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TMI BlogPRE-BUDGET MEMORANDUM 2013-2014 - FICCIX X X X Extracts X X X X X X X X Extracts X X X X ..... PRE-BUDGET MEMORANDUM 2013-2014 - FICCI - Budget Dated:- 26-2-2013 - News - I. PREAMBLE The Union Budget to be presented to the Parliament would be in the midst of one of the most challenging times the world is facing. The USA is dealing with the fiscal cliff, Europe with an all pervasive crisis and the rest of world bracing for a slowdown. We in India need to come out of the 'perceived policy paralysis' and need to present a Budget which will continue to inspire investor confidence and help us get back to the 8-9 per cent growth trajectory. The tax policies that we implement and follow go a long way in impacting foreign investment in the country and are an integral part thereof. As it happens, some of the recent policy developments have not gone down well with the investors and have shaken their faith in the efficacy of the judicial system. We at FICCI do believe that the ensuing Budget offers a platform to communicate to the investing community that we are willing to offer a stable and consistent tax environment conducive for investment and in conformity with our priorities. Our detailed memorandum on the various recommendations follows. What we would li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke to set out in this Preamble are the key issues which we believe need to be addressed in the forthcoming Budget: 1.1. Implementation of Reports of key Committees One of the key positive developments in the recent past has been the setting up of the Shome and Rangachary Committees to address the various concerns that the taxpaying community has. The Draft Reports of the Shome Committee on GAAR and on retrospective amendment to Section 9 of the Income Tax Act have been received very positively by the taxpaying community. It is imperative that the final reports of the Shome Committee are placed in the public domain and, more important, the recommendations acted upon. Similarly, it is imperative that the recommendations of the Rangachary Committee are placed in the public domain and acted upon. If this is not done urgently, there is a danger that the deliberations of these Committees will be perceived as one more symbolic exercise with little result to show. FICCI would like to endorse several of the recommendations contained in the Draft Reports of the Shome Committee. In particular, FICCI supports the view of the Committee that GAAR needs to be implemente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d after adequate 3 year notice, the existing investments and structures need to be grand fathered and the subjectivity be taken out of the implementation process. FICCI also endorses the view of the Committee that Retrospective amendments to tax laws should be a rare phenomenon only to prevent abuse and not to overcome judicial pronouncements, that where retrospective amendments are made they should not result in withholding tax obligations, interest and penalty and the need to curtail the implications of amendment to Section 9 of the Incometax Act by prescribing threshold limits. The Rangachary Committee has heard at length the IT/ITES industry and has come up with recommendations on resolution of several disputes. It has also prescribed Safe Harbour Rules. Apart from implementing these recommendations, it is necessary to ensure that other industries too find a mechanism of dispute resolution. 1.2. Debate on Inheritance Tax The recent invitation by the Hon'ble FM to views on the revival of Inheritance Tax has sparked of a major debate. Coming at a time when there is a need to generate capital resources to invest in developmental needs, any proposal to intro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce Inheritance Tax would be counterproductive. A substantial portion of the resources generated in the post liberalization era is in listed entities which have helped the progress of the country. To impose a tax which could potentially require a promoter to dilute his shareholding in a Company merely to pay incidence of Inheritance Tax is preposterous. Moreover such a tax could be very onerous for illiquid assets e. g. self occupied housing where the value of the property may have steeply escalated. When the Estate Duty was in existence, the fact was that the cost of administering the tax was more that the taxes garnered. In a country where there are few social security measures, imposition of such a tax would indeed be counterproductive. It will lead to misuse of the provisions and there would be attempts to find loopholes to avoid payment of such a tax. Over a period of time, the Government has cast the net of taxes wide and there are several other avenues to increase the tax base. FICCI strongly opposes any imposition of Inheritance Tax; in any case, even in an extreme case if such a tax was to be imposed, there is a need for a wider debate including the nee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to work out the ambit of the tax, the exemptions, the rates, etc. Such a tax should not, if at all, be imposed in a hurry and without extensive debate which must necessarily encompass the societal ramifications as these are likely to be significant. 1.3. Dispute resolution measures One of the key concerns of the taxpaying community is the prolonged litigation, the length of time it takes to resolve a dispute, the need to make on account payments in the interregnum, etc. The Dispute Resolution Panel (DRP) and the Mutual Agreement Procedure (MAP) in the context of Direct Taxes have not proved effective mechanisms in this regard. The fact that multiple benches of ITAT/High Courts give differing decisions has not helped the cause of the taxpaying community. FICCI strongly recommends that there be a 'conciliation bench' which can be approached by a tax payer to help 'settle' tax disputes. This will ensure that where a tax payer has already got a favourable resolution of a dispute on a matter, the dispute is not continued in the later years as a matter of routine. Similarly, non-resident tax payers can focus on quantum of profits attributable to a Permanent E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablishment or the adjustment on a Transfer Pricing issue. Industry has observed that the assessing officers tend to display a revenue bias in adjudicating tax disputes. This tendency is pronounced in disputes relating to indirect taxes. There is always pressure of maximizing revenue since yearly targets for collection of duties are assigned to each such officer. This results in show cause notice/demands getting confirmed even when the same are legally untenable as is evident from the statistics of appeals decided in favour of the Department or against it. It is suggested that the adjudicating officers should be disengaged from the duties of revenue collection. Moreover, revenue realizations dependent as they are on the economic activities should not be a parameter to assess the efficiency or competence of a revenue officer. 1.4. Refunds Tax payers are indeed concerned about the substantial refunds pending at the tax office on account of both Direct and Indirect taxes. There is a spiral here because there is a higher withholding tax and most often tax payers are unable to get lower tax withholding certificates because the Departments within the Tax Office w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho deal with withholding tax and those dealing with assessments are different and each have their own separate Budgets. The tax payer is stuck in between. Once higher taxes are withheld, there is a need for a refund and one finds, in practice, that tax offices make high pitched assessments to avoid refunds. We thus get into prolonged litigation and a tax payer has major problems trying to get back funds which are legitimately his. A new internal instruction that refunds will not be issued if a case is chosen for scrutiny makes a mockery of the whole system and is outrageous. This spiral needs to be broken. There is a need to issue instructions or guidance for issue of lower or nil withholding certificates. All pending refunds need to be granted forthwith, even when a case is chosen for scrutiny assessment. 1.5. Taxation of dividends from overseas Over the last few years, corporate India has emerged as a fairly active global player and Indian business houses have made investments and acquisitions which do India proud. The returns from these investments, when brought to India, suffer tax unlike domestic dividends which are tax free in the hands of the recip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients. In the last Budget, the rate of tax was reduced to 15 per cent. FICCI believes that such dividends received out of tax paid profits overseas and subjected to withholding taxes in those jurisdictions, should not be subjected to further tax in India on remittance. Indeed, the US example has shown that when corporates are permitted to repatriate dividends tax free, there is a significant inflow of funds; inward remittance of forex at this point of time would be a very welcome step for our economy. FICCI recommends that tax on dividends from overseas be done away with; in the alternative, tax on such dividends should be treated akin to minimum alternate tax, creditable against the normal tax liability and payable only if the tax on normal income is less than the tax on such dividends. 1.6. Import duties Domestic Industry continues to suffer from cost disadvantages on account of higher local taxes such as VAT, octroi, entry tax as also due to higher cost of financing and inadequate infrastructure. It deserves a minimal level of protection to compete with imported goods. FICCI would suggest that generally the basic customs duties should continue at existing levels ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll such time a comprehensive Goods and Services Tax is introduced and the cost of financing is reduced to competitive levels. 1.7. Service Tax A comprehensive service tax based on the concept of a negative list of services has been introduced with effect from 1st July, 2012. It is an important step towards introduction of GST. However, it is noticed that while the levy is universal in its application (barring the negative list and exemptions); there are restrictions on the availment of Cenvat credit. This dichotomy needs to be resolved urgently. Further, several doubts have been expressed about the scope of the new levy. Some of the issues requiring clarification have been listed in the memorandum. The Ministry of Finance should issue clarifications on these issues at the earliest to avoid litigation. 1.8. Goods and Services Tax The recent move by the Hon'ble Finance Minister in reviving the move to introduce the GST, sooner rather than later, is indeed welcome. FICCI indeed has strongly supported introduction of GST and believes that this will go a long way in streamlining the economy and provide impetus to the growth of our GDP. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICCI believes that it is imperative that this economic reform which is critical to the growth of the country be not a subject of party politics and should be pushed forward at the soonest possible. Also, it is important that the framework of GST should encompass the multiple taxes currently levied at the state and local levels and should subsume all of them. 1.9. Expanding the tax base and dealing with unaccounted monies Any system that taxes those who are in the tax net on a progressively higher basis leaving out those who manage to outside the tax net is regressive and will not achieve the objectives of economic and inclusive growth.On the subject of funds lying overseas, while being fully sensitive on the Government's rights to appropriately deal with defaulters, FICCI has strongly recommended that India enters into an agreement with countries like Switzerland on the lines of similar treaties entered into it by the UK as this will ensure that taxes are collected on such monies, including future earnings. FICCI would be happy to contribute to this thought process and feels that this move should not be delayed further. Finally, on this subject, it is obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that despite persistent efforts in the last few years there is hardly any widening of the tax base; efforts so far made have yielded dismal results. FICCI sees the need to tax all the sectors which are presently outside the scope of the tax net albeit at much higher levels of income/wealth. There is no economic justification to not tax persons who have income above the threshold of maximum marginal rates payable by other tax payers. Changes needed to the Constitution of India in this regard should be initiated and a debate on this subject needs to take place. II. ECONOMIC OVERVIEW AND KEY ISSUES Economic Overview 2.1. Output and Prices The RBI in the latest macro-economic and monetary development has revised downwards the growth rate for current fiscal to 5.8%. Table 1: Chronology of downward revision of GDP for FY '13 Institution/Month GDP Forecast (in %) RBI April 2012 7.3 July 2012 6.5 Oct 2012 5.8 IMF# July 2012 6.2 (2012), 6.6 (2013) Oct 2012 4.9 (2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), 6.0 (2013) FICCI Oct 2012 5.7 (2012-13) 6.5 (2013-14) Latest GDP numbers indicate a growth of 5.5% in Q1 of 2012-13. This growth rate is slightly higher than the 5.3% growth registered in Q4 of FY12, a consecutive decline for five quarters. Agriculture expanded by 2.9% (vis- -vis 3.7% of Q1 FY 12 and 1.7% of Q4 FY 12). This positive growth in agriculture vis- -vis last quarter is a pleasant surprise. However, in spite of the agricultural sector clocking close to 3% growth food grain prices may remain elevated owing to the ripple effect of the lower productivity in the months of June July due to deficient monsoon The industry sector recorded a growth of 3.6% which is substantially higher than the 1.9% 2.5% growth recorded in Q4 Q3 FY12 respectively. However, this figure is not in line with the growth figures that have been achieved in FY10 FY11. The growth in the mining quarrying sector was 0.1% as compared to 4.3% in the last quarter. The performance of the manufacturing sector was also not buoyant. The manufacturing sector reported a growth of 0.2% in Q1FY13, vis- -vis (-) 0.3% growth in Q4 FY1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The construction sector recorded a growth of 10.9% in the first quarter as compared to 4.8% in Q4 FY 12. The sector has not recorded such a high growth ever since Q2 FY08. This year's good performance could be due to delayed monsoon which otherwise affects construction activity. Cement dispatch numbers for the quarter have been fairly decent and may be the delay in the monsoons this year has lent some support to the cement companies. However, the worrying point was the growth rate in service sector at a low of 6.9% as compared to 10.2% in Q1 FY 12. At a disaggregated level, it was the trade, hotels restaurants sector which dragged the services growth down. The trade, hotels restaurants sector recorded an all-time low growth of 4% in Q1FY13 as compared to 7% in the last quarter and close to 14% in Q1 FY 12. Headline inflation came in at 7.81% year on year (YoY) in Sep'12, sharply higher than previous month's print of 7.55% YoY. The inflation print for the month of September came in at a 10-month high. The July number was revised upward to 7.52% YoY from provisional estimate of 6.87% YoY. Primary inflation eased to 8.77% YoY in Sep'12 from 10.4% Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oY in July with food price inflation at 7.9% YoY. Within food, the structural components of inflation in protein rich items witnessed a sharp spike compared to the previous month. Prices for cereals jumped 14.2% YoY in Sep'12 from 10.7% YoY respectively in August. This can be mainly owed to the spike in wheat inflation to18.6% YoY from a prior of 12.9% YoY. Meanwhile, the decline in fruits and vegetables prices by 3.37% month on month (MoM) helped limit the monthly rise in food inflation levels. Fuel inflation rose sharply to 11.9% YoY from 8.3% YoY, owing to a partial impact of the 13.6% hike in high speed diesel prices in the month. The fuel inflation is likely to rise higher in October, as the rest of direct impact coupled with the indirect impact of hike in diesel prices will be witnessed. Inflation pressures in the manufacturing sector surged to 6.26% YoY in Sep'12 and core printed 5.57% YoY. Both indices continue to exhibit an upward momentum. The Central Bank is facing a sharp growth-inflation conundrum with growth continuing to remain weak, while inflation is likely to increase in the coming months. Table 2: Inflation rates as on Sept 2012 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptember Month YTD* Year Year September FY13 FY12 Month YTD Year Year All Commodities 1.1 4.6 7.8 10.0 Primary Articles 0.5 6.2 8.8 12.2 Food Articles 0.6 7.9 7.9 9.6 Fuel Power 4 5.9 11.9 14 Manufactured 0.5 3.6 6.3 8 2.2. Money Banking The latest data available as on Oct 5'12 indicates a growth of 13.3% in Broad Money (M3). This is lower than the targeted level of 15.0% for 2011-12. The growth in non-food credit was at 15.5%. Table 3: Growth in monetary indicators and RBI target As on Oct 5 12 RBI Target : October 12 RBI August 12 FY13 Year Till date Year Year (YTD) M3 7.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.3 14.0 15.0 15.0 Non food Credit 4.3 15.5 16.0 17.0 17.0 Deposits 8.5 13.9 15.0 16.0 2.3. Public Finance The Government has recently submitted a detailed fiscal consolidation roadmap that endeavors to bring down the fiscal deficit to 3% by FY17. Meanwhile, fiscal deficit trends in the current fiscal reveal a likely slippage in fiscal deficit for FY13. Table 4: Fiscal indicators scal Indicators Fiscal Indicators FY 13: Apr- Sept (Rs bn) FY 13: Apr- Sept Budget FY12 :April- Sept FY 11: April - Sept % to Budget Receipts 3571.15 9773.35 36.5 37.7 Expenditure 6940.19 14909.25 46.5 47.6 Fiscal Deficit 3369.04 5135.90 65.6 68.0 Rev. Deficit 2632.84 3504.24 75.1 72.2 Primary Def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icit 205739 193831 106.1 109.3 2.4. Industry The IIP print for the month of August was a positive surprise and came in at 2.7% YoY. On the manufacturing PMI front, the performance has been stable at 52.8 for August as well as September. The performance on a segmental basis was more encouraging for manufacturing and mining. Mining growth improved to 2% YoY in August as against -1.6% YoY earlier. However, for the April-August period it continues to remain in the negative territory at -0.6% YoY. Manufacturing clocked 2.9% YoY in August whereas during Apr-Aug it has been 0% YoY. As per the two-industry classification, 13 out of the 22 industry groups displayed positive growth among which were publishing, printing and radio, TV and communication equipment. Industries such as office, accounting and computing machinery and motor vehicles and other transport equipment demonstrated negative growth. Further, components such as capital goods have started to show reduced volatility and declined by 1.7% YoY as against the lows of -28.1% YoY seen in June. For April-August capital goods continues to show contractio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of -13.8% YoY. The positive surprise however, ensued from the consumer goods front, which grew by 5% YoY as against 0.5% YoY earlier. April-August, consumer goods clocked 3.5% YoY. Table 5: IIP Growth Trend: Apr- Aug'12 Period Basic Capital Intermediate Consumer General Apr- Aug '11 7.6 7.3 0.8 4.4 5.6 Apr- Aug '12 2.8 -13.8 0.6 3.5 0.4 2.5. External Sector Cumulative trade deficit for FY2013 (April-August) now stands at $71.3 bn as against $76 bn in the same period last year. Cumulative exports for FY2013 (April-August) now stand at $119 bn - a decline of 6.6% over the corresponding period last year. Cumulative imports for FY2013 (April-August) now stand at $190 bn - a decline of 6.6% over the corresponding period last year. Nevertheless, exports trajectory is expected to improve slightly going ahead owing to the lagged impact of the sharp Rupee depreciation against the major trading partners in early part of FY2013. However on the downside, on the imports side, the rise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n international crude oil prices in the August-September period is expected to be reflected in incoming trade data and thereby poses upside risks to quantum of India's trade deficit. Table 6: Exports Imports: USD billion 2012 Exports Imports April 23.5 37.1 May 25.7 41.9 June 25.1 35.4 July 22.4 37.9 Aug 22.3 37.9 Sep 23.7 41.8 Key Issues and Reforms Needed Though the government has set pace for the reform process, a forward movement on GST, introducing greater competition in the mining sector (particularly coal), strengthening framework and creating new avenues for infrastructure financing and improving agri-marketing systems are some areas where the government should now focus on. For example, the recent bout of inflation, which has lasted for more than two years, has highlighted a very important weak spot in our planning process. And this relates to shortage of food products whose demand is already on the rise. As income levels in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economy increase, the demand for food in general and protein rich items in particular goes up at a fast pace. We are already witnessing this in India and unless we take appropriate measures to increase supply of food items such as pulses, milk and milk products, meat, fish and eggs etc, food inflation would become endemic and derail the growth process. Additionally, steps should be taken to improve marketing and distribution of food products in the country. And one of the key reforms here is for the states to implement the amended APMC Acts in letter and spirit. The Government should also examine the issue of land acquisition keeping the development agenda in mind. At its present stage of development, India needs industrialisation. A land acquisition policy that could hamper this by imposing heavy acquisition and relief and rehabilitation costs should be reconsidered. Likewise, Government has to play a role in acquiring land for large private sector projects, including PPP projects for infrastructure development. Goods and Services Tax will be a landmark reform once introduced. It will be a permanent stimulus for overall economic activity and boost GDP growth, exports and empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyment generation. The central and the state governments must engage in a positive manner on this issue and ensure that GST is introduced in the country at the earliest. Estimates suggest that proposed GST structure, if implemented is estimated to increase the potential GDP by at least 1.7%. Special stress must also now be laid on policies like National Manufacturing Policy and National Electronics Policy which has the potential of creating 28 to 100 million jobs in the coming decade. Such policies are particularly welcome as they will be providing gainful employment to the growing young Indian population. India needs to create substantial amount of jobs by the year 2025 so as to reap the benefit of the demographic dividend. It is believed that a chunk of such employment opportunities would be generated from the manufacturing and IT sector. While we should continue to explore all options for raising resources for infrastructure development, greater emphasis should be laid on developing the corporate bond market and leveraging insurance and pension funds to invest in infrastructure sector. III. SECTORAL ISSUES CEMENT 3.1.1. Red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction in the rate of excise duty on Cement Excise duty is levied on Cement @12% + Rs.120 per MT. These duty rates are one of the highest and other core industries such as coal and steel attract duty at around 5%. Cement is one of the core infrastructure industries and it requires large scale investments and capacity additions in view of the expected GDP growth and projected demand for cement over the medium to long term. Further, the excise duty structure for both cement as well as cement clinker has become quite complicated in the last few years. Earlier it was at a specific rate per MT. Now, it has become ad-valorem cum specific duty and is further also related to the declared MRP of the product. There is surplus capacity of cement in the country and cement market is on a bearish trend. Therefore excise duty rate on cement should be significantly reduced for growth of the industry at par with other core and infrastructure industries. 3.1.2. Levy of Clean Energy Cess on Coal A clean energy cess has been levied on coal, peat and lignite with effect from 1.7.2010. Energy is one of the major cost drivers for cement. Though levied as a duty of excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no cenvat credit is being allowed against this levy. This cess, along with state VAT etc. is putting further pressure on an industry faced with surplus capacity, falling realizations and increasing costs. It is requested that Cenvat credit be allowed on Clean Energy Cess so as to mitigate the impact on costs. 3.1.3. Classifying Cement as Declared Goods Cement is one of the basic and core infrastructure industries. However, unlike other similar industries/goods, cement is subject to higher rates of taxation. It is requested that Cement be stipulated as Declared Goods under Section 14 of Central Sales Tax Act so that it is put on an equal footing with other core sector goods like coal and steel. 3.1.4. Levy of Customs Duty on Cement Imports Presently, import of cement into India is freely allowed without paying basic customs duty. However, all the major inputs for manufacturing cement such as limestone, gypsum, pet coke, packing bags etc. attract customs duty. In this situation, duty free import causes further hardships to the Indian cement industry. Hence, it is requested that to provide a level playing field, basic customs duty be levied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cement imports into India. Alternatively, import duties on goods required for manufacture of cement be abolished and freely allowed without levy of duty. 3.1.5. Reduction of Customs Duty on Imports under EPCG scheme The EPCG is meant to encourage exports. Hence, the scheme allows import of capital goods at concessional duty rate of 3% and export obligation is also attached along with it. Now the normal customs duty is in the range of 5-7.5% unlike 15-20% earlier. Recognizing this, the Government has already reduced duty to 0% for certain sectors. It is suggested that this concession should be extended to cement industry as well. 3.1.6. Abolition of import duty on tyre chips Cement industry is an energy intensive industry and requires huge amounts of energy resources. However, it does not get adequate supplies of domestic coal and hence has to resort to expensive imported coal. To meet its requirements, the industry is developing alternative energy sources like tyre chips etc. It is suggested that tyre chips be allowed to be imported by removing it from the Negative list. Further, the import duty on the same be reduced to zero. 3.1.7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Customs Duty on Pet Coke Pet coke is one of the important fuels used by Cement Industry. This is expensive and mostly imported and the situation is further compounded by the fact that the import duty on pet coke is 5%, whereas on final product 'Cement' there is no basic customs duty. The Cement Industry, therefore, requests that Customs Duty on pet coke be abolished. This would remove the aberration in the structure of duties existing in cement imports vis- -vis its inputs. 3.1.8. Treatment of Waste Heat Recovery as Renewable Energy Source Energy cost is a very substantial part of the cost of producing cement. The prices of conventional energy resources are rising higher and higher and further, greater use of these is adversely affecting the environment. Also, various Governments are imposing renewable energy obligations on the industry. Cement industry is putting up Waste Heat Recovery plants so as to derive more energy from the same energy resource. In a way, this is akin to green energy. All of this requires further capital investments. To help the industry in its endeavor to produce more such environment friendly energy, it is requested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that such energy generation be treated as Renewable Energy Source. 3.1.9. Incentives for Limestone availability for future growth As per IBM data the total cement grade limestone reserve available to meet the industry requirements is 89.86 billion tonnes. Based on the expected growth and consumption pattern, the current reserves are expected to last only for another 35 - 41 years. There is a need to streamline and simplify the procedures related to limestone mining leases approval / renewal. There is a need to provide incentives like lower royalty rate, excise rebate for usage of marginal and low grade limestone. In order to ensure systematic mining operation for better recovery, there is need to integrate small mining leases in a limestone belt. In order to encourage utilization of limestone deposits located in remote areas, there is a need to offer incentives like road freight subsidy, lower royalty/excise rates etc. It is to be ensured that the systematic mining is carried out as per approved mining plan. 3.1.10. Stimulus to the sectors which are major users of Cement Using cement concrete technology for roads - All new expansio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the national and state highways may be made of cement concrete as a policy. To begin with, this % could be 30% of total allocations. All existing city roads having bitumen surface be converted gradually to cement concrete and new ones should preferably be constructed with cement concrete technology. All connecting roads in villages must be done with cement concrete technology. TEXTILE AND APPAREL 3.2.1. Indian Textile Industry The Indian Textiles Clothing industry has an overwhelming presence in the economic life of the country. It contributes about 14% to industrial production, 4% to the GDP, and 17% to the country's export earnings. It also provides direct employment to over 35 million persons which is second only after agriculture. India's total textile and apparel industry size (domestic + exports) is estimated to be $ 89 billion in 2011 and is projected to grow at a CAGR of 9.5% to reach $ 223 billion by 2021. The domestic textile and apparel market in India is worth $ 58 billion and has the potential to grow at a CAGR of 9%, to reach $ 141 billion by 2021. 3.2.2. Challenges to the Textile Industry and National Fibre Policy Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present demand of the industry is collectively met by 8 million tons of different fibres in India. It is envisaged that fibre demand will reach 11.5 million tons by 2015, thereby necessitating an incremental production of 3.5 million tons. The two major category or fibres are cotton and man-made. The current ratio of consumption being 60:40. As per the draft National Fibre Policy (NFP) 2010-11, we need to harness the potential of Man Made Fibres to catalyse the growth of the textile industry, as globally the fibre ratio is 60% man-made to the total fibre consumption. Also, the evolving trends in the textile industry have created huge potential for technical textile, used primarily for specialty applications. Due to wide functional diversity, the growth in this segment would be met by man-made fibres. Indian man-made fibres textile industry has not been able to create a mark in the global textiles market post dismantling of textile quotas (2005), whereas the cotton textile industry has witnessed substantial growth. Indian cotton apparel exports to the world have grown at about 10.7% CAGR, while MMF apparel exports have witnessed a decline. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... One major impediment in India is disparity of excise duty that the man-made fibre chain is subjected to. There have been genuine and forceful attempts by the Government towards realizing fibre neutrality when the excise duty in 2008-09 was reduced to 4% to spur growth of the T C industry, when the global industry faced the economic downturn. But in subsequent years, there were gradual increases in excise duty from 4% to present rate of 12%. Following suggestions may be considered by the Government for the balanced growth of the Indian Textile industry:- 3.2.3. Excise Duty on Man-made Fibres The excise duty on polyester fibers and yarns has been raised from time to time for the last about 4 years from a level of 4% in December 2008 to 12% in March 2012. Higher duty on synthetics results in costlier fabrics and consequently suppresses the demand for garments using polyester fiber and yarns. A higher duty on synthetics not only acts against the fiber neutral policy of the Government but also impacts the export of value added garments. In order to reduce the price of synthetic fabrics and to improve the capacity utilization of the fiber/yarn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturers it is requested that the duty structure on fiber and yarns be revisited and duties on polyester fibers / filament yarn should be brought down to 4%. Such a reduction in duty would help not only the polyester yarn / fiber manufacturers but also the texturizers, weavers, knitting industry, processors and apparel manufacturers. A reduction in excise duty as suggested is not likely to affect the revenue collections because of increased volumes of man-made fibres and yarns 3.2.4. Accumulation of Cenvat Credit The draw texturized yarn was exempted from the levy of NCCD with effect from 17-05-2003, however, the duty on the inputs namely POY, for such yarn was continued which has resulted in accumulation of NCCD credit with the DTY manufacturers. The accumulated credit of manufacturing units needs to be reimbursed back to the units who have paid this, alternatively same to be credited to Basic Excise duty account of assesses under excise rules. 3.2.5. Customs Duty on Synthetic Fibres To encourage investments across the value chain and to make the industry competitive, it is requested that the following customs duty structure for all fibres / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yarn value chains be adopted. (a) Polyester Value Chain Item Customs Duty (%) Tariff No Present Proposal PTA 2917.36 5 5 MEG 2905.31 5 5 Polyester chips 3907.91 5 7.5 Polyester staple fiber 5503.20 5 10 Polyester filament yarn 5 10 Polyester high tenacity yarn 5402.20 5 10 Polyester tyrecord fabric 5902.20 5 10 (b) Nylon Value Chain temsy) riff No. Present Proposal Item Customs Duty (%) Caprolactam Tariff No Present Proposal Nylon Chips 3908.10 7.5 7.5 Nylon filament yarn 5402.45 7.5 10 Nylon high tenacity Yarn 5402.10 7.5 10 Nylon tyrecord fabric 5902.10 10 10 3.2.6. Levy of Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Excise Duty on Branded Readymade Garments Branded Garment industry, as a whole, incurred huge losses earlier when the excise was introduced in 2011. In Union Budget 2012, the excise levy was increased to 12%. Simultaneously, however, some relief was provided by increasing the abatement from 55% to 70%. The increase in abatement, while being a very welcome step, is not, unfortunately, enough to mitigate the severe cost pressure under which the industry is operating. The slowdown in the economy with consequential impact on consumer sentiment has resulted in sluggish demand. Most of the branded garment businesses are incurring losses or earn marginal profits due to high incidence of retail costs, marketing expenses, VAT, freight and octroi. The Branded Garment Industry provides employment to lakhs of semi-skilled women in manufacturing garments in the country. The fall in demand will have an adverse impact on the employment of these workers from economically backward class who have very limited scope of employability otherwise. In view of the issues stated above, it is strongly urged that the abatement provided for branded garments be increased from 70% to 85%. Alternately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , excise duty at 1% may be levied without any entitlement for abatement, in line with similar levy imposed on about 130 items, which were exempt from central excise duty till then, in the Union Budget of 2011. This will provide much needed relief to industry and go a long way in rebuilding the growth sentiment. 3.2.7. Sample Movement In garment industry, development, display and approval of samples is an iterative and fundamental activity involving manufacture and movement of samples across supply chain - from Brand Owner to Vendor/Job worker, washing units, value add in form of embellishments etc. and then finally from manufacturer/Brand Owner to the Buyers. To maintain records for these multiple movements is a cumbersome process and there is no commercial transaction involving consideration. To facilitate the business process, it is submitted that necessary clarification be issued to consider regular delivery challan of concerned parties with an endorsement 'For Sample Purpose. No Commercial Value' as proof and samples be exempt from Excise Duty. Further to prevent misuse of the facility, such garments may be mutilated in the front. 3.2.8. Import of goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds falling under Chapters 51, 52, 54, 55, 58 - Testing of Samples Goods covered by the above stated chapters attract different specific duties at 8 digit HS code level. The difference in the product description under various sub -classifications cannot be determined or identified by physical inspection and requires submission of samples for tests by Textile Committee. This results in inordinate delays in clearance of goods. It is recommended that the structure of specific duties applicable to the goods covered by the said chapters be rationalized to reduce the testing requirements. Further, clarifications/instructions may be issued to field formations to accept test reports of any accredited testing laboratory after matching the sample fabric affixed on the test report with the import consignment. 3.2.9. Presence of Azo dyes - Certification by international agencies Textile goods of Chapters 51 to 62 are required to be accompanied by a certificate from a laboratory accredited by the government of the exporting country confirming that the goods are free from Azo dyes and other harmful chemicals. If the goods are not accompanied by such certificate, they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are subjected to mandatory testing - as prescribed vide DGFT's Public Notice No. 12 (RE-2001)/1997-2002 - to ensure that the products imported are free from Azo dyes and other harmful chemicals. This process leads to delay in clearances and resultant additional costs. Internationally, the Institute of the International Association for Research and Testing in the Field of Textile Ecology accredits mills after carrying out rigorous controls to ensure that they do not use prohibited dyes/chemicals. Once accredited, the certification remains valid for a specific period and a specific group of products. It is an internationally accepted practice to accept the accreditations and not insist for consignment wise testing. It is recommended that the international practice of accepting the accreditation certificate issued by Institute of the International Association for Research and Testing in the Field of Textile Ecology be adopted in India also. AGRICULTURE AND ALLIED SECTORS 3.3.1. Background It is essential that an integrated holistic view of the agriculture value chain is taken towards providing the necessary fillip to the stagnating agricultural growth. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires a joint participatory approach from all concerned stakeholders including the farmers, input vendors, traders, processors and the Government. The Union Budget can be a very effective catalyst by laying down a comprehensive policy framework and providing a tremendous thrust through appropriate fiscal benefits and closely monitor action plans. We believe that an enabling policy framework with attractive fiscal incentives can be provided to attract private investments in the rural economy. Private investment in agriculture and allied activities can provide the necessary boost to the already committed Government spends and can have a multiplier effect in the rural economy. The under noted suggestions and recommendations are being made in the aforesaid context. 3.3.2. Increase Investment in Agriculture and Allied Sectors In the last budget there was no increase in funding for agriculture research. It is requested that funding to research institutes like ICAR, state agriculture universities may be increased and a special fund created for fast track development of high yielding varieties, hybrids and plantlets multiplied through tissue culture and other advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced technologies under PPP mode. Similarly, a special fund may be created for research and development of high yielding dairy cattle. China has come up with a unique scheme where they have given a rebate to companies per unit of Hybrid/plantlet/min tuber sold domestically for the particular crop that they want to promote. This has encouraged companies to up production of this type of planting material. 3.3.3. Support Diversification in Captive Fishery through Innovative Financing In order to realize the unexploited potential in fresh water fish farming, long line shark and tuna fishing, financial assistance / incentives should be provided under special fund. This financial assistance could be provided through soft loans, equity, risk covers and insurance, as well as through establishment of integrative farm to fork chains, information and market intelligence, quality and safety measure. 3.3.4. Weather Stations Government should announce a separate fund for investing in automatic weather stations in India as the expanded network would help farmers in mitigating their risk through weather insurance products. Investments in automatic weather stations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be eligible for direct tax incentive in the form of 100% tax holiday in respect of the profits earned from this segment for a period of 10 years. 3.3.5. Model Farms Companies be encouraged to set up model farms for farmer training and demonstration. New technologies, equipment etc should get a 25 % subsidy subject to a maximum of Rs 5 Lakhs per farm and this should be disbursed after at least 1000 farmers have been trained at the farm 3.3.6. Horticulture Horticulture today accounts for about 28% of value added in the Agriculture sector and 52% of India's agri-exports but takes up barely 9% of arable land. The Government has rightly identified the National Horticulture Mission as a key driver of growth and value addition. This sector is also characterized by high wastages - up to 35% in the case of certain fruits and vegetables. Large scale investments are required in cold chain infrastructure to minimize waste and improve farmer realizations. Cold chain infrastructure is not confined to cold storages only, but extends to temperature handling across the value chain from farms to consumers. The cold chain thus includes farm level pre-coolers, sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all capacity chill cold storage, refrigerated trucks, cold storages, food processing plants, refrigerated display cabinets for retail shops and deep freezers. In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural wastage and enhancing shelf-life, it is recommended that customs duty rates on cold chain equipment and their parts be pegged at 5% or below. Similarly, excise duty rates on cold chain equipment and parts need to be lowered to 5% or below to expand domestic manufacture, which is presently in its infancy. 3.3.7. Income Tax for Dairy Cooperatives Under the prevailing taxation system, while primary dairy cooperatives at the village level are exempt from paying income tax, the district and state level cooperatives are taxed at the rate of 35 percent. In 2006-07, the Government reduced the income tax rate for private dairy companies by 10 percent but did not reduce it for cooperatives. In order to strengthen the co-operative dairy sector, which occupies 18% of the sector the income tax rate for cooperative sector needs to be brought at par with private dairy companies. 3.3.8. Other fiscal inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entives for Cooperatives Provide fiscal incentives to corporates aiming at increasing crop productivity and developing the entire supply chain i.e. sorting and grading centres, warehouses, temperature and humidity controlled warehouses, cold storages, temperature controlled transport up to consumer location. Grant fiscal incentives by way of 100 per cent depreciation on all investments in physical assets like infrastructure development by the private sector in agriculture and the entire agri-value chain. They should be given 100% tax holiday in respect of the profits of the undertaking for a period of at least 10 years and further giving the assessee an option to claim this tax holiday for any 10 consecutive years out of 15 years. 3.3.9. Tax exemption to Electronic Spot Exchanges Electronic spot exchanges are directly connecting farmers to markets through purchase/sale of agricultural commodities in the country, thereby, helping in evolving National Common Market by providing a Pan-India alternative market across the country, for enhancement of farmers' price realization by reducing cost of intermediation. Such an institutional framework merits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government support for full growth, therefore, the Government may provide tax exemption to these spot exchanges for a period of 5 years. 3.3.10. Weighted Deduction for Water Harvesting, Conversation etc. Investments made by companies in water harvesting, water conservation, repair and renovation of water bodies, interlinking of small canals/river lets should be eligible for 150 per cent weighted deduction on expenditure. The operation and maintenance of the above activities should also be eligible for similar benefits. 3.3.11. Excise duty exemption for Agricultural Machines Excise duty and VAT exemption for agricultural machinery and equipments. 3.3.12. Service Tax Exemptions for Agriculture sector Service tax exemption may be granted to the following services:- In terms of Notification No. 25/2012, S.T. dated 20/06/2012 exemption from service tax has been provided, inter- ali ia, to services provided by a goods transport agency by way of transportation of fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage. It is recommended that the scope of exemption be enhanced to include all agricultural produce including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oil seeds, coffee, tea, spices and staples as well as marine products. As per extant Service Tax laws the agro-sector has been supported by keeping a bulk of services relating to agriculture or agricultural produce in the Negative List or in the list of exempted services. However, there are some services like Security Services, Laboratory Testing Services and so on - which are essential to secure storage of agricultural produce and to determine quality of the produce - are subjected to Service Tax. It is recommended that all services provided for agricultural produce be kept outside the ambit of taxable services. 3.3.13. Import Duty Exemption Import duty exemption may be granted to the following items:- Laser Land Leveler and its components such as transmitter Machines for cleaning, sorting or grading seed, grain or dried leguminous vegetables Harvesting machinery; threshing machinery, root or tuber harvesting machines such as potato diggers and potato harvesters Machines for cleaning, sorting or grading eggs, fruit or other agricultural produce 3.3.14. Tea Industry FICCI recommends that Indian Tea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industry be given interest subsidy @ 5% on the applicable rate of interest on the funds specifically borrowed by the Tea Companies earmarked for the activities under the Special Purpose Tea Fund i.e. replanting and/or rejuvenation etc ('SPTF'). Tea producers are discouraged to take up developmental activities in their estates whether in field or in factories due to inadequate subsidy component under the various Schemes of Tea Board. It is, therefore, prayed that the rate of subsidy should be increased to 40% across the board on all the schemes under the aegis of Tea Board, Ministry of Commerce (from the existing 25%). It is recommended to continue the benefit available under section 33AB of the Act even under the Direct Tax Code. Orthodox Production Subsidy Scheme be included under the ambit of Section 10(30) of the Income Tax Act,1961. FICCI recommends to provide financial incentive to encourage organic tea cultivation. Tea Estates are located in the remotest corners of the country and no alternate accommodation is available locally, the managerial personnel, under force of circumstances, are to be provided with fully furnished residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial accommodation to enable them to attend their routine duties round the clock. It is therefore suggested that for calculation of perquisites in respect of residential accommodation and for the value of furniture provided to the employees working in the tea estate, such tea estate should be treated as 'remote area', like those working at a mining site or an onshore oil exploration site, or a project executive site or an accommodation provided in an offshore site. FICCI suggests that only 40% of the book profit of tea companies should be subjected to MAT. A suitable modification in section 115JB of Act be made accordingly. PAPER INDUSTRY 3.4.1. Customs Duty on Paper/Paperboards The Indian Paper/Paperboard industry has made significant capital investments to ramp up capacities for meeting domestic requirements. The Industry has strong backward linkages with the farming community, from whom wood, which is a raw material, is sourced. A large part of this wood is grown in backward marginal/sub-marginal land, which is potentially unfit for other use. In India an estimated 5 lakh farmers are engaged in growing plantations of Eucalyptus/Subabul etc, ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er an estimated 10 lakh hectares. This has generated significant employment opportunities for the local community and benefits have been reaped from this source, which are higher than other commercial crops. It is therefore strategically important and also necessary to keep Paper/Paperboard industry outside the ambit of FTA's (ASEAN etc) and recognize this Industry as sensitive deserving special treatment. Increased imports from foreign countries are severely impacting the cost competitiveness of many paper mills in India. In order to provide a level playing field to the domestic industry it is recommended that: (i) the Customs duty for import of Paper and Paperboards should be increased and brought in line with agricultural products as currently industry is sourcing majority of its raw materials from Agro-forestry - supporting millions of farmers in creating value on their marginal lands. (ii) this category to be kept in the Negative List (i.e., no preferential treatment) in bi-lateral and multi-lateral trade treaties and agreements. 3.4.2. Customs Duty on Import of Pulp In May 2012 the Government reduced the import duty on pulp from 5% to Nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . More than 1,250 thousand MT of pulp, valued at approximately USD 820 million (about Rs. 4,600 crores) is imported in to the country every year. The customs duty for these imports is estimated to be about Rs. 230 crores per annum. The break-up of the pulp imports is as under: Type of Pulp Type of Pulp Quantity ( 000 MT) Value (Rs Crores) Hard Wood Pulp 900 3,200 SoftWoodPulp 200 840 Bleached Chemi Thermo Mechanical Pulp (BCTM Pulp) 5402.45 7.5 Total 1,260 4,580 In view of the fact that Soft Wood cannot be grown in the country and in the absence of BCTM technology in India, requirements of Soft Wood Pulp and BCTM Pulp will have to be met through the import route only. However, in so far as Hard Wood Pulp is concerned, it would be pertinent to note that the domestic industry is working closely with the farming community for creating sustainable supply of wood - a key raw material for hard wood pulp - through redevelopment of waste-lands. Cheaper imports of duty free hardwood pulp would not be in the interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian farmers as the benefit will flow to farmers in exporting countries like Indonesia and Brazil. Accordingly, for creation of sustainable sources of fibre required by the pulp and paper industry it is recommended that: (i) 5% customs duty on pulp be reinstated only for Hard Wood Pulp; and, (ii) policy measures put in place to facilitate private sector participation in plantation development programmes. 3.4.3. Reduction of Excise Duty on Poly-coated Paper products - Central Excise Tariff No. 4811 59 00 Paper and paperboard that is coated / impregnated / covered with plastic is classified under Central Excise Tariff 4811 59 00 with an excise levy of 10% ad valorem - even as a large number of paper / paperboard items covered by Central Excise Tariff 4802, 4804, 4805, 4807, 4808 and 4810 are exigible to excise duty only at 6% ad valorem. Plastic coated paper and paperboard are essentially bio-degradable paperboard and are eco-friendly substitutes for plastics which do not conform to requisite hygiene and environmental standards. The global trend is to actively discourage the use of plastics and to replace it with plastic coated paper / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paperboard. In India the major consumers of this type of paper / paperboards are SSI / SME units engaged in manufacture of paper cups that are increasingly being supplied to institutional customers like the Railways, the FMCG sector and the household sector. It is recommended that since SSI / SME units are not in a position to avail cenvat credit the excise duty on plastic coated paper / paperboards, classifiable under Central Excise Tariff 4811 59 00 be reduced to 6% from 12% - in line with most other paper / paperboards classifiable under Chapter 48. 3.4.4. Incentives for investments in environment friendly Clean technologies by paper industry Today technology stands out as the most critical factor in achieving sustained competitiveness and industry performance. Indian Paper Industry is a signatory to the Government of India's Charter on Corporate Responsibility for Environmental Protection (CREP). This calls for substantial investments in green technologies such as introduction of ECF (Elemental Chlorine Free) pulp manufacture, Ozone bleaching etc. to ensure a positive environmental footprint. In order to encourage manufacturers withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the industry to adopt environment friendly clean technologies that ensure, inter-alia, reduced carbon footprints, better emission norms, better effluent treatment norms, usage of renewable sources of raw material and energy, improved waste recycling, etc., appropriate fiscal benefits should be provided. It is, therefore, recommended that: (i) Import of capital goods required by the Paper Paperboard industry for technological up-gradation - specially aimed at environmental protection (e.g. Elemental Chlorine Free Technologies) and for compliance with CREP - should be permitted at 'Nil' rate of Customs Duty. (ii) Exports by manufactures who have adopted environmentally friendly technology should be granted additional incentives in the form of duty credit-scrips etc. (iii) Additional benefits like entitlement for import of raw materials at a 50% concessional rate of duty, full exemption from excise and VAT taxes for paper and paperboard produced using clean technology, accelerated tax depreciation @ 150% of the normal depreciation rates under income tax laws for investments on environment friendly technology, should be provided to the industry. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... measures will not only promote preservation of ecology, it will also incentivize all players in the Indian Paper Industry to adopt 'green' technologies, thus aligning domestic industry to international quality norms. 3.4.5. Plantations for pulp and paper mills on degraded waste lands Planning Commission intends to bring 33% of land mass of India under tree cover. To achieve this objective nearly 43 million ha of land is to be afforested which includes development of degraded forest lands to the extent of 15 million ha. This requires investment of more than 10 Billion USD over a period of 10 years. The Government alone cannot muster required financial resources. Therefore private/public partnership is the way forward to achieve the above targets. The industry has been making representations to Government to allot about 1.2 million hectare of waste land to meet its raw material requirements on sustainable and continuous basis and to make it globally competitive. The above would result in the following benefits: (i) Employment generation - 77.4 million man days per annum (ii) Continuous employment generation on a sustained basis (iii) Pulp wood yi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld - 14 million metric tonnes per annum - resulting in meeting sustainable fibre requirement of pulp and paper industry (iv) Savings of foreign exchange to a tune of US $ 2 Billion per year (v) Potential for carbon credits to a tune of US $ 36 million (vi) Increase in forest cover resulting in attendant benefits. It is recommended that appropriate policy changes are put in place to enable allotment of degraded waste lands to the pulp, paper and paperboards industry for development through afforestation and watershed programmes. HEALTHCARE 3.5.1. Infrastructure Status for Healthcare Sector Though the government is progressively moving away from profit linked tax incentives towards investment linked incentives, healthcare has never been accorded infrastructure status and thus has not benefitted from the related provisions. Infrastructure constraints have to be addressed meaningfully and with an eye on the future with burgeoning disease burden coupled with a healthy growth rate in population. Immediate need of the hour is therefore to accord infrastructure status to the sector for improvement in investment activity and enabling market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forces to partly address the issues faced. The following benefits should be made available:- Tax deduction of 100% of the profits and gains derived from operating and maintaining hospitals for a period of ten consecutive assessment years, beginning with the initial assessment year in any 15 year period starting from date of operation of hospital facility, anywhere in India. Accordingly, the savings that accrue to hospitals could be ploughed back to expand hospital beds which would assist them in improvising the health care facility and the bed to patient ratio. Healthcare sector should be exempt from Minimum Alternate Tax Any new capital expenditure towards replacement of old machinery / equipment, at any time, be entitled to 100% deduction Healthcare sector should be eligible for loans / financial assistance on a priority basis, at concessional rates, as provided to the infrastructure sector. 3.5.2. Increase public spending on Healthcare The proposal by the Planning Commission to increase the spending to 2.5-3% of GDP over the 12th five year plan is the need of the hour and should be implemented on priority. 3.5.3. PPP Framework ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Free/concessional land and use of public healthcare facilities for private medical colleges in focus states. Private sector participation to be encouraged in promoting preventive and primary care with appropriate tax incentives to primary health care chains operating beyond Tier 2 towns; and PPP model for private sector participation in screening and detection programs of the government. 3.5.4. Service Tax waiver on health insurance schemes There is a pressing need to increase the safety net of health insurance in India. One measure that could help is withdrawal of service tax on health insurance premiums, thereby leading to a lowering of cost/premium for the consumer. Healthcare services are already exempt from service tax, and this benefit should be extended to health insurance premiums. 3.5.5. TDS benefit on health insurance claims In case of cashless arrangements of health insurance claims, the ultimate beneficiary of such health care services is the individual. Therefore TDS should not be applicable on payments made towards settlement of claims by the insurance company to the hospital on behalf of the insured. 3.5.6. R D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support 250% deduction of approved expenditure incurred on R D activities related to indigenous development of medical technology should be provided. 3.5.7. Technology Enabled Healthcare Services 250% deduction on approved expenditure incurred on operating technology enabled healthcare services like telemedicine, remote radiology etc. should be provided. 3.5.8. Electronic Health Record To encourage move towards maintenance of EHR (Electronic Health Record), financial incentives/grants should be provided to willing institutions. 250% deduction on investment made for the implementation of Electronic Health Record (EHR) should be extended. 3.5.9. Compulsory Health Insurance for Employees To promote Health insurance penetration in the country, it should be mandated that organizations insure every employee for a minimum amount of Rs.1 Lakh. The employer should be allowed tax deduction on the premium paid. Moreover, the employee should have the flexibility to increase this cover; the additional premium so paid should also be tax exempt. This should be over and above the cover extended under the ESI, CGHS and other government health insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rance schemes. 3.5.10. Deduction for Preventive Health Check-Ups The amount of tax deduction provided for preventive health check-ups introduced last year should be over and above the provision of Rs 15,000 towards the health insurance premium paid under section 80D. This will definitely incentivize people to undergo a preventive health checkup on a regular basis. STEEL AND OTHER FERROUS METALS 3.6.1. Exemption to Coal used in Iron Steel industry Coking coal has been exempted from payment of Customs Duty vide S. No 122 of Notification No 12/2012-Customs dated 17.03.2012. As per the explanation in the Notification, coking coal has been defined to mean coal having mean reflectance of more than 0.60 and Swelling Index or Crucible Swelling Number of 1 and above It has been reported that crucible swelling No. and swelling index are too technical and sensitive to test and the departmental labs are not equipped to test these parameters creating delays and giving rise to litigation. Coals not meeting the parameters in test but being used for metallurgical purposes in COREX / PCI / FINEX, are being charged to duty as Other coals under sub headin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 2701 19 90 at the rate of 5%. This has defeated the well intentioned objective of the Government to provide relief to steel industry. Although in the Budget 2012-13, the customs duty benefit of Nil customs duty is allowed to Steam coal (S. No 123 of Not 12/2012-Customs dated 17.03.2012), there is still a doubt as whether the coal used in the manufacturing of steel using Corex, Finex or PCI technology is covered under said entry. It is accordingly requested that to simplify the process of granting exemption, the entry at sl. No. 122 may be amended in the said notification 12/2012 - Customs to exempt Coals for use in iron steel making using any technology such as Blast Furnace, COREX, PCI or FINEX . With the above amendment, all coals used in the manufacturing of Hot Metal / Steel will be brought on par for the purpose of Custom Duty exemption. Customs duty on Anthracite Coal (Heading No. 2701 11 00) and all such reductants should be reduced to Nil since these are vital inputs for the Ferro Alloy industry as well as the pig iron industry. 3.6.2. Removal of Steel products from the ambit of Free Trade Agreement (FTA) with Japan Korea There is mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e than 300% increase in the import of steel in just one year from Japan Korea. According to the Joint Plant Committee of the Steel Ministry, imports went up to 2.88 million tonne during April-July of the current fiscal as against 1.88 million tonne in the same period of last year, representing growth rate of 53%. Effective rate of Customs Duty (BCD) is levied at 4.2% for Steel products falling under Chapters 7208.10 to 7229.90 for imports from Japan (Sl. No. 430 of Not No. 69/2011-Cus). Similarly, effective rate of Customs Duty (BCD) varies from 2.2% to 3.125 % for steel imports from Korea (Sl. No. 532 to 540 of Not No. 152/2009-Cus). In view of the discriminatory treatment for customs duty levy on imports from Japan Korea owing to the Free Trade Agreement (FTA) pact, domestic industry is severely affected. It is accordingly requested that urgent steps be taken to remove steel items under chapter 7208.10 to 7212.60 from the purview of FTA. 3.6.3. Import duty on Graphite Electrodes and Refractory materials Currently there is an import duty of 7.5% on 30 and 16 graphite electrodes 5% for refractory materials. As there is no sufficient domestic capaci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty for manufacture of these items and these need to be imported, consequently the cost for the domestic producers is increased. It is accordingly requested that the import duty on electrodes and refractory material may be reduced to Nil. 3.6.4. Import duty on steel grade limestone and dolomite For Iron and Steel Industry, limestone availability was 4320 tonnes in 2008-09 (1.9% of total production) and 7664 tonnes in 2009-10 (3.3% of total production). While cement grade limestone reserves are adequate, SMS, BF and Chemical grade limestone (required by the steel industry) are not and occur in selective areas. Increase in steel production in the country, has led to rising demand for SMS and BF grade limestone. Limestone imports have been increasing consistently and in 2009-10, it was imported primarily from Oman (40%), UAE (32%), Thailand (16%) and Malaysia (5%). As the reserves of SMS and BF grade limestone within the country are scattered and there is a capacity limitation of the existing limestone mines in various States, it is imperative that Customs duty on steel grade lime stone (sub heading 2521 00 10) and dolomite (sub heading 2518 10 00) be reduced from 5% to n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il as in the case of coal, coke and steel scrap. 3.6.5. Import duty on HBI / DRI Domestic Sponge Iron industry faces a threat due to sharp increase in imports of HBI / DRI from 50,000 tonnes in 2011-12 (April - August) to more than 3 lakhs tonnes in 2012-13. Imports are mainly from Middle East countries due to lower costs because of availability of cheaper natural gas. There is urgent need to protect the investment made by the domestic Sponge Iron industry by raising the import duty on ferrous products obtained by direct reduction of iron ore (Heading 7203 10 00) from 5% to 10%. 3.6.6. Import duty on Manganese ore, Chrome ore etc. Customs duty on Manganese ore (Heading 2602 00 10 to 2602 00 90), Chrome ore (Heading 2610 00 10 to 2610 00 90) and Molybdenum ore (Heading 2613 10 00 and 2613 90 00) and Vanadium oxides and Hydroxides under Heading 2825 30 and other salts of Oxometallic Acids (Vanadium Oxides Concentrates and Ammonium Meta Vanadate) under Heading 2841 90 00 may be reduced to Nil from the existing 2.5%. 3.6.7. Customs duty on Natural gas used in steel manufacturing process Imported Natural gas is charged to customs duty at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of 5%. In the 2011-12 budget exemption from custom duty is granted to LNG imported for power generation by utilities. In view of the preference for supply of domestic gas to the fertilizer and power sectors the only option for gas based steel plants is to import gas. The high price of LNG is making gas based steel manufacturing unviable. Gas used by Steel Manufacturers as process feedstock for manufacture of steel should be fully exempted from custom duty so that these facilities remain commercially viable. 3.6.8. Project Imports Consequent to the reduction in customs duty for the EPCG clearances from 3% to 0%, the project import duty which was reduced from 7.5% to 5% for all the projects could not serve the intended purpose due to the apparent advantages of EPCG licence. It is hoped that the project import duty would be reduced to 2% from 5% so that the unnecessary burden of export obligations through EPCG route can be avoided. This would also encourage EPCG licence holders to take recourse to the import of capital goods for the setting up of green field projects and substantial expansions. 3.6.9. Customs duty on stainless steel flat products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There has been a considerable surge in the imports of Stainless Steel Flat products over the last three years (both in Hot Rolled Cold Rolled). Today, India is a 3rd largest market for Stainless Steel after China European Union and also has the highest growth rate next only to China. The Indian market is expected to grow 10% CAGR over the next 6 years. In order to cater to this growing demand, the domestic industry has put in massive investment towards capacity enhancement and modernisation. However, China EU are riddled with huge surplus capacities and stagnant domestic demand in their respective countries. Therefore, the most expedient way for producers of such countries is to divert their excess production to growing markets like India. While domestic industry welcomes healthy competition, the recent surge in imports has been marked by rampant price undercutting and massive circumvention of anti dumping duties imposed by the Govt. from time to time. The time has come, the very viability of domestic industry is a question and domestic producers are now facing an unprecedented challenge in terms of countering this threat. It is submitted that the Basic Custom D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty (BCD) on Stainless Steel flat products may be increased from the existing level of 5% to 15% in order to create a level playing field for the domestic stainless steel industry vis- -vis their overseas counterparts 3.6.10. Other duty changes (i) Ship-building quality (SBQ) plates manufactured in India and used for vessels made in India must get the deemed export status to match with duty free facility extended to imported SBQ plates (ii) The refractory materials like mortar, mud gun mass, refractory cement etc. should be levied to import duty at 5% instead of 7.5% to align with the prevailing 5% customs duty on refractory bricks. (iii) Excise duty on directly reduced iron (DRI) of Heading 7203 10 00 may be reduced from 12% to 6% since the rebars made through DRI-EAF/IF route are mainly used for housing for lower and middle class section. (iv) The Central Excise duty on steam coal should be fully exempted. 3.6.11. Drawback Rate increase After discontinuation of DEPB Scheme with effect from 01.10.2012 the new drawback rates have been declared. In respect of the CRCA, Colour coated sheets and pipes, DEPB entitlement was much higher a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s compared to the drawback rates now announced. Therefore the drawback rates for these items need to be revised suitably at the level of earlier DEPB rates. 3.6.12. Shearing/Slitting/Annealing operations to be considered as Manufacturing activities under Central Excise In order to service the just in time supply concept being adopted by the automobile industry the Steel manufacturers have set up state of the art service centres for cutting /slitting of hot rolled/cold rolled/galvanized coils with a huge investment of more than Rs 500 crores. At present the Shearing / Slitting/Annealing/Cutting operations of the Steel products are not considered as manufacturing activities under Central Excise. Therefore the domestic producers have to seek various permissions like Rule 16C from the Commissioner of Central Excise for sending such goods for job work. Many times such permissions are either delayed or not granted resulting into substantial loss of value addition. In order to simplify the procedure and at the same time to protect Government revenue, such operations may be considered as normal manufacturing activities so that the manufacturers have another options to clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods on payment of duties instead of being subjected to discretionary powers of granting permissions. It is accordingly requested that appropriate amendments may be made for declaring processes such as shearing, slitting, annealing as processes amounting to manufacture for the purpose of levy of central excise duty. As an alternative, option to pay duty shall be made available to manufacturers who clear the goods to customers for further manufacturing. Pickling and Oiling was treated as manufacturing in 2012 Budget. 3.6.13. Classification of Corex under Central Excise Tariff Existing tariff entry 2705 of Central Excise schedule covers : 2705: Coal gas, water gas, producer gas similar gases other than petroleum gases other gaseous hydrocarbons. Certain doubts have been expressed about classification of Corex Gas under the aforesaid entry of heading 2705. Blast Furnace gas is specifically mentioned in the heading 2705 of the HSN. Blast furnace gas corex gas both emerge as by-products in the process of manufacture of molten hot iron using, respectively, Blast furnace and Corex. The manufacturing process involved in the blast f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnace technology corex technology is similar. The by-product Corex gas is very similar in composition use to coal gas blast furnace gas covered under the tariff heading 2705. However, in the absence of specific mention these gases under tariff entry 2705 a doubt is being created about coverage of corex gas as 'similar gases 'under the said tariff entry. For removal of this doubt, either a clarification may be issued or the aforesaid entry in heading 2705 may be amended to specifically include Corex Gas. 3.6.14. Review of Excise Duty Structure on Patta -Patti The unorganised sector (normally referred to as Patta-Patti) in the Stainless Steel Industry currently accounts for sizable portion of the stainless steel market in India. As per the estimates, the total production of Patta-Patti Sector is around 1.1 million tons out of total Stainless Steel production of 2.4 million tons in India. This sector operates on the basis of compounded levy scheme wherein they are exempted from paying excise duty on normal production and are instead subject to a compounded levy of Rs.30,000 per machine per month. Since, this levy is not dependent on production quantity and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value; there is no compulsion on the Patta-Patti units to maintain production records for this purpose. This has resulted in a huge anomaly in Stainless Steel Industry because the organised units face a considerable competitive disadvantage when compared to the Patta -Patti units. The organised sector is subject to 12.36% excise duty whereas the Patta-Patti sector gets away with virtually zero duty. Moreover, even the incidence of compounded levy is considerably diluted because of lack of exhaustive reporting regarding number of operational machines. Moreover, most of these units don't have emission control equipments installed within their premises. It is suggested that the duty structure applicable to Patta - patti units should be reviewed in order to create a level playing field in Stainless Steel Industry. NON-FERROUS METALS Aluminum Industry 3.7.1. Increase in Basic Customs Duty on Aluminium Products from 5% at present to 10% Indian Aluminium industry has been facing pressures from both sides - realizations and costs. Its competitiveness has been threatened. Imports of Aluminium products have been rising sharply. Data from DGCIS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /IBIS shows that average monthly imports of unwrought aluminium into India have increased from around 15,000 tonnes in FY09 to over 20,000 tonnes per month during April-August 2012. The rising imports are happening at a time when the domestic industry has been putting up huge investment projects in the country. To provide a relief to the industry it is requested that the basic customs duty on Aluminium products (Heading Nos. 76.01 to 76.16) may be increased from 5% at present to 10%. 3.7.2. Bringing Customs Duty on Scrap at par with Aluminium For all base metals other than Aluminium, the import duty on scrap in India is same as the duty on the metal. It is only in case of Aluminium that the duty on scrap is Nil, while duty on aluminium products is at 5% at present. In most of the Aluminium downstream products, scrap and primary aluminium can be used almost interchangeably. The differential duty structure seems to be, therefore, leading to a substitution of primary aluminium by scrap - reflected in a sharp rise in imports of scrap (CH 7602). Between FY09 and FY12, import of aluminium waste and scrap has increased at a CAGR of 33%. Scrap imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts are causing an immense harm to the Indian aluminium industry due to market diversion. To prevent the market diversion and adverse implications of rising scrap imports and to bring Aluminium scrap on par with the scrap for other base metals, it is requested that the basic customs duty on Aluminium Scrap (CH 7602) may be raised and brought on par with the duty on Aluminium products. 3.7.3. Imposition of Export Duty on Bauxite India has the sixth largest reserves of bauxite in the world. However, this natural advantage is being negated in the recent years as many alumina refineries (for whom bauxite is the basic raw material) in India are finding it difficult to source bauxite of an appropriate quality. Partly, this has been due to delays in mine clearances and the expansion of alumina refining capacity in India over the recent years. The problem has been further intensified by the export of bauxite from India. China has been adding alumina capacities very aggressively over the last few years, leading to increased demand for imported bauxite. In the recent past, Indonesia - which was a major source of bauxite for China - has imposed restrictions on exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of bauxite. With these developments, exports of bauxite from India have increased sharply. As per DGCIS data, India exported 414 thousand tones of bauxite during Apr-Dec12, which was significantly higher than the export of 101 thousand tones during FY11. Consequently, domestic bauxite availability has become challenging. Some refineries have been forced to curtail production in the recent months due to non-availability of bauxite. Deterioration in quality of bauxite also increases the conversion cost for refineries. Bauxite is India's natural advantage and it does not make economic sense to export it without value addition. This is effectively export of jobs - while endangering the long-term resource security for the domestic aluminium industry that is putting up huge expansion projects. To ensure more value addition within India, it is requested to impose export duty on bauxite - in line with the export duty on iron ore. 3.7.4. Reduction of Excise duty on Aluminum products Due to high price of aluminum products in the country, the consumption of aluminum has been declining steadily during the last 5-6 years. Unless aluminum is made avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable at an affordable price to the common man, other substitutes such as plastic, wood etc. would continue to threaten the environment. Under the circumstances, excise duty on aluminum extrusions be reduced from 12% to 8% in order to encourage the use of aluminum products in day-to-day life. 3.7.5. Exemption from Excise duty on Aluminum Irrigation Pipes and Tubes The price of aluminum metal in India is the highest in the world primarily due to the high customs and central excise duties. The farming community has shifted from aluminum extruded agricultural pipes to the cheaper PVC pipes though aluminum pipes have longer life and high re-sale value. It is requested that agricultural pipes and tubes used for irrigation purposes should be exempted from the levy of excise duty to benefit farmers and contribute to the agricultural production in the country. 3.7.6. Reduction in Duty on Aluminium Fluoride from 7.5% at present to 5% Aluminium Fluoride (AlF3) is a critical input in manufacturing of aluminium. Considering the expansion projects of Aluminium producers in India, the requirement of AlF3 is projected to increase from around 35,000 tonnes at presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to over 87,000 tonnes in the next 3-4 years. As against this, the domestic production was only 13,904 tonnes in FY12. The duty on AlF3 is higher than the present basic customs duty on Aluminium, leading to a situation of inverted duty structure. Considering the inevitability of imports of Aluminium Fluoride in India given the small domestic production base and to address the inverted duty structure, it is requested to reduce basic customs duty on Aluminium Fluoride (CH 2826.3000) from 7.5% at present to 5%. 3.7.7. Reduction in Duty on Coal Tar Pitch from 10% at present to 5% Coal Tar Pitch is another critical raw material for producing anodes which are used in the manufacturing process of Aluminium. To address the inverted duty structure, it is requested to reduce basic customs duty on Coal Tar Pitch (CH 2708.1010) from 10% at present to 5%. Copper Industry 3.7.8. Reduction in Basic Customs Duty on Copper Concentrate from 2.5% at present to NIL The sharp reduction in treatment of refining charges - the key value driver of the industry - along with the continued cost pressures, have affected the viability of the copper smelt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing industry. Over the years, the duty differential between refined copper and copper concentrate has been compressed from 30% at the turn of the century to just 2.5%. At present, the duty on refined copper is 5% while the duty on copper concentrate is 2.5%. This tiny differential, in a conversion business where TCRCs are less than 5% of the turnover, is hardly adequate. It may be also noted that copper concentrate is starting point of the value chain for this strategically important industry, and is not available in India. Type of Pulp UOM Amount Exchange Rate Rs/USD 55.8 LBMA USD/Tz 1660 Refining Charge USD/Tz 4 CIF Value USD/Tz 1656 Rs/Kg 2874113 Assessable Value Rs. 2902854 Customs Duty % 0 Rs. 0 CVD % 10.3 Rs. 298994 Additional Duty % 4 Rs. 128074 Total Duty Implication Rs/K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 427068 To sustain the viability of the custom smelting model in Indian refined copper industry, it is requested to exempt copper concentrate (CH 2603) from basic customs duty. 3.7.9. Exemption of Gold and Silver content in copper concentrate from Countervailing Duty and Additional Customs Duty As per the present duty structure, import of Gold and Silver in pure form or as Dore anode, does not suffer countervailing duty and additional customs duty at the time of import. However, the value of gold and silver content imported through copper concentrate under chapter no 2603 attracts Countervailing duty @10.3% and additional customs duty @4%. These duties are revenue neutral as the same are allowed as credit for set off on a later date. However, there is a financial hardship to the copper smelters as huge money is blocked in the process. At the present market valuation, the duty incidence is as high as Rs. 427,068/ Kg of Gold (ref. table below) It is requested to exempt Gold and Silver content in copper concentrate (CH 2603) from Additional Customs Duty and Countervailing Duty - as a revenue-neutral measure that will ease the financing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... burden for copper industry. 3.7.10. Technical correction in the notification regarding Exemption of Customs duty for import of Gold and Silver content in Copper Concentrate In the Union Budget 2011-12, the Government had exempted gold and silver content in imported copper concentrate (CH 2603) from basic customs duty to encourage production of precious metals through the copper concentrate route. While this was a welcome move, the notification (Notification No. 24/2011) incorporated that the exemption is subject to the condition that the importer produces .. an assay certificate from the mining company specifying separately, the value of gold and silver content in such copper concentrate. It may be mentioned that a significant quantity of copper concentrate is procured from traders or from trading companies of the miners. This trade route has been inadvertently left out of the notification - which needs to be corrected. It is requested to amend the notification regarding exemption of gold and silver content in copper concentrate from basic customs duty so as to make the assay certificate from the supplier of concentrate as an adequate cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition rather than assay certificate from the mining company. This is a technical modification without changing the intent of the condition, and will ease the fulfillment of condition for import of copper concentrate for all existing routes. 3.7.11. Reduction in the Duty on Furnace Oil from 5% at present to NIL Furnace oil is a critical input for Aluminium industry accounting for nearly one-tenth of the input costs. In the recent past, furnace oil prices have been increasing continuously - in a sharp contrast to the generally declining trend in international commodity prices and in aluminium. During FY12, furnace oil prices have increased by more than 40%. This is creating a serious impact on the Aluminium industry, along with the impact on other user industries. Considering the sharp increase in furnace oil prices and the burden thereof, it is requested that the duty on furnace oil may be reduced from 5% at present to NIL. SOLAR ENERGY 3.8.1. Background The policy framework put forth by the Ministry of New and Renewable Energy (MNRE) through the National Solar Mission has accelerated the growth of the solar industry in India. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re are some larger issues before the developers, manufacturers, Engineering, Procurement and Construction (EPC) system integrators and associated solar energy stakeholders in India. While MNRE is taking steps to address the technology and on-ground risk perceptions through knowledge management and sharing, there is a need to provide various fiscal measures to Indian solar industry to enable development of high quality low cost projects and a strong solar manufacturing base to develop India as a hub of solar energy of the world. The FICCI solar energy task force, representing the entire value chain of the solar industry, recommends the following points to be included in the Union Budget 2013-14. 3.8.2. Financing of Solar Energy Projects One of the biggest challenges that Indian solar industry faces, be it project developers, manufacturers or EPC companies, is the availability of funds at competitive interest rates. It is estimated that the difference between the lending rates of Indian banks and that of foreign lenders is around 10%. This difference puts pressure on the solar energy industry resulting in increase in the price of indigenously manufactured solar e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quipment or per unit cost of solar power generation. In addition to non-availability of low cost funds, availability of readily available funds is also a challenge. Low cost funds can provide a competitive edge to the Indian solar value chain. 3.8.3. Bankability-Renewable Energy Sector as an Independent Sector Considering the necessity for setting up projects on renewable energy source especially solar to meet the Jawaharlal Nehru National Solar Mission targets, renewable energy should be treated as a separate sector. This will enable to promote the renewable energy projects as well as establish grid parity. As per the prevalent banking practice, advances to renewable energy sector are accounted in power sector exposure limits. Further the power sector needs to grow to achieve the planned growth at an average debt funding requirement of Rs 2 lakh crores per year in the 12th Five Year Plan (2012-2017). The funds available for power sector will be inadequate to support renewable energy projects included in power sector. This leads to an extra pressure on the manufacturer and developer in obtaining project finance from Indian banks a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s these projects are compared with other conventional sources. Being a nascent technology in India, despite favorable policies and support being provided by the Central government and various State governments, lenders are reluctant to provide financing to solar energy projects. Taking into account the above consideration, there may not be enough headroom for accommodating renewable energy sector under power sector exposure ceiling norms, which will affect the debt funding of renewable energy sector. Thus this necessitates a paradigm shift of banks' treatment of renewable energy sector as a sector different from power sector having separate exposure ceiling norms. It is recommended that Renewable Energy projects should be removed from power sector exposure limit and a separate category for Renewable Energy is created. 3.8.4. Priority Sector lending Considering the environmental and socio-economic benefits and contribution to energy security, Renewable Energy Sector should be given priority sector lending status to promote both grid-connected as well as off-grid projects. 3.8.5. Low Cost Finance In India, the rate of finance is high (13-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4%) in comparison to other countries such as China (3-4%) and Germany (5- 6%). Higher cost of debt financing for solar project development or manufacturing has been a deterrent in its growth and makes them vulnerable to foreign lenders' terms and conditions. The debt from the foreign institutions come along with riders and force developers to accede to their terms and conditions. It is suggested that the following steps be taken to make financing attractive for solar projects in India:- (a) To create a separate low cost fund. The financing of projects through separate low cost finance would not only help in reducing the solar power tariff but will also help in eliminating subsidy over time. Low cost funds will also allow developers to choose their suppliers and thus provide a competitive platform for Indian solar manufacturers to compete with global counterparts. Low cost finance should be made available to manufacturers of solar power equipment as well. (b) The solar energy sector should also be supported through interest subsidy on the loans and this subsidy could be provided through the National Clean Energy Fund. (c) The solar energy sector needs to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve access to long term External Commercial Borrowings (ECBs) at reduced rates. Government intervention is needed to work with banks to create a hedging mechanism. The industry at present is paying around 5% to hedge foreign exchange risk resulting in additional burden on the cost of the project. Government and banking sector should work towards developing solutions for hedging. One example could be to take care of foreign exchange risk by allocating 1% of foreign exchange reserve towards hedging foreign exchange risks associated with the solar energy sector. This would bring down the cost of solar power from current Rs8-9 to Rs 7-8. 3.8.6. Payment Security Though the Central government has provided Gross Budgetary Support of Rs. 486 crores towards payment security mechanism, lenders are still wary about off-taker risk in the event of default including the payment capability of state electricity boards (SEBs)/Discoms due to their weak financial health. While considering debt restructuring of discoms, it is requested that debt restructuring be done with the conditionality of improving Transmission and Distribution losses and directive be given to the concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d authorities for making reasonable tariff revisions annually. Considering the technological limitations of the renewable energy sector, a clause for time bound payment may also be provided to ensure payment security to this sector. 3.8.7. Tax holidays Solar industry being an industry with strategic significance for not only energy security but also for improving energy access requires economic and financial support from the government. A long term tax holiday should be extended to Solar Energy Projects to act as a catalyst for the growth and development of the sector. The following recommendations may be considered:- (a) Tax holiday of 10 years on solar power projects should be announced under section 80 I(A) of Income Tax act. (b) For taking benefits under Section 80 (I) (A), the projects are required to be completed within the same financial year. Every year the Government extends it for one more year. Therefore, it effectively leaves less than a year for an entity to complete the project to avail these benefits. It turns out to be uncertain for the developers who wish to venture into a long term project. It is suggested to extend cuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff date for availing the benefits under Section 80IA till year 2017 (end of 12th Plan) to give a boost to grid connected solar PV projects in the country. (c) To promote development of solar energy projects, companies engaged in the business of generating power from grid connected solar PV projects should be exempted from payment of Minimum Alternate Tax under Section 115JB of the Income Tax Act. (d) The investments made in solar photovoltaic and solar thermal manufacturing should be given accelerated depreciation to claim IT benefits as given to the power plants that use the solar panels. The rates of depreciation under Income Tax Act for solar power generating systems, solar modules and flat plate collector are 80%, but there is no provision for manufacturing companies involved in solar market. 80% depreciation should be provided to the manufacturing companies and 100% depreciation benefits should be extended to companies installing large MW scale solar systems. (e) Manufacturing cost of the indigenously manufactured solar equipments increases due to Customs and Excise duties on some of the raw materials used by Solar Photovoltaic industry. It is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggested to remove or reduce the raw material used in the manufacturing of solar photovoltaic cells and modules. On raw materials used by multiple industries, an end use certificate may be mandated to avail such benefits by the photovoltaic manufacturing sector. (f) As Government of India is trying to promote Solar Energy, growth of domestic industry will be very critical to meet the objectives and success of JNNSM. All forms of tax including CST, VAT service tax etc should be waived off on the equipments and machinery used in grid connected and off grid solar energy projects and on input services for a period of five years specifically during the entire 12th five year plan period. 3.8.8. Provision of Incentive in Personal Income Tax for Implementation of a Solar Energy System Provide incentives on the Personal Income Tax payable by individuals who are implementing Solar Photovoltaic or solar thermal systems for domestic use by either procuring Solar Products such as Lanterns, Solar Water Pumps etc or implementing solar installations such as Solar Rooftop System, Solar Home Lighting etc. Individuals can have the option of availing either the subsidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the deduction of interest on loan from income as it is done in case of housing loan. USA and Netherlands have such schemes available wherein the tax payer (individual) can either claim subsidy or tax incentive for implementing and/or purchase of solar products/ installations. This would help in promoting solar energy applications across the country. 3.8.9. Technology Up-gradation Schemes for Solar Manufacturing and the Supply Chain A special incentive package to upgrade the facilities for substituting costly raw materials with cost effective raw materials should be introduced. This will help the industry to tide over the constant technology up gradation that is taking place in the photovoltaic and solar thermal industry and remain cost competitive and avoid obsolescence. Grants to the tune of 25% of investment should be provided to local manufacturing industry for up gradation of unit to overcome obsolescence. OIL AND GAS 3.9.1. Tax Holiday for Exploration and Production activities relating to Natural Gas including Coal Bed Methane To avoid uncertainty, it is important Government should clarify that for the availability of tax ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liday, the definition of 'mineral oil' includes natural gas retrospectively irrespective of the NELP round and that the benefit would also be available to Coal Bed Methane. In other words, it should be explicitly provided that the term 'Mineral Oil' will include Natural Gas, including to CBM for all past and future rounds of production of Natural Gas. 3.9.2. Scope of Undertaking for the purposes of tax holiday The limitation of the tax holiday for oil gas to a single undertaking based on a single PSC is regressive and inconsistent with the construct of tax holidays for other sectors. This should be amended to define an 'undertaking' (consistent with the judicial decisions) that each distinct field development evidenced by a separate development plan should be an undertaking eligible for the tax holiday. This is all the more important as the amendment has been made retrospectively and declaring each block as a single undertaking, that too with retrospective effect, will adversely affect the profitability of operators. 3.9.3. Extension of benefit under section 80-IB(9) from 7 years to 10 years Extend the benefit under section 80-IB(9) of the Income Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from 7 years to 10 years to companies engaged in production of mineral oil and natural gas. It may further be provided that benefit under section 80-IB(9) of the Act shall not be restricted only to blocks licensed under a contract awarded till March 31, 2011 and the period March 31, 2011 be extended till March 31, 2017. 3.9.4. Section 80-IA be amended to include exploration and refining activities Definition of infrastructure sector in the explanation to Section 80-IA of the Income Tax Act should be amended to include exploration and refining activities. Accordingly, exploration and refining undertaking may be allowed deduction for 10 consecutive assessment years as against 7 years at present out of 15 years period. 3.9.5. Deduction of expenditure covered under section 42 of the Act It would be appropriate to provide a suitable encouraging weighted deduction of say, 150% of the actual expenses incurred by the assessee, in respect of drilling and exploration activities etc. covered under section 42 of the Act. The benefit of infructuous or abortive expenditure should be given in the year of incurrence of expenditure without any condition of surrende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of block as mentioned in section 42(1)(a) of the Act. The Ministry of Finance in consultation with the Ministry of Petroleum Natural Gas should amend all PSCs in respect of Exploratory Blocks to provide that the allowances specified in the PSCs with respect to section 42 of the Income Tax Act would apply in addition to the allowances provided under the Income Tax Act under other provisions while computing income tax payable by a Contracting Party under the PSC. 3.9.6. Extension of period under Section 80 IB (9) for refining projects As the completion of various refinery projects is likely to get delayed, it would be appropriate that the validity of the deduction be extended from 31.03.2012 to 31.03.2015 in order to ensure that the intended benefit of deduction is availed for the said projects. 3.9.7. Allow set off loss under section 35AD against profits of any other business Under section 35AD of Income Tax Act, 100% deduction in respect of capital expenditure incurred (other than land, goodwill and financial instrument) prior to commencement of operation of the specified business to the assessee engaged in laying operating a cross-country Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural Gas/Crude/Petroleum pipeline network for distribution is allowed. Section 70 provides that in case of loss under any head of income (other than Capital gains), assessee is entitled to set off such loss from any other source of income under the same head. Therefore loss from one business can be set off from profits of other businesses. However section 73A provides that loss computed under section 35AD will be set off only against profits gains of Specified Business and Specified Business inter-alia includes business of laying and operating a cross-country natural gas (laid after 01.04.2007) or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. This restricts the claim for adjustment of loss from profits of other income which is allowed otherwise in all other cases. This discrimination needs to be removed In the initial 3 to 4 years there may be no profit in Specified Business of an assessee. Therefore section 73A appears to be restrictive and unfair to the assessee. It is suggested to allow set off of loss under section 35AD against profits of any other business carried on by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3.9.8. Exemption for various services provided to Exploration Production (E P) c ompanies Oil and Gas exploration production is a capital intensive industry. The capital expenditure is very significant given the nature of business. Goods required by E P Companies are exempt from customs / excise duties, however, various services availed by the E P Companies are subject to the levy of a service tax. The service tax so paid is a cost to the operator, since excise duty on production of oil and gas products is wholly exempted. This levy of service tax thus increases the cost of exploration activities and reduces the funds available for exploration. The recent introduction of Negative List based taxation of services has further increased the service tax burden. Since exploration is a non-revenue generating activity, special incentives should be offered to encourage exploration initiatives in the country. Accordingly, services provided to companies engaged in Exploration and Production of oil and gas should be exempted from service tax. On the same analogy, various services imported by the E P companies could be considered for exemption. Such servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es should be included in the negative list of services. 3.9.9. Customs Duty Exemption for all items required for Oil and Gas Exploration Currently, Sr.No.356 of notification No. 12/2012-Customs dated 17.03.2012 exempts all items covered by List 13 when imported for petroleum operations. While the notification obviously intends to cover all items critical to carry out the petroleum operations , which would include not only the items required for drilling but also the extraction of the oil and gas using equipments such as compressors, pumps, processing and refrigerating equipments, etc. some of these equipments may also be installed in an on- shore terminal and yet essential for the completion of the petroleum operation. S. No. 9 of the list 13 currently covers only items required for production, processing and well platforms. Therefore, items required for petroleum operations and installed on-shore should be specifically covered in List 13. It is requested that the entries against S.No.9 of List 13 of Notification No.12/2012-Cus dated 17-03-2012 may be replaced as follows: - Subsea/Floating /Fixed Process, Production and well platforms and onsho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re facilities for storage/production/processing of oil, gas and water injection including items forming part of the platforms/onshore facilities and equipment/raw materials required like process equipment, turbines, pumps generations, compressors, prime movers water makers, filters and filtering equipment, all types of instrumentation items, control systems, electrical equipments/items, oil improvement, construction equipment, telemetry, telecommunication, tele-control security, access control and other material required for petroleum operations". 3.9.10. Customs exemption to Rig imported for Oil Gas Exploration Currently goods specified in List 13 of notification No.12/2012-Customs dated 17-03-2012 required in connection with petroleum operations undertaken by ONGC and Oil India Limited (OIL) are exempted under Sr.No.356 when imported by ONGC/OIL or the contractor of ONGC/OIL. However, in some cases, the contractor may engage a subcontractor to execute some of the work for ONGC/OIL. Since imports by the sub-contractor are not explicitly covered in the notification (condition 41 of the notification) there may be some objection in extending this exemption to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sub-contractors though the goods are intended for the notified purpose. It is accordingly requested that the condition 41 of customs notification No.12/2012 dated 17-03-2012 may be amended to permit import of the goods either by ONGC/ OIL or contractor of ONGC/ OIL or a sub- contractor of such contractor subject to fulfilment of the prescribed conditions. 3.9.11. Exemption for onshore Exploration and Production (E P) activities An exemption has been provided to the parts and raw materials for manufacture of goods to be supplied in connection with the purposes of offshore oil exploration or exploitation. Under the above exemption similar benefits are not provided in relation to the petroleum operation carried out onshore. This structure was introduced when petroleum operations were at a nascent stage in India. However, the recent onshore discoveries have highlighted the fact that such an opportunity also exists onshore and benefit should thus not be restricted to the offshore areas alone. It is requested that the benefits extended to the offshore oil exploration activities (Sl. No, 357 of the customs Notification no. 12/2012) should also be exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to the onshore oil exploration activities to provide the operators a level playing field. 3.9.12. Levy of Service Tax on Transmission Charges Included in Sale Price of Gas Presently, Natural gas is sold to the customer including transportation to customer's premises as a bundled activity. The transmission charges form part of Sale price and VAT is being paid on the component of transportation charges (forming part of sale price). Accordingly, service tax should therefore not be chargeable on the component of transmission charges. However, service tax on the component of transmission charges is being demanded by local officers resulting in double taxation. As there has been huge litigation in past over taxability on certain services which are as such part of supply of goods or treated as supply of goods under various state statutes thereby resulting in double taxation of both VAT and service tax on the same value which could never be the intention of the government. It is suggested that CBEC may like to consider and issue a suitable clarification that service tax will not be payable on any activity associated with transaction of sale where the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mponent of value relatable to such activity forms part of total sale price and attracts VAT/CST under CST/VAST laws. Alternatively, any activity integrally connected with transaction of sale wherein the component of value relatable to such activity forms part of sale price under CST/VAST laws may be added in the exclusions to the definition of 'service' under sub-section (44) of the new section 65B. 3.9.13. Exemption to LNG from customs duty for use in power sector Liquefied Natural Gas (LNG) and Natural Gas (NG) imported for generation of power have been exempted from Customs duties vide notification No 12/2012- Cus Dated 17.03.2012.It may be appreciated that the above exemption may not result in any real benefit to power generating companies as it stipulates a very harsh condition requiring them to import LNG/NG directly. R-LNG/Natural Gas is supplied to power generating companies by pipeline companies like GAIL, GSPC etc. as per their requirement which varies from time to time. The Power generating companies normally do not have a requirement of the size that they can import a full cargo on their own. Further, power companies do not have storag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facilities in their plant where surplus RLNG/NG could be used at a later date for generation of power/electrical energy. The above exemption in present form is ineffective and inadequate for power sector. In view of above, it is suggested that the custom duty exemption to LNG/Natural Gas may be granted on imports made by any person subject to its 'end-use' for generation of power with suitable safeguards. 3.9.14. Other Import duty exemption on LNG should be extended to all sectors not just power, aligning it with crude petroleum. Swapping of gas should not attract taxes of any kind, if the swaps are made through the Ministry of Petroleum and Natural Gas as a part of the policy measure. ENVIRONMENT SECTOR Following proposals may be considered for improving the environment:- 3.10.1. National Clean Energy Fund 1. Develop an effective and efficient funds utilization framework, enabling commercial banks to lend to and invest in Renewable Energy, Energy Efficiency Water management/recycling projects. 2. Incentivizing commercial banks to develop and launch fund raising instruments of their own for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of easing/facilitating environmental project financing. 3.10.2. Municipal Services (Solid Waste and others) 1. Decentralized segregation and organic waste processing should be incentivized. This could be done through penalties for noncompliance and incentives through municipality purchasing compost at rates attractive to organic waste processers. 2. Collection and Transportation of Municipal Solid Waste (MSW) Grant should be provided for Solid Waste Equipment like Mini Tippers, Refuse Compactors, Tipper Trucks, Garbage Bins, Garbage Containers, Power Sweeping Machines, Hook Loaders-Bulk Transportation, Garbage Compaction Units, as all solid waste management concessionaires have to purchase or import some of them as well due to lack of a quality product in India. They should be given the status of pollution control equipment when they are imported/ purchased against a work order under MSW Rules 2000 and duties should be levied at concessional rate / nil rates. Activities related to management of Solid Waste should be exempted from Service Tax (by adding it to the negative list of the Services) Provision of support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the budget for recycling and process outputs (output based) which will ensure better Operations and Maintenance of existing processing facilities 3.10.3. Incentives for Processing of Municipal Solid Wastes 100 % depreciation in the first year for investment in wastewater recycling, waste recycling, green belt, E-waste processing plant, advanced pollution control technologies such as flue gas de-sulphurisation, advanced wastewater treatment such as MBR, ozone treatment, etc; Exemption of VAT for manufacturers and custom duty exemption for importers of advanced pollution control equipments/systems [like flue gas de-sulphurisation, advanced wastewater treatment such as MBR, ozone treatment, environmental monitoring instruments for air quality, stack emission, noise monitoring, water quality, composting process control, compost quality monitoring, etc]; and Service tax exemptions for Operation and Maintenance of centralized / common wastewater / industrial effluent treatment plant, MSW sanitary landfill facilities, E-waste processing facilities transport of industrial waste, E-waste, other wastes, etc to authorized treatment, recyclin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g or disposal sites. There should be enablers for recycling waste through reasonable gate fees for units that would recycle plastics, paper/cardboard, metals, etc. Composting of Municipal Solid Waste: Marketing support of Rs. 2320 per ton of Fertilizer Control Order (FCO) compliant city compost in order to provide compost to the farmers at an affordable price and enhance organic Carbon in the soil to improve productivity. 100% of the compost produced through treatment of municipal solid waste should be purchased by the Urban Local Bodies subject to meeting the quality norms. The purchase price of the compost should recover full costs like the fixed costs and variable costs including the predetermined profit margins for the developer/operating agencies. 50% of the purchase costs should be borne by the central government for a period of ten years while the remaining 50% of the purchase costs should be borne by the state government. The municipal finances in India are in precarious state. The tipping fee in India is very low compared to the rates in other parts of the world. The Municipal Solid Waste Management industry serves a huge populatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n base and helps in pollution control - both air and water. Therefore, on the grounds of non- availability of indigenous products in India, the industry seeks a reduction in customs tariff if the equipment is used for projects under MSW Rules 2000. Also duty concessions and exemptions should be given to cement industry on Waste Heat Recovery systems and Alternative Fuel and Raw Material Feeding systems. Construction Demolition (C D) waste management projects: Excise duty exemption for inputs and products made from recycled C D waste (such as the precast products like kerb stones, pavement blocks and tiles made from the processing of Construction Demolition waste). Waste to Energy: Electricity tariff support for Waste to Energy projects at Rs. 8/KWH similar to Solar power. These output oriented supports will greatly help in ensuring processing of municipal waste which in turn will reduce the indiscriminate dumping of waste. 3.10.4. Sewage Treatment 100% of the bulk treated water should be purchased by the Urban Local Bodies subject to meeting the quality norms. The purchase price should ensure full cost recovery including the prede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined profit margins for the developer/operating agencies. Union Government should give 25% subsidy on the capital costs and also give viability of funding for sustained operations. Provision is requested in the Union Budget 2013-14 for financial aid in terms of 50% subsidy, for manufacturing industries for development of effluent treatment facility by which zero liquid discharge status can be achieved in line with the concept of 4Rs (Reduce, Recover, Reuse and Recycle). This will be helpful not only in protecting the environment but also saving scarce valuable natural resource - water. 3.10.5. Carbon Revenues To motivate the Corporate Sector to engage further in green house gas (GHG) emissions reduction projects, income derived from sale of Certified Emission Reductions (CERs) should be exempted from income tax. It should be treated as Capital Receipt and not charged to Tax, since CERs are generated from huge investment in capital intensive projects with low return on investment. Moreover, CDM projects receive CERs after deduction of 2% by UNFCCC as Adaptation fund and another 2% needs to be committed for CSR activities. CERs are export pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts which are sold to developed countries to meet their emissions reduction targets and are of no use in the Indian market. Therefore these carbon credits may be treated accordingly as Export products and accorded similar benefits. 3.10.6. Incentives to promote green environment Country is facing serious problem on deteriorating environment and it is seen that approximately 30% of municipal waste comprises of different kinds of packaging waste like plastic, metal, glass, paper etc. which are being used by different segments of the industry. In order to encourage the user industry to use and promote more and more packaging materials which are environment friendly and recyclable, the Government should announce schemes to provide incentives either in the shape of refund of indirect taxes, providing subsidies or Income tax exemption and also concessional import duties for Capital Goods used to manufacture such packaging materials. 3.10.7. Energy Efficiency 1. Financial incentives should be extended to Demand Side Management (DSM) projects, particularly for Municipal, Hospital, Infrastructure (i.e. Transportation, Water, etc.). Incentives may be in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm of inclusion in PAT mechanism, Interest Subsidy, etc. 2. Subsidy/grants should be given for preparation of Detailed Energy Audits and Investment Grade energy Audits. 3. DISCOMS, TRANSCOS and ESCOs may be provided with tax incentives to promote investments in Energy Efficiency programs. 3.10.8. Particulate Emissions (burning of agricultural residues in fields) Straw baling units should be financed at concessional rates (perhaps similar to farm loans) as there should be enablers for establishment of Biomass Briquetting units, which would pay for receipt of agricultural residues and thus ensure that farmers do not economically suffer for collection/transporting agricultural residues instead of burning them on the fields. CHEMICALS AND PETROCHEMICALS 3.11.1 Duties on Petrochemical inputs, polymers and articles of plastics The Petrochemical industry in India is passing through a difficult phase due to adverse fiscal and policy environment. Demand growth has decelerated and reached a low of 3% during 2011-12. No major investment is forthcoming. It is expected that demand will pick-up in future, benefits of such growth would accrue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overseas producers in the absence of supportive policy environment for local investment. Some of the fiscal issues that need attention for growth of Indian petrochemical industry are detailed below with recommendations to address these: 1. Import duty on Polymers like Polyethylene, Polypropylene, Poly Vinyl Chloride and Polystyrene at 5% in India is one of the lowest in the world. This is even lower than those prevailing in developed nations like USA, EU and Japan. In most of these countries, including China, the duty level is 6.5% and above. 2. On the other hand we have high duty on inputs resulting in nil to very little duty spread between polymers and their feedstock. Import duty on naphtha at 5%, reformate (10%), propane (5%), butane (5%) and intermediates like ethylene (5%), propylene (5%), EDC (2.5%), VCM (2.5%) and styrene (2.5%) have made local production unviable. Some of the feedstock like EDC, VCM and styrene are also not produced locally for domestic sale. 3. Due to FTA with Singapore, which is a large exporter of Polymers (PE, PP PS), duty on import of Polymers has further come down to 2.3% when imported from there. This duty would shor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly come down to 0%. This has resulted in an inverted duty of -2.7% now to -5% eventually between Polymers and Ethylene, Propylene as well as naphtha. 4. Reformate obtained from refinery operations, which is a major input for the aromatic production, attracts 10% import duty. The primary downstream petrochemicals from reformate, Paraxylene, has 0% import duty making it one of the worst case of inverted duty. 5. Petrochemical industry is capital intensive. Countries we compete with have higher spreads between import duty on Polymers and their feedstock. Middle East has added advantage of extremely low feedstock cost. 6. As a result, the petrochemical industry is in financial difficulty with very poor margins. If not corrected urgently, there would be very little local investment and the industry will become highly import dependent. There is already large imports and huge outflow of foreign exchange. 7. Also, in view of very low duty differential, the polymer producers are unable to offset the SAD paid on feedstock imports, leading to large accumulation. This is further impacting on the already low margin spread available for local producers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In order to create a level playing field for domestic producers that encourage investment and employment in the industry it is requested that: 1. Import duty on petrochemical inputs like naphtha, reformate, propane, butane, ethylene, propylene, EDC, VCM and styrene may be brought down to zero. It may be highlighted here that there is very little production of many of these items like EDC, VCM and styrene for merchant sale within the country and whatever capacity exists is essentially for captive use. 2. Import duty on polymers like PE, PP, PVC and PS may be increased from 5% to 7.5% so as to provide a reasonable duty spread and make local investment viable. This will also bring Indian duty structure closer to developed economies. 3. Increase import duty on articles of plastics to a higher level or fix a minimum assessable value with import duty at the new level to arrest undervalued imports. 4. Excise duty on plastic raw materials and plastic products be reduced from 12% to 8%. 5. In order to address the issue of unutilized SAD credit, it is submitted that SAD may be waived on imports of feedstock and import of monomers by end-use ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturers. If this is not feasible, then we would request for a facility for end use manufacturers to either adjust the SAD against the basic customs duty payable on imports or obtain refund of such credit balance. 3.11.2 Anomaly arising due to occurrence of Inverted Duty Structure in the chemicals and petrochemicals industry Incidence of Inverted Duty faced by the petrochemicals industry and details of current duties on finished, intermediary and raw materials in the value chain relating to Reformate is given below:- [i] Reformate is used for blending with gasoline and; Naphtha and Propane are feedstock for polymer. While these basic inputs have relatively high level of import duty, duty on downstream products has been one of the lowest in the world. Reformate is used for blending with gasoline. While the import duty on Reformate (HS code 27075000 or 27101219) is 10% or 5% depending on the classification; the duty on its downstream product, Motor Spirit is 2.5%. Reformate is obtained on processing of naphtha at the refinery and is a blend stock for Motor Spirit. As shown in the flowchart below, a major case of inverted duty structu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is experienced in Reformate. Crude 0% Naphtha 5% Reformate 10% / 5% Motor Spirit 2.5% [ii] Naphtha and Propane Naphtha (HS Code 27101190) and Propane (HS Code 27111200) are primary feedstock for olefins. Cracking Naphtha and Propane in a petrochemical plant produces building blocks like Ethylene (HS Code 29012100), Propylene (HS Code 29012200) and downstream chemicals like EDC/Ethylene Dichloride (HS Code 29031500), VCM/Vinyl Chloride Monomer (HS Code 29032100) and Styrene (HS Code 29025000). While Naphtha and Propane attract import duty of 5% for petrochemical production, duties on downstream products are lower. As shown in the flowchart below, EDC, VCM and Styrene have import duty of 2.5% resulting in an inverted duty structure. Crude 0% Naphtha 5% Ethylene 5% PE Singapore 2.3% Propane 5% Propylene 5% EDC 5% to VCM 2.5% Other Co- products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EB to Syyrene 2.5% The incidence of inverted duty on the imports of Polyethylene (PE) and Polypropylene (PP) would get magnified due to the India-Singapore Comprehensive Economic Cooperation Agreement (CECA). Ethylene and Propylene obtained from Naphtha and Propane and are predominantly used for making Polyethylene (PE) and Polypropylene (PP). While the normal rate of duty on PE and PP is 5%, import from Singapore under the CECA attracts concessional rate of 2.3% duty. Since the duty on PE and PP would eventually come down to zero under the CECA, the degree of irregularity in the duty structure would further widen. [iii] Ethanol Nonyl Phenol The table below clearly demonstrates that the import duty on raw materials is more than the import duty on finished products. This makes domestically manufactured products from imported raw material least competitive as compared to importing the finished product directly. It is suggested to reduce the import duty on raw material to the level that its impact on the finished product produced locally is less than the duty impact on imported finished product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence promote local manufacturing. Sl.No Feed Stock Import Duty (%) Finished Product Import Duty (%) 1. Ethanol CTH-22071090 7.50% MONO ETHYLENE GLYCOLS 290553100 5% 2. Nonyl Phenol CTH-29071300 7.5+ antidumping duty NONYL PHENOL THOXYLATES 34042000 7.50% In order to address the concerns of the chemical and petrochemicals industry, the existing anomaly faced arising out of such inverted duty structure may be removed. 3.11.3 Antimony Trioxide and Antimony Metal. It is recommended to have a 5% differential between the Antimony Metal and Antimony Trioxide duties. Presently it is 2.5% (On Antimony 7.5% and on Antimony metal it is 5%). 3.11.4 Pesticides Pesticides (medicines for plants) are an important ingredient for agriculture sector along with good seeds and fertilizers. They need similar treatment for the levy of excise duty, as the fertilizer sector. The excise duty on pesticides of heading 3808 50 00 and 3808 91 11 to 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 808 99 90 needs to be same as that on fertilizers. SHIPPING AND PORTS 3.12.1. Income from transfer of qualifying asset and income from deployment of reserves be treated as income from 'core activity' Any profits or gains arising from transfer of a qualifying asset are chargeable to income-tax as capital gains. Such profits, being not considered as 'core shipping income' are also subjected to MAT. This results in double taxation of the same income. Book profit on sale of qualifying assets should be treated as 'core shipping income' and should be excluded from book profits while computing MAT liability. In order to utilize the reserve account for the purpose of acquisition of ships, Indian tonnage tax companies need to maintain adequate cash. Income generated through deployment of such cash in short term investments till the time statutory reserves are utilized for acquisition of ships is not being considered as income from 'core activity'. The reserves are created as per the requirement under the Act and is out of core and incidental activities of the tonnage tax company and it is therefore, recommended that aforesaid income should be treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as income from core activity of a tonnage tax company and should be subjected to tax accordingly. 3.12.2. Other Direct tax Suggestions Port projects should be completely exempt from MAT and from payment of Dividend Distribution Tax. In respect of revenue share or royalty or wharfage or any other revenue payable to the Port Authority, 150% deduction shall be permitted. 3.12.3. Granting of Infrastructure Status to Shipping Industry The Indian shipping industry fulfills the characteristics of infrastructure as mentioned in the harmonized Master List of infrastructure sub-sectors. Granting infrastructure status would mean reduced cost of borrowings to buy technologically advanced and environment friendly ships leading to increased trade volumes resulting in higher employment and higher foreign exchange earnings/ savings. As one of the steps to rationalize, strengthen and provide environment conducive to the growth of Indian shipping sector, it is requested that 'infrastructure' status be granted to 'ships and other vessels' as defined under the Merchant Shipping Act, 1958. 3.12.4. Creation of a 'shipping modernization fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d' for growth of Indian flag shipping Shipping, being capital intensive, requires huge funds for financing ship acquisitions depending upon the market conditions. Funds are mobilized largely through external commercial borrowings and internal generations. In the current depressed shipping scenario, it is uncertain as to how the shipping companies will be able to source the equity and debt requirement for acquisition of ships. As the shipping industry is in substantial need of funds for acquiring tonnage, it is essential that the Govt. of India set up a fund to support the national fleet, thereby enabling access to funds. 3.12.5. Exemption for import of equipment for port projects Considering importance of modern equipment based on latest technology for efficient port operations, customs duty for import of port equipment should be waived off. 3.12.6. Customs duty on foreign going vessels Foreign going vessels are exempted from customs duty vide entry no 462 of the Table to the Notification 12/2012-Customs dated 17 March 2012 subject to fulfillment of condition 82 of the said Notification. Earlier to this exemption foreign going vessels were exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted from CVD provided the vessels had a global trading general licence under section 406 of the Merchant Shipping Act, 1958. With effect from 17 March 2012, CVD is payable on conversion of foreign going vessels to coastal vessels as follows: - full lease or contract value, if the import is under a lease agreement or contract - 1/120th of the applicable duty, for each month or part thereof, of stay in India as coastal vessel Most international jurisdictions (e.g., European Union, and Canada) do not apply CVD (or equivalent duties) on vessels used in international transportation business. Even where the tax applies to vessels used in domestic freight, the tax is fully credited (with a refund for any excess credits) within a few days of the payment, with no net impact except for a temporary negative cash flow. The amendment would result in customs duty payment every time the vessel is imported into India and converted to coastal run. There would be a significant compliance burden in having to pay tax on every conversion, determination of the value for tax, determination of the time period of coastal use, and making adjustments if the anticipated coastal use differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from the actual. There would be no revenue gain to the Government as theoretically the tax paid on conversion is fully creditable against the output tax on coastal freight. It is accordingly requested that customs duty should be exempted on vessels used in international commercial transportation business. 3.12.7. Withdrawal of excise duty on ships and other vessels With effect from 1 March 2011, excise duty has been introduced on various types of ships covered under chapters 8901, 8904, 8905 and 8906 9000 at 2% (increased from 1% to 2% with effect from 17 March 2012) if no CENVAT credit is taken of taxes and duties paid on inputs and input services and 6% in other cases (increased from 5% to 6% with effect from 17 March 2012). The new levy has created an additional burden to Indian ship yards and adversely affected their competitiveness In order to encourage the ship building industry, it is requested that excise duty exemption be granted to ships and other vessels falling under chapters 8901, 8904, 8905 and 8906 9000 as was available prior to 1 March 2011. POWER 3.13.1. Import of power under OGL (Open General Licence) Import of power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be under OGL to tap power generation potential in neighbouring countries. The current nil import duty on power imported from Nepal should be continued over the duration of the Power Purchased Agreement (PPA). Cross border transmission links should also be developed. 3.13.2. Mega Power Policy At present Mega power policy directive is to tie-up power within 3 years from date of issuance of Provisional Mega certificate. Mega Power policy stipulates up to 85% power tie-up under Power Purchase Agreement. Changes in this norm are essential on account of uncertainties in coal supply. Under the Mega power policy, timeline for tie up of power should be three years from the commencement of coal supply under Fuel Supply Agreements (FSA) instead of 3 years from date of issuance of Provisional Mega certificate. Further, extent of power capacity tie-up should be limited to domestic coal linkage, not 85% presently prevailing. 3.13.3. Financial incentives for Hydro power projects In order to promote development of clean energy, energy security should be improved and challenges faced by fossil fuel based plants mitigated. Project cost reducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on should be encouraged by extending benefits to the Construction equipment and material. State Governments should provide exemptions from local duties. 3.13.4. Lending capacity of banks to power sector Power sector is important and needs massive financing requirements. Many public sector banks have reached their lending limits. This sectoral lending limit of the banks should be relaxed to facilitate fresh lending and Power sector should be included in priority sector lending. Financing of operational projects by IIFCL should be taken out or such other agencies should be encouraged to create more lending capacity for banks. 3.13.5. Encouraging Insurance Company Investments in power sector Under the existing IRDA guidelines insurance company investments flow mostly to State owned institutions. Allowing insurance company investment to Power sector will enhance market liquidity. The credit rating for investment in debt paper should be reduced. Insurance companies should be encouraged to invest outside public-sector entities, specifically in power sector. 3.13.6. Reduction of Macroeconomic risks Macroeconomic risks arising out of adverse interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate and exchange rate movements need to be reduced. The large macro-economic shocks cannot be borne by projects supplying through long-term 25 year contracts. Long term base rate to be introduced for infrastructure projects which should be delinked from bank base rates in order to provide stable interest charges for projects. The base lending rates of institutions like Power Finance Corporation (PFC) may be used for domestic debt. RBI should facilitate creation of a fund to hedge against short term interest rate fluctuations maintain the long term rate. Exchange rate variations should also be permitted for ECB/ECA debt. 3.13.7. Extension of Tax Holiday for Power sector Under section 80IA, an undertaking is eligible for tax holiday only if it begins to generate power by 31.03.2013. There is an immediate need to augment electricity generation capacity in the country. Industry has to invest large capital in setting up of power plants to ensure uninterrupted power supply. This sunset clause under section 80IA for power plants needs to be amended to extend the tax holiday for another period of five years. In other words undertaking which beings generation of powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by 31st March 2017 should be eligible for tax holiday. 3.13.8. Exemption from Dividend Distribution Tax for SPVs In view of the re-investment needs by the holding company in the power sector, Dividend Distribution Tax should be levied only at the ultimate parent company level and SPVs be exempted from the DDT. 3.13.9. Other Tax benefits for Power sector The following recommendations are also submitted for consideration:- Removal of MAT and DDT for SEZ Units Service tax exemption to infrastructure projects in the power sector, on the lines of the benefits available for projects in other infrastructure sectors such as roads, railways and airports. This would reduce the cost of Power Generation, as Power Generation Companies are not entitled to credits on tax paid on procurements. Removal of withholding tax on External Commercial Borrowings of Infra companies especially Power companies. Issuance of a clarification whether Electricity is goods or not for purposes of claiming Additional Depreciation. It is urged that the initial depreciation of 20% be allowed in full in the first year as an incentive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for investments irrespective of the number of days of use. EDUCATION 3.14.1 Infrastructure Status for higher education sector To infuse more capital in the sector, grant 'infrastructure status' to higher education in order to allow legal and tax treatment similar to other infrastructure projects. 3.14.2 Establishment of educational institutions as section 25 companies Allowing all types of institutions to be established as Section 25 companies and permission to convert the existing trusts and societies to Section 25 companies. This will be a positive step forward to attract private sector to invest in the sector. Currently, government is allowing only technical institutions to be set up though Section 25 Companies. 3.14.3 Setting up of National Higher Education Finance Corporation (NHEFC) Top priority to be accorded to the setting up of National Higher Education Finance Corporation (NHEFC) in the 12th Five Year Plan for creating alternative avenues of revenue generation for higher educational institutions/universities. NHEFC is an initiative by the Government aimed at fee rationalization, student financing and education financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng mechanism for the higher educational institutions. It provides loans at concessional rates of interest to agencies for establishment of institutions in educationally backward areas. 3.14.4 National Mission for Faculty Development Shortage of adequately trained faculty is the biggest challenge to the growth of higher education. About 25% of Faculty positions in Universities remain vacant while 24% of faculty in universities and 57% in colleges are without PhD degrees. There is a need to promote specific scheme for skill development of university teachers and for the day to day academic and research activity. Tax relief to the tune of 50% should be provided to Universities /HEIs which spend on the capacity development and training of their staff. Allocate grants/funds to Universities/organizations/industry associations focusing on faculty development programmes. 3.14.5 Income Tax Exemptions Given that India needs skilled personnel for global requirements, Government should make a provision that: Any person enrolling for a Skills Certification course be eligible for a 20% tax rebate (only applicable for the tuitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fee amount) Any Educational Service Provider opening a Skills Centre in a backward area should be given an incentive like exemption from income tax for a period of 5 years. Establishment of the proposed Education Finance Corporation for easy access to loans. Parents or Students allowed to open education specific accounts/purchase bonds where earnings /growth of investments inside the account accumulate without being taxed. Withdrawal should be tax free as long as it is used for specified higher education expenses. CIVIL AVIATION 3.15.1. Exemption from Custom Duty for X-ray baggage inspection system and other Airport security systems. X-ray baggage inspection system and parts thereof are eligible for NIL basic customs duty in terms of notification No. 12/2012 - Customs dated 17-03-2012 (S. No. 490) when imported by Government or its authorized persons for antismuggling or by CISF, Police Force, Central Reserve Police Force, National Security Guard (NSG) or Special Protection Group (SPG) for bomb detection and disposal. Import of x-ray baggage inspection system at Airports is for securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty purpose and security is a sovereign function (Reserved Activity) as per State Support Agreement (SSA) with Ministry of Civil Aviation (MoCA) and import cost is met out of Security Component of Passenger Service Fee. However, since import is not directly undertaken by the above specified agencies but by respective Airport operators, duty concession is not available though money is being paid out of funds of Government of India (GoI). Hence, this condition needs to be amended to expand its scope to cover imports by respective Airport operators subject to production of a certificate from Ministry of Civil Aviation. Further this concession should not be limited to x-ray machines alone because there are other machines, which are used for bomb detection and disposal. The list of goods eligible for exemption be expanded to cover the following items and parts of Security Systems falling under any chapter of the Customs Tariff. a) X-ray baggage inspection system b) Explosive detectors c) Bomb/suspect luggage containment vessels/units d) Robots for handling of bombs or suspected baggage e) Parameter security intrusion system and accessories ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f) Access control system g) Hydraulic bollards h) Boom barriers i)Cameras for CCTV All the above systems are bought as per specifications laid down by Bureau of Civil Aviation Security (BCAS), MoCA, and GoI. 3.15.2. Concessional Customs Duty on Goods required for development of Airports It is requested that the following items required for development of airports should be permitted to be imported at a concessional rate of basic customs duty of 5% 1. Navigational / Communication Aids; 2. Airfield Crash Fire Tenders other fire fighting vehicles; 3. Elevated Transport Vehicle; 4. AC Plant of capacity more than 200 TR; 5. T-5 Triphosfor Tube; 6. Flight Inspection System (Ground Air); 7. Runway Marking Pavement testing machine; 8. Baggage Conveyor (handling) system; 9. Passenger Boarding bridges (Aerobridges) along with associated Visual Guidance Docking Systems; 10. HVAC accessories; 11. Travelators / Escalators / Lifts; 12. Structural glazing (glass); 13. Airport ground lighting; 14. Aluminium (Roof sheeting); 15. False ceiling; 16. Carpet; 17. Fire proof door; 18. Revolving door; 19. LED Light fittings; 20. Check in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counters; 21. Chillers; 22. Ground Power Unit (frequency convertor); 23. Signages; 24. Chairs; 25. Vitrified tiles; 26. Runway Sweepers; 27. Variable speed drives; 28. LCD/ LED Flat Panels 3.15.3. Alternative / Take-out financing Aviation Finance Corporation (AFC): SPV providing dedicated capital can be set up by the Government to facilitate lower interest rates and longer maturity of loans. 3.15.4. Liberalization of Infrastructure Bonds Allow private Airport Operators to issue long term non-taxable infrastructure bonds to raise the required funding from the market. 3.15.5. Liberalize Sectoral Funding Limits Ease RBI limits on sectoral funding thereby removing the current compulsion for airport developers to raise required funds / debt from multiple banks making process time consuming and cumbersome. 3.15.6. Receivables Special mechanism for easing cash flows issues arising from delayed Receivables from related government entities, such as Air India / Indian Airlines. Enhance Plan allocation for Air India and implement robust measures for quick disbursement to affected airport operators and agencies. 3.15.7. Issuance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Tax Free Infrastructure Bonds To facilitate the private airport operators raise funds, it is recommended that they should also be allowed to issue tax free infrastructure bonds from the public. 3.15.8. Clarificatory amendment in Section 80 IA with regard to upgrading existing infrastructure Infrastructure development is a pre requisite for the growth and development of any country. Infrastructure development is available in two ways i.e.to build altogether new infrastructure or to convert the existing structure by upgrading it and also enhancing the existing capacity. Both activities entail huge investment and human efforts. It is recommended that a suitable amendment may be made in the Act to clarify that the up-gradation / extension of the existing infrastructure facility would also be eligible for the benefit of Section 80IA of the Act. 3.15.9. Support services of airport to be termed as infrastructure In the airport sector of infrastructure, there are many ancillary/support services required which are essential for smooth functioning of airports. These include fuel facility, parking, cargo etc. No airport can function in absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these facilities as these are life line services for airport. In the absence of clear definition of 'Airport' under the present section 80-IA of the Act, it leaves an ambiguity whether these services enjoy benefit of Sec 80-IA of the Act or not. FICCI recommends that benefit under section 80- IA of the Act be extended to these services as well. As per the current law, the deduction is available to an enterprise if it has entered into an agreement with the Central Government or a State Government or authorities prescribed in the section. FICCI recommends that it should be further clarified that the agreement entered between the sub contractor and the main Concessionaire for carrying out ancillary activities be deemed as an agreement entered by the sub-contractor with the Central or State Government. 3.15.10.Specific clarification on non-exclusion of security component of passenger service fee As part of air ticket, the airline is to collect from each passenger a certain amount of passenger service fee. The passenger service fee collected from each passenger consists of two parts, namely (1) facilitation component an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (2) security component. The amount of facilitation component is the regular income of airport operator and thus forms an integral part of its revenue. The amount of security component is held by the airport operator in fiduciary capacity in an ESCROW account for and on behalf of Central Government and does not form an integral part of revenue/receipt of airport operator. However, the tax officers while finalising the assessment of the airport operators are taxing the surplus amount lying in ESCROW account as their income. It is recommended that a specific clarification may be issued specifying that the amount of security component of passenger service fee which is held by the airport operator in fiduciary capacity for and on behalf of the Government should not be made liable to tax in their hands. 3.15.11. Other Direct Tax issues Section 72A of the Income Tax Act be amended to extend the benefits therein to the entire airline industry and not only to public sector companies with a view to providing the private airlines operators a level playing field as well as sustaining the current growth of the civil aviation sector. Section 10(15A) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act may be Reinstated. This exemption was withdrawn for operating leases (for aircrafts/engines) which are entered into after 1st April 2007. This has put significant burden on the airline industry. As per the current provision of the Income Tax Act, airlines have to incur additional costs arising out of withholding tax on maintenance related payments towards labour charges and fees for technical services and royalties. These provisions need to be withdrawn and such payments allowed without requiring the tax to be deducted at source. FICCI strongly recommends for provision of tax incentives for development of Maintenance, Repair and Overhaul ('MRO') facility in India which will help airlines to reduce cost of repairs carried overseas but will also develop India as a hub for such facility. VEGETABLE OIL OIL SEEDS 3.16.1. Review of Customs and Excise duty structure To bridge the gap between demand and supply, India is compelled to import a large quantity of edible oils. India has become the largest importer of vegetable oils in the world. During November, 2011 to October, 2012 imports are likely to be about 97 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /98 lakh tonnes of edible oil worth Rs 50,000 crores, a huge burden on exchequer next to crude petroleum products and gold. It is therefore essential to increase the availability of vegetable oils from domestic resources by encouraging diversification of land from food grains to oilseeds, increasing productivity of oilseeds and fullest exploitation of non traditional domestic sources. For this, Government may consider the following for the ensuing Union Budget: Review and withdraw export duty of 10% on deoiled rice bran. Consider revising the tariff value on RBD Palm oil and other oils as is being done for RBD Palmolein on fortnightly basis to check huge imports of RBD Palm oil on questionable prices. Permit import of Copra cake, Palm Kernel cake and Rice bran at Nil Customs duty to increase supply for domestic and export purposes. Impose import duty on Crude Palm oil (CPO) at 10% and RBD Palmolein and RBD Palm oil at 20% to protect soybean and mustard seed farmers. Grant excise exemption to food grade hexane (Heading No.2710 12) used in the processing of oil seed and oil bearing material. Allocate Rs.1000 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res per year for the next 3 years under the Oil Seed development programme. Grant exemption from the levy of excise duty to refining of vegetable oils and manufacture of Vanaspati so as to cover by-products of vegetable oil refining industry. Grant excise duty exemption to refining of rice bran oil and processing of its by-products with a view to encourage production of value added products during the refining of rice bran oil. INFRASTRUCTURE 3.17.1. Priority sector lending for infrastructure sector Infrastructure growth is essential for the overall growth of the Indian economy. 12th Five Year Plan envisages investment of USD 1000 billion during 2012-2017 for the development of infrastructure in India. Infrastructure investment has high gestation period and it is highly sensitive to interest rate because of higher proportion of debt financing (around 70-75%). In today's interest rate environment most of the infrastructure projects are not viable because of high cost of debt. Government needs to give Infrastructure lending the status of priority sector lending just like agriculture sector. Cost of debt for infrastructure should be reduced a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd financial institutions should be asked to make higher allocation of loan portfolio towards infrastructure sector. As in the case of financing for exports, banks may be asked to compulsorily provide for certain percentage exposure to the infrastructure sector. RBI may be requested to provide interest subsidies to banks for their exposure to this sector. 3.17.2. Permitting 100% refinancing of existing debt in Infrastructure sector by External Commercial Borrowing (ECB) In its circular dated 23rd September 2011 on ECB for Infrastructure sector, RBI has allowed up to 25% refinancing of existing rupee debt through ECB but with the condition that rest of 75% of ECB debt should be utilized for financing of new projects. This is a step in the right direction and ECB borrowing norms in Infrastructure sector should be further relaxed by permitting 100% refinancing of existing rupee debt through ECB. Restriction on utilization of 75% of ECB borrowing for financing of new project will restrict the amount of ECB that can be raised as ECB lenders have lower appetite of lending for new projects than for refinancing of rupee debt of operational projects. It will also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strict the flexibility of infrastructure companies as companies should have projects which require 3 times as much ECB as the refinancing requirement of existing rupee debt. 3.17.3. Exemption of MAT for infrastructure sector during 80IA period Infrastructure projects get tax holiday under section 80IA for 10 consecutive years during first 15 years of its operation. However, during this period MAT need to be paid by the companies on Book profit which to a great extent negates the tax benefit being offered for these projects. It is suggested that MAT should be exempted for Infrastructure sector during 80IA period. 3.17.4. Specific clarification on applicability of TDS on amount paid to National Highways Authority of India The private toll operators are required to pay fixed amount called as additional compensation fees or Negative Grant to National Highway Authority of India (NHAI) for allowing the site on lease/license to operate Toll plaza and collect the toll charges. There is ambiguity on applicability of withholding tax on such payments made by the private operators to NHAI. It is recommended that either such payments be specifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly excluded out of the purview of withholding tax or the section under which such payments are subject to TDS should be explicitly provided to avoid any further ambiguity. 3.17.5. Access to Infrastructure Companies to raise capital overseas Unlisted and listed Indian Infrastructure companies should be allowed to list in overseas capital markets by allowing them issue direct equity shares. Unlisted and listed Indian Infrastructure companies should be allowed, as an option, to set up an overseas entity for raising equity abroad for investing the same in India. The transfer of holding to such an overseas entity from an Indian entity should be permitted at erstwhile CCI / Book Value as was prevalent till 31st March, 2010. ENTERTAINMENT 3.18.1. Television and Radio Broadcasting At present the DTH Cable TV services are taxed as under:- Service Tax: 12.36% of the subscription amount Entertainment Tax: on an average 30% of the subscription amount Customs Duty: (i) on Set Top Boxes: 5% (ii) on equipments used in digital head end -ranging from 7.5% to 10% VAT on STB: 12% B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth DTH services and cable services are at present reeling under the heavy burden of multiple taxation and levies such as license fee, service tax, entertainment tax, VAT on customer premises equipment (STB, Dish Antenna etc.) which cumulatively add up to as high as 56%. These levies are acting as an impediment to the growth and development of these services. To ensure proper growth and development of this sector, the multiple levies/ taxation structure needs to be rationalized. 3.18.2. Digitization with addressability Migration to addressable digital systems calls for large capital investment. This would involve changing/up-grading of head-ends by MSOs and provision of STBs at the customer premises. During the migration period there is a need to bring down the prices of imported equipments by reducing basic custom duty to make it affordable for the consumers and to facilitate smooth migration from analogue to digital. It is proposed that the Government, as a special measure, should allow reduction of the basic custom duty on the major items in digital addressable broadcast distribution i.e. digital head-end equipments and STBs falling under Chapter 85 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Customs Tariff as per the following list, to zero level to give a boost to conversion of the broadcast distribution network to digital addressable. Digital Headend 1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Equipment Racks for CATV Head End; 7 Video Descrablers; 8 Conditional Access Modules; 9 Video Remultiplexers for CATV; 10 Encoder; 11 EMM Generator; 12 ECM Generator; 13 Integrated Receiver Decoder; 14 QAM modulator; 15 Multiplexer DVB,IVG series; 16 Transmodulator; 17 Encoder with CID Broadcast Headend for HITS and DTH 1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Video Descrablers; 7 Conditional Access Modules; 8 Video Remultiplexers for CATV; 9 Encoder; 10 EMM Generator; 11 ECM Generator; 12 Integrated Receiver Decoder; 13 QAM modulator; 14 Multiplexer DVB,IVG series; 15 Transmodulator; 16 Encoder with CID; 17 Encryptors; 18 Audio Monitor amp 2-vsa; 19 Monitor 10 "; 20 Push Button; 21 Wave From Monitor; 22 WR - 75 Cross Guide; 23 L Band Router; 24 Up Convertor; 25 Waveguide; 26 Switch Over System; 27 Beacon Tracking Rec,; 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 TWTA; 29 Broadcast Amplifiers; 30 Optical Amplifier; 31 Optical Splitter; 32 Optical Combiner; 33 Klystrons; 34 NMS (Network Management Sys); 35 Monitoring Remote Services; 36 Generator PSI/SI; 37 Decryptor; 38 TV Cameras; 39 Combiner; 40 Power Divider Network Distribution 1 Optical Node; 2 EDFA; 3 Optical Transmitters 1310; 4 Optical Transmitters 1550 3.18.3. Entertainment Tax Rationalization It has been suggested by the Empowered Group of Ministers that the Entertainment Tax be subsumed in GST. However, pending introduction of GST regime it is suggested that rationalization of rates of Entertainment Tax across various States at a uniform level should be encouraged by Central Government. Given that under the Digital Access System (DAS) regime there will be full transparency; there is a need to lower the percentage/lump sum amount of Entertainment Tax, as the case may be for the DAS areas. The revenue jump on account of Entertainment Tax is going to be 5 to 7 times because of associated transparency under which the complete count of subscribers would be available. Scheme for waiver of entertainment tax by State Governments should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered for a period of 5 years for cable networks migrating from analogue to digital so as to incentivize promote digitalization. 3.18.4. Infrastructure Status to the Cable sector The Cable sector needs to be given Infrastructure status in order to garner domestic funding. 3.18.5. Rationalization of License Fee for DTH industry Presently, a License Fee of 10% of the Gross Revenue collected by the DTH service provider is levied on the DTH industry. It is recommended that the license fee for DTH services be reduced from present 10% to 6%. Since the DTH industry is a capital intensive industry, this relief would help the industry in a long way. 3.18.6. Inclusion of DTH services in the Negative List of service tax Cable TV and DTH Service is essentially the transmission of programme (images, audio, video, etc through radio frequency) which is taxed as services by Central Government and the same transmission of programme, is also considered as 'entertainment' services by the state governments and is also being taxed as a local service tax under a different nomenclature i.e. entertainment tax . It is recommended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTH services be included in the negative list of service tax. 3.18.7. Film Sector Government should exempt necessary equipment and hardware for film production from the levy of customs duty. 3.18.8. Exemption of service tax on Digital Cinema services Digital Cinema Solutions Providers had been granted exemption from Service Tax in respect of Services provided in relation to delivery of the Cinematography Film in digitalized form transmitted directly to cinema theatres for exhibition through use of Satellite, Micro Wave or Terrestrial Communication lines by virtue of Service tax notification No. 12/2007 dated 1st March 2007. This exemption was granted to promote this technology as it has following unique advantages: The technology brings transparency, efficiency and accountability in the media and entertainment business. It eliminates the need for printing films and thereby bring substantially cost saving to the industry. Delivery through digitalized mode through satellite promotes pollution control and eliminates usage of pollutant film rolls. The technology curbs piracy to a great extent and elimination / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduction in piracy will substantially help the ailing industry and also bring revenue to the Government as chances of pirated films escaping tax nets are high. The technology has given a great boost to the Indian film trade and is currently the mainstay for many film industries across India. Withdrawal of this notification in the new scheme of things has put undue hardship to the film industry particularly when the intention of the Government is to grant relief to the industry by way of exemption from service tax and that is why Notification No.12/2012-ST dated 17-03-2012 has proposed exemption from Service Tax in serial No.15 of the notification for temporary transfer or permitting the use or enjoyment of copy right relating to original literary, dramatic, musical, artistic works or cinematographic films. In the absence of satellite delivery the remote locations of India will be starved of content and this will be a great disservice to these price sensitive markets since they will not be able to afford the increased costs. In view of the above it is recommended that the exemption to digital cinema solution providers for the services rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in relation to delivery of digital content in movie to cinema theatres through satellite by Notification 12/2007 - ST dated 1-3-2007 should be continued. 3.18.9. Animation, Gaming VFX Industry On Animation, Gaming VFX Industry the following suggestions are for consideration: On the lines of IITs and IIMs, Government should consider setting up Centers of Excellence for the Animation, Gaming VFX Industry which also offers opportunities for applied and commercial and others type of arts. 10 Years Tax Holiday for Animation, gaming, and Visual Effects Industry. Removal of withholding tax on revenues accruing from sales of mobile games in non India markets as well as removal of withholding tax on the development contracts given to mobile game developers outside India Removal of withholding tax on payments to expatriates working in India for Indian mobile game development companies There should be a provision of 50% reimbursable MDA (Market Development Assistance) for travel and registration fees to international market events. Government to extend support under Market Development Assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stance (MDA) activity for Indian companies to exhibit by setting Indian Pavilions in the world markets. What is needed is to help bringing local production companies to international markets, collect and disseminate information and support creating the infrastructure needed for a healthy media market to develop. To promote domestic gaming market, Excise Duty on local manufacture should be brought down from 12.5% to 0% (similar to film and music industry). This will enable CVD to be brought to zero also. The effective reduction in taxes would be around 15%. Import duty on consoles (Gaming hardware) to be brought down to 0% to increase the installed base to enable the local developer ecosystem to flourish. Directions should be given to commercial bankers to treat Animation sector on priority and to offer concessional rate of credit. The Minimum Alternate Tax (MAT) applicability for units undertaking Animation work in SEZ should be withdrawn to encourage export of animated contents. The government should introduce subsidies like a CNC Fund (in France) to fund animated content co-produced and developed in India t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o enable Indian producers to be competitive on the global scale. 3.18.10. Multiplexes On Multiplexes, Government should consider the following suggestions: Multiplex operators should be exempted from payment of duties on import of cinema exhibition equipments. The Industry should be entitled to take full credit of certain 'input services' which are commonly used for non- taxable as well as taxable activities. CIGARETTE/TOBACCO INDUSTRY 3.19.1. Continue with multiple price point, length based specific excise duty structure This structure is best suited to India as it caters to the country's wide range of income distribution and enables positioning of brands at convenient and affordable price points. It has proven to be extremely successful over the years as it has ensured increasing revenue collections in a litigation-free environment with no valuation disputes and transparent administration. Additionally, it provides for value-addition to achieve international quality standards and improved farmer earnings through usage of high quality tobaccos and increased exports. 3.19.2. Maintain tax stability in Excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Duty rates Excise Duty rates should be kept unchanged to leverage the tax efficiency of cigarettes by encouraging shifts from non-cigarette forms of consumption. This, in turn, will maximize contribution to the Exchequer, even in a shrinking basket of overall tobacco consumption. 3.19.3. Reduction in the rates of duty on Cigarettes The duty evaded illegal cigarette market continues to grow unabated and the domestic industry is not able to counter the same due to high excise duties and steep incidence of VAT on legitimate cigarettes. Measures need to be taken to enable the legitimate industry to effectively combat this menace and, simultaneously, provide some stability to farmer livelihoods. Accordingly, it is recommended that the rate of Central Excise duty on the 65 mm filter cigarette slab be reduced from the existing level of Rs.689 per thousand cigarettes to Rs.200 per thousand cigarettes. Excise duty on other slabs may also be considered for appropriate reduction to increase the revenue from this industry. It is anticipated that this will also have a salutary effect on tobacco tax revenue in addition to aiding the legitimate domest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic industry in achieving the above-stated objectives through viable offers to consumers. 3.19.4. Measures to check evasion of duties (A) To curb sale of illegal, duty evaded cigarettes implement compulsory licensing under Industries (Development Regulation) Act, 1951 for all cigarette manufacture in the country and tracking key inputs of cigarettes through their respective supply chains. The following measures are recommended in this regard: (i) Licensing under I(D R) Act, 1951 should be made compulsory for all Cigarette manufacture in the country, irrespective of the size and nature of the Units in which such manufacture is undertaken, without any exceptions and SSI should be included in the ambit of licence. (ii) In line with the procedural requirements for tobacco exports, buyers of tobacco from auction platforms to file with the Tobacco Board complete details of sales made to their domestic customers. (B) Curb contraband cigarette trade to protect revenue collections. Suggested measures in this regard are: (i) Basic Customs Duty on cigarettes should be increased from the extant 30% to the WTO bound rate of 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% subject to a minimum duty equivalent to 50% of the prevailing countervailing duty, i.e., length based, specific central excise duty applicable on cigarettes manufactured within the country. This will go a long way in resolving the problem of tax evasion by some unscrupulous importers by under invoicing the value of imported cigarettes. (ii) Disallowing cigarette manufacture in EOUs and SEZs as this is misused to smuggle cigarettes into Domestic Tariff Area. (iii) In line with extant Policy, keep cigarettes, all tobacco and tobacco products, including cigarettes and cigars in the Negative List in all Trade Treaties, FTAs, etc. (C) A Chapter Note in Chapter 24 of the Central Excise Tariff should be inserted to clarify what constitutes a Biri and how the so called Paper Rolled Biri is to be classified. It is suggested that for this purpose reliance is placed on the definition of biri as stated in the Indian Standards (IS) 1925:1992. A suggested draft of the Chapter Note is given below: Biris shall be either conical or cylindrical in shape and only consist of biri tobacco mixture and the wrapper leaves to hold the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents. Any smoking product comprising of tobacco wrapped in paper, with or without filter, will be classifiable as cigarette. 3.19.5. Ban on FDI in manufacture and trade of Cigarettes and other Tobacco products The Government of India has prohibited FDI in manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes and has notified the same in May 2010. However, multinationals set up entities in India for wholesale trading which serves as a platform for creating demand for their brands which is then met through large scale contraband/smuggling. This adversely impacts domestic farmer income, employment and revenue interests. Hence the existing ban on manufacturing must be strengthened by extending the ban end to end to cover FDI in manufacture as well as wholesale trade in these products. Moreover, to ensure proper implementation of the Government's tobacco control policies, the extant ban on FDI in the tobacco sector should be reinforced by appropriate amendments in FEMA to prohibit infusion of funds into the tobacco sector whether through (a) advances against equity, (b) preference shares and debentures - convertible or ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise, (c) loans and other forms of debt by whatever name called, (d) advances, (e) guarantees issued by banks, corporate entities or any other third party (f) letters of comfort or (g) through any other means. Similar restrictions should also be extended to entities set up by multinationals in India with the objective of marketing cigarettes and other tobacco products. 3.19.6. E-Cigarettes A separate tariff classification under Chapter 24 be introduced under both Excise and Customs Tariffs for e-cigarettes. Since e-cigarettes can be sold as different parts - to be assembled by the user, length-based excise duty, as applicable to conventional cigarettes, is impractical for e-cigarettes. Accordingly, the recommendations for duty levy e- cigarettes are: (i) Central Excise Duty at an appropriately high ad-valorem rate for e-cigarettes, its components and all flavours containing nicotine meant for use in e-cigarettes. (ii) Customs Duty at the WTO bound rate of 150% for Chapter 24 goods i.e. all tobacco and tobacco products Further, e-cigarettes or its part(s), refills should also be removed from OGL and put under Restricted List of import and e-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igarettes must feature under the Negative List in all Trade Treaties, FTAs etc. HOUSING AND REAL ESTATE 3.20.1. Industry status to real estate sector It is requested that Real Estate Sector be granted Industry status for easier availability of funds for this sector for purposes of availing long term and short term finances. 3.20.2. Extend loan on Stamp Duty / Registration Fee / VAT / Service Tax to buyers (a) For the first purchase of the house, borrower should be eligible to avail 90% of the costs of purchase as loan. (b) Second purchase of the house, eligibility to be brought down to 80% insisting on 20% by the borrower margin. In both the categories, Stamp Duty, Registration, VAT, Service Tax should be included in the cost to bring relief to the borrower. 3.20.3. Raise the limit for Priority Sector lending Considering the high prices of dwelling units across country and particularly amongst tier 1 and 2 cities, the home loan up to Rs.25 lakhs as priority sector classification should be enhanced Rs.35 Lacs for consumer loan. 3.20.4. Technology for Low Cost Housing Considering the need to provide affordable h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouses at a very fast pace in the country, new construction technology is required (such as aluminum formwork or precast technology). Currently most of these technologies are being imported and have high taxes levied on them. The customs duty/ taxes paid for importing these technologies vary in the range of 20-25%. This prohibits the use of these technologies and hence the pace of development of affordable housing. The need of the hour is to reduce these taxes for the development of housing for the EWS/LIG segment. 3.20.5. Deduction of interest paid on borrowed capital A deduction upto a maximum limit of Rs. 1,50,000/- is currently available from taxable income towards interest on loan taken for acquisition/construction of self-occupied house property. It is recommended that this exemption should be harmonized with the rising interest rates and increased to at least INR 2,50,000 per annum. 3.20.6. Raise the limit for deduction for principal repayment In the case of home loan repayments, the ceiling under tax benefits is capped at Rs.1,00,000/- for principal paid. The ceiling of Rs.1,00,000/- under Section 80C is less, particularly when home loan princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal repayments are clubbed with other tax saving instruments. Therefore, the deduction for principal repayment of housing loan under Sec 80C should be either increased from the existing limit of Rs.1 lakh or the principal repayments treated as a separate tax exemption entity and excluded from benefits under section 80C. 3.20.7. Infrastructure status to development of integrated townships. An integrated township involves development of residential, institutional, educational, medical, community and commercial buildings etc. In the process of development of an integrated township, apart from development and construction of above establishments, various facilities such as roads, water supply, sewerage system, sanitation, water treatment, electrification, land scaping, solid waste treatment, horticulture and other civic services are required to be created/provided. While according approval, the State Government specifically directs that these development projects including all facilities/services created/provided therein will ultimately be handed over to respective State Governments/Local Bodies and shall not remain with the developer. These integrated township ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... projects are therefore in a way at par with the BOT (Built, Operate Transfer) projects. In the light of above facts and in order to motivate the genuine Real Estate Companies to come forward and step into promotion and development of large integrated townships in line with above arrangements to mitigate the huge shortage of housing to all class of society, it is requested that Integrated township development projects be brought within the definition of infrastructure. 3.20.8. Deduction for Ground Rent Deduction for ground rent should be restored while computing the income under the head 'House Property'. Considering the rising value of land and proportionate ground rent in metros and other big cities, it is recommended that the deduction for ground rent be separately provided i.e. in addition to the overall statutory deduction of 30% available within the ambit and scope of section 24 of the Act. LIFE SCIENCES 3.21.1. Weighted deduction under section 35(2AB) for expenditure outside the approved R D facility A weighted deduction @ 200% is allowed on in-house research development expenditure incurred by companies engaged in the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of biotechnology or manufacture or production of specified goods. The pharmaceutical research and development is very expensive and time consuming as compared to other industrial research, on account of regulatory requirements of safety, efficacy and quality. The current provisions for deduction u/s 35(2AB) are restrictive in nature, so as to cover only expenditure incidental to research carried on at the in-house R D facility. Some of the activities though directly related to research and development are not eligible for weighted deduction e.g. clinical trials undertaken on patients in hospitals, since the same are carried outside the approved R D facility. All expenditure related to research carried on in the in-house facility i.e. clinical trials, bioequivalence studies, regulatory and patent approvals should be eligible for weighted deduction, even if these activities are carried outside the approved R D facility including overseas expenditure. 3.21.2. Weighted deduction under section 35(2AB) for computing Book profits Presently, while computing the 'Book Profit' under Section 115JB, the amount of weighted deduction u/s 35(2AB) is not deducted. In the past, simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r adjustment in respect of export profits under Section 80HHC was permitted for purposes of computation of 'Book Profit' under Section 115JB. Therefore, if the Government is serious about promoting in-house R D in India, the amount of weighted deduction u/s 35(2AB) should be deducted while computing tax under MAT. 3.21.3. Weighted deduction to an approved R D company be extended from 125% to 175% Vide Finance Act 2010, the percentage of weighted deduction allowable u/s 35(2AA) on sponsored scientific research undertaken through an approved National Laboratory, University, Indian Institute of Technology and other specified institutions was increased from 125% to 200%. Similarly, the percentage of weighted deduction u/s 35(1)(ii) on contributions made to approved scientific research associations, University, College or other institutions was also increased from 125% to 175%. However, similar increase in the percentage of weighted deduction on contributions made u/s 35(1)(iia) to an exclusive R D company approved by the specified authority, has not been allowed. It is therefore, suggested that the aforesaid anomaly should be removed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the percentage of weighted deduction on contributions made to an exclusive R D company for carrying research and development should be increased from 125% to 175%. 3.21.4. Other Suggestions for Direct Taxes 1. In order to facilitate and encourage Scientific Research, all expenses of revenue nature incurred prior to commencement of business, should be allowed as deduction in the year in which business has commenced. 2. Government must create a budget through which 50% of the total income tax paid by a company in the last 10 years can be paid back, or at least as a loan to an R D organization for 20 years at a nominal rate of interest. 3.21.5. Service Tax on Clinical Trials of Drugs The following services in relation to Clinical Trials of Drugs are exempted from the levy of service tax vide Sr.No.7 of Notification 25/2012-ST dated 20-06-2012, namely:- 7. Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies on human participants by a clinical research organization approved to conduct clinical trials by the Drug Controller General of India. As may be observed the exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is applicable for clinical research organizations (CRO) if the CRO is approved specifically by the Drug Controller General of India (DCGI). However, the DCGI does not approve any CROs; in fact there is no mechanism in place for approving a CRO per se by the DCGI. It is suggested that the aforesaid entry No.7 in the said Notification may be amended so that the service tax exemption is applicable to the clinical trial process which is approved by the DCGI. 3.21.6. Excise Duty on Bulk Drugs The rate of Central Excise duty on bulk drugs which is 10% may be brought down at par with drug formulations which is 5%. 3.21.7. Central Sales Tax Life saving drugs, life saving medical devices and critical diagnostic kits may be exempted from CST. 3.21.8. Exemption from Excise Duty for Generic Drugs At present branded and generic medicines are subjected to the same rate of excise duty. In order to promote generic medicines, as per Government's policy, it is desirable that medicines sold under the monogram of any pharmacopoeia (generic -without any brand name) may be exempted from the levy of central excise duty. MEDICAL EQUI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PMENTS AND DEVICES 3.22.1. Background India's healthcare infrastructure is lagging behind when compared with other developing countries. There exists a huge gap between demand and supply of healthcare infrastructure facilities available in the country. To achieve a desired bed density of 2 per 1000 population by 2025, investment to the tune of $86 billion would be required, a bulk of which has to come from the private sector / FDI going by the current figure of 74% contribution coming from the non-government sector. Therefore, it is imperative to create an inductive environment for facilitating investments into the sector. 3.22.2. Medical Technology Parks Creation of exclusive dedicated Medical Technology Parks where there is a cluster of manufacturers of Medical Technology products with basic infrastructure to support these and the inclusion of benefits for Customs duty on raw material, excise duty concessions, VAT holidays, IT holidays, etc. Furthermore, there is a need for R D grants / subsidies in the Medical Technology space for promoting Domestic Innovation initiatives. To ensure that there is thrust in the Research and Development area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for design as well as innovation of these products, special incentives must be offered to get more participants in this. As benefits to the society would be very significant due to such projects, incentives in the form of Income Tax write-off for up to 250% of the value of investment for R D and innovation of Medical Instruments, Diagnostics Instruments, Consumables, Devices, etc. should be offered. 3.22.3. Lifetime Complete Health Coverage, through Insurance Benefits for Voluntary Organ Donors India needs to do 2,00,000 solid organ transplants each year to meet the recipient target, which is grossly undersupplied due to the shortage of donor pool. Amendments to the Transplant Act, 1994 need to be looked at, to increase donor pool. Also, taking a cue from the worldwide practice, it is imperative to incentivize and promote voluntary donors to meet the organ shortage. The donors may be provided lifetime health coverage through insurance benefits. 3.22.4. Health Coverage There should not be rejection for health insurance due to age limitations for senior citizens even with non continuous / no provision of health insurance coverage. Also, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is a need for restructuring the premium, so that the monetary burden on the end user reduces as his / her age increases and the ability to contribute decreases. This innovative premium structuring will help increasing affordability amongst the masses. Customs Duty Recommendations 3.22.5. Exemption for Medical / Dental / Surgical Equipments Medical device technology is driven by innovation and there are tens of thousands of different products and applications in different surgical streams. Tariff barrier on imports of finished goods impacts healthcare costs because economies of scale will not permit manufacturing of all products in the country. Therefore, import of finished goods and raw materials/components should be at low customs rates. Local manufacturing should be incentivized through better infrastructure rather than through tariff barriers alone. Tariff barrier on finished goods will only result in late introduction and adoption of new technologies critical for the healthcare sector. Customs Duty on import of finished products should be prescribed at a very low level while NIL customs duty be specified for the import of Raw Materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / Parts / Sub-Assemblies required for ultimate local manufacturing of instruments / Accessories and Consumables. It is requested that Nil Basic Customs Duty be specified for Medical Equipments, Medical or Surgical Implants, Medical Devices falling under headings 9018, 9019, 9020, 9022 and 9027. Blood Glucose Monitoring Strips of heading 3822, Medical, Surgical or Laboratory Sterilisers of heading 8419 and Sterile surgical catgut and similar sterile suture materials and sterile tissue adhesives for wound closure of heading 3006 should also be exempted from customs duties. It is requested that medical products classifiable under headings 9018 to 9022 and parts and accessories thereof presently levied to 5% basic duty in terms of S.No. 474 of Notification No. 12/12-Cus dt. 17.03.2012, be totally exempted from import duties. The exemption may also be extended to parts, accessories, consumables or assembly components, whether required for manufacturing or to be assembled at site of use. This will remove classification disputes and allow the industry to get the desired exemption. Specifically parts and components of hearing aids should be exempted from customs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duties to provide a level playing field for domestic manufacturers. To ensure that the spare parts imported to be used for maintenance of life saving devices, are used for the same purpose, importer may be asked to furnish End Use Certificate within a period of 12 months. Procedure for Consumption Certificate for materials imported as per Customs Notification 21/2010 to be amended to read as Importer to submit Self Declaration for having consumed the materials in the process of manufacture of Medical Equipment . The objective of the aforesaid request is to give a fillip to medical device manufacturing in India by making it attractive to FDI from global majors. It is part of an effort to turn India into a manufacturing hub for supplying the medical devices to not just India, but globally. Once investment begins, then this will automatically encompass technology transfer, investment in R D, development of ancillary industries in addition to financial investment. High tariff barriers will drive away investment, isolate domestic industry and the opportunity will flow to other countries. 3.22.6. Special CVD 4% in lieu of VAT For any product that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meant for retail sale, MRP is required to be declared at the point of import. Further, 4% Special CVD is not levied on products that carry MRP at the time of import. This causes peculiar complications for the industry - The industry has tens of thousands of SKUs that are imported. It is not possible to forecast accurately and get products manufactured that carry India specific labeling and within the required time and cost. As a result, products are bonded with customs; MRP labels are affixed and then released. This is a logistical nightmare and adds to the cost of import. It is requested that a provision be made to exempt Medical Products falling under Chapters 9018, 9019, 9020, 9022, 9027, 3822, 8419 and 3006 from carrying an MRP sticker at the time of import and permission be granted to importers to affix MRP stickers post importation at their own warehouses 3.22.7. Other Customs Exemptions 1. All life saving medical devices, consumables used with devices in the specific life saving treatment procedure and their spare parts should be exempted from Customs Duty. It is recommended that the following be included in the list of Life S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving Products:- Patient monitoring systems image guidance systems Pacemakers Image Guided System External Defibrillators NT ENT Surgery Products including electrical/pneumatic drills the consumables Deep Brain Stimulation Implanters, drug pumps, lead etc Heart Lung Machine Oxygenators- During cardiopulmonary Heart valves, Annuloplasty Rings and various Cardiac catheters Respirators and Masks (industrial healthcare) Dialysis Machines equipments and Devices (Hemo and Peritoneal Dialysis) Peripheral Vascular stents 2. Sterilizers of Heading 8419 20 90 which are presently levied to import duty at 25.85% may be fully exempted from the levy of customs duties. Plasma sterilizer allows sterilization of all type of surgical instruments and devices. 3. Topical Skin Adhesive of Heading 3006 10 10 which is presently levied to import duty at 19.567% may be fully exempted. These are used for wound closure, instead of conventional sutures. 4. Custom Duty waiver for essentially required radiopharmaceuticals used in Diagnostics like Imaging and Scanning (PET- SPECT) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therapy some of which are not manufactured in India like Iodine 131, MIBG 131, Lutetium 177, Yttrium 90, Ge-68-Ga 68 generator, Cold Kits for Tc 99m, Rubidium 82. 5. Cardiovascular, cancer and neurological surgeries involves Iodophor impregnated drapes (HS 3005) for prevention of wound infection and Fibrin sealants (HS 300620) for achieving immediate sealing of blood vessels which are critical for life of the patients. These products currently are levied duties under headings 3005 and 3006 at basic of 10% and a total import duty of 21.78%. It is submitted that these may be included in the Life Saving category (List 4) and subjected to concessional 5% basic duty and Nil CVD. 6. Polyurethane film (Heading 3926) used for the manufacture of adhesive coated PU film, Medical grade PVC (Heading 3921 90 99) required for the manufacture of dialysis products, Dextrose Anhydrous USP, for use in manufacture of Intravenous fluids be exempted from the levy of customs duties. 7. Medical Stretcher / Wheel Chairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / Medical Beds should be levied to concessional rate of basic customs duty of 5%. 8. Power tools/ drills, surgical blades and burs used in various neurological, orthopedic, spinal, by-pass surgery other skeletal surgeries, Endoscopy Camera, accessories parts should be exempted from customs duty. 9. Integrated Operation Theatre (Consisting of Routers, Booms, Pendants, Lights, Monitors, Camera, and Connectors etc) should be charged to a reduced duty of 5% basic and Nil CVD. 3.22.8. Procedural Simplification Any imported item be it raw material or otherwise falling under chapters 28,29, 30 or 35 is allowed import subject to obtaining No objection certificate (NOC) for each consignment from Asst. Drug Controller (ADC) posted in the Ports. Current process is that as and when an item falling under any of the above chapters is imported, Customs EDI System automatically issues a Compulsory Compliance report (CCR) calling for NOC from ADC before permitting the clearance of the Cargo. Importers in turn register the customs request (CCR) with Drug Authorities and submit all relevant import Documents for ADC Review. AD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C would depute an Officer to either inspect or draw samples from the imported lot and based on his analysis/examination issues NOC to the importer to clear the cargo. This is applicable for all items falling under the chapters mentioned above. This procedure is not adding any value and to the contrary is leading to delays in clearing imported Cargo and also adds up transaction cost like demurrage, Port charges and unnecessary waste of time. It is suggested that importers should be permitted to obtain prior No Objection Certificates from Drug Authorities for a prescribed fee with validity of 2 years and same should be used for clearing the cargo. 3.22.9. Excise Duty Recommendations It is recommended that the excise duty on medical equipments be reduced significantly and may be prescribed at the lowest slab to enable the domestic industry to find a foothold. 3.22.10. Service Tax Recommendations It is requested that the service tax on Service and Maintenance Contracts for medical equipments be either exempted fully or a minimal rate of tax prescribed for this sector. In-Vitro Diagnostics (IVD) Sector 3.22.11. Duty Exemption for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Antigens / Antibodies used in Diagnostic Kits The import of raw materials such as antigens/antibodies or any other ingredient corresponding to the manufacture of diagnostic test kits specified in list 4 put the local manufacturer at disadvantage in comparison to imported finished diagnostic test kit specified in list 4 which is imported at nil duty. The notification should therefore include: Bulk drugs / antigens/antibodies (monoclonal / polyclonal) / raw materials / components used in the manufacture of Life saving drugs / medicines including their salts and esters and diagnostic test kits . The following items which were a part of the now abolished List 37 need to be included in List 4 under notification No.12/2012-Customs, dated 17/03/2012 to allow for a level playing field for both Indian manufacturers and importers. - AIDS (Acquired Immune Deficiency Syndrome) test kits - T.P.H.A kits and AIDS diagnostic kits. - Rapid diagnostic kit for detecting infection with malaria parasite / Tuberculosis (TB) - Australia antigen/ HBsAg kit. - HCV (Hepatitis C Virus) by any technology. - Dengue detectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n systems/kits. Exemptions for components for Elisa Kits to be expanded: The list that provides the benefit of lower duty may be extended to include antigen or antibody on the solid phase for coating. The other key component is the enzyme conjugate and their stabilizing buffer / solutions. It is important to put the local ELISA kit manufacturers at par with the importers because all finished ELISA kits are imported at nil duty as per item no. 36 of List 4. Automated Blood Culture : When a patient shows signs or symptoms of a systemic infection, results from a blood culture can verify that an infection is present, and they can identify the type (or types) of microorganism that is responsible for the infection. For example, blood tests can identify the causative organisms in severe pneumonia, puerperal fever, pelvic inflammatory disease, neonatal epiglottises, sepsis, and fever of unknown origin (FUO). Automated Identification Antibiotic System: The increasing prevalence of antibiotic resistance is challenging established empirical treatments, making early identification and susceptibility determination more important. To avoid tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-consuming overnight cultures, the rapid identification and susceptibility testing helps to detect antibiotic susceptibility and rational use of antibiotics Cases of duty rationalization: With abolishing of List 37, all diagnostic devices are now covered under Chapter 90 (9027). They therefore attract high duty rates and it is recommended that they be charged to NIL duty to encourage access to newer technologies. Further duty on manufacture or import of diagnostic reagents to be reduced to encourage manufacturing in India. That apart duty structure of following items should be rationalized: - Excise duty for manufacturing of Diagnostics Reagents may be made NIL from existing 10% to allow cost benefit to indigenous manufacturer. - Diagnostics Reagents may be subjected to same levels of duty as Medical Equipment/Devices under Chapter 9018 as against the existing rate of 26.75% - Duty on PCR kits may be made NIL duty as given for ELISA, CLIA Diagnostics kits, etc from existing 26.75% in order to quantify the load of deadly viruses/bacteria such as Hepatitis C, CMV, H1N1, TB, etc in patients for subsequent treatment and monitoring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - All diagnostics equipments including Fully Automated Biochemical Analyzers may be assessed at NIL duty or with a total duty of 9.63% as sudden reversal and imposing duty of 14.72% makes the cost of these Hi Tech Instruments significantly expensive - Customs duties for Diagnostics kits may be based on criticality of the test rather than the technology. Duty exemption be based on Test rather than Analyte for critical tests- Customs Tariff for Diagnostics kits is based on technology rather than the Analyte causing anomalies Eg: ELISA CLIA kits are exempt from customs duty whereas IFA(Immuno Florescence) and Bio-chemistry kits are liable for duty under heading 3822 dutiable @ 26.75%. It is recommended that duty exemption be based on Test rather than Analyte for the following critical tests: a. Blood Banking Panel b. HIV c. HBSAG d. HCV e. Sepsis Marker f. Procalcitonin (PCT) g. Tests of Auto immune diseases (ANA and ds DNA) ELECTRONICS HARDWARE 3.23.1. Market Scenario Demand in the Indian electronics market was USD 45 Billion in 2008-09 and is expected to reach USD 400 Billion by 2020.The dom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estic production in 2008-09 was USD 20 Billion and at the current rate of growth, the domestic production can cater to a demand of $100B in 2020.This aggregates to a demand supply gap of nearly USD 300 Billion by 2020.Government has announced a number of policies to promote local manufacturing create ecosystem for electronics manufacturing. The following suggestions may be considered by the government for promoting electronics semiconductor manufacturing:- 3.23.2. Funding Provide low Interest loans (~3%) to electronic hardware manufacturing units; prevailing interest rates are at the maximum of 15% and reduction in that shall attract new investments players in the electronics manufacturing 3.23.3. Tax Holidays Tax holiday to semiconductor industry in various countries like Taiwan, China, Singapore, Malaysia lower effective rate to zero or single digit. Taiwan and China each offer five year tax holiday with extensions possible, while Singapore offers a 15-year tax holiday to qualified pioneer companies. It is recommended to allow tax exemption and R D grants to semiconductor companies in India. China levied only 3% VAT on semiconducto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs made in China but charges 17% VAT on imported semiconductors. China has created a tax-free environment for new semiconductor plants and Companies were subsidized through tax incentives whether they make profit or not. 3.23.4. Remove Anomaly in duty structure The present rates of CVD and SAD increase the cost of a finished computer or laptop that is manufactured in India as compared to a direct import due to an inverted duty structure. Most components of computers like motherboards, cabinets, memory modules, graphic cards attract a CVD of 10.3% and a SAD of 4% leading to an effective duty of 14.73% as against 10.3% for finished goods. On some components like microprocessor, hard disc drive, the duty rate is 5% CVD and nil SAD. The total input duty on components is higher than the output duty on the finished product or duty on imported finished goods as shown in the table below. The higher duty directly leads to a higher cost for manufacturers in excise exempt zones as such manufacturers cannot claim offset of input tax against output tax. For manufacturers in DTA areas, there is overflow of input credit due to higher input tax versus output tax wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich again adds to the cost. As a result, IT companies that have established large manufacturing facilities in India that manufactures information technology hardware like desktop and laptops are operating at only fraction of their capacities. The low production in turn leads to further higher manufacturing cost. This in turn discourages other component manufacturers who want to set up their manufacturing base in India. Table: Inverted Duty structure in finished computer or laptop omponent Component Duty Rate Cost Proportion in BOM cost Weighted average duty HDD 5.20% 7.20% 0.40% Processor 5.20% 20.20% 1.00% ODD 5.20% 3.60% 0.20% Operating System 10.30% 8.60% 0.90% Memory 14.70% 8.90% 1.30% Adaptor 14.70% 2.30% 0.30% Mechanicals 14.70% 3.30% 0.50% Keyboard 14.70% 1.30% 0.20% BU 14.70% 38.20% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.60% Card 14.70% 1.00% 0.20% Battery 26.80% 5.40% 1.50% 100.00% 12.00% Weighted average duty 12.00% Duty on finished product 10.30% It is requested that corrective action may be taken to remove the anomaly in the duty structure. 3.23.5. Power / Utilities Incentives for Alternate Power Generation - This helps the manufacturing industries to cater their need through the alternate sources. Providing Incentives for the initiatives would help the industries to contemplate the proposals. 3.23.6. Logistics/Manpower Extending 24x7 customs clearance for EOUs. TOURISM 3.24.1. The Highpoints 1. The total contribution of Travel Tourism to GDP was INR 5651.0 billion (6.4% of GDP) in 2011.This is expected to rise by 7% in 2012 and by 7.8% pa to INR 12891.2 billion in 2022 2. In 2011 the total contribution of Travel and Tourism to employment, including jobs indirectly supported by the industry was 7.8% of total employment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (39,352,000 jobs). This is expected to grow by 2.8% in 2012 to 40,450,000 jobs and rise by 1.7% pa to 47,911,000 jobs in 2022 (8% of the total).It is estimated to create 78 jobs per million rupees of investment compared to 45 jobs in the agriculture sector and only 18 in the manufacturing sector for similar investment. Along with construction, it is one of the largest sectors of service industry in India. 3. Foreign Exchange Earnings (FEE) in rupee terms during 2011 were Rs.77,591 crores with a growth of 19.6% as compared to the FEE of Rs.64,889 crores with a growth rate of 18.1% during the year 2010 over 2009. For an industry which is people intensive with an enormous multiplier effect it is imperative that the following suggestions are considered by the Government for the growth of Tourism:- 3.24.2. Inclusion of Hotels as infrastructure It is suggested that like airports, seaports and railways, hotels should be included as an infrastructural facility eligible for benefits under Section 80 I A of the Income Tax Act. If implemented all new hotel projects will be able to avail the benefit of deductions of 100% with respect to profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a period of 10 years. This will lead to many new hotel projects being set up by companies re-investing their profits in the hotel sector. The country's hotel industry needs at least Rs 72,000-crore investment in the next four-five years to build another 1.8 lakh rooms across 1- to - 5- star categories, In fact under Section 10(23G) of the Income Tax Act, Hotels were added to the infrastructure list so that interest received by the Financial Institutions and banks for loans extended to hotels were tax exempted. However the section itself was discontinued with effect from 1.4.2007. Capacity building in Tourism will lead to huge opportunity for employment. 3.24.3. Export Industry Status Given quantum Foreign Exchange earnings, this industry should be granted deductions on foreign exchange earnings. The benefits available under Section 80HHD of Income Tax Act 1956, which was discontinued after 2005-06, should be revived. An exemption on the foreign exchange earning of tourism industry on the same lines as that given to other foreign exchange-earning industries would be beneficial for the industry's growth. 3.24.4. Declaration of Tourism as an Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustry Many States of the Union of India have already granted Industry status to tourism i.e. Tamil Nadu, Kerala, Uttar Pradesh, West Bengal, Arunachal Pradesh, Uttarakhand, Sikkim, J K, Jharkhand, Haryana and UT of Daman Diu, Dadar Nagar Haveli. It is proposed that tourism should be included in Schedule 1 of the Industries Development Act 1951 and that all the remaining State Government of the union of India may be requested to recognize tourism as an Industry so that Hotels throughout the country will be able to avail of the benefits under the industrial policy of the respective state government:- Land banks for budget Hotels Exemption of Duty on Stamp Paper Exemption / Concession in VAT and Sales Tax Property Tax levied as per Industrial rates Electricity rates revised as per Industrial rates Water Charges levied as per Industrial rates To ease procedural hassles, Single Window clearance be adopted for approval and setting up of new hotel projects 3.24.5. PAN Number for payments in Hotels/Restaurants As per Rule 114B, every person is required to quote PAN while making payment to hotels and restaurant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against bills for an amount exceeding Rs.25,000/-. Most parties pay by credit card and it becomes a huge problem to collect PAN in all instances. It may be pointed out that the credit card companies are separately reporting towards payments made by any person against credit card bills aggregating to Rs.2 lakhs or more per annum on PAN basis as per Rule 114E. The aforesaid limit of Rs.25,000/- for quoting of PAN against payment of hotel/restaurant bills was fixed long back. It is recommended that quoting of PAN on payment to hotels/restaurants be only made applicable for cash payments above Rs.1,00,000. 3.24.6. TDS on Room Charges Hotel Charges for long stay are currently subject to TDS under section 194-I of the Act. Payment made to hotels are not in the nature of rent, per-se and hence hotels should be excluded from the purview of section 194-I of the Act for the purpose of tax deduction at source. 3.24.7. Depreciation for Hotel Buildings Depreciation on Hotel Buildings under section 32 to be increased to 20% from the present 10% as hotels have to make huge investment in plant and machinery due to their running on a 24 hour ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis. RETAIL 3.25.1. Policy Reforms A Retail Policy should be considered for promulgation by the Government which will help modern retailing grow from strength to strength in India. An empowered committee under the Ministry may guide and supervise implementation of the Retail Policy and take appropriate decisions. Industry status for the Retail Sector Incentivise States for a model Shops and Establishment Act through amendment in the various provisions of the Act. 3.25.2. Tax Reforms In order to enable mergers and amalgamations in loss making retail companies, so that the amalgamated entity is able to carry forward the predecessor losses, section 72A of the Income Tax Act 1961, should be extended to retail companies, as currently the retail companies do not come under the definition of industrial undertaking, which is one of the mandatory conditions for carrying forward of losses under section 72A for any M A. Currently 200% weighted deduction is permissible for in-house approved R D under section 35 (2AB), however the same is restricted to manufacturing organization. Retail is not consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered as manufacturing, however retail companies also incur substantial R D expenditure, which is very much required for growth and survival of the industry. Hence this benefit should be extended to retail companies. Supply chain investments by retailers help support infrastructure development in logistics across the country and positively impacts industries like agriculture. Thus supply chain investments need to be incentivized as follows: Exemption for capital imports of supply chain equipment including hand held scanners, fork-lifts, cold chain equipment etc. Duty and tax exemption on supply chain automation products (Hand-held scanners, Ware-house management software and associated services) Special tariff loans for warehousing and back-end processing Retail industry depends on the informal sector, private equity and banks for finance. Banks currently treat retail as trade and the rate of interest is relatively high. In a low margin business, this is unaffordable. Hence, banks must be encouraged to provide cheaper funding in the form of loans and cash credit lines, with a moratorium on repayment. Several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... states have implemented entry tax and octroi. These hamper the free movement of goods and create additional tax barriers and inefficiencies. While these may not be within the purview of the Union Government, the Centre may attempt to influence the states which adopt such barriers. Several retail companies incur costs and investments in order to scale up the capability of under educated Indians in order to facilitate their working in a retail store. These costs and investments which are developmental in nature should be encouraged by providing suitable tax breaks Review stock limits under Essential Commodities Act Uniform legislation allowing shops to operate 365 days and extended hours. Amendment in APMC Act that would allow the retailers directly procure vegetables and fruits from the farmers, invest in them to help drive yields, quality of yield, storage and processing capacities. CONSUMER ELECTRONICS 3.26.1 Proposals for the Consumer Electronics industry The following suggestions are submitted for consideration of the Government for encouraging growth of the Indian consumer electronics indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try:- Reduce customs duty on panels of LCD / LED televisions even for sizes below 19 inches. Increase customs duty on set top boxes from 5% to 10% for the next 2 years to encourage local manufacturers. Exempt magnetron from the whole of customs duty without any conditions, since this component has no use other than in the manufacturing of microwave ovens. The abatement for assessment of consumer electronic and home appliance products (monitor, air-conditioner, LCD television, Plasma television, refrigerator, GSM mobile phone) should be increased to 40% from the current levels of 20% to 35% in view of heavy discounts offered by the industry on the printed MRP as per the prevailing trade practice. Interest on loans for purchase of consumer durable products should be reduced to 9% to enable lower middle income groups in the rural sector to purchase such products thus reviving the industry. CHLOR ALKALI INDUSTRY 3.27.1 Proposals for the Chlor Alkali industry The Chlor-Alkali Industry in the country produces mainly Caustic Soda, Chlorine and Soda Ash. Industries that have direct linkages with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sector include Soaps and Detergent Industry, Pulp and Paper Industry, Textile Processing Industry, Aluminium Smelting, Dyes and Dyestuff Industry, Plastic Polymers, Rayon Grade Pulp, Pharmaceuticals, Electroplating, Adhesives/Additives. Chlorine is important for manufacturing PVC and is also used in the pharmaceutical industry. Soda ash is used in the glass industry, silicates and other chemical industries. The following proposals may be considered for the healthy growth of the chlor-alkali sector:- (i) The major input in chlor-alkali industry is power. In case of caustic soda, power constitutes more than 60% of the cost of production. Measures need to be taken to make available this important input to the industry at internationally competitive prices. The following suggestions could be considered in this regard:- In order to increase the availability of coal for captive power plants at reasonable prices, coal mining should be opened to the private sector. Coal blocks should be allocated on priority basis to power intensive industries like Chlor-Alkali Soda Ash through an independent regulatory mechanism. To reduce the input costs, Customs du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of 5% on fuel oils should be abolished for imports by power intensive chlor-alkali industry. Allocation of natural gas and pricing for such gas used by captive power units feeding power to caustic soda and soda ash units should be made available under the administrative price mechanism. As per Electricity Act 2003 the distribution companies are bound to provide network access to large industries that consume above 1 MW of power and regulators can fix the charges for such wheeling of power, but the State Governments are not implementing this provision and they impose a huge cross subsidy charges on consumers buying from open market. This needs to be implemented by the Government of India on priority basis so that wheeling of power is a reality. (ii) To reduce the cost of inputs, it is also important that interest rates are reduced and brought at international level. (iii) An industry like Caustic Soda Soda Ash consumes salt to the extent of 50% of the national production. This provides lot of employment to the salt workers and the transporters. In order to ensure quality salt supply at reasonable cost Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment should provide incentives for R D work and mechanization of salt industry. (iv) To secure raw materials like Ethylene Cl2 for producing Vinyls, investments in PCPIRs may be encouraged. Indirect import of Chlorine through EDC/VCM/PVC should be avoided by retaining appropriate duty structure on these products. (v) Incentives should be provided to chemical industries for pursuing green initiatives like providing star ratings which could facilitate fast clearances of New Projects. (vi) R D for effective use of Hydrogen as green energy like in fuel cells to be encouraged. (vii) To ban import of chemicals like Caustic Soda, Soda Ash, Hydrogen Peroxide from Pakistan till Pakistan removes it from their negative list. (viii) Most of the caustic soda industry is operating on Membrane Cell technology while duty on new plants including Membrane and parts is 5% (Notification No.12/2012-Cus dated 17-03-2012 Sl. No.417), the spare parts of the existing plants are subject to customs duty of 10% + CVD etc. Import of spare parts and membranes which are not manufactured in India may be allowed free of duty. IV. DIRE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CT TAXES A. Income Tax 4.1. Tax Rates - Companies/Firms/Limited Liability Partnership Issues All countries around the world need to compete vigorously for international investments and one of the means is lowering the income tax rates. High corporate tax rates tend to reduce investment, entrepreneurial activity and economic growth. The Finance Act, 2012 had not made any change in the Corporate Tax rate, which continues to be at 30% (calculating at 32.45% with surcharge and education cess), despite the global average corporate tax rate having fallen down to 24.49% in the last year 2012. In the current global economic scenario, Indian corporates need to be competitive. Further, India needs to retain and foster its title as one of the most attractive foreign investment destination. The current corporate tax rate of 30% for domestic companies is fairly high. Accordingly, there is a strong case for reduction in the current corporate tax rate for domestic companies from 30 percent to 25 percent. Recommendations It is therefore submitted that the corporate tax rate for domestic companies be reduced to 25 perc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in the forthcoming Union Budget 2013. This will give India the competitive edge that will foster its growth and ambition to become one of the largest economies in the world. FICCI believes that we have not yet reached the optimal level of the Laffer Curve. In case, the tax burden is moderated and brought down to 25% level, it would in ultimate analysis result in larger revenues for the government as amply demonstrated in past in so far as whenever the tax rates were reduced, the tax revenues invariably went up. Similarly the income tax rates for Unincorporated bodies i.e. Firm, Limited Liability Partnership, etc., should also be reduced to 25 percent from the current 30 percent. 4.2. Tax Rates - Individual Taxpayers Issues The Finance Act, 2012 had marginally increased the basic exemption limit to Rs. 2 lakhs and also the peak tax rate of 30 per cent is made applicable over an income of INR 10 lakhs for individual taxpayers. However, the income trigger for peak rate in other countries is significantly higher. Hence, there is a need for further raising the income level on which the peak rate triggers, to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the same compatible with the international standards. The Parliamentary Standing Committee on Finance (PSC) in its Report on the Direct Taxes Code Bill 2010 (DTC Bill) has appropriately recommended the following revised tax slabs for individual taxpayers. Slab (lakhs) Tax Rate 0-3 Nil 3-10 10% 10-20 20% Beyond 20 30% FICCI fully shares the views of the Committee and is firmly of the view that if our individuals in the lower income bracket are left with more disposable incomes, and those at a higher income level have to face lower tax rates, it will serve the following purposes:- Incentivize people to come into the tax net; Ensure higher collection from greater compliance; Encourage consumption and savings; Higher exemption limit to minimize compliance and transaction costs of the tax administration; and Enable Income Tax wing to re-orient its resources to focus more on higher income groups - prone to tax avoidance and evasion, and to plug loopholes and raise more revenues. FICCI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would, therefore, like to urge that the recommendations of the PSC should be implemented expeditiously during fiscal year 2013-14. 4.3. Surcharge and Education Cess The surcharge on Income-tax was initially levied at a nominal rate of 2.5 percent. It thereafter increased to 10 percent. Subsequent amendments have resulted in varying Surcharge rates for different categories of persons. The removal of levy of Surcharge for individuals, firms, etc. earlier was a welcome relief. In the Union Budget 2011, the Surcharge for domestic companies was partially reduced to 5 percent from 7.5 percent. Presently, the Surcharge is 5 percent for domestic companies and 2 percent for foreign companies. With the increase in collection of Direct Taxes, it would be in fitness of things to remove the surcharge for companies in the forthcoming Union Budget 2013. Similarly, the object of Education Cess levy was to collect specific revenue for securing funds for educational needs. With the increase in collection of Direct taxes, a portion of Direct Taxes collections can internally be apportioned for funding educational projects instead of having a separate levy which also comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licates the effective tax rate computation. It is submitted that the Education Cess be also removed in the ensuing budget. The removal of both Surcharge and Education Cess will be in line with moving towards the DTC regime wherein both these levies are proposed to be withdrawn. 4.4. Minimum Alternate Tax and Alternate Minimum Tax Issues Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act, 1961 was introduced to collect tax from those companies which had adequate book profit as per audited financial statements but nil or less taxable income. The difference in these two items generally related to tax incentive or depreciation rates and method. With the change in the economic scenario, tax incentives have and are being phased out and rates of depreciation have been lowered. The MAT rate has increased from 7.5 percent in 2007 to 18.5 percent for 2011-12. This increase in rate has impacted significantly cash flow of Companies who otherwise have low taxable income or have incurred tax losses. Further, this has also diluted significantly the tax incentives offered under Chapter VI-A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act,1961 (the Act) to eligible businesses and Industrial Undertakings as the difference between the corporate tax rate at 30 percent and MAT at 18.5 percent is not very large. The scope of MAT has been broadened effective AY 2012-13 by bringing Special Economic Zone (SEZ) developers and units under the ambit of MAT thereby significantly diluting benefits offered under the popular SEZ Scheme. Income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund is exempt under Section 10(38) of the Act. The objective of giving such exemption was that Indian residents should invest in the Capital Market for long term. This benefit is also available to Companies under the Act however, by including such income in the book profit the benefit is taken back from the Companies. Taking back such benefit from the Companies is not equitable and therefore the proviso to Section 10(38) should be deleted. Further, an Alternate Minimum Tax (AMT) under Section 115JC of the Act was also introduced on Limited Liability Partnership's (LLP's) which was to be computed on their t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable income as increased by deductions eligible under Chapter VI-A and Section 10AA of the Act. The Finance Act, 2012 has extended the applicability of AMT to include other taxpayers i.e. Sole proprietors, Association of Persons and Partnership firms. Pursuant to above, the Companies / LLPs / Firms who have invested large sums in eligible businesses / industrial units in the backward areas are also getting penalized as the benefit of such incentive gets reduced due to the narrow difference between the basic MAT / AMT rate of 18.50 percent and the basic corporate tax rate / LLP tax rate of 30 percent. The MAT /AMT credit is allowed to be carried forward for 10 years for set-off but this period is generally not always sufficient. Many companies, particularly investment companies whose core business is investments are not able to utilize MAT credit efficiently and within prescribed time-limits. Exemption from AMT is provided to certain specified persons if the adjusted total income of such person does not exceed INR 20 lakhs. The limit of INR 20 lakhs is inadequate considering especially the huge amount of inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments made by the businesses in relation to exports of goods and services and should therefore be raised to at least INR 50 lakhs. Recommendations MAT/AMT rates to be reduced substantially over the coming years. The basic rate of MAT / AMT to be fixed at 50 percent of the basic corporate tax rate (currently 30 percent). To attract more industrial and infrastructural investments, MAT/ AMT on SEZ units, SEZ developers and other eligible businesses/industrial undertaking to be abolished. The MAT/AMT credit is recommended to be allowed as carried forward and set-off without any time limit. Income arising from transfer of a long term capital asset being equity shares and units which are subjected to Securities Transaction Tax is exempt under Section 10(38) of the Act. As per current provisions of MAT, the tax exemption under Section 10(38) of the Act needs to be added back to book profits of the Companies. We recommend that the tax exemption under Section 10(38) of the Act should also be available while computing MAT. In other words this exemption should not be added back while computing book p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits. The threshold limit from exemption of AMT should be increased from INR 20 lakhs to INR 50 lakhs. The amount of weighted deduction under section 35(2AB) be deducted while computing MAT. Companies be allowed to set-off entire past book losses including unabsorbed depreciation before they are subjected to MAT. 4.5. MAT on infrastructure companies Issues Infrastructure Industry in India have been experiencing a rapid growth in its different sectors with the development of urbanization and increasing involvement of foreign investments. The Indian government has offered various tax incentives benefit under Section 80-IA of the Act to the infrastructure companies to boost infrastructure. The benefit available to the infrastructure companies and other entities eligible for deduction under heading C of Chapter VI-A of the Act, gets neutralized since the companies are required to pay MAT on their book profits. Recommendations To attract more and more investment in infrastructure sector, MAT on infrastructure companies should be abolished. 4.6. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend Distribution Tax under Section 115-O of the Act Issues The Finance Act, 2011 have also burdened the SEZ developers by including them in the scope of DDT. Further, DDT currently is payable at the basic rate of 15 percent translating into an effective tax rate of 16.223 percent. Since DDT is a sort of surrogate tax on behalf of the shareholders, and if the shareholders were to pay tax on their dividend receipts, the tax impact thereon is likely to be lesser in most of the cases in comparison to the DDT tax burden. The earlier DDT rate at 10 percent was lower in line with the withholding tax rate on dividends in most Indian and international tax treaties. The increased basic DDT rate of 15 percent reduces the dividend distribution ability of the Indian Company. Further, the uncertainty with respect to its credit in overseas jurisdictions impacts the non-resident shareholders adversely. Currently, DDT is also levied on undertakings engaged in infrastructure development which are eligible for tax benefit under Section 80-IA of the Act. This is detrimental to the growth of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infrastructure sector in the Indian Economy. The Government needs to look at providing various incentives to boost the development of robust infrastructure in India. Recommendations To attract more investment in the SEZs, DDT on SEZ developers to be abolished. The tax rate of DDT is recommended to be reduced to 10 percent from the current 15 percent. To incentives the investment in infrastructure sector, it is recommended that DDT on industrial undertakings or enterprises engaged in infrastructure development, eligible for deduction under section 80-IA of the Act be abolished. It is also recommended that further exemption from DDT be granted to the infrastructure capital company/fund with the condition that it invests the dividend received from its subsidiary in the infrastructure projects. Issue The Finance Act, 2012 amended Section 115-O of the Act to provide that in case any company receives, during the year any dividend from any subsidiary and such subsidiary has paid DDT as payable on such dividend, then, dividend distributed by the holding company in the same year, to that extent, shall not be subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Dividend Distribution Tax. The removal of additional condition to claim the said benefit i.e. domestic company should not be a subsidiary of any other company, is a welcome step, insofar as, removes the cascading impact of the DDT. However, continuation of the condition that the dividend should be received from a subsidiary is still quite restrictive and unrealistic in as much as a company is stipulated to be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company. The said condition is unlikely to be fulfilled by majority of the promoter companies which hold investment in operating companies listed on stock exchanges. Even shareholders of joint venture companies are impacted by the above restrictions. In both the scenarios, since the operating / joint venture company i.e. the company declaring the dividend is not a subsidiary of any company, the first condition i.e. dividend should be received from a subsidiary company is never fulfilled and accordingly when the promoter company / shareholder of joint venture company declares dividend to their shareholders, it cannot deduct the dividend so recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved from the operating / joint venture company for the purpose of payment of DDT. Recommendations The condition that dividend should be received from the subsidiary company should be removed and provision similar to erstwhile Section 80M, mentioned above, be re-introduced as per which, if the income of a company included any dividend received from a domestic company, a deduction was allowed to the recipient company from the income upto the amount distributed by it to its shareholders. No conditions / restrictions such as (a) dividend should be received from the subsidiary company and (b) the company declaring the dividend should not be a subsidiary of any other company existed in the said provisions. In the alternative, the benefit of this section should be extended to a company who is receiving dividend from a company in which they have significant interest i.e. 10% of the voting power in the company. Besides, it is suggested that proviso to Section 115-O(1A) (which provides that the same amount of dividend shall not be taken into account for reduction more than once) be deleted so that the cascad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing effect of DDT in multi-tier corporate structure, as is intended, can be removed. It also needs to be clarified that in order to claim the benefit under Section 115-O(1A), it is not essential that the holding company distributes dividend in the same year in which it receives dividend from its subsidiary company. Further, investment companies which do not necessarily own/have subsidiaries as they invest in various companies in the open market, be also made eligible for such benefit. 4.7. Rationalization of provisions of Section 14A and Rule 8D As per Section 14A of the Act, no deduction shall be allowed in respect of expenditure incurred in relation to income not includible in the total income. Section 14A(2) of the Act provides that the amount of expenditure incurred in relation to income not includible in the total income shall be determined by the tax authority if he is not satisfied with the correctness of the claim of the taxpayer in respect of such expenditure in relation to income not includible in the total income. This satisfaction is to be arrived at by the tax authority having regard to the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of the taxpayer. The determination of the amount of expenditure incurred in relation to the income which is not includible in the total income of the taxpayer is to be done in accordance with the method prescribed, i.e. Rule 8D of the Income-tax Rules, 1962 (the rules). Issue Disallowance of expenditure even if there is no exempt income or restricting the disallowance to the extent of dividend income earned Recommendations The way in which the Rule stands drafted providing for disallowance of interest based on the average value of investment divided by total assets, leads to a conclusion that the disallowance shall happen even if there is no income or the quantum of disallowance far exceed the income, which is not includible in the total income. This runs contrary to the intention of Section 14A of the Act. It should be specifically clarified that in the year in which no income which is not includible in the total income has accrued to the taxpayer, no disallowance in terms of Rule 8D of the Rules shall be made. Further, it should also be clarified that the disallowance as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deeming provisions of Rule 8D of the Rules should not exceed the amount of exempt income earned. Issue A deeming provision of the administrative expenditure at the rate of 0.5 percent of the average investments, results in adhoc and excessive disallowance. Recommendations This Rule is very harsh and by applying the formula under the said Rule, expenditure that has no connection with the earning of exempt income gets disallowed. A deeming provision of the administrative expenditure at the rate of 0.5 percent of the average investments, results in adhoc and excessive disallowance. There is even more hardship when the investments are made only at the end of the accounting year (say 31 March) which are also subject to disallowance @ 0.5 percent as per the deeming provisions. Rule 8D be amended such that the arbitrary clause i.e. clause (iii) of Rule 8D(2) of the Rules on disallowance of 0.5 percent of the average investments be deleted. Alternatively, the disallowance for administrative expenses should be made by estimating the time of the personnel and the resources involved for undertaking th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e activities which would earn exempt income. The aforesaid estimation to be done on reasonable basis after considering the facts of each case and the frequency of such activities. Issue The disallowance under Section 14A of the Act is required to be made in respect of expenses incurred for earning exempt income. The provisions are harsh in respect of the investments held as stock-in-trade or strategic investments made purely for acquiring controlling interest. The provisions are also harsh where the investments made in the company as per the specific requirement under a statute or contract with government. Recommendations The strategic investments are generally made with the intention of acquiring controlling interest and management of the group for the purpose of enhancing the business objective of the group. The investment idea is therefore business driven and not with the intention of earning dividend income. While making such investment and also in respect of investments held as stock-in-trade, the main intention is to maximize business income which is taxable and dividend income are purely incid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental. Further, in respect of certain businesses like power, infrastructure development etc., the statute / government requires the taxpayer to execute the project only through a Special Purpose Vehicle (SPV) Company. Accordingly, making an investment in a Company is a pre-requisite business model for such businesses. It should be specifically clarified that aforesaid investments would not be included for computing disallowance under Section 14A of the Act 4.8. Introduction of Technological Upgradation Allowance Issues In the era of fast changing technology, corporates have to upgrade their technologies to minimize their manufacturing cost with a view to achieving competitive edge, which is absolutely necessary for the survival Need for giving a much-needed boost to jack up investment in the sagging manufacturing sector Sectors such as drugs and biotechnology, identified as having strong potential for growth and other strategic sectors like capital goods, engineering, electronics etc require huge amount of money for research and development Need for introduction of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance for technology upgradation Recommendations In this perspective, technological upgradation allowance should also be introduced whereby a Company is permitted to set apart a certain percentage, say, 5-7 percent of their profits, by way of deduction in the computation of taxable profits, to be exclusively used for upgrading their technologies. Certain industries like automobile, Information Technology Companies, Pharmaceutical Companies, Banks using very high-tech technology could also be considered on a specific/ priority basis and be entitled to such benefit. 4.9. Depreciation Issues Whether depreciation allowable on Goodwill Need for Higher depreciation allowability for plant and machineries used in double/triple shifts. Need for additional depreciation for Service industries. Additional depreciation for Hotel Industry- Hotel buildings constitutes the 'plants' for the hotel industry as their usage is round the clock for 24 hours. The industry has to make very heavy investments in renovation, up- gradation and upkeep of the hotel buildings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Depreciation allowability with regard to various items viz. printers, scanners, UPS, router, switches etc. which are integral part of the computer and cannot be used in isolation Need for restoration of 100% allowance on small items of assets. Recommendations In line with the recent Supreme Court decision in the case of CIT v. Smifs Securities Ltd. (2012) 24 Taxmann.com 222 a clarificatory amendment should be brought for specific inclusion of Goodwill in the definition of block of intangible assets. Further, it would be appropriate to provide clarity on allowability of depreciation on self generated/ purchased goodwill. Further, it is noteworthy that under the Companies Act, extra shift depreciation allowance is available, which is upto 50 percent more for double shift working and 100 percent more for triple shift working, to be calculated separately in the proportion which the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal number of working days during the previous year. It is common knowledge that plant and machineries are generally used f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or double / triple shift working and it would be in fitness of things to allow depreciation at least at the rate permissible under the Companies Act in such cases. It is imperative to introduce the concept of 'free depreciation' where an enterprise may choose the quantum of depreciation and the years of claim so that it is in a position to plan its cash flows in a better manner to optimize productivity. Since the total depreciation allowed to the enterprise will not exceed the cost of the asset, the proposal per-se is revenue neutral. Moreover, the Government should extend the initial depreciation under Section 32(1)(iia) of the Act to service industries as well which is currently available to only manufacturing sector. The steady growth in the contribution by various service industries to the Country's Gross Domestic Product should be augmented by incentive in the form of extending the initial depreciation benefit to service industries. Appendix 1 of the rules should be suitably amended to provide that computer shall also include printers, scanners, UPS, routers, switches and other accessories and peripherals whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are integral part of computer and cannot be used independently if not used along with the computer. This clarification will provide needed certainty to the taxpayers and will put an end to unwarranted litigation on this issue. Schedule XIV of the Companies Act, 1956 makes it mandatory for companies to charge off asset for value below Rs. 5,000. It is imperative that first proviso to section 32 of the Act allowing for charge off of small assets for value not exceeding Rs. 5,000 be reintroduced however, it shall be made applicable to all the assets as against only plant and machinery in the original provision. 4.10. Disallowance under Section 40(a)(i) and 40(a)(ia) of the Act Issues Section 40(a)(ia) of the Act provides that specified payments to residents without deduction of tax at source will result in disallowance of the related expenditure and the payer is considered as a taxpayer in default and is liable for interest, penalty and prosecution (except in certain cases as stipulated). Further, Section 40(a)(ia) of the Act allows the taxpayer the extended time upto the due date of filing the Retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of Income for depositing the tax deducted at source whereas under Section 40(a)(i) of the Act dealing with specified payments to non-residents no such benefit is available. Recommendations FICCI recommends that the disallowance should be restricted to the amount of tax deductible on source on the payment and not the entire payment. In any case, in cases where a lower rate has been applied for tax deduction, a clarificatory amendment should be made to Section 40(a)(ia) of the Act to allow expenditure proportionate to the tax paid. It is further recommended that the discrimination between payments to residents and non-residents regarding extended time line for deposit of TDS should be removed and even under Section 40(a)(i) of the Act the taxpayer should be given the benefit of extended time for depositing the TDS on payments made to non-residents upto the due date of filing the Return of Income. 4.11. Disallowance of cash payments under Section 40A of the Act Section 40A(3) of the Act broadly provides that where a taxpayer makes payment or payments to a person in a day in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of an expenditure otherwise than by an account payee cheque or draft, and such payment or payments exceed INR 20,000 the said expense will be disallowed. In case the payment or payments are made for plying, hiring or leasing goods carriages, the limit is INR 35,000. Issue Section 40A(3) of the Act was introduced primarily to discourage cash payments. However the section has courted controversy. For instance where payment is made directly into the bank account of the recipient, there is a possibility of disallowance under Section 40A(3) of the Act even though there are judicial precedents to the contrary. Further, due to technological advancements, there are various modes of payment like internet banking, credit card payment etc. The trail of payments through online banking channels can be easily traced. Recommendations Considering the above, the following suggestions are made: No disallowance should be made, where payment is made by any mode other than cash. Further the limit of INR 20,000 which was introduced a long time back may be suitably increased to I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NR 50,000 per transaction per day. 4.12. Taking/Repayment of Loans and Deposits Section 269SS of the Act requires that acceptance of any loan or deposit exceeding INR 20,000 may be made only by an account payee cheque or an account payee bank draft. Further, Section 269T of the Act requires that the repayment of any loan or deposit exceeding INR 20,000 may be made only by an account payee cheque or an account payee bank draft. Issue However, in the present scenario many banking transactions take place by way of Net banking facilities that include Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Electronic Funds Transfer (EFT) and Electronic Clearing Service (ECS). Use of payment gateways for online transactions as well as credit cards is also on the rise. Recommendations It is therefore suggested that mode of transfers like RTGS, NEFT, EFT, ECS etc be included as valid modes of fund transfers under Section 269SS and 269T of the Act. In the alternative, any mode other cash may be accepted as valid. Further the limit of INR 20,000 may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suitably increased to INR 50,000. 4.13. Deemed Dividend [Section 2(22)(e) of the Act] Section 2(22) of the Act defines the term 'dividend' and sub-clause (e) thereof includes, within the meaning of this term, even an advance or loan, to a shareholder having at least a 10 percent voting-power in a company in which the public are not substantially interested, to the extent that the company possesses accumulated profits. Thus, a payment, which is clearly not a dividend as commercially understood, is, by a fiction of law, deemed to be one. Apart from payment to the shareholder himself, a loan or advance to a firm in which he is a partner with a 20 percent share, or to an association or body of which he is a member and entitled to 20 percent of its income, is also considered, to be deemed dividend, and is taxed accordingly. The object clearly is to prevent tax-avoidance by making an advance or loan (which would not be taxable) instead of distributing the amount as a dividend, which is subject to income tax. 4.13.1 Taxability of genuine inter-corporate loans and advances as deemed dividend Issues The provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion suffers from many inequities: It taxes a loan, though it may be quite a genuine one, which is duly repaid within its scheduled short time. Moreover, there is no corresponding tax-relieving provision at the time of recovery of the loan. The tax is attracted, notwithstanding that the loan may be advanced at a fair commercial rate of interest and notwithstanding that preponderant majority of persons owning the concern which received the loan are not even shareholders of the lending company. Recommendations In the light of all these infirmities, it is submitted that there is a strong case for deletion of the mischievous sub- clause (e). This would also serve the desirable objects of rationalization and simplification. At present, no tax is payable by the shareholder on dividend received from companies and only the company pays dividend distribution tax @ 15percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend distribution tax. If this suggestion is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot accepted, then adequate provisions should be made to exclude genuine transactions from the consequences of these provisions. Illustratively, genuine loans and advances, given on current market rate of interest and which are re-paid during the year, should be excluded from the scope of deemed dividend as these are not a subterfuge for payment of dividend. Similarly, where loans or advances are given by the companies to their shareholder employees on current market rates of interest as per the policy of the company, deemed dividend provisions should not get triggered as even otherwise the company is meeting its obligation by paying taxes on such interest income. Also, loans and advances given out of business necessities, needs and exigencies should be excluded. Loan given as part of business transaction and Inter-corporate deposits should be excluded from the application of Section 2(22)(e) of the Act. 4.13.2. Taxability of deemed dividend in the hands of recipient not being a registered shareholder Recommendation Since the object of sub-clause (e) is to prevent tax-avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by making an advance or loan (which would not be taxable), instead of distributing the amount as a dividend to the shareholder, which is subject to income tax, a loan or advance to a company / firm / association or body, which is not a shareholder, should not be considered as deemed dividend. Alternatively, the threshold for substantial interest of the shareholder in the recipient concern should be increased to 51 percent. 4.13.3. Tax rate applicable to deemed dividend Recommendation At present, no tax is payable by the shareholder on dividend received from companies and only the company pays dividend distribution tax @ 15 percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend distribution tax. Thus, if the above suggestions are not accepted, even deemed dividend under sub-cause (e) should be taxed at 15 percent (i.e. the DDT rate at which the other deemed dividend are taxed). 4.14. Carry Backward of Business Losses Tax outflow should arise only when taxpayer has earned ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income even on cumulative basis. Tax collected from the taxpayer should be eligible for refund, in case taxpayer suffers losses in subsequent years. Issues Section 72 of the Act provides for carry forward and set off of business losses suffered by the taxpayer against future profits upto subsequent 8 years. It is a clear indication that even though income-tax is payable on a year to year basis, it is not payable till the time the taxpayer has not earned net profit. The tax is payable by the taxpayer in the years in which all past losses are recovered. Business activities involve lot of uncertainty e.g. change in technology. A profit earning activity may turn into loss making activity. Best example can be paging companies. Pagers had a very short life as they were soon replaced by mobiles. Companies paid taxes on pager manufacturing and selling and within 2 years started suffering losses. There was no revival for such companies. Carry forward facility is necessary for startup entities suffering losses in earlier years and reaping profits subsequently. However, it does not cover impacts of cyclical changes in b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness environments. Such changes require carry back of losses. Taxation laws of a number of countries including Canada, France, Germany, Japan, Netherlands, USA and UK provide for carry backward of business losses for varying periods, whereas we in India do not have such facility, which is very much needed. In the wake of opening up of the Indian economy and reduction in import duties and the removal of most of the import restrictions, the Indian industry is facing stiff global competition. Some companies which could not face the competition in the transitional phase, became temporarily sick. To assist such companies in their bad times, it is necessary to provide some temporary financial help by way of providing for carry backward of the business losses to the preceding 3 to 4 years in our taxing statute. Alternatively, a scheme may be formulated to provide option to the company to create Rehabilitation Reserve in any given year to be utilized in the year it suffers losses. It is suggested that such reserve should be allowed as a deduction in computing the total income of the company. Recommendations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Internationally, business losses are allowed to carry backward. Therefore, in line with best international practice, it would be appropriate to introduce the same in India to allow carry backward of business losses. Further tax cap of 8 years should be removed to allow the carry forward of business losses infinitely. Section 72 of the Act should be suitably amended to allow carry back of the losses and to remove upper cap of 8 years. Alternatively, a new provision be inserted in Chapter IV dealing with Business Income to provide deduction for reserve created for future rehabilitation. 4.15. Section 35D - Amortization of certain preliminary expenses Issues Section 35D provides deduction to Indian Companies for certain expenditure incurred before the commencement of business or after the commencement in connection with the extension of the undertaking or in connection with setting up a new unit. The benefit of deduction under Section 35D is limited to the expenditure in the nature of legal charges and registration fees etc. incurred for incorporating the Company. Further, the deduction of this expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is restricted to 5 percent of the cost of project or capital employed at the option of the company. However, legitimate expenditure incurred post incorporation for and until setting up of business, which are neither covered within Section 35D nor can be capitalized to the actual cost of fixed assets, gets permanently disallowed under any of the provisions of the Act even though they are incurred for the setting up the business and becomes sunk cost. Some of this expenditure could be office / sales employees' salary, audit fees, ROC filing fees, advertisement and business promotion expenditure incurred prior to setting up of business, etc. This is more particularly in the case of companies having longer gestation period for setting up their business such as manufacturing entities, insurance business requiring multiple licenses, etc. This affects the cash flow and the spending capacity of the company. Recommendation There is no plausible reason for not allowing these expenses as deduction either as revenue or on a deferred basis in five equal installments. Therefore, Section 35D of the Act should be suitably ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded to include all the expenses incurred by Companies post incorporation but during the course of setting up of its business as eligible for deduction. Even the ceiling of 5 percent should be removed as there is no rationale behind having such ceiling when the actual expenditure is far higher. Non-Resident Related Provisions 4.16.1. Tax Neutrality should be provided even in case with Foreign Transferee company Issues The provisions of the Act are framed to provide tax neutrality only in cases where the amalgamated company is an Indian company. Section 47(vii) of the Act provides that a transfer of shares by the shareholder of an amalgamating company would not be liable to capital gains tax subject to the following conditions: The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and The amalgamated company is an Indian company Clearly the above exemption would be allowed only in case a foreign company is merged into an Indian company. In other words, if an Indian company merges into a foreign company, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s proposed to be allowed by the Companies Amendment Bill, Amalgamating company and the shareholders would be subject to capital gains tax in India. In the emerging global scenario it is important that the merger of Indian companies into the foreign companies should be legally recognized and made pari-passu with the foreign companies merging into Indian companies, particularly for taxation purposes. It is noteworthy that the Companies Bill 2009 currently before Parliament has now allowed Indian company to merge with Foreign Company, vide its Section 205(2), stipulating inter-alia that for the payment of consideration to the shareholders of the merging company in cash, or in Indian Depository Receipts, or partly in cash and partly in Indian Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose. Recommendation Requirement of Transferee Company to be an Indian Company be removed from Section 47(vi), and (vii) of the Act. Income deemed to accrue or arise in India 4.16.2. Clarification on definition of software royalty In Section 9 of the Act, in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b section (1) of clause (vi), an Explanation 4 has been inserted, with effect from the 1 June 1976, clarifying that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Issues Royalty' internationally applies to payments for use of a copyright, patent, trademark or such intellectual property. As per international commentaries and jurisprudence, any payments for use of a copyrighted article would not typically get covered under the gamut of the term 'Royalty'. Taxability of the software usage / licensing payments in the hands of non-resident software companies / vendors would go against the internationally accepted principles of taxation. Expenditure on software is one of the key elements for business today and especially for the IT and ITeS sector. Taxation of such software usage payments in the hands of non-resident software companies / vendors would resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt in passing on of the costs to their Indian domestic counterparts as well as other Indian customers (business as well as personal consumers) causing significant hardship. This will also significantly impact the global competitiveness of Indian Inc The retrospective application of the amendment is grossly unfair and would further aggravate the situation. Recommendations It is suggested to roll back the Explanation 4. In view of the international tax practises and mindful of the impact on Indian Inc, it should be clarified that the payments for use of software made to non-residents would not be covered under the definition of 'royalty'. At very least, it is suggested that the amendment should not have retrospective application. 4.16.3. Clarification on inclusion of Explanation 5 to section 9(1)(vi) of the Act In Section 9 of the Act, in sub section (1) of clause (vi), an Explanation 5 has been inserted, clarifying that royalty includes and has always included consideration in respect of any right, property or information, whether or not (a) the possession or control of such right, property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. Issues The Explanation 5 conflicts with the existing Explanation 2 to section 9(1)(vi) of the Act in as much as there cannot be any transfer, right to use or imparting without the possession or control in the right, property or information vesting with the buyer/payer. Explanation 5 has the effect of taxing the consideration as royalty even if there is no transfer, right to use or imparting to the payer. The provisions of this explanation are also not in line with the internationally accepted principles. By virtue of the above amendment, the scope of the term Royalty could get expanded to cover payments which are not even intended and may lead to application of the tax provision which could be detrimental to the taxpayers at large. The mere fact that a transaction involves use of equipment by a service provider, without the customer having control/ physical possession of such equipment, payment for such facility / services canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as Royalty. For example, where a person boards a bus or train by purchasing the requisite ticket, it cannot be said that the person is making payment for availing the bus or train on hire as he does not have the control over such equipment. Rather the customer is merely availing the facility of transportation, the consideration for which facility is not in the nature of Royalty. Recommendations Explanation 5 under clause (vi) of Section 9(1) inserted by the Finance Act, 2012 may be omitted altogether, as this is clearly against the basic principle of the definition of the term Royalty provided under Explanation 2 clause (iva) and as also understood internationally. In the alternative, in order to avoid ambiguity, the amendment should be modified to objectively provide the rationale behind the insertion of the Explanation 5 and should list out the specific transactions, which it seeks to cover. In the least, such amendment should be made with only prospective effect from April 1, 2013 i.e. from Assessment Year 2013-14 4.16.4. Clarification on definition of process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty In Section 9 of the Act, in sub-section (1) clause (vi), Explanation 6 shall be inserted, with retrospective effect from the 1 June 1976, clarifying that the expression 'process' includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. Issues The amendment may result in inclusion of charges for the use of transponder capacity or connectivity / bandwidth within the definition of 'Royalty'. Services in the nature of provision of transponder capacity or connectivity / bandwidth are merely facilities provided. As per international tax practices and supported by the OECD Commentary, payments for such facilities should not be treated as 'Royalty'. The way Explanation 6 has been currently drafted, even includes payments towards provision of basic telephone service within the ambit of the term royalty. The business income derived by the telecom providers, if classified as royalty, will significantly alter the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax consequences on the payer and the receiver of the consideration for the services provided. Taxation of foreign companies for such facilities and subsequent passing on of the tax cost to India Inc would entail a significant tax outgo for India Inc, especially companies operating in the field of media and entertainment (satellite and broadcasting companies), IT and ITeS companies and Telecom. This would also impact their global competitiveness. The retrospective application of the amendment is grossly unfair and would further aggravate the situation. Recommendations In line with international practises and the OECD Commentary, it is suggested that the terms 'transmission', 'up- linking', 'amplification', 'downlinking' could be specifically defined in the Act to remove ambiguity on its scope/ coverage definition of 'royalty' and the definition of the term 'transmission' should explicitly clarify that payments for the use of a 'facility' as a service charge, without any control on the process and where the payer is only interested in the service and not in the use of process, should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be covered within its meaning. A clarification should be provided that basic services such as telephone/mobile charges and broadband/internet connectivity charges would be outside the ambit of royalty. At very least, it is suggested that the amendment should not have retrospective application Issues With the insertion of Explanation 4 and Explanation 6 in clause (vi) to sub-section (1) of section 9 of the Act, there is a ambiguity as to whether subscription charges paid for download of e-content, access to online database, reports, journals etc. can fall within the purview of Royalty . It has been held by various Courts that the information that is available in public domain is collated and presented in a proper form by applying the taxpayer's methodology and the payment for the same is not to be construed as royalty. It is line with the international standards and supported by the OECD Commentary which provides that data retrieval or delivery of exclusive or other high value data cannot be characterized as royalty or technical fee. Taxation of foreign companies/publishers for providing access to such online database ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in the form of CD as royalty and subsequent passing on of the tax cost to India Inc would entail a significant tax outgo for India Inc. and will especially impact the education system in India. While there is no restriction on expansion of Indian tax base to growing sectors, it is disappointing to see a lack of foresight in relation to a changing economy which is likely to get more reliant on technology and intangible products by the day. The retrospective application of the amendment is grossly unfair and would further aggravate the situation. Recommendations It is suggested that the terms 'transmission by satellite, cable, optic fibre or by any other similar technology' could be specifically defined in the Act to remove ambiguity on its scope/coverage definition of 'royalty' and also a detailed circular may be issued elucidating the types of payments covered within the purview of the said terms and thus constituting royalty. It is recommended to suitably exclude the payment for the use/access to online databases, reports, journals etc. and any other payments made by the payer from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purview of royalty which are essentially made for the use of a 'facility' as a service charge and where (a) the payer is only interested in the service and not in the use of process/technology used for transmission (b) does not have any control on the process/technology used for transmission. At very least, it is suggested that the amendment should not have retrospective application. 4.16.5. Deputation of employees Increasing globalization has resulted in fast growing mobilization of labour across various countries. Typically, the company deputing the personnel initially pays the salary and other costs on behalf of the company to which such personnel are deputed, which are thereafter reimbursed by the latter company. Issue The issue which had cropped up before the Indian tax authorities due to the increasing deputation agreements being entered cross border was whether such reimbursements made by Indian entity to an overseas entity towards salary and other costs in relation to the deputed employees should be taxable in India as being payment in the nature of service fees. Recommendation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Since the employees deputed to the Indian company work under the control and supervision of the Indian company and hence are essentially 'employees' of the Indian company, the amounts paid by the Indian company to the foreign company are merely 'cost reimbursements' for the salaries paid on the Indian company's behalf. However, despite various rulings, the issue is still not free from litigation. In order to put an end to this litigation, a specific clarification may be inserted in the Act to the effect that as long as the employee reports and works directly for the Indian company and operationally works under the 'control and supervision' of the Indian company, payments made by the Indian company to the foreign company towards reimbursement of the salary cost would be treated as 'pure reimbursement' and would not be taxable under the Act 4.16.6. Amendment to the Explanation inserted after Section 9(2) Section 9 of the Act provides for situations where income is deemed to accrue or arise in India. Vide Finance Act, 1976, a source rule was provided in Section 9 through insertion of clauses (v), (vi) and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vii) in sub-section (1) for income by way of interest, royalty and Fees for Technical Services (FTS) respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein. The intention of introducing the source rule was to bring to tax interest, royalty and FTS, by creating a legal fiction in Section 9 of the Act, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India. This was the settled position of law till 2007. However, the Supreme Court, in the case of Ishikawajima-Harima 1 Heavy Industries Ltd . held that despite the deeming fiction in Section 9 of the Act, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blishing such territorial nexus, the services have to be rendered in India as well as utilized in India. This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India. Therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-section (2) of Section 9 of the Act with retrospective effect from 1 June 1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of Section 9 of the Act, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India. However, the Karnataka High Court, in a recent judgment in the case of Jindal Thermal Power Company Ltd. v. DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under Section 9 of the Act. It has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme Court in its judgment in the case of Ishikawajima-Harima Heavy Industries Ltd. remains untouched and unaffected by the Explanation. With a view to removing any doubt about the legislative intent of the aforesaid source rule, the Finance Act, 2010 substituted the existing Explanation with a new Explanation to specifically state that the income of a nonresident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub-section (1) of Section 9 of the Act and shall be included in his total income, whether or not: the non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India. This was made effective retrospectively from 1 June 1976. This retrospective nature of the amendment is a cause of concern amongst taxpayers. Issue Retrospective amendment would lead to reopening of the past assessments. Recommendations The relevant provisions of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 of the Act in force since 1976 have been interpreted by the highest court in India as requiring the taxpayer to also satisfy the condition of 'rendering of service in India' to be taxable in India. It would therefore be only fair to make this provision only prospectively. This would avert litigation and send the right messages to the international community on certainty of India's taxation statutes and its respect for judicial decisions. Alternatively, a provision be inserted to clarify that past transactions would not be re-opened or contested by the Indian Revenue on the strength of this provision. 4.16.7. Taxation of Foreign Dividends and Capital Gains With the rapid growth and development of the Indian economy over the last two decade, many Indian entrepreneurs have expanded their horizons outside India. A large number of Indian Corporate Houses have been making huge investments abroad to tap the foreign markets. A number of companies have established subsidiaries not only in USA and Europe but across the globe. While initially it was the Information Technology sector which forayed into the global markets, over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time even other sectors like healthcare, pharmaceuticals, chemicals, Fast Moving Consumer Goods (FMCG), consumer durables, textiles, automotive, metals and mining etc. have shown interest in global expansion. The Indian outbound investments have been steadily growing year after year. While some outbound investments have been made directly, many have been structured through holding companies based in low taxed jurisdiction. The returns from these investments, when brought to India, suffer tax unlike domestic dividends which are tax free in the hands of the recipients. A special tax regime of taxing dividend income from foreign companies at the rate 15 percent was enacted by Finance Act 2011 and which was further extended by one year by Finance Act, 2012, however has not bolstered the Corporate India s inclination to repatriate profits back to India. Further, capital gains tax regime for unlisted companies not being beneficial compared to total exemption on long term capital gains from sale of shares of companies listed in Indian stock exchange, the gains derived by overseas holding companies from divesture in overseas operating companies are retained at overseas hold C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o level. Issues Dividend income earned from Indian companies is exempt in the hands of the recipient whereas dividend income received from foreign companies is taxable in the hands of Indian residents at normal tax rates at the rate of 32.45 percent even if the same are already taxed in the foreign country. Long Term Capital gains earned by Indian Holding Company from transfer of shares in foreign companies is taxable in India at the rate of 20 percent. Capital gains arising pursuant to certain business restructuring overseas (viz. amalgamation of foreign companies held by Indian company, demerger) are not exempt. Recommendations With the signs of weakening economy and liquidity, beneficial tax regime for repatriation of dividend and capital gains would provide sustainability to India s growth story. FICCI recommends that such dividends received out of tax paid profits overseas and subjected to withholding tax in those jurisdictions, should not be subjected to further tax in India on remittance. Indeed, the US example has shown that when corporates are permitted to repatriate dividends tax free, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is significant flow of funds. Inward remittance of forex at this point of time would be a very welcome step for our economy. FICCI strongly recommends that tax on dividends from overseas be done away with. In the alternative, tax on such dividends should be treated akin to minimum alternate tax, creditable against the normal tax liability and payable only if the tax on normal income is less than the tax on such dividends. Capital Gains It is further recommended that capital gains income earned by an Indian resident/ Indian Company should be fully exempt from income-tax in India provided the Indian resident/Indian Company holds a specified percentage of shares in the foreign company (say 20 percent). Overseas Business Restructuring At times foreign companies in which Indian company has investment either merge with other foreign companies or demerge a division into a separate company. Though such transactions are generally not taxable in the foreign country, there are no express provisions under the Act which exempt exchange of shares arising from such merger or demerger by the Indian parent. Accordingly, the scope of Section 47 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act (dealing with the provisions for transactions excluded from the purview of transfer) should be extended to cover transfer of shares in a foreign company by a resident or domestic company pursuant to a merger or demerger abroad, provided that such merger or demerger is exempt from tax under the domestic tax laws of the foreign country in which such merger or demerger takes place. Withholding tax obligation on payments to a non-resident [Section 195 of the Act] 4.16.8. Withholding tax obligations on non-residents who do not have a place of business in India The Finance Act, 2012 extended the obligation to withhold taxes to non-residents irrespective of whether the nonresident has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. The aforesaid amendment was introduced with retrospective effect from 1 April 1962. Issue The amendment will result in a significant expansion in the scope of withholding provisions under the Act and will cover all non-residents, regardless of their presence / connection with India. Recommenda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions Applicable rules of statutory interpretation read with Section 1(2) of the Act, indicates that Section 195 of the Act as currently in force should not apply to non-residents This view found acceptance in the decision of the Supreme Court in the case of Vodafone International Holdings B.V.2 where it was observed that the provisions of Section 195 of the Act would not apply to payments between two non-residents situated outside India. The Supreme Court also referred to tax presence as being a relevant factor in order to determine whether a non-resident has a withholding obligation in India under Section 195 of the Act. The amendment by the Finance Act, 2012 however seeks to expressly extend the scope of withholding tax obligations to all persons including non-residents, irrespective of whether they have a residence / place of business / business connection or any other presence in India. The extension of withholding tax obligation to all non-residents without regard to their presence/connections in India would place an excessive and unwarranted compliance burden on non-residents. Hence the amendment should be mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dified to restrict the applicability of withholding tax provisions to residents and non residents having a tax presence in India. In the alternative, the amendment should be made effective only prospectively. Making such a provision applicable with retrospective effect will operate harshly on persons who may have made payments based on the law prevalent prior to the amendment. 4.16.9. Withholding tax from payments to non-residents that have an India branch or a fixed place Permanent Establishment (PE) in India Issue The corporate tax rate for non-resident companies being 42.02 percent on net basis, results in requiring the non resident company file tax returns to claim refund of excess tax collected. This creates cash flow issues for the nonresident company making operations through an Indian branch unviable, when compared with its Indian counterparts. This additionally requires the non-resident company to mandatorily approach the Tax Authority to seek a lower withholding tax order, the process being time-consuming and non-taxpayer friendly. Often, the non-resident company faces a lot of difficulties justifying its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... request for a lower withholding tax certificate in the initial years of its operations, when it has no past India assessments justifying its request for a lower withholding tax certificate. From the Tax Authority's perspective, this results in excess tax collection by way of Withholding tax only to be refunded later together with interest in addition to significant administrative burden which may not be commensurate with the benefits of an efficient tax collection mechanism. Recommendations For an effective solution to this issue, one may refer to the Vijay Mathur Report on Non-Resident Taxation (January 2003) which advocates treating non-residents with a branch office at par with residents for the purpose of Withholding tax payments. Illustratively, it provides as follows: 4.13.2 Non-residents having Branch Office/Project Office in India and performing work covered u/s 194C should be considered at par with the residents for withholding tax purposes and as such the same rate of withholding tax should apply to payments made to them. The Working Group recommends that suitable amendment should be made for this purpose. In line with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid principle, it is recommended that payments which are in the nature of business income of non-residents having an India branch office or 'a place of business within India' under the Companies Act, 1956 as explained earlier should be subject to similar tax withholding requirements as in case of payments to domestic companies (residents). At the beginning of a tax year, the non-resident taxpayer who has an India branch office or 'a place of business within India' under the Companies Act (registration with the Companies Act) should be permitted to admit PE and opt for a Withholding tax mechanism as is applicable to a resident company. Being treated at par with resident companies would encourage the non-resident to voluntarily obtain PAN and file the requisite tax and other returns with the Indian Tax Authority. It would also go a long way in facilitating ease of doing business in India and the Tax Authority would be in a position to better monitor and regulate such non-resident companies. Further, it would also achieve the stated objective in the Kelkar Report (December 2002) to abolish the system of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproaching the Tax Authority for obtaining certificates for deduction at lower rates and minimize the interface between the taxpayer and Tax Authorities. Significantly, it would send positive signals to the global community on the ease of establishing a place of business within India/doing business in India. 4.16.10. Applicability of Section 195 of the Act to individuals Issue As per the provisions of Section 195, 'any person' responsible for paying to a non-resident any sum chargeable under the Act is required to comply with the withholding tax provisions. Thus, even an individual is required to comply with the withholding tax provisions vis- -vis payments made to a non-resident, for e.g. purchase of property, payment of rent, etc. This creates undue hardship for the individual of compliance i.e. obtaining TAN, depositing tax with the Government, filing of TDS return, issue of TDS certificate, etc. Recommendation Hence, it is suggested to exclude individuals from the withholding provisions of Section 195 of the Act. 4.17. Refund of tax withheld under Section 195 of the Act Issue Cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rently, for grant of refund of tax withheld under the provisions of Section 195 of the Act to the payer in the case of net-off tax contracts, one of the conditions to be fulfilled is that the recipient should not have filed a return of income in India. In this connection, it needs to be appreciated that if the payer has not issued the TDS certificate to the recipient, the refund of the amount withheld under Section 195 of the Act should be granted to him irrespective of whether or not the non-resident recipient has filed a return of income in India. This is more so because the recipient may have earned certain other income(s) from India which are liable to tax in India and it is in the regard that the non-resident may have filed a return of income in India. In such a scenario, the person making the payment faces an undue hardship vis- -vis obtaining refund of the tax withheld under Section 195 of the Act. Recommendation The intention of the Legislature appears to be that the non-resident recipient should not have claimed the credit in respect of the tax withheld under the provisions of Section 195 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Thus, it is suggested that the requirement of non-resident having not filed a return of income in India should be done away with in a case where the payer has not issued any TDS certificate to the payee. 4.18. Mandatory application to AO to determine sum chargeable to tax Finance Act 2012 has introduced sub-section (7) to Section 195 of the Act under which it is mandatory to make an application to the AO to determine the appropriate proportion of sum chargeable under the Act This provision will apply to notified persons/cases and will apply regardless of whether such transaction is chargeable to tax or not Issue Requiring compulsory clearance from the Income-tax authorities on notified overseas payments will add to the compliance burden and can impact legitimate commercial activities Recommendations The Supreme Court in the case of GE India Technology Centre observed that, there exists no obligation to deduct tax under Section 195 of the Act unless sum payable to the non-resident is 'chargeable' under Act. The sub-section (7) of section 195 of the Act imposes man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... datory requirement in the case of notified persons / cases of making an application to the tax officer for an order determining the taxability of payments being made to the non residents, irrespective of whether such payment is chargeable to tax in India or not. Considering the volume of international transactions/payments, the imposition of a requirement to obtain clearance from the tax office would prove very onerous and slow down the pace of commercial transactions. It is submitted that the present system of reporting together with withholding tax enforcement provisions are sufficient to ensure appropriate deduction of tax on overseas payments. Hence the section 195(7) should be deleted In any event, the list of persons/cases to be notified under this provision should be tailored narrowly so as to not affect genuine commercial transactions 4.19. Obligation to obtain CA certificate for remittance abroad against import of goods Issue As per section 195(6) of the Act read with Rule 37BB of the Rules, a person making remittance to a non-resident is required to submit Form 15CA electronically o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the website designated by the income tax department and is further required to get a certificate from a Chartered Accountant in Form 15CB in respect of the particulars filled in Form 15CA. The requirement to obtain an undertaking in Form 15CB even in respect of transactions which are not chargeable to tax in India like import of goods/raw materials adds to the compliance cost of Indian payers. Recommendation It is recommended that a specific relaxation be provided to the importer of goods/raw materials from obtaining a certificate in Form 15CB from a Chartered Accountant and a residuary field may be inserted in Form 15CA for specifying the purpose of payment. The recommendation if accepted will not affect the working of the revenue department in identifying such transactions and at the same time will relieve the payers from the unnecessary burden of obtaining CA certificates. 4.20. Threshold limit for deduction of tax under section 195 Issue Currently, there is no threshold limit prescribed under section 195 of the Act unlike in section 194C, 194J, 194I of the Act for deducting tax at s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource. Thus, making payments to non-residents even for a smaller amount triggers withholding tax and casts an onerous responsibility of various compliances to be made by the payer. Recommendation It is recommended that a minimum threshold limit for deduction of tax at source under section 195 of the Act may be prescribed. This will not have much effect on the tax revenues generated from these transactions, however, will provide immense relief to the small payers/payees. 4.21. Tax Residency Certificate (TRC) Finance Act 2012 has introduced an amendment in Section 90 of the Act which provides that obtaining a TRC with prescribed particulars will be mandatory for claiming relief under the tax treaties. The CBDT (vide Notification No. S.O. 2188 (E) dated 17 September 2012) has introduced Rule 21AB with effect from 1 April 2013. The CBDT Notification contains various particulars that a valid TRC should contain. Issues Every country/jurisdiction may not issue a TRC containing the prescribed particulars and this could result in the revenue authorities denying the tax treaty benefits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to procedural issues, even though the taxpayer may otherwise be entitled to avail tax treaty benefits. Depending on the jurisdiction, obtaining a TRC certificate may also be a time consuming/difficult process. TRC requirement increases the administrative difficulty for non-residents, especially from the perspective of non- residents having very few/limited transactions connected to India. The TRC format specified in the CBDT notification could increase the compliance requirements and issues for deductors. For example, the CBDT notification requires a valid TRC to specify the period for which the certificate is valid. Therefore, while the deductor would like to obtain the TRC at the time of the transaction/deducting the tax (to ensure that the payee is eligible for the tax treaty benefits), it would pose a hardship to the payee to obtain a TRC before the end of the relevant financial year. The procedure so cast would pose onerous responsibility both on the payers/payee resulting in holding of payments by the payer. It is unclear whether the requirement of furnishing TRC to the Indian tax authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be effective from financial year starting from April 1, 2012 or April 1, 2013. As per the new Rule an Indian resident who wishes to obtain TRC from Indian income tax authorities, is required to make an application in Form No. 10FA to the tax officer, containing prescribed details. However, no time limit for issue of TRC is specified from the date of application by the assessee. Furthermore, the issue of TRC in Form No. 10FB has been left to the discretion of satisfaction of the tax officer, without providing a substantive definition for satisfaction in this regard. Recommendations At the outset, our suggestion would be to delete the provision in total. At assessment stage, it is anyway incumbent upon the AO to ascertain complete details before allowing tax treaty benefits. There may be circumstances wherein the taxpayer who is a bona fide tax resident of the other contracting state is unable to procure a TRC owing to circumstances outside his control. In such a scenario, even though the AO may otherwise be satisfied that the tax treaty benefits must be allowed, only owing to the procedural lapse of no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t obtaining the TRC which is beyond the tax payer's control, the AO would be compelled to deny tax treaty benefits, which will cause needless hardship. Therefore, the above provision may be deleted. Without prejudice, even if the provision must stay, it should suffice if the taxpayer obtained a valid TRC from the concerned authorities without requiring it to comply with any particulars (which are prescribed). It will be difficult to obtain the TRC as per the format prescribed under the Indian laws from an offshore jurisdiction as the offshore authorities may not agree with the kind of particulars prescribed. It is also recommended that the requirement to obtain TRC shall be made mandatory only for cases where the total payment to a non-resident exceeds Rs. 1 crore in a financial year. This would mitigate hardship in respect of small payments. It is further recommended that the requirement to furnish TRC should be cast upon the payee at the time of the assessment of the payee and the deductor/payer should not be made liable to collect TRC from the payee at the time of withholding tax. It should be appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely clarified that the requirement to furnish TRC is effective from financial year 2013-14 as against assessment year 2013-14 mentioned in section 90 and 90A of the Act. It is recommended that the time limit to issue TRC in Form 10FB should be specified and to further specify that in case the tax officer refuses to issue a TRC, the application of the assessee should be disposed by the tax officer by passing a speaking order and clearly specifying the reasons for rejecting the application of assessee. 4.22. Meaning of terms not defined in a tax treaty Any meaning assigned through notification to a term used in an agreement but not defined in the Act or tax treaty, shall be effective from the date of coming into force of the tax treaty (Section90(3) - Amendment retrospective from 1 October 2009, Section 90A, Explanation 3 Amendment retrospective from 1 June 2006) Issues Any meaning notified will have a retrospective effect from the date when the tax treaty was signed causing uncertainty and hardship to the taxpayers This provision is also contrary to Government's intent of reviewing retrospective amendments, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have caused grave concerns to overseas companies over stability in tax policy and considered positions. Recommendations As per Article 3 of the UN and OECD Model Convention: As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State . Further, as per the UN and OECD Model Commentaries on Article 3: In case of terms not defined in the tax treaty, when a conflict arises between the law in force when the Convention was signed and that in force when the Convention is applied, the latter should prevail. This has now been expressly codified in the Model Convention. The above approach provides a satisfactory balance between, the need to ensure the permanency of commitments entered into by Contracting States when signing a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvention (since a Contracting State should not be allowed to make a convention partially inoperative by amending afterwards in its domestic law the scope of terms not defined in the Convention) and, on the other hand, the need to be able to apply the Convention in a convenient and practical way over time (the need to refer to outdated concepts should be avoided). Therefore, the accepted principle is that, generally, the meaning ascribed to a particular term at the time when a tax treaty is being interpreted should be applied. Based on the proposed explanation, the definition notified under Section 90(3) or Section 90A(3) of the Act shall take effect from the date of coming into force of the tax treaty and not from the date of the notification itself. In other words, the notification of the definition will have a retrospective effect. Whilst the conventions do recognise the ambulatory approach of interpreting terms not defined in the tax treaty, making such changes with retrospective effect will lead to needless hardship on the taxpayers and an unfair expectation to be aware of a definition, which was not in existence when the arrangement / tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction was put into place. This will lead to uncertainty, re-opening of assessments etc, which can be avoided. Even pursuant to a notification, there is more liberal interpretation supplied to a particular term, a taxpayer may not necessarily be able to easily claim refund / credit of taxes paid in earlier years. It is recommended that any definition notified under Section 90(3) Section 90A(3) of the Act should apply prospectively. 4.23. Advance Ruling The Authority for Advance Rulings (AAR) is established to ensure a simple, inexpensive, expeditious and authoritative procedure for seeking conclusive Rulings on taxation of a non-resident in respect of Indian income-tax implications. It is seen becoming more and more indispensible as trade and commerce are getting more global and complex. While the AAR mechanism continues to gain favorable responses in India and is highly looked upon as an alternate Dispute Resolution mechanism, there remains scope for some clarifications / amendments in the existing provisions to ensure that the underlying objectives behind setting up of the AAR are purposefully achieved. Towards this, some suggestions/recommendati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are under: 4.23.1. Scope of Advance Ruling for non-resident applicant Issues Sub-clause (i) to Clause (a) of Section 245N of the Act defines an Advance Ruling to mean a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant. It is seen that the said sub-clause is silent on the nature of determination when compared to sub-clause (ii) of Section 245N of the Act which specifically refers to determination in relation to the tax liability of non-resident arising out of a transaction with a resident. Recommendation Hence, it is suggested to suitably employ an explicit language to facilitate easy interpretation of the legislature intent in defining the scope for maintainability of the application before the AAR with respect to non-resident applicant. 4.23.2. Determination of Residential Status for non-resident applicant Issue Clause (b) of Section 245N of the Act defines applicant to inter alia include a non-resident. However, the provision fails to stipulate in specific terms the point of time an applicant is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered to be a non-resident. As it devolves from the other provisions of the Act, as also from the Rulings pronounced, the residential status would have to be determined with reference to a particular year and not with reference to a particular date. Accordingly, it appears that non-residential status of an applicant has to be determined with respect to the previous year immediately preceding the financial year in which the application is made, even though as on the date of application the applicant has become a resident. Recommendation In this context, it is suggested that an express mention on the determination of the residential status is hereby required so that the admission of application is not rejected merely on maintainability. 4.23.3. Time limit for withdrawal of application Issue Section 245Q of the Act provides an option to the applicant to withdraw the application within a period of 30 days from date of making an application. Such a time limit fails to serve any purpose since practically even the first hearing does not happen within the time span specified. It is however seen that the applicant is not precluded from withdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awing the application even after the specified time with the permission of AAR. Recommendation In such a scenario and keeping in mind the interest of justice, it is hereby suggested that the period should be suitably extended so as to enable the applicant to withdraw its application anytime before the application is admitted/heard. 4.23.4. Time limit for Commissioner of Income tax to furnish his observations and relevant records Issue Section 245R of the Act stipulates to provide a copy of the application to the jurisdictional Commissioner of Income tax (CIT) and if necessary to call for relevant records. Further, the Rule 13(2) of the Authority for Advance Rulings (Procedure) Rules, 1996 also empowers the AAR to call for relevant records along with comments from the CIT, if any, on the contents of the application. However, the Section as well as the mentioned Rule is silent on the time frame within which the CIT is required to furnish the relevant records called and provide his comments, if any, on the content of the application. It is seen in many cases that the CIT does not reply within a reasonable period of time which delays the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocedure for the admission of the application. Recommendation In view of speedy disposal of the matters, it is suggested that a time limit should be introduced and be made mandatory for the CIT to follow as regards providing his observations and relevant records. 4.23.5. Satisfaction of conditions mentioned in the Proviso Issue First proviso to sub-section (2) of Section 245R of the Act stipulates that the AAR shall not allow an application where the question (i) is already pending before any Income Tax Authority or the Tribunal or any court, (ii) involves determination of fair value of any property, and (iii) relates to a transaction or issue that it is prima facie designed to avoid income-tax. A bare reading of the Section, as also from the Rulings pronounced, it appears that satisfaction of the conditions has to be examined as on the date of the application. However, the recent Ruling of the AAR has held that Section 245R of the Act is an integrated section not only dealing with the admission of an application but also its final disposal and the mere fact that the disabilities are placed at the earlier stage, cannot lead t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the position that the disabilities should be ignored even when they become discernible when the application is taken up for final disposal. Recommendation In such a scenario, it is suggested that the legislature should explicitly mention point of time for allowing the application. The mentioned conditions need to be satisfied and frame clear guidelines as to what would constitute 'prima facie' tax avoidance circumstances. 4.23.6. Time limit for disposal of Advance Ruling Issue Sub-section (6) of Section 245R of the Act stipulates a time limit of six months from the date of application to pronounce the Advance Ruling. However, as deduced from the Rulings pronounced and reference to handbook issued by the AAR, it appears that the time limit is flexible and not mandatory to follow. Recommendation As the AAR was set-up with an underlying intent to expedite the disposal of income-tax issues, it is hereby suggested that the time limit so specified should be adhered to and made mandatory. 4.23.7. Binding Nature of the Precedent Issue Section 245S of the Act which provides for the binding force of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ruling pronounced, fails to address whether the AAR would be bound by an earlier Ruling pronounced by it. With judicial precedents specifying that the Ruling only has a persuasive value, it is seen that the recent Rulings of AAR taking divergent views from the stand already taken earlier by the AAR for similar legal and factual situations. Recommendation Hence, with a view to establish consistency, correct legal position and to avoid conflicting Rulings on similar facts, it would be appreciated if the Legislature suitably incorporates provisions giving effect the binding nature of the earlier Rulings of the AAR. Alternatively, in case the current bench of the AAR does not agree with a Ruling pronounced earlier, the matter may be referred to a larger bench as done in the Tribunal. Suitable provisions to the above effect may be introduced / inserted. 4.23.8. Constitution of additional Benches Recommendation It is suggested that in view to speed up the well-established judicial process, another bench of AAR should be constituted at Mumbai which has a large number of taxpayers or at any other place where the volume of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork so justifies, in addition to the current bench stationed at New Delhi. 4.23.9. AAR mechanism to be extended to all resident applicants AAR was introduced in India in 1993 as an alternate dispute resolution forum with an underlying objective of facilitating the non-residents to ascertain their tax liability well in advance and to provide recourse to avoid long drawn and expensive litigation under the regular course of assessment and appeal procedures. The AAR's jurisdiction was originally confined to pronouncing rulings in cases of non-residents till it was enlarged to include cases of only notified residents (i.e. Public Sector Company). Issues On conjoint perusal of sub-clause (iii) to clause (a) of Section 245N and sub-clause (iii) to clause (b) of Section 245N of the Act along with Notification No. So 725(E) dated 3 August 2000, it transpires that the benefit of the Advance Ruling mechanism is inter-alia available to resident applicant being Public Sector Companies, only if the issue is relating to computation of total income and the same is pending before any Income Tax Authority or the Income-tax Appellate Tribunal. Such a forum is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus not available to (a) all resident applicants; and (b) for their domestic transactions which are proposed to be entered into with other resident taxpayers, resulting in disparity between the non-resident applicants and resident applicants. Recommendations Hence, it is suggested to suitably amend the provisions of Chapter XIX-B of the Act to extend the benefit of Advance Ruling mechanism to all resident applicants (including Public Sector Companies) for their domestic transactions proposed to be entered into with other resident taxpayers. This would be of great advantage to resident applicants who can pre-empt their income-tax liability arising out of high value / structuring transactions. Further, such mechanism will lend a degree of decisiveness and certainty, provide more consistency in the application of the law, minimize controversies and result in good relations between tax administrators and the taxpayers and thus reduce the litigation before the courts of law. 4.23.10. Admissions of applications by AAR even where return of income has been filed Issues Recently, it has been seen that the AAR has rejecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d various applications filed by the applicants on the ground that the tax return has already been filed before the AAR application has been filed. This is because filing of tax return has been construed as case pending before an Income Tax Authority and going by the rules governing AAR, the latter cannot entertain a case which is pending before an Income Tax Authority. This stand of the AAR has also been affirmed by the Delhi High Court in a recent ruling in the case of Netapp BV and Sin Oceanic Shipping ASA. The High Court has held that if a company files an income tax return, then it would lose the right to seek a Ruling from the AAR. Since the AO has the right to issue notice after the taxpayer files return, the latter becomes obligated to disclose the details sought by the AO. Therefore, the issue can be treated as one pending before the AO. The rationale behind introducing the AAR was to significantly faster dispute resolution process as compared to normal litigation process and to sort out complex international tax issues which may not be appreciated by lower level tax authorities. The applicants approach the AAR to seek certainty on taxability of transactions undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en/to be undertaken by them and upfront crystallization of tax implications of proposed transactions. If such a stand is followed by the AAR, the applicants will lose the right to move to the AAR in a large number of cases and it would cause genuine hardship to the applicants if their right to seek advance ruling is lost merely by filing income tax return. This may prove to be a deterrent on the mechanism of the AAR and may discourage the applicants from moving to the AAR. Recommendations It should be clarified that filing of income tax return will not be construed as case pending before the Income Tax Authority and the AAR can still entertain applications where return of income has been filed by the applicant. Till the time the AO issues the notice initiating the assessment proceedings, the applicant will have the right to apply for Advance Ruling before the AAR and the same will be admitted by the AAR. This will help in propagating the mechanism of AAR and will provide an opportunity to a large number of applicants to seek clarity and certainty on various complex international tax issues faced by them. 4.24. Tax Incentives and benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Tax incentives by way of exemptions and deductions are designed to create economic security, promote asset creation, accelerate the pace of industrial production, enhance exports, provide employment opportunities, remove regional imbalances and provide social welfare. The present tax holiday regime has over the years continuously attracted investment into these priority sectors despite some of them being characterized by long gestation periods and red tapism. Motivation to continue channelization of investments into these sectors is largely dependent on the tax incentives these industries enjoy. Hence it is crucial that the Government consider retaining attractiveness of these sectors by continuing with the present tax holidays, removing existing ambiguities and extending the benefits to additional sectors as may be warranted for improvement of the country's infrastructure and economic development. Profit-Linked Incentives 4.24.1. Phase out of profit-linked incentives for industries Issues Undertakings engaged in generation, transmission, distribution, modernization of existing network for power are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currently eligible for tax holidays with regard to profits generated from such business. The same has helped attract investment, both domestic and foreign into the sector. Despite being a priority sector for the Government and the large investments drawn into the sector for capacity addition, the Governments mission 'Power for all by 2012' appears a distant dream. Greater capacity addition and renewal/ modernization of existing networks will require substantial investment. Phasing out of the tax incentives for the industry will dampen growth and investment in the sector. Similarly, tax holiday for industrial parks has been phased out. Tax holiday enjoyed by the sector has pushed industrialization and resulted in a spurt of industry hubs created such as for information technology, manufacturing, warehousing, etc, across the country. Large scale developments such as an industrial park require significant investment, which holds attractiveness on account of the tax benefits enjoyed by the sector. Withdrawals of the incentives will surely slower investment into the sector owing to the significant upfront capital commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment required. Recommendation The profit-linked incentives currently given for infrastructure and crucial sectors should be continued till the end of 12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's power and industrial sector. 4.24.2. Phase out of profit-linked incentives for industries and replacement by investment linked incentives Issues The current provisions of the Act provide profit-linked incentive to infrastructure sectors and other critical sectors such as telecom, power, etc. The Direct Taxes Code, 2010 (DTC proposed to be) effective from 1 April 2013, intends to substitute all profit-linked incentives with investment linked incentives. Under the proposed DTC, the infrastructure companies eligible for the tax holiday as on 31 March 2013 under the current provisions of the Act would be permitted to grandfather the tax holiday under the proposed DTC subject to the prescribed conditions. The existing profit-based incentives in our country have greatly motivated in channelizing huge investments into priority sectors of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conomy such as infrastructure, exports and energy etc thereby fortifying the country in attaining high growth rates over the last two decades and putting in on the path of energy security. It is therefore imperative that that these incentives, more importantly for infrastructure development including power sector, fertilizer sector, hydrocarbon sector, cement industry and export promotion, are not only continued but strengthened further for maintaining the growth momentum of the country. Recommendation The profit-linked incentives currently given for infrastructure and crucial sectors should be continued as such, even under the proposed DTC. This is due to the fact that even with the current tax incentive, the IRR (Internal Rate of Return) achieved by most of the projects in such sectors are not sufficiently attractive for bankers and lenders, and financing of these projects is proving to be a difficult exercise. Given the huge capital investments and wafer-thin margins plaguing these sectors, the substitution of profit-linked incentive by investment-linked incentive may lead to an adverse impact in terms of financial crunch and non-ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilability of funding. 4.24.3. Phase out of profit-linked incentives for certain undertakings in Special Category States Issue The tax benefit under section 80IC for specified under takings in certain special category states was valid till 31st March, 2012 and has not been extended further. In the context of the difficult economic situation in India and low growth in the industrial sector, it is necessary to encourage industry to invest in the backward states in the country. This will address the issue of unequal and lopsided growth, which continues at the present juncture. Recommendation FICCI recommends that the aforesaid tax benefit be extended for a few more years to bring about balanced development till the economy gets back to a higher growth trajectory 4.24.4. Substitution of profit linked incentives for specified industries with investment linked incentives and abolition of Minimum Alternate Tax (MAT) for infrastructure industry Issues Budget 2009 introduced Section 35AD of the Act, wherein extending tax incentives to specified industries (cold chain facilities, 2 sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r hotels, hospitals, affordable housing, housing projects under a scheme for slum development or rehabilitation, warehousing for storage of agricultural produce, laying and operating a cross- country natural gas or crude or petroleum oil pipeline and production of fertilizer in India, inland container depot, container freight station, bee-keeping and production of honey and bee wax, warehousing for storage of sugar) with respect to the capital expenditure incurred for set up and operation of such specified business. Further, once a deduction for the capital expenditure is availed under this Section, no deduction shall be allowed in respect of such specified business under Chapter VI-A (Deductions in respect of certain incomes). With the introduction of Section 35AD of the Act, the envisaged 'specified businesses' would instead of enjoying a deduction of the profits earned (as is envisaged under the Chapter VI-A deduction), in addition to depreciation of the capital investment on creation of the assets, would now be eligible to claim a complete deduction/weighted deduction for the entire capital expenditure incurred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set up of the specified business. In effect, the deduction under Section 35AD of the Act is nothing but an alternate form of accelerated deduction for the capital expenditure in the specified business and no real benefit is being extended to these industries. Additionally, with investment linked incentives, the cash flows of these capital intensive industries would suffer on account of levy of MAT. This is because book profits will continue to be higher than taxable profits (given that deduction for capital expenditure is not taken to the profit and loss account other than in the form of depreciation) and hence MAT will be paid by the industry during the 'tax holiday period'. While MAT is creditable against normal taxes in future, the period for recovery of MAT paid could result in being longer than under profit linked incentives. `Further, given the restriction on the years for carry forward of MAT, it is possible that MAT paid in initial years may not be recovered, especially for those taxpayer who have a longer period before reaching break-even. Recommendations The profit-linked incentive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s currently given for infrastructure and crucial sectors should be continued till the end of 12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's infrastructure sector. It should be considered to do away with MAT for the infrastructure industry as levy of the same defeats the very purpose of extending tax incentives to the industry, especially given the high rate of MAT now. While the same would have some revenue implications, but only from a short-run angle, FICCI is confident that in the ultimate analysis the Government would continue enlarging its revenues by way of manifold direct and indirect tax collections arising out of improved competitiveness of manufacturing and services sectors. Investment-linked Incentive 4.24.5. Tax incentive under Section 73A vis- -vis incentive as provided under Section 35AD Issues The concept of investment-linked incentive was introduced vide the Finance (No.2) Act 2009 by inserting Section 35AD of the Act. In terms of the said Section 35AD of the Act, a taxpayer is allowed a deduction in respect of the whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any expenditure of capital nature incurred (other than on land, goodwill or financial instruments), wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. For this purpose, 'specified business' means any one or more of the following business, namely:- setting up and operating a cold chain facility; setting up and operating a warehousing facility for storage of agricultural produce; laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network; building and operating, anywhere in India, hotels of two-star or above category as classified by the Central Government; building and operating, anywhere in India, hospital with at least one hundred beds for patients; developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elines as may be prescribed; developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed; production of fertilizer in India; setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962; bee-keeping and production of honey and beeswax; setting up and operating a warehousing facility for storage of sugar. The underlying idea behind allowing the said deduction seems to be intended to enable the taxpayer concerned to set-off the business losses incurred by this write-off against the taxable profits from their existing businesses and reduce their tax liability in the year of deduction and thereby to provide part of the resources of investment required for setting up of the businesses. Unfortunately, however, the incentive so intended cannot be achieved owing to the insertion of another Section 73A of the Act, which restricts the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-off / carry-forward of losses by specified business only against the profits and gains, if any, of any other specified business carried on by the taxpayer in that assessment year and the amount of loss not so set-off can only be carried forward and set-off against profits from specified business in the subsequent assessment years. Recommendation The losses from the specified business under Section 35AD of the Act ought to be made eligible for set-off against profits from other businesses of the taxpayer, and not restricted to be set-off against only the specified businesses, as it is not always the case that the taxpayer would only be carrying on the 'specified business'. In light of this, Section 73A of the Act should therefore be deleted. 4.24.6. Whether the amendment to Section 35AD(3) means that the taxpayer has a choice to either claim benefit under section 35AD or Chapter VI-A Issues It appears that the above amendment to Section 35AD(3) of the Act carried by the Finance Act, 2010, seeks to prevent a taxpayer from claiming dual deduction in respect of the same business. Accordingly, it appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that if a taxpayer carrying on a specified business does not claim deduction under Section 35AD, he can claim deduction under the relevant provisions of Chapter VI-A, if the same exist for such business and if the exercise of such a choice is more beneficial. Recommendations A clarification be issued that the taxpayer may exercise a choice (where available to the taxpayer) to avail tax incentive under section 35AD or Chapter VI-A, depending upon which is more beneficial to the taxpayer and thus clear the ambiguity as currently existing. Further, it is suggested that a clarification also be issued that in the event the taxpayer opts for the investment linked incentive under Section 35AD of the Act and the same is denied/ rejected at time of revenue audit (could be on account of non-satisfaction of prescribed conditions), in such case the taxpayer is eligible to make an alternative claim under Chapter VI-A on satisfaction of the conditions provided therein notwithstanding the requirement stipulated in Section 80A(5) of the Act. This is because, a taxpayer who is otherwise entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction in respect of qualifying profits of the specified business would lose such deduction on account of Section 80A(5) of the Act that mandates a claim for deduction under Chapter VI-A be made in its tax return. As the taxpayer would not have claimed deduction under provisions of Chapter VI-A in its tax return in view of a claim being made under Section 35-AD of the Act, such taxpayer would be precluded from claiming deduction in view of Section 80-A(5) of the Act. 4.24.7. Investment linked tax incentive under Section 35AD Issues Section 35AD of the Act extended investment linked tax incentive to a taxpayer engaged in building and operating anywhere in India a 2-star or above category hotel. The same is a restrictive tax incentive to the industry as only such taxpayers are eligible which are engaged in both building and operating the hotel. Similar restriction exists for the hospital industry, wherein the tax incentive is available for 'building and operating anywhere in India a hospital with at least 100 beds for patients. Thereafter, vide Finance Act, 2012 with retrospective effect from 1 April 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011, a new Section 35AD(6A) was inserted, which extended investment linked tax incentive to a taxpayer engaged only in 'building' hotel (and transferring the operation to another person). However, similar benefit was not extended for taxpayer engaged in building hospital. As can be seen from a plain reading of Section 35AD of the Act, it appears that the benefit under the Section would not be available in case the person building the hospital is different from the person operating the hospital. This does not seem to be in harmony with the objective, specifically given the typical operating structure of the industry wherein very often the developer or builder of the hospital is different from the taxpayer who is operating and managing the hospital. Considering the said anomaly was removed by the Finance Act, 2012 vide Section 35AD (6A) for hotel industry by granting investment incentive to a builder (thought not operating the hotel), similar benefit ought to be extended to a hospital industry. Further, if a person does not build the hotel/ hospital, but acquires the same by purchase or rent or otherwise for purposes of operation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd management thereafter, such taxpayer would not be entitled to the benefits of this section. Accordingly, to accord benefit to the industry, as is the very purpose of extending the tax incentive to the industry by amendment of Section 35AD of the Act vide the Finance Act, 2010, the benefit should be made available to the specified business of 'building' or 'operating' or 'building and operating' a hotel of two-star or above category anywhere in India. Similar amendment should also be considered for case of hospitals. Recommendations In view of the above disconnect, a clarification is required and it is suggested that the relevant clause be amended to read as under: (aa) on or after 1st day of April, 2010, where the specified business is in the nature of building or operating or building and operating a hotel of two-star or above category as classified by the Central Government. Similar, amendment to also recommend for the hospital sector and the relevant clause be amended to read as under: (ab) on or after 1st day of April 2010, where the specified business is in the nature of building or operating or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... building and operating a hospital with at least one hundred beds for patients Consequential amendments should also be considered in clause (iv) and (v) of sub-section (8) of Section 35AD of the Act. 4.24.8. Weighted Deduction in respect of Capital Expenditure on certain Specified Businesses Issues The following specified businesses commencing operation on or after the 1st of April, 2012 has been allowed a deduction of 150% (as against 100%) of the capital expenditure under section 35AD of the Income-Tax Act, namely:- (i) setting up and operating a cold chain facility; (ii) setting up and operating a warehousing facility for storage of agricultural produce; (iii) building and operating, anywhere in India, a hospital with at least one hundred beds for patients; (iv) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed; and (v) production of fertilizer in India. The same has been w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elcomed and is an inducement for setting-up of the above businesses. However, investmentlinked incentive by way of 100 per cent deduction of capital expenditure under section 35AD was introduced by The Finance (No.2) Act, 2009, with effect from 1st April, 2010 to encourage investment in priority areas for which a specific list (enlarged over the last two years) is contained in the section. The rationale behind the discriminatory tax treatment in between these specified businesses is not understandable Recommendation It is recommended that the weighted deduction of 150% be extended to the entire list in the said section since all the said businesses are extremely important for the Indian economy like natural gas/crude pipe line distribution, hotels etc. 4.25. Restoration of exemption of income from investment in infrastructure and other projects Section 10(23G) of the Act provided for tax exemption in respect of any income by way of dividends other than dividends referred to in Section 115-O of the Act, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company or a cooperative bank fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m investments made on or after 1 June 1998 by way of shares or long-term finance in approved eligible businesses including infrastructure projects, developers of Special Economic Zones (SEZs), hotel projects of not less than three star category, hospital projects with at least one hundred beds for patients and certain housing projects. The above exemption played a significant role in attracting investment towards development of infrastructure projects in India. This exemption was withdrawn by the Finance Act, 2006. Issue Consideration by the Government to restore the above exemption of income from investment in infrastructure and other projects Recommendation In view of the increasing need for huge investments in infrastructure and other vital projects, we plead for restoration of the aforesaid exemption with a view to ensuring low cost of raising capital for such thrust project areas. 4.26. Tax Incentives - Weighted deduction under section 35(2AB) Issues Section 35(2AB) of the Act extends deduction of a sum equal to twice the expenditure incurred towards scientific research on in-house research and development faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity as approved by the prescribed authority to companies engaged in the business of bio-technology; or manufacture or production of any article or thing (other than those specifically excluded for purposes of this tax incentive). The Section extends the weighted deduction of expenditure incurred only in respect of in-house research and development facility . India is globally recognized as an attractive jurisdiction for outsourcing owing to its affordable, skilled and English-speaking manpower. Outsourced R D work is becoming a key area of growth for the Indian services sector however there are no specific tax benefits available to units engaged in the business of R D or contract manufacturing. There certainly exists a need to provide impetus to such activities in the form of tax and fiscal benefits. Further, specifically in the pharma sector, pharmaceutical discovery is a lengthy, risky and expensive proposition. In this business environment, necessitated by the current business needs, sometimes companies incur expenses towards scientific research outside their R D facility. Another anomaly existing in the current provisions is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any expenditure incurred outside the approved R D facility by pharma companies' i.e. towards clinical trials (including those carried out in approved hospitals and institutions by non-manufacturing firms), bioequivalence studies conducted in overseas CROs and regulatory and patent approvals, overseas trials, preparations of dossiers, consulting/legal fees for filings in USA for NCE (new chemicals entities) and ANDA (abbreviated new drug applications) as approved by the DSIR which are directly related to the R D, etc. are currently not covered. Furthermore, Indian companies incur substantial costs in defending their patent rights and applications in and outside India and these sums are not eligible for deduction. Recommendations Extend tax benefits to units engaged in the business of R D or contract manufacturing rather than just for in- house R D facilities to provide impetus to R D in India. Benefits should be provided for units engaged in the business of R D and contract manufacturing by way of deduction from profits linked to investments. Benefits in the form of research tax credits which can be used to offset fut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure tax liability, similar to those given in developed economies can be introduced. As discussed above, in view of the lengthy, risky and expensive conception period for pharmaceutical discovery, it should be considered for the existing provisions to specifically allow weighted deduction in respect of expenses incurred outside the R D facility which are sometimes necessitated by the industry's business needs. Additionally it could be clarified that where the risk of doing research is assumed by a company, the entire cost of R D activities - whether outsourced or undertaken in-house - is eligible for weighted deduction in the hands of company undertaking the risk. The existing anomaly in the current provisions, i.e. any expenditure incurred outside the approved R D facility by pharma companies' although in relation to the R D activity is not eligible for the weighted deduction should be removed. This will further help promote in-house R D in India. Issues In order to claim deduction under the section in-house R D facility has to be approved by the Department of Scientific Industrial Research ('DSIR' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Among various conditions, the DSIR guidelines lay down the following conditions:- (a) The company should enter into an agreement with DSIR for 'co-operation' in such research and development facility. The word 'co-operation' shall inter-alia, mean that the company shall be willing to undertake projects of national importance, as may be assigned to it by DSIR, on its own, or in association with laboratories of CSIR, ICAR, ICMR, DRDO, DBT, MCIT, M/O Environment, DOD, DAE, Department of Space, Universities, Colleges or any other public funded institutions. The company would be free to exploit the results of such R D projects, subject however, to any conditions which may be imposed by Government of India, in view of national security or in public interest (b) Assets acquired and products, if any emanating out of R D work done in approved facility, shall not be disposed of without approval of DSIR. It cannot be denied that such conditions, as above, are very restrictive in nature and instead of promoting in-house research and development, hamper the willingness of corporates to carry out in-house research and development. Recommendation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FICCI recommends that there is a need to relax these conditions to encourage in- house R D activities by companies. Issue Currently, there seems to be an ambiguity in the office of Department of Scientific and Industrial Research ('DSIR') with respect to whether a company engaged in the business of development and sale of software or providing IT services or ITES is eligible for weighted deduction on the R D expenditure incurred by it. Recommendation Explicit provisions should be introduced in the Act, to remove the ambiguity such that DSIR can approve the R D facilities of the companies engaged in development and sale of software. It is further recommended that weighted deduction for R D to be extended to service sector as well. 4.27. Deduction under section 80 of the Act Issues Currently, section 80JJAA of the Act endows incentive to an Indian company which derives profits from an industrial undertaking engaged in the manufacture or production of an article or thing, by providing a deduction for an amount of thirty percent of the additional wages paid to the new workmen for a period of three years beg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inning with the year in which new workmen is employed. The deduction is available subject to the satisfaction of the conditions specified in the section. The section was inserted in the Act with the intent to create more employment opportunities. One of the conditions stipulated by the section is that new workman should be employed for a period of three hundred days or more during the previous year of employment. In a situation, where workman joined in July and worked till March of the relevant previous year of employment i.e. worked for less than 300 days in Year 1 but for full year in Year 2 and Year 3 and assuming all other conditions prescribed in section 80JJAA of the Act are complied with, the company is still not eligible to claim deduction in any of the years. As it can be seen that the deduction is not available to companies engaged in the service sector irrespective of the same being major contributor of the employment in the Indian economy. Such discrimination is unfair. Recommendations It is recommended that workmen in respect of whom the period of continuous employment of 300 days or more is attained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year succeeding the previous year in which the workmen is employed, the deduction under section 80JJAA of the Act be granted from the succeeding previous year. Extend the benefit of deduction under section 80JJAA of the Act to assessees engaged in the business of providing service. It will provide impetus to the growth of the service industry in India and will also generate employment opportunities. 4.28. Deduction under section 42 of the Act for Infructuous or Abortive Exploration Expenses Issue Section 42 of the Act provides that deduction for infructuous or abortive exploration expenses is not allowed until the surrender of the area, even though the expenses are already charged off in the books of account as per the company's accounting practices. Typically, the provisions of the Production Sharing Contract do not require the area to be surrendered as a prerequisite for claiming the deduction of abortive exploration cost. As a result of the requirement to surrender the area in section 42 of the Act prior to the beginning of commercial pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction, the taxpayer is not in a position to avail the deduction, of expenses on account of abortive exploration in the year when the areas is considered abortive. This results in undue hardship being faced by the oil exploration companies in claiming the deduction. Recommendation It is recommended that the requirement to 'surrender' the area should be deleted from section 42(1)(a) and deduction should be allowed from the year in which the area is abandoned as abortive. 4.29. Deduction for Expenditure on prospecting for certain minerals Issue As per the existing provisions of the Act, the expenditure incurred by an assessee engaged in any operation relating to prospecting for, or extraction or production of any mineral during the five year period ending with the year of commercial production is allowed as a deduction from the total income to the extent of one-tenth of the amount of such expenditure. Section 35E does not cover capital expenditure. The allowability of even revenue expenditure over a period of 10 years makes the provision quiet restrictive. Thus, instead of promoting the development of mineral industry in the country ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the existing provision acts as detriment to the development of the minerals in India. India has huge mineral resources which can be exploited for the benefit of the economy but however, huge expenditure is required for prospecting and developing various mineral resources. It would be in the fitness of things, if the Legislature makes a suitable amendment in the Act by allowing the entire revenue expenditure in the year of commercial production Recommendation It is recommended that section 35E be amended to provide that the expenditure incurred at any time during the year of commercial production and during the prior four years be allowed entirely in the year in which the commercial production starts. 4.30. Deductibility in respect of subscription to long-term infrastructure bonds Issue Section 80CCF of the Act provided for a deduction to an individual or HUF in respect of subscription towards long term infrastructure bonds (as may be notified by the Central Government) to the extent of Rs. 20,000. This benefit of deduction was introduced by Finance Act, 2010 and was further extended in respect of aforesaid subscriptions made duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng financial year 2011-12. The rationale of providing this deduction was to promote investment in the infrastructure sector. Recommendation It is recommended that benefit of section 80CCF of the Act be restored from financial year 2013-14 and onwards and further the limit of deduction be extended to Rs. 50,000. 4.31. Income tax exemption in case of Sale of Carbon Credits Issue Carbon credit is an incentive available to the industries reducing CO2 emission by investing in energy efficient technology. Considering the 'Global Warming' impacts, it is a very important initiative on the part of industries. Energy efficient and carbon emission reduction technologies are substantially costly and results in additional investment for industries. It is very much likely that the income generated from sale of Carbon Credits may or may not compensate additional outflow laid out for earning the same. Recommendations Section 10 of the Act should be amended to provide exemption to income from sale of Carbon Credit entitlements Alternatively, suitable amendment should be made in S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 35 of the Act to allow weighted deduction for expenditure in relation to infrastructure requirement resulting into earning of Carbon Credit. Mergers Acquisitions 4.32.1. Transactions without consideration or for inadequate consideration Issues The Finance Act, 2010 inserted clause (viia) in sub-section (2) of Section 56 of the Act with a view to curb abusive transactions. Section 47 of the Act and other provisions of the Act exempts certain transactions from taxation. However, proviso to Section 56(2)(viia) of the Act excludes only a part of such exempted transactions from its applicability. Consequently, those transactions which are otherwise exempt under Section 47 of the Act will still be liable to tax under Section 56(2)(viia) of the Act. The rationale behind this discrimination is not understandable. Therefore, the view is that all transactions which are specifically exempted from capital gains tax under Section 47 of the Act or other provisions of the Act should be outside the purview of the said Section 56(2)(viia) of the Act. Section 56(2)(viia) of the Act is applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to receipt of shares. The provisions are anti-abusive and intended to curb tax avoidance. Consequently, it should be applicable to transactions liable to tax and not otherwise. Thus section should be applicable to receipt of shares consequent to transfers which are not covered under section 47, and not otherwise. Once the section is made applicable to receipt pursuant to transfers as above, issue of shares will clearly be out of purview of the section, however, for avoiding litigation, it needs to be clarified that the following transactions are also outside its purview:- Issue of shares including: i. right issue ii. Preferential allotments iii. Conversion of financial instruments iv. Bonus shares v. Split/subdivision/ consolidation of shares. Receipt pursuant to stock lending scheme Receipt by trustee company. Buyback of shares By Offshore investors in cases where purchase price is determined by Indian laws in force (e.g. SEBI rules, FEMA guidelines) Besides, it may be appreciated that transfer of shares of unlisted/private Indian companies for no co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration or for consideration less than the Fair Market Value, by or between non-residents would result in double taxation of the same income, once in the hands of the transferor and thereafter again in the hands of the recipient. For example, share transfer transactions between associated enterprises would be subject to transfer pricing provisions under the Act and hence income from such transactions would be taxed based on arm's length price basis in the hands of the transferor, even though the consideration is inadequate or nil. It would therefore be unfair to once again tax such transactions in the hands of the recipients. Being anti-abuse provision, it should be applicable to transactions between associated concerns and not to other transactions. The amendment will adversely impact genuine cases where the shares are transferred at a pre determined price for agreed commercial and bonafide considerations, For example: Joint venture or investment agreements particularly for unlisted company, frequently make provisions for put and call options to be exercised at agreed prices which are compliant with all relevant exchange control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and related laws though they may not necessarily be at fair market value. This is, often, to permit Indian promoters to enjoy some upside benefit if their companies perform better than the rate of return expected by the investor. To visit such promoters with an income-tax liability on a purely notional unrealized gain when they acquire shares from the investors at the negotiated price is clearly unwarranted and, possibly, unintended. Likewise, there may be default forced sale provisions in such agreements that allow a non-defaulting party to acquire shares from a defaulting party at a price below market value. Again, to tax the non-defaulting acquirer for the discount would be unfair and possibly, also unintended. It may thus be seen that the provision is clearly against the interest of the large body of bonafide and high quality Indian promoters. Abuse of provisions by a small errant minority should not be a reason for the government to tax the large majority that has engaged in no-wrongdoing. The provision thus needs a re-look, ideally for withdrawal. However, suggestions are given below to reduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negative impact, if not withdrawn. As per newly introduced Section 56(2)(viib) of the Act, if shares are issued by a company to a resident person (other than a domestic VCF) for a consideration higher than the fair market value, then such excess would be treated as income in the hands of the issuer company. The method for determining fair value is not yet prescribed. This could adversely affect the ratchet structures agreed with resident promoters wherein they were required to infuse funds or convert at a substantial premium for the adjustment of shareholding. Further, in the absence of a prescribed formulae and determination left to the tax officer, it is unclear how this provision would be applied and whether each time a closely held company issues shares at premium, it would need to suo-motto offer income to tax under this clause There may be instances where the company receives consideration in one tax year but issues shares in the following tax year or in certain cases does not issue shares but refunds the share application money to the shareholder, there is lack of clarity in such cases as to the year in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision would apply or whether the provision would apply at all Also, this issue is relevant for the Angel Investment industry investing in start-up ventures, where the immediate valuation of the entity may not be a benchmark for the investment being made by Angel Investors. The investment decision is based on the evaluation of the skills of the promoter and other intangible factors, which may not be adequately captured in any fair value formula. Also, the typical situation for such start-ups ventures is that the entrepreneur brings in a small amount of capital whereas the Angel Investor provides a larger amount. Considering that the entrepreneur is the one making the efforts, his stake in the company is proportionately higher than his capital contribution. Accordingly, levying a tax on the company ignoring this fundamental reality would result in a big cash drain on such start-up ventures. This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The overall principles enunciated under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GAAR provisions to treat an arrangement as Impermissible Avoidance Arrangement should be applied to the share subscription transaction for determining the taxability of securities premium account in the hands of company. It would be prejudicial to subject the Issuer company to such adverse provisions which did not exist in law when the transactions were entered into. Recommendations Primarily, the provisions should be withdrawn. All transactions which are specifically exempted from capital gains tax under Section 47 of the Act or other Act should be outside the purview of the said Sections 56(2)(viia) of the Act. Section 56(2)(viiia) of the Act should be applicable to receipt of shares pursuant to transfers not covered under section 47 and not otherwise. Section 56(2)(viia) of the Act shall not be applicable to transactions governed under Transfer Pricing provisions. Section 56(2)(viia) of the Act should not be applicable to non-residents. Section 56(2)(viia) of the Act should be suitably amended to provide that it applies to receipt of shares from related/connected entities. It must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be clear that it is not applicable to genuine business /commercial transactions. Section 56(2)(viia) of the Act should be suitably amended to provide that the section should be applicable only if the share being received by the taxpayer is in existence and held by another person. Similar amendments should also be made in section 56(2)(vii) of the Act and restriction thereof should be restricted only to shares of companies in which public are not substantially interested. Rule 11UA of the rules should be suitably amended to value unquoted equity shares on fully diluted basis. The amendment in Section 56(2)(viib) of the Act should be deleted. Without prejudice to the above, the following need consideration: Applicability should be restricted to issue of shares in consideration for cash. The issue of shares pursuant to otherwise exempt transactions such as merger, demerger, etc should be excluded from the purview of Section 56(2)(viib). The methodology for determining the fair market value of shares should be based on all relevant factors including future cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h flows, profit earnings capacity, asset valuation etc. Intangibles such as industry experience, specialized skills, etc need to be given due weightage in the valuation to encourage entrepreneurial activities. Sufficient weightage should also be given to widely held companies which are business peers of the company, investment by non-resident shareholders, VCF etc. It is recommended that it should be suitably provided for in the section that it would apply only in the year of issue of shares. It should be suitably clarified to provide that the section does not require every closely held company that issues shares to a resident to suo-motto offer such income to tax. Further, the tax officer should be empowered to invoke this section only if at the time of assessment; the tax officer is of the view that premium charged by the company from the resident shareholder is in excess of the fair market value of shares issued. The provisions of this section should not be made applicable in case of receipt of consideration for issue of shares from a resident, in case where shares are issued to both residents as well as non-resident simultaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly at the same price. The provision should not be made applicable to Angel investors or ratchet transactions entered into with the promoters. Grand fathering should be provided to the existing arrangement / transactions pursuant to which shares are issued. 4.32.2. Amalgamation into parent/subsidiary/co-subsidiary Issues Since 1991, Government started the process of reforms which gave opportunity to companies to dismantle their complicated structures created over the years and move towards simplified structures to conduct their businesses in an more open and transparent manner. Government supported companies to do so by enacting exempting provisions in the Act to ensure that only real gains gets taxed which results from disposal of assets to outsiders and not the notional gains arising from mere changes in ownership between entities within the same group. Section 47 of the Act exempts various transactions from being taxed under the head capital gains by not regarding such transactions to be 'Transfer' for Section 45 of the Act. Finance Act, 2012 has made amendment in section 47(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) of the Act by providing that the condition regarding allotment of shares in the amalgamated company need not be satisfied where the shareholder itself is the amalgamated company. Section 47(vii) of the Act after amendment states as under:- any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if- (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where shareholder itself is the amalgamated company, and (b) the amalgamated company is an Indian Company. The amendment covers only one type of situation i.e. where the amalgamated company itself holds shares in the amalgamating company. It however does not take care of the situations listed below: (i) Company A is a subsidiary of company B, Company B is a subsidiary of Company C. Company A and Company B gets amalgamated into Company C. (ii) Company P and Company Q hold shares in each other and one of the companies gets amalgamated into another. (iii) Company X, Company Y and Company Z are three companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and each company holds shares in the other two companies. Any two companies get amalgamated into the third company. (iv) Company X, Company Y and Company Z are three companies and each company holds shares in the other two companies. All the three companies get amalgamated into another Company T. Further, section 42 of the Companies Act, 1956 do not allow a subsidiary company to hold shares in the parent company. Pursuant to such merger, in case where subsidiary was holding shares in Transferor company, the parent company cannot allot shares to it. Section 2(19AA) of the Act defining Demerger specifies conditions which are conflicting in nature. First condition requires that at least 75 percent shareholders of transferor should become shareholder of transferee. Second condition provides that shares should be issued to the shareholders of the transferor company on a proportionate basis. If one logically reads the two conditions, it means that shares should be issued on a proportionate basis to the shareholders of demerged company to whom shares are issued under First condition. However, to avoid litigation, clarity needs to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be provided. Section 41 of the Act provides that if certain income, relating to business of predecessor, will be taxable in hands of successor even though it arises post succession. However, similar provision is not there in Section 43B, 35DD etc of the Act where expenses need to be claimed post restructuring in hands of successor. Recommendations Section 47(vii)(a) should be amended to provide exclusion to (a) shareholder of amalgamating company being subsidiary of Amalgamated Company (b) Amalgamation of direct subsidiary with stepdown subsidiary, (c) Amalgamation involving amalgamating company holding shares in amalgamated companies. Section 2(19AA) of the Act be amended to provide that the shares of the transferee company should be issued on a proportionate basis to the shareholders of demerged company to whom shares are issued under First condition. It should be clear that proportionate basis does not apply to all the shareholders. A new section be inserted in chapter IV providing that in case of reorganization, deduction in relation (a) to expenditures incurred in pre-reorganizat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion period but allowable during post-reorganization period and (b) expenditures incurred during the previous year but allowable on certain criteria for e.g. payment basis under Section 43B, etc. will be allowed to successor as it would have been allowed to the predecessor. 4.32.3. Conversion of one type of share into other type of share of the same company, not resulting into any real income Issues Clause (x) of section 47 of the Act provides that, any transfer by way of debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company, will not be treated as a 'transfer' for the purposes of section 45 of the Act. Sub-section (2A) of Section 49 of the Act provides that, where a share or debenture in a company, became the property of the taxpayer on such conversion, the cost of acquisition to the taxpayer shall be deemed to be that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such share or debenture was acquired by the taxpayer. It is noteworthy that while inserting clause (x), the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent of the Legislature was that no taxable capital gains can arise at the time of conversion of convertible debentures, deposit certificates or shares of the company into debentures or shares of that company, since it amounts to conversion of an asset held by an taxpayer from one form to another and there is no other party involved to whom any transfer is made. In fact, clause (x) of section 47 of the Act was further amended by the Finance Act, 1992 to include 'bonds' in the said provision. However, it appears that there has been an inadvertent omission in both the foregoing provisions, i.e., conversion of preference shares or warrants into equity shares of a company have not been specifically covered under the said provisions. Similar to Section 49(2A), Section 55(2) (v) of the Act provides that cost of shares received on conversion should be cost of the shares which were converted. Thus, there does not seem to be any difference in taxing of conversion of debenture or share. However, legislature has missed to provide exemption to conversion of shares. Recommendations Section 47(x) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act should be amended to include cases of conversion of one type of shares or warrants into shares or other type of shares. Section 2(42A) of the Act should be amended to provide that the period of holding of earlier instrument should be considered as period of holding for new instrument. 4.32.4. Carry forward and set off of accumulated loss and unabsorbed depreciation allowances in amalgamation or merger Issues Currently, Section 72A/72AA of the Act allows carry forward of loss and accumulated depreciation only in case of following type of companies: a company owning an industrial undertaking or a ship or a hotel with another company a banking company one or more public sector company or companies engaged in the business of operation of aircraft Apparently, the benefit is not available to all the companies engaged in the business of providing services. Considering the facts that many multinational companies have entered in the Indian service market and it has become imperative for the small companies to consolidate their resources to survive, the benefit applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under the provision of Section 72A of the Act should be extended to all companies irrespective of their line of operations. This will encourage the flow of FDI into India as multinationals will be encouraged to invest into existing businesses promoted and managed by Indian entrepreneurs. There is ambiguity on the availability of benefit to companies engaged in the business of manufacturing of computer software . More so, section 72A(2) of the Act prescribes stringent condition about continuity of holding of assets by the amalgamating company for at least 2 years prior to transfer and by the amalgamated company for 5 years post transfer. Similarly it requires that the amalgamating company should be in the business for at least 3 years prior to the amalgamation. The conditions in the hands of the amalgamated company are sufficient to control misuse of the provisions and therefore, the conditions applicable to the amalgamating company should be deleted. Also, holding of assets and continuation of business for 5 years is quite a long period. Same should be reduced to 3 years. Recommendations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 72A of the Act should be amended to allow benefit of carry forward of losses, pursuant to amalgamation, to all Companies irrespective of their line of business especially services business. It should be explicitly clarified that the benefit of section 72 for carry forward of losses, pursuant to amalgamation should be allowed to the companies engaged in the business of manufacture of computer software. Section 72(A)(2) of the Act be amended to delete conditions under sub-clause(a) relating to amalgamating company. Also, section 72A(2)(b) of the Act should be amended to reduce the period of holding assets and carrying on of business to 3 years. 4.32.5. Conversion into Limited Liability Partnership under provisions of Chapter X of the Limited Liability Partnership Act, 2008/conversion of firm- into company Issues Chapter X of the LLP Act allows following conversions: Partnership Firm (Firm) into LLP (Section 55 of the LLP Act) Private Limited/Unlisted Public Company into LLP (Section 56/57 of the LLP Act) The Finance Act 2010 provided tax neutral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity to conversion of Company into LLP under Section56-57 of the LLP Act. However, there is no provision allowing tax neutrality to conversion of firm into LLP under Section 55 of the LLP Act. Same should be provided. Section 47(xiiib) of the Act provides tax neutrality to conversion of Company into LLP subject to certain stringent conditions. Such conditions should be made less stringent or some relaxation should be provided in application of the same as discussed below: It is available only to a Company having Turnover of less than INR 60 lakhs for 3 years prior to such conversion. In the current economic scenario, this limit of INR 60 lakhs needs to be removed. There is no reason, why companies with large turnover, which otherwise qualify, should not be eligible for conversion with tax neutrality. Another condition is that all the shareholders of the company, immediately before the conversion, should become partners of the LLP. This condition should be made applicable only in respect of equity shareholders and not preference shareholders, since preference shares are in the nature quasi equity. Further, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is necessary that that the aggregate of the profit sharing ratio of the shareholders of the company, in the LLP shall not be less than 50 percent at any time during the period of five years from the date of conversion. This condition should be applicable only to voluntary transfers and not to all the transfers. Say, this condition should not apply in case of dilution resulting from death or disqualification of a partner or amalgamation of a corporate partner. For claiming tax neutrality, it is provided that accumulated profits of the company as on the date of conversion should not be paid to the partners of the LLP for a period of three years from date of conversion. Under Income-tax Act LLP is considered akin to a partnership firm and there is no restriction on distribution of the profits of the partnership firm. Further in case of partnership firm there is no requirement to show Reserves and Surplus separately but the same is credited to partner's capital account. Thus, there should not be any restriction on LLP in relation to payment out of profits. Further, the term accumulated profits is not defined and may include other reserves also. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MAT payment under Section 115JB of the Act is prepayment of taxes actually becoming due in subsequent years under normal provisions of the Act. Consequently, Section 115JAA of the Act allows credit for such payments in the year the company becomes liable to pay tax under normal provisions of the Act. There is no reason, why such credit should not be allowed to LLP, which is converted from a company eligible to such credits, if it is paying taxes under normal provisions of the Act. Section 47(xiii)/(xiiib) and (xiv) requires that the members of the firm/shareholders of the company should continue to maintain profit sharing/shareholding for 5 years. 5 years is a fairly long time, it should be restricted to 3 years. Section 47A(4) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiiib) of the Act, the gains on conversion of company/transfer of shares shall be the profits gain taxable in the hands of the LLP/shareholders in the year of such non-compliance. Similarly, proviso to Section 72A(6A) of the Act provides that in case of non-compliance of any condition provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Section 47(xiiib) of the Act, the losses/unabsorbed depreciation of the company utilized by the LLP shall be income of the LLP for the year of such non-compliance. Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiii) or (xiv) of the Act, the gains on conversion of partnership or proprietary concern shall be profits gains taxable in the hands of the Company in the year of such non-compliance. Similar to section 72A(6A), 72A(6) deals with cases covered under section 47(xiii) and (xiv). Recommendations Section 47(xiii) of the Act should be suitably amended to include conversion of a Firm into LLP along with conversion of Firm into a Company. Turnover criteria should be removed from Section 47(xiiib) of the Act. Words equity shareholder should substitute the word shareholder wherever it appears in Section 47(xiiib) of the Act. Insert proviso under clause (d) in proviso to Section 47(xiiib) of the Act to provide that it should not be applicable to a case where a change in profit sharing takes place consequent to deat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of a partner or pursuant to any other transaction covered under Section 47 of the Act. Condition of non-payment out of accumulated profits specified in clause (f) to proviso to Section 47(xiiib) of the Act should be removed. If not removed, term accumulated profit should be appropriately defined. Provisions of Section 115JAA of the Act allowing utilization of MAT credit should be amended to allowed credit for MAT paid by the Company to the successor LLP. Sections 47(xiii)/(xiiib)/(xiv) should be amended to reduce period of continuing same profit sharing /shareholding from 5 years to 3 years. Words profits gains in Section 47A(3)/(4) of the Act should be replaced with the income. 4.32.6. Continuation of deduction under Section 80-IA of the Act in case of re- organization Issues Section 80-IA of the Act provides deduction in relation to profits of certain undertakings. It was well settled that in the case of restructuring of any entity owning such undertaking, the benefits of deduction will be available to entity owning the undertaking post restruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing. Board's Circular vide Letter F.No. 15/5/63-IT (AI), dated 13 December 1963; specifically provided that in the year of corporate restructuring, the benefit shall be available to transferor entity upto the date of transfer and to the transferee entity for the remaining period of tax holiday. Sub-section (12) provided that in the year of restructuring deduction will not be allowable to the Transferor entity but same will be allowed to the Transferee entity as it would have been allowed, had the restructuring not taken place. In totality, this will restrict the total period of deduction to not more than the total period for which the deduction should have been allowed under the provisions of the Act. However, sub-section (12A) was inserted in section 80-IA with effect from 1 April 2008 to provide that nothing contained in sub-section (12) shall apply to reorganization post 1 April 2007. A view is expressed that post insertion of sub section (12A), benefit of deduction under Section 80-IA of the Act will not be available to the Transferee entity. Recommendations Section 80-IA(12A) of the Act be deleted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enable restructuring of eligible entities. Section 80-IA(12) should be amended to provide for allowing deduction to the Transferor entity for the period till transfer date and to the transferee entity post transfer. 4.32.7. Definition of Widely held Company Issues Section 2(18) of the Act defines widely held company. This definition has wide implication on carry forward of loss, taxability under Section 56(2) of the Act and in various other provisions. It includes a listed company, only if its shares are listed on exchange as on last date of the relevant year. Further it includes subsidiary of listed company, only if the shares of such subsidiary were held throughout the relevant year by the listed company. These provisions lead to situations which does not seem intended. Therefore, it stands logical that the conditions of listing, holding of shares etc. should be subject matter of test on the date of transaction and should not be stretched to be continuing till the end of that financial year. Recommendation Section 2(18) of the Act should be suitably amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to provide test of conditions on the date of relevant transaction. 4.32.8. Non-Compliance of conditions applicable to certain reoganisations Issues Section 47(iv)/(v) of the Act provides exemption to gains arising from transfer of capital assets between a holding company and its wholly owned subsidiary company. Section 47A(1) of the Act provides that in case holding company not continuing to hold 100 percent of shares of the subsidiary company or treatment of the transferred asset as stock-in-trade, within a period of eight years from the date of the transfer of capital asset, the gain exempted under Section 47(iv) / (v) of the Act shall be taxable in the hands of the transferor company for the year of transfer. The period of eight years is too long. Further, in any case such income should be taxable in the year of event specified in the section and not in the year of transfer of capital asset. Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiii) or (xiv) of the Act, the gains on conversion of partnership or proprietary concern s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be profits gains taxable in the hands of the Company in the year of such non-compliance. The conditions should be complied in the year of conversion and it should not be required to be complied forever/5years. Recommendations Section 47A (1) of the Act should be amended to reduce period of eight years to period of two years . Further, in any case, such income should be taxable in the year of event specified in the section and not in the year of transfer of capital asset. Section 47A(3) of the Act should made applicable in the year of conversion only or at the most in the year immediately succeeding that year. Further, words 'profits gains' in Section 47A(3) of the Act should be replaced with the words 'income'. 4.32.9. MAT Credit Issues MAT credit is akin to advance payment of tax. Benefit of MAT credit cannot be denied to successors in case of reorganization. Recommendation S.115JAA should be amended to provide that successors in case of amalgamation, demerger or any other form of reorganization should be eligible to claim benefit of MAT Cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit. 4.33. Amendment to Section 9(1) of the Act - Retrospective insertion of Explanations (a) To expand meaning of word through (b) To shift the situs of shares in foreign company/interest in other foreign entity to India, in case the share or interest in such company / entity derives substantial value from assets in India. Issues The amendment is retrospective in nature and proposed to be inserted with effect from 1 April 1962. The amendment would mean that the transactions in past 6 years can be brought to tax. The transactions were carried out considering the same not to be subject to tax in India. This view has been upheld by the Supreme Court in the case of Vodafone International BV. Amending the tax laws post judicial pronouncement by the Supreme Court would damage the face of India in the International market at such a sensitive juncture of the Indian economy. Recommendations The amendment should only be prospective. Explanation 5 to section 9(1) of the Act should be amended to provide the following: - Explanation should be applicable only for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... last part of Section 9(1) of the Act relating to or through the transfer of a capital asset situate in India - The terms 'value' and 'substantial' needs to be clearly defined. - In any case, substantial should mean 50% - Threshold limits in terms of (a) quantum of consideration e.g. exceeding Rs.100 crores, (b) quantum of shares of the foreign company e.g. exceeding 20% of paid up capital etc. should be provided for applicability of explanation. - The phrase the share or interest in a company or entity registered or incorporated outside India in Explanation 5 should be reworded to mean the share in a company incorporated outside India or ownership interest in other entity registered outside India. It should be clear that all interest, other than ownership or controlling interest, should not be contemplated within the ambit of Explanation 5. 4.34. Amendment to Section 2(14) and Section 2(47) of the Act Section 2(14) - Retrospective insertion of Explanation expanding scope of the definition of capital asset - the term 'property' has been defined to include any rights in relation to an Indian company, including righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of management or control or any other rights whatsoever. Section 2(47) - Retrospective insertion of an Explanation to the effect that the term 'transfer' includes disposing or parting with an asset or any interest therein or creating any interest in any asset, notwithstanding that such transfer of rights is effected or dependent upon or flowing from transfer of shares of a foreign company. Issues It is not very clear as to what is meant to be covered by the term 'any rights'. The term is very wide and is defined in an inclusive manner. The amendment in Section 2(14) read with Section 2(47) of the Act, may even cover unintended consequences. For example, creation of management or control rights upon equity infusion in an Indian Company could be treated as transfer. Further, 'the rights in relation to an Indian company' should not include rights of the company. For example, Company may have its significant asset in the form of certain rights such as hotel license, lease rights, etc. Acquisition of shares in an Indian Company holding such rights should not be treated as creation of interest in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets which is deemed as 'transfer'. Lifting of corporate veil in such a manner could lead to severe consequences. Explanation 5 to Section9(1) of the Act seem to be inserted for covering indirect transfer of shares in Indian Company. However, the amendment may cover all income through or from such shares. Recommendations Explanation to Section 2(14) of the Act should be amended as under : - Rights in an Indian Company' should be restricted to management and contractual rights. Explanation. to Section 2(47) of the Act should be amended as under : - Words or creating any interest in an asset should be deleted. - The transactions which are otherwise not 'transfer' as per law (for example - gift) or transactions which do not result in any transfer per se, (for example primary infusion in company for acquisition of shares) should not be covered in the deeming fiction created by amending Section 2(47) of the Act. 4.35. Insertion of Section 50D in the Act Section 50D is inserted to provide that in cases involving transfer of assets, if the consideration is not determinable, fair value of the considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion received or accruing shall be deemed to be consideration Issues Method of determining fair value is not specified Section overlaps with certain other sections providing similar mechanism for determining consideration. e.g. section 45(3) of the Act dealing with transfer of a capital asset. Recommendations Method for determination of fair value should be specified Applicability of the section should be restricted to the transactions not covered under other similar provisions. 4.36. Amendment to Section 68 of the Act made by Finance Act, 2012 Section 68 of the Act is amended to insert a proviso to provide that in case of closely held company share application money (including share premium) shall be considered as not satisfactorily explained unless the investor provides necessary explanation to the satisfaction of the Assessing Officer. Issues This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The overall pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciples enunciated under GAAR provisions to treat an arrangement as Impermissible Avoidance Arrangement should be applied to the share subscription transaction for determining the taxability of securities premium account in the hands of company. This amendment may overlap with provisions of Section 56(2)(viib) and may be taxed twice. Recommendation This amendment should be deleted. 4.37. Amendment to Section 115JB S.115JB has been amended to provide that revaluation reserve should be included in book profit at the time of retirement or disposal of asset Issues Income tax is on realized profit and not on notional profit On retirement of an asset there is no income and same should not be made liable on the basis of book profit also. There is no set-off provided that if the reserve is included on retirement same should not be included at the time of disposal. Recommendations This section should be deleted. The amendment should not refer to adjustment at the time of retirement of asset. Capital Gains 4.38.1. Rate of tax applicable to Long Term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Capital Gain Issues Section 112 of the Act provides rate of tax of 20 percent (plus surcharge applicable if any cess) for Long Term Capital Gains. However, considering the fact that in computation of capital gains very limited deductions are allowed, rate of 20 percent seem to be on a higher side. It has been observed that owing to this high taxation cost on long-term capital gains, there may be a temptation to understate the value of sale consideration. To curb such adjustment provisions of Section 56(2)(vii) and (viia) of the Act are brought on the statute. For computing the said capital gains, indexed cost of acquisition is deductible from the full value of the consideration. In case of listed shares, Section 112 of the Act provides an option to the taxpayer either to pay 20 percent on post index profit or to pay 10 percent on profit without indexation. Further, there is imposition of Education cess, Secondary and higher education cess and, Surcharge (if applicable). Deduction under Section 80C to 80U of the Act is not available in respect of short-term capital gains taxable unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 111A of the Act and long-term capital gains taxable under Section 112 of the Act. Recommendations It is suggested that rate of tax on long-term capital gains be reduced to 15 percent. Provisions of Section 56(2)(vii) and (viia) of the Act be removed as they will no longer be required. Choice of computation of capital gain with index benefit or without should be extended to all assets. Deductions under Section 80C to 80U of the Act are in form of tax incentives hence such deduction should be available from capital gains taxable under Section 111A and 112 of Act. 4.38.2. Removal of upper cap of INR 50 lakhs under Section 54EC of the Act Issues Section 54EC of the Act provides tax exemption on capital gains rising from the transfer of a long-term capital asset if invested in long-term specified assets within a period of six months from the date of such transfer. The Finance Act, 2007 has provided that the investments in such bonds should not exceed INR 5 million in a financial year. Currently, huge amounts are required to be deployed in the infrastructure sector and this vehic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le could be used for raising such infrastructure development funds. Moreover, the interest income on such bonds is fully taxable. Tax exemption is only on capital gains invested in the bonds issued by National Highways Authority of India or by the Rural Electrification Corporation Limited. There does not seem to be any rationale behind prescribing the monetary limit of INR 5 million per investor per year and restricting the investment to be made in bonds issued by National Highways Authority of India or by the Rural Electrification Corporation Limited. Especially in the context that such funds would in any case be used for meeting the infrastructure requirements. In addition to the above, there is an ambiguity created by certain judicial precedents, where the taxpayer who has transferred a capital asset in the second half of a financial year and who has exhausted the exemption limit of INR 5 million in a financial year, whether can he look to invest a further sum of INR 5 million within 6 months from the date of transfer even if such period of 6 months spills over into next financial year. Recommendations Proviso to Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 54EC(1) of the Act should be deleted which mandates that the investment in such bonds does not exceeds INR 5 million in a financial year or the limit be substantially increased With a view to accelerate growth in the infrastructure sector, investment in bonds issued by Infrastructure Capital Companies/Fund should also be notified for the purposes of section 54EC of the Act. The abovementioned ambiguity should be removed by clarifying that the amount of investment per financial year is INR 5 million irrespective of whether the same is used for claiming exemption from sale of one long term capital asset only. 4.38.3. Cut-off date for ascertaining cost and Index factor for computation of Long Term Capital Gain Issues Section 55 (2) of the Act provides that in case of asset acquired before 1 April 1981, taxpayer has an option to replace cost of such asset by market value thereof. Section 48 of the Act provides that for computation of long term capital gain, indexed cost of acquisition is deductible from the full value of the consideration received from the transfer of the capital asset. Indexed cost means cost of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition adjusted for inflation index. Again, base for ascertainment of index factor is 1 April 1981. Cost Inflation Index is notified every year having regard to 75 percent of average rise in the Consumer Price Index for urban, non-manual employees for the immediately preceding previous year to such previous year. It may thus be seen that such indexation benefit is notional and does not take care of full inflationary impact and causes inequities to the taxpayers. Thus, the cut-off date for cost replacement and base for index being 30 year old needs to be revised. Further, in case of taxpayer, acquiring assets through specified modes, period of holding of earlier transferor is added to period of holding of taxpayer, however, index benefit is allowed only from the date of holding of the asset by the taxpayer. This seems to be an unintended anomaly and needs to be set right. Recommendations Cut-off date for cost replacement in Section 55 of the Act and for index factor in Section 48 of the Act be shifted to 1 April 2001. Index benefit even to the taxpayer acquiring assets through specified modes should commence from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of acquisition in the hands of original purchaser. 4.38.4. Rate of Tax applicable to Short-term Capital Gains Issues Section 111A of the Act provides that short-term capital gains on sale of shares of listed companies or units of equity oriented fund should be taxed at 15 percent. The rate was 10 percent till 31 March 2009. The difference between normal income and capital gain arising on transfer of assets is well recognized even under the Act. It is a known fact that owner of an asset incurs a lot of expenditure for maintaining an asset. In case such asset is used in business, deduction is allowed for such maintenance and other expenses. However, no such deduction is allowed if such asset is a non-business asset. Thus it makes a strong case that rate of tax in case of capital gains should be different from the rate applicable to other incomes. This distinction is recognized to some extent in Section 111A and 112 of the Act. However, in case of short term gain relating to assets other than listed shares, such difference is not recognized. In case of assets other tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n listed shares, the period of holding of less than 3 years makes it a short-term capital asset. According to the 'Cost Inflation Index' in the recent years, the inflation is about 10 percent per annum. This would result into an inflated cost of about 30 percent in 3 years. Hence, any tax on this inflated 30 percent would be actually taxing non-real income in hands of the taxpayer and consequently the taxpayer is taxed without any income in his hands. Recommendations The rate for listed shares should be restored to 10 percent as was the position till 31 March 2009. Section 111A of the Act should be amended to provide the rate of tax for short term gain on transfer of assets other than listed shares to be at 20 percent. Indexation benefit should be given for short-term asset if they are held for a period more than 1 year. 4.38.5. Abolition of tax on gains arising from transfer of listed securities Issues The Shome Committee Report on 1 September 2012 on General Anti Avoidance Rules has recommended that the Government should abolish the tax on gains arising fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m transfer of listed securities, whether in the nature of capital gains or business income, to both residents and non-residents. The Government is also considering increasing the rate of Securities Transaction Tax ('STT') appropriately to make the proposal tax neutral. As per National Stock Exchange, India is one of the costliest destinations to trade. STT, along with other taxes, and high brokerage structure makes trading in India almost five-six times higher than in advanced countries. Recommendations The Government should abolish tax on gains arising from listed securities whether in the nature of capital gains or business income which shall incentivize the investors to have more participation in the Indian Capital Markets. Increasing the STT rate will reduce the liquidity from the system and Government may consider reducing the same. These are just suggestions of the Expert Committee and the Government may consider reconsidering these amendments post receiving comments from various stakeholders involved. Transfer Pricing 4.39.1. Transfer Pricing of Marketing Intangibles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Issue Marketing intangibles are crucial sources of value and its value is derived from the company's levels of Advertising, Marketing and Promotion expenditures (AMP) which adds intrinsic value to a company. Tax authorities are increasingly scrutinizing the cross border transfer, use and further development of intangibles relating to brand and licenses. The ruling of the Delhi High Court in the case of Maruti Suzuki India, which discusses the creation and compensation for marketing intangibles only, underlines this trend. Now, in light of the amendment introduced vide Finance Act 2012 which specifically includes marketing intangibles in the expanded definition of international transactions, substantiating the arm's length compensation for the transfer price of the intangibles would pose great challenges without specific guidance relating to these aspects in the Indian transfer pricing regulations. Recommendation Accordingly, in line with the Organization for Economic Co-operation and Development (OECD) principles, guidance should be issued to recognize certain methodologies /approaches for evaluating the arm's length character of transactions involving mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keting intangibles. 4.39.2. Transfer Pricing of Manufacturing Intangibles Issue Compensation for use of manufacturing intangibles has generally been in the form of royalty payouts and is commonly benchmarked by adopting the aggregated approach further substantiated with external benchmarking [e.g. limits specified by the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) regulations]. However, this approach is increasingly challenged by the revenue authorities, who adopt transaction-specific approach, and the taxpayer is required to substantiate the economic and commercial benefits derived from the royalty payout. Recommendation With the recent removal of the above limits as prescribed by the RBI and the FEMA regulations, it is therefore necessary that guidance be provided to test such transactions particularly in cases of start-up or loss making companies. 4.39.3. Transfer Pricing of Intra Group Financial Transactions / Management services Issue Management services are services where an entity in a multinational group renders shared services in the nature of legal, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dministrative, human resources, information technology, finance, sales/ marketing, etc. to its group affiliates. One of the important issues that draw the attention of the tax authorities is the arm's length nature of the compensation paid for such intra-group services to related entities. The entire onus to substantiate the arm's length payment and establish 'cost-benefit' analysis by way of maintaining service agreements, basis of charge out rates, allocation keys, etc, is upon the taxpayer to establish that only those costs are pooled which have been incurred for rendering of services by Associated Enterprises (AE). Recommendations In the absence of industry benchmarks in public domain for testing management fee payouts, guidance for maintaining specific documentation outlining the various costs incurred in relation thereto and the related benefits derived there from, should be highlighted and elaborated upon in the regulations. 4.39.4. Interest on Inter-company loans and Guarantee fees Issues Transfer pricing of cross-border financial transactions deals with inter-company loans, debentures, corporate guarantee charges, cash-poo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling arrangements, debtors discounting, etc, and intends to arrive at arm's-length outcome in a related-party scenario. Typically, interest rates on loan transactions between third parties depend on factors like borrowers' credit rating, loan tenor, prevailing market conditions, loan seniority, security to lender(s), etc. The Comparable Uncontrolled Price (CUP) method, which is commonly used for arriving at arm's-length interest rates for intra-group loan transactions, demands a high degree of comparability and necessitates complex adjustments. Pricing a guarantee is even more challenging in the absence of comparable data and warrants application of sophisticated transfer pricing techniques. In India, lack of guidelines often leads to application of arbitrary methods for pricing of inter-company financial transactions. Recently, the income-tax tribunals have laid emphasis on the credit quality of the borrower while holding that inter-company loans should attract arm's-length interest charge. Further, vide the Finance Act 2012, the definition of international transactions has been expanded to specifically include capital financing, including any type of long-term or short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business which would now give rise to a whole gamut of such financial transactions to be reported by the taxpayer. Recommendation Given the increasing global trend of cross border financing and inter-company lending, it is of paramount importance to introduce appropriate guidance governing the pricing of inter-company funding. 4.39.5. Transfer Pricing Methods - Profit Split Method (PSM) Issue PSM is applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately or the purpose of determining the arm's length price of any one transaction. The method involves valuation of non routine intangible, assigning the combined profit or loss according to each party based on allocation keys and using of projected financials. Lack of clarity on valuation of intangibles and use of complex analysis for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... splitting the profit or loss has been experienced as the major reasons for the reluctance in using this method in India, both from a taxpayer and revenue perspective. Recommendation Issuance of guidance for application of this method and valuation norms can bring about clarity to the taxpayer on usage of this method. 4.39.6. Arithmetic mean v. inter-quartile range Issue The Indian transfer pricing regulations require the determination of a single arm's-length price. In cases where multiple comparable prices exist, the Indian transfer pricing laws require the arm's-length price to be determined as the arithmetic mean of the prices of such comparable uncontrolled transactions. The computation of a single arm's-length price poses many difficulties, since transfer pricing, is not a mathematical or scientific calculation, but a subjective commercial analysis. Recommendation Under such a scenario, median and/or inter-quartile range would be a better indicator of comparable prices. It is less sensitive to extreme observations, particularly where the distribution is highly skewed. The TP regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations could therefore be amended to permit application of the concept of an arm's-length range of prices, similar to provisions contained in the OECD regulations and those of other developed nations. 4.39.7. Structural Changes of the Dispute Resolution Panel Issue Transfer pricing is a serious issue faced by MNCs. Recognizing this Dispute Resolution Panel (DRP) was established. Given recent experiences, the government should consider some structural changes to the DRP mechanism. Recommendations For the DRP mechanism to be an effective tool of alternate dispute resolution, reforms in the Union Budget 2013 should include: DRP being constituted as an 'independent' judicial board with panelists from economic legal and accounting background and tax department Affixing personal accountability at each level for appeals filed by tax authorities Constitution of a legal cell to monitor progress of tax cases Limitation period to be prescribed for disposal of appeals and closely monitored and Suo-moto withdrawal of cases which are covered by decisions of courts and which are found without m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erit. 4.39.8. Stay of Demand Issue In cases where the DRP is proposing an adverse recommendation to the AO, it is not clear as to whether it has powers to issue direction to the AO to grant stay of demand if the taxpayer is intending to prefer an appeal to Tribunal. Recommendation Specific provision may be introduced to also provide for such powers to the DRP, so that the DRP process achieves its stated objective. 4.39.9. Eligible Assessee Issue Section 144C(15)(b) of the Act defines 'eligible assessee' as (i) any person who has had a TP adjustment; and (ii) any foreign company. The use of the word 'and' in the definition could lead to an interpretation that the conditions need to be satisfied cumulatively i.e. the taxpayer has to be a 'foreign company' and should have suffered a TP adjustment. Recommendation It appears that the intention of the amendment is that 'both' the above type of taxpayers should be covered within the meaning of the phrase 'eligible assessee'. Hence, to reflect correctly the intent and prevent anomalous interpretation on account of the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, 'and' should be replaced by 'or'. 4.39.10. TP Documentation requirement Issue The documentation requirements are attracted if the aggregate value of the transactions exceeds INR 10 million. Recommendation This monetary limit seems to be on lower side especially for software, which has associates in various countries, and calls for upward revision. Also, documentation requirements should be such as to enable the tax authorities to arrive at arm's length price without subjecting the concerned parties to undue cost, time and harassment. 4.39.11. Use of Multiple year data / Contemporaneous data Issues The transfer pricing regulations require taxpayers to maintain documentation on a contemporaneous basis. The comparability analysis (or choice of appropriate comparables) is required to be based on data relating to the financial year in which the international transaction has been entered into (current year data). Further, the use of data from the past two years is permitted where the past data reveals facts which could influence the determination of transfer prices for the current year. It is worth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while to note that the taxpayers need to have their transfer pricing analysis in place at the latest by the due date of filing their income-tax return. The issue of the number of year's data to be considered has been a matter of subjective interpretation to date. It is generally felt that if data from the relevant financial year is not found in the public databases at the point in time when the benchmarking exercise is undertaken, then there is sufficient cause for use of prior year's data. However, the revenue authorities have generally disregarded the use of the same in the course of transfer pricing audits. Recommendation Relevant clarifications could be incorporated in the regulations that clearly permit use of multiple year data for comparability analysis. 4.39.12. Adjustments for differences in functions and risks Issues The India transfer pricing regulations provide for making reasonably accurate adjustments to take into account differences between international transactions and uncontrolled transactions, considering the specific characteristics relating thereto. However, in practice th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no guidance or clarity on the manner in which these adjustments are to be made. For example, adjustments in areas such as differences in levels of working capital, differences in risk profile, differences in volumes, pricing on marginal cost, startup losses or capacity utilization and so on, have generally not been permitted by the revenue authorities in the course of transfer pricing audits as upheld in certain Tribunal decisions as well. Recommendations Accordingly, suitable guidance on the manner of carrying out economic and risk adjustments to comparable and taxpayer's data is necessary. Further, the Tax Authorities should be encouraged to duly consider in the course of transfer pricing audits, business strategies and commercial or economic realities such as market entry strategies, market penetration, and non recovery of initial set-up costs, unfavorable economic conditions and other legitimate business peculiarities while determining the arm's length pricing. 4.39.13. Valuation under Customs and Transfer Pricing Both Customs and Transfer Pricing require taxpayer to establish arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle with respect to transactions between related parties. Objective under respective laws is to provide safeguard measures to ensure that taxable values (whether it is import value of goods or reported tax profits) are the correct values on which respective taxes are levied. The above objective, while established on a common platform has diverse end-results as seen below: To increase Customs duty amounts, the Customs (GATT Valuation) Cell would prefer to increase the import value of goods To increase tax, the tax department would prefer to reduce purchase price of goods Issues The diverse end-results create ambiguity in the manner in which the taxpayer should report values under the Customs and the Transfer Pricing. We have judicial precedents which favor and contradict the use of custom valuation in transfer pricing. In the case of Coastal Energy Private Ltd the Chennai Tribunal endorsed the TPO's decision to apply the customs data for transfer pricing analysis. Similarly in the case of Liberty Agri Products Pvt. Ltd the Chennai Tribunal again held that arm's length price on imports for transfer pricing purposes is to be determined usin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the rate for customs. Contrastingly, a decision from the Delhi Tribunal in the case of Panasonic Limited and another one from the Mumbai Tribunal in the case of Serdia Pharmaceutical highlighted the distinctive objective of Customs valuation and the necessity for separate arm's length analysis as per transfer pricing provision. These contradicting decisions necessitate a greater need for convergence of transfer pricing mechanism under the Act and the Customs Regulations. Recommendation There is a need for a common platform that would provide a 'middle-path' of arms length price that is equally acceptable under Customs Law and under the Transfer Pricing. 4.39.14. Safe Harbor Safe harbor has been defined to mean 'circumstances' in which the revenue authorities shall accept the transfer pricing declared by the taxpayer. Internationally used safe harbors take two forms: Exclusion of certain classes of transactions based on quantitative limits from Transfer Pricing regulations. Stipulation of margins / thresholds for prescribed classes of transactions / specified industries. Issue The Act was specifically ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded in 2009 to provide Safe Harbors to be formulated by the CBDT. Even though 3years have passed since then, no Safe Harbors have been announced yet. The idea of safe harbor is to reduce the impact of judgmental errors in determining transfer prices in international transactions. Safe harbor eases the compliance burden for taxpayers, curtails disputes and reduces administrative hassles for taxmen. Recommendations While making these rules, the CBDT should consider simplification measures involving Cost Plus Method (CPM) and CUP method. Safe harbors for interest rates on borrowings and lending, reimbursement and recovery of expenditure, would be a salutary simplification measure. Such Safe Harbor may benefit large number of taxpayers but revenue implication may not be significant. Similarly, captive IT/ ITES services can be covered by Safe Harbor provisions. The Safe Harbor Rules in India can be framed keeping in view the national considerations and the most litigated and disputed aspects. Simplification measures might help in reducing the costs of maintaining detailed documentation for the taxpayers and reduce administrative and litigation costs for both th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax department and the taxpayer. It will also help the tax department to focus more on the bigger and more risky transactions in the interest of revenue. 4.39.15. Specified Domestic Transaction Section 92BA has been inserted vide Finance Act 2012 by which the coverage of transfer pricing has been expanded to include certain 'Specified Domestic Transactions' if the aggregate amount of all such transactions entered by the assessee in the previous year exceeds Rs. 5 crores in the previous year Issues This amendment covers a scenario wherein the payment of remuneration by the company to its director or relative of such directors is also required to be at arm's length. The same casts an onerous responsibility on the company vis -vis justification of the arm's length nature of such payments. There could be a situation where by the said adjustment due to non-arm's length nature can lead to double taxation. For example a payment by a taxable entity to another taxable related entity and in case it is determined that such payment are not at arm's length the same can lead to tax being paid by the entity making the payment and further the other entity w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould also pay tax on the transaction value rather than the arm's length value, as the transfer pricing regulations as they stand today specifically negate the corresponding adjustment. The Advance Pricing Agreement (APA) provisions are being made applicable to only international transactions. The same should also be made applicable to domestic transactions covered by transfer pricing regulations. The term specified domestic transaction has been defined to inter alia mean any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A of the Act. Such expenditure could possibly include capital expenditure made to such a related person. It should therefore be clarified that this pertains to revenue expenditure only. Recommendations FICCI recommends that the threshold limit for applicability of transfer pricing regulations to specified domestic transactions be increased from Rs. 5 crores to Rs. 15 crores to avoid undue hardship for small businesses Necessary guidance for benchmarking in respect of the directors remuneration should be provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This amendment seeks to cover a situation wherein there could not be any loss to the exchequer. The same is not in line with the suggestion provided by the Supreme Court in case of Glaxo Smithkline. The Supreme Court had provided the situation wherein transfer pricing should be applicable in case of transactions between a profit making and a loss unit / company. The other scenario which was envisaged by the Supreme Court was transactions between units / assesses having different tax rates. Other than the scenarios contemplated above, a corresponding adjustment should be allowed and hence provided for on the statue. It should be suitably clarified that the transfer pricing provisions would only apply to revenue expenditure referred to in section 40A(2)(a) of the Act, and not to payments made to persons specified in section 40A(2)(b) of the Act. 'Any other transaction as may be prescribed' covered under section 92BA of the Act may be notified and should be made applicable from prospective effect to avoid undue hardship to the taxpayers. The words close connection appearing in section 80-IA(10) of the Act needs to be clarified to avoid ambiguity in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e application of provisions of section 92BA of the Act. 4.39.16. Penalty for failure to keep and maintain information and document etc. in respect of certain transactions Issues The Finance Act, 2012 has substituted section 271AA with effect from 1st July 2012 which reads as under:- 271AA. Without prejudice to the provisions of section 271 or section 271BA, if any person in respect of an international transaction or specified domestic transaction- (i) fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2) of section 92D; (ii) fails to report such transaction which he is required to do so; or (iii) maintains or furnishes an incorrect information or document, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction or specified domestic transaction entered into by such person. While the quantum of addition itself is disputable in transfer pricing assessments, fixing the penalty on the assessed income would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increase the burden of the taxpayer considerably. Due to retrospective extension of scope of international transaction, the Transfer Pricing Officer (TPO) can ask the taxpayer to pay penalty under the said section 271AA at the rate of 2 per cent of value of international transaction due to failure to keep information in addition to another 2 per cent under section 271G for not furnishing the information besides regular penalty under section 271(1)(c) of the Act. This would result in multiple tax demand on arbitrary values. Recommendation It is, therefore, suggested that penalty should be restricted to tax in dispute and not linked to the value of transaction. Financial Services 4.40.1. Expanding the scope of section 10(23FB) to all categories of Alternative Investment Funds (AIF) Under the AIF Regulations, the AIFs are broadly classified into three categories viz. Category I (e.g. - venture capital funds, social venture funds, SME funds), Category II (private equity funds, debt funds, etc) and Category III (hedge funds, etc) based on their eligibility criteria, investment restrictions and the positive effects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they would have on the economy. The AIF regulations provide that Category I AIFs would be construed as Venture Capital Fund ( VCF ) or Venture Capital Company ( VCC ) as specified under Section 10(23FB) of the Act for the purposes of claiming the pass through benefits under the Act i.e. income arising to such AIFs would be taxable in the hands of the investors and not in the hands of the AIFs. However, there is no such tax pass through benefit accorded to Category II and III AIFs. Issues The Finance Act, 2012 amended section 10(23FB) of the Act providing tax pass through to a VCF / VCC registered under SEBI regulations for any income earned from a Venture Capital Undertaking ( VCU ). The beneficiary of a VCF / VCC is taxed as if it has made the investments directly in the VCU. Before the amendment, VCU was defined to mean an unlisted Indian company engaged in 9 specified sectors. The Finance Act, 2012 amended the definition with effect from 1 April 2013 to mean a VCU referred to in the SEBI (VCF) Regulations, 1996 made under the SEBI Act. The above amendment in section 10(23FB) of the Act read with section 115U has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to the removal of sectoral restrictions encapsulated under the erstwhile section 10(23FB) of the Act. Therefore, all SEBI registered VCFs / VCCs enjoyed complete tax pass through status with respect to income earned from any VCU under section 10(23FB) of the Act. PASS THROUGH STATUS ONLY FOR CATEGORY 1 AIF However, pursuant to the AIF regulations, the above tax pass through status provided in section 10(23FB) of the Act is now made available to Category I AIFs only. This has created disparity in the treatment accorded inter-se between the three categories of AIFs. The aforesaid tax pass through benefit is not extended to Category II and Category III AIFs and hence, the income earned by the AIFs falling under these categories (and if constituted as trusts) shall be taxed as per the general trust tax provisions, which are quite onerous. It must be noted that section 10(23FB) read with section 115U of the Act provides only a flexibility to the VCF for being treated as a tax pass through entity. The Act does not provide any income-tax exemption on the income earned by the VCF since the investors of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VCF have to pay tax on the same. Further, there is no deferral of tax as well since the investors pay tax as and when income is accrued to the VCF. In a nutshell, the income is subject to tax in the hands of the investors (subject to other provisions of the Act) and hence, this mechanism of pass through only provides flexibility and tax certainty to the VCF. Recommendation Complete tax exemption for the all categories of AIF as a specific provision of tax pass through and single level of taxation would be critical to promote investments in India. 4.40.2. Pass through status for entire income of Venture Capital Fund ('VCF')/ Venture Capital Company ('VCC') As per section 10(23FB) of the Act, any income earned by a VCF or VCC from a venture capital undertaking ( VCU ) (i.e.: an unlisted Indian company) would be exempt in the hands of the VCF / VCC and be taxable in the hands of the investors on a pass through basis. However, the provisions of section 10(23FB) do not extend to income earned from non-VCUs. Issues Under the extant regulatory framework, a SEBI registered VCF / VCC cannot undertake any activity other than i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment activity. A minimum of 66.66 per cent of investible funds of a VCF / VCC must be invested in equity shares/equity linked instruments of VCUs. Within the 33.33 per cent basket, VCF/ VCCs are permitted to make certain non-VCU investments, which comprise the following (i) investment into special purpose vehicles ( SPVs ) set up exclusively for downstream investments into VCUs (ii) preferential allotment by financial weak / sick listed companies (iii) initial public offerings and (iv) preferential allotments by other listed companies. At times, it may be commercially expedient for a VCF / VCC to make an investment into a VCU through an SPV. Such SPVs by themselves are merely investment holding vehicles and, hence, may not qualify as VCUs for the purposes of the Act. However, in the SPV structure, a VCF / VCC has ultimately invested its capital into the VCU albeit through an SPV. Clearly, the tax treatment of income arising from a VCU investment made by a VCF / VCC through an SPV for certain cogent commercial reasons ought not to be different from a direct VCU investment. It is self-evident that capital flow into any financial weak / sick company ought to be incen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivized from rehabilitation perspective etc. Lastly, allowing VCF / VCC to participate in IPOs and preferential allotment by listed companies facilitates a more vibrant capital market, provides Indian companies greater access to VC / PE funding and enables VCF / VCCs to legitimately diversify their portfolio without altering their basic character of being a long term capital provider. Also, there may be situations wherein a VCF / VCC may invest into an unlisted company, which may get subsequently listed and the VCF / VCC may exit only post listing; technically, the investee company may not qualify as a VCU at the time of exit and, therefore, income arising upon exit would not be covered by section 10(23FB) read with section 115U of the Act. Such a consequence seems inequitable and unintentional given that the investment was made at the stage when the investee company was a VCU. A VCF / VCC may have two income streams subject to differing tax treatments - income from VCUs would be taxable under the section 10(23FB) of the Act and section 115U of the Act framework and the balance income would be taxable as per general trust tax provisions (for VCFs), which are not tai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lored to apply to VCFs. Such a duality on mode of taxability at VCF / VCC level is avoidable. Recommendation For the aforementioned reasons (and akin to a mutual fund whose entire income is exempt under section 10(23D) of the Act), the whole of the income earned by SEBI registered funds ought to be taxable on a pass-through basis under section 10(23FB) read with section 115U of the Act in the hands of the investors. Preferably, the aforesaid suggestion should be effected retrospectively with effect from April 1, 2008. 4.40.3. Demarcation between general trust taxation provisions and VCF taxation provisions Issues Part B and Part C of Chapter XV of the Act (primarily Section 160 to Section 164A of the Act) deal inter alia with general trust taxation. As stated earlier, most VCF's in India are established as trusts. However, the taxation of VCFs and their beneficiaries is governed by a special set of provisions namely: Section 10(23FB) read with Section 115U of the Act. The relevant provisions forming part of Part B and Part C of Chapter XV dealing with general trust taxation would not apply to trustees of a VCF and/or their be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neficiaries. It would be advisable to insert a clarificatory provision to state that nothing contained in Part B and Part C of Chapter XV of the Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust. This will result in a clear demarcation between provisions dealing with taxation of VCF trusts and other general trusts. Recommendation Clarificatory provision should be inserted, to state that nothing contained in Part B and Part C of Chapter XV of the Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust. Assessment and Procedural Aspects 4.41. Dispute Resolution Panel related issues 4.41.1. Dispute Resolution Panel directions - not to be a precedent Issue The Dispute Resolution Panel (DRP) may, on certain occasions, refrain from passing directions in favour of the taxpayer due to the apprehension that the same may become a precedent for other taxpayers or for the same taxpayer in subsequent years. Recommendation In order to avoid such instances, which may hamper the administration of justice, specific provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be inserted in the Act to clarify that the directions of the DRP are binding only for a particular assessment order and a particular taxpayer and that the position may not be applicable for other AYs/ other taxpayers. The same may be framed on similar lines to the provisions of Section 245S of the Act (as applicable to Advance Rulings). 4.41.2. DRP may be formed as an appellate authority Issues Vide Finance Act, 2012, the AO has been given a right to file an appeal against the order of the DRP, before the ITAT. This amendment, has although granted a recourse to the AO against the directions of the DRP, it has not effectively resolved the practical issue of independence of the DRP. The members of the DRP are actually revenue officers who have been entrusted with the responsibility of disposing off objections against the orders, which in many cases are passed by the AO(s) under their own jurisdiction(s). Moreover, currently, there are no restrictions imposed on the appointment of jurisdictional Commissioners/Directors of Income-tax as a member of the DRP to hear cases falling within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e jurisdiction of the DRP member. In such a scenario, there may be cases of bias, actual or perceived, towards Revenue in issuing directions in cases falling within the jurisdiction of the DRP member. Recommendations The members of the DRP should be independent (such as retired members of the Tribunal) now that the AO has been entitled to appeal before the Tribunal against the order of DRP, rather than comprising of revenue officials. It is also recommended that one DRP member should be from outside Government and person of eminence drawn from the fields of accountancy, economics or business with knowledge of income tax matters. Alternatively, the DRP may be disbanded and the power to hear the cases be transferred back to the Commissioner of Income-tax (Appeals) [CIT(A)]. However, in such a case, the appeal procedure would need to be amended to bring in certain positive features of the DRP mechanism. In particular, stringent provisions may be inserted to ensure the following: That the CIT(A) should hear the appeal and dispose it off within a period of 12 months from the date of institution of the appeal; and That no deman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d should be raised upon the taxpayer till the appeal is disposed off by the CIT(A). Further, in order to ensure speedy disposal of appeals, more number of CIT(A)s may be appointed and allocation of appeals to the CIT(A)s be streamlined. Furthermore, in order to avoid cases of actual or perceived bias and to ensure objectivity in the dealing of cases, specific provisions may be inserted to restrain a jurisdictional Commissioner/ Director from being appointed as a member of the DRP hearing cases falling within his/ her jurisdiction. This view was also endorsed by the Uttarakhand High Court in its recent decision in the case of Hyundai Heavy Industries and Mumbai Tribunal in the case of Huntsman International (India) Limited and Lionbridge Technologies Private Limited Electronic Filing of income-tax returns 4.42.1. Grant of credit for Tax Deducted at Source Issues While e-filing the income-tax return, a taxpayer claims credit for TDS, advance tax and tax paid on self- assessment. As per the CBDT instructions, no supporting documents to the return will be accepted by the tax officers. Due to mismatches in the data betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een TDS Certificates issued by deductors to the taxpayer and the TDS details uploaded by the deductors on TIN system (i.e. bank payment details, PAN Nos. of the deductees), complete details of actual TDS deducted is not captured in the system. In addition, the information furnished by the taxpayers is not appropriately captured in the software due to processing errors. As a result, no credit /short credit of TDS is being given while processing of returns, causing undue grievances to the taxpayer where the default actually lies in the hands of deductors or in the software itself. As a consequence, the endeavor of the tax department to introduce paperless TDS certificates is yet to achieve its desired goal. Recommendations It is suggested that so long as the TIN and TDS systems are not independently reviewed and all bugs are fixed, TDS Certificates issued by the deductors, advance tax challans and self-assessment tax challans which are furnished by the deductees in the tax assessment, should be given due cognizance by the AO and credit of such claims should be allowed within a given time frame to address the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayers grievances. It is also suggested that the AO should be made accountable for delay in granting credits when original documents are furnished by the taxpayer. 4.42.2. Option to insert explanatory notes/ edit fields in the return Issues Under the income-tax form notified by the income-tax department, there is no provision in the e-format for giving explanatory notes in respect of any adjustments in the return of income. If on the one hand the taxpayer does not make any adjustments, he will have to forego the claim. On the other hand, if the taxpayer makes the adjustment and the AO does not agree with the same, he is likely to make adjustments to the income and also initiate penalty proceedings causing undue hardship to the taxpayer. Further certain fields are locked for editing and values are calculated automatically. (e.g.: In case of a taxpayer who has not used an asset for the purpose of his business is not eligible to claim depreciation. But as the taxpayer is required to give details of opening written down value of the asset in the income-tax form, depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation is calculated automatically, despite the taxpayer being not eligible to claim such depreciation.) Recommendation It is suggested that the e-format of the income-tax return form be re-devised to provide the taxpayer the option to edit fields and give explanatory notes which the taxpayer considers necessary in respect of any adjustments carried out. It will not only safeguard the taxpayer against penalty proceedings but also against reopening of completed assessments. 4.42.3. Carry forward of business losses in cases of newly setup companies Issues As per Section 139 of the Act, every company is required to file its income-tax return. As per Section 3 of the Act, in respect of a business newly set-up in any financial year, the 'previous year' is the period beginning with the date of setting up of the business and ending with the said financial year. The actual point at which a business can be said to have been set up is at the point when the Company is ready to commence its operations. As such, provisions relating to computation of income under the head 'profits and gains of business' would not apply t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the companies who are yet to commence its business and would not be eligible to carry forward any business loss for possible set-off in subsequent assessment years under Section 72 of the Act. However, in the income-tax return form, the computation of income under head 'profits from business' is linked to the items of profit and loss account entered in the form. As a result business loss is also automatically calculated, although the taxpayer is not eligible to carry forward any business loss, thereby resulting in incorrect claims. Recommendations It is suggested that the e-format of income-tax return form be re-devised to manually edit fields relating to carry forward of unabsorbed losses and also as suggested earlier, provision be made for providing explanatory notes for carrying out the edits. As per the provisions of Section 3 of the Act, expenses incurred prior to the date of set-up of business are not allowed as deduction while computing profits and gains of business. In the current income-tax return form, there is no separate Section wherein such expenses can be mentioned. Hence, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suggested to include a section wherein expenses incurred prior to set-up of business may be disclosed. 4.42.4. Entering of bank account details in case of refund for foreign companies Issue Foreign companies that have no PE in India and have refunds arising in India are compulsorily required to furnish Indian bank account details in the income-tax return. Since the foreign companies have no bank accounts in India, it is causing undue hardship to the companies. Recommendation It is suggested that the e-format of the income-tax return form be re-devised to allow the foreign companies to provide details of foreign bank accounts in the return form. In this connection, it is also suggested that, since the cheques issued by the Income-tax department are denominated in Indian Currency which are not accepted by all the foreign banks, a facility of remitting refunds through wire transfer be introduced. 4.43. Compulsory filing of income tax return in relation to assets located outside India Finance Act, 2012 has made mandatory for residents (other than not ordinarily resident in India) to file tax return in India if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they have any asset (including any financial interest in any entity) located outside India or signing authority in any account located outside India irrespective of the fact whether the resident taxpayer has taxable income or not. Issues There is no minimum threshold prescribed for foreign asset/financial interest reporting. In absence of minimum threshold, there could be diligent reporting of minimal values of bank account balances etc. defeating the purpose of data collection, and overburdening the tax department with irrelevant information. On the other hand, assessees may inadvertently ignore certain details (given the low values), which may trigger a non compliance which may not be intentional. This could be avoided by prescribing a minimum threshold. The time limit of 16 years prescribed by the Finance Act, 2012 for reopening of cases where any person is found to have any asset (including financial interest in any entity) located outside India will pose serious hardships for assessees who have returned to India after staying abroad for long as it is not reasonable to expect them to have the documentation retained for the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 16 years to explain the bonafide. Hence, this will even cover the genuine assessees who would have paid tax on the foreign assets while their stay abroad but are unable to prove their bonafide in absence of any documentation for a such a prior period. The Central Board of Direct taxes (CBDT) has notified the tax forms for AY 2012-13, mandating disclosure of foreign assets. In the tax return forms, a new section called Foreign Assets has been introduced to disclose foreign assets. However, there are no guidelines on as to what would come within the purview of 'any asset, 'financial interest in any entity'. In the absence of any guidance the term may have wide connotation leading to litigation. Clarity would be required on whether assets such life insurance policies, stock options benefits, overseas social security schemes and pension plans, paintings, works of art, collection items (such as stamp collection/coin collection) etc. are covered. The reporting requirement could end up to be a meaningless collection of data if suitable guidelines are not issued. In practical situations, many executives of a company are appointed as authorized signatory o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f company account situated outside India while discharging their duty as an employee of that company. Details of such accounts may not be available with such executives. It has now become mandatory for every resident to report details in the income tax form if they have signing authority in any account located outside India. Such a requirement poses hardship for the assessees who are signatory to accounts held by the entities in which they are employed/directors. Recommendations It is strongly recommended that a minimum threshold be prescribed for reporting of foreign assets. The period of 16 years for reopening of cases should be made applicable only for any assessment year beginning from on or after AY 2012-13. It should be suitably clarified as to what would constitute any asset , financial interest . It is recommended that an exception be provided to a resident who is a signing authority to a foreign account by virtue of his employment/directorship. Assessment Procedure 4.44.1. Standard questionnaires Issue While issuing notices [e.g. under Section 142(1) of the Act], th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is a practice to issue standard questionnaires to taxpayers without customizing it to the facts and circumstances of the taxpayer concerned, most of the questions raised are not applicable to the taxpayer and causes unnecessary hardship to the taxpayer, who is unsure of what action needs to be taken at his end. Recommendation It is suggested that the AOs be appropriately instructed to issue customized notices to a taxpayer instead of dispatching a generic standard form questionnaire to all taxpayers. 4.44.2. Non-consideration of submissions made by taxpayer Issue During assessment, a taxpayer often provides elaborate submissions in response to questions raised by the AO in relation to notices issued under Section 142(1) or 143(2) of the Act. However, very often, the AO passes the assessment order against the taxpayer without stating any reasons for rejecting the submissions made by the taxpayer. Since the AO functions as a quasi-judicial authority in assessing a taxpayer's income, it is important that the AO provides appropriate reasons for rejecting the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Recommendation It is suggested that appropriate instructions be given to the AOs to issue a well-reasoned assessment order after considering appropriately a taxpayer's submission. 4.44.3. Collection of demand Issue Over-pitched assessments, huge demands and coercive methods without any accountability on the part of the AOs, are a common phenomenon. Recommendation It is suggested that appropriate instructions be given to the AOs to consider applications for stay of demand favourably for payment of demand by taxpayers especially when the appellate orders are in favour of the taxpayer. 4.44.4. Proceedings under Section 201 of the Act Issue In respect of Assessee-in-default (AID) proceedings carried out under Section 201 of the Act, it has been the experience of taxpayers that credits are not granted for taxes paid and demands raised are expected to be complied within an unreasonably short period of time. Thus, a bonafide taxpayer is not given time to weigh the option of filing an appeal against the assessment order. Recommendation Since thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AID proceedings are carried out on a taxpayer in respect of someone else's primary tax liability, it is essential that the tax authorities provide additional sufficient time to the taxpayer to collate relevant data. 4.44.5. Training at the AO/Field office level Issue It has often been observed that AOs at the ground level do not have sufficient knowledge of the transactions and indulge in roving enquiries and data from a taxpayer. Often, the AOs are prejudiced against the taxpayer and conduct assessments based on baseless suspicion. Recommendation In these situations, it becomes extremely difficult for a taxpayer to submit necessary information to convince the AO on the genuineness of the transactions. It would therefore be in fitness of things that appropriate training be provided at the AO /field officer level and a central pool of specialists be put in place for guidance on assessment (example in respect of non-charitable trust, etc). 4.44.6. Delay in disposing of applications Issue Delay in timely processing of applications filed under Sections 195(2), 197 and 154 of the Act by the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax authority results in inordinate delay in carrying out the commercial transactions for a taxpayer and adversely affects the taxpayer's business. Recommendation The current scheme of the Act does not provide any time limit for disposal of application under Section 195(2) and 197 of the Act. Furthermore, the time limit prescribed for the application under section 154 is generally not adhered by the Tax Authorities. Hence, it is necessary to provide suitable time limits for disposal of such applications, with inbuilt accountability and strict adherence. The order should be passed within three months from the end of the month in which the application is made. 4.44.7. Enquiry Issue During assessment, a taxpayer is often told to provide information along with all supporting documentary evidence which is voluminous in nature within a very short span of time and sometimes the nature of information is so large that it causes undue hardship to the taxpayer to collate the information. Recommendation It is therefore recommended that tax authority should set a monetary threshold limit which can be u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed while enquiring information. 4.44.8. Claim made during the assessment proceedings Issue The tax officers reject the claims made by the taxpayers during the course of the assessment proceedings which are omitted to be claimed by the latter in their return of income. The rejection of claim by the tax officer is made on the basis of the judgment of the Supreme Court in the case of Goetze India Ltd. Vs. CIT (2006) 284 ITR 323 (SC), The said Apex Court judgment has been distinguished by various courts in plethora of judgments and also not in consonance with the Circular No. 14 dated April 11, 1955 issued by CBDT. The genuine claim of the taxpayers not entertained by the tax officers at the time of assessment causes unnecessary hardship to the taxpayers and leads to protracted litigation. Recommendation It should be suitably clarified in the Act that the tax officer is duty bound to allow the legitimate claim of the taxpayer made before him during the course of the assessment proceedings and assess the total income/loss after allowing the said claim. 4.44.9. Initiation of penalty proceedings on question of law Issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has been seen that the tax officers initiates penalty proceedings under section 271(1)(c) of the Act even when disallowance is being made in the assessment order on a matter of question of law. It is a settled law as has been held by various Courts that penalty for concealment of income cannot be levied due to addition on account of a question of law. However, initiation of penalty proceedings in such cases causes undue hardship to the taxpayers who have to take up unwarranted litigation with the tax department and waste time and resources for filing replies for dropping of penalty proceedings. Recommendation It is suggested that appropriate instructions be given to the AOs that no penalty under section 271(1)(c) of the Act should be initiated on addition on account of a question of law. Reassessment 4.45.1. Reopening of assessment Issue Under the existing provisions of Section 147 of the Act, the AO can reopen the assessment at any time within a period of 4 years from the end of the relevant assessment year. In certain cases assessments are being reopened by the AO on mere change of opinion/ information obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained through roving enquiries, causing undue hardship to the taxpayer. Recommendation It is suggested that, if there are no changes in facts and circumstances of the case and the taxpayer has made full and true disclosure of all material facts and reassessment is based on mere change of opinion/ information obtained through roving enquiries made by the AO, opening of reassessment without bringing on record any fresh facts, evidences or reasoning in support should be deemed to be invalid. It is suggested to insert an Explanation to Section 147 of the Act to make amendment to this effect. 4.45.2. Time Limit for filing return based on notice of reassessment Issue The Finance (No.2) Act, 1996 amended Section 148 of the Act doing away with the minimum period of 30 days within which a taxpayer was required to submit his return of income in response to a notice for reassessment. With this amendment, the period within which the taxpayer is required to submit the return of income for the purpose of reassessment is left to the discretion of the AO. Recommendation It is suggested that time limit of not less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 30 days be provided to the taxpayer for filing return of income from the date of service of notice upon the taxpayer. It is also suggested that the printed form of notice under Section 148 of the Act should be amended likewise. 4.46. Time limit for completing income-tax proceedings, where matters are partially set-aside by higher Appellate Authorities Issues Over the years, in an attempt to continuously remove the perils faced by the taxpayer, the Legislature has been shortening the time span within which an assessment must be completed. Toward this, Section 153(2A) of the Act was introduced which mandates a specific period (9 months/21 months/24 months) for framing a fresh assessment in pursuance of an Order of higher Appellate Authorities, setting-aside or cancelling an assessment in toto. However, for cases falling within the purview of Section 153(3) of the Act, wherein no fresh assessment has been directed but the higher Appellate Authority directs the AO to reconsider some aspects after proper investigation or to recompute the income as per the their finding or directions, no time span has been specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under the Act for their disposal. Hence, if the complete assessment is not set aside but only a few matters are set aside for re- examination, there is no time limit for passing orders to give effect to such direction. Consequently, it is seen that there is a tendency on the part of AO to defer such assessments resulting into matters pending for an unduly long period. As a result, refunds due are locked-up for no fault of the taxpayer. Recommendation Hence, it is suggested that in the interest of justice and to expedite the speedy disposal of matters concluded by higher Appellate Authorities, the Legislature should either provide for a mandatory time limit in Section 153(3) of the Act for matters partially set-aside by higher Appellate Authorities or enlarge the scope of Section 153(2A) of the Act so as to also encompass such matters which are partially set-aside by higher Appellate Authorities. 4.47. Stay of Demand by the Tribunal With a view to mitigate undue hardship to the taxpayer arising out of high income-tax demands pursuant to Orders of lower tax authorities, Section 254(2A) of the Act was introduced and amended from tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to time. It inter alia empowers the Tribunal for granting stay of any proceedings (including granting extension of stay) relating to appeal filed before it for a period not exceeding 365 days in aggregate. Further, it cast a responsibility on the Tribunal to dispose of the appeal within such period, failing which the stay granted will stand vacated after the expiry of such period, irrespective of the delay in disposing the appeal not being attributable to the taxpayer. However, the Statute fails to provide elaborate/clarificatory provisions with respect to grant of stay, resulting in many procedural hassles and long drawn litigation on stay applications. In such backdrop and in the interest of justice, some key recommendations / suggestions that may be considered under Section 254(2A) are as under: 4.47.1. Stay beyond the maximum stipulated period of 365 days Issue Section 254(2A) of the Act provides for maximum time limit of 365 days, beyond which the stay shall stand vacated even if the delay in disposing the appeal is not attributable to the taxpayer. However, such automatic vacation of stay does not envisage a situation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the Tribunal is unable to dispose the appeal within the maximum stipulated time (365 days), say, complex issue, issue pending before Special Bench, administrative reasons, etc. Such procedural delay in disposing the appeal has the effect of penalising the taxpayer even for cases where the delay in disposing the appeal is not attributable to them. Even after specific amendments, there are judicial decisions which have held that where delay in disposal of appeal is not attributable to taxpayer, the Tribunal has power to extend stay of demand beyond period of 365 days. Recommendation It is thus suggested to suitably relax the stringent timeframe of 365 days, where delay in disposal of appeal is not attributable to taxpayer. 4.47.2. Stay of Demand of income-tax v. Stay of Proceedings Issue Though Section 254(2A) of the Act provides for the Tribunal to grant stay of any proceedings in respect of an appeal filed before it, Rule 35A of the Income-tax (Appellate Tribunal) Rules, 1963 refers to stay of recovery of demand of tax, interest, penalty, fine, estate duty or any other sum. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is context, there is a grey area as to whether the Tribunal can grant stay of proceedings to give effect to the Order of revision under Section 263 of the Act and penalty proceedings initiated under the Act, pending the disposal of corresponding appeals against Order made under Section 263 / 143(3) of the Act. Recommendation In such scenario, while judicial decisions have upheld the grant of stay of proceedings to give effect to the Order of revision under Section 263 of the Act and penalty proceedings, it is suggested to suitably clarify the same under the Act/Rules to avoid further litigation. Refunds 4.48.1. Interest on delay in grant of refund Issue Where refund claims are processed and granted, there may be a delay of few months from the date of grant of such refunds to the date of actual disbursement of the refund amount to the taxpayer. However, interest under Section 244A of the Act is typically computed on such refunds only till the date of grant of refunds and not till the date of actual disbursement of the refunds. Recommendation It would be ideal to ensure that refunds ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disbursed without time lag. Provisions may be inserted to ensure that in cases where the time lag between the date of grant and the date of disbursement exceeds 30 days, interest under Section 244A of the Act should be made applicable till the date of disbursement of refund. 4.48.2. Delay in passing of order giving effect to the order of CIT(A)/ Tribunal/ Court Issue Considerable delay is seen in giving effect to the order of the CIT(A)/Tribunal/Court by the AO, particularly where relief/refund is allowed by the CIT(A)/ Tribunal /Court. Due to the delay in giving the effect of appellate order, substantial refund/ relief to be allowed to the taxpayer is withheld by the tax department. Though Section 244A of the Act provides for payment of interest for the delay in grant of refund, no time limit has been prescribed within which the appeal effect is to be given by the AO. As a result, the tax payments made by the taxpayer on funds borrowed at heavy rate of interest is unnecessarily held up by the tax department. Recommendation Provisions may be inserted to require the AO to give effect to the order of CIT(A)/ Tribunal / Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within a reasonable period, say six months, failing which the taxpayer should be given an option to adjust the amount of refund (along with interest) while making payment of advance tax for the current year. 4.48.3. No express provision for refund of income-tax, if recovered before the expiry of time limit to file an appeal before Tribunal or during the pendency of disposal of stay application Issue Judicial precedents have held that the taxpayer would be entitled to get refund of income-tax recovered either before the expiry of time limit to file an appeal before the Tribunal or during the pendency of disposal of stay application. However, in the absence of express provisions to this effect under the Act, it is seen that in many cases the Tax Authorities adopting a coercive approach against the taxpayer (recovery proceedings) whereby the taxpayer is required to pay the income-tax, irrespective of merits of case. Recommendations Thus, it is suggested that the Legislature should suitably include an express provision whereby the Income-tax Authorities are either: restricted to proceed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the income-tax recovery proceedings; or refund the income-tax paid during the recovery proceedings, without adjusting against the income-tax arrears, if any, before the expiry of time limit to file an appeal before Tribunal or during the pendency of disposal of stay application in such cases. 4.49. Maintenance of Books of Account in Digital Form Issue The present law requires the taxpayers to maintain books of account in physical form thus causing a lot of hardship to the assessees in the world of digitization and also leading to wastage of valuable resources. Recommendation Section 2(12A) of the Income Tax Act needs to be amended to include books maintained in digital form also as 'books or books of accounts' for the purpose of the Income Tax Act. Major corporate entities manage their books of account on automated systems only and the proposed amendment would encourage maintenance of accounts in digital form enabling effective management of cumbersome records. Personal Tax 4.50.1. Taxation of Employee Stock Option Plans for migratory employees Issues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 17(2)(vi) of the Act, read with Rule 3 of the Rules deal with taxation of Employee Stock Option Plans (ESOPs). It is provided that the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate shall be taxable as perquisite in the hands of the employee. For this purpose, the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the taxpayer as reduced by the amount actually paid by, or recovered from, the taxpayer in respect of such security or shares. In this connection, what has not been appreciated is that ESOPs shares stand on a different footing because on the date of exercise, the shares are subject to lock-in condition and cannot be considered to be a benefit and therefore, ought not to be fictionally treated as benefit and brought under the ambit of perquisites for taxation purposes. The Supreme Court, in CIT v. Infosys Technologies Ltd., [2008] 2 SCC 272, at page 277, had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aptly held: During the said period, the said shares had no realisable value, hence, there was no cash inflow to the employees on account of mere exercise of options. On the date when the options were exercised, it was not possible for the employees to foresee the future market value of the shares. Therefore, in our view, the benefit, if any, which arose on the date when the option stood exercised was only a notional benefit whose value was unascertainable. Therefore, in our view, the Department had erred in treating INR 165 crores as perquisite value being the difference in the market value of shares on the date of exercise of option and the total amount paid by the employees consequent upon exercise of the said options. That apart, it has to be appreciated that if an employee is subjected to tax on the notional benefit as perquisite, there could be situations where he may suffer double loss, first by way of tax outgo and again as a loss on actual sale of shares, which may neither be fair nor warranted, especially when such tax out-go are not allowed to be set-off against capital loss. Recommendations ESOPs should not be subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on notional perquisite value and taxed only on capital gains arising from the sale of shares, as was the position till 31 March 2006. It may be mentioned that only when Fringe Benefit Tax (FBT) was introduced by the Finance Act 2005, these provisions were changed for the purposes of taxation of ESOPs under FBT regime. However, those very provisions have been brought back by way of insertion in sub-clause (vi) of sub-section (2) of Section 17 of the Act, after the abolition of FBT, which has caused a lot of anxiety. It is imperative that the earlier tax treatment be restored to facilitate the employers in retaining talented persons in the organization. Needless to mention that ESOPs have, over the years, emerged as a critical motivational and retention tool for companies in a highly competitive market for talents. It proved an effective instrument to motivate employees to perform and excel and thereby a win-win proposition for the employers / shareholders on one hand and the employees on the other. It is in this perspective the FICCI pleads for the restoration of earlier position of taxing the ESOPs only by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of capital gains tax on gains arising to the employee on the actual sale of shares allotted to him. Issues Notwithstanding the above, taxation of ESOPs creates an issue in the case of migrating employees, who move from one country to another, while performing services for the company during the period between the grant date and the allotment date of the ESOP. The domestic tax law is unsettled on the taxation of such migrating employees and does not clearly provide for such cases. There was a specific clarification on proportionate taxability of benefits under the erstwhile FBT regime, where the employee was based in India only for a part of the period between grant and vesting. However, there is no specific provision in this regard under the amended taxation regime from 1 April 2009. As per Rule 3 of the Rules, the fair market value of share of the company which is not listed on a recognized stock exchange in India on the date of exercise of ESOP represents the value determined by the merchant banker. The requirement of obtaining a certificate from the merchant banker in case of shares granted by foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding companies to the employees of Indian companies poses undue hardship on the taxpayers Recommendations A specific clarification should be inserted with respect to taxability of only proportionate ESOPs benefit based on residential status of the individual, where an employee was based in India for only a part of the period between grant and vesting It is recommended that the rules should be amended to specifically provide that in case the shares are listed on the foreign stock exchange, the fair market value of such shares should be the average of opening price and closing price of the share on the said foreign stock exchange on the date of exercise of the option. This will ease the taxpayers from the burden of obtaining merchant bankers certificate. 4.50.2. Taxation of Rent Free Accommodation (RFA)/Concessional RFA provided by the Employer Issues Section 17(2) of the Act provides for valuation of perquisite in case of provision of accommodation by the employer or by way of concession in rent provided by any employer other than the Central Government or State Government. The rule provides for valuation at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified rate of 15% or 10% or 7.5% of salary based on the size of population as per 2001 census. However, the above method of determination of the perquisite suffers from various inequities:- The same employee staying in the same company owned accommodation will have a different perquisite value with increase in salary and further, different employees with different salaries will have a different perquisite value in respect of the same accommodation. The determination of the perquisite value of the accommodation based on the salary of the employee irrespective of the size/fair rental value of the accommodation is completely illogical and unfair. Recommendation FICCI recommends that the rule for perquisite valuation of accommodation should be suitably amended to provide that value should be taken as Fair Rental Value based on Valuation Report obtained from the Municipal Authorities. 4.50.3. Taxation of Contribution to Superannuation Fund in excess of INR 1 lakh Issues Section 17(2)(vii) inserted by the Finance (No.2) Act, 2009, provides that the amount of any contribution to any approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... superannuation fund by the employer in excess of INR 1 lakh will be taxable as perquisite in the hands of the employee. It has to be appreciated that contributions to superannuation fund may or may not result in superannuation benefits to the employees since there are various conditions to be fulfilled by the employees like serving a stipulated number of years, reaching a certain age etc. Further, the pension payments are subject to tax at the time of actual receipt by the employee after his retirement. As such this may lead to partial double taxation for the employee where the contributions had been taxed earlier. Recommendation It is recommended that employer contribution to approved superannuation fund be made fully exempt from tax. This would also be in line with the Direct Taxes code 2010. 4.50.4. Revival of Standard Deduction Issues A standard deduction was earlier available to the salaried individuals from their taxable salary income. However the same was abolished with effect from AY 2006-07. On the other hand, business expenditure continued to remain as permissible deductions from taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income. It has to be appreciated that standard deduction is not a personal allowance and used to be given as a lump sum for meeting employment related expenditure. In many countries like Malaysia, Indonesia, Germany, France, Japan, Thailand etc. allowance in the form of standard deduction is available for salaried employees for expenditure connected with salary income. To illustrate in Thailand the deduction is as high as 40 percent of income subject to certain limits. Recommendation The standard deduction for salaried employees should be reinstated to at least INR 50,000 to ease the tax burden of the employees. This should also reduce the disparity between salaried and business class with only the latter being eligible for deduction for expenditure incurred by them for earning their income. 4.50.5. Transportation Allowance Issues The transport allowance granted by the employer to the employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is currently tax exempt up to INR 800 per month in terms of Section 10(14) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read with Rule 2BB of the Rules. This exemption limit was fixed in 1998 and seems quite nominal considering the ever rising fuel costs and resultant conveyance costs. Recommendation The exemption limit of INR 800 per month needs to be considerably raised upwards, say to minimum of INR 2,000 per month to bring it in line with the rising conveyance costs. 4.50.6. Education Allowance Issues The education allowance granted by the employer to the employee to meet the cost of education expenditure upto two children is currently tax exempt up to INR 100 per month per child in terms of Section 10(14) of the Act read with Rule 2BB of the Rules. This exemption limit was fixed in 2000 with retrospective effect from 1 August 1997 and seems quite nominal considering the ever rising cost of education Recommendation The exemption limit of INR 100 per month needs to be considerably raised upwards, say to minimum of INR 1,000 per month to bring it in line with the rising inflation and cost of education. 4.50.7. Reimbursement of Medical Expenditure Issues Any sum paid by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he employer in respect of any expenditure incurred by the employee on the medical treatment of self/ family is currently exempt from tax, to the extent of INR15,000 per annum. This limit was last revised almost 14 years ago and needs to be revisited in light of the soaring medical and hospitalization costs especially for private hospitals. Recommendation The current tax exemption limit of INR 15,000 per annum needs to be increased to at least INR 50,000 per annum. This could to some extent help to bring the exemption up to speed with the rising medical costs. Further, this would also be in line with the limit set in the Direct Taxes Code 2010. 4.50.8. Deduction in respect of Health Insurance Premia under Section 80D Issues Currently, a deduction up to INR 35,000 (15,000 for self/ family and 15,000 for parents) is available to an individual under Section 80D of the Act from taxable income, towards health insurance premium paid by him. The limit for parents is increased to INR 20,000 if the parents are senior citizens. Unlike many other countries, India does not have a comprehensive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... health-care system for its citizens. There are Government hospitals but the facilities available are woefully inadequate while the private hospitals are very expensive. Also, the penetration and awareness of health insurance in India is very slow. Most individuals buy insurance only to save taxes. Recommendations Therefore, there is a need to raise the above limit to achieve two-fold objective of giving a tax incentive while also encouraging people to obtain larger healthcare cover in wake of the rising costs. It will be immensely helpful if, till the Government introduces adequate healthcare systems, the quantum of deduction under Section 80D of the Act is increased. A reference to General Insurance Corporation to find out how much they charge as premium for insurance of a family under a comprehensive hospitalization scheme will give an indication about the reasonable higher limit of the deduction. 4.50.9. Tax Exemption in respect of Leave Travel Concession (LTC) Issue Presently, the economy class air fare for going to anywhere in India is tax exempt (twice in block of four years). However, this exemption is being allowed only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for travel within India. Lately, owing to low airfares and package tours, a number of Indians prefer to avail LTC for going abroad particularly to neighboring countries like Thailand, Malaysia, Sri Lanka, Mauritius, etc., as the fares thereto are at times less than for traveling to some far away destination within India. Recommendations It is therefore recommended to grant tax exemption for economy class airfare for travel abroad also on holidays so long these are within the overall airfare tax exemption conditions for traveling in India. Under Rule 2B of the Rules, the amount exempt in respect of LTC by air is to the extent of the economy fare of National Carrier i.e. Indian Airlines. It is suggested that word National Carrier should be deleted from Rule 2B. Moreover, as per the current provisions, Leave Travel Concession/Assistance is eligible for tax relief for 2 calendar years in a block of 4 calendar years. It is suggested that the concept of calendar year should be replaced with financial year (April - March) in line with the other provisions of the Income Tax Law and further exemption should be made available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of at least one journey in each financial year. 4.50.10. Taxation of social security contributions in the hands of Expatriates Issues In respect of an expatriate employee deputed to India, the home employer and employee may be required to contribute to social security schemes under the local law of country. In most cases, the contributions made to these schemes may not vest on the employee at the time of making the contributions and thereby do not provide any immediate benefit to the employee. Further, the employee contributions may also be mandatory under the law of the home country. Both the employer and employee contributions may be available as a deduction from taxable income in the home country of the expatriates. However, currently, there is no provision under the Act, which provides for the taxability or otherwise in respect 7 of such contributions from the taxable income though there have been several favorable judicial precedents Recommendation It needs to be clarified under the Act, that employer contributions to such social security schemes should be exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the individual employee based on the principle of vesting. Further, the employee contributions should be available as a deduction where the same are mandatory and constitute diversion of income by overriding title. 4.50.11. Provision of treaty benefits while calculating TDS under Section 192 Issues Currently, there is no provision in the Act, enabling the employer to consider admissible treaty benefits (e.g. credits for taxes paid in another country/ treaty exclusions of income), while withholding tax under Section 192 of the Act from salary income. This creates cash flow issues for the expatriates who are initially subject to full withholding by their employers and then are required to claim large refunds on account of treaty benefits at the time of filing their tax return. Many of these expatriates may complete their assignments and leave India prior to obtaining their tax refunds which also creates issues with respect to credit of their refund amounts. Recommendation Since the credit is otherwise admissible in terms of Section 90/91 of the Act, a suitable amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment may be incorporated in Section 192 of the Act providing for the employer to consider such credits/exclusions at the time of deducting taxes. 4.50.12. Threshold limit under Section 80C of the Act Issues Over the years, investments made in various avenues available under Section 80C of the Act have helped the Government to raise funds as well as the individuals to save tax. However, with too many investment/ expenditures clubbed into the existing overall limit of INR 1 lakh individuals sometimes are discouraged from making further investments. Recommendations There must be a clear distinction between long-term and short-term savings. So far there has not been any significant support in tax policy to actively encourage 'long-term savings' which is very much needed. Life insurance and pensions are the main segments of the financial services that address the needs of individuals in the long-term. It would be equally desirable to have many more such tax-exempt investment avenues to mobilize funds for infrastructural and overall economic development. Therefore, the Government may consider separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption limits for such important avenues. Further, the Government may look at increasing the overall deduction limit to at least INR 200,000 to boost further investment and increase tax savings for the individual. That apart, Term deposits for a period of 5 years or more with a scheduled bank, in accordance with a scheme framed and notified by the Central Government, by an individual / HUF is eligible for inclusion in gross qualifying amount for the purpose of deduction under Section 80C of the Act. For other eligible investments viz. bonds and mutual funds the lock in period is 3 years and hence to ensure parity, the period of term deposits for claiming deduction under Section 80C of the Act should also be reduced to 3 years from existing 5 years. 4.50.13. Deduction for Educational Expenditure Issue Education of children these days imposes a heavy burden on the middle class. A good beginning was made in 2003 by providing deduction for tuition fees under Section 80C of the Act. But Section 80C of the Act is particularly a provision granting incentive for savings and also considering the long list of eligible investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in this section, there is very little relief to the individual on account of the education fees incurred by him. Recommendation It is therefore recommended to de-link deduction for educational expenditure for children from Section 80C and provide under a separate provision like Section 80D of the Act for medical insurance. A reference to the Ministry of Education to find out the tuition fee for an average middle class household will give an indication about the limit of the deduction. 4.50.14. Deduction in respect of rent paid by taxpayers not receiving a House Rent Allowance (HRA) Issue Under Section 80GG of the Act, the maximum deduction available to individuals who do not receive an HRA, in respect of rent paid is only INR 2000 per month. The said limit was last revised in 1998 and is very low in light of the huge rental costs especially in the metro cities. Recommendation The exemption needs to be increased to at least INR 10,000 per month in view of the huge rental escalation. As in the case of HRA exemption, the Government may also consider introducing separate limits for metro and non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... metro cities. 4.50.15. Electronic meal card Issues As per the revised perquisite rules reinstated in December 2009, if food and non-alcoholic beverages are provided during working hours at office or business premises or through non-transferable paid vouchers usable only at eating joints, the value of facility to the extent of INR 50 per meal is exempt from the tax. This limit of Rs.50 is very meager and needs to be revised. Many employers these days provide this facility through electronic meal swipe cards. However, the current rules expressly provide exemption to paid vouchers and not electronic cards though such cards were expressly exempted under the erstwhile FBT regime subject to conditions. Accordingly their treatment is not free from doubt. Recommendation The said exemption along with increased limit should be extended to electronic meal vouchers as well. 4.50.16. Deduction for interest on housing loan Issues A deduction upto a maximum limit of INR 150,000 is currently available from taxable income towards interest on loan taken for acquisition/c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction of self-occupied house property provided such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed and the capital is borrowed on or after 1 April 1999. With the property prices and interest rates rising steeply with each passing year, there is a need to revise this age-old deduction limit. Recommendation It is recommended that this exemption should be harmonized with the rising interest rates and increased to at least INR 250,000 per annum. 4.50.17. Exemption for payment of Leave Encashment to be raised to INR 1 million Issue The exemption limit for leave encashment paid at the time of retirement or otherwise is notified by the CBDT in accordance with the powers given under section 10(10AA) of the Act. The current limit of INR 3 lakhs is very old (since 1998) and needs to be raised substantially with immediate effect. Recommendation It is suggested that the limit should be raised to INR1 million in line with the increase in the limit of gratuity. 4.50.18. Income of minors - to increase exemption limits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 10(32) of the Act Issue As per section 10(32) of the Act, in case the income of an individual includes the income of his minor child in terms of Section 64(1A), such individual shall be entitled to exemption of INR 1,500 in respect of each minor child if the income of such minor as includible under section 64(1A) exceeds that amount. The current limit of INR 1,500 was fixed by the Finance Act, 1992 and needs to be raised substantially with immediate effect. Recommendation The limit should be raised to at least INR10,000/- for each minor child. Other Direct Tax provisions 4.51.1. Calculation of interest for delay in deposit of taxes withheld - meaning of 'month' Issue Interest under Section 201 of the Act is calculated for every month or part of month from the date on which tax was actually deductible to the date on which tax was actually paid. For instance, where tax was deductible on 30 June and the tax so deducted was remitted on 8 July (one day delay) interest has to be paid for June and July, i.e. 2 months for a one day delay. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Recommendation In order to mitigate this hardship caused to the taxpayer, it is suggested that 'month' be defined as a period of 30 days to avoid litigation on this issue. This would make the reckoning of period while interpreting the tax law more meaningful and clear. 4.51.2. Interest payable in case of default in furnishing return Issue Where return of income is filed after the due date, interest under Section 234A of the Act is leviable from the due date of filing return till the date of actual filing. Currently while computing the amount on which interest is payable, self assessment tax paid by the taxpayer is not considered. Consequently the taxpayer has to pay a higher amount of interest. Recommendation Since interest is not a penalty and the reason for levy of interest is only to compensate the revenue in order to avoid it from being deprived of the payment of tax on the due date, it is suggested that in cases where the tax on self- assessment is paid under Section 140A of the Act before the due date for filing return on income but return has been filed after the due date, such tax on self-assessment should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as item of deduction for the levy of interest under Section 234A of the Act. This would be in line with the ruling of the Supreme Court in the case of Pranoy Roy 4.51.3. Interest for deferment of advance tax under Section 234C of the Act Issues Interest under Section 234C of the Act is triggered only if advance tax paid is less than 80 percent of the actual advance tax due for the first and second quarters, i.e. 12 percent and 36 percent respectively. This flexibility is not available while discharging advance tax for the third and final quarters. This leaves very little margin for error for companies while projecting business performance. Further the economic swings which may happen anytime during the financial year, manner of disclosure of financial information in accordance with accounting standards, etc. may result in deviation of actual results from projections. Recommendation As the above factors are beyond the control of an entrepreneur, provisions relating to trigger of interest under Section 234C of the Act should be relaxed as below: Installment Minim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um % of tax due to be paid as advance tax to avoid interest Existing provision Proposed 15 June 12 12 15 September 36 36 15 December 75 67.5 15 March 100 100 This proposal will also align Section 234C with Section 234B of the Act, since interest under the latter Section is triggered only if advance tax paid is less than 90 percent of assessed tax. 4.52. Deduction in respect of interest on time deposits Issue The Finance Act, 2012 provided deduction to the extent of Rs. 10,000 to an individual/HUF in respect of income by way of interest on deposits (not being time deposits) in a savings account. The provision of such a deduction is a welcome step, however, the deduction does not apply to interest income on time deposits. Recommendation FICCI recommends that the deduction under Section 80TTA of the Act should also be provided on income by way of interest on time deposits (made for a fixed period of not less than three years) and the limit should be set at least INR 20,000. This would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... encourage long term savings by the middle class. 4.53. Receipt of amount under Life Insurance Policy - Section 10(10D)(d) of the Act Issue As per Sec 10(10D)(d) of the Act, any sum received under an insurance policy in respect of which the annual premium payable during the term of the policy exceeds ten percent of the actual capital sum assured, is taxable in the hands of receiver. Thus, whole of maturity/ proceeds of life insurance policy in such case gets taxed under this Section. Recommendation Further, to the extent such amount received is calculated based on premium within specified limit (10 per cent) the said amount should be exempt. In other words exemption should not be eligible for amount calculated with reference to premium in excess of 10 per cent of sum assured. 4.54. Monetary Limit for Accounts Audit Issue Currently the limits for audit of accounts of taxpayers are as under: Existing Limit Particulars (INR Lakhs) Particulars Existing limit (INR Lakhs) Sales turnover /Gross receipts of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 100 Gross receipts of profession 25 Recommendation Given the growth in volume of economic activity, the limits need to be revised as under: Particulars Existing limit (INR Lakhs) Sales turnover /Gross receipts of business 500 Gross receipts of profession 50 Existing Limit Particulars (INR Lakhs) Relaxation on mandatory requirement of PAN (Section 206 AA) 4.55.1. Mandatory Requirement of PAN results in undue burden in certain cases Issue Section 206AA of the Act provides that if PAN is not furnished by payee, the withholding tax rate would be 20 percent or rate in force, whichever is higher. The provisions further lay down that no certificate under Section 197 of the Act shall be granted unless the applicant has stated his PAN in the application. It also further lays down that declaration in Form 15G/15H for Nil deduction of tax would not be valid unless PAN is furnished in such declaration. Further, it has been specified that where the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipient of the income has furnished invalid/ incorrect PAN, it shall be deemed that such person has not furnished PAN and accordingly, tax would be required to be deducted at the higher of the specified three rates while making payment to such persons. Recommendations The mandatory requirement to furnish PAN poses a number of practical problems, for example an overseas entity is not amenable to comply with any Indian tax compliance such as obtaining PAN, many senior citizens may not have PAN, as they are within tax exemption limit, so may be the position for many farmers/seed growers etc. Further, it must be appreciated that many foreign companies enter into a one-off transaction with an Indian entity for provision of services or goods. Such transaction may not attract any withholding tax implication or a withholding tax rate of 10-15 percent at the maximum (either under the treaty provisions or under Section 115A of the Act). As the transaction may be one-off such foreign companies may not have obtained a PAN or are even unaware of the requirements under the Indian tax laws. Even otherwise, the law also provides re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laxation to the non-residents from filing tax return in India in case of certain payments of the nature specified under section 115A of the Act provided tax is deducted at source on such payments as per the provisions of Chapter XVII-B of the Act. However, in absence of PAN, payer of the income would not have any resort but to withhold tax at the rate of 20 percent or even higher as applicable to foreign companies. Such excess withholding may not be viewed favourably by the foreign companies and even act as a detriment for them in case of future transactions. Alternatively, foreign companies should be exempted from Indian compliances e.g. filing of tax returns, etc.(on the same lines as relaxation provided under Section 115A). 4.55.2. Whether the provisions of Section 206AA will override the provisions of tax treaties Recommendations A plain reading of the provisions of Section 206AA of the Act suggests that the provision would override the provision contained in the respective tax treaty resulting in a situation of treaty override. This is because in absence of PAN of the foreign company, the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer would be required to deduct tax at the rate of 20 percent if such rate is higher than the rate specified under the applicable tax treaty. This is likely to create hardships for the foreign company in availing appropriate tax credit in its country of residence for the excess tax deducted over and above the specified rate in the tax treaty and also protracted litigation in the matter discouraging foreign entities from entering into transactions with India as also increasing the cost of doing business with India. These provisions may act detrimental not only to the recipients of income but also may be detrimental to the payer of such income. A payer may have deducted tax under the specified Section at the specified rates under a bonafide belief that the PAN furnished by the income recipient is correct. In case the same is found to be invalid/ incorrect, the payer may have to deduct tax at the rate of 20 percent or higher. In case the payer has already made the payment of the sum to the receiver, then it would create the problem of recovery of the differential amount from the recipient of the income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, considering the uncertainty in the Indian tax systems, practically it is seen that the foreign entities generally prefer a tax protected agreement wherein the tax liability is to be borne by the payer of the income. In such cases, the cost to be borne by the payer of the income would escalate by substantial amount as not only the rate of tax would go up but even such higher rate would be required to be grossed up. This will create liquidity issues for the payer of income as also increasing substantially his costs of doing business and importing foreign technology. 4.55.3. Undue burden on senior citizens and other persons not having taxable income Recommendation The provisions of Section 206AA of the Act are detrimental to the interest of not only foreign companies but also persons resident in India, especially the senior citizens. One of the conditions under Section 206AA of the Act specifies that no declaration under Form 15G/ Form 15H is valid unless the person furnishing such declaration has quoted his PAN on such declaration. The condition of mandatorily furnishing PAN on such declaration is likely to create many docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entary hassles for senior citizens across the country for whom the only source of income is perhaps interest from deposits with banks. In this regard, reference may be drawn to Section 139A of the Act which requires a person to obtain a PAN inter alia in case his total income exceeds the maximum exemption limit while Form 15G/ Form 15H is to be furnished by persons whose tax on total estimated income for the concerned year is likely to be NIL. Accordingly, the provisions of Section 206AA of the Act seem to be overriding the basic provision laid down under Sections 139A and 197A of the Act. Even if a person was to comply with the provisions of Section 206AA of the Act and was to obtain and quote his PAN, he is likely to face various documentary hassles. There is also a fear, perhaps not without reason, that the Income-tax officers in their zeal to widen the tax net would issue notices to those people who have obtained PAN but have not been filing their tax returns in spite of their income falling within the exemption limit. Further, there is apprehension that this would result in more harassment for such senior citizens. In our country, where an individual is expected to look af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter their own social security needs, subjecting such senior citizens to such unnecessary procedural requirements would only reflect very poorly on the Government as being insensitive to the needs of our senior citizens. Hence, there is an urgent need to carve out exceptions in these provisions for senior citizens and other persons who do not have taxable income. 4.55.4. Whether tax required to be grossed up in case Section 206AA is applicable Recommendations At present, there is no clarification as to whether provisions of Section 195A of the Act would apply to Section 206AA i.e. rate at which tax is required to withheld under Section 206AA of the Act is also to be grossed-up under Section 195A of the Act. This creates uncertainty among the tax payer and may have to bear additional tax. A withholding tax rate of 20 percent after grossing up would be as high as 25 percent. Hence, it is suggested that clarification may be introduced to provide that provision of 195A of the Act would not apply in the case where provisions of Section 206AA of the Act are attracted, since Section 206AA of the Act starts with non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - obstante clause. We suggest that quoting of PAN should be made optional for the following category of persons: Individuals, including senior citizens, farmers/seed growers, transporters etc. whose total income do not exceed the exemption limit or are illiterate and the mandatory requirement to obtain and furnish PAN may pose practical problems Foreign companies earning income in India which is not liable to tax in India under the Act or under tax treaty provisions. Pure business transactions of purchase/sale of goods In addition, the onerous responsibility and consequences faced by the payer of the income in case the recipient furnishes incorrect/ invalid PAN should also be relaxed. It may also be clarified that the provisions of Section 195A of the Act relating to grossing up of payments do not apply in a case where provisions of Section 206AA of the Act are attracted. Tax Deducted at Source (TDS) 4.56.1. Exclusion of service tax, Out of pocket expenses and VAT Issue TDS provisions should be amended to exclude service tax charged on all services. As per CBDT Circular No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4 /2008 this benefit is given only in respect of rent income even though the reasoning contained therein would apply to all services. Recommendations It is suggested that no tax at source be deducted on service tax component of professional fees and other services. The benefit for the exclusion of service tax for calculating TDS should be given for other payments also. Further where out of pocket expenses have been clearly stated in the invoice, tax should not be deducted on such out of pocket expenses, since these are merely reimbursement of expenses incurred and do not represent income. 4.56.2. TDS on monthly provision entries and year end provision memorandum entries Issues Most of the companies record provision entries towards various expenditures on a monthly basis to report performance to their parent entities. These entries are reversed in the subsequent month. The tax officers often take the view that, tax is required to be withheld even on monthly accruals or provisions which are made just to meet the accounting requirements and are reversed at the start of the following month. These a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccruals are made on very broad estimates to unidentified payees. The tax officers have been insisting that tax be deducted on these provisional entries. Recommendation In line with the relief given to banks for similar accruals made on account of interest accrued but not due, similar relief should be given to other payments that are accrued but are not due to the payee and for which the payees are not identifiable and represents only a provision made in accordance with accounting policy. 4.56.3. Rationalisation of TDS provisions Issue There is a lot of litigation surrounding applicability of TDS provisions on various payments. Recommendation In order to reduce litigation on TDS related issues, it is suggested that in the context of the current scenario, the CBDT should issue a FAQ similar to Circular 715 dated 8 August 1995, clarifying the position on various current issues in respect of TDS. 4.56.4. TDS credit Issues The E-TDS system is undergoing issues and there is mismatch of data between TDS Certificates issued by Deductors, TDS statements uploaded on TIN system and bank payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt details, PAN of the deductees. As a result deductees do not get the full credit for tax deducted. Further, based on the mismatch the tax authority is issuing orders upon the deductor thereby causing unnecessary adversity to the deductor/taxpayer. The E-TDS system mandates all the deductors of taxes to process TDS Certificates in Form 16A's only through TIN-NSDL website. The software of the tax department automatically picks up the address of the deductee from the address appearing in the PAN database maintained by the tax department. As a result, all the TDS certificates are getting issued at the address declared in the PAN application made by the deductee. This has resulted into severe hardship for the companies which have a multi locational set up, since, all the TDS certificates gets dumped at the Registered office of the company (being PAN based address). The accumulation of TDS certificates at the registered office of the deductee makes it difficult for them to co-relate/reconcile them with the accounts which are maintained at different locations and also the units are not able to identify whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TDS certificate is received from the party or not Recommendations In view of the above, it is suggested that TDS certificates issued by the deductors, which are furnished by the deductees in the tax assessment, should be given due cognizance and refund claims based on such TDS certificates should be processed. Further the tax authority can suitably issue proper notice for the clarification rather than hurriedly issuing orders to the taxpayer concerned. It is recommended that suitable instructions be issued by the lawmakers providing an option to the deductee to indicate their TAN in the invoice and further a column/field may be added in the TDS returns asking the payers to furnish the TAN against each deductee (this should however be an optional column), wherever TAN has been provided by the deductee, at the time of submission/filing of TDS returns by the payers. At the same time, it is also recommended that the E-TDS software of the tax department may be amended so that when the TDS returns are processed to generate the TDS certificates, the address should first be automatically picked from the TAN database in respect of the deductee maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the tax department and in case no TAN is mentioned in the TDS return, then the address should be picked from the PAN database. This would facilitate generation of the TDS certificate at the TAN address, wherever TAN is provided by the deductee. 4.56.5. Intimation under section 200A of the Act Issues Section 200A of the Act was introduced by the Finance (No. 2) Act, 2009 with effect from 1 April 2010. As per the provisions of this section, TDS Statements filed under Section 200 of the Act are processed to verify arithmetical errors and incorrect claims. Post such processing, if any arithmetical error or incorrect claim is found in TDS statement, intimations showing the amount of proposed demand to be levied on the deductor is issued. Practically, it has been observed that Income-tax department has also issued notice of demand under Section 156 of the Act along with such intimations. In the absence of any provision for rectification and appeal, the said errors were rectifiable only by filing online correction statement on the website of NSDL. However, at times some errors could not be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctified by filing correction statements. For such errors it was very much essential that the tax officer has an authority to rectify the same under Section 154 of the Act or the taxpayer has a right to appeal under Section 246A of the Act. It is a welcome move in the Finance Act 2012 that the above mentioned intimations have been made subject to rectification or appeal. However, the said intimation is subject to rectification and appeal with effect from 1 July 2012. Recommendations We suggest that the said amendment should be made applicable with retrospective effect from 1 April 2010. The reason that all the intimations issued between 1 April 2010 and 1 July 2012 if not rectified or appeals are not admitted, will have a pending demand without any available course of action to the taxpayer. 4.56.6. Withholding tax on reimbursements Issues With increasing cross border transactions, reimbursements of expenditures / costs incurred on behalf of the Indian Company by the Foreign Parent / Group Company have been subject to scrutiny by the tax authorities. Broadly reimbursements made to the foreign company could be cate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gorized as follows: Reimbursement/ allocation of expenditure/ costs (shared services/ incidental costs/ third party costs) Reimbursement of salaries / overseas social security contribution/ personnel related cost of deputed employees Contrary positions have been taken by the judiciary on the issue of withholding tax on reimbursements made by an Indian Company to its Foreign Parent / Group Company with specific reference to the facts of each case. Further with respect to recharge of salary costs of seconded employees, there is ambiguity on the applicability of withholding tax under Section 195 of the Act, notwithstanding the fact that tax has been withheld under Section 192 of the Act upon payment of salary to such employee. The consequences of non compliance with withholding tax provisions are manifold for the deductor in the form of disallowance under Section 40(a)(i) of the Act, interest and penal proceedings Recommendation To reduce litigation on this issue it is recommended that the CBDT issues a circular / FAQ clarifying with illustrations on the applicability of withholding tax on reimbursements. Specifically, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following need to be addressed: Query Clarification Recharge of salary costs of seconded employees if tax has been withheld at source in the employees hands No withholding tax on payment of recharge to foreign company which has made such payment from perspective of administrative convenience. Reimbursement of third party costs or incidental expenses or travel costs on cost-to-cost basis No withholding tax under section 195 where It is not payment for a service rendered, such as travel cost The underlying third party cost would not attract withholding tax in India or if paid from India This relates to expenses incidental to the fee Query Clarification 4.57. Retrospective Amendments The Indian tax laws have been breeding grounds for protracted litigation between the tax department (i.e. the Government) and the taxpayers. One of the weapons that is used by the Government is the amendment of provisions with retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect. These amendments override a law settled by judicial precedence or a legitimate argument of the taxpayer supported either by an interpretation of law or by any decision of the court. Almost every Finance Bill has some amendments, which have retrospective effect. Issues Overriding of a settled law/ existing provision Reopening of assessment based on retrospective amendments Levy of penalty on tax arising due to retrospective amendments Recommendations Admittedly, the Parliament is supreme and it should enact laws for the benefit of the economy and the people at large. Further, in today's constant changing world, it is imperative that the tax laws are amended regularly. However, this should not be used to override a benefit / argument available to the taxpayer. The legislature has powers to introduce enactments and amend enacted laws with a retrospective effect; however, the same is not only subject to the question of competence but is also subject to judicially recognized limitations: Firstly, words used must expressly provide for retrospective operation as it is a settled law that a taxing provision imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osing liability is governed by the normal presumption that is not retrospective. Secondly, the retrospectively must be reasonable and not excessive otherwise, it runs the risk of being struck down as unconstitutional. Lastly, it is apposite where the legislation is introduced to overcome a judicial decision. The legislative power cannot be used to subvert the decision without removing statutory basis of the decision. It is important that the above principles are adhered to failing which courts will intervene at the taxpayer's behest. Moreover, it has to be appreciated that the judiciary interprets the law as it is worded and not on the basis of what would have been the intention of the legislation. In case it has been interpreted in a way which Government thinks was not intended, it only means that the provisions were not properly drafted. In case some benefit has arisen from this ambiguity to the taxpayer in the judicial pronouncement, the same should not be negated. It is the cardinal principle of the jurisprudence that the benefit of doubt should go to the affected person. Further, even if a retrospective amendmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has a tax impact on the taxpayer, he should not be burdened additionally by way of reopening of assessments and levy of penalty. An appropriate amendment in the tax laws specifying the above will be a relief to the taxpayer. 4.58. Amendment in the definition of 'Charitable Purpose' The Finance Act, 2011, has amended Section 2(15) of the Act to provide that 'the advancement of any other object of general public utility' shall continue to be a 'charitable purpose' if the total receipts from any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business do not exceed INR 2.5 million in the previous year. This has been done by inserting a proviso to Section 2(15) of the Act to read as under:- Provided further that the first proviso shall not apply if the aggregate value of the receipts from activities referred to therein is twenty five lakh rupees or less in the previous year; The said amendment where the earlier limit of INR 1 million has been increased to INR 2.5 million though a welcome move to mitigate the problem to some extent of smaller charitable organizations but no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t adequate enough for bigger ones. It may be mentioned that originally the term 'charitable purpose' under the said section was defined to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The problem had arisen because the Finance Act 2008 amended the said definition by inserting a proviso to Section 2(15) of the Act as under:- Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity The then Finance Minister Shri P Chidambaram, while replying to the debate in the Lok Sabha on 29 April, 2008, provided a clarification that: . I once again assure the House that genuine charitable organizations will not in any way be affected. The CBDT will, following the usual practice, issue explanatory c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular containing guidelines for determining whether an entity is carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as advancement of any other object of general public utility . . Issue The aforesaid amendment is vehemently opposed by trade organizations, chambers of commerce, NGOs and other charitable organizations, as it was felt that it would have wide repercussions on the genuine charitable organizations which are rendering laudable service in the country. These are not-for-profit organizations and to be eligible for tax exemption, Sections 11 to 13 of the Act, provide for rigid regulations for charitable institutions as regards inter-alia, investments, application of income, accumulation of profits, audit, timely filing of returns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with reports from Chartered Accountants, bar against any private benefit etc., and the tax exemption could be withdrawn for violation of any of such conditions. Recommendations We are of the view that the underlying objective of tax exemption for charitable organizations should be the end use of its income and not the generation of income. In this perspective, it pleaded that the chambers of commerce, trade organizations, NGOs and other not-for-profit organizations should be explicitly exempted from tax provided the income generated by them are exclusively utilized for charitable purposes and that they are strictly adhering to the requirements under the Act. In the alternative, we would like to suggest that at least aforesaid proposed proviso be substituted to read as under: Provided further that the first proviso shall not apply if the aggregate value of the receipts from activities referred to therein is not more than 49% of the aggregate receipts. Issue The dichotomy is in respect of different tax treatment to organizations engaged in carrying out specified activities for charitable purpose like relief to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the poor vis- -vis organization carrying out any activity of general public utility though charitable in nature. For instance, the sale proceeds from education material/books by a Non Government Organization (NGO) working towards the charitable purpose of education may not necessarily affect its tax exempt status. However, where an NGO engaged in 'any other object of general public utility' say an old age home earns revenue from sale of books or literature or providing some assistance to its members on subject matter aligned to their main object may impact its tax exemption status, where value of such sale proceeds/consideration exceeds 2.5 million. Recommendation The law should provide greater clarity on the tax treatment given to organizations falling within the purview of the residual clause of 'advancement of general public utility'. There is a dire necessity to provide a thumb rule on what would constitute 'charitable purpose' under the residual clause. The nature of activity and the application of income towards the said activity should be the emphasis of grant of tax exemption status rather than the activities from which income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is derived. Issues The restrictive provisions were inserted with an intention of prohibiting indiscriminate claim of exemption under the pretext or guise of being engaged in charitable activities. However, this has also impacted the low profile organizations genuinely working towards the betterment of society as their activities are falling within the purview of 'advancement of any other object of general public utility'. Even though the Government has provided marginal relief by increasing the limit, such a relief may not be adequate for the organizations to eventually become self-sustainable. This would result in huge dependence on external grants and donations for carrying their charitable activities. Recommendation The law should suitably be amended and the limit prescribed should be increased to enable the genuine organizations to become self-sustainable. Issue The Finance (No.2) Act, 2009 inserted clause (vii) in sub-section (5) of Section 80G of the Act to protect donations upto 31 March, 2009 if any institution for fund established for charitable purposes, loses exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion due to the first proviso to Section 2(15) of the Act. Recommendation It is suggested that a similar provision be made in Section 80G of the Act to the effect that donation to such institutions / funds / trusts will continue to be exempt in respect of the donations and the donor will be eligible for tax deduction benefit under Section 80G of the Act, even if the trust loses exemption owing to its receipts from commercial activities exceed the monetary limit or the specified percentage of the total receipts as suggested above. It may also be clarified that these will not lose recognition under Section 12AA of the Act if the receipts exceed the said specified limits / percentage. In other words, in case of excess receipts, the exemption should not be denied in relation to other activities. Issue Under section 2(15) of the Act, charitable purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Different views a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re expressed by various experts with respect to vocational training activity as to whether same amounts to education or not. Some views are expressed that since it is systematic process of learning which enables an individual to earn his livelihood, therefore it is education . However since there is no clear cut jurisprudence on this issue, the tax authorities take a cautious approach and do not term it as education Recommendation FICCI strongly recommends that section 2(15) of the Act be suitably amended to provide that education includes vocation training. This will boost and further provide impetus to the skill development programme undertaken by the Government of India. 4.59. Credit in respect of foreign taxes Issues As per existing provisions of the Act dealing with computation and payment of advance tax by an taxpayer, advance tax payable is to be reduced by the TDS or tax collectible at source (TCS) under any provisions of the Act. Although the provisions rightfully allow reduction of TDS / TCS while computing advance tax liability, the same is restricted only to TDS / TCS under provisions of the Act and doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not cover TDS in foreign country vis- -vis income earned by the taxpayer from such country and offered to tax in the return of income. However, in terms of provisions of Section 90/91 of the Act, the taxpayer is allowed to claim credit of foreign taxes against its tax liability at the time of filing of its return of income. Further, the interest provisions in Section 234A/234B/234C of the Act for shortfall in payment of advance tax also provide for reduction of foreign taxes while computing such interest liability. As a consequence of above disconnect, the taxpayer ends up paying excess advance tax, resulting in a refund situation post claiming of credit of foreign taxes. Further, the cash to this extent gets locked till the time refund is received. India domestic tax legislation does not contain any guidelines with respect to foreign tax credits with tax treaty countries. Thus leading to double taxation of a particular stream of income and denial/reduction of foreign tax credit. As per existing provisions of the Act foreign tax credit is restricted to the tax liability of the taxpayer in India and in certain cases, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he taxpayer is not in a position to claim any foreign tax credit because of losses under the Act or in some cases he is only able to claim partial tax credit. The provisions under the prevailing tax law does not allow for carry forward of the unutilized foreign tax credit resulting in permanent loss to the taxpayer in respect of the foreign tax credit which he is unable to claim. In case of countries like USA, Canada and Switzerland the local governments at the provincial/state level also levies taxes on income hence taxes on income levied by such jurisdictions also amounts to double taxation of income, however, the relief of taxes paid is being denied by the tax authorities in India on the ground that such local taxes are not covered by the applicable tax treaty. Recommendations Section 209 of the Act dealing with payment of advance tax should be amended to expressly provide that advance tax liability should be computed after reducing credit for taxes withheld in foreign country as the credit is otherwise admissible in terms of Section 90/91 of the Act. FICCI recommends that with Indian companies increasingly going globa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, clear legislation as part of the domestic law be incorporated which could potentially address, among others, the following aspects: conflict in determining source of income, change in characterization of income, varying audit periods, varying basis of audits and mechanism for allowing full tax credit. A mechanism should be expressly provided in the Act for allowing credit for taxes on income levied by overseas provincial/local tax jurisdictions by amending section 90 of the Act. A suitable amendment may be made in the Act by inserting a provision which allows carry forward of unutilized foreign tax credit to be set off against the tax liability of the company as per the Act in the succeeding years. 4.60. Modification of Definition of Association of Persons (AOP) Issues The term Association of Persons (AOP) has not been defined in the Act. As per section 2(31) of the Act, 'person' includes, inter-alia, association of persons or body of individuals, whether incorporated or not. Explanation to section 2(31) of the Act further provides that an AOP shall be deemed to be a person, whether or not such person or body ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was formed or established or incorporated with the object of deriving income, profits or gains. Since the definition is not provided by the statute itself, one has to refer to the legal jurisprudence for understanding the meaning of term 'AOP'. The Supreme Court observed in the case of CIT v. Indira Balkrishna (39 ITR 546), The word 'associate' means, according to the Oxford Dictionary, 'to join in common purpose or to join in an action' . The essential characteristics of an AOP flowing from the various judicial precedents can be illustrated as under: Two or more persons join together or associate together; The parties should come together out of their own free will (out of volition); The association should be for common purpose or common action; Mutual rights and obligations; Incurrence of common expenditure; There should be joint execution and / or supervision of the work; Possibility of reassignment of work amongst members; Some kind of scheme for common management. Whether an AOP is constituted or not would have to be decided on a conjoint reading and analysis of the above factors to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and circumstances of the case. No one factor can be said to be decisive of the subject and the priority of the factors is also not laid down in law. In particular, the issues surrounding the 'Benefit/ profit sharing test' to determine AOP are as follows: Whether mere intention to collaborate without anything more is sufficient to constitute AOP [even without profit sharing and/or without sharing of common resources/costs]? Whether it is sharing of gross remuneration OR it is the sharing of net profit that is relevant to decide the existence or not of AOP? The existing provisions of the Act on whether a particular association constitutes an 'association of persons' for purposes of Section 2(31) of the Act are thus open to diverse interpretations. While it is recognized that whether an AOP exists or not is both a question of law and fact, yet in the absence of legislative framework defining an AOP in the Act, the matter is often litigative thus creating uncertainty and being costly for both the taxpayer and the exchequer. Recommendations The following proviso be inserted to Explanation to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(31) of the Act Existing law Explanation to Section 2(31) of the Act: For the purposes of this clause, an association or persons or body of individuals or a local authority of an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or judicial authority was formed or established or incorporated with the object of deriving income, profits or gains. Proposed law Explanation to section 2(31) of the Act: For the purposes of this clause, an association or persons or body of individuals or a local authority of an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or judicial authority was formed or established or incorporated with the object of deriving income, profits or gains. Provided however that an association of persons shall not be deemed to be a 'person' for the purposes of this clause if the members of such association of persons receive gross receipts in their respective separate bank account(s) and incur their respective expenditure or costs from their respective separate bank account(s); and; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no adjustment inter-se the members to share the (net) profit or loss. Issue As per section 86 of the Act, share of the member in the income of an AOP is not includible in total income of the member. However, such income is not excluded while computing the MAT liability of the member unlike in the case of a partner of firm whose share in the profits in the firm is exempt in the hands of the partner as per section 10(2A) of the Act and also no MAT is payable by the partner on such profits under section 115JB of the Act. The reference to section 86 in section 115JB of the Act is missing. It is unfair to have such a discriminatory tax treatment between a partner of a firm and a member of an AOP. Recommendation It is recommended that section 115JB of the Act should be amended to specifically provide that the share of income of a member from an AOP which is otherwise exempt under the provisions of section 86 of the Act should be excluded while computing the liability of the member under 115JB of the Act 4.61. Corporate Social Responsibility costs Issue Corporate are currently involved in various areas of soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al responsibility/community development as part of nation building. Suitable tax incentives should be introduced in respect of such Corporate Social Responsibility (CSR) Costs to accelerate the process and to ensure that the country can reach the goal of being a developed nation in the near future. Recommendation It is recommended that a weighted deduction of 150 percent of the expenditure on community / social development (both capital and revenue) be introduced, specifically covering critical areas like education, health, animal husbandry, water management, women's empowerment, poverty alleviation and rural development. Further, even in cases where a company has its own trust or foundation it should also be eligible for the weighted deduction in respect of expenditure incurred for CSR activities. 4.62. Deduction for Road Safety Development Programmes Issue India has reported the highest number of road fatalities among all countries in the world. Due to such incidents, the households of road accident victims lose their near and dear ones who are left behind without any support and also lead to an enormous economic loss. Since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is a huge task and involves large financial outlays, it is of paramount importance that companies and individuals partnering and contributing towards the Road Safety measures be given deduction from their income in respect of the contribution/expenditure incurred by them on approved road safety projects. Recommendation FICCI recommends that a provision be inserted in the Act which shall grant deduction to assessees while computing total income, of an amount equal to the expenditure incurred by them for the purpose of road safety measures under schemes and programmes approved by the Central Government, the National Highway Authority of India or the Highway Departments of the State Governments. Such a measure will go a long way towards incentivising wider participation in the war against road accidents thus saving human lives, reducing the trauma of the families of accident victims and stemming the unacceptable drain on the economy 4.63. Inclusive Method of accounting - Section 145A of the Act Issue The conflict in the provisions of Section 145A of the Act and the Accounting Standards notwithstanding its Nil impact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Profit and Loss or taxable income has transformed itself into long drawn and avoidable litigation. Recommendations It is recommended that provision of Section 145A of the Act be amended to fall in line with the Accounting Standards. Alternatively, it is recommended that the said provision be deleted, since in ultimate analysis, there is no revenue implication. 4.64. Enhancement of Limits for TDS under Section 194C for Payment to Contractors Issue Currently any payment for contract services rendered which exceeds INR 30,000 at a time or INR 75,000 per annum requires the persons responsible for making such payments to deduct tax at source under Section 194C. These limits have been fixed some years ago. The deduction of tax at source on such small amounts involves deployment of relatively large amount of resources in terms of manpower, systems and other costs at the assessee's end without any significant benefits to the revenue. Recommendation It is recommended that the threshold limit be increased to INR 50,000 for single payment and INR 100,000 for aggregate annual limit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. Wealth Tax 4.65. Wealth Tax Issues The administration and litigation cost that the government incurs for the collection of wealth tax and in litigative matters is too high. The government almost spends 40 percent of amount collected as its cost for collecting the wealth tax. This is a very high cost which does not justify the quantum of collection of wealth tax. The low collection of wealth tax could be due to lack of law enforcing machinery for collection of wealth tax. If we incur additional expenditure to strengthen the law enforcing machinery then it would add up to the administrative expenditure which is currently at 40 percent to 50 percent level. Recommendations The government can consider other option of increasing the exemption limit of wealth tax and to include all taxpayers but it may lead to reduction in the number of wealth taxpayers. Considering the reduction in the number of taxpayers and cost of collection remaining the same, wealth tax should be abolished. We further suggest that the levy of wealth tax tantamount to double taxation, as wealth is only an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccumulated savings of income over a period of time on which income tax has already been paid. Issue Motorcars are included in the definition of the 'specified assets' for the charge of wealth tax and are termed as unproductive items. Recommendation With the rise in the standard of living of the people and rise in the development of roadways, motorcar is becoming the necessity rather than being a luxury item. Hence, the motorcar should be removed from the purview of the definition of specified assets. Issue A residential property owned by the company is charged to wealth tax if it is given to its employees drawing salary exceeding INR 1 million Recommendation It is equally important that residential accommodation provided by a company to its employees drawing salary exceeding INR 1 million should not be brought within its tax net. It has to be appreciated that companies need to provide accommodation to its employees considering the remote location of its factory/offices and other reasons like attracting talented persons. Such residential accommodations should not be construed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s non productive assets. Issue Vacant Industrial land held for more than two years from the date of acquisition is considered as non productive asset and charged to wealth tax. Recommendations Vacant industrial land earmarked for future expansion should also be outside its preview even if it is kept vacant after two years of its acquisition. Further, considering the changing face of service industry on account of size and infrastructure requirements the exemption benefit of initial two years should be allowed to land held for all business purposes instead of limiting the exemption to industrial purposes only. Wealth tax does not differentiate between senior citizen and the normal citizen. Recommendation It should give benefit to the senior citizens like under the Act. It is therefore suggested that wealth tax should not be charged on the wealth of senior citizens. Issue Government companies are charged to wealth tax and not treated at par with statutory bodies which are exempted from wealth tax. Recommendation The bodies incorporated under the Central or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Act is exempted from wealth tax but Government companies are charged to wealth tax. It is therefore suggested that the Government companies should also not be covered under wealth tax net. V. INDIRECT TAXES SERVICE TAX Exemptions With the introduction of a comprehensive service tax regime with effect from 1st July, 2012, based on the concept of a Negative List, the coverage of the service tax levy has become broad-based. FICCI has received several representations requesting for exemptions from the levy of service tax from several sectors. In some case it appears that the levy was unintended. The services which could be considered for exemptions are specified in the following paragraphs. 5.1.1. Expanding the scope of services in relation to Agriculture produce under the negative List As per Section 66D of the Finance Act, 1994, the Negative List shall comprise of the services specified therein. Clause (d) of the said section specifies the services relating to agriculture or agricultural produce which shall not be taxable to service tax. The agro sector has been supported by keeping a bulk of services relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to agriculture or agricultural produce in the Negative List or in the list of exempted services. However, there are some services such as security services, laboratory testing services, renting of immovable property services provided in relation to agriculture produce, etc. which are essential to secure to storage of agri-produce and to determine quality of the agri-produce, but which are subjected to service tax. It is recommended that services provided in relation to agriculture produce may be kept outside the ambit of levy of service tax. 5.1.2. Exemption for Services provided by Tobacco Board, Coffee Board, Tea Board etc. As per Section 66D of the Finance Act, 1994 the Negative List of Services includes: (d)(vii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce; Under Section 65B (6) "Agricultural Produce Marketing Committee or Board" has been defined to mean any committee or board constituted under a State law for the time being in force for the purpose of regulating the marketing of agricultural produce. In this conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection it would be pertinent to note that by virtue of it being expedient in public interest, the Union Government has taken under its control several agri industries and has set up Boards for such industries. The duties and objectives of such Boards include, inter-alia, regulating the relevant agri commodity and promoting its sale - both within the country as well as exports, having due regard to the interests of all the stakeholders like the farmers / growers, manufacturers, dealers and the government. Examples of such Boards include Spices Board of India, Tobacco Board, Coffee Board of India, Coir Board and Tea Board of India. In line with the inclusion in the Negative List of services provided by Agricultural Produce Marketing Committees or Boards, it is recommended that the services provided by Boards set up under Central enactment for similar purposes are also included under the definition of Board under Section 65B of the Finance Act, 2003. This will ensure that the tax cost of the services are not embedded in the export cost of the agri-products or in the cost of the agriproducts sold in the domestic market, as is the case today. 5.1.3. Exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption from the levy of Service tax on treatment and recycling of effluents and solid waste Notification No. 42/2011-ST dated 25-07-2011 as amended by Notification No. 1/2012 dated 17-03-2012 exempts services provided by an association in relation to common facility set up for treatment and recycling of effluents and solid waste with financial assistance from Central or State Government under the taxing entry of club or association services. However, following introduction of the comprehensive service tax regime based on the concept of Negative List, such services of processing of waste have again been brought under the taxable net. The Central Effluent Treatment plants are set up to help the micro and small scale industries to treat the effluent of units who cannot afford to set up their own individual waste treatment plants. It is requested that the exemption from the levy of service tax on processing of waste / effluent in relation to common facility set up with financial assistance from the Central or State Government be restored. 5.1.4. Exemption from Service Tax on Membership Subscription of Associations Trade Associations provide a common forum and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... help catalyze the Government / Industry dialogue. They also undertake industry-wise collective bargaining. These non-profit Associations are for the members, by the members and of the members and are also recognized by the Government and its various bodies who utilize services of the Trade Associations for interface with the trade and industry. It is requested that membership subscription to recognized Trade Associations be exempted from the purview of the Service Tax. 5.1.5. Exemption for Services availed by 100% EOUs CENVAT Credit Rules, 2004 permit taking of credit of inputs and input services which are used for providing output services or output goods. In order to zero-rate the exports, Rule 5 of CENVAT Credit Rules, 2004 provides that such accumulated credit can be refunded to the exporter subject to stipulated conditions. Notification No. 5/2006-CE (NT) dated 14.03.2006 provides the conditions, safeguards and limitations for obtaining refund of such credit. At present units are paying service tax liability, taking input credit and then claiming refund. However, despite several clarifications and exhortations from the Board from time to time gett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a refund of accumulated cenvat credit is a herculean task. The field officers do not take any cognizance of the certificate issued by the statutory auditors. Issues of Nexus in the software industry are not clearly understood by the concerned officers. At a strategic level predictability is becoming a challenge. Cost of litigations is increasing and working capitals are being blocked In this background, it is suggested that complete exemption from service tax be provided for all types of services availed by 100% EOUs. This would ease the cash flow of the concerned units and save the department its precious time in processing papers. Many service providers are captive service centres for their parent companies outside India and are exporting hundred percent of their services outside India. The total cycle of payment of service tax on the output services and making a claim for the total service tax paid can be avoided if such assessees are granted exemption from payment of service tax on input services. This would meet the same objective without going through the full process. It is suggested that service tax exemption be granted at least to ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essees engaged solely in export of taxable services. 5.1.6. Exemption for intermediary services for exports The intermediary services of the type as explained in the following example may be considered for exemption from the levy of service tax:- Company A is an Indian agent of Company B, a US company which provides repair services. Company C is a potential Indian Customer for the repair services provided by Company B. Company A identifies the Customer Company C and negotiates the scope and value of services to be rendered in a services contract between Company B and Company C. Company A earns a consideration for its services. Rule 9 of the Place of Provision of Services Rules, 2012 provides that the place of provision of Intermediary Services shall be the location of the service provider. 'Intermediary' has been defined to mean a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of service between two or more persons . Therefore, services provided by Company A are eligible to be classified as an Intermediary Service. The place of supply of these services under the current rules will be based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n location of Service Provider i.e. Company A and hence the place of provision of services will be India. The activities performed by Company A as explained above tantamount to export under the previous Export of Services Rules, however, these are liable to be taxed under the new service tax regime. The services of the nature mentioned above qualify as export under the EU Place of Supply Rules also. The fact also remains that the contractual recipient of the service as well as the beneficial enjoyment of the service, is outside India. Also in case Company A is helping Company B sell goods to Company C in India, then the services of Company A fall under Rule 3 of POPS and qualify as exports. Thus, there is no reason why in case of service transactions the service of Company A should not qualify as exports. In the circumstances, there is adequate justification for exemption from the levy of service tax on such intermediary services. 5.1.7. Service tax exemption for services received by power industry The economic development of the nation is intricately connected with the development of infrastructure. Recognizing this fact, the Government has provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded various incentives to the power industry including incentives by way of tax reliefs to augment the power industry and reduce power deficiency. Accordingly various indirect tax advantages have been provided to certain power generation units such as mega power plants to reduce the cost of power generation. The Government however, has not exempted input services consumed in the power generation plants leading to higher cost of power production. This is because the cenvat credit is not available to the power industry. All input services received by power producing units should be exempted from service tax. 5.1.8. Exemption from payment of service tax for oil gas exploration The Government has consistently encouraged investment in oil exploration to reduce dependence on crude oil import and to provide energy security to the nation. To achieve this the oil exploration sector has been granted exemptions from all excise and customs duties so long as the exempted items are used in oil exploration. However, a similar exemption has not been extended to services consumed by Exploration and Production entities. This drains away a substantial portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the funds committed for exploration as the tax is not vatable. Therefore, service tax incurred by entities end up as 'stranded costs' on which no cenvat credit can be availed. The service tax payable on services received for exploration activities may be exempted. Alternatively, The Government should formulate a scheme to refund the service tax on input services consumed by the oil exploration sector. 5.1.9. Enhancement of value limits for exemption to specified services provided by a goods transport agency Services provided by a goods transport agency by way of transportation of the following goods are exempt from the levy of service tax in terms of Notification No.25/2012-ST dated 20-06-2012 (Sl.No.21):- (a) goods where gross amount charged for the transportation of goods on a consignment transported in a single goods carriage does not exceed one thousand five hundred rupees; or (b) goods, where gross amount charged for transportation of all such goods for a single consignee in the goods carriage does not exceed rupees seven hundred fifty; The exemption has been provided as a measure of relief to small traders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , manufacturers and service providers outside the cenvat chain who are relieved from observing the compliance formalities for small freight transactions. The exemption limits of Rs.1500 and Rs.750 were notified for the first time in 2004 vide Notification No.34/2004-ST dated 03-12-2004. Since then freight costs has risen by 70% to 75% on account of increase in diesel prices by 56% (from Rs.26.28 to Rs.41.13 per liter), increase in capital costs, increase in interest rate for motor vehicle finance and other cost increases. In view of the aforesaid circumstances, with a view to provide genuine relief to small entrepreneurs it is requested that the exemption limits of Rs.1500 and Rs.750 may be increased to Rs.3000 and Rs.1500 respectively. 5.1.10. Increase in exemption limit for levy of service tax The value limit of Rupees Ten Lakhs for exemption from the levy of service tax in a financial year be increased to a total of Rupees Twenty Lakhs. 5.1.11. Exemption for input services availed by Shipping Companies Service tax is currently imposed not only on various services availed by the Indian shipping companies domestically but also on some of the cruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial services availed by them outside India. Globally, in major maritime jurisdictions like UK, Singapore, Netherlands, Greece etc, taxes relating to the shipping industry are either zero rated/exempted, whether such services are availed domestically or internationally by non-resident or resident ship owner. The Government has, by introduction of Tonnage Tax, recognized the need to create income tax parity with other shipping jurisdictions to create competitiveness in this industry. It is essential that this philosophy is also extended to create a comprehensive zero rating of indirect taxes for the industry. It is suggested that exemption from service tax should be provided on all input services availed by shipping companies. 5.1.12. Exemption for Transmission and Distribution of Electricity Transmission and distribution of electricity by an Electricity Transmission or distribution utility has been included in the negative list of services. However, by definition, this relief from the levy of service tax on transmission and distribution of electricity is available only to Central and State notified agencies (CEA, State Electricity Boards etc.). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is requested that electricity transmission and distribution being an infrastructure input should be kept out of the service tax net irrespective of the agency involved in this activity. 5.1.13. Exemption of Services Provided by way of Construction of Power Plants As per entry at S. No. 14 of Notification No. 25/2012-ST dated 20.06.2012, services by way of construction, erection, commissioning or installation of original works pertaining to airports and services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of roads is exempted. Likewise, keeping in mind the public good any services involved in the work undertaken for construction of Power Plants should also be exempted from service tax. 5.1.14. Exemption from the levy of Service Tax on Maintenance, Repair and Overhaul (MRO) Services of aircraft MRO Business in relation to aircrafts has a huge potential to attract foreign investments and earn precious foreign exchange and at the same time save outflow of foreign exchange from India. It is desirable to exempt the MRO services as a whole from impositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of service tax in order to promote the industry in India. The exemption is necessary for promoting the upcoming MRO business which has just begun to grow in India. It is suggested that MRO services may be included in the negative list of services or may be specifically exempted from service tax. 5.1.15. Exemption for services provided in relation to cold storage and warehousing of goods Prior to the introduction of the comprehensive Service Tax based on concept of Negative List, services provided in relation to storage and warehousing of goods by way of cold storage were specifically excluded from the purview of service tax. In order to reduce the costs of the farm produce and to prolong the shelf life of food products it is requested that service tax may be exempted on storage and warehousing services necessary for maintenance of cold chain at least in respect of the food products. 5.1.16 Double Taxation on Rooms and Food and Beverages provided in hotels In Finance Act 2011 the scope of Service Tax was expanded to levy Service Tax on Room Sale Food sold in Air Conditioned Restaurants having liquor license despite the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Luxury Tax is already charged on Sale of Room nights and VAT on Sale of Food Beverages. Whilst abatement, in respect of service tax has been provided @ 50% for Rooms and @ 70% for Food Beverage, on the balance portion there is an element of double taxation - Service Tax and Luxury Tax in the case of Rooms and Service Tax and VAT in the case of Food Beverages. The total tax outflow for the Guest works out to around 20% on an average. This is a significant deterrent to the Hospitality Industry, especially the Luxury Hotels. It is recommended that the levy of Service Tax on sale of Room nights and Food Beverages be discontinued. Valuation of Services 5.1.17. Valuation of Works Contract Services In respect of works contract services where the actual value of goods is not known, it has been prescribed that the service tax is to be computed with reference to the total amount charged for the works contract. Further, it has been stipulated that the total amount will be a sum equal to the gross amount charged plus the fair market value of all goods and services supplied by the Service Recipient under the same or any other contract less amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s charged for such goods and services by the Service Recipient. It is apprehended that in such cases the Department would insist on service tax on value of goods that do not, in any way, contribute towards the value of service provided and for which there is no transfer of title during the execution of the works contract. For example, if a service recipient awards a works contract to a service provider for preparation of foundation and installation of a machine belonging to the service recipient, the Department may insist that as per valuation rules the cost of the machine has to be included for purposes of computation of service tax liability. In order to avoid such untenable situations, it is recommended that either the valuation rules are amended suitably or appropriate clarifications are provided immediately. 5.1.18. Value of service portion in case of works contract As per Rule 2A of the Service (Determination of Value) Rules, 2006, in cases where the actual value of goods is not known, the value of the service portion of the works contract service is deemed to be a specified percentage. For different types of works contract the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed percentages for determining the deemed value of the service portion are as under: Where work contract for Value of the service portion shall be deemed to be (i) execution of original work 40% of the total amount charged for the works contract (ii)maintenance or repair or reconditioning or restoration or servicing of any goods 70% of the total amount charged for the works contract (iii)Other works contracts not covered in (i) (ii), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property 60% of the total amount charged for the works contract 5.1.19. The segregation of works contract services with reference to goods and immovable property and the different percentages prescribed for determining the deemed value of service portion of a works contract has the following infirmities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Issues of interpretation on what constitutes goods and what constitutes immovable property. Under Central Excise there is a plethora of litigation regarding interpretation of what is goods and what is immovable property . It is apprehended that the same issues will arise in case of works contract services also, particularly since the deemed value of service portion in a works contract is to be determined with reference to prescribed percentages that are different. In order to avoid litigation in this regard and lock-up of revenue, it is recommended that the segregation of works contract services on the basis of goods and immovable properties be done away with and a uniform percentage prescribed for all works contract services. (ii) Instances of total tax pay-out (Service Tax plus VAT) on a tax base that is higher than the total value of the works contract. The issue with the prescribed percentages - for determination of the deemed value of service portion - is that they appear to have been prescribed on a stand-alone basis without reference to valuation rules for works contracts specified in the State VAT Laws. As per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State VAT Laws in cases of indivisible works contracts the value of goods is deemed to be a certain prescribed percentage. For different types of works contracts different percentages have been prescribed. The deeming provisions come into effect under both Service Tax and State VAT laws in case of indivisible works contracts. Since neither Service Tax law nor State VAT laws recognize the deeming provision that exist in the other law, the assessee is forced, in many cases, to pay tax (service tax plus VAT) on a value higher than the total value of the works contract. Illustrations of such cases are as under:- Type of Indivisible Work Deemed value of Service portion (Per service tax laws) on which tax payable Deemed value of goods (As per the vat laws) Total value of works contract on which service tax and vat is payable Installation of Plant Machinery 40% 85% (Karnataka Vat Rules 2005) 125% (40%+85%) Civil Works like construction of Building 40% 70% (Rajasthan Vat Rules 2006) 110% (40%+70%) Works C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract For Repairs/Not Specified 60% 75% (Karnataka Vat Rules 2005) 135% (60%+75%) The recently amended Valuation Rules under Service Tax laws clearly lead to an untenable situation whereby assessees are required to pay tax on a value base that, more often than not, is higher than the total value of service that is provided. The Central Government is requested to take up this matter with the Empowered Committee of State Finance Ministers to find a solution to this problem such that the total tax (service tax plus VAT) to be paid by an assessee is not computed on a tax base that is higher than the total value of the works contract. Alternatively, Service Tax (Determination of Value) Rules, 2006 be amended so as to provide a uniform rate, between 10% and 15%, for arriving at the value of service portion for all kind of works contracts. 5.1.20. Increase in abatement from value for service tax on coastal transportation services Services of 'transport of coastal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and goods transported through national waterways and inland water' are liable to service tax. In the Budget 2012, the abatement of 25% available for these services was increased to 50%. Transport of goods by road services are eligible for an unconditional abatement of 75% from the value of taxable services i.e. service tax is payable on 25% value. Rail transport is eligible for an abatement of 70% subject to the condition that no credit of service tax is availed of taxes paid on inputs, input services and capital goods. There is a similar abatement for transport of goods by road and rail transport services. The present anomaly results in a cost disadvantage to Indian shipping companies vis- -vis providers of road transport services and rail transport services. It is requested to provide an increase in abatement from 50% to 75% for services of 'transport of coastal goods and goods transported through national waterways and inland water'. 5.1.21. Deduction of reimbursements from the value of service Under the Service Tax (Determination of Value) Rules, 2006 the taxable value of a service is to be computed inclusive of cost of any reimbursements made to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service provider. The only exception is in respect of reimbursements made to a pure agent. Prior to these Rules, cost of reimbursements could be deducted while computing the value of taxable services provided the invoice showed value of such reimbursements was shown separately on the invoice. Consider a case where a consultant has been appointed and he, in turn, uses the services of a lawyer in connection with providing the consultancy service to his client. Under the Valuation Rules the value of the taxable service provided to the client by the consultant is inclusive of the charges paid by the consultant to the lawyer as legal fees. Accordingly, service tax is payable by the client even on the legal fees paid to individual counsel by the consultant though, in terms of Service Tax laws such legal fees are outside the scope of service tax. It is recommended that the Service Tax laws be amended such that cost of reimbursements in connection with input services are allowed to be deducted while computing value of taxable services. 5.1.22. Service tax on outbound transactions provided by an entity in taxable territory to its office in non-taxable territory Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the service tax regime as applicable prior to July 1, 2012, the Head Office and Branch Office/ Project Office of the same legal entity located in two different territories were treated as separate persons for the limited purpose of import of services. In other words, if an office of a legal entity located in India imported taxable services from another office of the same legal entity located outside India, then it was deemed as services received by Indian office from another person and such Indian office was liable to pay service tax under reverse charge, subject to the conditions prescribed under the law. With the introduction of service tax regime based on the concept of a negative list, it has been provided vide Explanation 3 of the definition of 'service' in section 65B that the establishment of a legal entity located in India and of the establishment of the same legal entity located outside India would be treated as distinct persons. With the introduction of this explanation, it is apprehended that even the outbound transactions (i.e. services provided by the office in India to office located abroad) may fall under the service tax net leading to levy of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice tax twice. On the main contract between Indian Project Owner and Contractor (located outside India) - Since the Contractor has an office in India and such office is directly concerned with the provision of services, the liability to pay service tax would fall on the Project Office of the Contractor in India On the transactions between the Head Office and the Project Office of the Contractor - Since the two would be treated as two distinct persons, the remittances received by the Project Office from the Head Office to meet the expenses for execution of the project in India are also likely to be exposed to service tax. On a strict interpretation of the legal provisions, the Project Office may become liable to pay service tax twice on the same transaction (one on the services provided under the main contract and second on services provided by Project Office to Head Office), without any credit eligibility. Perhaps the intention of the Government is to levy service tax only on the services provided by offshore office to the office located in taxable territory (i.e. on import of service transactions), however due to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... language of explanation any transaction between offices of same legal entity located in two taxable territories are getting exposed to service tax, resulting into multiplicity of taxes and adding to the tax cost. Also, since the state of Jammu and Kashmir is treated as outside the taxable territory for the purposes of service tax, transaction (inbound or outbound) between office of a legal entity located in Jammu with the office of the same legal entity located in taxable territory is getting exposed to service tax. It is suggested that necessary amendments be made in the text of the explanation to clarify that the establishment of a legal entity located in taxable territory and another establishment of the same legal entity located outside India would be treated as distinct persons only for the purpose of transaction of import of services. Alternatively, it may be clarified that since in the transaction structure provided above, the Foreign Contractor is providing services to the Indian Project Owner through its Project Office in India, the liability of service tax should be restricted to the Indian Project Office and the money remittances from the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign Contractor to its Project Office are merely flow of money between two offices of one Company without any underlying transaction and hence should not be liable to service tax 5.1.23. Place of provision of services in case of transportation of the goods by road Rule 10 of the Place of Provision of Services Rules, 2012 (POPS Rules) provides that in case of transportation of goods by road i.e. through Goods Transport Agency ( GTA ), the place of provision is the place where the person liable to pay service tax is located. In case of GTA services, the person liable to pay freight to the GTA is liable to pay service tax to the Government, however Rule 2(1)(d) of Service Tax Rules provides, if the person liable to pay freight to the GTA is located in nontaxable territory, then the GTA becomes liable to pay service tax on transportation services. On a combined reading of the two provisions it appears that for transportation services provided by GTA, place of provision shall be outside taxable territory only when the person liable to pay freight to the GTA and GTA both are located outside the taxable territory. If any of them is located in taxable territory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then irrespective for inward or outward transportation of goods the place of provision shall be taxable territory and hence such services would become liable to service tax. It may be pointed out that the above provision is not in line with the provisions related to transportation of goods through ocean, air or rail. We have provided below a table comparing the provisions related to place of provision for transportation of goods through road and other transportation modes: Scanario Service Tax liability Ocean/ Air Rail GTA Transportation of goods from India to outside India No (exports) No (exports) No Tax would be paid by the specified person. However if the specified person is located in non-taxable territory, GTA would be liable to pay tax Transportation of goods from outside India to India No (as covered under the negative list) Yes Transportation of goods within India (From J K to a taxable territory) Yes Yes Transportation of goods within India (from taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le territory to J K) No, since the destination of goods shall be a non taxable territory No, since the destination of goods shall be a non taxable territory Transportation of goods within India (where movement of goods is within J K) No No No, Provided that both service recipient and GTA are located in J K To elaborate, if an Indian supplier is to supply the goods to its customer located in Nepal or to Jammu and Kashmir, then if the goods are supplied through rail or air then since the destination of goods is outside India, the place of provision of services would be outside India, however if he appoints a GTA and pays freight to him for transportation services, then the place of provision would be where the supplier is located and such services would become liable to service tax. It is recommended that the place of provision of service rules for transportation of goods by road services should be in line with the provision for transpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of goods through air/ sea or rail. In other words, there should not be any change in the tax implications due to change in modes of transportation. 5.1.24. Place of provision of service in case of (a) R D activities conducted using inputs supplied by the service recipient and (b) testing of software In terms of the Place of Provision of Service Rules, 2012 ('POPS Rules'), services related to testing of goods (where the goods are provided for examination) is likely to fall under Rule 4 and be taxable where the services are performed. Under the service tax regime effective prior to July 1, 2012, such services used to qualify as export based on the location of the recipient for whom the research is carried out. In certain cases the goods are returned to the service recipient and in certain cases the goods get consumed in the process of testing. For example, if some seeds are supplied by the service recipient abroad for carrying out certain field trials in the area of agriculture and the seeds get consumed in the process of testing, under the POPS Rules, the service tax liability is likely to fall on the service provider, whereas the results of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he R D activity are made available to the service recipient abroad on payment of service charges in foreign exchange. Similarly, in the case of software testing services for overseas clients, the testing is performed on the software itself or on a hardware in which the software is embedded or etched. Some of the testing would be undertaken in labs located in India. The service provider would provide the test report or an exception report to the service receiver outside India and receive the consideration in convertible foreign exchange. Rule 4(a) read with the first proviso there under are not adequate in scope to cover such testing services, as exports. It is recommended that the POPS Rules should be appropriately amended so that such testing related services should not fall under Rule 4 and instead should be covered under Rule 3 of the said Rules. In respect of testing service performed on goods, the place of provision of service should be the place where the test report or exception report, if any, is required to be delivered. 5.1.25. Treatment of call centre services / BPO services as 'intermediary services' The term intermediary as de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fined in Rule 2(f) may be erroneously applied to the BPO services performed from India for clients in countries outside India. Typically, under an outsourcing arrangement, the BPO Units established in India would follow a set of agreed procedures/ processes and when these are executed electronically, it may be construed that services have resulted in arranging or facilitating a provision of service between the clients and the clients' customers / service recipients. Likewise, call centre services make calls to contractual recipients located outside India which are in the nature of marketing. There have been doubts whether the above services would qualify under:- (i) Rule 3 of POPS Rules (and hence, would qualify as exports, subject to fulfillment of other prescribed conditions, since place of provision in such a case would be outside India i.e. place of the service recipient); or (ii) Rule 9 of the POPS Rules as an 'intermediary service' (and hence, would not qualify as exports since place of provision of this service would be in India viz. location of service provider). In this regard, while the Guidance Note, under Para 5.9.6, seeks t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o generally exclude call centers from the purview of 'intermediary', it does not address the issue of call centers set up specially for marketing the services of its overseas service recipients (such as those in the financial sector) and other BPO activities executed electronically. Prior to the Negative list regime, such services qualified as 'export' in terms of the erstwhile Export of Services Rules. Denying export benefit on such transactions would lead to unnecessary burden and would also result in exporting taxes along with services. It should be clarified that B2B transactions like marketing services / BPO activities are not covered within Rule 9 of POPS Rules. The status prior to July 1, 2012 should be continued. 5.1.26. Time charter services - impact of Place of Provision of Services Rules, 2012 In case of time charter services provided by an Indian shipping company to an overseas customer for a period up to one month, place of provision of services is in India i.e. location of service provider and hence service tax is applicable. These services do not qualify as export even if the services are performed entirely outside India and considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is received in convertible foreign exchange. Time charter services provided by an Indian shipping company to a foreign shipping company for a period up to one month would attract service tax. However, if similar services provided by foreign shipping companies to foreign customers, service not taxable since place of provision of services is outside India. Time charter services provided by an Indian shipping company to an Indian customer for up to one month would be liable to service tax. However, if similar services provided by foreign shipping companies to an Indian customer, service tax would not be applicable since place of provision of services is outside India. This results in a disparity in levy of service tax on services provided by Indian shipping companies vis- -vis foreign shipping companies. Services of 'hiring of means of transport for a period up to one month' should be excluded from Rule 9 of the POPS Rules. If this amendment is made, the place of provision of services for all time charter services irrespective of the period of hiring would be governed by the location of service recipient as per Rule 3 of the POPS Rules i.e. the default rule fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r determining the place of provision of services. Hence, the disparity in levy of service tax on time charter services provided by Indian shipping companies and by foreign shipping companies should be removed. 5.1.27. Voyage charter services - impact of Place of Provision of Services ('POPS') Rules, 2012 The negative list of services covers services of 'transportation of goods by vessel from outside India to the first customs station of landing in India'. On account of the above, CENVAT credit / refund of taxes paid on inputs, input services and capital goods used for international transportation of goods from outside India to India is not available. Non eligibility to claim refund of taxes and duties paid on inputs, input services and capital goods result in high costs relating to transportation of goods. This has a serious impact on the Shipping industry and is a stumbling block to the development of the international transportation business. Globally, major maritime jurisdictions like UK, Singapore, Netherlands, Greece etc, give full credit of taxes paid on inputs used for export and import cargo. Services of transportation of goods by sea from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utside India to a destination in India should be excluded from the negative list. An amendment should be made in Rule 10 of the POPS Rules stating that for services of transportation of goods, the place of provision of services would be considered as outside India if either the origin or destination of goods is outside India. For international transportation of goods to qualify as export, the two conditions i.e. service recipient located outside India and consideration received in convertible foreign exchange, should not be made applicable. Reverse Charge 5.1.28. Reverse Charge Mechanism Prior to introduction of the Negative List of Services, only two types of services were taxed under the reverse charge mechanism - services provided by GTA and services provided by persons outside India in case such persons did not have any establishment in India. With the advent of the Negative List of Services a whole host of services have been notified under the reverse charge mechanism, including services of works contracts, manpower supply and security provided by non-corporate service providers to corporate bodies. Also, penal provisions that are applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to service providers have been made applicable to service recipients as well in case of the services that are under the reverse charge mechanism. The undesirable consequences of these changes in the service tax laws include:- (i) significant increase in complexity and cost of compliance in case of corporate bodies in terms of identification of status of service provider, maintenance of records, submission of returns, Departmental audits and so on. (ii) undermining of threshold limits and exemptions prescribed under service tax laws. This is due to the fact that in case of payment of tax under the reverse charge mechanism threshold limits are not applicable, leading to situations where the service recipient, being a corporate body, has to pay service tax in respect of specified services provided by non-corporate service providers even if such service providers are below the prescribed threshold limits. (iii) chances of short/excess payment of service tax consequent to differences in understanding of service provider and service recipient on whether a particular service falls under the services notified for taxation under the reverse charge mechanism. (iv) sco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe for dispute and litigation with the Department on interpretation and valuation. For example, whether a particular service is a manpower supply service (to be taxed under reverse charge mechanism) or not would depend on the facts of the case and is open for interpretation. Similarly, the laws prescribe that in case of works contract services it is open to the service provider and the service recipient to follow different options of valuation. It is apprehended that issues like these will give rise to disputes with Department, resulting in avoidable litigation and lock-up of revenue. The enlargement of list of services under the reverse charge mechanism has, in effect, burdened the service recipient with responsibilities that are rightly those of the Department. In an era of growing transparency and simplicity in tax laws this is clearly a retrograde step. Accordingly, it is strongly recommended that the list of services under reverse charge mechanism be restricted to services provided in India by parties outside India and road transportation services provided by GTA - as was the case prior to introduction of the Negative List of Services. 5.1.29. Exemption of Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Lakhs for services subject to tax on reverse charge basis Notification No. 33/2012 dated 20.06.2012 exempts taxable services of aggregate value not exceeding Rs. 10 lakhs in any financial year from payment of Service Tax. The said exemption is made applicable to Service Providers. As per rule 2(r) of the Cenvat Credit Rules, 2004, 'provider of taxable service' includes a person liable for paying Service Tax. In terms Rule 2(1)(d) of Service Tax Rules read with Notification No.30/2012-ST dated 20.6.2012 there are certain taxable services notified wherein the recipient of services are liable to discharge service tax (services subjected to tax under reverse charge mechanism). The liability is on the receiver of services even if the service provider is below the threshold limit of Rs.10 lakhs. The anomaly should be rectified and the exemption limit of Rs. ten lakhs so granted to the Service Provider should also be extended to Service Receiver in such cases. 5.1.30. Exemption limits for payment of service tax on partial reverse charge basis Under the new Service tax regime, for the first time, certain services have been notified for payment of service tax under par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial reverse charge mechanism, partly by service provider and balance by the service receiver. These changes have created hardship to industry at large predominantly due to the fact that compliance becomes a major hurdle and non-service providers like traders also undesirably get subjected to service tax jurisdiction. Lack of clarity on the terminology adopted for implementing the reverse charge and also valuation for purpose of service tax computation by both service provider and receiver, if different, could be prone for litigation. Further, Cenvat credit availed thereon is likely to result in dispute. It is suggested that the scheme of partial recovery of service tax on reverse charge basis may be withdrawn and the entire service tax liability should be discharged by the service provider. In case this suggestion is not acceptable for any reason, the revenue should introduce monetary threshold for the service recipient to pay service tax under reverse charge. The objective should be to ease the compliance requirements where the revenue implications are not substantial. We have suggested below the monetary limits for different services liable to tax under reverse charge, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may be considered by the Revenue: Nature of Services Reverse Charge Applicability Monetary Limit (In INR) Goods Transport Agency 100% 20,000 per transporter per month Sponsorship services 100% 1,00,000 per event Services by Arbitral Tribunal 100% 20,000 per case Support services by Government 100% 1,00,000 per annum Services provided by Directors 100% 1,00,000 per annum Legal Services 100% 20,000 per contract Manpower supply/ security services Partial 20,000 per person per month Renting of motor vehicle Partial 20,000 per month Works contract services Partial 1,00,000 per contract Miscellaneous 5.1.31. Amendment of the definition of Agricultural Produce The term agricultural produce has been defined under section 65B as below: '(5) agricultural produce means any produce of agriculture on which either no further processing is done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or such processing is done as is usually done by a cultivator or producer which does not alter its essential characters but makes it marketable for primary market;' Under the erstwhile Service tax regime the following Notification / Circulars are issued by the Government of India and CBEC which clarifies Unmanufactured Tobacco is an Agricultural Produce and services provided in relation to unmanufactured tobacco is in relation to Agriculture :- (i) Order issued by the Central Government under the power vested under Section 95 of the Finance Act - Order No.1/2002: Agricultural produce means any produce of agriculture on which either no processing is done or such processing is done as is usually done by a cultivator like tending, pruning, cutting, harvesting, drying which does not alter the essential characteristics but make it only marketable and includes all cereals, pulses, fruits, nuts and vegetables, spices, copra, sugarcane, jiggery, raw vegetable fibers such as cotton, flax, jute, indigo, unmanufactured tobacco, betel leaves, tendu leaves, and similar products but does not include manufactured products such as sugar, edible oils, processed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood and processed tobacco. (ii) CBEC Circular No.143/12/2011 - ST, dated 26th May, 2011, F.No.332/37/2010-TRU (Refer Annexure-1) It is recommended that the definition of Agricultural Produce may be appropriately amended to avoid issues relating to interpretations. 5.1.32. Taxability of part consideration recovered by the employer from employee The definition of service as provided under section 65B (44) excludes the transaction of service provided by employee to the employer in relation to his employment. It is an industry practice that Employers provide certain facilities to employees during the course of employment. Few of such facilities are mandatory as per provisions of law relating to employment, like Canteen. However in order to have a participation in the business from the side of employee, a small element of the cost is recovered from the employee. Such benefits are considered to be provided by the employer to the employee on a concessional rate. Most of the benefits given by an employer to its employees are procured from outside wherein service provider is either asked to provide the facility directly to employees or is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sked to visit to company's premises to provide such services. In both the cases, the service provided by service provider is directly consumed by the employees on behalf of their company and company remains just a conduit to recover some subsidized rates from each of its employees. In nutshell, in cases of above types of arrangements, it is only one activity which is carried out where service provider directly provides the services to company / employees. It is also evident from the way such transactions are recorded in the books of accounts of the company wherein only net cost i.e. service fee charged by service provider less recoveries from employees is shown as expenses instead of booking expenses with gross amount and showing recoveries as miscellaneous receipt / service fee. Therefore, it is not fair to break such transactions artificially into two transactions i.e. service provider provides the services to the company and company, in turn, is providing such services to its employees. Such recovery from the employees should not be construed as a Service provided by the employer due to the fact that the employer is not in the regular business of providing such serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice. The concessional benefit provided by the employer to employee is only under the employment arrangement between the employer and the employee. The intention of the employer is not to trade services to the employee, the intention is to provide benefits to its employees in respect of their services. In addition, the service provider would already be charging applicable service tax in the billing to Employer, and therefore there is no loss of revenue to the Government Hence, in situations where part consideration is received by the employer from the employee towards the benefit forming part of the salary of the employee, the same should not be liable to service tax. It also needs to be clarified that any amount recovered from the employee for breach of contract of employment would be out of the purview of the Service Tax as the contract itself is out of the scope of the service tax. 5.1.33. Transaction between unincorporated Association of Persons ( AoP ) and its members As per Explanation-3 under clause (44) of Section 65B of the Finance Act, 1994, an unincorporated association or body of persons and a member thereof shall be treated as distinct persons for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he levy of service tax. The phrase 'unincorporated association or body of persons' ( AOP ) is not defined under the service tax laws. In the absence of any definition, clarifying/explaining what constitutes an AOP, significant difficulties are likely to arise for the tax payer leading to protracted litigation. The examples of such association in its simplest form could be the residents of a block of residential flats managing the upkeep of their building to a more organized structure where a group of persons join hands to bid for a project in the name of one of the persons in the group but where each person would be providing services in its area of specialization. The tax consequences in such cases can be severe unless the intention is clearly spelt out by defining the term 'unincorporated association or body of persons'. Given the above, it is recommended that the term 'unincorporated association or body of person' should be specifically defined under the service tax laws to avoid any unnecessary and unwarranted litigation and hardship to the tax payer as also the project owner awarding works contract to an AOP. Alternatively, the concept of AOP may be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one away with since in any case the members of the AOP would discharge their service tax liability. Treating AOP as a distinct person from a service tax perspective would only lead to ambiguity in law and onerous compliance burden on the assessees without any incremental service tax revenue for the Government. In view of the extensive risks and resource requirements associated with exploration and allied activities in oil gas industry, it is common for industry players to pool in their resources and form Unincorporated Joint Venture (UJV) to execute the project. The UJV typically executes a Production Sharing Contract (PSC) with the Government of India to carry out the exploration and development activities and share the output. In terms of the specific requirements laid down under the PSC, one of the members of the UJV is required to be nominated as an Operator, and is responsible for carrying out the requisite activities on behalf of constituents of the UJV. However, all the members of the UJV continue to be responsible for their obligations or liabilities under the PSC. To fund these operations and manage the project, the members are required to make their contribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions through various modes (e.g. in the form of 'cash calls', allocation of manpower to the UJV, recovery of project related expenses incurred by members from UJV or vice-versa, etc.). With the recent changes in service tax laws resulting from implementation of negative list based taxation regime, certain doubts have arisen regarding the applicability of service tax on financial dealings between such UJVs and their members. As may be observed payments made by the members from the UJV towards 'cash calls' are not towards an activity carried out by UJV for the members, which is a pre-requisite for levy of service tax. Such payments are in essence pure funding arrangements/ capital contributions made by the members to the UJV. Even with respect to other payments made by UJV to members towards project related expenses/ charges, there is no intention to provide a service. Instead, these are necessary for the functioning of the UJV. Therefore, even if the members and UJV are viewed as separate entities for service tax purposes, the underlying transactions are not towards any service provided by either party to the other. While the industry is of the view that servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax is not applicable on such transactions, in view of the broadened ambit of service tax under the negative list based regime, it is imperative to have absolute clarity and certainty in terms of tax treatment. Any additional cost to the industry in the form of service tax or litigation cost would translate into a higher cost of exploration and development, which would not be desirable, given the impetus that the Government intends to give to the sector. Therefore, it is submitted that appropriate clarifications/ exemption notifications may be issued to ensure that transactions between the members and UJV, and inter se between the members, remain outside the purview of service tax. 5.1.34. Periodicity of Filing Service Tax Return for small Service Providers Small Service providers classified on the basis of threshold limit of annual turnover upto 50 Lakhs should be given exemption from half yearly filing of service tax return. Yearly return filing procedure should be made for small service providers. 5.1.35. Extension of Due Date of Payment of Service Tax The Service Tax Rules, 1994 have been amended advancing the date of payment of service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax from 25th of the month following the month in which the service charges are collected to 5th of the following month or 6th if the payment is made by internet. Further, in case of month of March, the service tax is required to be paid by 31st March only. The amendment creates practical difficulties in case of organizations having multiple branches / locations over the country but paying service tax on a centralized basis due to time required in collating and reconciling the necessary data. Further, in view of non availability of provisions for adjusting service tax liability against subsequent payment, the amount even if paid on estimated basis will get blocked till the refund, if any, is granted by service tax authorities. It is suggested that if it is not possible to restore the earlier provisions of due date for payment of service tax viz. 25th of the following month, the due date for payment should be fixed between 15th-20th day of the succeeding month for all months including the month of March. 5.1.36. Rate of Interest for delayed payment of excise duty or service tax The rate of interest on delayed payment of excise duty has been revis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with effect from 1st April 2011 to a uniform rate of 18% per annum. The rate of interest on delayed payment of taxes has been increased from erstwhile 13% per annum to 18% per annum. The rate of interest as has been prescribed for delayed payment of taxes is exorbitantly high as compared to the rate of interest which the exchequer would have earned if the same would had been deposited with the nationalized banks. Such high rate of interest is more penal in nature rather than being compensatory. Such high rate of interest is also detrimental to the overall industry as a whole and especially with regard to assessees' who have paid short tax or no tax under a bona fide belief. The rate of interest on delayed payment of taxes should be prescribed at 12% per annum for delayed payment of excise duty as well as service tax (as is the case for delayed payment of income tax). 5.1.37. Point of Taxation for Construction Activities The Construction Business is very unique and complex in nature. The execution of huge Projects for reason of Engineering, Procurement and Logistic support, Client Coordination, follow up with other Agencies, control and monitorin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, etc. need officiating from multiple divisions spread across different geographical location. With this background the transaction documentation, holding of records / details for measurements and check measurements, payment receipts and disbursement, maintenance of Books of Accounts and other statutory records, also have to be decentralized. Therefore, Construction Business has got to be supported by a system of Progressive Billing which is a continuous activity till the completion of the Project. These Progressive Bills are raised for an adhoc amount which are considered as Work in Progress instead of normal sales as per Accounting Standard (AS7) in the Books of A/c because of the uncertainty in recognizing the element of Profit in the ongoing Projects. It will therefore be appropriate only when the incidence of Service Tax is attracted only after due certification of Bills by the Architects / Engineers instead of imposing Service Tax on every running bill which is always subject to modification. 5.1.38. Dual Levies on Software-VAT and Service Tax The definition of the term service given under section 65B (44) is wide enough to cover any activity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The definition excludes sale of goods and other deemed sale transactions as per Article 366(29A) of the Constitution, like for example transfer of right to use goods. Hence, all transactions which are treated as sale shall be outside the ambit of service tax. Historically, while packaged software has been treated as 'goods' and customized software has been treated as 'services'. In this respect, the Central Board of Excise and Customs ( CBEC ) has issued a Guidance Note on Taxation of Services - An Education Guide ('the Guidance Note') which also states that pre-packaged or canned or shrink wrapped software, when supplied on a media, would qualify as 'goods' and hence would not be liable to Service tax. However, the CBEC has issued a Guidance Note on Taxation of Services - An Education Guide . Para 6.4.4 of the guide suggests that download of software shall be liable to service tax. From the said Para it appears that in case separate consideration is charged for license to use packaged software, the same may attract Service tax, as license to use software may not fulfill all the conditions of 'transfer of right to use goods'. However, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a settled position under the VAT laws of all the States that providing right to use the license/ copyright in software is to be construed as a deemed sale transaction and therefore is to be levied with VAT at the applicable rates. The Guidance Note further appears to suggest that Service tax shall be applicable on software that has been downloaded electronically by end customers. The said view appears to have been formed based on the understanding that the Supreme Court judgment in the case of Tata Consultancy Services ( the TCS Judgment ) can be applied only to transactions of sale of software on media. Therefore, the Guidance Note suggests that conclusion of the TCS Judgment cannot be made applicable where software is not sold on media, and therefore no VAT is payable on the same (thereby implying that Service tax shall be payable). However, the payment of VAT on sale of software supplied electronically has been a settled position, for the reason that software is treated as goods for the purpose of VAT, having all the attributes of the term goods as laid out by the TCS Judgment (even when supplied electronically). Pertinently, the term goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds for VAT purposes is wide enough to cover tangible and intangible goods and software supplied electronically also qualifies as goods . As software is treated as goods , even when supplied electronically, and VAT is being discharged on the same, the question of treating the same as a service does not arise. Even otherwise, no Service tax should apply on copyright in packaged/canned software, whether sold on media or otherwise, due to a specific exemption provided under the Mega Exemption Notification No 25/2012-Service Tax dated June 20th, 2012 ( Mega Exemption Notification ). The reason for the same is explained as below. (i) Section 66E of the Service tax law, as amended by the Finance Act, 2012, prescribes nine types of activities as declared services ( deemed services for service taxation). (ii) One of the declared services refers to temporary transfer or permitting the use or enjoyment of any intellectual property right. (iii) The Mega Exemption Notification exempts temporary transfer or permitting the use of copyright covered under clauses (a) or (b) of sub-section (1) of Section 13 of the Copyright Act, 1957 ( the Copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Act ). The said clauses include, inter alia, original literary work within its purview. (iv) As per Section 2(o) of the Copyright Act, literary work includes computer programmes, tables and compilations including computer databases. Hence, copyright in packaged/canned software, whether sold on media or otherwise, would get covered under the said category and hence would be exempt from Service tax. Given the above, observation in the Guidance Note with respect to licensing of software creates a contradiction vis- -vis exemption granted under the Mega Exemption Notification in respect of copyright in computer programmes. In the interest of smooth functioning of trade and industry and in the interest of certainty, it is recommended that CBEC clarify the position that provision of standard software, including license to use such software, whether electronically or on a media, would not be liable to Service tax. Applicability of VAT, Service Tax and Tax Deducted at Source on Software makes it very difficult for the Product companies to do business in India, especially where tax rates are high and margins are low or negligible. If necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry, an exemption may be granted to remove any doubts on the issue. 5.1.39. Service Tax on Insurance Charges for Export Shipments Service Tax is charged on the insurance premium if insurance is done for export shipments on FOB basis. However, no service tax is payable if insurance is done for export shipments till delivery along with freight i.e. on CIF basis. It is a well known fact that duties and levies should not be exported. It is accordingly requested that no Service Tax be levied on Insurance Premium paid on export shipments whether the export is made on FOB basis or CIF basis. Sometimes, the Importers abroad ask the exporters in India to pay for destination terminal handling charges (DTHC) in the importing country. Service Tax @12.5% is being charged from exporters who pay this DTHC. It is requested that the Service Tax should not be levied on Terminal Handling Charges levied at the importer's end. 5.1.40. Payment of service tax on accrual basis The Service Tax Point of Taxation Rules have been amended with effect from 01-07-2011 to make service tax liability payable on billing basis and not on receipted basis i.e. on accrual basis a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not cash basis The amendment needs reconsideration as the service tax payers are caused unnecessary hardship. The service providers are investing the funds for providing services and asking them to pay service tax on accrual basis even if the payment for the same is not received will cause unnecessary burden on the Service Tax payers. It is accordingly requested that the payment of service tax should be demanded only on receipt of the charges for services rendered. 5.1.41. Cenvat Credit of Service Tax on freight for transportation of Goods from ICDs to Port of Export Notification 31/2012-ST exempts the service provided to an exporter of goods in relation to transport of the said goods by goods transport agency in a goods carriage directly from their place of removal, to an inland container depot, a container freight station, a port or airport, as the case may be. The exemption recognizes the fact that the taxes ought not to be exported and simultaneously does not debar an exporter to avail CENVAT credit of the Service Tax payable instead of going in for the Exemption. However, certain Commissionerates are disputing the availment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Credits and insisting on opting for the Exemption. The conditions laid down in the Notification for claiming exemption are cumbersome. It is suggested that suitable clarification/ amendments may be issued to enable an Exporter to avail the CENVAT credit of Service Tax paid on the above referred services instead of mandatorily going in for the Exemption route. 5.1.42. Service tax on input services consumed in shipping industry While input services consumed by the shipping industry are taxable, these services consumed in sea transportation to a place outside India though in the nature of export of service are not eligible for credit. This leads to an anomalous situation where services used for export get taxed and this tax gets exported as they add to the transaction cost. Obviously this is an unintended consequence and needs to be remedied by zero rating the input services. Inputs services consumed by the shipping industry in export of goods should be exempted from service tax. 5.1.43. Prosecution under the Service Tax law Prosecution provisions were introduced in Service Tax in 1994 by way of Section 89 of the Finance Act, 1994 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This section was omitted in 1998 and at that time the then Finance Minister in his Budget Speech had mentioned:- 176. I am conscious of the fact that there is strong resentment against the procedures and legal obligations relating to service tax. I have removed a number of obnoxious and deterrent provisions in law. I also propose to abolish several of the redundant and irritating Central Excise Rules very shortly. Section 89 of Finance Act, 1994 has been reintroduced in Finance Act, 2011 and clause (1) (a) has been further amended, to widen the scope, in Finance Act, 2012. If these provisions were perceived to be obnoxious and deterrent , there is no reason why it should not viewed to be the same today. It is suggested that the prosecution provisions of law should be removed, in view of the potential for misuse by the tax administrators / field formations. 5.1.44. Penal provisions when complete details are available from the records of the assessee Section 73 (4A) of the Finance Act,1994 provides that where during the course of any audit, investigation or verification, it is found that any service tax has not been levied or paid or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been short levied or short paid or erroneously refunded, but the true and complete details of transactions are available in the specified records, the person chargeable to service tax or to whom erroneous refund has been made, may pay service tax in full or in part along with interest and penalty up to a maximum of 25% of the tax amount before service of notice. It is submitted that in the event the complete details of the transaction are available in specified records of the assessee then it would be incorrect to presume that there is any intention to evade duty or tax. The non-payment or short-payment of tax in such cases would normally arise out of bona-fide belief that the tax is not payable or due to genuine human error. Penalty should be imposed only where there is an intention to evade payment of duty by the assessee. In cases illustrated above where the records are available to the Department for scrutiny and audit at any time, an assessee should not be asked to pay penalty - more so in cases where duty is deposited suo-moto, even if such deposit is made pursuant to the error being brought to the notice of the assessee during the course of audit or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestigation or verification. Service Tax Law should be amended to do away with penal provisions when complete details are available from the records of the assessee. Similar amendment should be made in Central Excise Act. CENTRAL EXCISE 5.2.1. Reduction of Excise Duty on Soy Processed Products Excise Duty on certain Soy Processed Products was rationalized during Budget 2012-13, however, many Value Added Products are still under the umbrella of Excise Duty varying between 4 to 8%. According to the recommendations of WHO, 14 gm of Soy Protein per day (565 Kcal) can meet nutrition needs of our citizens thereby reducing the expenses on Health Care by minimum Rs.20,000 crores per annum. This will improve the health and physical development of our citizens. It is suggested that Excise Duty on the entire range of Soy Processed Food Products be exempted. 5.2.2. Excise duty on carton boxes, notebook etc. Carton boxes, register, notebooks, labels etc. are classified under heading 4819, 4820 and 4821 of the Central Excise tariff and are leviable to duty at the rate of 12%. The basic raw materials required for production of these items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are paper and paper board which attract an excise duty of 6% only. Similarly, carton boxes of corrugated paper or paper board of heading 4819 10 attract a duty of 6%. It is accordingly requested that the differential duty structure on various types of boxes may be done away with and central excise duty on products of tariff items 4819, 4820 and 4821 should be reduced to 6%. 5.2.3. Excise duty on waste and scrap of paper and paper board Excise duty on recovered (waste and scrap) paper or paper board is levied at the rate of 12% under heading 4707. Waste paper and paper scrap are, however, charged a duty at the rate of 6% in terms of Notification No.12/2012-CE dated 17-3-2012 (sl. No.160). Further, recovered (waste and scrap) paper or paper board arising in the course of printing of educational text books is wholly exempted from excise duty in terms of the entry 161 of the table in thesaid Notification. It may be noted that it is impossible in the print industry to segregate recovered waste and scrap of paper and paper board since in the recovery process these wastes get mixed up. It is suggested that the goods covered by sl.no. 160 and 161 of the said table should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subjected to a uniform rate of duty of 6%. 5.2.4. Excise Duty on Sugar Confectionery containing Cocoa The sugar confectionery space is not a level playing field. While excise duty on sugar confectionery is @ 6%, if the same sugar confectionery contains traces of cocoa, the excise duty doubles to 12%. The presence of cocoa merely adds to the flavour like coffee or lime or mint and does not materially change the nature of product. Sugar confectionary is defined by rigid price points of Rs.1 or Rs.2 and is consumed by a price sensitive segment of thepopulation. Higher excise duty merely because of the presence of cocoa is an unnecessary burden on the common man. The lower rate of excise duty of 6% should be made applicable to all sugar confectionery whether or not it contains cocoa. 5.2.5. Value of exemption limit for Small Scale Industries (SSI) sector Units in the small scale sector are eligible for exemption from excise duties provided the value of clearances effected by them in a financial year does not exceed Rs.1.5 crores (Notification No.8/2003-CE dated 01-03-2003). Costs of raw materials and input services have increased substantially since 1-4- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007 when the exemption limit was enhanced from Rs. 1 crores to Rs.1.5 crores. FICCI has received several representations from its constituent members requesting for recommending an increase in the exemption limit of Rs.1.5 crores having regard to the increase in the costs of raw materials and input services. FICCI would suggest that the Government take a decision in the matter in the context of the impending introduction of GST and the timeframe for such reform of the indirect tax administration. 5.2.6. Return of Specified Goods covered by notification No.1/2011-CE for Reprocessing, Rework In the Union Budget 2011-12, vide Notification No. 1/2011 -C.E. dated 01.03.2011, Central Excise duty was levied for the first time on specified goods (which were earlier exempted from duty) with a condition that no cenvat credit of duty on inputs or input services has been taken for such goods. As there is no cenvat credit available the Government imposed a nominal levy of 1% duty (Assessment under Section 4 or 4A of the Central Excise Tariff). The above rate of 1% got revised to 2% in the Union Budget 2012-13 and the condition of non availment of cenvat on inputs or input s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices continued. It is to point out that there are situations whereby the duty paid stocks need to come back to factory for quality checking or re-processing or re-work (for example coffee/tea pre-mixes, soup powders, tooth powder, medicaments etc. where reprocessing amounts to manufacture). The same goods will be cleared after necessary re-work or re- processing from the same factory. As per the Notification referred above, no credit could be availed when the goods are returned to factory, in the event of payment of nominal levy of 1 or 2 % at the time of first removal from the factory. However after quality checking or re-processing or re-work, if the same goods are cleared again, duty is required to be paid once again (second time) prior to clearance. Therefore the goods would suffer duty twice as there is no credit mechanism available in the aforesaid instance. The intent of the legislature is very clear that no goods would suffer duty twice. But as per the current notification, conditions have not been prescribed and there is no mechanism to avail credit on 2% dutiable goods which need to undergo some process as explained supra. It is requested that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n amendment may be made in the notification to permit availment of cenvat credit in such situations. 5.2.7. Benefits under Excise Act Rules for Supplies to SEZ Central Excise Rules applicable to physical exports from Domestic Tariff Area (DTA) Units have been made applicable to Special Economic Zone (SEZ) supplies through SEZ Rules. However, the Excise Department is denying such benefits on the grounds that there are no specific provisions in the Central Excise Act or Rules to extend such benefits to SEZ supplies and the provisions of SEZ Act or Rules do not override the provisions of Central Excise Rules. Consequently, the Domestic Tariff Area (DTA) units are being denied the benefit of Refund under Rule 5 of the CENVAT Rules which are applicable to physical exports. The circulars issued by the Central Board of Excise and Customs are not being followed by the Commissioners. The Department has even filed appeal before the Customs Excise and Service Tax Appellate Tribunal (CESTAT) on the issue, which has been allowed but the decision has been stayed by the Mumbai High Court. It is proposed that the Government should make its stand clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on the subject so as to enable the suppliers to SEZ to firm up their business plan. If all the benefits under the Central Excise Act applicable to physical exports were intended to be extended to SEZ supplies, the same may be implemented through retrospective amendment of the Central Excise Rules to put an end to the litigation on the subject resulting in hardship to the DTA suppliers. 5.2.8. Exemption from excise duty on interplant transfers When goods are produced for further manufacture within the same factory the intermediate goods are exempted and duty is collected after the final stage of manufacture. However, if the intermediate goods are cleared on stock transfer from one factory to another of the same manufacturer, duty is payable on value calculated using the cost construction method. This approach is based on the premise that cenvat credit would be available at the receiving end and the value chain will remain revenue neutral. However, there are instances where cenvat credit builds up for a variety of reasons such as large export volumes of the final product, credit accumulated in new factory, inverted duty structure etc. This creates a huge workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g capital burden on the manufacturers. In such circumstances, the manufacturer should be allowed to clear the intermediate product from one unit to another without payment of duty but with adequate controls to ensure the actual receipt and consumption at the receiving end. Such a procedure was available under the erstwhile Chapter X where the intermediate goods could move in-bond without payment of duty. Currently, such exemption for intermediate products has been extended to goods such as parts of power tillers (Not 16/2011 CE dt. 1.3.2011) parts of mobile handsets (sl. No. 31 of Notification No. 6/2006-CE, dt. 1.3.2006), subject to following the procedure of the Central Excise [Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods] Rules, 2001. It is accordingly suggested that suitable exemption from excise duty, to intermediate products transferred to any other factory of the same manufacturer for use in the manufacture of dutiable final products may please be issued, subject to following the procedure of the Central Excise [Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods] Rules, 2001. Also, provisions may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made in the Cenvat Credit Rules to grant permission to transfer credit from one unit to another of the same manufacturer, so long as the units are manufacturing the intermediate product and final product in the same product line. 5.2.9. Excise duty exemption for distilled water used for industrial purpose With a view to conserve precious ground water, the Central Government has exempted water treatment plants and pipes used for treating water (including de-salination using sea water) from excise and customs duty. The only condition is that the processed water should be consumed for agricultural or industrial purpose. However, distilledwater itself (classifiable under CETH 28530010) obtained through this process and used for industrial purpose is apparently not exempt. This appears to be an unintended omission. When excise and customs duty exemptions are granted to the desalination plant which produces distilled water, the water produced would qualify for exemption. Such distilled water is used in a variety of industrial applications, mainly in generating electricity. Having extended the excise and customs duty exemption for the capital goods, equipments and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pipes, to produce desalinated water it would be appropriate that the distilled water used for industrial purpose is also exempted from duty. It is accordingly requested that desalinated / distilled water falling under CETH 28530010 when supplied for industrial use may be exempted from excise duty. 5.2.10. Grant of Deemed Export Benefit for supply of HR Plates to Ship Building Units Roughly, 50% of total import of Hot Rolled Steel Plates is by Ship Building Units (SBUs). Import of Hot Rolled steel plates by SBUs is exempt from all excise duties. Supply of these plates by domestic manufacturers attracts excise duty of 12%. Ship Building Activity is not covered in CENVAT chain resulting in the excise duty paid by the users on indigenous steel as an additional cost. Ship Building Units, therefore, prefer importing the Steel Plates putting domestic manufacturers at a disadvantage. Hot rolled steel plates should be exempted from the levy of excise duty when supplied to ship building units; alternatively, deemed export benefits should be extended for supply of Hot Rolled Steel Plates to Ship Building Units in order to provide a level playing ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the domestic manufacturers. 5.2.11. Deemed Export Status for supplies to Defence Projects Ministry of Defence is making sincere efforts for ensuring the progressive evolution of DPP but Indian (Private Sector) Industry has been facing regressive and differential treatment in terms of taxes and duties vis- -vis Foreign OEMs as well as DPSUs/OFBs. The existing tax/ duty treatment places the private industry players at a significant disadvantage thereby restricting their ability to leverage the capabilities and capacities built up for defence manufacturing. If given the opportunity, the industry can make major contribution and effort in strengthening the national defence industrial base and positively contribute in the national endeavour to largely indigenize the defence aerospace sector. This can reverse the decades old import - indigenous ratio of 70:30 in favour of Indian Industry through significant 'import substitution' as well as create System Integration capabilities within the Indian Defence Industry. At present Deemed Export Status is available to various projects with an intention to encourage Indian Industry manufacture the required equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to compete with Foreign Supplier in terms of cost. It also saves valuable foreign exchange of the country and supports the growth of Indian Industry. The Defence Projects currently being not treated as Deemed Export Projects are deprived of the benefits available to the later projects. Benefits of Deemed Export project should be extended to all the Defense projects which are awarded through International Competitive Bidding. Similar benefit should be extended to Indian offset partners as well as to its sub- contractor. 5.2.12. Withdrawal of Excise Duty on Fly Ash Excise duty is levied on fly ash at the concessional rate of 2%, vide Notification No. 1/2011 - CE 2/2011 - CE. Fly ash is a waste product generated on burning of coal in the boiler of power plant. It has been held by the Hon'ble Supreme Court in case of Union of India Vs. Ahmadabad Electricity Co. Ltd., in 2003 (158) ELT 3 (SC) that burning of coal as fuel to produce steam cannot amount to manufacture and that ash is a byproduct and not manufactured product. There is no change in the process generation of fly ash viz. a waste generated on burning coal in the boilers, therefore the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove judgment still holds good hence fly ash generation should not be treated as manufacture. No excise duty should be levied on fly ash. 5.2.13. Excise Duty rates on cold chain equipment In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural wastage and enhancing shelf-life, it is recommended that excise duty rates on cold chain equipment and their parts be pegged at 5% or below. 5.2.14. Excise duty exemption for capital goods used for Research Development Excise duty on inputs / capital goods for Research Development adds to the R D cost. Presently, Cenvat credit on inputs / capital goods is available only if they are used in the factory. However, many companies have R D centres independent of the factory of manufacture and thus Cenvat credit on such capital goods is not allowed. Thus this is unfavourable to the companies who are carrying out R D independent of factory of manufacture. It is suggested that specific provisions may be inserted to exempt Excise Duty on capital goods required for R D purpose. Alternatively, Cenvat credit of capital good used for R D purpose should be av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable irrespective of the location of the R D unit. 5.2.15. Exemption for Ice-creams Ice cream is classifiable under 2105 00 of the Central Excise tariff and was exempt from excise duty till 28th February, 2011. Ice creams were subjected to central excise duty at the rate of 5% with effect from 1st March, 2011; a concessional rate of duty of 1% was also prescribed subject to the condition of non-availment of cenvat credit on inputs or input services. Ice creams are also covered under the small scale industry exemption scheme and goods upto a value of Rs.1.5 crores in a financial year are exempt. Ice cream industry is a highly fragmented one and majority of the players are small. At the same time, it is a highly capital intensive industry. Maintenance of hygienic manufacturing environment requires additional capital cost. With the rising cost of the capital, mounting inflation and stress on the customer's capacity to spend, the levy of excise duty even at nominal rate puts tremendous financial burden on the industry. It is requested that the levy of excise duty on ice cream be withdrawn altogether. 5.2.16. Exemption for goods supplied against Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national Competitive bidding Serial no. 336 of Notification no. 12/2012-CE dated 17-03-2012 exempts all goods supplied against International competitive bidding from Central Excise duty subject to the Condition no. 41 which states if the goods are exempted from duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under Section 3 of the said Customs Tariff Act when imported into India . The exemption under Customs is conditional upon complying with certain procedural / documentation requirements. While such condition of complying customs notification had been deleted for Ultra Mega Mega Power Projects, such adversity still persists under the condition no. 41 attached to Sr. No. 336 of notification no. 12/2012-CE. It causes undue hardship to the domestic manufacturers particularly those who are supplying goods for petroleum operations, as they are forced by the field officers to comply with the condition, attached to the Customs Exemption notification no. Sr. No. 356 358 of 12/2012-Cus. dated 17-03-2012, i.e. to obtain a certificate from Directorate General Of Hydrocarbon (DGH) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertifying that such goods are required for Petroleum Exploration, for the purpose of availing excise exemption. However, DGH refuses to give such certificate to domestic manufacturers. It is suggested to amend the condition no. 41 to Serial No. 336 of the Notification 12/2012-CE dated 17-03-2012, in a way that certificate from project authority (i.e. Customer) be enough for availing the excise exemption. 5.2.17. Excise Duty rates on Computers Currently India has one of the highest taxation rates in the world on computers. It is requested that Excise duty rates on computers and parts thereof may be reduced 5.2.18. Excise duty exemption for Confectionery Organized Confectionery Industry is the second largest category in the processed food industry with a turnover of nearly Rs. 1,600 crores, providing significant sustainable rural / semi urban employment. Confectionery is primarily targeted towards children. Confectionery is basically made out of Sugar, Milk and Milk Products, Glucose etc which are agricultural produce. In order to provide some relief to industry, it is recommended that the central excise duty on confectionary be realigned to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2% - the rate of excise duty imposed on most other food products like Soya Milk Drinks, Preserved Fruits and Vegetables, Milk Based Beverages, Mudi (Puffed Rice), Ice-cream, Ready to Eat Packaged Food, Mineral Water, Dried Soups and Broths, Pasta, Fruit Juice, Potato Chips and so on. 5.2.19. Providing retrospective effect to the exemption from Excise Duty on Captively Consumed Intermediate Product At present, Biscuits up to MRP of Rs. 100 per Kg are exempt from payment of excise duty. During the course of manufacture of biscuits, intermediate products like invert (sugar) syrup/cream are produced and consumed almost immediately within the manufacturing process. Whilst the Government has exempted such intermediate goods from excise duty with effect from September 2011 the Department, however, continues to raise duty demands for the past period - disregarding the submission of the manufacturers to the effect that these intermediate products don't have any shelf life and are consumed captively, almost immediately, within the manufacturing process. It is therefore requested that in order to avoid vexatious litigation in the matter the exemption from excis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e duty be given retrospective effect from April 2007. 5.2.20. Clean Energy Cess In the Union Budget 2010 the Hon'ble Finance Minister imposed levy of a Clean Energy Cess on purchase of coal. No doubt, the Cess was introduced on the principle of polluter pays . Whilst this principle may be justifiable for industries causing environmental pollution, it must be kept in mind that within the industry there are players who have invested considerable sums of money on state of the art technology like elemental chlorine free paper manufacture, ozone bleaching processes, waste water management, solid waste recycling, usage of energy from renewable sources etc. to ensure environment friendly manufacture. In view of the above, levy of a clean energy cess on coal - which impacts adversely on the cost competitiveness of manufacturers - should be restricted to only those manufacturers who do not adopt clean technologies. Manufacturers who have already adopted internationally recognized clean technologies, at considerable investment, should be incentivized and encouraged by way of being exempted from levy of any clean energy cess. 5.2.21. Exemption for units i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n North Eastern States Notification No. 20/2007 -CE dated 25.04.2007 provides for exemption from duty of excise as is equivalent to the amount of duty paid other than by utilization of Cenvat Credit. The aforesaid notification was brought in as to give effect to the Industrial Policy Resolution of Central Government namely North East Industrial and Investment Promotion Policy 2007 (NEIIPP, 07). This policy provision was in continuation of 100% excise duty exemption on finished products in North Eastern Region as was available under NEIP, 1997. The Notification was amended in 2008 because it felt that the Notification was being misused by certain manufacturers. To obviate this problem various criteria were introduced in the amending notifications such as value addition, rate of value addition fixed on an adhoc basis, procedure for fixation of special rate for refund of excess of duty over value addition rate as notified and amendments to the value addition rate for few industries where the Department considered that notified rate and special rate mechanism did not result in total refund. Most of the industries whose rates were not revised are also facing difficultie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in getting total refund in view the aforesaid criteria. It is submitted that these amendments instead of improving the effectiveness of the refund mechanism resulted in various abnormalities which defeated the very purpose for which the notification was issued. In the guise of streamlining the procedure of refund, the net refund admissible to the manufacturer was actually curtailed and they did not receive the full benefit as was intended by the original notification and such amending notification also resulted in defeating partially the original North East Industrial and Investment Promotion Policy. To alleviate the difficulties faced by the manufacturers in the North Eastern Region in getting full refund of the duty paid otherwise than by cenvat credit and to remove the difficulties faced by the genuine manufacturers in implementing the aforesaid criteria mentioned above, it is suggested that the Notification No. 20/2007 -CE dated 25.04.2007 be restored in its original form. If in the implementation of the notification certain problems arise they could be suitably dealt with by the administrative authorities implementing notification and granting refunds. The exclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons mentioned in the Policy denying the benefit to certain categories of manufacturers or certain processors could be continued to achieve the objectives in the Memorandum. CUSTOMS 5.3.1. Inverted duty structure for import of Copper Brass strips/ Phosphorous Bronze Strips for Connectors and other applications Instances of disparity caused due to inverted duty structure on the import of Copper Brass Strips/ Phosphorous Bronze Strips. (a) Imports of finished Copper Brass Strips/ Phosphorous Bronze Strips are exempted from import duty when imported by connectors/terminal manufacturers in terms of exemption under notification No. 25/99 - Customs dated 28-02-1999 (Serial no 90 112). The connector(s) is the terminal contact part made out of brass, phosphorous bronze, copper, which passes current and joins two components. Maximum usage of this part is in the automobile sector as the terminal part of the wiring harness system or in white good items, electrical panels and engines and several other applications. During the last few years, the Indian non-ferrous industry has become strong with 5 established large manufacturers and many ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other smaller manufactures. All the large manufactures are capable of producing strips and foils of copper, brass as well as phosphorous bronze required for connector application with high precision and close tolerance as required by this industry. Presently, these items are imported mainly from China at lower cost. This is adversely affecting the competitiveness in the domestic as well as in export market segments. The raw material i.e. copper and zinc attracts full rate of duty of 5% at the time of import. Various Indian manufacturers prefer imports over our product because of difference of 5% on account of custom duty. The preferential treatment given due to this duty exemption of 5% puts Indian industry at a disadvantage. It is recommended that the duty exemption in the current market scenario should be removed. (b) Various manufactures of copper and copper alloy are permitted to be imported duty free or at concessional rates from Nepal, Bangladesh, Thailand etc. in terms of various exemptions given to imports from these countries. Consequently, the manufacturers of copper, copper alloys, strips and foils become uncompetitive in view of the fact that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mported finished products are either duty free or charged to a concessional import duty. It is recommended that the import of basic raw material in the form of Copper Ingots (Tariff Head 74031900), Copper Cathode (Tariff Head 74031100), Copper Scrap (Tariff Head 74040019), Brass Scrap (Tariff Head 74040022), Tin (Tariff Head 80011090) and Zinc (Tariff Head 79011100) to be used for the manufacturing of various Copper and Copper based alloys strips and foils may be allowed at zero percent duty. This would enable Indian non ferrous manufacturers to be at par and would provide parity with those Companies who are availing benefits under the above captioned exemption notifications. 5.3.2. Exemption from Special Additional Duty (SAD) for goods imported for sale in India Goods when imported into India for subsequent sale are exempted from the levy of Additional Duty of Customs under Section 3(5) of the Custom Tariff Act in terms of notification no.102/2007-Customs dated 14-09-2007. One of the conditions for the exemption is that the exemption shall be available by following the procedure prescribed for refunds. The current procedure is cumbersome and leaves lot o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f discretion to the authorities in granting of refund. Since the intent of the Government is to grant an exemption, it is requested that the exemption be given upfront at the time of import itself instead of by way of a refund. The importer may be asked to declare at the time of import that: Goods will be sold within a specified period The importer undertakes to pay SAD on goods which remain unsold for the specified period Given that Customs is gradually moving to 'self-assessment' and post import audit regime, verification of declarations in selected cases may not be an issue. 5.3.3. Level Playing Field for Domestic Capital Goods Industry The Indian Capital Goods Industry (Private and Public Sectors) has, over the past 6 decades, built expensive and sophisticated manufacturing facilities and has also acquired State-of-the-art" technology or supplying complete range of equipments required by Core Sectors viz. Fertilizer, Power, Oil Gas, Gas Process, Refinery, Coal Mining, etc. The Indian industry has also fully geared up to cater to the requirements of Defence, Nuclear power, Aerospace and other strategic sectors. Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has however given customs duty exemptions to imported goods required for certain industries and has reduced the custom duty to zero or 5%. This acts against the interests of the domestic capital goods industry. In some cases Government has no doubt extended the deemed export status to the supplies affected by the domestic manufacturers. However, due to the incidence of local taxes duties, the domestic manufacturers face the cost disadvantages to the extent of 12% to 26%, on account of sales tax, entry tax / octroi, higher cost of finance, inadequate infrastructure, etc. To encourage domestic capital goods manufacturing and to offset a part of the cost disadvantages faced by the domestic Capital Goods manufacturers due to incidence of higher local taxes duties, it is suggested that the full exemption to such goods from the levy of customs duties may be reviewed to provide at least minimal protection to the domestic industry. Further, full deemed export benefits be accorded to the domestic manufacturers. This will inter-alia help the domestic industry to compete with the foreign companies in India and create reference from Indian projects, which can be us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for qualifying and securing business in overseas markets. It would also increase competition and ultimately reduce the cost of the project. 5.3.4. Inverted Duty Structure under ASEAN-India FTA (AIFTA) for Soap and Raw Materials of Soap Soap import from ASEAN countries comprise more than 20% of total soap imports in to India. However, import of raw materials for soap such as palm fatty acids, crude palm stearin, lauric acid and so on from ASEAN countries is much higher and accounts for about 90% of import of these raw materials. In terms of the commitments made by India under AIFTA the reduction in rates of Basic Customs Duty for soap and raw materials of soap has resulted in an inverted duty structure whereby the rate of duty on the value-added finished product, i.e., soap, is lower than the rate of duty on its raw materials. In fact, in about two years time the rate of customs duty on ASEAN soap imports will become Nil whilst the imports of most raw materials of soap from ASEAN countries will continue to suffer customs duty at, more or less, the prevailing rates. This is apparent from the data given in the table on next page. Goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HS Tariff ID Pre AIFTA 2010 2011 2012 2013 2014 2015 2016 Soap (Normal Track) 1 34011190 10.0% 7.5% 5.0% 5.0% 2.5% 0% 0% 0% Raw Materials for Soap Palm Fatty Acid Distillate (Sensitive Track) 2 38231900 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 8.0% 5.0% Crude Palm Stearin (Special Product) 3 15119090 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Crude Palm Kernel Oil (Exclusion List)4 15132110 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% Lauric Ac id (Exclusion List) 29159090 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% In such a scenario it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be far more cost efficient to import soap from ASEAN countries for resale in India rather than undertaking value-addition activity by way of import of raw materials and soap manufacture in the country. As a consequence, it is apprehended that the significant investment made by industry in building up capacities in this respect - particularly in economically backward regions where Government has provided tax incentives to spur development - will be at an economic disadvantage. Adoption of either of the following recommendations will also help safeguard the investments in capacities - particularly in backward regions, thereby enabling actualization of the Government's objective of economic development of such regions. In order to protect employment and value-addition activity in this sector it is recommended that the Government considers: i.Moving Toilet Soaps (HS Code 34011190) from the Normal Track to the Exclusion List, i.e., excluding soap from preferential duty treatment in AIFTA. ii. Alternately, if it is not possible to exclude soap from the Normal Track, including the raw materials of soap in the Normal Track in AIFTA such that the rates of customs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty on these raw materials are aligned to that applicable on soap. 5.3.5. Oleo Chemicals Industry In the context of Oleo Chemicals industry, it is suggested that:- (i) fatty alcohols manufactured by export oriented units in India may be permitted to clear in the domestic tariff area at reduced rates of duties so that such units can survive and compete with import from ASEAN countries. (ii) steps may be taken to eliminate inversion in import duty on crude palm kernel oil (CPKO) falling under heading 1513 21 10 (100%; 12.5%) and other vegetable oils for industrial applications, fatty alcohols of heading 3823 70 (7.5%), soap noodles of heading 3401 20 (5%) and surfactants of heading 3402 00 (5%) so that the industry can compete with imports from ASEAN countries. (iii) inversion in import duty on fatty alcohols based surfactants (5%) against fatty alcohols as feedstocks (7.5%) to make the domestic industry to compete with imports. (iv) import duty inversion may be removed between crude glycerin (12.5%) and refined glycerin (6% ASEAN and 7.5% general) 5.3.6. Cocoa Beans Cocoa beans currently attract a very high tariff rate of ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sic Customs duty @30% (effective rate 36.5%) in an effort to protect the domestic agricultural produce. The demand in India for cocoa however far outstrips domestically grown cocoa beans and Industry is forced to import cocoa beans and/or intermediate cocoa products like cocoa butter, cocoa liquor cocoa powder to meet the requirement in India. The average demand for cocoa beans and intermediate cocoa products over the past 4 years has been growing so significantly that domestically grown cocoa beans can meet less than half of the annual demand. Consequently, import of cocoa beans and intermediate cocoa products has been on the rise. Till such time as the domestic production of cocoa beans does not match the growing demand for cocoa and intermediate cocoa products, relief from the prohibitively high customs duty of cocoa beans and intermediate cocoa products is necessary in the interest of consumers and industry. 5.3.7. Customs duty on import of bamboo sticks for manufacture of Agarbatti As per information provided by South Asia Bamboo Foundation, there are about 10,000 agarbatti manufacturing units in the country including tiny, small and medium enterprises, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... besides about 200 well-established ones. Nearly 12 lakh people are directly or indirectly employed by the industry. Of the total agarbatti market of Rs 1,100 crores, the organised market contributes about 40%. The states of North East India used to fulfil 90% of raw sticks demand in India. The sticks are produced at the household and community level in many NE states . In the 2011 budget, customs duty on import of bamboo sticks for Agarbatti was reduced from 30% to 10% (Notification No. 12/2012 - Cus dated 17-3-2012, S.No.49). This has resulted in making the bamboo stick manufacturers of North East India uncompetitive compared to cheap imports from Vietnam and China, as the manufacturers from the NE region have to also contend with high transportation cost. A revision in the customs duty to pre 2011 status of 30% would help the bamboo industry in the North East. 5.3.8. Custom Duty relief for fire and security systems Most essential security and life safety products are not made in India. Countries like China and Korea have become large feeders of electronically based security products to the world. They have adopted mass production techniques and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been manufacturing these products for over 15 years. In view of the R D efforts put in by them and deployment of robotic tools, their products are of top quality and cost-wise competitive. It is not currently feasible to indigenize the manufacture of these products. The following essential security and safety products attract an import duty of approximately 26.85%:- CCTC Camera Systems Access Control and Biometric Readers Intrusion Detection System Fire Alarm and Suppression Systems These items are essential for maintaining surveillance at all places like markets, hotels, cinema halls and other public places. Biometric systems are required for controlling access into restricted areas similarly intrusion detection systems detect breach in perimeters as also buildings. Fire alarm and suppression systems comprise of smoke and heat detectors and associated control systems. In view of their essential usage, it is recommended that the customs duties on these products should be fully exempted. 5.3.9. Reduction of import duties on Global Positioning System(GPS)/ Global Navigation Satellite System (GNSS) technology Global Positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning System (GPS)/Global Navigation Satellite System (GNSS) is a technology which helps in determining position in a global co-ordinate frame to bring all the positioning data to a common reference. This aids in building a solid positioning foundation to be used in Geographic Information Systems (GIS). The commercial uses of GPS/GNSS are diverse with applications across industry such as Cadastral, Infrastructure development, Utility, Forestry, Mining, Agriculture, Transportation and Logistics. Some applications are simple, such as determining a position, whereas others are complex blend of GPS/GNSS with communications and other technologies to offer a comprehensive solution. GPS/GNSS as a technology is fast becoming an indispensible tool in infrastructure development, natural resource management, transparent governance etc. Productivity enhancement resulting from the adoption of GPS/GNSS technology as a professional tool can yield tremendous benefits to the user community as well as the nation. GPS/GNSS receivers are becoming a key part of our lives whether in a phone, a watch or in a car. However, there are hindrances in the import of this technology in India. Und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Chapter 8526 GPS/GNSS attracts a high duty of over 27% which acts as a deterrent in use of the technology. Cell phones with GPS do not attract any customs duty. Since GPS/GNSS would yield returns through productivity gains, savings and timely execution of projects especially infrastructure development such as Roads, Rail, Cadastral, Agriculture, Mining, and Environment, it is important to promote this technology in India. Since there are no indigenous manufacturers of in India, it is important to significantly reduce import duties and in the case of infrastructure projects remove import duties on GPS/GNSS receivers as part of national GIS initiative. 5.3.10. Import duty on Gold Following the increase in the duty on gold as a part of the last budget there have been reports of increased smuggling of the gold into the country. It is recommended that import duty on gold may be reduced from the current levels of about 4% to 1%. 5.3.11. Feedstock for Chemical Industry The customs duty on feedstocks like Ammonia (NH3) (for making urea fertilizer), Methanol and Ethanol (for manufacturing organic chemicals like dyes, pesticides etc.) should be reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to zero. Specially in NH3 and Methanol the country is import dependent due to domestic production not able to meet the demand. But the duty impact makes the feedstock costly for industry and hence impacts growth and competitiveness of value added products out of these two feedstocks, thus depriving nation of export revenue as well as higher indirect taxes out of value added products. 5.3.12. Rationalization of rates of custom duty for imports of brass rods from ASEAN countries and Brass Scrap Presently the rate of Custom duty for import of Brass Scrap is 5% whereas the custom duty for import of rods from ASEAN countries is 3%. Thus, there is difference in rates of custom duty in Brass Scrap and Rods imported from ASEAN countries which affects Indian manufacturers producing rods and exporting to different countries. Rates of custom duty may be rationalized so as to maintain equity. 5.3.13. Valuation of Catalysts made from precious metals for levy of Customs duty Refineries require certain critical catalysts made from Platinum, a precious metal. Normally, the catalyst metal is imported from the vendor under a lease agreement which requires the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pent catalyst to be returned after use. After the catalyst is used in the refinery and its useful life is over, the Platinum is returned through London Metal Exchange (physical export). The value of such catalysts is very high mainly due to the Platinum contained therein. Also, the supplier is paid only to the extent of the lease and not the full value of the catalyst (excluding the Platinum value). However, at the time of import, the customs duty is assessed on the entire value of catalyst including platinum even though the transaction value is limited to the lease arrangement only. The additional value of the platinum on which customs duty is paid is often 400% to 450% of the lease charges. This seems unfair and needs to be rectified. It is requested that a suitable Notification may be issued to exempt the duty on the portion of value of the precious metal exported as spent catalyst after use. Usually this would be around 50% of the value of the catalyst imported. Suitable safeguards through Undertaking/Bond maybe furnished by the refinery till the spent catalyst is exported. 5.3.14. Reduction in Environment Cess on Coal Coal Cess of Rs 50 per ton of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oal produced or imported in India was introduced in Union Budget 2010.This is akin to a 'carbon tax', inspired by the 'polluter pays' principle, and is meant to fund the National Clean Energy Fund. This cess has an adverse impact across sectors; its impact is even more severe for the Aluminium industry, which is a power-intensive industry and depends on coal-fired electricity in the Indian context. There is a case for reconsidering the rate of cess in view of the following: a) Endowment of energy resources to India has been predominantly tilted towards coal, which accounts for 55% of India's energy needs and 75% of power generation. Considering the future energy requirements of the growing economy, coal would continue to be the dominant source of energy - and a critical driver of the country's competitiveness. The effective users of coal or coal-generated electricity are spread across sectors and all strata of population. Cess on coal has made generation of electricity costlier by about 5 paise per unit. Thus, taxation of coal is not a progressive tax. b) Coal consumption accounts for nearly 40% of the emissions of Greenhouse gases from India, as per World Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimates for 2005. Rather than making this sector bear the entire burden of the Clean Energy Fund, it may be worthwhile to broaden this tax and moderate the burden on coal users, especially since a large portion of the burden of coal cess is being passed on to the entire population in the form of costlier electricity. There could be more effective options to broaden the tax (such as air travel, high-end cars) in a manner that the more affluent polluters are taxed more. This will be in line with the principle of 'progressive taxation'. Else, this levy will become a parallel to the efforts at the global platforms to make the poor countries participate proportionately in emissions reduction. It is requested that the cess on coal should be reduced from Rs 50 per ton to Rs 10 per ton and government should explore ways of distributing the burden of the Clean Energy Fund more equitably. 5.3.15. Additional Duty on Coal The applicable CVD on all types of coal import other than steam coal is 6%. The CVD credit is not available in respect of imports made by power industries and this will only add up to the cost of power generated. Hence it is requested that the levy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% CVD on Imported coal (chapter sub heading 2701 19 20) for generation of electricity may be withdrawn. 5.3.16. Customs duty on ships on coastal conversion For more than 60 years ocean going ships were not subject to customs duty at the time of import or on subsequent entry to Indian coastal waters. It was treated as a conveyance and hence not subject to import duty. It was dutiable only at the time of ship-breaking. But from 17th March 2012 ocean going ships are subject to customs duty at the time of each coastal conversion. As per the International practice prevailing in many maritime nations ocean going ships in international trade are not subjected to customs duty on each arrival for coastal operation. Ship should be subject to customs duty only at the time of ship breaking. As ocean going ships are in international trade, these should be exempted from customs duty. 5.3.17. Exemption for goods supplied in connection with Offshore Oil Exploration Serial No. 357 of the Customs Notification No. 12/2012-Cus dated 17-03-2012 exempts Parts and raw material for manufacture of goods supplied in connection with the purpose of offshore oil ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ploration or exploitation from the Customs Duty subject to the condition No. 42, which stipulates that the parts and raw materials are used in the manufacture of goods in accordance with the provisions of section 65 of the Customs Act, 1962 (52 of 1962); and that a certificate is produced in each case from the prescribed authority to the effect that the goods are required for the purposes of off-shore oil exploration or exploitation. Contrary to the intention of the Government for granting the said exemption, the field revenue officers are raising the customs duty demand on the finished goods that are manufactured under Bond (u/s 65 of Customs Act) and supplied to Offshore Petroleum Exploration Projects. This contention of the field officers is unjustified, as there could not be a relief where exemption is granted from customs duty on raw materials but duty be levied on the finished product. It is suggested that a clarification may be issued that the finished goods cleared from the bonded premises for offshore oil exploration would not be leviable to any excise or customs duty. Alternatively, an appropriate exemption may be provided to achieve the desired objective. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.3.18. Oil exploration - condition of no foreign exchange remittance Companies authorized to undertake oil exploration activities in India are eligible for Customs duty exemption of specified equipment imported for this purpose under Notification No 12/2012 -Cus dated 17 March 2012 (Sr. No.358 and 359). The exemption is granted subject to specific conditions, one such condition requires furnishing of an undertaking that no foreign exchange would be remitted from India for these imports (Condition No 43 and 44 of the aforesaid Notification). There are other end use based/ sector specific exemption, however, none of these exemptions carries similar condition or requires similar compliance from the importer. Hence, above condition/ compliance requirement may be removed as the compliance with the condition is resulting in avoidable complications/ issue to the Industry. 5.3.19. Baggage Allowance Duty Free baggage allowance should be raised from Rs.35000 to Rs.50000 for incoming passengers. Allowance from children should be raised from Rs.15000 to Rs.20000. 5.3.20. Other changes 1. Duty on consumables like titanium dioxide, ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tase grade (heading 2823 00) and spin finish oil for treatment of textiles (heading 3403 11 00) should be reduced from 10% and 7.5% respectively to 5%. 2. The rate of depreciation for calculation of Net Book Value for the purpose of calculating Customs duty on De-bonding of 100% EOUs has not been revised for long time. The depreciation rates prescribed are very low and do not reflect the actual useful life of computer and networking equipment. Due to technological advancement and increased obsolescence the Depreciation rates should be increased to reflect the current reality. 3. In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural wastage and enhancing shelf-life, it is recommended that customs duty rates on cold chain equipment and their parts be pegged at 5% or below. 4. Customs duty on inputs / capital goods for Research Development adds to the R D cost. It is suggested that specific provisions may be inserted to exempt Customs Duty on capital goods required for R D purpose. 5. Capital cost of investment in food processing plants remain prohibitive due to duties in excess of 20%. Import duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be reduced on machinery for food processing which will inter-alia benefit the agriculture sector. CENVAT CREDIT SCHEME 5.4.1. Restrictions on Input Tax Credit The implementation of the concept of Negative List of Services is obviously, a precursor to the introduction of GST in the country. Whilst practically all activities done by one person for another for a consideration, with the exception of activities restricted to transfer of title in goods, have been brought under the service tax net, the restrictions, exceptions and limitations on availability of input tax credit still continue. This is clearly an anomaly and has led to an inequitable situation whereby the taxation of services is universal based on the principles of GST whilst the credit for the tax paid on input services continues to be restricted, as was the case during the regime of taxation of services based on a Positive List. In order to correct this inequity and to provide much needed relief to industry the service tax laws in general and, specifically, the definition of input service should be amended to allow input tax credit without any restrictions - in line with the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciples of GST. Accordingly, it is recommended that the definitions of input service should be reinstated to what it was prior to amendments brought about by the Union Budget of 2011 such that service tax credit is also available for all input services used in connection with activities related to business and additionally, there is no restriction, as prevails currently, on availing credit of tax on services like (i) construction or execution of works contract of a building or a civil structure (ii) services related to laying of foundation or making of structures for support of capital goods (iii) services provided by way of renting of a motor vehicle / rent-a-cab services (iv) service of general insurance business and so on. 5.4.2. Simplification of CENVAT Credit scheme - classification as inputs, capital goods and input services The biggest stumbling block that the current CENVAT Credit regime faces in meeting its objectives is the abundance of interpretative disputes vis-a-vis qualification as 'input', 'input service' and 'capital goods' and the restrictive interpretations adopted in this regard. Service tax and excise duty are value added taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s; that is to say, they are not taxes on the business and have to be borne by the ultimate consumers. The ultimate objective of a value added tax should be to ensure a free flow of credit between various business entities and to ensure that the burden of paying tax is only on the end consumer of the service / goods. The concept of 'value added tax' is elucidated in the International VAT / GST Guidelines dated February, 2006 issued by the Organization for Economic Co-operation and Development ( OECD Guidelines ). The OECD Guidelines clearly point out that complete deductibility of input taxes is the key feature of value added taxes. The relevant portion is excerpted below: These features give value added taxes their main economic characteristic, that of neutrality. The full right to deduction of input tax through the supply chain, with the exception of the final consumer, ensures the neutrality of the tax, whatever the nature of the product, the structure of the distribution chain and the technical means used for its delivery (stores, physical delivery, Internet). Thus, in order to ensure that the CENVAT Credit scheme meets its objectives it is important that unnecessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry qualifications/categorizations like 'input', 'input service' and 'capital goods' be done away with and all input side tax costs forming part of a business entity's profit and loss account (and forming part of the price of the final output good/service) should be allowed as credit. 5.4.3. Removal of restrictions in availment of cenvat credit on services related to civil construction or services which are mandatory for business The definition of 'input service' places restrictions on availment of cenvat credit on certain services which inter-alia include Services related to civil construction, Services related to motor vehicles i.e. cab services, Services which are used for consumption of any employee In so far as Civil construction related services are concerned many a times construction of a property is essential for provision of output services i.e. without construction of property the manufacturer or service provider cannot undertake its activities. For instance, without construction of factory building, the manufacturer cannot manufacture the goods, without construction of office complex or shopping mall, the service provider would not be able t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o provide renting services, without the construction of pipeline, a service provider cannot provide services of transportation of goods through pipeline. Hence, in cases where the construction services form integral part of provision of services, credit should not be denied to the manufacturer or service provider. It is recommended that necessary amendment should be made in the definition of input service to allow credit when the immovable property is used for manufacture of excisable goods or for provision of taxable services. The credit should be denied only in cases where the immovable property is used for sale or for non-taxable purposes. 5.4.4. Credit on services for consumption of employees It is understood that the intention of the Government is to deny credit on services which are not used for business purposes and are more in the nature of personal consumption. However, it should be noted that certain services on which credit has been denied are essential part of the business of the assessee. For instance, for factories it is a statutory requirement to provide meal facilities to employee and hence they have to procure catering services; fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r call centers etc it is mandatory to provide cab facilities to employees. Therefore, it is recommended that while the credit can be denied on services primarily meant for personal consumption of the employees like, beauty treatment, cosmetic and plastic surgery, membership of club, health and fitness centre, travel benefits extended to employees while on leave and the like services, the credit on services like outdoor catering, cab facilities, medical insurances etc should not be denied. 5.4.5. Credit reversal in case of removal of used capital goods from the factory In terms of the amendments made in Rule 3(5A) of the Cenvat Credit Rules where the capital goods (on which credit is availed) are removed after being used whether as capital goods or as scrap or waste, the cenvat credit is to be reversed based on the specified percentage per quarter or transaction value, whichever is higher. The reversal percentage per quarter prescribed under Cenvat Credit Rules is 2.5 percentage points for each quarter of the year or a part thereof by straight line method (except in case of IT goods). This provision assumes that capital goods (other than IT goods) have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a shelf life of 10 years and if the goods are removed from the factory prior to completion of 10 years then the credit would have to be reversed as per the abovementioned formula. It may be pointed out that there are several capital goods (for e.g. refractory bricks, batteries, DG sets, AC, power management system, etc) which have shelf life of 3 - 5 years due to industrial usage, technological obsolescence, etc. Hence, if such goods are cleared after completion of their useful life, then no credit reversal should be required or if the same goods are cleared as scrap, the credit should be required to be reversed only to the extent of duty payable on the transaction value. However, as per the amendment in Rule 3(5A), in case of removal of these goods prior to completion of 10 years, only partial credit is allowed as per the formula prescribed under Rule 3(5A). This is causing undue administrative cost for the companies in terms of keeping track of original invoice for 10 years, computation of depreciated CENVAT Credit and co-relating the same with original purchase invoices. Some of the other difficulties faced in implementation of this provision are:- (a) Practically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , one type of capital goods (mostly in nature of consumables) would be purchased by the assessee under different invoices and such goods purchased under each of the invoice may in turn be used in different machines. In such a case, it is impossible to correlate the capital goods with the invoice under which such goods were received. (b) For most of the capital goods, the unit of measurement (UoM) at the time of purchase of invoice and UoM at the time of selling them as scrap differs. Also, practically, the scrap of number of capital goods is sold in a single lot. Most parts are received in numbers as UOM, however their scrap e.g. MS scrap is sold by weight basis in MTs. In such a case, it is impossible to correlate the scrapped material with the invoice under which it was purchased. (c) Another situation can be where an item in the nature of capital goods is purchased and during the life of such an item, some of its parts are worn out and are required to be replaced. In such a case, it would be impossible to determine the amount of cenvat credit attributable to such part. The aforesaid illustrations are few amongst various problems that can arise out of the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent amendment. Further, the provision requiring payment of duty on used capital goods based on transaction value is against the basic principle of Cenvat Rules which require the assessee to reverse credit (fully or on depreciated basis). Similarly, the requirement of reversing cenvat credit on waste scrap of capital goods based on depreciated value is incorrect particularly when the capital goods are used to their fullest economic life. In the past also, the Cenvat Rules or erstwhile Central Excise Rules, 1944 had similar provisions linking the payment to duty leviable. However, the same were withdrawn considering the aforesaid problems. It is suggested that the following options may be adopted by the Revenue to address the above problem: Credit should be reversed based on the transaction value at which such goods are sold, subject to maximum of cenvat credit availed on such goods and checks to be put forth to safeguard the interest of the revenue as in case of undervaluation of manufactured goods Allowing payment of CENVAT on certified book value of asset after considering depreciation or transaction value whichever is higher, subject to the maximum a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of credit availed on such capital goods It should be noted that the amount of credit reversal, in any of the options, should not be more than the amount of cenvat credit availed by the assessee on such capital goods, since such goods are not manufactured by the assessee. 5.4.6. Eligibility to avail CENVAT credit on Capital Goods in the year of receipt In terms of Rule 4(2) of the CENVAT Credit Rules, 2004 the credit of CENVAT in respect of capital goods has to be distributed over two years. In the year in which the capital goods are received in the factory credit equivalent to 50% of CENVAT can be availed. The balance 50% can be availed only during the next financial year. As a result of this a lot of time and effort is expended in tracking each item of capital goods in terms of year of entry, amount of credit available in each year, etc. Apart from the cost involved in such tracking, this also leads to errors and, consequently, long-drawn disputes/litigation with the Department. It is recommended that the CENVAT Credit Rules, 2004 be amended appropriately to enable credit of full CENVAT in respect of capital goods in the year of receipt in to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he factory. This would be in line with the provisions on CENVAT credit in respect of inputs. 5.4.7. CENVAT Credit - distribution of credit on the basis of turnover Rule 7 of the Cenvat Credit Rules contains the provisions relating to the manner and procedure for distributing the Cenvat Credit of the tax paid on the input services. Rule 7(d) of the Credit Rules provides that credit of service tax attributable to service used in more than one unit shall be distributed pro rata on the basis of the turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units to which the service relates during the same period. Explanation 3(a) to Rule 7 provides that the relevant period shall be the month previous to the month during which the Cenvat Credit is distributed. The above amendment has created hardship for all industries by creating many practical difficulties. Computation of turnover on a month to month basis is extremely difficult for industries which have factories located in multi locations and such distribution can only be on provisional basis. It may have to be revised often as and when the turnover figures are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... updated (and it may be more than once). Moreover in many cases the assessee may choose to distribute the credit once in 2-3 months instead of each month. In the case of Large Taxpayer Units (LTUs) they have the flexibility of transferring excess cenvat credit from one unit to another. The option of passing on the entire eligible input service tax credit to any one unit needs to be restored. It is further requested that the Cenvat Rules may be amended to provide - (a) The assessee has the option to distribute the credit as and when felt necessary and not each month, and (b) for the purpose of distribution of CENVAT credit, an ISD may be permitted to follow the principles laid down under Rule 6 (3A) of the CENVAT credit rules at the company level as a whole with provisional transfer to individual sites on the basis of the previous year's ratio and making suitable adjustments by the 30th June of the next financial year. In any case, the credit to be availed would not exceed the total tax already collected by the Department. 5.4.8. Cascading of Service Tax for Brand Owners when Manufacture is by Job-Workers As per the provisions of CENVAT Cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it Rules, 2004 CENVAT credit on inputs and capital goods may be availed by a manufacturer as long as such inputs / capital goods are physically received in his factory premises (or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory in case of capital goods) under cover of a valid Central Excise Invoice and are used by him in or in relation to manufacture. However, under the same Rules, credit of service tax may be availed by an assessee on payment of the same to any input service provider, as long as the input service is received in or in relation to manufacture. The credit is, thus, only available on the basis of Invoice payments. In the case of Brand Owners who employ job-workers exclusively for manufacture of goods, the benefit of CENVAT credit on inputs is available since the job-worker can claim the CENVAT credit and offset his central excise liabilities against the said credit. However, as far as service tax is concerned, since the payments for taxable input services are generally effected by the Brand Owner instead of the job-worker, the benefit of service tax credit is not available. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is due to the fact that the Brand Owner cannot avail the credit since he is not the manufacturer and the manufacturer, i.e., the job-worker, cannot avail the credit since he does not pay for the taxable input service. Consequently, under the Rules the Brand Owner employing job-workers exclusively is discriminated vis- -vis Brand Owners having their own manufacturing facilities, in so far as credit of service tax is concerned. A typical example would be one where the principal manufacturer undertakes advertising and sales promotion, market research; storage upto the place of removal for the goods manufactured by it as well as by its job workers and discharges the service tax liability thereon. The CENVAT Credit Rules also provide for an Input Service Distributor (ISD) mechanism whereby the credit of service tax can be distributed by an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards purchase of input services. Hence, by definition, the ISD cannot distribute credit of service tax to job-workers in case the input services are paid for by the principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, i.e., the Brand Owner. Accordingly, the provisions of the CENVAT Credit Rules, 2004 create an inequitable situation, in that, the benefit of CENVAT credit pertaining to inputs and capital goods is available to the assessee irrespective of whether manufacture is in-house or at job worker premises whereas the benefit of service tax credit is available only if the manufacture is at the assessee's own unit. This inequity dilutes the cost competitiveness of assessees who own brands and use jobworkers exclusively for manufacture of goods - more so since, the scope of the service tax has been expanded following the introduction of 'negative list' based approach to Service Tax. It is recommended that the CENVAT Credit Rules be amended to provide a mechanism that enables availment and distribution of credit of service tax by brand owners to job-workers. This will ensure cost competitiveness of the brand owners and protect the long-term interests of job-workers. 5.4.9. Cenvat Credit of capital goods used outside the factory Presently the benefit of Cenvat Credit on capital goods installed outside the factory is restricted to only few of the industries like Mining, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction, power generation unit etc. We wish to bring to your kind notice that the industries dealing with milk products also require refrigeration, chilling, cooling machineries as well as other necessary infrastructure for storing the milk at the point of collection i.e.; dairy farmers. The milk is collected from dairy farmers in the village and needs to be stored under refrigeration /chilling conditions the same is perishable and milk is shifted to the manufacturing site once or twice in a day after proper storage and chilling. Since this activity of chilling is in direct relation to manufacturing activities of the manufacturer and has to take place near to the point of collection of milk to maintain the quality of milk, it is requested that the cenvat credit on machine used for chilling, cooling etc installed outside the factory by industries using milk as ingredients may be also allowed. 5.4.10. Refund of service tax under Rule 5B of Cenvat Credit Rules An output service provider providing services taxable under reverse charge mechanism (and therefore unable to utilize credit for payment of tax on output services) is allowed to claim refund of un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilized credit on inputs or input services, subject to fulfillment of the procedure and conditions prescribed. It should be noted that the definition of 'output service' excludes the services on which whole of the service tax is ayable by the service recipient. The issue that arises here is if the services on which service tax is payable under reverse charge do not qualify as output services, the input services used by the service provider to provide such services would not qualify as input services in terms of Cenvat Credit Rules. Hence, the service provider providing such services may not be able to claim refund of such input services under Rule 5B of the Cenvat Credit Rules. It is understood that the intention of the Government in excluding such services from the definition of output services is to provide that for the service recipient such services would not qualify as output services and hence hecannot utilize cenvat credit to discharge the service tax liability under reverse charge. However, due to the language used in definition of output services, such services would not even qualify as output services for the service provider, which may lead to difficulties i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n claiming credit of input services used by the service provider to provide such services. It is recommended that necessary amendments may be made in the definition of output service or rule 5B to clarify that services in respect of which the liability to pay service tax is entirely on the recipient would not qualify as output services for service recipient but for service provider the services would qualify as output services. 5.4.11. Refund of unutilized Cenvat Credit It has been observed that there is accumulation of cenvat credit with the manufacturers on several counts. Some of the manufacturers of excisable goods supply most of their production to other manufacturers of goods for export by availing the exemption in terms of Notification No 43/2001 - Central Excise dated 26-06-2009. This leads to accumulation of cenvat credit of the duties paid on the inputs. In many other cases the excise duty rate on the finished articles is either exempt or is low enough not to fully exhaust the cenvat credit admissible to the manufacturers on the components and the raw materials. Similarly, in specific situations of import of goods like inverted duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structure, lower value addition, manufactured goods subjected to MRP levy, the credit of duty mainly on account of SAD is not fully utilized and gets accumulated. It is recommended that a provision may be made for refund of cenvat credit to such manufactures. In fact all excess credits accruing for whatever reason should be allowed as refunds periodically like in the case of VAT 5.4.12. Credit of duty paid on conveyor belts / pipelines used for transporting material / intermediate goods In certain industries such as the steel industry, the manufacturer who produces the steel from the basic iron ore is compelled to set up separate units often in different geographical locations due to the proximity to mineral/energy resources. For instance, the iron ore will be available in abundance in one geographical area whereas the natural gas for the steel manufacture may be available elsewhere. The units though situated in different locations, are nevertheless part of an integrated manufacturing chain as one unit feeds the raw material for the other till the ultimate finished products emerges and gets shipped to the customer. To maximize efficiency and contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ol transportation costs, the output from one unit is dispatched through non- conventional means to the next unit say through conveyor belts (for short distances) or through pipelines (iron oreslurry). The pipelines connect the units and integrate the manufacturing chain and become an integral part of the manufacturing process. The current Cenvat credit rules seem to allow credit on capital goods only when used inside the factory. However, an exception has been made for capital goods used for generation of electricity for captive use even if the power equipment is used outside the factory (Rule 2 (a) (A) (1A) of the Cenvat Credit Rules, 2004). Such conveyor belts and pipelines used for transferring the raw material from one unit to another for further manufacture being an integral part of the manufacturing chain and an integral part of the manufacturing process, they should be eligible for credit. This would be in line with the fundamental VAT principle which is to refund the taxes paid on goods which are used in the production of goods or services. An appropriate amendment may be made to enable credit on conveyor belts and pipelines which are connecting one unit to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother for transportation of materials and also inputs used for generating electricity for further manufacture. 5.4.13. Classification of Refractory Bricks as Inputs Refractory Bricks are categorized as capital goods though they are more in the nature of consumables and have a useful life of less than one year. It is requested that an amendment may be made in the Cenvat Credit Rules to provide that for the purposes of the Rules, Refractory Bricks would be deemed to be categorized as Inputs and be allowed cenvat credit accordingly. 5.4.14. Retrospective Application of Amendment of Rule 14 of Cenvat Credit Rules In Finance Act 2012, the Government has amended Rule 14 of the Cenvat Credit Rule by replacing the word or with and to clarify that liability to pay interest on wrongful credit will arise only in the cases where the assessee has utilized such credits resulting in a financial loss to the exchequer and not otherwise. It is a welcome change and will nullify the Supreme Court judgment in the matter of Ind Swift laboratory. However, the change has been made with prospective effect and may still lead to unnecessary litigation for the past peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od. It is requested that this amendment may be made effective retrospectively as this was always the intention of the legislators and the proposed change has just clarified the same. 5.4.15. Credit Availment for Input by the Works Contractor Service Tax (Determination of Value) Rules, 2006 provide that the provider of taxable service opting to pay service tax under clause 2A (ii) [on deemed value of service] is not entitled to take CENVAT credit of duty on inputs, used in or in relation to the said works contract, under the provisions of the CENVAT Credit Rules, 2004. There is no restriction to take CENVAT credit of duty paid on capital goods and/or service tax paid on input services. It is recommended that the laws be amended appropriately to allow CENVAT credit in respect of inputs to works contractors who have opted to pay service tax on deemed value of service as provided under clause 2A (ii) of Service Tax (Determination of Value) Rules, 2006. 5.4.16. Inputs cleared 'As Such' Rule 3(5) of CENVAT Credit Rules, 2004 provides for payment of excise duty on inputs / capital goods equal to the credit availed on them in case they are cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eared from the factory 'as such'. In order to comply with this provision, the manufacturer has to keep track of inputs, the rate of duty at the time of their entry into the factory and the value at which they were purchased - until such time that the inputs are in stock. Since maintenance of such voluminous data over long periods is prone to human error, very often there are objections by Departmental officers, particularly Audit, and consequent litigation. It is recommended that Central Excise statutes be amended to allow removal of inputs 'as such' on payment of excise duty at the rate prevailing on the date of removal and the value for purpose of duty determination be the Weighted Average Cost of the inputs as on that date (as per the assessees books of accounts). 5.4.17. CENVAT Credit on Service Tax paid on Input Services Under Rule 6 of CENVAT Credit Rules, 2004 there is no restriction on availing CENVAT credit of excise duty paid on capital goods that are used for manufacture of goods that are dutiable and goods that are exempt. For example, if any capital goods are used to manufacture any goods that are excisable and has any by-product that is exempt or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any capital goods are used to manufacture exempt as well as dutiable goods alternately, there is no restriction on availment of CENVAT credit. However, under the same Rule 6 in case of input services that are used partly for providing taxable output services or for manufacturing excisable goods and partly for providing exempt output services or manufacturing exempt goods, in order to avail input tax credit the assessee has to satisfy any one of three stringent conditions that have been prescribed. It is recommended that the CENVAT Credit Rules 2004 be amended appropriately permitting the manufacturers and service providers to avail entire CENVAT credit of service tax paid on all input services, if such services are partly used for exempted goods and partly for dutiable final products or partly used for providing both taxable service as well as exempted service. 5.4.18. CENVAT Credit on Service Tax paid on intermediate Goods There are many instances where a manufacturer manufactures excisable goods in two or more stages across different manufacturing units. In cases like these it is quite possible that intermediate goods are manufactured in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne or more stages and then the same are transferred to another manufacturing unit where the finished goods are manufactured. In cases where such intermediate goods are exempt from central excise duty, the manufacturer is denied CENVAT credit of input services used in the manufacturing process notwithstanding the fact that the intermediate goods are used thereafter for manufacture of excisable goods. It is recommended that in such cases the manufacturer is allowed to take credit of input taxes paid on services and transfer the same, through the ISD mechanism to the unit where the dutiable finished goods are manufactured. 5.4.19. Other Issues (a) Cenvat credit should be made available on steel and cement used in the buildings. (b) Presently unutilized credit of SAD is permitted to be transferred at the end of each quarter to other registered premises. It is requested that such a facility should be made applicable in respect of the entire unutilized cenvat credit. (c) Cenvat credit of service tax paid on GTA services for outbound transport should be allowed without any condition like freight being part of assessable value or place of removal etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) Consumables such as coal, fuel, oil, diesel etc. are directly used in the process of manufacturing and hence should be treated as inputs and credit of duty paid on these items should be permitted. (e) As per present rules if the payment is not made to the service provider within three months from the date of Invoice, credit taken, if any, needs to be reversed. The payment terms are decided by the service provider and service receiver and hence there should not be restriction on availment of credit even if payment is made after 90 days. For inputs or capital goods credit there is no such restriction and hence in order to have an uniformity in availing cenvat credit the restriction of payment should be removed. (f) An amendment has been made in Rule 2(l) substituting the words 'in relation to clearance of final products from the place of removal' to 'clearance of final products, up to the place of removal', with effect from 01-04-2008. The amendment providing for denial of the credit on and from 01-04-2008 is clearly against the principle of the CENVAT credit scheme which is the avoidance of the cascading effect of taxes. It is suggested that the amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be withdrawn and the benefit of Credit on outward transportation be extended. (g) As per Rule 6 (8) of Cenvat Credit Rules, if the foreign exchange realization is not received within 6 months for export of services, it will be treated as exempted service. Being so, Cenvat credit @ 6% of the value of service needs to be reversed. As the terms of payment are decided by the parties and one year time limit for bringing the foreign exchange is allowed as per FEMA, the rule 6(8) should be amended suitably to prescribe the time allowed as per FEMA. (h) The prices of SKO supplied to PDS and LPG supplied to domestic household customers continue to be regulated by the Government. The duty exemption for such supplies has been granted in the interest of Government policy in this regard. In other words the benefit of exemption does not accrue to the manufacturers. However, the manufactures are required to reverse the Cenvat Credit attributable to such supplies. But, the manufacturers are not compensated for the loss resulting from such reversals. It is accordingly requested that SKO supplied to PDS and LPG supplied to Domestic households should be excluded from the mischief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rule 6 of Cenvat Credit Rules, 2004, by including these goods in list of goods specified under Rule 6 (6) of the Cenvat Credit Rules, 2004. (i) Cenvat credit should be allowed on Input used in wheeling of power to other manufacturing unit within the same company / legal entity (j) Service Tax input credit should be made available on various services availed by the assessee in relation to a residential colony which is situated next or near to the plant area. A nexus exists between manufacturing facility and the residential colony in a continuous process industry. It is essential for the manufacturer to have its staff located near the plant to cope up with any type of emergency. (k) The erstwhile procedure of Customs endorsement of Bill of Entry copy for availment of CENVAT Credit by the end user unit has been dispensed with vide Customs Public Notice No. 16/2006 dated 22-03-2006. This is causing hardships to the manufacturers since they are unable to avail CENVAT Credit on the imported [free issue] material received by them from their customers. It is suggested that the procedure of Customs endorsement of the Bill of Entry EDI copy for avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lment of CENVAT Credit by the end user unit, be restored at the earliest by way of a suitable Customs Trade Notice to this effect. Or alternatively a provision should be made in the Bill of Entry format for indicating the details of the consignee (end user receiver) of the goods in addition to the details of the Importer as is being done in the case of Excise invoices where the Invoice is made on the buyer with the consignee indicated as the end user. (l) The courier agency imports the goods for various customers under the single bill of entry and thereafter provides the photocopy of the bill of entry to various customers. Department is currently denying the credit on the basis of the self certified copy of bill of entry. It is practically impossible for courier agency to provide original bill of entries to each of its customers. A provision may be made in the Cenvat Credit Rules to provide that the credit would be available on the basis of self certified copy of bill of entries issued by courier agencies to the respective customers. STRUCTURAL AND PROCEDURAL ISSUES Structural Changes 5.5.1. Independence of Adjudication Wing The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicating authority, namely, Asstt. Commissioner / Dy. Commissioner / Additional Commissioner / Commissioner / Superintendent (Adjudication) has to play a dual role - that of a tax collector as well as adjudicator of the disputes. There is always pressure of maximizing revenue since yearly targets for collection of duties are assigned to each such officer. Under the circumstances, when he is required to adjudicate customs or excise duty disputes, it is practically impossible for him to remain impartial and do justice to the assessee even in deserving cases. This results in show cause notice/demands getting confirmed even when the same are legally untenable as is evident from the statistics of appeals decided in favour of the Department or against it. Consequently the assessees are required to carry the matter in appeal thereby increasing litigation. It is suggested that the Adjudicating Wing should be separately established in each Commissionerate. The adjudicating officers should be disengaged from the duties of revenue collection. The Adjudicator Wing should not be working under the Commissioner. These officers could be placed under the Directorate of Legal Affairs or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other such Central Directorate. If this suggestion is implemented, it is felt that the adjudicating authorities will not have any revenue bias and shall pass orders with a judicious mind and as per the law laid down by various judicial authorities, thereby reducing needless litigation arising from high pitched assessments. 5.5.2. Improvement in Dispute Resolution Mechanism The present system of resolving disputes between the taxpayer and the department is unsatisfactory and requires to be overhauled. The existing system is marked by - (a) issue of show-cause notices on frivolous grounds (b) issue of protective demand notices following objections by Central Revenues Audit which remain unresolved for years till the objections are settled (c) delay in completing the adjudication process (d) lack of uniformity in assessment decisions taken for different units manufacturing the same commodity and even for different facilities of the same manufacturers (e) failure of the Committee system to prevent filing of appeals in undeserving cases thereby prolonging litigation. Once a show-cause notice has been issued even though on unreasonable an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d unsustainable grounds the process of adjudication has to be gone through entailing time and costs. The adjudication process itself is lengthy - issue of adjudication orders is delayed months after the personal hearing has been granted. On many occasions the officers get transferred without completing the adjudication requiring fresh hearings and increased costs. Judicial precedents are ignored and the demand notices are confirmed even when the law is well settled. The adjudication orders are not speaking orders and generally do not provide the reasons for ignoring a judicial decision except for recording that the facts of the case are different. The aforesaid factors severely impact the tax environment of a business. There is no clarity / finality on the tax liability of a business entity; the contingent liability keeps on adding disproportionately and the compliance burden keeps on increasing. It has a net dampening effect on the business environment. Following suggestions are submitted for consideration to reduce the hardships for the businesses:- (a) The department has successfully established an advanced system of automation covering customs, central excise a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd service tax assessments processing several thousand online transactions of import and export consignments per day apart from the excise and service tax returns of lakhs of assessees. It is absolutely necessary that all the processes involved in an adjudication are captured online and are accessible to the public at large. The data capture should start from the stage of issue of show-cause notice, the date on which a reply has been furnished by the assessee, the date of personal hearing, the date of issuing the adjudication order, the stages in the first appeal, second appeal etc. The grounds on the basis of which the show-cause notice has been issued should be briefly recorded in the system so that on the one hand senior supervisory officers can review whether the notice has been issued on bonafide grounds and on the other hand it can be used by other Assessing officers to review the practice of assessment in their jurisdiction. An important field of data capture should be the name of the officer designated to adjudicate that show-cause notice. In case the officer gets transferred, the system should capture the name of the new officer to whom the case has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigned along with the date of such assignment. Apart from enabling monitoring the progress of adjudication, such a system should also enable evaluation of the quality of orders passed by each officer since the system would record the outcome of appeal if any filed against the said order. Such a system would enable the department to assess the judiciousness of each adjudicating officer at any point of time in his career. In the long run it is expected that such an exercise would help improve the quality of decision making by the officers. (b) Administrative measures should be introduced to ensure that the adjudicating officer issues the orders within a reasonable time of the hearing having been completed. The automated system as proposed above would no doubt provide the necessary information regarding the cases pending for issue of orders after the hearings have been completed. In case an officer is transferred, while he may be relieved of his regular assignment, he may be retained for a reasonable period (one to two months) to finalize the orders for which personal hearings have been completed till the date of issue of the orders. He may be conferred the requisite legal au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority to complete this task. It is further suggested that a provision be made in the law that in case a show-cause notice is not adjudicated upon within a specified period of the date of issue of show-cause notice, the proceedings shall lapse as if the show-cause notice was never issued. Given the current pendency of adjudications, this period may initially be fixed at 3 years but be brought down to 1 year progressively. Thus, if a show-cause notice is not adjudicated upon within 1 year for reasons not attributable to the notice, the proceedings should be deemed to have never been initiated and consequential reliefs should follow. Such an extreme step is considered necessary since administrative measures taken so far have not yielded the desired results and the trade is put to unnecessary hardships for delays on the part of the adjudicating officers. It may be noted that even the income tax law has a sunset clause if the assessments for a particular year are not finalized within the prescribed time limit. (c) There is need for flow of information from the policy makers to the field and vice versa. Many a times the field officers issue demand notices because they have un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derstood a particular policy (exemption notification / rules/regulations etc.) in a different manner than what the policy makers intended. The instructions / circulars issued by the Ministry sometimes do not explain the full background of the policy changes made by the Government. It is suggested that the field officers should be encouraged to seek clarifications from the policy makers to have their doubts clarified. It will also enable policy makers to identify deficiencies if any in the policy or in the manner in which a particular notification / rule or regulation has been drafted for taking corrective action if any. The policy makers should not shy away from their responsibility to clarify matters to the field formations. The objective should be to disseminate information and explain the policy objectives in clear terms to prevent litigation ab-initio. It must also be realized that tax policy is a specialized field and the officers who have to frequently shuffle between various areas of work (customs, excise, service tax, enforcement, assessment etc.) cannot be expected to acquire expertise within the limited period they are assigned to a particular post. The policy wings of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ministry should be adequately staffed if so required to enable such a timely flow of information. It is felt that increased allocation of human and financial resources in this area of work would provide the desired results. Given the electronic means of communication at their disposal, timely flow of information and sharing of knowledge can prevent litigation to a large extent. (d) The department should repose an element of trust in its officers and not view every decision taken in favour of the assessee with suspicion. (e) T he practice of issuing protective demands following objections by the Central Revenues Audit needs to be reviewed. Once an objection has been received, the department should evaluate the objection and decide whether the objection is sustainable or not. Such evaluation should be completed within a prescribed time limit of say one month of the receipt of the Audit report. The question whether the CRA objection is sustainable or not should be examined at a pre-decided level say Commissioner or Chief Commissioner of Customs or Central Excise, as the case may be. In case instructions are to be sought from the Ministry, let it be so but the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision should be taken within one month. Electronic communication systems be made use of to expedite the decision making process. In case, the department agrees with the CRA, a show-cause notice be issued and adjudicated upon as soon as possible. If, however, the department does not agree with the Audit contention, no notice should be issued to the assessee. In such a case the department should convince the CRA about the correctness of the decision made by them. The practice of issuing a show-cause notice as soon as the Audit report is received, without examining the merits thereof, should be discontinued. It is suggested that these modalities be settled between the department and the CRA. It is felt that these measures apart from proper supervision by senior officers may result in reducing litigation and improving the Dispute Resolution Mechanism. 5.5.3. Expanding the Scope of Authority for Advance Rulings The Authority for Advance Rulings (Central Excise, Customs and Service Tax) was constituted with the objective of providing binding rulings to the foreign investors intending to set up joint ventures in India so that they are assured in advance of their i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndirect tax liability. After its inception, the scope of the Authority to entertain applications for issuing rulings has been enlarged and at present, apart from non-residents, the following categories of resident companies have been notified under the relevant provisions of Customs Act, 1962, Central Excise Act, 1944 and Finance Act, 1994, making them eligible for applying for advance rulings: a) Residents proposing to import goods from Singapore under the Comprehensive EconomicCooperation Agreement for seeking advance ruling on origin of goods under the Customs Act, 1962 b) Public Sector Companies in Customs, Central Excise as well Service Tax matters c ) Residents proposing to import goods under the project imports facility for seeking advance ruling under the Custom Act d) Public Limited Companies in the matter of Customs However, this still leaves out a large segment of the taxpayers from availing the benefit of obtaining a binding ruling on their indirect tax liability. It is therefore, felt that there is a strong case for revisiting the approach towards the scope of matters handled by the Authority. The facility of advance ruling is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered to be an important element in the taxpayer services and is generally made widely available. An effective advance ruling machinery contributes to reduction of disputes by eliminating them in the bud. It affords both the taxpayers as well as the tax administration the advantage of certainty in taxation and of lowering the cost of compliance. Although the institution of Authority for Advance Rulings was set up primarily by the desire to attract foreign investment, the time has come to introduce a complete level playing field between foreign and domestic businesses in the matter of a facility as important as advance ruling. There is also need to eliminate discrimination between public sector and private sector companies. Further, there appears to be no justifiable reason to exclude taxpayers which are not companies from jurisdiction of this authority. In fact a time has come when the facility of advance ruling should be made available universally to one and all. It is accordingly recommended that that all persons, whether individuals, proprietary or partnership firms, and public or private limited companies may be made eligible to seek advance rulings in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of Customs, Central Excise and Service Tax matters on equal footing. Another important issue has arisen in the context of advance rulings following the judgment of the Supreme Court in the case of Columbia Sportswear Company vs Director of Income Tax, Bangalore. In that case the Court, while dealing with a petition under Art. 136 of the Constitution, held that the Authority for Advance Rulings is a tribunal within the meaning of Articles 136 and 227 of the Constitution and, consequently, petitions against its rulings would lie to the High Courts. As a result of this ruling High Courts can now entertain petitions against rulings issued by this Authority. This is bound to prove counterproductive to the basic purpose for which the Authority was constituted, namely, to provide quick, efficacious and binding rulings to eligible applicants and to minimize litigation. With the opening of the doors of High Courts to the challenges against the Authority's rulings, matters will follow the usual dilatory course of normal litigation and will take much longer to attain finality. Ideally, therefore, the rulings of this Authority should be allowed to be questioned only in the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court. The legislation that created this Authority has not provided for a statutory appeal - obviously owing to the concern to avoid delays in matters attaining finality. However, with the judgment of the Supreme Court, a piquant situation has arisen and it is the absence of a statutory appeal that would contribute to delays in matters reaching finality. It is recommended that the Government should amend the legislation relating to this Authority to provide for an appeal against the Rulings of the Authority directly to the Supreme Court. This would avoid parties approaching the High Courts and the original purpose of setting up of the Authority for an expeditious decision to the taxpayers would be served. Further, currently the provision permits appointment of a retired Judge of the Supreme Court as the Chairperson of the authority. Limiting the appointment of Chairperson to a retired Judge of Supreme Court at times results in delay in constitution of the authority and consequent disposal of the applications. Hence, relevant provision may be amended to permit appoint of a retired Judge of High Court as well to address issues relating to delays in taking up a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd disposal of applications. 5.5.4. Introduction of Advance Pricing Mechanism in Customs Law in line with Transfer Pricing regulations of Direct Taxes Advance Ruling Mechanism facilitates ruling on principles to be adopted for valuation of imported goods in terms of the provisions of the Customs Act, 1962. However, very few applications on valuation till date have been dealt by the Authorities. With the opening up of the Indian economy, the number and volume of transactions of import and export between related entities has gone up substantially. The existing mechanism of examination of such transactions by the Special Valuation Branches (SVBs) in the Custom Houses is inadequate to determine the true price of the goods imported or exported. Apart from the considerable time taken to finalize the prices, there are also questions about the processes deployed for such determination. It is suggested that an Advance Pricing Agreement (APA) Mechanism on the lines of the one recently notified by the Ministry of Finance (CBDT) under Transfer Pricing Regulations may be considered. Alternatively, prices as agreed under the Transfer Pricing regulations of CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be adopted since those regulations also require determination of arm's length prices in the course of international transactions of goods and services between related persons. It may also be provided that the SVB of Custom Houses and Transfer Pricing Officers (TPO) of CBDT would accept the determination made by each other in respect of the transactions examined by them. 5.5.5. Extension of Large Taxpayer Unit (LTU) Scheme Government of India has been framing a number of schemes to simplify the tax laws in the country and make them taxpayer friendly. Amongst these several schemes and the measures, one of the most pioneering scheme is relating to Large Taxpayer Units. However, the above scheme is limited to only those units, whose registered office is at any of the places at Bangalore, Chennai, Delhi, Kolkata or Mumbai. Hence if any unit is fulfilling all other conditions, but its registered office is not located at the places as mentioned above, It can't apply for LTU facility. To simplify the procedures for all units especially multilocational units not having their registered office at the notified places, it is strongly suggested that the LTU facility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be made available to all units irrespective of the location of their registered office. The Department should also open additional LTU offices at other cities such as all the State Capitals etc. 5.5.6. Annual Audit of Service Providers by Chartered Accountants A new comprehensive service tax regime based on the concept of the Negative List has been introduced with effect from 1st July, 2012. This has resulted in several new assessees being brought under the tax net apart from broadening the scope of transactions that are now covered for the levy of service tax. It is suggested that the concept of annual audit by chartered accountants be introduced for specified assessees in lieu of an audit by the departmental officers. This suggestion is based on a similar audit being conducted by the chartered accountants for the purposes of income tax. This mechanism would reduce the burden on the administrative machinery of the department in conducting such audits by going to the assessees premises. The department would of course be scrutinizing the returns of the assessee and also have the authority to conduct any special audit of a particular assessee, if it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so desired. Common Procedural Issues 5.5.7. Rate of Interest for delayed payment of excise duty or service tax The rate of interest on delayed payment of excise duty has been revised with effect from 1st April 2011 to a uniform rate of 18% per annum. The rate of interest on delayed payment of taxes has been increased from erstwhile 13% per annum to 18% per annum. The rate of interest as has been prescribed for delayed payment of taxes is exorbitantly high as compared to the rate of interest which the exchequer would have earned if the same would had been deposited with the nationalized banks. Such high rate of interest is more penal in nature rather than being compensatory. Such high rate of interest is also detrimental to the overall industry as a whole and especially with regard to assessees' who have paid short tax or no tax under a bona fide belief. The rate of interest on delayed payment of taxes should be prescribed at 12% per annum for delayed payment of excise duty as well as service tax (as is the case for delayed payment of income tax). 5.5.8. Time limit for disposal of appeals by CESTAT At present Section 35C (2A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Central Excise Act,1944 specifies a recommendatory time limit of three years from the date on which such appeal is filed for hearing and disposing off the appeal. This leads to piling of huge number of cases at Tribunal level, which also blocks the Government revenue for the cases which are in its favour and increases the interest cost for the appellant. There has to be a statutory deadline for disposal of Appeals and not only recommendatory deadline as it exists at present. Once the dead line is statutorily fixed there would be pressure on the Appellate Authorities to dispose of the appeals within the statutory time limit. 5.5.9. New Benches of CESTAT at Hyderabad, Lucknow, Ranchi etc. There is no CESTAT bench near many big cities like Hyderabad, Lucknow, Ranchi, etc. which makes cost of defending demands prohibitive due to unaffordable fees at existing cities where the Benches are located and the cost of travel and stay. With decentralization, pendency at existing Benches and the cost of litigation will come down. It is suggested that the new Benches be opened at cities like Hyderabad, Lucknow, Ranchi, etc. 5.5.10. Expiry of Stay order if app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal is not disposed of within the period of 180 days Under the provisions of Section 35C of the Central Excise Act, 1944, stay granted by CESTAT for full or partial waiver of pre-deposit of duty demanded, penalty levied etc. shall automatically be vacated, if the appeal itself is not decided within 180 days from the date of stay order. As soon as the period of 180 days is over, the department is attempting to recover the duty, in spite of the fact that the assessee is not responsible for delay in decision of the appeal. This necessitates the appellant to make fresh application every six month till the disposal of appeal, thereby increasing time spent on unproductive work and cost. The above provisions are not equitable and are arbitrary. The limitation on validity of stay granted by CESTAT should be withdrawn in order to spare the applicant from this unnecessary hardship. 5.5.11. Issue of multiple notices on same issue for different periods It has been observed that field officers issue separate show-cause notices on the same issue by splitting up the period for which the short levy pertains. This is reportedly done to keep the value limits for whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the notice is issued within the competence of the Assistant / Deputy Commissioner to avoid having to put up the matter to the Commissioner. This however increases the administrative work and the costs for the assessee who has to file separate replies and appeals later on apart from paying higher fees for the advocates. It is suggested that the departmental officers should be instructed to issue a single show-cause notice for the same issue for the entire period. 5.5.12. Maintenance of scanned copies of documents in lieu of originals Large organizations opting for centralized registration have a considerable volume of invoices for raw materials, components and input services. As a result, it is practically not feasible to retain original invoices at the location at which centralized registration is taken. To ensure safety of these documents, significant processes towards storage and retrieval of original documents have been set up. Amendment should be made in the service tax and other laws prescribing that in the case of large assessees, furnishing of the scanned copies of the original invoices at the time of inspection or audit should be treated to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sufficient documentary evidence for the purpose of substantiating eligibility to avail and utilize Cenvat credit. Clarification may also prescribe a methodology on how the records of the scanned copied should be maintained and the checks which should be applied for the maintaining of this alternate mechanism of storing documentary evidence. 5.5.13. Merger of duties and cesses etc. Separate levy of 2% Education Cess (EC) and 1% Secondary Higher Education Cess (SHEC) should be abolished and merged into basic duties. These levies are causing innumerable complications in documentation, credit availment and accounting. To overcome such hardships, it is suggested that the rates of the main duty be rationalized to the extent of EC and SHEC and levy of these cesses separately be abolished. For example, instead of the present excise duty structure of BED 12% + EC 2% + SHEC 1% = Total 12.36% duty, it can be simplified as single Basic Excise Duty rate of 12.36%. With the level of automation achieved by the customs and central excise department, the allocation of revenue for the purposes for which the cesses were levied can be made at the backend by the automated sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tems. It is further suggested that these allocations need not be made transaction by transaction but can be made as a fixed percentage from the total excise or customs collections credited to the consolidated fund of India. This will result in a major simplification of the revenues collection process. 5.5.14. Streamlining of Instructions / Circulars by issue of Annual Master Circulars The Ministry of Finance issues several Circulars / Instructions each year for Customs, Excise, Service Tax etc. It is difficult at any given point of India to ascertain which of the circulars issued in the previous years are still valid or not. As a step towards improving taxpayers' services it is requested that a master circular be issued on 1st April of every year replacing individual circulars issued in the past. The Reserve Bank of India follows this practice for the last so many years and it makes compliance much easier. A master circular was attempted a few years ago in respect of service tax but it has not been updated. This exercise needs to be revived again not only for service tax but also for customs and central excise for the benefit of taxpayers. This will make assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s aware of the necessary procedural requirements Customs 5.5.15. Period of interest free warehousing of goods In terms of Section 61 of the Customs Act, 1962 interest is payable on the warehoused goods, if the goods are not cleared for home consumption within 3 months from the date of warehousing. The normal warehousing period under Section 61 is one year, hence charging interest on duty for the goods kept in the warehouse beyond 3 months, defeats the very purpose of one year validity. Liberalization of the interest free period will enable importer to pick up and store consignments when the international prices are favourable so that abrupt fluctuations on account of international prices, supplies constraint, currency fluctuations do not impact the operations and local sale price. It may also be pointed out that Free Trade Warehousing Zones (FTWZ)/SEZs offer similar facilities to trade and unlike bonded warehouse, FTWZ do not have any prescribed interest free warehousing period. The trade and industry prefer to store their imported goods in such FTWZs/SEZs. However, compared to FTWZ/SEZs, bonded warehouses offer greater locational flexibility and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereby give significant advantage from logistics perspective. It is therefore requested that warehoused goods may be allowed to be cleared from bonded warehouses at least up to 6 months period, without payment of interest on duty. 5.5.16. Refund of Extra Duty Deposit in case of provisional assessment Pending validation of value declared in case of related party imports, the imports are provisionally assessed and allowed clearance on payment of Extra Duty Deposit ('EDD') ranging from 1% to 5%. EDD can be claimed as refund on acceptance of the value declared by the authorities and finalization of assessment. However, claiming refund of EDD tends to be a challenge as authorities seek to apply the test of 'unjust enrichment' even to these cases. Since EDD is in the nature of a deposit that is collected separately by the authorities, its refund should not be governed by the provision relating to refund of Customs duty. The refund should be allowed automatically in cases where value declared is accepted by the authorities and Bills of Entry are finally assessed. It is accordingly recommended that legal provisions may be amended appropriately to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the test of unjust enrichment shall not be applied in cases of refund of extra duty deposits. 5.5.17. Finalization of provisional assessments within prescribed time lines Pending validation of value declared in case of related party imports by the Special Valuation Branch (SVB) of the Customs House, the imports are provisionally assessed. Normally the validation process and issuance of a formal order takes minimum of 3-6 months. The order issued by the SVB accepting the prices declared by the importer needs to be reviewed by the Review Cell of Customs for issuance of formal acceptance of the order. This acceptance needs to be furnished to the Customs authorities at the concerned ports for commencing the process of finalization of assessment. Completion of the above formalities takes another 3-4 weeks. However, even covering the above milestones, being a manual process, the assessment takes minimum of 6 months to 1 year including completion of review by Audit Cell. Hence, considerable time is taken before the importer can seek finalization of Bills of Entry, obtain cancellation of PD Bond and consequential refund. As a measure of trade fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilitation it is suggested that an amendment may be made in the regulations to provide for completion of the whole process of finalization of assessments within a specified period. (Internal timelines may be prescribed for passing of the SVB order, review by the Review and Audit departments etc.). In the event of failure to complete the process no further extra duty deposits should be charged and the duty deposits already paid should be refunded. In view of the high degree of automation achieved by the customs department it should not be a difficult proposition to implement. 5.5.18. Bank Guarantees to be returned if the assessee wins first appeal The Customs department asks for Bank guarantees for registration of contract, fulfillment of export obligation, provisional release of goods etc. However in spite of the first appeal being decided in favour of assessee the Bank Guarantees are not released quoting the reason that the department has filed an appeal which takes years as the department may file appeal again till the matter the decided by the Supreme Court. It is requested that the procedure may be set out to release the Bank Guarantees immediately if the first ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is decided in favour of the assessee if he is a manufacturer. As the industry is going through a very critical phase release of bank guarantees will help the manufacturer to manage cash flow efficiently. 5.5.19. Refund of excess Customs duty paid in case of amendment to Bill of Entry to rectify clerical mistakes In terms of Section 149 of the Customs Act, 1962, a Bill of Entry is permitted to be amended/ modified even after goods have been cleared for home consumption on the basis of documentary evidence which was in existence at the time the goods were cleared. However, any consequent refund arising out of such amendment e.g. in case of incorrect adoption of invoice value, exchange rate, etc. is denied by the authorities on the ground that the assessment has attained finality as same was not challenged in terms of Circular No 24/2004-Cus dated 18 March 2004 and Hon'ble Supreme Court Judgment in case of Priya Blue Industries Limited Vs Commissioner of Customs (Preventive) 2004 (172) E.L.T. 145 (S.C.) Amendment may be considered in the laws to allow refund in case of amendments permitted under Section 149 without the requirement to challenge the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment. 5.5.20. Import of Commercial Samples / Prototypes / Critical Spare Parts as Baggage R D Units need to provide quick turn around on software testing / validation on certain samples / prototypes. Further, sometimes spare parts essential for a running plant are required to be imported on an emergency basis as a baggage item of the engineers assigned for the maintenance / repair of the plant / machinery. It is requested that the procedure for allowing commercial samples / prototypes / spare parts for critical business activities as items of baggage should be simplified and well advertised. 5.5.21. Confirmation of Proof of Export In order to avail duty benefits arising out of exports made by an assessee, voluminous documents have to be submitted by the assessee to the Central Excise Department. The requirement of submission of documents in physical form leads to delays in processing claims and is prone to clerical errors. Considering the fact that in today's information age, where the Department itself is moving rapidly towards electronic filing of returns and records it is recommended that the proof of export confirmation can be automated between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Customs Department and the Central Excise Department and the burden on the assessee - in terms of submission of voluminous documents to the Central Excise Department - can be removed. 5.5.22. Implementation of the Report of Indian Institute of Foreign Trade on Trade Facilitation The Centre for WTO Studies at the Indian Institute of Foreign Trade had commissioned a study to carry out Trade Facilitation Gap Analysis for Border Clearance Procedures in India i.e. to examine the gap between the steps taken by the department on its own for trade facilitation and the continuing bottlenecks, if any. The Study was supported by Ministry of Commerce and was carried out in close cooperation with the Central Board of Excise and Customs. The Study has identified areas where constraints need to be removed to ensure smooth flow of trade. The Study has also touched upon certain areas where exporters and importers bear unnecessary costs which erode their competitiveness in the international market. The recommendations and suggestions made in the Study would help expediting the process of cargo clearance and reducing the transaction time and cost of clearance of import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / export and transit cargo, both at the sea ports and at the airports. The copies of the Study have already been submitted to the Ministry of Finance. FICCI had organized a seminar earlier this year on the draft of this Study which elicited valuable inputs, which have been incorporated in the Study. It is requested that the recommendations and the suggestions made in the study be considered for examination by the Government. Central Excise 5.5.23. Demand of interest for differential Excise Duty paid due to price increase subsequent to removal of goods The Supreme Court decision in CCE Vs. SKF India Ltd. (2009 (239) ELT 385), wherein the Court has held that the interest is payable on differential duty payable because of revision of prices subsequent to removal of goods. Demand of interest is not justified as at the time of removal there was no short payment or non-payment and differential duty was not determined by the CE Department but the same was paid by the manufacturers on their own. Therefore, keeping in view the aforesaid practice of industry, it would affect the manufacturers if there is a levy of interest on the duty payable on the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplementary invoices raised due to revision of price subsequent to the removal of goods. Further, the aforesaid interest so paid on supplementary invoice will not be eligible for CENVAT Credit and hence would add the cost of the product It is suggested that an explanation to Section 11 AB of the Central Excise Act 1944 may be added to the effect that no interest would be payable on account of differential duty paid because of any price revision subsequent to the removal of goods 5.5.24. Availability of Credit on Bill of Entry It has been reported that the Department is disallowing the credit availability on the basis of Bill of Entry despite the credit chain being established from the point of importation to the point of credit. It has been learnt that the Hon'ble High Court and Supreme Court have held that the credit is allowed on the basis of Bill of Entry even if Bill of Entry is not in the name of the person who is availing the credit. It is pertinent to mention here that the rule of endorsement on Bill of Entry has also been omitted. It is suggested that when the chain from point of importation to the point of credit is established, the credit on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of Bill of Entry should be allowed. 5.5.25. Clearance of goods for captive consumption As per Rule 8 of the Cenvat Excise Rules, the goods for captive consumption are to be cleared on cost of production + 10% profit margin. The computation of cost of production is based on the actual cost sheet which is prepared at the year end and accordingly the clearances have to be made on provisional basis on estimated cost of production during the year. The cost normally varies from month to month in view of changes in raw material / packing material cost, cost of various consumables like diesel, electricity, etc.etc. This variation in cost could be upward or downward depending on the marketing conditions of the various inputs. It may be appreciated that in case the estimated cost of production in any month increases, the assessee has to pay differential duty for the previous period with interest and start paying duty on revised estimated cost of production in future. If at a later date due to reduction of cost of raw/packing materials, the cost of production goes down, there is no provision for adjustment of excise duty paid in the past especially where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goods manufactured for captive consumption are sent to excise exempted areas like Himachal, Northeast etc. In such cases the excess excise duty paid in the past becomes an additional cost as no credit for the same is available at the other site of the manufacturer. In order to simplify the process the assessee may be permitted to clear the goods for captive consumption on provisional basis based on the actual cost sheet of the last year and any adjustment for difference in actual cost of production at the yearend vis a vis the rates at which the goods were cleared during the year should be allowed to be adjusted within 3 months of the close of the year. In case the actual cost is more than the cost at which the goods are cleared provisionally during the year the assessee may be permitted to pay the differential duty within 3 months at the close of the year without any interest and if the duty is not paid within 3 months, the assessee should be asked to pay interest from the due date of payment of excise duty of each month. In cases where actual cost at year end is less than the rate at which the duty was paid during the year, and the assessee has not claimed the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redit of such duty as the consignee was in excise exempt area, the assessee may be permitted to claim refund based on the certificate obtained from the consignee that no credit for the duty was availed by them. This certificate may also be required to be authenticated by the excise authorities of the consignee. This process will reduce the complexity of change of cost of production on monthly basis and will also ensure that the proper duty is paid to the department and hence will not lead to any loss of revenue to the department. We may add that this process suggested by the industry is somewhat similar to the present process of cenvat credit rules 6(3A). 5.5.26. Valuation of Goods manufactured by job worker for captive consumption by the manufacturer Presently there is no specific valuation rule for clearance of goods manufactured by job worker which are used by the manufacturer for captive consumption. Normally such goods manufactured by job worker for captive consumption of the manufacturer are cleared based on cost of raw material + packing material+ other inputs supplied by the principal + the conversion charges paid by the manufacturer to job worker. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onversion charges included in the cost also includes the profit margin of the job worker. The basis of computation of assessable value on cost of material + conversion charges is based on the Supreme Court's decision in the case of Ujjagar Prints. Recently certain Commissionerates have objected to this basis of clearance and raised show cause notices stating that Rule 8 should be applied even in such kind of situations and accordingly, the Job-Worker should pay the excise duty on the assessable value arrived on the basis of cost of raw material + packing material+ other inputs supplied by the principal + the conversion charges paid by the manufacturer to job worker + 10% margin. This basis of calculation results in unnecessary addition of 10% towards profit margin as the profit margin of the said job worker who is manufacturer of this goods already stands included in the conversion charges. Accordingly it is suggested that either a clarification may be issued for valuation of goods cleared by job worker for captive consumption clarifying that the value should be cost of goods + conversion charges which includes profit margin of the job worker or a specific Rule may be inserted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the valuation Rules for such cases. This will avoid unnecessary hardship to the assessee as well as this will also reduce possible litigations on this account. 5.5.27. Export of Excisable Goods For removal of goods from the factory for exports the manufacturer exporters are required to file one application for removal form (ARE-1) each day. When there are bulk orders and the cargo is moved from the factory to the premises of the Container Freight Station (CFS) over a period of time (i.e., rather than on a single day) multiple ARE-1 are required to be filed for export to be made to a single customer. It is recommended that: i. Large manufacturer exporters be permitted to raise one single ARE-1 for all the clearances made (i.e., for the aggregate quantity of clearances made over say a week) for export of cargo to a single customer. This would reduce the number of ARE-1s being raised for clearances from the factory for a single customer order. ii. The process of submission of proof of exports should get simplified in view of the fact that the process of obtaining endorsements on the ARE-1s post the exports is a highly time consuming process. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The data relating to proof of exports should automatically flow between the customs and central excise department without the need for the exporters to get involved in the process. 5.5.28. End Use Certificate for import of waste paper As per Customs Notification no.21/2002 as amended from time to time, provides for import of waste paper at Nil rate of customs duty, provided the importer furnishes an End Use Certificate (EUC) from the jurisdictional excise authorities. It is recommended that furnishing of end-use certificates should be dispensed with for manufacturer importers as the process of obtaining EUCs is highly time consuming process and results in higher transaction costs. The private records maintained by manufacturers - which are relied upon by Central Excise Audit also - should be prescribed as appropriate documentation for verification of end use of imported waste paper. 5.5.29. Clarificatory amendment to Rule 8 (3A) of the Central Excise Rules Rule 8 of the Central Excise Rules 2002 permits the facility of payment of excise duty on a monthly basis. Sub rule (3A) of the rule seeks to deny the facility if there is default in payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the duty.. This sub-rule is being invoked by the field formations even in cases of inadvertent errors in duty calculation, which cannot be equated with default as there is no intention to willfully default in payment of duty. Obviously, cases of inadvertent clerical errors cannot be construed as a default in payment of duty and such errors do not deserve harsh punishment. It is requested that the rule 8 (3A) of Central Excise Rules 2002 may be amended by substituting the words willful default in place of the word default and inserting an explanation - For the purpose of this rule, inadvertent clerical errors shall not be construed as a default . 5.5.30. Central Excise valuation - impact of the judgment of the Supreme Court in Fiat case The Hon'ble Supreme Court in a recent decision in the case of CCE, Mumbai vs. Fiat India (P) Ltd [AIT-2012-354-SC] has held that selling products for a long period of time at prices below the cost of production cannot be considered as ordinary sale under Section 4 of the Central Excise Act as it existed prior to 1.7.2000. It has also been held that under new Section 4 (i.e. post 1.7.2000), such sale of goods below the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production to benchmark with the price of the competitors will violate the condition of price being the sole consideration for sale . In other words, it has been held that 'intention' of the seller can determine as to whether sale price should be acceptable for the purpose of levy of excise duty, even if there is no additional consideration flowing from the buyer. Till the pronouncement of the above judgment, the understanding prevailing in the Government industry was that unless there is a quantifiable additional consideration flowing from the buyer to seller, the sale price shall be accepted as the transaction value at which the goods are sold in ordinary course. The decision is likely to have significant impact on industry. The manufacturers across the globe, when selling their merchandize fix a price in the market based on several factors and alter the same periodically to exist in the market. In many cases, the manufacturers may choose to sell the goods below the cost of production for various reasons. For example:- The manufacturers may choose a strategy to sell one product at a loss and make up the losses from the sales of other items. The ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturers may offer special discounts to penetrate the market. There can be sudden increase in the raw material prices or the cost of labour, due to totally external factors. However, the manufacturers may be forced to sell the goods below the cost of production because of their inability to pass on the extra cost to their buyers. There are several capital intensive industries like Oil Refineries, Fertilizer plants, Tyre Companies, Manufactures of Turbines, heavy boilers, etc. and these industries typically have long gestation period. During this time, the products will be sold below the cost after taking into account the high depreciation and interest on the capital goods. The judgment of the Hon'ble Supreme Court has unsettled the valuation norms under Section 4 of the Act. Implemented in letter and spirit, the law as interpreted by the Hon'ble Supreme Court would require each manufacturer to declare its cost of manufacture so that assessing officers can verify whether the goods are being sold at below the cost price. The judgment negates the principle of transaction cost and would result in subjectivity in assessments and consequential uncertainty o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the tax liability. It is requested that Section 4 of the Central Excise Act may be amended to clarify the true meaning of the term transaction value . It may specifically be provided that any factor taken into account by the manufacturer while fixing the transaction value but which does not result in any flow back directly or indirectly to the manufacturer shall be deemed to have not influenced the price between the manufacturer and the buyer. It is further requested that the amendment may be given retrospective effect in order not to disrupt the past assessments. GOODS AND SERVICES TAX 5.6.1. Introduction of Goods and Services Tax The Government had a target of introducing a nation-wide GST enactment originally from 1st April, 2011. The Government has initiated several measures in this direction but the timeframe for introduction of a comprehensive GST remains unclear. GST is going to be a landmark reform in the field of indirect taxation and would have a beneficial impact on the economy of the country. Government of India should reach out to State Governments and come out with a clear plan of implementation and timing at the earliest. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is requested that the draft legislative framework should be placed in the public domain so that industry can study the impact and gear up for a smooth transition to the new system of taxation. FICCI would like to reiterate that all the taxes levied by the Centre and the States on goods and services must be subsumed in the proposed GST including stamp duty, purchase tax, APMC fees, royalties, property tax, tax on motor vehicles, tax on goods and passengers, duty on electricity, entry tax, octroi, etc. We would also urge that the GST should be extended to all sectors of the economy without exception i.e. it must include petroleum and natural gas, real estate, alcohol and power generation sectors. CENTRAL SALES TAX 5.7.1. Natural Gas, Naphtha and LNG to be 'declared goods' under CST Act Currently State Governments charge varying VAT rates on Natural Gas, Naphtha and LNG (including regasified LNG i.e. R-LNG) ranging between15% to 18%. To bring down the cost of these inputs for manufacturing, natural gas and naphtha may be declared as Goods of Special Importance in Inter State Trade or Commerce under Section 14 of the Central Sales Tax Act, 1956. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change will reduce the VAT impact on gas purchased in certain States where the rates are higher. Such a move would also benefit the Public Sector Oil Companies. It is requested that natural gas and naphtha be declared as declared goods under the CST Act. It is further requested that Aviation Turbine Fuel (ATF) may also be classified at Declared goods with a uniform rate of sales tax of 4% all over the country. This will facilitate emergence of Indian airports as hubs and stabilize ATF prices across the country resulting in lower tariffs for the passengers. 5.7.2. Rate of Central Sales Tax Central Sales Tax rate of 2 per cent has continued to remain the same since 2008, though the rate was expected to be reduced to 1 per cent with effect from 1st April, 2009 and to Nil from 1.4.2010 on implementation of Goods and Services Tax. Now that the introduction of GST is on the anvil and the Finance Minister has recently stated that bill will be introduced before the financial year ends, it is time to gradually phase out CST. It is suggested that the CST rate be at least reduced to 1% in the forthcoming Budget. 5.7.3. Refund of CST for Deemed Exports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exporters who use copper as an input would have been an important market segment for the copper industry, but for the disadvantage faced on account of the Central Sales Tax (CST, currently at 2%). Such exporters find it more attractive to import copper vis- -vis buying from the domestic copper producers - since they have to absorb the burden of CST in case of the latter. Consequently, this important market segment has completely dried up for the Indian copper industry. To remove the above disadvantage to us vis- -vis imports, it is requested to allow refund of CST for exporters (i.e. our customers in the deemed export segment). 5.7.4. Exemption from Central Sales Tax on goods supplied to E P Companies for petroleum operation The import of goods required for petroleum operation is exempt from customs duties. Furthermore, the import of goods into India is also not subject to Value Added Tax / Central Sales Taxes. However, if similar goods are procured indigenously from the local vendor, although the excise duty is exempt on supply of such goods to E P Companies for petroleum operation, the supplier of goods however is required to charge either Value Add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Tax or Central Sales Tax based on the nature of transaction. The applicable rate of VAT / CST depends upon the nature of goods and the same could vary from 4% to 13.5% depending upon the nature of goods. This situation creates disparity for the Indian vendor as he is required to charge VAT at applicable rate whereas the same goods sourced from the foreign parties is not subject to any such taxes. This anomaly makes Indian vendor uncompetitive vis- -vis the foreign players. Localisation of petroleum operations would help in combating the foreign exchange deficit. In other words, it reduces the imports in India thus making Indian rupee stronger. While it is the jurisdiction of each State to classify and levy tax on petroleum products, the Centre can play its role by granting exemption under the CST regime to the various goods required for undertaking the petroleum operation. Considering the fact that levy of CST on the sale of goods by indigenous supplier would render the local industry uncompetitive and incentivises the foreign player, Government may issue a notification granting exemption to goods required for petroleum operations, under Central Sales tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law. Alternatively, the benefits may be provided on similar lines as available to supplies to SEZ. 5.7.5. Exemption for STP/EHTP Units On interstate purchases of goods, the Software Technology Park/Electronic Hardware Technology Park (STP/EHTP) units are required to pay central sales tax on all such procurements made from other states. Further CST paid adds to cost of goods/services exported by such units as no input credit is allowed to the units for such CST paid. There is CST reimbursement scheme for STP units however it is not efficient as there is insufficient allocation of funds for such reimbursements, the STP authorities asks for lot of documentation and the refund claims kept pending for two- three years and thereafter either the claims are rejected or partially awarded. Similar to the CST exemption provided to SEZ units the STP/EHTP units should be allowed to avail CST exemption against form I on interstate purchases made. 5.7.6. Extension of sale in transit facility to SEZ transactions As per the SEZ Act read with Section 8(6) of the CST Act and Rule 12(11) of the CST (Registration and Turnover) Rules, the interstate sale made by a DTA t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a SEZ unit is exempt from tax provided Form I is issued by the SEZ unit/developer. For the issuance of Form I, the SEZ unit/developer has to obtain registration under the CST Act. As per the above provision the SEZ unit / Developer can issue only Form I for their direct purchases made from DTA Units, However DTA units are unable to effect 6(2) sale transaction to SEZ units /Developer as only Form C is prescribed under section 6(2) of the CST Act for the purpose of claiming exemption from levy of tax on subsequent sales. In addition to Form C, Form I should also be prescribed under CST Act to enable SEZ units / Developer procuring goods by way of sale in transit / 6(2) sale transactions. 5.7.7. Inclusion of goods required for Natural Gas pipeline network in the category of goods eligible for concessional CST against form C Under Section 8(1)(b) read with section 8(3) and 8(4) of CST Act, the concessional VAT of 2% is applicable on inter-state sale of goods used for certain specified purposes against issuance of form C. The goods used for telecommunication network were specified for the purpose w.e.f 13.05.2002. Laying of cross country pipelines includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng connecting gas source to ultimate consumers is a priority in the course of developing National Gas Grid announced in the last budget. As the goods required for use in Natural Gas pipeline network are still not covered, Natural gas transmission companies like GAIL is not able to issue form C for purchase of goods for pipeline network at concessional tax of 2%. Since PNGRB regulated tariff is applicable to the pipeline network being expanded by GAIL across the country, it will be in the interest of the consumers in particular, if the capital cost of the pipeline is reduced. Eligibility of pipeline transmission projects for inter-state procurement of goods against form C will enable reduction in project cost which will ultimately benefit the consumers. Considering the importance of Natural Gas transmission pipeline network for building a national gas grid, it is suggested that the goods required for Natural Gas pipeline network should be included in eligible category of goods under section 8(1)(b) read with section 8(3) of CST Act. 5.7.8. Sale of Goods beyond 12 nautical miles For oil and Gas exploration and exploitation, facilities are required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established in the EEZ and Continental shelf area. These facilities are located much beyond territorial limits of India i.e. much beyond 12 nautical miles from the shoreline. Sales tax authorities in many states are trying to levy CST on sale of goods effected beyond 12 nautical miles treating this type of sale as 'Inter-State Sale , which is resulting in litigation and confusion. The legal position is that such sale cannot be exigible for CST as CST Act has not been extended to EEZ and CS area. Ministry of Finance should issue a clarification that CST cannot be levied on sale beyond 12 nautical miles until CST Act is suitably amended. Government, thereafter, should amend the CST Act for levy of tax, with prospective effect. 5.7.9. Restriction on free trade in Agri-commodities Certain statutory provisions in the Central / State Sales Tax legislation which restrict the applicability of exemption from sales tax for sale/purchase in the course of Export need to be amended appropriately as these provisions hinder free trade in agri-commodities. Section-5 of the Central Sales Tax Act, 1956 covers, inter alia, some aspects of taxes/exemptions applicable to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade conducted in the course of export. Three of the provisions therein affect the free trade in the course of exports. Firstly, it is mandatory that the purchases must take place after procuring the Export Order to qualify the transaction for exemption from Sales Tax. In items like agri commodities, where supplies are seasonal and the demand is spread over the year, it is important that an exporter procures the exportable commodities in advance (during the season) even if the demand does not exist in the international market at that point; even if it does, prices may not be right. Exporters either sell in distress or lose the business opportunity to remain within the scope of this provision. Sec 5(3) of CST Act to be amended such that any sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of India is also deemed to be in course of such export not withstanding whether such sale or purchase took place against an existing Export Order Secondly, the exemption is applicable to the penultimate sale prior to the actual export sale alone. Traditionally, in India the existing commodity trade channels and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e highly fragmented structure of Indian farms has fostered a chain of traders and agents between a farmer and the exporter. The aforesaid provisions of CST severely restrict trading liquidity because it is not always possible that an exporter directly procures from farmers. Thus, the only alternative is to pay taxes at all points until the penultimate leg, making the price uncompetitive in the process. Lastly, the procedure to avail exemption from CST necessitates a one-to-one linkage of various purchases and sales. This would mean complication in blending of goods of various qualities to produce the exportable product of a desired specification, when multiple purchases (made at different points of time) are used to deliver multiple sales (compounded by the first provision explained above). An exporter has to issue Form H under the CST Act in support of his claim of tax exemption. It is recommended that Form H may be permitted to be issued and the exemption be availed by the buyers at all transaction points as long as the goods are eventually exported (evidenced by the Bills of Lading as required under the current regulations) irrespective of the timing of buy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing (meaning that an exporter can also buy goods before entering into a sales contract) without necessarily linking purchases and sales one-to-one (only the aggregate volumes may be considered at the time of assessment). 5.7.10. C Forms Though Airport sector is an important infrastructure sector like telecom, electricity generation and distribution, and mining, it is not included as one of the eligible categories which can issue concessional Form 'C' because of which purchase of goods for Airport development attracts higher Sales Tax resulting in increased cost of project, which is not in public interest as any increase in cost of project ultimately translates into higher passenger fees. In view of this, Airport sector should also be allowed to issue C Form and to this extent Section 8(3)(b) of Central Sales Tax Act, 1956 may be suitably amended. Goods for construction activity are not eligible for C Forms which increases the cost of construction. Goods for construction industry should be made eligible for lower rate of CST of 2%. At present, 'C' forms are submitted to assessing authority within three months after the end of the relevant quarter to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 'C' form relate (Rule 12(7) of CST Rule,1957). The time limit for submitting 'C' forms should be extended upto assessment in view of difficulties in collection from various dealers. - News - Press release - PIB Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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