SOME POSITIVE BUDGETARY CHANGES.

[HARISH RADHAKRISHNAN]

1 Issue Valuation under the Customs Act, 1962 (‘Customs Act’) Industry / Sector involved All (Importing from related parties) Tax involved Customs duty Genesis of the issue

• The examination of transfer price of goods for the purpose of levy of Customs duty is conducted by the Customs authorities and for Income Tax (‘IT’) purpose by the IT authorities. Thus, there are two different arms of the Government for assessing the valuation.

• The Customs value on imported goods is determined mainly for the purposes of applying ad valorem rate of duties.

• Whereas, under the Transfer Pricing (‘TP’) provisions contained under the Income Tax Act, 1961 (‘Income Tax Act’), the transactions with Associate Enterprises (‘AE’) are scrutinized for checking whether the same are at Arm's Length.

• Methodologies of valuation under both laws are almost similar. Suggestions

• Both the Customs and IT have diametrically opposite interest in determining transfer price. The Customs authorities are interested in enhancing the value of imports while the IT authorities are interested in lowering the import value to increase the profit margin. This means that whichever way the price is fixed by the importer revenue would be accruing to the Government either through the Customs duty or IT

• Because of the above there is a huge pendency under Special Valuation Branch (‘SVB’) as well as TP wings of IT Department and protracted litigations. This increases transaction cost and leads to blockages of funds. It is therefore suggested that Customs SVB and TP proceedings under Customs Act for import of goods should be discontinued.

• If the above suggestion is not acceptable we would like to make following suggestions: It is proposed that the Customs valuation done at the point of entry and within stipulated period should be made acceptable for IT purposes as well.  The present budget has introduced the provisions to share the information collected by one arm with another. On the similar lines it is suggested that the best results will be achieved if a common authority comprising of the officers from both, Customs and IT Department and the experts on auditing the accounts is established to examine all TP cases. IT authorities have introduced Advance Pricing Arrangements (‘APA’) to finalize transfer price based on the negotiations between the Industry and the Government. It is suggested that APA rulings should be binding on Customs authorities wherever applicable. This will bring parity between Customs and TP authorities. SVB (which has no legal authority under the current Customs law except for two Circulars issued in 1998 and 2001) could be completely dispensed with and declaration by the importer should be accepted at face value as in case of Excise valuation. Any scrutiny could be undertaken at the time of onsite post clearance audit. This is more in conformity with the self-assessment regime in place since 2011. This will also remove blockage of crores of Rupees deposited by the Industry in the form of Extra Duty Deposit (‘EDD’).

2 Issue Definition of “Inputs” and “Input Service” under CENVAT credit Rules, 2004 Industry/ sector involved All Tax involved CENVATable Customs duties, Central Excise and Service Tax Genesis of the issue

• Definition of “Input” and “Input Services” under CENVAT credit Rules, 2004 (‘CCR’) has underwent change in 2011, thus upsetting the settled case laws, interpretation etc. Newer litigation has started because of the change in the definitions. Earlier almost all expenses were available as credit under the expression “activities relating to Business”. Suggestions

• The sale price of the goods and services always include all expenses incurred on that count. Therefore, to make tax compliance simple it is suggested that the credit of taxes paid on the goods purchased and services used by the assesse should be allowed in totality (the Government of Maharashtra allows input tax credit with respect to all capital assets as well as purchases debited to profit and loss account - vide Rule 52(1)(a) of Maharashtra Value Added Tax Act Rules, 2005). On the other side the duty/ tax could be levied on the sale invoice price without any deduction/ abatement for transport as is done now.

• Any fear of loss of revenue due to trading activity by manufacturer would be taken care by Rule 6(3) of CCR.

3 Issue Change in the Rule 6 of CCR Industry / Sector involved All Tax involved CENVA Table Customs duties, Central Excise and Service Tax Genesis of the issue

• Earlier, credit with respect to certain common services was allowed in terms of provision of Rule 6(5) of CCR. Removal of this Rule as well as some Tribunal judgments have resulted in anomalous situation where credit with respect to exempted activity is totally disallowed, while that exclusively used for taxable activity is allowed only proportionately. This is double whammy and needs to be corrected. Suggestions

• Rule 6(5) needs to be re-introduced to correct the situation.

• Even otherwise it should be made very clear in the CCR that Rule 6(3A) applies only to inputs and input services common to taxable and exempt activity

4 Issue Service tax under Reverse Charge Mechanism Industry / Sector involved All Tax involved Service tax Genesis of the issue

• The reverse charge is now applicable based on a number of combinations i.e. category of service, the legal status of service provider (i.e. individual, company, etc.), whether credit has been availed by service provider or not (like rent-a-cab case) and percentage of Service tax payable respectively by service provider and service recipient.

• Tax should be actually paid by the person who is responsible for payment i.e. service provider. Government has already exempted small assessees through threshold limit of ₹ 10 lakhs. Hence tax administration for remaining assessees should be practical for the Department. There is no logical justification to burden corporate assessees for tax compliance of others.

• Where 100% tax paid on reverse charge basis (e.g. advocates, bank recovery agents etc.), credit of input services to the service provider is getting blocked and it is not available as refund under Rule 5B of CCR. This add to the cost of transaction. Suggestions

• It is suggested to abolish the reverse charge mechanism except when service provider is located out of India ( foreign service providers)

5 Issue Remove redundant Excise returns Industry / sector involved All Tax involved Central Excise Rules Genesis of the issue

• Under Rule 12(2A)(a) of Central Excise Rules, 2002 (‘Central Excise Rules’) every assessee is supposed to file Annual Installed Capacity statement (ER-7) with the Range Superintendent by 30th of April of the succeeding year. There is no exemption for filing this Return.

• Under Rule 9(A)(i) of CCR, Annual Return (ER-5) of information relating to principal inputs consumed in finished products is required to be filed with the Range Superintendent by 30th April of each year.

• Under Rule 9A(3) of CCR monthly Return (ER-6) of information relating to principal inputs consumed in finished products is required to be filed with the Range Superintendent within ten days from the close of the month.

• The filing of this Return is a fruitless exercise as objection on such Returns is not raised by any agency of Excise. Non or late Filing of this Return attracts penalty upto ₹ 20, 000/-, which is being used as a tool to harass the assessee.

• Under Rule 12(2)(a) of Central Excise Rules, Annual Financial Information statement (ER-4) needs to be filed with the Range Superintendent by 30th November of the succeeding year. As the information under this statement is mostly covered in the Balance sheet, it is suggested that in place of this Return, a copy of Balance sheet may be allowed to be filed Suggestions

• There is a need to streamline returns as mentioned earlier. If the returns are not being used by various agencies of the Department they may be dispensed with.

6 Issue Parity in interest rates recovered by the Government and Paid by the Government Industry / sector involved All Tax involved Excise duty and Service tax Genesis of the issue

• Interest rate for delayed refund is 6 percent while interest payable by assesses on delayed payment of tax is 18 to 30 percent. Therefore there is huge gap between the interest paid by the Government and that paid to the Government.

• 30 percent interest is a draconian rate for anyone to pay. Suggestions

• Since interest is compensatory in nature it should be pegged at the applicable bank rates both for delays refunds and delayed payment of taxes and duties

7 Issue Imposition of mandatory penalty Industry / sector involved All Tax involved Customs, Central Excise and Service tax Genesis of the issue

• Penalty is imposed as deterrent and needs to impose only in cases where there is a guilty intent to evade.

• Today it is imposed irrespective of any such intent ever for matter concerning interpretations of legal provisions. Resulting in litigations piling up only for imposition of penalty.

• Most of these cases end up against the Department and legal expenses of assessees pile up for no fault. Suggestions

• Mandatory penalty should be reviewed and should be imposed on selective basis only depending upon the nature of default i.e. where Mens rea is established.

• To discourage lodging of irrelevant appeals for imposition of penalty mandatory award of cost of litigations to a successful assessee should be prescribed to arrest this tendency of forced litigations.

8 Issue Advance Ruling (‘AR’) Industry / sector involved All Tax involved Customs, Excise and Service Tax Genesis of the issue

• AR is applicable only to the new activities. Often assessees may want to have certainty for on-going operations. Suggestions

• AR should be available to even on-going activities which are not under litigation.

• AR benches should be increased and AR decision should be released mandatorily within 90 days and with a condition that any delayed decision would mean assessee’s contention is acceptable to the Government.

• AR decisions should be used a precedents in other similar cases just like Tribunal decisions.

9 Issue Restriction of availing CENVAT credit within 6 months from invoice date Industry / sector involved All Tax involved Service tax, Excise duty and CENVATable Customs duties Genesis of the issue

• In 2014 Budget, restriction was introduced requiring the assessee to claim CENVAT credit within 6 months of the invoice date.

• Due to various reasons like inventory management policies and logistic reasons like management of break bulk cargo the documents are received late. Hence there are genuine difficulties for the assessees and in any case an assessee who has paid for consignment will not get the credit. Suggestions

• The time limit of 6 month should be done away with and the status quo ante restored because even in the old regime there are no known/ reported cases of misuse of the provision.

10 Issue Replace permissions with the intimations Industry / sector involved All Tax involved Excise duty Genesis of the issue

• Many permissions in old era have been done away with and have been replaced by intimations.

• However there are still a few permissions which have skipped the attention of the authorities e.g. permission of weighment of scrap, job working permission and various permissions for EOU granted on annual basis causing hardship to the assesses. Suggestions

• All permissions should be replaced with intimation so as to keep the department informed of the status, since none of these have any bearing on the revenue generation.

11 Issue Refund of Service tax in respect of authorized operations in SEZs Industry / sector involved All SEZ units Tax involved Service tax Genesis of the issue

• Service tax exemption is provided for all authorized operations in the SEZ.

• In order to augment temporary revenue shortfall the scheme of payment of tax and claiming refund thereafter was introduced by the department in 2009.

• This scheme was thereafter carried on in a new form wherein a procedure of getting A1 certificates from Development Commissioners, on the basis of A1 getting another A2 issued by the Central Excise Division and thereafter providing these certificates to the service providers for claiming exemption which is originally provided in the SEZ scheme.

• Involvement of multiple agencies has caused delays and the scheme of exemption is being denied indirectly. Suggestions

• The SEZs are under physical control of the Customs department. The specified officer and authorized officers are on site and are in a position to verify the genuineness of use of service in the SEZ.

• The procedures of A1and A2 should be dispensed with and return filed with the specified officer should suffice to claim the exemption.

12 Issue Input Service Distribution - removal of restriction on distribution. Rule 7 of CCR Industry / sector involved All Tax involved Service tax Genesis of the issue

• Notification No 18/2012 CE (NT) dated 17 March 2012, substituted the Rule 7 of the CCR. The new rule came into effect from 1 April 2012 and read as below.“7. Manner of distribution of credit by input service distributor. - The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following conditions, namely:-(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;(b) credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed;(c) credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and(d) credit of service tax attributable to service used in more than one unit shall be distributed pro-rata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates.

Explanation 1.- For the purposes of this rule, ―unit‖ includes the premises of a provider of output service and the premises of a manufacturer including the factory, whether registered or otherwise.

Explanation 2.- For the purposes of this rule, the total turnover shall be determined in the same manner as determined under rule 5.” Suggestions

• Industry should be allowed to transfer eligible service tax credit to any unit as was allowed under earlier Rule 7. The input service distributor may distribute the credit to its manufacturing division subject to following conditions:(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or(b) credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.

13 Issue Export of testing activity Industry / Sector involved Large testing houses providing services to foreign customers Tax involved Service tax Genesis of the issue

• Prior to introduction of Place of Provision of Service Rules, 2012 (‘POPS Rules’), “testing services” provided to service recipient outside India were considered as export as it fell under Rule 3(iii) of Export of Service Rules, 2005.

• However, post July 2012, testing services have become taxable due to Rule 4 of POPS Rules (i.e. service provided in respect of goods that are required to be made physically available by recipient of service to the provider of service shall be deemed to be provided where the service is actually performed).

• The industry is being affected due to such change.

• Further the Rule 4 of POPS Rules carves out exception to services like repairs, reconditioning or re-engineering for re-export when goods are temporarily imported for the purpose. There is no reason why the activity of testing on goods received from outside India, or goods received in India should not be included in the exception carved out by the Rule. Suggestions Specific exclusion may be provided for testing activity from Rule 4 of Place of Provision of Services Rules, 2012 as is provided to activity of repairs, reconditioning or re-engineering.

14 Issue Taxability of packaged software- Lack of clarity on whether packaged software is to be treated as goods (and subject to VAT on sale and CVD on import) or as service (and subject to service tax) Industry / Sector involved II/ ITES Tax involved Service tax Genesis of the issue

• Taxability of software has always been a vexed issue. The confusion around taxability of software continues to exist even after introduction of ‘comprehensive taxation regime’ on 1 July 2012.

• The definition of “Service” explicitly excludes transfer of title in goods and a deemed sale transaction.

• However, the declared list of services inter alia covers services such relating to “temporary transfer or permitting the use or enjoyment of any intellectual property right”.

• Therefore, packaged software (which is treated as goods for the purposes of VAT) is covered under the exclusion provided in the definition of “service”, however, such transaction may still get covered under the declared service i.e. temporary transfer or permitting the use or enjoyment of an intellectual property i.e. the copyright in such packaged software.

• In this context, the industry has been struggling in adopting a consistent position whether the consideration for packaged software is leviable to service tax. • In this regard, reference may be made to certain service tax exemption notifications (Notification No. 17/2010 dated 27 February 2010 and 53/2010 dated 21 December 2010 - now rescinded) issued under the erstwhile law which provided for exemption from service tax where CVD was paid. This was issued to avoid payment of service tax and CVD on the same transaction.

• Similar notification or if need be a clarification is necessary to avoid double taxation of import of packaged software.

• Further, as regards simultaneous taxability under VAT and service tax, it appears that the service tax law intends to exclude sale of packaged software which amounts to deemed sale and is leviable to VAT. However, given the possibility of the same transaction to be covered under the declared service i.e. temporary transfer or permitting the use or enjoyment of an intellectual property i.e. the copyright in such packaged software, there is a need for appropriate clarification / instructions that such a transaction is out of the purview of service tax. Suggestions

• A notification / clarification may be issued to exempt / not levy service tax on import of packaged software

• A clarification may be issued to clarify that sale of packaged software is not leviable to service tax as it amounts to a deemed sale and is leviable to VAT or exemption may be provided if VAT/ CST has been paid on sale of packaged software (Similar exemptions exist in case of Intellectual property service if R&D Cess is paid ( Notification. 14/2012 dated 17 March 2012) or . exemption to the extent of property tax paid, available from the value for computation of service tax on renting services Notification No. 29/2012-S.T., dated 20 June 2012

15 Issue Clarity on Intermediary services Industry / sector involved Service providers using sub-contractors Tax involved Service tax Genesis of the issue

• In terms of Rule 9 of POPS Rules, Place of provision of intermediary services is the place of service provider

• Rule 2(f) of POPS Rules define “intermediary” as a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) between two or more persons, but does not include a person who provides the main service on his account;

• The Education Guide gives examples of Intermediary services in Para 5.9.6. It also gives examples of (i)Travel Agent (any mode of travel) (ii) Tour Operator (iii) Commission agent for a service an agent for buying or selling of goods is excluded (iv) Recovery Agent

• While the travel agent and Service Commission Agent may fit the definition in the Rules, Tour Operator and Recovery agent would not meet the criteria laid down in the Education guide like “…….Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal”

• In fact in case of recovery agent there is not service provided to the person taking loan and he does not therefore facilitate provision of service of loan.

• Such examples and clarifications have created ambiguity around the “intermediary” concept Suggestions

• Need to clarify the concept of intermediary

16 Issue Availability of exemption to sub-contractor Industry / sector involved Service providers using sub-contractors Tax involved Service tax Genesis of the issue

• In terms of Notification 25/2012 S.T. dated 20 June 2012, sr. 29(h) services by sub-contractor providing services by way of works contract to another contractor providing works contract services are exempt;

• This exemption is restricted only to works contract service and should be made available to all services Suggestions

• Benefit of sr. 29 (h) of Notification 25/2012 S.T. dated 20 June 2012 should be made extended to all services

17 Issue Availability of exemption to service provided in respect of one residential building Industry / sector involved Professions related to construction services Tax involved Service tax Genesis of the issue

• In terms of Notification 25/2012 S.T. dated 20 June 2012  sr.14(b) exemption is granted to services by way of construction, erection, commissioning or installation of original work pertaining to a single residential unit otherwise than as a part of residential complex

• The benefit is not available to other services which defeats the very purpose of this exemption which seeks to make the cost of single residential dwelling cheaper Suggestions

• All services in relation original work pertaining to a single residential unit otherwise than as a part of residential complex should be exempted e.g. architects services, consultant engineer

18 Issue Small scale exemption Industry / sector involved All small units Tax involved Excise, Service tax Genesis of the issue

• SSI exemption under Central Excise covers units with Turnover of ₹ 1.5 crore (if total clearances in the previous year had not exceeded ₹ 6 cr.) or less while that for Service tax covers service providers with turnover of ₹ 10 lakh or less

• (notification 8/2003 C.E. dated 1 March 2003 and Notification 33/2012 dated 20 June 2012 refer) Suggestions

• SS exemption for Excise may be revised to ₹ 3 cr. (turnover limit for previous year be revised to ₹ 8 Crore)

• SSI limit for service providers be revised to ₹ 20 lakh

19 Issue Rebate be made available to an EOU unit Industry / sector involved EOU Tax involved Central Excise Rules Genesis of the issue

• In terms of Notification 24/2003 C.E. dated 31 March 2003 any export by an EOU is exempt.

• Since the notification is issued under Section 5A of the Central Excise Act, the assesse is mandatorily required to export under bond.

• Such assesse is therefore not allowed to export goods under rebate ( Rule 18 of Central Excise Rules 2002) unlike their competitors who are operating as DTA units

• Many EOUs procure Capital goods from First/ Second stage dealers to whom CT-3 cannot be issued. Such credit remains unutilized in EOUs books as Rule 5 does not allow refund of CENVAT credit on Capital goods

• Further refund is restricted based on the turnover of exports and domestic sale whereas rebate under Rule 18 is granted on duty paid on finished goods which makes it attractive to many exporters. However EOUS are not allowed to claim benefit under this Rule Suggestions

• Notification 24/2003 should be rescinded as it is redundant in view of provisions of Rule 19 of Central Excise Rules 2002 which exempts all exports. This will bring parity between EOUs and DTA units

20 Issue Refund of accumulated credit to exporters ( instead of credit accumulated during the quarter) Industry / sector involved Exporting manufacturing/ service units Tax involved CENVAT Genesis of the issue

• In terms of Rule 5 of CCR refund of credit is allowed to exporters if the same cannot be utilized

• In terms of notification 27/2012 C.E. (N.T.) refund application in Form A sr. no. 3 requires the unit to mention “ Total CENVAT Credit taken on inputs and input services during the quarter.”

• The field formations are disallowing refund of accumulated credit on the ground that the refund is permissible on in respect of the credit availed of during the quarter

• In many situations it is possible that the unit may have an accumulated credit (e.g. heavy credit in the initial period of new units when there were no exports) and refund should be available as the rule seeks to grant refund of credit which cannot be used.

• In fact the Ministry of Finance under circular 120/01/2010 S.T. dated 19 January 2010 has explained that “At the outset it is necessary to understand that the entire purpose of Notification No. 5/2006-CX (NT) is to refund the accumulated input credit to exporters and zero-rate the exports. Accumulated credit and delayed sanction of refund causes cash flow problems for the exporters. Therefore, the sanctioning authorities are directed to dispose of the refund claims expeditiously based on the following clarifications to the issues raised in paragraph 2 above...”

• The framing of Form A has defeated the guidelines issued by ministry in the above circular and refunds are increasing being denied Suggestions

• Necessary amendments may be made to Notification 27/2012 C.E. (N.T.) should be made to allow refund of accumulated credit and not merely restricting to the credit pertaining to the quarter

21 Issue Availability of CENVAT credit for supplies to SEZ units ( pre 2008 period) Industry / sector involved Suppliers to SEZ Tax involved CENVAT credit Rules Genesis of the issue

• In terms of Rule 6(6) of CCR credit in respect of supplies to SEZs is available through such supplies are exempt. This provision was made w. e. f. 31 December 2008 (Notification 50/2008)

• In many decisions tribunals have held that such amendment would have retrospective effect. However Field formations are still confirming such demands for period prior to the amendment. This is resulting in unnecessary litigation where assesses have to approach Tribunal for a relief.

• As per our understanding no appeal has been filed against these decision Suggestions

• In view of the prevailing legal precedent, the position may be clarified through a CBEC circular or a retrospective amendment

23 Issue Refund of CENVAT credit for deemed export Industry / sector involved Units supplying goods or services which qualify as deemed export in terms of Chapter 8 of Foreign trade Policy Tax involved CENVAT credit Genesis of the issue

• In terms of Rule 5 of CCR refund of credit is allowed to exporters if the same cannot be utilized. The term “export” is not defined in the CCR, Central Excise Rules 2002, Central Excise Act 1944

• Hon’ble Gujarat High Court have held in the case of Shilpa Copper Wire Industries 2010 (2) TMI 711 - GUJARAT HIGH COURT that Clearance to 100% EOU should be treated as physical exports for entitling refund of unutilized CENVAT credit. Similar view is also held in the case of NBM Industries 2011 (9) TMI 360 - GUJARAT HIGH COURT and E.I Du Pont India Private Limited 2013-2014 (5) TMI 128 - GUJARAT HIGH COURT .

• These decision are not challenged in the Supreme Court

• There are many units which are saddled with accumulated credit as most of their sales are Deemed Exports. In fact such supplies are also counted towards DTA supplies further reducing the refund in respect of physical exports

• In terms of the prevailing legal position, deemed exports should also qualify for refund under rule 5 Suggestions

• Explanation may be inserted in Rule 5 of CCR to clarify that exports include Deemed Exports

24 Issue Non availability of Drawback when goods are exported under claim of input rebate 18 and Rule 19 or procurement of inputs under Rule 19 Industry / sector involved All exporters Tax involved Central Excise Genesis of the issue

• Input rebate is permitted under Rule 18 read with Notification No. 21/2004CE N.T. dated 6 September 2004 or inputs can be procured without payment of duty under notification 43/2001 C.E. N.T 26 June 2001.

• Text of the Notification does not bar availment of duty drawback whereas the format of ARE-2 given in the notification requires the exporter to make a declaration (d) stating that the exporter is not claiming any drawback on export of consignment covered under the application (ARE-2).

• All industry rate of Drawback is notified for “with availment of CENVAT” or “without availment of CENVAT credit”. With availment of CENVAT credit includes the amount of Customs and without availment of CENVAT credit pertains to Customs, Central Excise and Service tax portions.

• When input goods are procured without payment of duties or rebate of input is obtained as per above provisions there is duty incidence with respect to Custom portion.

• The declaration on ARE-2 has been seems to be wrongly drafted which disallows total duty drawback rather than allowing custom duty portion i.e. “with availment of CENVAT credit” (columns 6 and 7) Suggestions

• Condition number (d) of form ARE-2 should be amended as below,“we further declare that we shall not claim any drawback under column number 4 and 5 on exports of the consignment covered under this application”

25 Issue Payment of duty on 31 March Industry / sector involved All Tax involved Excise duty / Service tax Genesis of the issue

• In terms of Proviso to Rule 8(1) of Central Excise Rules 2002 and second proviso to Rule 6(1) of Service Tax Rules, 1994 Excise duty/service tax due for March needs to be paid on or before 31st March of that fiscal. However, industry is facing difficulty in discharging such duty on 31st itself, for reasons stated below :1 Clearances are allowed up to midnight of March 31st while duties can be deposited only during banking hours 2 Even assuming that estimated amount is deposited in PLA there is always a possibility that the duty deposited is short of the actual duty; 3 In SAP or other such similar systems, for excise purpose an entry is considered at real time and no back dated entry is allowed and hence entries of 31st March cannot be posted on subsequent date

 •On VAT side some states insist on advance tax by 31st on clearances/ sales made by 25th. If Central Government also follows the same process, it may at worst lose interest on clearances or supply of services in last 5 days ( or one day in case the cut-off date is kept at 30 March) but will make life much simpler for the industry Suggestions

• A cutoff date say 25th March (this date even can be extended to 30th March) may be considered for arriving at the liability for the month of March and which should be discharged by 31st March;

• Duty liability for clearances/ service tax between 26th March to 31st March can be discharged before filing of ER 1/ST-3 i.e. on or before 10th April/ 25th April.

26 Issue Need proper alignment in duties credit of which can be utilized towards only specific duties Industry / sector involved All Tax involved CENVAT credit Genesis of the issue

• This is an unintended slip in CENVAT rules existing since beginning but not corrected so far.

• In terms of Rule 3(7)(b) of CCR, credit of specified duties is allowed only against payment of specified duties. The rules mentions 9 duties which can be utilized only against 8 duties mentioned thereafter. The mis- alignment arises as the duties mentioned earlier include CVD (Additional Duty of Customs under Rule 3 of Customs Tariff Act) which does not have a corresponding entry in the second group - as CVD cannot be paid using any credit.

• We have recreated the rule as below to show how this has resulted in the misalignment from entry v onwards. This needs to be corrected as this would lead to huge unnecessary show cause notices or CERA objections against officers Rule 3(7)(b) of CCR in respect of -

(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 (40 of 1978); is allowed against Additional Duties of Excise (Textiles and Textile Articles) Act, 1978

(ii) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); is allowed against the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001)

(iii) the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No. 2) Act, 2004 (23 of 2004); is allowed against the education cess on excisable goods leviable under section 91 read with section 93 of the said Finance (No. 2) Act, 2004 (23 of 2004),

(iiia) the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007); is allowed against the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007)

(iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under items (i), (ii) and (iii) above; is allowed against the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003),

(v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); is allowed against the education cess on taxable services leviable under section 91 read with section 95 of the said Finance (No. 2) Act, 2004 (23 of 2004)

(vi) the education cess on taxable services leviable under section 91 read with section 95 of the Finance (No. 2) Act, 2004 (23 of 2004); is allowed against the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007 (22 of 2007)

(via) the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007 (22 of 2007) is allowed against the additional duty of excise leviable under section 85 of the Finance Act, 2005 (18 of 2005; and(vii) the additional duty of excise leviable under [section 85 of the Finance Act, 2005 (18 of 2005)], Suggestions

• The entry at (iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under items (i), (ii) and (iii) above be moved to the end or better still removed altogether

27 Issue Export of inputs or capital goods removed as such Industry / sector involved All exporters Tax involved CENVAT credit Genesis of the issue

• When a manufacturer availing CENVAT credit on inputs wants to export such inputs as such, he is asked by field formations to reverse the CENVAT Credit availed on such inputs, as provided in Rule 3 (4) (b) of CCR.

• Rule 3 (4) (b) of CCR reads as under -“The CENVAT credit may be utilized for payment of -(a)………..(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed or”

• There is no provision under this rule for non-reversal of credit when inputs/ Capital are exported as such.

• Accordingly the exporter has to first pay duty by reversing CENVAT credit taken on such inputs removed as such and thereafter file a rebate claim for refund of such duty paid.

• However, the CBEC has clarified in circular number 283/117/96 CE dated 31 December 1996 that inputs/ capital goods can be exported under bond

• It may be pertinent to note that The Central Excise Rules, 1944 had specific provision related to this which is reproduced below for ease of reference:“Rule 57 F (2) The inputs may be removed for home consumption or for export under Bond.(3) All removals of inputs for home consumption shall be made -

(a) on payment of duty equal to the amount of credit availed in respect of such inputs and

(b) under the cover of invoice prescribed under rule 52A

”• Similar view is expressed in para 3.4 of Chapter 5 of CBEC Manual

• Further Rule 19 allows export of excisable goods without payment of duty

• Despite these provisions number of show cause notices are issued by Field formations requiring reversal of credit when inputs or capital goods are exported as such, which is a futile exercise Suggestions

• Earlier provision should be reinstated either by way of amendment to Rule 3 of CCR or by way of circular under new rules

28 Issue Transfer of goods imported under Customs( Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 to other assesse entitled for similar exemption Industry / sector involved Job workers Tax involved CENVAT Credit Genesis of the issue

• Job worker undertaking intermediate process which does not amount to manufacture and such process is in relation to any goods on which appropriate duty is payable by principal manufacturer can claim exemption under serial number 30 (c) of notification 25/2012-ST.

• However this notification is not been included in Rule 6 of CCR.

• Due to the above anomaly, a manufacturer undertaking job work as well and claiming exemption of above notification is required to reverse credit on inputs used in such job work though duty is ultimately paid on the final product. Suggestions

• The reference of above notification should be included in sub-rule 6 of Rule 6 of CCR so that the manufacturer and job worker is not hit by the reversal provisions under Rule 6.

29 Issue Export of defective capital goods imported under Customs( Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 for repairs or otherwise. Industry / sector involved Assessees claiming benefit of above notification. Tax involved Customs Duties Genesis of the issue

• Rule 7A inserted in Customs( Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 w.e.f. 17 March 2012 reads as below:“7A. Re-export of unutilized goods- The manufacturer obtaining the benefit under these rules may re-export the unutilized or defective imported goods, with the permission of the jurisdictional Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise within six months from the date of import:Provided that the value of such goods for re-export shall not be less than the value of the said goods at the time of import.”

• In case the assesse decides to export the capital goods imported under above rule for repairs / re-conditioning etc. after period of 6 months then the same is not allowed /permitted to be exported.

• Further, often Capital goods are required to be returned to the supplier as they are meant for use only for a temporary purpose. Such export is now not possible after the amendment. However there is a confusion whether Rule 7A would apply to used goods too Suggestions

• Re-export of capital goods including those which are defective / for repairs should be allowed without any time limit.

• It should be clarified that Rule 7A does not apply to gods used and re-exported

30 Issue Capital goods / inputs be allowed to be transferred from one unit to another unit when imported under Customs( Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 (‘’IGCRD Rules”) Industry / sector involved Assessees claiming benefit of Customs notification which requires compliance with IGCRD Rules Tax involved Customs Act/ Excise Act Genesis of the issue

• Assessee having two or more units, both of which are entitled for import of goods at concessional rate of duties under a Customs Notification using IGCRD Rules

• Based on the requirement the goods (Inputs as well as Capital goods) are sometimes required to be transferred from one unit to other unit manufacturing same product

• There is no express provision for such inter unit transfer between both the units which are entitled for these concession Suggestions

• Inter unit transfer of goods to be allowed in cases where both the units are entitled to concessional import duty on compliance of IGCRD Rules

31 Issue Duty on DTA clearance by 100% EOU Industry/ sector involved 100% EOU Tax involved Central Excise Genesis of the issue

• Duty is payable in terms of Notification 23/2007 dated at concessional rate provided the conditions in Notification are fulfilled. Although this is duty of Excise the measure is adopted from Customs.

• Central Excise Section 5A  empowers Government to issue exemption notifications. The said Section 5A categorically states that :“Provided that, unless specifically provided in such notification, no exemption therein shall apply to excisable goods which are produced or manufactured -

(i) In a free trade zone or a special economic zone and brought to any other place in India;

(ii) By a hundred per cent export oriented undertaking and brought to any place in India.

• In short exemption notification or concessional rate would be applicable only if such notification specifically mentions about applicability to EOU.

• In such situation exemption, if any, issued will not be applicable and CVD would need to be calculated at tariff rate. Suggestions

• Anomaly in this respect be removed by suitably amending exemption notifications issued under Section 5A of Central Excise Act 1944, since Notification No. 23/2003 intends to extend 50% of duty benefit on DTA sale effected by 100% EOU.

32 Issue Registration of Importers Industry/ sector involved All Tax involved Central Excise Genesis of the issue

• Traders of imported / locally manufactured goods were earlier taking registration as a First Stage Dealer

• Basis recent notifications* an importer needs to obtain Central Excise registration (under a new category of “importer”) to be able to pass on CENVAT credit

• Accordingly, such trader is required to obtain separate excise registration for the products which are being imported and for manufactured products procured locally Suggestions

• Amendment should be applied prospectively. For assesses who were already registered with the Excise authorities prior to the amendment, their registration should be amended to include their profile as Importer/ First Stage Dealer

• If both the registrations are required, necessary guidelines should be issued to meet the practical challenges for compliances (segregation of premises, dealing with goods that are imported as well as traded etc.)

33 Issue Inter-unit transfer of CENVAT credit by Large Taxpayer Units (LTUs) Industry/ sector involved All Tax involved Central Excise, Service tax Genesis of the issue

• Prior to the amendment brought in union budget 2014- 2015, CENVAT credit taken on or before July 10, 2014 could be transferred from one manufacturing unit to another by LTU.

• With effect from 10 July 2014, transfer of credit by and between manufacturing units has been restricted.

• The amendment reduces/ restricts fungibility of credit between units of a LTU which was one of the drivers to register under the LTU scheme. Suggestions

• The facility for transfer of CENVAT credit should be restored.

34 Issue CENVAT Credit on RCM services where ST is discharged by Service Provider Industry/ sector involved Body Corporate Tax involved Service Tax Genesis of the issue

• Typically, the service provider is statutorily liable to register and pay service tax to the Government. However, as per Not. No. 30/2012-ST, in 12 situations, the statutory liability to deposit service tax to the Government and register is on the service recipient under ‘Reverse Charge Mechanism (RCM).

• In certain cases, inadvertently, the Service Provider collects the entire Service Tax from the Service Recipient and deposits the Service tax with the Government. Per se, this is a revenue neutral situation for the Government as instead of Service Recipient the Service Provider deposits the Service Tax.

• However, the issue arises in cases where: o CENVAT Credit is denied to the Service Receiver on the contention that the amount collected and paid by Service Provider is not ‘service tax’ but ‘an amount collected as service tax’ o Service Recipient is again asked to pay his share of Service Tax liability (though this Service Tax liability already stands discharged by Service Provider) Suggestions

• A proviso/explanation be added in the Notification or prescribed provisions that in RCM cases, if the applicable Service Tax is discharged, either by Service Provider or Service Recipient, then the same should be considered as sufficient compliance of the provisions.

• Further, in such cases, CENVAT credit of such amount would be available to the assessee (subject to CENVAT credit Rules)

35 Issue Bring uniformity in RCM percentages Industry/ sector involved Body Corporate Tax involved Service Tax Genesis of the issue

• As per Not. No. 30/2012-ST, in 4 situations, the statutory liability to deposit service tax to the Government is cast bot on Service Provider and Service Recipient under ‘Reverse Charge Mechanism (RCM).

• However, the percentage of Service Tax liability to be paid is different for different services as under: Nature of Service Percentage of tax payable by Service Provider Percentage of tax payable by Service ReceiverWorks Contract Service 50% 50%Rent-a-Cab Services (non- abated value) 50% 50%Rent-a-Cab Services (abated value) 0% 100%Manpower Supply Services 25% 75%Security Services 25% 75%

• Effective July 1, 2012, there was a paradigm shift in taxing services from the ‘positive list’ to a ‘negative list’ based approach. However, this change in legal provisions has increased the confusion of service providers. The confusion has been further compounded by aforesaid provisions such as partial reverse charge mechanism. Suggestions

• To bring simplicity, it is requested that in case of partial RCM, the percentage of Service Tax payable by Service Provider and Service Receiver should be uniform (say 50% for all the services). This will bring the much needed simplification.

36 Issue Remove compliances in CENVAT Credit Industry/ sector involved All Tax involved CENVAT Credit Genesis of the issue

• CENVAT credit in respect of ‘input services’ can be availed on receipt of invoice. However, if the said invoice is not paid within 3 months from the date of invoice then the said credit is required to be reversed. Later, on payment to vendor this CENVAT credit becomes available. Suggestions

• Practically for an assessee, tracking the payments for input invoices becomes difficult. The assessee needs to continuously track payments to vendor and maintain reconciliation.

• It may be noted that the Government receives the Service Tax from the service vendor raises (on earlier of) raising of invoice or receipt of payment (in accordance with Point of Taxation Rules, 2011).

• Thus, going forward, the condition for payment within 3 months should be dispensed with and the CENVAT credit should be made available without any condition of payment to vendor.

37 Issue Reduce litigation and support honest taxpayers Industry/ sector involved All Tax involved Central Excise and Service Tax Genesis of the issue

• As per the Central Board of Excise and Customs, there were more than 1 lakh indirect tax cases pending as of March 2012. Further, according to CAG’s report of 2013, approximately ₹ 3,23,037/- crore is currently locked up in pending litigation at various levels.

• Also there is a feeling amongst honest taxpayers that various recent schemes introduced by the government of India, such as Voluntary Compliance Encouragement Schemes (VCES), have only benefited the non-compliant taxpayer and not the honest ones.

• Even, the newly introduced arrest provisions are serious cause of concern for indirect taxpayers. Apart from these, asking taxpayers to pre-deposit amounts just in case of frivolous tax demand is another legitimate area of concern. Suggestions

• Immediate steps should be taken to reduce the backlog of pending litigation. For reducing the pending litigation, the Government should consider giving option of paying taxes along with interest and waiving off penalty.

• Also, Government should consider introducing provision for waiver of pre-deposit in cases where Apex Court or High Court ruling is in favor of the assessee

• These steps will surely restore the confidence of honest taxpayers.