-section (2) of section 40A
o Transfer of goods or services between entities claiming deduction
under section 80-IA (8)
o More than ordinary profits earned by entities claiming deduction
under section 80-IA (8)
o Profits earned by SEZ under section 10AA
The above amendment has opened a Pandora’s Box for taxpayers
with specified domestic related party transactions.
The introduction of domestic transfer pricing is in line with the
Supreme Court recommendation in case of CIT vs. Glaxo
Smithkline Asia Pvt Ltd [2010-195Taxman35(SC)]
The act earlier had limited provision, which mandated taxpayers to
domestically transact with related parties at fair market value.
However, a clear framework was missing in this regard.
The Finance Act has now extended the specific concept of arm’s
length pricing instead of a fair market value to determine the value of
domestic related party transactions.
Further, certain entities claiming tax holiday and having more than
ordinary profits are also required to comply with transfer pricing
provisions.
Documentation: The taxpayers will now have to maintain the
mandatory documentation for domestic related party transactions.
Compliance: Taxpayers will have to file Form 3CEB along with their
tax return.
Methods: The taxpayers will have to follow the five transfer pricing
methods for determining arm’s length price
Audit: The specified domestic transaction will be assessed by the
transfer pricing officer instead of assessing officer.
91
Enlarged Definition of International Transactions [92B]
Amendment
•
•
•
•
ELP’s Comments
•
•
The definition of the expression “international transaction” has been
extended to include—
Capital Financing:
o long-term or short-term borrowing, lending or guarantee, purchase
or sale of marketable securities, any type of advance, payments
or deferred payment or receivable, any other debt
Intangible Property:
o transfer of ownership or provision of use of rights for land use,
copyrights, patents, trademarks, licences, franchises, customer
list, marketing channel, brand, commercial secret, know-how,
industrial property right, exterior design or practical and new
design, any other business or commercial rights of similar nature
o “Intangible property” inter-alia includes marketing, artistic, data
processing, customer, contract, human capital, goodwill, location
related intangible assets
Provision of Services:
o market research, market development, marketing management,
administration, technical service, repairs, design, consultation,
agency, scientific research, legal or accounting service
o business re-structuring or re-organisation
Prior to the current amendment, the Income-tax Tribunals in certain
cases held that marketing intangibles, guarantees or delayed
payments from associated enterprises do not fall within the “purview
of international transactions”.
The Finance Act has now removed this ambiguity and brought clarity
on the scope of international transactions.
92
Benefits to assessee restricted [Section 92C ]
Amendment
•
•
ELP’s Comments
•
•
Second proviso to the explanation to Section 92C of the Act has
been amended and the permissible safe harbor range which was to
be “notified”, has been restricted to “not exceeding three per cent”.
Provisions of the second proviso shall also be applicable to all
assessment or reassessment proceedings pending before an
Assessing Officer as on the 1st day of October, 2009.
The Finance Act 2011 had amended the safe harbor range from the
previously specified option of 5 per cent to a per cent which was to
be notified by the CBDT. It was expected that the CBDT would
introduce different percentages which would be applied industrywise. Through Finance Act 2012, the safe harbor range has been
defined for all taxpayers and has been limited from the earlier 5 per
cent to a lower limit of 3 per cent thereby restricting the scope of
looking at a range.
The Indian way of calculating arm’s length price was already
restrictive in nature due to the “arithmetic mean concept” with a small
deviation of 5% available earlier. The small margin is further
curtailed from 5% to 3% and will lead to increase in transfer pricing
disputes.
93
Amendment regarding reference to Transfer Pricing Officer [Section 92CA ]
Amendment
•
ELP’s Comments
•
•
•
•
•
Where in respect of an international transaction (including the
domestic transaction), the assessee has not furnished the report
under section 92E and such transaction comes to the notice of the
Transfer Pricing Officer during the course of the proceeding before
him, the provisions of this Chapter shall apply as if such transaction
is an international transaction referred to him
Prior to 2011, the scope of transfer pricing audit was limited to the
transactions referred to by the assessing officer to the transfer pricing
officer.
The Finance Act 2011 had prospectively enhanced the powers of the
transfer pricing officer to audit international transactions which were
identified by him during the course of audit but not referred by the
assessing officer.
Considering the prospective nature of powers granted by Finance Act
2011 to the transfer pricing officer, the Income-tax Tribunals annulled
several orders passed by transfer pricing officers for determining
arm’s length value of international transactions not referred to them.
To reverse the stand taken by Income-tax tribunals, Finance Bill,
2012 now proposes to give powers to the transfer pricing officer with
retrospective effect from 1-June-2002, to determine arm’s length
price of transactions not reported by the taxpayer.
A safeguard has been proposed for not re-opening the audits for prior
years by the assessing officer.
Sunset clause for infrastructure services extended (Section 80-IA)
Amendment
•
•
ELP’s Comments
•
Under section 80-IA(4)(iv) of the IT Act, deduction is available to
undertakings engaged in the generation, distribution and
transmission of power if the undertaking begins to generate power,
starts transmission or distribution on or before March 31, 2012.
Tax holiday has been extended to undertakings in power sector for a
further period of one year i.e. if the undertaking begins to generate
power on or before March 31, 2013, deduction will be available.
The extension of the tax holiday in case of power sector is a welcome
measure and would certainly boost the undertakings in the power
sector.
94
Initial depreciation extended to power generating companies (Section 32)
Amendment
•
•
ELP’s Comments
•
•
Section 32(1)(iia) of the IT Act amended to provide that an assessee
engaged in the business of generation or generation and distribution
of power shall also be allowed initial depreciation at the rate of 20%
of the actual cost of the new machinery or plant.
The amendment will apply from AY 2013-2014.
The benefit of initial depreciation was not earlier available to
assessee’s engaged in the business of generation or generation and
distribution of power.
Extending this provision to cover assessee’s engaged in generation
or generation and distribution of power is a welcome amendment.
Other Amendments
Provisions relating to Venture Capital Fund (VCF) or Venture Capital Company
(VCC) [Section 10(23FB) and Section 115U]
Amendment
•
•
•
•
•
ELP’s Comments
•
•
•
•
Section 10(23FB) and Section 115U were intended to ensure a tax
pass through status to SEBI registered VFC and VCC.
An amendment has been made in Section 10(23FB) to provide that a
VCU shall have the same meaning as referred in the SEBI (Venture
Capital Funds) Regulations, 1996 and there would be no sectoral
restrictions.
An amendment has also been made to section 115U to provide that
income accruing or arising or received by VCF / VCC shall be taxable
in the hands of investor on accrual or receipt basis, whichever is
earlier.
If the income is taxed in the hands of the investor on accrual basis
then the same shall not be included in the total income on actual
receipt.
Income distribution by VCF/VCU are proposed to be subject to
withholding tax provisions.
The benefit to the SEBI registered VCF / VCU has been widened
through withdrawal of sectoral restrictions.
The income of investors is now sought to be taxed on accrual basis
as against earlier system of receipt basis.
The VCF / VCU shall also now be required to withhold tax on income
payable / paid to the investors.
However, it needs to be seen whether VCF / VCU are paying income
or distributing funds.
95
Cost of acquisition of the previous owner in certain situations [Section 49]
Amendment
•
ELP’s Comments
•
•
The section has been amended to provide the cost of acquisition of
the asset in the hands of the successor shall be taken as that of the
predecessor in the case of:
o Succession of a firm by a company
o Conversion of a company into a limited liability partnership
o Succession of a sole proprietary concern by a company
In absence of statutory provisions on succession of firm / solo
proprietary concern business, the non – depreciable assets were
recorded at revalued amount.
The amendment now sought to address this lacuna by not allowing
the cost step-up.
Determination of the full value of the consideration in certain cases [Section 50D]
Amendment
•
•
ELP’s Comments
•
A new section has been inserted to ascertain the sale consideration
on transfer of a capital asset in case the same is not determinable
under the existing provisions of the Income-tax Act.
As per the section 50D, in case the consideration for transfer of a
capital asset is not attributable or determinable then for the purpose
of computing income chargeable to tax as capital gains, the market
value of the asset on the date of transfer shall be deemed to be the
full value of consideration received or accrued.
This amendment would bring to tax the transfers that were earlier not
chargeable to tax, as the machinery provision would fail due to the
inability to determine the sale consideration of a capital asset.
Tax on short-term capital gains [Section 111A]
Amendment
•
ELP’s Comments
•
As per the amendment, the short term capital gains arising from
transfer of equity shares or unit of equity oriented fund, on which STT
has been paid, in case of individual or a HUF shall be taxable at the
rate of 15% as against the current rate of 10%.
The tax rate for short term capital gains for individuals and HUF have
been brought in line with the rate for the corporate tax payers.
96
Minimum Alternate Tax [Section 115JB]
Amendment
•
•
•
ELP’s Comments
•
The amendment to the section provides that in case of certain
companies i.e. insurance, banking or electricity company the book
profits shall be computed in accordance with the provisions of their
regulatory Acts as a basis for computing the book profit under section
115JB.
Further, the book profits shall be increased by any amount relating to
the revalued asset on the retirement or disposal of the asset.
Reference to Part III of the Schedule VI of the Companies Act, 1956
has been omitted.
There has been instances wherein on disposal of revalued asset, the
amount standing in revaluation reserve is directly transferred to the
general reserve. In light of the amendment the book profits shall be
increased by such amount of the revaluation reserve transferred to
the general reserve though not routed through the profit and loss
account.
Amounts not deductible (Section 40)
Amendment
•
•
•
ELP’s Comments
•
•
•
New proviso inserted in clause (a).
An assessee, who fails to deduct the whole or any part of the tax in
accordance with the provisions of Chapter XVII-B on any such sum,
but is not deemed to be an assessee in default under the first proviso
to sub-section (1) of section 201, then, it shall be deemed that the
assessee has deducted and paid the tax on such sum on the date of
furnishing of return of income by the resident payee referred to in the
said proviso.
This is applicable from AY 2013-14
Under the existing provisions of Chapter XVII-B of the Income-tax
Act, a person is required to deduct tax on certain specified payments
at the specified rates if the payment exceeds specified threshold. In
case of non-deduction of tax in accordance with the provisions of the
Act, he is deemed to be an assessee in default under section 201(1)
in respect of the amount of such non-deduction.
However, section 191 of the Act provides that a person shall be
deemed to be assessee in default in respect of non/short deduction
of tax only in cases where the payee has also failed to pay the tax
directly. Therefore, the deductor cannot be treated as assessee in
default in respect of non/short deduction of tax if the payee has
discharged his tax liability.
In such cases, there will not be any disallowance under section 40(a)
of the Act.
97
Tax Audit (Section 44AB)
Amendment
•
•
•
ELP’s Comments
•
•
Threshold of total sales/ turnover/ gross receipts from business/
profession for tax audit applicability changed with effect from AY
2013-14.
New threshold of INR 10 million and INR 2.5 million introduced In
case of business and profession respectively.
Specified date for getting the books audited has been changed from
30th September of the assessment year to the due date of furnishing
the return of income under section 139(1). This amendment will take
effect retrospectively from 1st April, 2012 and will, accordingly, apply
in relation to AY 2012-13 and subsequent assessment years.
This is a welcome step for small businessmen/ professionals since it
reduces the compliance burden on them.
As per the existing provisions of the Income-tax Act, the report of
audit under section 44AB is required to be furnished by 30th
September of the assessment year. Section 139 was amended vide
Finance Act 2011 to extend the due date of furnishing of return by the
corporate assessees, who have undertaken international
transactions, from 30th September to 30th November of the
assessment year. Substitution of the due date for getting the books
audited to the due date of furnishing return of income will remove the
ambiguity of various dates to be followed.
Exemption of capital gains on transfer of residential property (Section 54GB)
Amendment
•
•
•
•
•
New section 54GB has been inserted with effect from AY 2013-14
As per the new provisions, the capital gain arises from the transfer of
a long-term capital asset, being a residential property (a house or a
plot of land), owned by an individual or HUF will be exempt from
capital gain tax in case the assessee, before the due date of
furnishing of return of income under sub-section (1) of section 139,
utilises the net consideration for subscription in the equity shares of
an eligible company and the eligible company has, within a period of
one year from the date of subscription of the equity shares by the
assessee, utilized the amount for purchase of new asset
Other provisions like partial investment in new asset, mode of
investment of balance consideration etc has been inserted which are
in line with the other exemption provisions of section 54
Various terms like ‘Eligible Company’, ‘New Asset’ has been defined
The provision has sunset clause, i.e., applicable till 31 March 2017
98
ELP’s Comments
•
•
The Government had announced National Manufacturing Policy
(NMP) in 2011, one of the goals of which is to incentivize investment
in the Small and Medium Enterprises (SME) in the manufacturing
sector.
This provision is a boon for small or medium enterprises since one of
the conditions of being an Eligible Company is that it has to be a
small or medium enterprise wherein the individual or HUF should
hold more than 50% share capital/ voting rights.
Alternate Minimum Tax provisions (Section 115JC, 115JD, 115JE, 115JEE, 115JF)
Amendment
•
•
•
ELP’s Comments
•
•
•
Amendments made in Chapter XII-BA of the Act with effect from AY
2013-14
Heading of the chapter changed to “Special Provisions Relating To
Persons Other Than A Company” and the words “Limited Liability
Partnership” has been replaced with “Persons Other Than A
Company” in all the sections under the Chapter.
Provisions of Alternate Minimum Tax has been made applicable to all
persons other than a company expect in case where the adjusted
total income of such person does not exceed INR 2 million
Erstwhile provisions of Alternate Minimum Tax were applicable only
to LLPs.
The new provisions cover all assesses like individuals, HUFs, AOPs,
BOI, partnership firm etc.
One needs to take cognizance of these provisions while doing the tax
budgeting/ planning for the year.
Dividend Distribution Tax (Section 115O)
Amendment
•
•
It is proposed to amend 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 under section 115-O of the Act.
This amendment will take effect from 1st July, 2012.
99
ELP’s Comments
•
•
Erstwhile provision of Section 115-O of the Act provides that dividend
liable for DDT in case of a company is to be reduced by an amount of
dividend received from its subsidiary after payment of DDT if the
company is not a subsidiary of any other company. This removes the
cascading effect of DDT only in a two-tier corporate structure.
The new provision has been inserted to remove the cascading effect
of DDT in multi-tier structure and this is a welcome step for Corporate
following a complex multi-tier structure.
Amendment in respect of Reference to dispute resolution panel [Section 144C]
Amendment
•
ELP’s Comments
•
The power of the Dispute Resolution Panel to enhance the variation
shall include and shall be deemed always to have included the power
to consider any matter arising out of the assessment proceedings
relating to the draft order, notwithstanding that such matter was
raised or not by the eligible assessee
The earlier limitation of the Dispute Resolution Panel to restrict their
findings and observations to matters that the assessee had raised
has been now removed. Accordingly, the Dispute Resolution Panel is
now empowered to give their findings and observations even for
matters that were not agitated by the assessee.
Amendment to Penalty provision [Section 271AA]
Amendment
•
ELP’s Comments
•
•
Levy of penalty to be imposed on the taxpayer at the rate of 2% of
the value of the international transaction for instances of failure
pertaining to:
o Maintenance of prescribed documents or information
o Reporting of any international transaction which is required to be
reported
o maintaining or furnishing any incorrect information or documents
The increase in the penalty quantum is aimed at curbing instances of
inaccurate reporting on the taxpayer’s part and making them more
accountable.
It is however, pertinent to note that instances of inaccurate reporting
will continue as long as there is not enough clarity on what falls under
the ambit of international transactions for cases such as share
premium being treated as debt, etc.
100
Amendment to Appeal against directions of the DRP [Section 253 & Section 254]
Amendment
•
ELP’s Comments
•
•
Section 253 and Section 254 of the Act now allows the Assessing
Officer also to file an appeal before the Income-tax Appellate Tribunal
against an order passed in pursuance of the directions of the DRP
With this amendment, the limited efficacy of the DRP is further
eroded since now there will be no finality to the findings of the DRP.
Apart from being perceived as a fast-track mechanism, there is really
no further benefit to the DRP as the taxpayer, and now the Revenue
Authorities, are both allowed to appeal against the DRP’s findings
and directions
Tax Deduction at Source (Section 193, Section 194J, Section 194LAA and Section
194LC)
Amendment
•
•
•
•
ELP’s Comments
•
•
•
Section 193 of the IT Act has been amended, wherein it has been
proposed that no deduction of tax should be made from payment of
interest on any debenture issued by a company, in which the public
are substantially interested if the aggregate amount of interest on
such debenture paid during the financial year does not exceed Rs
5,000 and the payment is made by account payee cheque.
Section 194J of the IT Act has been amended, wherein it has been
proposed that tax is required to be deducted on the remuneration
paid to a director, which is not in the nature of salary, at the rate of
10% of such remuneration.
Section 194LAA has been introduced, wherein it has been provided
that tax is required to be deducted on the amount of consideration
paid for transfer of any immoveable property to a resident transferor
at the time of credit of such sum or at the time of payment of such
sum in cash or by issue of cheque or draft or by any other mode an
amount equal to one percent such sum. Limits have been provided,
beyond which tax is required to be deducted.
Section 194LC has been introduced, wherein tax is required to
deduct on the interest income paid by any specified company to a
non-resident at the rate of 5%.
The amendment to Section 193 of the IT Act is a welcome measure
which will reduce certain compliance issue to the companies in which
public are substantially interested.
A new entry has been added to Section 194J of the IT Act, wherein a
Company is required to deduct tax on the remuneration paid to a
Director.
The limits under Section 194LAA provided are very low and thus tax
is required to be deducted on all the transactions of transfer of
immoveable property. It has not been clarified whether while
deducting tax, exemption needs to be considered.
101
Consequences of failure to deduct or pay the tax (Section 201)
Amendment
•
•
•
ELP’s Comments
•
•
New proviso in sub-section (1) inserted with effect from 01 July 2012
As per the new proviso, any person who fails to deduct the whole or
any part of the tax in accordance with the provisions of the Act on the
sum paid to a resident or on the sum credited to the account of a
resident shall not be deemed to be an assessee in default in respect
of such tax if such resident—(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such
return of income; and
(iii) has paid the tax due on the income declared by him in such
return of income,
and the person furnishes a certificate to this effect from an
accountant in such form as may be prescribed
New proviso in sub-section (1A) inserted with effect from 01 July
2012 providing that in case any person fails to deduct the whole or
any part of the tax on the sum paid to a resident or on the sum
credited to the account of a resident, but is not deemed to be an
assessee in default under the first proviso of sub-section (1), the
interest under clause (i) shall be payable from the date on which such
tax was deductible to the date of furnishing of return of income by
such resident.
The payer is liable to pay interest under section 201(1A) on the
amount of non/short deduction of tax from the date on which such tax
was deductible to the date on which the payee has discharged his tax
liability directly. As there is no one-to-one correlation between the tax
to be deducted by the payer and the tax paid by the payee, there is
lack of clarity as to when it can be said that payer has paid the taxes
directly. Also, there is no clarity on the issue of the cut-off date, i.e.
the date on which it can be said that the payee has discharged his
tax liability. In order to provide clarity regarding discharge of tax
liability by the resident payee on payment of any sum received by
him without deduction of tax, it proposed to provide that the payer
who fails to deduct the whole or any part of the tax on the payment
made to a resident payee shall not be deemed to be an assessee in
default in respect of such tax if such resident payee has paid tax on
such income and filed his return of income.
The date of payment of taxes by the resident payee shall be deemed
to be the date on which return has been furnished by the payer.
102
Tax Collected at Source (Section 206C)
Amendment
•
•
ELP’s Comments
•
•
It is proposed to amend Section 206C of the Act to provide that
provide that the seller of bullion and jewellery shall collect tax at the
rate of 1% of sale consideration from every buyer of bullion and
jewellery if sale consideration exceeds two lakh rupees and the sale
is in cash.
This amendment will take effect from 1st July, 2012.
This provision has been introduced to reduce the quantum of cash
transaction in bullion and jewellery sector and for curbing the flow of
unaccounted money in the trading system of bullion and jewellery.
This provision would be applicable irrespective of the fact whether
buyer is a manufacturer, trader or purchase is for personal use.
Income Tax Rates
For Individuals, Hindu Undivided Families, Association of Persons and Body of Individuals**
Existing
Proposed
Income (INR) #
Rate (%) @
Income (INR)*
Rate (%) @
0 -1,80,000
Nil
0 - 2,00,000
Nil
1,80,001 - 5,00,000
10
2,00,001 – 5,00,00
10%
5,00,001 - 8,00,000
20
5,00,001 – 10,00,000
20%
8,00,001 and above
30
10,00,000 and above
30%
@ Education cess of 2% and Secondary Education cess of 1% is leviable on the amount of
income-tax.
# The basic exemption limit is:
INR 1,90,000 for resident women below the age of 60 years
INR 2,50,000 for resident individuals of the age of 60 years or more
INR 5,00,000 for Very Senior Citizens of the age of 80 years or more
* The proposed exemption limits are:
INR 2,50,000 for resident individuals of the age of 60 years or more
INR 5,00,000 for Very Senior Citizens of the age of 80 years or more
**Alternate Minimum Tax at the rate of 19.06% if the adjusted total income exceeds twenty
lakh rupees.
103
For Others – No Change
Description
A) Domestic company
Regular tax
Dividend income from
overseas subsidiary
MAT
DDT
B) Foreign company
Regular tax
B) Firms & LLP
Regular tax
Alternate Minimum Tax
Existing Rate (%)
Proposed Rate* (%)
32.45@
32.45@
16.22@@
16.22@@
20***(of book profits)
16.22
20***(of book profits)
16.22
42#
42#
30.90
19.06 (only for LLP)
30.90
19.06
Inclusive of applicable surcharge (5% in case of residents and 2% in case of non-residents).
Education cess of 2% & Secondary Education cess of 1% is leviable on the amount of
income-tax.
@
30.90% where the total income is equal to or less than INR.10 million
@@
15.45% where the total income is equal to or less than INR.10 million
** 18.54% where the total income is equal to or less than INR.10 million
*** 19.06% where the total income is equal to or less than INR.10 million
#
41.20% where the total income is equal to or less than INR.10 million
104
Transfer Pricing
Scope of Transfer Pricing Enlarged to Cover Domestic Related Party
Transactions [Section 92, Section 92BA]
Amendment
•
ELP’s Comments
•
•
•
•
•
•
•
•
•
Definition of international transaction has been extended to include
“Specified Domestic Transactions” with a threshold limit of
Rs. 5 crores. Specific domestic transactions that would now fall within
the ambit include:
o
Expenditures in respect of which payment has been made or is
to be made between domestic related parties under clause (b)
of sub-section (2) of section 40A
o
Transfer of goods or services between entities claiming
deduction under section 80-IA (8)
o
More than ordinary profits earned by entities claiming deduction
under section 80-IA (8)
o
Profits earned by SEZ under section 10AA
The above amendment has opened a Pandora’s Box for taxpayers
with specified domestic related party transactions.
The introduction of domestic transfer pricing is in line with the
Supreme Court recommendation in case of CIT vs. Glaxo Smithkline
Asia Pvt Ltd [2010-195Taxman35(SC)]
The act earlier had limited provision, which mandated taxpayers to
domestically transact with related parties at fair market value.
However, a clear framework was missing in this regard.
The Finance Act has now extended the specific concept of arm’s
length pricing instead of a fair market value to determine the value of
domestic related party transactions.
Further, certain entities claiming tax holiday and having more than
ordinary profits are also required to comply with transfer pricing
provisions.
Documentation: The taxpayers will now have to maintain the
mandatory documentation for domestic related party transactions.
Compliance: Taxpayers will have to file Form 3CEB along with their
tax return.
Methods: The taxpayers will have to follow the five transfer pricing
methods for determining arm’s length price
Audit: The specified domestic transaction will be assessed by the
transfer pricing officer instead of assessing officer.
105
Enlarged Definition of International Transactions [92B]
Amendment
•
•
•
•
ELP’s Comments
•
•
The definition of the expression “international transaction” has been
extended to include—
Capital Financing:
o
long-term or short-term borrowing, lending or guarantee,
purchase or sale of marketable securities, any type of advance,
payments or deferred payment or receivable, any other debt
Intangible Property:
o
transfer of ownership or provision of use of rights for land use,
copyrights, patents, trademarks, licences, franchises, customer
list, marketing channel, brand, commercial secret, know-how,
industrial property right, exterior design or practical and new
design, any other business or commercial rights of similar
nature
o
“Intangible property” inter-alia includes marketing, artistic, data
processing, customer, contract, human capital, goodwill,
location related intangible assets
Provision of Services:
o
market research, market development, marketing management,
administration, technical service, repairs, design, consultation,
agency, scientific research, legal or accounting service
o
business re-structuring or re-organisation
Prior to the current amendment, the Income-tax Tribunals in certain
cases held that marketing intangibles, guarantees or delayed
payments from associated enterprises do not fall within the “purview
of international transactions”.
The Finance Act has now removed this ambiguity and brought clarity
on the scope of international transactions.
106
Benefits to assessee restricted [Section 92C ]
Amendment
•
•
ELP’s Comments
•
•
Second proviso to the explanation to Section 92C of the Act has
been amended and the permissible safe harbor range which was to
be “notified”, has been restricted to “not exceeding three per cent”.
Provisions of the second proviso shall also be applicable to all
assessment or reassessment proceedings pending before an
Assessing Officer as on the 1st day of October, 2009.
The Finance Act 2011 had amended the safe harbor range from the
previously specified option of 5 per cent to a per cent which was to
be notified by the CBDT. It was expected that the CBDT would
introduce different percentages which would be applied industrywise. Through Finance Act 2012, the safe harbor range has been
defined for all taxpayers and has been limited from the earlier 5 per
cent to a lower limit of 3 per cent thereby restricting the scope of
looking at a range.
The Indian way of calculating arm’s length price was already
restrictive in nature due to the “arithmetic mean concept” with a small
deviation of 5% available earlier. The small margin is further
curtailed from 5% to 3% and will lead to increase in transfer pricing
disputes.
107
Amendment regarding reference to Transfer Pricing Officer [Section 92CA ]
Amendment
•
ELP’s Comments
•
•
•
•
•
Where in respect of an international transaction (including the
domestic transaction), the assessee has not furnished the report
under section 92E and such transaction comes to the notice of the
Transfer Pricing Officer during the course of the proceeding before
him, the provisions of this Chapter shall apply as if such transaction
is an international transaction referred to him
Prior to 2011, the scope of transfer pricing audit was limited to the
transactions referred to by the assessing officer to the transfer pricing
officer.
The Finance Act 2011 had prospectively enhanced the powers of the
transfer pricing officer to audit international transactions which were
identified by him during the course of audit but not referred by the
assessing officer.
Considering the prospective nature of powers granted by Finance Act
2011 to the transfer pricing officer, the Income-tax Tribunals annulled
several orders passed by transfer pricing officers for determining
arm’s length value of international transactions not referred to them.
To reverse the stand taken by Income-tax tribunals, Finance Act
2012 now proposes to give powers to the transfer pricing officer with
retrospective effect from 1-June-2002, to determine arm’s length
price of transactions not reported by the taxpayer.
A safeguard has been proposed for not re-opening the audits for prior
years by the assessing officer.
108
Introduction of Advance Pricing Agreements [Section 92CC and 92CD ]
Amendment
•
•
•
•
•
•
The Board, with the approval of the Central Government, may enter
into an advance pricing agreement with any person for the purpose of
determining the arm’s length price or specifying the manner in which
arm’s length price is to be determined in relation to an international
transaction to be entered into by that person.
The agreement referred to in sub-section (1) shall be valid for such
period not exceeding five consecutive previous years as may be
specified in the agreement.
The advance pricing agreement shall not be binding if there is a
change in law or facts having bearing on the agreement so entered.
Agreement to be held void ab initio if it is found that agreement has
been obtained by the person by fraud or misrepresentation of facts
Board is empowered to prescribe a scheme specifying the manner,
form, procedure and any other matter generally in respect of the
advance pricing agreement
Where the taxpayer has filed a return of income under Section 139
for any assessment year, prior to the date of entering into the
agreement, then it is required that a modified return be submitted
within a period of three months from the end of the month in which
the said agreement was entered into.
109
ELP’s Comments
•
•
•
•
•
•
•
•
•
•
Advance Pricing Agreements (APAs) which were proposed under the
Direct Tax Code in 2010 have now been made part of the current
legislation to reduce litigation and provide certainty to the taxpayer.
The scheme of APAs outlining the manner, form and procedure would
be announced by CBDT in near future. The scheme will provide clarity
on whether APAs would be unilateral or bilateral.
CBDT has been conferred with powers to make adjustments or
variations in the transfer pricing methods and manner of determination of
ALP. This power will provide flexibility to CBDT in carrying out scenario
analysis for determining the arm’s length price without being
compartmentalised by the current framework.
The APAs does not provide for a roll-back option for earlier years.
The APA process would be lengthier than other jurisdiction as the
approval process has to go through Competent authorities followed by
CBDT and then finally by the Central Government.
There is no clarity on whether taxpayers would be dispensed from the
requirement of maintaining documentation for years under APA. Further,
even for years under APA process, it is not clear whether transfer pricing
audit would continue as a parallel procedure.
The timelines for completion of APA process is not prescribed. The tax
authorities can take make their counterpart wait for endless time in a
bilateral APA process thereby frustrating them to agree with the
position(s) proposed by Indian authorities.
The entire APA process does not have a guaranteed outcome – While
the taxpayer would need to make full disclosures, there is no certainty of
an acceptance of the proposed agreement in the taxpayer’s case by the
Authorities. This means that a failed APA would give the taxing
authorities information otherwise not available with the Tax Authority.
Trust deficit: The taxpayer’s lost confidence due to inefficacies of the
Dispute Resolution Panel as a mechanism for resolving transfer pricing
issues. The authorities will have to put in significant effort in gaining the
confidence and making the APA program successful.
The CBDT has proactively announced posting of a Transfer pricing rank
officer (Smt. Batsala Jha Yadav - earlier TPO, Delhi) as Director (APA)
with the Indian Competent Authority for a period of 5 years
110
Amendment in respect of Reference to dispute resolution panel [Section 144C]
Amendment
•
ELP’s Comments
•
The power of the Dispute Resolution Panel to enhance the variation
shall include and shall be deemed always to have included the power
to consider any matter arising out of the assessment proceedings
relating to the draft order, notwithstanding that such matter was
raised or not by the eligible assessee
The earlier limitation of the Dispute Resolution Panel to restrict their
findings and observations to matters that the assessee had raised
has been now removed. Accordingly, the Dispute Resolution Panel is
now empowered to give their findings and observations even for
matters that were not agitated by the assessee.
Amendment to Penalty provision [Section 271AA]
Amendment
•
ELP’s Comments
•
•
Levy of penalty to be imposed on the taxpayer at the rate of 2% of
the value of the international transaction for instances of failure
pertaining to:
o Maintenance of prescribed documents or information
o Reporting of any international transaction which is required to be
reported
o maintaining or furnishing any incorrect information or documents
The increase in the penalty quantum is aimed at curbing instances of
inaccurate reporting on the taxpayer’s part and making them more
accountable.
It is however, pertinent to note that instances of inaccurate reporting
will continue as long as there is not enough clarity on what falls under
the ambit of international transactions for cases such as share
premium being treated as debt, etc.
Amendment to Appeal against directions of the DRP [Section 253 & Section 254]
Amendment
•
ELP’s Comments
•
•
Section 253 and Section 254 of the Act now allows the Assessing
Officer also to file an appeal before the Income-tax Appellate Tribunal
against an order passed in pursuance of the directions of the DRP
With this amendment, the limited efficacy of the DRP is further
eroded since now there will be no finality to the findings of the DRP.
Apart from being perceived as a fast-track mechanism, there is really
no further benefit to the DRP as the taxpayer, and now the Revenue
Authorities, are both allowed to appeal against the DRP’s findings
and directions
111
Banking, Finance and Infrastructure Update
It is well known that the relationship between the economy and infrastructure is evidently critical
in promoting inclusive growth and sustainable development. At the micro-level, it is recognized
that infrastructure investment enhances private sector activities by lowering the cost of
production and opening new markets, presenting new production opportunities, generating
employment and trade. Recognizing this importance, the Government has continued its liberal
outlook in relation to the banking, finance and infrastructure sectors. In the Twelfth Plan period,
the Government proposes investment in infrastructure to go up to Rupees 50 lakh crore with
half of it expected from private sector. The importance of public private partnerships (“PPPs”) in
infrastructure sector cannot be more emphasized.
Considering its importance and various fiscal and non fiscal benefits available to infrastructure
sector; there were several sectors, such as, steel, real estate, warehousing, etc. that were
expecting grant of “infrastructure” status. It was also expected that a new infrastructure ministry
be announced to handle significant challenges facing ‘infrastructure’ in a more concerted and
comprehensive manner. Although these expectations have not been fully addressed, the
Hon’ble Finance Minister has announced several incentives that are welcome and would
certainly provide continued fillip to this sector.
This section of the analysis has been further divided in to:
A:
Banking and Finance
B:
Infrastructure Sector
C:
Other Corporate Matters and Proposed Legislative Changes
A. Banking and Finance
As has been mentioned earlier, the Finance Minister in his speech has attributed India’s
slowdown, almost entirely, to weak industrial growth. One of the primary tools suggested to
address this issue has been to create methods for companies in the stressed sectors to
access funds. Moreover, this year’s union budget along with measures introduced by the
Reserve Bank of India (“RBI”) has tried to increase the capacity of the banks (especially the
public sector banks) to provide funds.
112
(i)
External Commercial Borrowing (“ECB”)
Apart from the impetus provided to the civil aviation and the power sector, as dealt
separately in this chapter, ECB has been allowed for the following sector in this year’s
budget:
a. In relation to road construction projects – for capital expenditure on the maintenance
and operations of toll systems for roads and highways so long as they are part of the
original project. It would be important to understand (once the necessary regulation
has been provided) on what would be meant by “so long as they are part of the
original project”. It would be important to note that the same has not been allowed
for working capital expenses, as has been allowed for the civil aviation sector.
Further, it is only for the stage of operation and maintenance of the toll systems.
b. In relation to low cost affordable housing projects apart from the other policy benefits
proposed – This would be the first instance where the ‘real estate sector’ has been
made amenable to receive ECBs. It would be pertinent to review what would be
classified as “low cost affordable housing projects”.
The changes introduced in the budget are in addition to the thrust received by the
“infrastructure” sector qua the series of changes introduced in the ECB regulations from
September, 2011 last year.
With the proposed divestment policy (as has been mentioned in this chapter), it is
important to note that ECB for investing in companies being divested, is a permitted enduse, subject to certain conditions.
(ii)
Withholding tax for ECBs
Additionally, the withholding tax applicable to interest payments on ECBs is to be
reduced from 20% to 5% for three years for power, airlines, roads and bridges, ports and
shipyards, affordable housing, fertilizer and dams.
(iii)
Access to funds by infrastructure projects and PPP projects
The union budget suggests that, India Infrastructure Finance Company Limited (“IIFCL”)
has put in place a structure for credit enhancement and take-out finance. A consortium
for direct lending and grant of in-principle approval to developers before the submission
of bids for PPP projects has also been created. It is important to note that the structures
for credit enhancement available with IIFCL would allow infrastructure projects to
113
procure a back-up for debt instruments (which is not permitted to banks as per existing
regulations). These structures would need to be reviewed and accessed by larger
infrastructure companies to capitalize on the cash being generated by the project
companies.
(iv)
Capitalisation of Public Sector Banks and RRBs
As had been provided in the union budget of 2011-2012, the Government this year has
proposed to provide Rs 15,888 crore for capitalization of Public Sector Banks, Regional
Rural Banks and other financial institutions including NABARD.
An additional move of creating a financial holding company which will raise resources to
meet the capital requirements of Public Sector Banks is being examined.
The above mentioned initiatives, the reduction in the withholding tax on interest
payments for ECBs, along with the recent reduction of CRR by RBI will assist banks to
build up the necessary capacity to access funds, incur lower costs and thereby provide
credit facilities at affordable rates.
(v)
Central Know Your Customer (KYC) database
In order to avoid multiplicity of records and registration and to assist banks to access a
ready database it has been proposed to set up a central database for all KYC records.
This is similar to the efforts of having a central database being created (in pursuance to
section 20 of the SARFAESI Act) for all securities being charged to banks.
(vi)
Financial Inclusion
Within the financial inclusion space the budget extends the “Swabhimaan” campaign to
all habitations that have crossed the population of 2000 as per Census 2011 and to
habitation, which have crossed the population of 1000 for North Eastern and hilly states.
This would form an important part of the financial inclusion exercise, which is required to
be followed by banks. As a part of this campaign banking facility services are being
made available to such groups of people.
114
Further, the Government is also concentrating in strengthening Regional Rural Banks
(“RRBs”) and has also proposed that it is in the process of capitalizing 40 financially
weak RRBs.
(vii)
The budget has mentioned that there is a proposal for re-examining existing
classification and issuing revised guidelines for priority sector lending.
B.
Infrastructure Sector
(i)
Power Sector
Over and above the other policy incentives extended to the power sector and for
infrastructure in general; and keeping in mind the supply related constraints being faced
by the sector, several initiatives have been proposed, (i) removal of basic customs duties
on coal and gas, (ii) Coal India Limited has been advised to sign fuel supply agreements
with power utilities that have entered into long term PPA’s with electricity distribution
companies and are to be commissioned on or prior to March 31, 2015, (iii) as a
continuation of its efforts reducing the stress on rupee lending to infrastructure sector,
part financing of rupee debt in power projects is proposed to be allowed through ECBs.
Various circulars have been issued in the past for permitting foreign currency ‘take out’
finance with prior RBI approval in the infrastructure sector, and the mechanics of the
present proposal would need to be examined to identify the differentiator from the
existing policy initiatives.
(ii)
Sectors eligible for Viability Gap Funding
The sectors eligible for Viability Gap Funding (“VGF”) as administered by the Ministry of
Finance have been increased to include irrigation (including dams, channels and
embankments), terminal markets, common infrastructure in agriculture markets, soil
testing laboratories and capital investment in fertiliser sector, oil and gas/LNG storage
facilities,
oil
and
gas
pipelines,
fixed
network
for
telecommunication
and
telecommunication towers, in order to aid such PPP infrastructure projects through the
provision of grants, with a view to make them commercially viable. PPP projects in these
additional sectors are now eligible for the provision of up to 20% of total project cost as
capital grant in order to meet the funding gap. Additionally, in such projects, the
115
sponsoring agency/department/state can give an additional 20% of the project cost as
VGF support.
(iii)
Guidelines for Joint Venture Companies by Defence PSU’s in the PPP mode
As part of the phased liberalisation in the area of defence goods production in order to
achieve substantive self-reliance in the sector and production of state-of-the-art defence
goods, guidelines have been approved for the establishment of joint venture companies
by defence Public Sector Undertakings as PPPs. It is important to note that a sector like
defence has also been opened to the private sector.
(iv)
Tax-free Infrastructure Bonds
It is proposed to raise Rs. 60,000 Crores in the year 2012-13 through the issue of taxfree bonds, under which there is no deduction for the principal invested, but the interest
earned is not taxed, for financing infrastructure projects. This proposal consists of Rs.
10,000 Crores for NHAI, Rs. 10,000 Crore for IRFC, Rs. 10,000 Crore for IIFCL, Rs.
5,000 Crores for HUDCO, Rs. 5,000 Crores for the National Housing Bank, Rs. 5,000
Crores for SIDBI, Rs. 5,000 Crore for ports and Rs.10,000 Crores for the power sector.
(v)
Master list of the Infrastructure Sector
A harmonised master list of the infrastructure sector has been approved, identifying
those sectors that should get infrastructure status, in order to remove ambiguity in the
policy and regulatory domain and encourage investment in this sector. It is important to
note that an ‘infrastructure’ status allows companies to cheaper access of fund (whether
rupee or foreign currency). Further banks have specific limits for such a sector.
Moreover, company compliances (for e.g.: compliance under section 372A of the
Companies Act, 1956) would be not required for such companies.
(vi)
Inter-ministerial group for coal activity
It has been stated in the union budget that an inter-ministerial group is also being
constituted to undertake periodic review of the allocated coal mines and make
recommendations on de-allocations, if so required.
(vii)
Projects to be awarded under the National Highways Development Project
116
It is proposed to award projects covering a length of 8,800 kms under the National
Highways Development Project in 2012-2013, for which the allocation of the Ministry of
Road Transport and Highways has been enhanced by 14 per cent to Rs. 25,360 Crores.
C.
Other Corporate Matters and Proposed Legislative Changes
(i)
Civil Aviation
•
To alleviate the extreme financial stress being faced by the civil aviation sector,
subject to a total ceiling of US Dollar 1 billion, the Finance Ministry has proposed
to allow infusion of foreign monies, in the nature of ECB, for working capital
requirements for a period of one year. It is important to note that this is the first
time that ECB has been allowed for working capital as an end-use. This comes
as a welcome relief for the sector, which is also experiencing increased attrition.
•
There is a proposal to completely exempt parts of aircraft and testing equipments
from customs duty to endorse India as a global hub for maintenance, repair and
overhaul for civilian aircrafts.
•
Also to relieve the civil aviation industry from high operating costs the
Government has permitted direct import of Aviation Turbine Fuel by Indian
Carriers, as actual users.
(ii)
Taxation of premiums on shares received by closely held companies
The Finance Ministry has proposed an imposition of tax for companies in which public is
not substantially interested on (a) the premium paid on shares by residents, which is in
excess of fair market value or (b) if the source of funds is unexplained by the resident
making the investment, then, on such unexplained funds. It appears that they have
consciously not touched upon FDI investments, which could continue to be at premium.
Further, the investment by promoters in the company or raising of money from resident
investors would be subject to this condition and therefore raise the cost of domestic
equity fund raising. This may possibly make compulsorily convertible or optionally
convertible debentures as valuable alternate instrument for investment.
However, such tax implication would not be applicable to a venture capital fund or a
venture capital companies.
117
(iii)
Disinvestment
The Finance Ministry has proposed to raise an amount of Rs. 30,000 crores by
disinvestment in Central Public Sector Enterprises. As such we can expect rounds of
follow-on public issues for listed Government Companies and initial public offerings for
unlisted Government Companies. However, the Government has made it very clear that
they would continue to own 51% shares and retain management control.
(iv)
Foreign direct investment
As opposed to the general expectation the Finance Minister suggested that foreign direct
investment in Multi-Brand Retail and in Civil Aviation is still being considered.
(v)
Capital Markets
•
There was a positive indication from the Finance Ministry towards improvement
of the Indian Capital Markets.
•
The major highlight was encouragement of foreign participation in Indian capital
market through Indian Depository Receipt by permitting two-way fungibility. Twoway fungibility means that the Depository Receipts can be converted into
underlying shares and Underlying shares can be converted into Depository
Receipts.
•
Indian Corporate Bond market can now expect investments from Qualified
Foreign Investors. A general overview of the global debt market and recent Basel
III recommendations suggests that financing through debt raising in the bond
markets is being encouraged. Such regulations become extremely important for
the Indian debt market wherein domestic bond issuances are still, comparatively
in a nascent stage.
•
Costs of Initial Public offerings are sought to be reduced thereby encouraging
companies to go public.
•
To encourage greater participation of retail investors, especially from small
towns, it is proposed to make it mandatory to float IPOs in electronic form
through nationwide broker network of stock exchanges.
•
To encourage greater participation of the shareholders in decision making of the
companies it is proposed to permit provision of electronic voting facilities,
although such electronic voting shall be initially made mandatory for top listed
118
companies. As a result whereof it would result in transparency of the decision
making process of companies.
(vi)
Real Estate
The ministry has proposed a deduction of tax at source pursuant to a sale of an
immovable property. The same would be applicable above a particular mandated
amount. It may result in a further slowdown in the already ailing real estate sector and to
add to it is also proposed to direct the registering authority under the Indian Registration
Act, 1908 to refuse registration of the sale instruments unless supported by evidence of
deduction and payment of tax deducted at source.
(vii)
List of forthcoming legislations/ amendments:
(a) The Micro Finance Institutions (Development and Regulation) Bill, 2012;
(b) The National Housing Bank (Amendment) Bill, 2012;
(c) The Small Industries Development Bank of India (Amendment) Bill, 2012;
(d) National Bank for Agriculture and Rural Development (Amendment) Bill, 2012;
(e) Regional Rural Banks (Amendment) Bill, 2012;
(f) Indian Stamp (Amendment) Bill, 2012; and
(g) Public Debt Management Agency of India Bill, 2012
While certain expected foreign direct investment initiatives did not come through in this budget,
there are considerable changes proposed to assist industry, especially the infrastructure sector.
119
GLOSSARY OF TERMS
Abbreviation
Meaning
ADR
Alternate Dispute Resolution
AMT
Alternate Minimum Tax
ALP
Arms Length Price
AO
Assessing Officer
AY
Assessment Year
AE
Associated Enterprise
BCD
Basic Customs Duty
CBDT
Central Board of Direct Taxes
CBEC
Central Board of Excise and Customs
CE Act
CE Act, 1944
CE Rules
Central Excise Rules, 2002
CESTAT / Tribunal
Customs, Excise and Service Tax Appellate Tribunal
CETA
Central Excise Tariff Act, 1985
CETH
Central Excise Tariff Heading
Credit Rules
Cenvat Credit Rules, 2004
CST
Central Sales Tax
CTA
Customs Tariff Act, 1975
CTH
Customs Tariff Heading
Customs Act
Customs Act, 1962
CVD
Additional Duty of Customs
DRP
Dispute Resolution Panel
dt.
dated
DTAA or Tax Treaty
Double Taxation Avoidance Agreement entered into by
India
DTA
Domestic Tariff Area
DTC
Direct Taxes Code Bill, 2010
Export Rules
Export of Services Rules, 2005
FTDR Act
Foreign Trade (Development and Regulation) Act, 1992
FTS
Fees for Technical Services
120
FY
Financial Year
GST
Goods and Services Tax
HUF
Hindu Undivided Family
Import Rules
Taxation of Services (Provided from Outside India and
Received in India) Rules, 2006
IT Act
Income Tax Act, 1961
ITAT
Income Tax Appellate Tribunal
IDF
Infrastructure Debt Fund
LO
Liaison Office
LLP
Limited Liability Partnership
LLP Act
Limited Liability Partnership Act, 2008
MAT
Minimum Alternate Tax
PY
Previous Year
PPSR
Place of Provision of Services Rules, 2012
SEZ
Special Economic Zone
SEZ Act
Special Economic Zone Act, 2005
the Act
Finance Act, 1994
TIEA
Tax Information Exchange Agreements
TP
Transfer Pricing
TPO
Transfer Pricing Officer
WDV
Written Down Value
w.e.f.
with effect from
w.r.e.f.
with retrospective effect from
WT Act
Wealth Tax Act, 1957
CRAR
Capital to Risk Weighted Asset Ratio
IIFCL
India Infrastructure Finance Company Limited
RBI
Reserve Bank of India
RRB
Regional Rural Bank
MFI
Micro-Finance Institution
FII
Foreign Institutional Investor
RDB
Recovery of Debts due to Banks and Financial
Institutions Act, 1993
SARFAESI
Securitisation and Reconstruction of Financial Assets
121
and Enforcement of Security Interests Act, 2002
STR
Service Tax Rules, 1994
Notes
DISCLAIMER
The analysis/views in this booklet do not purport to be and should not be treated as legal
opinion. Nothing contained herein can substitute appropriate legal opinion in the fact specific
situations that affect you or your enterprise.
© Economic Laws Practice, 2012
Prepared by Economic Laws Practice, for client service and internal use only. This document
summarizes the indirect and direct tax proposals of the Union Budget 2012. Expert guidance
may be sought before acting upon the proposals.
122
ECONOMIC LAWS PRACTICE
ADVOCATES & SOLICITORS
MUMBAI
1502, A Wing, Dalamal Towers, Nariman Point, Mumbai 400 021
Phone: + 91 22 6636 7000, Fax: + 91 22 6636 7172
Email: mumbai@elp-in.com
DELHI
405-406, 4th Floor, World Trade Centre, Barakhamba Lane,
New Delhi 110 001, Phone: + 91 11 4152 8400, Fax: + 91 11 4152 8404
Email: delhi@elp-in.com
AHMEDABAD
801, Abhijeet III, Mithakali Six Roads, Ellisbridge, Ahmedabad 380 006
Phone: +91 79 6605 4480 / 8, Fax: +91 79 6605 4482
Email: ahmedabad@elp-in.com
PUNE
Suyog Fusion, 7th Floor, No.1, 97, Dhole Patil Road, Nr. Ruby Hall Clinic,
Pune 411 000, Phone : +91 20 4146 7400, Fax :- +91 20- 4146 7499
Email: pune@elp-in.com