JANUARY 20, 2017

By TCS Limited

DIRECT TAX

1) Phasing out of deduction under section 80I-AB for SEZ developers.

Background:

As per Finance Act 2016 no deduction under section 80IAB will be available to the developer where the development of SEZ begins on or after 1st April 2017

Issue:

SEZ developers are making huge investments in land, buildings, and infrastructure. Development of SEZ facility is a long term process involving creation of infrastructure after completion of myriad government formalities and getting approvals from various agencies at the State and Federal level.

Because of the long drawn processes, many developers continue to hold valid approvals from the Ministry of Commerce for development of SEZ facilities, which are allowed to be extended based on the level of development of the SEZ infrastructure.

From the policy perspective, it will be unfair to deny the tax benefits at such a short notice to such SEZ developers who have planned massive investments in setting up SEZ infrastructure.

Recommendation:

In view of the above, the sunset date for the SEZ developer should be extended atleast up to 31st March 2018.

2) Formula for computing deduction under section 10A/10AA.

Background:

Whilst computing tax deductible profits of the STP/SEZ, the assessing officers reduce the expenses incurred in foreign currency only from the "export turnover" and not from the "total turnover" despite plethora of judicial pronouncements to the contrary as well as the recommendations of the Hon. Rangachary committee.

Issue:

The application of the above mathematically incorrect formula substantially dilutes the tax relief due to the Units under the provisions of sections 10A and 10AA.

Observations of the Rangachary Committee:

The formula for computation of the profits eligible for deduction under Sections 10A, 10AA and 10B cannot be altered without explicit provision in law in such a manner so as to artificially reduce such eligible profits. Therefore, if expenses/receipts are removed from the export turnover, then same should also be removed from the total turnover to retain parity in numerator and denominator.

Recommendation:

An appropriate clarification, effective from the inception of respective sections shall be issued by CBDT, advising the field that whilst computing the STP/SEZ profit, expenses incurred in delivering software services outside India shall be reduced both from the "export turnover" as well as the "total turnover".

3) Phasing out of weighted deduction u/s 35(2AB)

Background:

Presently weighted deduction of 200% is available under section 35(2AB) in respect of expenses incurred for in-house Research & Development. The Finance Bill 2016 proposes to restrict weighted deduction of R&D expenses under section 35(2AB) in respect of in-house R&D to 150% from April 2016 and 100% from April 2020

The proposed phasing out of weighted deduction for R & D incentives will not only discourage the various initiatives like "Make in India", Digital India", "e Governance", "Clean Energy" etc. which are being aggressively pursued by the Government but also will dampen the spirit of innovation which is essential for the robust growth of the Indian industry.

Incidentally, the current global trend is to encourage the R. & D. activities through provision of incentives e.g. such incentives are currently available in the USA, UK, Australia, France, Italy, China and Singapore to name a few.

The UK Government continues to implement its R. & D. incentive regime despite drastic reduction in the headline tax rate of 26% in 2011 to 21% in 2015 and proposes to further reduce the rate to 18% by 2020.

Recommendation:

In view of the above, it is strongly recommended to continue not only the current scheme of weighted deduction but also introduce new R. & D. incentive schemes which are administratively easy to implement.

4) Equalization Levy

Background:

Effective 1st June 2016.the Finance Act 2016 charged a levy @ 6% of the consideration for specified services received or receivable by a resident from a non-resident.

Issue:

The levy of 6% is required to be deducted from the amount payable to non-resident. Additionally, there is a possibility that the payment towards specified services may attract WHT which will result in double levy. The non-resident generally would not agree to a reduction of the amount charged by them and accordingly the Indian payer will have to bear the cost of the levy as well as the applicable WHT. This will increase the cost to the Indian payer. The Indian payer is also required to pay the service tax on reverse charge basis on such payment as such there will be double tax burden on Indian payer.

Recommendation:

In view of the above it is recommended that the proposed levy of 6% be deleted.

5) Deduction u/s 80JJAA

Background :

As per the provisions of section 80JJAA , an additional deduction of 30% of the additional wages paid to new regular workmen employed by the company during the year is allowed for three consecutive years if certain conditions are fulfilled. One of the conditions is that the employee should be employed for 240 days and more during that previous year.

Issue:

The benefit is available only in respect of the employees employed till July of the financial year since employees employed from August onwards will not be able to complete 240 days in that financial year and accordingly will not be fulfilling the required condition. The intention for this additional benefit is to incentivize the companies to generate more employment. If the benefit is not available since the employee has not completed 240 days , the very purpose of incentivizing the companies is defeated. The company especially IT company recruits the employees throughout the year and hence calculating the number of days in the first year of employment will not cover the employees which are recruited in the later part of the year.

Recommendation:

The condition of completion of 240 days by an employee will be required to be tested in two consecutive years instead of only first year. If the employee fulfills the condition cumulatively considering the first two financial years of employment, the company should be allowed to claim the additional deduction from the year in which the number of days condition is fulfilled and subsequent 2 years..

6) Filing of appeal with ITAT by Income Tax Dept. arising out of DRP order

Background:

From the inception of DRP in 2009 till June 2012, since no right of appeal was provided to the Income Tax Department against the directions of the Hon. DRP, the Hon’ble DRP’s directions were generally in favour of the Income Tax Department. This defeated the very purpose and existence of the forum for dispute resolution. Therefore, at Hon. Finance Minister by Finance Act 2012 rightly provided the Income Tax Department the right of appeal to ensure fair play. The Finance Act 2016 again took away this right of appeal of the Dept. which is a retrograde step.

Issue:

The Income Tax Department is not allowed to file an appeal against the order of AO pursuant to the directions of DRP, In all fairness the department needs to be allowed to agitate its issues which will also make DRP more effective, efficacious alternate dispute resolution forum.

Recommendation:

The DRP’s right of appeal to ITAT should be restored back.

7) Penalty under section 270A

Background:

The Finance Act 2016 inserted a new section 270A in respect of penalty to be imposed for "under reporting" and "misreporting" of the income. The levy of penalty of 200% of the tax payable in case of misreporting of income which includes misrepresentation or suppression of facts, failure to report any international transaction or any transaction deemed international transaction etc.

Issue:

At present section 271(1) (c) levies penalty of minimum 100% in respect of concealment of income. Similarly there is a provision of penalty under section 271G @ 2% for failure to furnish information under section 92D which relates to international transaction. Insertion of this additional new penalty section will result in double levy of penalty.

Recommendation:

The intention behind the insertion of this section is to rationalize the penalty provisions and to bring objectivity, certainty and clarity in the penalty provisions. The proposed levy of 200% instead of earlier 100% surely defeats the purpose of insertion of this section. In view of the same the proposed new section 270A is to be rationalized by reducing the penalty levy from 200% to 100%.

8) TRANSFER PRICING

a) Reporting requirement under section 286 (CBCR):

Background:

Various nations around the world are facing the issue of erosion of tax base and the BEPS project aims to reduce the same. To avoid issue of tax base erosion, the G20 finance ministers called on the OECD to develop an action plan to address Base Erosion and Profit Shifting (BEPS) issues and come out with new reporting requirement "Country by Country Reporting (CBCR)" for the multinational group entities having group turnover more than EUR 750 million.

Finance Act 2016 Provision:

As per the proposed reporting requirement under section 286(2) of Income Tax,

Every parent entity or the alternate reporting entity, resident in India, shall, for every reporting accounting year, in respect of the international group of which it is a constituent, furnish a report, to the prescribed authority on or before the due date specified under sub-section (1) of section 139, for furnishing the return of income for the relevant accounting year, in the form and manner as may be prescribed.

Issue:

Due to above proposed provision, multinational groups having one investment company with several separate groups may have too much burden of reporting requirements.

Recommendation:

In case a group is held by an unlisted company (i.e. the ultimate parent entity is an unlisted entity), the listed company / companies in the group can comply with the compliance requirement under section 286 and can file the necessary information for its group entities (i.e. for its subsidiary and branches).

Further since compliance is done by the listed company of its group entities, ultimate holding company should be excluded from the compliance requirement under section 286.

b) Background:

Transfer Pricing provisions were introduced in the Income Tax Act w.e.f. 1-4-2002 under chapter X "Special provisions relating to avoidance of tax"

The Finance Minister while explaining the rationale behind introduction of these transfer pricing provisions stated that:

- the new legislation is to curb tax avoidance by abuse of transfer pricing,

- a detailed statutory framework is being provided which can lead to computation of reasonable, fair and equitable profits and tax in India,

- The basic intention underlying the new transfer pricing regulations is to prevent shifting out profits by manipulating prices charged or paid in international transactions, thereby eroding the country’s tax base.

Issue:

However, it is observed that despite the well-articulated clarity in the rationale behind the transfer pricing provisions, the assessing officers are arbitrarily and/or mechanically invoking the transfer pricing provisions even in cases where the assessees are eligible for tax relief’s u/s 10A/10AA or have related party transactions with well-regulated tax jurisdictions.

Recommendation:

It is recommended that transfer pricing provisions shall not be invoked against tax payers:

i. who are entitled to tax holidays (section 10A/10AA reliefs) in India,

ii. In respect of transactions with countries as listed in a "white list" (to be prescribed) which shall include jurisdictions having reasonable tax rates/stable tax regimes.

c) MAP related issue

Background:

Mutual Agreement Process (MAP) is an important dispute resolution mechanism that exists regardless of the remedies offered in domestic tax laws. Under MAP, the Revenue Authorities of two countries signatory to the Double Tax Avoidance Agreement (DTAA) meet together to resolve cross border disputes to avoid double taxation of cross border transactions.

Generally, Article 9(2) of the DTAA is an "enabling" provision which facilitates initiation of such MAP.

Issue:

Article 9 (2) is absent in some DTAAs signed by India with other countries like Belgium, Singapore etc. India has taken a technical position that in such instances MAP will not be entertained even if the other signatory country is ready to initiate MAP in the absence of provisions of Article 9(2). This technical position tends to deprive the industry of the benefits of quick and cost effective cross border tax dispute resolution mechanism.

Recommendation:

1. To initiate a formal process of signing a bilateral protocol for inclusion of the provisions of Article 9(2) in all the DTAAs signed by India which do not have the provisions of Article 9(2),

2. Till the above formal protocol is completed, the CBDT should issue appropriate administrative instructions to allow to initiate MAP discussion in all such disputes which do not have the benefit of the provisions of Article 9(2).

9) Foreign Tax Credit Guidelines (FTC)

a) Foreign Tax Credits on aggregate basis

An option is available to the assessee to apply either the provisions of domestic law or of the treaty law, whichever is more beneficial to him. In respect of countries with which India has concluded DTAA,. The CBDT has recently notified FTC rules. The tax payer is required to work out FTC as per the rules.

Issue

Indian MNCs have global operations with permanent establishments in many countries. The present method of computing FTC for each country by referring to the relevant treaty is onerous for both the assessees as well as the tax administration in view of the fact that each tax treaty is a code in itself and has to be contextually interpreted.

Recommendation

The domestic law should provide for a simpler method of granting FTC by aggregating all foreign sourced incomes. The taxes paid in foreign country should be allowed as credit on aggregate basis against the India tax liability.

b) Carry-forward of excess Foreign Tax Credit

The FTC is restricted to the tax liability of the assessee in India.

Issue

In the following situations, the assessee is not granted full credit for the foreign taxes paid:

- The working formula prescribed in Section 91 or the relevant tax treaty is not yielding optimal results by way of granting FTC.

- Where the assessee incurs a loss on its worldwide income for any assessment year and as a result no FTC is granted.

- Where the Indian tax payable on the worldwide income is lower than the foreign tax paid and as a result the FTC is partially available.

- The method of computing the income in the foreign countries is different from the method of computing the income under the Income Tax Act.

- The time period within which tax credit should be claimed and allowed is not defined. Owing to differences in laws and practices in tax administration in foreign jurisdictions, the tax liability for any financial year could get determined much after the conclusion of assessment for the same year in India.

Recommendation

Assesses need to be allowed carry forward of the "unutilised" foreign tax credit for 5 years. It is recommended to suitably introduce the provisions to allow such relief which is due to the assessee.

Accordingly, rule for FTC should provide for the carry forward of the FTC.

c) Deduction for taxes paid on income to the provincial/local tax bodies like the State, Cities, Countries in overseas tax jurisdictions etc.

Background:

In order to mitigate the rigours of double taxation in respect of cross border transactions, India has entered into Double Tax Avoidance Agreements (DTAAs) with many overseas tax jurisdictions. The provisions of the DTAAs prescribe tax relief to resident of a contracting country either by way of exemption method or tax credit method. Generally, the DTAAs entered into by India are with the central governments of overseas countries.

However, in case of countries like the USA, Canada, and Switzerland which have Federal structure of governance, the local governments at the provincial/state, cities, counties
which also levy taxes on income are not party to the DTAA and hence taxes on income levied by such jurisdictions are not covered by the Scope of Taxes of such DTAAs. Such local taxes are merely not covered because the respective Federal Governments lack the necessary constitutional authority to contract on behalf of the local tax jurisdictions in view of the peculiar prevalent Federal structure of governance.

Issue:

Though the levy of such local taxes on income also amounts to double taxation of income, the relief is denied by the tax authorities in India on a specious ground that such local taxes are not covered by the applicable tax treaty.

The anomaly becomes more apparent in cases where India has not signed a DTAA with any country. The provisions of section 91 which allows tax relief in such cases do not distinguish between taxes on income levied by the Federal and/or provincial/local bodies and allows tax credit even for local taxes on income.

Recommendation:

The FTC should be allowed for taxes on income levied by overseas provincial/local tax jurisdictions or alternatively the taxes paid should be allowed as deduction from the total income of the assessee.

d) Foreign Tax Credit by employer in respect of taxes paid in overseas countries.

In the current scenario of globalization, substantial cross border movement of Indian employees is happening which results in double taxation of salaries of such mobile employees. The salaries are taxed in the home (India) country and in the host (country of deputation) country. This becomes a serious cash flow issue for such doubly taxed employee’s esp. since the employees can seek tax credit for the taxes paid in the overseas jurisdictions u/s 90/91 of the Act by filing tax returns in India. This leads to the avoidable administrative burden on the Department without any collection of additional revenue

Recommendation:

It needs to be clarified that the employer can allow credit at source in respect of foreign taxes paid by the employees overseas based on the foreign tax credit rules / clarifications

e) Foreign Tax Credit in case company is considered as Resident under POEM

Background:

Based on the application of POEM rules, if an overseas entity is considered to be a tax resident of India, it will lead to double taxation.

Recommendations:

The taxes paid by the deemed resident company in foreign country should be allowed to be set-off against the tax liability in India

10) Recommendations related to TDS

a) Issuance of Master Circular for resident & non-resident payments

Background:

A lot of time, money and energy of the assessee and Department are wasted in litigating various issues which are generally common in nature or affecting industry as such.

Recommendation:

Recommended that in case of any industry specific issue or any other common contentious issues, a guidance note/ circular shall be provided forthwith by the Tax Department just like the circular on FBT, the Handbook on negative service tax regime etc. which clarifies most of the doubts of the assesses. This will bring clarity and certainty in respect of various issues and reduce the litigation and saving the Department and the assessees of time.

b) Background:

Circulars issued by the Hon. CBDT are used by the industry and the tax practitioners to interpret the T.D.S. provisions including the compliance aspect thereof. Over a period of time, there have been a plethora of Circulars/Clarifications/Instructions, reflecting Department’s interpretation of the various T.D.S. provisions which the industry is required to navigate for compliance.

Recommendation:

After the enactment of the Finance Bill every year, the Hon. CBDT should as a policy, issue one comprehensive Master Circular clarifying compliance aspects, procedures, relaxations, interpretations etc. covering all the provisions of T.D.S. under the Act.

c) Issue of TDS Certificates:

Background:

As per the Income Tax (6th Amendment) Rules, 2010 (Notification No. 41 dated 31-May-2010), Form No. 16A is required to be issued on a quarterly basis.

Issue:

The requirement of issuing TDS certificates has become obsolete and if continued, leads to substantial administrative inconvenience without adding any corresponding value to the compliance requirement of service vendors or service providers.

Currently, TDS certificates to be issued are to be downloaded from Income Tax website. The same is on the basis of the TDS return filed by the deductor which gets reflected in the form 26AS of the payee. Hence, the requirement of issuing of TDS certificate has lost its relevance.

Recommendation:

The requirement of issuance of TDS certificates should be abolished with immediate effect.

d) Background: 26 AS to include PAN of deductor and the Unique TDS Certificate Number.

Currently, the 26AS statement contains the details of Name and TAN of the deductor. However, the PAN of the deductor is not appearing in the statement. In the absence of PAN, it is difficult to match the TDS as per 26AS with the books of the accounts of the deductee-companies since the customer details are generally PAN based.

Similarly in case of large companies, matching of TDS as per 26AS with TDS as per books with the books becomes very difficult.

Recommendation:

The 26AS statement shall also incorporate the PAN of the deductor and the unique certificate number so that the same can be reviewed and matched with the books of accounts of the company.

e) Background: TDS on Tax Component

CBDT Circular 1/2014 had clarified that service tax component should be excluded while determining tax deduction at source under Chapter XVII B of the Act, from amount payable to a resident.

Issue :

Since the circular covered only service tax , other taxes such as VAT etc continue to get subjected to TDS. Applying the principle of circular no 1/2014 in respect of Service Tax, no Tax should be subject to TDS/WHT.

Recommendation:

CBDT should notify that TDS should not be deducted on all taxes such as VAT , proposed GST etc..

f) Reporting of all cross border payment ( Form 15CA/15CB )

Background:

The Finance Act 2015 has mandated the payer to report specific information of all cross border payments in the prescribed form 15CA after obtaining certificate from a Chartered Accountant in Form 15CB whether such payment is chargeable to tax or not. The requirement of CA certification is cumbersome, an administrative and a financial burden since:

- the payer anyway is required to report the transaction/s with prescribed information on a quarterly basis,

- the Chartered Accountant’s certification is not binding on the Department.

Recommendation:

The requirement of CA certification and reporting of transaction in Form 15CA at the time of making cross border payment needs to be discontinued.

11) Recommendation in respect of Tax Simplification

a) Deletion of Substantive Retrospective amendments.

Background:

Retrospective amendments by their very nature destabilize a tax regime and goes against the principles of natural justice and increases litigation. The Finance Act 2012 introduced many such provisions with retrospective effect overturning established judicial pronouncements.

- Enlarging the scope of ‘royalty’ with retrospective effect (from 1 June 1976): Use of software.

Background:

The Finance Act 2012, vide explanation 4 under clause (vi) of Section 9(1), enlarged the scope of ‘royalty’ by amending the definition w.r.e. from 1 June 1976, to include transfer of all or any right for use or right to use a computer software (including granting of a license), irrespective of the medium through which it is transferred.

Issue:

In view of the above retrospective amendment, all the transactions in respect of software licenses will be subject to WHT which is not in line with the global best practices which treat purchase of standard/packaged software on par with purchase of "goods" and hence not subject to withholding of tax.

Recommendation:

In the light of the above, the Explanation 4 under clause (vi) of Section 9(1) should be omitted w. r.e. from June 1, 1976. Delete this sentence as covered below in process & relevant for the issue below

- Definition of "Process": Omission of Explanation 6 to section 9(1)(vi)

Background:

Explanation 2 (iii) to Section 9(1)(vi) defines "Royalty " to mean the use of any patent, invention, methods, design, secret formula or process or trade mark or similar property.

The Finance Act 2012 has enlarged the scope of ‘royalty’ by amending the definition w..e.f from 1 June 1976, by inserting the following explanation in respect of the definition of "Process".

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret".

Issue :

The above definition is broad enough to bring within its ambit, routine commercial payments towards provision of basic telephone services including mobile phones, leased lines etc.

Telecom service providers are like any other utility service provider e.g. electricity through cables etc. The consideration for such services results in earning ordinary business profits and not process royalty.

Classifying business income derived by the telecom providers as Royalty will not be in line with the global practices followed in European Countries , USA etc..

Recommendation:

Explanation 6 under clause (vi) of Section 9(1) inserted by the Finance Bill, 2012 therefore needs to be omitted altogether.

b) Transactions in foreign currency: Uniformity in use of exchange rates –

Background:

Service tax: As per the provisions of section 67A of the Finance Act, for determining the service tax liability in respect of transactions in foreign currency, the applicable rate of exchange as per generally accepted accounting principles (GAAP) on the date on which point of taxation arises is prescribed..

Income tax: The Income Tax Rule 115 of the Income Tax Rules, 1962 prescribes use of prevalent telegraphic transfer buying rate of the State Bank of India for conversion of foreign currency transaction into rupees.

Customs duty: For the purpose of valuation of foreign currency transactions, the Customs Act requires exchange rates declared under the provisions of section 12 of the Customs Act to be used for payment of customs duty.

Statutory Accounts: For the purpose of financial disclosures, Accounting Standard 11 of the Institute of Chartered Accounts of India prescribes the exchange rates to be used.

In order to reduce the issue of computing amounts under various exchange rates, the Central Government has accepted the recommendation of the industry to allow use of exchange rate accepted under the Indian GAAP for determining service tax liability in respect of foreign currency transactions.

Issue:

Different statutes require taxpayers to use different rates for converting foreign currency denominated transactions. Use of different exchange rates is nightmarish even to companies using latest ERPs

Recommendation:

It is recommended that, to bring uniformity and consistency, statutory provisions under different statutes should provide to use the exchange rate prescribed under the Indian GAAP.

12) Recommendations in respect of Tax Administration: Removing administrative and procedural difficulties.

a) Background: Delink Assessment and Collection of Tax functions

Because of the revenue pressures, the Revenue Officers tend to pass Orders with unrealistic tax demands which generally fail to get sustained at the higher appellate forums thus giving false sense of inflated revenue to the Department. The so-called short term gains (demands) are nullified in the longer term with the additional interest liability.

The root cause of this malaise seems to be the conflict of interest since the assessing officer acts as an assessor of tax, raises the tax demand and also collector of tax.

Recommendation:

It is recommended that the three distinct functions of assessment, raising of tax demand and collection of tax shall be handled by three different officer-functionaries to avoid the conflict of interest.

Alternatively, it is recommended to delink raising of tax demand at the assessment level as one of the key performance indicators. Instead, the quality of the assessment shall be made the key performance indicator.

b) Tax Residency Certificate

Background:

Many of the India based companies execute cross border purchase and/or sale transactions. In case of purchase transactions, for getting the benefit of lower/nil rate of withholding of tax under the provisions of applicable Double Tax Avoidance Agreement signed with the payee’s country, the Indian companies are required to provide Tax Residency Certificate/s (TRC) issued by the Income Tax Department.

Procuring TRC is a time consuming process which is an administrative burden both for the industry as well as for the Department.

Recommendation:

The entire process of issuing the TRC needs to be digitized which will enable companies to download the digitally signed Tax Residency Certificate from Department’s website which may be linked to the filing of the Tax Return by the companies.

c) Background: Statutory Time Limit for CIT (Appeals)

Currently, there is no statutory time limit for passing the order by the Commissioner of Income Tax (Appeals).

Similarly, where ever the remand report is sought by the CIT (A) from the AO, the same also does not have statutory timeline.

Recommendation:

Just like assessment.a reasonable statutory time limit 3 years from the filing of appeal shall be set for disposing of the appeal by CIT(A) as well as for disposal of the remand report by the AO. This will ensure the speedy disposal of appeal.

d) Background: Appeal disposal on FIFO basis

It has been the industry’s perception that the "hearings" before the Commissioner of Income Tax (Appeals) are influenced by the Demand/Refund position of that case. Preference is normally given to the high demand appeals and the "refund" appeals are normally kept aside increasing the "pending" list of matters to be heard.

Recommendation:

It is recommended that the appeals shall be instructed to be disposed off on the basis of filing dates of appeals i.e. on F.I.F.O. basis.

e) Background: Mechanical issue of penalty proceedings notices

There is an increasing tendency of initiating penalty proceedings mechanically under section 271(1)( c) of the Act in respect of all the additions made by assessing officer and many times despite orders of the higher judicial forums being favourable to the Assessees.

Recommendation:

1. Clear cut guidelines shall be issued advising the field officers the rare circumstances like deliberate suppression of facts having bearing on the assessment proceedings etc. under which such penalty proceedings shall be initiated.

Interpretation issues or tax positions supported by the rulings of higher appellate forums shall be outside the ambit of the penalty proceedings.

2. There shall be a mechanism in place to examine the quality of the penalty proceedings initiated by the assessing officer.

3. Further, in case of consistent and substantial rejection of the grounds of penalty proceedings by the higher judicial forums, the rejection shall reflect adversely in the appraisal process of the concerned assessing officer.

f) Background: Creation of Specialised Cells for scrutiny of assessment orders

Currently, the Revenue Officers are taking contradictory positions either at the assessment stage or at the various appellate forums with the sole motive of raising tax demands on the assessee to garner revenue.

This defeats the cardinal constitutional principle of "no collection of tax without the authority of law" and leads both the Department and the industry to a time consuming, expensive litigation.

Recommendation:

The Hon. CBDT/CBEC shall set up an apex specialized cell/s comprising technical/legal officers who shall examine each and every assessment order passed having monetary implications above a certain threshold.

This apex cell shall oversee similar local/regional cells comprising technical/legal officers.

On each and every issue affecting the industry, the Hon. CBDT/CBEC, based on the recommendations of this apex cell, issue the official legal position of the Department. This not only will assist the revenue officers during assessment, appeal proceedings but also give certainty to the industry about the Departmental position in respect of tax issues.

g) Background: Creation of cells for specialised knowledge

The assessing officers, are at times, not equipped to deal with specialized, technical issues (e.g. the transfer pricing issues etc.) which reflects badly on the quality of the assessment orders and many a times puts precious governmental revenues at jeopardy.

Recommendation:

Specialized cells comprising specialist/technical officers (like the Transfer Pricing Officers) shall be set up, under appropriate legislative mandate, to whom the issues may be referred to by the assessing officers.

These officers shall be intensively and continuously trained in newly identified complex, specialized areas.

h) Disclosure in New Income Tax Return Forms

Background:

The CBDT vide notification No. 14/2012, Dated: March 28, 2012 has prescribed the Income Tax Return forms -wherein a resident individual has to make additional disclosures if he holds any assets located outside India or has a signing authority in a bank account located outside India.

Issue:

Normally a company operates its bank account through their employees who are given the signing authority. The effect of the above notification is that even if an individual has a signing authority to operate company’s bank account located outside India, he is required to disclose these bank accounts in his individual Income Tax Return. This creates hardship for those individuals who merely operate bank accounts on behalf of the company. In the current scenario of globalisation it is very likely that the employees would be authorized to sign the bank accounts opned in the overseas countries.

Recommendation:

In view of the above, it is recommended that exclusion should be carved out for disclosing the details of the overseas bank accounts of a listed company in the income Tax Returns of their employees.

INDIRECT TAX

The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by the President of India post its passage in the Parliament (Rajya Sabha on 3 August 2016 and Lok Sabha on 8 August 2016) and ratification by more than 50 percent of state legislatures. The Government of India is committed to replace all the indirect taxes levied on goods and services by the Centre and States and implement GST by April 2017.

GST will be seen as a game changing reform for the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system.

GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.

Hence in pre-budget recommendation we would want to address concerns based on the Model GST draft law dated June 2016 published by the Empower Committee of State Finance Ministers and Finance Ministry of Government of India and the transition concerns.

1. Supply

Background:

Under Section 3(1) of the CGST/ SGST Act , ‘supply’ is defined as "supply" includes ‘supply of goods and services’ which is just a circular referencing not providing clarity on what does "supply" means. Further it covers all forms of transactions like sale, transfer, barter, exchange, license, rental, lease or disposal. The Supply further includes supplies without consideration as listed in Schedule-I and also importation of services without consideration. Further, import of services without consideration is also considered as supply and subjected to reverse charge.

Issue:

The all-inclusive definition leads to an ambiguity and does not provide guidance on coverage of many transactions. Further, the currently worded definition seems to be drafted keeping in mind taxability of goods rather than services.

Recommendation:

a. It is recommended that the term ‘supply’ be more clearly defined and scope of the definition should be restricted to the type of transactions the legislature intend to tax.

b. It is recommended that the GST law should apply only to supplies made for a consideration in monetary form or otherwise.

c. Schedule I needs to be deleted else it will only lead to litigation in identifying economic value of the transactions included.

d. It is further recommended that import of services without consideration should not be subjected to GST.

e. Services are essentially intangible and therefore in any case, taxing a service without a consideration will resulting in substantial ambiguity and uncertainties,

f. It is important that such supplies should be in the course of or furtherance of business or commerce.

g. The clarity that Supply excludes real estate, education, Electricity, petroleum and tobacco and other sectors not covered under GST law is required to be given in the definition.

h. The clarity that supply excludes supply by transporter of goods, Courier and Clearing Forwarding agent needs to be provided.

2. Clarity in definition of ‘Recipient’, ‘Supplier’ and ‘Location of Recipient’ and ‘location of Supplier’ should be provided

Background:

Section (80) defines "recipient" of supply of goods and/or services means-

(a) where a consideration is payable for the supply of goods and/or services, the person who is liable to pays that consideration,

Section 2 (91) defines "supplier" as in relation to any goods and/or services shall mean the person supplying said goods and/or services and shall include an agent acting as such on behalf of such supplier in relation to the goods and/or services supplied.

Further both location of recipient (Sec 2(64)) and location of supplier (Sec 2(65)) is defined Where a supply is made from or received at a place of business for which registration has been obtained, the location of such place of business ; ………….

Issue: According to the Model law for businesses operating from multiple states in India, require to get register for CGSTSGST registration in each state therefore, in cases where supply is provided by more than one location of the tax payer or such supply is received by recipient at places in multiple states in such situation, the provisions are not sufficiently guide regarding exactly which registered office of the service provider/service recipient is providing or receiving the services.

Recommendation:

a. Therefore, in all B2B and B2G (Business to Government) contracts Supplier and Recipient should be defined as branch of the supplier who enters into contract with the client and recipient should be the branch of the recipient which is party to the contract.

b. Definition of Location of supplier and Location of recipient should be ideally to be placed under IGST Act. Further, in B2B transactions the flexibility to the recipient and supplier should be provided to decide the place of supply since full tax is paid upfront hence there is no incentive to under pay and the business dynamics will drive the transaction to the place where the actual consumption of supply where it is getting consumed.

c. Also, definition of ‘fixed place of business’ and ‘usual place of business’ need to be moved to IGST Act.

3. TDS, TCS & Reverse charge Mechanism:

-Section 7 (3) of CGST/ SGST Act permits the government to notify reverse charge mechanism in respect of certain domestic goods and/ or service transactions. It requires a person other than the supplier to discharge full or partial tax liability.

-Section 37 provides for deduction of tax at source on notified goods and/ or services.

-Section 43C prescribes for collection of tax at source in case of e-commerce operators.

Issue:

The self-regulating law like GST implement through automated GST network does not require various methods of tax collection. They are unnecessarily complicate the system and increase compliance burden and would be unproductive work for the tax administration.

Recommendation:

It is therefore, recommended that all the above alternate collection mechanisms should be done away with and GST should be made payable only by the supplier of the goods and/ or services. The concept of payment by recipient under reverse charge should be restricted only for imports from outside of India.

4. Amendment to the definition of ‘goods’ and ‘services’.

Section 2 (48) of the CGST/ SGST Act defines ‘goods’ as

"goods means every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply.

Explanation.– For the purpose of this clause, the term ‘moveable property’
shall not include any intangible property."

The term "services" is defined u/s 2(88) of the CGST/SGST Act as under:

"(88) "services’’ means anything other than goods;
Explanation: Services include intangible property and actionable claim but does not include money."

Issue:

Whether software to be treated as goods or service is still debatable issue which has been put to rest by the explanations to definition of ‘service’ & ‘goods’ and incorporating various software related activities into Schedule II as ‘transaction deemed to be services’. However, still there is no clarity on "software" when delivered on media like CD whether to be treated as’ good’ or ‘service’.

Further securities are getting covered under definition of ‘goods’ and ‘immovable properties’ under ‘services’ would attract GST. Securities and immovable properties are subjected to separate taxation under STT and stamp duty act. These are primarily investment vehicles and not consumption vehicles.

Therefore, it is incorrect to apply a consumption tax like GST on such transactions

Recommendation:

a. It is therefore, recommended that entry 5 (d) of Schedule II should include software on media including licensing of software.

b. Transactions in securities and immovable properties recommended to be kept outside the purview of GST through exclusions in the definitions. In any case, such transactions attract STT and/ or stamp duty, neither of which is proposed to be subsumed under GST.

5. Time of Supply of Goods

Background:

Section 12 of the GST Act defines the time of supply of goods to be the earliest of 5 events, i.e., removal, making goods available to the recipient, invoice, recording of receipt of goods by the recipient in his books and payment received.

Issue:

Keeping track of all 5 events for each transaction is almost impossible for any business. Further, even the supplier has paid the tax, the credit of said tax to the recipient is available only after receipt of goods. This results in a disconnected position between an outward supply by the supplier and an inward supply by the recipient.

Recommendation

It is therefore recommended that the time of supply of goods should be raising of an invoice or delivery of goods whichever is earlier.

6. Time of Supply of Service

Background:

Section 13 of the GST Act defines the time of supply of services to be the earliest of 4 events, i.e., raising of invoice, receipt of payment, completion of service or recording of receipt of service by the recipient in his books.

Issue:

Keeping track of all 4 events for each service transaction is almost impossible for any business. Further, even if supplier has paid the tax credit to the recipient is made available only after receipt of service. This results in a disconnected position between an outward supply by the supplier and an inward supply by the recipient

Recommendation:

It is recommended that the time of supply of service should be defined as raising of an invoice or completion of service whichever is earlier. It is further recommended that extraneous factors like recording the transaction in the books of the recipient should not be a basis for determining time of supply by the supplier.

7. Value of Supply

Background:

Section 15 of the GST Act defines the value of a supply to be the transaction value. However, section 15 (2), requires to include value of free supply for the purpose of levy of tax. Further, as per Section 15 (4)

(iii) read with Rule 7 (b) valuation rules, the Officers are provided discretion to reject the contractual consideration.

Issue:

The notional valuation and inclusion of supply without consideration are charged to tax under the existing excise regime where the taxable event is manufacturing which is narrowly defined and therefore these provisions are relevant under excise regime to plug certain value from escaping taxation. However, the GST law has very comprehensive coverage, tax is charged on all stages of supply chain and with advent of GST Network, there is hardly any scope for any value exchanging hands without a tax implication. As such, notional valuations and inclusions of supply by recipient would result in cascading tax and will increase litigation. Globally adopted best practices also suggest that the contractual consideration to be considered to levy GST.

Recommendations:

a. It is recommended that the GST law should apply only on the contractually agreed transaction value. Hence, sub-section (a), (b), (c), (e) and (f) of 15(2) of SGST/CGST law need to be deleted.

8. Input Tax credits.

Background:

The model law provisions to claim of input tax credit requires that the tax payer shall be entitled to claim credit only if the supply is received, tax invoice is received, the supplier has paid the applicable taxes to the exchequer and the supplier has reflected the transaction in his returns and the supply is connected with an outward supply.

Issue:

Input Tax credit is the core of the GST framework. Prescribing so many conditions make the entire process of the claim of credit onerous and leads to huge blockage of funds. Further, certain parameters like the supplier has paid the applicable taxes to exchequer, the supplier has reflected the transaction in his returns are not in the control of the recipient. Therefore, recipient should not be penalised for the error or default of service providers. Further, when the tax department is provided with invoice wise sales and purchase details on monthly basis, thereby the tax authorities get real time information of defaulters. Hence, there is any reason to not allow the credits on the basis of ‘ tax invoice’.

Section 16(14) provides for reversal of input tax credit in case of supply of capital goods. This is not required as all outward supplies of the supplier are taxable.

Sections 17 and 18 prescribe for distribution of input credit on input services only on a proportionate basis. Model GST law does not provide effective mechanism to transfer accumulated CGST/IGST credits to own unit in other state, it is will create huge working capital crunch for business operating in multiple states.

Recommendation:

a. It is recommended that section 16 (11) should be deleted and input credit should be allowed based on tax invoice and payment to the vendor. Necessary amendments under Sec 28 and 29 needs to be made to have consistency with deletion of 16 (11).

b. There should be a prescribed format of Invoice numbering so that consistency and standardisation recording transactions by supplier and recipient will be maintained.

c. Section 16 (9) prescribes for ineligibility of credit in certain cases like construction activities, etc. In light of the comprehensive coverage of supply under the GST, such exclusions from the claim of credit are uncalled for. It is therefore recommended that section 16 (9) be deleted & input credits of tax paid on all business expenses should be made eligible. d. The Section 38 provides for refund mechanism in case of accumulation of credit in relation to export & inverted duty structure. An option should also be given to all tax payers under section 17 to adjust the accumulated input credit of one state against tax liability arising in another State subject to restrictions provided under Sec 35(5). (IGST can be adjusted against IGST/CGST/SGST ,SGST can be adjusted against SGST/IGST,CGST can be adjusted against CGST/IGST)

e. Section 16(14) which provides for reversal of input tax credit in case of supply of capital goods need to be deleted.

f. Explanation provided under Section 44 is irrelevant hence to be deleted.

9. Single registration for CGST & IGST

Background:

In the existing service tax regime service provider is allowed to obtain single centralised registration for all his places of business across the country and pay taxes under single tax registration to single tax authority.

Issue:

The model law requires every tax payer to get register in each of the State where he carries business.

These provisions fragments the pan India single market for services into 29 States and 7 Union territories, which put huge compliance cost and responsibility on the tax payers

Recommendation:

a. It is recommended that tax payer should be provided with an option to obtain single registration for at least taxes administered by the Central Government viz., CGST & IGST.

b. Tax wrongly collected and deposited with central or state government should be allowed to be adjusted against taxes to be paid.

c. Section 53 of CGST/IGST Act provides that in cases where SGST/CGST has been wrongly deposited on a interstate supply as intra state supply, the tax payer can claim refund of wrong taxes paid after making payment IGST. Generally, sanctioning of refund of taxes takes substantial time and it is at the discretion of the officers. In such cases, the SGST and IGST authorities being one from the State and another from Centre would most likely to take diverse views about the intra and interstate character of the same supply.

It will make refunds most difficult from either of the authority. Further, after discharging full tax payable the tax payer is required to make payment again is unjust. It is therefore recommended that in case of wrong payment of taxes the tax payer should be provided with an option to adjust such extra payment against actual liability instead of refund.

10. Zero rating for supplies to SEZ, STPs and EOU

Background:

Under the existing scheme, being exporting entities SEZ’s/STPs/EOUs have been granted various tax benefits under the service tax, excise as well as VAT laws.

The model law defines the term special economic zone but does not provide any clarity with respect to the various benefits that will be available to special economic zones under the proposed GST law.

Recommendation:

It is therefore recommended that supplies to SEZ, STPs and EOU units should made as ‘zero rated’ i.e. No tax will be chargeable on the invoices raised by the supplier on supply to SEZ/STP/EOU still the supplier would be eligible to claim full input credits.

11. Zero rating for all supplies to State and Central Governments.

Issue: Various Central Government departments do award contracts under which the supplier is required to deliver goods and services across the country. Similarly, State Governments also award various contracts. In both these cases CGST and SGST will be payable. In Pan-India Contracts determination of value of the work carried out or service provided in a particular State will be difficult and subjective which will eventually lead to taxation of same value in multiple State and will lead to litigation.

Recommendation: The supplies of goods and Services made to any State or Central Government should be made taxable at Nil rate with allowing availment of corresponding input credits i.e. making it ‘Zero rated"

12. Returns – Need for a single return and revised return

Background:

The Model GST law prescribes every registered dealer to file Return for the prescribed tax period (monthly). A Return needs to be filed even if there is no business activity (i.e. Nil Return) during the said tax period. Due dates for filing of return are specified for different categories of taxpayers which are ranging from 10th to 20th of subsequent month/ quarter. There would be separate returns for the outward supplies, inward supplies, annual return, separate return for the Input Service Distributors, non-resident taxpayers (foreigners) and Tax deductor. A registered Tax Payer is required to file GST Return at GST Common Portal either by himself or through his authorised representative. HSN code (4-digit) for Goods and Accounting Codes for Services is mandatory to be mentioned in the return,

Issue:

The multiplicity of returns in each state and at different dates within a span of 10 days makes compliance difficult and cumbersome to the tax payer. Also, cost of compliance would be very high.

Recommendation:

a. Returns should be required to be filed on six monthly basis although details viz Purchase, Sales including details of ISD would be filed monthly.

b. Late fee under section 33 for filing of late return should be capped to maximum of rupees five thousand.

13. Refunds:

Background:

Section 38 provides for refund in case of unutilised credit to exporter of goods and services and tax payer whose output supply is chargeable at lower rate whereas inputs are chargeable at normal rate (inverted rate structure).

Issue:

In case of excess payment made erroneously and in case of domestic supplier who has carried forward credits, the law does not provide any refund mechanism.

Recommendation:

Provision of refunds should be extended to cases where excess payment is made and in case of domestic supplier who has accumulated carried forward credits.

14. Interest on refunds

Issue:

Sec 39 provides for interest on delayed refund applications which fulfils prescribed condition.

Recommendation:

In case of any assessment or appeal order resulting in refund, the refund should be provided automatically on the basis of order without asking the tax payer to file separate application for refund and interest on such refunds should be given from the date on which said refund was due.

15. Time limit for scrutiny of returns

Issue:

Section 45 provides for Scrutiny of returns however there is no limitation period prescribed within which the officer has to carry out said scrutiny. Recommendation: Section 45 to be amended to the effect that any scrutiny of return if required should be carried out within 3 years from date of filing of such return

16. Penalties & prosecution

Issue:

Section 66 list out various offences and penalties, Section 73 proposes initiation of prosecution to punish the person who commits said offences.

Recommendation:

GST legislation puts onerous obligations on the tax payer to comply with multiple compliances in each state and for every month within very short time window therefore certain slippages are bound to happen. In view of this at least for the initial 3 years amount of penalties to be lower down and no prosecutions to be initiated.

17. Appeals

Issue

Under section 79, 80, 81, 82, 83 for CGST and SGST act separate appellate authorities are prescribed. Further said provision require the appellant to pay pre-deposit upto 50% of the disputed amount.

Recommendation

Single appellate authority should be prescribed for SGST, CGST and IGST appeals or the appellate authority should constitute one officer from State and one from Centre. The amount of maximum pre-deposit should be limited to 10% with discretion to the authorities to waive off the same in deserving cases

18. Sums due to be paid notwithstanding appeal

Issue:

Section 90 provides notwithstanding that an appeal has been preferred to the High Court or the Supreme court, sums due to the Government as a result of an order passed by the Appellate Tribunal under sub-section (1) of section 83 or an order passed by the High Court under section 87, as the case may be, shall be payable in accordance with the order so passed.

Recommendation:

These provisions are against the principle of natural justice and equality. Hence this section needs to be deleted

19. Advance Ruling

Issue:

Sec 100(3) provides where the members of the Appellate Authority differ on any point or points referred to in appeal against the advance ruling, then it shall be deemed that no advance ruling can be issued in respect of the question covered under the appeal.

Recommendations:

This defeats the very purpose of seeking advance ruling hence the subsection (3) of section 100 needs to be deleted and the advance ruling authority needs to give a decision.

20. Rulemaking powers under Sec 132 and 132A

Background:

Section 132 provides for powers to the Central and State Government to make rules sub-section 2 (v) provides for the lapsing of input tax credit lying unutilized which is unjust, in the circumstances as may be specified in the rules;

Recommendation:

Prescribing any rules to lapse input credits availed will destabilize costing of the goods and services provided by the tax payer hence sub-section 2(v) of Section 132 should be deleted. Further powers taken to make rules to regulate movement of goods under sec132 (2) (28)(29)(30)(35) means State/Central Govt can constitute check post of borders and will provide uncontrolled powers to the officials to stop and seize goods while on transit and which will get misused hence said powers should be removed.

21. Place of supply.

Section 3 of the IGST Act determines supply to be an interstate supply if the location of the supplier and the place of supply are in different states. Section 4 of the IGST Act determines supply to be an intrastate supply if the location of the supplier and the place of supply are in same states.

Issue:

The term "location of supplier of services" has been defined u/s 2 (65) of CGST/ SGST Act is applicable to IGST Act by virtue of Sec(2) (2). The first test therein is based on the status of registration under the law.

Recommendation

It is recommended that in all business to business transactions (B2B) (barring few transaction like services in respect of immovable property or entry to exhibition etc) place of supply to be defined as the place of contractual recipient irrespective of place of performance or place of delivery.

22. Transitional provisions

- Liability in case of ongoing works/turnkey contracts should not increase

Issue: The implementation of GST represents a paradigm shift in the basis of indirect taxation. In case of inclusive contracts of long term duration, it may be difficult for the supplier to economically survive in case the impact of fresh taxation is huge.

Recommendations: As a transitional measure, it is therefore recommended that the indirect tax on ongoing works contracts/turnkey contracts be discharged on similar basis as was being discharged prior to the introduction of GST. This can be done by waiving the excess GST payable on account of introduction of GST on such ongoing contracts

- Adequate Transition time should be given to the industries

Issue: Trade and industry will required adequate time to understand the GST Act and rules change business processes and IT systems to comply with the regulation.

Recommendation: At least 6-9 months clear time to be provided to transition the trade and industries to make system changes and align business processes with GST rules. Further, till it gets stabilize, lenient view for procedural lapses need to be taken (i.e. Penal provisions should not be invoked except in the cases of intentional evasion)

- Treatment to the Supplies in transit

Issue: On day of implementation for every business, there would be certain transactions under where goods and services which are already received prior however the invoices may be booked in books of account after the implementation date. Eligibility of Input credit tax paid under old law on such invoices should need to be clarified.

Recommendations: Credit of taxes paid under old laws on goods are services in transit or supplied prior however invoices remained to be booked in books of account In such situations credit should be given under GST law for the such taxes paid under old law. Adequate provisions for accounting such credit should be incorporated.

Refund of pre-GST taxes on export of goods should be allowed under the GST Regime.

- Cenvat Credit of Carried forward balance in erstwhile regime

- Input services received under the old period but invoices received under the new period.

- Input services and invoices received under the old period but certified and booked under the new period

- Re-credit of input service credit reversed due to non-payment within the prescribed three month period.

- It is recommended that transition period for issue of debit notes/ credit notes should be increased to 90 days

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23. Administrative challenges for domestic suppliers arising from PAN India contracts

Issue

In case of PAN India contract with the customers the services are required to be provided from various branches to customer’s location across India. As per the proposed GST, separate invoice required to be raised for the services rendered from each State. This would result in multiple invoicing from different States providing such services, despite there being a single contract. This will increase efforts around administration of such contracts and it is impossible to determine the value of the services rendered by each branch/ establishment separately by tracking the location from where the services are rendered in many cases. This will increase the cost of doing business in India. Further, valuation will be subject to litigation.

Recommendation

It is recommended that a centralized registration be allowed for CGST and IGST purposes providing for transfer of credits built up in different units at different locations to the centralized registration by amending Section 19(1), 37A of Model GST Law.