I-T DEPT DOUBTING AUTHENTICITY OF SWISS BANK A/C HOLDERS LIST [21 November 2011]

After serving notices and conducting raids, the income-tax department is having second thoughts on the authenticity of the list of Swiss bank account holders it obtained from the French government three months ago. Tax authorities, investigating the 700 unreported account holders with HSBC Geneva, are planning to go back to the French government to verify the list which was complied out of stolen data. It will seek the French Government's permission for approaching the Swiss government. Tax officials claim that they are not in a position to approach the Swiss authorities directly due to a provision in the treaty between India and France that stipulates information exchanged would not be shared with any agency other than the tax department. The I-T authorities are in an unenvious position with most of the individuals in the list denying having any account with HSBC Geneva. So, it is desperate to cross-check the information with Swiss authorities. Its immediate plan is to obtain the French governments approval as soon as possible, for dealing with the Swiss government directly. Most of those named in the list are hoping that the income-tax authorities will not be able to prove its point in any court of law as the list was based on data stolen in 2008 by a former HSBC employee. The French government had procured the data from an ex-employee of HSBC by offering him a new identity and asylum. The evidential value of data stolen from a foreign bank is almost nil unless the agency that produces it before the court has supporting evidence such as certification by the Swiss authorities or the bank itself. Even if the French authorities allow the Indian tax department to approach the Swiss authorities directly, the department is not certain whether it can persuade the Swiss banks to cooperate. More so, because of the revised Indo -Swiss tax treaty that will come into effect from April 1, 2012. Under the revised treaty, Swiss banks have to share information about accounts that are in operation. So far 17 individuals (out of the 700) have disclosed their account details with the Mumbai tax office. This was possible through revised returns, an exercise allowed under the Income-Tax Act if the taxpayer thinks there was a mistake in the original return. However, returns are allowed to be revised within one year of filing the original return. The amount disclosed ranges from.Rs.50-300 crore. It is also learnt that there is a disclosure of.Rs.300 crore at the Chennai income-tax office by a member of a leading business family who was the beneficiary of a trust set up by the patriarch of the family. - www.economictimes.indiatimes.com

I-T TO GET.RS.80 CRORE TAX ON STASHED BLACK MONEY [21 November 2011]

Over a score of black money hoarders in the capital, most of them businessmen, will pay Rs.80 crore as taxes to the income tax department on undisclosed income of about.Rs.500 crore following searches made across the city on the basis of a classified list of account holders in HSBC bank, Geneva. Sleuths of the enforcement and investigation wings of the I-T department carried out searches in the last two months on 22 individuals based in Delhi who have admitted to holding accounts and stashing funds in the foreign bank. According to initial estimates, the undisclosed income of these accounts could be around.Rs.500 crore. The information was extracted on the basis of details of over 700 HSBC accounts received from the French government. - www.economictimes.indiatimes.com

AWAITING PARLIAMENTARY PANEL REPORT ON DTC BILL: FINANCE MINISTRY [23 November 2011]

With the deadline for roll-out of the proposed Direct Taxes Code (DTC) approaching, the Finance Ministry today said it is awaiting the report of a parliamentary panel on the Bill for the new tax regime. The Direct Taxes Code (DTC), which seeks to replace the Income Tax Act of 1961, is scheduled to come into force from April 1, 2012. "If it does so (the Standing Committee submits its report before the end of the Winter Session), then the timelines are in order. Then we can have it in the Budget Session," Finance Secretary R S Gujral told reporters on the sidelines of the Head of National Drug Law Enforcement Agencies ( HONLEA) meet here. The DTC is an ambitious tax reform that will replace the country's existing, half-century-old direct tax laws. Gujral, however, said, "If the report of the Standing Committee is delayed, then the roll-out date might missed. But if it gets delayed, then obviously it is beyond our control." In the DTC Bill that was introduced in Parliament last year, the annual I-T exemption limit was proposed at Rs 2 lakh, compared to Rs 1.6 lakh at present. Under the Bill, the government seeks to widen tax slabs to levy 10 per cent tax on income between Rs 2 lakh and Rs 5 lakh, 20 per cent on Rs 5-10 lakh and 30 per cent above Rs 10 lakh, among other things. - www.business-standard.com

TAX PACTS NOT BLOCKING BLACK MONEY OFFENDERS, SAYS GOVT [23 November 2011]

As the government draws flak for allegedly not taking forward black money cases under the garb of bilateral treaty clauses, the finance ministry today made it clear that these tax agreements do not come in the way of legal prosecutions against offenders. However, till the time proceedings are initiated, the ministry cannot share information with the Enforcement Directorate (ED), Finance Secretary R S Gujral said today. "It is not correct. It is not that we cannot go for prosecution because we have committed something," he told reporters. To a query, he said the government had told a parliamentary panel that it could not ask for prosecution at this stage. He, however, admitted that there are secrecy clauses in the Double Taxation Avoidance Agreements (DTAAs), to which the government is committed. "The commitment is regarding secrecy. Secrecy has to be maintained," the top official said. However, as and when prosecution proceedings start, information comes into the public domain, he added. Gujral also clarified that the ED could take action against alleged offenders once information becomes public - but not before that. "Before information is in the public domain, it cannot be shared even with ED." The statement comes amid reports in certain quarters that the French and German governments had told India not to share details of accounts and individuals with investigating agencies. Treaty clauses, which allow India to get information on accounts held in a bank in Germany and another in Switzerland, provide that tax officials cannot share them with agencies responsible for criminal investigation without clearance by source countries. The government had recently told Parliament's standing committee on finance that it had requested Germany to share information with ED. The request is still under Germany's consideration, the government had said, according to officials. The government has already completed a probe in the case of 18 individuals holding accounts with LGT Bank in Liechtenstein. However, it is not revealing names, saying that once proceedings start, names will automatically come in the public domain. Before, that secrecy clauses comes into force. Recently, India had received information from France and Germany on secret accounts of some prominent people. The Directorate of Criminal Investigation has started sending notices to such people. But, the government maintained that it would reveal their names only in the court. There were also rumours that some members of Parliament have been summoned for allegedly keeping secret accounts in HSBC, Geneva. The finance ministry later denied this. As per the India's treaty with the Swiss government, names cannot be revealed before the prosecution. Under attack from various quarters for not doing enough to crack down on tax havens, the government has amended DTAA with 81 countries. Specific requests in 333 cases have been made by Indian authorities for obtaining information from foreign jurisdictions. Oer 9,900 pieces of information obtained regarding suspicious transactions by Indian citizens from several countries have been obtained which are now under different stages of processing and investigation. Under the DTAA with France, India has received some information regarding Indians having bank accounts. In 69 cases, the taxpayers have admitted to unaccounted income of Rs 397.17 crore. Taxes of Rs 30.07 crore have also been paid. As for the direct taxes code, the finance secretary said its rollout from the scheduled date depends on tabling of report by Parliament's standing committee on Finance. "If it gets delayed (beyond winter session), then obviously it's beyond the control of the government." The standing committee members have already expressed inability to submit the report in the ongoing winter session. On recapitalisation of banks that is a panel within the ministry, he said, the issue was not of just providing funds. "The committee examined various aspect of the requirement and the ways to meet the capitalisation needs of the banks based upon the Basel III." - www.business-standard.com

INCOME TAX DEPARTMENT DOUBTING AUTHENTICITY OF SWISS BANK ACCOUNT HOLDERS LIST [23 November 2011]

After serving notices and conducting raids, the income-tax department is having second thoughts on the authenticity of the list of Swiss bank account holders it obtained from the French government three months ago. Tax authorities, investigating the 700 unreported account holders with HSBC Geneva, are planning to go back to the French government to verify the list which was complied out of stolen data. It will seek the French Government's permission for approaching the Swiss government. Tax officials claim that they are not in a position to approach the Swiss authorities directly due to a provision in the treaty between India and France that stipulates information exchanged would not be shared with any agency other than the tax department. The I-T authorities are in an unenvious position with most of the individuals in the list denying having any account with HSBC Geneva. So, it is desperate to cross-check the information with Swiss authorities. Its immediate plan is to obtain the French government's approval as soon as possible, for dealing with the Swiss government directly. Most of those named in the list are hoping that the income-tax authorities will not be able to prove its point in any court of law as the list was based on data stolen in 2008 by a former HSBC employee. The French government had procured the data from an ex-employee of HSBC by offering him a new identity and asylum. The evidential value of data stolen from a foreign bank is almost nil unless the agency that produces it before the court has supporting evidence such as certification by the Swiss authorities or the bank itself. Even if the French authorities allow the Indian tax department to approach the Swiss authorities directly, the department is not certain whether it can persuade the Swiss banks to cooperate. More so, because of the revised Indo -Swiss tax treaty that will come into effect from April 1, 2012. Under the revised treaty, Swiss banks have to share information about accounts that are in operation. So far 17 individuals (out of the 700) have disclosed their account details with the Mumbai tax office. This was possible through revised returns, an exercise allowed under the Income-Tax Act if the taxpayer thinks there was a mistake in the original return. However, returns are allowed to be revised within one year of filing the original return. The amount disclosed ranges from Rs 50-300 crore. It is also learnt that there is a disclosure of Rs 300 crore at the Chennai income-tax office by a member of a leading business family who was the beneficiary of a trust set up by the patriarch of the family. - www.hindustan.times.com

CANT LINK BENEFITS OF I-T DEDUCTIONS TO DIRECT EMPLOYMENT: HC [23 November 2011]

The Bombay High Court has ruled that the Income-Tax Department cannot deny the benefits of deduction to the assessee companies on the ground that they must directly employ ten or more workers in their establishments.The court dismissed the plea of the Revenue which said the benefits of deduction under the income-tax law cannot be extended to the assessee employing the stipulated number of the workers through the agency or contractors.The condition imposed under Section 80IB(2)( iv) of the Act (Income Tax Act,1961) is that the assessee must employ ten or more workers in the manufacturing process / production of articles or things and it is immaterial as to whether the workers were directly employed or employed by hiring workers from a contractor,said a bench comprising Justice JP Devadhar and Justice AR Joshi.The bench said: When Section 80IB(2)( iv) of the Act merely provides that the undertaking must employ ten or more workers in the manufacturing process carried on with the aid of power,it would not be proper to hold that Section 80IB(2)( iv) refers to ten workers employed by the assessee directly.When the language used in Section 80IB(2) (iv) of the Act does not suggest that restricted meaning must be given to the expression worker,it would not proper to give a restricted meaning to that expression,the court pointed out.The bench in its order said,the expression worker is neither defined under Section 2 of the act nor under section 80IB(2)( iv) of the Act. - www.economictimes.indiatimes.com

TDS CREDIT TO PERCOLATE DOWN TO LEGAL HEIRS, PARENTS [24 November 2011]

Recently, the Central Board of Direct Taxes amended the rule for grant of Tax Deducted at Source (TDS) to a person in whose hands the income is assessable when paid to another person. Until now, the credit of TDS was given to the deductee, based on the deductor's TDS-related information. And, the information in the returns filed with respect to TDS credit. The amendment has been applicable from November 1. If tax is deducted at source on all or a part of the income assessable in the hands of the non-deductee, the credit of the TDS (complete or partial, as the case may be) shall be given only to him/her. However, the deductee (in whose name the tax is deducted) needs to file a declaration with the deductor (employer), which is filed in case the tax liability is nil. This is filed before the deductor furnishes the TDS information. And, the deductor is supposed to report the source in the name of the non-deductee and issue a pertinent certificate.
APPLICABILITY:
Tax experts say a taxpayer till now got the credit even when (s)he is dead. Now on, the legal heir of a deceased will be granted the TDS, says Sharad Shah, partner, tax advisory services, Haribhakti & Co. "As the legal heir, he/she is entitled to the grant of TDS when the person in whose hand the income was assessable has passed away. There was clarity required on such cases," he adds. Explains Amitabh Singh, tax partner at Ernst & Young: If one is putting money in the name of a minor, the TDS deducted used to be credited in the minor's name. "But, this amendment will allow the person (guardian or parent) who is putting the money in the minor's name or in whose hand the income is assessable, to get the TDS credit in place of the minor." Alike case was if the asset of a Hindu Undivided Family (HUF) was held in the name of an adult member, but the income is assessable in the hands of the HUF. Similarly, there was no rule on the method of grant of credit in case of corporate reorganisations (amalgamation, demerger), where the income of one company will be assessable in the hands of the other. Also, in cases where the asset was held by trustees of a trust but income was assessable in the hands of the beneficiary of such trusts, tax experts.
EXCEPTIONS:
Till now, the credit was to a non-deductee only under specific circumstances. Like clubbing of incomes, incomes from association of persons or trusts assessable in the hands of the member or trustees or joint ownership of assets. Here too, the deductee was suppose to file a declaration for nil tax liability.
DECLARATION FOR NIL TAX:
Currently, the rule which provides for the form, manner and periodicity (quarterly) for deductors to provide withholding tax statements does not specify the need to furnish information pertaining to cases where tax is not deducted based on the declarations. Henceforth, the rule will provide that the deductor furnishes particulars of the amount paid or credited on whih tax was not deducted due to the nil tax liability declaration. - www.business-standard.com

IDFC DEMANDS HIKE IN I-T SAVING CAP IN INFRA BONDS [24 November 2011]

Infrastructure Development Finance Company (IDFC) said on Wednesday said the government should raise the income tax exemption cap of.20,000 for investing in the infra sector so as to attract greater retail participation in its funding.From an inflation perspective,we have been telling the government that this (infra) is one sector which needs money,so raise the cap under 80CCF of IT Act (tax exemption) from.20,000 to.1 lakh, IDFC deputy head (fixed income and treasury) Prawin Devchell told reporters here. - www.economictimes.indiatimes.com

ALTERNATE MINIMUM TAX ON LLPS WILL CONTINUE IN DTC [24 November 2011]

The alternate minimum tax (AMT) on Limited Liability Partnerships (LLPs) and concessional rate of tax on dividend received from overseas subsidiaries of Indian companies will continue even in the proposed Direct Taxes Code. The finance ministry has decided to include these provisions in the final DTC Bill after its vetting by the standing committee of Parliament. In the DTC Bill introduced by finance minister Pranab Mukherjee in August last year, the alternate minimum tax (AMT) for LLPs was not included. Besides, there was also no provision for the concessional 15% tax on dividend received by an Indian company from its foreign subsidiary. The rate proposed in the Bill was 30%. However, in the Budget this year, the government proposed these changes and now, these will be included in the DTC Bill, official sources said. As per the Budget 2011 proposal, all LLPs will pay AMT at 18.5%. The levy was specifically introduced. for LLPs to plug the revenue leakage under the Income-Tax Act, and was made effective from April 1, 2011 for financial year 2011-12 and assessment year 2012-13. The tax rate of 18.5% was on the adjusted total income of LLPs, which would work out to be 19.05% inclusive of education cess. LLP is a new business structure that has hybrid features of a partnership firm and a corporate body. It has the twin benefits of a company's limited liability and the flexibility of a partnership firm. The LLP Act, 2008, was notified in April, 2009. In order to help in attracting more foreign investment, the government recently allowed FDI in LLPs in sectors like mining, power and airports. The government plans to introduce DTC, which would replace the extant, archaic I-T Act from April next year. However, since the Parliamentary Standing Committee on Finance is unlikely to submit its report in. the current Winter Session, the deadline could be missed. In this year's Budget, Mukherjee also halved tax on dividends received by an Indian company from its foreign subsidiary to 15%. "It has been represented that the taxation of foreign dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested abroad. For the year 2011-12, I propose a lower rate of 15 per cent tax on dividends," he had said in his Budget speech. This will also find way into the DTC Bill. The rules of operating liaison offices in India will also be tightened in the DTC. The government feels that many of these companies generate income in the country but have not opened branches, to avoid paying taxes. - www.financialexpress.com

BREATHER FOR MAHARASHTRA SUGAR MILLS ON INCOME TAX EVASION [24 November 2011]

Maharashtra's 125-odd cooperative sugar mills got a much-needed respite, as the state government has assured them of avoiding coercive measures like attachment of properties in the income tax department's bid to recover dues totalling Rs 2,500 crore pending since 1990-91. For now, the Central Board for Direct Taxes (CBDT) has rejected a blanket stay on the income tax demand made on these mills; it would instead consider the matter on case-to-case basis. The sugar mills have contested the I-T department's argument that the sugarcane price they paid in excess of the respective statutory minimum price (SMP) was profit distributed to farmers - and that such excess should not be allowed as their purchase cost. www.businesstandard.com

INCOME-TAX TRIBUNAL RULING MAY LEAD TO FLOOD OF STOCK OPTIONS [13 October 2011]

The taxman would soon be taking less away from executives incomes. A ruling of an income-tax tribunal could lead to a shift in salary structures towards stock options, which would attract lower tax rates. The income-tax tribunal has said that employee stock options (ESOPs), which give staff right to buy shares of the company they work for at a predetermined price, should be considered as capital assets. If the decision goes unchallenged, the ruling would mean that ESOPs would be taxed trary to what appeared to be settled law on this point, he said. The gains on ESOPs become taxable at two stages, once when the shares are allotted on exercise and again when employee sells them. As per the current practice, the difference between the fair market value and the price at which shares are allotted by the company to an employee is clubbed with the income of the employee and taxed at his marginal tax rate, which is 30% for people in the highest tax slab. When after possession of shares employee sells these shares the gains made on them will attract capital gains depending on the period of holding 15% if sold withaccording to capital gains tax rules, which will be less taxing than the current regime. Today, when employees exercise their ESOPs, the gain is added to the overall income and taxed at the income tax rate, which could be as high as 30% for the top income earners. In contrast, long-term capital gains are taxed 10% while the short-term capital gains tax is marginally higher at 15%. "This would be a welcome change for both employees and employers, increasing preference for ESOPS as part of the compensation package, "said Anandorup Ghose, Solution Head, Executive Compensation & Governance, Aon Hewitt. The high rates of taxation had reduced the attractiveness of ESOPs in employee compensation, but if the ruling goes unchallenged, then it could come back into focus. While this is good news for employees as they stand to pay lesser taxes, it could be a headache for employers who have the onus to deduct taxes at source, "said Amitabh Singh, partner, Ernst & Young. "This ruling is conin a year and 10% if sold afterwards. In the case of listed companies, there is no long-term capital gains tax, only a securities transactions tax is levied. According to the tribunal, at both the stages they should be taxed as capital assets. Many companies use ESOPs to compensate, retain and attract employees by pricing the shares under the stock option plan at below the fair value. The tribunals decision is likely to be appealed in higher court but the issue will remain open till the Supreme Court decides and settles the matter or the government makes suitable changes in the law. - www.economictimes.indiatimes.com

HUDCO TO RELAUNCH TAX-FREE BOND WITH HIGHER COUPON RATES [13 October 2011]

A tax-free bond Housing and Urban Development Corporation (Hudco) issued a fortnight ago has elicited poor response, prompting the government-owned entity to think of relaunching it with higher coupon rates. According to market players, the collections - after the issue opened on September 29 - were just around Rs 10-20 crore in the first round that closed on Wednesday. The urban infrastructure company had, after getting the approval from Central Board of Direct Taxes, offered tax-free bonds at coupon rates of 7.51 per cent for 10 years and 7.75 per cent for 15 years. According to norms, the coupon rates are linked to the government bond‘s closing yield at the end of the previous month. The issue opened on a day when yields on the 10-year benchmark government bond jumped 9 basis points to settle at 8.44 per cent. "This implies that the issuances in October will offer higher coupon rates," says a bond dealer with a domestic brokerage. "Hence investors have opted to wait." The 1970-incorporated Hudco on Wednesday said the aim was to raise Rs 100 crore in the first round. It is still optimistic. "With better coupon rates in the second round, we are expecting better response," said R K Khanna, the company‘s executive director (resource mobilisation). He declined to comment on the total amount raised in the first round. The company can raise up to Rs 5000 crore via sale of tax-free bonds this financial year. Based on the annualised closing yield of September, the company will now offer 7.62 per cent for 10-year bonds and 7.83 per cent for 15-year bonds via private placement. The coupon rates on tax-free bonds should not be less than 100 basis points lower than the annualised closing yield on government bond of previous month. – www.business-standard.com

TN BRINGS DTH, IPL UNDER ENTERTAINMENT TAX AMBIT [14 October 2011]

The Tamil Nadu Government has brought the DTH (Direct To Home) satellite television services and the Indian Premier League under the purview of the Tamil Nadu Entertainment Tax. The move will net the State Government nearly Rs 90 crore annually, according to sources in the know. The move has the potential to grow multi-fold the entertainment tax revenue for the State. In 2010-11, its revenue from entertainment tax was Rs 15 crore and in 2011-12 as of July it was Rs 10 crore, according to official figures. The amendments to the Tamil Nadu Entertainment Tax Rules were notified with effect from September 27, 2011 following statutory approvals. DTH services providers and IPL will now have to register with the Tamil Nadu commercial taxes authorities. IPL faces a 25 per cent tax and DTH services providers 30 per cent.
IPL matches
According to sources in the know, based on conservative estimates of the number of IPL matches played in Chennai last year and the capacity of the cricket stadium, the authorities expect entertainment tax on IPL to bring in about Rs 18 crore. The tax on DTH services is expected to net the Government about Rs 75 crore. Through the amendments the State Government has also hiked the entertainment tax on cinematographic exhibition to 30 per cent from the prevailing 15 per cent for Chennai and special grade municipalities for new feature films and to 20 per cent for old and new films exhibited in Tamil Nadu. - www.thehindubusinessline.com

EXCISE COLLECTION FALLS BY 8.7% IN SEPT [14 October 2011]

Excise duty collection fell by 8.7 per cent in September to Rs 11,432 crore from Rs 12,528 in same month last year, showing weak manufacturing activity. "The drop in excise collections shows that there has been a fall in the manufacturing activity," Central Board of Excise and Customs (CBEC) Chairman S D Majumder said. He expressed hope that customs and excise revenues pick up in October on account of the festive season, he added. The excise collections dropped sharply in September to Rs 11,432 crore whereas customs mop-up grew by a marginal 7.2 per cent to Rs 12,286 crore during the month, according to the Finance Ministry‘s latest data. "The 7.2 per cent growth in customs is mainly due to fall in rupee which has also depreciated 7 per cent," Majumder said. The overall collections for September went up by just 5.9 per cent at Rs 32,416 crore against Rs 30,608 crore in the same month last year. However, the April-September data showed an overall rise of 20.4 per cent in indirect tax revenues at Rs 1,90,141 crore. The customs collections in the first six months of the current fiscal expanded 19.4 per cent at Rs 75,613 crore, and excise collections also grew 13.2 per cent and stood at Rs 71,058 crore. Besides, services tax collections registered a robust 36.5 per cent growth in the April-September period at Rs 43,470 crore. For September, it was up 31.4 per cent at Rs 8,698 crore. The industrial growth of the country slowed to 4.1 per cent in August on account of the poor performance of the manufacturing sector and a decline in mining output, indicating a economic slowdown. Growth in factory output, as measured in terms of the Index of Industrial Production (IIP), stood at 4.5 per cent in August last year. Besides, economic growth in the first quarter (April- June) also fell to a six quarter low of 7.7 per cent. - www.financialexpress.com

RAILWAYS GET NOD FOR RAISING TAX-FREE BONDS [14 October 2011]

Facing a fund crunch,the Railways will soon issue taxfree bonds to raise around.Rs.10,000 crore. We have received the notification (clearance) from the Finance Ministry. Based on the notification, we are going ahead for public issue which should materialize by the end of November or beginning of December, Financial Commissioner Pompa Babbar said. The Finance Ministry has given notification to four organisations, including PFC and Railways, for raising tax-free bonds. The market borrowings of railways is pegged at.Rs.20,594 crore in the current fiscal, out of which.10,000 crore is expected to be raised through tax-free bonds by Indian Railway Finance Corporation for financing select capacity enhancement work. – www.economictimes.indiatimes.com

VAT ON SUGAR, TEXTILES [15 October 2011]

States have decided to impose a four-five per cent VAT on sugar and textiles from the beginning of the next fiscal. – www.business-standard.com

STATES TO LEVY 4-5% VAT ON SUGAR, TEXTILES [15 October 2011]

AMID high inflationary pressure, states today decided to impose four-five per cent value added tax (VAT) on sugar and textiles from the beginning of next fiscal. "We have decided to levy VAT on sugar and textiles from April 1, 2012, which earlier used to come under Additional Excise Duty (AED) and was collected by the Centre," Empowered Committee of State Finance Ministers on GST (Goods and Services Tax) Chairman Sushil Modi told reporters here. Modi is also Bihar‘s deputy chief minister. Earlier, the Centre used to collect AED on sugar, textiles and tobacco and used to give one per cent additional devolution from the Centre‘s tax in lieu of these taxes to the states. However, on the recommendation of the 12th Finance Commission, the Centre had stopped levying AED on these three items from 2006-07. After that, states started imposing VAT on tobacco, but sugar and textiles were not taxed. The reason was the Centre still used to give one per cent devolution to states till 2010-11. That devolution was stopped from this fiscal, said Modi. Also, sugar and textiles were taken out of schedule of AED only from this fiscal, Deloitte Senior Director Prashant Deshpande told Business Standard . He said if large sugar producing states like Maharashtra and Uttar Pradesh started imposing VAT on sugar, it would definitely have an upward pressure on inflation of the sweetener. Currently, only Tamil Nadu, Andhra Pradesh and Orissa impose AED on sugar and textiles. Modi said states would impose VAT on these two items at four or five per cent, depending on lower rate of VAT in the states. – www.business-standard.com

PROFIT-MAKING SEGMENTS TAX [15 October 2011]

The tax authorities will now focus on high profit-making segments of the economy as they are facing an increased and "difficult" direct taxes target of Rs. 5.85 lakh crore this financial year, Central Board Of Direct Taxes (CBDT) chairman M C Joshi said on Friday. – www.business-standard.com

APPLICABILITY OF SALES TAX TO OFFSHORE SUPPLIES-PART II [17 October 2011]

The sales tax authorities in Gujarat held these supplies to be taxable under the CST Act. While the petitioners filed a writ on several grounds, the Court confined itself to deciding only the first and substantial ground as to whether the supplies of goods from Hazira to Bombay High were at all taxable under the said Act. The Court examined in detail the provisions of the MZA and observed that while the Union of India had certain sovereign rights over the EEZ, it did not have sovereignty over the zone. Further, these sovereign rights were only for limited purposes. More importantly, the MZA empowered the Central Government to issue specific notifications to extend the ambit of certain laws to any part of the EEZ and to make such provisions as were necessary for the enforcement of such laws in the EEZ. Accordingly, the EEZ was deemed to be a part of the territory of India only for the limited purpose of the extension and application of notified law. Since, as per Section 3(a) of the CST Act, a sale of goods is inter alia deemed to take place in the course of inter State trade or commerce if it occasions the movement of goods from one State to another, the Court concluded that the movement of goods from Hazira to Bombay High was not covered within the expression "movement of goods from one State to another", as above since Bombay High did not form part of the territory of India in any general sense, under the MZA or any other law. Further, the Court noted that while the Government had issued notifications under various fiscal statutes such as the Income Tax Act, the Customs Act, the Central Excise Act and the Finance Act, 1994 to extend the income tax, customs, excise and service tax provisions to the EEZ, no such notification had been issued to extend the provisions of the CST Act to the EEZ. In the absence of such a notification, the Court held that the Gujarat VAT authorities could not demand tax under the CST Act on the transactions in question, particularly as the transfer of property of goods took place in Bombay High. While the Court took note of various decisions in coming to its conclusions, it particularly noted that the decision in Aban Loyd was on the point that since the customs law was expressly extended to the EEZ, it was applicable to supplies to the zone. Since no such extension of the CST law had been made, the decision in Aban Loyd meant that this Act could not apply to the EEZ. The High Court also discussed the ratio in the case of Murli Manohar and Co. and another Vs. State of Haryana (1991 (1) SCC 3777), wherein the Apex Court had held that any sale effected by an assessee must fall in one of three categories, namely local sales, inter State sales or sales in the course of export outside the territory of India and that there could not be a fourth category of sale, in addition to the above. The Court however concluded that the observations of the Apex Court in the aforesaid case were obiter and could not be seen in isolation a the facts in the instant case were materially different in as much as the transaction had occasioned the movement of goods from an Indian State to a territory which was not a part of India and over which India only had sovereign rights for the limited purpose of exploiting the natural resources etc. as laid out in the MZA. Thus, the question of whether the transaction, if not an inter State sale, should necessarily qualify as an export of goods outside the country, in order not to be exigible to the tax, was not addressed and answered by the Court. It will be interesting to see if the decision is accepted by the tax authorities. The above decision will come as a respite for the upstream oil and gas industry in relation to their offshore oilfield activities. It remains to be seen as to how this issue will be addressed under the forthcoming GST, especially for a bundled supply of goods and services provided in the EEZ. – www.business-standard.com

APPLICABILITY OF SALES TAX TO OFFSHORE SUPPLIES-PART I [17 October 2011]

The matter of the applicability of direct and indirect taxes to supplies of goods and services from India to offshore installations, typically situated in the Exclusive Economic Zone (EEZ) i.e. within 200 nautical miles of the appropriate baseline, as per the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act 1976 (MZA for short), has been the subject of much litigation. This has been the case particularly with the State sales tax, especially the central sales tax. There have been many judgements on the point and several of them have been contradictory to each other. In a previous article on this subject, the decision pronounced by the Larger Bench of the Maharashtra Tribunal in the case of M/s Industrial Oxygen Company Limited (the appellants) Vs. State of Maharashtra [(2010) 44 M.T.J. 89] was discussed wherein the supply of helium gas from Mumbai port to ONGC at the Bombay High offshore oilfields, situated within the EEZ, was held to be an inter-State sale by relying heavily on the decision of the Supreme Court in the case of Aban Loyd Chiles Offshore Ltd Vs. Union of India (2008) 227 E.L.T. 24 (S.C.), wherein it had been held that the designated areas in the EEZ were deemed to be a part of the territory of India, for the purposes of the Customs Act. The Tribunal quoted extensively from the above case and concluded that the apex Court had clearly held that Bombay High was part of the territory of India and hence any supplies made to Bombay High would be exigible to tax under the Central Sales Tax Act, 1956 (‘CST‘). Interestingly, in a very recent case of M/s Larsen and Toubro Ltd. Vs. Union of India (Special Civil Application No. 5575 / 2011), the Gujarat High Court, while deciding a writ petition, has held that goods supplied from Gujarat to ONGC‘s oilfield in Bombay High does not constitute an inter-State sale under the CST, thereby directly contradicting the decision in Industrial Oxygen. Also, the High Court has relied on the decision in Aban Loyd to come to its conclusion! In this case, the petitioners had entered into four indivisible turnkey projects consisting of both supply of goods and rendition of services. To execute such turnkey contracts, the petitioners had arranged for supplies of certain parts, equipment and machinery from their Hazira plant to ONGC at their Bombay High oilwells, which were situated around 180 kms off the baseline of the coast of India and which hence formed part of the EEZ. These goods were therefore used in the execution of the turnkey projects and by virtue of the contractual terms, the title to these goods passed at Bombay High, at the time of such usage, and not at the time of shipment from plant at Hazira. These facts were not in dispute. TO BE CONT...

FMPS WILL LOSE TAX ADVANTAGE UNDER PROPOSED DIRECT TAX CODE [18 October 2011]

Fixed maturity plans (FMPs) have been popular for quite some time now due to the tax advantage associated with them.But,will FMPs continue to remain attractive once the new tax regime,Direct Tax Code ( DTC),comes into effect FMPs are basically close-ended debt-oriented mutual fund schemes with a predetermined maturity date.The objectives of FMPs are to generate steady returns over the maturity period and protect investors against market fluctuations.To achieve these goals,fund managers make investments in short-term bonds,certificate of deposits issued by banks/companies,etc.Under the existing provisions of Income-Tax Act,1961,dividend from FMPs is exempt in the hands of the recipient.However,the mutual fund declaring the dividend has to pay a dividend distribution tax.If FMP units held for up to 12 months are sold,any gains arising from such a sale are termed as short-term capital gains and taxed at the normal tax slab rate as applicable to the individual (for instance,investors falling under the highest tax slab rate have to pay tax at 3o% plus applicable education cess).Where the units sold are held for more than 12 months,the gains arising thereto are termed as long-term capital gains and taxed at a rate of 20% (plus applicable education cess).In addition,the individual is allowed to avail of the indexation benefits.However,where the indexation benefit is not availed of,the applicable tax rate will be 10% (plus applicable education cess).Indexation provides for determination of cost price of the underlying asset as on the date of sale,after taking into account the inflation factor (as per the formula prescribed by the government) and is applicable from the year of purchase to the year of sale.But,one needs to evaluate both the options to optimise the tax liability.However,this would change once the DTC comes into effect.The concept of short-term and long-term capital gains has been done away with under DTC.Capital gains are taxable at the normal slab rate as income from ordinary sources.The existing benefit of special tax rate of 10/20% for long-term gains will no longer be available under the DTC.Further,the benefit of indexation would be available where the units of FMPs are held for at least one full financial year.For example,if an investor purchases units say on April 1,2012,he would need to hold them until March 31,2014,to avail of the indexation benefit.In other words holding period is extended beyond 12 months depending on the timing of purchase of units to avail of the indexation benefit.The provisions of DTC should not apply to investments made before the DTC comes into play.But this needs to be clarified under the DTC.One would really need to see the final enactment to know the exact impact.DTC is expected to be implemented with effect from April 1,2012,but keeping in view the current political situation,the process of clearance from Parliament may take a little longer. – www.economictimes.indiatimes.com

RISING YIELDS TO FETCH MORE RETURNS FOR TAX SAVERS [18 October 2011]

With government bond yields trading close to three-year high levels, investors can expect attractive coupon rates on tax-saving bonds from infrastructure finance companies. PTC India Financial Services and Infrastructure Development Finance Company (IDFC) are expected to announce bond issuances in November. These would be linked with the yields on government bonds on the last trading day of this month.Yields on the ten-year benchmark government bond closed at 8.75 per cent on Monday, up 30 basis points from the closing on September 29. Market participants expect yields to rise further, as investors accommodate government borrowings of Rs 12,000-15,000 crore every week. "Bond yields may touch nine per cent by the end of this month, if the central bank raises rates by 25 basis points," said a treasury head of a Chennai-based public sector bank. The Reserve Bank of India (RBI) is scheduled to announce its half-yearly monetary and credit policy review on October 25. RBI has raised policy rates by 150 basis points this financial year, leading to a rise in bond yields. After securing the approval of the finance ministry, Power Finance Corporation and Industrial Finance Corporation of India (IFCI) had launched tax-saving bonds in September. Both offer coupon rates of 8.5 per cent per year for 10 years, and 8.75 per cent per year for 15 years. Subscriptions for issuances from PFC close on November 4, while those for IFCI close on November 14. According to norms, issuers cannot offer coupon rates higher than the previous month‘s annualised closing yield on government bonds of the same maturity, as reported by the Fixed Income Money Market and Derivative Association of India. The annualised closing yield for ten-year government bond stood at 8.62 per cent in September. "Subscriptions in PFC and IFCI tax-saving bonds are yet to pick up, as yields are moving up and investors are expecting higher yields next month," said a bond arranger with a domestic brokerage. A senior PTC official said the company was yet to take a call, as yields were high and the response hadn‘t been good for existing papers. "Yields are very high now. We would take a call next month," he said. IDFC is also planning to raise funds in November. "If bond yields are high, the coupon rates would need to be adjusted accordingly," said a senior IDFC official. L&T infrastructure Finance and India Infrastructure Finance Company are also expected to come out with tax-saving bond issuances in November. Tax exemption of up to Rs 20,000 can be availed of by investing in long-term infrastructure bonds. This is above the existing tax savings limit of Rs 1 lakh. - www.business-standard.com

FINMIN REJECTS TAX EXEMPTION FOR MINING BONDS [18 October 2011]

The Finance Ministry has raised several questions on the mines ministry‘s proposal on attracting investors to the country‘s investment-starved mining sector. It has, in a recent note to the inter-ministerial committee for development of models of venture capital for mineral exploration, said that the proposal needed to be deliberated extensively with all concerned stakeholders before the ministry firms up its views. The ministry has shot down the proposal to provide tax exemption for mining and exploration bonds on the lines of infrastructure bonds. "Tax incentives and holidays are being discontinued and have been given a sunset clause under the Income Tax Act. In the Direct Taxes Code, only investment-linked incentives are proposed to be provided," the ministry said. It has also questioned the proposal to introduce the "flow-through shares" model to lure foreign multi-national giants to the mining sector. It argues that the concept needs a detailed scrutiny. "The introduction of flow-though shares concept in India requires detailed study as regards the impact it will have on revenue foregone for the government, and also the type of reporting and monitoring mechanism," the finance ministry said in its note. The ministry cited that the concept of these shares was first introduced by the Canada in 2000 to provide incentives for investment in exploration firms. Such firms, particularly the smaller ones, undertake capital-intensive exploration and they usually do not have sufficient revenue stream to set off the tax deductible expenses available to them. So, in order to improve their fund flows and incentivise investments, the concept of flow-through shares were introduced. This helped exploration companies pass on the un-utilisable tax deduction to potential investors. It also ruled out the suggestion that payment for exploration should be made eligible as tax exemption. "Deduction for payments to scientific research associations are being given to promote core R&D and mining activity does not stand on the same footing," it said. - www.financialexpress.com

APEX COURT NOTICE TO UP GOVT, JAYPEE ON TAX EXEMPTION FOR F1 [19 October 2011]

The Supreme Court on Tuesday issued notice to the Uttar Pradesh Government and the organiser of the Formula 1 Grand Prix of India – a Jaypee Group company -- on the state Government‘s move to grant entertainment tax exemption to the company. Acting on a Public Interest Litigation, the court asked the state Government and Jaypee Sports International Limited to reply by Friday regarding the racing event being granted entertainment tax exemption under the Uttar Pradesh Entertainments and Betting Tax Act, 1979. The F1 is scheduled to be held in India for the first time on October 30 at Buddh International Circuit near Greater Noida in Uttar Pradesh. According to the petitioner Mr Amit Kumar, F1 racing event is an elitist, exclusive and dangerous sport reserved for the very rich and the elite of society and did not deserve the entertainment tax waiver. Besides, the tax exemption is not going to lead to a mass-based popularising of the F1 but it will only help the company ‘make a killing‘, the PIL said. The PIL alleged that the waiver was granted because the private company is close to the Uttar Pradesh political leadership. It alleged that to give the exercise a measure of legitimacy, a policy was floated in the name of economic downturn to encourage developers and in this garb the benefit running into crores of rupees was given at the cost of the public exchequer and that of the taxpayers. It said Jaypee Sports, when seeking tax relief, had informed the Yamuna Expressway Industrial Development Authority that it had invested Rs 777.04 crore from May 2009-10 for the Special Development Zone (SDZ). Of this, Rs 600.13 crore was towards the land cost and Rs 176.91 crores was spent for construction of F1 track and other expenditures. The PIL also refers to communication from the Yamuna Expressway Industrial Development Authority to state that 351.12 hectares was used for sports core activity out of the total allotted land of 1000 hectares under the SDZ. In a similar matter relating to the Indian Premier League (IPL), the petitioner said, the Madras High Court had held that it was not inclined to appreciate a tax exemption for IPL and had asked the Tax Department to look into the prospects of collecting entertainment tax for the conduct of IPL matches in the city. The High Court had reasoned that revenues from such taxes could be used to implement welfare schemes, the petitioner said, adding that a direct parity can be drawn between the IPL and F1. Besides, the event does not even have mass support or popularity and therefore no entertainment tax exemption ought to have been given to the company, the PIL said. Each ticket for the event reportedly costs between Rs 2,500 to Rs 35,000. The total seating capacity is around one lakh and if the tickets for the event are completely sold, the company would reportedly earn around Rs 90 crore. - www.thehindubusinessline.com

PRIZE RECEIVED DURING FESTIVE OFFERS MAY ATTRACT TAX [19 October 2011]

The festive season is at its peak, with the navratras getting over a few days back and Diwali round the corner. There are many organisations that launch lotteries and schemes during this time to attract consumers. The prizes vary from a few hundred rupees in cash awards to expensive cars, gifts, watches, etc. It‘s important to know whether the prize money in cash or kind will have any tax implication for the recipient as well as the payer/sponsor of the scheme. According to the provisions of the Income Tax Act, 1961, where the total income of a taxpayer includes any income by way of a race (other than the income from activity of owning and maintaining race horses) or card game and other games of any sort or from gambling or betting, it will be taxable at the rate of 30%. Therefore, if an individual receives any such award, the prize money will be liable to tax as part of his total income. The issue that then arises is whether a particular scheme is in the nature of a lottery or not. In this context, one can refer to judicial precedents wherein the following key factors have been considered to constitute it as a lottery scheme: These, among other things, include cases where the prize is given as part of the overall scheme or some other advantage is given in the nature of a prize, the prize is distributed by chance and where some consideration is paid or promised for purchasing such chance. In this context, it is also important to note that the person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle for an amount exceeding R10,000 is required to deduct income tax at the rates in force-currently 30%-at the time of payment of such money. Thus, the payer is also responsible for deducting tax at source before giving the award. The dilemma faced is whether tax should be withheld if winnings are in kind or a combination of cash and kind. The answer to this is yes. Thus, where winnings are wholly in kind or partly in cash and partly in kind (and the cash portion is not sufficient to meet the liability of tax deduction), the person responsible for paying such winnings has to ensure that tax has been paid in respect of the same before releasing the winnings. Therefore, an obligation has been cast on the payer, irrespective of whether the winnings are in cash or in kind, to ensure that the tax is paid before the winnings are released in cash or in kind. It is good to enjoy the festival along with the prizes/awards if you are lucky. However, it is also necessary to take note of the tax obligations, both as the recipient as well as the payer, to avoid the joy of winning fizzle out after the festive season. - www.financialexpress.com

INDIRECT TAX REFORMS TO REV UP REVENUES, GDP [07 October 2011]

In its efforts to build a broad consensus on the proposed goods and services tax (GST), the Associated Chambers of Commerce and Industry of India (Assocham) has said the indirect tax reforms would lead to buoyancy in government revenues, increase the country‘s GDP and reduce inflationary pressures. The GST would lead to reduction in prices of most manufactured goods by about 10 per cent, the 1920-established industry chamber said here today. "Once the GST replaces all multiple taxes, it is going to be the biggest tax reforms in independent India‘s history," it said in a recent study titled ‘GST - Beyond Growth‘. The tax-GDP ratio too may go up by 1.5 to 2 percentage points with the net revenue jumping by Rs 1.5 lakh crore a year, said the study. The GST will create a single Indian common market - and there will be no distinction between goods and services with seamless input tax credit allowed throughout the supply chain. The study assumes importance since Finance Minister Pranab Mukherjee had sought the help of industry chambers to build a consensus on the GST. The GST has already missed two earlier deadlines of 2010-11, 2011-12 and is again unlikely to be enforced from the next financial year starting April 1, 2012. Reason: differences between the Centre and states. While a Constitutional amendment is being considered by a parliamentary standing committee, the next financial year is the time set for implementing the GST, which is a comprehensive value-added tax on goods and services levied at each stage of the supply chain. The GST, which is an indirect tax to imposed by all states and the central government, is meant to replace existing levies such the state VAT besides the Centre-imposed excise duty as well as the service tax. Initially, petroleum products and alcohol will be kept out of the purview of the GST. More professions in the services sector will be brought under the tax net. Under the proposed GST rate structure, the first year of tax will see all services attracting a standard rate of 16 per cent (its each half proposed to be imposed by the Centre and the respective state), with a negative list being considered for exemption of few. There could be a lower rate of 10 to 12 per cent for specified goods like basic food items and a very low rate for precious metals and stones. Other goods will be taxed at a standard rate of 20 per cent. All rates are ultimately proposed to converge into 16 per cent in three years, as per a proposal by the finance ministry. - www.business-standard.com

UK SWISS TAX AGREEMENT [07 October 2011]

The Tax Agreement between the UK and Switzerland was signed on 6 October by the Exchequer Secretary David Gauke and the Swiss Finance Minister Eveline Widmer-Schlumpf.
You can read the text of the Agreement and associated declarations by following the links below.
The Agreement is not yet in force. It will enter into force after both Contracting States have completed the necessary Parliamentary procedures required by domestic law and exchanged diplomatic notes. The Agreement will not take effect before 1 January 2013. Further guidance will be provided prior to that date. Responses to frequently asked questions will also be published. - www.hmrc.gov.uk

IMPLEMENTATION OF THE TAX AGREEMENTS WITH GERMANY AND THE UK [07 October 2011]

At its meeting today, the Federal Council launched the consultation on the Federal Act on International Withholding Tax (IWTA). The IWTA serves to implement the new tax agreements with Germany and the UK. It contains provisions on the organisation, procedure, judicial channels and criminal law provisions which are required due to the new tax agreements. The consultation will last until 18 November 2011.
On 21 September 2011, Switzerland signed a tax agreement with Germany. Under this agreement, persons resident in Germany can retrospectively tax their existing banking accounts in Switzerland either by making a one-off payment or by disclosing their accounts. Future investment income and capital gains will be subject to a final withholding tax. Thereby legal security will be increased and Switzerland will underscore its 2009 white money strategy. A similar agreement has been initialled with the UK and will be signed shortly.
Although the tax agreements are directly applicable, they nonetheless require legal provisions in Switzerland for implementation and specification. The IWTA contains provisions on the organisation, procedure, judicial channels and criminal law provisions. Interested organisations and associations have the opportunity until 18 November 2011 to submit their comments on these legislative proposals. - www.efd.admin.ch

TAX INCENTIVES LIKELY FOR SOFTWARE EXPORTERS [08 October 2011]

Government may offer sops to IT firms after the direct taxes code comes into effect. The government may consider offering tax incentives to software exporters once the Direct Taxes Code is implemented next year, Telecom and Information Technology Minister Kapil Sibal said on Friday."We will certainly try and do something," he said when media persons asked whether he will consider giving tax sops for IT companies after the direct tax bill comes into effect. The Software Technology Parks of India scheme, which expired on March this year, used to provide tax incentives to the Indian IT and ITeS companies. Earlier in the day, unveiling the Draft National Policy on Information Technology, 2011, Sibal said the government envisaged the country‘s software industry to generate nearly $300 billion revenue by 2020, compared to the current $89 billion. Moreover, since at present, four-fifth of the revenues for the IT sector come from exports, the policy proposes to encourage growth of indigenous market. The policy also aims at creating a pool of extra 10 million skilled manpower by 2020. The Indian IT and ITeS sector currently employs over 2.5 million skilled people. The policy also proposed formulation of fiscal incentives to attract investment in this sector in Tier-2 and 3 cities. "As most of the IT companies are located in big cities like Bangalore, Pune, Hyderabad and Mumbai, the policy will now look at expanding to tier 2 and tier 3 cities as well," Sibal said. The policy aims to strengthen and enhance India‘s position as a global IT hub and to use IT as an engine for rapid, inclusive and sustainable growth in the national economy, he added. The draft also aims to provide fiscal benefits to small and medium enterprises (SMEs) and start-up ventures in the key industrial verticals for adoption of IT. The draft is available for comments from the public and stakeholders for a month on the websites of the Department
OPENING OF 16-YEAR RECORDS POSSIBLE
To trace the secret bank accounts of Indians abroad, the finance ministry is considering reopening accounts of such individuals for the past 16 years, against the present norm of only six years. "We may inspect past records. The number of years may be extended from six years to 16 years," said a ministry official. This might, he said, help in seeking information from tax havens on such individuals, as the government would be in a condition to have more relevant details. Currently, the ministry can seek information from tax payers on unexplained investment under Section 69 of the Income Tax Act. Likewise, it can seek details on unexplained expenditure under Section 69C of the Act. The assessing officer has the power to reopen a case up to six years from the end of the relevant assessment year.India has been revising its tax treaties with many tax havens to crack down on evaders. However, the revised agreements, including a recent one with Switzerland, allow India to access informati fr these countries only from prospective effect. India and Switzerland will start exchanging information on tax matters from the next financial year after the new treaty is ratified by the Swiss parliament tomorrow, paving way for obtaining data on unaccounted money stashed there. Last month, a government panel had ruled out any Voluntary Disclosure of Income Scheme, creation of a new Act and capital punishment as measures to deal with the issue of black money abroad. The committee suggested only strengthening of the administrative machinery and better sharing of intelligence. The government has adopted a five-pronged strategy on unaccounted money. It includes creating an appropriate legislative framework, joining the global crusade against black money, setting up institutions for dealing with illicit funds, developing a system for implementation, and imparting skills to its staffers for effective action. It has entered into pacts with three economic think tanks - National Institute of Public Finance and Policy, National Council of Applied Economic Research and National Institute of Financial Management - to arrive at an official figure on the extent of the problem. - www.business-standard.com

DIRECT TAX COLLECTIONS UP 23 PER CENT [08 October 2011]

Led by higher corporate tax realisation, gross direct tax collections rose by 23 per cent to Rs 2,57,042 crore in the first six months of 2011-12. The gross direct tax mop was Rs 2,08,971 crore in the same period last year. The net direct tax collections, after refunds, stood at Rs 1,94,812 crore during April-September, up from 1,81,758 crore in the same period last year, a Finance Ministry statement said. Due to higher refunds, the increase in net tax mop is only about 7 per cent. The data showed that gross collection of corporate taxes was Rs 1,75,360 crore in the first half of the fiscal, up 23.17 per cent from Rs 1,42,368 lakh crore. Similarly, the personal income tax collection was up 22.65 per cent to Rs 81,353 crore, against Rs 66,330 crore last year. The government expects to mop up Rs 5.32 lakh crore from direct taxes. The growth in gross direct taxes for the first half of 2010-11 was 15.51 per cent, while the net taxes realisation had increased by 19.09 per cent. - www.financialexpress.com

TAX COLLECTOR MENTALITY MUST CHANGE AHEAD OF GST ROLLOUT [08 October 2011]

Smooth rollout of Goods and Service Tax (GST) calls for a change in tax collector mentality favouring a willingness to share related information. Collectors‘ mentality in one agency has generally been seen to impede sharing of information with a peer agency, according to Mr R. Mohan, an officer in the Indian Revenue Service and a researcher in public finance.
POSSESSIVE HOLD
Mr Mohan said this while speaking to Business Line on the sidelines of a national seminar on ‘Goods and services taxation in India: Fiscal and Constitutional issues‘ organised here by the Gulati Institute for Finance and Taxation (Gift) here recently. Tax collector of an agency is very possessive about the information he or she gathers and deals with. It would require considerable persuasive tactics to prevail on him/her with the need to share information with others. With Centre and States concurrently taxing on same base, this mentality needs to change or per force will, Mr Mohan said. "Signs of such sharing are available even now, but have been slow to register".
UNIQUE MODEL
The GST model being proposed for the country is unique if only because of the very nature of its federal polity - socially, culturally and economically diverse. The diverse nature is also exemplified by the varying fiscal capacities of States, comparable differences in tax effort and traders‘ attitudes. The States also differ in their individual capacity to attract a fare share of Central expenditure, varying income inequality measures and in terms of relative impact from devolution of taxes and grants. Mr Mohan sought to compliment the Gift for having brought the issue of GST and fiscal relations between the Centre and States into the public domain. WELCOME CHANGE
This is a welcome change in the context of the fact that not many discussions have taken place on the issue even as fiscal powers have tended to get centralised more and more towards New Delhi. Mr Mohan also recalled how the Punchi Commission report on Centre-State relations failed to trigger such public debates unlike the Sarkaria report wherein States vehemently argued for restructuring the relations. The Proposed GST with all its positive aspects seeks to give Constitutional sanctity to fiscal unitarism. But the Value-Added Tax (VAT) regime had sought to institutionalise fiscal unitarism thanks to the suasive powers of the Empowered Committee. "Now the rate harmonisation may get Constitutional sanction through the mechanism of GST Council conceived in the 115th Constitutional amendment," Mr Mohan said. - www.thehindubusinessline.com

SWITZERLAND AND THE UNITED ARAB EMIRATES SIGN DOUBLE TAXATION AGREEMENT [10 October 2011]

Dubai, Switzerland and the United Arab Emirates signed a double taxation agreement (DTA) in the area of taxes on income. The DTA will contribute to the positive development of bilateral economic relations. In particular, it contains provisions on the exchange of information in line with the internationally applicable standards. Aside from a provision on the exchange of information, Switzerland and the United Arab Emirates have agreed withholding tax exemption for dividend payments to the other contracting state or state institutions (e.g. sovereign funds), as well as for dividend payments to pension funds. There will be a residual tax of 5% for dividend payments to companies that hold a stake of at least 10% in the company making the payment, and of 15% in all other cases. Interest and royalty payments will be taxed only in the state of residence. The DTA with the United Arab Emirates contains the rule on interpretation in the case of administrative assistance recommended in mid-February 2011 by the Federal Council. After negotiations finished, a report on the DTA was submitted to the cantons and the business associations concerned for their comments. They largely approved the signing of this agreement. - www.efd.admin.ch

REJECT TAX AMNESTY FOR THE MEGA-RICH [10 October 2011]

According to a report in a prominent English daily on September 15, "devising an amnesty scheme for offshore black money of Indians" was one of the demands of a team of industry captains (that met the Finance Minister in August) and included Mr Ratan Tata, Mr Anil Ambani, Mr Anand Mahindra, Mr Y.C. Deveshwar, Mr N.R. Narayana Murthy, Mr G.M. Rao, Mr R.P. Goenka and Mr Shashi Ruia, among others. It was argued that such money lying idle could be brought back to the country and invested in infrastructure sector, where huge funding of $1 trillion over the next Plan period is required. The suggestion is fraught with many contentious issues and needs to be rejected outright, inter alia, for the following reasons: In the press release dated September 6, the Government of India has accepted that "there is no reliable information about the money of Indians in undisclosed bank accounts outside the jurisdiction of the country". Hence, an amnesty scheme for bringing huge sums of money to meet the country‘s funding needs would be only a shot in the dark. The highest amount that India could collect via amnesty by its last Voluntary Disclosure of Income Scheme in 1997 was Rs 10,050 crore. When this is the position regarding black money under the Government‘s control, the position regarding offshore black money can only be worse.
No need to beg evaders
The Income-Tax Department says that it has developed robust techniques of getting information, which would drive delinquent Indians to avail of the amnesty scheme. This is only a tall wish. If the techniques are ‘robust‘, then why should the Government itself not use the same for capturing concealed incomes instead of depending on the mercy of evaders to pay via amnesty and approach them with a begging bowl? No doubt, a global move for amnesties is getting generated but, except the US, other countries are still in the initial stages of formulating a workable scheme. India need not show over-enthusiasm for this. In the US, the declarants were made subject to heavy penalties, which would be unacceptable in the Indian scenario. The fundamental aspects, concerning such a scheme in the Indian context, are as follows: Such schemes are, prima facie, objectionable on moral grounds, as these give dishonest taxpayers an edge over honest and law-abiding taxpayers. This amounts to abdication of government authority in regard to enforcement of tax laws and accepting defeatism vis-a-vis tax evaders. Expert committees have denounced amnesties, considering these as extraordinary measures meant for abnormal situations such as after a war or other national crises. Such measures, during normal times, only shake the confidence of taxpayers and reduce capacity of the Government to deal with law-breakers. Such schemes have a deleterious effect on level of compliance (Wanchoo Committee). Amnesties do not check onslaught (flow) of black money. These only deplete stocks - that, too, not in any significant way.
More harm than good
Thus, amnesties cannot be a solution to the problem of black money. The revenue gains from these are not commensurate to the damage done. And finally, the rich or mega-rich of the country have to change their mindset and, instead of transferring incomes or wealth to offshore destinations, without tax payments, and then arranging for its repatriation through amnesty schemes, need to develop nationalist outlook. - www.thehindubusinessline.com

TAXING THE MOON CAKE [10 October 2011]

Yue bing or Moon cake is the flavour of the season in China where mid-autumn moon festival, Zhongqiu, is every year with gusto and fervour reminiscent of Diwali celebrations back home in India. Quite a few commentators in India aver that Diwali is the ‘gangotri‘ of corruption in India as corporate houses and businessmen get busy in the run up to the festival, by handing out gift packs of various sizes to people who matter. Invariably, the purse strings are also loosened in favour of employees who, in addition to the annual bonus, often , get goodies depending upon which consumer durables sector has the lion‘s share of slow or unmoving stocks as well as on the amount earmarked by the employer. The amount spent on employees on this count makes the grade in the income-tax assessment under the altruistic sounding head of account -staff welfare and the amount spent on others who matter, makes the grade under another equally head of account - sales promotion. Moon cake expenses booked by employers pass muster as a genuine business expense under the Chinese tax laws but over the years, authorities have been watching, with growing dismay, how corporates have been taking advantage of the liberal tax dispensation. Gold plated cakes became the order of the day especially at higher echelons of wheeling-dealing so much so that the emperor had to strike back. And it has struck where it hurts more, in the hands of the beneficiary employee.
Fringe Benefit Tax
The Chinese moon cake story is likely to ring a bell in the minds of Indian tax policy wonks as well as in the minds of practitioners as indeed in the minds of employers. Fringe Benefit Tax (FBT) was introduced some five years ago by the then Finance Minister, P. Chidambaram who has had a penchant for collecting tax from a single source rather than from thousands of persons. The seemingly work-a-day scene of celebrities boarding a private jet owned by a corporate to South Africa to watch the World Cup cricket matches was the provocation for FBT.
Company resources
Seething with self-righteous rage, the Left parties were quick to point out the grossness of the abuse of company resources for private enjoyment and the Finance Minister lost no time in coming out with FBT that taxed a range of expenses either fully or partially to the extent perceived to be enuring for private benefits. Like its predecessors Securities Transactions Tax (STT) which collects tax from the stock exchange rather than from the players therein and Dividend Distribution Tax (DDT) that collects tax from a company rather than from its shareholders, FBT also swore by single point collection and hence brought in a lot of moolah to the exchequer. Mr Chidambaram‘s successor, Mr Pranab Mukherjee, however, thought it appropriate to scrap the FBT and hence we are back to the regime of taxing fringe benefits in the hands of individual employees with the inevitable and attendant dilution, besides the innate inablity in eaching out to outsiders with a tax bill. But it must be conceded readily that however compelling and attractive it is to tax the employer, equity lies in taxing the beneficiaries.
Tax-exempted gifts
Back home, Diwali gifts do not add to the tax bill of employees thanks to the generous exemption upto Rs 5,000 given by income tax rules for gift from employers. Parenthetically, a keen China watcher is likely to wonder whether the Chinese riposte is churlish given the fact that its government is now slowly trying to somewhat partially give up its export fixation in favour of domestic consumption. The cake tax would leave that much less money in the hands of employees pro tanto reducing disposable income. In any case the move is not likely to go down well with the masses as it smacks both of pettiness and party pooping. But a repressive regime can get away with anything including a petty tax not possible in India where public opinion counts for something at the hustings. One hopes the policy wonks in India do not emulate the Chinese authorities in this regard. - www.thehindubusinessline.com

GOVT EXPANDS CBDT PANEL ON BLACK MONEY [12 Ooctober 2011]

The government has expanded the CBDT Chairman led committee on black money by adding one more member to it - Member Investigation of the Income Tax department. Senior IRS officer Mr S S Rana has recently taken over as the Member (Investigation) in the Central Board of Direct Taxes (CBDT) and with his inclusion, the strength of the high-level committee has gone up to 10. According to sources, the need to expand the strength of the committee was felt as CBDT Chairman Mr M C Joshi had recently divested the Member (Investigation) charge to Mr Rana Mr Rana is now handling all the probe cases related to tax evasion and search-and-seizure operations by the I-T Department which will form part of the panel‘s deliberations. The Committee has been constituted to examine ways to strengthen laws to curb the generation of black money in the country, its illegal transfer abroad and its recovery. It is expected to submit its report by next month. The other members of the committee, besides Rana and CBDT Chairman, are: CBDT Member (Legislation and Computerisation), Director of the Enforcement Directorate, Director General of Directorate of Revenue Intelligence (DRI), Director General (Currency), CBDT Joint Secretary (Foreign Trade and Tax Regulation), Director of the Financial Intelligence Unit, CBDT‘s Commissioner of Income Tax (Investigation), Joint Secretary (Ministry of Law). - www.thehindubusinessline.com

OECD: TAX REFROM CAN CREATE JOBS [12 Ooctober 2011]

High unemployment rates, in the wake of the financial and economic crisis, have governments scrambling to create jobs. The number of long-term unemployed is increasing, with young people and low-skilled workers particularly hard hit. G20 Labour and Employment Ministers emphasize that policies to enhance employment are key to the recovery from the financial and economic crisis. OECD‘s new Tax Policy Study No. 21: Taxation and Employment suggests that well-targeted tax reforms can encourage employers to hire more people and the jobless to look for employment. Taxing employers, through social security contributions or payroll taxes, discourages them from hiring. And taxing employees‘ wages lowers their take-home pay and discourages work. Making across-the-board reductions to these tax burdens will be difficult for governments already battling to reduce their deficits. Instead, the report recommends target reforms to generate the greatest employment gains at the most efficient cost. In addition to getting more people into work, these reforms will reduce dependency on benefit payments and pension incomes. In light of rapidly ageing populations, this is critical to ensuring the sustainability of social security systems around the world. The Study suggests that governments should consider tax cuts for employers who hire low-skilled workers - particularly youth and the long-term unemployed. "By lowering the cost of hiring these workers, tax cuts can reduce unemployment amongst the groups hardest hit by the crisis", said Jeffrey Owens, Director of OECD‘s Centre for Tax Policy and Administration. To give all people an incentive to work, the report proposes a number of reforms targeted at three groups that tend to be under-represented in labour markets across the world: low-income workers; second earners (generally women); older workers. Analysis suggests tax reform would improve incentives and encourage them to work. - www.oecd.org

TO ARREST DEFICIT, FINMIN UPS TAX MOP-UP TARGET BY RS 53,000 CR [12 Ooctober 2011]

The income tax department has revised the tax collection target for the current financial year to Rs 5.85 lakh crore, up Rs 53,000 crore from the budget target of Rs 5.32 lakh crore. Faced with falling tax collections and a difficult-to-achieve disinvestment target, the government is looking at the revenue department to shore up its kitty for arresting a widening fiscal deficit. "Internally, the income tax department has been asked to collect Rs 53,000 crore more than the budget target," sources told The Indian Express. The net direct tax collection for the first half of 2011-12 was up by a 7 per cent to Rs 1,94,812 crore after a refund of over Rs 62,000 crore. Indirect tax collection was also down with slowdown in economic activities coupled with duty cuts on petroleum products. While tax collection from customs duty fell by 10.9 per cent to Rs 10,126 crore, excise duty collection eased marginally by 0.3 per cent to Rs 11,417 crore. In June, the government had cut customs and excise duties on crude oil and other products, which led to a loss of Rs 49,000 crore to the exchequer. The government is also unsure of achieving the disinvestment target of Rs 40,000 crore during the current financial year, given the adverse market conditions. The government has been able to mop up just over Rs 1,100 crore by offloading stake in Power Finance Corporation. Sources said the additional mop up is directed to rein in the fiscal deficit which could rise in the wake of additional market borrowings, which incidentally is Rs 53,000 crore. The government will now borrow Rs 4.7 lakh crore in 2011-12 against the earlier target of Rs 4.17 lakh crore, due to a lower cash balance and dip in collections from small savings schemes. The I-T department has asked its field officers to monitor advance tax payments by local authorities, educational institutions, trusts and societies with commercial receipts of more than Rs 1 crore for possible tax evasion. The Central Board of Direct Taxes has also asked field officers to look into the quarterly financial statements of large and medium firms under the Companies Act. The department will also scrutinise corporate tax payers as they comprise almost two-thirds of total direct tax collections. Tax mop- up from corporates was up a meagre 3 per cent at Rs 1.29 lakh crore during April-August period. - www.financialexpress.com

KARNATAKA FAVOURS ADOPTION OF GOODS AND SERVICES TAX, SAYS CM [12 Ooctober 2011]

The Karnataka Chief Minister said on Tuesday that his Government favours adoption of the Goods and Services Tax (GST). "We, in the Empowered Committee of the State Finance Ministers, are for GST in India and will be guided by the views taken collectively by the Committee," the Karnataka Chief Minister, Mr D.V. Sadananda Gowda, said while addressing the national executive committee meeting of the Federation of Indian Chambers of Commerce and Industry (FICCI). Vision He also outlined the State‘s vision for holistic growth by promoting equitable development of sectors and districts, and providing employment to all sections of the people and regions of the State by 2020. According to him, the core elements of Karnataka‘s Vision 2020 are: Institutionalising of good governance across the State through enhanced transparency, accountability and participation; making Karnataka a globally-competitive destination and a leader among Indian states; enhancing human capabilities to promote equitable growth; eliminating poverty and deprivation and achieve millennium development goals by 2015 and providing safety and security to all citizens, and upholding peace and communal harmony in the State.
Investor-friendly policy framework
Karnataka has been successful in implementing an investor-friendly policy framework, said Mr Gowda, adding that the State was "a veritable treasure trove for investors". He pointed out that the State has endless potential across sectors such as agro and food processing to automobiles and engineering, textiles and garments to IT and biotechnology. The State Government has taken initiatives to strengthen the industrial base through the creation of land banks, augmentation of power, gas pipeline projects from Dabhol to Bangalore and from Chennai to Bangalore to Mangalore, he said. Mr Gowda added that the State through its new industrial policy (2009-14) aims to create a level-playing field for free and fair competition and robust industrial growth in the State. Speaking at the event, Mr Harsh Mariwala, President, FICCI, said that transaction costs associated with regulations and administrative procedures were still high in the State, and emphasised the need to streamline the process of giving approvals through a single-window mechanism to make it more effective.
On mining
He expressed concern over the ban imposed by the State on mining in Bellary, Tumkur and Chitradurga districts. The economic losses resulting from the continuation of the ban on private-sector mining of iron ore could be enormous, he said. According to him, it might even force closure of steel plants in Karnataka and lead to loss of employment and revenue to the State exchequer. Mr Mariwala said that the introduction of the GST from 2012 would make the supply chain tax neutral, reduce economic distortions and compliance cost and create a common market across India. - www.thehindubusinessline.com

NEW INDO-SWISS TAXATION TREATY COMES INTO EFFECT [12 Ooctober 2011]

India will finally be able to get its hands on the information relating to Swiss bank accounts of its nationals. The updated India-Switzerland taxation treaty that provides for such exchange of information came into force from Monday. The revised double taxation agreement with India in the area of taxes on income and capital entered into force, a statement by the Federal Department of Finance said on Monday. It contains provisions on the exchange of information in accordance with the international standard applicable at present, the statement said. However, the amended treaty does not allow India to seek information on old accounts, limiting its usefulness in unearthing black monies that may have been parked in Swiss accounts earlier. - www.economictimes.indiatimes.com

TAX ON FINANCIAL TRANSACTIONS IN EUROPE LIKELY BY 2014 [29 September 2011]

A tax on financial transactions in Europe has come one step closer as the European Commission laid out plans for a levy that would come into effect in 2014. It would raise up to €57 billion a year, helping European nations refill their depleted public coffers. In his so-called ‘State of the Union‘ address in Strasbourg, the President of the EC, Mr Jose Manuel Barroso, gave the policy an impassioned defense. "It is time for the financial sector to make a contribution back to society," he said. "It is a question of fairness." Under the proposals before the 27 members of the European Union, a 0.1 per cent rate of tax will be applied to the exchange of shares and bonds, while derivative contracts will face a levy of 0.01 per cent. Revenues will be shared across member States. "I am confident that our partners in the G20 will see their interest in following this path," said Mr Algirdas Semeta, Commissioner for Taxation, Customs, Anti-fraud and Audit. In addition to boosting public coffers, EU officials hope the move will help strengthen the monetary union by harmonising rates across countries. "It was an illusion to think that we could have a common currency and a single market with national approaches to economic and budgetary policy," he said. "For the euro area to be credible, we need a truly Community approach." In reality, however, the move will open up divisions within Europe. While France and Germany have been pressing for such a transaction, the UK Government has openly opposed any such tax that isn‘t applied globally. Last week, it emerged that Bill Gates, commissioned by the French President Mr Nicholas Sarkozy to make recommendations to the G20 on raising funds, will back the tax. - www.thehindubusinessline.com

THE RICH SHOULD BE TAXED MORE: CHIDAMBARAM [29 September 2011]

The Home Minister, Mr P. Chidambaram, wants the rich to be taxed more to sustain the Indian dream of inclusive growth. "I am (was) the Finance Minister who slashed your tax rates. And I am now suggesting to raise the rates, putting the onus on the richer classes," he said, while addressing a function of All India Management Association here on Wednesday. Even as preparations for the next Budget (2012-13) have started, Mr Chidambaram said, "We must raise the tax revenue to raise our non-debt revenue. I know my suggestions will not receive popular support but I think, I can summon the courage to make the statement."
Capital formation
As Finance Minister between May 2004 and November 2008, Mr Chidambaram had slashed taxes, winning much popular approval. He said that in the initial years, capital formation was an issue that required slashing tax rates. "But today, capital formation, both locally and internationally, is no longer a challenge," he said. The Home Minister‘s suggestions are in line with the proposals in the US and Europe to raise taxes for the rich. According to the Approach Paper to the 12th Plan, tax revenue is expected to rise from the current 7.4 per cent to 8.9 per cent next year and the non-tax revenue is expected to decline from 14 per cent in the current year to 13.11 per cent as a percentage of GDP. This would lead to a decline in aggregate resources. - www.thehindubusinessline.com

DIP IN DIRECT TAX KITTY INDICATIVE OF SLOWDOWN: FIN SECY [30 September 2011]

Union Finance and Revenue Secretary RS Gujral today flagged concerns over the dip in direct tax collection growth, saying it was indicative of a "slowdown in the economy". Pointing out to disappointing advance tax collection for the second quarter, Gujral said, "There has been a decline. It does indicate a certain slowdown in the economy." "The government would monitor the space as we go along," he added. The overall advance tax collections are estimated to have grown by 12% in the September quarter against the budget target of 19%. For top 100 companies, the growth was a modest 9.9%. Fears have been expressed earlier that weakening global economic environment and repeated rate hikes by the Reserve Bank in its quest to tame the uncomfortable inflation number are having an adverse impact on the economy. According to the official data, growth in factory output also slowed down to 3.5% for the month of August. On the indirect taxes front, Gujral sounded confident of achieving the targeted number of Rs 3.92 lakh crore, in spite of the Rs 36,000 crore hit on account of cut in excise and customs duties on petroleum products in wake of rising global crude prices. The Finance and Revenue Secretary did not give a direct answer when asked if the Government would achieve its target of collecting Rs 40,000 crore from the disinvestment programme this fiscal. "You cannot disinvest without taking the timing into account. The market situation needs to be taken into account because you are disinvesting government shareholding in these companies," he said. The Department of Economic Affairs on Wednesday had said it was considering other options like asking public sector undertakings to buyback Government equity so that the target was achieved. "If there is any decline from the Rs 40,000 crore which has been assessed, that would be taken care of from the other aspects that are there," Gujral said, without elaborating. A shortfall in collections from the divestment proceeds would not affect any planned spending by the government on social programmes, he stressed. When asked about the problems emanating from US (slowdown in growth) and the European Union (sovereign debt troubles) and its impact on exports, Gujral said the uncertainty is bound to exist for at least one year. He, however, said that the country‘s exports would not go down in absolute terms though there may be some slowdown in percentage terms due to base effect. - www.business-standard.com

NEGATIVE LIST BASIS OF SERVICE TAXATION-PART-II [3 October 2011]

Further, as indicated earlier, the negative list is also part of the larger debate on how best to introduce the GST from a philosophical standpoint of broadbasing of the tax and hence moderating the tax rates, with the corollary of necessarily limiting the exemptions and exclusions from the tax to a small and finite set of economic activities. Hence, while it is indeed now the accepted best practice to tax all services, with the exclusion of a negative list, as opposed to a positive basis of service taxation, through definitions of specified services, it is very necessary to have an informed and wide ranging debate on the nature of this negative list. An extremely important point, which has been made earlier but which merits reiteration, is the one on zero rating. The distinction between zero rating and exemptions is well known but critical, since the benefit of recouping of input taxes, in regard to a situation of zero rating, is likely to be significant for several sectors forming part of the negative list. It is thus imperative that zero rating be explicitly incorporated in the negative list, wherever appropriate. The broad recommendation would be to form a small core group of Government officials which will be mandated with carrying out extensive consultations and to thereafter make recommendations on the negative list which ought to be considered by the Government in much the same way as recommendations of a Parliamentary Standing Committee are treated. Finally, there is also the discussion as to the timing of the introduction of the negative list and as to whether it should be introduced at the time of implementation of the GST or whether it should be introduced prior thereto. There are evidently pros and cons of either option. Some key considerations that ought to weigh in this regard are that the States do not currently tax services, whereas they would do so under the GST, as also that several major sectors such as retail, upstream oil exploration etc. are unable to offset input service taxes in the absence of relevant output taxes and the like. On balance, it does appear that the better option is to introduce the negative list of service taxation co-terminus of the introduction of the GST. That would be the recommendation on timing. - www.thehindubusinessline.com

NEGATIVE LIST BASIS OF SERVICE TAXATION-PART-I [3 October 2011]

This is the last and the concluding article in this series on the Concept Paper on the negative list of service taxation (Paper) released by the Central Board of Excise and Customs for public debate. The previous two articles in this column had highlighted the salient features of the Paper and had focused on the various services that have been listed out therein for possible inclusion in the negative list. As indicated earlier, these services have been grouped into eight specified categories with the ninth being a residual one wherein as many as ten individual services have been identified. The earlier article had discussed the first six categories of services. The seventh and eighth categories of exclusions are the perennials relating to Education and Health. On education, the Paper limits the exclusions to pre-school, school and recognised education (i.e. education leading to the award of a certificate or a degree recognised by a body established under Indian law) and vocational training of a particular kind, except for those where capitation fees, donations or similar charges in relation to admissions are received. The attempt here appears to be to exclude large parts of education from the tax. Given that the right to education is a fundamental right as per the Indian Constitution, as it is in most other countries, keeping education out of the levy of the tax is certainly in line with both public policy as well as global best practice. It is however imperative that the exclusions be as broad as possible and also that the principle of zero rating is made applicable. The rationale for excluding capitation fees and donations from the purview of the negative list, even if they are in regard to the excluded categories of education, as above, appears in order since such charges are typically recovered by high end educational institutions and/or from students who can afford to bear the tax.The next category of service is that of Health. It is obvious that India has very poor public health indicators, when compared to global benchmarks and even when compared to many other developing countries. So, the case for universal healthcare is well made. The question is however moot as to how fiscal policy ought to be used in furtherance of this objective, if at all. Consequently, the Paper devotes an entire paragraph to elaborating the manner in which healthcare is sought to be included in the negative list. Two options are envisaged. Under the first, all healthcare services provided by clinical establishments with a turnover below Rs 4 crore in the previous year would stand excluded. Further, services provided by such establishments to the economically weaker sections, as notified, as well as all services provided by hospitals could be exempted from the tax. The second option envisages that all healthcare services provided by hospitals as well as all diagnostic and paramedical services would be outside the tax and only preventive health check ups carried outn a clinical establishment, cosmetic or plastic surgery would be within the purview. However, this option does not accord with the discussion in the Paper which envisages that only basic and public health services ought to be in the negative list, with all other services being part of the tax chain, so that input taxes paid at the previous stage are allowed to be offset in the consequent stages of consumption. Clearly, further debate is required in this regard and the Paper does recognise this fact. The Others category, being the residual one, contains a diverse range of services. Copyright services relating to original literary, dramatic, musical and artistic works, services relating to news gathering, sports and the performing arts, religion, trade unions, political parties, national and international prizes/awards in specified areas have all been sought to be excluded from the tax. These are all quite straightforward and do not admit of much discussion. On legal services, the exclusion is limited only to representational services provided by advocates to individuals and all other legal services will be taxed. This seems in order. The penultimate exclusion is with regard to tolls, except services in relation to collections of such tolls. The final exclusion relates to betting and gambling, as these are activities which are charged to entertainment taxes and the like, most of which are quite steep and the idea appears to be to avoid double taxation. It can thus be seen that the Paper has enumerated a fairly detailed list of exclusions from the imposition of the service tax. As has been elaborated in this article and earlier ones, there are several aspects of these exclusions which would need to be debated and discussed, not only from the point of view of whether certain services ought to be part of the exclusions at all but also from the point of whether the restrictive definitions pertaining to certain exclusions would pose both interpretation challenges as well as difficulties in implementation. Further, there is no one right answer to many of these questions and international experience and tax treatment, relative to the negative list, do vary across jurisdictions. TO BE CONT...

EXCISE DUTY ON BEER FROM STAGE OF FERMENTATION: SC [3 October 2011]

The Supreme Court has set aside the ruling of the Allahabad high court and held that manufacturers of beer in the state are liable to pay excise duty from the stage of fermentation and not when beer was fit for human consumption. Mohan Meakin Breweries and other distilleries had challenged the imposition of duty from the stage of fermentation. The high court struck it down, stating that the point at which the liquor was exigible to duty was when it was capable of being consumed by human beings as a beverage. Therefore, the state government appealed to the Supreme Court. The question was at what stage does the beer exigible to duty. The court declared that "when the fermentation process is completed, it becomes an alcoholic liquor for human consumption and there is no legal impediment for subjecting beer to excise duty at that stage."
Directors not vicariously liable for crime of company
Though civil law recognizes the principle of ‘vicarious liability‘ of directors of companies, the concept is not acknowledged in criminal law, the Supreme Court stated while allowing the appeal case, M/s Thermax Ltd vs K M Johny. The company was accused of criminal offences and the directors were also named in the complaint case moved by a contracting party due to disputes over the termination of the agreement. The Bombay high court allowed the prosecution to proceed. On appeal, the Supreme Court quashed the complaint and set aside the high court order. The Supreme Court stated that there was no specific allegation against the members of the board of directors or senior executives but they have been roped in for being in the management of the company. The offence of cheating and misappropriation of property could be filed only against the company and not against the persons in such circumstances, the court said. Provisions of the Negotiable Instruments Act and the Industrial Disputes Act cannot be imported into the offences under the Indian Penal Code, the judgment explained.
Jurisdiction in case of bounced cheques
In a case of bounced cheque, the Delhi high court has ruled that the magistrate in the place where the cheque was drawn and where the drawee bank is situated has jurisdiction to deal with the complaint. The power under the Negotiable Instruments Act is not with the magistrate where the cheque was presented or from where the notice was issued to the offending party, the high court stated in the case, Shree Raj Travels & Tours Ltd vs Destination of the World. Shree Raj issued some 45 cheques drawn on State Bank of India in Mumbai to Destination of the World in New Delhi. When the payee company presented them to ICICI Bank in Delhi, they were dishonoured by bank for want of funds. The Delhi company sent 15 days‘ notice to the Mumbai firm, as required by law before complaining to the magistrate. As the payment was still not made, a complaint was filed before a Delhi magistrate by the Delhi firm against the Mumbai firm andsix of its directors. Shree Raj contested the jurisdiction of the Delhi magistrate, arguing that it was Mumbai where the complaint had to be filed as the cheques were drawn on the bank there. Merely because the cheques were presented in Delhi and notice was issued from Delhi did not give the Delhi magistrate jurisdiction. The high court asked the magistrate to return the complaint. It also remarked that due to electronic clearing in recent times, the situation has changed. However, the changed scenario will be taken note of in an appropriate case in future. - www.business-standard.com

CBDT NOD FOR TAX FREE BONDS WORTH RS 30,000 CR [3 October 2011]

The income-tax department has given its nod for NHAI, IRFC, HUDCO and PFC to cumulatively issue tax-free bonds to the tune of Rs 30,000 crore during 2011-12. Both National Highways Authority of India (NHAI) and Indian Railway Finance Corporation (IRFC) have been allowed to issue tax free bonds of Rs 10,000 crore each during current fiscal. Housing and Urban Development Corporation (HUDCO) and Power FinanceCorporation (PFC) can issue tax free bonds for Rs 5,000 crore each, the central board of direct taxes (CBDT) has said.
Fund raising
The Finance Ministry move to allow these entities to issue tax free bonds would pave the way for them to raise long term resources, which are crucial for infrastructure development. The tenure of the tax free bonds, which will have to be secured, redeemable and non-convertible, will have to be ten or fifteen years. The bonds can be issued to the public or through private placement route. However, in both cases, the commission paid on sale of such bonds has been capped.
Interest on bonds
The CBDT has also stipulated that the interest on bonds should not be less than hundred basis points lower than the yield on government securities of equivalent residual maturity as reported by Fixed Income Money Market and Derivatives Association (FIMMDA) on the last working day of the month preceding the month of issue of bonds. But in the case of public issue, the interest on bonds will not beless than 50 basis points lower than the yield on government securities of equivalent residual maturity, the CBDT has said. - www.thehindubusinessline.com

LOWER WITHHOLDING TAX ON ECB MAY HAVE TO WAIT [3 October 2011]

DEA presses firms‘ case on infra funds; CBDT says tax sops a problem in FY12Lowering of the 20 per cent withholding tax rate on the interest paid for external commercial borrowings (ECBs) may have to wait, due to the pressure on direct tax collections.While deciding on steps to further relax ECB norms last month, the department of economic affairs (DEA) referred this demand of companies to the department of revenue. The specific proposal is to exempt the tax on interest payable for ECBs of a maturity of at least five years. A senior Central Board of Direct Taxes official told Business Standard it would be very difficult to agree on any reduction in the tax rate for any area, given the pressure on direct tax collections this year. Net direct tax collection in the financial year up to September 15 saw an increase of only 6.7 per cent, at Rs 1,27,858 crore, as against Rs 1,19,849 crore collected from April 1 to September 15 last year. Said a DEA official: "We are consulting the revenue department on this issue. They will come with their point of view and then we will discuss all aspects of the matter." He said ECBs were an important component for financing the huge requirement of the infrastructure sector and a final decision in this regard would be taken by finance minister Pranab Mukherjee. Explaining the position on taxation of interest on ECBs, Himanshu Parekh, executive director of KPMG, said: "Interest on any borrowing in foreign currency payable by an Indian concern to a non-resident attracts tax withholding @ 20 per cent (plus surcharge) under the Income Tax Act. The withholding tax rate could be lower under the various Double Tax Avoidance Agreements entered into by India." The government, keeping in mind the infrastructure sector‘s requirements, has substantially relaxed the norms on ECBs by companies in recent months. In the backdrop of rising interest rates, a high-level committee decided on September 15 to allow companies to raise cheaper funds abroad to refinance their rupee loans. It permitted China‘s renminbi as an acceptable currency for the first time under ECBs, with an overall ceiling of $1 billion. And, to increase the limit for these borrowings under the ‘automatic‘ route to $750 million from the current $500 mn. Such ECBs, where a company can raise money without seeking the regulator‘s approval, would have a maturity of a least five years. Though the committee left the overall annual permissible ECB limit of $30 bn (raised from $20 bn in May) unchanged, as only $15.13 bn from this route had been used so far this year, economic affairs secretary R Gopalan said additional ECB for the infrastructure sector could be considered, above this limit. - www.business-standard.com

TAX REFUND LETTERS TO REACH IT FIRMS SOON [4 October 2011]

The finance ministry is firming up a plan to expedite payment of thousands of crores of rupees it owes the software and BPO industry in tax refunds.The move promises to bring some joy to the $50 billion information technology sector haunted by the deepening economic woes of the western world.A plan is being finalised to ensure refunds are issued expeditiously, a finance ministry official told ET on condition of anonymity.Chairman of the Central Board of Excise and Customs S D Mazumdar said the plan will be taken up by the board this week.Software makers in India are facing a huge pressure on their margins as fears of a recession in the US and debt crisis in Europe cripple their main export markets.Industry watchers say a settlement of pending refund claims during such a distress will help shore up the dwindling bottom lines of these companies.The IT and BPO industry,which employs over two million workers,has been consistently raising the issue of refunds with the government.Infosys Chairman Emeritus N R Narayana Murthy had even voiced the concern at a recent meeting of industry leaders with Finance Minister Pranab Mukherjee.Experts say the problem arises because of a linkage between input services consumed by the industry and output services that are exported. Since no taxes can be levied on exports, taxes on inputs used in the process of carrying out the exports are neutralised through refunds.In the IT sector, however,there has been an issue over taxes paid on input services consumed in the process of providing a service overseas. Although some inputs have been specified by the CBEC,confusion persists.This leads to delays in refunds or denials altogether.The government has made several attempts in the past to ensure speedier refunds through simplification of procedures,but this has failed to satisfy the industry.The process (of refunds) is very cumbersome and tedious, said Som Mittal, president of IT industry body Nasscom.Requirement of documentation has led to unnecessary delay in issue of refunds. In its last attempt to simplify procedures,CBEC had issued a circular clearing the ambiguity over definition of services used as inputs by technology and BPO companies.Service tax paid on inputs,such as transportation of staff,telecom facilities,software maintenance and up-grades,hiring of recruitment agencies and other related services were made eligible for refunds.But the industry says the conditions specified in the circular,such as proof of consumption of services, made the refund process cumbersome.‘‘If there is a single query involving just Rs 1lakh,a refund of Rs 10 crore may be put on hold,‘‘ Mittal said,pointing out that refund claims worth Rs 3,000 crore made in 2010-11 remain locked up.The finance ministry official quoted earlier said the proposal for speeding up the refunds will go to the finance minister for approval after it is cleared by the CBEC.‘‘The guidelines will be issued by next week,‘‘ the official said,addin that they will cover both dues of current fiscal as well as those of the previous financial years.Experts,however,say that easing of the process on its own will not help.Liberalizing procedures for grant of refund of service tax is welcome,but they should be implemented in actual letter and spirit by the field formations, said Bipin Sapra,partner with audit firm Ernst & Young.The ministry is also working on a drawback scheme to refund service tax for goods exporters.This is expected to become operational soon. - www.economictimes.indiatimes.com

I-T RETURNS DATE EXTENDED IN SIKKIM [5 October 2011]

The government has extended the last date of filing income tax returns for assessment year 2011-12 by a month to October 31 in Sikkim, due to disruption in life following the earthquake. - www.business-standard.com

OPTIMISE HRA TO INCREASE MONTHLY SAVINGS [15 September 2011]

House rent allowance or HRA is a core component of one‘s salary. It is given to every salaried employee towards meeting the cost of renting of house in the city of work. HRA gets special treatment in tax liability calculations and is exempt from income tax to a certain limit.
When you are calculating HRA for tax exemption you take into consideration four
aspects, which include: salary, HRA received, actual rent paid and the city where you reside (metro or non-metro). If they remain constant throughout the year, then the tax exemption is calculated as a whole annually. If they are subject to change, as in the case of a rent hike or shift in residence etc, then it is calculated on a monthly basis. The place of residence is significant in HRA calculation as for a metro the tax exemption for house rent is 50 per cent of the basic salary while for non-metro it is 40 per cent of the basic salary.
How to calculate HRA?
Let us consider an example to understand how HRA exemption is calculated. Sameer Shah is working with an IT company and resides in a rented house in Mumbai for which he pays Rs 25,000 per month as rent. His monthly basic salary is Rs 60,000 and actual HRA received is Rs 20,000. Least of following values are considered to find out HRA tax exemption: Actual HRA received [Rs 20,000 in the case Sameer Shah] 50 per cent of the basic salary if residing in a metro [In Sameer‘s case, Rs 30,000] Or 40 per cent of basic salary if residing in non-metro city [Rs 24,000 in this case] Actual rent paid minus 10 per cent of basic salary [Rs 19,000 in this case] As per the above calculation, the least of all values is Rs 19,000 which is allowed as
HRA exemption.How to optimize HRA exemption benefits?
Many tax payers have a question in their mind that how they can utilise the benefit of HRA if they are not living in a rented house. If you are staying with parents and paying them the rent, then in that case you can claim the rent paid to your parents. In this case your parents will be the landlord and you can show the rent paid in the tax calculations for HRA. But please make sure that your parents show the rental income in their records to avoid any discrepancy in the future. You, however, cannot claim rent paid to your spouse for the purposes of exemption.
Home loan and HRA
Many investors are also stuck when it comes to claiming exemption from HRA and home loans together when they buy a new house. The most obvious question is that can they get the benefit of HRA exemption along with housing loan? As per the Income Tax Act there is no restriction on claiming home loan and HRA benefit together. If you have taken a home loan for the purchase of a house but staying in rented house due to some genuine reason, in that case you can claim the benefit of HRA and the principal and interest component of the home loan as well.
Following are some of the cases considered
as genuine for staying i rented house inspite of having taken a home loan: The house which you own is located far from your work place and is inconvenient to commute. You have bought house in one city but due to a job transfer you have to live in another city. If you have taken home loan but house is yet not ready to move into or occupy. - www.thehindubusinessline.com

TN TO LEVY ENTERTAINMENT TAX ON IPL MATCHES, DTH [15 September 2011]

The Tamil Nadu Government today brought the multi-million rupee cricket extravaganza, the Indian Premier League, and DTH services under the ambit of entertainment tax. The AIADMK government amended the Tamil Nadu Entertainment Act, 1939, to bring the cricket tournaments conducted by the Indian Premier League (IPL), and the direct-to-home (DTH) services under the tax ambit. Noting that certain States are already levying the tax on cricket tournaments and DTH service, it said the 1939 Act did not contain any provision to levy entertainment tax on IPL matches and DTH services. ‘In certain States, entertainment tax has been levied on DTH service and on cricket tournaments conducted by IPL. The Government has therefore decided to include DTH service and cricket tournaments conducted by IPL within the definition of the term ‘entertainment‘ and to levy entertainment tax under the Act,‘ the Bill to amend the Act said. The Bill, moved by the Commercial Taxes Minister, Mr S.S. Krishnamurthy, was adopted by a voice vote. - www.thehindubusinessline.com

ERRORS IN DIRECT TAXES CODE [17 September 2011]

The Direct Taxes Code Bill, 2010, was presented in the Lok Sabha on August 30, 2010, to replace the existing Income-Tax Act, 1961, and the Wealth-Tax Act, 1957, with effect from April 1, 2012. The task of drafting DTC was undertaken on the directions of the finance minister for the purpose of simplifying the cumbersome language of various direct tax laws. Although the DTC is now clothed in a simple and uncomplicated language, the simplification of the language has been achieved at an enormous, but unnecessary, cost to the exchequer by opening the floodgates for tax evasion as most provisions are atrociously ill-drafted and defective, making them totally ineffective. Section 191 of the DTC is an important section to protect revenues. Since no appeal can be filed against the order of the assessing officer (AO) by the income-tax department, the only way in which his orders prejudicial to the interests of the revenue can be corrected is by way of revision by commissioner of income tax under section 191 of the DTC. Like all other important sections, this section has been drafted with culpable carelessness. Section 191(5) throws all orders out of the purview of revision by the CIT against which appeal has been filed or appeal has been decided, and all orders that were considered by the Dispute Resolution Panel. This is simply absurd and is clearly the result of faulty drafting. The appeal against the assessment order is filed before the CIT(A) by the assessee only. Therefore, the issues raised in appeal are those where AO decided against the assessee whereas the issues falling under section 191 for revision are those where the order of the AO is prejudicial to the interest of the revenue and is in favour of the assessee. Obviously, the issues falling under section 191 would not generally be part of the appeal. Therefore, it does not stand to reason that an assessment order should be out of the purview of section 191, simply because it is appealed against. Rather, a clever assessee would like to file appeal on a minor matter to get out of the purview of section 191. That is why in the I-T Act, 1961, it was clearly provided in Explanation(c) of section 263(1) that where any order had been subject matter of any appeal, the powers of the CIT to revise an order will extend to all those matters that were not considered and decided in appeal. Similarly, the section 194(5) of the original DTC provided that the powers of the CIT for revision of orders did not extend to matters that were appealed against or were considered and decided in appeal. However, the section 191(5) of the DTC throws all orders out of the purview of revision where appeal is filed or decided on any matter whatsoever. This is the care with which this much-touted DTC has been drafted. And in this particular instance, the drafting is even worse than the drafting in the original DTC! The next very important section is section 159, under which income that escaped assessment earlier is to be brght to tax. Even this section suffers from drafting errors so serious to render it almost completely ineffective. Suppose an assessment order is passed by an AO and the assessee files appeal against it. Now, as soon as CIT (A) passes an order, the order of the AO merges with the order of the CIT (A) and, therefore, cannot be reopened by the AO for reassessment. Similarly, when CIT would pass order of revision particularly under the DTC, the order of the AO will be merged with it and lose its separate existence and cannot be reopened by the AO. Therefore, in all such cases, even if the AO has definite evidence to prove that income escaped assessment at the time of original assessment even in matters not considered by the CIT or CIT (A), he cannot proceed to reopen the assessment u/s 159. Again, the AO cannot reopen an order passed with the approval of DRP even in regard to matters not considered by it. To take care of such eventualities, a provision was required to be made in the DTC to provide that the AO could proceed under this section in respect of matters that were not subject to any appeal, revision or directions of DRP. There was such a provision in the I-T Act, 1961, which provided that the AO could reopen the assessment to assess or reassess income relating to issues not raised in appeal, reference or revision. This provision is now missing from the DTC! There are many more errors in the sections discussed here and there are many more sections in the DTC that suffer from such drafting errors. In fact, it would need a very large volume to discuss all the errors. In some instances, even the correct language used in the original DTC circulated to people inviting their comments and suggestions has been changed to incorrect language for incomprehensible reasons. Thus, Parliament, in passing the DTC in its present form, will be passing a law that is full of patent errors, pitfalls and loopholes that will come handy for tax evaders to fulfil their nefarious designs to the detriment of the revenue department. - www.economictimes.indiatimes.com

DEPB REPLACEMENT SET TO CUT TAX REFUNDS BY 1-3 % [17 September 2011]

The government has expanded its duty drawback scheme to cover items under a lucrative duty reimbursement mechanism for exporters that ends this month, reducing the benefits under the transitory alternative regime. The 1, 100 items under the popular exports incentive, Duty Entitlement Pass Book (DEPB) scheme, will now move to the duty drawback scheme from October 1, which will be valid for a year. Both schemes give credit to exporters for the taxes paid on the inputs used in producing goods, but DEPB yields more benefits. The new regime will lower tax refunds of exporters by 1% to 3% from October 1, finance Secretary R S Gujral said while announcing the switchover. The government had last year provided. 8, 700-crore refund under the DEPB scheme, largely benefiting engineering, chemical, pharma, textile and marine products industries. With the inclusion of these 1, 100 items the drawback schedule will now have nearly 4, 000 items. Effectively, the reduction amounts to reducing the stimulus of higher DEPB rates announced after exports crashed in the wake of the global financial crisis. Since reduction would only be to the extent of the stimulus component added to the DEPB rates in October 2008, the new rates would be by and large acceptable to the industry, said Ramu Deora, president, Federation of Indian Export Organisations. The product-wise duty drawback rates will be announced next week. The rates are based on the recommendations of a committee headed by Planning Commission member Saumitra Chaudhuri. Aman Chadha, chairman, Engineering Exports Promotion Council, said he would like to see the final rates before making a comment. There are apprehensions about the reduction in tax refunds. But we need to see how much they are going to come down product by product before we can make any conclusive remarks, said Chadha. Bharat Forge, a leading exporter and a DEPB user, declined to comment. There will be a minor reduction in the drawback rates from those applicable as of now because of the reduction in basic customs duty on crude from 5% to zero and excise on diesel from. 4. 40 a litre to. 2. 40 a litre. Exporters had been demanding that the DEPB scheme be allowed to continue for one year because of the uncertain global environment that was beginning to affect orders. Looking at the increasing economic problems in the US and Europe, our major export markets, it is difficult to sustain this momentum unless the current DEPB rates are maintained, said DB Mody chairman of international committee of Indian Drug manufacturers Association. Exports grew a robust 44. 2% in August 2011 from a year ago, but were down 17% from July. - www.economictimes.indiatimes.com

EXPORTERS TO GET LOWER TAX REFUNDS UNDER NEW SCHEME [17 September 2011]

Exporters will get lower tax refunds from October 1, as the Union finance ministry today announced a new duty drawback scheme, ending the 14year-old Duty Entitlement Passbook Scheme (DEPB). To provide a smooth transition from the popular tax credit scheme to the drawback scheme, the ministry said the drawback rate would have a floor rate of 5.5 per cent of the value of export consignments for most items. The decision, taken after years of dallying, to neutralise the input tax paid on duties, may primarily affect companies in the engineering sector, including automobiles and the auto component industry, chemicals, textiles, pharmaceuticals and the marine sector, which were major exporters, getting the benefit of the DEPB scheme. The finance ministry has softened the blow, as the new duty drawback rates will mean a moderate reduction of one to three per cent in the existing DEPB rates. The lower reduction has been provided only for the current financial year and the rates may be rationalised next year.
COMMENTS
‘Since the DEPB scheme will not continue beyond September 30, it has been decided to provide a smooth transition for these items, while incorporating these in the drawback schedule. As a transitory arrangement, these items will suffer a modest reduction in the existing DEPB rates, to the extent of one per cent to three per cent, which represents the ad hoc rates of DEPB introduced in 2007,‘ Finance Secretary R S Gujral told a press conference. There are 2,130 items on the DEPB list, of which 1,030 are also covered in the drawback schedule. The remaining 1,100 items would now be incorporated in the new drawback schedule, taking its total count to about 4,000 items from the present 2,835. With the DEPB facility, exporters got credit for customs duty paid on inputs used in making export goods. Under duty drawback, they receive dutyfree scrips which can be used to pay import duties. The DEPB scheme was based on the assumption that the exporter used duty-paid imported inputs. Duty drawback neutralises levies paid on inputs. The revenue outgo towards the DEPB scheme has increased over the years and was ‘8,700 crore last year. ‘With withdrawal of the DEPB scheme, the government‘s revenue forgone will be less. But our intention was to unify export promotion schemes, not maximise revenues,‘ said the Central Board of Excise & Customs chairman, S Dutt Majumder. He said the rates would be notified by the end of next week. The ministry said the duty drawback rates for items under DEPB were recomputed taking into account prevailing customs duty rates. It was observed that for most items, the recomputed rate worked out to be far lower than the existing DEPB rates, even after removal of the ad hoc element of one to three per cent. Despite that, the ministry decided to have the minimum drawback rate at 5.5 per cent for most items, so that exporters were not adversely affected. For another 340 items, such as worsted woollen yarn, bankets and nylon twine, where the recomputed rate worked out to more than 5.5 per cent, the government has decided to provide the higher recomputed rate. The rate could be over 10 per cent for some items. Ramu S Deora, President, Federation of Indian Export Organisations, said since reduction would be only to the extent of the stimulus component, added to DEPB rates in October 2008, the new rates will be, by and large, acceptable to the industry. He said even if the new drawback rates were a little less, the saving on account of transaction time and cost would offset the disadvantage. - www.business-standard.com

DIRECT TAX COLLECTION UP 6.7% [17 September 2011]

Net direct tax collection in the current financial year up to September 15 is higher by 6.7 per cent at Rs. ‘1,27,858 crore as against Rs. ‘1,19,849 crore collected from April 1 to September 15 last year. The net collection has been impacted by Rs. ‘61,000 crore of refunds. Gross direct tax mop-up during the period has been Rs. ‘1,88,868 crore, a growth of 29.5 per cent over the previous year‘s collection during the period of Rs. ‘1,45,825 crore. September 15 was the due date for payment of the second instalment of advance tax. Interestingly, smaller centres have been doing better in growth of direct tax collection this year as compared to Mumbai and Delhi. Net direct tax revenue realisation in Chandigarh grew 42.9 per cent to RS. ‘7,594 crore up to September 15 from Rs. ‘5,315 crore in the same period last year. Similarly, Pune‘s growth was 20.5 per cent at Rs. ‘6,623 crore, over last year‘s collection of Rs. ‘5,499 crore. Bhopal‘s rise was 51.3 per cent, with the realisation of Rs. ‘3,584 crore against RS. ‘2,369 crore in the period last year. Ahmedabad;s was up 38.2 per cent, to Rs. ‘6,009 crore from Rs. ‘4,348 crore. Other smaller centres with asimilar story include Bhubaneswar, Patna, Lucknow, Kochi and Jaipur. The biggest contributor to the direct tax kitty, Mumbai, has seen an eight per cent decline in tax realisation with Rs. ‘36,815.5 crore till September 15, as compared to Rs. ‘40,000 crore in the same period last year. Delhi has seen a drop of 16.2 per cent, from Rs. ‘18,427 crore in the 2010 period to Rs. ‘15,444 crore. - www.business-standard.com

TAX RATES AND INFLATION [19 September 2011]

In the past several months, the Reserve Bank of India has raised interest rates nearly a dozen times to curb inflation. The rise in interest rates is meant to curb liquidity in the system. It has no doubt worked well to some extent. While monetary policy has been active, fiscal policy is not. Inflation means large cash chasing limited stocks. A higher direct tax rate could have been thought of to curb conspicuous consumption on the part of the rich. Our income tax rates have been practically stabilised at 33 per cent for nearly 15 years. Prof. Arun Kumar of the Centre for Economic Studies and Planning of New Delhi points out that if the Managing Director of a company gets Rs 30 crore as salary, bonus, commission etc., but gets Rs 1,000 crore as dividend, his tax liability is only about Rs 10 crore. This will amount to a tax rate of 0.01 per cent of the total income. Indian corporate houses account for 0.1 per cent of the population but control 20 per cent of the national income. They enjoy tax expenditures of over Rs 5 lakh crore. Corporate houses pay an average tax of 23 per cent of their legally declared taxable incomes, and not the official rate of 33 per cent. All this accounts for the low tax-GDP ratio in India.
IN EUROPE, UK
Mr Warren Buffet wrote to the New York Times on August 14, that the US should stop ‘coddling‘ the rich and raise the top tax rate in order to reduce the deficit. His call found loud echoes across Europe. Sixteen of France‘s wealthiest people signed a petition urging the French Government to tax them more. Welcoming the French initiative, about 50 wealthy individuals in Germany started campaigning for a higher top tax rate and styled themselves as a group representing the Initiative of the Wealthy for a Wealth Tax. The French President, Mr Nicolas Sarkozy, announced a 3 per cent increase in the tax on the wealthiest individuals. Britain levies 50 per cent tax on the Super-rich. This is paid by 300,000 people earning more than $2,45,000 a year. The Economist points out that larger number of affluent British feel hard hit by tweaks to tax allowances, as well as higher taxes on pension contributions, capital gains and house sales. The British Chancellor described tax evaders as ‘leeches‘. Liberal Democrats advocate rebalancing taxation away from earned income towards unproductive assets generated by the long property boom. Advocating higher property taxes, they point out that ‘Mansions can‘t run away to Switzerland‘. For the first time the British Government was able to secure an agreement with Switzerland under which the UK was able to collect billions of pounds from those who have far too long evaded their responsibility to pay UK tax by abusing Swiss banking secrecy laws. Hereafter, under the agreement, the Swiss will tax the bank accounts of UK citizens at rates ranging between 19 per cent and 34 per cent the principal sum hidden, depending on how long the account has been running. The taxwill be transfered to the UK without revealing the identity of the account holders. The UK authorities struck a similar deal with the Government of Liechtenstein, a tax haven. America has been able to force Switzerland to reveal the names of holders of secret Swiss bank accounts under threat of reprisals. Names of thousands of secret accounts holders in Swiss banks will be revealed to the US authorities. Failure to comply with the mandate from the American IRS could have meant a fine up to $2.6 billion on the Swiss banks. The US rejected the Swiss proposal to tax money kept by American residents in secret Swiss accounts and also to introduce a withholding tax on future interest earned.
THE INDIAN SCENE
For the first time, the Swiss National Bank (SNB) disclosed towards the end of July, 2011 that Indian deposits in secret Swiss bank accounts amounted to 1945 billion Swiss francs ($2.5 billion at the end of 2010). It is also now known that there has been a perceptible flight of funds of Indian holders from Swiss banks to those in Singapore, Dubai and Mauritius. Indian policy makers should wake up to the changing tax scenario across the globe. Even the British Conservatives have concluded that the so called free market is a ‘corporatist racket for the few‘. It is free only for the very rich who can move their money at will. Can the Finance Minister do something to make our tax system more progressive? The Estate Duty was never meant to be abolished permanently. The exemption for long-term capital gains tax in shares and securities has led to abuse. Dividends in the hands of captains of industries must be brought back to tax. There is also an urgent need to look into the tax rate remaining stagnant at 33 per cent for nearly 15 years. Fiscal policy must aid monetary policy to flight inflation. - www.thehindubusinessline.com

NEGATIVE LIST BASIS OF SERVICE TAXATION PART-II [19 September 2011]

This is both from the point that it is hard to tax financial services in many instances and also from apublic policy standpoint given the primary role of the sector towards building financial inclusion and other socially relevant objectives. However, under this broad category, only four specific services have been listed out for possible inclusion in the negative list, namely sale or purchase of securities/debts on a principal to principal basis, interest, dividend and inter-bank sale and purchase of foreign currency. Surely, the just initiated debate on the appropriate taxation of the financial sector under the forthcoming GST is the appropriate and broader one and the negative list, insofar as this sector is concerned, will need to be considered in the light of this debate. It is also important to note that the report of the Task Force of the Thirteenth Finance Commission on the GST did recommend full taxation of the sector under the GST, with a corresponding complete offset of all input taxes on both goods and services used in the sector. This debate is very nascent and it is critical to bring international best practices to bear upon the discussion, so that indirect taxation of this important engine of economic growth is appropriately calibrated. The next category is with regard to transportation. The sub categories are public transport of passengers by buses, metered taxis, three wheeler auto rickshaws, ships or vessels of specified tonnage, transportation of goods outside India by any means of transport and supply of goods carriage to a person engaged in goods transportation. It is interesting to note that public transportation of passengers by local rail, metro rail etc. is not part of this list and is hence apparently intended to be taxed. It is also moot as to why transportation to a destination outside India need at all to form part of the exclusion, notwithstanding that inland transportation up to the country‘s borders could happen during such transportation. This is because the overall principle of zero rating of exportation from the country of both goods and services will, in any event, need to be observed, regardless of the inclusion of such transportation in the negative list. The sixth categorization of services is in relation to specified construction and real estate related services, all of which can clubbed together as ‘public works‘. Hence, the detailed itemization of such ‘public works‘ is entirely in order. In addition, there is an exclusion pertaining to construction activities relating to residential buildings comprising of a single dwelling unit. This is again unexceptionable. The point about zero rating however is an important one in relation to these ‘public works‘, as without the benefit of input tax offsets/refunds, the resultant stranded tax costs could be significant, given the magnitude and the scale of such public works requiring the widespread use of tax paid goods and services. This is a very impotant point and requires substantial discussion and debate. The final sub categorization under this category relates to renting of residential houses below adefined monetary threshold (supposed to be finalized after debate) and when used otherwise as a hotel, inn, guest house, etc. This sub categorization appears problematic and would surely merit further discussion. The next and last article in this series will focus on the other services contained in the Paper and conclude with some broad recommendations in regard to the proposed negative list. - www.business-standard.com

NEGATIVE LIST BASIS OF SERVICE TAXATION PART-I [19 September 2011]

The previous article in this column had highlighted the salient features of the Concept Paper on Services Taxation (Paper), which was recently released by the Central Board of Excise and Customs for public debate. This article will focus on the various services that have been listed out in the Paper for possible inclusion in the negative list. These services have been grouped into eight specified categories with the ninth being a residual one wherein as many as ten individual services have been identified. The first category is that of services provided by specified persons and the three sub categories enumerated there under are: -notified services provided by: a. the Government and the judiciary; b. the RBI; and c. Government regulatory bodies -services provided by individuals to the Government in relation to their representation on any council, commission or similar body set up by the Government. -services provided by the UN, international bodies, diplomatic missions under diplomatic and consular arrangements as per laid down conditions (details to be specified). Now, it can be seen that the aforesaid services, to the extent notified as per certain principles that would be laid down for the purpose, ought certainly to form part of the exclusions to the tax since they would typically qualify under the grounds of public policy, international agreements/obligations and the like. Hence, this first categorization of services for possible inclusion in the negative list appears in line with the prevalent practice elsewhere in the world. It is interesting to note here that regarding the services to be provided to the UN and others bodies, the Remarks Column in the relevant Table to the Paper states that such services will be exempt, as is currently the case. This would imply two things; one, that exempt services would not form part of the negative list and, second, that all services which will form part of the negative list would be zero rated, with the consequent ability to recoup input taxes. This point needs further elaboration and discussion since, as pointed out in the previous article, there is otherwise no explicit recognition of the principle of zero rating in the Paper. The second categorization of services provided as part of social welfare and by public utilities is again in line with international practice, including the caveat contained in the Remarks Column that the above public and social welfare activities will be suitably defined/restricted. There is a further sub categorization relating to services connected with deaths and this is surely unexceptionable, since surely there ought not to be taxes attendant to such unfortunate events even though deaths and taxes are supposedly the only two constants in this world! The third categorization is an unusual one relating to agriculture and animal husbandry notwithstanding that it is limited to those services that are directly used for growing, cultivation or harvesting of agricultural produc or in horticulture, forestry, poultry/dairy farming etc. It is moot as to whether all such services, notwithstanding the envisaged limited set of exclusions, should be in this list, especially given the overall philosophy of tax reform in general and of the GST in particular, of broadening the tax base and hence moderating the resultant tax rates. It is also India specific, given the country‘s continued inability to tax agriculture to any meaningful degree. Here again, there is an interesting reference to exemption from tax of support services in regard to these areas, again leading to the possible interference of zero rating of services under the negative list. The fourth categorization is an interesting one relating to the financial sector. As is well known, the financial sector has internationally been treated distinctly under the GST. Cont....

IT ACT MAY POLICE 3G SERVICES [20 September 2011]

The government is tightening the noose around telcos, internet service providers (ISPs), network service providers and search engines in a bid to monitor internet traffic. The exercise is ostensibly for security reasons and to prevent ‘misuse‘ of the freedom of speech in cyberspace. For one, the Centre plans to monitor third-generation (3G) mobile services offered by all telecom service providers - currently monitored by provisions under the unified access service licence - by bringing these under the ambit of the internet monitoring system (IMS). Simultaneously, prominent ISPs and search engines such as Google, Microsoft, Yahoo and Facebook have been given till the end of this month to come up with a concrete proposal to monitor ‘defamatory and unsavoury‘ content. The move, according to sources close to the development, was initiated by Kapil Sibal, minister for communications and information technology. In a recent meeting of an inter-ministerial group to review the IMS deployed nationwide by the Centre for Development of Telematics (C-DoT), it was suggested 3G mobile services may also be considered as internet service provider data. The group had officials from the department of telecommunications (DoT), Intelligence Bureau and C-DoT, among others. The IMS already installed by C-DoT enables the monitoring of internet data. It will now be upgraded, keeping in mind the latest attacks and security needs of the country. The IMS covers 71 locations and nearly 1,500 Gbps internet traffic, and is developed in close coordination with security agencies. The IMS capacity is decided in consultation with service providers by C-DoT, considering the three-year traffic projections provided by service providers. The government can access data through IMS based on the needs of security agencies. Both state-run telecom players BSNL and MTNL have already floated tenders for procuring hardware equipment. For BSNL, the process is expected to be completed by the month-end. The IT Act (Amendments), 2008, provides the broad parameters for interception/monitoring of telecom services. If 3G mobile services are brought under it, it will be the first step towards making the Act effective, according to cyber law expert and Supreme Court lawyer, Pawan Duggal. Curbs on search engines and ISPs in India are not new. Currently, under Section 79 of the IT Intermediary (Rules and Guidelines) 2011, intermediaries (comprising telcos, ISPs, network services providers, search engines, cyber cafes, web-hosting companies, online auction portals and online payment sites) are mandated to exercise ‘due diligence‘ and advise users not to share/distribute information violative of the law or a person‘s privacy and rights. Intermediaries are expected to act on a complaint within 36 hours of receiving it, and remove such content when warranted. Now the government is not only demanding ‘due diligence‘ but also active monitoring of content on the internet. The affected partie, meanwhile, are uderstood to be preparing their response while simultaneously garnering the support of industry bodies to support their point of view. While ISPs and search engines like Yahoo and Google actively support the government when asked to remove content from their sites, they do not monitor content. ‘We do understand there should be no child pornography or other such content on our sites. But how, for instance, does one define defamation? That should be left to the courts. We can only remove offensive content when requested,‘ said an ISP player, who did not wish to be identified. It was only last month that the Centre had written to DoT, asking it to ‘ensure effective monitoring of Twitter and Facebook‘, a fact the minister of state for communications and information technology, Milind Deora, acknowledged a few days later in a written reply to a question in the Rajya Sabha. He spoke, in particular, about access to ‘encrypted data‘ on social networking sites, but did not elaborate on the subject. Currently, the Indian Telegraph Act and the Indian Information Technology Act 2008 (amendments were introduced in the IT Act 2000) give the government the power to monitor, intercept and even block online conversations and websites. The Centre for Internet and Society has put up a list of 11 such websites blocked by a government order. The data were received from the department of information technology. DoT is also looking at the feasibility of having an interception solution for all highly encrypted services such as BlackBerry, Gmail and Skype. Earlier, all the operators had agreed to develop the required technical capability for interception of 3G video calls. DoT and the home ministry are working together to put in place rules for intercepting or monitoring 3G data. The government can, and should, monitor conversations and websites if it believes the content can harm the security, defence, sovereignty and integrity of the country, agree experts. But, they have often wondered how the government would go about its idea of ‘blanket surveillance‘, implementing the task of monitoring each and every conversation on an unstructured internet. Companies like Facebook, Twitter and Google have their servers outside India. Hence, the jurisdictions are different, and Indian laws will not apply. Twitter, for instance, states in its guidelines for law enforcement, ‘Non-public information about Twitter users is not released, unless we have received a subpoena, court order, or other valid legal process documents.‘ Facebook has a similar policy. US federal law prohibits the disclosure of the contents of an account such as messages, wall posts and photos except in response to a civil subpoena or court order, the company says on its website. Google‘s policy is no different, though it has cooperated with the Indian government in cases where security was involved. - www.business-standard.com

E-FILING OF EXCISE, SERVICE TAX RETURNS MANDATORY [20 September 2011]

To introduce the much-awaited Goods and Services Tax (GST) in 2012-13, the finance ministry has made it mandatory for taxpayers to file their central excise and service tax returns electronically from October 1. E-filing through the Centre‘s online tax payment application ACES (Automation of Central Excise and Service Tax) will be a must not only for returns due after October 1, but also for returns of past periods which have not been filed yet or are to be revised.The Central Board of Excise and Customs (CBEC) said the returns would have to be filed electronically by all assesses, including export-oriented units, small-scale industries or those availing of certain exemptions, irrespective of the duty paid by them in the preceding financial year. CBEC has also asked taxpayers to file various other documents on the electronic mode, such as the annual financial information statement and the annual installed capacity statement. The steps are being taken to make the transition to GST smooth. The finance ministry has set the next financial year as the target to introduce the indirect tax regime, which will subsume most of the taxes levied by the Centre and the states on sale of goods and supply of services. The government wants to strengthen its information technology backbone before switching to GST. It is designing a single portal for registration, filing returns and payment of taxes under GST. The system, called GST-N, will automatically segregate the data that needs to go to the state system. Payments will be done through RBI clearing accounts for states and the Centre. A pilot project is being undertaken in 11 states. States are expected to move to this IT platform even before the introduction of GST. The new platform would provide a common PAN-based taxpayer identification, a common return, and a common challan for tax payment. This will have the facility of reconciliation of transaction across different taxes - value added tax, income tax and central excise resulting in detecting tax evasion and plugging loopholes. Meanwhile, the report of a task force on business processes relating to GST will be put in the public domain by the end of this month for discussion. The task force, set up to put together legislation on GST, has already submitted an interim report. - www.business-standard.com

INDIRECT TAX TARGET OF RS 3.98 LAKH CR WILL BE MET [20 September 2011]

The slowdown in industrial activities notwithstanding, the government on Monday said it is confident of achieving its FY‘12 indirect tax collection target of Rs 3.98 lakh crore, an 18 per cent increase year-on-year. ‘Our revenue collection is robust right now. Total indirect tax collection is 23.9 per cent up till August. I don‘t think, there is any reason for concern (on meeting target). We are confident of achieving the target,‘ Central Board of Excise and Customs (CBEC) Chairman Mr S Dutt Majumder told reporters on the sidelines of a CII meet here. He said central excise and service tax collections were good and so was customs duty collections. Led by robust service tax collections, the indirect tax mop-up in the April-August period rose by 23.9 per cent to Rs 1,57,725 crore. The government has fixed an indirect taxes collection target of Rs 3.98 lakh crore for the CBEC, compared to Rs 3.38 lakh crore last fiscal. There were apprehensions on the indirect tax collection front as industrial output measured on the basis of the Index of Industrial Production (IIP) slowed to a 21-month low of 3.3 per cent in July. In addition, the government has slashed customs and excise duty on petroleum products, which contribute Rs 49,000 crore annually to the Centre‘s coffers. The CBEC chairman, however, maintained that the cut in duties on petroleum products would not impact revenue collections. On taxation of services based on a negative list, Mr Majumder said it was under discussion. ‘That call (on negative list) will be taken later, as the Finance Minister Mr Pranab Mukherjee has announced that he wants to have an informed debate on the subject, whether we should go for a positive list or negative list. So we have thrown that debate open,‘ he said, without giving any timeframe for completing the exercise. The Finance Ministry recently released a draft negative list of services. The negative list approach means that all services that are not included in the list would be taxed. Mr Majumder, however, said that service tax collection would increase if the negative list approach is followed. - www.thehindubusinessline.com

SERVICE TAX: NEGATIVE LIST APPROACH NOT A REVENUE RAISING MEASURE [21 September 2011]

The Finance Ministry has said that the exercise of introducing a negative list for taxation of services was not primarily being done to mobilise more revenues or tax people to a greater extent. With service tax mop up expected to grow by 20-25 per cent on implementation of negative list, many stakeholders see this proposed introduction as a ‘revenue raising measure‘. ‘A large part of the tax you might collect as service tax (under the negative list approach) would be available as credit with another section of services sector or in the manufacturing sector. It‘s not that simply because the figures are going up, that is the net amount Government will be getting. That‘s not true,‘ Mr V.K. Garg, Joint Secretary, CBEC, said at a Phdcci conference on ‘Negative List of Services and its implications‘ here today. A concept paper on negative list of services is currently out in the public domain for an informed debate. The last date for feedback is September 30. The Finance Ministry intends to come up with a new paper after factoring in the public response to the recently released concept paper. The Government had through the concept paper sought to ascertain whether the negative list was the right approach to implement service tax law. ‘The whole world has done this (negative list). Why should we not be able to do this?,‘ Mr Garg said. At the same time, he noted that the concept paper was not cast in stone and that there was scope for additions and deletions. - www.thehindubusinessline.com

HUGE REFUNDS DENT DIRECT TAX COLLECTION [21 September 2011]

Corporate tax refund has lent a big dent to the direct tax kitty this year, with the figure touching a staggering Rs 48,426.20 crore till September 15. The segregated collection figures available for the period April-September 15 shows that the income tax department did make a gross collection of Rs 1,18,489 crore from the corporate sector during April-September 15, but huge refund outgo pulled the net corporate tax collections down to just Rs 70,062.80 crore. The refunds issued to the personal income tax payers during April-September 15 has been Rs 12,562.10 crore from a total of Rs 61,009.90 crore direct tax refunds issued in the period. The gross personal income tax mop-up till September 15 stood at Rs 67,559.30 crore and net collection during the period has been Rs 54,997.20 crore. Corporate tax refunds issued this year is nearly double of the Rs 25,975.20 crore total refunds given in both corporate and personal income tax till September 15. Overall, direct tax refunds jumped 135 per cent during April-September 15 from the same period in 2010-11. A senior finance ministry official said the huge refunds issued this year must be analysed in the context of tax payments in 2010-11. The total direct tax collection in the last financial year grew by 18 per cent over 2009-10 collection by touching Rs 4,46,070 crore. Out of this, corporate tax collection was Rs 2,99,386 crore and personal tax realisation was Rs 1,45,997 crore. In comparison, net direct tax collection in the current financial year till September 15 recorded a growth of only 6.7 per cent at Rs 1,27,858 crore as against Rs 1,19,849 crore collected during April-September 15 period last year. The gross direct tax mop-up during the period has been Rs 1,88,868 crore, showing a growth of 29.5 per cent over previous year‘s collection during April-September 15 of Rs 1,45,825 crore. - www.business-standard.com

AUTOMATIC SERVICE TAX REFUND FOR EXPORTERS ON ANVIL: CBEC [22 September 2011]

In a move that will bring cheers to exporters, the government today said it was working on a system to automatically transfer service tax refunds in their accounts. ‘We are at a very advanced stage of preparing a software which would provide refunds of service tax to exporters automatically, based on [pattern of] duty drawback. We would come out with it in the next 15-20 days,‘ VK Garg, Joint Secretary in Central Board of Excise and Customs (CBEC), said at a PHD Chamber event here. Currently, the duty drawback is directly credited to accounts of exporters maintained at customs houses, but exporters have to file claims separately to get service tax refunds. Exporters complain that many a times there are unusual delay in refund of the levy. Welcoming the move, Federation of Indian Export Organisations (FIEO) Director General Ajay Sahai said exporters would now get a faster refund of service tax. - www.thehindubusinessline.com

SWITZERLAND AND GERMANY SIGN TAX AGREEMENT [22 September 2011]

Today in Berlin, a tax agreement was signed by Germany‘s Finance Minister, Wolfgang Schäuble, and Switzerland‘s Finance Minister, Eveline Widmer-Schlumpf. The agreement will resolve the outstanding issues that have existed for decades between Germany and Switzerland concerning the taxation of German investors‘ investment income in Switzerland. The negotiations led to a fair outcome that ensures a balanced reconciliation of interests between the two countries, particularly from a tax equity viewpoint. The agreement represents a good result for the two countries, as it satisfies the interests and requirements of both countries equally well. The tax agreement signed by Switzerland and Germany respects the protection of bank clients‘ privacy applicable in Switzerland and also ensures the implementation of the German authorities‘ legitimate tax claims. In addition, mutual market access for financial services will be improved. For the future, a final withholding tax will ensure equal tax treatment of investment income irrespective of whether the income in question was generated in Switzerland or Germany. This will be accompanied by an exchange of information that goes beyond the OECD minimum standard. It will be used for process checks and introduce a significant additional mechanism for detecting potential new ‘black money‘ in Switzerland. A lump-sum solution has been found for the past: German investors with investment income in Switzerland will be given a way out of tax flight that is linked to a fair tax burden and that, on the whole, leads to an equitable burden that is materially comparable with that of investors who were already tax-compliant. Those who could previously bide their time and wait for tax and penalty claims to expire - often under the statute of limitations - without paying anything, must now fulfil their tax obligations. Both sides acknowledge that the agreed system will have a long-term impact that is equivalent to the automatic exchange of information in the area of capital income. The agreement requires the approval of parliament in both countries, and should enter into force at the start of 2013. Upon signing by both finance ministers, the complete text of the agreement will also be published. - www.efd.admin.ch

GERMANY AND TURKEY SIGN DOUBLE TAXATION AGREEMENT [22 September 2011]

In the presence of presidents Christian Wulff and Abdullah Gül, finance ministers Dr. Wolfgang Schäuble and Mehmet Simsek signed a new agreement between the Federal Republic of Germany and the Republic of Turkey on the avoidance of double taxation on income. This took place in Berlin on 19 September 2011. The new agreement will enter into force once the instruments of ratification have been exchanged and will apply retroactively from 1 January 2011. It replaces the existing agreement from 1985 that, following termination, was applicable until 31 December 2010. The new agreement is based largely on the model tax convention from the OECD. The following updates have been made to bring the agreement into line with current international practices: Withholding taxes rates on dividends and interest were reduced. A limited right to tax pensions in the source state was introduced. The ability to credit notional unpaid Turkish taxes will be revoked. A clause providing for a changeover from the tax exemption to the crediting method will be introduced to the benefit of Germany. The exchange of tax information will be enhanced in line with the applicable OECD standard. A modern double taxation agreement has thus been signed that will promote a deepening of mutual economic ties by reducing double taxation, a factor which is a substantial barrier to trade and investment when companies operate internationally. - www.bundesfinanzministerium.de

TAXING GOVERNMENT SERVICES [22 September 2011]

The concept paper on the negative list for service tax circulated by the government on August 29 has much to its credit. The paper provides a good background of the approach to service tax as a part of the Goods and Services Tax (GST). So a comment on it can go beyond the negative list. To start with the ‘negative list‘‘ is not legal language. It only means that, first, it is a list of services that ‘will not be taxed‘ and, second, that all other services will be taxed. The second point is correct. But the first point is inexact. ‘Will not be taxed‘ includes two types of services: those exempted and those that are not taxable at all. The paper does not distinguish between them. They are not taxable when they are not services at all. There are certain activities, such as the sovereign functions of the state, which are not services. Nor are the Indian Foreign Service, Indian Administrative Service, Indian Revenue Service, Indian Defence Service, Indian Judicial Service, maintenance of law and order, or the Reserve Bank of India. The government carries on activities within the powers entrusted with Parliament and Legislatures and such exercise of power cannot be the subject matter of service tax because they are not commercial functions. So the position is that there are three aspects of government functions:
a) Sovereign functions: not leviable to service tax.
b) The government‘s other functions supplied on a fee: leviable to tax.
c) Commercial functions of the state: squarely leviable to service tax.
The charging section has to be drafted to clarify this issue. What is leviable is not goods but the sale of goods, both manufactured and un-manufactured. Similarly, what is leviable to tax is not service but the supply of service. So the charging section should ideally be worded in the following manner: Tax will be leviable on the sale of goods (defined separately) and supply of services (defined separately). Proviso - Any supply of service of government in discharge of sovereign functions is not leviable to service tax. Government here means the central and the state governments. It is important to note that this definition of government is different from the definition of government given in the negative list that includes even local self-governments. Government might even mean government undertakings, depending on the shareholding by the government. Therefore, whenever the expression government is used, there must be a separate definition clarifying what government means. This will steer clear of controversies. The negative list should, therefore, be termed an exempted list because that is the legal language. The first item in this list namely ‘notified services provided by the Government‘ should be replaced by the expression ‘Services supplied by Union or State Government on fee or invoice‘. This will be conceptually the correct position. The amount may be exempted since the amount is very small The present way of writng to include the government, the judiciary and the Reserve Bank of India (RBI) in the negative list gives the wrong impression that these services are basically leviable to tax. So far as the other exemptions in the negative list are concerned, theoretically the best option is that there should be no exemptions (as in New Zealand) since that will make it a neutral tax, which economists adore. But the best is often the enemy of the good. Therefore, I can only suggest that many of the exemptions mentioned in the negative list should be deleted and only a few should continue. Regarding education, the exemption proposed for pre-school, school and recognised education, etc suggested by the government is justifiable except that the definition of recognised education is vague. It should exclude coaching classes. Regarding health, the first option of exempting services by a clinical establishment with aturnover below `4crore in the previous year is proper but government (properly defined here) hospitals should be specifically exempted. There should be no exemptions for copyright services, services provided by independent journalists, PTI & UNI, sportsmen, by religious services, by a political party, trade unions, representational services provided by an advocate, tolls and betting and gambling. All these exemptions are only to appease certain pressure groups or lobbies. The definition of service given in the paper is ‘anything which does not constitute supply of goods, money or immovable property‘. This is good enough. Then the definition includes six items and excludes three items. There should be no inclusions or exclusions. The exclusion ‘B‘ is in reality an exemption for some authorities. It should be transparently given in the exemption list. Including an exemption in the concept of service will distort the definition conceptually. The exclusion ‘C‘ is totally unnecessary since it is debarred by the concept of service. Conceptually, the service tax definition should be the same as in Canada, South Africa, Singapore, France, Ireland, Netherlands and the UK, where they have no inclusions or exclusions. In conclusion: (a) The negative list should be termed the exemption list. It should not contain services that are not taxable at all. (b) The charging section should clarify what is not leviable to tax. (c) The definition of government should be different for different purposes. (d) The definition of service should not have exclusions and inclusions. It should not contain something that is fundamentally an exemption. (e) Exemptions to accommodate pressure groups should go. - www.business-standard.com

I-T DEPT GOES ALL OUT TO SHORE UP KITTY [22 September 2011]

The Income Tax department has asked its field officers to monitor advance tax payments by local authorities, educational institutions, trusts and societies with commercial receipts of more than Rs 1 crore for possible tax evasion. Faced with a steep target of Rs 5.32 lakh crore, 19 per cent higher than the revised estimate of last year, the department has asked all the commissioners to increase collections in their jurisdiction. The Central Board of Direct Taxes has also asked the filed officers to look into ‘cases of private limited companies where unaccounted income is introduced in form of share premium,‘ an official source told The Indian Express. ‘We have also asked them to study the quarterly financial statements of large and medium firms under the Companies Act. They have been told to examine and co-relate it with the advance tax paid in the quarter,‘ the official said. The tax department is also planning to scrutinise corporate tax payers as they comprise almost two-thirds of total direct tax collections. In the current financial year, the government expects to collect about Rs 3.6 lakh crore as corporation tax, up 21 per cent than the actual corporate tax revenue last fiscal. As per statistics available with the government, around 1,200 companies pay over 75 per cent of corporate tax. The collected amount accounts for more than 50 per cent of the total advance tax. The department has said all these companies should be monitored and a list of high non-tax payers too need to be a part of ABC analysis. This is a practice adopted by the department for prioritising important cases under three categories of A, B and C. All the top filers and non-filers will be identified by the department and companies paying advance tax will be specially looked into given the fact that the rate of Minimum Alternative Tax (MAT) has been increased in the current Budget from 18 per cent to 18.5 per cent, the official said. The department has fixed a collectable target of Rs 16,954 crore from the total arrears demand of Rs 3,33,077 crore in the current year. Finance Minister Pranab Mukherjee had also asked the department to collect an additional 10 per cent over and above the budget target to make up for the loss on account of revenues foregone on account of duty cuts. In cases where the tax deducted at source has been withheld by deductor and not deposited with the department, mandatory prosecution would be launched in cases where the amount is more than Rs 1 lakh and retaining period is more than 12 months, the official said. - www.indianexpress.com

FINMIN NOTIFIES DUTY DRAWBACK RATES [23 September 2011]

The finance ministry on Thursday notified all India rates of duty drawback covering items which were earlier getting tax credit in the Entitlement Passbook Scheme (DEPB) scheme. To provide a smooth transition from the popular tax credit scheme, the drawback rate has been capped at 5.5 per cent for most of the items. The notified rates will come into effect from October 1, 2011. - www.business-standard.com

PVT GROUP TO DEPOSIT RS 31 CR FOR TAX EVASION [26 September 2011]

Income Tax sleuths have unearthed tax evasion to the tune of Rs 31 crore after conducting searches at three places belonging to the city-based Bhandari Medical group, official sources said today. A team of 20 sleuths of Commissioner Income Tax-1 led by B P Jain conducted searches at three places in Indore since yesterday and seized heaps of documents related to purchases and sale of medical drugs, equipment and machines, they said. The group has agreed to deposit Rs 31 crore for alleged tax evasion, they added. - www.financialexpress.com

DELHI HC DISMISSES CORPORATE TENANTS

A division bench of the Delhi high court last week dismissed a large number of writ petitions challenging the constitutional validity of Section 65(105)(zzzz) of the Finance Act, 1995 and Section 66 as amended by the Finance Act, 2010. The petitions were moved by tenant companies arguing that an ‘artificial liability‘ was imposed on them to pay service tax though the onus rested with the owners. The owners insisted upon the petitioner companies making the payment. The dispute arose due to the Finance Acts. The high court rejected the petitions, led by Home Solutions Retails (India), challenging the power of Parliament to pass a law which dealt with property. It was the state which has the power to deal with renting of immovable property as it is a tax on lands and buildings which came within Entry 49 of List II of the 7th of the Constitution. - www.business-standard.com

SELF-ASSESSMENT AND AUDIT UNDER CUSTOMS [26 September 2011]

The Budget showcased some radical moves of the Union Government to streamline the taxation regime in India. The Indian taxation regime is being modified to facilitate free trade, promote higher investment and ensure revenue generation for the Government. One such move is the introduction of self-assessment based import-export clearances and on-site customs audit at the premises of the importer/exporter. Self-assessment is a dynamic departure from the existing structure governing customs clearance of goods. Introduction of this procedure shifts the responsibility of assessment to the importer/exporter, while the power to verify such assessments and make re-assessment remains with the Customs. As a consequence of this procedure, the onus of ensuring that appropriate and accurate declarations such as classification, duty rate, value, imported/ export goods, are factored at the time of self-assessment rests with the importer. The Customs department can selectively verify bills of entry on the basis of the output of the Risk Management System, which ensures that on the basis of certain rules and intervention, high-risk consignments are identified for detailed verification before clearance. The procedure for provisional assessment is also being suitably modified to align it with the self-assessment system. A draft circular of the Central Board of Excise and Customs (CBEC) dated July 29, 2011, inviting comments in respect of the draft Customs (Provisional Duty Assessment) Amendment Regulations, 2011, is a step in this direction. The scheme for ‘On Site Post Clearance Audit‘ has been introduced for protection of the Revenue‘s interest in case of clearances based on self-assessment. On-site audit deals with the verification of declarations and underlying documentation at the premises of the importer/exporter. It empowers the Customs to inspect the books of account of the company in addition to verifying import/ export-related documentation. A draft circular dated August 1, 2011, pertaining to ‘On-site Post Clearance Audit at the Premises of Importers and Exporters Regulations, 2011‘ is a welcome move by the CBEC and outlines the obligations of the importers/ exporters, the manner of conducting the audit and the penal consequences in case of non-compliance. Introduction of the above changes would result in higher accountability of the importer / exporter on customs assessment and increased visibility of the trend in import/ exports, the financials of the company and transfer pricing documents. The Customs department is gearing up to re-align its internal systems and processes with the above mentioned changes. Customs officers need to be trained to ensure that trade encumbrances are not created on account of minor infractions, the sensitivity of business and commercial information is not compromised and such changes are effectively implemented. Simultaneously, industry will have to develop systems and processes and in-house expertise on customs asessment and audit to cope with this change. While the legal provisions for self-assessment have been in place since April 8, 2011, and the first audit team is expected to visit the premises of the importers in the near future, the industry has not been given sufficient time to develop systems to deal with such change. This may lead to ground-level issues, which might trigger unwarranted disputes between the Customs and the importers/ exporters. In conclusion, while the ‘self-assessment procedure‘ and related procedural changes is aimed at promoting foreign trade by easing the compliance norms and revamping the assessment procedure, its effective implementation is expected to face its share of teething problems. For ensuring smooth implementation of these procedures, necessary steps should be initiated to settle any unwarranted implementation gaps. - www.thehindubusinessline.com

THE PERPLEXING PERPETUAL BONDS [26 September 2011]

The UK government is said to have pioneered perpetual bonds to finance Napoleon wars. It now issues perpetual bonds under the name of consol, but heaven forbid, should the uninitiated, without the understanding of its grave implications, invest in these bonds, there is no way they can be consoled if things go wrong for them and the market is down.
EQUITY SHAREHOLDERS
Perpetual bonds are said to have the characteristics of both equity and debt. They carry a fixed coupon rate of interest, which is naturally a few notches higher than that on bonds that are redeemable, to compensate for the money permanently locked in. Of course, its holder can seek an exit through the bourses, as in the case of equity shareholders, where he may make profits or incur losses accordingly, depending on if the prevailing interest rates for similar bonds are lower or higher, vis-à-vis the bond he is holding, among other things. It has, but accoutrements of equity, in the sense that like equity, it is not redeemable, and hence a permanent source of finance for the issuer, which is why Basle-scarred banks have been lapping up the instrument with alacrity, with manufacturing and companies too getting into the act lately. The one-sided nature of the instrument would be apparent if one considers the take-it-or-leave-it features written into such bonds by the issuers. Some of the typical features are that the issuer may choose to call the bonds anytime, after say five years; the issuer may choose to convert the bonds into shares and so on, with the holders of the bonds not having the put or indeed any other option. Despite the odds against the investors, perpetual bonds have been a huge hit with insurers and pension funds abroad, ever on the lookout for long-term avenues to park their funds, and wanting to lock into an attractive rate of interest, from which there is no reneging by the issuer. Tata Steel has already tapped the wholesale market in India for perpetual bonds denominated in rupees, and raised as much as Rs 1,500 crore and is gearing up for an overseas issue, its appetite having been sharpened.
BOOMING MARKET
Quite a few other Indian companies are girding their loins to get into the bandwagon. The bonds do not strain the cash resources of the company, except at the time of payment of periodic interest, which is why from its standpoint, it is as good as equity. If anything, slightly better, because while raising of equity calls for an elaborate procedural and regulatory drill, a bond issue is much faster and relatively hassle-free. One might of course say, in the Indian context, equity would still be a better choice, especially if a company is lucky enough to make an IPO in a booming market, because it invariably walks away with a mind-boggling premium on which it doesn‘t have to pay any user charges. Come to think of it, there aren‘t any user charges either on the face value, because dividend isn‘t mandatory, but reputation-mindedcompanes try to keep the investors in good humour.It is curious that the law speaks with a forked tongue on perpetual instruments. While equity conceptually and by definition is perpetual, the Companies Act, 1956, doesn‘t permit postponement of the denouement beyond twenty years, insofar as preference shares are concerned. In other words, not only can‘t companies in India issue irredeemable preference shares, but their redemption must happen within twenty years of their issue. This is as it should be, given the fact that an investor in preference shares gets only a marginally higher coupon rate vis-a-vis bonds, but sans security, and it would have been advisedly better for him to put his money in bonds for a similar maturity. Be that as it may, Section 120 couched in legal jargon, has, in fact, been gathering dust till a clutch of Indian companies took heart from its generosity, and thought it fit to extract the maximum out of it. It reads as follows:
LEGAL ASPECT
‘A condition contained in any debentures, or in any deed for securing any debentures, whether issued or executed before or after the commencement of this Act, shall not be invalid by reason, only that thereby, the debentures are made irredeemable or redeemable only on the happening of a contingency, however remote, or on the expiration of a period, however long.‘ Besides reeking of laboured drafting, the section is a complete retreat from Section 80, which makes an all out effort to safeguard the interests of the preference shareholders when it comes to redemption. Retail investors should stay away from perpetual bonds, even if offered to them, because it simply isn‘t their cup of tea. In comparison, deep discount bonds emerge as a much better choice, because they call for a very low upfront investment, with the possibility of handing a bonanza over to generation next, on maturity, even though inflation, meanwhile, could make inroads into the perceived excessive returns. On the other hand, putting money in perpetual bonds would mean denial of liquid resources to progeny, to get which they would be driven to entering the market, which is never free of minefields. - www.thehindubusinessline.com

CARBON TAX CAN

India has told the G20 grouping that carbon tax should not be counted as a new and additional source of funding to fight climate change. Making an intervention at the G20 Finance Ministers‘ meeting on September 23 at Washington, the Finance Minister, Mr Pranab Mukherjee, said that measures like carbon tax and levy on clean development mechanism (CDM) offsets violate the principle of UN Framework Convention on Climate Change (UNFCCC) as the incidence falls entirely on developing countries. There is a talk that developed countries could levy unilateral trade measures (UTM) such as carbon tax on goods and services imported from developing countries on environmental grounds. India has opposed any such move and has sought inclusion of UTM as an additional item for discussion at the upcoming climate talks in Durban in South Africa.
Levies opposed
In his intervention, Mr Mukherjee also opposed inclusion of international levies on shipping and aviation emissions as revenue raising options, until a mechanism for refund of the revenues collected from developing countries is instituted. ‘The refund should not be treated as climate change finance flow or a contribution of developing countries to global revenue mobilisation,‘ he said. India has also said that the flow of finance leveraged by the international financial institutions (IFIs) or the multilateral development banks (MDBs) should be counted towards the overall target only if there is a net additional infusion of capital by the developed countries to the capital base of the MDBs/IFIs. - www.thehindubusinessline.com

FINMIN MOVE TO SLIM DUTY ON STOCK TRADE [27 September 2011]

Aiming to provide relief to stock market investors facing negative cues of late, the finance ministry is planning to reduce duties on transactions in equities and currency derivatives. It is considering a cut in the securities transaction tax (STT) as well as a reduction in stamp duty on ‘futures and options‘ and currency derivatives. However, any possible cut in STT may take time as it would come only in the next Budget. Also, stamp duty is a state subject. Against the current practice of different stamp duty rates in states on stock market transactions, the finance ministry is planning to propose a uniform rate of 0.003 per cent of values of shares transacted on ‘futures and options‘ trading as part of the Indian Stamp (Amendment Bill), 2011. For currency derivatives, it is considering a rate of 0.0001 per cent. Earlier, the revenue department had suggested a uniform rate of 0.005 per cent, but the economic affairs department suggested to bring it further down. Though stamp duty on stock market transactions is a state subject, many states have adopted the Indian Stamps Act. The states will have to agree to the proposals to give an effect to a uniform rate. STT, on the other, is a direct tax levied by the Centre. STT ranges from 0.010 per cent to 0.015 per cent depending on whether they trade in derivative or spot segment. The finance ministry may, however, take afinal call on lowering STT during the Budget in February by making amendments to the Finance Act. While the proposed measures had a temporary impact on the stock market, but it may not encourage markets on a sustainable basis in the short run. In the long run, investors may benefit from lower taxes on transactions - and the government and companies may benefit from higher volumes. N C Maheshwari of the Association of NSE Members of India says statutory rates in Indian securities market are the highest, which is why the country‘s markets are shallow. ‘A uniform and lower stamp duty and STT will be one of the finest positive steps by government for Indian markets,‘ he notes. The government has set a target of raising Rs.40,000 crore through disinvestment proceeds this year. However, it has raised only about Rs.1,144 crore so far through a follow-on public issue of Power Finance Corporation. A weak market sentiment may hurt government‘s upcoming issues. ONGC, SAIL, OIL India, GAIL, IOC, MMTC, RITES, and BHEL are likely targets this year. Once an agreement on stamp duty is reached, the Centre will amend the Indian Stamps Act, 1899, and block power of the states‘ to fix rates in case of securities. Of the total stamp duty collections of Rs.40,000 crore in the country, about Rs.100-150 crore comes from securities. - www.business-standard.com

STT MAY BE CUT TO FIRE UP MKT [27 September 2011]

The capital markets division of the finance ministry has mooted a proposal to abolish or substantially dilute the securities transaction tax (STT), a levy that fetches the government around.Rs.7, 500 crore a year but is disliked by investors as it adds to the cost of buying and selling shares in the country. A senior official in the capital markets division said this proposal along with other measures such as reducing stamp duty is being discussed with the revenue department. The BSE Sensex recovered from an intra-day low of 15801 to close down only 111 points at 16051 on strong recovery in the European markets and the governments STT proposal. The revenue department had in 2009-10 rejected a similar proposal to remove STT and even if there is agreement this time, any change in the regime will have to wait till the next budget is presented in February 2012. The STT was introduced in the 2004 budget by then finance minister P Chidambaram and over the years, the rate of this transaction tax has come down from 0. 15% levied initially. Currently, a 0. 125% tax is levied on both buyers and sellers in case of delivery-based trades. In the case of day trades, the levy is 0. 025% on the seller only. The removal of this tax is a long-standing demand of investors and stock exchanges who argue that a multiplicity of levies such as stamp duty, service tax, exchange turnover fees, Sebi charges, in addition to STT itself, make India one of the most expensive markets as far as transactions costs are concerned. Cost of trading in Indian markets is one of the highest in the world due to numerous taxes such as STT. Removal of STT or cut in rates will lower transaction cost substantially and benefit short-term traders, hedgers, arbitrageurs and intraday traders and boost overall market sentiment, says Motilal Oswal Financial Services CMD Motilal Oswal. According to Praveen Malik, vice-president in charge of compliance at Centrum Broking, the removal of STT would certainly help in attracting more volumes. The capital markets division had pitched for complete abolition of the tax ahead of the 2009-10 budget, but the revenue department prevailed as it wanted the STT phaseout to be timed with the rollout of the Direct Tax Code. The code was to unveil a new method of taxing capital gains on securities. However, the DTC Bill finally introduced in Parliament does not propose any change in the capital gains tax regime and it remains to be seen whether the revenue department will now agree to remove STT. The revenue department has also in the past been keen on STT as it allows it to collect tax on sale of securities from FIIs routing their investment through Mauritius, thereby enabling it to trace a trail back to offshore tax havens. On the issue of stamp duty, the department of revenue has agreed a single countrywide rate of 0. 003 % from a high of 0. 005% in some states for most securities transactions, both, in the futures and cash segments. For currency derivatives, th Department of Economic Affairs is pushing for reduction to 0. 0001% to boost trade in this segment. Finance minister Pranab Mukherjee will take a final call on the rates before the stamp duty amendment bill is taken up by the cabinet. - www.economictimes.indiatimes.com

IRCS TO GET BENEFITS UNDER INCOME TAX ACT [28 September 2011]

The Union Health Minister and Chairman of Indian Red Cross Society and St John Ambulance (India), Shri Ghulam Nabi Azad today presided over the General Body meeting of the two organizations on behalf of the President of India Smt. Pratibha Devisingh Patil. Over 350 members of the General Body including Governors of the States of Uttar Pradesh, Chhattisgarh and UT Andaman and Nicobar Islands attended today‘s meeting. Addressing the gathering Shri Azad said that he is happy to note the increased role and recognition of Indian Red Cross. The Society now has the latest communication tools, including emergency response units, mobile disaster units and medical disaster units to initiate assessment and relief in times of calamity. There are six warehouses located in strategic locations in the country where these equipments and relief items are stored. Shri Azad recalled the IRCS‘s response mechanism efforts during the Leh cloud burst in August, 2010. He also noted that it is a matter of satisfaction that the IRCS is contributing 10% of total blood collection in the country through its 118 Blood Banks. Sh Azad informed the General Body members that due to persistent efforts, we have been able to obtain tax exemption for the income of the society on a perpetual basis under the Income Tax Act. Also a Bill has been passed in Parliament which will cover organizations like the Indian Red Cross under section 10(46) of the Income Tax Act and inter alia would enable Indian Red Cross to spend funds outside India to help vulnerable people. The necessary notification to this effect would be issued by the Ministry of Finance, Govt. of India shortly, the Minister informed. Shri Azad added that after 15 years of deliberations and consultations among state branches and other stakeholders, uniform rules for the state and district branches were approved by the President of IRCS, Her Excellency the President of Republic of India. These uniform rules were circulated to all the state and UT branches. He urged the States to take necessary steps for implementation of these rules. The Minister also said that now the emphasis should be to include latest training modules so that First-Aid providers are better informed and equipped. He noted with satisfaction that the common First Aid Manual for St. John and Red Cross has been upgraded. The Red Cross and St John Awards since year 2004 were also presented on the occasion by Shri Ghulam Nabi Azad to awardees from various regional and State branches in recognition of the devoted service to the humanitarian cause of the Red Cross as also fund raising and membership drive and blood donation efforts. At today‘s meeting, the General Body also adopted the Annual Reports and audited accounts of Indian Red Cross Society and St John Ambulance (India), since the year 2004-05 till 2009-10. - www.pib.nic.in

GOODS, SERVICES TAX REGIME IS WIN-WIN FOR ALL: FINANCE MINISTER [28 September 2011]

The State Finance Minister, Mr K.M. Mani, has welcomed Goods and Services Tax regime, saying that it will create a win-win situation for all concerned. WIN-WIN FOR ALL He said this while delivering the inaugural address on a two-day national seminar on ‘Goods and Service Taxation in India: Fiscal and constitutional issues‘ organised here on Tuesday. The seminar is being organised by the Gulati Institute of Finance and Taxation (GIFT) and Centre for Parliamentary Studies and Law Reforms, National University of Advanced Legal Studies (Nuals). The Finance Minister said that GST would help avoid tax on tax and reduce prices for consumers. By simplifying the tax system, law, procedures and rates, it will benefit the trading and business community and enhance compliance. By broadening the tax base, it will also increase tax revenues of both the Central and the State Governments. The Minister also opined that with GST and the mechanisms for sharing of tax between the Centre and States in place, the role of a constitutional body such as Finance Commission would become limited.
FISAL AUTONOMY
Delivering the presidential address, Dr N.K. Jayakumar, Vice-Chancellor, Nuals, wondered how the late Dr I.S. Gulati, a dyed-in-the-wool economist and specialist in the Centre-State relations, would respond to the introduction of GST. According to Dr Jayakumar, the issues relating to fiscal autonomy are still relevant. GST has been introduced in various forms in different parts of the world. In the Indian context, detailed deliberations about the pros and cons of constitutional and fiscal aspects of GST need to be conducted to customise it to our needs and specificities. This calls for statesmanship of a high order. Prof Vijayakumar, Vice-Chancellor, Tamil Nadu Dr Ambedkar Law University, pointed out that GST is a globally accepted form of taxation adopted by various nations- unitary or federalist. ‘What we are moving towards at is a system where policy making is done at the global level and implemented nationally,‘ he said. Earlier, Mr V.P. Joy, Secretary (Finance), welcomed the gathering. Mr Murukesh Kumar, Registrar, GIFT, proposed a vote of thanks. - www.thehindubusinessline.com

STATE MINISTERS FLY TO EUROPE TO TAKE LESSONS ON GST [3 September 2011]

AT a time when talks between the Centre and states on the much-anticipated Goods and Services Tax (GST) have failed to make much headway, states have decided to walk an extra mile, in fact a few thousand miles, to break the ice. Top ministers from about 20 states and some officials from the finance ministry are leaving for a 10-day trip to Europe next week. Their destinations - Paris, Spain, Brussels and Luxembourg - may seem exotic, but the ministers mean serious business. From Madhya Pradesh finance minister Raghavji, strongest opponent of the Centre‘s GST model, to the chief ministers of Uttarakhand, Meghalaya and Assam, everyone will get together in Paris on September 7 to study the European model of GST. The time they spend in each other‘s company may help resolve differences and take things to a logical conclusion, says an optimistic official from the finance ministry. He is also hopeful some of the fence-seaters may be able to make up their mind on which way to go after understanding their GST model. Ironically, former Empowered Committee chairman Asim Dasgupta, during whose tenure the idea of this trip was envisaged, will not be a part of the 40member delegation. In fact, current West Bengal finance minister Amit Mitra is also giving it a miss, along with ministers from Tamil Nadu, Gujarat, Karnataka and Uttar Pradesh. Tamil Nadu, Gujarat and Uttar Pradesh have not yet lent their support to many aspects of GST. Officials, however, say this has more to do with the internal administration and politics of these states, rather than politics of GST. Some ministers have not been able to get the approval from their chief ministers, explained one official. Nevertheless, the presence of 20 state ministers is a rare sight even in the meetings of the Empowered Committee. The enthusiasm to fly to Europe is such that the name of more than one official from each state was sent to the finance ministry, so that they could also "learn" about GST from the European countries. Their learning curve, however, may plateau for the time being, as the ministry has allowed only one official from a state and only when accompanied by the state finance minister. The total cost of the tour for over 40 people may run into a couple of crores. The expenses will be borne by individual states. The Empowered Committee is willing to bear the expenses of the three visiting Union finance ministry officials. Some ministers and officials are even taking their spouse and children along "on their personal expense", as there might be some "free time" during their four-day stay in Paris, three days in Spain, two days in Brussels and a day in Luxembourg. This will be the first foreign trip to study GST for over 90 per cent of the state ministers and officials, barring Empowered Committee chairman and Bihar deputy chief minister Sushil Modi, Orissa finance minister Prafulla Ghadai, Delhi health minister A K Walia and Raghavji. Prior to this, the Empowered Committee travelled to Cada, Australia and Brazil but that was a long time back. "No trip can change things over night but there will be learning for sure. They will make new connections besides studying the complexity of inter-state trade, taxation mechanism and implementation of GST. One can hope the states will be more learned and more aware when they come home on September 17," sums up the official. Earlier, Canada was also discussed as an option for this tour, but the Committee later finalised Europe, as it was felt the European model was more complex and similar to a federal system. - www.business-standard.com

MNCS FINDING IT HARD TO AVOID TAXMANS GLARE [1 September 2011]

The leading trio of foreign IT firms with a presence in India IBM, Accenture and Capgemini have 30% of their global workforce in the country, but record just 5% of their revenues from here. In 2009-10, the Indian subsidiary of France-registered Capgemini recorded a profit per employee of.Rs.1. 5 lakh about a third of TCS, the largest homegrown IT firm. Gaps like these which arise because of the discretion available to the foreign parent to price its transactions with its subsidiary, leading to under-reporting of revenues in India and thus tax avoidance are being examined with greater vigour by the Income-Tax Department. In 2010-11, the department forced the Indian arms of foreign companies to increase their revenues by.Rs.22, 800 crore. This amounts to a 130% year-on-year increase in transfer pricing adjustments, and almost equals the sum of all such adjustments since 2000-01, when India introduced transfer pricing rules. The spike reflects government posturing on transfer pricing, an active tax-avoidance channel for foreign companies. At a tax seminar nine days before Budget 2010, Finance Minister Pranab Mukherjee had said: The tendency to shift profit from India would be prominent as it is among the few countries exhibiting higher growth, leading to a greater opportunity for profitability than other countries. He added the department was going to crack down on such practices. Transfer pricing provisions are triggered when, say, IBM India provides services to its parent in the US. The basic premise of rules governing such transactions is that the price at which IBM India provides the service to its parent should be similar to what it would have charged an unrelated party. When companies undervalue related-party transactions, it is called mis-pricing. According to the department,Rs.22, 800 crore was the quantum of mis-pricing reported by multinationals in 2010-11. IT multinationals are reported to be the worst offenders. There is no firm estimate, says Rohan Phatarphekar, head of transfer pricing at KPMG. But IT and ITES (IT-enabled services) companies accounted for between one-third and half of these adjustments last year. -www.economictimes.indiatimes.com

ONLINE FILING OF SERVICE TAX RETURNS MUST FROM OCTOBER [2 September 2011]

Faced with 70% rise in service tax evasion cases in the last two years, the revenue department has decided to make it mandatory for all the assessees to file online returns of their transactions from October onwards. At present, the online filing of returns is mandatory only when the service tax payment is over R10 lakh annually. A finance ministry official said that online returns would facilitate tracking of documents more efficiently. The revenue department has a software called Automation of Central Excise and Service Tax (ACES) for electronic filing of returns. However, experts said the software and hardware should be upgraded as there had been problems in the past. "The electronic filing of returns would definitely bring efficiency in the system. However, the hardware supporting the ACES software needs to be upgraded as the trade has faced difficulties in the past," said Ernst & Young tax partner Bipin Sapra. There are 15 lakh registered service tax payers in the country. However, only six lakh service tax payers are filing returns. According to Central Board of Excise and Customs (CBEC) Chairman S Dutt Majumder, the government is trying to locate the rest to find out whether they have stopped providing services or there is tax evasion. The government aims to increase the share of service tax mop-up in the overall revenue kitty. The contribution of services to GDP at current prices in 2010-11 was about R50 lakh crore or 63%. However, the total collection from service tax was just R70,000 crore in the last financial year, which is nearly 10% of the overall collections. To bring in more services under the tax net, the government recently floated a concept paper on negative list of services. It proposes to tax all except 27 services, which is a significant increase from the 119 services being taxed currently. Service tax is currently levied at 10.3%, inclusive of the education cess. Besides, the finance ministry is considering introducing tax deduction at source (TDS) provisions for around two-dozen services, which might include transportation, security agency and utility services. The move is aimed to bring under the tax net those fly-by-night service providers which are not registered with the tax department. -www.financialexpress.com

MIDDLE-CLASS AND TAX TYRANNY [3 September 2011]

The vast Indian urban middle class, which enthusiastically participated in the Anna Hazare movement against all pervasive corruption, perhaps should also take up an equally worthy cause, the one that affects them more intimately and directly. Indirect taxes, especially of essential commodities, are said to be regressive as it targets all consumers without discrimination whereas direct taxes by their very nature can be healthily discriminatory with progressive rates of taxation extracting more and more out of successive slabs of income. But in India as indeed in the US, numerous exemptionscreated either by design or accident and kid glove treatment to tax evaders have rendered even direct taxes regressive. Public trusts enjoy tax exemption, but often enure substantially for giving tax sanctuary to private interests, with altruistic causes for which the tax exemption is designed relegated to the background and serving as a fig leaf. The bulk of country‘s educational institutions and hospitals are public trusts whose benign founders help themselves, their families and hangers-on to a considerable tax free income, with their students and patients respectively paying through their noses. And their cause has been helped by the long-held legal position that charity need not underlie a public trust so as to be eligible for tax exemption. Company promoters and industrialists, thanks to their immense lobbying power, have written for themselves a tax regime that leaves a substantial part of their income untouched by taxation despite some of them being Forbes dollar billionaires - no tax on dividend and no tax on long-term capital gains earned through the bourses either from their shareholdings. They for good measure might bristle with indignation at any suggestion of indulgence by saying that they after all pay a vicarious 15 per cent plus dividend distribution tax but that, come to think of it, is only half the tax they would have paid had the tax been on the recipient rather than on the payer. Investment in farm houses beckons both the rich and the nouveau rich what with they conferring not only social status but also luxurious living with farming, the raison d‘ etre of the tax exemption for farm houses, conspicuous by its absence or at best a facade. And Foreign Institutional Investors (FIIs), the movers and shakers of the Indian bourses, never had it so good in any other country thanks mainly to an obnoxious tax treaty with Mauritius where all of them are invariably registered which says like the dog in the manger that India cannot tax the capital gains earned in India by residents of Mauritius and Mauritius simply cannot tax them because it does not have capital gains tax. Many belonging to the middle class would tell you that bulk of the FII money is actually Indian black money stashed away abroad. The process, they would add for good measure, is called round tripping. The reason behind the feet dragging and dithering in scrapping this patently oensve treaty must be apparent against this backdrop. No taxation without representation was the American war cry. In India there is representation all right, but only for the well-heeled with lobbying power who obviously take up cudgels only for themselves. The vast middle class in the event is left in the cold with nobody to champion their cause. Shouldn‘t they rebel against a regime that collects close to Rs 2 lakh from a salary income of Rs 10 lakh while the one with similar qualifications doing private practice cocks a snook at the taxman through means that are either blatant or covert? Shouldn‘t they rebel against a regime that leaves a vast amount of unearned income largely untaxed, with Securities Transactions Tax (STT) just being a slap on the wrists of market operators even while without doubt setting the governmental cash registers ringing happily? Shouldn‘t they rebel against a regime that lets lakhs of traders and merchants get away without tax or with an apology of a tax thanks to slack enforcement and absence of banking culture? The Direct Taxes Code Bill, 2010 (the DTC) is a huge letdown especially against the background of its draft version that fluttered the dovecots of vested interests with its leitmotif income is incomeand therefore must be taxed uniformly. The DTC is a pale shadow of its draft version, nay a rehash of the existing law substantially. The middle class which rallied behind Anna Hazare against his crusade against corruption has greater stakes in raising its banner of revolt against this unjust tax regime that focuses just on sitting ducks - the salaried class and corporate sector, while leaving out others either out of inertia or ineptitude or both. Corruption strikes a chord, and resonates with the masses. But taxation is considered too esoteric a subject to galvanize the masses into anger and action. Which is all the more reason why the middle class perhaps may have to raise the banner of revolt against the unjust tax regime. Of course if they choose to put their weight behind the revolt against tax tyranny, it would be so much better because in India things happen only when powerful lobbyists take up your causes or honest mass leaders with unimpeachable integrity get things done by holding the barrel of gun.-www.thehindubusinessline.com

TEDIOUS TDS REGIME FOR SERVICE TAX [3 September 2011]

The finance ministry recently proposed introduction of the tax deduction at source (TDS) mechanism for service tax collection to curb its evasion. It is being proposed that the TDS mechanism, like in income tax, would be replicated for service tax. Though there is little clarity on the exact law governing the TDS, it is assumed the principles in vogue in income tax would apply. The concept of TDS requires the person making the payment to the recipient to deduct tax at appropriate rates. The deducted amount is required to be deposited to the credit of the central government. The recipient from whose income TDS has been deducted gets the credit of the amount deducted in his personal assessment on the basis of the certificate issued by the deductor. In the present service-tax regime, generally, the service provider collects service tax at a rate of 10. 3% on the value of services, and deposits the same with the government. However, in a TDS regime, the service recipient would deduct TDS while making payment to the service provider and deposit the same with the government. Thereafter, like incometax TDS, the service recipient would issue TDS certificate to the service provider against which the provider would set off its output tax liability. Given the service-tax regime and the recent changes in its provisions, it would not be easy to implement the TDS mechanism in service tax. First, it would be interesting to see how the credit mechanism would work in the TDS regime in the presence of cenvat credit rules. The service provider would be required to avail the credit of taxes paid on inputs and input services as well as TDS credits. This in itself would be quite a task due to uncertainty in the payment schedule (by the service provider for availing cenvat credit) and issuance of TDS certificates by the service recipient (for TDS credits). In case where the value addition is low, depending on the TDS rate, there would be a situation where the service provider would have to claim refund of tax paid. This would be a huge transaction cost to the service provider. The cash-flow blockage would also increase due to the point of taxation rules that have shifted the service tax liability from payment to accrual basis. It is obvious that payment of service tax upon accrual by the service provider and deduction of TDS by the service recipient would be a double hit on the cash flows of the service provider. Also, since the entire tax would already be paid before the TDS is deducted, the same would lead to an anomalous situation and the service provider will have to ask for refund in all the cases. This would lead to an increased transaction cost and high litigation. In addition to the cash-flow issue, the compliance burden would substantially increase for all the three parties, i. e. , service provider, service recipient and the tax authorities. In the present regime, generally, the compliance burden is only on the service provider and the authorities (for admintering the compliances). However, in the TDS scenario, even the service recipient would be burdened with TDS compliances such as obtaining TDS registration, issuing TDS certificate, maintaining TDS register and filing of TDS return. Considering that processing service-tax refund is a cumbersome procedure for both the service provider and the tax authorities, TDS refunds, instead of simplifying the process, would further complicate it and add on to the burden. Given that the authorities are themselves not geared to handle such large administrative work, TDS refunds would surely be delayed and the TDS mechanism would only lead to blockage in the working capital of the businesses. Notwithstanding these issues, even if TDS mechanism is introduced in service tax, it can only be successfully implemented for business-to-business (B2B) transactions. B2B transactions are mostly undertaken in organised sectors that are well-regulated and monitored by the tax authorities. While the TDS mechanism cannot be possibly implemented for the unorganised sector, which mostly escapes service-tax assessment and is essentially the abode for tax evasion. Considering that the sole objective of introducing TDS mechanism is to curb service-tax evasion, introducing the same for B2B transactions would not serve the purpose. In most advanced value added tax (VAT) or goods and services tax (GST) jurisdictions across the world, the concept of TDS in indirect taxes does not exist. The continuous flow of VAT credit is an incentive for the service provider and service recipient to be compliant. Introduction of TDS for service tax in India would warp the existing credit system and substantially increase transaction costs. It is also impractical to even propose introduction of TDS regime in service tax when the introduction of GST is imminent, and service tax is to be subsumed into GST. A TDS mechanism will not curb evasion but only compound it. - www.economictimes.indiatimes.com