JULY 23, 2014

By Bimal Jain FCA, FCS, LLB, B.Com (Hons)

AMIDST huge expectations, the Hon'ble Finance Minister of India, Mr. Arun Jaitley presented the Union Budget for the fiscal year 2014-15, the first under Prime Minister Mr. Narendra Modi's new Government. The Budget, 2014 is the first major test of Mr. Modi's reformist credentials since he swept to power with a pledge to boost growth and create millions of new jobs to cover expenditure.

We are highlighting some of the key concerns on Indirect Tax proposal in the Budget 2014, which are retrograde and needs to be revisited:

1. Imposition of high rate of Interest up to 30% PA (from 18% PA) for delay in payment of Service tax [vide Notification No. 12/2014-ST, dated 11.07.2014] – Applicable w.e.f 1-10-2014:

The Government had notified the rate of interest for delayed payment of Service Tax vide Notification No. 26/2004-ST dated 10.09.2004, as amended by Notification No. 14/2011-ST dated 01.03.2011 fixing the rate as 18% PA in exercise of the powers conferred by Section 75 of the Finance Act, 1994. Now, this notification is being superseded by Notification No. 12/2014-ST dated 11.07.2014 (w.e.f 01.10.2014), which states, "the Central Government hereby, for the purpose of the said section, fixes the following rates of simple interest per annum for delayed payment of service tax, as given in table below: -

Table

Key Concern:

Such high rate of interest is unwarranted and unjustified when the Assessee including Individual/ Firm having taxable turnover more than Rs. 50 Lakhs in preceding financial year, has to pay Service tax on accrual basis and that too with the separate Penalty under Section 76 of the Finance Act, 1994. Moreover, imagine a situation when there is huge pendency in deciding the appeals by the Commissioner (Appeals) and/ or Tribunal/Court if assessee loses a case then he/she has to bear a higher rate of interest @ 30% PA, which was never envisaged by the Assessee at the time of filing Appeal.

Clarification/ Suggestion:

Please moderate the Interest rate around 15% PA because Service tax needs to be paid on accrual basis at large except Individual/ Firm having taxable turnover less than Rs. 50 Lakhs in preceding financial year OR clarify that proposed increase in Interest rate applicable only when Service tax collected but not deposited by the Assessee.

Further, penalty for delay under Section 76 of the Finance Act, 1994 should be abolished as there is separate Penalty provisions under Section 78 of the Finance Act, 1994 for fraud; or collusion; or wilful mis-statement; or suppression of facts; or contravention of any of the provisions of this Chapter V or of the rules made there under with the intent to evade payment of Service tax.

2. Mandatory Fixed Pre-deposit for filing of appeals, boon to tax evaders and bane for honest taxpayer:

The Government vide clause 98 of the Finance (No. 2) Bill, 2014 has substituted new Section 35F of the Central Excise Act, 1944, which is also applicable for Service Tax vide Section 83 of the Finance Act, 1994 and for Customs vide Section 129E of the Customs Act, 1962.

This substituted section prescribes a mandatory fixed pre-deposit of:

a) 7.5% of the duty demanded or penalty imposed or both for filing of appeal before the Commissioner(Appeals) or the Tribunal at the first stage; and

b) 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal.

The amount of pre-deposit payable would be subject to a ceiling of Rs 10 Crore.

The proposed amendment will do away with the requirement of filing Stay applications for waiver of pre-deposit, thereby, the controversy regarding extension of Stay beyond 365 days from the initial grant of stay in terms of Section 35C(2A) of the Central Excise Act, 1944 also loses its significance. All pending appeals/ Stay application would be governed by the statutory provisions prevailing at the time of filing such stay applications/appeals.

Key Concern:

The Hon'ble Finance Minister said during the Budget speech that there is around Rs. 4 Lakh Crore held up in the litigation. Statistics indicate that around 80% of the cases are lost by the Revenue Dept. at the Tribunal level as the Tax Dept. blindly confirms the demand against the Assessee by passing mechanical and perverse orders deliberately ignoring the precedents and settled position of law. Therefore, honest tax payers have to suffer as earlier they used to get justice from the Tribunal/ Court by getting waiver from pre-deposit of any amount but now have to make mandatory fixed pre-deposit for filing appeals.

Further, after paying such deposits, still their case is not going to be decided in time bound manner for lack of infrastructure for handling indirect taxes litigations in the Country. Thus, such provisions will create undue hardship to the honest assessee and boon to tax evaders as after paying 7.5%/ 10%, they will enjoy for many years till the time their case turns up for hearing, which may not likely to come for another 4-5 years or so with present pendency at the Tribunal.

Clarification/ Suggestion:

Such provisions of mandatory fixed pre-deposit for filing appeals should be withdrawn. Rather, it is advisable not to demand any mandatory pre-deposit for filing appeals for legal cases involving demand of Duty and Penalty upto Rs. 1 Crore to extend trade friendly support to SME and MSME assessee and such cases should be heard without any pre-deposit by Commissioner (Appeals) or Tribunal as the case may be on time bound (say within 3 months from date of filing) manner.

Further, there is confusion/doubt prevails if an appellant has already deposited 7.5% in first stage of appeal then whether he is required to deposit another 10% in second stage of appeal or differential 2.5% only?

It is specified in the budgetary notes issued by the Ministry of Finance vide D.O.F. No. 334/15/2014-TRU dated 10 July 2014 as below-

"13. Section 35F is being substituted with a new section to prescribe a mandatory fixed pre-deposit of 7.5% of the duty demanded or penalty imposed or both for filing appeal with the Commissioner (Appeals) or the Tribunal at the first stage and another 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal."

The underlined words are significant for they would indicate that an appellant at the second stage of appeal would have to pay an additional 10% distinct from the 7.5% he paid in the first appeal.

However, the language employed in the proposed section 35F does not justify the above mention made in the budgetary note of the “added 10%” required to be deposited at the second stage of filing an appeal before the Tribunal. Suffice to say if a litigant pays 7.5% as pre-deposit at the first stage of appeal, it would be enough if he pays the balance of 2.5% so as to make the total pre-deposit paid by him as 10%.

Hence, the Board needs to clarify the above point apart from the suggestion of withdrawal of mandatory fixed pre-deposit for filing appeals.

3. Time limit for availing CENVAT credit on Inputs and Input Services vide Notification No. 21/2014-CE (NT), dated 11.07.2014 – Applicable w.e.f 1 st September, 2014:

An assessee shall not be able to avail Cenvat credit on Inputs and Input Services after six months from the date of invoice. Rule 4(1) for input credit and Rule 4(7) for input service credit are being amended in order to fix a time limit of six months for availment of the CENVAT Credit. In case of Service tax paid under full reverse charge, the condition of payment of invoice value to the service provider for availing credit of input services is being withdrawn. However, the said change is not applicable in respect of partial reverse charge.

Key Concern:

Restriction on availment of Cenvat credit within 6 months from date of invoice has taken back the industry to 1995 when similar provisions were introduced for the first time. These were however, deleted in the year 2000 to allow industries to avail Cenvat credit at any time for which they were eligible. Incidentally, the Board had vide F. No. 345/2/2000-TRU dated 29.08.2000 clarified thus –

"10. Rule 57AC provides that CENVAT credit may be taken immediately on receipt of inputs in the factory. Some apprehensions have been expressed that if the CENVAT credit is not taken "immediately", like within 24 hours or so, the field officers may deny the CENVAT credit. The idea is that if the manufacturer desires he can take the CENVAT credit at the earliest opportunity when the inputs are received in the factory. This, however, does not mean, nor is it even intended that if the manufacturer does not take credit as soon as the inputs are received in the factory, he would be denied the benefit of CENVAT credit. Such an interpretation is not tenable."

As such, Cenvat Credit Rules suffers from excessive delegations, which has led to repetitive amendments, which is prone to legislation and not able to remove cascading effect even in a scenario when the Government is moving towards GST.

Further, the Cenvat credit on Input Services has been linked with the payments of Invoice value and Service tax thereon within 3 month from the date of invoice and if payment is not made within 3 months from date of Invoice then the assessee has to reverse Cenvat credit availed on such Input service and take Cenvat credit whenever paid by the assessee but now restricted to six months from date of invoice. Whereas, although the Government has already collect the Service tax from the Service provider immediately after raising invoice the service recipient will not be allowed Cenvat credit unless payments is made to said bill within six months from date of invoice.

Suggestion:

It is suggested that a time limit of six months for availment of Cenvat Credit should be enhanced to one year on reasonable ground.

Further, suggestion is that suitable amendment should be made in the Cenvat Credit Rules to delink payments to be made to Service provider within six months from date of invoice at par with Inputs/ Capital goods to remove cascading effect.

4. Disallowing transfer of credit by a large taxpayer from one unit to another – Rule 12A vide Notification No. 21/2014-CE (NT), dated 11.07.2014:

The Finance Minister also has taken away the major attraction for assessees to opt for LTU i.e., the facility of transfer of credit by LTU from one unit to another but nowhere it is specified in Clarification provided by the JS TRU as to Why such benefit is withdrawn and what is way forward for LTU in this regard.

5. Issue of Excisability/ Taxability - No appeal before High Court against the order of tribunal and appeal need to be filed directly before Supreme Court [vide clause 99]:

Section 35L of the Central Excise Act, 1944 is being amended so as to clarify that determination of disputes relating to taxability or excisability of goods is covered under the term “determination of any question having a relation to rate of duty” and hence, appeal against Tribunal orders in such matters would lie before the Supreme Court.

Key Concern:

Appeal against the tribunal order will lie to the Supreme Court even for the dispute related to taxability on goods or services & it is not convenient for every assessee especially SME and MSME assessees and this will result into costly affair and will lead to the filing of large number of appeals in the Supreme Court, which result in delay for getting the Justice.

Suggestion:

Section 35G of the Central Excise Act, 1944 should be suitably amended so that every order of the tribunal can be challenged by filing an appeal before the jurisdictional High Court.

Hope the Hon'ble Finance Minister will hear our concerns and make necessary changes to provide conducive and trade friendly atmosphere for real growth and development of Trade and Industry.